Opinion
Civil Action No. 97-3499 Section "R" (3).
November 4, 1998
ORDER AND REASONS
At issue in this case is the method by which Medicare Part B reimburses non-teaching hospitals for the "moonlighting" services of graduate medical students ("residents"). Before the Court is defendant's motion to dismiss, or, in the alternative, for summary judgment, and plaintiffs' cross motion for summary judgment. Based on the reasons stated below, the Court grants plaintiffs' motion and denies defendant's motions.
I. Background
During the fiscal years ending May 31, 1982 through May 31, 1986, plaintiffs St. Charles General Hospital and Century City Hospital employed residents to provide "house physician" services on nights and weekends. The residents participated in approved training programs in other hospitals, but they were not enrolled in either approved or unapproved programs with plaintiffs. Rather, the residents "moonlighted" for plaintiffs to deliver medical services to inpatients when the admitting or attending physician was unavailable. Plaintiffs paid the residents between $20.00 and $25.00 per hour.
Pursuant to the Medicare Act, plaintiffs submitted annual "cost reports" to a fiscal intermediary contracted to the Health Care Financing Administration ("HCFA"). Plaintiffs sought reimbursement pursuant to 42 C.F.R. § 405.523, the regulation governing "residents' services." Under § 405.523, plaintiffs argue that they are entitled to reimbursement for the share of the residents' salaries corresponding to the share of Medicare patients treated. Pl.['s] Mem. at 2-3. Plaintiffs say that this is known as "reasonable cost-based" reimbursement.
Approximately 40 percent of the hospitals' patients were enrolled in Medicare. The hospitals did not charge Medicare patients for the residents' services.
The intermediary disallowed plaintiffs' claims, asserting that the residents acted in the capacity of licensed physicians unrelated to their training program. See A.R. at 108. Accordingly, the intermediary stated that Medicare Part B would reimburse the hospitals under 42 C.F.R. § 405.550, the regulation governing "physicians' services." This provision indicates that providers are to be reimbursed on a "reasonable charge basis" for the services of physicians if certain requirements are met. See Def.'s Ex. 1.
Reasonable charge-based reimbursement is based on the charges to Medicare beneficiaries for specific services as opposed to the cost to the hospital of providing those services. One important difference between cost-based reimbursement and charge-based reimbursement is that the latter does not account for the residents' "standby" or "availability" services — the salary paid to residents for the time spent "on-call" not actually treating patients. Using the charge-based approach, the intermediary disallowed any such expenses.
Plaintiffs appealed the intermediary's decision to the Provider Reimbursement Review Board ("PRRB"), which affirmed the intermediary's decision on July 15, 1997. See A.R. at 24-36. On September 8, 1997, the HCFA Administrator affirmed the PRRB on behalf of defendant Donna Shalala ("defendant"), Secretary of the Department of Health and Human Services. See A.R. at 2-9.
Pursuant to 42 U.S.C. § 1395oo(f) and 42 C.F.R. § 405.1877, plaintiffs now seek judicial review of the Secretary's final decision. Plaintiffs argue that they should be reimbursed for the services of residents' under § 405.523, and that § 405.523 requires cost-based payment that includes the Medicare portion of the residents' salaries. Defendant contends that the Secretary properly decided that § 405.550 applies. However, defendant claims that even if § 405.523 governs, plaintiffs still should be reimbursed based on the cost of specific services provided to Medicare beneficiaries as opposed to the Medicare percentage of the hospitals' overall costs.
II Discussion
A. Summary Judgment Standard
Summary judgment is appropriate when there are no genuine issues as to any material facts, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2551 (1986). The court must be satisfied that no reasonable trier of fact could find for the nonmoving party or, in other words, "that the evidence favoring the nonmoving party is insufficient to enable a reasonable jury to return a verdict in her favor." Lavespere v. Niagara Mach. Tool Works, Inc., 910 F.2d 167, 178 (5th Cir. 1990); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). The moving party bears the burden of establishing that there are no genuine issues of material fact.
If the dispositive issue is one for which the nonmoving party will bear the burden of proof at trial, the moving party may satisfy its burden by merely pointing out that the evidence in the record contains insufficient proof concerning an essential element of the nonmoving party's claim. Celotex, 477 U.S. at 325, 106 S.Ct. at 2552; Lavespere, 910 F.2d at 178. The burden then shifts to the nonmoving party, who must, by submitting or referring to evidence, set out specific facts showing that a genuine issue exists. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553.
