Docket: Nos. 84-5510 to 84-5523, 84-5641, 84-5647 and 84-5714
Court: Court of Appeals for the D.C. Circuit; April 30, 1985; Federal Appellate Court
The court, led by Senior Circuit Judge McGowan, addressed the inclusion of labor/delivery patients in Medicare's reimbursement calculations. It affirmed the District Court's ruling that prevented the Department of Health and Human Services (HHS) from counting labor/delivery patients as inpatients for routine-cost reimbursement calculations, a decision prompted by HHS's policy that included such patients regardless of whether they received routine services. The hospitals contested this policy before the Provider Reimbursement Review Board (PRRB), which initially sided with them. However, the Secretary’s delegatee reversed this decision, prompting the hospitals to seek relief in District Court, which upheld the government’s stance.
On appeal, the court vacated the Secretary's delegatee’s decision, finding the HHS policy arbitrary and violative of statutory cost-shifting mandates. The case was remanded to the District Court with instructions to refer it back to the PRRB for evidence regarding the impact of including labor/delivery patients on Medicare reimbursement. Despite this, the District Court concluded that no remand to the PRRB was necessary, determining that the Secretary should exclude labor/delivery patients who received no routine care from the inpatient count for reimbursement purposes.
HHS subsequently appealed this order and has indicated an inability to provide evidence supporting its policy on ancillary service utilization, although it requested remand to the PRRB to gather evidence on routine care costs, asserting that its treatment of labor/delivery patients aligns with Congressional intent regarding Medicare reimbursement.
The District Court's decision in favor of the hospitals stems from an analysis of the Medicare reimbursement structure, which categorizes hospital services into three types: general routine care, special routine care, and ancillary care. General routine care covers basic services like room and food, while special routine care pertains to higher-cost services in intensive areas. Ancillary care includes separately billed services such as surgeries.
Under the current reimbursement policy, hospitals count all patients in ancillary-care areas at midnight as inpatients for calculating routine care costs, including those in labor/delivery units. However, the costs associated with labor/delivery services are excluded from the routine cost calculations, leading to a potential distortion in reimbursement. Specifically, this practice can result in lower reimbursements for hospitals treating Medicare patients because it skews the fraction used to determine average routine service costs—where the numerator does not account for all relevant costs due to the exclusion of labor/delivery services.
The hospitals argue that this method creates a "dilution" of reimbursement, effectively subsidizing Medicare patients with funds from non-Medicare patients. They maintain that the inclusion of labor/delivery patients in the count at midnight, while excluding their costs from the numerator, unfairly reduces the total reimbursement amount. Thus, the hospitals' challenge to this regulation is rooted in concerns over inadequate compensation for the care provided to Medicare patients.
Ancillary costs are excluded from routine-costs totals and reimbursed separately due to their distinct nature. In St. Mary’s I, it was determined that the inclusion of labor/delivery patients in routine cost calculations violates 42 U.S.C. 1395x(v)(1)(A). This is because labor/delivery patients—who predominantly are non-Medicare patients—are unfairly made to subsidize the routine costs for others, contradicting the foundational assumptions of the reimbursement framework. HHS failed to disprove this presumption on remand, relying instead on inconsistent post hoc justifications. The fundamental difference highlighted is that labor/delivery patients typically receive only ancillary care without routine care, unlike other patients who receive both. Hospitals demonstrated that those in labor/delivery areas had not received routine care, thereby invalidating the attribution of routine care costs to them. The court clarified that without evidence of a disproportionate number of Medicare patients in non-labor/delivery ancillary services, labor/delivery patients must be excluded from inpatient counts used for calculating average routine costs. This ruling does not condemn the overall Medicare reimbursement scheme but asserts that labor/delivery patients cannot be considered as contributing to routine costs unless they have received such care.
Labor and delivery patients are classified as routine inpatients under Medicare, even when they do not receive routine care. This classification alone does not demonstrate that the Medicare reimbursement scheme improperly shifts costs to non-Medicare patients. The statute, 42 U.S.C. 1395x(v)(1)(A), prohibits the costs of care for Medicare patients from being borne by non-Medicare individuals and vice versa. HHS's inclusion of labor/delivery patients as routine inpatients necessitates that these patients subsidize the care of others. However, the critical issue is whether non-Medicare patients are unfairly subsidizing Medicare patients’ routine care.
Evidence from St. Mary’s I indicated that the proportion of Medicare patients in labor/delivery services is significantly lower than in other areas, suggesting non-Medicare patients disproportionately bear the routine costs. Key evidence showed that many labor/delivery patients were present during the census-taking hour and were predominantly non-Medicare, leading to an imbalance in cost allocation. The court concluded that HHS's practice of counting these patients as routine inpatients constituted a violation of the statutory mandate.
HHS contended that this violation could be offset by the presence of non-routine care patients in other ancillary areas who might be primarily Medicare patients. Although this argument had merit, the potential for balance does not negate the inaccuracies in patient classification regarding Medicare status. Thus, the Secretary's policy of counting patients in ancillary areas as routine inpatients does not necessarily subsidize Medicare patients at the expense of non-Medicare patients, but it does highlight inaccuracies in patient classification.
Remand instructions from St. Mary’s I directed HHS to demonstrate whether the inclusion of Medicare patients in non-labor/delivery ancillary areas could counterbalance the dilution of Medicare reimbursement caused by counting labor/maternity patients among routine inpatients. HHS has consistently failed to provide such evidence, resulting in an unrefuted prima facie violation of 42 U.S.C. 1395x(v)(1)(A), thereby invalidating the policy. The District Court ruled correctly that the Secretary could not include labor/delivery patients as routine inpatients if they had not received routine care in the preceding day.
