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Borgess Medical Center v. Sebelius

United States District Court, District Circuit

September 4, 2013

KATHLEEN SEBELIUS, Secretary Department of Health and Human Services Defendant.


RICHARD J. LEON, District Judge.

Plaintiffs Borgess Medical Center ("Borgess") and Bronson Methodist Hospital ("Bronson") ("plaintiffs" or "Hospitals, " collectively) commenced this action against Kathleen Sebelius, in her official capacity as Secretary of the United States Department of Health and Human Services ("Secretary"), pursuant to 42 U.S.C. § 1395 et seq., seeking judicial review of the Secretary's denial of reimbursements for costs associated with offsite resident training during fiscal years 2000 through 2004. See Compl. [Dkt. #1]. Before the Court are the parties' cross-motions for summary judgment. Upon consideration of the parties' pleadings, relevant law, and the entire record in this case, the Court GRANTS defendant's Motion for Summary Judgment [Dkt. #21] and DENIES plaintiffs' Motion for Summary Judgment [Dkt. #19].


A. Statutory and Regulatory Background

The Medicare Act provides health insurance benefits to eligible elderly and disabled persons. 42 U.S.C. § 1395 et seq. The Centers for Medicare and Medicaid Services ("CMS") administers the program for the Secretary. 42 U.S.C. § 1395kk; 42 C.F.R. § 400.200 et seq. Medicare Part A serves as hospital insurance and covers the cost of hospital care, related post-hospital care, home health services, and hospice care. 42 U.S.C. § 1395c et seq. The Secretary contracts with fiscal intermediaries to determine and process payments to hospitals. 42 U.S.C. § 1395h. At the close of the fiscal year, a participating hospital submits a cost report to its intermediary. 42 C.F.R. §§ 413.20, 413.24. After auditing the report, the intermediary issues a Notice of Program Reimbursement ("NPR"). 42 C.F.R. § 405.1803. A hospital may challenge an NPR by requesting a hearing before the Provider Reimbursement Review Board ("PRRB"). 42 U.S.C. § 1395oo(a). The PRRB's decision is subject to review by the CMS Administrator. 42 U.S.C. § 1395oo(f)(l); 42 C.F.R. § 405.1875(a). The Administrator's decision constitutes a final agency decision subject to judicial review. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877.

Under Part A of the Medicare program, hospitals that operate approved medical residency programs are entitled to reimbursement for certain costs related to graduate medical education. Medicare makes both a direct graduate medical education payment ("GME") and an indirect graduate medical education payment ("IME"). GME costs include residents' salaries and fringe benefits, as well as compensation paid to teaching physicians and supervisors. 42 U.S.C. § 1395ww(h); 42 C.F.R. § 413.86(b)(3) (1998). IME costs include higher-than-average operating costs incurred as an indirect result of having a teaching program. 42 U.S.C. §§ 1395f(b), 1395ww(d); 42 C.F.R. § 412.105 (1998).

Congress amended the Medicare statute in 1986 and 1997 to include the time residents spend training in nonhospital settings in GME and IME payment calculations. See 42 U.S.C. §§ 1395ww(d)(5)(B)(iv), 1395ww(h)(4)(E). These statutory provisions ("Nonhospital Site Statutes") permit reimbursement so long as (1) the residents' time is related to patient care, and (2) the hospital incurs all, or substantially all, of the costs for the training program in the nonhospital setting. Id. The Nonhospital Site Statutes do not define the second requirement, which is referred to herein as the "All or Substantially All Requirement."

For the cost reporting years at issue in this case, the Secretary's regulations defined the statutory All or Substantially All Requirement to include:

the residents' salaries and fringe benefits (including travel and lodging where applicable) and the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education.

42 C.F.R. § 413.86(b)(3) (1998), AR at 0645. The Secretary also imposed an additional regulatory requirement that, in order for a hospital to count resident training time at nonhospital sites, the hospital must have a written agreement with the nonhospital site

indicat[ing] that the hospital will incur the cost of the resident's salary and fringe benefits while the resident is training in the nonhospital site and the hospital is providing reasonable compensation to the nonhospital site for supervisory teaching activities. The agreement must indicate the compensation the hospital is providing to the nonhospital site for supervisory teaching activities.

42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648. This regulation is referred to herein as the "Written Agreement Requirement."

B. Factual and Procedural Background

Plaintiffs are non-profit acute care hospitals located in Kalamazoo, Michigan. The Hospitals have agreements with the Michigan State University Kalamazoo Center for Medical Studies ("KCMS") to rotate medical residents through KCMS' nonhospital clinic facility ("Affiliation Agreements"). See AR at 931-42. The Hospitals' joint resident training program dates back to 1973, when they entered into an agreement establishing the predecessor of KCMS, the Southwestern Michigan Area Health Education Center ("SWMAHEC"). AR at 796-800. The 1973 Agreement, which remains in effect, provides that the Hospitals "shall provide the CORPORATION with financing to carry out its purposes as negotiated on a yearly basis." See AR at 799, 811-15. In 1989, the Hospitals expanded the joint training program to include rotations at KCMS clinics. The Affiliation ...

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