Michigan Dep't of Cmty. Health v. Sec'y of Health & Human Servs.

MICHIGAN DEPARTMENT OF COMMUNITY HEALTH, et al., Plaintiffs-Appellants, v. SECRETARY OF HEALTH AND HUMAN SERVICES, et al., Defendants-Appellees.

Case No. 11-1905

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Dated: August 23, 2012

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 12a0942n.06

On Appeal from the United States

District Court for the Eastern

District of Michigan

OPINION

Before: COLE and DONALD, Circuit Judges; SARGUS, District Judge.^*

SARGUS, District Judge. Plaintiffs-Appellants, the Michigan Department of Community Health and the psychiatric hospitals it operates ("Providers"), appeal the district court's grant of summary judgment in favor of Defendants-Appellees, Secretary Kathleen Sebelius of the United States Department of Health and Human Services ("HHS") and the Centers for Medicare and Medicaid Services ("CMS") (together "Agency"¹) and its denial of the Providers' request for summary judgment in their favor. The Providers allege that they were not fully reimbursed by the Agency for psychiatric hospital services provided to Medicare patients during fiscal years 2003through 2006. In an attempt to recover nearly $10 million in costs, the Providers filed suit against the Agency contending that the methods it used to calculate the Providers' Medicare reimbursements during fiscal years 2003 through 2006 violated the Medicare statute, Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., and the Administrative Procedures Act, 5 U.S.C. § 551 et seq. In granting the Agency's motion for summary judgment and denying the Providers' motion for summary judgment, the district court held that the applicable sections of the Medicare statute are clear and unambiguous and that the Agency's determination of the amount of Medicare reimbursements is compelled by the statute. In the alternative the district court also concluded that, even if the statute is considered ambiguous, it is likely that the Agency would prevail because its regulations would be entitled to deference. For the reasons that follow, we AFFIRM the district court's decision.

I. BACKGROUND

This case concerns the manner in which psychiatric hospitals were reimbursed for care they provided to Medicare beneficiaries after the 2002 expiration of a section of the Medicare statute that provided specific caps on the reimbursed amounts.

A. Statutes and Regulations

The Medicare program initially utilized the reasonable-cost payment system to determine reimbursements to provider hospitals. Under that system, a hospital would report the total costs of providing services to Medicare beneficiaries at the end of a year and the Agency would reimburse the hospital for the costs it determined were reasonable. Congress modified this system a numberof times and with the passage of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), replaced it entirely with the Prospective Payment System ("PPS"). Pub. L. No. 97-248, 96 Stat. 324 (1982); 42 U.S.C. § 1395ww(d)(1)-(4). The PPS requires classification of each patient into a "diagnosis related group," or DRG. See Tommy G. Thompson, Prospective Payment System for Inpatient Services in Psychiatric Hospitals and Exempt Units (2002) ("Thompson Report"). Each patient in any given DRG will have a similar illness or disorder which, in theory, will require similar treatment at "relatively similar cost." Id. The implementation of the PPS for acute care hospitals in 1983 followed ten years of research and study concerning the appropriate way to classify patients and resulted in nearly 500 distinct DRGs. Id. at 4-6. The goal of the PPS is to define payments to hospitals based on patient characteristics rather than the historical practices and expenses of the hospital. With the passage of TEFRA and the implementation of the PPS, Congress largely ended the Agency's historic compensation system that was based on hospitals' actual costs, and which varied widely for different hospitals.

TEFRA imposed a standardized reimbursement system based on specific patient characteristics. TEFRA, however, exempted in-patient psychiatric services from the PPS because those services were difficult to define based on patient characteristics and because there was little consensus about a national standard of care for in-patient psychiatric services. See 42 U.S.C. § 1395ww(a)-(b) (outlining payment plans for certain types of facilities).

1. TEFRA - Target Amounts Pre-1998

Under TEFRA, the PPS exempt providers, such as the Providers herein, continued to be reimbursed for their actual "operating costs" as long as those costs did not exceed a defined "target amount." 42 U.S.C. § 1395ww(b)(1)(A). In the first fiscal year after TEFRA was enacted, the "target amount" was defined as the "allowable operating costs . . . for the preceding 12-month cost reporting period." 42 U.S.C. § 1395ww(b)(3)(A)(i). Thus, the initial target amounts were based on each hospital's actual operating costs. In later years, the "target amount" was defined as "the target amount for the preceding 12-month cost reporting period" plus a standard percentage increase identified by the statute and regulations. 42 U.S.C. § 1395ww(b)(3)(A)(ii).

