Abraham Lincoln Memorial Hospital et al
Filing
22
OPINION: Plaintiffs' Motion for Summary Judgment 14 is DENIED and Defendant's Motion for Summary Judgment 16 is GRANTED. CASE CLOSED. Entered by Judge Sue E. Myerscough on 6/7/2011. (ME, ilcd)
E-FILED
Wednesday, 08 June, 2011 01:34:14 PM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
ABRAHAM LINCOLN MEMORIAL HOSPITAL;
)
BLESSING HOSPITAL; BLESSINGCARE
)
CORPORATION, INC., d/b/a ILLINI COMMUNITY )
HOSPITAL; COMMUNITY MEDICAL CENTER OF )
WESTERN ILLINOIS, INC.; COMMUNITY
)
MEMORIAL HOSPITAL; GIBSON COMMUNITY )
HOSPITAL, d/b/a GIBSON AREA HOSPITAL AND
)
HEALTH SERVICES; HARDIN COUNTY GENERAL )
HOSPITAL, INC.; HILLSBORO AREA HOSPITAL,
)
INC.; HOOPESTON COMMUNITY MEMORIAL
)
HOSPITAL; HOSPITAL & MEDICAL FOUNDATION)
OF PARIS, INC., d/b/a PARIS COMMUNITY
)
HOSPITAL; KEWANEE HOSPITAL; MEMORIAL
)
HOSPITAL ASSOCIATION, INC.; MEMORIAL
)
MEDICAL CENTER; MENDOTA COMMUNITY
)
HOSPITAL; PANA COMMUNITY HOSPITAL
)
ASSOCIATION; PASSAVANT MEMORIAL AREA
)
HOSPITAL ASSOCIATION; RICHLAND MEMORIAL)
HOSPITAL, INC.; SARAH BUSH LINCOLN HEALTH)
CENTER; SHELBY MEMORIAL HOSPITAL
)
ASSOCIATION, INC.; SOUTHERN ILLINOIS
)
HOSPITAL SERVICES, d/b/a FERRELL HOSPITAL; )
SOUTHERN ILLINOIS HOSPITAL SERVICES, d/b/a )
HERRIN HOSPITAL; SOUTHERN ILLINOIS
)
HOSPITAL SERVICES, d/b/a SAINT JOSEPH
)
MEMORIAL HOSPITAL; ST. JOSEPH HOSPITAL
)
OF THE HOSPITAL SISTERS OF THE THIRD
)
ORDER OF ST. FRANCIS; TAYLORVILLE
)
MEMORIAL HOSPITAL; THE METHODIST
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MEDICAL CENTER OF ILLINOIS; and VALLEY
)
WEST COMMUNITY HOSPITAL,
)
)
Plaintiffs,
v.
KATHLEEN SEBELIUS, in her official capacity as
SECRETARY OF THE UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN
SERVICES,
Defendant.
)
)
) No. 10-3122
)
)
)
)
)
)
)
OPINION
SUE E. MYERSCOUGH, United States District Judge.
Plaintiff Hospitals seek judicial review of the Secretary of Health
and Human Services’ (Secretary) final decision reversing a decision of the
Provider Reimbursement Review Board (Board). The Hospitals and the
Secretary each moves for summary judgment. For the reasons set forth
below, the Court grants the Secretary’s Motion and denies the Hospitals’
motion.
I. INTRODUCTION
The Plaintiffs, who consist of 26 Illinois hospitals (Hospitals),
challenge the final administrative decision of the Secretary. In a ruling
that stands as the final decision of the Secretary, the Administrator of the
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Centers for Medicare & Medicaid Services (Administrator) upheld
Medicare disallowances of the expenses claimed by the Hospitals.
Although the Administrator’s decision stands as the final decision of the
Secretary, this Court will continue to refer to the decision as the
Administrator’s decision for purposes of clarity. The Administrator
found that the amount of the Tax Assessment1 paid by the Hospitals
pursuant to state statute was an allowable cost under the Medicare
program but was subject to offset by the payments the Hospitals received
from the fund created by the tax .
A.
Overview of the Medicare Program
“The Medicare program is a federally-subsidized health insurance
program primarily for elderly and disabled individuals.” Michael Reese
Hosp. and Medical Center v. Thompson, 427 F.3d 436, 438 (7th Cir.
2005). The Centers for Medicare & Medicaid Services (CMS) is charged
The type of tax at issue here is referred to by the parties and
applicable regulations as a “provider tax,” “hospital tax assessment,” and
“health care provider tax.” This Court will use the term “Tax
Assessment” when referring to the tax claimed by the Hospitals on the
cost report.
1
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with administering the Medicare program. Select Specialty Hosp. of
Atlanta v. Thompson, 292 F.Supp.2d 57, 61 (D.D.C. 2003).
CMS contracts with insurance companies–called fiscal
intermediaries–“to process claims made on behalf of Medicare
beneficiaries.” See Doctors Nursing & Rehabilitation Center, LLC v.
