Opinion
No. 04 Civ. 8639 (LMM).
March 1, 2005
MEMORANDUM AND ORDER
1.
Plaintiffs, seventy-six public and not-for-profit hospitals located in or near New York City, commenced this action against the Secretary of the United States Department of Health and Human Services ("Secretary") to challenge new rules affecting the calculation of payments to be made to hospitals for the treatment of Medicare beneficiaries beginning October 1, 2004, as described more fully below.
The plaintiffs are either located in the pre-October 1, 2004 Metropolitan Statistical Area ("MSA") described below, or have been reclassified to it. Reclassification is described inRobert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 276-77 (3d Cir. 2002).
Plaintiffs move, pursuant to Fed.R.Civ.P. 56, for summary judgment finding certain rules invalid and for related relief, or, in the alternative, pursuant to id. 65, for a preliminary injunction pendente lite; the Secretary cross-moves, pursuant to id. 56, for summary judgment of dismissal. The Court, with the parties' concurrence (see Transcript, Feb. 10, 2005, at 54), has found no issues of fact requiring trial; the case is decided on the Administrative Record filed by the Secretary.
2.
Medicare, established under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., provides a system of federally-funded health insurance for eligible elderly and disabled individuals. Under the Medicare statute, hospitals and other health care providers enter into written provider agreements with the Secretary in order to render services to Medicare beneficiaries and receive reimbursement. Subsection (d) hospitals which have entered into such provider agreements have, since 1983, been reimbursed through the Inpatient Prospective Payment System ("PPS"), which reimburses hospitals not for actual incurred costs, but at predetermined, specific rates for each hospital discharge. "By establishing predetermined reimbursement rates that remain static regardless of the costs incurred by a hospital, Congress sought `to reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost/effective hospital practices.'" County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quoting H.R. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351).
A "subsection (d)" hospital is defined in 42 U.S.C. § 1395ww(d) (1) (B), and is distinguished, in general, from psychiatric, rehabilitation, childrens', long-term care, and cancer hospitals. References herein to hospitals are to subsection (d) hospitals.
Under PPS, Medicare authorities first construct a standard nationwide cost rate — the "federal rate" — based on the average operating costs of inpatient hospital services. They then assign a weight to each category of inpatient treatment, or "diagnosis-related group ("DRG"). Finally, they calculate a "wage index" to adjust reimbursement rates to reflect regional variations in hospital wage costs. For each patient discharge, a hospital's final reimbursement is calculated by taking the federal rate, adjusting it for wage variations, and multiplying it by the weight assigned to the patient's DRG.Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (citations omitted).
In order to account for wide variations in the cost of labor across the country, the amount of a hospital's payment under the PPS will vary depending on its location. First, hospitals are assigned a standardized rate based on whether they are located in a county in a "large urban," "urban," or "rural" area. A wage area in a "large urban" or "urban" location is known as a Metropolitan Statistical Area (MSA). After calculating the standardized rate based on the area, the hospital's payment rates are computed by adjusting the standardized amount by a "wage index" to account for area wage differences.
The wage index is updated each year based on hourly wage data collected from the hospitals. Each hospital provides the Secretary with data including the total salaries paid to and hours worked by its employees. The Secretary computes the average hourly wage for a labor market area by adding the total of the salaries and fringe benefits paid by the hospitals within that area, and dividing that figure by the total number of hours worked. The Secretary uses this data to create the wage index for each geographic area. The wage index compares the average hourly wage for hospitals in a given geographic area with the national average hourly wage, which in turn determines the payment rate above or below the national average at which a hospital is reimbursed. The wage index for an area generally applies to all hospitals physically located within that geographic area. Thus, the wage index has a significant effect on the amount of reimbursement a hospital receives.Robert Wood Johnson, 297 F.2d at 275-76 (citations omitted).
The present case is concerned with the manner in which, beginning October 1, 2004 (the beginning of FY 2005), the Secretary will determine and implement the wage index.
3.
The Medicare statute requires (with an exception not presently relevant) that
the Secretary shall adjust the proportion, (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the DRG prospective payment rates computed under subparagraph (D) for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.42 U.S.C. § 1395ww(d) (3) (E) (i). The statute further requires that, annually, "the Secretary shall update the factor under the preceding sentence on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage related costs of subsection (d) hospitals in the United States."Id.
