D.C. Court Rules for Secretary in Group Appeal on Wage Index Calculation

31 August 2009 Publication
Authors: Judith A. Waltz

American Health Lawyers Association

By Judith A. Waltz

In a decision issued on August 26, 2009, the District Court for the District of Columbia ruled in favor of Department of Health and Human Services Secretary Kathleen Sebelius (Secretary) in a group appeal brought by twenty-two urban hospitals seeking additional reimbursement relating to the wage index component of the federal rate (federal rate) used to calculate inpatient prospective payment system (IPPS) rates paid for diagnosis-related groups (DRGs).1 At issue were cost-reporting years 2000 and 2001. In short, the court rejected the challenge by the plaintiff hospitals to the Secretary's methodology (now changed), which calculated the wage index without including data from hospitals that had been reclassified into higher-wage areas.

Wage Index Data Overview

For those hospitals paid under IPPS, the final reimbursement per patient is determined by multiplying the patient's DRG and the federal rate—after that rate has been standardized by making adjustments based on a variety of factors.2 To account for regional variations in labor costs, the Secretary adjusts the labor-related portion of the federal rate by a geographically specific factor known as the wage index.3 For purposes of the wage index, the Secretary classifies a hospital as being in either an urban or rural area, using Metropolitan Statistical Areas (MSAs).4 Because these standard classifications sometimes result in hardship for some hospitals, e.g., for those that are in some rural areas where they compete with larger urban areas for the same and higher-priced talent pool, the Secretary allows a hospital to seek reclassification to a nearby wage area for payment purposes if it meets certain criteria. Plaintiffs here challenged the Secretary's practice of calculating the wage index for urban areas without including data from hospitals that had been reclassified into higher-wage areas, which allegedly denied them full payment credit.

Court Applies Chevron Analysis

In reaching its decision, the court applied the familiar Chevron analysis, under which a court first looks to whether Congress has directly spoken to the precise question at issue, and if not, whether the agency's interpretation is based upon a permissible construction of the statute.5 Under this analysis, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of the agency.

The court rejected plaintiffs' argument that the statute was "clear and unambiguous," finding that the statute did not speak to the issue's precise question.6 The court found of particular note other subsections of this same statutory provision which would be rendered superfluous under the reading urged by plaintiffs, contrary to a cardinal principle of statutory construction. In sum, the court accepted the Secretary's argument that the statutory provision required the Secretary to establish a factor that reflects the relative hospital wage level in the geographic area of the hospital, but left substantial discretion to the Secretary in determining "relative hospital wage level" and relevant "geographic area."

The court further concluded that the Secretary's interpretation of the statute was reasonable. Plaintiffs' main argument here was that the decision to implement a "hold harmless" provision for fiscal year 2002 suggested (or demonstrated under plaintiffs' view) that the prior practice of excluding the wage data from a reclassified hospital was an impermissible construction of the statute. The court observed that the mere fact that the agency reevaluated the impact of its policy and changed its practice does not render the prior interpretation unreasonable. The court also found significant the fact that, despite Congressional amendments to the statute during the relevant time period, Congress never questioned or otherwise addressed the Secretary's policy of excluding the reclassified hospitals' wage data.

Other Theories Also Rejected

Also rejected by the court were plaintiffs' claims that the Secretary's interpretation: (1) violated 42 C.F.R. § 413.5(b)(3) (which sets forth as a goal of reimbursement a division of allowable costs between Medicare program beneficiaries and other patients which is fair to each provider individually); (2) was arbitrary and capricious; and (3) violated plaintiffs' rights to equal protection.

EJR Was Appropriate

It should also be noted that this matter was before the district court under the provisions relating to Expedited Judicial Review (EJR), which may be granted when the Provider Reimbursement Review Board (PRRB) determines that it lacks the authority to decide a legal issue.7 Because granting plaintiffs' requested relief would require an evaluation of the lawfulness of the Secretary's interpretation of the statute, the PRRB concluded that EJR was appropriate. The magistrate judge, to whom the matter had been referred, recommended remand to the Secretary for the articulation of findings with respect to each provider which was a plaintiff in the action, and found that the absence from the administrative record of any indication of how CMS interpreted and applied the statute prevented judicial review of a final agency action. Both parties filed objections to the magistrate judge's report and recommendation. Contrary to the magistrate's recommendation, the district court found that no remand was necessary, as the sole question before the Court was a legal question. As to the lack of factual information sufficient to determine the precise amount of additional reimbursement to which plaintiffs would be entitled if they prevailed on the legal question, the court concluded this deficiency did not create a material factual dispute preventing the court from resolving the legal issue. Given the facts and circumstances, the court found that EJR was appropriate in this case.


1 St. Michael's Medical Center, et al., v. Sebelius, Nos. 07-2036; 07-1484, 2009 WL 2619346 (D.D.C. August 26, 2009).

2 See 42 U.S.C. § 1395ww(d)(2)(C) (listing the factors used for standardization).

3 42 U.S.C. § 1395ww(d)(3)(E)(i).

4 42 C.F.R. § 412.64.

5 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

6 42 U.S.C. § 1395ww(d)(3)(E)(i).

7 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1842(f)(1)(ii).


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