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                              Blue Valley Hospital, DAB CR6169 (2022)
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Blue Valley Hospital, DAB CR6169 (2022)








  
  
    

  
      
Department of Health and Human Services 
    DEPARTMENTAL APPEALS BOARD
          Civil Remedies Division





Blue Valley Hospital
(CCN: 17-0201),
Petitioner,

v.

Centers for Medicare & Medicaid
Services,
Respondent.
Docket No. C-18-783Decision No. CR6169September 30, 2022

        
              
    

      DECISION

Petitioner, Blue Valley Hospital (Blue Valley), appeals termination of its status as a provider in the Medicare program by Respondent, the Centers for Medicare & Medicaid Services (CMS).  As explained herein, I affirm CMS’s termination action based on its determination that Petitioner was not “primarily engaged” in the provision of inpatient services as required by the Social Security Act (the Act).

I.     Background

At times material here, Blue Valley was a Medicare-certified acute care hospital in Overland Park, Kansas.  Hearing Transcript (Tr.) at 24; P. Ex. 10 at ¶¶ 10-11.  It provided surgical services including bariatric or weight loss surgery and minimally invasive spine surgery.  CMS Ex. 7 at 2 (¶ 6); *see also*P. Ex. 9 at 10.

In October 2017, the American Osteopathic Association (AOA), a CMS-approved accrediting organization, completed a re-accreditation survey of Blue Valley and recommended that CMS continue to deem Blue Valley a hospital.  CMS Ex. 7 at 2 (¶ 4); P. Ex. 5 at 1.  CMS subsequently instructed the Kansas Department of Health and Environment (KDHE or state agency) to complete a full validation survey within 60

**Page 2**

calendar days of the AOA survey.  CMS Ex. 2 at 15-16.

KDHE attempted to perform a full survey beginning November 13, 2017 but could not do so because Blue Valley did not have the two admitted inpatients necessary to allow a full survey with observation of patient care (or indeed, any inpatients at all).  CMS Ex. 7 at 2 (¶ 5); CMS Ex. 1 at 1.  KDHE instead reviewed admissions data showing Blue Valley’s average daily census of inpatients and the average length of stay for each of its inpatients.  CMS Ex. 1at 3; CMS Ex. 7 at 2-3 (¶¶ 7, 12).

On February 2, 2018, CMS notified Blue Valley that KDHE’s surveyors found it was not in compliance with****conditions of participation****for hospitals.  CMS Ex. 2 at 12-14.  The surveyors issued a Form CMS-2567 Statement of Deficiencies indicating Blue Valley was out of compliance with 42 C.F.R. § 482.11 (Compliance with Laws) because it did not meet the statutory definition of a “hospital” as defined at section 1861(e)(1) of the Act (42 U.S.C. § 1395x(e)(1)) that required it to be “primarily engaged” in providing inpatient services.  CMS Ex. 1 at 1-2.  CMS advised Blue Valley its Medicare provider agreement would be terminated May 3, 2018 if it did not correct the deficiencies cited in the SOD.  CMS Ex. 2 at 13.

Blue Valley submitted a plan of correction on February 12, 2018 to address the alleged deficiencies and provide estimated dates of completion.  P. Exs. 1-3; *see also*Tr. at 70.  On March 27, 2018, CMS notified Blue Valley of its decision to reject the plan of correction and terminate Blue Valley’s provider agreement pursuant to 42 C.F.R. § 489.53(a)(1) on April 11, 2018.**** CMS Ex. 2 at 9-11.  CMS described Blue Valley’s plan of correction as “aspirational” and stated Blue Valley had not alleged a date certain by which it would be in compliance with the conditions of participation.  *Id.* at 9.

Blue Valley timely filed a request for hearing before an Administrative Law Judge in the Civil Remedies Division on April 12, 2018 and I was designated to hear and decide this case.  I issued an Acknowledgment and Pre-hearing Order (Pre-hearing Order) that set deadlines for the parties to file pre-hearing exchanges, including briefs, proposed exhibits, and the direct testimony of any proposed witnesses.  Pre-hearing Order at 3-6.  CMS and Blue Valley timely filed pre-hearing exchanges including pre-hearing briefs (CMS Br. and P. Br.).

On the same day it filed its hearing request in the Civil Remedies Division, Blue Valley sought a temporary restraining order and injunction in the U.S. District Court for the District of Kansas.  *See* P. Ex. 10 at 6 (¶ 20).  Blue Valley asked the District Court to enjoin CMS from terminating Blue Valley’s provider agreement during the pendency of this administrative appeal.  P. Ex. 9.  CMS revised Blue Valley’s termination date to take effect May 3, 2018, as the agency had initially warned.  CMS Ex. 2 at 8.

CMS also acceded to Blue Valley’s request for a revisit survey to provide the facility

**Page 3**

another opportunity to demonstrate it was in compliance.  As a result of that revisit survey, which concluded on April 25, 2018, KDHE cited Blue Valley for numerous deficiencies and, relevant here, found Blue Valley was still not “primarily engaged” in providing services to inpatients.  CMS Ex. 2 at 7; CMS Ex. 1 at 15-51.  CMS subsequently terminated Blue Valley’s provider agreement effective July 8, 2018.  CMS Ex. 2 at 2; *but see*CMS Br. at 9 (indicating termination took effect June 15, 2018).

