Opinion
Case No. C2-02-94
July 31, 2003
MEMORANDUM AND ORDER
Plaintiff Riverside Methodist Hospital ("Riverside") seeks judicial review, pursuant to 42 U.S.C. § 1395oo, of a decision by the Defendant Secretary of Health and Human Services ("Secretary") denying Medicare reimbursement for certain costs incurred by Riverside during its fiscal year ending June 30, 1996. The crux of this case involves the validity of the Secretary's interpretation and application of a particular Medicare regulation, 42 C.F.R. § 412.105. The parties have agreed this current issue can be resolved as a matter of law on the parties' cross motions for summary judgment. (Docket Nos. 8 and II).
Unless otherwise noted, all citations to the Code of Federal Regulations are to the 1995 version, which was the version in effect at the end of Riverside's 1996 fiscal year.
Plaintiff has requested oral argument in this case; however, the Court finds that oral argument would not further aid in the determination of the legal issues involved in this case. Accordingly, Plaintiffs request is denied, and the Court will decide the matter on the briefs submitted.
I. Background
A. Statutory and Regulatory Background
Congress created Medicare in 1965 to serve as a federally funded and administered health insurance program for the elderly and the disabled. 42 U.S.C. § 1395 et seq. Pursuant to congressional authorization, the Secretary has promulgated extensive regulations governing the administration of the Medicare program. The Secretary has delegated responsibility for administering the Medicare program to the Administrator of the Centers for Medicare Medicaid Services ("CMS Administrator" or "Administrator"). Hospitals, including Riverside, enter into written agreements with the Secretary to be "providers of services" for eligible individuals under the Medicare Act. 42 U.S.C. § 1395cc. Under the Medicare program, the government pays for specific medical services rendered by participating providers to Medicare beneficiaries. The process of reimbursing Medicare service providers is conducted through "fiscal intermediaries" who contract with, and serve as agents for, the Secretary.
The fiscal intermediary serving Riverside during the relevant time period in this case was Blue Cross and Blue Shield Association/AdminaStar Federal.
At the end of each fiscal year, a provider is required to file a Medicare cost report with its fiscal intermediary; the fiscal intermediary then analyzes the report and issues a Notice of Program Reimbursement ("NPR") identifying the amount of Medicare payment that it determines is due to the provider for that period. 42 C.F.R. § 405.1803. If the provider is dissatisfied with the amount determined by the fiscal intermediary, it may request a hearing before the Provider Reimbursement Review Board ("PRRB" or "Board"). 42 U.S.C. § 1395oo(a). The PRRB's decision is final unless the Secretary, acting through the CMS Administrator, reverses, affirms, or modifies the Board's decision within 60 days. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1871 (b) and 405.1875(a). Providers may seek judicial review of any final decision of the Board, or of any reversal, affirmance, or modification of the Board's decision by the Administrator if the Administrator decided to exercise his or her power of review. 42U.S.C. § 139500(f)(1); 42 C.F.R. § 405.1877.
In the current case, the dispute arises from the calculation and determination of a certain reimbursement amount to which Riverside alleges it is entitled for "indirect medical education" (or "IME") costs associated with one of its graduate medical education programs. It is therefore important, at the outset, to summarize the mechanism by which indirect medical education costs are reimbursed under the Medicare program.
B. Reimbursement for Indirect Medical Education Costs
Prior to 1983, hospitals received reimbursement for medical services provided to Medicare beneficiaries on a "reasonable cost" basis. "Reasonable cost" equaled the actual cost incurred by the hospital minus any cost found to be unnecessary or excessive. 42 U.S.C. § 1395x(v). Under this system, reimbursement was retroactive and, because reimbursement was tied to actual cost, there was little incentive for hospitals to provide covered services in an efficient, cost-effective manner. In order to provide such an incentive, Congress enacted the Prospective Payment System ("PPS") in 1983, pursuant to which providers were reimbursed based on predetermined federal rates rather than on the actual costs of the services provided. 42 U.S.C. § 1395ww. If hospitals were able to provide a given service for less than the federal reimbursement rate, they would keep the excess; on the other hand, if hospitals spent more than the federal rate when providing covered services, they would suffer a loss on the transaction. Consequently, the PPS gave hospitals an economic incentive to operate efficiently when providing Medicare services.
Congress recognized, however, that "teaching hospitals" typically have higher operating costs in providing patient services than non-teaching hospitals. The reasons for these increased costs were said to include:
the severity of illness of patients requiring the specialized services and treatment programs provided by teaching institutions and the additional costs associated with the teaching of residents. The latter costs are understood to include the additional tests and procedures ordered by residents as well as the extra demands placed on other staff as they participate in the educational process.
