Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-92-01065/USCOURTS-ca10-92-01065-0/pdf.json

Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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FILL.U 

United Staa CA,urt" Appea1t PUBLISH Tenth Cimilt 

OHITED STATES COURT OF APPEALS FEB 1 6 1993 

TENTH CIRCUIT 

COMMUNITY HOSPITAL, ) 

) 

Plaintiff-Appellee, ) 

) 

v. ) 

) 

LOUIS W. SULLIVAN, in his official) 

capacity as Secretary of the United) 

States Department of Health and ) 

Human Services, ) 

) 

Defendant-Appellant. ) 

ROBERT L HOECKER Clerk . 

No. 92-1065 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 91-F-1317) 

Steve Frank (Stuart M. Gerson, Assistant Attorney General, Michael 

J. Norton, United States Attorney, and Anthony J. Steinmeyer with 

him on the brief), Appellate Staff Civil Division, Department of 

Justice, Washington, D.C., attorney for Defendant-Appellant. 

Carel T. Hedlund (Venel D. Brown with her on the brief) of Ober, 

Kaler, Grimes & Shriver, attorney for Plaintiff-Appellee. 

Before KELLY AND BARRETT, circuit Judges, and OWEN*, District 

Judge. 

BARRE'rr, Circuit Judge. 

*The Honorable Richard Owen, Senior District Judge, for the 

Southern District of New York, sitting by designation. 

Appellate Case: 92-1065 Document: 010110170368 Date Filed: 02/16/1993 Page: 1 
The United States Government (Government), on behalf of Louis 

w. Sullivan, Secretary of Health and Human Services (Secretary), 

appeals a district court order reversing the Secretary's refusal 

to designate Community Hospital (Community) as a sole community 

hospital (SCH) under the Medicare reimbursement system and directing the Secretary to classify Community as such. 

Statutory and Regulatory Background 

This case arises under the Medicare Act , 42 U. S.C. §§ 1395 

(1992). Since Medicare's inception, two systems have been used to 

provide payment to participating hospitals. From 1965 to 1983, 

hospitals were reimbursed for the lesser of the "customary charge" 

or "reasonable cost" of the services provided to Medicare 

beneficiaries. 

In 1983, 

replacing the 

Congress reformed 

"reasonable cost" 

the reimbursement system, 

methodology with a prospective 

payment system whereby hospitals were paid fixed amounts based on 

patients' diagnoses. With this change, Conqress intended to 

"promot[e] efficiency in the provision of services by rewarding 

cost-effective hospital practices." H.R. Rep. No. 25, 98th Cong ., 

1st Sess. 132, reprinted in 1983 U.S . C. C. A. N. 219, 351 . Congress 

recognized that the new, more cost effective system could result 

in closure of less efficient hospitals. It also understood that 

the adverse impact on patients would be minimal , except in areas 

where the hospital in question was a SCH and the primary deliverer 

of hospital services. To circumvent this potential impact, 

Congress authorized the Secretary to make appropriate adjustments 

to account for the special needs of SCHs. Thereafter, the 

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Secretary promulgated regulations exempting SCHs 

reimbursement limitations. 

from cost 

From 1983 until Congress later amended the statute in 1989, 

Congress statutorily defined SCH as "a hospital that, by reason of 

factors such as isolated locat_ion, weather conditions, travel 

conditions, or absence of other hospitals (as determined by the 

Secretary), is the sole source of inpatient hospital services 

reasonably available to individuals in a geographic area II 

42 U.S.C. § 1395ww(d) (5) (C) (ii) (1983). 

By the time the instant action was brought, Congress had 

amended the statute to redefine SCH as 

any hospital (I) that the Secretary determines is 

located more than 35 road miles from another hospital, 

(II) that, by reason of factors such as the time 

required for an individual to travel to the nearest 

alternative source of appropriate inpatient care (in 

accordance with standards promulgated by the Secretary), 

location, weather conditions, travel conditions, or 

absence of other like hospitals (as determined by the 

Secretary), is the sole source of inpatient hospital 

services reasonably available to individuals in a 

geographic area who are entitled to benefits under part 

A of the subchapter, or (III) that is designated by the 

Secretary as an essential access community hospital under section 1395i-4(i) (1) of this title. 42 U.S.C. § 

1395ww(d) (5) (D) (iii) (1992). 

Further, the Secretary added -to the definition of SCH the 

proviso that the Health Care Financing Administration "will not 

evaluate comparability of specialty services in making 

determinations on classifications as sole community hospitals." 

42 C.F.R. § 412.92(c) (2) (1990). Additionally, hospitals which 

had previously been classified as SCHs under the prior 

reimbursement system would be grandfathered in as SCHs and would 

not have to meet the new requirements. 42 C.F.R. § 412.92(b) (5). 

