Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 82 C 735 -- William T. Hart, Judge. Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 80 C 258 -- S. Hugh Dillin, Judge.
Cummings, Chief Judge, Eschbach, Circuit Judge, and Swygert, Senior Circuit Judge.
In these consolidated appeals the Secretary of Health and Human Services seeks reversal of district court decisions disapproving her policy of counting patients who are in the labor/delivery area of a hospital at the census hour of midnight as having received a full day of routine care for purposes of calculating Medicare's share of the hospital's costs of routine care. We conclude that the cases should be remanded to the Provider Reimbursement Review Board to enable the Secretary to introduce evidence that the dilution of routine care reimbursement created by her policy is offset by other factors in the reimbursement calculus.
Medicare reimburses hospitals annually for their costs of providing routine care to Medicare patients by using an average cost formula.*fn1 A hospital computes the average per diem cost of routine care for all patients by computing its total annual cost for all patients and dividing it by the number of patient-days of routine care provided. It then multiplies by the number of Medicare patient-days in the year to arrive at the amount to be reimbursed by Medicare. For the purpose of computing the number of patient-days, the day of admission is counted as a whole day and the day of discharge is disregarded. Fractional days are not used. A daily census is taken at midnight. The Secretary has instructed hospitals, by interpretation of her regulations,*fn2 to count any patient who is in the labor/delivery area at the midnight census as having had a full day of routine care, even though such patients, on admission, are generally taken straight to the labor/delivery area and actually receive no routine care on that day.*fn3
In No. 83-3255 twenty-two Illinois hospitals joined to seek redress for alleged lost Medicare reimbursement for fiscal years 1977-1980 traceable to the Secretary's labor/delivery policy. In their annual cost reports to their fiscal intermediary*fn4 for the years in question, the hospitals excluded from their count of routine patient days those days attributable to maternity patients in the hospital's labor/delivery area at the census hour of midnight. The intermediary adjusted these cost reports to count such days as routine patient days. The hospitals appealed to the Provider Reimbursement Review Board (PRRB),*fn5 which found in their favor. The Deputy Administrator of the Health Care Financing Administration, acting as the Secretary's delegate, elected to review the PRRB decision and reversed it. The hospitals then filed a complaint for judicial review in the district court, pursuant to 42 U.S.C. § 1395oo(f).
The district court, following Saint Mary of Nazareth Hospital Center v. Schweiker, 231 U.S. App. D.C. 47, 718 F.2d 459 (D.C. Cir. 1983), accepted the hospitals' argument but decided to remand the case to the PRRB for the limited purpose of determining whether the number of Medicare patients found nationally in ancillary areas other than the labor/delivery area at the midnight census is sufficient to offset the dilution of Medicare reimbursement created by counting labor/delivery patients in the routine inpatient count. The court ordered further that if the Secretary could prove no such offset, or if she conceded that she could not, she must omit from the calculation of the average cost per diem for routine services those labor/delivery patients who have not actually received routine services that day.
The Secretary subsequently conceded that she could not prove the offset in the limited way allowed by the court and moved for entry of judgment. The court entered final judgment for the hospitals on March 8, 1984.
In No. 83-3259 sixty-one Indiana hospitals joined to challenge the same policy. On their cost reports for fiscal years 1977 and 1978 the hospitals excluded patients who were in labor/delivery rooms at the daily census-taking hour from their computations of average routine per diem costs. The fiscal intermediary made audit adjustments including those patients in the computation. The hospitals sought a hearing before the PRRB, which reversed the intermediary's decision. The Administrator of the Health Care Financing Administration then reversed the decision of the PRRB. The hospitals filed this action for judicial review in the district court pursuant to 42 U.S.C. § 1395oo(f). The district court, in a thorough discussion of the issue, considered all the Secretary's defenses of her policy and rejected them, reversing the Administrator without remand. Johnson County Memorial Hospital v. Heckler, 572 F. Supp. 1538 (S.D. Ind. 1983).
The issue presented to us is whether the Secretary's policy of counting any patient who is in the labor/delivery area at the midnight census as having had a full day of routine care is rational. The hospitals contend that it is irrational, because it results in an obvious overcounting of patient-days of routine care. Patients in the labor/delivery area at the midnight census are treated as having had a full day of routine care, even though in fact the vast majority has had none. This overcounting, they argue, inflates the denominator in the average per diem cost fraction without affecting the numerator. As a result, the hospitals further contend, the figure obtained as the average per diem cost of routine care for a given year is necessarily too low, and because Medicare's share of routine care costs is computed by multiplying that figure by the number of Medicare patient-days in the year, the resulting reimbursement by Medicare for routine care costs is also necessarily too low. Thus, the hospitals contend, the Secretary's policy causes non-Medicare patients to subsidize Medicare patients, contrary to 42 U.S.C. § 1395x(v)(1)(A).
Four courts of appeals have considered the issue before us, and all have ruled against the Secretary. Beth Israel Hospital v. Heckler, 734 F.2d 90 (1st Cir. 1984); Baylor University Medical Center v. Heckler, 730 F.2d 391 (5th Cir. 1984) (per curiam); International Philanthropic Hospital Foundation v. Heckler, 724 F.2d 1368 (9th Cir. 1984) (per curiam); Saint Mary of Nazareth Hospital Center v. Schweiker, 231 U.S. App. D.C. 47, 718 F.2d 459 (D.C. Cir. 1983). We find the thorough analysis of the Court of Appeals for the District of Columbia Circuit in Saint Mary of Nazareth fully persuasive, and we adopt its reasoning as our own, as have the Courts of Appeals for the First, Fifth, and Ninth Circuits, in the cases cited supra.*fn6 On the basis of that reasoning we hold that it is irrational to count patients in the labor/delivery area at the census-taking hour of midnight as having had a full day of routine care if in fact they have had no routine care on that day, unless it can be shown that the reimbursement lost to the hospitals as a result of this policy is offset by excess reimbursement attributable to some other factor in the Medicare reimbursement formula as applied to the hospitals in question.*fn7
The Secretary seeks a remand to the PRRB for the purpose of enabling her to make such a showing. The hospitals oppose any remand, on the grounds that the theory of offset that the Secretary proposes to prove by evidence is contrary to her own regulations, that it is an untimely post hoc rationalization not raised in the administrative proceedings below, that any remand is unfair and ...