Opinion
CASE NO. 4:02-cv-0232-DFH
March 23, 2004
ENTRY ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
Plaintiff Southern Indiana Rehabilitation Hospital ("the hospital") brought this action pursuant to 42 U.S.C. § 1395oo(f)(1). The hospital seeks judicial review of a final decision by the Provider Reimbursement Review Board, which acts for the Secretary of the United States Department of Health and Human Services to decide disputes concerning health care providers' reimbursement under the Medicare program. The Board, known as PRRB, decided after an evidentiary hearing that the Base Year for calculating the hospital's reimbursement rates for Medicare patients should be the hospital's fiscal year ending February 29, 1996. The hospital contends that its Base Year should be the fiscal year ending February 28, 1995, and that the PRRB's different conclusion was arbitrary, capricious, and contrary to law. The record does not clearly indicate the financial stakes, but the hospital has told the court it believes the choice of the base year will make a difference of roughly $3 million in its Medicare reimbursement.
Under 42 U.S.C. § 139500(f)(1), judicial review is limited to review of the administrative record before the PRRB. Section 1395oo(f)(1) also incorporates the standards for judicial review under the Administrative Procedure Act, 5 U.S.C. § 701, et seq. Under the portions of 5 U.S.C. § 706(2) that are relevant here, the court must consider whether the PRRB's decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," and whether the decision was supported by substantial evidence. If the PRRB's decision is supported by substantial evidence and is consistent with the law, then the court must affirm that decision. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994); ML Sinai Hosp. Medical Center v. Shalala, 196 F.3d 703, 708 (7th Cir. 1999) (applying standard to affirm decision of PRRB on Medicare reimbursement issue). The court gives considerable deference to the Secretary's and PRRB's interpretations of the applicable regulations and the policy judgments made in administering a program as complex and technical as Medicare. Thomas Jefferson Univ., 512 U.S. at 512; see also Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984) (courts defer to executive agencies' reasonable interpretations of applicable laws and regulations).
Procedurally, the case conies before the court on cross-motions for summary judgment. Those motions provide an appropriate procedural vehicle for deciding the legal significance of the evidence set forth in the administrative record and for evaluating the administrative decision. See Mt Sinai Hosp. v. Shalala, 196 F.3d at 707-08 (judicial review of agency decision on administrative record decided on cross-motions for summary judgment); Milton v. Harris, 616 F.2d 968, 975-76 (7th Cir. 1980) (summary judgment appropriate where plaintiff does not challenge completeness of agency record); Saint Mary of Nazareth Hosp. Center v. Shalala, 96 F. Supp.2d 773, 775 (N.D. Ill. 2000) (deciding judicial review of Secretary's decision on Medicare reimbursement on cross-motions for summary judgment).
The administrative record is extensive, comprising more than 1800 pages. The record shows that the hospital is a joint venture formed by three existing hospitals in Floyd and Clark Counties in Indiana and Louisville, Kentucky. The hospital began operating in February 1994, caring for a small number of patients while it underwent health and life safety surveys by the Indiana state department of health in early March 1994. The hospital then received a Medicare certification as a rehabilitation hospital-which is an important term of art here-effective on March 11, 1994. It was assigned Medicare provider number 15-3031.
At the time in question, rehabilitation hospitals were reimbursed by the Medicare program based on the costs they incurred, but the reimbursement was capped pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248. Under TEFRA, the reimbursement caps for a Medicare provider such as the hospital would be based on the hospital's actual costs incurred during a base year, with a limit on the percentage increase in following years. See 42 C.F.R. § 413.40(b) (defining "base period" for purposes of calculating ceilings in hospital rate increases). In the complex formulas, the selection of a base year is a critical component, at least if there are significant differences in costs incurred from year to year. See Rye Psychiatric Hosp. Center, Inc. v. Shalala, 52 F.3d 1163, 1167 (2d Cir. 1995) (discussing TEFRA limits and noting that "changing the base period affects all future target amount calculations of the hospital, not merely that of a particular year").
As might be expected in a program as complex as Medicare, the applicable regulations and statutes have been amended often. The court is citing and quoting the versions of the regulations and statutes as they existed at the relevant times, generally from 1994 to 1996.
The Secretary's brief indicates that the reimbursement system for rehabilitation hospitals has been changed in the meantime to a prospective
payment system, and the system for long term care hospitals is now in transition to a prospective payment system. Def. Br. at 4 n. 2.
