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Media Alerts - Nazareth Hospital v. Secretary United States Department of Health and Human Services - Third Circuit
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April 4, 2014
  Nazareth Hospital v. Secretary United States Department of Health and Human Services - Third Circuit
Headline: Third Circuit Finds that Secretary of Department of Health Had Rational Basis for Medicare Regulation

Area of Law: Medicare/Medicaid, Administrative Law, APA

Issue(s) Presented: Whether the Secretary had a rational basis for her Medicare regulation?

Brief Summary:
Because Medicare payments are fixed and not cost-based, hospitals that see larger numbers of low-income patients can sometimes get more funding through disproportionate share hospital (DSH) calculations. The Secretary of the U.S. Department of Health and Human Services made a determination that state general assistance patients are not includable in disproportionate share hospital calculations, yet waiver patients are. The District Court held that the Secretary provided no rational basis for making this distinction, and found that the rule violated the APA and equal protection clause. The Third Circuit reversed, holding that the Secretary had statutory authority to make the distinction, and provided several rational bases for doing so.

Significance (if any):

Extended Summary (if applicable):
The Secretary of the United States Department of Health and Human Services ("HHS") appealed the District Court's judgment holding the Secretary's Medicare regulation to be arbitrary and capricious, as well as a violation of the Equal Protection Clause. The dispute centers around certain Medicare reimbursement adjustments to appellees, two Pennsylvania hospitals. The District Court found there was no rational basis to exclude from such reimbursements patients covered by Pennsylvania's General Assistance ("GA") plan, while at the same time including patients covered under a federal statutory waiver program. The Third Circuit reversed.
Medicare reimbursements to hospitals are based on prevailing rates for given services, rather than on the hospital's actual costs. Some hospitals that serve high numbers of low-income patients are eligible for a Medicare disproportionate share hospital (DSH) adjustment. Eligibility depends on the number of days the hospital treats low-income patients who are eligible for Medicaid. DSH also takes into account the days the hospital has treated patients ineligible for Medicaid but who receive benefits pursuant to a Medicaid demonstration project ("waiver projects"). DSH calculations do not, however, include state general assistance patients. The Secretary has discretion to choose which Medicaid requirements will be waived, how long the waiver lasts, and whether the costs of the project will be considered Medicaid-covered expenditures.
Nazareth Hospital and St. Agnes Medical Center, two Pennsylvania hospitals, included "protest" Pennsylvania general assistance patient days in their 2002 Medicare cost reports. The Intermediary then excluded these protest general assistance inclusions from the hospital's Medicare DSH calculations. The Intermediary's decision was affirmed by the Provider Reimbursement Review Board and the Centers for Medicare and Medicaid Administrator. The U.S. District Court for the Eastern District of Pennsylvania held that there was no rational distinction between the state general assistance program and the waiver projects in terms of eligibility requirements and services covered, and concluded that the Secretary's disparate treatment could not stand under the APA and the Equal protection Clause.
The scope of the Third Circuit's review of an agency determination is rational basis. Thus, the Court considered whether the Secretary set forth a rational explanation for her actions, and found that the Secretary set forth multiple rational bases upon which to distinguish patient days covered under the general assistance program from those covered under a waiver project. The Secretary has the statutory authority to treat the two categories of patient days differently, and given the different purposes of the programs, it was neither arbitrary nor capricious to do so. The Third Circuit recognized that a court is no substitute for the judgment of the agency, and should uphold an agency decision if the court can reasonably understand the agency's reasoning. Thus, because the Secretary set forth multiple rational bases justifying her inclusion of waiver program patient days in Medicare DSH calculations, but excluding days covered under Pennsylvania's general assistance plan, the Third Circuit reversed the District Court.
The full opinion is available at

Panel (if known): Rendell, Roth, and Barry, Circuit Judges

Argument (if known): January 16, 2014

Date of Issued Opinion: April 2, 2014

Docket Number: 13-2627

Decided: April 2, 2014

Case Alert Author: Alexandra Perry

Counsel (if known):
Veronica J. Finkelstein, Esquire
Joel M. Sweet, Esquire
Office of the United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106

Stuart F. Delery, Esquire
Assistant Attorney General
Zane David Memeger, Esquire
United States Attorney
Anthony J. Steinmeyer, Esquire
Joshua Waldman, Esquire (Argued)
Attorneys, Appellate Staff
United States Department of Justice
Civil Division, Room 7232
950 Pennsylvania Ave., N.W.
Washington, D.C. 20530
Counsel for Appellant
Mark H. Gallant, Esquire (Argued)
Gregory M. Fliszar, Esquire
Katie Beran, Esquire
Robert A. Chu, Esquire
Cozen O'Connor
1900 Market Street
Philadelphia, PA 19103
Counsel for Appellees

Author of Opinion: Rendell, Circuit Judge

Case Alert Circuit Supervisor: Professor Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 04/04/2014 03:44 PM     3rd Circuit  

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