United States v. 2010-12-16 | 09-56246 | Beacon Healthcare Services, in V. Mike Leavitt |…

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 BEACON HEALTHCARE SERVICES,
INC., DBA Newport Bay Hospital, No. 09-56246
Plaintiff-Appellant, D.C. No.
v. 8:07-cv-00918-JVS- 
MIKE LEAVITT, Secretary, United RNB
States Department of Health & OPINION
Human Services,
Defendant-Appellee. 
Appeal from the United States District Court
for the Central District of California
James V. Selna, District Judge, Presiding
Argued and Submitted
October 8, 2010—Pasadena, California
Filed December 16, 2010
Before: Raymond C. Fisher and Jay S. Bybee, Circuit
Judges, and Edward F. Shea, District Judge.*
Opinion by Judge Bybee
*The Honorable Edward F. Shea, United States District Judge for the
Eastern District of Washington, sitting by designation.
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COUNSEL
Richard J. Foster, Law Office of Richard J. Foster, Seal
Beach, California; Mark S. Kennedy, Kennedy Attorneys &
Counselors at Law, Dallas, Texas, for the appellant.
Andre Birotte, Jr., Leon W. Weidman, and Russell W. Chit-
tenden, United States Department of Justice, Civil Division,
Los Angeles, California, for the appellee.
OPINION
BYBEE, Circuit Judge:
Plaintiff-Appellant Beacon Healthcare Services, Inc.,
(“Beacon”) appeals the district court’s judgment affirming the
Provider Reimbursement Review Board’s (“PRRB”) determi-
nation that it did not have jurisdiction to hear Beacon’s appeal
of a fiscal intermediary’s decision; concluding on the merits
that the Secretary of the U.S. Department of Health and
Human Services (“Secretary”) is not required by law to adjust
Beacon’s target TEFRA costs; and dismissing Beacon’s
remaining claims.
For the reasons discussed below, we conclude the PRRB
did have jurisdiction to hear Beacon’s appeal. We affirm,
however, the district court’s (1) decision that the Secretary is
not required by law to adjust Beacon’s TEFRA target, and (2)
dismissal of the additional claims for which Beacon invoked
subject matter jurisdiction under 28 U.S.C. § 1331.
I. FACTS AND PROCEEDINGS
Beacon operates Newport Bay Hospital, a 34-bed psychiat-
ric hospital specializing in services for geriatric patients in
California. The medical conditions attendant to this aged pop-
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ulation require Beacon to provide a larger and more varied
array of services, medical machines, and physical amenities
(e.g., railings and ramps) than does a psychiatric hospital
serving the general population. For this reason, Beacon’s
expected annual expenses are higher than those of typical psy-
chiatric hospitals.
For the period ending April 30, 2001, and in accordance
with the Tax Equity and Fiscal Responsibility Act of 1982
(“TEFRA”), Pub. L. No. 97-248, the Centers for Medicare
and Medicaid Services capped Beacon’s annual reimburse-
ment at a target amount based upon the expected annual costs
of all psychiatric hospitals. 42 U.S.C. § 1395ww(b)(3)(H).
Beacon’s TEFRA target amount is adjusted annually in accor-
dance with a statutory index designed to reflect inflation. Id.
In 2003, Beacon made a claim to its fiscal intermediary,
Mutual of Omaha Insurance Company (“Mutual”), for an
increase to its annual TEFRA target amount in excess of its
as-of-right inflation increase. Beacon requested the increase to
compensate for the higher costs associated with serving an
atypically geriatric mix of patients. Mutual denied Beacon’s
claim for an increased TEFRA target amount but did allocate
to Beacon an additional payment of $32,081 because Bea-
con’s 2001 costs had been below its 2001 TEFRA ceiling, a
payment mandated by 42 U.S.C. § 1395ww(b)(1)(A). Section
1395ww(b) requires the Secretary to pay hospitals a bonus if
their costs do not exceed their TEFRA annual ceiling for the
year.
Beacon appealed to the PRRB. The PRRB found it “lack-
[ed] jurisdiction to decide [Beacon’s] case” because Beacon’s
claim did not meet “the ‘amount in controversy’ requirement
for a Board hearing.” The PRRB reasoned that Beacon’s
claim for $164,000 in additional payments did not meet the
statutory requirement that the PRRB only hear cases for
which “the amount in controversy is $10,000 or more,” 42
U.S.C. § 1395oo(a)(2), because “[Beacon’s] calculation is
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based upon an adjustment to its TEFRA ceiling (and a corre-
sponding increase to its TEFRA incentive or bonus payment),
not how much additional reimbursement will be due to the
Provider, which is inconsistent with program rules.” Citing 42
C.F.R. § 413.40(g)(1)(iii), the PRRB concluded that the Sec-
retary was prohibited from making the adjustment Beacon
requested. The PRRB held that because “[Beacon’s] TEFRA
ceiling is not subject to adjustment, [Beacon’s] amount in
controversy calculation is inaccurate, and there is no Medi-
care reimbursement at issue.” The PRRB ordered the dis-
missal of Beacon’s appeal.
