Manchester Memorial Hosp et al v. Sebelius
Filing
44
ORDER: Plaintiffs' Motion 31 for Summary Judgment is DENIED; Defendant's Motion 34 for Summary Judgment is GRANTED. Signed by Judge Janet Bond Arterton on 03/29/2012. (Budris, K.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
Manchester Memorial Hospital, et al.,
Plaintiffs,
Civil No. 3:10cv1853 (JBA)
v.
Kathleen Sebelius, Secretary of the United States
Department of Health and Human Services,
Defendant.
March 29, 2012
RULING ON MOTIONS FOR SUMMARY JUDGMENT
On November 29, 2010, Plaintiffs Manchester Memorial Hospital, Rockville General
Hospital, Lawrence & Memorial Hospital, St. Francis Hospital & Medical Center, The
Charlotte Hungerford Hospital, Waterbury Hospital, Bridgeport Hospital, Greenwich
Hospital, Yale New Haven Hospital, Hartford Hospital, and Norwalk Hospital filed a
Complaint against Defendant Secretary of the United States Department of Health and
Human Services Kathleen Sebelius (the “Secretary”), alleging that the Secretary violated
Section 4410 of the Balanced Budget Act of 1997, Pub. L. No. 105–33, § 4410, 111 Stat. 251
(1997), by applying the budget neutrality adjustment to the wage indices for hospitals under
the Medicare statute on a state–by–state rather than nationwide basis. On July 5, 2011,
Plaintiffs moved [Doc. # 31] for summary judgment in their favor that the Secretary violated
the clear language of the Medicare statute. On July 8, 2011, the Secretary cross–moved
[Doc. # 34] for summary judgment in her favor on Plaintiffs’ claims. For the reasons that
follow, Plaintiffs’ motion will be denied and the Secretary’s motion will be granted.
I.
Background
Plaintiffs are eleven fully–licensed acute care hospitals located in Connecticut. (Pls.’
Loc. R. 56(a)1 Stmt. [Doc. # 32] ¶¶ 1–11; Def.’s Loc. R. 56(a)2 Stmt. ¶¶ 1–11.)
The Medicare program, established by Title XVIII of the Social Security Act and
administered by the Centers for Medicare and Medicaid Services on behalf of the Secretary,
provides for payment to hospitals for care rendered to covered individuals. See 42 U.S.C.
§ 1395 et seq. Hospitals are reimbursed for inpatient services under the Prospective Payment
System (“PPS”), which provides a specified amount of compensation to the hospitals for each
patient discharge based on the patient’s diagnosis or Diagnosis Related Group (“DRG”). See
id. § 1395ww(d). The prospective reimbursement rates are based on separate average
“standardized amounts” per discharge for urban areas and rural areas. Id.; see also 42 C.F.R.
§ 412.64.
The standardized amounts payable to hospitals in rural and urban areas are
readjusted to account for wage level variations in different geographic areas by identifying
the proportion of the standardized amount that is attributable to wages and labor–related
costs and multiplying it by the appropriate “wage index.” 42 U.S.C. § 1395ww(d)(3)(E); 42
C.F.R. § 412.64(h). The wage index is calculated by comparing the average hourly wage in
the market area of a particular hospital with the average hourly wage for all participating
hospitals nationwide. 42 C.F.R. § 412.64(h).
Pursuant to the Balanced Budget Act of 1997 (“BBA”), where a state’s rural hospitals
would otherwise have a higher wage index than any urban hospital in that state, a “rural
floor” is applied to the urban hospital’s wage index to raise it to match that of the rural
hospitals. See Publ. L. No. 105–33, § 4410, 111 Stat. 251 (1997). Section 4410(a) of the BBA
reads:
For purposes of section 1886(d)(3)(E) of the Social Security Act (42 U.S.C.
1395ww(d)(3)(E)) for discharges occurring on or after October 1, 1997, the
area wage index applicable under such section to any hospital which is not
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located in a rural area . . . may not be less than the area wage index applicable
under such section to hospitals located in rural areas in the State in which the
hospital is located.
With respect to the implementation of this rural floor provision, Section 4410(b) provides
that the Secretary:
shall adjust the area wage index referred to in subsection (a) for hospitals not
described in such subsection in a manner which assures that the aggregate
payments made under section 1886(d) of the Social Security Act (42 U.S.C.
