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Nazareth Hospital and v. Kathleen Sebelius

April 8, 2013


The opinion of the court was delivered by: Ludwig, J.


This action reviews the decision of the Secretary of the Department of Health and Human Services Kathleen Sebelius, dated September 11, 2012, as issued by the Administrator of CMS (Centers for Medicare and Medicaid Services). That decision followed the July 12, 2012 remand of the case to the agency by this court (doc. no. 40). It affirmed the May 17, 2010 determination by CMS, which had in turn affirmed the March 23, 2010 determination of the PRRB (Provider Reimbursement Review Board). Jurisdiction: review, 42 U.S.C. § 1395oo(f)(1); federal question, 28 U.S.C. § 1331.

The Secretary's decision denied plaintiffs' statutory claims for Medicare payments for serving a disproportionate share of low-income patients during 2002, known as "DSH adjustments,"*fn1 Section 1886(d)(5)(F)(vi) of the Social Security Act (Act), 42 U.S.C. § 1395ww(d)(5)(F)(vi) -- as to Nazareth, $250,751; St. Agnes, $312,520.

This case is unlike Cooper Univ. Hosp. v. Sebelius, 636 F.3d 44 (3d Cir. 2010). The substantive issue here is whether denial of Medicare DSH payments for services to specified low-income individuals under Pennsylvania's CMS-approved Medicaid state plan was fair and reasonable given clear Constitutional requirements and the standards of the Administrative Procedures Act (APA), 5 U.S.C. §§ 701-706. Plaintiffs contend (1) the denial violated principles of equal protection and was, therefore, Constitutionally impermissible, and (2) it was arbitrary and capricious under the APA. For the reasons now discussed, plaintiffs' position will be upheld.

Plaintiffs' motion for summary judgment (doc. no. 16) asserts that under the regulation implementing the Medicare DSH statute, as amended, 42 C.F.R. § 412.106(b)(4) (2000), there are two "diametrically opposite" interpretations of the statute's requirements. Both, they say, are unreasonable and as a matter of Constitutional law disadvantage them. Pls. supp. br. (doc. no. 77 at 4-6); pls. submission on remand, supplemental admininistrative record (SAR) 85-86, 88-94. First, the regulation precludes Medicare DSH adjustments for days of inpatient hospital services to low-income general medical assistance (GA) patients not eligible for Medicaid. Second, it permits those adjustments in states serving similar low-income patients engaged in a Section 1115 waiver project*fn2 under Subchapter XI, Section1115 of the Act, 42 U.S.C. § 1315 -- and this is without regard to the patient's eligibility for Medicaid.*fn3

In 2010, plaintiff hospitals sued defendant Secretary for Medicare DSH adjustments for fiscal year 2002, together with statutory interest under 42 U.S.C. § 1395oo(f)(2). Pls. supp. br. (doc. no. 77 at 20, 28, 42); pls. supp. sur-reply br. (doc. no. 86 at 2-3).

Defendant cross-moved for summary judgment (doc. no. 21). Defendant's argument is that the challenged decisions involved two separate groups of individuals who are classified differently under the Act and who receive medical assistance through dissimilar programs. Therefore, there was no Constitutional or APA violation. The cross-motion reasserts procedural and other grounds previously ruled on in this case.*fn4 Its foremost point is that "the result here is axiomatic in view of the dispositive decision in Cooper"; and "to include GA patients in the Medicare DSH calculation is not authorized by law." Def. supp. br. (doc. no. 79 at 1), def. supp. reply br. (doc. no. 83 at 16). This memorandum disagrees.

Agency Record Prior to July 12, 2012 Remand

For fiscal year 2002, plaintiffs' reports to the Intermediary listed costs of inpatient hospital services that were partially reimbursed by Medicare and Medicaid DSH adjustments.

Pennsylvania's Medicaid state plan included a Medicaid DSH in the form of a state-specific, lump sum allotment that was distributed to eligible hospitals such as plaintiffs.*fn5 The state plan amendment at issue here paid additional Medicaid DSH directly to plaintiff hospitals*fn6 -- Nazareth about 57 percent of actual costs and St. Agnes about 62 percent. Coyle decl. ¶ 35, SAR 114 (see Coyle's qualifications, SAR 106); pls. supp. br. (doc. no. 77 at 30 n.24).

In their reports as to Medicare DSH adjustments, plaintiff hospitals included costs of hospital services for GA inpatients along with costs for Medicaid inpatients. They did so in protest against policies stated in CMS's Program Memorandum (PM) A-99-62*fn7 and the regulation implementing the Medicare DSH statute, 42 C.F.R. § 412.106(b)(4). On May 12, 2004 and August 20, 2004, respectively, the Intermediary notified plaintiffs that the claimed GA days were ineligible as "only State supplementation" and would not be counted -- which reduced the Medicare DSH payments. Intermediary's position papers and notices of program reimbursement, administrative record (AR) 467-470, 475-476, 516-518, 828-846 (Nazareth); AR 322-325, 329-330, 333-335, 373-375, 813-822 (St. Agnes).