II.     Hearing and Admission of Exhibits.

CMS provided the written direct testimony of one witness, Joyce E. Danner, R.N., M.S.N., CMS Ex. 7, who Petitioner sought to cross-examine.  Petitioner provided the written direct testimony of its Chief Executive Officer, Todd Wells, P. Ex. 17, for whom CMS requested cross-examination.  On July 12, 2018, I held a videoconference hearing to allow each party to cross-examine the opposing party’s witness.1

As part of its pre-hearing exchange, CMS offered CMS Exhibits 1 through 7 into evidence.  Petitioner objected to CMS Exhibits 1 and 3 on grounds of hearsay.  I overruled Petitioner’s objection but explained I would consider arguments by Petitioner as to the weight I should give that evidence.  Tr. at 8.  Petitioner also objected to pages 1 through 4 of CMS Exhibit 2 as irrelevant.  Upon CMS’s stipulation, I sustained Petitioner’s objection and have not considered these pages in my decision.  Tr. at 8.  Meanwhile, CMS raised no objection to Petitioner’s 10 proposed exhibits.  I therefore entered into evidence CMS Exhibits 1 through 7 and Petitioner Exhibits 1 through 9 and Petitioner’s Amended Exhibit 10.2  *Id.* at 10.

Following the hearing, the parties filed post-hearing briefs (CMS Closing Br. and P. Closing Br.).  Petitioner also filed a supplemental brief (P. Supp. Br.) and a proposed statement of facts, while CMS filed a response to Petitioner’s supplemental brief (CMS Supp. Resp.).

**Page 4**

III.     Issue

Whether CMS had a valid basis to terminate Blue Valley’s provider agreement under 42 C.F.R. § 489.53(a)(1).

IV.     Jurisdiction

I have jurisdiction to hear and decide this case.  42 U.S.C. § 1395cc(h)(1); 42 C.F.R. §§ 498.5(b), 498.3(b)(8).

V.       Statutory and Regulatory Background

To be approved to participate in the Medicare program as a hospital, a facility provider must meet the statutory definition of a hospital as well as the applicable Conditions of Participation set forth in the Secretary’s regulations promulgated in 42 C.F.R. Part 482.  Act § 1866(b)(2)(B); 42 C.F.R. §§ 482.1(a)(1), 488.3(a), 489.12(a)(4); *see also*42 C.F.R. §§ 400.202 (definition of “provider”), 488.1 (definition of “provider of services”), 489.10(a) (requirement to meet applicable conditions of participation), 409.3 (definition of “qualified hospital”).

CMS may terminate a provider’s agreement to participate in the Medicare program where the provider is not in substantial compliance with the provisions of title XVIII of the Act or the applicable regulations or if the hospital no longer****substantially meets the appropriate Conditions of Participation or requirements.  Act § 1866(b)(2)(A); 42 C.F.R. §§ 489.53(a)(1), (3).  CMS may also terminate a provider’s agreement to participate in the Medicare program if CMS determines that the provider “fails substantially to meet the applicable provisions of section 1861.”  Act § 1866(b)(2)(B).

VII.    Discussion

****Applicable Law****The Act defines a “hospital” as an institution which –

is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services for the rehabilitation of injured, disabled, or sick persons; . . . .

Act § 1861(e)(1).  This statutory definition has remained unchanged since Congress enacted the original Act in 1965.  The term “primarily engaged” has not been further defined by statute or regulation.  CMS reported to Congress in 2006 that it considered

**Page 5**

defining the term “primarily engaged” by regulation but ultimately chose to continue interpreting the term on a case-by-case basis.  U.S. Dep’t of Health and Human Servs., Final Report to the Congress and Strategic and Implementing Plan Required under Section 5006 of the Deficit Reduction Act of 2005 at 18-19 (2006), *available at*https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/specialty_hospital_issues (last modified Dec. 1, 2021) (Final Report).

The term “inpatient,” however, has been defined in the Secretary’s regulations to mean an individual who has been formally admitted “pursuant to an order for inpatient admission by a physician or other qualified practitioner” where the admitting practitioner “expects the patient to require hospital care that crosses two midnights.”  42 C.F.R. § 412.3(a), (d)(1).

Finally, under the Conditions of Participation set forth at 42 C.F.R. § 482.11, to be considered a hospital a provider must (a) comply with applicable Federal laws related to the health and safety of patients; (b) be licensed or approved as meeting standards for licensing established by the responsible agency of the State or locality; and (c) assure that personnel are licensed or meet other applicable standards that are required by State or local laws.

**The record before me supports CMS’s determination that Blue Valley was not “primarily engaged” in providing services to inpatients and therefore did not meet the statutory definition of a “hospital.”**Blue Valley challenges CMS’s termination action as improper because CMS relied on statistical benchmarks not found in law or regulation to assess whether Blue Valley was “primarily engaged” in providing inpatient services to meet the definition of a “hospital:”  (1) a two-night average length of stay of inpatients (“ALOS”) and (2) an average daily census (“ADC”) of the number of admitted inpatients.3  *See, e.g.*, P. Closing Br. at 5.  Blue Valley contends CMS promulgated a new policy in a memorandum entitled “S&C Memo 17-44-All Hospitals” (“S&C Memo”) establishing a presumption that, absent successfully meeting the ALOS or ADC benchmarks, a facility was “most likely not primarily engaged [in provision of inpatient services].”  *Id.*at 6.  Blue Valley argues the presumptive benchmarks set forth in CMS’s policy memorandum are “invalid and unenforceable” under the Act because they were not published through the statutorily mandated notice-and-comment process.  *Id.*at 5.