1395ww(d)) in a fiscal year for the operating costs of inpatient hospital
services are not greater or less than those which would have been made in the
year if this section did not apply.
Prior to 2009, this budget neutrality adjustment was applied in such a way that the
increases in urban hospitals’ wage indexes to reach the rural floor were funded by hospitals
above the rural floor nationwide, i.e., to maintain budget neutrality, those non–rural floor
hospital’s wage indexes were lowered so that hospitals below the rural floor could have their
indexes raised. See 73 Fed. Reg. 23,528, 23,620 (Apr. 30, 2008). On April 30, 2008, the
Secretary issued a Notice of Proposed Rulemaking (“NPRM”) describing an intent to change
this nationwide approach to a state–by–state approach in which the rural floor in each
particular state would be funded by hospitals in that state rather than nationwide:
[A]t a State–by–State level, the rural floor is creating a benefit for a minority
of States that is then funded by a majority of States, including States that are
overwhelmingly rural in character. The intent behind the rural floor seems
to have been to address anomalous occurrences where certain urban areas in
a State have unusually depressed wages when compared to the State’s rural
areas. However, because these comparisons occur at the State level, we
believe it also would be sound policy to make the budget neutrality
adjustment specific to the State, redistributing payments among hospitals
within the State, rather than adjusting payments to hospitals in other States.
...
3
[W]e are proposing to apply a State level rural floor budget neutrality
adjustment to the wage index beginning in FY 2009. States that have no
hospitals receiving a rural floor wage index would no longer have a negative
budget neutrality adjustment applied to their wage indices. Conversely,
hospitals in States with hospitals receiving a rural floor would have their
wage indices downwardly adjusted to achieve budget neutrality within the
State. All hospitals within each State would, in effect, be responsible for
funding the rural floor adjustment applicable within that specific State.
Id. at 23,622–23.
After receiving more than 1,700 pages of comments on this NPRM, including
challenges from Plaintiffs (see R.R. 2988–4709), the Secretary published the final rule
declaring that the neutrality adjustment would be applied on a state–by–state level:
[W]e have decided to adopt our proposal for State level budget neutrality for
the rural and imputed floors as final in this final rule, to be effective
beginning with the FY 2009 wage index. However, in response to the public's
concerns and taking into account the potentially drastic payment cuts that
may occur to hospitals in some States, we have decided to phase in, over a
3-year period, the transition from the national budget neutrality adjustment
to the State level budget neutrality adjustment. In FY 2009, hospitals will
receive a blended wage index that is 20 percent of a wage index with the State
level rural and imputed floor budget neutrality adjustment and 80 percent of
a wage index with the national budget neutrality adjustment. In FY 2010, the
blended wage index will reflect 50 percent of the State level adjustment and
50 percent of the national adjustment. In FY 2011, the adjustment will be
completely transitioned to the State level methodology.
73 Fed. Reg. 48,434, 48,574 (Aug. 19, 2008).
On March 23, 2010, Congress enacted the Patient Protection and Affordable Care
Act (“PPACA”), which directed the Secretary to return to applying Section 4410(b)’s budget
neutrality adjustment on a nationwide basis:
In the case of discharges occurring on or after October 1, 2010, for purposes
of applying section 4410 of the Balanced Budget Act of 1997 (42 U.S.C.
1395ww note) and paragraph (h)(4) of section 412.64 of title 42, Code of
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Federal Regulations, the Secretary of Health and Human Services shall
administer subsection (b) of such section 4410 and paragraph (e) of such
section 412.64 in the same manner as the Secretary administered such
subsection (b) and paragraph (e) for discharges occurring during fiscal year
2008 (through a uniform, national adjustment to the area wage index).
Pub. L. 111–148, § 3141, 124 Stat. 119 (2010).
II.
Discussion1
A.
Waiver
The Secretary argues that Plaintiffs’ claims are barred as a matter of law because
Plaintiffs failed to submit a comment objecting to the Secretary’s proposal during the FY
2008 rulemaking process to apply the budget neutrality adjustment to all hospitals’ wage
indices. In their response to the Secretary’s “failure to comment” argument, Plaintiffs clarify
that they “are not challenging the FY 2008 Rule” but are instead only challenging the
Secretary’s decision “as set forth in the FY 2009 Rule, to apply the budget neutrality
adjustment on a statewide, rather than a nationwide basis.” (Pls.’ Opp’n [Doc. # 37] at 12.)