Geographic areas were established by the Secretary in 1983 by grouping hospitals according to their locations in different Metropolitan Statistical Areas ("MSAs") developed by the then Bureau of the Budget, now the Executive Office of Management and Budget ("OMB"). The MSAs were based on census data identifying large centers of population.
Prior to October 1, 2004, all hospitals in the five New York State counties of New York City and in New York's Westchester, Putnam and Rockland counties were included in one MSA, and thus grouped together for wage geographic area purposes. The hospitals in New Jersey's counties of Bergen and Passaic were located in another MSA, and similarly grouped for wage geographic area purposes, as was also the case with the hospitals in New Jersey's county of Hudson.
In final rules issued on August 11, 2004, the Secretary (through the Centers for Medicare and Medicaid Services ("CMS") of the Department of Health and Human Services) made a number of changes affecting the PPS. ( 69 Fed. Reg. 48,916 (Aug. 11, 2004)et. seq.)
The rule was proposed on May 18, 2004 ( 69 Fed. Reg. 28,196 (May 18, 2004) et. seq.), and corrected on October 7, 2004 ( 69 Fed. Reg. 60,242 (Oct. 7, 2004) et. seq.).
On December 27, 2000, following the last decennial census, OMB had issued new definitions of statistical areas and, on June 6, 2003, published new boundaries differing in many cases from those of prior MSAs; specifically at issue here is the change of the boundaries of the former MSA including New York's New York City counties and Westchester, Putnam and Rockland to include, with those counties, New Jersey's Bergen, Passaic and Hudson counties as well. By the new rule, the Secretary adopted OMB's newly defined MSAs, including that just described. In the case of hospitals subjected to a reduced wage index as a result of an MSA change, the wage index for the initial fiscal year, FY 2005, will be calculated by using 50% of the new index and 50% of that for the preceding year.
See 42 C.F.R. § 412.64(b)(4).
See 69 Fed. Reg. 49,033 (Aug. 11, 2004).
The Medicare statute (in the same section quoted above) also provides that: "Not less often than once every 3 years the Secretary (through such survey [of wages and wage-related costs of subsection (d) hospitals] or otherwise) shall measure the earnings and paid hours of employment by occupational category [excluding data relating to skilled nursing facility services]." 42 U.S.C. § 1395ww(d)(3)(E)(i).
Under the quoted provision, the Secretary, every three years, is to collect data from hospitals in order to construct an "occupational mix adjustment" to the wage index to control the effect of hospitals' employment choices (e.g., to use registered nurses, licensed practical nurses, nursing aides, or medical assistants, to give nursing care) on the wage index. See 69 Fed. Reg. 49,034 (Aug. 11, 2004).
In the new rules which added the New Jersey counties of Bergen, Passaic and Hudson to the former MSA in which plaintiffs were grouped, the Secretary determined to establish the wage index for the one year commencing October 1, 2004 without fully implementing the occupational mix adjustment, but instead basing it "on a blend of 10 percent of an average hourly wage, adjusted for occupational mix, and 90 percent of an average hourly wage, unadjusted for occupational mix." 69 Fed. Reg. 49,052 (Aug. 11, 2004).
The plaintiff hospitals challenge (1) the inclusion of the New Jersey counties in their former MSA, and (2) the postponement of full implementation of the occupational mix adjustment, as arbitrary, capricious and contrary to law.
4.
When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984) (footnotes omitted); see also Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 409 (1993). "Confronted with an ambiguous statutory provision, [a court] generally will defer to a permissible interpretation espoused by the agency entrusted with its interpretation," Good Samaritan, 508 U.S. at 414 (citations omitted); the court will "defer to the agency's interpretation unless it is `arbitrary, capricious, or manifestly contrary to the statute.'" Skubel v. Fuoroli, 113 F.3d 330, 335 (2d Cir. 1997) (quoting Chevron, 467 U.S. at 843; other citation omitted). "The scope of review under the `arbitrary and capricious' standard is narrow and a court is not to substitute its judgment for that of the agency."Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Where a court is considering a statute that "`is silent or ambiguous with respect to the specific issue,'" it "must decide (1) whether the statute unambiguously forbids the Agency's interpretation, and, if not, (2) whether the interpretation, for other reasons, exceeds the bounds of the permissible." Barnhart v. Walton, 535 U.S. 212, 218 (2002) (quoting Chevron, 467 U.S. at 843; other citation omitted).