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Finally, at this same time, "like hospital" was defined as a 

facility "furnishing short-tenn, acute care." 

Factual Background 

Conununity is an osteopathic facility furnishing short-tenn, 

acute care in Grand Junction, _Colorado. The nearest osteopathic 

hospital is located in Albuquerque, New Mexico, 500 miles from 

Community. St. Mary's Health Center (St. Mary's), an allopathic 

facility furnishing shor~-tenn, acute care, is located less than 

six blocks from Conununity. 

In 1985, under the statutory and regulatory scheme in effect 

at that time, a federal district court detennined that St. Mary's 

could be classified as a SCH because it was not located near a 

"like hospital. " St. Mary's Hosp. and Medical Ctr. v. Heckler, 

[1985 Transfer Binder] Medicare and Medicaid Guide (CCH) 134,660 

(D. Colo . Feb. 7, 1985) (St. Mary's) . The St. Mary's decision 

rested on two bases. First, Conununity was an osteopathic facility 

while St. Mary's was an allopathic hospital. Second, at the time 

of the decision, Conununity provided limited services; it did not 

have the intensive or cardiac care, therapeutic radiology, or 

emergency facilities which St. Mary~s had. The St. Mary's court 

indicated that "[a]ll of these factors must be considered in 

talking about like facilities." It further noted that "[t]he fact 

that both [St. Mary ' s and Community] are classified as general 

acute care short- tenn hospitals is just not sufficient in 

considering like facilities." 

In May 1990, Community applied for SCH status, relying on the 

St. Mary's decision and asserting that it was located more than 35 

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miles from any "like hospital." The Secretary denied the request, 

claiming that Community and St. Mary's were "like hospitals." 

The Provider Reimbursement Review Board granted Community's 

request for expedited judicial review, and Community subsequently 

appealed the denial of SCH status in the federal district court 

for the District of Colorado. There, Community alleged (1) that 

the definition of "like hospital" was invalid as applied to 

Community, (2) that it relied on the determination in St. Mary's 

which found the two facilities were not "like hospitals," and (3) 

that the Secretary was collaterally estopped from raising the 

"like hospital" issue, as it had been previously litigated in St. 

Mary's. 

Following the filing of an answer by the Government, the 

court,TM sponte, granted judgment on the pleadings to Community. 

Relying on the 1985 St. Mary's decision, the court reversed the 

Secretary's decision denying SCH status to Community and directed 

the Secretary to designate Community as such. 

Standard of Review 

In reviewing the Secretary's decision denying SCH status to 

Community, we are to "hold unlawful- and set aside agency action, 

findings and conclusions found to be -- (A) arbitrary, capricious, 

an abuse of discretion, or otherwise not in accorda nce with law." 

5 u.s.c. § 706(2) (A) (1988). ·Our review is based on the same 

administrative record which was before the district court, and the 

district court decision is afforded no particular deference. 

Franklin Savs. Ass'n v, Director. Office of Thrift Supervision, 

934 F . 2d 1121, 1142 (10th Cir. 1991), cert. denied, 112 s. ct. 

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1475 (1992). 

Cir. 1989). 

See also Webb v. Hodel , 878 F . 2d 1252, 1254 (10th 

I. Collateral Bstoppel 

Community asserts that the Government is collaterally 

estopped from arguing that ~ommunity and St . Mary's are "like 

hospitals," as that issue was litigated in St . Mary's. Community 

contends that nonmutual offensive collateral estoppel applies 

where, as here, Community seeks to foreclose the Government from 

raising an issue which the Government previously litigated 

unsuccessfully in an action with another party. 

The Government responds that nonmutual offensive collateral 

estoppel does not lie against it. See,~' United States v. 

Mendoza, 464 U. S. 154, 162 (1984). The Government also correctly 

asserts that collateral estoppel is inapplicable because both the 

facts and the law in this action are substantially different from 

those at issue in St. Mary' s. ~. ~. Commissioner of Internal 

Revenue v . Sunnen, 333 U. S . 591, 599 - 601 (194 8) (doctrine of 

collateral estoppel confined to instances where controlling facts 

and applicable legal principles remain unchanged). Due to the 

change in services provided by CGmmunity since 1985 and the 

revision of the applicable statutory and regulatory provisions, we 

hold that the Government is not precl uded from raising the "like 

hospital" issue. 

