In Select Specialty Hospital – Bloomington, Inc. v. Burwell, No. 15-5355 (D.C. Cir., Jul. 8, 2014), a group of long-term care hospitals (LTCHs) successfully challenged the Secretary’s determination that they were not “new hospitals” and, therefore, did not qualify to have 85% of their capital-related costs reimbursed.  The court held that the Provider Reimbursement Review Board’s decision was “arbitrary and capricious” because it was inadequately reasoned, and the court could not “tell how the Secretary arrived at this conclusion.” 

Under Medicare regulations, most hospitals are reimbursed for their capital costs through the inpatient prospective payment system.  New hospitals, however, have the option of being reimbursed for 85 percent of their reasonable capital related costs for their first two years of operation.  A “new hospital” is defined for purposes of the capital reimbursement provision as a “hospital that has operated (under previous or present ownership) for less than 2 years.”  57 Fed. Reg. 39746, 38827 (Sept. 1, 1982); see also 42 C.F.R. 412.300(b). 

The plaintiff hospitals in Select Specialty were new corporate organizations that had leased and significantly renovated buildings previously operated as hospital entities.  Because “all of the [leased] buildings . . . were operated by [a] hospital for more than 2 years prior to the lease arrangement,” however, the Board found that they could not qualify as “new hospitals.”  In other words, “the Board looked to when the ‘bricks and mortar were established’ for a practical physical asset and who had them.”

The D.C. circuit court found that the Board failed to explain adequately “the difference between an old hospital building that has been completely gutted and renovated, and a new hospital building built from the ground up.”  The court also questioned the Board’s assumption “that the prior operation of the various physical assets by other hospital entities meant that the assets had already been the subject of a reasonable cost basis reimbursement” stating the “Board’s sweeping presumption” in this regard “remains a mystery.”  Since the Board’s decision was, in the court’s estimation, inadequately reasoned, the court held that it was “arbitrary and capricious” and remanded the case back to the Secretary “for further proceedings not inconsistent with [the court’s] opinion.”

Select Specialty is significant not only for its substantive holding but also for the court’s unwillingness to defer to the Secretary’s decision where the logical underpinnings of that decision are lacking:  “The Board’s failure to connect the dots makes remand necessary.”  The court specifically refused to allow the Secretary’s counsel to fill the gaps left by the Board’s reasoning: “The Board . . . did not articulate this particular rationale in its decision, and we therefore cannot entertain the Government’s post hoc justifications.” 

The court’s decision can be found here