UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
BORGESS MEDICAL CENTER, et al. )
)
Plaintiff, )
)
v. ) Civil Case No. 12-144 (RJL)
)
KATHLEEN SEBELIUS, Secretary )
Department ofHealth and Human Services )
)
Defendant. )
1?.--
MEMORANDUM OPINION
(September __!!J_., 2013) (Dkts. ##19, 21)
Plaintiffs Borgess Medical Center ("Borgess") and Bronson Methodist Hospital
("Bronson") ("plaintiffs" or "Hospitals," collectively) commenced this action against
Kathleen Sebelius, in her official capacity as Secretary of the United States Department
of Health and Human Services ("Secretary"), pursuant to 42 U.S.C. § 1395 et seq.,
seeking judicial review ofthe Secretary's denial of reimbursements for costs associated
with offsite resident training during fiscal years 2000 through 2004. See Compl. [Dkt.
#1]. Before the Court are the parties' cross-motions for summary judgment. Upon
consideration of the parties' pleadings, relevant law, and the entire record in this case, the
Court GRANTS defendant's Motion for Summary Judgment [Dkt. #21] and DENIES
plaintiffs' Motion for Summary Judgment [Dkt. #19].
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BACKGROUND
A. Statutory and Regulatory Background
The Medicare Act provides health insurance benefits to eligible elderly and
disabled persons. 42 U.S.C. § 1395 et seq. The Centers for Medicare and Medicaid
Services ("CMS") administers the program for the Secretary. 42 U.S.C. § 1395kk; 42
C.F.R. § 400.200 et seq. Medicare Part A serves as hospital insurance and covers the
cost of hospital care, related post-hospital care, home health services, and hospice care.
42 U.S.C. § 1395c et seq. The Secretary contracts with fiscal intermediaries to determine
and process payments to hospitals. 42 U.S.C. § 1395h. At the close of the fiscal year, a
participating hospital submits a cost report to its intermediary. 42 C.F.R. §§ 413.20,
413.24. After auditing the report, the intermediary issues a Notice of Program
Reimbursement ("NPR"). 42 C.F.R. § 405.1803. A hospital may challenge an NPR by
requesting a hearing before the Provider Reimbursement Review Board ("PRRB"). 42
U.S.C. § 1395oo(a). The PRRB's decision is subject to review by the CMS
Administrator. 42 U.S.C. § 1395oo(f)(l); 42 C.F.R. § 405.1875(a). The Administrator's
decision constitutes a final agency decision subject to judicial review. 42 U.S. C. §
1395oo(f)(1); 42 C.F.R. § 405.1877.
Under Part A of the Medicare program, hospitals that operate approved medical
residency programs are entitled to reimbursement for certain costs related to graduate
medical education. Medicare makes both a direct graduate medical education payment
("GME") and an indirect graduate medical education payment ("IME"). GME costs
include residents' salaries and fringe benefits, as well as compensation paid to teaching
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physicians and supervisors. 42 U.S.C. § 1395ww(h); 42 C.F.R. § 413.86(b)(3) (1998).
IME costs include higher-than-average operating costs incurred as an indirect result of
having a teaching program. 42 U.S.C. §§ 1395f(b), 1395ww(d); 42 C.F.R. § 412.105
(1998).
Congress amended the Medicare statute in 1986 and 1997 to include the time
residents spend training in nonhospital settings in GME and IME payment calculations.
See 42 U.S.C. §§ 1395ww(d)(5)(B)(iv), 1395ww(h)(4)(E). These statutory provisions
("Nonhospital Site Statutes") permit reimbursement so long as (1) the residents' time is
related to patient care, and (2) the hospital incurs all, or substantially all, of the costs for
the training program in the nonhospital setting. !d. The Nonhospital Site Statutes do not
define the second requirement, which is referred to herein as the "All or Substantially All
Requirement."
For the cost reporting years at issue in this case, the Secretary's regulations
defined the statutory All or Substantially All Requirement to include:
the residents' salaries and fringe benefits (including travel and lodging
where applicable) and the portion of the cost of teaching physicians'
salaries and fringe benefits attributable to direct graduate medical
education.
42 C.F.R. § 413.86(b)(3) (1998), AR at 0645. The Secretary also imposed an additional
regulatory requirement that, in order for a hospital to count resident training time at
nonhospital sites, the hospital must have a written agreement with the nonhospital site
indicat[ing] that the hospital will incur the cost of the resident's salary and
fringe benefits while the resident is training in the nonhospital site and the
hospital is providing reasonable compensation to the nonhospital site for
supervisory teaching activities. The agreement must indicate the
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compensation the hospital is providing to the nonhospital site for
supervisory teaching activities.