5.
The essence of plaintiffs' objection to the Secretary's adoption of the new MSAs — in particular of course that which includes the three New Jersey counties in the former MSA in which plaintiffs were included — is, in summary, that:
(i) the Medicare Act requires the Secretary to establish accurate wage indexes; (ii) the old MSAs were acknowledged (by Congress, [the Prospective Payment Assessment Commission ("ProPAC")], the [General Accountability Office ("GAO")] and indeed by CMS itself) to be deficient, particularly with respect to the dilution of the indexes of core city hospitals in large MSAs; and (iii) the new MSAs exacerbated the deficiencies, particularly in light of the expansion of, and further dilution in, 47 already large MSAs. Such adoption of a deficient — more deficient — hospital labor markets violates the Medicare Act.
(Pl. Reply Mem. at 3 (citations omitted).)
In the case of the Secretary's 10% rather than full implementation of the occupational mix adjustment, plaintiff's objection, again in summary, is that:
Whatever discretion Congress might have given the Secretary as to how to devise the [occupational mix adjustment], Congress granted the Secretary no discretion whatsoever whether to implement [it] by October 1, 2004. . . . There is no sub silentio exception authorizing the Secretary not to implement the OMA or to only partially implement the OMA by 10%.
(Id. at 39.)
The Court considers the adoption of the new MSAs first.
6.
The relevant section of the Medicare statute requires the Secretary to establish: "a factor . . . reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level." 42 U.S.C. § 1395ww(d) (3) (E) (i). The "factor" is to be used by the Secretary to adjust that "proportion" of DRG prospective payment rates which are attributable to wages and wage related costs, for "area differences in hospital wage levels." Id.
The "proportion" of hospitals' costs so affected is now, by statute, 62%. 42 U.S.C. § 1395ww(d) (3) (E) (ii).
The "factor" the Secretary is required to establish is, plainly, a number. Here, for instance, the wage index "factor" obtaining for the MSA in which plaintiffs were grouped prior to October 1, 2004 was, according to plaintiffs, 1.3596, which, through the addition of the New Jersey counties as of that date, has been reduced to 1.3317. (Pl. Mem. at 11-12.)
See Webster's Third New International Dictionary 813, definition 5a (1986) ("any of the numbers, quantities or symbols in mathematics that when multiplied together form a product").
The factor is to "reflect" the comparison of "the national average wage level" with "the relative wage level in the geographic area of the hospital." 42 U.S.C. § 1395ww(d) (3) (E) (i). The phrase "national average wage level" is, essentially, self-defining: it is the average of the hospital wage level of all hospitals in the country, derived from the hospitals' submissions of actual costs. Id. The "relative wage level in the geographic area of the hospital" is also to be derived from the same hospitals' submissions, but separately for groups of hospitals located in given "geographic area[s]." Id. The core issue is whether the Secretary may permissibly use, in making the comparison, OMB-determined MSAs as the "geographic area[s]" required by the statute. Id.
There is no question but that the new MSAs are geographic areas. In the specific case at issue, for instance, the new MSA is geographically defined as including identified counties in New York and New Jersey. Nor do plaintiffs show that the use of the new MSAs does not, to some degree, reflect wage differences among different new MSAs. There is no language in the statute that requires more of the Secretary. The question "whether the statute unambiguously forbids the Agency's interpretation,"Walton, 535 U.S. at 218, must be answered in the negative. The Court must thus consider whether the rule adopting the new MSAs "exceeds the bounds of the permissible." Id.
The Secretary reports, e.g., that the wage index for the new MSA including Cleveland is .9644, that for the new MSA including Boston 1.1766, and that for the new MSA including Knoxville .8564; the Secretary further notes that the 1.3317 wage index applicable to plaintiffs is more than 33 percent higher than the national average, and reports that only certain MSAs in California have wage indexes higher than 1.3317. (Def. Reply Mem. at 31 n. 17 (citing 69 Fed. Reg. 49, 481-49, 521 (Aug. 11, 2004).) While these figures do not necessarily demonstrate accuracy, they strongly suggest that the new wage indexes do reflect wage differences between different geographical areas.
