Abington Memorial Hospital v. Burwell, 216 F. Supp. 3d 110

Background

Medicare’s Inpatient Prospective Payment System (PPS) adjusts national DRG rates by a regional wage index derived from hospitals’ cost-report Worksheet S-3; CMS updates indices annually using historical cost-report data (typically 3–4 years old).
From 1994–2005 CMS generally instructed hospitals to follow GAAP for wage-related costs; concerns about inconsistent or overreported unfunded pension/postretirement costs led CMS to propose changing the reporting standard in 2005.
The 2005 Final Rule required hospitals to develop pension and other deferred compensation costs for wage-index purposes according to Medicare reasonable-cost principles (MRCP), combining GAAP, Medicare payment principles, and other federal labor/IRS/ERISA requirements, effective for data used in the FY2007 wage index and later.
CMS agents (MACs) audited historical cost reports under the new standard when compiling the FY2007–FY2011 wage indices; CMS also issued Transmittal 436 (2008) clarifying PRM terminology and released an optional 2009 auditing spreadsheet—plaintiffs allege inconsistent application of these changes.
493 hospitals challenged the lawfulness of the 2005 Final Rule, Transmittal 436, and the MACs’ applications (including alleged retroactive effect) before the PRRB and then in federal court, seeking recalculation of wage indices and increased PPS reimbursements for FY2007–FY2011.
The district court denied plaintiffs’ summary judgment and granted the Secretary’s cross-motion, holding that CMS provided adequate notice, the 2005 change was reasonable and entitled to deference, the PRM transmittal was interpretive (not subject to notice-and-comment), and application of the rules to historical data was not impermissibly retroactive.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the 2005 Final Rule violated notice-and-comment requirements	2005 proposal disguised a substantive change as a "clarification" and did not give fair notice or opportunity to comment	Proposed rule expressly described changes to wage-data reporting, referenced MRCP, and gave an implementation lag; commenters did address the change	Court: proposal provided fair notice and final rule was a logical outgrowth of the proposed rule — no APA notice-and-comment violation
Whether Transmittal 436 required notice-and-comment rulemaking	Transmittal replaced GAAP terms with ERISA terminology and effected substantive change without notice	Transmittal was an interpretive guidance clarifying existing manual language; interpretive rules are exempt from notice-and-comment	Court: plaintiffs characterized Transmittal 436 as interpretive; Perez abrogated Paralyzed Veterans; no notice-and-comment required; claim waived/unsupported
Whether the 2005 Final Rule (shift to MRCP) was arbitrary and capricious or contrary to statute	Change was inadequately explained and MRCP is inconsistent with statutory goal of reflecting regional relative labor costs	CMS articulated reasons (IG findings, inconsistent/overreporting under GAAP) and chose a reasonable, expert policy within its delegated statutory authority	Court: agency provided adequate reasoned explanation and choice of MRCP is entitled to deference under Chevron framework; not arbitrary or capricious
Whether applying the 2005 Rule/Transmittal/spreadsheet to pre-rule cost reports was impermissibly retroactive	Applying the new rules to previously submitted historical data impaired vested rights and retroactively changed liability	PPS is prospective: historical cost data are used to set future rates; the rule altered future compensation expectations, not past payments or vested rights	Court: no impermissible retroactivity — changes affected prospective reimbursement rates and did not alter legal consequences of past completed transactions

Key Cases Cited

Anna Jaques Hosp. v. Burwell, 797 F.3d 1155 (D.C. Cir. 2015) (discussing wage-index methodology and deference to CMS)
Cape Cod Hosp. v. Sebelius, 630 F.3d 203 (D.C. Cir. 2011) (explaining wage-index adjustment for regional labor costs)
Regents of the Univ. of Cal. v. Burwell, 155 F. Supp. 3d 31 (D.D.C. 2016) (similar retroactivity analysis rejecting retroactive-rule claim when historical data used to set prospective rates)
Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) (notice/"clarify" discussion where a purported clarification masked a substantive reversal)
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (agency must engage in reasoned decisionmaking; arbitrary-and-capricious standard)
Landgraf v. USI Film Prods., 511 U.S. 244 (1994) (principles governing retroactivity: when new law impairs vested rights)
Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199 (2015) (Supreme Court held interpretive rules are exempt from notice-and-comment under APA)
Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1 (D.C. Cir. 2011) (retroactivity framework in administrative context)