42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648. This regulation is referred to herein as
the "Written Agreement Requirement."
B. Factual and Procedural Background
Plaintiffs are non-profit acute care hospitals located in Kalamazoo, Michigan. The
Hospitals have agreements with the Michigan State University Kalamazoo Center for
Medical Studies ("KCMS") to rotate medical residents through KCMS' nonhospital
clinic facility ("Affiliation Agreements"). See AR at 931-42. The Hospitals' joint
resident training program dates back to 1973, when they entered into an agreement
establishing the predecessor of KCMS, the Southwestern Michigan Area Health
Education Center ("SWMAHEC"). AR at 796-800. The 1973 Agreement, which
remains in effect, provides that the Hospitals "shall provide the CORPORATION with
financing to carry out its purposes as negotiated on a yearly basis." See AR at 799,
811-15. In 1989, the Hospitals expanded the joint training program to include rotations
at KCMS clinics. The Affiliation Agreements state that the Hospitals "share[] joint and
equal responsibility for providing [KCMS] with sufficient financing to carry out [the
KCMS] programs as negotiated on a yearly basis." AR at 931, 933, 935, 937, 939, 941.
The Hospitals claim that their former fiscal intermediary, United Government
Services ("UGS"), allowed Medicare reimbursement for costs the Hospitals incurred for
resident rotations at KCMS clinics. See Compl. ~ 23. In 2008, however, the Hospitals'
current fiscal intermediary, National Government Services ("NGS"), began to issue NPRs
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and revised NPRs disallowing reimbursement for these costs. 1 !d. at~ 24. NOS claimed
that the Hospitals could not satisfy the statutory All or Substantially All Requirement
because they split the costs of the KCMS training program. !d. NOS also found that the
Hospitals failed to meet the Written Agreement Requirement. See AR at 47.
The Hospitals successfully challenged NOS' disallowances before the PRRB. See
Compl. at~ 31; AR at 38-52. The PRRB concluded that the Hospitals satisfied the All or
Substantially All Requirement because the two Hospitals jointly paid all of the costs of
the resident training program at KCMS. AR at 48-50. The PRRB also held that the
Hospitals satisfied the Written Agreement Requirement. AR at 46-48. The PRRB's
decision was reversed, however, by the CMS Administrator, acting under authority
delegated by the Secretary. AR at 2-19. The Administrator interpreted the All or
Substantially All Requirement to preclude multiple hospitals from sharing the costs of
nonhospital training ("Single Hospital Interpretation"). AR at 17. The Administrator
also concluded that the Hospitals failed to comply with the Written Agreement
Requirement. AR at 18. Plaintiffs now challenge that final agency decision.
STANDARD OF REVIEW
The Medicare Act provides for judicial review of the Administrator's final
decision under the Administrative Procedure Act ("APA"). 42 U.S.C. § 1395oo(f)(l).
Under the APA's strict standard of review, the Court must set aside agency actions,
'NOS issued revised NPRs for Borgess' fiscal years ended ("FYE") 6/30/01, 6/30/02, and
6/30/03, Compl. at~ 25, and for Bronson's FYE 12/31100, 12/31101, and 12/31102, id. at
~ 27. NOS also issued NPRs denying reimbursement for Bronson's FYE 12/31103 and
12/31104. !d. at~ 28.
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findings, and conclusions that are "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Under the arbitrary and
capricious standard, an agency action "may be invalidated ... if [it is] not rational and
based on consideration of the relevant factors." FCC v. Nat'! Citizens Comm. for Broad.,
436 U.S. 775, 803 (1978) (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S.
402, 413-16 (1971)). Factual conclusions are reviewed under the substantial evidence
standard and may be overturned where they are "unsupported by substantial evidence in a
case ... reviewed on the record of an agency hearing provided by statute." 5 U.S.C. §
706(2)(E); see also Overton Park, 401 U.S. at 414. The Supreme Court has "defined
'substantial evidence' as 'such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion."' Consolo v. Fed. Mar. Comm 'n, 383 U.S. 607,
619-20 (1966) (quoting Canso!. Edison Co. ofNew Yorkv. NLRB, 305 U.S. 197,229
(1938)). Substantial evidence "is something less than the weight of the evidence, and the
possibility of drawing two inconsistent conclusions from the evidence does not prevent
an administrative agency's finding from being supported by substantial evidence." !d. at
620. In applying the substantial evidence standard, the reviewing court may not
"displace ... [a] choice between two fairly conflicting views, even though the court
would justifiably have made a different choice had the matter been before it de novo."
