UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

ST. HELENA CLEAR LAKE HOSPITAL,

Plaintiff,

v. Civil Action No. 1:19-cv-00141 (CJN)

XAVIER BECERRA, Secretary, U.S. Department of Health and Human Services,

Defendant.

MEMORANDUM OPINION

St. Helena Clear Lake Hospital, a Medicare Critical Access Hospital, challenges the

Department of Health and Human Services’ decision denying the hospital’s claim for the

reimbursement of certain health care costs under the Medicare health insurance program. See

generally Compl., ECF No. 1. The Parties have cross-moved for summary judgment. See

generally Pl.’s Mot. Summ. J. (“Pl.’s Mot.”), ECF No. 10; Def.’s Mot. Summ. J. (“Def.’s Cross-

Mot.”), ECF No. 12. For the reasons discussed below, the Court denies St. Helena’s Motion and

grants Defendant’s Cross-Motion.

I. Background

St. Helena is a short-term acute care hospital located in California. Under the Medicare

program, it is designated as a Critical Access Hospital. These facilities differ from most other

short-term acute care hospitals in that they receive Medicare reimbursement under the reasonable

cost system.

(d).

From 2005 to 2008, St. Helena contracted with physicians in certain specialties to

provide on-call coverage for inpatient hospital services. St. Helena sought reimbursement from

1 Medicare for those costs, which the Medicare contractor responsible for auditing St. Helena’s

Medicare cost reports disallowed. St. Helena appealed that decision to the Provider

Reimbursement Review Board, which concurred with the Medicare contractor.

The Court begins with a review of the Medicare insurance program and the system for

reimbursing Critical Access Hospitals, like St. Helena, for services provided to Medicare

beneficiaries.

A. Statutory and Regulatory Provisions

1. The Medicare Program

The Medicare program, established by Title XVIII of the Social Security Act,

, et seq., pays for covered medical care provided to eligible aged and disabled persons.

Congress entrusted the Secretary with determining proper Medicare payments to hospitals. And

the Secretary delegated that authority to the Centers for Medicare & Medicaid Services

(“CMS”). Under a “complex statutory and regulatory regime,” Good Samaritan Hosp. v.

Shalala,

(1993), known as Medicare Part A, the Secretary, through CMS, pays

participating hospitals for inpatient care they provide to Medicare beneficiaries.

At one time, Medicare reimbursed participating hospitals for the “reasonable costs”

actually incurred providing inpatient services to Medicare beneficiaries. Methodist Hosp. of

Sacramento v. Shalala,

(D.C. Cir. 1994) (quoting 42 U.S.C. § 1395f(b)

(1988)). But in 1983, Congress directed the Department of Health and Human Services to

implement a “prospective payment system.” 42 U.S.C. § 1395ww(d). Under this system,

hospitals generally receive fixed payments for different inpatient services, regardless of the

actual cost to the hospital. See id. CMS now pays most acute care hospitals for inpatient

services furnished to Medicare beneficiaries at fixed rates through something called the Inpatient

2 Prospective Payment System. See generally Dist. Hosp. Partners, L.P. v. Burwell,

(D.C. Cir. 2015).

2. Critical Access Hospitals and the Reasonable Cost System

In 1997, Congress exempted many rural hospitals from the Inpatient Prospective Payment

System when it created the Critical Access Hospital designation. Critical Access Hospitals

instead receive reimbursement for inpatient services under the reasonable cost system, 42 U.S.C.

§ 1395i-4(c)(2);

(d), and receive payment at a rate of 101 percent of the

reasonable costs of furnishing inpatient and outpatient services to Medicare beneficiaries. See 42

U.S.C. §§ 1395f(l)(1), 1395m(g)(1).

Medicare hospitals subject to the reasonable cost system are paid the lesser of the

“reasonable cost” of or the “customary charges” for services they furnish to Medicare

beneficiaries. 42 U.S.C. § 1395f(b)(1). Congress defined “reasonable cost” broadly as “the cost

actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the

efficient delivery of needed health services.” 42 U.S.C. § 1395x(v)(1)(A).

Congress empowered the Secretary “to issue regulations defining reimbursable costs and

otherwise giving content to the broad outlines of the Medicare statute.” Thomas Jefferson Univ.

v. Shalala,

(1994). Specifically, Congress authorized the Secretary to further

define both the “reasonable cost” of health care services to be reimbursed, and the “items to be

included” in the category of reimbursable costs. 42 U.S.C. § 1395x(v)(1)(A).

