Maryland Gen. Hosp. v. Thompson

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

MARYLAND GENERAL HOSPITAL, INC.:
d/b/a TRANSITIONAL CARE CENTER
:

v.
:

TOMMY G. THOMPSON, SECRETARY OF
THE UNITED STATES DEPT. OF :
HEALTH AND HUMAN SERVICES

Civil Action WMN-00-221

MEMORANDUM

Before the Court are cross motions for summary judgment.

Paper Nos. 14 (Plaintiff’s) and 19 (Defendant’s). The motions

are fully briefed and a hearing on the motions was held on

March 23, 2001. Upon a review of the motions and the

applicable case law, the Court determines that Defendant’s

motion should be granted, and Plaintiff’s denied.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 1994, Plaintiff Maryland General Hospital determined to

open a hospital based skilled nursing facility (SNF). At

issue in this action is whether Defendant erred in denying that

facility “new provider” status for the purpose of determining

the rate of reimbursement under Medicare. Understanding the

context of this dispute requires a brief overview of Maryland’s

regulation of licensed hospital and nursing care facility beds,

as well as Medicare reimbursement regulations.

The number of hospital and nursing care facility beds are

tightly regulated by the State. To create or expand a health

care facility generally requires obtaining a Certificate of

Need (CON) from the Maryland Health Resources Planning

Commission (Commission). State regulations, however, allow an

existing facility to add up to 10 beds without obtaining a CON.

COMAR 10.24.01.02. This inchoate right to add these additional

beds is referred to as “bed credits” or “waiver beds.”

When Plaintiff decided to open its SNF, it determined that

the easiest way to start the facility was to purchase bed

rights from other existing providers. Accordingly, Plaintiff

proceeded to enter into contracts with three local nursing

facilities to purchase bed rights: 10 from Villa St. Michael, 6

from Granada Nursing Home, and 8 from the Wesley Home

(collectively, the Selling Facilities). As these purchases of

bed rights were originally contemplated, Plaintiff would

purchase operational beds from the Selling Facilities and those

facilities would then replace them by activating their waiver

bed rights. The contracts drawn up by the parties and all of

the contemporaneous documentation reflected this understanding

of the transaction. As it turns out, however, the Commission

treated the transactions as simply the transfer of waiver beds

from the Selling Facilities to Plaintiff.1

1 There is some dispute as to what motivated the re-
characterization of the transaction. It was not until
approximately one year after the initial denial of the new

The relevant Medicare regulations in effect during the

applicable time period provided as follows. The Medicare

program reimbursed SNFs such as Plaintiff for their actual

“reasonable costs” of providing inpatient services to Medicare

patients, subject to certain upper limits. 42 U.S.C. §§

1395f(b), 1395(v)(1)(A). Because new providers of skilled

nursing services are likely to experience higher per patient

per diem costs because of start up costs and lower occupancy

levels, the Health Care Financing Administration (HCFA),

promulgated regulations that exempted new providers from the

routine cost limits for their first few years of operation. 42

C.F.R. § 413.30(e)(1996). Section 413.30(e) provides:

Exemptions. Exemptions from the limits
imposed under this section may be granted
to a new provider. A new provider is a
provider of inpatient services that has
operated as the type of provider (or the
equivalent) for which it is certified for
Medicare, under present and previous

provider exemption that anyone asserted that the transfer
involved anything other than licensed and operational beds.
Long after the denial and at the request of Plaintiff, the
Commission issued a letter stating that waiver beds, and not
operational beds had been transferred. Thus, one could
conclude that the recasting of the transactions was made to
aid Plaintiff in challenging the denial. There is also
evidence in the record that the Commission treated the
transaction as a transfer of waiver beds merely for its own
administrative convenience, “to avoid the rigmarole of
delicensing at the nursing homes, relicensing additional
beds.” Administrative Record (A.R.) at 209 (testimony of
Plaintiff’s expert witness).

ownership, for less than 3 full years. An
exemption granted under this paragraph
expires at the end of the providers first
cost reporting period beginning at least
two years after the provider accepts its
first patient.

