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Adirondack Medical Center, et al v. Kathleen Sebelius

September 17, 2012


The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge


This case arises out of the federal Medicare program; it relates to payments to rural and sole community hospitals for the inpatient care they provide to Medicare beneficiaries. The Secretary of Health and Human Services adjusted the rate paid to these types of hospitals downward in order to ameliorate the increasing rate paid to all hospitals due to revamping the diagnosis coding system. The authority for this adjustment is found in a general statutory provision. Plaintiffs object to the downward adjustment. They contend that because Congress expressly authorized the Secretary to make such a downward adjustment for other types of hospitals without similarly providing for such an adjustment for rural and sole community hospitals, Congress stripped the Secretary of authority to make the same type of downward adjustment for rural and community hospitals. The Secretary did not read the legislative silence in this way, and the Court defers to the Secretary's reasonable statutory interpretation. Plaintiffs' complaint will be dismissed for failure to state a claim.


Medicare is a federal health insurance program for the elderly and the disabled. 42 U.S.C. § 1395 et seq. Under Medicare Part A, the Secretary reimburses participating hospitals for care they provide to Medicare beneficiaries. Plaintiffs are providers of hospital services that have been designated under Medicare as either a "sole community hospital" or a "Medicare-dependent, small rural hospital." See 42 U.S.C. § 1395ww(d)(5)(D)(iii) (defining sole community hospital); id. § 1395ww(d)(5)(G)(iv) (defining rural hospital). Because they are critical to providing hospital services in remote and rural areas and because they face significant financial difficulties, the Medicare Act provides special payment protections for such hospitals. Id. §§ 1395ww(d)(5)(D) & 1395ww(d)(5)(G).

In order to provide a cost-savings incentive, Congress directed the Secretary to create an "inpatient prospective payment system" ("IPPS"), whereby the Secretary pays the hospital a fixed payment for each patient discharge, as described in 42 U.S.C. § 1395ww(d). Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226-27 (D.C. Cir. 1994). The rate is set in advance and that is the amount paid no matter how much the hospital actually spends on that patient. Id. Because hospitals are paid a fixed rate, they are encouraged to minimize the cost of treatment. Id.

IPPS depends on the patient's diagnosis. Diagnoses are assigned to a "diagnosis related group" (DRG), and each DRG is assigned a weight that is multiplied by a base dollar amount to determine payment. 42 C.F.R. § 412.64(g). The majority of hospitals are paid the "federal rate," the product of the DRG times a base dollar "standardized" amount.*fn1 Id. Sole community and rural hospitals are paid the "hospital-specific rate," the product of the DRG times each hospital's unique target amount. The target amount is based on each hospital's historic per-person operating costs in a specific year. 42 U.S.C. § 1395ww(d)(5)(D); id. § 1395ww(d)(5)(G). Sole community and rural hospitals are paid whichever rate yields a higher payment, the federal rate or the hospital-specific rate.*fn2 Id.

Effective at the start of Fiscal Year ("FY") 2008,*fn3 the Secretary implemented a new diagnosis classification system using "Medicare severity diagnosis-related groups," called MS-DRGs. See 72 Fed. Reg. 66,580, 66,886 (Nov. 27, 2007). Just like the original DRG system, the Secretary assigns a weight to each MS-DRG. The value of the MS-DRG is multiplied by the standardized amount to determine the federal rate and by the target amount to determine the hospital-specific rate. The MS-DRG system was designed to better account for differences in the severity of an illness. Id.

The Secretary anticipated changes to how hospitals code and report diagnoses under the new system and predicted a resulting increase in payments, i.e., "coding creep." To combat such coding creep, the Secretary adjusted the federal rate downward. See 72 Fed. Reg. 47,130 (Aug. 22, 2007) ("August 2007 Final Rule").*fn4 Specifically, actuaries estimated that an adjustment of -4.8% over the course of three years was needed to maintain budget neutrality, and the Secretary established a -1.2 % prospective adjustment for FY 2008 and -1.8% for FY 2009. Id. at 47,416.

