Alhambra Hospital Memorial Hospital of Gardena v. Tommy G. Thompson , Secretary, United States Department of Health and Human Services

Citations: 259 F.3d 1071; 2001 WL 880831Docket: 99-57009

Court: Court of Appeals for the Ninth Circuit; August 7, 2001; Federal Appellate Court

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The case involves Alhambra Hospital and Memorial Hospital of Gardena appealing against Tommy G. Thompson, the Secretary of Health and Human Services, regarding the improper exclusion of subacute patient days from the calculation of disproportionate share hospital (DSH) reimbursements under the Medicare statute (42 U.S.C. § 1395ww(d)(5)(F)(vi)). The Ninth Circuit Court of Appeals found that the Secretary's actions contradicted the clear meaning of the governing regulation.

The background indicates that Part A of Medicare provides basic health coverage and reimbursement for hospitals is regulated by the Department of Health and Human Services. In 1983, a prospective payment system (PPS) replaced the previous cost-based reimbursement method, establishing fixed rates for hospital discharges based on patient diagnosis. Notably, PPS does not apply to long-term care in skilled nursing facilities, which are reimbursed differently.

Hospitals treating a disproportionate number of low-income patients qualify for additional DSH payments based on a calculation involving Medicaid patient days. The relevant statute defines the calculation as the ratio of patient days eligible for Medicaid but not entitled to Medicare Part A, to the total patient days. However, the Secretary's regulation restricts the definition of "hospital's patient days" to those associated with areas subject to PPS, excluding others, which the appellants argue is a misapplication of the regulation's intended meaning.

The Hospitals operate subacute care units, which provide a level of care that falls between acute care and skilled nursing facility (SNF) care, as classified under California's Medi-Cal program. Although these units are licensed as SNFs by California, they lack Medicare certification. The Hospitals aimed to include patient days from these subacute units in their Disproportionate Share Hospital (DSH) calculation, but this request was denied by the fiscal intermediary, prompting an administrative review.

The Provider Reimbursement Review Board (PRRB) ruled unanimously in favor of the Hospitals, determining that the subacute units were not exempt from the Prospective Payment System (PPS) and should be included in the DSH calculation. The PRRB found that the care provided in the subacute units was more akin to inpatient acute care than to SNF care and deemed California's classification irrelevant to federal Medicare standards. It cited a 1992 Health Care Financing Administration (HCFA) letter supporting the inclusion of subacute days in the DSH calculation.

The fiscal intermediary appealed to the HCFA Administrator, who reversed the PRRB's decision, concluding that the Hospitals failed to prove that the beds in question should be classified as inpatient hospital beds for the DSH adjustment. The Administrator emphasized that the beds were licensed as SNF beds, which do not contribute to the areas of the hospital subject to PPS, and deemed the 1992 letter unpersuasive regarding HCFA policy.

Subsequently, the Hospitals filed a lawsuit against the Secretary, who won a summary judgment motion, stating that excluding subacute patient days from the DSH calculation aligned with the governing regulation's language. The court indicated that non-reimbursable services do not require exemption from PPS, and there was insufficient evidence of a conflicting interpretation of the Secretary's position. The Hospitals appealed this decision, and jurisdiction was established under 28 U.S.C. 1291.

The standard of review for the agency's regulation interpretation is highly deferential, with controlling weight given unless the interpretation is clearly erroneous or inconsistent with the regulation’s language. This deference is particularly justified in complex regulatory contexts.

The district court's summary judgment is reviewed de novo. The relevant regulation specifies that only patient days from hospital areas under the prospective payment system (PPS) are included, clearly delineating the geographic scope of PPS. The central issue is whether the Hospitals' sub-acute Medicaid patient days fall within areas subject to PPS. According to 42 C.F.R. 412.20(a), all inpatient hospital services are presumed covered by PPS unless explicitly exempted. Sub-acute care units must meet stringent criteria to qualify for exemption under 42 C.F.R. 412.25 and 412.29; failure to comply means they remain under PPS. The Hospitals did not apply for exemption, nor were their units certified as exempt by Medicare, indicating that these sub-acute units are subject to PPS. 

The Secretary's counterarguments—that sub-acute units do not require exemption because they are not "covered inpatient hospital services"—are dismissed. The Secretary's reasoning misapplies the context of the Disproportionate Share Hospital (DSH) reimbursement calculation, which is based on patient days eligible for Medicaid but ineligible for Medicare Part A coverage. Thus, the patient days from the Hospitals' sub-acute units must be included in the DSH calculation as they are subject to PPS.

Patient days included in the Medicare proxy are not payable under the Prospective Payment System (PPS), as indicated by the relevant regulation, which specifies "areas of the hospital" rather than "services" or "patients." The determination of Medicaid patient days does not depend on whether subacute units provide Medicare services. The purpose of Disproportionate Share Hospital (DSH) reimbursement is to augment PPS payments for hospitals serving low-income populations due to their higher care costs. DSH payments are distinct from PPS payments. The Secretary's assertion that subacute services are excluded from DSH reimbursement because of a lack of Medicare coverage is an improper interpretation of the regulation. The regulation requires inclusion of subacute patient days in DSH calculations. Although the Secretary's regulatory interpretations are generally afforded deference, this regulation's language is clear, necessitating the inclusion of subacute patient days. The Secretary's claim that California's licensing of subacute units as skilled nursing facilities (SNFs) exempts them from PPS lacks merit, and there is no clear statute or regulation excluding subacute services from Medicare reimbursement. The argument that DSH payments are solely for increased costs associated with treating Medicare patients is unsupported. Congress intended for hospitals treating many low-income patients to receive additional compensation, a decision that the Health Care Financing Administration (HCFA) cannot unilaterally disregard. The ruling is reversed, affirming the inclusion of subacute patient days in DSH reimbursement calculations.