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Grant Medical Center v. Burwell

United States District Court, District of Columbia

September 1, 2016

GRANT MEDICAL CENTER, et al., Plaintiffs,
SYLVIA MATHEWS BURWELL, Secretary of Health and Human Services, Defendant.



         Plaintiff Hospitals blithely argue that the Secretary of Health and Human Services should ignore a decision of the Sixth Circuit Court of Appeals. The Hospitals challenge the Secretary's decision to comply with Clark Regional Medical Center v. HHS, 314 F.3d 241 (6th Cir. 2002), a decision concerning how to calculate hospital bed counts under 42 C.F.R. § 412.105(b). Bed counts substantially affect Medicare payments. The Hospitals insist that the Secretary should ignore Clark because it results in bed counts for (and payments to) hospitals located in the jurisdiction of the Sixth Circuit that are different from similar hospitals located elsewhere. Because the Secretary's decision to follow Clark was not arbitrary and capricious, the Hospitals' motion for summary judgment will be denied and the Secretary's cross motion will be granted.

         I. FACTS

         A. The Medicare Act

         In 1965, Congress enacted Title XVIII of the Social Security Act, known as the Medicare Act, 42 U.S.C. § 1395 et seq., which provides for federal reimbursement for health care to the elderly and the disabled, see 42 U.S.C. § 1395c. Under Medicare Part A, the Secretary reimburses participating hospitals for care they provide to Medicare patients for “inpatient hospital services, post-hospital extended care services, home health services, and hospice care.” Id. § 1395d(a). Medicare Part B, id. §§ 1395j-1395k, is a voluntary program that supplements Part A; it provides for reimbursement for, among other things, “hospital services . . . incident to physicians' services rendered to outpatients, ” id. §§ 1395k(a)(1), 1395x(s)(2)(b).

         1. The Prospective Payment System and Bed Counts

         Initially, Medicare reimbursed hospitals for the “reasonable costs” of providing Medicare services. Starting in 1983, Congress directed the Secretary to create an “inpatient prospective payment system” (IPPS), whereby the Secretary pays the hospital a fixed payment for each patient diagnosis at discharge, as described in 42 U.S.C. § 1395ww(d). Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994). IPPS depends on the patient's diagnosis. Diagnoses are assigned to a “diagnosis related group” (DRG), see 42 C.F.R. § 412.60, and each DRG is assigned a weight that is multiplied by a base dollar amount to determine payment, see id. § 412.64(g).[1] The rate is set in advance and is the amount commonly paid, no matter how much the hospital actually may spend on that patient. Methodist Hosp., 38 F.3d at 1227. Because hospitals are paid a fixed rate, they are encouraged to minimize the cost of treatment. Id.

         Generally, Medicare Part A pays for inpatient hospital services. To impose “cost limits” on reimbursement as required by statute, see 42 U.S.C. § 1395x(v)(1)(A), the Secretary classifies providers by bed type and count. Identifying the type of hospital bed and counting such beds is critical to determining a providers' IPPS payment.

         A small rural hospital can have “swing beds, ” which are beds that can change in reimbursement status. When a swing bed is used for acute care, Medicare reimburses the hospital under IPPS. When the patient “swings” from needing acute care to needing “post-acute skilled nursing facility care, ” the status of the bed changes and Medicare reimburses the hospital under skilled nursing facility policies. 42 U.S.C. § 1395tt; Medicare Program Proposed Changes to the Hospital IPPS & FY 2004 Rates, 68 Fed. Reg. 27154, 27205 (May 19, 2003). Hospitals also can have “observation beds, ” where patients are not formally admitted to the hospital but they occupy a bed for short-term treatment and/or assessment in order to determine the patient's condition and whether s/he needs to be admitted as an inpatient. 68 Fed. Reg. at 27205. When a hospital assigns a patient to an observation bed, Medicare reimburses the hospital under outpatient rules. IPPS does not recognize observation bed-days as part of the hospital's inpatient operating costs. Id. If the hospital subsequently admits an observation patient as an inpatient, Medicare thereafter reimburses for services under Part A. Medicare Program Changes to the Hospital IPPS for Acute Care Hospitals and FY 2010 Rates, 74 Fed. Reg. 43754, 43905 (Aug. 27, 2009).

         Bed counts affect Medicare payments in different ways. Because hospitals that train medical residents incur higher operating costs, the Medicare Act provides an additional payment for teaching hospitals-- the “indirect medical education” (IME) adjustment. 42 U.S.C. § 1395ww(d)(5)(B). The IME adjustment is calculated by multiplying a hospital's DRG revenue by a factor that in turn is calculated using the hospital's ratio of medical residents over beds. Id.; 42 C.F.R. § 412.105(a) & (b). Notably, the number of beds is a denominator in this ratio and thus, the per-student IME rises as the bed count falls and vice versa. In other words, a teaching hospital has an incentive to exclude beds from the total count because it would receive a larger IME payment with a smaller number of beds.

         The bed count has the opposite effect on the “disproportionate share” (DSH) payment. Hospitals that serve a significantly disproportionate number of low income patients receive a supplemental payment, i.e., the DSH adjustment, see 42 U.S.C. § 1395ww(d)(5)(F), because low income patients tend to be in poorer health and treatment costs are thus higher, see Rye Psychiatric Hosp. Ctr., Inc. v. Shalala, 52 F.3d 1163, 1171-72 (2d Cir. 1995). A hospital is eligible for DSH payments if it has a “disproportionate share percentage” amounting to: (1) 15% if the hospital has 100 or more beds; or (2) 40% if the hospital has fewer than 100 beds. 42 U.S.C. § 1395ww(d)(5)(F)(v).[2] The Secretary counts beds using the formula set forth in 42 C.F.R. § 412.105(b), and the DSH bed totals incorporate the formula for counting swing beds. See 42 C.F.R. § 412.106(a)(1)(i) (2004) (incorporating § 412.105(b) by reference). In contrast to the IME adjustment for teaching hospitals, the DSH adjustment is higher if the hospital in question has a larger bed count, at least to the 100-bed threshold. In other words, a hospital may have an incentive to include beds in the DSH calculation because this makes it easier to meet the low-income patient threshold and receive DSH payments.

