Queen of Angels/Hollywood Presbyterian Medical Center v. Shalala

Citations: 65 F.3d 1472; 95 Cal. Daily Op. Serv. 7253; 95 Daily Journal DAR 12370; 1995 U.S. App. LEXIS 25955; 1995 WL 542453Docket: No. 94-55561

Court: Court of Appeals for the Ninth Circuit; September 14, 1995; Federal Appellate Court

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Queen of Angels/Hollywood Presbyterian Medical Center initiated a class action lawsuit against the Secretary of Health and Human Services on behalf of all hospitals participating in the Medicare program since July 1, 1991. The Hospitals contest the Secretary’s interpretation of 42 U.S.C. 1395cc(a)(l)(F)(i), which pertains to costs incurred during peer review organization (PRO) reviews. They argue that the Secretary's refusal to comply with the statute and her "Photocopy Rule" regarding payments for duplicating medical records is inconsistent with the law, rendering it invalid. The district court ruled in favor of the Secretary, deeming her interpretations reasonable, prompting the Hospitals to appeal.

The background details the establishment of the PRO system following the Peer Review Improvement Act of 1982 and subsequent amendments. PROs, contracted by the Secretary, assess the medical necessity and quality of services provided by hospitals. Under 42 U.S.C. 1395cc(a)(l)(F)(i), hospitals must maintain agreements with PROs to participate in Medicare, which necessitates providing patient data and access during reviews. A key point of contention is whether hospitals are reimbursed for administrative costs related to PRO compliance under Medicare’s Prospective Payment System (PPS). 

The Hospitals argue that these costs are not reimbursed because the PRO system was not in place when base reimbursement rates were set in 1981. Conversely, the Secretary contends that these costs are reimbursed as they are akin to indirect costs from the prior PSRO system, included in the 1981 calculations. The differing interpretations of the relevant statutes center on whether reimbursements pertain to hospitals or the PROs themselves. The Hospitals assert that the statute clearly mandates reimbursements to hospitals through the PROs, while the Secretary interprets it as providing reimbursements directly to the PROs. The Hospitals filed their complaint on March 25, 1992, claiming inadequate reimbursements for maintaining PRO agreements since July 1, 1991.

The Secretary of Health and Human Services is alleged to have misinterpreted the PRO Payment Rule, which mandates reimbursement to hospitals for costs incurred under PRO agreements based on a “rate per review.” On October 20, 1992, the Secretary established the Photocopy Rule, authorizing additional payments for PRO-related photocopying costs at a national rate of $0.07 per page for hospitals under the Prospective Payment System (PPS). The Secretary filed two motions to dismiss the case for lack of subject matter jurisdiction, both of which were denied by the district court. The Hospitals later amended their complaint, asserting the Photocopy Rule was invalid under the Administrative Procedure Act and conflicted with the PRO Payment Rule, arguing it neglected other costs incurred under PRO agreements. The district court denied the Secretary's second motion to dismiss but granted her motion for summary judgment, finding the Secretary's interpretation of 42 U.S.C. 1395cc(a)(1)(F)(i) reasonable and validating the Photocopy Rule as neither arbitrary, capricious, nor procedurally defective. The Hospitals appealed, contending the district court erred in supporting the Secretary's interpretation and asserting that if the PRO Payment Rule mandates payments on a rate per review basis, the Photocopy Rule is invalid. Additionally, they argued that if the Secretary's interpretation is correct, the district court lacked jurisdiction to review the Photocopy Rule's validity since a dissatisfied hospital should first appeal to the Provider Reimbursement Review Board (PRRB). The Hospitals did not contest the district court's finding on the Photocopy Rule's validity. They claim 42 U.S.C. 1395cc(a)(1)(F)(i) imposes a clear obligation on the Secretary to reimburse hospitals for PRO review costs on a rate per review basis, arguing that the Secretary's interpretation undermines the statute's intent. The Secretary countered that the language in question indicates that Medicare pays the PROs directly, negating the need for PROs to seek payment from hospitals, and maintained that the Hospitals' interpretation would render parts of the statute superfluous. The Secretary further asserted that the PRO Payment Rule aligns with other statutory provisions establishing funding mechanisms for different review functions.