In December 1995, Plaintiff submitted an application for a

new provider exemption to its Intermediary.2 The Intermediary

passed the application on to HCFA with the recommendation that

the new provider exemption be granted. HCFA denied the

application. As was its right, Plaintiff appealed the decision

to the Provider Reimbursement Review Board (PRRB) which

reversed the decision of HCFA, in a three to two split

decision. The HCFA Administrator elected to review the

decision of the PRRB and reversed the Board’s decision, holding

that the application should be denied.3 Maryland General

Hospital Transitional Care Center v. Blue Cross & Blue Shield

Assoc., 1999 WL 33105616, (H.C.F.A. November 22, 1999). The

2 Medicare payments are made through fiscal intermediaries
pursuant to contracts with the Secretary. During the relevant
time period, Plaintiff’s Intermediary was Blue Cross and Blue
Shield Association.

3 While Plaintiff was denied the new provider exemption,
Plaintiff has been granted “exceptions” to the routine cost
limits for two of the cost years in question pursuant to 42
C.F.R. § 413.30(f)(1), based on “atypical” services.
According to Defendant, additional payments to Plaintiff based
on these exceptions amounted to hundreds of thousands of
dollars.

Administrator’s decision represents a final agency action of

the Secretary and Plaintiff filed this action seeking judicial

review.

II. STANDARD OF REVIEW

Judicial review of final agency decisions on Medicare

provider reimbursement disputes is guided by the provisions of

the Administrative Procedure Act, 5 U.S.C. § 701, et seq.

(APA). See 42 U.S.C. § 1395oo(f). Under the APA, a court

shall not set aside an agency action, findings, or conclusions,

unless the same are found by the court “to be . . . arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law . . .” 5 U.S.C. § 706(2)(A).

Under this standard, “there is a presumption in favor of

the validity of administrative action,” and courts are

particularly deferential when an agency, as here, is

interpreting its own statute and regulations. United States

v. Rutherford, 442 U.S. 544, 553 (1979). The agency action

“must be given controlling weight unless it is plainly

erroneous or inconsistent with the regulation.” Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)(internal

quotations omitted). While a reviewing court is to show a

proper deference to the expertise of the agency, the court

should make a “searching and careful” inquiry of the record in

order to ascertain whether the agency decision “was based on a

consideration of the relevant factors and whether there has

been a clear error of judgment.” Citizens to Preserve Overton

Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). Under this

narrow scope of review, however, “[t]he court is not empowered

to substitute its judgment for that of the agency.” Id.

III. DISCUSSION

In reversing the PRRB’s decision and denying Plaintiff’s

request for a new provider exemption, the Administrator found

that the record supported the conclusion that Plaintiff’s SNF

“was created based upon the purchase and relocation of existing

beds which had been used for equivalent comprehensive care

services for more than three years at the seller-facilities.”

1999 WL 33105616 at *10. While the Administrator deemed

Plaintiff’s contention that it was only waiver beds that were

transferred a “post-hoc characterization” for the purpose of

this litigation, he also noted that “regardless of whether the

beds are characterized as ‘operational beds’ or ‘waiver beds,’

there was a CHOW [change of ownership] for purposes of the new

provider exception.” Id. at *11. Finally, the Administrator

concluded that Plaintiff’s SNF was located in the same service

area as the previous owners, and thus, was not entitled to the

application of section 2533.1B.3 of the Provider Reimbursement

Manual. That section allows an exemption where there has been

a relocation of a facility to an area where the previous

patient population may no longer be served. Id. at *12.

Plaintiff does not take issue with the Administrator’s

position that the Selling Facilities were providing services

equivalent to those of the Plaintiff for more than three years,

or that the Selling Facilities and Plaintiff’s SNF were located

in the same service area. Nor does Plaintiff disagree that, if

licensed and operational beds were transferred, that would have

been a CHOW and the new provider exemption would have been

properly denied. Plaintiff takes issue with the

Administrator’s conclusion that operational beds, and not

waiver beds, were transferred. Furthermore, in Plaintiff’s

view, the transfer of waiver beds does not constitute a CHOW.

The Court does not believe that it is necessary to decide

whether it was operational beds or waiver beds that were sold

and transferred, for the Court concludes that the transfer of

any beds, be they operational or simply waiver beds, is an

adequate basis for denying new provider status. In reaching

this conclusion, the Court is guided by the Seventh Circuit’s

recent decision in Paragon Health Network, Inc. v. Thompson, –

F.3D –, 2001 WL 605711 (7th Cir. June 5, 2001). Although

Paragon arises in the context of a transfer of licensed and

operational beds, the analysis employed by the court in

reviewing the Secretary’s decision in that context seems

applicable here.4

In Paragon, the plaintiff opened a SNF in downtown

Milwaukee. Because Wisconsin regulates nursing facilities in a

manner similar to Maryland, the plaintiff opened the new

facility by purchasing and transferring CON rights for 35 beds

from another facility it owned in a suburb of Milwaukee. Prior

to the transfer, the selling facility had 403 beds and it

continued to operate as a separate facility after the transfer.

