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HUNTINGTON HOSP. v. SHALALA

February 23, 2001

HUNTINGTON HOSPITAL, LONG ISLAND COLLEGE HOSPITAL; NASSAU COUNTY MEDICAL CENTER; NEW YORK METHODIST HOSPITAL; NORTHERN WESTCHESTER HOSPITAL CENTER; PHELPS MEMORIAL HOSPITAL CENTER; ST. VINCENT'S HOSPITAL OF NEW YORK; SOUND SHORE MEDICAL CENTER, FORMERLY KNOWN AS NEW ROCHELLE HOSPITAL; SOUTHAMPTON HOSPITAL; AND STATEN ISLAND UNIVERSITY HOSPITAL, FORMERLY KNOWN AS RICHMOND MEMORIAL HOSPITAL, PLAINTIFFS,
V.
DONNA E. SHALALA, IN HER OFFICIAL CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND EMPIRE BLUE CROSS AND BLUE SHIELD, DEFENDANTS. GOOD SAMARITAN HOSPITAL; NEW YORK METHODIST HOSPITAL; NORTHERN WESTCHESTER HOSPITAL CENTER; PHELPS MEMORIAL HOSPITAL CENTER; ST. VINCENT'S HOSPITAL OF NEW YORK; AND STATEN ISLAND UNIVERSITY HOSPITAL, FORMERLY KNOWN AS RICHMOND MEMORIAL HOSPITAL, PLAINTIFFS, V. DONNA E. SHALALA, IN HER OFFICIAL CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND EMPIRE BLUE CROSS AND BLUE SHIELD, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

This dispute arises out of reimbursement allegedly due to Huntington Hospital, Long Island College Hospital, Nassau County Medical Center, New York Methodist Hospital, Northern Westchester Hospital Center, Phelps Memorial Hospital Center, St. Vincent's Hospital of New York, Sound Shore Medical Center, Southampton Hospital, Staten Island University Hospital, and Good Samaritan Hospital (collectively the "Hospitals" or the "plaintiffs"), under the Medicare Statute 42 U.S.C. § 1395, et. seq. The narrow issue presented here is whether the Secretary of Health and Human Services (the "Secretary" or a "defendant") exceeded her statutory authority when she promulgated the regulation that set September 30, 1982, through September 20, 1983, as the base year for the hospital specific portion of the blended payment rate that was to be used in the four-year transition from a cost-based Medicare hospital reimbursement system to a prospective payment system.

I. BACKGROUND

A. Statutory and Regulatory Framework

Part A of the Medicare Program, 42 U.S.C. § 1359c et. seq., authorizes payment for in-patient hospital services to eligible aged and disabled persons. Providers of these services are reimbursed by fiscal intermediaries designated by the provider and the Secretary. See 42 U.S.C. § 1359h-1359i.

Prior to October 1, 1983, the Medicare Program reimbursed hospitals based on a "retrospective, reasonable cost system. At the end of each fiscal year, hospitals reported the total costs for which they sought reimbursement." Rye Psychiatric Hosp. Ctr., Inc. v. Shalala, 52 F.3d 1163, 1165 (2d Cir. 1995). The Medicare Program reimbursed the hospitals for the reasonable cost of covered services, excluding charges that the Secretary found were "unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). This method of reimbursement provided little incentive for hospitals to reduce or contain costs and shifted the burden of cost increases from the hospitals to the federal government. See Rye Psychiatric, 52 F.3d at 1165; Episcopal Hosp. v. Shalala, 994 F.2d 879, 881 (D.C.Cir. 1993); Tucson Medical Ctr. v. Sullivan, 947 F.2d 971, 973-74 (D.C.Cir. 1991) (noting that under the reasonable cost system, "[t]he more the [hospitals] spent, the more they were reimbursed").

The Court of Appeals described the effect TEFRA's target amount has on hospitals' Medicare reimbursements:

How fully a TEFRA hospital is reimbursed from year to year thus depends on (1) how representative its base period is of its actual total costs in the relevant year, and (2) how closely the Congressionally fixed percentage increase mirrors any increase in the hospital's costs. . . . Because the base period is the starting point for the determination of all subsequent ceilings, changing the base period affects all future target amount calculations of the hospital, not merely that of a particular year.

Rye Psychiatric, 52 F.3d at 1166.

On October 1, 1983, Congress replaced this retroactive reimbursement of reasonable costs with the Prospective Payment System ("PPS"). See Pub.L. No. 98-21, §§ 601-606, 97 Stat. 65, 149 (1983) (codified as amended primarily at 42 U.S.C. § 1395-1395ww). Congress' intent was "to reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost-effective hospital practices." H.R.Rep. No. 25, 98th Cong., 1st Sess. 132 (1983), reprinted in U.S.C.C.A.N. 219, 351. The PPS established 470 "diagnosis related groups" ("DRGs") and set a fixed rate of reimbursement for each DRG. 42 U.S.C. § 1395ww(d)(4). "DRG cost schedules are generated from anticipated national and regional average costs for the treatment of particular illnesses." Rye Psychiatric, 52 F.3d at 1167 (citing 42 U.S.C. § 1395ww(d)(2)(D) (1983)). The PPS promotes efficiency and treatment-cost reduction by allowing the hospitals to retain the difference between the hospital's actual operating cost and the DRG while forcing the hospitals to absorb operating costs in excess of the DRG. See Rye Psychiatric, 52 F.3d at 1167 n. 4 (citing H.R.Rep. No. 25, 98th Cong., 1st Sess. 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351; S.Rep. No. 23, 98th Cong., 1st Sess. 47 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 187); New York University Medical Ctr. v. Shalala, 1996 WL 636128 (S.D.N.Y. 1996).

Recognizing that implementation of the PPS would create a financial hardship for many hospitals, Congress created a four-year transition period between the reasonable cost system and the PPS, see 42 U.S.C. § 1395ww(d), that was designed to "minimize disruptions that might otherwise occur because of a sudden change in reimbursement policy." S.Rep. No. 23, 98th Cong., 1st Sess. 53 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 193; H.R.Rep. No. 25 136, 98th Cong., 1st Sess., reprinted in 1983 U.S.C.C.A.N. 143, 355. During the transition period, the federal government reimbursed hospitals according to a "blended" rate, which had two components. The first component, the hospital-specific portion ("HSP"), was a percentage of "the hospital's target amount for the cost reporting period (as defined in subsection (b)(3)(A) of this subsection)." 42 U.S.C. § 1395ww(d)(1)(A)(i)(I), (ii)(I). The ecretary promulgated a regulation that defined the HSP base year for the transition period as the hospital's allowable costs "for the twelve month or longer cost reporting period ending on or after September 30, 1982, and before September 30, 1983." 42 C.F.R. § 412.71(a).

The second component of the blended rate was the "federal" portion, which was a percentage of the DRG prospective payment rate. See 42 U.S.C. ยง 1395ww(d)(1)(A)(i)(II), (ii)(II). Over the course of the four-year transition period, which began on October 1, 1983, the federal portion of the blended rate became progressively larger while the HSP portion became progressively smaller until the ...


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