Billings Clinic v. Alex M. Azar II
901 F.3d 301
D.C. Cir.2018Background
- Medicare uses a prospective payment system with DRG-based base rates and permits "outlier" payments when a case's estimated cost (charges adjusted by a hospital-specific cost-to-charge ratio) exceeds a fixed-loss threshold.
- To set annual outlier thresholds, HHS projects historical charges and cost-to-charge ratios forward using charge- and cost-inflation factors; since 2007 HHS incorporated a market-basket–based cost-inflation adjustment.
- The 2003 reforms addressed ‘‘turbo-charging’’ abuse and allowed reconciliation (claw-backs) at settlement, but HHS historically declined to incorporate reconciliation into its ex ante threshold-setting.
- Several hospitals challenged HHS’s outlier-threshold methodology for fiscal years 2008–2011 as arbitrary and capricious and also complained HHS failed to publish an abandoned 2003 draft rule.
- The Provider Reimbursement Review Board certified expedited review for many hospitals; the district court upheld HHS on summary judgment; hospitals appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether HHS’s failure to publish the 2003 draft rule violated rulemaking requirements | Hospitals: nondisclosure deprived them of material information and procedural fairness | HHS: draft was not relied on in final rule; no disclosure duty | Rejected — Banner Health controls; nondisclosure not reversible error |
| Whether HHS had to account for reconciliation (claw-backs) when setting thresholds | Hospitals: reconciliation can materially change aggregate outlier payments; must be considered | HHS: reconciliation is unpredictable, administratively impracticable to model ex ante | Rejected — prior precedent allows HHS not to model reconciliation |
| Whether HHS’s cost-inflation methodology (market-basket + cost-per-discharge) is arbitrary compared to a simpler industry-specific method | Hospitals: simpler method (actual rate of cost change) was more accurate; repeated shortfalls show arbitrariness | HHS: complex model better accounts for macro and hospital-specific factors; more stable and reasonable post–turbo-charging | Rejected — Banner Health upheld facial validity; complexity alone not arbitrary |
| Whether continuing the 2007 methodology through 2008–2011 was arbitrary given accumulating underpayments | Hospitals: repeated under-target payments and available data made continued use arbitrary | HHS: limited, lagged, and inconsistent data; 2009 showed meeting/exceeding target; deliberative continuation reasonable | Rejected — not arbitrary; reasonable to wait for more settled data before changing model |
Key Cases Cited
- Banner Health v. Price, 867 F.3d 1323 (D.C. Cir.) (upholding HHS’s 2007 outlier methodology and addressing nondisclosure and reconciliation arguments)
- Allina Health Servs. v. Price, 863 F.3d 937 (D.C. Cir.) (jurisdictional discussion on expedited review and Board certification)
- County of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir.) (background on Medicare prospective payment and outlier statutory framework)
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (U.S. 1983) (arbitrary-and-capricious standard for agency action)
- District Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir.) (on effect of 2003 reforms correcting turbo-charging flaws)
- American Petroleum Institute v. EPA, 706 F.3d 474 (D.C. Cir.) (noting that a model may appear more arbitrary the longer it is applied)
- Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (U.S.) (context on Medicare prospective payment shift from reasonable cost)