Opinion ID: 685568
Heading Depth: 2
Heading Rank: 1

Heading: Classification of Costs as Ancillary or Routine

Text: 8 Insofar as the Secretary's determination of whether the disputed costs are properly allocated to routine, as opposed to ancillary, cost centers is treated as a finding of fact, that finding constitutes agency action which neither the district court nor this court can set aside unless it fails to meet the highly deferential standard set forth in the Administrative Procedure Act, 5 U.S.C. Sec. 706(2) (1988). In this case, the Hospital asserts that the Secretary failed that deferential standard because the decision was unsupported by substantial evidence in the record. 5 U.S.C. Sec. 706(2)(E). Like the district court, we reject this contention. 9 In making the allocation, the Secretary applied section 2202.6 of the PRM which states that routine services include regular room, dietary and nursing services, minor medical and surgical supplies and other facilities for which a separate charge is not customarily made. Section 2202.8 specifies as ancillary laboratory, radiology, drugs, delivery room, operating room, and therapy services, and further provides that ancillary services may also include other special items and services for which separate charges are customarily made. A cost not recognized as an ancillary service under section 2202.8 is a routine service cost unless section 2203 permits ancillary allocation. That section provides: 10 A separate ancillary charge for a particular item or service other than those listed as ancillary in Sec. 2202.8 is not recognized, and the cost of the item or service is not included in an ancillary cost center, where the common or established practice of providers of the same class ... in the same State is to include the item or service in the routine service charge. Where there is no common or established classification of an item or service as routine or ancillary among providers of the same class in the same State, a provider's customary charging practice is recognized so long as it is consistently followed for all patients and does not result in an inequitable apportionment of cost to the program. 11 Medicare Provider Reimbursement Manual Sec. 2203. In applying section 2203 to allocate the disputed charges, the Secretary relied on Loma Linda University v. Schweiker, Medicare & Medicaid Guide (CCH) p 31,650 at 10,148 (C.D.Cal.1981), and concluded that the common or established practice of hospitals in California was not to charge separately for IV therapy labor costs. In Loma Linda, which also considered whether IV therapy labor costs were routine or ancillary, the Secretary cited a survey of two fiscal intermediaries that cover approximately 75% of California's acute care hospitals who stated that the vast majority of these hospitals classify IV administration as a routine service. The district court in that case upheld the reclassification of the IV therapy labor costs as routine on the basis that the record established that the customary and prevailing practice among California hospitals is to include IV therapy services as routine nursing services and not to bill separately for them. Id. at 10,151. 12 The Hospital maintains that the Secretary improperly relied on the holding in Loma Linda because the survey used in that case was not presented to the Review Board, and thus was not available for review by the Hospital, and because a Medicare procedural regulation, 42 C.F.R. Sec. 405.1875(g)(3) (1991), 2 requires the decision be confined to the record of the Review Board, materials submitted by the parties, and generally known facts not reasonably in dispute. Without Loma Linda, the Hospital maintains that the Secretary's decision was unsupported by substantial evidence, and that the only evidence properly before her was that HHS allowed Brotman Medical Center (Brotman) to list its IV therapy administration costs as ancillary. 13 This argument ignores the Secretary's explicit authority under 42 C.F.R. Sec. 405.1875(g)(4) (1991), to rely on prior decisions of the Board, the Administrator and the courts, and other applicable law, whether or not cited by the parties.... The Hospital was aware of the holding in Loma Linda, as evidenced by its citation to the case in its position paper submitted to the Review Board, and it had an opportunity to rebut the Loma Linda findings. Its evidence that Brotman was allowed to list these costs as ancillary was not sufficient to refute the statewide IV therapy statistics developed in Loma Linda. In short, there was sufficient support for the Secretary's determination that the customary practice in California was not to include IV therapy labor costs as ancillary. 14 As to the evidence upon which the Hospital relies that Brotman was allowed to allocate its similar costs to an ancillary center, the Secretary tendered in the district court an affidavit by Charles R. Booth, Director of the Office of Payment Policy at HHS's Health Care Financing Administration, to the effect that the placement of Brotman's costs was a mistake on the part of the financial intermediary and HCFA Region IX. The Hospital correctly asserts the general rule that courts review administrative action on the administrative record, without augmentation by supplemental affidavit. See Florida Power & Light Co. v. Lorion, 470 U.S. 729, 743, 105 S.Ct. 1598, 1606-07, 84 L.Ed.2d 643 (1985). It therefore contends the district court improperly considered the affidavit in upholding the Secretary's decision. We disagree. Without considering the possibility of exception to the general rule stated in Florida Power & Light Co., given the comprehensive nature of the Secretary's Loma Linda study and the isolated character of the Brotman incident forwarded by the Hospital, to have remanded the matter for resolution would have been a vain thing. There was substantial evidence on the record to support the Secretary's decision and that is all that the district court or this court can require. 