206 F.Supp.3d 393
D.D.C.2016Background
- Clarian Health West, an Indiana hospital, received Medicare outlier payments for 2007 that CMS later sought to recoup (about $2.4 million) after applying a 2010 CMS Claims Processing Manual reconciliation procedure.
- CMS promulgated a 2003 regulation authorizing reconciliation of outlier payments once a hospital’s settled cost report is available, but left specific implementation details to later guidance.
- In 2010 CMS issued manual instructions establishing two quantitative "qualifying criteria" to trigger reconciliation: a ±10 percentage-point difference in cost-to-charge ratio and total outlier payments over $500,000; the manual was issued without notice-and-comment.
- Clarian challenged the 2010 criteria (and related reconciliation practices) under the APA and Medicare’s notice-and-comment provisions, arguing they are substantive rules adopted without required procedures; CMS defended the criteria as interpretive or procedural and within agency authority.
- The district court considered cross-motions for summary judgment and supplemental briefing focusing on whether the manual criteria required notice-and-comment under the Medicare statute.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CMS’s 2010 manual qualifying criteria required notice-and-comment under Medicare | The criteria are substantive rules that change benefits/payment scope and thus required notice-and-comment | The criteria are interpretive or procedural guidance exempt from notice-and-comment | Held for Plaintiff: criteria are substantive and required notice-and-comment; agency failed to comply |
| Whether the criteria are interpretive (exempt) | The criteria are not grounded in specific statutory/regulatory text and impose arbitrary numeric thresholds | The criteria merely implement statutory concept of "marginal cost" and are technical details in a manual | Held: not interpretive — statutory language is too broad and link to criteria too attenuated |
| Whether Medicare’s notice-and-comment provision incorporates APA procedural-rule exemption | Plaintiff: Medicare does not incorporate a procedural-rule exemption; express statutory exemptions exclude it | Defendant: courts have recognized procedural exemptions in Medicare context; these criteria are procedural | Held: Medicare does not incorporate a procedural-rule exemption; expressio unius and statutory structure foreclose importing it |
| Whether the criteria are procedural rather than substantive | Plaintiff: criteria encode substantive policy choices and affect providers’ rights/benefits | Defendant: criteria are operational details, non-binding, and CMS retains discretion | Held: criteria are substantive (change agency policy, affect scope of benefits); agency discretion does not make them procedural |
Key Cases Cited
- Catholic Health Initiatives v. Sebelius, 617 F.3d 490 (D.C. Cir.) (numeric, detailed manual provisions were substantive and required notice-and-comment)
- Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir.) (explaining outlier payment formula and reconciliation context)
- Cape Cod Hosp. v. Sebelius, 630 F.3d 203 (D.C. Cir.) (prospective payment system background)
- County of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir.) (recognizing outlier and prospective payment complexities)
- American Hosp. Ass'n v. Bowen, 834 F.2d 1037 (D.C. Cir.) (agency characterizations of rule type not dispositive for notice-and-comment)
- Mendoza v. Perez, 754 F.3d 1002 (D.C. Cir.) (defining interpretive vs. substantive rules)
- U.S. Telecom Ass'n v. FCC, 400 F.3d 29 (D.C. Cir.) (narrow construction of notice-and-comment exceptions)
- Elec. Privacy Info. Ctr. v. U.S. Dep't of Homeland Sec., 653 F.3d 1 (D.C. Cir.) (agency discretion does not automatically make a rule procedural)
- Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (U.S. Supreme Court) (review standard for arbitrary and capricious agency action)