Sebelius, 2010 WL 4878832 (C.D. Ill. 2010). A hospital submits an
annual hospital cost report at the end of the hospital’s fiscal year stating
the amount of Medicare reimbursement the hospital believes is due. See
United States v. Rogan, 2002 WL 31433390, at *2 (N.D. Ill. 2002); see
also 42 C.F.R. § 413.20 (regulation pertaining to cost reports). Those
cost reports are reviewed by the fiscal intermediary, who then determines
the amount of reimbursement due the provider and issues the provider a
Notice of Program Reimbursement. See 42 C.F.R. § 405.1803. A
provider may challenge the fiscal intermediary’s determination by
requesting a hearing before the Board. See 42 U.S.C. § 1395oo(a); 42
C.F.R. § 405.1835.
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B.
The Hospitals’ Medicare Cost Reports
During the period at issue here, fiscal years 2005 and 2006, the
Hospitals sought reimbursement for services provided to patients covered
by the Medicare program on a “reasonable cost” basis. See 42 U.S.C. §
1395f(b)(1) (providers may be reimbursed for the lower of the reasonable
cost of services or the customary charges with respect to such services).
The Hospitals included in their cost reports the Tax Assessment they
paid pursuant to Illinois statute, discussed in more detail below.
The fiscal intermediary–AdminaStar Federal and its successor,
National Government Services (collectively, the Intermediary)–
disallowed the Tax Assessment payments as costs and made audit
adjustments which affected the amount of Medicare reimbursement that
each Hospital was due. According to the Hospitals, the disallowance
lowered Medicare payments to the Hospitals in the aggregate amount of
$4,195,424. The Secretary claims the amount at issue is $3,963,655.
The Administrator did not make any specific finding about the amount
at issue, and the exact amount is not relevant to this Court’s review of
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the Administrator’s decision.
C.
Medicaid and the State Health Care Provider Tax
Before discussing the Tax Assessment claimed as an expense by the
Hospitals on their cost reports, a brief explanation of the Medicaid
program is necessary to put the issue in context. “Medicaid is a
cooperative federal-state program that provides federal funding for state
medical services to the poor.” Frew ex rel. Frew v. Hawkins, 540 U.S.
431, 433 (2004). A state’s Medicaid program is set forth in a State
Plan, which must be approved by CMS before the State Plan may be
implemented. 42 U.S.C. §1396a. A state must also submit for approval
any proposed amendments to the State Plan. See 42 C.F.R. §430.12(c);
American Society of Consultant Pharmacists v. Garner, 180 F.Supp.2d
953, 958 (N.D. Ill. 2001). If the state establishes a Medicaid plan that
meets federal requirements, the federal government reimburses a state’s
medical assistance costs by paying a Federal Medical Assistance
Percentage. See 42 U.S.C. § 1396b(a)(1); Harris v. McRae, 448 U.S.
297, 308 (1980); Arkansas Dept. of Health and Human Services v.
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Ahlborn, 547 U.S. 268, 275 (2006) (noting that the federal government
pays between 50% and 83% of the costs the State incurs for patient
care). CMS is also charged with administering the Medicaid program.
Moore ex rel. Moore v. Reese, 637 F.3d 1220, 1235 (11th Cir. 2011).
In 2004, the Illinois Department of Public Aid (IDPA) filed two
Amendments to Illinois’ State Plans: one establishing new inpatient
adjustments; and one establishing new outpatient adjustments. The
Amendments were necessary because Illinois enacted legislation that
authorized a Hospital Provider Assessment Program (305 ILCS 5/5A-1,
et seq.).
Essentially, the statute imposed a health care related tax on
providers to raise revenue for the Medicaid program which would in turn
increase the matching funds received from the federal government.
Pursuant to 42 U.S.C. § 1396b(w), revenue a state receives from a health
care related tax will be eligible for the Federal Medical Assistance
Percentage if the tax is broadly based, uniformly imposed, and is not, in
effect, a hold harmless provision. See 42 U.S.C. § 1396b(w)(1)(A)(ii),
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(iii); 42 U.S.C. § 1396b(w)(3)(B); 42 U.S.C. § 1396b(w)(4). A health
care related tax is a hold harmless provision if: (1) it provides for
payment to the taxpayer that is tied to the amount of the health care
related tax paid; (2) the Medicaid payments the taxpayer received are
tied to the total health care related tax paid; or (3) the state promises to
hold the taxpayer harmless for a portion of the tax through a direct
payment or an exemption from the tax. Protestant Memorial Medical
Center, Inc. v. Maram, 471 F.3d 724, 727 (7th Cir. 2006), citing 42
U.S.C. § 1396b(w)(4).
CMS approved the State Plan Amendments after: (1) granting
IDPA a waiver of the broad-based requirement and (2) requiring IDPA
remove language from the State Plan Amendment that conditioned the
State’s increased Medicaid payments to hospitals on CMS’s waiver of the
broad-based requirement. The Hospitals and the Intermediary stipulated
at the hearing before the Board that CMS approved the State Plan
Amendments for federal matching and determined the health care
provider tax was not a hold harmless agreement.
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As a result of the approval of the State Plan Amendments, the
Hospitals received additional Medicaid payments from the Fund created
by the tax assessment. Those additional Medicaid payments were
included when the federal government calculated the Federal Medical
Assistance Percentage. This Court will hereinafter refer to the additional
Medicaid payments the Hospitals received from the Fund as the “Fund
Payments.”
The record contains evidence that most hospitals received more in
Fund Payments than they paid in taxes and some hospitals received less.
Some hospitals received Fund Payments even though the hospital was
exempt from paying the tax.
D.