H.R. Rep. No. 98-25(1) (1983), reprinted in 1983 U.S.C.C.A.N. 219, 359. Under the "reasonable cost" system, reimbursement for these higher costs was determinable, because the reimbursement was tied to actual costs. Under the PPS system, however, the generally applicable predetermined federal rates did not take into consideration these higher costs, and hence would leave teaching hospitals experiencing a shortfall. Given that the PPS rates would not, by themselves, compensate teaching hospitals for these increased costs, Congress enacted what it called the "indirect medical education" adjustment ("IME") in order to bring the reimbursements to the appropriate level for those institutions. 42 U.S.C. § 1395ww(d)(5)(B). However, these "indirect costs" were not separately identifiable or easily quantified, so Congress chose to statistically estimate these costs as a function of so-called "teaching intensity" — the theory being that the more a hospital engages in educational programs, the higher its IME costs will be. 51 Fed. Reg. 16772, 16775; University of Kentucky v. Shalala, 858 F. Supp. 639, 641 (E.D. Ky. 1994). "Teaching intensity" is expressed as a ratio of full-time equivalent residents and interns (hereinafter referred to collectively as "FTE residents") to the number of available beds in the hospital. Id.; 42 C.F.R. § 412.105. In the governing statute, this "teaching intensity" is incorporated in a formula used in the process for a determination of the amount of reimbursement for 1MB costs, Le. c x (((1 + r) to thenth power) — 1) where "r" is the ratio of the hospital's full-time equivalent interns and residents to beds, "n" equals 405, which is the factor representing the effect of teaching activity on inpatient operating costs, and "c" is equal to various statutory amounts for different fiscal year periods. 42 U.S.C. § 1395ww(d)(5)(B)(ii).
The "direct" costs of a graduate medical education program are reimbursed under a separate statutory mechanism known as "GME." 42 U.S.C. § 1395ww(h); 42 C.F.R. § 413.86. The IME adjustment, unlike payments under GME, is a result of the PPS, and is simply designed to account for the increased operating costs experienced by teaching hospitals in the care and treatment of patients in teaching hospitals (the so-called "indirect" costs of medical education) and is not designed to reimburse the direct costs of operating a graduate medical education program.
C. Procedural History of This Case
Riverside operates a large, non-profit hospital with a teaching program. Its graduate medical education program for interns and residents is reviewed and accredited by the Accreditation Council for Graduate Medical Education ("ACGME"), and is thus approved to operate residency programs in various specialties, including the specialty of family practice. In fiscal year 1996, Riverside had 18 residents enrolled in the family practice residency program.
The following activities were among those included in Riverside's family practice residency program: Journal Club (first-year rotation); OB/GYN seminars (second-year rotation); and psychiatry seminars (third-year rotation). All of these activities were required components of the family practice residency program under ACGME standards.
On July 31, 1997, Riverside's fiscal intermediary, AdminaStar Federal, issued a Notice of Amount of Program Reimbursement following an audit of Riverside's cost report for fiscal year 1996. (A.R. at 529-55). The Intermediary made a downward adjustment to Riverside's FTE resident count for purposes of its claimed IME reimbursement by excluding hours spent by residents in journal club, practice management seminars, ob/gyn seminars, and psychiatric seminars. (A.R. at 292-93, 339-43). The Intermediary excluded these hours because they were not related to "hands-on patient care." (A.R. at 302). Riverside appealed the Intermediary's decision to the PRRB. (A.R. at 541-55). On September 26, 2001, the PRRB found in favor of Riverside and reversed the Intermediary's adjustment to the FTE resident count, noting that "there is no authority in support of the Intermediary's contention that the activities performed by the residents be directly related to hands-on patient care." (A.R. at 38).
"A.R." refers to the Administrative Record filed in this case.
On October 12, 2001, the Director, Division of Acute Care in the Center for Medicare Management, CMS, requested that the Administrator review the PRRB's decision regarding the proper calculation of FTE residents for purposes of IME payments. (A.R. at 23-27). On November 14, 2001, the Administrator reversed the PRRB's decision, and held that the hours spent in the disputed activities were not to be included when calculating the FTE resident count for purposes of IME. (A.R. at 11-16). The Administrator stated that `"the indirect costs of medical education incurred by teaching hospitals are the increased operating costs (that is patient care costs) that are associated with approved intern and resident programs,'" and concluded that the residents' hours at issue were not "related to patient care" and therefore should be disallowed. (A.R. at 14-16). The Administrator's decision constituted the final administrative decision of the Secretary, and Riverside filed a timely appeal to this Court. 42 U.S.C. § 1395oo(f)(1).
