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
2
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).
3
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.
4
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
5
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
6
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
7
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).
8
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.
9
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.
10
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).
11
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
12
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
13
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.
14
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
16
