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Unity Healthcare v. Hargan

United States District Court, N.D. Iowa

January 30, 2018

UNITY HEALTHCARE, Plaintiffs,
v.
ERIC D. HARGAN, Acting Secretary of Health and Human Services, [1] Defendants. LAKES REGIONAL HEALTHCARE, Plaintiffs,
v.
ERIC D. HARGAN, Acting Secretary of the Department of Health and Human Services, Defendants.

         (Davenport Division) (Northern District of Iowa, Western Division)

          MEMORANDUM OPINION AND ORDER FOR JUDGMENT

          Helen C. Adams Chief U.S. Magistrate Judge

         Plaintiffs Unity Healthcare and Lakes Regional Healthcare, both Iowa hospitals, challenge decisions of the Secretary of the Department of Health and Human Services (the "Secretary") denying them payment of a specific Medicare payment known as the volume-decrease adjustment or "VDA."[2] The facts are undisputed and the plaintiffs do not challenge the statutes, regulations or interpretive guides under which the Secretary made the decision. At issue is whether the Secretary's decision was arbitrary and capricious or not supported by substantial evidence. Although these cases remain separate, because the PRRB and the Secretary dealt with them jointly, the factual background is similar and legal issues the same, the Court will issue one ruling which will be filed in each case.

         I. STATUTORY AND REGULATORY BACKGROUND

         The Medicare Program (the "Program") was established to provide health insurance to the aged and disabled. 42 U.S.C. § 1395 et seq. The Secretary has delegated authority to administer the Program to the Centers for Medicare and Medicaid Services ("CMS").[3] Under the Program qualifying health care providers are reimbursed for the costs of treating Medicare patients. 42 U.S.C. § 1395g. The payment and audit functions of CMS have been contracted to organizations known as fiscal intermediaries (FIs) and Medicare Administrative Contractors (MACs), both of which determine payment amounts due providers under the applicable law and interpretive guidelines CMS has published. 42 U.S.C. § 1395h, 42 C.F.R. §§ 413.20(b) and .24(b).

         Under the Social Security Amendments of 1983, Pub. L. No. 98-21 tit. VI, 97 Stat. 65, 149-72, hospitals are reimbursed for inpatient operating costs and capital-related costs on the basis of predetermined rates for each patient discharge, the Inpatient Prospective Payment System (IPPS). 42 U.S.C. § 1395ww(d). IPPS payments are based on a diagnosis-related group ("DRG") assigned to each patient. Id. § 1395ww(d)(2). DRG amounts "approximate the average cost of caring for a patient with a given diagnosis in a cost-effective hospital" with adjustments for geography and other factors, and not the actual cost of caring for a patient. (Pl. Brief [19-1]).

         Providers (hospitals) submit annual cost reports to the MAC at the close of their accounting year, showing costs incurred for the fiscal year and the proportion of the costs allocable to the Program. 42 C.F.R. §§ 413.20, 413.24(f). The MAC audits the cost report and issues a Notice of Program Reimbursement (NPR), the total Medicare reimbursement due the hospital for that fiscal year. 42 C.F.R. § 405.1803. A hospital may appeal the MAC's reimbursement determination to the Provider Reimbursement Review Board ("PRRB"). 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835. The PRRB is an administrative review entity appointed by the Secretary to adjudicate disputes between hospitals and the MACs, 42 U.S.C. § 1395oo(a), conduct hearings and issue written decisions. 42 C.F.R. § 405.1871. A decision by the PRRB is final unless reversed, affirmed or modified by the Secretary. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875(b). The Secretary has delegated PRRB review authority to the Administrator of CMS ("Administrator"). 42 C.F.R. § 405.1834. A final decision by PRRB or by the Administrator is subject to judicial review. 42 U.S.C. § 1395oo(f); 42 C.F.R. § 405.1877.

         Both plaintiff hospitals qualify as "Sole Community Hospitals" (SCHs) as defined in 42 C.F.R. § 412.92. SCHs may be entitled to an adjustment of their Medicare reimbursement payments if they incur a decrease in inpatient discharges of more than five percent from one cost reporting year to the next, the VDA.

