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June 5, 2000


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


This is a civil action pursuant to 42 U.S.C. § 1395. Plaintiff Bradford Hospital seeks judicial review of a final decision of the Secretary of Health and Human Services denying Plaintiff's request for a redetermination of its hospital-specific rate as untimely. Presently pending before the Court are cross-motions for summary judgment. For the reasons set forth below, the Plaintiff's motion is granted and the Defendant's motion is denied.


A. The Medicare Statute and Its Regulations

In 1965, Congress enacted Medicare, which is a federally funded health insurance program. See 42 U.S.C.A. §§ 1395-1395zz (West 1992 & Supp. 1999). Part A of the program, which is at issue in this case, provides hospital insurance for the elderly and disabled. See id. § 1395d. Under it, the federal government reimburses eligible hospitals for the "reasonable costs" of covered services provided to Medicare beneficiaries. See id.

Prior to 1983, hospitals were reimbursed retroactively for the actual reasonable costs of furnishing care to Medicare patients. See Monongahela Valley Hosp., Inc. v. Sullivan, 945 F.2d 576, 580 (3d Cir. 1991); Kean v. Heckler, 799 F.2d 895, 897 (3d Cir. 1986). At the end of each fiscal year, the hospital would submit a cost report detailing their actual costs of treating the patients and the intermediary would perform an audit to determine whether the costs were reasonable. See Monongahela Valley, 945 F.2d at 580. In 1983, however, Congress enacted the Prospective Payment System, under which hospitals are reimbursed prospectively for their treatment of Medicare beneficiaries on the basis of predetermined fixed rates which vary according to the type of services rendered. See Social Security Amendments of 1983, Pub.L. No. 98-21, § 601, 97 Stat. 65, 152-62 (codified at 42 U.S.C. § 1395ww(d)(e)); see also Kean, 799 F.2d at 897. The purpose of this new system 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. 98-25, 1st Sess. 132 (1983), reprinted in 1983 U.S.Code Cong. & Admin.News 143, 187; see also County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir. 1999).

Initially, the Prospective Payment System was limited to operating costs of inpatient hospital services.*fn1 However, in 1987, Congress directed that the HCFA extend the system to capital-related expenses*fn2, effective in 1991. See Pub.Law 100-203 § 4006(b)(1) (1987) (amending 42 U.S.C. § 1395ww(g)(1)(B)). Accordingly, the HCFA promulgated regulations that established a standard rate for capital costs. The standard rate was not effective immediately, however; the regulations provided for a ten-year transition period during which the amount of a hospital's capital reimbursement would be determined by the provider's hospital-specific rate. See 42 West Page 477 C.F.R. § 412.308, 412.324(a) (1999); 56 Fed. Reg. 43,358 (1991). The hospital-specific rate is based on the hospital's capital cost per discharge during its 1990 cost-reporting period. See 42 C.F.R. § 412.324(a), 412.344.

The regulations provide that two different payment methodologies apply to capital-related costs: the "fully prospective payment" methodology and the "hold harmless" methodology. 42 C.F.R. § 412.324(a); 56 Fed. Reg. at 43,363. If the hospital-specific rate is less than the standard federal rate, then Medicare reimburses the hospital under the fully prospective payment methodology. See 42 C.F.R. § 412.324(a), 412.340; 56 Fed. Reg. at 43,363. This methodology pays a blend of the hospital-specific rate and the federal rate; each year of the transition period, the federal rate proportion increases and the HSR proportion decreases, until the hospital is paid based on 100% of the federal rate in the year 2001. See 42 C.F.R. § 412.340; 56 Fed. Reg. at 43,363. Conversely, if the hospital-specific rate exceeds the federal rate, then Medicare reimburses the hospital under the hold-harmless payment methodology. See 42 C.F.R. § 412.324(a), 412.344; 56 Fed. Reg. at 43,363. This methodology pays the higher of either 100% of the federal rate or the sum of 85% of reasonable costs for old capital plus an amount for new capital based on a proportion of the federal rate. See 42 C.F.R. § 412.344; 56 Fed. Reg. at 43,363.

Additionally, the amount of the reimbursement is affected by whether the costs are categorized as old capital or new capital. Old capital costs are "capital-related costs for land and depreciable assets that were put in use for patient care on or before . . . December 31, 1990." 42 C.F.R. § 412.302(b). Conversely, new capital costs are "capital-related costs . . . that are related to assets that were first put in use for patient care after December 31, 1990." Id. § 412.302(a). Some assets put into use for patient care after December 31, 1990 can be considered old capital; these costs are called "obligated capital costs." Id. § 412.302(c). Obligated capital costs are costs for which the hospital became legally obligated prior to December 31, 1990 and which would be put into use before October 1, 1994. See id.; 56 Fed. Reg. at 43,362; Provider Reimbursement Manual ("PRM") § 2807.3.C.1.