The Illinois Statute Imposing the Health Care Related Tax
The Illinois statute imposed an annual health care related tax (the
statute calls it an “assessment”) on inpatient services on each hospital
provider–except for certain categories of exempt hospitals– “in an amount
equal to the hospital’s occupied bed days multiplied by $84.19 for State
fiscal years 2004 and 2005.” 305 ILCS 5/5A-2(a) (West 2004). A
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hospital provider who failed to pay the tax when due was subject to a
penalty. 305 ILCS 5/5A-4(c) (West 2004).
The funds received from the tax were put in a Hospital Provider
Fund (Fund). 305 ILCS 5/5A-6 (West 2004). In addition to funds
received from the tax the Fund contained: (1) all federal matching funds
received by IDPA as a result of expenditures made by IDPA that were
attributable to money deposited in the Fund; (2) interest and penalties
levied in conjunction with the statue; (3) money transferred from another
fund in the State treasury; and (4) money received for the Fund from any
other source, such as interest earned. 305 ILCS 5/5A-8(c) (West 2004).
IDPA was required to make Hospital Access Improvement
Payments with money from the Fund. 305 ILCS 5/5A-12 (West 2004)
(“To improve access to hospitals services, . . . [IDPA] shall make
payments to hospitals as set forth in this Section”). These Hospital
Access Improvement Payments were additional Medicaid payments. See,
e.g., Protestant Memorial, 471 F.3d at 727 (noting that the payments
under Section 5A-12 were “payments to the hospitals above the basic
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rate of inpatient hospital services, including a ‘Medicaid inpatient
utilization rate adjustment’”). In addition to the Hospital Access
Improvement Payments, the statute permitted IDPA to disburse money
from the Fund for eight different reasons, including making payments
under the Children’s Health Insurance Program Act and paying
administrative expenses by the IDPA in performing activities authorized
by the statute. 305 ILCS 5/5A-8(b) (West 2004).
The Hospitals’ tax liability was contingent on several factors,
including actual receipt of the Fund Payments, CMS’s approval of the
Fund Payments, and waiver of the broad-based requirement. See 305
ILCS 5/5A-4(a) (the payment of the tax shall not be due until after “the
hospital has received the payments required under Section 5A-12”); 305
ILCS 5/5A-10 (West 2004).
E.
Procedural History of this Case
The Intermediary disallowed the Tax Assessment as a cost and
made audit adjustments which affected the amount of Medicare
reimbursement each Hospital was due or owed for the cost reporting
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period. The Hospitals appealed the Intermediary’s decision to the Board.
The Board consolidated the appeals into one group appeal.
Following a hearing, the Board ruled that the Tax Assessment was
an allowable cost and that the Fund Payments did not constitute a
refund. In February 2010, the Intermediary requested review by the
CMS Administrator, asserting the Hospitals’ Tax Assessment costs
should reflect the amount refunded in the form of Fund Payments.
The Administrator then reversed the Board, finding that the Tax
Assessment was an allowable cost that must be offset by the Fund
Payments received.
II. JURISDICTION AND VENUE
Judicial review of the Administrator’s decision is provided by 42
U.S.C. § 1395oo(f)(1). Venue is proper because the greatest number of
providers are located in this district. 42 U.S.C. 1395oo (f)(1) (“in an
action brought jointly by several providers, [venue is proper in] the
judicial district in which the greatest number of providers are located”);
see also 28 U.S.C. 1391(e) (addressing venue when the defendant is an
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officer or employee of a United States agency acting in his or her official
capacity).
III. STANDARD FOR SUMMARY JUDGMENT AND JUDICIAL
REVIEW OF THE ADMINISTRATOR’S DECISION
The parties have filed cross-motions for summary judgment
pursuant to Rule 56 of the Federal Rules of Civil Procedure. A court may
grant summary judgment only if the “pleadings, the discovery, and
discovery materials on file, and any affidavits show that there is no
genuine issue as to any material fact and that the moving party is entitled
to judgment as a matter of law.” Fed.R.Civ.P. 56(c); see also, Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986). Cross-motions for summary
judgment “provide an appropriate procedural vehicle for deciding the
legal significance of the evidence set forth in the administrative record
and for evaluating the administrative decision.” Southern Indiana
Rehabilitation Hosp. v. Thompson, 2004 WL 784351, at *1 (S.D. Ind.
2004).
This Court reviews the Administrator’s decision in accordance with
the Administrative Procedure Act (APA) (5 U.S.C. §701 et seq.). 42
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U.S.C. § 1395oo(f)(1) (referencing 5 U.S.C., Chapter 7); see also
Thomas Jefferson University v. Shalala, 512 U.S. 504, 512 (1994).
Under the APA, agency action, findings, and conclusions may be found
unlawful and set aside where such actions, findings, or conclusions are
“arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law” or not supported by substantial evidence. 5 U.S.C.
§706(2).
When reviewing an agency’s interpretation of a statute it
administers, a court first determines “whether Congress has directly
spoken to the precise question at issue.” Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 842 (1984). If so, the
agency and the court must give effect to Congress’ expressed intent. Id.
at 842-43. If the statute is silent or ambiguous, the court examines
whether the agency’s interpretation was based on a permissible
construction of the statute. Id. at 843.