         2. Medicare Administration and the Notice of Program Reimbursement

         The Centers for Medicare and Medicaid Services (CMS), an agency within the Department of Health and Human Services, administers Medicare. CMS contracts with private entities to process hospital claims. Such entities were known as “fiscal intermediaries, ” but starting in 2004, became known as “Medicare Administrative Contractors” (MACs). See 42 U.S.C. § 1395h. At the end of every fiscal year, each healthcare provider submits a cost report to its assigned MAC showing the hospital's costs and the portion allocated to Medicare. See 42 C.F.R. §§ 405.1801, 413/24(f), 424.13. The MAC reviews the report, determines hospital-specific adjustments, decides the total amount of Medicare reimbursement owed, and issues a Notice of Program Reimbursement specifying how much Medicare will reimburse for that year. 42 C.F.R. § 405.1803.

         Within 180 days, a provider may appeal the determination of total reimbursement set forth in the Notice by filing an appeal with the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo(a)(3); 42 C.F.R. § 405.1835. PRRB decisions are final unless the Secretary reverses, affirms, or modifies the Board's decision within 60 days. 42 U.S.C. § 1395oo(f)(1). A hospital may seek judicial review of PRRB decisions in the federal district court where the hospital is located or in the federal district court in the District of Columbia. Id.

         3. Clark and Bed Counting in the Sixth Circuit

         In 2001, two Kentucky hospitals that provided Medicare services to low-income patients filed suit challenging the Secretary's interpretation of the bed counting provision, 42 C.F.R. § 412.105(b). See Clark Regional Medical Center v. HHS, 314 F.3d 241, 242 (6th Cir. 2002). Because the Secretary excluded both swing bed and observation bed-days from the count of inpatient bed days, the total count of inpatient beds for each of the Kentucky hospitals was fewer than 100. Id. at 244. With such a low bed count, the hospitals were not eligible for a DSH adjustment despite their 15% disproportionate share. Further, they could not meet the much higher 40% disproportionate share applicable to hospitals with fewer than 100 beds. Id. The hospitals argued that swing and observation beds should have been included in the count of inpatient bed days. If those beds had been included, the hospitals would have had more than 100 beds and would have qualified for the DSH adjustment under the 15% provision.

         The hospitals objected to the Secretary's bed counting methodology, arguing that the regulation unambiguously required the Secretary to include swing and observation beds in the bed count for inpatient days. Id. at 246. The district court ruled in favor of the hospitals and the Sixth Circuit affirmed, finding that § 412.105(b) listed beds to be excluded from the court as only “beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded distinct part hospital units.”[3] Id. at 247. “Because the regulation specifically lists certain types of beds that are excluded from the bed count, but does not list swing or observation beds, the plain meaning of the regulation suggests that it is permissible to count swing and observation beds.” Id.

         While the Secretary disagrees with Clark, she recognizes that Clark is binding in the Sixth Circuit. Accordingly, shortly after the Clark ruling, the Secretary published a notice of proposed rulemaking. 68 Fed. Reg. at 27202-05. The proposed new regulation excluded swing and observation beds from the count of inpatient beds. A few months later, the Secretary published the Final Rule amending § 412.105(b), effective October 1, 2003. See Medicare Program Changes to the Hospital IPPS and FY 2004 Rates, 68 Fed. Reg. 45346 (Aug. 1, 2003). The new version of § 412.105(b) superseded the regulation at issue in Clark.

         In addition to the amended regulation, the Secretary issued a Joint Signature Memorandum (JSM) 109. JSM-109 provides that the Secretary will follow Clark only as to hospitals located in the jurisdiction of the Sixth Circuit and only for hospital discharges prior to the effective date of the new regulation, October 1, 2003. Administrative Record (AR) 232-34 (JSM-109). That is, under JSM-109, the bed counts for Sixth Circuit hospitals include swing and observation beds for cost years beginning prior to October 2003, and exclude swing and observation beds for bed counting thereafter.

         The ten hospitals who are Plaintiffs here (collectively, Hospitals)[4] are acute care general hospitals located in Ohio, within the jurisdiction of the Sixth Circuit.[5] When calculating Medicare reimbursements for the Hospitals for fiscal years beginning prior to October 1, 2003, the MACs applied Clark in accordance with JSM-109, thereby counting swing and observation beds in total bed counts for the purpose of calculating both IME and DSH reimbursements, and they provided Notices of Program Reimbursement to the Hospitals. The Hospitals appealed their respective notices to the Provider Reimbursement Review Board (Board), and the Board consolidated the appeals.

         The Hospitals argued that (1) the Clark decision bound only the parties to that case; and (2) the Secretary should retroactively apply revised § 412.105(b) to Sixth Circuit hospitals' cost years prior to October 1, 2003. The Board rejected these claims. AR [Dkt. 30] 6-17. The Board held that Clark was binding precedent in the Sixth Circuit prior to October 1, 2003, and that:

[T]he separation of powers doctrine requires administrative agencies to follow the law of the circuit whose courts have jurisdiction over the cause of action. In the absence of a controlling decision by the Supreme Court, the respective courts of appeals express the laws of the circuit. As there is no controlling precedent by the Supreme Court addressing the issue in this case, the Board finds that the Intermediary ...

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