**Page 6**

Specifically, the Act requires the Secretary to promulgate by regulation any “rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits under [Medicare].”  42 U.S.C. § 1395hh(a)(2).  Blue Valley claims CMS’s S&C Memo constitutes a “rule, requirement, or other statement of policy” that “establishes” or “changes” a “substantive legal standard” because it seeks to impose a “new statistical approach” to determine whether a hospital is “primarily engaged” in providing services to inpatients and thus eligible to participate in Medicare.  P. Closing Br. at 12-14.  Blue Valley contends these benchmarks “conflict with and deviate from” the regulatory “expectation” standard for determining an inpatient, which relies on the medical judgment and intent of the physician at the time of admission, not the actual length of inpatient stay.  *Id.* at 12-17.

Blue Valley emphasizes the governing regulations and guidelines in effect prior to the S&C Memo did not require a patient’s hospital stay to exceed two midnights for a procedure to be considered inpatient but instead merely require *an expectation*by the admitting physician that the patient will require hospital care for at least two midnights.  P. Closing Br. at 13-14; 42 C.F.R. § 412.3(d); Medicare Benefits Policy Manual (MBPM), CMS Pub. 100-02, chap. 1, § 10 at 6 (rev. 234, eff. Jan. 1, 2016), *available at*https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c01.pdf (Rev. 10892, Aug. 6, 2021) (“a patient is considered an inpatient if formally admitted as inpatient with the expectation that he or she will require hospital care that is expected to span at least two midnights and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a hospital bed overnight.”).

Blue Valley argues CMS’s reliance on statistical benchmarks based on actual length of stay is improper because it “fail[s] to accurately consider the expectations and orders of admitting physicians” and because the ADC and ALOS benchmarks do not properly account for inpatients that may stay less than two nights.  P. Closing Br. at 15.  Blue Valley otherwise points out CMS cannot avoid the rulemaking requirements for the S&C Memo by labeling it as an interpretive rule.  According to Blue Valley, the Supreme Court’s decision in *Allina v. Azar*, 139 S. Ct. 1804 (2019), holds the Act does not exempt “interpretive” rules or guidance from statutory rulemaking requirements.  P. Closing Br. at 8, citing *Allina*, 139 S. Ct. at 1814.  Because CMS failed to provide for public notice-and-comment before it issued the S&C Memo, Blue Valley argues the new ALOS and ADC rules are invalid and unenforceable.  P. Closing Br. at 9-10.

CMS argues it has consistently applied the plain meaning of the Act’s requirement that a provider be “primarily engaged” in providing inpatient care to be considered a hospital.  CMS Br. at 11.  CMS points out that it declined the opportunity to explicitly define the meaning of being “primarily engaged” by regulation because it recognized the need to

**Page 7**

make that determination for each provider on a case-by-case basis.  *Id.*at 11-12.4  CMS notes the Board has confirmed it appropriate to apply the plain meaning of the phrase “primarily engaged” as it is an unambiguous expression of Congressional intent.  *Id.*at 13, citing *Connecticut Dept. of Social Services,*DAB No. 1982 (2005) (citations omitted).  CMS argues that Blue Valley’s operations do not satisfy the ordinary meaning of the phrase “primarily engaged” to justify deeming it a hospital under the Medicare program.  *Id.* at 14.

In its post-hearing briefing, CMS concedes the *Allina*decision requires even interpretive guidance to be subject to notice-and-comment rulemaking.  CMS Closing Br. at 1.5  Nevertheless, CMS contends that Petitioner’s termination would have occurred with or without the existence of the S&C Memo because CMS considered factors “crucial to the definition of a hospital” consistent with the plain meaning of the Act and the Secretary’s regulations.  *Id.* at 3.

***The S&C Memo did not establish or modify a “substantive legal standard” but merely memorialized CMS’s approach to applying the plain language of the Act to assess whether a provider was “primarily engaged” in furnishing inpatient services.***Blue Valley’s arguments against the validity of CMS’s termination action are largely premised on the notion that CMS based its decision on an invalidly promulgated change in the substantive legal standard providers were expected to meet to be deemed hospitals for purposes of participating in the Medicare program.  Blue Valley’s premise is incorrect.

