Case Information
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA )
CLARIAN HEALTH WEST, LLC, )
)
Plaintiff, )
) v. ) Civil Action No. 14-cv-0339 (KBJ) )
SYLVIA MATHEWS BURWELL, )
)
Defendant. )
) MEMORANDUM OPINION
Thе Centers for Medicare and Medicaid Services (“CMS”) is the sub-agency within the Department of Health and Human Services (“HHS”) that administers the federal health insurance program known as Medicare. In 2012, an agent of CMS informed Plaintiff Clarian Health West, LLC (“Clarian”), an Indiana hospital, that it needed to repay more than $2 million in Medicare reimbursement funds that the hospital had received under the Medicare program, due to a reconciliation process that CMS had performed with respect to certain Medicare payments. Clarian objected to CMS’s repayment demand, and filed the instant action against Sylvia Mathews Burwell, the Secretary of HHS, to contest the agency’s contentions. Clarian’s one-count complaint cites the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701–706, and the Medicare statute’s review provisions, 42 U.S.C. § 1395oo(f)(1), and asserts that the agency lacks the statutory and regulatory authority to make Clarian repay the money because the regulation that authorizes the reconciliation process (“the 2003 Rule”) and the guidelines that implement that rule (“the 2010 guidelines” or “the 2010 manual”) were improperly promulgated and are contrary to the terms of the Medicare statute.
Before this Court at present are the parties’ cross-motions for summary judgment. (Pl.’s Mot. for Summ. J. (“Pl.’s Mot.”), ECF No. 13; Def.’s Mot. for Summ. J. (“Def.’s Mot.”), ECF No. 14.) In its motion, Clarian contends, among other things, that CMS’s decision to recoup the $2 million was procedurally defective because the agency failed to employ required notice-and-comment procedures prior to adopting the guidelines that establish the criteria for identifying which hospitals should be subjected to the reconciliation рrocess. ( See Pl.’s Mem. in Supp. of Pl.’s Mot. (“Pl.’s Mem.”), ECF No. 13-1, at 29–36.) [1] The Secretary’s cross-motion argues that there is nothing procedurally or substantively improper about the rule that relates to the reconciliation process or its implementation. ( Def.’s Mem. in Supp. of Def.’s Mot. (“Def.’s Mem.”), ECF No. 14-1, at 24–49.)
Upon consideration of the parties’ arguments, this Court agrees with Clarian that the qualifying criteria contained in the implementing manual were the sort of substantive rule that must go through notice-and-comment rulemaking, and on that ground alone, Clarian’s motion for summary judgment will be GRANTED , and the Secretary’s motion for summary judgment will be DENIED . A separate order consistent with this opinion will follow.
I. BACKGROUND
A. The Applicable Statutory And Regulatory Framework
The Medicare program “was established in 1965 and provides health care
coverage for persons age 65 and older, disabled persons, and persons with end stage
renal disease who meet certain eligibility requirements.”
Allina Health Servs. v.
Burwell
, No. 14-cv-1415,
1. Medicare’s Prospective Payment System
The complexity of thе Medicare scheme is partly due to the intricacies of the
prospective payment system that Congress has adopted with respect to Part A
reimbursements—a payment system that Congress developed in reaction to the failures
of the cost-based payment system that was used when Medicare was first enacted.
See Dist. Hosp. Partners, L.P. v. Burwell
,
Under the prospective payment system, in contrast to the cost-based system, the
federal government pays the hospital a set reimbursement amount that is established in
advance of the hospital’s expenditures and that is generally based upon the
government’s
ex ante
assessment of what it cost s to care for an individual with the
Medicare beneficiary’s specific diagnosis, regardless of how much the hospital actually
spends to care for a beneficiary.
See Cape Cod Hosp. v. Sebelius
,
In order to ensure that the prospective payment system fairly approximates the
actual cost of the care provided, the MACs adjust the standardized amount to account
for various factors, including the relative cost of the care associated with different
patient diagnoses.