II. Standard of Review
Judicial review of a decision of the Secretary is governed by 42 U.S.C. § 1395oo(f), which incorporates section 706 of the Administrative Procedure Act. 5 U.S.C. § 706. Under section 706, the relevant question before the court is whether the administrative decision was arbitrary and capricious, contrary to law, or unsupported by substantial evidence. Maximum Home Health Care, Inc., v. Shalala, 272 F.3d 318, 320 (6th Cir. 2001). An agency's interpretation of its own regulation is entitled to deference "unless an alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation." Thomas Jefferson University v. Shalala, 512 U.S. 504, 512 (1994) (citations and internal quotations omitted). With this standard in mind, the Court now turns to the parties' cross motions for summary judgment.
III. Discussion
A. The Plain Language of 42 C.F.R. § 412.105(g)
Riverside contends that the Secretary's determination of the hospital's IME FTE resident count for fiscal year 1996 is contrary to the plain language of the governing regulation at issue and therefore cannot stand. Specifically, Riverside argues that the regulation clearly contains no mention of any requirement that resident hours be counted for IME purposes only if they are related to "patient care."
Section 412.105(g) of the Medicare regulations, reads in pertinent part:
Determining the total number of full-time equivalent residents for cost reporting periods beginning on or after July 1, 1991.
(1) For cost reporting periods beginning on or after July 1, 1991, the count of full-time equivalent residents for the purpose of determining the indirect medical education adjustment is determined as follows:
(i) The resident must be enrolled in an approved teaching program. An approved teaching program is one that meets one of the following requirements:
(A) Is approved by one of the national organizations listed in § 405.522(a) of this chapter.
(B) May count towards certification of the participant in a specialty or subspecialty listed in the Directory of Residency Training Programs published by the American Medical Association.
(C) Is approved by the Accreditation Council for Graduate Medical Education (ACGME) as a fellowship program in geriatric medicine.
(ii) In order to be counted, the resident must be assigned to one of the following areas:
(A) The portion of the hospital subject to the prospective payment system.
(B) The outpatient department of the hospital.
(C) For discharges occurring on or after August 10, 1993, any entity receiving a grant under section 330 of the Public Health Service Act that is under the ownership or control of the hospital (if the hospital incurs all, or substantially all, of the costs of the services furnished by those residents).
(iii) Full-time equivalent status is based on the total time necessary to fill a residency slot. No individual may be counted as more than one full-time equivalent. If a resident is assigned to more than one hospital, the resident counts as a partial full-time equivalent based on the proportion of time worked in any of the areas of the hospital listed in paragraph (g)(1)(ii) of this section, to the total time worked by the resident. A part-time resident or one working in an area of the hospital other than those listed under paragraph (g)(1)(ii) of this section (such as a freestanding family practice center or an excluded hospital unit) would be counted as a partial full-time equivalent based on the proportion of time assigned to an area of the hospital listed in paragraph (g)(1)(ii) of this section, compared to the total time necessary to fill a full-time internship or residency slot. . . .
(2) To include a resident in the full-time equivalent count for a particular cost reporting period, the hospital must furnish the following information. The information must be certified by an official of the hospital and, if different, an official responsible for administering the residency program.
(i) A listing, by specialty, of all residents assigned to the hospital and providing services to the hospital during the cost reporting period.
(ii) The name and social security number of each resident, (iii) The dates the resident is assigned to the hospital.
(iv) The dates the resident is assigned to other hospitals or other freestanding providers and any nonprovider setting during the cost reporting period.
(v) The proportion of the total time necessary to fill a residency slot that the resident is assigned to an area of the hospital listed under paragraph (g)(1)(ii) of this section.
(3) Fiscal intermediaries must verify the correct count of residents.42 C.F.R. § 412.105(g) (emphasis added).
