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LITTLE CO. OF MARY HOSP. & HEALTH CARE CTRS. v. SH

February 18, 1998

LITTLE COMPANY OF MARY HOSPITAL AND HEALTH CARE CENTERS, Plaintiff,
v.
DONNA SHALALA, Secretary of the U.S. Department of Health and Human Services, Defendant.



The opinion of the court was delivered by: SHADUR

 Little Company of Mary Hospital and Health Care Centers ("Hospital") brings this action pursuant to 42 U.S.C. § 1395oo(f) *fn1" to contest the decision by Secretary of Health and Human Services Donna Shalala ("Secretary") *fn2" to deny certain amounts of Medicare reimbursement claimed by Hospital for the fiscal year ended June 30, 1988 under Title XVIII of the Social Security Act (colloquially "Medicare," Sections 1395-1395ccc). Hospital contends alternatively (1) that Secretary's denial was arbitrary and capricious or (2) that her determination violated Hospital's due process rights under the Fifth and Fourteenth Amendments. *fn3"

 Hospital and Secretary have filed cross-motions for summary judgment under Fed. R. Civ. P. ("Rule") 56. Both parties have complied (at least in part) with this District Court's General Rule ("GR") 12(M) and 12(N), which have been adopted to facilitate the resolution of Rule 56 motions by smoking out any disputed issues of material fact. *fn4" With the cross-motions now fully briefed, the issues are ready for decision.

 For the reasons stated in this memorandum opinion and order, this Court holds that Secretary did not arbitrarily and capriciously deny Hospital's claim for Medicare reimbursements, nor was her decision violative of due process. Accordingly Secretary's motion is granted while Hospital's is denied, and this action is dismissed.

 Summary Judgment Standards

 Familiar Rule 56 principles impose on a party seeking summary judgment the burden of establishing the lack of a genuine issue of material fact ( Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). For that purpose this Court must "read[ ] the record in the light most favorable to the non-moving party," although it "is not required to draw unreasonable inferences from the evidence" ( St. Louis N. Joint Venture v. P & L Enters., Inc., 116 F.3d 262, 265 n.2 (7th Cir. 1997)). Where as here cross-motions for summary judgment are involved, it is necessary to adopt a dual perspective--one that this Court has often described as Janus-like--that sometimes forces the denial of both motions. That potential for such a dual denial does not arise here, however, because the underlying facts are not in dispute. Instead the parties are at odds about whether as a matter of law Secretary complied with the statutes and regulations governing the Medicare program.

 Standard and Scope of Review5

 
In making this determination, the court reviews the administrative record as it stood when the agency acted, not extra-record material produced later in court.

 In applying the general mandate of the APA to the Medicare reimbursement context, Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 129 L. Ed. 2d 405, 114 S. Ct. 2381 (1994)(internal citations and quotation marks omitted) has clarified the reviewing court's limited role:

 
We must give substantial deference to an agency's interpretation of its own regulations. Our task is not to decide which among several competing interpretations best serves the regulatory purpose. Rather, the agency's interpretation must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation. In other words, we must defer to the Secretary's interpretation unless an alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation. This broad deference is all the more warranted when, as here, the regulation concerns a complex and highly technical regulatory program, in which the identification and classification of relevant criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns. *fn6"

 Thus this opinion's sole task is to pass on the reasonableness of Secretary's decision. It need not--and it specifically does not--rule on the correctness of that determination as such.

 Statutory and Regulatory Framework7

 Medicare provides a federally funded health insurance program for the elderly and disabled. Only Medicare Part A, which authorizes payment for covered care in institutions such as Hospital, is at issue here. Secretary reimburses a qualified health care "provider of services" (Section 1395x(u)) for the reasonable cost of providing covered services to eligible Medicare beneficiaries through a "fiscal intermediary" (Sections 1395g and h). Each provider seeking reimbursement submits an annual cost report to the intermediary (42 C.F.R. §§ 413.20(a)-(b) and 413.24(f)) *fn8" , which then audits the report, determines the amount of reimbursement due to the provider and issues a Notice of Program Reimbursement ("NPR" *fn9" ) for the relevant fiscal year (Reg. § 405.1803).

 Before 1982 Medicare reimbursed providers through a retrospective reasonable cost system. Under that method providers were paid the lesser of two figures--the "reasonable cost of" or the "customary charges with respect to" furnishing services to Medicare beneficiaries--as determined in accordance with regulations promulgated by Secretary (Section 1395f(b)(1)).

 That approach soon proved prohibitively expensive because it did not provide hospitals with sufficient incentives to render cost-efficient services. So as part of the Social Security Amendments of 1983, Congress dramatically restructured provider reimbursement by enacting the Prospective Payment System ("PPS," see Section 1395ww(d)). PPS established a number of Diagnostically Related Groups ("DRGs") that describe particular classes of patients and treatments and determine the rates that Medicare will pay for each one in the future. For that purpose the DRG cost schedules base reimbursement on national and regional average costs for the treatment of particular illnesses, regardless of an individual hospital's actual treatment costs (Section 1395ww(d)(2)(D); Reg. § 412.60). To deal with costs not adequately captured by DRG, the Medicare statute and its regulations contain a number of adjustment provisions to supplement the DRG-related reimbursement amounts, such as the indirect medical education ("IME") and graduate medical education ("GME") adjustments.