Community 

interpretation 

argues 

of the 

II. Deference 

that deference to the 

statute is inappropriate 

Secretary's 

in this case 

because the Secretary' s application yields a result contrary to 

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the intent of Congress. See Webb, 878 F.2d at 1255 (citing 

Espinoza v . Farah Mfg. Co •. 414 U.S . 86, 94 (1973) (regulations 

which are inconsistent with congressional intent are entitled to 

no deference)) . According to Community, Congress intended to 

ensure Medicare beneficiaries' access to efficiently run 

hospitals. Yet, the Secretary's decision subjects Community to 

market forces while it protects St . Mary's. Thus, two similarly 

situated hospitals receive disparate treatment which may 

ultimately force Community out of business, thereby decreasing 

access to health care. 

"Our review of agency action is deferential to the agency, 

and lacks the customary deference to the district court." Marczak 

v . Greene, 971 F.2d 510, 515-16 n . 9 (10th Cir. 1992). We must 

give "substantial weight to the interpretation made by the agency 

which is charged with the statute's administration[,] (citation 

omitted) [and] are obligated to regard as controlling a 

reasonable , consistently applied interpretation of the 

government . " Webb, 878 F.2d at 1255 . We will not disturb the 

Secretary' s interpretation if it reflects a permissible construction of the statute and does not otherwise conflict with Congress' 

expressed intent. Chevron U.S.A •• Inc. v. Natural Resources Defense Council. Inc . , 467 U.S. 837 , 842.-45 (1984). This court 

will not substitute its judgment for that of the agency, but will 

uphold the agency if there exists a rational basis for the 

agency's decision. Thomas Brooks Chartered v. Burnett. 920 F.2d 

634, 643 (10th Cir. 1990) . In light of Congress' explicit delega-

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tion of authority to the Secretary,

1 the Secretary's regulations 

are entitled to deference from the courts. 

III. Validity of Regulation 

Community asserts that, as applied to it, the regulation 

defining "like hospital" is invalid. Community contends (A) that 

the regulatory definition produces a result contrary to 

Congressional intent, and (B) that the findings of the St. Macy's 

court are detenninative in this case. 

A. 

While Community claims that the Secretary's interpretation of 

the Medicare statute yields a result contrary to Congressional 

intent, Community's analysis of economic disparity between it and 

St. Mary's is irrelevanc . Congress intended to ensure that the 

reimbursement cost limits would not adversely impact a hospital 

which was "the sole source of inpatient hospital services 

reasonably available to individuals in a geographic area." 42 

U. S . C. § 1395ss(d) (5) (D) (iii) (1992) (emphasis added). Congress 

was concerned "where there is only one hospital in a community" 

and where, if reimbursement limitations were utilized, "additional 

charges could be imposed on beneficiaries who have no real 

opportunity to use a less expensive , non-luxury institution. " 

H. R. Rep. No . 231, 92d Cong., 1st Sess. 84 (1972), reprinted in 

1972 U.S.C.C.A.N. 4989, 5070 . · There is no indication in the 

language of the statute that Congress intended that the government 

subsidize specialty hospitals located in the same rural community . 

1 See 42 u.s.c. § 1395ww(d) (5) (D) (iii), supra. 

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To the contrary, the SCH classification provides exemption from 

reimbursement limitations only to rural hospitals which are "the 

sole source" of services available. 

When, as here, the "statute is clear and unambiguous[,] that 

is the end of the matter, for the court, as well as the agency, 

must give effect to · the unambiguously expressed intent of 

Congress." K Mart Corp. v. Cartier, 486 U.S. 281, 291 (1988). In 

the instant case, because the statute plainly dictates what is 

considered an SCH, and because the regulation plainly defines 

11 like hospital," "the statutory [and regulatory] language is clear 

and there is no reason to review the legislative history to 

determine congressional intent." Public Hosp. Dist . No. 1 v. 

Sullivan, No. CS-92-0160-WFN, 1992 WL 315592, at *6 (E. D. Wash. 

July 23, 1992). 

Community references the grandfather provision in its 

discussion of Congressional intent. The grandfather provision 

provides that hospitals with SCH status prior to the new 

reimbursement system "will be automatically classified as a sole 

community hospital [under the new system] unless that 

classification has been canceled under paragraph (b) (3) of this 

section, or there has been a change in the circumstances under 

which the 

412.92 (b) (5). 

classification was approved." 42 C.F.R. § 

Subsection (b) ·(3), which addresses the duration of 

SCH status, provides that "[a]n approved classification as a sole 

community hospital will remain in effect without need for 

reapproval unless there is a change in the circumstances under 

which the classification was approved." 

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Community asserts that the Secretary's own regulation gives 

to revoke SCH status from a grandfathered 

has been a change in circumstances since the 

was granted. Community submits that the 

him the authority 

hospital if there 

time SCH status 

Secretary's failure to review the SCH status of St. Mary's is, in 

effect, a de facto detennination that nothing has changed since 

St. Mary's was classified as a SCH. Community argues that the 

Secretary cannot insist that circumstances have changed and 

thereby deny SCH classification to Community now, while at the 

same time allow St. Mary's to be grandfathered in because there 

has been no change in circumstances. 

