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St. Anthony Regional Hospital v. Azar

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

February 6, 2018

ALEX M. AZAR II, Secretary of Department of Health and Human Services[1], Defendant.


          Leonard T. Strand, Chief Judge.


         This case is before me on a Report and Recommendation (R&R) by the Honorable Kelly K.E. Mahoney, United States Magistrate Judge. Doc. No. 22. Judge Mahoney recommends that I affirm the decision of the Secretary of the Department of Health and Human Services (the Secretary) denying an administrative appeal by plaintiff St. Anthony Regional Hospital (the Hospital) related to the calculation of its reimbursement for the treatment of patients insured through Medicare. The Hospital has filed timely objections (Doc. No. 23) to the R&R and the Secretary has filed a response (Doc. No. 26) to the objections. The procedural history and relevant facts are set forth in the R&R and are repeated herein only to the extent necessary.


         A. Judicial Review of the Secretary's Decision

         Because the Secretary's decision is the result of formal adjudication, judicial review is governed by the standard set forth in the Administrative Procedure Act (APA). See 42 U.S.C. § 1395oo(f)(1) (Medicare Act incorporates APA); see also St. Mary's Hosp. of Rochester v. Leavitt, 416 F.3d 906, 909-10, 914 (8th Cir. 2005) (decisions of the Board and CMS Administrator involve formal adjudication entitled to Chevron[2]deference). Under the APA, a reviewing court may set aside an agency decision if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A), (E).

         The Secretary's construction of its regulations and the statutes it administers is entitled to substantial deference. See Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 94-95, 97-100 (1995) (discussing deference owed to CMS Administrator's decision made through formal adjudication when decision was in accord with a provision in the Manual); see also Auer v. Robbins, 519 U.S. 452, 461 (1997) (deference to agency's construction of a regulation); Chevron, 467 U.S. at 842-45 (deference to agency's construction of a statute). “A reviewing court should not reject reasonable administrative interpretation even if another interpretation may also be reasonable.” Shalala v. St. Paul-Ramsey Med. Ctr., 50 F.3d 522, 528 (8th Cir. 1995) (quoting Creighton Omaha Reg'l Health Care Corp. v. Bowen, 822 F.2d 785, 789 (8th Cir. 1987)). “This broad deference is all the more warranted when, as here, the regulation concerns ‘a complex and highly technical regulatory program, ' in which the identification and classification of relevant ‘criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.'” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 510-12 (1994) (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 687 (1991)) (discussing review of a decision by the CMS Administrator). The court should reject an agency interpretation, however, that is plainly erroneous or that contradicts the plain meaning of the statute, the plain meaning of the regulation, or “other indications of the [drafter's] intent at the time of . . . promulgation.” St. Paul-Ramsey, 50 F.3d at 527-28 (quoting Thomas Jefferson Univ., 512 U.S. at 512); see also Chevron, 467 U.S. at 843 n.9.

         B. Review of Report and Recommendation

         A district judge must review a magistrate judge's R&R under the following standards:

Within fourteen days after being served with a copy, any party may serve and file written objections to such proposed findings and recommendations as provided by rules of court. A judge of the court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made. A judge of the court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. The judge may also receive further evidence or recommit the matter to the magistrate judge with instructions.

28 U.S.C. § 636(b)(1); see also Fed. R. Civ. P. 72(b). Thus, when a party objects to any portion of an R&R, the district judge must undertake a de novo review of that portion. Any portions of an R&R to which no objections have been made must be reviewed under at least a “clearly erroneous” standard. See, e.g., Grinder v. Gammon, 73 F.3d 793, 795 (8th Cir. 1996) (noting that when no objections are filed “[the district judge] would only have to review the findings of the magistrate judge for clear error”). As the Supreme Court has explained, “[a] finding is ‘clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). However, a district judge may elect to review an R&R under a more-exacting standard even if no objections are filed:

Any party that desires plenary consideration by the Article III judge of any issue need only ask. Moreover, while the statute does not require the judge to review an issue de novo if no objections are filed, it does not preclude further review by the district judge, sua sponte or at the request of a party, under a de novo or any other standard.

Thomas v. Arn, 474 U.S. 140, 150 (1985). Thus a district court may review de novo any issue in a magistrate judge's report and recommendation at any time. Id.

         III. THE R&R

         Judge Mahoney thoroughly and accurately explained the background regulations used to calculate the reimbursement paid to hospitals that treat patients insured through the Medicare program. Doc. No. 22 at 1-6. As such, I will provide only a brief overview here. Hospitals are paid a fixed rate per patient based on each discharged patient's diagnosis, regardless of how much the hospital actually spends on a particular patient (the Diagnosis Related Group (DRG) payment). See Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 406 n.3 (1993). This system has the potential to disadvantage a hospital if its patient volume shrinks, as hospitals have fixed costs (such as rent, interest, depreciation and costs associated with regulatory compliance) that do not automatically shrink along with patient volume. To protect a hospital that experiences a 5% or greater reduction in patient volume through no fault of its own, Congress created the Volume Decrease Adjustment (VDA) payment, which is to be used “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). The VDA payment is at issue in this case.

         Judge Mahoney summarized the method used to calculate the Hospital's VDA payment as follows:

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) . . . .

Here, the Hospital's total Medicare costs were $8, 348, 116, and its DRG payment was $6, 273, 905. AR 14, 32, 34. 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 supplies, and (6) implantable devices. Nar 12, 30-31. Based on this classification, the ...

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