Generally, the Secretary’s interpretation of the Medicare
regulations is entitled to considerable deference. See Loyola University
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of Chicago v. Brown, 905 F.2d 1061, 1067 (7th Cir. 1990); see also St.
Francis, 714 F.2d at 874. /Adventist Living Centers, Inc. v. Bowen, 881
F.2d 1417, 1420 -21 (7th Cir. 1989) (deference afforded to the Secretary
is not lessened by the fact that the Board reached a different conclusion).
However, the Secretary’s interpretation of “reasonable cost” is entitled to
a lesser degree of deference because the Medicare statute specifically
circumscribes the Secretary’s discretion to define “reasonable cost”.
Little Co. of Mary Hosp. v. Sebelius, 587 F.3d 849, 853 (7th Cir. 2009);
see also Bowen, 905 F.2d at 1067 (noting the reason for the lesser degree
of deference is because the statute requires that the regulations take into
account direct and indirect costs and must avoid cost shifting).
IV. ANALYSIS
The Hospitals argue: (1) the Administrator’s decision that the Fund
Payments constituted refunds of the Tax Assessment was contrary to law,
arbitrary, capricious, and not supported by substantial evidence; (2) the
Administrator’s decision must be set aside because it establishes a new
rule issued without notice and comment and cannot be retroactively
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applied; and (3) the Administrator’s decision violates the cost-shifting
provisions of the Medicare statute.
A.
Administrator’s Decision Was Not Arbitrary, Capricious, or
Contrary to Law, and Is Supported by Substantial Evidence
The Medicare program reimburses hospitals for the “reasonable
cost” of medical services. 42 U.S.C. § 1395f(b)(1). The statute defines
reasonable costs as:
the cost actually incurred, excluding therefrom any
part of incurred cost found to be unnecessary in
the efficient delivery of needed health services, and
shall be determined in accordance with regulations
establishing the method or methods to be used[.]
42 U.S. C. § 1395x(v)(1)(A).
The Secretary is authorized to promulgate regulations “establishing
the method or methods to be used” for determining reasonable costs. 42
U.S.C. § 1395x(v)(1)(A). The regulations must take into account both
direct and indirect costs so that, under the methods of determining costs,
the costs of providing services to persons covered by Medicare is not
borne by persons not covered under Medicare, and the costs of providing
services to persons not covered under Medicare is not borne by persons
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covered under Medicare. 42 U.S.C. § 1395x(v)(1)(A).
“The reimbursed costs should be actual costs, but the statute gives
the Secretary wide latitude in developing methods of determining costs.”
St. Mary’s Hospital Medical Center v. Heckler, 753 F.2d 1362, 1366 (7th
Cir. 1985), citing 42 U.S.C. §1395x(v)(1)(A). “Congress specifically left
a gap in the statute and gave the Secretary the authority to establish the
regulations which define ‘reasonable costs’ and which prevent Medicare
costs from being shifted to the provider hospitals.” Shalala v. St. PaulRamsey Medical Center, 50 F.3d 522, 524 (8th Cir. 1995), citing 42
U.S.C. §1395x(v)(1)(A).
1.
The Relevant Regulations
The Secretary has promulgated regulations “establishing the
methods for determining reasonable cost reimbursement.” Shalala v.
Guernsey Memorial Hosp., 514 U.S. 87, 91 (1995). The regulations
relevant to the time at question here define “reasonable cost” as including
all “necessary and proper costs incurred in furnishing the services, subject
to principles relating to specific items of revenue and cost.” 42 C.F.R. §
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413.9(a). This includes administrative costs. See 42 C.F.R. §
413.9(c)(3). The Provider Reimbursement Manual2 (Manual), provides
that, as a general rule, taxes assessed against a provider are allowable
costs. Manual, § 2122. The Manual contains a list of taxes not allowable
as costs, and health care provider taxes are not listed therein. Manual, §
2122.2.
The regulations also provide for adjustments to allowed costs.
Specifically, Section 413.98 of the regulations provides that discounts,
allowances, and refunds of various expenses are reductions of the costs to
which they relate. 42 C.F.R. § 413.98(a). Refunds are “amounts paid
back or a credit allowed on account of an overcollection.” 42 C.F.R. §
413.98(b)(3). In addition, “refunds of previous expense payments are
clearly reductions in costs and must be reflected in the determination of
allowable cost.” 42 C.F.R. § 413.98(d)(2).
The Manual also provides that “refunds of previous expense
The Manual is “an extensive set of informal interpretive guidelines
and policies published to assist intermediaries and providers in applying
the reasonable cost reimbursement principles.” Providence Hospital of
Toppenish v. Shalala, 52 F.3d 213, 218 (9th Cir. 1995).
2
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payments are reductions of the related expense.” Manual, § 800.
Discounts, allowances, refunds, and rebates are not considered a form of
income but should be used to reduce the specific costs to which they
apply. Manual, § 804. Finally, Section 2302.5 of the Manual defines
“Applicable Credits” that offset or reduce expense items listed on the cost
report as follows:
Those receipts or types of transactions which
offset or reduce expense items that are allocable to
cost centers as direct or indirect costs. Typical
examples of such transactions are: purchase
discounts, rebates or allowances; recoveries or
indemnities on losses; sales of scrap or incidental
services; adjustments of overpayments or
erroneous charges; and other income items which
serve to reduce costs.
Manual, § 2302.5
2.
