0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 1 of 14
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF SOUTH CAROLINA
`ROCK HILL DIVISION
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`LANCASTER HOSPITAL CORPORATION, §
`formerly d/b/a Springs Memorial Hospital, §
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`Plaintiff,
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`§
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`vs.
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` Civil Action No.: 0:19-01857-MGL
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`§
`Xavier Becerra, Secretary, U.S.
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`Department of Health and Human Services,
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`Defendant.
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`§
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`MEMORANDUM OPINION AND ORDER
`DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
`AND GRANTING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
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`I.
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`INTRODUCTION
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`Plaintiff Lancaster Hospital Corporation, formerly d/b/a Springs Memorial Hospital
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`(Springs), brought this action seeking review of the final decision of the Provider Reimbursement
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`Review Board (PRRB) against Alex M. Azar II (Azar), Secretary of the United States Department
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`of Health and Human Services (HHS). Although Springs named Azar, the former Secretary of
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`HHS, as the defendant when it filed the complaint, the Court takes judicial notice, pursuant to Fed.
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`R. Evid. 201, that Xavier Becerra is currently the Secretary of HHS. Therefore, pursuant to Fed.
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`R. Civ. P. 25(d), the Court will direct the Clerk’s Office to substitute Xavier Becerra, Secretary of
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`HHS, as the defendant in this case.
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`The suit, however, is actually against HHS. See generally Will v. Mich. Dep’t of State
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`Police, 491 U.S. 58, 71 (1989) (“[A] suit against a [federal] official in his or her official capacity
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`0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 2 of 14
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`is not a suit against the official but rather is a suit against the official’s office.”). The Court has
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`jurisdiction over this matter under 28 U.S.C. § 1331.
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`Pending before the Court are two motions for summary judgment: one from Springs and
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`one from HHS. Having considered the motions, the responses, the replies, the record, and the
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`applicable law, it is the judgement of the Court Springs’s motion for summary judgment will be
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`denied and HHS’s motion for summary judgment will be granted.
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`II.
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` FACTUAL AND PROCEDURAL HISTORY
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`Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., commonly known as the
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`Medicare Act, established a system of medically funded health insurance for elderly and disabled
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`persons. Under the Medicare Act, certain healthcare providers are eligible for reimbursement by
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`HHS for services furnished to Medicare beneficiaries.
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`Under this reimbursement program, healthcare providers submit their yearly cost reports
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`to a Medicare Administrative Contractor (MAC) that acts as an agent for HHS. After the MAC
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`reviews the healthcare provider’s cost reports to determine the amount due for reimbursement, it
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`issues a Notice of Program Reimbursement (NPR). If a healthcare provider is dissatisfied with the
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`NPR, it may appeal to the PRRB, an adjudicative body in HHS, within 180 days of issuance. The
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`PRRB’s decision is subject to judicial review in federal district court.
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`Springs is an acute care hospital located in Lancaster, South Carolina. Springs operates an
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`inpatient rehabilitation facility (IRF) and skilled nursing facility (SNF) that provide medical
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`services primarily to Medicare beneficiaries. During the relevant timeframe, Medicare reimbursed
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`IRF and SNF providers for their reasonable costs in providing services, as opposed to a fixed fee-
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`per-service payment schedule.
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`0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 3 of 14
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`Beginning in 1994, Springs entered into two separate contracts with RehabCare, Inc.
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`(RehabCare) to provide program management and therapy services for its IRF and SNF. Under
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`the terms of these contracts, RehabCare acted as a turn-key subcontractor, managing every single
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`aspect of the IRF and SNF on behalf of Springs. As to the IRF contract, Springs agreed to pay
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`RehabCare a per-patient-per-day rate for any and all services provided to its patients. And,
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`regarding the SNF contract, Springs agreed to pay RehabCare a per-patient-per-day rate for
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`program management services, and an hourly rate for direct therapy services.
