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Baystate Franklin Medical Center v. Azar

United States District Court, District of Columbia

July 31, 2018

ALEX M. AZAR II, in his official capacity as United States Secretary of Health and Human Services, Defendant.


          TREVOR N. MCFADDEN, U.S.D.J.

         The U.S. Department of Health and Human Services reimburses hospitals for certain costs they incur in providing healthcare to Medicare beneficiaries. To pay the hospitals, the Department uses a Prospective Payment System (“PPS”) to establish predetermined rates for each treatment type. The PPS features a “wage index, ” a multiplier that adjusts reimbursements to reflect regional variations in labor costs. See 42 U.S.C. § 1395ww. Hospitals submit annual cost reports to the Department, which are used to determine regional urban and rural wage rates. For each state, the rural rate acts as a “floor” ensuring that state hospitals receive at least that rate for their labor costs. See Pub. L. No. 105-33, § 4410 (1997).

         Massachusetts-based Baystate Franklin Medical Center and its affiliates (“Baystate” or “Plaintiffs”) challenge the Department's calculation of the wage index. The Department raised Baystate's 2017 index to the state's rural floor, as Plaintiffs' own labor costs were lower. Pl.'s Mem. in Supp. of Mot. for Summ. J. (“Pl.'s MSJ Mem.”) 7, ECF No. 23-1. Remarkably, Nantucket Cottage Hospital (“Nantucket”) is Massachusetts' only “rural” hospital as defined by 42 U.S.C. § 1395ww, and thus it sets the state's PPS reimbursement floor. Compl. 6, ECF No. 1. Nantucket erroneously reported some of its labor costs in 2015, causing its average hourly wage to be understated. Id. It failed to seek corrections to its data until more than seven months after a nationwide deadline for such requests. Def.'s Mem. in Supp. of Def.'s Cross Mot. for Summ. J. (“Def.'s Cross-MSJ. Mem.”) 9, ECF No. 25-1. The Department denied Nantucket's untimely request and used the earlier submitted data to calculate the index. Id. at 10. As a result, Baystate received $19, 907, 000 less in 2017 reimbursements than it would have if Nantucket had timely submitted accurate data.

         Baystate asserts that, as applied to Plaintiffs, the decision to use Nantucket's uncorrected data was arbitrary, capricious, and an abuse of discretion. Compl. 8. Baystate also challenges the Department's interpretation of 42 U.S.C. § 1395oo, the statute that establishes the Provider Reimbursement Review Board (“Board”). Plaintiffs contend that the Board must have the authority to grant relief when one hospital's claim is based on the inaccuracy of another's data.

         Department Secretary Alex Azar[1] (the “Secretary”) disagrees. He alleges that using the uncorrected data was a reasonable exercise of the agency's discretion, as Nantucket missed a clearly articulated deadline and because of the Department's interests in finality and efficiency. Def.'s Cross-MSJ. Mem. 9, 16. The Secretary further argues that the Board's grant of expedited review and the instant case validate the Department's interpretation. Id.

         Both parties seek summary judgment on the undisputed administrative record. I find that the Department's decision to require hospitals to correct their own wage data within program deadlines was reasonable, that Baystate's reimbursement was increased to reflect the region's labor costs as contemplated by the wage index statute, and that 42 U.S.C. § 1395oo does not obligate the Board to grant relief based on the inaccuracy of another hospital's data. I will therefore grant summary judgment for the Secretary.


         Medicare is a federally funded program that provides health insurance for the elderly, the disabled, and for people with end-stage renal disease. See 42 U.S.C. § 1395 et seq. A “complex statutory and regulatory regime governs [the] reimbursement” of healthcare providers who treat Medicare beneficiaries. Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993). The Centers for Medicare and Medicaid Services (CMS), a division within the Department, administers the program and, through the PPS, the reimbursement of participating hospitals. See Anna Jacques Hosp. v. Burwell, 797 F.3d 1155, 1157 (D.C. Cir. 2015).