As Riverside correctly points out, this regulation does not contain, or even implicitly allude to, any requirement that only resident hours spent in providing actual patient care can be included for purposes of the IME FTE resident count. Rather, the regulation provides that a resident is included in the calculation if he or she is (1) enrolled in an approved teaching program, and (2) assigned to a portion of the hospital subject to the PPS or to the outpatient department of the hospital. Importantly, according to the plain language of the regulation, a resident need only be "assigned to" a portion of the hospital subject to the PPS in order to be counted, and no mention is made of a requirement that a resident's time be directly related to providing care for specific patients. Accordingly, the Court concludes that the decision of the PRRB was correct, based upon the following basic and determinative facts and rules of law:
Furthermore, the regulation states that FTE status "is based onthe total time necessary to fill a residency slot," as opposed to the total time spent providing patient care. 42 C.F.R. § 412.105(g)(1)(iii). As Riverside notes, and as the Secretary effectively concedes, under ACGME standards medical residents are required to spend a portion of their time attending seminars and engaging in the type of educational activities involved in this case. (See PL's Mot. for Summ. J. at 12). Thus, by requiring residents to be enrolled in an approved educational program, see 42 C.F.R. § 412.105(g)(1)(i)(C), the regulation implicitly recognizes that "full-time" residents will spend some of their time engaged in solely educational activities that are not directly related to providing hands-on patient care; yet nothing in the regulation indicates that time so spent should be deducted from the FTE resident count. Although the phrase "total time necessary to fill a residency slot" is not specifically defined in the regulation, it can only reasonably be read to include time spent by residents participating in required educational activities (which of course include, but certainly are not limited to, activities involving participation in the direct care and treatment of patients), because such activities would be "necessary to fill a residency slot." The Court need not, however, define the parameters of what exactly is included in the phrase "total time necessary to fill a residency slot" in order to resolve the issue raised by Riverside's appeal. Although the logical interpretation of that phrase buttresses Riverside's argument, the clear and rather obvious answer to the question of whether the FTE resident count is restricted to time spent in the direct care and treatment of patients is found in the undeniable fact that the regulation simply contains no such requirement.
1. It is not denied by the Secretary that Riverside did in fact meet every single requirement of the regulation as it was written at the time in question. The residents were enrolled in an approved teaching program, as required and as defined in § 412.105(g)(1)(i); the residents were assigned to one of the areas as required and as listed in § 412.105(g)(1)(ii); and Riverside furnished all of the information required and as listed in § 412.105(g)(2).
2. It is not denied by the Secretary that the regulation, as it was written at the time in question, does not by its plain language contain any requirement that the time spent by residents had to be spent in direct patient care in order to be counted. The Secretary's argument is that this requirement should be read into the regulation because, in the past, the Secretary has interpreted "indirect costs of medical education" in 42 U.S.C. § 1395ww(d)(5)(B) as being "increased costs (that is, patient care costs)," 51 Fed. Reg. at 16775, and "additional operating (that is, patient care) costs," 54 Fed. Reg. at 40286. (Def.'s Mem. in Support of Def.'s Mot. for Summ. J. and in Opp. to Pl.'s Mot. for Summ. J. at 14). While this argument will be discussed in greater detail in the following section of this opinion, it is important to note at this point that: (A) there is nothing ambiguous about the regulation as it has been written; (B) the insertion of a new requirement by the Secretary's "interpretation" of unambiguous language is not legally permissible; and (C) if the Secretary desires to include a new requirement regarding excludable time, it must be done by amendment, and in compliance with the necessary administrative procedures for amending regulations (as was done in 2001 to exclude time spent by residents conducting research).
It is important to note that this is not a case in which a regulatory agency has adopted a challenged regulation dealing with the administration of a statute and which resolves some issue on which the statute is silent or ambiguous. In such cases, the agency's regulation interpreting the statute is given great deference by the courts.Chevron v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-845 (1983). In the present case, the agency adopted a regulation, as it unquestionably had the power to do, which specifically sets forth the requirements for determining the number of FTE residents a teaching hospital has during a given period of time. Riverside does not challenge that regulation or its application to the statute in question. The challenge, instead, is to the agency's interpretation of its own regulation.
An agency's interpretation of its own regulation is still entitled to deference, but deference is warranted "only when the language of the regulation is ambiguous." Christensen v. Harris County, 529 U.S. 585, 588 (2000) (emphasis added). There is certainly nothing ambiguous about § 412.105(g)(1). It sets forth two specific requirements-both of which Riverside met-for counting FTE residents for the purpose of determining the ratio of residents to hospital beds as contained in the statutory formula, and also a requirement for specific information to be furnished, which Riverside also met.