Hospitals seeking recognition of obligated capital are required to notify their intermediary in writing of the existence of the obligated capital and submit certain supporting documents by the later of October 1, 1992, or within 90 days after the hospital's first cost reporting period beginning on or after October 1, 1991. See 42 C.F.R. § 412.302(c)(1)(v); 56 Fed. Reg. at 43,393 (1991); PRM § 2807.3.C.1.c. The supporting documentation must include the binding agreement, a project description and an estimate of the total costs of the project. See 42 C.F.R. § 412.302(c)(1)(v).

After it receives the proper documentation, the intermediary is required to advise the hospital of its determination by the later of the close of the hospital's first 12 month cost reporting period under the capital prospective payment system or nine months after the date the hospital submitted its completed documentation. See id. § 412.302(c)(1)(vii)(B); 56 Fed. Reg. at 43,393-94; PRM § 2807.3.C.5. The purpose of the intermediary's deadline is to inform hospitals "in advance whether the project will be recognized as old capital." 56 Fed. Reg. at 43,393-94. The intermediary's determination, however, is contingent on the asset being put into use by October 1, 1994. See 42 C.F.R. § 412.302(c)(1)(vii)(C); 56 Fed. Reg. at 43,394; PRM § 2807.3.C.5.

After it receives the request, the intermediary must decide whether to redetermine the rate and whether the methodology must be changed from fully prospective payment to hold harmless. First, if the intermediary determines that the redetermined rate is lower than the hospital's current rate, then it will deny the request. See PRM § 2807.4.E.4. This denial will be issued summarily if the estimated rate submitted by the hospital is lower than the current rate. See 57 FedReg. 39,746, 39,794-95 (1992); PRM § 2807.4.E.4. According to the HFCA, this will avoid "unwarranted requests" and relieve the intermediary of "an unnecessary administrative burden." 57 Fed. Reg. at 39,795. Second, if the intermediary determines that the redetermined rate exceeds the hospital's current rate but is lower than the federal standard rate, then the hospital will continue to receive payments under the fully prospective methodology but the new rate will be used in determining the payments. See PRM § 2807.4.E.6. Third, if the intermediary determines that the redetermined rate exceeds the current rate and the federal standard rate, then the hospital will be reimbursed according to the hold harmless methodology. See id.

B. Factual and Administrative History

Prior to December 31, 1990, Bradford Hospital entered into several contracts for the construction of a four story addition onto the hospital and for numerous renovations. We will refer to this project as the "East Wing project" (AR 1273, 1287). The East Wing project was placed into use in the spring of 1992.

By letter dated May 22, 1992, the intermediary in this case, Blue Cross of Western Pennsylvania, issued an interim determination of Bradford Hospital's hospital-specific rate (Administrative Record "AR" at 901-02). It found that Bradford Hospital's capital base period was June 30, 1990 and that its interim hospital specific rate was $297.69 per discharge (AR 901). It concluded that the hospital-specific rate was lower than the federal rate and that reimbursement would be made according to the fully prospective payment method (AR 901). It also notified Bradford Hospital that if it believed it had capital costs that qualified as obligated capital, then it must submit supporting documentation to the intermediary within 90 days of the first affected cost period (AR 902). Subsequently, by letter dated August 24, 1992, the intermediary notified the hospital that the supporting documentation should include:

1. Board minute notes on the project which must include estimated cost of the project.

2. Certificate-of-need request and approval.

3. Loan agreement or bond purchase contract.

4. Architect or construction contract for the actual construction work.
5. Documentation of amounts expended for the project by December 31, 1990.

(AR 905). The letter also provided, "Failure to have this required information will not allow the FI to include these cost[s] as old capital." (AR 906)

On September 29, 1992, Bradford Hospital wrote a letter to the intermediary and enclosed the following documentation "for `Old (Obligated) Capital' for Bradford Hospital":

1) List of all capital assets acquired between 07/01/90 and 12/31/90 including useful life and annual depreciation.
2) Letter from Bob Cummins Construction Co. relating to the demolition of the building (destroyed in fire) and construction of new parking lot. The balance of the $167,565 that was capitalized was for additional blacktop work (done by ...

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