The Secretary's interpretation of the statute is affirmed as correct, emphasizing that statutory interpretation begins with the statute's language itself. The court highlights that if the statute's plain meaning is clear, it must reflect Congress's unambiguous intent, as established in precedent cases. The court finds that the language of the PRO Payment Rule supports the Secretary's interpretation, indicating that the Secretary is required to reimburse PROs for their expenses instead of hospitals receiving direct payments. The statute does not mention subsequent payments to hospitals, and the Hospitals' interpretation would render part of the statute superfluous.

Even if ambiguity is assumed, the Secretary's interpretation remains reasonable and permissible, as the agency is tasked by Congress with administering the Medicare program. The Secretary's reading is supported by the statutory language, and no other elements of the statutory scheme contradict this interpretation. The Hospitals argue that legislative history supports their view, citing a House Conference Report and statements from Senator Durenberger that imply reimbursement to hospitals. However, these arguments are deemed unconvincing, as the statements do not explicitly identify the reimbursement's intended recipient and can be interpreted to support the Secretary's position. Ultimately, the Secretary's interpretation is given deference unless the Hospitals can demonstrate that it defies Congress's intent regarding the PRO Payment Rule.

The Hospitals failed to present any legislative history from the 1983 adoption of the PRO Payment Rule that undermines the Secretary's interpretation. They argue that the Secretary's view leaves them uncompensated for costs associated with PROs, except for those covered by the Photocopy Rule. The Hospitals assert that while the Secretary claims PRO-related costs are included in the PPS rates, these costs were not part of the PPS rates established in 1981, as the PRO program began three years later. Previously, under the PSRO system, hospitals received reimbursement outside the PPS for direct PSRO review costs, which they claim justified the adoption of the PRO Payment Rule and demonstrate inconsistency with congressional intent in the Secretary's current interpretation.

The Hospitals also contend that Congress intended for PROs to be funded from the Medicare Trust Fund, as outlined in 42 U.S.C. 1320c-8. They argue that the Secretary's interpretation of 42 U.S.C. 1395cc(a)(l)(F)(i) makes this provision redundant or implies that the two sections pertain to different PRO costs, a claim they argue lacks support in the statutory framework. However, the Secretary offers a coherent explanation regarding the intended purpose of the PRO rule, considering the relationship between the PRO and PSRO programs and the PPS funding mechanism.

Under the PSRO system, only direct costs from delegated hospitals and PSROs were reimbursed outside standard cost-reporting, while indirect costs were included in PPS calculations or funded through annual appropriations. With the transition to PROs, direct review costs incurred by hospitals shifted to PROs, which were designed to reimburse PROs for both direct and previously appropriated indirect costs. The PRO Payment Rule was not intended to compensate hospitals, as they no longer had direct review costs and their indirect costs were covered by PPS rates.

The Hospitals' assertion that 42 U.S.C. 1320c-8 allows Trust Fund payments to PROs is rejected; this section is interpreted as permitting the Secretary to utilize Trust Fund resources for administrative costs related to PRO contracts. Thus, the Hospitals' claim that the Secretary's interpretation leads to duplicative payments or redundancy is unfounded. Furthermore, the Hospitals did not clarify how PROs would be funded under their interpretation. The Secretary's interpretation is deemed appropriate for deference. The discussion acknowledges that the issue of additional hospital costs in PRO reviews not covered under the PPS need not be addressed, noting that photocopying and mailing costs are explicitly excluded from PPS reimbursement due to their distinct nature from PSRO-related indirect costs. Other potential costs incurred by hospitals in meeting PRO requirements remain unexamined.

