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Unity HealthCare v. Azar

United States Court of Appeals, Eighth Circuit

March 12, 2019

Unity HealthCare Plaintiff - Appellant
v.
Alex M. Azar, II, Secretary, U.S. Department of Health and Human Services Defendant-Appellee St. Anthony Regional Hospital Plaintiff - Appellant
v.
Alex M. Azar, II, Secretary, U.S. Department of Health and Human Services Defendant-Appellee Lakes Regional Healthcare Plaintiff - Appellant
v.
Alex M. Azar, II, Secretary of the Department of Health and Human Services Defendant-Appellee

          Submitted: November 13, 2018

          Appeals from United States District Court for the Northern District of Iowa - Sioux City

          Before BENTON, BEAM, and ERICKSON, Circuit Judges.

          ERICKSON, CIRCUIT JUDGE.

         The Medicare statute directs the Secretary of Health and Human Services to adjust payment amounts to qualifying sole community and rural hospitals through a "volume-decrease adjustment" ("VDA") when a hospital experiences a significant decrease in the number of its inpatients because of circumstances beyond its control. 42 U.S.C. § 1395ww(d)(5)(D)(ii). Appellants Unity HealthCare, Lakes Regional Healthcare, and St. Anthony Regional Hospital are three qualifying rural hospitals. The hospitals challenge the method the Secretary, acting through the Administrator of the Centers for Medicare & Medicaid Services, used to calculate the VDA for certain fiscal years during the mid-2000s. They also challenge the Administrator's classification of certain costs as variable costs when calculating the adjustment. On January 30, 2018, the district court upheld the actions of the Secretary in Unity HealthCare's and Lakes Regional's cases.[1] On February 6, 2018, the district court upheld the actions of the Secretary in St. Anthony's case.[2] We consolidated the cases for argument, and affirm.

         I. Background

         Before 1983, when a participating provider hospital incurred Medicare-eligible costs the hospital's actual costs incurred were fully reimbursed on a dollar-for-dollar basis so long as the claimed costs were found by the Secretary to be reasonable. Baptist Health v. Thompson, 458 F.3d 768, 771 (8th Cir. 2006). In 1983, Congress responded to concerns that hospitals had "little incentive . . . to keep costs down," and implemented an inpatient prospective payment system. Cty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991)). Under the prospective payment system, a treating hospital receives a predetermined fixed payment based on a given patient's "diagnosis-related group," or DRG. See 42 U.S.C. § 1395ww(d)(1)(A)(iii), (d)(4). The DRG-adjusted amount "is theoretically equal to the 'average' cost per patient" for a cost-effective hospital in a given location, but does not represent the actual costs of treatment. Cmty. Hosp. of Chandler, Inc. v. Sullivan, 963 F.2d 1206, 1207-08 (9th Cir. 1992), as amended (July 10, 1992). Hospitals are incentivized to minimize actual costs because they may pocket any excess balance between their costs and the DRG-adjusted amount. See id.

         Certain sole community hospitals and Medicare-dependent, small rural hospitals fall under a modified reimbursement scheme. Those hospitals are paid either based off of the standard DRG "or a hospital-specific rate derived from its actual costs of treatment in one of the base years specified in the statute, whichever is higher." Adirondack Med. Ctr. v. Burwell, 782 F.3d 707, 709 (D.C. Cir. 2015) (citing 42 U.S.C. § 1395ww(d)(5)(D, G); 42 C.F.R. §§ 412.92, 412.108). Such hospital is also able to request a VDA if it experiences "a decrease of more than 5 percent in its total number of inpatient cases due to circumstances beyond its control." 42 U.S.C. § 1395ww(d)(5)(D)(ii), (d)(5)(G)(iii). The VDA is offered as "necessary to fully compensate the hospital for the fixed costs it incurs in the period in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services." 42 U.S.C. § 1395ww(d)(5)(D)(ii). Eligible fixed costs, such as "rent, interest, and depreciation," were "those over which management has no control." 48 Fed. Reg. 39, 752, 39, 781 (Sept. 1, 1983). "Variable costs," such as "food and laundry services," would not be reimbursed because they "vary directly with utilization." Id. at 39, 781-82. The Secretary recognized that certain costs were "essential for the hospital to maintain operation but [would] vary with volume." Id. at 39, 781. Those "semi-fixed" costs would be "considered as fixed on a case by case basis." Id. at 39, 782. This advice was repeated in § 2810.1(B) of the Provider Reimbursement Manual (the "Manual").