         Wages and related costs are a “significant component” of these reimbursements, and these costs “vary widely across the country.” Regents of the Univ. of Cal. v. Burwell, 155 F.Supp.3d 31, 37 (D.D.C. 2016). Accordingly, Congress mandates that the PPS rates attributable to labor costs be adjusted for “area differences in hospital wage levels.” 42 U.S.C. § 1395ww(d)(3)(E)(i). The Department must compute a factor “reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” Id. This factor is known as the “wage index.” Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914-915 (D.C. Cir. 2009).

         CMS calculates the wage index annually. Hospitals first submit their cost data to third party “fiscal intermediaries” (typically insurance companies), that then review the data for accuracy and to ensure that cost increases do not exceed predetermined “edit thresholds.” See Dignity Health v. Price, 243 F.Supp.3d 43, 46 (D.D.C. 2017). If the fiscal intermediary believes corrections are necessary, it must provide the hospital with an opportunity to respond. Id. If a hospital fails to respond to the issues the intermediary raises in the review process, the intermediary must notify the relevant state hospital association, warning members that “a hospital's failure to respond to matters raised by [the intermediary] can result in [the] lowering of an area's wage index value.” Id. After the review and corrections process is complete, the intermediaries transmit the data to CMS.

         Using this data, CMS calculates the average hourly wage rate for hospitals in each geographic area. Anna Jacques Hosp., 797 F.3d at 1159. Geographic areas typically correspond to the “metropolitan statistical areas” defined by the Office of Management and Budget. Any hospital not located in a metropolitan statistical area (or in a similarly defined urban area) is deemed to be in a “rural area.” 42 U.S.C. § 1395ww(d)(2)(D)(ii).

         CMS then determines the national average wage rate and divides the regional rate by the national rate for each geographic area to arrive at the wage index. Anna Jacques Hosp., 797 F.3d at 1159. The index is thus a ratio of each geography's labor cost to the national average: an “index of 1.0 means a given area is average [while] an index above 1.0 indicates higher than average wage costs, and thus a correspondingly higher” PPS reimbursement. Dignity Health, 243 F.Supp.3d at 46. Recall that CMS adjusts each hospital's reimbursement for labor-related costs using the relevant regional index, unless that hospital's state rural floor is higher.

         Because each hospital's wage data impacts the national average and that hospital's regional average, “errors or omissions by one hospital can lower (or increase) PPS rates for other hospitals in its area” and indeed, for each hospital in the country. Id.; Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1228 (D.C. Cir. 1994). All wage index adjustments must be budget-neutral, meaning that an increase in payment to one hospital requires offsetting decreases to others. Pub. L. No. 105-33, § 4410(b) (1997).

         Once CMS has completed these calculations, it publishes a preliminary wage index and establishes a deadline for hospitals to request revisions to their data. Dignity Health, 243 F.Supp.3d at 46-47. For the 2017 Wage Index, this preliminary data was published in May 2015, and the deadline to request revisions was that September. J.A. 17, ECF No. 32. The fiscal intermediaries notified hospitals that this data was available and “inform[ed] hospitals of their opportunity to request revisions.” Id.

         After this deadline passed, the Department published a proposed wage index for the year in the federal register, allowing hospitals to request changes only in “those very limited circumstances involving an error by the [fiscal intermediaries] or CMS that the hospital could not have known about before its review of the final wage index data files.” FY 2017 PPS Proposed Rule, 81 Fed. Reg. 24, 946, 25, 073 (Apr. 27, 2016). The Department then published the final wage index in a Final Rule. It allowed hospitals to seek corrections to the final index (“midyear corrections”) only if a fiscal intermediary made a tabulating error and the hospital could not have known about the error before publication of the final rule. Id. Midyear corrections are “not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area.” Id.; see also Dignity Health, 243 F.Supp.3d at 47 (summarizing the Department's FY 2004 process, which contained identical language ...

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