B. Legal Framework
Plaintiffs challenge the Secretary's decision under the Administrative Procedures Act, which commands reviewing courts to set aside agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706 (2) (A); Thomas Jefferson University v. Shalala, 512 U.S. 504, 512 (1994).
This Court must give "substantial deference to an agency's interpretation of its own regulations." Thomas Jefferson, 512 U.S. at 512. Indeed, the agency's interpretation is entitled to "controlling weight unless it is plainly erroneous or inconsistent with the regulation." Id. Accordingly, this Court must defer to the Secretary unless an "alternative reading is compelled by the regulation's plain language . . ." Id. Broad deference is particularly appropriate when the regulation concerns a complex and highly technical regulatory program that implicates the "exercise of judgment grounded in policy concerns." Id.
C. Residents or Physicians?
The Secretary found that plaintiffs hired the residents in the capacity of licensed physicians, not in the capacity of residents. Plaintiffs disagree. They contend that the plain language and history of enforcement of § 405.523 indicate that they should be reimbursed for the services of residents. The regulation states:
Interns' and residents' services not in approved teaching programs.
(a) The services of a hospital resident or intern who is not under an approved teaching program in the hospital are reimbursable to the hospital on a cost basis under the supplementary medical insurance program. For purposes of this section, such services shall be deemed to include the services of a physician employed by the hospital who is authorized to practice only in a hospital setting. . . .
42 C.F.R. § 405.523. Plaintiffs argue that the plain language of this regulation covers their situation: hospitals that hire residents who are in approved training programs in other hospitals.
In addition to the plain language, plaintiffs cite three PRRB decisions supporting their interpretation. Plaintiffs argue that these decisions became the final decision of the Secretary because the HCFA Administrator did not reverse or modify them. Indeed, the first two cases cited by plaintiffs held that the services of "moonlighting residents" were reimbursable under Part B on a reasonable cost basis. See Unity Hospital v. Blue Cross Assoc./Blue Cross of Northern California, PRRB Dec. No. 78-D86 at 16 (Dec. 21, 1978) (Pl.'s Ex. 4); Los Angeles New Hospital v. Blue Cross Assoc./Blue Cross of Southern California, PRRB Dec. No. 82-D42 (Jan. 26, 1982) (Pl.'s Ex. 5). The providers in both of these cases paid the residents by the hour and did not directly bill the patients. The Court notes, however, that these decisions do not explicitly consider the interpretation of either § 405.523 or § 405.550; rather, they relied on "Section 3115 of HIM-13."
In the third case cited by plaintiffs, the PRRB specifically rejected the argument that services by "moonlighting" residents should be treated as physician services reimbursable on a reasonable charge basis. Instead, the PRRB found that such "moonlighting" was to be reimbursed as residents' services under § 405.523. Medical Center Del Oro Hospital v. Mutual of Omaha, PRRB Dec. No. 86-D106 (Aug. 25, 1986) (Pl.'s Ex. 6). The PRRB distinguished a case in which the residents worked on a fee-for-service basis. In that case, the PRRB had characterized the residents' work as physician services reimbursable on a reasonable charge basis. This was unlike Del Oro, where the patients were not billed on a fee-for-service basis.
As in the cases cited above, plaintiffs in this case paid the residents an hourly wage and did not bill Medicare or the patients for individual services provided by the residents. In fact, defendant does not dispute that in the 1980s the Secretary interpreted § 405.523 to be the controlling regulation.
Defendant does dispute, however, other aspects of the holdings in the cases cited by plaintiffs.
The Secretary's position apparently changed, however, in 1994. In Edward H. White, II Memorial Hospital v. Mutual of Omaha Ins. Co., HCFA Administrator Dec. dated June 28, 1994, the HCFA Administrator reversed a PRRB decision applying § 405.523 to moonlighting by residents. See A.R. at 140-155. The Administrator found that § 405.523 "is not intended to apply to services furnished by interns and residents in approved programs at another facility, who are also fully-licensed physicians." Id. at 149. Rather, the Administrator held that § 405.523 applies to residents "who are not in an approved program [at all] and those who are authorized to practice only in the hospital setting and are employed by the hospital." Id. at 148.
