Appeal from the United States District Court for the Eastern District of Washington Fred L. Van Sickle, District Judge, Presiding, D.C. No. 2:03-cv-03096-FVS.
Argued and Submitted April 6, 2010 -- Seattle, Washington
Before: Michael Daly Hawkins, Carlos F. Lucero,*fn2 and N. Randy Smith, Circuit Judges.
Secretary of the Department of Health and Human Services Kathleen Sebelius ("the Secretary") appeals the adverse summary judgment grant in an action brought by five not-for-profit hospitals ("Hospitals"), each recipients of Medicare direct graduate medical education ("DGME") payments for approved family medicine residency programs. The district court found the Secretary's methodology for calculating the Hospitals' base-year per resident amounts ("PRAs") under the existing regulation 42 C.F.R. § 413.86(e)(4)(I) (1989) ("1989 regulation"), known as Sequential Geographic Methodology ("SGM"), arbitrary and capricious. On appeal, the Secretary argues the agency's Provider Review Reimbursement Board ("PRRB") improperly granted expedited judicial review ("EJR") to the Hospitals' challenge to SGM. The Hospitals cross appeal, challenging, among other determinations, the district court's failure to find the 1989 regulation both substantively and procedurally invalid on its face.
Finding a lack of subject matter jurisdiction based on the PRRB's incorrect granting of EJR, we vacate the district court's invalidation of SGM, and remand to the district court with instructions to dismiss the Hospitals' challenge and further remand to the agency for it to determine the validity of the methodology. We affirm the district court's determination as to the validity of the 1989 regulation.
The Hospitals operate residency training programs in rural family medicine, and include Yakima Medical Center and Yakima Valley Memorial Hospital ("Yakima Medical"), located in Yakima Valley, Washington, St. Vincent Hospital and Deaconess-Billings Clinic Health System ("St. Vincent"), located in Billings, Montana, and Merle West Medical Center ("Merle West"), located in Klamath Falls, Oregon. The five Hospitals were recipients of Medicare DGME payments, which are based on a hospital-specific PRA and calculated according to several formulas. These formulas included the 1989 regulation and SGM.
The 1989 regulation based the PRA for the new graduate medical education programs on "the lower of the following:
(A) The hospital's actual costs . . . (B) The mean value of per resident amounts of hospitals located in the same geographic wage area."*fn3 54 Fed. Reg. 40286, 40317 (Sept. 29, 1989). In areas with "fewer than three amounts in the wage area, . . . the intermediary [was required to] write HCFA [Health Care Financing Administration]*fn4 Central Office for a determination of the per resident amount to use." 54 Fed. Reg. at 40291.
HCFA described SGM in a June 1997 letter to the reimbursement manager of Blue Cross of Montana. The methodology was used in the mid-1990s by HCFA to calculate the PRAs for hospitals with "fewer than three amounts in the wage area." See 54 Fed. Reg. at 40291. In its letter, HCFA noted:
If there are at least three hospitals in the same geographic wage area, we determine the base year per resident amount based on a weighted average of the per resident amounts in the same geographic wage area. If there are less than three teaching hospitals in the same geographic wage area, we include all hospitals in contiguous wage areas. If we continue to have fewer than three hospitals for this calculation, we use a statewide average. In the case of St. Vincent's and Deaconess, there are fewer than three hospitals with teaching programs in the entire state so we calculated a weighted average among all hospitals with teaching programs in contiguous states.
However, in its final rule, issued in 1997, the Secretary ultimately declined to adopt SGM as its methodology, relying instead on the "regional weighted average per resident amounts determined for each of the nine census regions established by the Bureau of Census for statistical and reporting purposes" for areas with fewer than three hospitals in a given geographic wage area. 62 Fed. Reg. 45966, 46004 (Aug. 29, 1997).
Here, the Secretary calculated the Hospitals' PRAs via SGM, based on the weighted average of PRAs of teaching hospitals in each state (for Merle West, Yakima Medical, the PRAs of Oregon and Washington, respectively), or the weighted average of PRAs of teaching hospitals in contiguous states (St. Vincent). The Hospitals appealed these PRA ...