The Administrator’s Decision
After considering the law, regulations, policy guidelines, and
evidence in the record, the Administrator found the Tax Assessment was
an allowable cost, but that cost had to be offset by the Fund Payments
received by the Hospitals. That is, the “allowable tax is properly
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calculated as being the amount of the State imposed tax less the amount
refunded by the State of Illinois in the form of the hospital access
improvement payments.”
Specifically, the Administrator found the Tax Assessment and Fund
Payment “inextricably linked,” as evidenced by: (1) the language in the
state statute containing the Hospitals’ conditional obligation to pay the
Tax Assessment tax contingent on CMS’s approval of the tax
arrangement for Federal Medicaid matching funds; and (2) the timing of
the Tax Assessment and Fund Payments--the Tax Assessment payments
were not due until the Fund Payments were received. The Administrator
found that, but for the Tax Assessment, there would have been no Fund
Payment, and, without the Fund Payment, there would have been no Tax
Assessment. Finally, the Administrator noted that if the State had not
benefitted from the increased Federal funding, neither the tax nor the
Fund would have been established.
The Administrator also found that regardless of how the Fund
Payment was characterized, the Fund Payment must be used to offset the
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Tax Assessment under Medicare reasonable cost rules. The reasonable
cost rules in the statute and the regulations required providers be
reimbursed the reasonable costs of those services, which are defined as
the costs actually incurred. The Administrator found the cost actually
incurred by the Hospitals was the Tax Assessment expense offset by the
Fund Payment.
The Administrator found such conclusion was analogous to and
supported by the regulations relating to refunds. Because almost all of
the participating hospitals received a Fund Payment greater than the Tax
Assessment, the Administrator found it was only reasonable that the
“refund” be used to reduce the allowable expenses for Medicare cost
reimbursement purposes. The Administrator specifically held that “[t]he
reduction of the [T]ax [A]ssessment by the redistribution/refund received
most accurately captures the costs actually ‘incurred’ for purposes of
Medicare reimbursement.”
The Administrator found it was immaterial that the tax itself met
the required Medicaid “hold harmless” provision. See 42 U.S.C. §
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1396b(w)(4) (a health care related tax is a hold harmless provision if a
payment to the taxpayer–Medicaid or otherwise–is tied to the amount of
the tax paid by the taxpayer or if the state promises to hold the taxpayer
harmless for a portion of the tax through a direct payment or exemption
from the tax). According to the Administrator, “the Medicaid
determination regarding the validity of State’s hospital tax program for
purposes of Federal contributions, is not controlling over the Medicare
program’s determination of reasonable and necessary tax expense for
purposes of payment under Medicare.” The Administrator found the
“guiding principle” in this case was the reasonable cost rule in the statute
and the regulations and was not controlled by the Medicaid hold
harmless provision.
3.
Administrator’s Decision Was Not Arbitrary, Capricious, or
Contrary to Law, and Is Supported by Substantial Evidence
The Hospitals assert the Administrator’s decision was arbitrary,
capricious, and not supported by substantial evidence. The Hospitals
argue the Fund Payment and Tax Assessment were not linked and the
Fund Payment did not constitute a refund of the Tax Assessment. The
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Hospitals further assert that, in approving the State Plan Amendments,
CMS determined that the Hospitals’ tax expenses were not refunded by
the Medicaid payments. Finally, the Hospitals claim the Administrator’s
decision ignores CMS’s established policy of recognizing such Tax
Assessments as allowable expenses without offsetting the Medicaid
payments.
Reasonable costs, as that term is used in the statute, means the
costs actually incurred. See 42 U.S. C. § 1395x(v)(1)(A). The
Administrator’s conclusion that the amount of the Tax Assessment
actually incurred was the amount paid, minus the Fund Payment
received, is supported by substantial evidence.
The statute evidenced the link between the Tax Assessment and the
Fund Payment. The statute specifically provided that the Tax
Assessment was not due until the Fund Payment was made. 305 ILCS
5/5A-4(a)(ii) (West 2004). Moreover, the Hospitals did not pay the Tax
Assessment until they had received the Fund Payments. This evidence
supports the Administrator’s conclusion that the Hospitals did not
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actually incur the full Tax Assessment amount.
The Hospitals argue that the Administrator improperly determined
that the Fund Payment was a “refund” of the Tax Assessment. The
Hospitals argue the plain language of section 412.98(b)(3), which defines
“refund” as “amounts paid back or a credit allowed on account of
overcollection,” dictates that a refund occurs only when a payment is
made to correct an overcollection.
The Administrator’s apparent decision that a “refund” is an
“amount paid back” or a “credit allowed on account of overcollection” is
a permissible construction of the regulation. See, e.g., Sta-Home, 34
F.3d at 309 (rejecting a reading of section 413.98(b)(9) as requiring that
a refund be an amount paid back on account of overcollection, noting
that if that were the correct reading, “any amount that is paid out by
Sta-Home as a reimbursable expense and then is returned by the payee
for any reason other than ‘on account of an overcollection’, is not subject
to offset”)(emphasis in original). Substantial evidence supports the
conclusion that the Fund Payments were an “amount paid back” on the
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Tax Assessment.