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`To assist Palmetto GBA (Palmetto), the MAC in this case, in its audit of Springs’s IRF cost
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`reports, RehabCare would provide a breakdown of its fiscal year (FY) charges to Springs into two
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`basic components: program management costs and therapy costs. So, if Springs paid RehabCare
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`$1,500,000 in a fiscal year for services provided to its IRF patients, RehabCare would separate,
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`into a detailed financial report, the dollar amounts for program management fees and direct therapy
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`costs. This method of reporting is called a Value Quantification Model (VQM). Palmetto would
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`then take the VQM and use RehabCare’s payroll records to audit the program management and
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`therapy costs for reasonableness.
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`These IRF and SNF contracts with RehabCare remained in force through Springs’s FY
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`2000, and the type and intensity of therapy services provided by RehabCare to Springs’s patients
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`over FYs 1997–2000 remained, according to Springs, consistent.
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`Palmetto audited Springs’s Medicare reimbursement cost reports for its IRF and SNF’s
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`FYs 1997–2000 and disallowed all the reasonable costs it claimed in these eight cost reporting
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`periods. Springs appealed Palmetto’s decision to disallow these eight cost reports to the PRRB.
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`While the case was on appeal to the PRRB, Springs and Palmetto settled the IRF and SNF’s FYs
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`1999 cost reporting period. Accordingly, after that settlement, six disputed cost reporting periods
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`0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 4 of 14
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`remained before the PRRB: three as to Springs’s IRF cost reports and three as to Springs’s SNF
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`cost reports, all for FYs 1997, 1998, 2000.
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`The PRRB, on April 30, 2019, determined: “[Palmetto]’s adjustments to remove all of the
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`costs/charges for RehabCare services from [Springs]’s [FY] 1997 cost reports as it relates to the
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`IRF subprovider unit were proper as [Springs] did not submit sufficient documentation to
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`demonstrate these costs were reasonable.” PRRB’s Decision at 2, A.R. at 0007. As to the other
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`five costs reports, the PRRB remanded them to Palmetto because it found sufficient auditable
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`documentation existed to allow at least some of Springs’s costs to be reimbursed.
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`According to the PRRB, it upheld Palmetto’s disallowance of Springs’s IRF cost report for
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`FY 1997 because Springs “did not have the RehabCare payroll information [for IRF FY 1997,]
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`and could only estimate RehabCare’s therapy salaries and hours for” that year. Id. at 8, A.R. at
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`0013. The PRRB also noted Springs failed to “submit FY 1997 salary and hours documentation
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`for the [program] management positions related to the RehabCare contract” as well, including the
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`positions of “Program Director, Clinical Coordinator, Community Relations Coordinator,
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`Secretary, Social Worker and Admission Coordinator.” Id. As is relevant to this underlying
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`dispute, RehabCare’s 1997 VQM totaled approximately $1,383,000 and listed the program
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`management costs as roughly $750,000, and the therapy costs as around $633,000.
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`The CMS Administrator declined to review the PRRB’s decision, and it became final.
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`Accordingly, Springs appealed the PRRB’s decision to this Court by filing this action and
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`subsequently filed the instant motion for summary judgment, after which HHS filed its motion for
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`summary judgment. HHS’s motion contained its response to Springs’s motion. Thereafter,
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`Springs filed its response to HHS’s motion, as well as replied to HHS’s response. HHS then
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`replied to Springs’s response.
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`0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 5 of 14
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`Springs requests this Court enter an order setting aside part of the PRRB’s decision that
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`denied its Medicare reimbursement claim for reasonable costs in providing IRF services to
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`Medicare beneficiaries for its FY 1997. HHS, on the other hand, requests the Court affirm the
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`decision of the PRRB.
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`Springs, in its motion, requested an oral argument. Inasmuch as the parties’ briefs
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`adequately informed the Court of their positions, the Court exercises its discretion to adjudicate
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`the motions without a hearing. See S.C. District Court Local Rule 7:08 (“Hearings on motions
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`may be ordered by the [C]ourt in its discretion. Unless so ordered, motions may be determined
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`without a hearing.”). Accordingly, the Court, having been fully briefed on the relevant issues, will
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`now adjudicate the motions.
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`III.