Pursuant to this authority, the Secretary promulgated general regulations to better

articulate the items included in the reasonable costs category as “all necessary and proper costs

incurred in furnishing the [Medicare] services.”

(a). And the Secretary defines

“necessary and proper” as “costs that are appropriate and helpful in developing and maintaining

the operation of patient care facilities and activities. They are usually costs that are common and

3 accepted occurrences in the field of the provider’s activity.”

§ 413.9(b)(2). Such costs

include “both direct and indirect costs and normal standby costs.”

(c)(3).

When it comes to the amount reimbursed under the reasonable cost system, the Secretary

has noted that medical costs “vary from one provider to another and the variations generally

reflect differences in scope of services and intensity of care.”

(c)(2). The

reasonable cost regulations seek to reimburse each provider with its “actual costs, however

widely they may vary from one institution to another.”

But there are limits. For instance,

the reasonable cost system will not reimburse a provider’s actual costs if that “institution’s costs

are found to be substantially out of line with other institutions in the same area that are similar in

size, scope of services, utilization, and other relevant factors.”

The regulations also specifically address inpatient and outpatient services provided at

Critical Access Hospitals. See

(a), (b). Medicare reimburses, at a rate of 101

percent, all reasonable costs a Critical Access Hospital incurs while furnishing inpatient and

outpatient services to Medicare beneficiaries. See 42 U.S.C. §§ 1395f(l)(1), 1395m(g)(1).

3. On-Call Costs

After Congress created the Critical Access Hospital designation in 1997, CMS (then

known as the Health Care Financing Administration) issued the first series of the regulations

governing those hospitals.

(May 12, 1998). During the comment period for

that initial rulemaking, CMS explained, in response to a question regarding temporary substitute

physicians, that “Medicare does not recognize costs of ‘on-call’ physicians as allowable costs of

operating a [Critical Access Hospital].”

.

Only two years later, Congress, through the enactment of Section 204 of Public Law

106–554, carved out an exception to that general prohibition. The relevant part of the statute

provides that with regard to “reasonable costs of outpatient critical access hospital services . . .

4 the Secretary shall recognize as allowable costs, amounts . . . for reasonable compensation and

related costs for emergency room physicians who are on call.” 42 U.S.C. § 1395m(g)(5).

Based on this congressional directive, CMS implemented regulations relating to the

reimbursement of these on-call costs. The regulation stated:

Effective for cost reporting periods beginning on or after October 1, 2001, the reasonable costs of outpatient [Critical Access Hospital] services under paragraph (b) of this section may include amounts for reasonable compensation and related costs for an emergency room physician who is on call but who is not present on the premises of the [Critical Access Hospital] involved, is not otherwise furnishing physician’s services, and is not on call at any other provider or facility.

(b)(4). In the preamble to this final rule, the Secretary explained that prior to

Congress’s enactment of this exception, Critical Access Hospitals were not to include “any costs

of compensating physicians who are not present in the facility but are on call.”

, 39922–23 (Aug. 1, 2001).

4. Administration of Medicare Reimbursement

CMS contracts with private insurance companies to act as Medicare Administrative

Contractors, which assist in the day-to-day operations of the program. 42 U.S.C. §§ 1395u(a),

1395kk-1(a)(4). Each Medicare-participating hospital is assigned a contractor. The contractor

audits annual cost reports submitted by the provider to determine the Medicare reimbursement

payment to be made to the provider. See

, 413.24(f)(4)(iii). To receive

payment from Medicare for services rendered, the provider must file a Medicare cost report with

its contractor at the end of each cost reporting period.

. The contractor then

reviews that report and issues a Notice of Program Reimbursement setting forth the amount of

allowable Medicare payments.

.

If a provider disagrees with a contractor’s Notice of Program Reimbursement, the

provider may appeal the decision to the Provider Reimbursement Review Board—an

5 administrative tribunal within the Department of Health and Human Services. A Board decision

represents the final agency decision unless the Secretary, on his own motion, decides to reverse,

affirm, or modify the Board’s decision. 42 U.S.C. § 1395oo(f). And the Secretary has delegated

his authority to review Board decisions to the CMS Administrator. 42 U.S.C. § 1395oo(f)(1);

(a)(1). A provider may then seek judicial review of the Board’s or the CMS

Administrator’s decision. 42 U.S.C. § 1395oo(f)(1);

(b).