         In 1987, the agency amended its regulations after observing hospitals claiming eligibility for VDAs after experiencing a downturn in patients even though their DRG payments actually exceeded their inpatient operating costs. Recognizing that granting a VDA in those circumstances would conflict with the general purpose behind adopting the prospective payment system, the agency made clear "that any adjustment amounts granted to [sole community hospitals] for a volume decrease may not exceed the difference between the hospital's Medicare inpatient operating costs and total payments made under the prospective payment system." 52 Fed. Reg. 33, 034, 33, 049 (Sept. 1, 1987).

         To receive a VDA, qualifying hospitals must submit an annual cost report to fiscal intermediaries or Medicare Administrative Contractors. The Centers for Medicare and Medicaid Services contract with those entities to determine payment amounts due providers. 42 U.S.C. § 1395h, 42 C.F.R. §§ 413.20(b) and .24(a-b). The contractor then audits the report and notifies the hospital of its total Medicare reimbursement for that fiscal year. 42 C.F.R. § 405.1803. If a hospital disputes the amount of reimbursement, it may appeal the determination "to the Provider Reimbursement Review Board and, under certain circumstances, may obtain a hearing from the Board." Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399, 401 (1988). Decisions by the Board are subject to review by the Administrator or the Centers for Medicare and Medicaid Services. 42 C.F.R. § 405.1834. A final decision by the Board or by the Administrator is subject to judicial review. 42 U.S.C. § 1395oo(f); 42 C.F.R. § 405.1877.

         During the time period in question, no regulation provided for a specific method of calculating a VDA payment. Instead, the contractors were directed to consider: "(A) [t]he individual hospital's needs and circumstances, including the reasonable cost of maintaining necessary core staff and services in view of minimum staffing requirements imposed by State agencies; (B) [t]he hospital's fixed (and semi-fixed) costs, other than those costs paid . . . under [other provisions]; and (C) [t]he length of time the hospital has experienced a decrease in utilization." 42 C.F.R. § 412.92(e)(3). The amount of the adjustment was capped at the "ceiling" of "the difference between the hospital's Medicare inpatient operating costs and the hospital's total DRG revenue for inpatient operating costs." Id.

         This consolidated appeal arises from contested decisions by the Administrator concerning the VDA amounts due to each hospital. Unity requested $741, 308 for fiscal year 2006, the difference between its Medicare inpatient operating costs ($5, 698, 829) and its DRG payments ($4, 957, 521) in that year. The contractor reclassified $664, 994 in costs as "variable" for: (i) billable medical supplies; (ii) billable drugs and intravenous solutions; (iii) professional services and supplies obtained from outside providers for physical therapy, reference laboratory, blood bank, and radiology; and (iv) dietary and linen services and supplies. The contractor calculated the net VDA payment as $76, 314. Unity appealed the decision to the Board.

         Lakes Regional requested $1, 184, 574 for fiscal year 2006, the difference between its Medicare inpatient costs ($4, 923, 186) and its DRG payments ($3, 738, 612) for that year. The contractor reclassified $1, 360, 118 in costs as "variable" for: (i) billable medical supplies associated with anesthesia, laboratory, oncology and emergency departments and respiratory therapy services; (ii) billable drugs and intravenous solutions; (iii) professional services and supplies obtained from outside providers for physical therapy, speech therapy, blood bank, and radiology; and (iv) dietary and linen services and supplies. Because Lakes Regional's decreased total costs were now lower than the DRG payments Lakes Regional had received for that year, the contractor denied a VDA. Lakes Regional appealed that decision to the Board.

         St. Anthony requested $1, 954, 257 for fiscal year 2009, the difference between its total inpatient operating costs ($8, 333, 903) and its total Pay Per Service payments for that year. The contractor excluded $1, 619, 594 attributed to services and supplies similar to those excluded for Unity and Lakes Regional, corrected the subtracted payment total to equal total DRG payments ...


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