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`STANDARD OF REVIEW
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`“A decision of the [PRRB] shall be final unless [HHS], on [its] own motion, and within
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`[sixty] days after the provider of services is notified of the [PRRB]’s decision, reverses, affirms,
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`or modifies the [PRRB]’s decision.” 42 U.S.C. § 1395oo(f)(1). “Providers shall have the right to
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`obtain judicial review of any final decision of the [PRRB], or of any reversal, affirmance, or
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`modification by [HHS], by a civil action commenced within [sixty] days of the date on which
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`notice of any final decision by the [PRRB] of any reversal, affirmance, or modification by [HHS]
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`is received.” Id. The district court reviews the PRRB’s decision under the standards of the APA.
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`Id.
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`“[W]hen a party seeks review of agency action under the APA, the district judge sits as an
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`appellate tribunal.” Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001).
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`“The APA commands reviewing courts to ‘hold unlawful and set aside’ agency action where it is
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`‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; . . . [or]
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`unsupported by substantial evidence . . . .” Abraham Lincoln Memorial Hosp. v. Sebelius, 698
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`F.3d 536, 547 (7th Cir. 2012) (quoting 5 U.S.C. § 706(2)). A final agency determination is
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`arbitrary and capricious if:
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`the agency has relied on factors which Congress has not intended it
`to consider, entirely failed to consider an important aspect of the
`problem, offered an explanation for its decision that runs counter to
`the evidence before the agency, or is so implausible that it could not
`be ascribed to a difference in view or the product of agency
`expertise.
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`Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
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`To deem an agency action arbitrary and capricious, its decision must be “so implausible that it
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`could not be ascribed to a difference in view or the product of agency expertise.” Id. A court “will
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`uphold a decision of less than ideal clarity if the agency’s path may be reasonably discerned.”
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`Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 286 (1974).
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`The substantial evidence standard of review “requires the district court to determine
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`whether the agency decision on direct review is supported by substantial evidence.” Int’l Rehab.
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`Sci. Inc. v. Sebelius, 688 F.3d 994, 1002 (9th Cir. 2012). Substantial evidence fails to “give the
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`district court license to compare the agency decision on direct review with other agency decisions
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`not on review and determine which is supported by more substantive evidence” as “that would be
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`tantamount to de novo review, which is not the standard.” Id. “[S]ubstantial evidence [is] ‘more
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`than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as
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`adequate to support a conclusion.’” Almy v. Sebelius, 679 F.3d 297, 301 (4th Cir. 2012) (quoting
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`Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)).
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`In an APA case such as this, summary judgment serves as the mechanism for deciding, as
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`a matter of law, whether the agency action is supported by the administrative record and is
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`otherwise consistent with the APA.
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`IV. DISCUSSION AND ANALYSIS
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`Before the Court considers the parties’ arguments, it will provide a brief primer on the
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`Medicare reimbursement process for reasonable costs incurred by a Medicare beneficiary provider
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`such as Springs. The Medicare statute authorizes reimbursement to Medicare beneficiary
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`providers for the “reasonable costs of such services[.]” 42 U.S.C. § 1395f(b)(1). “The reasonable
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`cost of any services shall be the cost actually incurred, excluding therefrom any part of the incurred
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`cost found to be unnecessary in the efficient delivery of needed health services[.]” Id.
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`§ 1395x(v)(1)(A).
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`The Medicare statute provides “no payments shall be made to any [Medicare] provider
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`unless it has furnished such information as [HHS] may request [to] determine the amounts due
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`such provider under this part for the period with respect to which the amounts are being paid or
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`any prior period.” Id. § 1395g(a).
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`HHS has promulgated regulations governing the submission of annual provider cost reports
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`and the records used to support them. These regulations require “providers maintain sufficient
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`financial records and statistical data for proper determination of costs payable under the program.”
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`42 C.F.R. § 413.20(a). “Standardized definitions, accounting, statistics, and reporting practices
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`that are widely accepted in the hospital and related fields are followed.” Id.
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`In particular, the data submitted to the MAC “must be based on [the provider’s] financial
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`and statistical records which must be capable of verification by qualified auditors.” Id. § 413.24(a).