Universal Camera Corp. v. NLRB, 340 U.S. 474,488 (1951).
The Supreme Court has established a two-step framework for reviewing an
agency's interpretation of a statute that the agency administers. See Chevron, US.A., Inc.
v. NRDC, 467 U.S. 837, 842-43 (1984). Under the first step, the Court must look at the
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statute to determine whether Congress has "directly spoken to the precise question at
issue." !d. at 842. If it has, "that is the end of the matter." !d. If, however, "the statute
is silent or ambiguous with respect to the specific issue," the court proceeds to Chevron
step two and must determine whether the agency's interpretation is "based on a
permissible construction of the statute." !d. at 843. Under this second step, the
Secretary's statutory interpretation will be given controlling weight so long as it falls
"within the bounds of reasonable interpretation." Your Home Visiting Nurse Servs., Inc.
v. Shalala, 525 U.S. 449, 453 (1999). The Secretary's reading "need not be the only
reasonable one" in order to be upheld. Conn. Dep 't ofIncome Maint. v. Heckler, 4 71
U.S. 524, 532 (1985). Where a Medicare statutory provision is subject to multiple
reasonable interpretations, courts defer to the Secretary's interpretation. See Gentiva
Healthcare Corp. v. Sebelius, 2013 WL 3800066, *3 (D.C. Cir. 2013).
When the agency action at issue is "the construction of an administrative
regulation rather than a statute ... deference is even more clearly in order." Udall v.
Tallman, 380 U.S. 1, 16 (1965). "[T]he agency's interpretation 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) (quotations and citations omitted).
In other words, a court "must defer to the Secretary's interpretation unless an alternative
reading is compelled by the regulation's plain language or by other indications of the
Secretary's intent at the time of the regulation's promulgation." !d. (quotations and
citations omitted). The more complex a regulatory program is, the greater the deference
owed. See id.; see also Methodist Hosp. ofSacramento v. Shalala, 38 F.3d 1225, 1229
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(D.C. Cir. 1994) ("[I]n framing the scope of review, the court takes special note of the
tremendous complexity of the Medicare statute. That complexity adds to the deference
which is due to the Secretary's decision.").
ANALYSIS
This case involves the issue of whether plaintiff Hospitals are entitled to
reimbursement under the Medicare Act for costs the Hospitals incurred in training
medical residents at KCMS during fiscal years 2000 through 2004. I agree with the
Secretary's decision denying plaintiffs reimbursement for two reasons. First, the
Nonhospital Site Statutes are reasonably read to require the Secretary to disallow
reimbursement where two or more hospitals split the costs of nonhospital training.
Second, the Hospitals' Affiliation Agreements with KCMS do not satisfy the Written
Agreement Requirement. Accordingly, the Secretary's decision denying reimbursement
was reasonable and not arbitrary, capricious, or in violation of the law, and the Court will
grant the Secretary's Motion for Summary Judgment.
Congress did not speak directly to whether the All or Substantially All
Requirement is satisfied where there is cost-splitting between two or more hospitals.
Plaintiffs, of course, interpret the Nonhospital Site Statutes to permit reimbursement
where cost-splitting occurs. By contrast, the Secretary has concluded that the Single
Hospital Interpretation is necessary to comply with the statutory requirements. Indeed, in
2007, the Secretary clarified the Single Hospital Interpretation in the Federal Register via
notice and comment procedures:
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... under current policy, if two (or more) hospitals train residents in the
same accredited program, and the residents rotate to the same nonhospital
site(s), the hospitals cannot share the costs of that program at that
nonhospital site ... as we do not believe this is consistent with the statutory
requirement ... that the hospital incur "all, or substantially all, of the costs
for the training program in that setting."
72 Fed. Reg. 26870, 26969 (May 11, 2007) (emphasis in original). This clarification,
however, did not constitute a substantive change in payment policy. Prior to any of the
cost reporting years at issue in this case, the Secretary announced that
Under sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) ofthe Act, a hospital
may include the time a resident spends in nonprovider settings in its
indirect medical education (IME) and direct GME full-time equivalent
count if it incurs "all or substantially all" of the costs oftraining residents in
the nonhospital site.