On remand, the government introduced a new argument not previously raised, seeking to present evidence on the overall balance of routine-cost reimbursement, asserting that if Medicare's contributions align with average routine costs, the reimbursement scheme does not violate statutory provisions. They contend that labor/delivery patients, when they eventually receive routine care, incur higher routine costs, which justifies their initial classification despite not receiving immediate routine services.
The government references broad language in St. Mary’s I that may support a comprehensive evidentiary inquiry. It argues against allocating costs to labor/maternity patients that they have not incurred without showing that this distortion is compensated elsewhere. The absence of labor/delivery costs in average routine cost calculations forces non-Medicare payors to cover some Medicare costs. However, the ruling in St. Mary’s I focused on HHS's failure to justify its treatment of labor/delivery patients rather than a comprehensive assessment of routine-care costs. The intent was to allow HHS to prove that any imbalance due to Medicare's policy on labor/delivery patients is counterbalanced by similar subsidies affecting non-Medicare patients. This consideration arose because HHS had previously argued this point but was unable to present evidence due to opposition from intermediaries before the PRRB.
HHS contends that the ancillary-care balancing argument is a broad assertion that the panel allowed the government to present before the PRRB. The core issue for the court is whether HHS’s decision to classify labor/delivery patients without routine care as routine inpatients is arbitrary or not in accordance with the law, as per 5 U.S.C. 706 (1982). HHS is required to provide a valid rationale for this classification. St. Mary’s I found HHS's justifications lacking and held that the policy violated 42 U.S.C. 1395x(v)(1)(A) unless it could demonstrate that the policy's application to other ancillary patients balanced the inequity created for labor/delivery patients, who typically are not Medicare patients. HHS has admitted it cannot show the utilization of ancillary care by Medicare versus non-Medicare patients, which would undermine the court's ability to evaluate the overall reimbursement balance. HHS's definitions and attributions in its reimbursement scheme must be grounded in reality; it cannot assign costs from broader hospital expenditures to labor/delivery patients without justification. HHS has introduced a new defense claiming its policy offsets higher routine costs for labor/delivery patients once they receive care, but this argument is considered a post hoc rationalization, not previously raised in St. Mary’s I or in its rehearing petition. HHS has consistently assumed equal average routine costs across patient types in its regulations and has not utilized mechanisms available for accounting for higher routine-care costs in this context. The government also references Walter O. Boswell Memorial Hospital v. Heckler to support its position on the evidence for remand, but this case involved different reimbursement challenges and does not apply.
HHS previously reimbursed hospitals for their general administrative (G.A.) costs based on the proportion of services provided to Medicare patients. Under a new proposal, HHS aims to maintain this method for all G.A. costs except malpractice insurance premiums, arguing that the change prevents Medicare patients from subsidizing the malpractice costs of non-Medicare patients. The Boswell court remanded the case to the District Court, highlighting that for HHS to segregate expenses, it must establish that the old G.A. pool was subsidizing non-Medicare patients at the expense of Medicare patients. Without such a determination, removing malpractice premiums lacks justification, as the old G.A. pool was presumed to balance costs equitably. The court noted that without cost-shifting, the new G.A. pool could lead to Medicare patients subsidizing non-Medicare patients instead. HHS contends it should be allowed to demonstrate that the general routine costs are balanced, and that creating new cost categories contradicts Boswell’s ruling. However, the case differs from Boswell because it involves costs for routine care, which non-Medicare patients do not benefit from, while in Boswell, the costs related to shared benefits of malpractice insurance. The court affirmed this distinction, emphasizing the importance of proper cost allocation. Furthermore, hospitals expressed concerns over delays in resolving reimbursement issues for labor/delivery services, noting HHS's refusal to retroactively include contested costs in reimbursement calculations. However, the hospitals did not challenge HHS's treatment of these contested costs directly in this suit, so that matter was not addressed.
A notable percentage of women classified as victims of "false labor" enter the labor/delivery area of hospitals but leave without receiving routine care. In contrast, patients in other ancillary services typically remain for routine care. The assumption that patients in ancillary areas are temporarily occupying space between routine care doses is not valid for many labor/delivery patients. The court in St. Mary’s I recognized this flaw and suggested that if similar issues affect other ancillary areas, patients there should also be excluded from the routine inpatient count. Labor/delivery patients are more likely to be present in greater numbers during unpredictable and lengthy labor, especially at midnight, unlike scheduled services like x-rays. Most labor/delivery service users tend to be non-Medicare patients, as those over 65 rarely need such services.
In the context of legal precedents, once a hospital demonstrates a prima facie violation of 42 U.S.C. 1395x(v)(1)(A), the Secretary must provide counter-evidence. The First Circuit, while upholding St. Mary’s I, allowed the Secretary to show that labor/delivery patients incur higher routine costs post-care compared to other patients. The Fifth Circuit has similarly permitted such evidence in an unpublished decision. Earlier, the Fifth Circuit affirmed a hospital's exclusion of labor/delivery patients from the inpatient count. Conversely, the Ninth Circuit, which adopted St. Mary’s I's ruling, has ruled to exclude these patients from routine-care calculations for Medicare reimbursement, rejecting new evidence aimed at recalculating costs for maternity patients. The Sixth Circuit has only remanded cases for further consideration in light of St. Mary’s I, while a Fourth Circuit district court has disagreed with this interpretation.