The Government submits, and we agree, that the Secretary did 

not grant St. Mary's SCH status based on application of the 

challenged regulation. To the contrary, the Provider 

Reimbursement Review Board denied St. Mary's request, a decision 

which was later reversed by the St. Macy's court. Thus, there has 

not been a change of circumstances "under which the classification 

was approved," as the classification was never approved. We hold 

that the fact that Congress chose to grandfather in hospitals such 

as St. Mary's but requires new appli~ants for SCH status to abide 

by the current statute and regulations does not make the 

regulation defining "like hospitals" invalid as applied. 

B. 

The Government asserts that the district court relied on factual findings made in St. Macy's which were outside of the administrative record. The St. Macy's decision was the central 

component in Community's request for SCH designation, and the 

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decision is indisputably a part of the administrative record. 

However, we agree that the district court improperly relied upon 

the St . Macy's findings as determinative in this case. 

Particularly, those findings include (1) that Community was a 

limited hospital, and (2) that Community was an osteopathic 

facility. 

The 1985 decision reflects neither the services which 

Community now provides n~r the statutory and regulatory scheme now 

in effect. Due to expansion of existing services and development 

of new ones, Community is no longer considered a limited facili~y . 

Additionally, when St. Mary's was decided, neither the statute 

nor the regulations contained the term "like hospital" or its 

definition. Thus, under the law applied in 1985, the court 

determined that "[t]he fact that both [St. Mary's and Community] 

are classified as general acute care short-term hospitals is just 

not sufficient in considering like facilities." Inste ad , the St. 

Mary's court found the osteopathic/allopathic distinction 

sufficient. 

Today , 

conclusion. 

however, 

Given 

there is no basis for reaching the same 

the fundamental - changes to the pertinent 

statutory and regulatory provisions, the district court erred in 

relying on the St . Macy' s decision as determinative . Under the 

revised statutory and reguiatory scheme applicable here, it ll 

sufficient, for SCH designation purposes, that the hospitals at 

issue are located within 35 miles of each other and that both are 

classified as short-term, acute care facil ities. 

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Community continues to assert that, because of the 

distinction between osteopathic and allopathic facilities, 2 it 

remains fundamentally different from St. Mary's. Concerning the 

proviso that comparability of specialty services will not be 

evaluated, Community submits that osteopathy is not a "specialty 

service," but is rather an entire systematic approach to the 

treatment of diseases which affects all services 

provides. 

Community 

The Government notes that to the extent that the St. Mary ' s 

court relied upon the comparability of specialty services in 

reaching its decision, namely the osteopathic/allopathic 

distinction, similar analysis is not permissible under the 

present, revised regulatory scheme. We agree and hold that by 

similarly relying on this distinction in reaching its decision, 

the district court herein failed to apply the regulatory 

definition of "like hospital." Nothing in today's Medicare 

statute expresses Congress' intent that various medical 

philosophies be fostered through the SCH designation. Congress 

sought to exempt a rural facility located more than 35 miles from 

other like hospitals, regardless of medical orientation. Had the 

district court simply applied the regulatory definition of "like 

2 While allopathic medic~ne is practiced by doctors of 

medicine, osteopathic medicine is practiced by doctors of 

osteopathy. According to the American Osteopathic Association, 

"osteopathic medicine focuses special attention on the biological 

mechanisms by which the musculoskeletal system interacts 

with all body organs and systems[,] [which] provides osteopathic 

physicians and their patients an added dimension of health care . " 

Diagnosis and treatment are "through palpation and appropriately 

applied manipnlative procedures . . i n combination with all 

other accepted diagnostic and therapeutic modalities .... " 

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hospital," it would have concluded that, because both hospitals 

furnish "short-term, acute care" within six blocks of one another, 

regardless of the fact that Community does so within the 

osteopathic theory of medicine, the two facilities meet the 

current definition of "like hospitals." 

Conclusion 

Community concedes in its complaint that it furnishes shortterm, acute care and is located within 35 miles of St. Mary's, a 

facility which also provides short- term, acute care. Under the 

current statutory and regulatory scheme, Community cannot qualify 

for SCH status. The fact that St. Mary's attained SCH status 

under a different set of facts and pursuant to different statutory 

and regulatory provisions does not make the current rules invalid 

as applied. We conclude that the presence of another short- term, 

acute care facility within 35 miles is fill. that is required to 

make SCH status unavailable to Community . Accordingly, we REVERSE 

the decision of the district court and we REMAND the case with 

instruction to reinstate the Secretary's determination which 

denied SCH status to Community. 

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