“The only thing that [the new SNF] received from [the selling

facility] were the CON rights; no residents, staff, or

equipment were transferred.” Id. at *1. Because the new

facility was created using transferred CON rights, the

Secretary denied the plaintiff new provider status and the

plaintiff challenged that decision in the district court. The

district court affirmed the Secretary’s decision, and plaintiff

4 The parties have not identified and the Court is not
aware of any reported Medicare reimbursement decision arising
in the context of the transfer of waiver beds.

In the context of the transfer of CON rights for
operational beds, the PRRB has consistently held that the
receiving institution is not entitled to new provider status.
See, e.g., Providence Yakima Medical Center v. Blue Cross &
Blue Shield, 2001 WL 599895 (PRRB May 16, 2001); Ashtabula
County Med. Ctr. Skilled Nursing Facility v. Blue Cross & Blue
Shield, 2000 WL 875714 (PRRB June 29, 2001).

appealed.

On appeal, the plaintiff focused on the meaning of

“provider” in the phrase “provider of inpatient services that

has operated . . . under present and previous ownership.” The

plaintiff argued that “‘provider’ consists of all those

attributes necessary for a SNF to operate – that is, not just

CON rights, but physical beds, employees, administrators,

equipment, patients, referral sources, etc.” Id. at *5. Thus,

in the plaintiff’s view, “only when the SNF as an entire

operating institution is transferred to a new owner can the

exemption for a new provider be denied.” Id.

The Seventh Circuit disagreed, finding that the word

“provider” was ambiguous as used in the regulation. The court

explained that a facility might fire its whole staff and hire

an new one, or modernize all of its equipment, and yet would

remain the same “provider.” Of course, at the point that all

of the various elements that make up a SNF are “new,” in the

sense that they have never been a part of another facility, the

SNF must be considered a “new provider.” In the court’s view,

it was the difficulty in drawing the line as to when enough of

the elements are “new” so as to deem a SNF a new provider that

makes the word “provider” ambiguous as used in § 413.30(e).

Id. at *5.

Having concluded that the word “provider” was ambigous,

the court proceeded to determine whether the Secretary’s

interpretation was plainly erroneous or inconsistent with the

text. In responding to the plaintiff’s argument that the

Secretary should not rely on CON rights alone in determining

whether a SNF operated under previous ownership, the Seventh

Circuit responded,

Paragon’s argument does have a degree of
merit –- terms like “operate[]” and
“provider” suggest that one should look to
whether a group of attributes making up the
institution have changed such that the SNF
may be described as new, rather than just
focusing on a single characteristic, such
as CON rights. Nevertheless, we conclude
that the Secretary’s interpretation is not
so much at variance with the language of
the regulation as to be deemed plainly
erroneous or inconsistent with the text.
Medicare is a highly complex and technical
program, and so deference to the
Secretary’s determinations in the course of
administering the system is especially
warranted. Thomas Jefferson, 512 U.S. at
512 []. Furthermore, an agency need not
adopt the most natural reading of the
regulation, but only a reasonable one.
Pauley v. BethEnergy Mines, Inc., 501 U.S.
680, 702 [] (1991). The Secretary explains
that a transfer of CON rights does not
result in the provision of any new
services. Even though the transferee might
have new equipment, staff, etc., it will
provide the same kind of services as the
transferor of the CON rights, just at a
different location. We cannot say that the
Secretary’s interpretation that because no
new services are being provided there is
not a new provider is unreasonable.

Paragon at *5 (emphasis added).

The plaintiff in Paragon also raised several policy

arguments against the Secretary’s interpretation, the primary

argument being one also raised by Plaintiff in this action.

Referring to the purpose of the new provider exemption, i.e.,

to allow a provider to recoup the higher costs normally

resulting from low occupancy rates and one time start-up costs,

the plaintiff observed that “the receipt of CON rights from

[the selling facility] did nothing to ameliorate these

expenses.” Id. at *6. The plaintiff in Paragon, as did

Plaintiff here, “incurred large start-up costs and had a very

low occupancy rate, resulting in high costs per patient.” Id.