I. The PRRB Decision
The clearest way to understand the PRRB's decision and the issue here is to consider what would have happened if the hospital had simply remained a rehabilitation hospital, and then to compare that to what happened when the hospital asked for and received approval to be reclassified as a "long term care hospital," another important term of art. See 42 C.F.R. § 412.23(b) (e) (regulatory classification of rehabilitation hospitals and long term care hospitals).
In this decision, the court is not distinguishing between Medicare officials employed by the Department of Health and Human Services and those employed by AdminaStar Federal, the fiscal intermediary with which the department contracted to administer most aspects of the Medicare program in Indiana.
If the hospital had remained a rehabilitation hospital, then its base year would have been its fiscal year ending February 28, 1995. That is because Medicare officials determined that the hospital was not a "new" hospital but was instead treated as a "reorganization" by existing Medicare providers. Under the applicable regulations, a reorganized provider uses as its base year the first full fiscal year after it starts caring for patients. (New providers use instead the second full fiscal year after they begin caring for patients, so as to minimize the effects of unusual start-up costs. See 42 C.F.R. § 413.40(b)(1)(ii) (iii).)
The hospital originally asked that it be designated as a new provider. Medicare officials disagreed and found that it was instead a reorganization of existing providers. R. 81. That determination is not being challenged in this case.
The complication here arose from the hospital's decision to change from a rehabilitation hospital to a long term care hospital during its first year of operation. The hospital asked Medicare officials to change its classification. On February 6, 1995, its request was approved with a retroactive effective date of October 1, 1994, which was during the hospital's first fiscal year. The hospital was also assigned a new provider number, as 15-2009. Thus, for Medicare reimbursement purposes, the hospital was a rehabilitation hospital from March 11, 1994 through September 30, 1994 and a long term care hospital from October 1, 1994 forward.
Under the applicable regulations, the hospital was required to submit a cost report for costs ending September 30, 1994, essentially to close out the accounting of its seven months as a rehabilitation hospital: "Final Cost Report. — When a provider ceases to participate in the health insurance program, it must file a cost report covering a period under the program up to the effective date of cessation of participation in the program." HCFA Pub. 15-1 § 2414.2(A), quoted by PRRB at R. 7-8. In a letter dated May 31, 1995, after approval of the conversion to a long term care hospital, a Medicare official with the fiscal intermediary requested the hospital to submit two cost reports covering the two portions of the year under different Medicare classifications:
We do, however, request that two individual cost reports be filed. The report for provider 15-3031 should cover the period March 11, 1994 through September 30, 1995. The report for provider number 15-2009 should cover the period October 1, 1994 through February 28, 1995.
R. 89.
On June 29, 1995, the hospital submitted those two cost reports for the two portions of that fiscal year. It also submitted a third cost report covering the entire fiscal year ending February 28, 1995. The hospital's cover letter for all three reports described this third report for the entire year as its "official" cost report. R. 93. The hospital's description of the full year cost report took care to acknowledge the potential for disagreement:
This cost report is for the full 12-month period of 3/1/94 to 2/28/95. Per review of the regulations we believe only one cost report is necessary. As such, it is our understanding and belief that this cost report will be used for calculation of our TEFRA cost per discharge for future years and reflects the proper matching of revenues and expenses outlined in the regulations. This cost report is a combination of the two [short period] cost reports which will be outlined in (B) below. As such, this [full year] cost report is the one we consider official, used for settlement purposes and to protect our appeal rights should disagreements arise upon audit.
R. 93.
After years of debate between the hospital and AdminaStar Federal, the fiscal intermediary who manages the Medicare program in Indiana, and after an evidentiary hearing before the PRRB, the PRRB decided that the hospital's change in status from a rehabilitation hospital to a long term care hospital meant that the base year should be the first full fiscal year after the conversion to a long term care hospital (the year ending February 29, 1996), and not the previous fiscal year during which that conversion occurred. The PRRB explained its decision in a thirteen-page decision. R. 7-19. The PRRB based its decision primarily on 42 C.F.R. § 413.40(b)(1), which governs the base year for
cost reporting periods subject to the TEFRA ceilings on rates of increase. The regulation provides in relevant part:
Cost reporting periods subject to the rate-of-increase ceiling — (1) Base Period. Each hospital's target amount is based on its allowable net inpatient operating costs per case from the cost reporting period of at least 12 months immediately preceding the first cost reporting period subject to the rate-of-increase ceiling established under this section. If the immediately preceding cost reporting period is a short reporting period (fewer than 12 months), the first period of at least 12 months subsequent to that short period is the base period.