To insert a new requirement in the regulation — namely, that in counting the number of FTE residents, a hospital must exclude each and every hour spent by a resident fulfilling the resident's approved program that is not considered by the agency to be spent on individual "patient care" would be to illegally change the regulation without the necessity of complying with the procedures mandated by the Administrative Procedure Act. 5 U.S.C. § 553(b). As the Supreme Court said inChristensen, "to defer to the agency's position would be to permit the agency under the guise of interpreting a regulation to create de facto a new regulation." 529 U.S. at 588.
The Secretary's "interpretation" of his agency's own regulation in this case does not resolve some ambiguous language in the regulation; nor is a "policy" statement needed to resolve any doubts about the requirements specifically set forth in the regulation. As stated above, to change the regulation and to add a new requirement would require compliance with the Administrative Procedure Act. Notably, this is exactly what the Secretary did in 2001 when the same regulation at issue here was amended to add the requirement that "[t]he time spent by a resident in research that is not associated with the treatment or diagnosis of a particular patient is not countable." 42 C.F.R. § 412.105(f)(iii)(B)(2001).
The Secretary contends that this added requirement — the exclusion of research activities was only a "clarification" of the Secretary's "long-standing policy" that time spent by residents that is not associated with the treatment or diagnosis of a particular patient should be excluded. If, indeed, the Secretary felt it was necessary to incorporate this policy into the regulation, the obvious method would have been to exclude all non-patient care time, and not just non-patient care research time, when the regulation was amended. Instead, as Riverside appropriately points out, the addition of this specific exclusion of non-patient care research activity with no reference to any other non-patient care activities (such as the seminars, etc., in question) invokes the statutory canon expressio unius est exclusio alterius.
In regulations dealing with payments for the services of physicians in teaching settings, § 415.152 contains a definition of "Direct medical and surgical services" as "services to individual beneficiaries that are either personally furnished by a physician or furnished by a resident under the supervision of a physician in a teaching hospital making the cost election described in §§ 415.160 through 415.162." If the purpose of the 2001 amendment was simply to clarify the Secretary's long-standing policy to disallow a resident's time not spent on direct patient care, it would seem that the Secretary, instead of carving out a single activity — research — could have easily promulgated an amendment to § 412.105(f)(iii) which would simply have provided that "the time spent by a resident that is not spent on direct medical and surgical services to individual beneficiaries is not countable." This, of course, was not done.
Whether the exclusion added to the regulation in 2001 conflicts with either the Congressional purpose of compensating teaching hospitals for their IME costs, or the statutory method for determining the amount of such compensation, is not an issue in this case. The addition of the research exclusion requirement in the regulation is relevant to this case, however, because it contradicts the Secretary's contention that he need not comply with the Administrative Procedure Act in order to impose another exclusion requirement, this one concerning seminars and similar educational activities, under the guise of "clarification."
B. The Secretary's Interpretation of § 412.105(g)(1) is Not Mandated by the Congressional Purpose of Compensating Teaching Hospitals for their IME Costs and the Statutory Formula in 42 U.S.C. § 1395ww(d)(4)(B)
1. The Congressional Purpose and the Statutory Formula
As noted earlier, when Congress went from a "reasonable cost" basis to a "prospective payment system" in 1983 as the basis for reimbursement to hospitals for Medicare patients, a problem was created with respect to the increased operating costs in providing patient services in a teaching hospital. While the direct costs of residency programs, e.g., salaries of the residents and other direct costs, could be measured and reimbursed, Congress recognized that there were indirect costs in a teaching hospital that simply could not be accurately or even feasibly measured. As reported by the House of Representatives Ways and Means Committee, these unmeasurable costs are unique to teaching hospitals because of the very nature of those institutions. The inherent costs arise because of:
factors such as severity of illness of patients requiring the specialized services and treatment programs provided by teaching institutions and the additional costs associated with the teaching of residents. The latter costs are understood to include the additional tests and procedures ordered by residents as well as the extra demands placed on other staff as they participate in the education process. Your committee emphasizes its view that these indirect teaching expenses are not to be subjected to the same standards of `efficiency' implied under the DRG prospective system, but rather that they are legitimate expenses involved in the postgraduate medical education of physicians which the Medicare program has historically recognized as worthy of support under the reimbursement system.
The adjustment for indirect medical education costs is only a proxy to account for a number of factors which may legitimately increase costs in teaching institutions.
H.R. Rep. No. 98-25(I)(1983), reprinted in 1983 U.S.C.C.A.N. 219, 359.