Plaintiffs' real argument is that the new MSAs (and the MSAs that preceded them, for that matter) do not accurately reflect the actual differences obtaining between the wages of core city hospitals and other hospitals because of the "dilution effect . . . inherent in the use of geographically large MSAs to measure area wage differences, where hospitals in core city areas, which have high wage levels, are grouped with hospitals in outlying suburban areas, which have lower levels." (Pl. Mem. at 14.)
Plaintiffs thus argue that the Secretary's use of MSAs is arbitrary and capricious because the statutory mandate requires that the Secretary use a more accurate way to determine wage costs as they vary from area to area. They point out that, shortly after the institution of the PPS system in 1983, "Congress mandated that the Secretary develop a more accurate wage index than the one previously used under the former Medicare cost reimbursement program." Sarasota Mem'l Hosp. v. Shalala, 60 F.3d 1507, 1511 (11th Cir. 1995) (citing H.R. Rep. No. 432, 98th Cong., 2nd Sess., pt. II, at 1809-10 (1984), reprinted in 1984 U.S.C.C.A.N. 1423-24), and that, in 1993, Congress made it clear that the Secretary was not required to use MSAs. (Pl. Mem. at 14 n. 5 (citing 42 U.S.C. §§ 1395ww(d) (8) (C) (v) (d) (10) (D) (ii), as amended by P.L. 103-432, 108 Stat. 4398).)
Plaintiffs also recount various actions taken by Congress over the years to ameliorate the effects of the use of MSAs, or to refine the calculation of the MSA-based wage index (Pl. Mem. at 5-7), and they describe governmental criticisms (by ProPac, the GAO and CMS itself) of the MSA system. (Id. at 15-17.) They also point out OMB's own caution that MSA definitions should not be adopted "`without full consideration of the' effects of their use, which `may or may not be suitable' for nonstatistical purposes:
`It is the sponsoring agency's responsibility to ensure that the definitions are appropriate for such use.'" (Id. at 9 (quoting OMB Bulletin No. 04-03, Feb. 18, 2004 [Nadel Aff., Nov. 22, 2004, Ex. E], ¶ 4.)
Some "inaccuracy," however, is inherent in the very use of averages. Figures submitted by the Secretary show the average hourly wages of hospitals of the old MSA to which plaintiffs belonged to range from a high of $44.07 to a low of $26.38 (Def. Mem. Ex. B at 1 (citing 69 Fed. Reg. 49, 295-49, 424)), while the average of the hourly wages of those hospitals is reported by plaintiffs to be $34.97. (Nadel Aff. ¶ 5(h).) The average is plainly "inaccurate" at the high end and the low, simply because it is an average. The statute, though, indisputably contemplates the use of averages. One could certainly argue that the most accurate available measure of wage costs would be for each hospital to be treated, as it were, as a distinct MSA, thus most precisely reflecting the hospital's actual wage costs. That would be very close, however, to the pre-1983 system that Congress rejected. See Methodist Hosp., 38 F.3d at 1226-27. It would obviously be possible to construct smaller MSAs so arranged as to include as many high wage hospitals and as few low wage hospitals as possible, so that the MSA average would increase, but that would require the drawing of specific geographical boundaries, including and excluding specific hospitals, and doing so on geographic, not other, grounds, a task for which a district does not have the relevant information, even were it authorized to make attendant policy determinations. Plaintiffs have not put forward an alternative to the new MSAs.
Further, beyond the inherent "inaccuracy" that averages entail, plaintiffs have not demonstrated material inaccuracy in the use of the new MSAs. The Court does not regard the potential that the use of the new MSAs may result in some unquantified loss of accuracy for some hospitals, if that be the case, to be a ground for invalidating use of the new MSAs (or the old ones of which they are a modification).
Since the statute does not forbid the use of MSAs, or mandate the use of some other means of defining (as the Secretary must do) geographical areas for wage index purposes, the determination how to do so rests with the Secretary. The Court cannot find that the continued use of MSAs, as now updated by OMB, is arbitrary or capricious, or impermissible for any other reason. The decision to do so is "well within the bound of reasonable interpretation," and so entitled to deference under Chevron. Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 553 (1999).