Dist. Hosp. Partners
,
Significantly for present purposes, Medicare’s prospective payment system not only seems to provide incentives for hospitals to control costs while accounting for the variable care costs that are associated with different patient diagnoses, it also recognizes that the costs of healthcare can sometimes be unpredictable, and that a purely prospective system would unfairly omit reimbursements for the high costs a hospital can incur when a particular beneficiary’s care ends up being unduly expensive through no fault of the hospital, as sometimes happens. See Cty. of Los Angeles , 192 F.3d at 1009 (“Despite the anticipated virtues of [the prospective payment system], Congress recognized that health-care providers would inevitably care for some patients whose hospitalization would be extraordinarily costly or lengthy.”). To prevent hospitals from facing significant losses for providing care to patients in such “outlier” cases—i.e., situations in which the cost of the care provided to a Medicare beneficiary far exceeds the prospective reimbursement rate for a particular diagnosis—Congress authorized HHS to reimburse hospitals for these costs through a system of “outlier payments.” 42 U.S.C. § 1395ww(d)(5)(A); H.R. Rep. No. 98-25, at 154, reprinted in 1983 U.S.C.C.A.N. 219, 373. It is the manner in which CMS calculates, assesses, and retroactively reconciles such outlier payments that is at issue in this case.
2. Outlier-Payment Calculations
Section 1395ww(d)(5)(A)(ii) of Title 42 of the U.S. Code permits a hospital to
“request additional payments” (above and beyond the standardized payments that are
provided pursuant to the prospective payment system) in certain instances, and the
statute identifies the particular circumstances under which such a request is warranted.
Specifically, per the statute, “[a] hospital is eligible for an outlier payment ‘in any case
where charges, adjusted to cost, exceed . . . the sum of the applicable DRG prospective
payment rate . . . plus a fixed dollar amount determined by the Secretary.’”
Dist. Hosp.
Partners
,
§ 1395ww(d)(5)(A)(ii));
see also
42 U.S.C. § 1395ww(d)(5)(A)(iii) (stating that the
amount of the outlier payment “shall be determined by the Secretary and shall . . .
approximate the marginal cost of care beyond” the otherwise applicable “cutoff point”).
In practice, this statutory command has spawned an “elaborate process” for calculating
outlier payments, which involves the intersection of three distinct concepts: (1) charges,
adjusted to cost, (2) the outlier threshold, and (3) the marginal cost factor.
Dist. Hosp.
Partners
,
The “charges, adjusted to cost” figure ensures that the outlier payment reflects
the actual cost of the care provided to a beneficiary, and that the government “does not
simply reimburse a hospital for the charges reflected on a patient’s invoice[.]”
Dist.
Hosp. Partners
,
The outlier threshold is also a combination of numbers, but the numbers are
added rather than multiplied.
[5]
The first figure is “the applicable DRG prospective
payment rate[,]” 42 U.S.C. § 1395ww(d)(5)(A)(ii), which is the payment that the
hospital would ordinarily receive under Medicare’s reimbursement process for a non-
outlier case. The second number is the “fixed loss threshold,” which is a fixed amount
that the Secretary sets anew each year.
Dist. Hosp. Partners
,
The final component that factors into the calculation of an outlier payment is the marginal cost factor. This factor represents the “marginal cost” of offering extra care to outlier patients, 42 U.S.C. § 1395ww(d)(5)(A)(iii), and by regulation, this factor is set at 80%, see 42 C.F.R. § 412.84(k).
Putting these all together, the amount of an outlier payment is determined by taking the cost-adjusted charges (which are determined by multiplying the charge for the outlier treatment by the hospital’s cost-to-charge ratio), subtracting the outlier threshold (which is determined by adding the standard reimbursement payment for the services provided and the fixed loss threshold), and multiplying that number by the marginal cost factor (which is always 80%). [7] In a recent opinion, the D.C. Circuit provided a helpful example that explains how this formula works in practice, and also illustrates the fact that outliеr payments cover some, but not all, of the costs associated with treating outlier cases :
Assume that the Secretary sets the fixed loss threshold at $10,000. Assume also that a hospital treats a Medicare patient for a broken bone and that the DRG rate for the treatment is $3,000. The Medicare patient required unusually extensive treatment which caused the hospital to impose $23,000 in cost-adjusted charges. If no other statutory factor is triggered, . . . the hospital is eligible for an outlier payment of $8,000, which is 80% of the difference between its cost-adjusted charges ($23,000) and the outlier threshold ($13,000).