As authority for the rate adjustment, the Secretary cited 42 U.S.C. § 1395ww(d)(3)(A)(vi), enacted in 2000, which provides for adjustments to the federal rate:

Insofar as the Secretary determines that the adjustments under paragraph (4)(C)(i) [providing for annual adjustments to the DRGs and weighting factors] for a previous fiscal year (or estimates that such adjustments for a future fiscal year) did (or are likely to) result in a change in aggregate payments under this subsection during the fiscal year that are a result of changes in the coding or classification of discharges that do not reflect real changes in the case mix, the Secretary may adjust the average standardized amounts computed under this paragraph for subsequent fiscal years so as to eliminate the effect of such coding or classification changes.

The Secretary originally sought to adjust both the federal rate and the hospital-specific rate in the August 2007 Final Rule. See generally 72 Fed. Reg. 47,130.

On September 29, 2007, just two months after the Secretary issued the August 2007 Final Rule adjusting the federal rate downward, Congress enacted the Transitional Medical Assistance, Abstinence Education, and QI Programs Extension Act of 2007. See Pub. L. No. 110-90, § 7, 121 Stat. 984 (2007) (attached to Pls.' Reply [Dkt. 21] as Ex. C) ("TMA"). Section 7(a) of the TMA reduced the adjustment of the federal rate specified in the August 2007 Final Rule, providing for a -0.6% adjustment for FY 2008 and a -0.9% adjustment for FY 2009. Section 7(b) further instructed the Secretary how and when to apply an adjustment to the federal rate in the future. If the Secretary determines that implementation of the MS-DRG system results in an increase that does not reflect real changes in patient severity of illness, then the Secretary shall adjust the federal rate downward.*fn5 TMA § 7(b). Notably, and critically to Plaintiffs' complaint, the TMA dealt only with the federal rate and was silent as to payments to rural and sole community hospitals.

Two months after the enactment of the TMA, the Secretary determined that her authority to make an adjustment to the federal rate under § (d)(3)(A)(vi) did not apply to the hospital-specific rate. 72 Fed. Reg. at 66,886. She also changed the adjustments to the federal rate as directed by the TMA. Id. As a result, sole community and rural hospitals (like Plaintiffs) generally obtained higher payments in FY 2008 and FY 2009.

However, the Secretary still viewed payments to sole community and rural hospitals as artificially inflated by the new MS-DRG. Even though the Secretary did not have the authority to adjust the hospital-specific rate under § (d)(3)(A)(vi), she determined in 2011 that she had authority under a "special exceptions and adjustments" provision. This "gap-filler" provision authorizes the Secretary to provide "for such other exceptions and adjustments to [IPPS] payment amounts . . . as the Secretary deems appropriate." 42 U.S.C. § 1395ww(d)(5)(I)(i).*fn6 The Secretary engaged in notice and comment rulemaking and promulgated a Final Rule reducing the hospital-specific rate for FY 2011 and FY 2012. Finding that the predicted coding creep had occurred in FY 2008 and FY 2009, i.e., that there was an artificial increase in payments unrelated to any actual change in the severity of illnesses treated, the Secretary made a -2.9 % adjustment to both the federal rate and to the hospital-specific rate for FY 2011. 75 Fed. Reg. 50,042, 50,067-71 (Aug. 16, 2010). Similarly, the Secretary made a -2.0% downward adjustment for FY 2012 in both the federal as well as the hospital-specific rates. 76 Fed. Reg. 51,476, 51,499 (Aug. 18, 2011).*fn7

Plaintiffs filed a request for expedited judicial review with the Provider Reimbursement Review Board ("PRRB"). The PRRB determined that it lacked jurisdiction, or alternatively, that expedited judicial review was appropriate. Plaintiffs appealed and the Administrator for the Centers for Medicare & Medicaid Services reversed the ...

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