In the case of a sole community hospital that experiences, in a cost reporting period compared to the previous cost reporting period, a decrease of more than 5 percent in its total number of inpatient cases due to circumstances beyond its control, the Secretary shall provide for such adjustment to the payment amounts under this subsection (other than under paragraph (9)) as may be 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). To qualify for the VDA, a hospital must timely submit its request for payment with information which "[d]emonstrate[es] the size of the decrease in discharges and the resulting effect on per discharge costs" and "show[ing] that the decrease is due to circumstances beyond the hospital's control." 42 C.F.R. § 412.92(e)(2). It is undisputed that both plaintiff hospitals experienced qualifying decreases.

         The FI or MAC then determines the appropriate adjustment amount, if any, which is due the hospital:

The intermediary determines a lump sum adjustment amount not to exceed the difference between the hospital's Medicare inpatient operating costs and the hospital's total DRG revenue for inpatient operating costs based on DRG-adjusted prospective payment rates for inpatient operating costs . . . .

(i) In determining the adjustment amount, the intermediary considers-

(A) The 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) The hospital's fixed (and semi-fixed) costs, other than those costs paid on a reasonable cost basis under part 413 of this chapter; and
(C) The length of time the hospital has experienced a decrease in utilization.

42 C.F.R. § 412.92(e)(3). CMS has provided interpretive guidance in the Provider Reimbursement Manual, CMS Pub. No. 15-1 (PRM 15-1). The applicable guidance instructs the MACs in calculating VDAs:

B. Amount of Payment Adjustment. - Additional payment is made to an eligible SCH 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 this adjustment, many semifixed costs, such as personnel-related costs, may be considered as fixed on a case-by-case basis.
In evaluating semifixed costs, the intermediary considers 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, we expect 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 payment adjustment.
The adjustment amount includes the reasonable cost of maintaining necessary core staff and services. The intermediary reviews the determination of core staff and services based on an individual hospital's needs and circumstances; e.g., minimum staffing requirements imposed by State agencies.

PRM 15-1 § 2810.1(B). In processing an adjustment request the following further directions are provided:

D. Determination on Requests.--The intermediary reviews a hospital's request for additional payment for completeness and accuracy. If any of the required documentation is missing, incomplete, or inaccurate, the intermediary requests the needed information. The intermediary makes a determination on the request and notifies the hospital of the decision within 180 days of the date the intermediary receives all required information.
The payment adjustment is calculated under the same assumption used to evaluate core staff, i.e., the hospital is assumed to have budgeted based on prior year utilization and to have had insufficient time in the year in which the volume decrease occurred to make significant reductions in cost. Therefore, the adjustment allows an increase in cost up to the prior year's total Program Inpatient Operating Cost (excluding pass-through costs), increased by the PPS update factor.

Id. § 2810.1(D). The manual then gives examples of how to make the adjustment request:

EXAMPLE A: Hospital C has justified an adjustment to its DRG payment for its FYE September 30, 1987. The adjustment is calculated as follows:

         Hospital C

         PPS Payment Adjustment Fiscal Year Ended 09/30/87

1FY 1986 Program Operating Cost

$2, 900, 000

PPS Update Factor

x 1.0115

FY 1987 Maximum Allowable Cost

$2, 933, 350

Hospital C FY 1987 Program Inpatient Operating Cost

$2, 800, 000

2FY 1987 DRG Payment

- $2, 500, 000

FY 1987 Payment Adjustment

$ 300, 000

1From Worksheet D-1, Part II, Line 54

2From Worksheet E, Part A, Lines 1A and 1B

         Since Hospital C's FY 1987 Program Inpatient Operating Cost was less than that of FY 1986 increased by the PPS update factor, its adjustment is the entire difference between FY 1987 Program Inpatient Operating Cost and FY 1987 DRG payments.

         EXAMPLE B: Hospital D has justified an adjustment to its DRG payment for its FYE December 31, 1988. The adjustment is calculated as follows:

         Hospital D

         PPS Payment Adjustment Fiscal ...


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