24 F.4th 116
2d Cir.2022Background
- Medicare distinguishes inpatient (Part A) from outpatient/observation (Part B); Part A covers inpatient hospital and post-hospital SNF care after a 3-day inpatient stay, Part B does not.
- Hospitals initially admit patients as inpatients; hospital utilization review committees (URCs) may reclassify some to outpatient/observation, which can strip Part A coverage and SNF eligibility.
- Hospitals can appeal Medicare denials of Part A reimbursement through multi-level administrative appeals, but beneficiaries reclassified before a Part A claim is ever submitted have no administrative appeal of the URC reclassification.
- Plaintiffs (Medicare beneficiaries reclassified from inpatient to observation) brought an 11-year class action alleging the Secretary violated the Fifth Amendment by providing no appeals process for URC reclassification decisions; the district court found a due process violation and enjoined the Secretary to create appellate procedures.
- The Second Circuit affirmed: it held plaintiffs had standing, the class was properly certified under Rule 23(b)(2), URC reclassification is fairly attributable to the state, beneficiaries have a protected property interest in Part A coverage, and due process requires an appeals mechanism.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing (named plaintiff) | Leyanna suffered concrete financial harm when SNF care was denied after reclassification | Secretary: plaintiff failed to prove SNF care was reasonable/necessary, so no injury | Held: Leyanna proved CMS denied coverage due to reclassification; she has Article III standing |
| Class standing / scope of relief | Named plaintiffs can represent absent/hypothetical future patients; relief should include expedited and retrospective appeals | Secretary: named plaintiffs lack interest in expedited relief and thus lack class standing for that remedy | Held: Named plaintiffs suffered the same injury type and share litigation incentives; class standing exists for both forms of relief |
| Class certification (commonality/typicality/23(b)(2)) | Common injury: denial of Part A coverage due to no appeals of URC reclassification; representatives typical | Secretary: variation in injuries and interests (some need retrospective, some expedited) defeats commonality/typicality and (b)(2) suitability | Held: District court did not abuse discretion; common questions predominate, representatives typical, (b)(2) appropriate because injunctive relief benefits class as a whole |
| State action (URC reclassification) | URCs act under statutory/regulatory mandate, use CMS guidance and screening tools, and are pressured by audits – so URC decisions are fairly attributable to the state | Secretary: URC/reclassification is independent medical judgment of private hospitals, not state action; Blum controls | Held: URC reclassification is fairly attributable to the state (compulsion/close-nexus tests); Blum not controlling because decision here is URC-driven rather than purely physician-driven |
| Property interest (Part A coverage) | Two-Midnight Rule and related guidance meaningfully channel official discretion, creating an entitlement to Part A when criteria met | Secretary: medical judgment required to apply rule; no guaranteed entitlement | Held: The regulatory scheme and CMS practice channel discretion so beneficiaries have a protected property interest in Part A coverage |
| Due process (Mathews balancing; remedies) | Without an appeals process beneficiaries face substantial private interests and significant risk of erroneous deprivation; appeals are feasible and should be required | Secretary: creating appeals is burdensome, costly, and unnecessary given existing hospital remedies | Held: On balance (private interest, error risk, government burden) due process requires an appeals mechanism (expedited for current patients and retrospective review); injunction affirmed |
Key Cases Cited
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (Article III standing standards)
- Blum v. Yaretsky, 457 U.S. 991 (1982) (state-action analysis for private medical decisions)
- Mathews v. Eldridge, 424 U.S. 319 (1976) (three‑factor due‑process balancing test)
- Brentwood Academy v. Tennessee Secondary School Athletic Ass'n, 531 U.S. 288 (2001) (tests for attributing private action to the state)
- Bd. of Regents v. Roth, 408 U.S. 564 (1972) (property‑interest/entitlement standard)
- Goldberg v. Kelly, 397 U.S. 254 (1970) (procedural protections for public-benefit deprivations)
- Barrows v. Burwell, 777 F.3d 106 (2d Cir. 2015) (prior panel on plaintiffs’ entitlement theory)
- Wal‑Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) (class commonality principles)
- Kramer v. Heckler, 737 F.2d 214 (2d Cir. 1984) (URC/state-action discussion)