Plaintiffs appealed the Intermediary's determination to the PRRB -- Nazareth on August 25, 2004, and St. Agnes on February 17, 2005. AR 825-846; AR 35 & n.1, 809-822. On February 29, 2008, Nazareth's case was heard on stipulated facts. AR 36-37, 82-83; 2/29/08 PRRB Hr'g, N.T. 7:22-25, AR 63. Nazareth cited the Medicare DSH statute, 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) ("number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under Subchapter XIX [Medicaid] . . . ."). Nazareth had contended that this statutory phrase meant it should receive reimbursement because Pennsylvania provided hospital services to low-income, non-Medicaid-eligible inpatients through a Medicaid state plan approved by CMS. See 2/29/08 PRRB Hr'g, N.T. 11:18-12:16, 14:9-15:9, 28:9-25, AR 64-65, 68. (Plaintiffs acknowledge that this issue is now moot, given Cooper's holding that defendant's interpretation of the Medicare DSH statute was not improper.*fn8

In a final position paper, Nazareth also contended that it was unfair to disallow its costs for low-income GA inpatients. Reason: similar hospital costs were compensated under the Medicare DSH statute as implemented by the amended regulation, 42 C.F.R. § 412.106(b)(4) (2000), in states that had obtained a waiver of Medicaid eligibility requirements for patients served by a Section 1115 project.*fn9 Under this view, both Pennsylvania's state plan and other states' Section 1115 waiver projects served low-income persons who were not eligible for Medicaid, and both used federal funds to do so.*fn10

On March 23, 2010, the PRRB upheld the Intermediary's disallowance of the costs claimed for GA inpatients. PRRB decision, AR 33-41. CMS notified plaintiffs that the PRRB's determination would be reviewed on the Administrator's own motion and advised them of the right to submit comments, which plaintiffs did on April 27, 2010.*fn11 AR 17-21, 28-29.

On May 17, 2010, CMS's Administrator affirmed the PRRB's ruling. AR 2-16. It determined that hospital services for GA inpatients "are for patients who are not eligible for Medicaid but rather are only eligible for State general assistance." AR 12 & n.26. Also, the Medicare DSH statute "requires that for a day to be counted, the individual must be eligible for 'medical assistance'" under the Medicaid statute. AR 13-14. The Administrator did not heed plaintiffs' April 27, 2010 comments, concluding that GA "days are not counted as Medicaid days for purposes of the Medicare DSH calculation."*fn12 AR 2-3, 14-15.

The Administrator did not consider the rationales for amending the implementing regulation, 42 C.F.R. § 412.106(b)(4) (2000). That amendment permitted all inpatient hospital days funded under a Section 1115 waiver project to be counted in the Medicare DSH calculation -- regardless of a patient's eligibility for Medicaid.*fn13 See pls. Apr. 27, 2010 comments, AR 18-20 (rationales). As stated by the Secretary in 2000, the purpose was to compensate providers through Medicare DSH adjustments for the costs of services to Section 1115 patients who could not otherwise have been made eligible for Medicaid. Interim final rule, 65 Fed. Reg. 3136, 3137, 3139 (Jan. 20, 2000), rulemaking record (RR) 1-2, 4 (doc. no. 74 at 1-2, 4); final rule, 65 Fed. Reg. 47054, 47086-47087 (Aug. 1, 2000), RR 46, 78-79 (doc. no. 75 at 33-34).

Record on July 12, 2012 Remand

On remand, CMS's Administrator asked plaintiffs, BlueCross BlueShield Association (BCBS) -- the Medicare Administrative Contractor now assigned to plaintiffs' cases -- and CMS's Director of Hospital and Ambulatory Policy Group to "respond with supporting documentation" to three questions.*fn14 The responses "would be included in the record and considered in making the required findings and conclusions." SAR 211-212. Each responded;*fn15 but supporting evidence was submitted only by plaintiffs. SAR 82-151.

As approved by CMS for fiscal year 2002,*fn16 Pennsylvania's Medicaid state plan contained state plan amendment (SPA) 94-08, Attachment 4.19A at 25-26, entitled "Methods and Standards for Establishing Payment Rates--Inpatient Hospital Care" -- "Additional Disproportionate Share Payment." SAR 955-956; Piper report at 2, SAR 132 (see Piper's qualifications, SAR 141). That amendment pertained to hospitals serving "a large number of Medicaid and medical assistance eligible, low[-]income patients, including those eligible for general assistance, who[m] other providers view as financially undesirable." Attachment 4.19A at 25, SAR 955; Coyle decl. ¶¶ 8, 13, SAR 107, 109; Piper report at 2, SAR132. It also set forth eligibility criteria as to a patient's low-income ceiling in order for hospital inpatient care to be covered under Pennsylvania's Medicaid plan.*fn17 Attachment 4.19A at 25, SAR 955; Coyle decl. ¶¶ 8-11, SAR 107-108; see also stipulations before the PRRB, ¶¶ 2, 5, AR 83.*fn18 Under SPA 94-08, plaintiffs cooperated in the delivery of inpatient care to low-income individuals who were not eligible for Medicaid in Pennsylvania.*fn19

For fiscal year 2002, as noted, plaintiffs were partially reimbursed for their costs of inpatient hospital services under SPA 94-08. Those payments were federal funds under Sections 1903 and 1905 of the Act, 42 U.S.C. §§ 1396b, 1396d. Piper report at 1-4, SAR 131-134; Attachment 4.19A at 25-26, SAR 955-956. Some funds used to cover actual costs also came from Medicaid DSH allotments under Section 1923 of the Act, 42 U.S.C. § 1396r-4 and from plaintiff hospitals. Coyle decl. ¶¶ 34-38, 40-41, SAR 113-115.

Pennsylvania's Medicaid agency, its Department of Public Welfare (DPW), and Medicaid managed-care organizations paid hospitals for Medicaid and GA patient care in the same way.*fn20 Coyle decl. ¶¶ 22-27, SAR 111-112. "Identical payment rates appl[ied] for traditional Medicaid beneficiaries and . . . GA program recipients in Pennsylvania." Id. at ¶¶ 22, 24, SAR 111. For fiscal year 2002, "Pennsylvania Medicaid used the Medicare version 19 DRG*fn21 grouper to calculate the payment for inpatient hospital services . . . using a hospital-specific base rate per ...

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