Beacon appealed the PRRB’s dismissal to the district court,
which declined to resolve whether the issue on appeal was
“jurisdictional or substantive” but held that, regardless, “the
dispute here really turns on whether a provider whose
expenses do not exceed the TEFRA cap may seek an adjust-
ment.” The court concluded “the PRRB was correct when it
concluded that Beacon’s claim did not meet the amount-in-
controversy requirement.” But the court also held, in the alter-
native, that even if the PRRB were mistaken in its jurisdic-
tional decision, “the error would be harmless because there
was no substantive basis for an adjustment.” Beacon filed a
timely appeal.
II. STANDARD OF REVIEW
We review de novo the district court’s affirmance of the
PRRB’s dismissal for lack of subject matter jurisdiction,
McNatt v. Apfel, 201 F.3d 1084, 1087 (9th Cir. 2000); the dis-
trict court’s determination of the merits of Beacon’s appeal,
Regents of Univ. of Cal. v. Heckler, 756 F.2d 1387, 1393 (9th
Cir. 1985); and the district court’s dismissal of Beacon’s
unexhausted claims, Boettcher v. Sec’y of Health & Human
Services, 759 F.2d 719, 720 (9th Cir. 1985).
The Secretary’s decision on the merits may be overturned
only if it is arbitrary, capricious, or otherwise defective under
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the Administrative Procedure Act, 5 U.S.C. § 706. 42 U.S.C.
§ 1395oo(f)(1). See Mt. Diablo Hosp. v. Shalala, 3 F.3d 1226,
1230 (9th Cir. 1993) (“Under the APA, we must determine if
the Secretary’s action was ‘arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with the law.’ ”
(quoting 5 U.S.C. § 706(2)(A))).
III. DISCUSSION
A. The PRRB’s Jurisdiction
[1] The scope of the PRRB’s jurisdiction is established by
42 U.S.C. § 1395oo(a). The relevant portion of that section
specifies that “any hospital which receives payments in
amounts computed under subsection (b) or (d) of section
1395ww of this title . . . may obtain a hearing with respect to
such payment by the Board” if “(1) such provider . . . is dis-
satisfied with a final determination of the Secretary as to the
amount of the payment”; “(2) the amount in controversy is
$10,000 or more”; and (3) “such provider files a request for
a hearing within 180 days. . . .” 42 U.S.C. § 1395oo(a). In
other words, this statute requires that the PRRB hear appeals
from a hospital “dissatisfied” with the § 1395ww(b) payment
it received, as long as the hospital’s appeal meets the amount
in controversy requirement ($10,000 or more) and procedural
deadlines.
[2] The only § 1395oo(a) requirement in dispute here is the
amount in controversy, which, in the context of cases origi-
nating in the federal district courts, “is normally determined
from the face of the pleadings.” Pachinger v. MGM Grand
Hotel-Las Vegas, Inc., 802 F.2d 362, 363 (9th Cir. 1986). In
this case, Beacon claimed in its pleadings approximately
$164,000 as the amount in controversy. This amount meets
the requirements of § 1395oo(a)(2). Nevertheless, the PRRB
dismissed Beacon’s suit on jurisdictional grounds because it
concluded that Beacon was not in fact entitled to an adjust-
ment of at least $10,000, the PRRB’s required amount in con-
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troversy. This was error. The PRRB confused the amount in
controversy with the remedy.1 The amount in controversy is
judged prospectively: that is, we determine our jurisdiction by
asking whether, assuming the petitioner or plaintiff has stated
a cause of action, he has pled sufficient damages. Here the
PRRB inverted the inquiry. It began by asking if Beacon was
entitled to an adjustment of the TEFRA ceiling. Having deter-
mined that Beacon was not so entitled, the PRRB dismissed
for want of jurisdiction because Beacon had failed to state a
claim for the requisite amount in controversy.
[3] As Beacon’s case met all of the statutory requirements
of 42 U.S.C. § 1395oo(a), it fell within the scope of the Secre-
tary’s jurisdiction, and the PRRB erred in finding otherwise.
B. The TEFRA Adjustment
The PRRB made clear, and the district court held in the
alternative, that even if the PRRB had jurisdiction, Beacon
could not receive an increase to its TEFRA target. This
inquiry goes to the merits of Beacon’s claim.
[4] Section 1395ww(b)(4)(A) requires the Secretary to
make TEFRA target exceptions and adjustments “where
events beyond the hospital’s control or extraordinary circum-
stances . . . create a distortion in the increase in costs for a
cost reporting period.” The Secretary promulgated an addi-
tional regulation requiring that a hospital’s “operating costs
exceed the [TEFRA] rate-of-increase ceiling” before the Sec-
1To state the problem by analogy to the Federal Rules of Civil Proce-
dure, the PRRB confused a 12(b)(6) dismissal (dismissal for failure to
state a cause of action) with a 12(b)(1) dismissal (dismissal for want of
subject matter jurisdiction). See Reed Elsevier Inc. v. Muchnick, 130 S. Ct.