In any event, the Administrator also held that regardless of the
characterization of the payment–meaning, regardless of whether it was
technically a “refund”– the Tax Assessment must be offset by the Fund
Payment because the statute and regulations require that providers only
be reimbursed for costs “actually incurred.” See Sta-Home, 34 F.3d at
310 (reimbursement is allowed only for ‘cost[s] actually incurred’”).
Here, the Administrator’s interpretation is in keeping with the statutory
directive.
In that regard, the case is distinguishable from the case cited by the
Hospitals, Loyola University of Chicago v. Bowen, 905 F.2d 1061. In
Loyola, the Seventh Circuit found that the Secretary’s decision to offset a
University’s claim for reimbursement of clinical medical education costs
by an amount equal to funds allocated to the Research and Education
account was not supported by substantial evidence. Id. at 1070 (the
faculty-physicians’ contract with a faculty practice plan provided that a
portion of patient-care fees over a certain earning ceiling would be
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allocated to a Research and Education account of the medical school
department to which the faculty-physician belonged). The Secretary had
recharacterized a payment made pursuant to the faculty-physicians’
employment contract as a “donation,” in which case the “donation”
would reduce the reimbursement expense. Id. at 1064, citing 42 C.F.R.
§405.421(g)(1) (providing that costs of approved medical educational
activities, including faculty salaries attributable to clinical education, are
offset by revenues received from “tuition and grants and donations that a
donor has designated for the activities”). The evidence did not support a
finding that the faculty-physicians assigned future income to the
university or that the funds were designated for payment of specific
operating costs of the hospital. Loyola, 905 F.2d 1069.
In contrast here, the record supports the Administrator’s decision
that Fund Payments constituted an offset of the Tax Assessments
incurred by the Hospitals. First, the full Tax Assessment was not an
incurred cost. Under the terms of the statute, the Hospitals did not have
to pay the tax until the Hospitals received the Fund Payments. See 305
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ILCS 5/5A-4(a) (the payment of the tax shall not be due until after “the
hospital has received the payments required under Section 5A-12”); 305
ILCS 5/5A-10 (West 2004).
Further, this Court rejects the Hospital’s implicit argument that
because no regulation specifically addresses the situation involved here,
the Administrator could not find that the Tax Assessment expense had to
be offset by the Fund Payment received. No basis exists “for suggesting
that the Secretary has a statutory duty to promulgate regulations that,
either by default rule or by specification, address every conceivable
question in the process of determining equitable reimbursement.”
Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 96 (1995).
The Hospitals also argue that by approving the State Plan
Amendments, CMS determined that the tax did not constitute a hold
harmless agreement. The Hospitals argue this shows CMS has already
determined that the Tax Assessment payments were not refunded by the
Fund Payments.
However, Medicaid and Medicare are different programs governed
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by different rules. See, e.g., Florida v. Association of Rehabilitation
Facilities v. Florida, 225 F.3d 1208, 1211 (11th Cir. 2000). The finding
that the tax was a permissible tax for purposes of matching federal funds
under Medicaid is not dispositive of whether those same taxes are
actually incurred and are “reasonable costs” under the Medicare statute.
See, e.g., Community Health Center v. Wilson-Coker, 311 F.3d 132, 137
(2nd Cir. 2002) (“It does not follow, however, that the Secretary’s
definition of ‘reasonable’ or ‘reasonably related’ under Medicare
necessarily also defines those terms for Medicaid purposes”).
The Hospitals also argue the Administrator’s decision is arbitrary
and capricious because it ignores CMS’s established policy of recognizing
health care provider taxes as allowable expenses without offsetting
Medicaid payments. See, e.g., pre-Fab Transit Co. v. United States, 595
F.2d 384, 387 (7th Cir. 1979) (agencies must explain “departures from
agency norms”). As evidence of the alleged prior position on the issue,
the Hospitals cited in their initial brief to five Board decisions, one CMS
decision (Kindred Hosp. v. Wisconsin Physician Services, 2009 WL
Page 28 of 41
6049415), and an Office of Inspector General report regarding the
Missouri provider tax program.
In the Hospital’s responsive brief, however, the Hospitals state
“while it is true that the prior manual provisions and administrative
determinations (with the exception of Kindred) do not directly address
the precise issue of whether a tax on hospitals paid to a State must be
offset by the amount of Medicaid payments made to the hospitals, that is
solely because CMS heretofore has never contested this matter.” This
Court concludes those prior administrative determinations– including
Kindred– do not address the precise issue raised here.
In Kindred, the Administrator concluded that payments hospitals
received from a voluntary pooling arrangement had to be offset against
the hospitals’ allowable tax expense. Kindred, 2009 WL 6049415, at *9.
That decision did not address whether the Medicaid revenues the
hospitals received from the State had to be offset against the allowable
tax expense.
The Hospitals essentially argue that implicit in the Kindred
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decision is the finding that the actual Medicaid revenues received directly
from the State cannot be considered an offset or reduction or refund of
provider taxes. However, this Court cannot infer the existence of a
contrary policy based on the Administrator’s silence. See, e.g., Thomas
Jefferson University, 512 U.S. at 516 (rejecting the petitioner’s attempt
to infer from silence in an intermediary letter a contrary policy, noting
“the mere failure to address [the issue] here hardly establishes an
inconsistent policy”).