(Emphasis added.) In the case of this hospital, the cost reporting period immediately preceding the fiscal year ending February 29, 1996 was such a "short reporting period," for the five months as a long term care hospital, from October 1, 1994 to February 28, 1995. Accordingly, pursuant to the second sentence of Section 413.40(b)(1), the PRRB found that the base period became the first period of at least 12 months subsequent to that short period, which was the fiscal year ending February 29, 1996.
Although the Medicare program is complicated by efforts to avoid creating incentives for "gaming" the reimbursement system, the PRRB's decision amounts to a reasonable and straight-forward application of 42 C.F.R. § 413.40(b)(1). Its decision is supported by substantial evidence and does not otherwise conflict with applicable law.
II. The Hospital's Criticisms of the PRRB's Decision
The hospital has offered a number of reasons for coming to a contrary conclusion. Especially in light of the deferential standard that applies on judicial review, those reasons are not persuasive.
The hospital contends that the two cost reports it submitted for the two portions of the fiscal year ending February 28, 1995 (seven months as a rehabilitation hospital and five months as a long term care hospital) were "unofficial" cost reports. As stated in its letter of June 29, 1995 quoted above, the hospital contends that the "official" cost report was the one it submitted for the entire fiscal year. The hospital seeks to avoid the effect of the second sentence of Section 413.40(b)(1) by relying on this distinction between the "official" and "unofficial" cost reports.
There is, however, no such thing as an "unofficial" cost report. In fact such "short period reports" were required in connection with the hospital's conversion from a rehabilitation hospital to a long term care hospital, using a new provider number. See HCFA Pub. 15-1, § 2414.2(A) ("Final Cost Report. — When a provider ceases to participate in the health insurance program, it must file a cost report covering a period under the program up to the effective date of cessation of participation in the program."). In addition, the hospital has not laid out for the court an argument supporting its assertion in the June 29, 1995 letter that "only one cost report is necessary" under these circumstances, which involved the conversion from a rehabilitation hospital to a long term care hospital during the fiscal year in question.
The hospital also relies on the letter written on May 31, 1995 by Richard Hagen, who worked for the fiscal intermediary. R. 88. In that letter, Hagen addressed the problems posed by the fact that the hospital had continued to bill under its old rehabilitation hospital provider number after the October 1, 1994 effective date of the conversion to a long term care hospital. (Such billing was apparently proper and perhaps even required while the hospital was waiting for a decision on its request to convert to along term care hospital.) Regarding these claims, Hagen wrote:
We are not requiring you to go back and cancel and rebill those claims. We will be able to facilitate a settlement for individual provider numbers by a proper set up of the PSR Claims Summary Report. We do, however, request that two individual cost reports be filed.
R. 88. Hagen also addressed the issue of the Base Year determination:
One question you have expressed concerns the determination of the base year for this provider. Our requirement for two cost reports will not change the normal base year determination. The regulations in HCFA Pub. 15-1, Section 3003.6(C)(1) state that the base year will be "the first 12 month cost reporting period that begins at least one year after a hospital accepts its first patient." Based on our previous discussions, the first patient was not seen until after March 1, 1994. Therefore, the base year for Southern Indiana Rehab Hospital would be the period of March 1, 1996 through February 28, 1997. If however the first patient (not limited to a Medicare patient) was seen before 3/1/94, the base year would move up one year.
R. 89. Hagen's letter clearly but mistakenly assumed that the hospital was being treated as if it were a new provider. An agent of the hospital (Gregory Dorris) responded to Hagen's letter and explained in his June 29, 1995 cover letter for the cost reports that the hospital was being treated as a reorganization. R. 92.
Hagen's letter of May 31, 1995 clearly reflected confusion, but the hospital immediately recognized that confusion. The hospital responded with its own letter stating its view of the situation, but it did not ask for a correction that would take into account all the correct facts: the date the hospital saw its first patient in February 1994, the hospital's status as a reorganized provider, and its conversion from rehabilitation hospital to long term care hospital during its first full fiscal year of operation. Instead, the hospital wrote the June 29, 1995 cover letter stating its views and trying to preserve its rights in the event of appeal. R. 92-94. At that point, the hospital decided not to press for further clarification, see R. 390, and it took the risk that the Medicare officials would ultimately disagree with it.