1237, 1244 (2010) (“Our recent cases evince a marked desire to curtail
such drive-by jurisdictional rulings, which too easily can miss the critical
differences between true jurisdictional conditions and nonjurisdictional
limitations on causes of action.”) (quotation marks and citations omitted).
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retary will make a § 1395ww(b)(4)(A) adjustment. 42 C.F.R.
§ 413.40(g)(1)(iii).
[5] The Secretary’s regulation is a reasonable interpreta-
tion of 42 U.S.C. § 1395ww(b)(4)(A). The Medicare Act does
not define the critical term—“distortion in the increase in
costs”—meriting adjustment. Recognizing this ambiguity, the
Secretary has interpreted “increase in cost” to mean an “in-
crease in operating costs beyond the TEFRA ceiling” and not
an “increase in potential operating costs.” 42 C.F.R.
§ 413.40(g)(1)(iii). As the district court noted, the Secretary
issued a “detailed explanation for why adjustments should be
limited to situations where the provider has exceeded his
TEFRA cost ceiling.” See Medicare Program; Miscellaneous
Changes Affecting Payment for Inpatient Hospital Services,
53 Fed. Reg. 9337 (Mar. 22, 1988). The Secretary explained
that the regulation filled a gap in the statutory regime created
by the adoption of the adjustment provision and the incentive
payment provision from two different versions of the law. As
the Secretary explained: “[T]he language in the statute autho-
rizing the exemptions, exceptions, and adjustments was added
by the Senate without its contemplating that this process
would apply in cases in which the hospital’s costs do not
exceed the target amount and the hospital receives an incen-
tive payment.” Medicare Program, 53 Fed. Reg. at 9340. The
Secretary’s explanation and policy choice are reasonable con-
structions of the Medicare Act. See Chevron, U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984).
[6] Because Beacon did not experience an increase in oper-
ating costs beyond the TEFRA ceiling, the district court cor-
rectly determined that Beacon was not eligible for a TEFRA
target cost adjustment under 42 U.S.C. § 413.40(g)(1)(iii).
C. Beacon’s Remaining Claims
[7] The district court dismissed Beacon’s claims that were
not raised before the PRRB. As the district court properly
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explained, 42 U.S.C. § 1395ii makes § 405(h) of the Social
Security Act applicable to the Medicare Act. Section 405(h)
states:
The findings and decision of the Commissioner of
Social Security after a hearing shall be binding upon
all individuals who were parties to such hearing. No
findings of fact or decision of the Commissioner of
Social Security shall be reviewed by any person, tri-
bunal, or governmental agency except as herein pro-
vided. No action against the United States, the
Commissioner of Social Security, or any officer or
employee thereof shall be brought under section
1331 or 1346 of Title 28 to recover on any claim
arising under this subchapter.
42 U.S.C. § 405(h). This provision makes exclusive the judi-
cial review method set forth in § 1395oo(f), which allows for
district court review of “any final decision” of the PRRB “or
of any reversal, affirmance, or modification by the Secretary.”
See also 42 U.S.C. § 1395ii.
[8] In Shalala v. Illinois Council on Long Term Care, Inc.,
529 U.S. 1 (2000), the Supreme Court held that, though the
scope of the “arising under” language of § 405(h) is facially
“uncertain,” “th[e]se words clearly apply in a typical . . .
Medicare benefits case, where an individual seeks a monetary
benefit from the agency . . . , the agency denies the benefit,
and the individual challenges the lawfulness of that denial.”
Id. at 10. The Court observed that § 405(h) “plainly bars . . .
§ 1331 review . . . irrespective of whether the individual chal-
lenges the agency’s denial on evidentiary, rule-related, statu-
tory, constitutional, or other legal grounds.” Id. Such is the
case here, and as a consequence, Beacon was barred from
joining the claims it did not bring before the PRRB to its
appeal of the agency’s final decision. Therefore, the district
court correctly concluded it lacked jurisdiction over Beacon’s
unexhausted claims.
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IV. CONCLUSION
In sum, although the PRRB improperly ruled that it lacked
jurisdiction to hear Beacon’s appeal, the district court prop-
erly affirmed the agency’s decision on the merits, holding
Beacon was not entitled to a TEFRA target cost adjustment
under 42 U.S.C. § 413.40(g)(1)(iii) when its annual operating
costs have not already exceeded its TEFRA target. The dis-
trict court also properly dismissed Beacon’s additional claims,
as these claims are precluded by 42 U.S.C. § 1395ii.
The judgment is AFFIRMED.
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