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 ...