The S&C Memo issued by CMS on October 18, 20176 does not set forth new or modified standards for providers to be considered hospitals.  CMS instead advised state surveyors that the “starting point” for such an assessment was to determine whether the hospital had at least two inpatients to permit the surveyors to observe actual patient care.  CMS Ex. 5 at 3 (explaining this requirement is based on 42 C.F.R. § 488.26(c)(2)’s requirement that surveyors observe actual care and services provided to “patients” (plural) as well as the statutory definition of a hospital, which also refers to “patients” (plural)).  CMS explained that where a hospital did not have two inpatients, as was true during the November 2017

**Page 8**

attempt to survey Blue Valley, “a survey will not be conducted at that time, and an initial review of the facility’s admission data will be performed by surveyors while onsite to determine if the hospital has had an ADC of at least two and an ALOS of at least two midnights over the last 12 months.”  *Id.*

The S&C Memo goes on to state that where the facility did not have a minimum ADC of two inpatients and an ALOS of two over the prior 12 months (or less than 12 months for facilities not in operation that long), CMS would review additional information provided by the state agency or accrediting organization conducting the survey to determine whether a second survey should be attempted.  *Id.* at 3-4.

The language of the S&C Memo undermines Blue Valley’s claim that CMS relied solely on its failure to meet the ADC and ALOS benchmarks to determine it was not a hospital within the meaning of the Act.  *See*P. Closing Br. at 18 (arguing “these invalid legal standards were the overwhelming basis for CMS’s decision.”).  Contrary to Blue Valley’s understanding, CMS did not purport to establish a regime through the S&C Memo where it would automatically terminate a hospital for failing to meet the ADC and ALOS benchmarks.  The agency’s guidance instead makes clear that in the absence of such data, surveyors should subsequently “obtain further information” from the facility and make a recommendation to CMS as to whether a second survey should be attempted.  CMS Ex. 5 at 4.  Indeed, the S&C Memo explicitly cautions surveyors that the ADC and ALOS benchmarks “will be two factors,*in addition to other factors,*utilized to determine if the hospital is primarily engaged.”  *Id.* at 1 (emphasis added).  The S&C Memo sets forth alternate pathways to allow surveyors to obtain the information necessary to determine if a provider was primarily engaged in furnishing inpatient services.  The benchmarks are simply a starting point.  *Id.* at 3.

A provider concerned the benchmarks fail to fairly reflect its inpatient numbers can still point to other evidence to demonstrate to CMS it is “primarily engaged” in the provision of inpatient services.  The S&C Memo provides CMS will consider other factors including:

The number of provider-based off-campus emergency departments (EDs). An unusually large number of off-campus EDs may suggest that a facility is primarily engaged in providing outpatient emergency services rather than inpatient care.
	The number of inpatient beds in relation to the size of the facility and services offered.
	The volume of outpatient surgical procedures compared to inpatient surgical procedures.
	If the facility considers itself to be a “surgical” hospital, are procedures mostly outpatient?
	Patterns and trends in the ADC by the day of the week.  An ADC**Page 9**

consistently dropping to zero on Saturdays and Sundays may suggest that the facility is not consistently and primarily engaged in providing care to inpatients.

Staffing patterns and whether nurses, pharmacists, physicians, etc. are scheduled to work to support 24/7 inpatient care versus staffing patterns to support outpatient operations.
	How does the facility advertise itself to the community?  Is it advertised as a “specialty” hospital or “emergency” hospital?  Does the name of the facility include terms like “clinic” or “center” as opposed to “hospital”?CMS Ex. 5 at 4-5.

Contrary to Blue Valley’s understanding, the S&C Memo makes plain that CMS will “consider *all of the above factors (and other factors as necessary*) to make a determination as to whether or not a facility is truly operating as a hospital for Medicare purposes.”  *Id.*at 5 (emphasis added).  Blue Valley was never doomed to termination simply because of its inadequate ADC and ALOS numbers.  It remained free to point to other measures, such as the ratio of inpatient to outpatient procedures, sources of revenue, staffing patterns, the complexity of the care it provided, or its community identity to demonstrate it was “primarily engaged” in furnishing inpatient services.  The multifactorial approach outlined by CMS in the S&C Memo is consistent with its historical case-by-case approach to assessing a provider’s status as a hospital under the Act.  As the Board observed in *Wills Eye Hospital*, “neither CMS nor the Board has articulated a single evidentiary test that can be applied in every case to determine whether a particular facility is primarily engaged in serving inpatients.”  DAB No. 2743 at 19 (2016), *aff’d sub nom. Trust Under Will of Wills v. Burwell*, 306 F.Supp.3d 684 (E.D. Pa. 2018).

Blue Valley’s contention that the statistical benchmarks identified in the S&C Memo were “new” is also erroneous.  CMS witness Joyce Danner, the official who determined Blue Valley did not meet the statutory definition of a hospital, testified that “hospitals have tracked and monitored their average daily census for a very long time,” and ADC and ALOS have “always been looked at” by surveyors and the hospitals themselves.  Tr. at 35, 41.7  Ms. Danner explained that surveyors have also “routinely” and “historically” considered other factors identified in the S&C Memo.  Tr. at 58 (citing use of ratio of inpatient to outpatient claims); Tr. at 45 (citing pattern of discharge prior to weekend).  Ms. Danner asserted the S&C Memo was only new in the sense that it memorialized “new guidance put in writing . . . not new guidance that [surveyors] followed.”  Tr. at 35;

**Page 10**

CMS Closing Br. at 3-4.