The court sees no significance in Hagen's use of the word "request" rather than "require" for the three cost reports. See PL Br. at 12 (noting that Dorris verified with Hagen fact that hospital was "required" to file three cost reports). The PRRB did not err when it found that the hospital was actually "required" to file the two short period cost reports. R. 17. The PRRB found that HCFA issued two "Tie-In Notices" to the hospital under the two provider numbers requiring the filing of two short period cost reports. R. 18. In fact, Hagen's letter directed the filing of only two cost reports, for the two short periods in the fiscal year, and not three.
The hospital also makes much out of the changes in position and analysis from the fiscal intermediary and Medicare officials from the beginning of the controversy until the decision by the PRRB. For example, the parties seem to agree that the fiscal intermediary's March 11, 1998 letter stating the original determination of the hospital's Base Year as the year ending February 29, 1996 stated an invalid reason for that conclusion, having to do with the date of the hospital's original certification date.
There is no doubt that the situation was confusing, and some mistakes occurred in the analysis and advice shared with the hospital along the way. This court, however, reviews the final decision of the PRRB, not all of the preliminary steps along the way. See Saint Mary of Nazareth Hasp. Center v. Shalala, 96 F. Supp.2d 773, 777 (N.D. Ill. 2000), citing Saint Francis Hosp. Center v. Heckler, 714 F.2d 872, 874 (7th Cir. 1983). The final decision by the PRRB was sound. This is not a situation where the first-line agents of the fiscal intermediary have the power or freedom to change or to disregard the applicable regulations. See Community Care Foundation v. Thompson, 318 F.3d 219, 227 (D.C. Cir. 2003) (reversing district court decision setting aside PRRB decision: "There is no authority for the proposition that a lower component of a government agency may bind the decision making of the highest level.").
The government is not subject to the "mend the hold" doctrine applied under contract law, which bars a defendant from adding defenses as the litigation unfolds. See, e.g., Herremansv. Carrera Designs, Inc., 157 F.3d 1118, 1123 (7th Cir. 1998) (applying Indiana law).
The hospital also relies on the fact that the fiscal intermediary cannot show that it issued an official "notice of amount of program reimbursement" or "NPR" to the hospital for the two short periods for the fiscal year ending February 28, 1995. Instead, the fiscal intermediary issued one NPR based on the full year cost report. There is evidence that the fiscal intermediary issued two more NPRs based on the two short periods, but the hospital is suspicious of that evidence. Only one other NPR was produced, and it lacked the normal indicia of an official document. The other NPR could not be located. The court understands the hospital's suspicions, but the fact remains that Medicare regulations still required that the two short period cost reports be filed. Even if the fiscal intermediary erred by using the full-year cost report to settle reimbursement with the hospital, the PRRB did not err by concluding from the regulatory requirement for two short period cost reports that the second sentence in 42 C.F.R. § 413.40(b)(1) applied to the hospital.
The hospital contends that its "Medicare certification classification" did not change when it converted from a rehabilitation hospital to a long term care hospital. See PL Br. at 26, 42 C.F.R. § 412.23. The court sees nothing arbitrary or capricious, however, in the PRRB's decision to treat the conversion from rehabilitation hospital to long term care hospital as a change in the hospital's certification classification.
Finally, beneath all of the complexity in the regulations and the Medicare system, the court sees a fairly simple and practical premise underlying the PRRB's decision. For purposes of reimbursement rates, Medicare treats rehabilitation hospitals and long term care hospitals differently. Notwithstanding that difference, or perhaps even because of it, the hospital in this case is trying to build into its rate base — the allowable costs from its "Base Year" — as a long term care hospital the (presumably higher) costs that it incurred during seven months of operation as a rehabilitation hospital. In general, at least, rehabilitation hospitals are required to offer a broader and more expensive range of care. Compare 42 C.F.R. § 412.23(b) (1995) (criteria for rehabilitation hospital), with 42 C.F.R. § 412.23(e) (more limited criteria for long term care hospital). Whether that general premise is true or not in this particular case, the PRRB is entitled to apply the general premise. Given the larger policy issues in this complex relationship between government and private providers, it was reasonable for Medicare officials to use as the Base Year for a long term care hospital the first full year in which the hospital actually operated as a long term care hospital. That decision is also consistent with 42 C.F.R. § 413.40(b)(1) and HCFA Pub. 15-1 § 2414.2(A).