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`Thus, the data must be “capable of being audited” and be “accurate and in sufficient detail to
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`accomplish the purposes for which it is intended.” Id. § 413.24(c). The purpose of using the
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`provider’s financial and statistical records to determine reasonable cost reimbursement is “to arrive
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`at equitable and proper payment [to providers] for services to” Medicare beneficiaries. Id.
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`§ 413.20(a).
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`Springs, in its motion, makes three arguments in support of its position the PRRB’s
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`decision was incorrect: (1) the PPRB acted arbitrarily and capriciously, (2) the PRRB’s decision
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`was unsupported by law, and (3) the PRRB’s decision was unsupported by substantial evidence.
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`HHS, in its motion, argues the PRRB’s “decision is not arbitrary nor capricious but is supported
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`by the substantial evidence.” HHS’s Mot. for Summ. J. at 12.
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`A.
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`Whether the PRRB’s decision as to Springs’s IRF’s FY 1997 cost report is arbitrary
`and capricious
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`Springs makes three primary arguments supporting its contention the PRRB’s decision is
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`arbitrary and capricious. As to the first, Springs avers the PRRB’s decision arbitrarily ignored
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`voluminous information that supported a finding its costs were reasonable.
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`For example, Springs notes it offered Palmetto “medical records for every [IRF] patient,
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`which included admission criteria, treatment protocols, diagnoses, lengths of stay, and the number
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`of therapy units provided to each patient.” Springs’s Mot. for Summ. J. at 24. And, according to
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`Springs, it provided Palmetto access to its Provider Statistical & Reimbursement Report (PS&R)
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`data “to support the volume of therapy services provided (and, indirectly, the number of therapy
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`hours provided to Medicare beneficiaries) and also gave [Palmetto] access to direct medical
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`records that could be used to verify the number of therapy hours provided.” Id. (internal citations
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`omitted).
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`These PS&R records, according to Springs, “offered to show, as an alternative to payroll
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`records, the volume of work that RehabCare did to back into what is most important about . . .
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`payroll data—it shows the number of hours worked by the [therapists on behalf of Springs’s
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`Medicaid beneficiaries].” Id. And, Springs opines, “PS&R data is presumed to be accurate, and
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`can be relied upon by [HHS], unless the provider furnishes documentation to the contrary.”
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`Springs’s Reply at 15.
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`HHS, in its motion, contends the PRRB’s decision is not arbitrary and capricious because
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`Springs failed to demonstrate it provided Palmetto adequate financial and statistical records
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`“capable of being audited[.]” 42 C.F.R. § 413.24(c).
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`In particular, HHS posits “the record contains no documentation that would allow the
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`auditors to determine whether [the amount Springs claims it paid RehabCare] was reasonable.”
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`HHS’s Mot. for Summ. J. at 9. Regarding the VQM, HHS notes “[w]hile this document breaks
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`down the cost of the contract based upon employees, such as physical therapist costs and therapist
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`assistant costs, it is not auditable documentation itself, but a model that attempts to use
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`documentation to separate therapy charges from [program] management charges.” Id. at 10.
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`And, as to the PS&R data, HHS contends “it does not contain salary information or other
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`information that the PRRB found was necessary to conduct an audit of the contract costs” and the
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`PS&R data “relates only to medical care costs such as therapy[,]” not program management costs.
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`HHS’s Reply at 8. Thus, according to HHS, even assuming the PS&R data provided auditable
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`documentation, which it believes it fails to do, the data provides zero input as to the program
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`management costs.
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`To recap, as previously discussed, for Springs’s IRF’s FYs 1998, 1999, and 2000 cost
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`reporting periods, it provided Palmetto, among other things, RehabCare’s payroll records for the
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`employees that serviced Springs’s patients. Palmetto used these payroll records to audit the VQM
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`submitted by RehabCare to determine their reasonableness. But, for Springs’s IRF’s FY 1997 cost
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`reporting period, it was unable to obtain RehabCare’s payroll records for Palmetto to utilize for
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`VQM auditing purposes.
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`Although Springs argues
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`it provided “voluminous, and more
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`than sufficient,
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`documentation [to demonstrate] the reasonableness of its costs for the [IRF’s FY 1997 cost
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`reporting period],” Springs’s Mot. for Summ. J. at 27, it failed to summarize and synthesize the
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`information into an auditable form for use by Palmetto. For example, as noted by HHS, Springs
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`“never attempted itself to support the 1997 costs with specific medical records, but left that job to
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`the auditors, which was not practical.” HHS’s Mot. for Summ. J. at 18 (citation omitted).