63 Fed. Reg. 40954,40986 (July 31, 1998) (emphasis added). And, in 2003, the
Secretary stated in the Federal Register that a hospital could not qualify for
reimbursement of its offsite medical education costs if it funds only a portion of
the offsite training program. See 68 Fed. Reg. 45346, 45439 (Aug. 1, 2003).
I defer to the Secretary's Single Hospital Interpretation because it is reasonable
and consistent with the plain language of the All or Substantially All Requirement.
Congress used the singular terms "hospital" and "program," rather than plural terms
"hospitals" and "programs." Not surprisingly, Congress later used alternative language
in the Patient Protection and Affordable Care Act ("PPACA"), which revised the
Nonhospital Site Statutes to allow hospitals to share nonhospital training costs effective
July 1,2010:
If more than one hospital incurs these costs, either directly or through a
third party, such hospitals shall count a proportional share of the time, as
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determined by written agreement between the hospitals, that a resident
spends training in that setting.
See 42 U.S.C. §§ 1395ww(h)(4)(E) and 1395ww(d)(5)(B) (both as amended
effective July 1, 201 0). Unfortunately for the plaintiffs, the statutes and
regulations in place during the cost reporting years at issue did not permit a
hospital seeking reimbursement to incur anything less than all, or substantially all,
of the costs of the training in the nonhospital setting. It is of no moment that UGS
failed to disallow reimbursement to the Hospitals for costs incurred in connection
with the joint training program at KCMS. See Thomas Jefferson Univ., 512 U.S.
at 517.
I also defer to the Secretary's reasonable interpretation of the Written Agreement
Requirement, which was promulgated to enable the Secretary to quickly and easily verify
compliance with the All or Substantially All Requirement. See Covenant Med. Ctr., Inc.
v. Sebelius, 424 Fed. App'x. 434, 438 (6th Cir. 2011) ("The Secretary reasonably
determined that the written agreement requirement would improve administrability, and
thereby ... avoid [ ] the wasteful litigation and continuing uncertainty that would
inevitably accompany a purely case-by-case approach for determining whether a hospital
incurs all, or substantially all, of the costs for [a particular] training program.")
(quotations and citations omitted). Specifically, the Secretary requires the written
agreement between the hospital and nonhospital to:
indicate that the hospital will incur the cost of the resident's salary and
fringe benefits while the resident is training in the nonhospital site and the
hospital is providing reasonable compensation to the nonhospital site for
supervisory teaching activities. The agreement must indicate the
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compensation the hospital is providing to the nonhospital site for
supervisory teaching activities.
42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648.
Plaintiffs' documentation here does not comply with this requirement, which
applied to all hospitals seeking Medicare reimbursement during the cost reporting years
at issue in this case. The 1973 Agreement does not satisfy the Written Agreement
Requirement because it was not executed, as required, between a hospital and
nonhospital. See AR at 796-800. The Affiliation Agreements do not satisfy the Written
Agreement Requirement because their use of the phrase "sufficient financing" is
ambiguous. See AR at 931, 933, 935, 937, 939, 941. Put simply, the plain language of
the Affiliation Agreements does not obligate the Hospitals to pay for all, or substantially
all, of the costs of the KCMS training programs. The Affiliation Agreements also fail to
sufficiently detail the compensation scheme for supervisory teaching activities and the
amounts the Hospitals will actually pay for these activities. See Kingston Hasp. v.
Sebelius, 828 F. Supp. 2d 473, 478 (N.D.N.Y. 2011). Finally, the KCMS Bylaws do not
meet the Written Agreement Requirement for at least three reasons. First, they are not an
agreement between a hospital and a nonhospital site. Second, they do not on their face
commit the Hospitals to incur all, or substantially all, of the costs of the training program.
Third, KCMS receives funding from private patients and grants, and the Hospitals cannot
cite to any document confirming that KCMS did not use such funding to pay supervisory
physician costs, resident salaries, or other nonhospital training costs. See AR at 314, 316,
340, 974, 991, 1000, 2644. In short, the documents plaintiffs proffer woefully fail to
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meet the standards of the Written Agreement Requirement that the Secretary reasonably
interpreted to ensure compliance with the All or Substantially All Requirement.
CONCLUSION
Thus, for all of the foregoing reasons, the Court GRANTS defendant's Motion for
Summary Judgment and DENIES plaintiffs' Motion for Summary Judgment. An Order
consistent with this decision accompanies this Memorandum Opinion.
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