I am also unpersuaded by Blue Valley’s claim that the ADC and ALOS benchmarks “conflict with and deviate from” the established regulatory standard for determining a patient’s status as “inpatient,” which relies on an admitting practitioner’s expectation that a patient will “require hospital care that crosses two midnights.”  P. Br. at 15-16.  It is true the applicable regulation generally considers a patient admitted by a practitioner who expects that patient will require hospital care exceeding two midnights to be an “inpatient.”  42 C.F.R. § 412.3(a), (d)(1).  But the regulation does not automatically confer “inpatient status” based solely on the practitioner’s expectation that a patient’s stay will exceed two midnights.8  42 C.F.R. § 412.3(d)(1) (“. . . an inpatient admission is *generally*appropriate . . . when the admitting physician expects the patient to require hospital care that crosses two midnights.”) (emphasis added).  It instead requires an admitting practitioner to base the “expectation” of the length of stay on “complex medical factors [such] as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event” and document that evaluation in a patient’s medical record for CMS’s consideration.  42 C.F.R. § 412.3(d)(1)(i).

Blue Valley’s claim that 42 C.F.R. § 412.3 requires the Medicare program to consider every patient admitted by a practitioner who “expects” that patient to require more than two midnights’ care an “inpatient” is belied by the regulation’s plain language.  It does not afford admitting practitioners the blanket authority to deem any patient an “inpatient” for purposes of reimbursement by the Medicare program simply by asserting he or she “expects” that patient’s need for hospital care will exceed two midnights.  A practitioner is instead obliged to undertake an individualized assessment for each patient to justify his or her expectation, and then document that assessment for later consideration.  *Id.*

In sum, the ALOS and ADC benchmarks do not change the regulatory definition of an “inpatient;” they merely corroborate the degree to which a facility’s admitting practitioners’ expectations correctly predict a stay exceeding two midnights.  If the benchmarks largely corroborate the expectations of admitting practitioners, the inpatient admissions are “generally appropriate” withing the meaning of the regulation.  42 C.F.R. § 412.3(d)(1).  But where admitting practitioners’ expectations are not confirmed by the benchmarks, as is true here, the regulation still affords a facility the flexibility to demonstrate the reasonableness of its admitting practitioners’ expectations on a case-by-case basis by citing documented medical factors warranting the admitter to expect a stay exceeding two midnights.  *Id.*  Blue Valley could have proffered such individualized documentation for its patients to explain why their admitting practitioners “expected”

**Page 11**

their patients to require more than two midnights of inpatient care, even though the vast majority were discharged in less time.  It did not do so.

Finally, I consider Blue Valley’s argument that the Supreme Court’s decision in *Allina v. Azar* invalidated the S&C Memo because CMS promulgated it without adhering to notice-and-comment rulemaking requirements.  The Court held in *Allina*that any “rule, requirement, or other statement of policy” pursuant to the Act that “establishes or changes a substantive legal standard governing . . . the payment for services” is required to satisfy the requirements of notice-and-comment rulemaking. 139 S. Ct. at 1808-09.  Blue Valley correctly points out the Court found that “interpretive rules” or those that merely “advise[] the public of the agency’s construction of the statutes and rules which it administers” could nevertheless set forth a “substantive legal standard” and were thus not necessarily excluded from the rulemaking requirement.  *Id.* at 1811, 1814.

In *Allina*the Court considered a new CMS policy concerning how to calculate a hospital’s “Medicare fraction,” used by the government to calculate additional payments to institutions that serve a disproportionate number of low-income Medicare patients.  *Id.* at 1809.  It found that CMS could not avoid notice-and-comment procedures to establish or change a substantive legal standard governing payment for services simply by labeling the new policy an “interpretive rule.”  *Id.* at 1812.

But the Court also observed that the government declined to argue the standard for determining how to calculate the Medicare fraction came from a statute and instead “insisted that [the Medicare Act] ‘[did] not speak directly to the issue.’”  *Id.* at 1816-17.  Here, by contrast, CMS expressly set forth its intention in the S&C Memo to “clarif[y] guidance . . . to address . . . The Social Security Act[‘s] . . . definition of a hospital.”  CMS Ex. 5 at 1*.*

Rather than seek to establish a new payment formula that would significantly affect payments to hospitals without reliance on statutory or regulatory foundation, as in *Allina*, here CMS simply set forth factors it had long deemed appropriate to consider as part of its effort to comply with the Act’s mandate to meaningfully evaluate whether an individual provider was “primarily engaged” in providing inpatient care.  The ALOS benchmark (the “two-midnight” rule) derives directly from the regulatory definition of an “inpatient” for purposes of hospital-level reimbursement.  42 C.F.R. § 412.3(a), (d)(1).  The ADC benchmark (requiring an average of at least two inpatients) comes directly from the Act itself.  *See*CMS Ex. 5 at 3 (explaining the requirement to have two inpatients comes from, among other sources, section 1861(e) of the Act, which refers to “patients” in plural).  Neither were plucked from thin air or derived independently of the Act’s mandate that hospitals be “primarily engaged” in furnishing inpatient services.  The factors set forth in the S&C Memo – including the statistical benchmarks – did not establish or change a substantive legal standard; they are merely exemplars of the analysis the Act has always required CMS to undertake.  CMS Closing Br. at 1-2.