In Edward White, the Administrator cited Section 237 of the Hospital Manual in support of its decision. This provision states that services furnished by "moonlighting" interns and residents unrelated to their training program are reimbursed as "physicians' services" on a reasonable charge basis. A.R. at 151-52. Accordingly, the Administrator concluded that the providers would be reimbursed under § 405.550 for physicians' services, and not under § 405.523 for residents' services. A.R. at 152.
Finally, in 1995, the Department of Health and Human Services implemented rules "clarifying" § 405.523 to conform with the Secretary's decision in Edward White. 60 Fed. Reg. 38,411 (1995); Def.'s Mem. at 11 n. 7. The Department also added a new regulation entitled "Services of moonlighting residents," which provides that moonlighting services of residents furnished outside of their approved training program are payable as physicians' services. 42 C.F.R. § 415.208 (1998); Def.'s Mem. at 11 n. 7; Def.'s Ex. 12.
The Supreme Court instructs that broad deference to the Secretary's interpretation is not warranted if "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). Moreover, an agency's interpretation is entitled to less deference if it conflicts with a prior interpretation. Good Samaritan Hospital v. Shalala, 508 U.S. 402, 417 (1993). In Good Samaritan, the Supreme Court held:
The Secretary is not estopped from changing a view she believes to have been grounded upon a mistaken legal interpretation . . . On the other hand, the consistency of an agency's position is a factor in assessing the weight that position is due. As we have stated: `An agency interpretation of a relevant provision which conflicts with the agency's earlier interpretation is entitled to considerably less deference than a consistently held agency view.'Id. Finally, the Supreme Court has held, in the context of Chevron deference, that an agency's change in interpretation of a statute "that does not take account of legitimate reliance on prior interpretation, may be `arbitrary, capricious or an abuse of discretion.'" Smiley v. Citibank (South Dakota), 517 U.S. 735, 742 (1996).
In this case, the Court finds that the Secretary's current interpretation of § 405.523 does violence to the plain language of the regulation and directly conflicts with the Secretary's prior interpretations on which plaintiffs relied.
Section 405.523 states that "The services of a hospital resident or intern who is not under an approved teaching program in the hospital are reimbursable to the hospital on a cost basis . . ." 42 C.F.R. § 405.523 (emphasis added). Contrary to the Secretary's current, strained interpretation, this language suggests that the regulation applies to residents who participate in approved teaching programs in other facilities. The regulation does not refer to residents who are not in any approved programs in any hospital; rather, it refers to residents who are not part of approved teaching programs in the hospital seeking reimbursement. In the case at hand, the residents did not attend approved teaching programs in the hospitals seeking reimbursement.
Moreover, contrary to the Secretary's holding in Edward White, the regulation does not exclude residents who happen to be fully licensed simply because the regulation also applies to "services of a physician . . . who is authorized to practice only in a hospital setting." Accordingly, the plain language of § 405.523 covers plaintiffs' situation.
The position taken by the Secretary in Edward White is also entitled to less deference because it represented a change in the Secretary's interpretation. Defendant has not submitted any evidence that the Secretary employed her current interpretation of § 405.523 at any time prior to the Edward White decision in 1994. Accordingly, this Court concludes that the PRRB's previous decisions in the 1970's and 1980's represented the Secretary's understanding of the regulation until 1994.
This Court also finds that plaintiffs legitimately relied on defendant's prior holdings. Specifically, because plaintiffs expected to be reimbursed on a cost basis, they did not keep information on the individual cost of specific services to Medicare patients. When the Secretary changed her position in 1994, it would have been difficult or impossible for plaintiffs to uncover this information for services provided from 1981 through 1986. Accordingly, the Secretary's new interpretation is entitled to considerably less deference because it conflicts with a previous interpretation on which plaintiffs legitimately relied.
In fact, plaintiffs did not "charge" Medicare patients for the services at all.
Further, defendant's policy arguments are not compelling. Defendant argues that Medicare aims to provide special support to teaching hospitals and that plaintiffs' interpretation of the regulation would result in an "unwarranted windfall" for non-teaching hospitals. Def.'s Mem. at 2. This is because the non-teaching hospitals "would be reimbursed for the full salaries paid to moonlighting residents, even though the hospitals could collect reimbursement only for the delivery of specific services if they hired regular, licensed physicians to perform the same duties." Id.
