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Memorial Rehabilitation Hospital of Santa Barbara v. Secretary of Health and Human Services

filed: August 30, 1995.

MEMORIAL REHABILITATION HOSPITAL OF SANTA BARBARA, PLAINTIFF-APPELLANT,
v.
SECRETARY OF HEALTH AND HUMAN SERVICES, DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Central District of California. D.C. No. CV-91-06394-RSWL. Ronald S.W. Lew, District Judge, Presiding.

Before: Donald P. Lay,*fn* Melvin Brunetti and Pamela Ann Rymer, Circuit Judges. Opinion by Judge Lay.

Author: Lay

LAY, Circuit Judge:

Memorial Rehabilitation Hospital of Santa Barbara ("Memorial") challenges the Conclusion of the Secretary of Health and Human Services ("the Secretary") that it does not qualify as a "new hospital," exempt from ceilings on hospital rates by regulations enacted under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), 42 U.S.C. § 1395. The district court granted summary judgment upholding the decision of the Secretary, and this appeal followed. We now affirm.

BACKGROUND

In 1978, Santa Barbara County ("the County") operated Santa Barbara General Hospital ("the County Hospital"), a 180-bed acute care hospital. During that year, the County stopped operating several of its inpatient services because of reduced revenues resulting from California's Proposition 13. In addition, the County agreed to lease property and equipment associated with the hospital's rehabilitation service to the Memorial Rehabilitation Foundation ("the Foundation"). The next year, the hospital's psychiatric services were relicensed and moved off campus, leaving the 45-bed rehabilitation service as the hospital's only remaining inpatient service. This situation remained unchanged until January 1, 1982, when the County transferred its operation of the rehabilitation services to the Foundation, which then founded the Memorial Rehabilitation Hospital.

To obtain a license under California law and meet Medicare's conditions of participation, Memorial was required to add or upgrade a number of structures and support services. These included improvements to the physical plant as well as the acquisition of administrative, recordkeeping, accounting, maintenance, security, and other services and programs. In all, Memorial had $870,000 in capital and other improvement costs during its first three years of operation to meet the various licensing requirements.

In terms of per patient operating costs, which do not include the capital and other outlays just discussed, the general rules of TEFRA provided that the fiscal year ending June 1983 would serve as Memorial's base year for Medicare reimbursement. Under the statute, a hospital's per patient operating costs are measured in the established base year and the reimbursements in subsequent years are limited to the base year's costs plus an adjustment factor. See 42 U.S.C. § 1395ww(a), (b). Memorial's operating costs from its base year produced a reimbursement per patient discharge of approximately $11,000 in 1984, while it alleges its actual costs for that year were approximately $13,450 per discharge.

Thus, on July 31, 1985, Memorial applied to Blue Cross of California, its fiscal intermediary, for an exemption from TEFRA's limits on increases in reimbursable hospital costs. Blue Cross determined that Memorial met the criteria for a "new hospital" under 42 C.F.R. § 405.463(f)(1), which provides as follows:

Exemptions - (1) New Hospitals. [The Secretary] will exempt new hospitals from the rate of increase ceiling imposed under this section. For the purposes of this section, a new hospital is a provider of inpatient hospital services that has operated as the type of provider for which it is certified for Medicare participation, under present and previous ownership, for less than 3 full years. This exemption expires at the end of the first cost reporting period beginning at least 2 years after the hospital accepts its first patient, or the first cost reporting period beginning on or after October 1, 1985, whichever comes first.

(Emphasis added).*fn1 Application of this provision would exempt Memorial from the normal ceilings on hospital rate increases for the year ending in June 1984, and establish as its base year the fiscal year ending in June 1985.

The Secretary rejected Blue Cross's recommendation, however, and denied Memorial "new hospital" status. Thereafter, the Provider Reimbursement Review Board upheld the Secretary's denial of Memorial's claim. It found that Memorial had operated as the type of provider for which it was certified for Medicare for more than three years, because the only material change in its status was the change in ownership (from the County to the Foundation) in 1982. The Board relied heavily on the fact that the County Hospital and Memorial were licensed exclusively for the same type of inpatient services from 1979 through 1985 and that they both were certified under Medicare for long-term care rehabilitation since 1981. On November 14, 1991, the Board's decision became the final decision of the Secretary when the Deputy Administrator of Health Care Financing Administration declined to review it.

Memorial brought an action for judicial review in the District Court for the Central District of California, seeking to overturn the agency's decision. Specifically, Memorial claims it is entitled to approximately $206,000 in additional Medicare reimbursement for the cost year ending June 30, 1984.*fn2 Memorial moved for summary judgment, which the Secretary opposed. The district court denied Memorial's motion, concluding the Secretary's action was not arbitrary and capricious, contrary to the law, unsupported by substantial evidence, or based on a misinterpretation ...


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