Howard Young Medical Center, Incorporated v. Donna E. Shalala, Secretary of Health and Human Services
Docket: 99-2035
Court: Court of Appeals for the Seventh Circuit; March 21, 2000; Federal Appellate Court
Howard Young Medical Center, Inc., a 99-bed hospital in Woodruff, Wisconsin, appealed a decision by the Secretary of Health and Human Services, which denied its classification as a sole community hospital. On December 4, 1999, the district court granted summary judgment in favor of the Secretary, affirming that the denial was supported by evidence and adhered to administrative regulations. The Medicare system, prior to 1983, reimbursed hospitals based on "reasonable cost" or "customary charge," but this transitioned to a prospective payment system (PPS) that established predetermined rates based on patient diagnoses. Sole community hospitals, which qualify for additional payments, must meet specific criteria: they must be over 35 road miles from another hospital, serve as the only source of inpatient care for Medicare beneficiaries in their area, or be designated as essential access community hospitals. To qualify, hospitals need to demonstrate their rural location, their distance from similar hospitals (25-35 miles), and that no more than 25% of their patient population has sought care at other hospitals within a 35-mile radius. This involves defining their "service area," which must consist of the geographic area from which 75% of their inpatients are drawn, typically identified by contiguous zip codes.
In 1992, Howard Young submitted an application for sole community hospital status to Blue Cross and Blue Shield United of Wisconsin, defining its service area based on 16 zip codes with the highest percentages of discharges. However, the Health Care Financing Administration (HCFA) denied the application, citing non-compliance with the requirement to select zip codes based on the highest number of discharges instead. The HCFA recalculated the service area, determining that it needed to include at least 1,690 discharges from a maximum of 10 zip codes, leading to a market share of only 41.4%, below the required 75%.
Howard Young appealed HCFA's denial to the Provider Reimbursement Review Board (PRRB) and submitted additional discharge data from fiscal year 1991 shortly before the hearing. This data suggested that substituting a zip code would allow the hospital to qualify under the HCFA's criteria. During the October 12, 1995, hearing, both the hospital and Blue Cross agreed that the updated information would qualify Howard Young for sole community hospital status.
On March 26, 1998, the PRRB reversed the HCFA's decision, granting Howard Young sole community hospital status effective September 24, 1992, based on the new evidence and the stipulation by both parties that the hospital would qualify if that evidence were considered. The PRRB affirmed its authority to evaluate the new materials under relevant Medicare regulations.
The Secretary, through the Deputy Administrator of HCFA, reversed the PRRB's decision, concluding that HCFA correctly denied Howard Young's application for designation as a sole community hospital. The Secretary emphasized that Howard Young was required to submit all pertinent information with its original application, and based on the data provided, HCFA properly determined that the application did not utilize the "lowest number of zip codes." The Secretary also found no valid justification for replacing Rhinelander with Boulder Junction in the analysis, as Boulder Junction had fewer discharges.
The Secretary stated that any reversal of HCFA's denial could only be based on the original information submitted and not on new data provided to the PRRB. The information submitted to the PRRB did not demonstrate improper denial by HCFA and was deemed a new application rather than grounds for reversal. Furthermore, the Secretary criticized the PRRB for basing its decision on the stipulation, asserting that HCFA's recalculation of Howard Young's service area was consistent with regulatory requirements.
Howard Young appealed the Secretary's reversal to the district court, which granted summary judgment in favor of the Secretary. The current appeal questions whether the Secretary's decision to uphold HCFA's denial was supported by substantial evidence and adhered to legal standards. The federal court's review of administrative decisions is limited and deferential, only overturning decisions deemed arbitrary, capricious, or unsupported by substantial evidence. The court will assess whether the agency considered relevant data and provided a rational explanation for its decision, without reweighing the evidence or substituting its judgment. The Secretary's interpretations of Medicare regulations are afforded significant deference, and differing conclusions from the PRRB do not reduce the Secretary's authority.
Howard Young contends that the Secretary's decision regarding its 1992 application for sole community hospital status was not supported by substantial evidence and misapplied the governing laws. The hospital argues that its original application met regulatory requirements by identifying a service area from which over 75% of its inpatient admissions originated, with less than 25% admitted to other hospitals within a 35-mile radius. However, the Health Care Financing Administration (HCFA) recalculated Howard Young's service area, using a methodology that resulted in only ten zip codes and a market share of 41.4%, which fell short of the 75% threshold required for designation as a sole community hospital.
Howard Young challenges the HCFA's service area definition, claiming that contiguity of zip codes should be considered. This argument is countered by the HCFA’s clarification that while the term "contiguous zip codes" appears in the Provider Reimbursement Manual (PRM), it was included by mistake; the correct criterion is simply the "lowest number of zip codes." The HCFA's approach aims to provide a more accurate depiction of a hospital's service area.
Furthermore, case law indicates that PRM statements are generally interpretive and not binding, while statements in the Federal Register preamble reflect the agency's statutory interpretation. Both the 1988 and 1996 Federal Register preambles specify that a service area is defined by the lowest number of zip codes without necessitating contiguity. Consequently, since contiguity is not a requirement, the HCFA's defined service area is upheld, confirming that Howard Young's market share of 41.4% does not meet the regulatory requirement of 75%. Therefore, the Secretary's decision to deny Howard Young's application is affirmed.
Howard Young submitted a new ten zip code service area prior to the PRRB hearing, demonstrating that over 75% of its inpatients for fiscal year 1991 came from this area, with fewer than 25% admitted to similar hospitals. Both the hospital's and the fiscal intermediary's counsel agreed that this service area met regulatory requirements. They stipulated that, if allowed to use this 1995 data instead of the 1992 HCFA data, Howard Young would satisfy the market share test and qualify as a sole community hospital. However, neither the HCFA nor the Secretary participated in the stipulation, which the Court determined did not bind them due to regulatory provisions stating that they are not parties to PRRB hearings. The Secretary concluded that even if the 1995 data had been considered, the outcome would not have changed, as the proposed service area did not align with regulations. Specifically, the Secretary criticized the replacement of a higher discharge zip code with one that had fewer discharges, which contradicts the requirement to list zip codes by discharge volume until 75% of inpatient discharges are covered. The Court upheld the Secretary's interpretation of the regulations, finding no error in the decision regarding the service area.
The ten zip code service area proposed by the Health Care Financing Administration (HCFA) is compliant with regulations, while Howard Young's substitution of the Boulder Junction zip code for the Rhinelander zip code is not. Consequently, even considering 1995 data, Howard Young's application fails to qualify as a sole community hospital. The district court's summary judgment in favor of the Secretary is upheld. The designation of sole community hospital under Medicare is crucial for Howard Young as it allows for greater reimbursement. The definition of 'like hospital' is clarified as one providing short-term, acute care, and specialty services do not affect sole community hospital classifications. For the relevant 1991 fiscal year, Boulder Junction had 90 discharges (ranked 11th) compared to Rhinelander's 130 discharges (ranked 6th). The court confirms the Secretary's denial of Howard Young's application, rendering unnecessary further review of the PRRB's consideration of the 1995 data.
