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Lawrence & Memorial Hospital v. Burwell

United States District Court, D. Connecticut

May 2, 2016




Plaintiff Lawrence & Memorial Hospital ("LM") filed this suit against Defendants Sylvia Burwell, Secretary of the Department of Health and Human Services ("HHS"), Marilyn Tavenner, Administrator of the Centers for Medicare and Medicaid Services ("CMS"), and Robert G. Eaton, Chairman of the Medicare Geographic Classification Review Board ("MGCRB"), seeking a declaration that the regulatory scheme governing the MGCRB violates the Medicare Act and the Administrative Procedures Act, and a permanent injunction preventing Defendants from applying that scheme to Plaintiffs current and future reclassification applications. This Court granted [Doc. # 41] Defendants' motion for summary judgment on December 22, 2014, finding that Defendants' regulations did not violate the Medicare and Administrative Procedures Acts. Thereafter, Plaintiff appealed that decision to the Second Circuit which, by mandate dated February 25, 2016, reversed this Court's order and invalidated the regulation at issue, holding that it contravened the unambiguous language of the Medicare Act. The Second Circuit remanded the case to this Court "so that it may impose appropriate remedies consistent" with the Second Circuit's opinion. (Mandate [Doc. # 48] at 17.)

On March 11 and 14, 2016, respectively, Plaintiff filed an Emergency Motion for Preliminary Injunction [Doc. # 50] and a supplemental declaration [Doc. # 53] in support of that motion. Defendants, at the Court's request, filed a brief summary of their opposition [Doc. # 54] to Plaintiffs motion on March 15, 2016. Following a status conference held on the record on March 17, 2016, Defendants filed a full opposition [Doc. #61] to the motion and Plaintiff filed a reply [Doc. # 62]. For the following reasons, Plaintiffs motion is denied.

I. Background

A. The Wage Index and the Medicare Geographic Classification Review Board

As detailed in the Court's Ruling [Doc. # 25] on Plaintiffs Motion for Preliminary Injunction and Ruling on the Cross-Motions for Summary Judgment, Medicare payments to hospitals are made pursuant to the inpatient prospective payment system ("IPPS") for Medicare Part A and pursuant to the outpatient prospective payment system ("OPPS") for Medicare Part B. (Am. Compl. [Doc. # 28] ¶ 15.) Under both systems, CMS sets a standardized payment rate, which is then adjusted to account for the fact that labor costs vary across the country. (See Id. ¶¶ 16-17.) To effectuate this adjustment, CMS uses a "wage index, " which represents the relation between the local average of hospital wages and the national average of hospital wages. (See id.); see also 42.U.S.C. § 1395ww(d)(3)(E).

In 1983, in order to effectuate the wage index adjustment, the Secretary of HHS established standardized hospital labor markets by grouping hospitals according to their location in Metropolitan Statistical Areas ("MSAs"). (Am. Compl. ¶ 21.) After the 2000 census, the MSAs were replaced with Core Based Statistical Areas ("CBSAs") that are roughly equivalent to the previous groupings. (Id. ¶ 22.) Each hospital is reimbursed according to the wage index of the CBSA in which it is physically located. (Id. ¶ 23.) Since the late 1980s, Congress has periodically amended the Medicare Act to permit hospitals to be reclassified from urban to rural, or to be reclassified to a CBSA other than the one in which they are physically located in order to adjust those hospitals' wage indices to reflect the fact that the CBSAs do not always accurately reflect labor market wage differences. (See Id. ¶¶ 29-33.)

In 1989, Congress established the Medicare Geographic Classification Review Board ("MGCRB") to provide a mechanism by which a hospital could request to be relocated from the geographical area in which it was located to another proximate area for the purposes of determining its wage index and reimbursement rate. (Id. ¶ 28); see also 42 U.S.C. § 1395ww(d)(10). In order to have its application for reclassification approved by the MGCRB, a hospital must show that (1) its wages are higher than those of other hospitals in the area where it is physically located; (2) its wages are comparable to those of other hospitals in the area to which it seeks to be reclassified; and (3) it is proximate to the area to which it seeks to be reclassified. (Am. Compl. ¶ 37.) If a hospital has been designated as a rural referral center ("RRC"), the first and third elements of this test are waived. (Id. ¶ 44); see also 42 C.F.R. §§ 412.230(a)(3), 412.230(d)(1)(3)(C). If the MGCRB approves a hospital's application, its reclassification is valid for a period of three years. (Am. Compl. ¶ 43.)

B. 340B Drug Discount Program

Pursuant to the 340B Drug Discount Program, pharmaceutical manufacturers must, as a condition of Medicaid covering their products, enter into a Pharmaceutical Pricing Agreement with the Secretary of HHS, under which the manufacturers agree to offer 340B "covered entities" (including RRCs) "covered outpatient drugs" at a discounted price. (Id. ¶¶ 57-59); 42 U.S.C. § 256b. While disproportionate share hospitals must have a disproportionate share adjustment factor of greater than 11.75% to participate, RRCs may participate as long as they have a disproportionate share adjustment factor of greater 8%. (Am. Compl. ¶ 60.) Plaintiff represents that its disproportionate share factor "based on its most recently filed cost report is greater than 8 percent but less than 11.75 percent." (Mem. Supp. Emergency Mot. Prelim. Inj. [Doc. #51] at 6.)

C. Section 401

In 1999, Congress enacted Section 401, which provides a mechanism by which hospitals in urban areas may be reclassified as rural for reimbursement purposes. (Am. Compl. ¶ 46); 42 U.S.C. § 1395ww(D)(8)(E). Pursuant to Section 401, HHS adopted regulations providing that "[a]n urban hospital that has been granted redesignation as rural under § 412.103 cannot receive an additional reclassification by the MGCRB based on this acquired rural status for a year in which such redesignation is in effect." 42 C.F.R. § 412.230(a)(5)(iii). Further, a hospital must maintain its rural status for at least one full twelve-month cost reporting period after being reclassified pursuant to Section 401 before it can cancel that status and reapply for reclassification by the MGCRB. See 42 C.F.R. § 412.103(g)(2). Finally, once a hospital that has been redesignated as an RCC pursuant to Section 401 cancels its rural status, that hospital also loses its RRC designation under § 412.96. (See Am. Compl. ¶ 56.) It is these regulations that the Second Circuit found invalid.

D. Plaintiffs Reclassification Efforts

On July 2, 2013, Plaintiff requested, pursuant to Section 401, to be redesignated from urban to rural status, and to be designated as an RRC. (Id. ¶¶ 64-65.) Those requests were granted, and Plaintiff was treated as an RRC beginning October 1, 2013. (Id. ¶ 66.) Shortly after being reclassified as rural under Section 401, Plaintiff filed an application with the MGCRB to be reclassified to the (urban) Nassau-Suffolk, NY CBSA. (Id. ¶ 67.) On October 11, 2013, while Plaintiffs application was pending, Plaintiff filed this suit and sought a preliminary injunction enjoining Defendants from acting on its application for reclassification until the Court could hold a hearing on the merits of Plaintiffs claims, which the Court denied. (See Id. ¶ 68.) In order to avoid the denial of its reclassification application (pursuant to the Secretary's regulation), ...

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