Dist. Hosp. Partners
,
B. The 2003 Rule And The 2010 Implementation
1. The Road To Reconciliation Of Past Outlier Payments
In the early 2000s, many hospitals were attempting to game the outlier-payment
process through a sophisticated form of overbilling known as “turbocharging.”
Banner Health v. Burwell
,
By 2003, HHS had discovered that turbocharging practices were widespread among hospitals, and issued a proposed rule regarding a change in the methodology for determining outlier payments partly to address the turbocharging problem. See Medicare Program; Proposed Change in Methodology for Determining Payment for Extraordinarily High-Cost Cases (Cost Outlier) Under the Acute Care Hospital Inpatient Prospective Payment System, 68 Fed. Reg. 10,420 (March 5, 2003). The agency received notice and comment, and promulgated the final rule—referred to herein as the “2003 Rule”—on June 9, 2003. See Medicare Program; Change in Methodology for Determining Payment for Extraordinarily High-Cost Cases (Cost Outliers) Under the Acute Care Hospital Inpatient and Long-Term Care Hospital Prospective Payment Systems, 68 Fed. Reg. 34,494 (June 9, 2003).
The 2003 Rule revised “the methodology for determining payments for extraordinarily high-cost cases (cost outliers) . . . under the . . . prospective payment system[.]” Id. at 34,494. Notably, the 2003 Rule did not alter the underlying formula for calculating outlier payments, but it did include a host of measures designed to combat turbocharging. For example, instead of relying on the most recent settled cost report, the rule provided that a MAC can consider “the most recent tentative settled cost report” when determining the applicable cost-to-charge ratio for the following year. id. at 34,499 (emphasis added); see also 42 C.F.R. § 412.84. [9] Furthermore, and that a hospital actually charges for patient care rather than by a predetermined, standardized amount— and cost-based repayment systems tend to incentivize providers to increase the cost of care, unmoored from any improvements in the quality of care being offered. Cf. Alice G. Gosfield, Medicare and Medicaid Fraud and Abuse § 1:7 (2014) (describing various types of Medicare fraud and abuse in the context of physician reimbursement, which is governed by a cost-based reimbursement system). [9] Using the most recent tentative report results in less of a lag time between the cost-to-charge ratio applied to a provider and that provider’s actual cost-to-charge ratio.
most relevant to the present case, the 2003 Rule provided for the “reconciliation” of
outlier payments after the cost report for the relevant period has been finalized.
See
Change in Methodology,
2. The 2010 CMS Manual And The Qualifying Criteria For Being
Subjected To The Outlier Payment Reconciliation Process
The core of Clarian’s complaint revolves around the fact that the 2003 Rule only
generally authorized the reconciliation process and specified that any reconciliation
would be based on the cost and charge data contained in the hospital’s final settled cost
report, and did
not
proceed to detail how the reconciliation process would operate in
practice.
See
42 C.F.R. § 412.84(i)(4). In fact, in response to a number of comments
that asked the agency to set certain “parameters” in order to guide the implementation
of the newly authorized reconciliation process, the Secretary expressly acknowledged
that the agency would not be addressing the specific circumstances under which
reconciliation would be appropriate at the time the rule was promulgated. Change
in Methodology,
In December of 2010—more than seven years after the 2003 Rule took effect— the HHS finally provided specific standards for MACs to use when administering the reconciliation process: it published instructions for reconciliation in a CMS manual governing Medicare claims processing. Ctrs. for Medicare & Medicaid Servs., Pub. No. 100-04, Medicare Claims Processing Manual, Ch. 3 § 20.1.2.5. Importantly, according to this 2010 manual, a hospital’s outlier payments are potentially subject to reconciliation if two criteria are met:
(1) the provider’s “actual operating [cost-to-charge ratio] is found to be plus or minus 10 percentage points from the [cost-to-charge ratio] used [to calculate a provider’s] outlier payments,” and
(2) the provider’s “[t]otal outlier payments in that cost reporting period exceed $500,000.”