The Agency issued regulations implementing Congress's definition of target amount in 42 § C.F.R. § 413.40.² After determining the target amount for a particular year, a reimbursement ceiling was calculated by multiplying the target amount for a hospital by the number of discharges from that hospital in the same year. See 42 C.F.R. § 413.40(a)(3). Reimbursements could not exceed the ceiling. Id. The Agency also issued regulations instructing its intermediaries³ on the method by which a hospital's target amount was to be calculated in a base year and updating it in subsequent years. See 42 C.F.R. § 413.40(c)(4)(i)-(ii).

This procedure was followed consistently until 1997, when Congress responded to "significant variation" in the TEFRA ceilings of different hospitals by enacting further limitations to the reasonable-cost based reimbursement in the Balanced Budget Act of 1997 ("BBA"), § 4414, Pub. L. No. 105-33, 111 Stat. 251, 405 (codified at 42 U.S.C. § 1395ww(b)(3)(H)). H.R. Rep. No. 105-149, at 1336 (1997).

2. BBA - Target Amounts 1998 through 2002

As part of the BBA, Congress added limits, or caps, on reimbursement payments, including those for psychiatric hospitals. See 42 U.S.C. § 1395ww(b)(3)(H)(i)-(ii). The caps were instituted to achieve federal budget savings. See Rehabilitation and Long-Term Care Hospital Payments: Hearing before the Subcomm. on Health of the H. Comm. on Ways and Means, 105th Cong. at 60 (1997), Rec. Doc. No. 17-3. For fiscal years 1998 through 2002, the target amounts for psychiatric hospitals could not exceed the 75th percentile of target amounts for all hospitals in the same class of providers. See id. Much like TEFRA, the BBA required that this capped amount be multiplied by update factors prescribed as part of the cap scheme for each year of the five-year period. 42 U.S.C. § 1395ww(b)(3)(H)(i).

The Agency promulgated regulations implementing the BBA cap scheme. See 42 C.F.R. § 413.40(c)(4)(iii). The cap regulation specified the calculation of a "hospital-specific target amount," defined as the "net allowable costs in a base period increased by the applicable update factors" for the subject period. 42 C.F.R. § 413.40(c)(4)(iii)(A). That amount was then to be compared to the 75th percentile of the target amount for hospitals in the same class. 42 C.F.R. § 413.40(c)(4)(iii)(B).The final target amount for reimbursement "is the lower of the amounts specified" in subsections (c)(4)(iii)(A) and (B).

This procedure was followed consistently until 2002, when the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act ("BBRA"), which was enacted by Congress in 1999, further refined the reimbursement rules for providers. Pub. L. No. 106-113, 113 Stat. 1501 (1999).

3. BBRA - Target Amounts Post-2002

In the BBRA, Congress directed that, upon expiration of the BBA caps, the Agency was to make "payments for inpatient hospital services furnished by psychiatric hospitals or units . . . in accordance with the prospective payment system [PPS]." Pub. L. No. 106-113, 113 Stat. 1501 (1999). The Agency was unable to implement Congress's directive at the end of the cap period⁴ and instead calculated the psychiatric hospitals' target amounts by using the statute and regulations that were in place at that time-42 U.S.C. § 1395ww(b)(3)(A)(ii) and 42 C.F.R. § 413.40(c)(4)(ii). Specifically, the Agency took the previous year's target amount, updated by the applicable inflationfactor. Thus, a hospital's target amount for 2003 was the target amount actually used for 2002 (which had the 75th percentile cap provision applied) updated by the inflation factor set by statute.

In August 2005, and effective October 1, 2005, the Agency added an introductory phrase to 42 C.F.R. § 413.40(c)(4)(iii), which specified that the entire section was to apply "[f]or cost reporting periods beginning on or after October 1, 1997 through September 30, 2002." 42 C.F.R. § 413.40(c)(4)(iii) (2008). This language supports the way in which the Agency had been calculating the reimbursements since the expiration of the BBA caps. During the first three periods of time at issue in this case (2003, 2004, 2005) that introductory language was not present.

From 2005 through 2008, the Agency gradually moved the psychiatric hospitals over to the new PPS that had been drafted for psychiatric hospitals. 69 Fed. Reg. at 66, 980; 42 C.F.R. § 412.426(a). Reimbursement payments during the only transition-phase year at issue in this case, fiscal year 2006, were 25% based on the new PPS amounts and 75% based on the TEFRA target amounts.

B. Facts and Procedure

The facts in this case are not in dispute. During the BBA period, from 1998 to 2002, the Providers' reimbursement amounts were calculated pursuant to 42 C.F.R. § 413.40(c)(4)(iii). For each year during...