“[Judicial review of HHS reimbursement decisions shall be made under APA standards”
How later courts described this case
- “[Judicial review of HHS reimbursement decisions shall be made under APA standards”
Written by the judges who cited it.
The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 7, 2004 Decided February 4, 2005
No. 04-5092
ST . ELIZABETH'S MEDICAL CENTER OF BOSTON, INC.,
APPELLANT
v.
TOMMY G. THOMPSON, IN HIS OFFICIAL CAPACITY AS
SECRETARY OF THE U.S. DEPARTMENT OF HEALTH AND
HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 03cv00153)
Gregg D. Shapiro argued the cause for appellant. With him
on the briefs was Robert D. Wick.
Anthony A. Yang, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the briefs were
Peter D. Keisler, Assistant Attorney General, and Barbara C.
Biddle, Attorney.
Before: EDWARDS, SENTELLE and RANDOLPH, Circuit
Judges.
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Opinion for the Court filed by Circuit Judge SENTELLE.
SENTELLE, Circuit Judge: St. Elizabeth’s Medical Center
of Boston (“St. Elizabeth’s”) appeals from a summary judgment
entered by the United States District Court in favor of appellee
Thompson, Secretary of Health and Human Services (“the
Secretary” or “HHS”), seeking to overturn the Secretary’s
administrative decision that St. Elizabeth’s was not entitled to an
exemption from limitations on Medicare reimbursements to a
new skilled nursing facility (“SNF”). The Secretary’s decision
to deny St. Elizabeth’s the exemption was based on his
conclusion that the St. Elizabeth’s SNF was not a “new
provider” within the meaning of the governing regulation,
because it was opened with operating rights acquired from a pre-
existing nursing facility which was a SNF or its equivalent.
Because the Secretary’s conclusion that the pre-existing nursing
facility was a SNF or its equivalent was not supported by
sufficient evidence, we hold that St. Elizabeth’s, not the
appellee, was entitled to summary judgment. We reverse the
judgment, and direct the remand of the administrative
proceedings to HHS for a determination of other related issues.
I. Glossary
Because of the numerous acronyms and terms of art
employed in this opinion, we provide a brief glossary.
APA Administrative Procedure Act
CMS Centers for Medicare and Medicaid
Services
HCFA Health Care Financing Administration
HHS Department of Health and Human
Services
NF nursing facility
PRM Provider Reimbursement Manual
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PRRB Provider Reimbursement Review Board
RCLs reasonable cost limits
SNF skilled nursing facility
St. Elizabeth’s St. Elizabeth’s Medical Center of Boston
(Appellant)
TCU transitional care unit
II. Background
A. Regulatory Scheme
The Social Security Act provides for the reimbursement of
“reasonable costs” of care for Medicare patients–primarily the
elderly and certain disabled people–to Medicare-certified skilled
nursing facilities. See 42 U.S.C. § 1395 et seq. The Centers for
Medicare and Medicaid Services (“CMS”) (formerly known as
the Health Care Financing Administration (“HCFA”)),
administers Medicare on the Secretary’s behalf. See Community
Care Foundation v. Thompson, 318 F.3d 219, 221 (D.C. Cir.
2003).
Seeking to encourage Medicare-certified providers to
operate efficiently, Congress has instructed the Secretary of
HHS (who now acts through CMS) to cap payments under these
programs at what he determines to be reasonable cost limits
(“RCLs”), see 42 U.S.C. § 1395f(b), and apply statutory norms
in the determination, see 42 U.S.C. § 1395x(v); see also 42
U.S.C. § 1395yy (setting specific norms for the determination of
RCLs for SNFs). With respect to reimbursements for routine
care at SNFs, the Secretary is authorized to establish appropriate
exemptions to these caps. See 42 U.S.C. § 1395yy(c). One such
exemption is the “new provider exemption,” which allows
providers of skilled nursing services to receive reimbursement
at a higher rate for the first two years of operation. See 42
C.F.R. § 413.30(e) (1997) (now codified at 42 C.F.R. §
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413.30(d)). According to the Provider Reimbursement Manual
(“PRM”), a compilation of interpretive rules published by HHS,
see St. Luke’s Hospital v. Thompson, 355 F.3d 690, 692 (D.C.
Cir. 2004), the new provider exemption “was implemented to
recognize the difficulties in meeting the applicable cost limits
due to underutilization during the initial years of providing
skilled nursing and/or rehabilitative services[.]” HCFA Pub. 15-
1, § 2533.1(A). Put another way, the exemption was meant to
“allow a [new] provider to recoup the higher costs normally
resulting from low occupancy rates and start-up costs during the
time it takes to build its patient population.” Paragon Health
Network v. Thompson, 251 F.3d 1141, 1149 (7th Cir. 2001).