The Court is not convinced that the scenario described by defendant would result in a "windfall" to non-teaching hospitals. For example, plaintiffs contend that the charge for specific medical services is often far greater than the $20.00 to $25.00 an hour salary paid to moonlighting residents. Indeed, defendant admits that the cost-based reimbursement sought by plaintiffs is less generous than charge-based reimbursement. Def.'s Mem. at 4 n. 3 (noting that "`reasonable cost' is nearly always lower than `customary charge'"); Def.'s Reply Mem. at 6 (admitting that plaintiffs seek the "less generous standard of reimbursement"). This Court will not rely on the unsubstantiated — and contradictory — policy arguments of defendant to overcome the plain language and contemporaneous interpretation of a regulation.
The Court has no reason to doubt defendant's position that Medicare aims to treat teaching hospitals differently than non-teaching hospitals. The Court disagrees, however, that this general proposition leads to the conclusion defendant seeks. Perhaps Medicare distinguishes between teaching and non-teaching hospitals in that the former are entitled to reimbursement for 100 percent of cost and the latter are only entitled to reimbursement for 80 percent of cost after recognition of the deductible. See 42 C.F.R. § 405.522; 42 C.F.R. § 405.523.
Finally, in both Edward White and in this case, the Secretary relies on Provider Reimbursement Manuals to support her position that Medicare distinguishes between services furnished by residents related to their training program and those performed by fully-licensed residents unrelated to their training programs. See A.R. at 7; A.R. at 151-52. However, the Fifth Circuit has indicated that such manuals do "not carry the force and effect of law, and certainly [do] not displace a reasonable statutory interpretation." Sta-Home Health Agency, Inc. v. Shalala, 34 F.3d 305, 310 n. 11 (5th Cir. 1994).
Accordingly, the Court finds that § 405.523 governs plaintiffs reimbursement in this case — not § 405.550. The Secretary's decisions to the contrary are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); Thomas Jefferson University v. Shalala, 512 U.S. 504, 512 (1994).
In so holding, the Court declines to retroactively apply the Secretary's purported "clarification" of § 405.523 adopted in 1995. The District of Columbia Circuit has noted:
An agency may be prevented from applying a new policy for one of two reasons . . . a departure from prior policy cannot stand when the agency fails to explain the reason for the change . . . [and] an agency may be prevented from applying a new policy retroactive to parties who detrimentally relied upon the previous policy.New England Tel. Tel. Co. v. F.C.C., 826 F.2d 1101, 1110 (D.C. Cir. 1987).
As explained above, this Court finds that the "clarification" issued by the Secretary in 1995 in reality represents a departure from prior policy and that plaintiffs detrimentally relied on the earlier approach. In this case, retroactive application of a 1995 policy change to conduct that occurred between 1982 and 1986 is especially inappropriate because it would be nearly impossible for plaintiffs to comply with the new interpretation at this late date. Indeed, defendant admits in its reply brief that it does not contend "that the later regulations should be applied here." Def.'s Reply Mem. at 8 n. 6. Accordingly, the Court applies § 405.523 to plaintiffs' claims as that regulation was contemporaneously understood.
D. Reimbursement under § 405.523
Defendant argues that even if § 405.523 governs, plaintiffs are entitled to reimbursement only for the specific, identifiable services provided to Medicare patients. Plaintiffs assert, however, that the Secretary owes them a proportionate share of the residents' salaries under the "cost-based" system. Pl.'s Mem. 2-3, n. 1.
Section § 405.523 states in relevant part:
(a) The services of a hospital resident or intern who is not under an approved teaching program in the hospital are reimbursable to the hospital on a cost basis . . .
(b) In this connection reimbursement under the health insurance program for services discussed in paragraph (a) of this section will be to the hospital in an amount of 80 percent of the cost of services rendered to the beneficiaries after recognition of the deductible.
42 C.F.R. § 405.523 (emphasis added).
Defendant urges this Court to defer to the Secretary's interpretation. A careful review of the Secretary's decision, however, reveals that the Secretary never addressed the interpretation of the payment provision of § 405.523. Indeed, because the Secretary found that § 405.550 applied to this case, she had no need to interpret the reimbursement provision of § 405.523. Accordingly, there is no interpretation by the Secretary to which this Court can defer.