Id. § 20.1.2.5(A). The manual instructs that a MAC must follow a step-by-step procedure for initiating reconciliation if these two criteria are satisfied. See id. (“If the criteria for reconciliation are met, Medicarе contractors shall follow the instructions below in § 20.1.2.7.”); see also id. § 20.1.2.7 (detailing the 14-step reconciliation process). And as part of that process, the MAC must alert the CMS Central Office that the offending hospital has met the reconciliation criteria and provide a bevy of information about the hospital. See id. § 20.1.2.7. If CMS gives the go-ahead, the MAC must then calculate the difference between the original and revised outlier payments, finalize the hospital’s cost report, issue a Notice of Program Reimbursement, and “make the necessary adjustment from or to the provider.” Id. The manual is less clear about what happens if a hospital does not meet the reconciliation criteria after the cost report for a given year settles: on the one hand, it suggests that no reconciliation will occur because “the cost report shall be finalized[;]” on the other hand, it notes that “[e]ven if a hospital does not meet the criteria for reconciliation . . . the Medicare contractor has the discretion to request that a hospital’s outlier payments . . . be reconciled if the hospital’s most recent cost and charge data indicate that the outlier payments to the hospital were significantly inaccurate.” Id. § 20.1.2.5(A).
Notably, as mentioned, the Secretary’s statement in the preamble to the 2003 Rule hinted at the possibility that the agency might eventually adopt these two qualifying criteria for initiating reconciliation, Change in Methodology, 68 Fed. Reg. at 34,503, but these reconciliation standards did not become official agency policy until the 2010 claims processing manual was published. It is undisputed that the 2010 manual was produced without notice or an оpportunity for the public to comment on the selected standards, and the manual contains no statement from the agency that sets forth any justification for these particular criteria. The only record evidence regarding the agency’s reasoning appears in the preamble to the 2003 Rule, which notes the agency’s general view that these thresholds “would appropriately capture those hospitals whose outlier payments will be substantially inaccurate when using the ratio from the contemporaneous cost reporting period.” Change in Methodology, 68 Fed. Reg. at 34,503.
C. Instant Facts And Procedural History [10] Clarian West Medical Center is a 127-bed hospital that is located in Avon, Indiana. ( See Compl., ECF No. 1, ¶ 8.) Clarian began operating in December of 2004 ( see id. ¶ 48), and according to the complaint, in its relatively brief existence, Clarian has already been subjected to the whims of the outlier-payment reconciliation process twice . The first instance (which Clarian is not challenging in the instant lawsuit) purportedly occurred in 2005; Clarian maintains that its outlier payments for that year should have been—but were not—reconciled, and as a result, the hospital lost out on $1 million in outlier payments. ( See Compl. ¶¶ 48–49; Pl.’s Mem. at 23–24.) [11] It is the second instance of alleged unfairness with respect to the outlier-payment reconciliation process that is the subject of the instant dispute; specifically, Clarian insists that the agency has improperly identified it as a turbocharger under the criteria laid out in the 2010 manual, and then subjected its outlier payments for the year 2007 to reconciliation, which has wrongly resulted in a recoupment demand of more than $2 million. ( See id. at 24–25.)
The problem, according to Clarian, was the agency’s allеged failure to recognize that the cost-to-charge ratio for new hospitals starts high and inevitably decreases in the first few years of operation, not because of turbocharging but because initial hospital operations are inherently costly when evaluated on a per-patient basis. ( See Compl. ¶ 50.) [12] Per standard practice, the cost-to-charge ratio that was used to calculate Clarian’s outlier payments for 2007 was based on Clarian’s cost reports from 2005 and 2006; those cost reports necessarily generated a higher cost-to-charge ratio than Clarian’s actual (decreased) cost-to-charge ratio for 2007. ( See Pl.’s Mem. at 24.) Consequently, the MAC that undertook the retrospective evaluation of Clarian’s 2007 outlier payment once the cost reports for that year had settled determined that the two qualifying criteria for reconciliation were met, and on March 30, 2012, the MAC informed Clarian that its outlier payments from 2007 were being revised downward to reflect updated information regarding Clarian’s actual cost-to-charge ratio for that year. ( See Compl. ¶ 52.) The upshot of Clarian’s claim is that, due to the reconciliation process, the agency demanded that Clarian pay back more than $2.4 million worth of outlier payments that it had received during the period at issue, when, according to Clarian, reconciliation should not have been undertaken in the first place. ( See id. ¶ 53.)
