New Lifecare Hospitals of Chester County LLC v. Azar, II, 417 F.Supp.3d 31

Background

Medicare generally pays hospitals fixed prospective rates; Congress authorized high-cost outlier (HCO) payments to offset exceptionally costly stays but required overall payment system budget neutrality, so CMS applies a budget neutrality adjustment (BNA) reducing rates to account for projected outlier payments.
Long-term care hospitals (LTCHs) operate under a dual-rate system: a higher standard Federal LTCH rate and a lower "site neutral" rate for certain cases; the site neutral rate is statutorily defined as the lower of (1) an "IPPS comparable per diem amount" (calculated using IPPS inputs) or (2) 100% of the estimated cost.
The IPPS inputs used to compute the IPPS comparable per diem amount already incorporate an IPPS BNA (about 5.1%). CMS also applies a separate 5.1% BNA directly to the LTCH site neutral rate to preserve LTCH PPS budget neutrality for outliers.
A group of over 100 LTCHs challenged CMS’s application of the BNA to site neutral payments as unlawfully duplicative under the Administrative Procedure Act (APA); they sought expedited judicial review through the Provider Reimbursement Review Board (PRRB).
The PRRB granted expedited review only for Fiscal Year (FY) 2019, so the district court had jurisdiction to review CMS’s FY2019 site-neutral BNA; plaintiffs’ broader challenges to earlier years were not presented to the PRRB and thus not before the court.
Applying Chevron and arbitrary-and-capricious review, the court held that CMS’s methodology in applying the BNA to the LTCH site neutral rate was reasonable and adequately explained, and therefore granted the Secretary’s cross-motion for summary judgment and denied plaintiffs’ motion.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Jurisdiction	Plaintiffs say PRRB submissions referenced prior years and support review beyond FY2019	CMS says only FY2019 was timely presented to PRRB	Court: jurisdiction limited to FY2019 because PRRB granted review only for that year
Notice-and-comment adequacy	CMS gave only a brief FY2019 response and failed to address significant comments about duplication	CMS relied on and incorporated detailed prior-year explanations addressing identical comments	Court: CMS sufficiently addressed comments; rulemaking not arbitrary or capricious
Whether applying a separate BNA to site-neutral rates is unlawful duplication under statute	BNA is duplicative because IPPS inputs already include an IPPS BNA, so applying another 5.1% double-counts outliers	IPPS BNA applies only to IPPS outliers; it does not account for LTCH PPS outliers, so an LTCH-level BNA is a permissible budget-neutrality adjustment	Court: Chevron step 1 ambiguous; at step 2 CMS’s interpretation is reasonable and entitled to deference; not arbitrary or capricious
Other federal-law challenges (dual-rate structure; cost-shifting)	BNA violates statutory dual-rate scheme and causes unlawful cost-shifting	Statute requires comparability not exact parity; cost-shifting prohibition applies to cost-based reimbursements, not prospective PPS	Court: claims fail — CMS policy consistent with statute and cost-shifting argument inapplicable

Key Cases Cited

Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) (framework for judicial deference to agency statutory interpretations)
Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (arbitrary-and-capricious standard for agency rulemaking review)
District Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015) (deference in Medicare statutory interpretation context)
Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225 (D.C. Cir. 1994) (background on Medicare prospective payment system)
Adirondack Med. Ctr. v. Sebelius, 29 F. Supp. 3d 25 (D.D.C. 2014) (discussing deference to Secretary's budget-neutrality choices in Medicare)
Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208 (2009) (agency interpretation governs if reasonable, even if not the only permissible view)