Shands Jacksonville Medical Center, Inc. v. Sebelius
139 F. Supp. 3d 240
| D.D.C. | 2015Background
- CMS replaced a vague 24-hour inpatient-admission benchmark with the "2-midnight" rule in 2013, presuming inpatient status when a physician expects a stay to span at least two midnights.
- CMS actuaries predicted the 2‑midnight policy would cause a net shift of ~40,000 encounters from outpatient to inpatient in FY2014, costing Medicare an estimated $220 million.
- To offset that cost, the final rule adopted an across-the-board 0.2% reduction to the IPPS standardized amount, hospital‑specific rates, and Puerto Rico standardized amount, invoking 42 U.S.C. § 1395ww(d)(5)(I)(i) (exceptions and adjustments authority).
- Six hospital plaintiffs challenged only the 0.2% reduction, alleging (1) lack of statutory authority, (2) APA notice-and-comment defects (failure to disclose actuarial methodology), and (3) arbitrary and capricious decisionmaking.
- The district court held the statutory provision ambiguous and the Secretary’s interpretation reasonable under Chevron step two, but found CMS violated APA notice-and-comment obligations by failing to disclose critical actuarial assumptions before the comment period ended.
- Remedy: the court remanded for further proceedings (without vacatur) and ordered the parties to propose a timetable for repromulgation and further comment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 1395ww(d)(5)(I)(i) authorizes an across‑the‑board 0.2% reduction to the standardized amount and related rates | The statute limits adjustments to targeted or unique circumstances and cannot be read to permit sweeping reductions to standardized amounts | The provision is a broad grant of authority to make "other exceptions and adjustments" by regulation and includes adjustments to standardized amounts | The provision is ambiguous at Chevron step one; CMS’s expansive reading is a permissible construction under Chevron step two, so the Secretary had statutory authority for the reduction (but separate §1395ww(g) capital-rate challenge left unripe) |
| Whether CMS violated the APA by failing to disclose actuarial methodology and assumptions used to estimate the 40,000 encounter shift | CMS withheld critical actuarial assumptions (e.g., excluding certain claims and medical MS‑DRGs) until the final rule, preventing meaningful public comment | CMS points to publicly available claims data and argues not every modeling detail must be disclosed; commenters could replicate analysis | Court held CMS failed to provide adequate notice of key methodology/assumptions; that deprived the public of a meaningful opportunity to comment and violated the APA |
| Whether the disclosure omission was harmless (prejudicial‑error doctrine) | The omission prejudiced commenters because assumptions materially affected the projected shift; harm is not speculative | CMS contends any defect was harmless because data were public and assumptions were reasonable or self‑evident | Court found the omission prejudicial (not harmless) because assumptions were central and not apparent to commenters |
| Remedy: whether the rule should be vacated or remanded without vacatur | Plaintiffs urged vacatur given the notice defect | CMS urged remand without vacatur citing disruptive consequences and reliance concerns | Court remanded without vacatur, finding procedural defects serious but vacatur would be disruptive; ordered CMS to repromulgate on an expedited timetable |
Key Cases Cited
- Adirondack Med. Ctr. v. Sebelius, 740 F.3d 692 (D.C. Cir. 2014) (upheld broad agency use of §1395ww(d)(5)(I)(i) to achieve budget neutrality and treated the provision as ambiguous)
- Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (agency must examine relevant data and provide reasoned explanation; arbitrary-and-capricious standard)
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (two-step framework for judicial review of agency statutory interpretation)
- Owner-Operator Indep. Drivers Ass’n v. FMCSA, 494 F.3d 188 (D.C. Cir. 2007) (agency must disclose model/methodology central to rulemaking to permit meaningful comment)
- Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) (court skeptical of harmless-error claims for notice-and-comment failures)
- Heartland Reg’l Med. Ctr. v. Sebelius, 566 F.3d 193 (D.C. Cir. 2009) (remand-without-vacatur may be justified where vacatur would produce disruptive consequences)
- Good Samaritan Hosp. v. Shalala, 508 U.S. 402 (1993) (context re: Medicare prospective payment system and deference to agency)
- Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199 (2015) (agency can change interpretation but should account for change when assessing deference)