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St. Francis Medical Center v. Shalala

filed: August 9, 1994.

ST. FRANCIS MEDICAL CENTER, APPELLANT
v.
DONNA E. SHALALA, SECRETARY OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES, BRUCE C. VLADECK, ADMINISTRATOR, HEALTH CARE FINANCING ADMINISTRATION; AND JACK MARTIN, CHAIRMAN, PROVIDER REIMBURSEMENT REVIEW BOARD



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 89-02452).

Before: Sloviter, Chief Judge, Alito, Circuit Judge, and Parell, District Judge*fn*

Author: Alito

Opinion OF THE COURT

ALITO, Circuit Judge :

St. Francis Medical Center (SFMC) is a provider of health care services covered under Part A of Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et. seq., which is commonly known as the Medicare Act. SFMC appeals from a district court order dismissing its amended complaint for lack of jurisdiction under 28 U.S.C. § 1331. We affirm.

I.

A. Before 1982, Medicare providers were reimbursed for the "reasonable cost" of covered services. See Sacred Heart Medical Ctr. v. Sullivan, 958 F.2d 537, 540 (3d Cir. 1992). "Under this regime, hospitals and other health care providers had little incentive to curb operating costs and render services more economically, for the federal government bore the financial burden of increases." Id. (footnote omitted). "In 1982, Congress determined that the Medicare Program should be modified to provide hospitals with better incentives to render services more economically. Accordingly, in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Congress amended the [Social Security Act] by imposing a ceiling on the rate of increase of inpatient operating costs recoverable by a hospital." Id. (footnote omitted).

"Under TEFRA, a hospital may receive no more than the 'target amount' of per patient costs." St. Francis Medical Ctr. v. Sullivan, 962 F.2d 1110, 1111 (3d Cir. 1992) (St. Francis I).

The statute provided: "'target amount' means with respect to a hospital for a particular 12-month cost reporting period -- (i) in the case of the first reporting period for which this subsection is in effect, the allowable operating costs of inpatient hospital services . . . recognized . . . for such hospital for the preceding 12-month cost reporting period." [42 U.S.C. § ] 1395ww(b)(3)(A). For each reporting period subsequent to the initial period, the target amount was increased by a specified percentage. Section 1395ww(b)(3)(A). Under this system, hospitals were obligated to absorb operating costs in excess of their target amounts, but they received bonuses if their operating costs were less than their targeted amounts. Section 1395ww(b)(1)(A).

Sacred Heart Medical Ctr., 958 F.2d at 540.

TEFRA also directed the Secretary to provide for exemptions from, and exceptions or adjustments to, the TEFRA limits (see 42 U.S.C. § 1395ww (b)(3)(A)), and the Secretary has done so. Before 1991, 42 C.F.R. § 413.40(g) (1990), which bore the heading "Exceptions," permitted the Health Care Financing Administration (HCFA)*fn1 to "adjust a hospital's operating costs . . . upward or downward" if the hospital could "show that it incurred unusual costs (in either a cost reporting period subject to the ceiling or the hospital's base period) due to extraordinary circumstances beyond its control" (42 C.F.R. § 413.40(g)(2) (1990)) or if the hospital had experienced a change in its "case mix" (42 C.F.R. § 413.40(g)(3) (1990)). In addition, 42 C.F.R. § 413.40(h), which bore the heading "Adjustments," provided in pertinent part:

HCFA may adjust the amount of the operating costs considered in establishing cost per case for one or more cost reporting periods, including both periods subject to the ceiling and the hospital's base period, to take into account factors that could result in a significant distortion in the operating costs of inpatient hospital services.

42 C.F.R. § 413.40(h)(1) (1990).

In 1991, these provisions were combined to form what is now 42 C.F.R. § 413.40(g) (1993). Under this provision, the HCFA "may adjust the amount of the operating costs considered in establishing the rate-of-increase ceiling for one or more cost reporting periods, including both periods subject to the ceiling and the hospital's base period, under the circumstances specified below." Subsequent provisions state that such adjustments may be granted for essentially the same reasons listed in the previous version of the regulations. See 42 C.F.R. § 413.40(g)(2)-(3) (1993).*fn2

The Secretary now interprets 42 C.F.R. § 413.40(g) (1993) to mean that a provider may obtain two different types of "base period inpatient operating cost adjustments." Appellees' Br. at 7. According to the Secretary, the first type is "cost year-specific" and may raise a provider's target amount for the purpose of recovering that year's costs but not for the purpose of calculating bonus payments. Id. at 7-9. The second type of adjustment, the Secretary explains, results in "a permanent adjustment to the base period inpatient operating costs used to calculate the TEFRA limit," and "any permanent increase in the limit would come into play under the TEFRA bonus provision beginning only with the fiscal year after the one for which any permanent base period relief [is] granted." Id. at 8-9. SFMC argues vigorously that the Secretary's recognition of this second type of adjustment represents a recent change in position that was taken for purposes of litigation.

In 1983, Congress largely replaced the TEFRA system with a "prospective payment system" (PPS) (see Sacred Heart Medical Ctr., 958 F.2d at 540), but certain types of hospitals and hospital units were excluded from the PPS. See 42 U.S.C. § 1395ww(b), and (d)(1)(A)-(B); 42 C.F.R. §§ 412.20(b), 412.22(b). Among the excluded units were distinct part rehabilitation units. See 42 U.S.C. § 1395ww(d)(1)(B); 42 C.F.R. §§ 412.23, 412.30.

B. SFMC operates a general acute-care hospital that includes a rehabilitation unit. For TEFRA purposes, the hospital's base period ended on June 30, 1985. During this period, SFMC's fiscal intermediary concluded that SFMC did not have a distinct part rehabilitation unit under the applicable regulations "since less than 75% of its patients required intensive rehabilitation. The intermediary terminated the provider as a distinct part rehabilitation unit and the Health Care Financing Administration . . . upheld that decision. To comply with the 75% rule, the Medical Center transferred some of its 'non-qualifying' patients from the rehabilitation unit to its acute care facility. This transfer was completed in the year ending July 30, 1986 . . . ." St. Francis I, 962 F.2d at 1112. Because this transfer was not completed until after the base period ended, SFMC maintains,

certain "non-qualifying" patients were included on the original 1985 cost report for the Medical Center's rehabilitation unit, but then were transferred out of that unit by 1986. The absence of these "non-qualifying" patients from the group of patients treated by the unit in 1986 meant that the Medical Center's average patient costs were higher in 1986 than the estimates of those costs derived from the 1985 base year cost report. In ...


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