Because the previous cases did not address the precise issue that
was before the Administrator in this case, the Administrator’s decision
here was not inconsistent. As such, the Administrator was not required
to explain the departure from previous interpretations. See Indiana Coal
Council Inc. v. Babbit, 2000 WL 1469452, at *7 (S.D. Ind. 2000)
(administrative agencies are not bound by the doctrine of stare decisis
and a court will not reverse an agency’s determination because it may be
inconsistent with prior decisions, but the agency must explain its
departure from established precedent).
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B.
Administrator’s Decision Did Not Constitute a New Rule that
Required Notice and Comment Procedures
The Hospitals next argue that the Administrator’s decision must be
set aside because it establishes a new rule that fails to comply with the
APA and the Medicare statute. The Hospitals also argue that the
decision is impermissibly retroactive.
1.
Administrator’s Decision Was an Adjudication
An administrative agency must provide the public with notice and
the opportunity to comment prior to promulgating substantive changes
to a regulation. 5 U.S.C. §552(a)(1)(D) (agency shall publish in the
Federal Register substantive rules, statements of general policies,
interpretations of general applicability formulated and adopted by the
agency); 5 U.S.C. §552(a)(1)(E) (agency shall publish in the Federal
Register amendments, revisions or repeals of substantive rules general
policy, and interpretations of general applicability); 5 U.S.C. §553(b)
(requiring notice of proposed rulemaking). The Hospitals argue the
Administrator’s decision constitutes a modification of the regulation
defining “refunds of expenses” and, therefore, was required to comply
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with the rulemaking provisions of the APA.
This Court finds, however, that the Administrator’s decision
qualifies as an adjudication under the APA. See 5 U.S.C. § 554 (an
adjudication is a “decision required by statute to be determined on the
record after opportunity for an agency hearing[.]”). Section 1395oo of
the Social Security Act (Act) (of which Medicare is a part) requires a
hearing where the provider contests the amount of reimbursement due,
and the decision “shall be based upon the records made at such hearing.”
42 U.S.C. § 1395oo(a), (d). Therefore, the Administrator’s decision is an
adjudicative decision, not a rule within the meaning of the APA, and the
requirements for rule-making do not apply. See Shalala v. Guernsey
Memorial Hospital, 514 U.S. 87, 96 (1995) (“The APA does not require
that all specific applications of a rule evolve by further, more precise rules
rather than by adjudication”); see also Negrete-Rodriguez v. Mukasey,
518 F.3d 497, 503 (7th Cir. 2008) ( “[a]n agency is not precluded from
announcing new principles in an adjudicative proceeding rather than
through notice-and-comment ruling-making”).
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Moreover, as noted, above, the Administrator’s decision did not
constitute a departure from a previous position. The conclusion that the
Secretary has not changed positions disposes of the Hospitals’ argument
that the decision was such a departure as to constitute a new rule that
requires notice and the opportunity for comment. See Homemakers
North Shore, Inc. v. Bowen, 832 F.2d 408, 413 (7th Cir. 1987).
2.
The Act Does Not Impose More Stringent Requirement Than APA
The Hospitals also argue that the Act prescribes a process for
Medicare rulemaking and asserts the Administrator’s decision violated
that rule. Section 1395hh(a)(2) of the Act provides as follows:
No rule, requirement, or other statement of policy
(other than a national coverage determination)
that establishes or changes a substantive legal
standard governing the scope of benefits, the
payment for services, or the eligibility of
individuals, entities, or organizations to furnish or
receive services or benefits under this title shall
take effect unless it is promulgated by the
Secretary by regulation under paragraph (I).
42 U.S.C. §1395hh(a)(2); see also 42 U.S.C. § 1395hh(e)(I)(A)
(providing that a “substantive change in regulations, manual instructions,
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interpretative rules, statements of policy, or guidelines of general
applicability” shall not be applied retroactively except under certain
circumstances).
The Hospitals argue the Administrator’s decision “effects a
substantial change in the regulatory definition of ‘refunds’” and,
therefore, CMS could not adopt the new rule or apply it retroactively
unless CMS complied with Section 1395hh.
The courts that have considered this issue have concluded or
assumed without deciding that Section1395hh imposes no standards
greater than those established by the APA. See Baptist Health v.
Thompson, 458 F.3d 768, 776 n. 8 (8th Cir. 2006); Erringer v.
Thompson, 371 F.3d 625, 633 (9th Cir. 2004); Monmouth Medical
Center v. Thompson, 257 F.3d 807, 814 (D.C. Cir. 2001); Warder v.
Shalala, 149 F.3d 73, 79 n. 4 (1st Cir. 1998). Because rulemaking
procedures were not required under the APA, this Court finds rulemaking
procedures were not required under Section 1395hh(a)(2) of the Act.
Additionally, the case cited by the Hospitals, Chippewa Dialysis
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Services v. Leavitt, 511 F.3d 172 (D.C. Cir. 2007) is distinguishable. In
that case, the providers challenged the Board’s use of a “3.0 hour per
treatment standard” to its denial of a request for reimbursement at a
higher rate because the standard should have been published in the
Federal Register. Chippewa, 511 F.3d at 173. On judicial review of the
Board’s decision, the court examined Section 1395hh(c)(1) of the Act.
See 42 U.S.C. §1395hh(c)(1), which requires publication in the Federal
Register of all manual instructions, interpretive rules, statements of
policy, and guidelines of general applicability. The court held the
Secretary should have published the 3.0 hour per treatment standard
because it was a guideline of general applicability. Chippewa, 511 F.3d
at 177. The evidence showed the Secretary had used that standard as the
threshold in the past and intended to continue using that standard.
