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BAPTIST HEALTH v. THOMPSON

November 9, 2005.

BAPTIST HEALTH d/b/a/ BAPTIST MEMORIAL MEDICAL CENTER — NORTH LITTLE ROCK, Plaintiff,
v.
TOMMY G. THOMPSON, in his official capacity as Secretary, U.S. Department of Heath and Human Services, Defendant.



The opinion of the court was delivered by: Wm. WILSON JR., District Judge

ORDER

Baptist Health appeals the decision of the Secretary of the United States Department of Health and Human Services ("HHS") regarding denial of Medicare reimbursement to a hospital for nursing and allied health education costs. The decision by the Secretary was rendered through the Administrator of the Centers for Medicare and Medicaid Services ("CMS"). CMS is a component of HHS that administers the Medicare program. Pending is Thompson's Motion for Summary Judgment (Doc. No. 16) and Baptist's Cross-Motion for Summary Judgment (Doc. No. 19). Although raised as cross-motions for summary judgment, this Court will treat the this case as an appeal from an administrative agency — the standard of review is determined by the Administrative Procedure Act.*fn1 I. Introduction

This action arises under title XVIII of the Social Security Act,*fn2 commonly referred to as the Medicare statute, which establishes a federally funded health insurance program for the elderly and disabled. Baptist has a Medicare provider agreement with the Secretary and furnishes health care services to Medicare beneficiaries. Part A of Medicare ("Hospital Insurance Benefits"), authorizes payment for covered hospital services and other institutional services. The Medicare program reimburses costs to provider hospitals through a "fiscal intermediary," normally an insurance company under contract to the Secretary; in this case, Blue Cross Blue Shield. The fiscal intermediary acts as a claims adjustor for the Secretary and determines how much of the hospital's claimed Medicare reimbursement costs should be paid.*fn3 The intermediary analyzes the claims made in the report, performs an audit, and eventually issues a written Notice of Program Reimbursement informing the provider hospital of the amount of reimbursement to which it is entitled.*fn4

  If the provider hospital is not satisfied with the intermediary's reimbursement determination, the hospital can, within 180 days of the Board's decision, request a hearing before the Provider Reimbursement Review Board (the "Board"),*fn5 which is within the HHS. The Board consists of five people within HHS that decide Medicare reimbursement disputes between hospitals and the Medicare program. The Board's decision is the final agency determination of the reimbursement claim unless the Secretary on his own motion decides to affirm, reverse, or modify the decision of the Board.*fn6 As will be discussed below, the Secretary's decision, which was rendered through the Administrator of CMS, reversed the Board's decision granting Baptist reimbursement for classroom costs.

  This case involves four consolidated appeals,*fn7 originally brought by Memorial before the Board. The Board and Administrator addressed whether Baptist is entitled to "pass-through" reimbursement by Medicare for the "clinical" and "classroom" costs of providing nursing and allied health education. These four appeals involve Baptist's fiscal years ending 12/31/1991 through 12/31/1994. Because of an internal remand within HHS, there were two decisions by the Administrator, reviewing two decisions by the Board. Both Board decisions allowed all nursing and allied health education costs, both clinical and classroom, on a pass-through basis. Baptist presently seeks judicial review of the Administrator's decision to reverse the Board by limiting reimbursement to clinical costs only.

  a. Standard of Review

  Under the APA, a court can set aside an agency action if the court finds the action to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law."*fn8 Similarly, a Court should set aside any agency decision issued on the basis of an evidentiary hearing record if the agency decision is "unsupported by substantial evidence" in the record.*fn9 A court must give substantial deference to an agency's interpretation of its own regulations,*fn10 and that interpretation "must be given `controlling weight unless it is plainly erroneous or inconsistent with the regulation'" itself.*fn11 Under this test, a court must defer to an agency's interpretation of a regulation unless an alternative reading is "compelled by the regulation's plain language" or, if the language is ambiguous, by "other indications of the Secretary's intent at the time of the regulation's promulgation."*fn12 If the language of a regulation does not "speak clearly `to the precise question at issue'" in a case, "say[ing] nothing explicitly about" the specific matter in dispute, the court must give substantial deference to the agency's resolution of the resulting ambiguity.*fn13