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`Palmetto’s auditor “testified that the amount of medical data provided [by Springs] was
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`overwhelming and couldn’t be audited in a practical manner” and “the medical files [sent by
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`Springs in an electronic format] were hard to open[.]” Id. at 12. The burden of proof of the statutes
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`and regulations at issue in this case “remains on the provider.” Mercy Home Health v. Leavitt, 436
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`F.3d 370, 379 (3d Cir. 2006).
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`Consequently, the regulations governing the submission of annual provider cost reports
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`and the records used to support them are clear: the data must be capable of verification by qualified
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`auditors. In the instant case, Springs’s failure to provide RehabCare’s payroll records to support
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`the VQM made auditing the VQM impossible. “The consequence of failure to provide auditable
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`records is [] specifically provided for in the Medicare statute at 42 U.S.C. § 1395g(a)” and this
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`section “directs that ‘no [Medicare reimbursement] payments shall be made to any provider unless
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`it has furnished some information as [HHS] may request in order to determine the amounts due
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`such provider[.]’” Daviess County Hosp. v. Bowen, 811 F.2d 338 at 346 (7th Cir. 1987) (quoting
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`42 U.S.C § 1395g(a)). “Indeed, the plain language of § 1395g(a) seems to require that [HHS]
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`deny reimbursement unless [it] gets the information [it] asks for.” Id. (footnote omitted). Thus,
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`for all these reasons, the Court will reject Springs’s argument the PRRB’s decision was arbitrary
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`and capricious.
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`Turning to Springs’s second argument, it contends it demonstrated, pursuant to HHS’s
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`Provider Reimbursement Manual (PRM), its costs were reasonable, and the PRRB’s decision to
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`ignore the PRM’s instructions as to the type of evidence used to support the reasonableness of
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`costs was arbitrary.
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`HHS avers, notwithstanding its belief the PRM is inapplicable to Springs’s contractual
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`agreement with RehabCare, the “PRRB’s decision was based upon Springs’s failure to” provide
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`auditable data. HHS’s Mot. for Summ. J. at 17.
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`Here, the Court’s analysis is the same as in the preceding paragraphs. Whether the PRM
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`is applicable to Springs’s contractual agreement with RehabCare fails to override the Medicare
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`regulation requiring the data submitted to Palmetto must be “capable of being audited[.]” 42
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`C.F.R. § 413.24(c). And, as discussed above, Springs failed to present auditable records to
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`Palmetto to meet the mandatory requirements of this regulation. Consequently, Springs’s inability
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`to provide data “capable of being audited[,] Id. § 413.24(c), proves fatal to its argument the
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`PRRB’s decision is arbitrary.
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`Lastly, Springs contends the PRRB “acted arbitrarily by denying [its] claim for payment
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`for 1997 after allowing [] materially identical claims for other years.” Springs’s Reply at 8
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`(emphasis and capitalization modified).
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`HHS, in its motion, posits FY 1997 is unique and distinct from FYs 1998–2000, as
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`RehabCare provided payroll data for Palmetto to audit the VQM’s for all fiscal years except 1997.
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`Thus, according to HHS, the PRRB’s decision as to Springs’s IRF’s FY 1997 “is not arbitrary nor
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`capricious but is supported by the substantial evidence.” HSS’s Mot. for Summ. J. at 12.
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`Here, the Court agrees with HHS for the same reasons as articulated above. The primary
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`issue before the PRRB was whether Springs’s records were “capable of being audited[,]” 42 C.F.R.
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`§ 413.24(c). Because Springs failed to present auditable records pursuant to the Medicare
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`regulations, the Court is unable to conclude the PRRB’s decision is arbitrary and capricious.
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`B.
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`Whether the PRRB’s decision as to Springs’ IRF’s FY 1997 cost report is contrary
`to law
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`Springs argues HHS “entirely ignored [the] legal presumption” that a Medicare “providers’
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`actual costs are presumed to be its reasonable costs in providing services to Medicare
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`beneficiaries.” Springs’s Mot. for Summ. J. at 18.