Concerns regarding the scope of PPS reimbursements focus solely on whether the Secretary can justify her interpretation of the PRO Payment Rule within the broader Medicare reimbursement framework. The Secretary's interpretation aligns with the statutory language, legislative history, and the overall structure of PSRO and PRO reimbursements, warranting deference despite the absence of reimbursement for certain review-related costs. The Hospitals argue that the Secretary's interpretation is invalid due to inconsistencies with her prior positions and its introduction in this litigation. They reference Motor Vehicle Manufacturers Association v. State Farm, asserting that the Court should reject post hoc rationalizations. The Hospitals claim the Secretary has previously acknowledged the PRO Payment Rule as a basis for additional hospital payments. However, many inconsistencies cited do not withstand examination; the Secretary has not maintained contradictory interpretations. In Burlington, for instance, she asserted that 42 U.S.C. 1395cc(a)(l)(F) was intended to ensure sufficient funding for PROs, indicating that PPS is the sole source for photocopy costs related to peer review. The Secretary's alternative claims regarding the non-reimbursement of photocopy costs do not imply a different interpretation of the PRO Payment Rule. Cited cases involve distinct issues and provide limited relevance. Although the Secretary referenced 42 U.S.C. 1395cc(a)(l)(F) as authority for the Photocopy Rule, indicating a possible prior view of the PRO Payment Rule as a reimbursement mechanism, inconsistencies do not negate the statute's clear language. Even if ambiguity exists, past inconsistencies alone do not invalidate her interpretation. The Supreme Court has recognized that while consistency can influence the level of deference provided to an agency's interpretation, agencies are not precluded from altering their views. If the agency's interpretation is as plausible as alternatives, deference is typically warranted.

The Secretary's interpretation of the PRO Payment Rule is deemed reasonable, supported by legislative history and the peer review system's context. The Hospitals do not contest the district court's finding that the Photocopy Rule is neither arbitrary nor capricious but argue instead that the district court lacked jurisdiction due to their failure to exhaust administrative remedies under 42 U.S.C. 1395oo. They seek to reverse the district court's federal question jurisdiction ruling under 28 U.S.C. 1331, despite previously convincing the court otherwise.

The Secretary argues against the Hospitals' shift in position and maintains that the court must assess its own jurisdiction. Importantly, the Secretary asserts her ability to waive the exhaustion requirement in this case, based on its unique circumstances. Although Medicare's exhaustion requirements are jurisdictional, the Supreme Court has established that the Secretary can waive these requirements, particularly when further administrative review is deemed futile. The Secretary's discretion in determining the futility of further procedures is upheld, and she is not required to provide reasons for her waiver. Given the Secretary's choice to waive the exhaustion requirements, jurisdiction is confirmed under the Medicare statute, resolving the need for further consideration of the Hospitals' jurisdictional arguments.

The Hospitals' argument that the Secretary's waiver is untimely is rejected, as their jurisdiction claim emerged only during this appeal. The district court's ruling on the validity of the Photocopy Rule is upheld because the Hospitals failed to appeal the merits of that judgment, leading to an affirmation of the court's conclusions. In 1983, Congress implemented a new Medicare reimbursement system, the PPS, which compensates most hospitals based on a standard rate-per-discharge, reflecting costs from the 1981 fiscal year and adjusted annually. Indirect administrative costs from the previous PSRO system were included in the 1981 cost base, while hospitals conducting their own peer reviews received separate funding. Non-PPS hospitals continued to receive reimbursement based on actual costs for treating Medicare patients. The PSRO program, established in 1972, provided peer review for Medicare services, reimbursing hospitals for direct review costs through fiscal intermediaries and covering indirect costs via Medicare Cost Reports. The Hospitals argue the Secretary has shifted her stance on reimbursements for photocopy and mailing costs, which she now acknowledges are not covered by the PPS due to the nature of on-site reviews. This change, prompted by court decisions, confirms that these costs were not part of the indirect costs calculated in the 1981 base year. The Secretary adopted the Photocopy Rule in response to legal challenges, including a ruling in Burlington Memorial Hospital v. Bowen, which invalidated the requirement for hospitals to cover their photocopying expenses.