III. Equitable Estoppel
The hospital also contends that even if the PRRB's decision was not erroneous on the merits, the government should be equitably estopped from following that decision because the hospital had received contrary advice from the fiscal intermediary.
The Supreme Court's decision in Office of Personnel Management v. Richmond, 496 U.S. 414 (1990), bars the hospital's estoppel argument. The Court there held that courts cannot use the equitable doctrine of estoppel to grant someone a money remedy against the government that Congress has not authorized. 496 U.S. at 426-27, 433-34. The hospital attempts to distinguish Richmond on the ground that the plaintiff in Richmond sought a payment not authorized by Congress, while the relief the hospital seeks is authorized by Congress. The suggested distinction begs the question and is inconsistent with the very premise of an estoppel theory. The doctrine of equitable estoppel could not come into play here unless and until the court determines (as it has) that the decision under review was substantially correct. Thus, the starting point of the estoppel analysis must be that the PRRB's final decision was correct, meaning that the payments that the hospital seeks were not in fact authorized by Congress. The court sees no significant difference for these purposes between a requested decision ordering the Secretary to write a check and a requested decision (such as specifying a particular Base Year) that will inexorably lead to the same result. R ichmondbars the hospital's estoppel claim as a matter of law.
Moreover, even if equitable estoppel were theoretically available here, the record does not show a factual foundation for it. To show equitable estoppel, a party must show the traditional elements: (1) misrepresentation by the party against whom estoppel is asserted; (2) reasonable reliance on that misrepresentation; and (3) detriment to the party asserting estoppel. Kennedy v. United States, 965 F.2d 413, 417 (7th Cir. 1992) (affirming denial of equitable estoppel claim for refund of tax penalty). To show equitable estoppel against the government, the party must also show a fourth element: "affirmative misconduct" by the government, which is "something more than mere negligence." Id. at 417, 421. In this case, the hospital has not shown anything worse than honest errors among front line officials trying to administer a complicated program. There is no evidence of "affirmative misconduct."
The traditional elements of estoppel are also lacking. The writings that the hospital relies upon included mistakes that the hospital's agents themselves recognized immediately. The hospital cannot show estoppel, based on a communication that it recognized was mistaken, by picking and choosing the portions of that communication it wanted to rely upon. Moreover, even if the PRRB had found facts that would tend to support such a theory, the court would not consider an estoppel claim based on oral communications. See Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 65 (1984) (reliance on advice concerning difficult problem under Medicare reimbursement regulations was not justified, in part because advice was oral); see also id. at 64 (in administering complex Medicare program, the federal government cannot be "expected to ensure that every bit of informal advice given by its agents in the course of such a program will be sufficiently reliable to justify expenditure of sums of money as substantial as those spent by respondent").
On the element of reliance, the hospital's arguments are not at all convincing. The court assumes here that the hospital was not deliberately trying to manage its costs so as to record as many costs as possible in the year that would ultimately be treated as the Base Year. The hospital at least has not made that argument in an attempt to show reliance, though the Secretary has suggested that such a strategy may have been the real source of the dispute. See Def. Br. at 15 n. 10. Instead, the hospital suggests it has shown reliance because it would have tried to resist filing two short period cost reports in 1995 if it had thought that the consequences of the separate reports would be so great. That suggestion is not persuasive. The Secretary has shown convincingly that the separate reports were required in any event because of the hospital's decision to convert from a rehabilitation hospital to a long term care hospital.
The hospital also suggests that estoppel is appropriate because it spent time and money on the issue of the date of its certification, an issue that ultimately turned out not to matter. The fact that some wheels were spun as this dispute moved toward resolution is not enough to re-write the regulations as applied to the hospital and to pay it millions of dollars to which it would otherwise not be entitled.
There is also a striking difference between the costs of the hospital's asserted reliance and the relief it seeks. The reliance costs incurred in arguing about the wrong issue must surely be trivial compared to the millions of dollars the hospital seeks to win. Equitable estoppel is intended to provide equitable protection to compensate those who reasonably relied on mistaken or even deliberately false assurances from others. The doctrine is not intended to generate much larger windfalls as a result of an opposing party's errors. See generally First Nat'1 Bank of Logansport v. Logan Mfg. Co., 577 N.E.2d 949, 956 (Ind. 1991) (under Section 90 of Restatement (Second) of Contracts, remedy for promissory estoppel "may be limited as justice requires," so damages were limited to reliance damages, and did not extend to the greater expected benefits of the alleged bargain).