Bellevue Hospital Center v. Leavitt

443 F.3d 163 (2nd Cir. 2006)

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Nature of the Case

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Facts

The Medicare program pays for covered medical services provided to eligible aged and disabled persons. It reimburses hospitals for the cost of serving Medicare beneficiaries. The Centers for Medicare and Medicaid Services (CMS) is the agency within D responsible for administering the Medicare program. From the inception in 1965 until 1983, P were reimbursed for their actual costs in treating beneficiaries, so long as those costs were reasonable. In 1983, Congress switched to what is known as the Inpatient Prospective Payment System (IPPS). Under IPPS Ps were paid fixed rates for providing specific categories of treatment, known as 'diagnosis-related groups,' or 'DRGs.' Separate DRG rates are set for hospitals in urban and rural areas. D must adjust DRG payment rates for the relative labor costs in each hospital's geographic area. The base DRG payment rate is divided into two portions: the labor-related costs, which get adjusted for these geographic differences, and the non-labor-related costs, which do not. While the relative proportions of these two cost sources used to be 'estimated by D from time to time,' Congress has removed D's discretion and set the labor-cost proportion at sixty-two percent of the base DRG payment. D is not required to adjust the [labor-related costs] of the DRG prospective payment rates . . . for area differences in hospital wage levels by a factor (established by D) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level. D is not required to adjust the [labor-related costs] of the DRG prospective payment rates . . . for area differences in hospital wage levels by a factor (established by D) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level. These adjustments must be cost-neutral so that any increase in one hospital's wage factor must be offset by a decrease in another's. CMS has consistently grouped hospitals into geographic areas by adopting MSAs. D uses MSAs for other aspects of the reimbursement formula, such \as to divide hospitals into urban and rural regions. CMS knows that MSAs were not designed for this specific purpose. It has promised to consider alternative methodologies that are based on 'objective criteria that will provide more equitable labor market area definitions than the current MSA/non-MSA classifications.' Congress has never directed CMS to implement any methodology or otherwise deviate in any fundamental way from the MSA system. Congress has enacted a series of exceptions by which hospitals can get some relief by relocating into other MSAs or having dramatic changes to their wage factors phased in over a period of time. Ps challenge D's implementation of a statutory requirement that the agency adjusts hospitals' reimbursements for the costs of administering care to Medicare recipients to reflect 'differences in hospital wage levels' across 'geographic area[s].' 42 U.S.C. § 1395ww(d)(3)(E)(i). The New York City MSA was expanded to hospitals in northern New Jersey. The New Jersey wages are lower, and that dropped the average wage level in the NYC MSA, The bottom line is that Ps will receive $812 million less in reimbursements over the next ten years than they would have under their former wage adjustment. Congress directed CMS to collect data to better refine and define hospital geographic areas. CMS failed to obtain the data by the date Congress set. Ps sued D under the APA over the new MSAs, the failure to collect the data as directed by Congress, and D’s decision to implement the occupational mix adjustment at only ten percent effectiveness. The court granted D summary judgment with respect to the 'geographic areas' issue, finding that this term was ambiguous and that the use of MSAs to fill that gap was reasonable. It concluded that, because the statutory scheme requires hospitals' costs to be averaged, hospitals with somewhat dissimilar costs will inevitably be lumped together, and Ps had made no showing that the level of 'inaccuracy' created by this particular grouping went beyond what the statute permits. It then granted Ps summary judgment with respect to the occupational mix adjustment issue, finding that Congress had unambiguously mandated that the agency implement the adjustment in full by October 1, 2004. Everybody appealed.