  The court's task then is "not to decide which among several competing interpretations best serves the regulatory purpose;" rather, the court must set aside only those agency interpretations that are plainly "inconsistent" with the regulation itself.*fn14 The Supreme Court has recognized that this heightened deference is particularly warranted in the Medicare context because of the complex and highly technical nature of the program, where "the identification and classification of relevant `criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.'"*fn15

  b. History

  In an effort to curtail escalating Medicare expenditures, Congress revised the reimbursement scheme in 1983.*fn16 Congress adopted the Prospective Payment System ("PPS"), which relies upon prospectively fixed rates for each category of treatment rendered.*fn17 Congress adopted PPS because it was more restrictive than the reasonable cost system. Under the PPS scheme, after a four-year transition period, Medicare began to pay hospitals for their inpatient operating costs on the basis of prospectively determined rates rather than on a reasonable cost basis.*fn18 These PPS rates are calculated according to hospital costs in a base year, 1981. Although Congress gave the Secretary discretion to determine a hospital's inpatient operating costs under PPS, Congress specifically excluded approved educational activities*fn19 from the PPS rates.*fn20

  Medicare payments for approved educational activities operated directly by the hospital were deemed to be costs that "pass-through" PPS and continue to be made on a reasonable cost basis.*fn21 All other costs of educational programs, such as the cost associated with programs operated by third parties, on-the-job training programs, employee education, continuing education, and maintaining and operating a medical library, are activities considered to be part of the normal operating costs covered by the hospital's PPS payment.*fn22

  Following the Congressional adoption of PPS in 1983, the Secretary issued new regulations.*fn23 The new regulations that implemented PPS prohibited pass-through treatment for "[c]linical training of students not enrolled in an approved education program operated by the provider" and "activities that do not involve the actual operation of an approved education program."*fn24 As early as 1984, the Secretary stated that "only the costs of those approved medical education programs operated directly by a hospital be excluded from [PPS]."*fn25 The Secretary continued in the preamble:

  If a program is operated by another institution, . . . [it] must be noted that by far the majority of the costs of that program are borne by that other institution, and not by the hospital. While it is true that the hospital may incur some costs associated with its provision of clinical training to students enrolled in a nearby institution, the hospital also gains in return. For example, it obtains the services of the trainee . . . We do not believe that this type of relationship was what Congress intended when it provided for a pass through of the costs of approved medical education programs. Rather, we believe that Congress was concerned with those programs that a hospital operates itself, and for which it incurs substantial direct costs. . . . We are revising 405.421(d)(6) [now 413.85(d)(6)] to clarify that the costs of clinical training for students enrolled in programs, other than at the hospital, are normal operating costs.*fn26 In 1989 and 1990, Congress passed the Omnibus Budget Reconciliation Act of 1989 ("OBRA 89")*fn27 and the Omnibus Budget Reconciliation Act of 1990 ("OBRA 90"),*fn28 which allows broader pass-through payment of nursing education costs where specific criteria are met. Section 6205 of OBRA 89,*fn29 created a temporary category of hospital-based nursing schools in addition to those already recognized under 42 C.F.R. § 413.85. It permitted reimbursement of a hospital's reasonable costs of training students in a hospital-based nursing school if:

 
[B]efore June 15, 1989, and thereafter, the hospital demonstrates that for each year, it incurs at least 50 percent of the costs of training nursing students at such school, the nursing school and hospital share some common board members, and all instruction is provided at the hospital, or if in another building, a building on the immediate grounds of the hospital.*fn30
In 1990, Congress extended OBRA 89 nursing education legislation by enacting Section 4004(b) of OBRA 90.*fn31 OBRA 90 allows reasonable cost reimbursement of the clinical ...

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