 Following the issuance of a NPR, a dissatisfied provider may appeal the intermediary's determination to the Provider Reimbursement Review Board ("Board") if the amount in controversy is at least $ 10,000 and if the hearing request is submitted within 180 days of the initial NPR (Section 1395oo(a)). If those jurisdictional prerequisites are met, Board has the power to affirm, modify or reverse the intermediary's decisions (Section 1395oo(d)). Secretary, acting through the HCFA Administrator, may review the matter further either on her own motion or at the provider's request (Reg. § 405.1875). Any provider that remains dissatisfied with Board's or Secretary's final decision may then seek judicial review in the District Courts (Section 1395oo(f)(1)).

 Procedural History

 Hospital, a non-profit hospital located in Evergreen Park, Illinois, maintains a nine-bed neonatal intensive care unit ("NICU") in addition to its nursery devoted to healthy newborn infants. Hospital's 1988 cost report submitted to its fiscal intermediary Blue Cross and Blue Shield of Illinois ("Blue Cross") excluded its NICU beds from the IME and GME calculations. Blue Cross disagreed and issued an NPR that included those beds in both figures, thus reducing Hospital's Medicare reimbursement.

 Pursuant to Section 1395oo(f), Hospital appealed that adverse NPR to Board. On February 4, 1997 Board reversed, stating that Blue Cross had improperly included the provider's neonatal beds in the adjustment calculations and that Board had jurisdiction to review another reimbursement claim concerning loss on the sale of land. On April 4, 1997 Secretary reversed Board's decision and reinstated Blue Cross' ruling. Hospital has timely brought suit in this District Court to challenge that final administrative decision.

 Arbitrary-and-Capricious Claims

 IME Adjustment

 Section 1395ww(d)(5)(B) provides that teaching hospitals that operate approved graduate medical education programs and that are subject to PPS shall receive an additional payment to reflect the higher indirect costs associated with such programs. To implement that statutory provision, in 1987 Secretary promulgated Reg. § 412.118 (now recodified at Reg. § 412.105, though this opinion will continue to follow the 412.118 numbering applicable to the 1988 fiscal year at issue here) to calculate the IME adjustment. That calculation is made by multiplying a provider's DRG revenue by an IME adjustment factor, which is based partly on the ratio of a hospital's full-time interns and residents to the number of hospital inpatient beds (Section 1395ww(d)(5)(B)(ii)), the latter determined in accordance with Reg. § 412.118(b). Because an exclusion of beds reduces the denominator and thus increases the ratio, it is to the provider's reimbursement advantage to exclude as many beds as possible from the bed count.

 Hospital contends that Secretary's decision to include its NICU beds in the IME adjustment factor is incompatible with the controlling regulation's plain language. Because Secretary's interpretation of any of her regulations is entitled to substantial deference, this Court is not free simply to decide whether it agrees with her decision. Instead the dispositive question is whether Secretary's reading is a reasonable construction of the controlling regulatory language.

 At the time Hospital submitted its cost report for the fiscal year ending June 30, 1988, Reg. § 412.118(b) prescribed the formula for determining the number of beds in a hospital for purposes of the IME adjustment:

 
For purposes of this section, the number of beds in a hospital is determined by counting the number of available bed days during the cost reporting period, not including beds assigned to newborns, custodial care, and excluded distinct part hospital units, and dividing that number by the number of days in the cost reporting period.

 After the regulation was renumbered to 412.105(b) without substantive effect in 1991, it was then amended in September 1994 and again reworded in September 1995 to eliminate disputes such as the present one:

 
For purposes of this section, the number of beds in a hospital is determined by counting the number of available bed days during the cost reporting period, not including beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded distinct part hospital units, and dividing that number by the number of days in the cost reporting period.

 Today's dispute centers around the meaning of the phrase "not including beds assigned to newborns" in the earlier version of the regulation.

 Hospital contends that a straightforward reading of that bed-counting regulation plainly excludes all beds assigned to newborns, thus including those in its neonatal intensive care unit. That contention presupposes that the quoted language is clear and not susceptible to different interpretations. This Court disagrees with that position, as have two Courts of Appeals that have addressed the question in unpublished orders ( Hahnemann Univ. Hosp. v. Shalala, 1997 U.S. App. LEXIS 16357, No. 96-5191, 1997 WL 362672, at *1 (D.C. Cir. May 5)(per curiam); Sioux Valley Hosp. v. Shalala, 1994 U.S. App. LEXIS 17759, No. 93-3741 SD, 1994 WL 377024, at *3 (8th Cir. July 20), reported in table at 29 F.3d 628). *fn1 ...


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