Without challenging that observation, the court held that

the Secretary’s interpretation was nonetheless consistent with

the regulation. During the relevant time period, Medicare

reimburses SNFs for “reasonable costs.”5 Excluded from the

definition of “reasonable costs” was any “cost found to be

unnecessary in the efficient delivery of needed health

services.” 42 U.S.C. § 1395f(b)(1). The Secretary reasoned,

and the court concurred,

that the transfer of CON rights simply

5 As of July 1, 1998, Medicare began reimbursing SNFs on a
“prospective payment system.” 42 U.S.C. § 1935yy(e).

shifts around SNF services. Creating a new
facility and moving services to it, as [the
plaintiff did between the new facility and
the selling facility], is costly, but no
benefit is gained in the overall delivery
of health care services if the new facility
is providing the same services to the same
population as the old one. Thus, the
Secretary’s judgment that the high startup
costs of [the new facility] were
“unnecessary in the efficient delivery of
needed health services” is a reasonable one
that will not be disturbed by this Court.

Id.

While transferring non-operational waiver beds might

result in fewer unnecessary costs than the transfer of

operational beds, a similar observation could be made here.

Transferring waiver beds to a new institution and bringing them

into operation is clearly more costly than an on site

activation of waiver beds as part of an ongoing facility with

access to existing staff, administration, and referral network

to lower start up costs and avoid the initial lower occupancy

levels.

In trying to arrive at a different result, Plaintiff

argues that the test as to whether an exemption is granted

under § 413.30(e) should be “whether the transferred assets

were ‘operated’ by a prior owner.” Plaintiff’s Reply at 3; see

also, Plaintiff’s Motion at 15 (“The key word in this

definition of ‘new provider’ is ‘operated.’ . . . It

contradicts the plain language of the regulation to interpret

the word ‘operated’ to include Waiver Beds that have never been

previously ‘operated.’”).

Section 413.30(e), however,

nowhere speaks of assets being operated or not operated. The

question is whether “the provider . . . has operated.”

Here, there is no dispute that the previous owners of the

transferred assets were operated as the same type of provider

as Plaintiff’s SNF.

Perhaps the strongest rationale, in this Court’s view, for

denying new provider status where waiver beds were transferred,

is the ease by which the transaction was re-characterized by

the Commission. It is undisputed that Plaintiff and the

Selling Facilities entered in the transaction anticipating that

operational beds would be transferred. Aside from the impact

on Plaintiff’s new provider status, Plaintiff makes no argument

that there was any practical significance to whether the

transferred beds were deemed waiver beds or operational beds.

Furthermore, Plaintiff concedes that it was not entitled to new

provider status under the terms of the transaction into which

it believed it was entering. See Plaintiff’s Reply at 3 (“[i]f

the transferred assets were actually ‘operated’ previously as a

functioning and recognized part of a licensed facility, new

provider status would not be warranted”). That a year later

the Commissioner fortuitously chose to re-cast the transaction

as the transfer of waiver beds (whether for administrative

convenience or some other reason) should not impact the

Secretary’s determination of new provider status.

IV. CONCLUSION

For these reasons, the Court finds that Defendant’s

decision was supported by the record and was neither arbitrary

nor capricious. Accordingly, Defendant’s Motion for Summary

Judgment will be granted. A separate order will issue.

William M. Nickerson
United States District Judge

Dated: June , 2001.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

MARYLAND GENERAL HOSPITAL, INC.:
d/b/a TRANSITIONAL CARE CENTER
:

v.
:

TOMMY G. THOMPSON, SECRETARY OF
THE UNITED STATES DEPT. OF :
HEALTH AND HUMAN SERVICES

Civil Action WMN-00-221

ORDER

In accordance with the foregoing Memorandum and for the

reasons stated therein, IT IS this day of June, 2001, by the

United States District Court for the District of Maryland,

ORDERED:

1. That Plaintiff’s Motion for Summary Judgment, Paper No.

14, is DENIED;

2. That Defendant’s Motion for Summary Judgment, Paper No.

19, is GRANTED;

3. That judgment is entered in favor of Defendant and

against Plaintiff;

4 . That any and all prior rulings made by this Cour t

disposing of any claims against any parties are incorporated by

reference herein and this order shall be deemed t o b e a f i n a l

judgment within the meaning of Fed. R. Civ. P. 58;

5. That this action is hereby CLOSED; and

6. That the Clerk of the Court shall mail copies of the

foregoing Memorandum and this Order to all counsel of record.

William M. Nickerson
United States District Judge