**Page 12**

The U.S. District Court in *Trust Under Will of Wills v. Burwell* similarly rejected Wills Eye Hospital’s argument that CMS could not review its volume of inpatients versus outpatients to assess whether it was “primarily engaged” in furnishing inpatient services because CMS had applied a new “test” for the statutory term “primarily engaged” without first undertaking necessary notice-and-comment rulemaking.  306 F. Supp.3d 684 at 687, 689-91 (E.D. Pa. 2018).  The District Court disagreed, finding that CMS’s review of Wills Eye’s inpatient and outpatient volume was “only one factor in the evaluation,” not a dispositive metric.  *Id.* at 691-92.  The Court opined CMS’s comparative volume consideration did not “establish[] or change[] a substantive legal standard” to trigger the Act’s rulemaking requirement.  *Id.* at 692.  As the Court explained, “it is the Medicare Act and its implementing regulations that establish the standard for whether an applicant qualifies as a hospital,” and consideration of the comparative volume “merely provides CMS and regulated parties . . . with some form of guidance as to how legal standards are applied, and [CMS] maintains the same authority to grant or deny applications as it would without a stated public policy.”  *Id.* at 693.  Blue Valley’s arguments concerning the use of statistical benchmarks and other factors found in the S&C Memo echo Wills Eye’s arguments concerning comparative volume.  They fail for the same reasons laid out by the District Court.

CMS’s S&C Memo did not impermissibly create or modify a substantive legal standard that would render it invalid under *Allina v. Azar*.  CMS published interpretive guidance to notify the public of the factors it used to evaluate whether a provider was “primarily engaged” in providing inpatient care, as the Act expressly demands of any entity that wishes to be identified as a hospital for purposes of Medicare reimbursement.  Blue Valley’s argument that CMS was not entitled to consider the factors identified in the S&C Memo, most of which were historically in use and thus familiar to both surveyors and hospitals, is without merit.

***CMS properly determined Blue Valley was not “primarily engaged” in providing services to inpatients.***Even if Blue Valley’s claim that the S&C Memo codified an impermissible creation or modification of a substantive legal standard was correct, its appeal would still fail because the record before me demonstrates CMS’s determination to terminate Blue Valley’s hospital status was based on the plain language of section 1861(e) of the Act.  Put another way, even if the S&C Memo had never been issued, CMS considered every relevant possible factor to determine whether Blue Valley met the statutory definition of a hospital.

There is no dispute that surveyors sought to conduct a survey in November 2017 of Blue Valley to assess its care for inpatients but could not do so because Blue Valley had no inpatients at the time.  This led the surveyors to review years of Blue Valley’s ADC and

**Page 13**

ALOS data.  CMS Ex. 7 at 2 (¶ 5).  Ms. Danner reviewed data provided by CMS’s contractor, Wisconsin Physicians Service Insurance Corporation (WPS), including a summary of all claims submitted by Blue Valley and paid by the Medicare program (referred to as Provider and Statistical Reimbursement System or PS&R data).  CMS Ex. 7; CMS Ex. 1 at 17.  She and the surveyors reviewed almost four years of data from 2014 to 2017, which revealed Blue Valley consistently failed to meet the ADC and ALOS benchmarks of at least two inpatients with stays exceeding two midnights:

Avg. Daily Census
			Avg. Length of Stay (days)2014
			0.09
			1.502015
			0.21
			1.042016
			0.25
			1.08Through Nov. 2017
			0.22
			1.10CMS Ex. 1 at 5; CMS Ex. 7 at 3 (¶ 12).

Ms. Danner and the surveyors did not stop at reviewing four years of ADC and ALOS data, as Blue Valley claims.  They also considered other factors to evaluate whether Blue Valley was primarily engaged in furnishing inpatient services.  They noted that:

Blue Valley performed 309 outpatient surgical procedures for the prior year compared to 146 inpatient surgical procedures, according to the facility’s own data (CMS Ex. 1 at 6);
	Blue Valley submitted 626 outpatient claims with revenue code 0360 (Operating Room Procedure) compared to 303 inpatients claims, a ratio of more than two-to-one outpatient to inpatient claims, according to data from WPS for January 1, 2014 through November 30, 2017 (CMS Ex. 7 at 3 ¶ 13);
	Nearly every one of Blue Valley’s “inpatients” was discharged prior to the weekend (CMS Ex. 7 at 3 ¶ 8);
	Blue Valley advertised to its community that it performed laparoscopic procedures where most patients could return home the day after surgery (CMS Ex. 7 at 6 ¶ 30).CMS Ex. 7 at 3, 6 ¶¶ 8, 13, 30; *see also* CMS Ex. 1 at 1-2, 6.

**Page 14**

Ms. Danner and the surveyors also considered the following factors which are not identified in the S&C Memo:

PS&R data showing Blue Valley had a net reimbursement of $845,237 for inpatients in 2017 and more than*double* that amount, $1,723,629, for outpatients that same year.  For the first quarter of 2018, Blue Valley received $67,377 in reimbursement for inpatients and $494,586 for outpatients, more than*seven times* the reimbursement amount for inpatients.  CMS Ex. 3 at 62; CMS Ex. 7 at 6 (¶ 30).
	Blue Valley did not perform any inpatient surgical procedures for 22 consecutive days in December 2016.  It performed only four in July 2017, and no inpatient surgical procedures for 11 consecutive days in August 2017.  CMS Ex. 7 at 3 (¶ 10).The record before me demonstrates CMS reviewed a broad range of criteria that included but was not limited to the statistical benchmark data or other factors identified by the S&C Memo.  CMS’s consideration of this broad array of factors confirms its decision to terminate Blue Valley’s hospital status emanated from proper consideration of the statutory requirement that a hospital be “primarily engaged” in providing services to inpatients.

