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