As further clarified at oral argument, Plaintiffs’ claim takes aim at a particular effect of the
FY 2009 Rule change: because the Secretary adjusted wage indices on a state–by–state
instead of nationwide basis following the 2009 change, there were urban hospitals above the
rural rate in some states whose rates were not adjusted (because there were no
1
“Summary judgment is appropriate where, construing all evidence in the light most
favorable to the non-moving party,” Pabon v. Wright, 459 F.3d 241, 247 (2d Cir. 2006), “the
pleadings, the discovery and disclosure materials on file, and any affidavits show that there
is no genuine issue as to any material fact and that the movant is entitled to judgment as a
matter of law,” Fed. R. Civ. P. 56(c)(2). An issue of fact is “material” if it “might affect the
outcome of the suit under the governing law,” and is “genuine” if “a reasonable jury could
return a verdict for the nonmoving party” based on it. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986). “Unsupported allegations do not create a material issue of fact.”
Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000).
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below–rural–floor hospitals in those states) in contravention of Section 4410(b)’s directive
that the Secretary “shall adjust the area wage index” for those hospitals.2 Plaintiffs claim that
with the new statewide, rather than nationwide, adjustments, hospitals in states that have
no hospitals receiving a rural floor wage index did not receive a negative budget neutrality
adjustment, whereas hospitals in states that do have hospitals receiving a rural floor wage
index are required to shoulder a higher burden to achieve budget neutrality within the state.
(See Compl. ¶ 46; Pls.’ Mem. Supp. [Doc. # 31–1] at 16–18.) It is the “carve–out,” which
exempts some urban hospitals above the rural floor from a wage index adjustment, that they
argue violates Section 4410(b)’s command that the Secretary “shall adjust” their wage index.
Although the Secretary argues that Plaintiffs failed to submit any comment during
the FY 2008 rulemaking process, she agrees that she did receive comments from Plaintiffs
and others during the FY 2009 rulemaking process addressing “her decision to apply the
budget neutrality adjustment on a statewide, rather than nationwide basis.” (Def.’s Reply
[Doc. # 40] at 2–3.) The Secretary’s evolving argument with respect to the comments
received during the FY 2009 rulemaking, reflecting Plaintiffs’ clarification that what they are
specifically challenging is that state–by–state application of Section 4410(b) violates the
requirement that the Secretary “shall adjust” the wage indices of urban hospitals above the
rural floor, is that although the Secretary received comments on the statewide application,
2
Plaintiffs argue in their memorandum in support of their motion for summary
judgment that “in direct contravention of the clear Congressional command of ‘shall adjust’
found in § 4410(b), the Secretary turned the statute on its head and immunized a broad array
of urban hospitals against the budget neutrality adjustment. According to the Secretary’s
own proclamation: ‘States that have no hospitals receiving a rural floor wage index would
no longer have a negative budget neutrality adjustment applied to their wage indices.’ 73
Fed. Reg. 48573 (August 19, 2008) (emphasis added).” (Mem. Supp. at 16.)
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she did not receive any specific comments on this particular effect of the statewide
application. Plaintiffs argue that the Secretary’s failure to adjust the wage indices of urban
hospitals in some states as a result of the 2009 Rule in violation of Section 4410(b)’s “shall
adjust” is “part and parcel” of the state–by–state application to which they did object.
“Absent special circumstances, a party must initially present its comments to the
agency during the rulemaking in order for the court to consider the issue.” Appalachian
Power Co. v. EPA, 251 F.3d 1026, 1036 (D.C. Cir. 2001) (internal quotations and citations
omitted). “An objection must be made with sufficient specificity reasonably to alert the
agency.” Id. In a June 9, 2008 comment, Plaintiff Danbury Hospital specifically highlighted
the unbalance that would negatively affect hospitals in some states, while benefitting
hospitals in others:
Applying budget neutrality on a nationwide basis minimizes the policy’s
impact on payments and results in the nation funding a nationwide policy.
