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St. Anthony Regional Hospital v. Hargan

United States District Court, N.D. Iowa, Central Division

December 29, 2017

ST. ANTHONY REGIONAL HOSPITAL, Plaintiff,
v.
ERIC D. HARGAN, [1] Acting Secretary of the Department of Health and Human Services, Defendant.

          REPORT AND RECOMMENDATION

          Kelly K. E. Mahoney United States Magistrate Judge.

         This appeal involves a dispute between Plaintiff St. Anthony Regional Hospital (the Hospital) and Defendant Secretary of the Department of Health and Human Services (the Secretary) regarding the proper method of calculating the volume decrease adjustment (VDA) payment owed to the Hospital through the Medicare program. The Hospital argues that the Secretary's methodology resulted in it not being fully compensated for its fixed costs, as required by statute, and that the Secretary should not have classified certain expenses (related to laundry, food, drugs, and certain supplies) as variable costs. I recommend affirming the Secretary's decision.

         I. BACKGROUND

         Hospitals that treat patients with health insurance through the Medicare program are paid a predetermined fixed amount per patient based on that patient's diagnosis, irrespective of the actual cost of treatment to the hospital. See Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 406 n.3 (1993). This payment is called the Diagnosis Related Group (DRG)[2] payment. Congress adopted the DRG payment method in 1983 to encourage hospitals to provide services at lower costs; prior to that, hospitals were reimbursed for their actual costs and had “little incentive . . . to keep costs down, ” as “[t]he more they spent, the more they were reimbursed.” County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (alteration in original) (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991)). Under the DRG method of payment, “[h]ospitals that treat patients for less than the DRG amount get ‘rewarded, ' while hospitals that spend more than the DRG amount must absorb the excess costs.” Cmty. Hosp. of Chandler, Inc. v. Sullivan, 963 F.2d 1206, 1207 (9th Cir. 1992).

         To provide some protection to rural hospitals, Congress also provided that sole community hospitals that experience a more than 5% decline in patients due to circumstances beyond their control are entitled to an additional payment, called the VDA payment, “as may be necessary to fully compensate the hospital for the fixed costs it incurs 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). In this appeal, the parties agree that the Hospital is entitled to a VDA payment for the 2009 fiscal year. They dispute only the amount of such payment.

         The regulations promulgated by the Secretary in effect during the relevant time period did not provide a specific formula for calculating the VDA payment. See 42 C.F.R. § 412.92(e)(3) (2009). Instead, the regulation directed that the following factors be considered in determining the VDA payment amount: “(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 . . .; and (C) [t]he length of time the hospital has experienced a decrease in utilization.” Id. § 412.92(e)(3)(1). In addition, the regulation provided that the VDA payment could not exceed the difference between the hospital's total Medicare costs and the hospital's DRG payment. Id. § 412.92(e)(3).

         A section of the Medicare Provider Reimbursement Manual (Manual or PRM), issued around the same time as the regulation, also addressed calculation of the VDA payment:

[A VDA] payment is made to an eligible [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, not to exceed the difference between the hospital's Medicare inpatient operating cost and the hospital's total DRG revenue.
Fixed costs are those costs over which management has no control. Most truly fixed costs, such as rent, interest, and depreciation, are capital-related costs and are paid on a reasonable cost basis, regardless of volume. Variable costs, on the other hand, are those costs for items and services that vary directly with utilization such as food and laundry costs.
In a hospital setting, however, many costs are neither perfectly fixed nor perfectly variable, but are semifixed. Semifixed costs are those costs for items and services that are essential for the hospital to maintain operation but also vary somewhat with volume. For purposes of [the VDA payment], many semifixed costs, such as personnel-related costs, may be considered as fixed on a case-by-case basis.
In evaluating semifixed costs, [the Secretary] consider[s] the length of time the hospital has experienced a decrease in utilization. For a short period of time, most semifixed costs are considered fixed. As the period of decreased utilization continues, [the Secretary] expect[s] that a cost-effective hospital would take action to reduce unnecessary expenses. Therefore, if a hospital did not take such action, some of the semifixed costs may not be included in determining the amount of the [VDA] payment . . . .