To challenge the agency’s recoupment demand, Clarian appealed the repayment decision to the Provider Reimbursement Review Board (“PRRB”), which is the administrative tribunal that Congress has authorized to review cost -report disputes betwеen MACs and service providers. See 42 U.S.C. § 1395oo; 42 C.F.R.
§§ 405.1835–77. Clarian requested expedited judicial review of the dispute pursuant to 42 U.S.C. § 1395oo(f)(1) ( Pl.’s Mem. at 25), and on January 3, 2014, the PRRB permitted expedited judicial review of some of Clarian’s arguments, paving the way for the instant action ( see id. ). [13]
Clarian’s one-count complaint, which was filed in this Court on March 3, 2014, asserts that “the Secretary’s 2012 [reconciliation] determination, and the agency rules governing that determination, are invalid and should be set aside” because they violate the Administrative Procedure Act and the Medicare statute. (Compl. ¶ 58; see id. ¶ 60.) Thus, Clarian challenges not only the $2.4 million recoupment demand but also the administrative acts that form the backbone of that repayment determination: the 2003 Rule that authorizes reconciliation and the 2010 guidelines that implement that rule. And Clarian’s memorandum of law in support of its motion for summary judgment, which was filed October 10, 2014, clarifies that it seeks to attack these regulatory enactments on three fronts.
First, Clarian argues that the Secretary failed to adhere to the Medicare statute’s notice-and-comment rulemaking requirements when the agency adopted the standards for reconciliation that appear in the 2010 manual. (Pl.’s Mem. at 29–30, 32–33.) [14] Second, Clarian argues that the Secretary’s decision to authorize reconciliation for outlier payments in the 2003 Rule was not the product of reasoned decision making, because the Secretary improperly failed to consider a host of factors, including the effect of reconciliation on new hospitals ( id. at 37–40); the procedures for implementing the reconciliation rules ( id. at 40–43); and whether the retrospective reconciliation process was justified, given the broader prospective payment scheme ( id. at 43–45). ( See also id. at 47–49 (arguing that the Secretary did not have sufficient evidence from which to conclude that retroactively correcting cost-to-charge ratios through reconciliation would actually lead to more accurate outlier payments).) Third, and finally, Clarian argues that, to the extent that the 2003 Rule and the 2010 implementing guidelines permit MACs to recover interest on payments owed as a result of the reconciliation process ( see id. at 50–53) and transgress certain statute of limitations and beneficiary notification requirements ( see id. at 33–36), these agency pronouncements are inconsistent with the Medicare statute.
The Secretary filed a cross-motion for summary judgment on October 10, 2014. In that motion, the Secretary argues that the agency fully complied with the procedural requirements of the Medicare statute’s notice-and-comment rulemaking provision when it promulgated the 2003 Rule and undertook the 2010 implementation. ( Def.’s Mem. at 26– 34.) The Secretary further argues that the substance of the 2003 Rule is entirely consistent with the terms of the Medicare statute. In particular, the Secretary contends that there is nothing improper about using an “offline” process for reconciling outlier payments ( id. at 35–37), or in requiring that interest be paid on all reconciled outlier payments ( id. at 46–49). Finally, the Secretary defends the 2003 Rule’s emphasis on revising bloated cost-to-charge ratios without altering other elements of the outlier-payment formula, and also the fact that it does not exempt new hospitals from the outlier-payment reconciliation process. ( Id. at 37–42, 44–46.)
This Court hеld oral argument on the parties’ cross-motions for summary judgment on February 10, 2015 , and it took the motions under advisement at that time. On March 9, 2015, the Court ordered the parties to submit supplemental briefs on significant questions of law regarding the Medicare statute and the agency conduct at issue here. ( See Order, ECF No. 20.) Those supplemental briefs became ripe on May 1, 2015. ( Pl.’s Supplemental Brief (“Pl.’s Suppl. Br.”), ECF No. 21; Def.’s Supplemental Brief (“Def.’s Suppl. Br.”), ECF No. 22.)
II. LEGAL STANDARDS
A. Motions For Summary Judgment In APA Cases
“Summary judgment is the proper mechanism for deciding, as a matter of law,
whether an agency action is supported by the administrative record and consistent with
the APA standard of review.”