Conversely, applying budget neutrality on a statewide basis maximizes the
policy’s impact on the payments of a few hospitals, and results in several
states funding a national policy. While the proposed statewide neutrality
adjustment would affect 266 hospitals in 27 states, it would have severe
adverse financial consequences for hospitals in seven states: California,
Connecticut, Iowa, New Hampshire, New Jersey, North Dakota, and
Vermont. Our estimate is that hospitals in these seven states will see the loss
of over $150 million next year in Medicare funding.
Since 1997 CMS has always interpreted the requirement that the “rural floor”
be implemented in a budget neutral manner to mean that budget neutrality
is achieved by adjusting rates for all hospitals across the nation, not just the
rates for hospitals within the state where the rural floor applies.
(R.R. at 3470.) A June 13, 2008 letter from Plaintiff Yale New Haven Hospital included the
objection: “Budget neutrality must remain a national policy in accordance with current
practice in order to retain balance and symmetry within a complex wage index
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environment.” (R.R. at 4526.) Comments such as these, addressing the imbalance in the
neutrality adjustments that would be created by a state–by–state approach and the unfair
burden that some hospitals would have to bear to the benefit of other hospitals, raise
Plaintiffs’ objection with sufficient specificity to reasonably alert the Secretary. That some
hospitals would not have their wage indices adjusted, while others would be
disproportionately impacted by the adjustment is a part of what Plaintiffs objected to, and
they therefore have not waived their claims that the Secretary improperly failed to adjust the
wage indices for some urban hospitals under the 2009 Rule.
B.
State–by–State Adjustment and the BBA
Plaintiffs argue that they are entitled to summary judgment in their favor because the
Secretary’s policy change to a state–by–state neutrality adjustment is prohibited by the plain
language of the BBA,3 or in the alternative that the statute is ambiguous, the PPACA shows
that the Congress intended the budget neutrality provision to be applied on a nationwide
basis. Defendants argue that they are entitled to summary judgment because the BBA does
not unambiguously prohibit the Secretary from applying the budget neutrality adjustment
on a statewide basis, the Secretary’s construction of the BBA, as embodied in the FY 2009
rule, is neither arbitrary nor capricious, and the PPACA cannot, by its express terms, be
applied retroactively to the Secretary’s application of the neutrality adjustment prior to
October 1, 2010.
3
Plaintiffs also argue in their opening brief that the legislative history of the BBA
shows that Congress clearly intended a nationwide adjustment, but in their opposition to
the Secretary’s cross–motion for summary judgment they agree that the legislative history
that they rely on in making this argument “did not concern the budget neutrality adjustment
and the rural floor” and they concede this argument (Pls.’ Opp’n at 6 n.2).
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The Court employs a two–step process in reviewing the Secretary’s interpretation of
the BBA: 1) if “Congress has directly spoken to the precise question at issue . . . [and] the
intent of Congress is clear, that is the end of the matter; for the court, as well as the agency,
must give effect to the unambiguously expressed intent of Congress”; 2) if “Congress has not
directly addressed the precise question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the absence of an administrative
interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue,
the question for the court is whether the agency’s answer is based on a permissible
construction of the statute.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837, 842–43 (1984). If the Court finds that the statute is not unambiguous and adopts the
second step, “unless [the Court finds] the Secretary’s construction of the statute to be
‘arbitrary, capricious, or manifestly contrary to the statute’ . . . [it] must yield to that
construction of the statute even if [it] would reach a different conclusion of [its] own
accord.” G & T Terminal Packaging Co. v. USDA, 468 F.3d 86, 95 (quoting Chevron, 467 U.S.
at 844).
i.
Language of the BBA
Plaintiffs argue that the language of Section 4410 is clear in that it unambiguously
requires the Secretary to adjust the wage indices of the urban hospitals above the rural floor
in making the neutrality adjustment. According to Plaintiffs, by performing this adjustment
on a statewide rather than nationwide basis, the Secretary failed to apply the budget
neutrality adjustment to urban hospitals in some states. The Secretary responds that the
language of Section 4410 does not unambiguously mandate the application of Section
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4410(b)’s budget neutrality adjustment on a uniform nationwide basis. (Def.’s Opp’n at
23–24.)