For all its complaints concerning CMS’s reliance on ADC and ALOS data, Blue Valley cannot cite to any other factors that support its claim that it is a hospital within the meaning of the Act.  Data capturing inpatient numbers and lengths of stay, generated over a period of years, demonstrated Blue Valley consistently made significantly more income from outpatient care, not inpatient services – more than double, in fact, as measured by procedures performed, claims submitted, and reimbursement amounts.  *See*CMS Ex. 3 at 62; CMS Ex. 7 at 3 ¶ 13.  Blue Valley’s demand that it be deemed a hospital even though most of its revenue came from outpatient services is difficult to credit.  The record amply supports CMS’s determination that Blue Valley was not “primarily engaged” in providing inpatient services to inpatients under the Act.

******Petitioner’s effort to demonstrate it was “primarily engaged” in providing inpatient services is unpersuasive.******Blue Valley alternatively argues that it met CMS’s statistical benchmarks “at, or soon after, the survey and well before termination.”  P. Closing Br. at 2.  Blue Valley explains that at the time of the November 2017 survey, it did not have the “proper data readily available” and was “unable to compile and print an inpatient census from its system.”  P. Closing Br. at 23.  Blue Valley asserts it subsequently provided CMS “additional explanation and documentation” to show that it was “near” meeting the ALOS and ADC benchmarks monthly at the time of the attempted survey and “meeting or exceeding”

**Page 15**

those benchmarks “just months after the S&C Memo was released.”  *Id.*  Blue Valley explains its gains after the survey resulted from “long-term plans” to expand its inpatient population base and services.  P. Closing Br. at 23; *see also*P. Ex. 2 at 4 (noting Blue Valley’s “efforts to increase the inpatient services offered as well as the additional specialists added to the medical staff.”).

Blue Valley did not provide specific figures to corroborate these claims in its briefing before me, but its plan of correction included the following numbers:

In November 2017, ADC was 0.57 for inpatient and 1.27 for “all patients overnight in the inpatient unit, including observation overnight stays.”  P. Ex. 2 at 5.
	In December 2017, ADC was 1.39 “for inpatient status patients” and 1.68 “for all overnight patients in the inpatient unit.”  P. Ex. 2 at 5.
	ADC for 2017 was “1.34 for all medical surgical unit patients.”  P. Ex. 2 at 2.
	ALOS from February 2017 through January 2018 was 1.4 “for inpatient only” which includes an ALOS of 1.8 in the last four months, from October 2017 through January 2018.  P. Ex. 2 at 4; P. Ex. 10 at 12 (¶ 41).
	ALOS increased from 1.1 days during November 1-15, 2017 to 1.9 days in January 2018.  P. Ex. 2 at 5.P. Ex. 2 at 2, 4-5.

Despite Blue Valley’s claims, these figures still fail to meet the ADC and ALOS benchmarks of at least two inpatients and stays exceeding two midnights.  I therefore cannot credit Blue Valley’s claim that it met or was even near meeting the benchmarks.  Blue Valley’s claims are otherwise confusing due to its inconsistent approach to calculating ADC.  For example, Blue Valley identified one ADC for “inpatient” or “inpatient status patients” and another ADC for “all patients overnight in the inpatient unit” or “all overnight patients in the inpatient unit.”  P. Ex. 2 at 5.  Blue Valley did not count the number of its inpatients consistently and applied a more expansive definition than that used by the Medicare program.  In its own “Inpatient and Outpatient Guidelines,” which became effective in January 2018 and “define what patients are included in the hospital definition of inpatient and outpatient admissions,” Blue Valley instructed its staff to consider periods of outpatient observations exceeding 24 hours to be inpatient.  CMS Ex. 6 at 1.  But patients under observation are never considered inpatients for purposes of reimbursement by the Medicare program.  CMS Ex. 7 at 5 (¶ 23); MBPM, CMS Pub. 100-02, chap. 1, § 10.2(B)(5) at 19 (“CMS will continue to treat orders that specify a typically outpatient or other limited service (e.g., admit “to ER,” “*to Observation*,” “to Recovery,” “to Outpatient Surgery,” “to Day Surgery,” or “to Short Stay Surgery”) as defining a non‐inpatient service, and such orders will not be treated as meeting the inpatient admission requirements.”) (emphasis added).

**Page 16**

Blue Valley also acknowledged during the revisit survey that it classified patients as “inpatients” based on the location of their bed or room in the facility, rather than a practitioner’s expectation their stays would exceed two midnights.  CMS Ex. 7 at 5 (¶ 26); *see also* CMS Br. at 15 (noting that, during the revisit survey, Blue Valley reported it had an ADC of 1.29 inpatients from April 1, 2017 to March 31, 2018, which conflicted with data reported by WPS).  By any measure, Blue Valley has failed to demonstrate it ever met or came close to meeting the S&C Memo’s statistical benchmarks, or that the benchmarks undercounted its actual number of inpatients in any way.