PRM 15-1 § 2810.1(B).[3] The Manual also included two examples that illustrated that unless a hospital's Medicare costs exceeded a cap based on its Medicare costs for the previous year (the cap is not in play here), the hospital's VDA payment would be calculated as “the entire difference between” the hospital's Medicare costs and its DRG payment. Id. § 2810.1(D). The example in the Manual does not explicitly say that the Medicare costs should include only fixed and semifixed costs, but in another example related to evaluating core staffing, the Manual states that if a hospital's staff exceeded the number allowed, Medicare costs in the formula should be “reduced to eliminate the salary costs” of the excess staff. Id. § 2810.1(C).

         The amount of the VDA payment is initially determined by a hospital's Medicare administrative contractor (MAC), [4] usually a private insurance company that contracts with the government to process hospitals' Medicare claims. The MAC's determination can be appealed to the Provider Reimbursement Review Board (Board). An administrator for the Centers for Medicare and Medicaid Services (CMS), which administer the Medicare program through authority delegated by the Secretary, may then review any decision of the Board.

         Here, the Hospital's total Medicare costs were $8, 348, 116, and its DRG payment was $6, 273, 905. AR 14, 32, 34.[5] The MAC, the Board, and the CMS Administrator all classified the following expenses as variable: (1) purchased laundry services, (2) dietary cost of food, (3) central distribution supplies, (4) drugs and intravenous (IV) solutions, (5) operating room supplies, and (6) implantable devices. AR 12, 30-31. Based on this classification, the Hospital's variable Medicare costs were $1, 543, 034 and its fixed Medicare costs were $6, 805, 082. AR 14.

         The MAC and the CMS Administrator both determined that the Hospital's VDA payment should be its total Medicare costs, less its variable Medicare costs and its DRG payment (or stated another way, the Hospital's fixed Medicare costs less its DRG payment). AR 7, 14. Thus, the CMS Administrator found that the Hospital's VDA payment should be $531, 177 ($8, 348, 116-$1, 543, 034-$6, 273, 905) (the MAC would have come to the same conclusion but for some mathematical errors). AR 14.

         The Board employed a different methodology. Rather than subtracting the entire DRG payment from the Hospital's fixed Medicare costs (as the MAC and CMS Administrator did), the Board found that only that portion of the DRG payment intended to compensate the Hospital's fixed costs should be subtracted. AR 33-34. The Board estimated the portion of the DRG payment related to fixed costs by determining what percentage of the Hospital's Medicare costs were fixed costs and multiplying that percentage by the total DRG payment ((fixed Medicare costs ÷ total Medicare costs) x DRG payment). Id. Thus, the Board estimated that the Hospital's DRG payment related to fixed costs was $5, 114, 261 (($6, 805, 084[6] ÷$8, 348, 116) x $6, 273, 905). Id. The Board determined the VDA payment by subtracting the fixed-costs DRG payment from the Hospital's fixed Medicare costs ($6, 805, 084-$5, 114, 261) for a total of $1, 690, 823.[7]Id.

         The CMS Administrator rejected the Board's methodology, finding that the Board's “creation of a ‘fixed[-costs] portion' of the DRG payment is unsupported by the statute, regulations, [M]anual, and prior case law.” AR 13. The CMS Administrator noted that the statute mandates only that the hospital receive, through a combination of its DRG payment and its VDA payment, an amount “at least equal to” its fixed costs. Id. The CMS Administrator found that the Board's methodology assumes that a portion of the hospital's variable Medicare costs are also compensated. Id.

         The CMS Administrator's decision is the final decision of the Secretary. The Hospital appealed to this court, arguing that the CMS Administrator's methodology for calculating VDA payment violates the plain language of the statute and that the Board's methodology should be employed instead. The Hospital also argues that the CMS Administrator (as well as the Board and the MAC) erred in classifying any expenses as variable. The parties briefed the issues, [8] and the Honorable Leonard T. Strand, Chief Judge of the United States District Court for the Northern District of Iowa, referred this case to me for a report and recommendation.

         II. ...


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