United States District Court, N.D. Iowa, Central Division
ST. ANTHONY REGIONAL HOSPITAL, Plaintiff,
ALEX M. AZAR II, Secretary of Department of Health and Human Services, Defendant.
Leonard T. Strand, Chief Judge.
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.
Judicial Review of the Secretary's Decision
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 Chevrondeference). 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).
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.
Review of Report and Recommendation
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
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.
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.
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. §
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
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 ...