In adopting MSAs for use over 10 years ago, the Secretary had said (at that time, in relation to the distinction between rural and urban hospitals) that:
In administering a national payment system, we must have a national classification system built on clear, objective standards. Otherwise the program becomes increasingly difficult to administer because the distinction between rural and urban hospitals is blurred. We believe that the MSA system is the only one that currently meets the requirements for use as a classification system in a national payment program. The MSA classification system is a statistical standard developed for use by Federal agencies in the production, analysis, and publication of data on metropolitan areas. The standards have been developed with the aim of producing definitions that will be as consistent as possible for all MSAs nationwide.49 Fed. Reg. 27, 426 (July 3, 1984).
In preparing the new rules here under consideration, the Secretary noted that alternatives to the use of MSAs had been studied, see 69 Fed. Reg. 28,249 (May 18, 2004), but concluded that, "[w]hile we recognize MSAs are not designed specifically to define labor market areas, we believe they do represent a useful proxy for this purpose. . . ." Id. at 28,250. After receiving comments, and responding, the Secretary found no reason to abandon MSAs, and (with some modification) adopted the new MSAs. It is true, as plaintiffs urge, that the Secretary has not made an independent de novo study of how geographical areas for wage index purposes might be better constructed, but nothing in the statute mandates such a study, nor have plaintiffs put forward a proposal for a different scheme, or even a better proxy than MSAs.
It is not irrelevant to note that Congress, which has so frequently amended the Medicare statute, cannot be regarded as ignorant of the Secretary's continued use from 1983 of MSAs as defining the geographical areas necessary to construction of the wage index.
For the foregoing reasons, summary judgment is granted in favor of the Secretary dismissing the complaint insofar as it asserts a claim that the Secretary's adoption of the new MSAs (and, in particular, that in which plaintiffs are included) was arbitrary, capricious and contrary to law.
7.
The Court next considers plaintiffs' claim that the Secretary's decision to postpone full implementation of the occupational mix adjustment for the year commencing October 1, 2004 — applying instead a "blended" rate composed of 10% of the new adjustment and 90% of the old — is statutorily impermissible.
The background to the dispute regarding implementation of the occupational mix adjustment is described by the Secretary as follows:
The Act requires the Secretary at least once every three years to measure the earnings and paid hours by occupational category for short-term, acute care hospitals in order to construct an occupational mix adjustment ("OMA") to the wage index. The purpose of the OMA is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor. The OMA was required to be implemented for the first time in fiscal year 2005, commencing on October 1, 2004. The Secretary determined that applying the OMA to only 10 percent of the wage index was appropriate given that the OMA was based on a first time collection of unaudited data and the potential negative impact that this unverified data might have on some hospitals.
(Def. Mem. at 15-16 (citations omitted).)
It is not clear precisely what impact the implementation of the occupational mix adjustment will have on plaintiffs, but the parties are in agreement that it will be negative. (Transcript, Feb. 10, 2005, at 33, 48.)
In promulgating the rule in question, the Secretary acknowledged, correctly, that 42 U.S.C. § 1395ww(d) (3) (E) "provides for the collection of data every 3 years on the occupational mix of employees for each short term, acute care hospital [i.e., subsection (d) hospital] participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index)." 69 Fed. Reg. 49,034 (Aug. 11, 2004).
The relevant sentence of the statute is mandatory — "the Secretary . . . shall measure" (emphasis added) — and the Secretary has come forward with no authority for reading discretion into it. "If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress."Chevron, 467 U.S. at 842-43 (footnote omitted). Congress did not give the Secretary the authority to implement the occupational mix adjustment beginning October 1, 2004 other than in full.
For the foregoing reasons, the Court grants summary judgment in favor of plaintiffs on the issue whether the Secretary may implement the occupational adjustment only in part for FY 2005.
8.
Plaintiffs' motion for a preliminary injunction is denied as moot.
9.
As to the Court's grant of summary judgment in favor of plaintiffs with respect to the implementation of the occupational mix adjustment (§ 7, supra), plaintiffs are to submit within seven calendar days a proposed judgment setting forth the specific form of relief to which they believe they are entitled, taking into consideration what is said in County of Los Angeles, 192 F.3d at 1023. The Secretary may respond within a further seven calendar days.
SO ORDERED.