The new provider exemption provided at the time that:
Exemptions from the limits imposed under this section may
be granted to a new provider . . . . A new provider is a
provider of inpatient services that has operated as the type
of provider (or the equivalent) for which it is certified under
Medicare, under present and previous ownership, for less
than three full years.
42 C.F.R. § 413.30(e) (1997). This means that, to qualify for
the new provider exemption, a facility must show that it is either
(1) new, or (2) operating for the first time as a SNF or
equivalent. It follows logically that facilities that (1) have
operated before under “present or previous ownership,” and (2)
have operated as a SNF or equivalent, cannot qualify as “new
providers.” In some instances, the new provider exemption may
also be available to relocated providers, provided they can show
that “in the new location a substantially different inpatient
population is being served.” PRM § 2604.1.
Given the complex state and federal administrative schemes
that nursing care providers must navigate to set up a SNF, it is
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not always obvious whether a newly opened facility has
operated before under previous ownership. Several states, for
example, require that new facilities purchase the right to offer
the new beds they plan to make available, so as to keep the total
number of nursing home beds in the state constant. See, e.g.,
Ashtabula County Medical Center v. Thompson, 352 F.3d 1090,
1092 (6th Cir. 2003) (describing Ohio “certificate of need”
(“CON”) program); Maryland General Hospital, Inc. v.
Thompson, 308 F.3d 340, 342-43 (4th Cir. 2002) (describing
Maryland’s CON program); Paragon Health Network, 251 F.3d
at 1143 (describing Wisconsin’s CON program). But our sister
circuits have split over whether it is reasonable for CMS to
attribute operation under previous ownership to a newly opened
SNF solely because it acquired such rights. Compare Maryland
General Hospital, 308 F.3d at 345 (4th Cir.) (unreasonable),
with Providence Health System v. Thompson, 353 F.3d 661, 666-
68 (9th Cir. 2003) (reasonable); South Shore Hospital Inc. v.
Thompson, 308 F.3d 91, 105-06 (1st Cir. 2002) (reasonable);
Paragon Health Network, 251 F.3d at 1149-50 (7th Cir.)
(reasonable). There is no definitive court precedent as to what
it means to operate as a SNF or its equivalent.
B. Factual and Procedural Background
In 1996, St. Elizabeth’s opened a transitional care unit
(“TCU”) using operating rights purchased from the Friel
Nursing Home, an extant nursing home in Quincy,
Massachusetts. St. Elizabeth’s purchased those operating rights
for the sole purpose of obtaining a determination of need
(“DON”) from the Massachusetts Department of Public
Health–then necessary under state law to opening a new nursing
facility. (At the time, Massachusetts had imposed a moratorium
on creating new nursing home beds in the state, which meant
that anyone seeking to open new nursing facilities had to first
obtain the operating rights to existing nursing beds.) Before St.
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Elizabeth’s opened the TCU in October of that year, Friel ceased
operations completely.
The TCU, which qualifies as a SNF under the Medicare
statute, 42 U.S.C. § 1395x(j), see HHS Letter of November 27,
1996, provides rehabilitative care for patients recovering from
major surgery who “no longer require the intensity and scope of
invasive procedures, yet, have complex medical and therapeutic
management needs . . . .” Dep. of Francis X. Campion at 240
(Jan. 30, 2001), reprinted in J.A. 729. In other words, the TCU
is intended for (mainly elderly) patients who need short-term
care and rehabilitation after surgery, but will eventually return
to their own homes, or transfer to long-term care facilities for
less intensive care. Patients in the TCU are attended by a team
of physicians, nurses, physical, occupational and speech
therapists, and social workers, and stay an average of 10-15
days.
In January 1997, St. Elizabeth’s applied to CMS for the new
provider exemption for the new TCU. CMS denied St.
Elizabeth’s request, on the basis that (1) the TCU “was
established due to the purchase and relocation of 29 long term
care beds from [Friel],” which (2) as a Medicaid-certified
nursing facility (“NF”), provided the same “type of services” as
the TCU. HHS Letter of June 23, 1997. In other words, CMS
determined that because the TCU acquired operating rights from
Friel, it in effect operated previously under other ownership.
Further, CMS determined that Friel’s status as a nursing facility
qualified it as a SNF or its equivalent. Because, according to
CMS, the TCU had operated before under “present or previous
ownership” as a SNF or equivalent, it could not qualify as a
“new” provider under 42 C.F.R. § 413.30(d). The CMS further
concluded that the TCU was not entitled to the new provider
exemption as a relocated facility, because the TCU’s inpatient
population was not substantially different from Friel’s.