The Photocopy Rule does not apply to non-PPS (Prospective Payment System) hospitals, as these facilities receive direct reimbursement for photocopying and other indirect costs associated with peer review, alongside all reasonable costs for treating Medicare patients. Non-PPS hospitals claim various costs, including personnel expenses for providing data outside medical records, handling PRO (Peer Review Organization) inquiries, offering space, and managing appeals. The Secretary emphasizes that 42 U.S.C. 1395cc(a)(l)(F) imposes conditions for participation in the Medicare program without establishing a substantive payment provision; instead, it ensures proper funding for PRO review activities. Legislative history suggests that while peer review costs are considered hospital expenses, reimbursements for PROs derive from the Secretary, not directly from hospitals. The Secretary must pay these costs from the hospital insurance trust fund at rates adjusted for inflation from fiscal year 1982. Section 1320c-8 authorizes the use of funds from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund for administering related contracts, with provisions for transferring funds as necessary. The legislative history does not substantiate the Hospitals' interpretation of the PRO Payment Rule, as non-PPS hospitals continue to have their peer review indirect costs reimbursed on a reasonable cost basis. While the Hospitals assert they incur direct costs for PRO reviews, they have not effectively demonstrated such costs or provided a conflicting definition to that of the Secretary.

The Secretary's explanation aligns with Senator Durenberger's intent behind the PRO Payment Rule, which aims to stabilize funding for peer review organizations (PROs) by ensuring reimbursement for their administrative costs without relying on appropriation statutes. This rule also eliminates the previous system requiring hospitals to pay PROs for nondelegated review costs, which would then be reimbursed by Medicare. The Hospitals argue that the PRO Payment Rule is the sole statutory authority for the Photocopy Rule, implying it is designed for hospital reimbursements. However, the Secretary cites additional statutory support for the Photocopy Rule in 42 U.S.C. 1302, 1395hh, and 1395ww(d), which confer general rulemaking authority for Medicare administration.

The Hospitals assert that the Secretary has historically maintained that the PRO Payment Rule mandates payments to hospitals through PROs, though these payments are often unnecessary due to existing reimbursements under the Prospective Payment System (PPS). A specific case, Beverly Hospital, highlights a jurisdictional question and the need for retrospective relief. 

Section 405(h) prohibits judicial actions against the government regarding claims under the Medicare Act, a prohibition characterized by the Supreme Court in Weinberger v. Salfi as comprehensive. This section is incorporated into the Medicare Act via 42 U.S.C. 1395ii, which stipulates that dissatisfied hospitals must first seek review before the Provider Reimbursement Review Board (PRRB) before pursuing judicial review related to Medicare reimbursements. The critical question is whether the Hospitals' challenge to the Photocopy Rule falls under the Medicare Act, necessitating administrative review, or if it allows for district court jurisdiction under 28 U.S.C. 1331. 

Additionally, there is a nonwaivable requirement for claims to be presented to the Secretary. The relief sought by the Hospitals essentially requests a policy change from the Secretary for increased reimbursements, categorizing their claim as a request for benefits. The failure to raise their challenge with the Secretary does not negate their position, as determined in past cases. The PRRB lacks the authority to review agency decisions like the adoption of the Photocopy Rule, allowing the Hospitals to bypass presenting their claim to the Secretary before the PRRB.

The Hospitals’ claim meets the non-waivable requirement for judicial review, drawing parallels between the Medicare benefits case Ringer and reimbursement cases. The relevant judicial review provisions are 42 U.S.C. § 405(g) and § 1395oo(f), which establish similar requirements for obtaining a "final decision" from the Secretary before seeking judicial review. The Court's ruling that the Secretary can waive the "final decision" requirement applies to reimbursement contexts as well. For instance, in Diaz, the Court held that the Secretary’s agreement for the case to be decided on the merits constituted a waiver of the hearing and final decision requirement. Similarly, in Salfi, the Secretary's lack of challenge to the allegations of exhaustion indicated a determination that the reconsideration decision was “final” for that litigation.