Chippewa, 511 F.3d at 177.
Here, the Administrator’s decision constituted an interpretation of
the relevant regulations, not a specific, numerical test. Moreover, unlike
Chippewa, the record here contains no evidence that the Secretary has
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previously addressed this precise issue. See, e.g., Provena Hospitals v.
Sebelius, 662 F.Supp.2d 140, 154 (D.D.C. 2009) (rejecting argument
that the Secretary failed to include the program memorandum “in the
mandatory list of agency issuances published in the Federal Register”
under Section 1395hh(c)(1); the argument was premised on the assertion
that the Secretary had previously committed to a different position, and
the court rejected that assertion). Therefore, the Administrator’s
decision did not violate the Act.
3.
Administrator’s Decision Can Apply Retroactively to the Hospitals
The Hospitals further argue the rule announced in the
Administrator’s decision cannot be retroactively applied. However,
“[w]ithin the context of an agency adjudication, the Secretary generally
may lawfully interpret a regulation notwithstanding its retroactive effect.”
St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 907 (D.C. Cir. 2010).
Therefore, the Administrator’s decision applies to the Hospitals.
4.
No Basis Exists to Set Aside Administrator’s Decision Due to an
Alleged Ex-Parte Communication
The Hospitals also argue, in a footnote, that the Administrator’s
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decision failed to comply with the Secretary’s regulation prohibiting ex
parte communications. See 42 C.F.R. § 405.1875(d). The Hospitals
claim the Administrator relied on comments filed by the Center of
Medicare Management (CMM), a division of CMS. The Administrator’s
decision reflected CMM submitted comments requesting the Board’s
decision be reversed.
Although the comments filed by CMM contained a certification
that a copy was provided to attorneys for the Hospital and Intermediary,
the Hospitals provided the affidavit of Carel T. Hedlund, an attorney for
the Hospitals, asserting she had not received the comments. The
Hospitals ask that the decision be set aside for noncompliance with the
procedures. 5 U.S.C. § 706(2)(D) (providing a reviewing court may set
aside agency action found to be “without observance of procedure
required by law”).
The Medicare regulations provide that a nonparty may
communicate with the Administrator concerning a Board decision so long
as the following requirements are met: (1) the comments must be in
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writing and (2) must contain a certification that copies were served on
all parties. 42 C.F.R. §405.1875(d)(1), (2). Those requirements were
met here. The comments were in writing and contained a certification
that the copies were served on all parties. The Hospitals could have
asked the Administrator to reopen and revise the decision, but the
Hospitals did not do so. 42 C.F.R. §405.1875(e)(4)(ii). See, e.g., United
States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952) (“orderly
procedure and good administration require that objections to the
proceedings of an administrative agency be made while it has opportunity
for correction in order to raise issues reviewable by the courts).
Finally, even if the CMM comments constituted an improper ex
parte communication, improper ex parte communications do not render
proceedings automatically void. Professional Air Traffic Controllers Org.
v. Federal Labor Relations Auth., 685 F.2d 547, 564-65 (D.C. Cir.
1982). Relevant considerations include the gravity of the
communication, whether the contact influenced the agency’s ultimate
decision, and whether the contents of the communications were
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unknown to opposing parties, who therefore had no opportunity to
respond. Id.
The Hospitals claim the comments from CMM substantially
influenced the Administrator’s decision because the Administrator
reached a different conclusion than had been reached in Kindred. But, as
noted above, Kindred is not inconsistent with the decision here.
Consequently, the alleged ex parte communication could not have
influenced the agency’s ultimate decision. Therefore, this Court will not
set aside the Administrator’s decision on the basis of an alleged ex parte
communication.
C.
Administrator’s Decision Does Not Violate the Cost-Shifting
Provisions of the Medicare Statute
The Hospitals’ final argument is that the Administrator’s decision
violates the cost-shifting provisions of the Medicare statute. The Act
prohibits “shifting Medicare costs to non-Medicare patients and vice
versa.” St. James Hosp. v. Heckler, 760 F.2d 1460, 1470 (7th Cir. 1985),
Page 39 of 41
citing 42 U.S.C. § 1395x(v)(1)(A). The Hospitals argue that Medicare is
not paying “its full share of the provider tax expense,” and the Secretary
is reducing that expense by the amount of Medicaid payments to the
Hospitals.
As this Court noted previously, the Administrator’s decision that
the Tax Assessment expenses were only “incurred” to the extent the Tax
Assessments exceeded the Fund Payments was not arbitrary, capricious,
contrary to law, and was supported by substantial evidence. To the
extent the Hospitals received Fund Payments, the Hospitals did not incur
an expense. As such, charging the Medicare program for tax costs the
Hospitals have not incurred would be improper. The Administrator’s
decision did not constitute improper cost shifting.
V. CONCLUSION
For the reasons stated, Plaintiffs’ Motion for Summary Judgment
(d/e 14) is DENIED and Defendant’s Motion for Summary Judgment
(d/e 16) is GRANTED. CASE CLOSED.
ENTERED:
June 7, 2011
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FOR THE COURT:
s/ Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATE DISTRICT JUDGE
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