B. Procedural History

St. Helena submitted its Medicare cost reports for fiscal years 2005 through 2008 to its

Medicare contractor. See November 26, 2018 PRRB Decision, ECF No. 1-1, at 2. During these

years, St. Helena contracted with physicians in the specialties of surgery, obstetrics, pediatrics,

and cardiology to provide on-call coverage for inpatient hospital services.

. On the cost

reports, St. Helena reported costs for compensating these physicians, which included providing

on-call services as part of furnishing inpatient care.

The Medicare contractor disallowed

these on-call costs on the grounds that they were not emergency costs and thus were not

allowable. See

St. Helena appealed to the Provider Reimbursement Review Board. See

After

conducting a hearing, the Board affirmed the Medicare contractor’s decision. See

. The

Board reasoned that, under

(b)(4), Medicare reimbursement “is only available

to [Critical Access Hospitals] for outpatient on-call services rendered in the emergency room

setting.”

(emphasis added). The Board determined that St. Helena’s “specialty on-call

services” were related to inpatient services and thus not eligible for reimbursement.

The Board then analyzed St. Helena’s claims that the costs must be reimbursed because

they were necessary to comply with California law or to stabilize a hospital inpatient. See

. The Board concluded that California law did not require specialty physicians to be on-call and

6 that St. Helena’s emergency room physicians, trained in emergency medicine, would be capable

of stabilizing a hospital inpatient.

The Board therefore affirmed the Medicare contractor’s

determination disallowing St. Helena’s claimed specialty physician on-call expenses.

The Secretary, through the CMS Administrator, declined to review the Board’s decision.

As a result, the Board’s decision became the final, reviewable decision of the Secretary, which

St. Helena challenges here.

II. Standard of Review

In this action proceeding under the Medicare statute, 42 U.S.C. § 1395oo(f)(1), judicial

review is governed by the standards of the Administrative Procedure Act (“APA”),

, and is decided on the administrative record. Southeast Ala. Med. Ctr. v. Sebelius,

, 916–17 (D.C. Cir. 2009). Under the APA, a court will “hold unlawful and set aside

agency action, findings, and conclusions” if they are “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law,”

(2)(A), or “in excess of

statutory jurisdiction, authority, or limitations, or short of statutory right,”

§ 706(2)(C). The

arbitrary and capricious standard is “‘narrow’ . . . as courts defer to the agency’s expertise.” Ctr.

for Food Safety v. Salazar,

(D.D.C. 2012) (quoting Motor Vehicle

Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. at 29, 43 (1983)). Under

this standard, the Court presumes the validity of agency action, see, e.g., Davis v. Latschar,

(D.C. Cir. 2000), and will not “substitute [its] judgment for that of the agency,”

Sioux Valley Rural Television v. F.C.C.,

(D.C. Cir. 2003).

When the issue is whether an agency properly interpreted its own regulation, the Court

gives substantial deference to the agency’s interpretation. Thomas Jefferson Univ.,

. The agency’s interpretation is given “controlling weight unless it is plainly erroneous or

inconsistent with the regulation.”

(quoting Bowles v. Seminole Rock & Sand Co.,

(1945)). In Medicare cases such as this one, the “tremendous complexity of the

Medicare statute . . . adds to the deference which is due to the Secretary’s decision.” Dist. Hosp.

Partners,

(quoting Methodist Hosp.,

).

III. Analysis

A. Deference to the Agency’s Decision

At the outset, the Parties disagree about whether the Provider Reimbursement Review

Board’s decision disallowing on-call costs for physicians providing inpatient hospital services is

entitled to deference. St. Helena insists that it is not because Congress authorized only the

Secretary, and not the Board, to determine which costs qualify as reasonable. Pl.’s Reply, ECF

No. 15, at 6. And, Plaintiff argues, because the determination to disallow inpatient on-call costs

was made “only by the [Board] in a decision the Secretary’s designee did not review,” it should

not receive deference. Id. at 6.

But the Medicare statute is not so narrow. It “instructs the reviewing court to apply the

provisions of the Administrative Procedure Act, which requires federal courts to be ‘highly

deferential’ in their review of agency action,” regardless of whether the agency action is a

decision by the Board or the Secretary. Emanuel Med. Ctr., Inc. v. Sebelius,

(D.D.C. 2014) (quoting Bloch v. Powell,

(D.C. Cir. 2003)). The fact

that the Board’s decision was not later altered or adopted by the CMS Administrator (or the

Secretary) does not alter the deference due.