Although increased operating costs in teaching hospitals (apart from the direct costs of the graduate medical education) were therefore recognized as indisputable facts, the problem was that these increased costs could not be quantitatively isolated because they are not direct costs that can be ascertained from the hospital's records. In an effort to nevertheless compensate teaching hospitals for these indirect medical education costs, Congress concluded that the greater the "teaching intensity" in a residency program the greater the indirect costs of such a program, and hence the greater the reimbursement should be. The "teaching intensity," as noted earlier, is measured by the ratio of the teaching hospital's full-time equivalent residents to the hospital's beds in the statutory formula adopted by Congress.
While it is true that the purpose of the IME adjustment is to reimburse teaching hospitals for the largely unmeasurable increased operating costs of a teaching hospital, there is nothing in the statute, or in the statutory formula for estimating those costs, to indicate that Congress considered only the costs attributable to residents providing direct care and treatment of the hospital's patients (only one of the activities involved in a required residency program) as causing the indirect increase in the hospital's operating costs.
It is obvious that among the cited examples requiring the IME adjustment are increased patient care costs attributable to a resident directly caring for a patient, e.g., additional tests and procedures ordered by a resident that more experienced physicians would not require. It is equally obvious, however, that the IME adjustment includes increased operating costs that are not attributable to a resident directly caring for a particular patient. Included are increased costs due to the "severity of illness of patients requiring the specialized services and treatment programs provided by teaching institutions" which are in addition to "the additional costsassociated with the teaching of residents." Even the additional costs associated with the teaching of residents include "the extra demands placed on other staff as they participate in the education process." It is also important to note that the specific examples of increased costs mentioned in the report are not the only factors that justified the IME reimbursement. As the House Report stated, there are "anumber of factors which may legitimately increase costs in teaching institutions." (emphasis added).
The point is that indirect medical education costs are virtually impossible to quantify in that they include not only costs directly caused by residents in actually caring for and treating patients, but also costs indirectly caused by the very nature of teaching hospitals. Regardless of the nature of the costs, they are measured by a Congressional formula that is a "proxy," or substitute, for any attempt to itemize and quantify such costs — a formula that makes no distinction as to the nature of the costs incurred. Reimbursement is not based on time spent at the bedside of patients, time spent on making rounds, time spent on ordering tests, time spent on record keeping or on any other aspect of patient care. Instead, reimbursement is based on the degree of teaching intensity as measured by a formula that is based on the ratio of the number of residents to the number of beds. The higher that ratio, the greater the teaching intensity; and a greater teaching intensity equates with greater indirect costs of that teaching. This is simply a method of approximating all types of increased indirect costs incurred by teaching hospitals, arising not only from costs attributable to direct patient care by residents, but also from increased general costs attributable to engaging in teaching activities and treating patients with more severe illnesses than are normally encountered in non-teaching hospitals.
In short, there is nothing in the purpose of the 1MB statute, or in its statutory formula, that shows any intention of Congress to base reimbursement on a method that excludes all required residency program activities from consideration except those considered by the Secretary to involve a resident providing direct care to a specific patient.
2. The Secretary's Interpretation of "Indirect Costs of Medical Education"
As noted earlier, the Secretary's argument is that adding the challenged requirement to the language of the regulation is justified by the Secretary's previous interpretation of the phrase "indirect costs of medical education" in 42 U.S.C. § 1395ww(d)(5)(B). To that end, the Secretary argues:
42 U.S.C. § 1395ww(d)(5)(B) in its entirety reads as follows:
(B) The Secretary shall provide for an additional payment amount for subsection (d) hospitals with indirect costs of medical education, in an amount computed in the same manner as the adjustment for such costs under regulations (in effect as of January 1, 1983) under subsection (a)(2) of this section, except as follows:
(i) The amount of such additional payment shall be determined by multiplying (I) the sum of the amount determined under paragraph (1)(A)(ii)(II) (or, if applicable, the amount determined under paragraph (1)(A)(iii) and the amount paid to the hospital under subparagraph (A), by (II) the indirect teaching adjustment factor described in clause (ii).
(ii) For purposes of clause (i)(II), the indirect teaching adjustment factor for discharges occurring on or after May 1, 1986, is equal to 1.89 x (((1 + r) to the nth power) — 1), where "r" is the ratio of the hospital's full-time equivalent interns and residents to beds and "n" equals .405.
(iii) In determining such adjustment the Secretary shall not distinguish between those interns and residents who are employees of a hospital and those interns and residents who furnish services to a hospital but are not employees of such hospital.
(iv) In determining such adjustment, the Secretary shall continue to count interns and residents assigned to outpatient services of the hospital as part of the calculation of the full-time-equivalent number of interns and residents.