Hill Dermaceuticals, Inc. v. FDA
, No. 11-cv-1950, 2012
WL 5914516, at *7 (D.D.C. May 18, 2012) (citing
Richard v. INS
,
This Court’s review of the Secretаry’s interpretation of the Medicare Act is
governed by the familiar two-step test that the Supreme Court adopted in
Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc.
,
B. Medicare’s Notice-and-Comment Requirements
In the APA, Congress requires that agency policymaking be subjected to notice-
and-comment procedures (unless an exemption applies) in order “to reintroduce public
participation” and “assure[] that the agency will have before it the facts and information
relevant to a particular administrative problem, as well as suggestions for alternative
solutions.”
Am. Hosp. Ass’n
, 834 F.2d at 1044 (internal quotation marks and citations
omitted);
see also id
. (explaining that notice-and-comment requirements instantiate
“policy goals of maximum рarticipation and full information”). In the Medicare
context, the HHS generally must proceed by notice-and-comment rulemaking, but the
notice-and-comment mandate emerges from the Medicare statute itself rather than the
APA.
[15]
Section 1395hh(a)(1) of the Medicare statute authorizes the Secretary to
“prescribe such regulations as may be necessary to carry out the administration” of the
Medicare statute, 42 U.S.C. § 1395hh(a)(1), and Section 1395hh(b)(1) states that,
“[e]xcept as [otherwise] provided . . . , before issuing in final form any regulation under
subsection (a) of this section, the Secretary shall provide for notice of the proposed
regulation in the Federal Register and a period of not less than 60 days for public
comment therein[,]”
id.
§ 1395hh(b)(1). The Secretary’s rulemaking power
encompasses any “rule, requirement, or other statement of policy . . . that establishes or
changes a substantive legal standard governing the scope of benefits, the payment for
services, or the eligibility of individuals, entities, or organizations to furnish or receive
services or benefits[,]”
id.
§ 1395hh(a)(2)—a Medicare-related policy pronouncement
that falls within this definition and that is not subject to an exemption in the Medicare
statute is considered to be a “substantive” rule with respect to which the HHS must
provide notice and an opportunity for comment prior to its adoption.
See Allina Health
,
As a general matter, courts use the APA’s standards for determining whether or
not a particular Medicare rule is a “substantive” one for notice-and-comment purposes.
See Monmouth Med. Ctr. v. Thompson
,
The Medicare statute expressly exempts the HHS from notice-and-comment rulemaking in three circumstances: (1) when a statutory provision permits an interim regulation to be issued, see 42 U.S.C. § 1395hh(b)(2)(A); (2) when a statutory provision requires that a rule be promulgated within 150 da ys of the passage of that provision, see id. § 1395hh(b)(2)(B); and (3) when the rule at issue would be exempt under the APA’s Section 553(b)(B) exemption, id. § 1395hh(b)(2)(C). The Medicare statute thus expressly incorporates only the APA’s exemption for situations where notice and comment would be impracticable, unnecessary, or contrary to the public interest, but it does not contain any provision that expressly contains or references the APA’s exemptions for interpretive rules, policy statements, and procedural rules. Nevеrtheless, courts have interpreted the Medicare statute to import the APA’s exemption for interpretive rules because one of the Medicare statute’s provisions requires that the Secretary publish certain material in the Federal Register and indicates that “manual instructions, interpretative rules , statements of policy, and guidelines of general applicability,” 42 U.S.C. § 1395hh(c)(1) (emphasis added), may not fit the definition of a “regulation” under Section 1395hh(a)(1). See Monmouth Med. Ctr. , 257 F.3d at 814 n.2 (“Although no explicit exception to those requirements is made for ‘interpretive rules,’ an exception is implicit in the provision for periodic publication for such rules, 42 U.S.C. § 1395hh(c), and courts generally have assumed the exception.”). Thus, while the Medicare Act has been interpreted to incorporate the APA’s distinction between substantive and interpretive rules, this Court is not aware of any case that squarely holds that the Medicare statute should be read to incorporate the other exemptions contained in APA Section 553(b)(A)—i.e., policy statements and procedural rules.