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St. Elizabeth’s appealed this decision to the Provider
Reimbursement Review Board (“PRRB”), which reversed the
CMS, determining that the TCU was entitled to the new
provider exemption because mere “acquisition of bed rights” did
not amount to an existing facility changing hands. HHS PRRB
Dec. No. 2002-D49 (Sept. 30, 2002), reprinted in J.A. 83 at 117,
119.
In December 2002, the Secretary, acting through the CMS
Administrator, reversed the PRRB’s decision. Decision of the
Administrator, Review of PRRB Dec. 2002-D49. In January
2003, St. Elizabeth’s filed suit in the U.S. District Court for the
District of Columbia, challenging the Administrator’s decision
as arbitrary and capricious in violation of section 706 of the
Administrative Procedure Act (“APA”), 5 U.S.C. § 706. See
Complaint, J.A. at 1. The District Court heard the challenge
under 42 U.S.C. § 1395oo(f), which provides for judicial review
of the final HHS decision.
In its complaint, St. Elizabeth’s argued that the decision was
arbitrary and capricious, and unsupported by substantial evidence
on three main grounds: (i) Friel’s operating rights were never
actually transferred to the TCU; (ii) even if they were
transferred, the TCU was a “new provider” because transfer of
bed operating rights did not amount to a transfer of ownership,
and Friel never operated as a SNF; and (iii) regardless, the TCU
qualified for the PRM’s relocated provider exemption. J.A. at
13. Resolving cross motions for summary judgment, the district
court ruled in favor of HHS, on the basis that “the Secretary’s
determinations that Friel was the previous owner of the TCU,
Friel operated as the equivalent of a SNF for over 3 years and St.
Elizabeth’s is not a relocated provider [we]re rationally
connected to the facts[.]” 307 F. Supp. 2d 73, 80 (D.D.C. 2004).
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St. Elizabeth’s appeals from that decision, reasserting the
arguments made in its original complaint before the District
Court. We have jurisdiction under 28 U.S.C. § 1291, and reverse
on the basis that the Administrator lacked substantial evidence
to conclude that Friel operated as a SNF or its equivalent. We
therefore conclude that St. Elizabeth’s was entitled to the new
provider exemption.
III. Discussion
A. Standard of Review
The Administrator’s decision can be set aside only if it is
“unsupported by substantial evidence,” or “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with law.”
5 U.S.C. § 706(2)(E); see 42 U.S.C. § 1395oo(f)(1) (providing
that judicial review of HHS reimbursement decisions shall be
made under APA standards). Because we apply the same
standard of review as the district court, we proceed de novo, as
if the case were before us on direct appeal from the
administrative hearing below. Tenet Healthsystems Healthcorp
v. Thompson, 254 F.3d 238, 244 (D.C. Cir. 2001).
B. Equivalent Provider Status
As related above, CMS concluded that the St. Elizabeth’s
TCU did not qualify for the new provider exemption because (1)
the fact that it was opened using operating rights acquired from
Friel meant it had already been in operation under prior
ownership, and (2) Friel “was an equivalent provider of skilled
nursing and/or rehabilitative services.” Decision of
Administrator at 11. Under the terms of the governing
regulation, both conclusions had to be made to disqualify the
TCU from the exemption. See 42 C.F.R. § 413.30(e) (1997).
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To come to the second conclusion–that Friel operated as a
SNF or its equivalent–CMS relied primarily on the fact that Friel
was a Medicaid-certified NF and operated as such. Id.
Specifically, the Administrator reasoned:
[B]oth Medicare SNFs and Medicaid NFs are required to
provide directly or indirectly, the same basic range of
services. These ranges of services include those nursing
services and specialized rehabilitative services needed to
attain or maintain each resident’s highest practicable level
of physical, mental, and psychological well-being.
Consequently, the fact that the prior owner of the [TCU’s]
DON rights was a NF supports the conclusion that it [was]
clearly an equivalent provider of skilled nursing and/or
rehabilitative services . . . .
Id. As a comparison of the statutory definitions of NFs and
SNFs reveals, this reasoning is flawed. The Medicaid statute
defines a NF as:
An institution (or a distinct part of an institution) which
(1) is primarily engaged in providing to residents:
(A) skilled nursing care and related services for
residents who require medical or nursing care,
(B) rehabilitation services for the rehabilitation of
injured, disabled, or sick persons, or
(C) on a regular basis, health-related care and
services to individuals who because of their mental
or physical condition require care and services
(above the level of room and board) which can be
made available to them only through institutional
facilities . . . .