In promulgating regulations implementing 42 U.S.C. § 1395ww (d)(5)(B), the statute authorizing IME payments, the Secretary has, over the past nearly 20 years, repeatedly interpreted IME payments as being for the higher cost of patient care at teaching hospitals. For example, in a final interim rule issued on May 6, 1986, the Secretary stated
indirect costs of medical education incurred by teaching hospitals are the increased operating costs (that is, patient care costs) that are associated with approved intern and resident programs. These increased costs may reflect a number of factors; for example, an increase in the number of tests and procedures ordered by interns and residents relative to the number ordered by more experienced physicians or the need of hospitals with teaching programs to maintain more detailed medical records.
51 Fed. Reg. at 16775. Likewise, in a final rule issued September 29, 1989, the Secretary stated that
As used in section 1886(d)(5)(B) of the Act, "indirect costs of medical education" means those additional operating (that is, patient care) costs incurred by hospitals with graduate medical education programs. The indirect costs of medical education might, for example include added costs resulting from an increased number of tests ordered by residents as compared to the number of tests normally ordered by more experienced physicians. 54 Fed. Reg. at 40286.
Although not cited by the Secretary, a more recent discussion by the Secretary dealing with the purpose of IME costs is found in 55 Fed. Reg. at 19457 in which the Secretary does not describe increased operating costs as "patient care costs" as he does in the references cited by the Secretary in his memorandum, 51 Fed. Reg. at 16775 and 54 Fed. Reg. at 40286. In 1990, in 55 Fed. Reg. at 19457, the Secretary said, "[a]s noted above, the IME payment is an add-on to a teaching hospital's total DRG payment and is intended to compensate for the additional operating costs (that is, indirect costs) incurred by the hospital in training interns and residents." The Secretary here, correctly, does not equate "operating costs" with "patient care costs."
(Def.'s Mem. in Support Def.'s Mot. for Summ. J. at 14).
It is undisputed that an increase in operating costs associated with teaching hospitals was the reason for the IME reimbursement. The Secretary, however, equates "increased operating costs" with "patient care costs" and then gives as examples of patient care costs only (1) an increase in the number of tests and procedures ordered by interns and residents, and (2) the need for hospitals with teaching programs to maintain more detailed records. As noted above, however, the IME adjustment is not based solely on these factors. It is also based on factors that are not attributable to a resident ordering more tests than an experienced physician or the need for more detailed records. It is also based on other factors described in the House Report that do not necessarily involve residents directly rendering care to the hospital's patients, e.g., the severity of the illnesses of patients who seek the specialized services and treatment programs available in teaching hospitals, and the general costs associated with the teaching of residents, including extra demands placed on the medical staff.
Riverside so admits. "Increased operating costs incurred by teaching hospitals was the reason for the additional IME payment, but it does not follow . . . that a hospital demonstrate how each medical education activity affected the care of a particular patient." (PL's Reply and Mem. Contra Def.'s Mot. for Summ. J. at 8).
It is precisely because the indirect costs cannot be adequately itemized and quantified that Congress devised a formula based on the degree of teaching intensity in a particular hospital, as a substitution for any other method of reimbursing such costs. If Congress had believed that the indirect medical education costs of a teaching hospital could be separately identified and quantified, and that higher direct patient care costs could be so determined from the hospital's records, then Congress could easily have qualified its formula for reimbursement to restrict the number of FTE residents to a number based only on hours that residents spent providing "patient care." It obviously did not do so.
lt could be very difficult to define exactly what is included in the Secretary's phrase "patient care costs." For example, if a resident suspects that a patient has a mental disorder, and does some research in order to better understand the patient's condition and treatment, is this time spent for "patient care"? If the same resident, for the same purpose, attends a psychiatric seminar, is this time spent for "patient care"? The Secretary, in the present case, disallowed time spent in psychiatric seminars.
The Secretary also contends that the agency's regulations concerning a determination of the number of FTE residents show that there is a different method used for IME payments and GME payments and that this difference is "consistent with the respective purposes of the payments." (Def.'s Mem. in Support of Def.'s Mot. for Summ. J. at 6).
