Canonsburg General Hospital v. Sebelius
989 F. Supp. 2d 8
D.D.C.2013Background
- Canonsburg General Hospital operated a hospital-based skilled nursing facility (SNF) that submitted Medicare cost reports seeking atypical-services exceptions to Reasonable Cost Limits (RCLs).
- CMS promulgated PRM § 2534.5, measuring hospital-based SNF exception eligibility against 112% of the peer-group mean rather than the (reduced) hospital-based RCL, which prevented reimbursement for costs above the RCL but below the 112% threshold.
- Canonsburg previously litigated the same challenge to PRM § 2534.5 in the Western District of Pennsylvania (Canonsburg I) and lost on cross-motions for summary judgment; it did not appeal that decision.
- After administrative proceedings on Canonsburg’s FY1996 cost report, the PRRB sided with Canonsburg but the CMS Acting Deputy Administrator reversed; Canonsburg then sued under 42 U.S.C. § 1395oo(f).
- The Secretary moved for summary judgment arguing issue preclusion based on Canonsburg I; Canonsburg argued fairness exceptions (changed law, waiver, Chenery, policy) to avoid preclusion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of PRM § 2534.5 under the APA (arbitrary & capricious) | PRM § 2534.5 illegally limits atypical-service exceptions by measuring from 112% peer mean, excluding recoverable reasonable costs | CMS contends the regulation is a permissible interpretation of Medicare statutes and regulations | Not reached on the merits: court barred consideration by issue preclusion |
| Procedural validity (notice-and-comment) | PRM § 2534.5 is a substantive change requiring APA notice-and-comment (relying on Paralyzed Veterans line) | CMS maintains PRM § 2534.5 is interpretive and exempt from notice-and-comment | Not reached on the merits due to issue preclusion |
| Preclusive effect of Canonsburg I (issue preclusion) | Preclusion would be unfair because intervening legal developments and mixed authority changed landscape | Canonsburg I involved same parties, same issue; plaintiff had full and fair opportunity to litigate | Issue preclusion applies; plaintiff estopped from relitigating the regulation |
| Waiver / agency failure to raise preclusion administratively & Chenery barrier | CMS waived preclusion by not invoking it in agency proceedings; Chenery forbids judicial reliance on grounds not considered by agency | Defense: preclusion is a judicial doctrine; CMS timely raised it in court; Chenery inapplicable because preclusion is not an agency-only determination | Court rejects waiver/Chenery arguments and deems invocation timely and proper |
Key Cases Cited
- Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (Supreme Court) (Secretary has discretion to define "reasonable cost")
- St. Francis Health Care Ctr. v. Shalala, 205 F.3d 937 (6th Cir.) (upholding PRM § 2534.5 as reasonable interpretation)
- Paralyzed Veterans of Am. v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997) (agency course-change doctrine requiring notice-and-comment when substantive)
- Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (Supreme Court) (finality of judgments; preclusion principles)
- Yamaha Corp. of Am. v. United States, 961 F.2d 245 (D.C. Cir.) (test for unfairness in applying issue preclusion)
- City of Arlington v. FCC, 133 S. Ct. 1863 (Supreme Court) (judicial deference and finality; agency error does not defeat res judicata)
- St. Luke’s Methodist Hosp. v. Thompson, 315 F.3d 984 (8th Cir.) (finding PRM § 2534.5 arbitrary and capricious)
- SEC v. Chenery Corp., 332 U.S. 194 (Supreme Court) (courts must judge agency action by the grounds the agency invoked)
- Poulin v. Bowen, 817 F.2d 865 (D.C. Cir. 1987) (waiver of administrative res judicata when not asserted administratively)