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42 U.S.C. § 1396r(a) (emphasis added). In contrast, Medicare
defines a SNF as an institution that:
(1) is primarily engaged in providing to residents--
(A) skilled nursing care and related services for
residents who require medical or nursing care, or
(B) rehabilitation services for the rehabilitation of
injured, disabled, or sick persons, and is not primarily
for the care and treatment of mental diseases. . . .
42 U.S.C. § 1395i-3(a) (emphasis added).
It is evident that the range of services provided by a NF can
encompass skilled nursing or rehabilitative care. Some facilities
may, indeed, qualify as both NFs and SNFs. However, a facility
must be primarily engaged in providing skilled nursing or
rehabilitative care to qualify as a SNF, whereas a facility need
not even offer such services at all to qualify as a NF. Thus, the
bare fact that an institution has gained NF status or is operating
as a NF, without more, is not sufficient to qualify the NF as a
SNF or its equivalent. To do so, a NF would additionally have
to be “primarily engaged in providing . . . skilled nursing care
and related services . . . or rehabilitation services . . . .” 42
U.S.C. § 1395i-3(a)(1).
The record evidence is all to the effect that Friel was
primarily engaged in providing custodial care to its residents; it
does not show that Friel was primarily engaged in providing
skilled nursing and/or rehabilitative services. The Government
points out that Friel provided some treatment of bed sores,
vitamin injections, and some unspecified rehabilitation as skilled
nursing care, see Govt. Br. at 52–54. But the underlying
documentary evidence as to the provision of these services
suffices only to show that Friel occasionally provided this
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limited range of services. Thus, the CMS conclusion that Friel
was a SNF or equivalent must be overturned for lack of
substantial evidence, under 5 U.S.C. § 706(E)(2).
C. Remedy
Because the second CMS decision, representing the final
HHS decision, is invalid, we reinstate the September 30, 2002
PRRB decision granting the TCU the new provider exemption.
HHS PRRB Dec. No. 2002-D49. But one final question remains
to be answered: Is the St. Elizabeth’s TCU entitled to
reimbursement for the costs above the reasonable cost limits that
it incurred in just 1997, or for the successive fiscal year, as well.
(Recall that the new provider exemption covers new facilities for
their first two years of operation.) St. Elizabeth’s argues that it
is entitled to additional monies for both years, because the
exemption “has a defined multi-year period of duration.” Aplt.
Br. at 62. The Government responds that this court can only
order additional reimbursement for the fiscal year ending in
September 1997, because, when it started the administrative
appeal process, St. Elizabeth’s had only received a CMS opinion
on reimbursement for that year. Govt. Br. at 58. The
Government further contends that we have no jurisdiction over
any subsequent cost reporting period(s), because St. Elizabeth’s
only exhausted administrative remedies for 1997. Id. at 59.
This isn’t quite true. In a separate jurisdictional decision,
the PRRB determined that its decision, if rendered in favor of the
TCU, would apply to “multiple fiscal years.” HHS PRRB
Jurisdictional Decision in Case No. 98-0489, reprinted in J.A.
131, 133. Which years, exactly, remains to be decided, as the
PRRB reserved the right to determine the specific cost-reporting
periods for which the TCU is entitled to the exemption “should
it find for the [TCU] with regard to the substance of the issue
under dispute.” Id. The PRRB has not yet done so. The
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Government is right, in a sense, that we do not have jurisdiction
over the issue of the specific years for which the TCU is entitled
to additional reimbursement, because there has therefore been no
final agency decision on that count. But insofar as it is arguing
that we can only order reimbursement for the fiscal year ending
in September 1997, the Government is incorrect. Now that the
substantive decision as to the TCU’s entitlement to the new
provider exemption has been reinstated, the PRRB should
proceed, as it reserved the right to do, to determine the exact
years for which St. Elizabeth’s is entitled to reimbursement.
While this would seem a simple task under the statute, it is the
task of the PRRB, not the courts.
IV. Conclusion
The Secretary’s determination, through the CMS, that St.
Elizabeth’s was not entitled to the new provider exemption to
reasonable cost limits for Medicare reimbursement is not
supported by substantial evidence, because there was no
evidentiary basis for the conclusion that Friel operated as a SNF
or its equivalent. The district court erred in concluding
otherwise. Accordingly, we reverse the summary judgment. We
further order that the case be remanded to the Department of
HHS for a formal determination of the cost-reporting periods to
which that decision applies.