B. General Reasonable Cost Provisions

Turning to the substance of St. Helena’s claims, it first argues that the Provider

Reimbursement Review Board’s decision to disallow on-call costs for physicians in an inpatient

setting was arbitrary and capricious. Those costs, St. Helena claims, are expressly allowable

under the Medicare Act and its implementing regulations. St. Helena begins by looking to

8 Medicare’s “reasonable cost” provisions. See 42 U.S.C. § 1395x(v)(1)(A); see also

(a), (b), and (c). St. Helena insists that on-call costs for physicians in an inpatient setting

are necessarily “reasonable cost[s]” that therefore must be reimbursed.

But the general provisions on which St. Helena relies do not expressly allow

reimbursement for the costs of an on-call physician in an inpatient setting. And they do not

“permit reimbursement of all reasonable costs across the board.” See St. Luke Community

Health Care v. Sebelius,

, at *7 (D. Mont. Apr. 14, 2010) (emphasis added).

Instead, reimbursable reasonable costs are “determined [by the Secretary] in accordance with

regulations establishing the method . . . and the items to be included, in determining such costs

for various types or classes of institutions, agencies, and services.” 42 U.S.C. § 1395x(v)(1)(A).

St. Helena cannot demonstrate that the plain text of these provisions compels the conclusion that

non-emergency room on-call costs are reasonable and therefore reimbursable. See Thomas

Jefferson Univ.,

.

St. Helena also argues that the costs must be allowable under

because

they are “necessary and proper.” See Pl.’s Mot. at 21–25. Necessary and proper costs are

defined by regulation as “costs that are appropriate and helpful in developing and maintaining

the operation of patient care facilities and activities.”

(b)(2). They are also

those costs that are “common and accepted occurrences” in the provider’s field.

St. Helena insists that the costs at issue here were necessary because: (1) California state

licensing and certification required the hospital to have these physician services on call; and (2)

specialty on-call physicians were needed to stabilize patients upon inpatient admission in

compliance with the Emergency Medical Treatment and Labor Act (“EMTALA”), 42 U.S.C.

§ 1395dd. See Pl.’s Mot. at 21–25. The Board examined these justifications, but ultimately

9 disagreed that they supported a finding that the claimed costs were “necessary and proper.” See

PRRB Decision at 7. With regard to the argument that California state licensing and certification

requirements necessitated the on-call costs at issue, the Board concluded, after a review of the

relevant California statutes, that those sections merely state the ideal physician qualifications.1

They did not dictate that St. Helena must have certain specialty physicians on-call to provide

inpatient services.

As for St. Helena’s argument that the on-call costs were necessary to stabilize inpatients

in compliance with the EMTALA, the Board noted that the EMTALA requires hospitals to

stabilize the medical condition of a patient before the patient can be transferred to another

facility, 42 U.S.C. § 1395dd(b)(1)(B), but does not require on-call specialty physicians to do so.

In fact, the statute requires only that a hospital use “the staff . . . available at the hospital” to

stabilize a patient. Id. § 1395dd(b)(1)(A). After reviewing St. Helena’s emergency room

staffing contracts, the Board reasoned that St. Helena’s emergency room physicians had “the

necessary skills to stabilize a patient and, if necessary, transfer the patient to another hospital.”

PRRB Decision, ECF No. 1-1, at 7. The on-call specialty physicians were, the Board concluded,

unnecessary to comply with the EMTALA. Id.

St. Helena has not demonstrated that the Board’s examination and ultimate dismissal of

these justifications was arbitrary and capricious. See

(2)(A). The Board

articulated a rational connection between the facts found and its ultimate decision. And it

appropriately considered the relevant facts in making that decision. See Marsh v. Or. Nat. Res.

1 The Board reviewed several provisions of California Title 22, including Sections 70225 (Surgical Services), 70415 (Emergency Medical Services), 70417 (Basic Emergency Medical Services Physician on Staff), 70495 (Intensive Care Service Staff), 70549 (Perinatal Unit Staff), and 70653 (Standby Emergency Medical Service, Physicians on Call). See PRRB Decision, ECF No. 1-1, at 7 n.29.

10 Council,

(1989). Nor can the hospital demonstrate that the Board’s

interpretation of “necessary and proper” costs to exclude on-call specialty physicians was plainly

erroneous. Thomas Jefferson Univ.,

. St. Helena has therefore failed to

demonstrate that the Medicare Act and its implementing regulations compel the conclusion that

on-call costs for specialty inpatient are reimbursable as reasonable costs.