III. ANALYSIS
By pressing a bevy of legal arguments about the agency’s reconciliation process
and the rules that undergird it, Clarian seeks to challenge the Secretary’s decision to
recoup from Clarian the $2.4 million that the agency previously provided to the hospital
for outlier payments under Medicare’s prospective payment system. As explained
above, Clarian’s opening salvo is its contention that the agency guidelines that establish
the criteria for eligibility for reconciliation and other specifics regarding the mechanics
of the reconciliation process constitute a substantive rule, and as suсh, can only be valid
if promulgated through notice-and-comment rulemaking, which indisputably did not
occur when the Secretary adopted those guidelines in 2010. ( Pl.’s Mem. at 29–32.)
If Clarian is right about this threshold issue, then there is no need for this Court to
proceed to consider the merits of Clarian’s myriad contentions regarding the unlawful
and/or improper substance of the guidelines; it can vacate the agency’s recoupment
decision and remand this matter to the agency simply and solely because of the
agency’s failure to comply with required notice-and-comment procedures.
See, e.g.
,
Catholic Health Initiatives v. Sebelius
,
This Court has evaluated the legal standards for characterizing agency guidelines such as those at issue here, and, in particular, the requirement that notice-and-comment procedures be afforded unless the agency’s pronouncement is interpretive, procedural, or otherwise fits into one of the statutory exemptions from notice-and-comment rulemaking. For the reasons explained below, the Court сoncludes that the qualifying criteria for being subjected to the outlier-payment reconciliation process that the agency adopted in the 2010 manual and applied to Clarian do not qualify as an interpretive rule or a procedural rule (even assuming that there is a procedural-rule exemption in the Medicare statute), and thus, must be deemed a substantive rule that should have been promulgated through notice-and-comment rulemaking. Accordingly, and without characterizing the other reconciliation standards that Clarian challenges or reaching the merits of Clarian’s arguments regarding the propriety of the policies that the guidelines embody, this Court will grant Clarian’s motion for summary judgment and remand this matter to the agency for proceedings consistent with the findings in this opinion. [18]
A. The Qualifying Criteria For Reconciliation That CMS Established In The 2010 Guidelines Are Not Interpretive Rules
1. Interpretive Rules Must Relate To Specific Text In A Statute Or A
Regulation
As noted, this Court’s determination regarding whether or not the qualifying
criteria in the 2010 manual are “substantive” rules involves eliminating the possibility
that these guidelines are the type of pronouncement that is exempted from notice-and-
comment procedures by statute, because a substantive rule is defined in opposition to
the various exemptions.
Cf. Mendoza v. Perez
,
Beginning with the Court’s consideration of whether the qualifying criteria are
interpretive in nature, the Court notes that agency rules are deemed interpretive when
the particular promulgation “clarif[ies] a statutory or regulatory term, remind[s] parties
of existing statutory or regulatory duties, or merely track[s] preexisting requirements
and explain[s] something the statute or regulation already required.”
Mendoza
, 754
F.3d at 1021 (internal quotation marks and citation omitted). “To fall within the
category of interpretive, the rule must derive a proposition from an existing document
whose meaning compels or logically justifies the proposition[,]” and “[t]he substance of
the derived proposition must flow fairly from the substance of the existing document.”
Catholic Health Initiatives
,
2. The Purported Textual Basis For The Qualifying Criteria Is Too Broad
And Attenuated To Render These Guidelines Merely Interpretive
The Secretary’s cross-motion for summary judgment suggests only one textual
reference point that potentially could support the agency’s contention that the
qualifying criteria for reconciliation that were adopted in the 2010 manual are
interpretive rules: the statement in Section 1395ww(d)(5)(A)(iii) that outlier payments
must “‘approximate the marginal cost of care beyond’ the fixed-loss threshold.” (Def.’s
Mem. at 30 (quoting 42 U.S.C. § 1395ww(d)(5)(A)(iii)). But under binding precedent,
this statutory language is too broad to support the invocation of the interpretive-rule
exemption to Medicare’s notice-and-comment requirements, and the link between it and
the technical details of a reconciliation program is too attenuated.
