72 F. Supp. 3d 159
D.D.C.2014Background
- Fayetteville City Hospital, an inpatient psychiatric facility, challenged CMS’s method of calculating its Medicare reimbursement for cost years 2003–2004 after BBA (Balanced Budget Act) caps expired in 2002.
- TEFRA originally reimbursed psychiatric (PPS-exempt) hospitals based on a hospital-specific “target amount” (first year = base-period allowable costs; later years = prior year target amount increased by an update factor).
- The BBA (1997) capped target amounts for 1998–2002 at the 75th percentile of similar hospitals; CMS implemented this via 42 C.F.R. § 413.40(c)(4)(iii) (lower of hospital-specific amount or capped 75th percentile).
- Congress later required psychiatric hospitals to move to the prospective payment system (PPS) in 2002, but CMS did not implement PPS until 2005, leaving 2003–2004 reimbursement method unsettled.
- CMS calculated 2003–2004 payments by updating the 2002 target amount (which had been capped) under 42 U.S.C. § 1395ww(b)(3)(A)(ii) and 42 C.F.R. § 413.40(c)(4)(ii); Fayetteville argued CMS should have used the hospital-specific base-period amount (thereby negating the cap’s effect).
- The PRRB and the district court upheld CMS’s method; Fayetteville sought review under the APA alleging misinterpretation of statute/regulation and improper retroactivity of a 2005 regulatory clarification.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper statutory method for 2003–2004 target amounts | Fayetteville: CMS must base post-cap target amounts on the hospital-specific base-period allowable costs updated (so caps do not echo into later years). | Secretary: TEFRA §1395ww(b)(3)(A)(ii) mandates updating the prior year’s target amount; thus CMS permissibly updated the capped 2002 amount. | Court: Held for Secretary — statute unambiguously requires updating prior year target amount. |
| Interpretation of 42 C.F.R. §413.40(c)(4)(iii) after caps expired | Fayetteville: Subparagraph (A) (hospital-specific amount) survived expiration of subparagraph (B); CMS had to use (A) post-2002. | Secretary: Paragraph (c)(4)(iii) implemented the BBA caps and became superfluous after caps expired; CMS reasonably reverted to (c)(4)(ii). | Court: Held for Secretary — agency reasonably disregarded (c)(4)(iii) and applied (c)(4)(ii). |
| Whether CMS’s approach unlawfully extended expired BBA caps | Fayetteville: Using 2002 capped amount as baseline unlawfully extended the caps beyond 2002. | Secretary: CMS applied existing statutory framework; any ‘‘echo’’ effect was a natural consequence of statutory updating, not an unlawful extension. | Court: Held for Secretary — no unlawful extension; result follows statute and congressional intent to constrain growth pre-PPS. |
| Retroactivity of 2005 regulatory clarification | Fayetteville: 2005 preamble addition limiting (c)(4)(iii) to 1997–2002 was a substantive retroactive change requiring notice-and-comment. | Secretary: 2005 clarification merely explained that the previously cap-specific paragraph was inapplicable after 2002 and restored alignment with statute; not retroactive. | Court: Held for Secretary — 2005 change was a clarification, not impermissibly retroactive. |
Key Cases Cited
- Chevron U.S.A. Inc. v. Nat’l Res. Def. Council, 467 U.S. 837 (agency statutory-interpretation framework)
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (arbitrary-and-capricious review standard)
- Landgraf v. USI Film Prods., 511 U.S. 244 (retroactivity test for rules)
- Hardy Wilson Mem’l Hosp. v. Sebelius, 616 F.3d 449 (Fifth Circuit decision rejecting CMS approach; contrasted by district court)