15 Although we conclude that the Secretary's action was supported by substantial evidence in the record, the Hospital also challenges the Secretary's interpretation of applicable law by asserting that because the Secretary's decision rejected the allegedly more accurate allocation of IV therapy labor costs into an ancillary cost center, it violated the Act's fundamental ban on shifting costs attributable to Medicare patients to non-Medicare patients. See 42 U.S.C. Sec. 1395x(v)(1)(A) (in prescribing regulations, the Secretary shall take into account the costs of services so that the necessary costs of delivering services to covered individuals will not be borne by individuals not covered by this program); 42 C.F.R. Sec. 405.452(a) (total allowable costs of a provider shall be apportioned between program beneficiaries and other patients so that the share borne by the program is based upon actual services received by program beneficiaries). 16 The Hospital cites a decision by the Administrator of the Health Care Financing Administration, Roper Hospital v. Blue Cross, Medicare & Medicaid Guide (CCH) p 39,428 at 26,862 (1991), which stressed that the object of any cost apportionment is to determine the relative costs incurred by Medicare and non-Medicare patients as accurately as possible. Id. at 26,864. The Hospital notes that this principle was also emphasized by the Review Board when it found in the Hospital's favor. Furthermore, the Hospital points out that in Sisters of Charity Hospital of Buffalo v. Blue Cross Ass'n, Medicare and Medicaid Guide (CCH) p 31,454 at 9283 (1981), the Administrator approved allocating to each ancillary department the costs of wages for employees who transported patients to different specialty departments within the hospital and noted that there is little correlation between the use of patient transporters and the number of days a patient spends in the hospital. Id. 9286-87. The Hospital maintains that there is likewise little correlation between IV therapy and the number of days a patient spends in the hospital so that IV wage costs should similarly be allocated to ancillary cost centers. 17 Again, we apply a deferential standard of review. Where, as here, an agency is applying a statute entrusted by Congress to its administration, we employ the familiar analysis set forth in Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-44, 104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984). Under Chevron, when Congress has left an ambiguity or silence to a specific issue, we proceed to what is called the second step of Chevron, where we defer to the Agency's interpretation of the statute if it is reasonable and consistent with the statute's purpose. Chemical Mfrs. Ass'n. v. EPA, 919 F.2d 158, 162-63 (D.C.Cir.1990). Here, in applying the statutory ban against cross-subsidization of Medicare and non-Medicare patients, Congress has not precisely spoken to the question of allocation between specific and general cost centers and therefore, the district court, and we in turn, must approve the Secretary's methodology provided it is reasonable and consistent with the statutory scheme. 18 As this court and others have previously noted, the Secretary has resolved this difficult task by adopting an averaging system wherein costs are balanced between Medicare and non-Medicare patients as a whole and not on a per service basis. See Vista Hill Found. v. Heckler, 767 F.2d 556, 564-66 (9th Cir.1985) (overturning Secretary's decision to exclude children's educational costs from routine cost pool, which was based on the fact that few Medicare patients use such services, because she adopted a system of overall routine cost averaging based on all patients' use of facilities). See also Villa View Community Hosp., Inc. v. Heckler, 728 F.2d 539 (D.C.Cir.1984) (per curiam); Psychiatric Inst. of Washington, D.C., Inc. v. Schweiker, 669 F.2d 812 (D.C.Cir.1981) (per curiam). Medicare patients may be 20% of a hospital's population but generate only 15% of its IV use. Or Medicare patients may, on average, use more of some routine service than do non-Medicare patients. The Secretary's decision to average in the way that she has accommodates the inevitability of specific disparities against the difficulty of exact allocation. Thus, the mere fact that IV labor costs for Medicare patients could be borne by non-Medicare patients in particular circumstances is not a sufficient basis upon which to find the Secretary's methodology unreasonable under the deferential standard of review. 19 The decisions upon which the Hospital relies are not to the contrary. In Roper Hospital the Administrator stressed that the object of any cost apportionment is to determine the relative costs incurred by Medicare and non-Medicare patients as accurately as possible. That case did not involve the distinction between ancillary and routine costs but rather in which ancillary department disputed supply costs should be included. Ancillary costs are reimbursed by Medicare on a relative basis. 42 C.F.R. Sec. 405.452(a)(1). Thus, determining the relative cost of ancillary services to Medicare patients as accurately as possible does not conflict with drawing the line between ancillary and routine costs so that an approximate balance is achieved overall without separate allocation of each individual cost. Sisters of Charity Hospital is also distinguishable. There the patient transporters moved patients and performed other services solely for the ancillary areas. Medicare and Medicaid Guide (CCH) p 31,454 at 9286. While the case does make the point that it is more accurate to apportion patient transporter costs through ancillary costs centers when there is little correlation between the use of patient transporters and the number of days a patient spends in the hospital, that reasoning does not compel the Secretary to deem IV labor costs ancillary in the instant case where the IV therapy personnel also perform nursing functions in routine cost center areas.