In its reply brief, defendant makes two arguments regarding the interpretation of § 405.523. First, defendant claims that reimbursement under this regulation should be made on a "reasonable charge" basis. Def.'s Reply Mem. at 6. Second, defendant asserts that reimbursement under § 405.523 is somehow based on the cost of specific, identifiable services provided to Medicare patients as opposed to the Medicare share of the hospitals' costs. Def.'s Reply Mem. at 2-6. The Court finds no support for either of these contentions.
1. Cost-Based versus Charge-Based Reimbursement
The plain language of § 405.523 is unambiguous that reimbursement is to be on a cost basis. Hence, each PRRB decision interpreting § 405.523 has found that it mandates cost-based reimbursement. For example, in Del Oro, the PRRB specifically rejected the argument that § 405.523 requires reasonable charge-based reimbursement. Pl.'s Ex. 6. Likewise, in Los Angeles New Hospital, the PRRB found that "the fees paid to [moonlighting residents] are reimbursed under Part B on a reasonable cost basis." Pl.'s Ex. 5. Finally, in Unity, the PRRB stated that the "services" of moonlighting residents were reimbursable on a "reasonable cost basis." Pl.'s Ex. 4.
Defendant has submitted absolutely no evidence that § 405.523 contemplates anything other than cost-based reimbursement. Accordingly, this Court finds that providers are to be payed for the services of residents on a reasonable cost basis under § 405.523 and not on a reasonable charge basis.
2. Salaries versus Services
Section 405.523 states that hospitals are to be reimbursed "in an amount of 80 percent of the cost of services rendered to the beneficiaries." Defendant claims that the phrase "cost of services" means that payment to the hospitals is limited to the cost of specific, identifiable services to Medicare beneficiaries and excludes the standby salaries of the residents.
Defendant's argument, however, disregards the settled meaning of the phrase "cost of services" in the context of Medicare reimbursement. In describing cost-based reimbursement, 42 C.F.R. § 413.5 states: "All necessary and proper expenses of an institution in the production of services, including normal standby costs, are recognized." (emphasis added). Section § 413.50(a) further explains that cost-based reimbursement "involves a determination of (1) Each provider's allowable costs for producing services, and (2) The share of these costs which is to be borne by Medicare . . ." Defendant has failed to cite any authority suggesting that the residents' salaries are excluded from the hospitals' allowable costs or that the allowable costs are limited to costs identified with specific services. Rather, hospitals must calculate the share of their total allowable costs that is attributable to Medicare beneficiaries. 42 C.F.R. § 413.50(b)-(j).
Defendant's reliance on the PRRB decisions of the 1970s and 1980s is misplaced. Def.'s Reply Mem. at 4-5. For example, in Los Angeles New Hospital, the PRRB found that "the fees paid to [moonlighting residents] are reimbursed under Part B on a reasonable cost basis." Pl.'s Ex. 5. Defendant claims that "fees paid" refers to the fees paid to the residents for specific services. However, the Medicare patients in Los Angeles New Hospital were not charged any fees for the specific services of the residents. Nor were the residents paid based on the amount of specific services they provided. Rather, the residents were paid a salary. Accordingly, "fees paid" refers to the salary paid to the residents.
Likewise, in Unity, the PRRB stated that the "services" of moonlighting residents were reimbursable on a "reasonable cost basis." Pl.'s Ex. 4. Defendant insists that "services" means the specific services provided by the residents. However, given the regulations cited above and the settled meaning of "reasonable cost basis," this Court concludes that "services" refers in a more general sense to the cost to the hospital of paying the residents' salaries in return for the residents' "services."
In sum, defendant has provided no support for her litigating position that "cost of services" refers to the specific, identifiable services provided by the residents. Moreover, the Secretary's position contradicts the settled meaning of cost-based reimbursement.
This Court therefore finds that plaintiffs are entitled to reimbursement under § 405.523 in the amount of 80 percent of the Medicare portion of the hospitals' allowable costs after recognition of the deductible. This includes the Medicare portion of the residents' salaries.
For some inexplicable reason, plaintiffs appear to argue that they are entitled to 100 percent of the Medicare portion of the residents' salaries. Indeed, plaintiffs originally submitted the full 100 percent in their cost reports to the intermediary. However, § 405.523(b) clearly indicates that plaintiffs are only due 80 percent of cost after recognition of the deductible.
III. Conclusion
For the reasons stated above, this Court denies defendant's motion to dismiss, or, in the alternative, for summary judgment and grants plaintiffs' cross-motion for summary judgment.