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`HHS notes, as the Court concluded above, “the controlling regulation [in this case] is 42
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`C.F.R. § 413.24,” HHS’s Mot. for Summ. J. at 2, especially subsection c, that requires the cost
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`information be “capable of being audited[.]” 42 C.F.R. § 413.24(c). And, according to HHS,
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`Springs failed to comply with this regulation.
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`Here, inasmuch as the issue before the Court is whether the data provided by Springs to
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`Palmetto is “capable of being audited[,] Id. § 413.24(c), and Springs failed to provide auditable
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`records to Palmetto, the Court concludes the PRRB’s decision is supported by law.
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`C.
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`Whether the PRRB’s decision is supported by substantial evidence
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`Springs presents two arguments in support of its contention the PRRB’s decision is
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`unsupported by substantial evidence. As to the first, Springs posits the PRRB ignored the
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`voluminous amount of documentation provided by it to demonstrate its costs were reasonable.
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`These documents, Springs avers, demonstrate the PRRB’s decision is unsupported by substantial
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`evidence.
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`HHS contends the data provided by Springs, regardless of its volume, must be “capable of
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`being auditable[,] Id. § 413.24(c), and it failed to meet such a threshold.
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`Here, a review of the record leads the Court to conclude the PRRB’s decision is supported
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`by “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.”
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`Consolidated Edison Co., 305 U.S. at 229. In the Court’s review of whether an agency’s decision
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`is supported by substantial evidence, the Court does “not consider the case de novo with respect
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`to the Administrator, resolve conflicts in the evidence, or decide questions of credibility.” Mercy,
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`436 F.3d at 380. The Medicare statute requires providers such as Springs submit data “capable of
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`being auditable[,] 42 C.F.R. § 413.24(c), and substantial evidence supports the PRRB’s decision
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`to disallow Springs’s IRF’s FY 1997 costs for failure to provide auditable data.
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`Turning to Springs’s second argument, it posits the PRRB’s decision is unsupported by
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`substantial evidence because it ignored 42 C.F.R. § 413.9(c)(2), as that regulation, according to
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`Springs, is the “only substantive standard for payment that governs here[.]” Springs’s Reply at
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`12.
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`HHS contends the majority of Springs’s motion for summary judgment “addresses the
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`issue of whether or not the costs for these services ‘were substantially out of line’ with similar
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`costs from its competitors pursuant to 42 C.F.R. § 413.9” but nothing in Section 413.9 “states that
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`[Springs] does not need adequate documentation that is required by” the Medicare statute.” HHS’s
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`Mot. for Summ. J. at 2, 17. Thus, according to HHS, the PRRB’s decision is supported by
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`substantial evidence.
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`Here, Springs’s argument fails to address the issue before the Court: whether the PRRB’s
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`decision is supported by substantial evidence in light of Springs’s failure to comply with 42 C.F.R.
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`0:19-cv-01857-MGL Date Filed 04/08/21 Entry Number 29 Page 14 of 14
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`§ 413.24(c). As noted in the preceding paragraphs, Springs’s failure to provide data “capable of
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`being auditable[,] § 413.24(c), proves fatal to its argument.
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`Accordingly, for these reasons, the Court concludes the PRRB’s decision is not arbitrary
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`and capricious, contrary to law, or unsupported by substantial evidence. In light of these
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`conclusions, the Court will deny summary judgment as to Springs and grant it as to HHS.
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`V.
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`CONCLUSION
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`For the reasons stated above, it is the judgment of the Court Springs’s motion for summary
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`judgment is DENIED and HHS’s motion for summary judgment is GRANTED.
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`And, the Court directs the Clerk’s Office to substitute Xavier Becerra, Secretary of HHS,
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`as the defendant in this case.
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` IT IS SO ORDERED.
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`Signed this 8th day of April 2021, in Columbia, South Carolina.
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`s/ Mary Geiger Lewis
`MARY GEIGER LEWIS
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`UNITED STATES DISTRICT JUDGE
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