The opinion of the court was delivered by: Michael A. Telesca United States District Judge
Plaintiffs ViaHealth of Wayne County (F/K/A Newark Wayne Community Hospital), Lakeside Memorial Hospital, Geneva General Hospital, F.F. Thompson Hospital, Rochester General Hospital, ("RGH"), Unity Hospital (F/K/A Park Ridge Hospital, Nicholas H. Noyes Memorial Hospital, Clifton Springs Hospital & Clinic, and Strong Memorial Hospital of Rochester (collectively "the hospitals") bring this action against defendant Charles E. Johnson, Acting Secretary of the United States Department of Health and Human Services, ("the Secretary") claiming that they have not been properly reimbursed through the Medicare and Medicaid programs for services provided to hospital patients covered by those programs for fiscal year 2003. Specifically, the hospitals claim that the Secretary miscalculated the hospitals' collective wage index (a numerical value upon which reimbursement rates are calculated) by improperly including the hours of certain employees of Rochester General Hospital as working hours--when in fact those employees were not working, but instead were receiving short term disability benefits. The hospitals claim that because hours that were included in the wage index calculation should not have been included, the collective wage index for all of the plaintiff hospitals was improperly deflated, and as a result, the hospitals received less in reimbursements than they were entitled to.
Plaintiffs now move for summary judgment against the Secretary claiming that there are no material issues of fact in dispute, and that as a matter of law, they are entitled to judgment in their favor. The Secretary cross-moves for summary judgment on grounds that he properly determined the plaintiffs' reimbursement rate, and therefore, his determination must stand as a matter of law.
For the reasons set forth below, I find that the Secretary's calculation the hospitals' collective wage index was arbitrary and capricious, and that the improper calculation resulted in insufficient reimbursement to the plaintiffs for services provided under the Medicaid and Medicare programs for fiscal year 2003.
Plaintiffs are hospitals that provide, inter alia, inpatient services to Medicare and Medicaid recipients. Pursuant to the Medicare and Medicaid programs, the hospitals receive reimbursement from the government for services provided to covered patients. The reimbursement amount that the hospitals receive is calculated pursuant to the Secretary's Prospective Payment System. Under this system, the Secretary prospectively determines the reimbursement rate for all inpatient procedures performed by the hospitals. In determining the amount of the reimbursement, the Secretary first considers the specific nature of the procedure performed. Next, the Secretary considers the average labor costs incurred by hospitals located in the same geographical area as the hospital at which the procedure is performed. By taking into consideration local labor costs, the Secretary is able to adjust reimbursement rates for areas in which labor costs are higher or lower than the national average, and provide higher reimbursement rates to areas with high labor costs, and lower rates to areas with lower labor costs.
To determine the labor costs of a particular geographic area, the Secretary first determines the average hourly wage that is paid to a hospital employee for each hospital nationwide. In general terms, the Secretary determines each hospital's average hourly wage by establishing the hospital's total wage related costs, and dividing that amount by the number of paid hours worked. The Secretary then looks at the hourly wages of hospitals located in a particular geographical area (known as a "Metropolitan Statistical Area," ("MSA")) and compares the average hourly wage of the hospitals within each MSA to the national average.*fn1 By dividing the average hourly wage of the hospitals within each MSA by the average hourly wage of all hospitals in the nation, the Secretary determines the "wage index" of each MSA--a numerical value indicating whether or not the labor costs of the MSA are greater or less than the national average. For example, a wage index number greater than "1" indicates that the average labor costs of the MSA are higher than average national labor costs, whereas an index number of less than "1" indicates that the average labor costs of the MSA are lower than national average costs. Once the Secretary has determined the wage index of each MSA, the Secretary then applies the wage index number to the authorized rate for a given procedure to determine the reimbursement rate applicable to each MSA for that procedure. All hospitals within the MSA will receive the same reimbursement rate for identical procedures, regardless of the actual cost of the procedure.
In the instant case the plaintiffs contend that the Secretary improperly calculated the wage index of the Rochester, New York MSA for fiscal year 2003 because he improperly determined the total number of hours worked by employees of the Rochester General Hospital. Specifically, the plaintiffs contend that the Secretary included as "paid worked hours" time that was actually not worked, because the employees at issue were on short-term disability leave. Plaintiffs contend that these hours should not have been included in determining Rochester General's average hourly wage, and that by including these hours, the hospital's average hourly wage (and by consequence the average hourly wage of the Rochester, New York MSA) was understated and therefore the reimbursement rate for the MSA was lower than it should have been.
The Secretary contends that the hours in question were properly considered working hours, and notes that Rochester General Hospital initially reported the hours that employees were out on disability as working hours. The plaintiffs counter that Rochester General's initial reporting of the short-term disability hours as working hours stemmed from two anomalies. First, unlike all other hospitals in the Rochester New York MSA, and most other hospitals in the nation, which carry short-term disability insurance through a third-party insurer that pays short-term disability benefits, Rochester General Hospital pays short-term disability benefits directly out of its payroll. It is undisputed that for hospitals which provide short-term disability benefits to employees through an insurer, the disability time taken by employees is not counted as working hours for purposes of determining the hospital's average hourly wage.
Second, with respect to administering the short-term disability benefits, Rochester General Hospital utilizes an accounting mechanism whereby the disability time is recorded as regular working time for purposes of determining each individual employee's disability benefit. Plaintiffs contend that but for the use of its chosen accounting method, the Secretary would not have considered the disability hours to be working hours, and would not have improperly calculated its average hourly wage. Indeed the plaintiffs claim that in 2005, Rochester General changed its accounting method, and the Secretary no longer considers the disability hours to be working hours.
Although Rochester General Hospital initially reported the short-term disability hours taken by its employees as working hours, it attempted to amend its report, and remove short-term disability time from its reported working hours. The Secretary, (through a private, third-party "fiscal intermediary" charged with administering Medicare and Medicaid benefits to participating hospitals) denied Rochester General's application to amend its report, and RGH ultimately appealed that decision to the Provider Reimbursement Review Board, ("PRRB") an independent panel charged with hearing appeals from providers of Medicaid and Medicare services. On August 31, 2007, in a sharply divided opinion, the PRRB upheld the Secretary's position by a 3 to 2 vote. The Board's Decision became the final decision of the Secretary on November 2, 2007 when the Secretary, through the Administrator for the Centers for Medicare and Medicaid Services, declined to review the PRRB's Decision.