Banner Health v. Thomas Price
2017 U.S. App. LEXIS 15635
D.C. Cir.2017Background
- Medicare's outlier-payment program makes supplemental payments when a patient's cost (charges adjusted to cost) exceeds a fixed-loss threshold; HHS sets that threshold annually to target aggregate outlier payments at 5.1% of non-outlier prospective payments.
- In late 1990s–early 2000s some hospitals engaged in “turbo-charging” (rapidly inflating charges), exploiting a lagged cost-to-charge ratio methodology to receive excessive outlier payments.
- HHS adopted regulatory changes in 2003 (using more recent cost reports and reconciling outlier payments upon settlement) but did not adjust the FY 2003 threshold midyear and used historical charge data to project FY 2004–2006 thresholds.
- A group of nonprofit hospitals sued under the APA challenging HHS’s methodology and record-handling for FYs 1997–2007 thresholds and specific rules (including failure to detect turbo-charging earlier, exclusion of turbo-chargers from datasets, and treatment of projection cost-to-charge ratios).
- The district court largely upheld HHS but remanded FY 2004 threshold issues; this appeal affirmed most holdings but found HHS’s explanations inadequate for aspects of FY 2004–2006 and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Article III standing to challenge HHS’s earlier (1997–2003) inaction | Hospitals: HHS had info to detect turbo-charging and their injuries would be redressed by remedial rule changes | HHS: relief would not redress because thresholds might not change or could increase | Court: Hospitals have standing; redressability satisfied on plaintiffs’ theory |
| Admissibility / supplementation of extra-record materials; motion to amend complaint (disclosure of draft IFR) | Hospitals: draft IFR and other materials are critical and HHS withheld/ lost materials; amendment alleging §553 violation warranted | HHS: administrative record is sufficient; claim to amend futile | Court: district court did not abuse discretion excluding certain materials; amendment denied as futile — American Radio Relay League doctrine not extended to draft IFRs |
| Failure to detect/stop turbo-charging (FYs 1997–2003) — arbitrary-and-capricious | Hospitals: public and nonpublic data should have put HHS on notice to act earlier | HHS: data ambiguous; many non-fraud explanations; no contemporaneous request to change rules | Court: not arbitrary or capricious — HHS reasonably failed to detect widespread turbo-charging in real time |
| FY 2003 midyear threshold adjustment | Hospitals: once HHS knew of turbo-charging it was required to lower FY 2003 threshold midyear to hit 5.1% target | HHS: prospectivity and County of Los Angeles bar midyear recalculation; may account for all lawful expected payments | Court: HHS not required to adjust midyear; decision not arbitrary given prospectivity concerns |
| FY 2004 charge-inflation data (including turbo-chargers) | Hospitals: including historical turbo-charged data to project FY 2004 inflation was irrational | HHS: justified using available data and anticipated that reforms would curb turbo-charging; excluding turbo-chargers would distort simulations | Held: Arbitrary and capricious — HHS failed to adequately explain why it used turbo-charged data to forecast charge inflation for FY 2004 |
| Projection cost-to-charge ratios (FYs 2004–2006) — failure to adjust downward | Hospitals: once using charge-inflation methodology, HHS had to lower projection cost-to-charge ratios to reflect faster charge growth vs cost growth | HHS: using most recent tentative settled reports and reconciliation expectations justified not adjusting | Held: Arbitrary and capricious for FYs 2004–2006 — HHS did not adequately explain why it did not adjust projection cost-to-charge ratios downward |
| FY 2004 selection of ~50 reconciliation candidates vs earlier-identified 123 turbo-chargers | Hospitals: HHS should have adjusted all 123; arbitrary to pick ~50 without record support | HHS: reconciliation criteria and practical forecasting justified selecting ~50; further explanation supplied on remand | Held: Court upheld HHS’s explanation as adequate for selecting ~50 hospitals |
| FY 2007 adjustment factor and other methodology changes | Hospitals: adjustment factor understates historical declines in cost-to-charge ratios; methodology arbitrary | HHS: used market-basket-based predictive modeling and other reasonable proxies | Held: Court upheld FY 2007 methodology and adjustment factor as adequately explained and entitled to deference |
Key Cases Cited
- County of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir. 1999) (prospectivity of outlier program permits setting thresholds in advance without retroactive midyear adjustments)
- District Hospital Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015) (remanding FY 2004 methodology; governs issues about turbo-chargers and projection choices)
- Auer v. Robbins, 519 U.S. 452 (1997) (agency not arbitrary for failing to revise regulation when no one asked; court distinguished here)
- American Radio Relay League v. FCC, 524 F.3d 227 (D.C. Cir. 2008) (APA notice-and-comment requires disclosure of technical studies/data relied upon; court limited application to draft IFRs)
- Florida Power & Light Co. v. Lorion, 470 U.S. 729 (1985) (if record does not support agency action, remand for explanation is appropriate)
- LaShawn A. v. Barry, 87 F.3d 1389 (D.C. Cir. 1996) (standard that plaintiffs are assumed correct on the merits for standing inquiry)