Nothing in Section 4410 of the BBA speaks directly to a nationwide application of
the budget neutrality measures. Section 4410(b) provides that the Secretary:
shall adjust the area wage index referred to in subsection (a) for hospitals not
described in such subsection in a manner which assures that the aggregate
payments made under section 1886(d) of the Social Security Act (42 U.S.C.
1395ww(d)) in a fiscal year for the operating costs of inpatient hospital
services are not greater or less than those which would have been made in the
year if this section did not apply.
The plain text does not unambiguously direct the Secretary to adjust the wage indices of
hospitals nationwide in order to ensure that aggregate payments do not exceed those that
would have been made if the section did not apply rather than adjusting the wage indices of
hospitals in each individual state.
Neither does the plain text of Section 4410(b) unambiguously direct the Secretary
that she “must” adjust the area wage index for all hospitals nationwide not described in
4410(a). The language of the Section directs the Secretary to adjust the wage indices for
those hospitals not described in 4410(a) “in a manner which assures that the aggregate
payments made under section 1886(d) of the Social Security Act . . . in a fiscal year for the
operating costs of inpatient hospital services are not greater or less than those which would
have been made in the year if this section did not apply.” This Section unambiguously
mandates that the Secretary preserve budget neutrality by adjusting wage indices for
hospitals not described in Section 4410(a), but does not unambiguously state that the
Secretary must ensure that all such hospitals across the entire country have their wage
indices so adjusted.
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ii.
The Secretary’s construction of the statute
With respect to the second step of the Chevron analysis, an agency’s interpretation
of a statute is not arbitrary or capricious if “[i]t is logically consistent with the language of
the regulation and it serves a permissible regulatory function.” Rollins Envtl. Servs., Inc. v.
EPA, 937 F.2d 649, 652 (D.C. Cir. 1991). In the NPRM for the 2009 Rule, the Secretary
explained that she sought to alter the budget neutrality adjustment to a state–by–state
calculation, because the rural floor had been “creating a benefit for a minority of States that
is then funded by a majority of States, including States that are overwhelmingly rural in
character.” 73 Fed. Reg. at 23,622. She further explained that “[t]he intent behind the rural
floor seems to have been to address anomalous occurrences where certain urban areas in a
State have unusually depressed wages when compared to the State’s rural areas,” and because
these discrepancies “occur at the State level, we believe it also would be sound policy to make
the budget neutrality adjustment specific to the State, redistributing payments among
hospitals within the State, rather than adjusting payments to hospitals in other States.” Id.
at 23,622–23. After notice and comment, the Secretary reiterated this explanation in the
final rulemaking. 73 Fed. Reg. at 48,752.
The Secretary’s reasoning reflects an interpretation of BBA Section 4410(b) that is
consistent with the language of the BBA and serves a permissible regulatory function. She
rationally considered the purpose of the rural floor and the neutrality adjustments and
decided that the goals of the regulation would be best served by resolving discrepancies
between the rural hospitals and the “depressed wages” at urban hospitals in each individual
state rather than on a nationwide basis. This interpretation is neither arbitrary, nor
capricious, nor manifestly contrary to the goals of Medicare or the BBA. The Secretary
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therefore did not violate the BBA by applying the neutrality adjustment on a state–by–state
rather than nationwide basis.
iii.
PPACA
Plaintiffs argue that the PPACA clarifies that Congress originally intended BBA
Section 4410(b) to apply on a nationwide basis rather than a statewide basis. This argument
ignores the plain language of the PPACA. By its own terms, the PPACA provides that the
Secretary shall administer Section 4410(b) “through a uniform, national adjustment to the
area wage index” for “discharges occurring on or after October 1, 2010.” Pub. L. 111–148,
§ 3141. Nothing in the PPACA states that it is to apply retroactively or that it is a
clarification of Section 4410(b), instead it simply instructs the Secretary how to conduct the
neutrality adjustment moving forward.
III.
Conclusion
For the reasons stated above, Plaintiffs’ motion [Doc. # 31] for summary judgment
is DENIED and the Secretary’s motion [Doc. # 34] for summary judgment is GRANTED.
The Clerk is directed to close this case.
IT IS SO ORDERED.
/s/
Janet Bond Arterton, U.S.D.J.
Dated at New Haven, Connecticut this 29th day of March, 2012.
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