C. The Board’s Reliance on

(b)(4)

St. Helena next argues that the Board’s decision was arbitrary and capricious because it

relied on

(b)(4). That regulation provides that “the reasonable costs of

outpatient [critical access hospital] services . . . may include amounts for reasonable

compensation . . . for an emergency room physician who is on call.”

(b)(4)(i).

It is the only Medicare regulation expressly permitting reimbursement for the cost for on-call

services.

The Board, relying on the fact that neither Congress nor the Secretary has expressly

permitted other on-call costs, interpreted § 413.70(b)(4) to mean that the only reimbursable on-

call costs are for physicians in an emergency room setting. See PRRB Decision at 6. St.

Helena’s claim for on-call costs for physicians assisting in inpatient settings was therefore

excluded from reimbursement. See id.

The Board’s interpretation of the agency’s own regulation is entitled to substantial

deference. See supra, Part IIIA. St. Helena must therefore demonstrate either that the Board’s

interpretation is inconsistent with the regulation or that an alternative interpretation is compelled

by the regulation’s plain language (or the intent behind its promulgation). See Thomas Jefferson

Univ.,

.

St. Helena has not done so here. The hospital claims that the regulation is inapposite

because the regulation does not “explicitly or implicitly, positively or negatively” affect

11 “Medicare reimbursement for [critical access hospitals] in an inpatient setting.” Pl.’s Mot. at 2.

But St. Helena cannot show that the plain language of the regulation compels its alternative

interpretation. Instead, the Secretary’s determination that the negative implications of

(b)(4) disallow reimbursement for on-call costs for physicians in an inpatient setting is

entirely consistent with the governing statute and regulations. It reflects a reasonable

determination to which deference is due.

The only court to previously address this issue agreed. It concluded, as this Court now

does, that the agency reasonably interpreted § 413.70(b)(4) to limit reimbursable on-call costs to

those costs that relate to emergency room care. In St. Luke Community Health Care v. Sebelius,

a hospital argued that

(b)(4) applied only to on-call costs for emergency room

physicians and was therefore inapplicable to the hospital’s request for the reimbursement of its

costs for the on-call services of nurse anesthetists.

, at *10 (D. Mot. Apr. 14,

2010), adopted by,

(D. Mont. May 5, 2010). The court disagreed and

deferred to the Secretary’s decision interpreting § 413.70(b)(4) to “identify emergency room

physician on-call costs as the only on-call costs that are reimbursable under Medicare.” Id.

Here too, St. Helena has failed to demonstrate that the Board’s interpretation was “plainly

erroneous or inconsistent” with

(b)(4). Thomas Jefferson Univ.,

. The Court therefore holds that the Board did not err when it relied on that regulation in

disallowing reimbursement for non-emergency room on-call costs.

D. Procedural Validity

Finally, St. Helena argues that because there is no statutory or regulatory prohibition

specifically excluding the reimbursement of costs for on-call physicians in an inpatient setting,

the Secretary cannot disallow those costs until such a regulation has been through the notice and

comment rulemaking process. See Pl.’s Mot. at 26–27. But St. Helena ignores that the

12 Secretary, in the absence of a binding rule promulgated through notice and comment procedures,

is entitled to determine what constitutes a reasonable cost through the adjudicatory process. See

SEC v. Chenery Corp.,

, 202–03 (1943) (holding that agencies can make policy

through rulemaking or adjudication). The Secretary is not required to address every conceivable

reasonable cost policy through notice-and-comment rulemaking. See Shalala v. Guernsey Mem’l

Hosp.,

(1995). And the Secretary is therefore certainly not required to address

every potential medical service to be excluded from reimbursement.

Even if the Secretary were required to address potential exclusions through the notice and

comment process, the Secretary’s position excluding on-call costs has already been articulated

through that process. In 1998, in response to a comment relating to a proposed rule, CMS stated

that “Medicare does not recognize costs of ‘on-call’ physicians as allowable costs of operating a

[critical access hospital].” 63 Fed. Reg. at 26353. This policy remains unaltered, except for the

narrow exception to allow for the reimbursement of on-call physicians in an emergency room

setting. See 42 U.S.C. § 1395m(g)(5);

(b)(4).

IV. Conclusion

For the foregoing reasons, the Court grants the Secretary’s Motion for Summary Judgment,

ECF No. 12, and denies St. Helena’s Motion for Summary Judgment, ECF No. 10. An Order will

be issued contemporaneously with this Memorandum Opinion.

DATE: March 31, 2021 CARL J. NICHOLS United States District Judge

13