Prior to the adoption of the regulation at issue in this case, there was a radically different methodology used. The FTE resident count for IME purposes was based simply on the number of residents assigned to the hospital and providing services there on September 1. The FTE count of residents for GME purposes was based on the total time necessary to fill a residency slot. The Secretary decided that "the GME and IME counts should be consistent. Therefore, in § 412.118, we would revise the current one-day method for counting interns and residents for purposes of computing the IME adjustment to a method more consistent with that used for computing GME payments under § 413.86."55 Fed. Reg. 19426, 19457. The current difference in the methodologies, the one which is emphasized by the Secretary, is that for IME purposes a resident who does not work full time in an area of the hospital that is subject to the prospective payment system or the outpatient department of the hospital is counted as a partial FTE based on the proportion of time assigned to one of those areas compared to the total time necessary to fill a full-time residency slot. That limitation does not apply to the residency count for GME purposes.
While this difference in the regulations does exist, it does little, if anything, to support the Secretary's position in this case. The entire IME program was created in order to adequately compensate teaching hospitals when the reasonable cost system was changed to the prospective payment system. Because reimbursement amounts under the prospective payment system were fixed amounts that do not distinguish between teaching and non-teaching hospitals, IME payments were added to the PPS income received by a teaching hospital, because it was recognized that the PPS did not account for the indirect costs of having a medical education program. If residents are not assigned to the portion of the hospital subject to the prospective payment system or the outpatient department, then it makes sense to not supplement the hospital's PPS income with any indirect medical education costs. The difference between assigned and non-assigned areas has nothing to do, however, with the Secretary's attempt in this case to draw distinctions among the types of activities required of a resident who isassigned to an area of the hospital subject to the prospective payment system or the outpatient department of the hospital.
The Secretary further contends that any resident time that is not directly related to patient care — using as an example, research — should be excluded "because the hospital does not incur any indirect cost, that is higher patient care costs, from the residents involved in research because they are not ordering additional tests and procedures for patients." (Def.'s Mem. in Support Def.'s Mot. for Summ. J. at 16-17). The problem with the Secretary's argument is the same problem described at length earlier in this opinion. Contrary to the purpose of IME and the Congressional reasons for enactment of the program, the Secretary persists in focusing on a single, isolated factor that can increase the costs of a teaching hospital — namely the ordering of additional tests by residents that a more experienced physician would probably not need. As pointed out earlier, however, this factor has been mentioned as simply one, but clearly not the only, example of a number of elusive factors that increase the operating costs of a teaching hospital over and above the quantifiable direct costs of a teaching program.
The Secretary also contends that because Riverside would be reimbursed for its direct costs of medical education, it should not be compensated for expenses attributable to costs of journal club and the seminars at issue in this case, because this would be, in the Secretary's words, an "attempt to have Medicare pay again." (Def.'s Mem. in Support Def.'s Mot. for Summ. J. at 19). If the IME program were based on reimbursement for the actual cost of each individual activity included in a resident's required program, the Secretary's argument might have some validity. However, that is not the basis of the IME program. It is precisely because the indirect costs of medical education cannot be so measured that Congress developed a formula, which is not based on the specific nature of each resident activity or the cost of each activity, but rather is based on the intensity of the entire accredited teaching program, a program that requires various types of teaching and learning experiences. To the extent the Secretary believes that some aspect of that program should not be counted and the time excluded, the recourse is to promulgate an amendment to the regulations, and not to impose this exclusion without compliance with the Administrative Procedure Act.
Finally, the Secretary argues that the regulation must be considered in the context of all PPS regulations and the entire Medicare regulatory scheme. (Def.'s Mem. in Support Def.'s Mot. for Summ. J. at 18). The court has no problem with this argument, but it does not support the Secretary's conclusion. First, the regulation in question is, as noted earlier, in very plain language; it is not in the slightest ambiguous or in any need of interpretation by anyone. Second, even if an interpretation were needed, which is not true, it is clear that the Secretary's "interpretation" of the regulation is not required by the Congressional purpose for the IME program and the statutory formula Congress developed based on the "teaching intensity" of a particular hospital's residency program. Third, to insert the additional requirement desired by the Secretary would require the Secretary to comply with the procedures mandated by the Administrative Procedure Act for the further amendment of the regulation in question. It cannot be done under the guise of an "interpretation."
IV. Conclusion
The court finds, for the reasons stated herein, that the Secretary's position in this case is contrary to both the plain language of the applicable regulation and the methodology adopted by Congress for the reimbursement of the indirect costs of medical education provided by teaching hospitals. Accordingly, the decision of the Secretary is REVERSED, and the case is hereby REMANDED to the Provider Reimbursement Review Board for a determination of the appropriate amount of reimbursement, together with interest thereon as provided by 42 U.S.C. § 1395oo(f)(2), and for further proceedings consistent with this opinion.
IT IS SO ORDERED.