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U.S. Court in Iowa Finds DHHS Secretary's Interpretation of Atypical Services Exception for Hospital Based-SNF Invalid

 
 

HLD, v. 29, n. 12 (December 2001)

U.S. Court in Iowa Finds DHHS Secretary's Interpretation of Atypical Services Exception for Hospital Based-SNF Invalid

Medicare reimburses skilled nursing facilities, both hospital-based (HB-SNF) and free-standing (FS-SNF), for their reasonable costs up to the Routine Cost Limit (RCL). Under 42 C.F.R. � 413.30, SNFs may obtain additional reimbursement above the RCL for their reasonable costs of providing atypical services to special needs Medicare patients. Until 1984, the RCL and the peer group mean were set at the same dollar amount. As part of the Deficit Reduction Act (DEFRA) of 1984, Congress lowered the RCL of HB-SNFs to mid-way between the RCL of FS-SNFs and the previous RCL for HB-SNFs. See 42 U.S.C. � 1395yy. For ten years after the DEFRA was enacted, the Department of Health and Human Services (DHHS) Secretary continued to measure atypical nursing services exceptions for HB-SNFs from the RCL, rather than some point above the RCL. However, in 1994, the Secretary issued Provider Reimbursement Manual (PRM) � 2534.5, which required that the atypical exception amount of an HB-SNF be measured from the higher peer group mean. As a result, HB-SNFs providing atypical services could not obtain reimbursement for per diem costs falling between the RCL and the peer group mean, creating a "gap" in reimbursement.

St. Luke's Methodist Hospital (St. Luke's) operates a Medicare HB-SNF in Iowa. St. Luke's had established in prior years that it provided atypical nursing services to Medicare patients and thus was granted reimbursement above the applicable limits for its reasonable, "actual" costs. St. Luke's requested an exception for 1992, relying on the same criteria used in previous years to prove exception eligibility. However, the Secretary rejected St. Luke's request based on the DHHS' new interpretation of 42 C.F.R. � 413.30 contained in PRM � 2543.5. Thus, St. Luke's could only be reimbursed for atypical costs that exceeded 112% of the peer group mean for HB-SNFs. St. Luke's appealed the denial in federal district court and moved for summary judgment, arguing that the Secretary's interpretation of the regulation, set forth in PRM � 2534.5, was arbitrary and capricious or not in accordance with law.

The U.S. District Court for the Northern District of Iowa granted St. Luke's summary judgment motion, concluding that PRM � 2534.5 was an unreasonable interpretation of 42 C.F.R. � 413.30 in light of the regulation's language and the underlying principles of the Medicare statute. Applying the U.S. Supreme Court's decisions in Christensen v. Harris County, 529 U.S. 576 (2000), and Skidmore v. Swift & Co., 323 U.S. 134 (1944), the court determined that the Secretary's interpretation of the regulation was entitled to "little deference." The court noted that PRM � 2534.5 was an abrupt and significant change in a longstanding policy issued ten years after the statute it purported to interpret. The court found the Secretary's explanation of the change unpersuasive, noting it lacked the reasoned consideration that would merit substantial deference on review. The court agreed with St. Luke's argument that a report to Congress the Secretary relied on in issuing PRM � 2534.5 could not reasonably be read to support the Secretary's conclusion that HB-SNF inefficiencies justified the new interpretation. Thus, the court found that the Secretary's interpretation of the regulatory exceptions process was not entitled to heightened deference.

Next, the court concluded that PRM � 2534.5 was invalid as an unreasonable interpretation of the regulation. The court rejected the Secretary's argument that PRM � 2534.5 simply incorporated congressional intent in 42 U.S.C. � 1395yy that there were inherent inefficiencies in HB-SNFs that should never be recovered. According to the court, the RCL and the exception process serve two distinct functions and an express adjustment to the RCL did not imply that Congress intended to adjust the exception process. The court was not persuaded by "the Secretary's attempt to use the inherently vague reasonableness limitation of � 413.30(f) to impose an additional significant substantive benchmark onto the exceptions eligibility." To hold otherwise, the court said, would "'make a mockery of . . . the APA' which was designed to enable an agency to use a carefully devised procedure to convert vague statutory and regulatory standards into a reasonably clear set of rules." Accordingly, the court granted St. Luke's summary judgment.

St. Luke's Methodist Hosp. v. Thompson, No. C 00-13-MJM (N.D. Iowa Sept. 26, 2001) (50 pages).

Health Lawyers thanks Frank P. Fedor, of Murphy Austin Adams Schoenfeld, LLP, in Sacramento, California, for sending us a copy of this decision and the summary from which the above was adapted.

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