Blue Valley also argues CMS erroneously reviewed incomplete admission data because the PS&R and WPS data only reflected data for Medicare patients, which “mispresented and skewed” the metrics because “a large portion of Blue Valley’s patient population consists of non-Medicare patients (e.g., Medicaid and private pay patients).”  P. Closing Br. at 22-23.  Blue Valley points out that CMS recognizes that the determination of whether a hospital is “primarily engaged” should not focus only on its population of Medicare patients.  *Id.* at 22 (citing Tr. at 55-56).  Blue Valley adds that, but for differences in coding guidelines, its non-Medicare patients would be considered inpatients when undergoing the same types of procedures.  P. Closing Br. at 27; P. Ex. 10 at 7-8 (¶¶ 25-27).  Blue Valley explains that CMS categorizes gastric surgery for patients with high body mass index (BMI) as an inpatient procedure, meaning under Medicare rules the expected ALOS for such patients is two or more midnights.  P. Ex. 10 at 7-8 (¶¶ 25-27).

Despite asserting that it has a large share of non-Medicare patients, Blue Valley has not submitted evidence to establish the number of non-Medicare patients who were admitted as inpatients or how those non-Medicare numbers would affect the hospital’s ADC or ALOS.  Nor has it submitted evidence to demonstrate how many patients, private or Medicare, qualified as inpatients because of high BMI.  Blue Valley could have submitted documentation before me to rebut CMS’s data analysis.  Blue Valley did not do so.

Blue Valley similarly complains that CMS relied on the WPS data instead of considering the underlying physician admission orders.  P. Closing Br. at 22 (arguing that the data does not necessarily reflect the intention of the physician which is the determinative consideration under the regulatory “expectation standard”); P. Ex. 10 ¶¶ 25-27.  But again, Blue Valley has not submitted evidence from those underlying physician orders to rebut CMS’s analysis.  In short, Blue Valley has submitted no evidence to me that might suggest Blue Valley was in fact “primarily engaged” in providing services to inpatients.

**Page 17**

VIII.  Conclusion

For the foregoing reasons, I conclude that Blue Valley was not “primarily engaged” in providing inpatient services to inpatients and therefore did not meet the statutory definition of a hospital at section 1861(e)(1).  I affirm CMS’s determination to terminate Blue Valley’s participation as a provider in the Medicare program.

Endnotes:

1  Petitioner identified three additional witnesses in its pre-hearing exchange:  Lindsay Taylor, Tammy Zimmerman, and Beth Peters.  CMS moved to exclude all three because Petitioner did not file written direct testimony for those witnesses, as required by my pre-hearing order.  I excluded Ms. Taylor on this basis but overruled CMS’s motion as to the remaining two individuals because they were adverse witnesses.  Sep. 17, 2018 Omnibus Order at 1-2.  I gave the parties an additional opportunity to request subpoenas.  *Id.* Based on Petitioner’s unopposed request, I issued a subpoena for Beth Peters, but she did not appear at the hearing.

2  Petitioner initially submitted exhibits numbered 8 through 17 but re-filed those exhibits correctly numbered 1 through 10.  Tr. at 9.  Petitioner also re-filed its pre-hearing brief (P. Amended Br.) after updating the citations for its re-numbered exhibits.

3  ADC is calculated by adding the midnight daily census for each day of the 12-month period and then dividing the total number by the number of days in the year.  CMS Ex. 5 at 3.  ALOS is calculated by dividing the total number of inpatient hospital days (day of admission to day of discharge or day of death) by the total number of discharges over 12 months.  *Id.*

4  CMS explained to Congress that both community and specialty hospital associations opposed a regulatorily fixed definition of being “primarily engaged in furnishing services to inpatients” because advances in medical technology would likely result in formerly inpatient services becoming outpatient and because smaller rural hospitals might not meet a rigid definition.  CMS Br. at 12, citing Final Report.

5  Strangely, CMS goes so far as to describe its prior position concerning the S&C Memo as “untenable” in light of the *Allina*decision.  CMS Closing Br. at 1.  But CMS does not actually abandon its claim that the S&C Memo is mere guidance not subject to notice-and-comment rulemaking.

6  This memorandum superseded one issued by CMS a month earlier in September 2017.  CMS Ex. 5 at 1.

7  Ms. Danner declared under oath that she has worked as a Health Quality Review Specialist in CMS’s Division of Survey, Certification and Enforcement since January 2000.  CMS Ex. 7 at 1.  Her opinions appear based on over 20 years of experience.  I find her fully credible on the topic of historical use of ADC and ALOS by surveyors and hospitals alike.

8  It equally contemplates scenarios where a patient who receives a period of care shorter than two midnights might nevertheless be considered an inpatient for purposes of payment by the Medicare program.  42 C.F.R. § 412.3(d)(1)(ii); 42 C.F.R. § 412.3(d)(3).
  
          /s/
        Bill Thomas

                      Administrative Law Judge Back to top
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