Catholic Health
Initiatives
,
The D.C. Circuit’s opinion in Catholic Health Initiatives v. Sebelius , 617 F.3d 490 (D.C. Cir. 2010), requires this conclusion. That case involved an agency manual that provided for the reimbursement of a hospital’s insurance costs, see id. at 491–92, but the relevant statutory and regulatory language said only that the government would reimburse a hospital’s “reasonable costs” and left the determination of what costs are “reasonable” to the Secretary, id. at 491. The Secretary subsequently determined that insurance costs were in the realm of reasonable costs, and also permitted reimbursement of insurance costs even where those costs were paid to so-called “captive” insurers— i.e., insurers that were actually a wholly owned subsidiary of the hospital—but the agency expressly differentiated between “domestic” captives and “offshore” captives, with insurance costs paid to offshore captives being reimbursable only if those captives satisfied a series of requirements not imposed on domestic captives. See id. at 492 (noting that, unlike domestic captives, a covered offshore captive could not invest more than ten percent of its assets in equity securities). Significantly for present purposes, when setting out the additional coverage requirements for offshore captives, the Secretary did not use notice-and-comment rulemaking, see id. at 493, and the D.C. Circuit held that the requirements that the agency imposed on offshore captives had to be promulgated through notice-and-comment rulemaking because the requirements were substantive and not interpretive, id. at 497.
Two principles undergirded the Circuit’s conclusion in
Catholic Health
Initiatives
and are instructive here. First, the panel reasoned that, if the statutory or
regulatory language that is purportedly being interpreted is sufficiently broad, then any
attempt by the agency to implement that language would necessarily involve making
substantive policy judgments that require notice-and-comment rulemaking.
See id.
at
494–95. In the context of the
Catholic Health Initiatives
case, the Circuit concluded
that the statutory term “reasonable cost” was so broad that “the sort of detailed—and
rigid—investment code” that the agency imposed when it determined which offshore
captives would be covered could not have been derived from an act of interpretation.
Id.
at 496. Second, the
Catholic Health Initiatives
Court noted that, if an interpretive
rule imposes “arbitrary” numeric criteria, then it likely reflects a substantive, rather
than interpretive, policy judgment.
See id.
at 495-96. By “аrbitrary,” the Circuit meant
numeric criteria that represented just one “choice among [many] methods of
implementation[,]”
id.
at 495 (quoting
Hoctor v. U.S. Dep’t of Agric.
,
Applying these two principles to the circumstances at issue in the instant case,
this Court concludes that the qualifying criteria for the outlier-payment reconciliation
process that the agency adopted in the 2010 manual are not merely interpretive of
Congress’s command that outlier payments must “approximate the marginal cost of care
beyond” the fixed-loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). This is so
because the statutory phrase “marginal cost of care”—much like “reasonable cost”—is
quite broad and does not, on its own, suggest any particular application. Furthermore,
as the complicated nature of the outlier-payment formula demonstrates, giving effect to
that term requires a series of interlocking policy and technical considerations,
Dist.
Hosp. Partners
,
The Secretary objects to this conclusion on a number of grounds, none of which
succeeds. Starting with the most sweeping contention, t he agency argues that the
qualifying criteria must be deemed interpretive rules simply and solely because they are
set forth in CMS instruction manuals. ( Def.’s Reply, ECF No. 18, at 12–13
(“Courts construing [Medicare Provider Reimbursement Manual] provisions have
concluded that they are interpretive rules and do not require notice and comment
rulemaking.” (internal quotation marks and citation omitted).) The D.C. Circuit’s
Catholic Health Initiatives
case belies this contention; the provisions under review in
that case were contained in a CMS manual and were nevertheless found to be
substantive, not interpretive.
See Catholic Health Initiatives
,
Undaunted, the Secretary further insists that the qualifying criteria and other,
similar manual instructions provide “technical details of issues such as calculation
methodologies” in order “to help intermediaries and providers better understand the
regulations” and are exempt from Medicare’s notice-and-comment requirements on
that
basis as well. (Def.’s Mem. at 31 (internal quotation marks and citations omitted)).
Even if this is an accurate statement regarding the agency’s intentions, it does not help
the Secretary, because the particular criteria that Clarian challenges are much more than
mere “technical details”—they reflect substantive policy decisions, as explained further
below.
infra
Part III.C. Moreover, as discussed above, the two qualifying criteria
are not sufficiently grounded in the statutory phrase “marginal cost of care” for them to
amount to an implementation of that language, and their seeming consistency with
Medicare’s outlier-payment provisions and/or the text of the 2003 Rule ( Def.’s
Mem. at 32–33) is beside the point; it is well established that an agency’s well-
intentioned efforts to adopt provisions that are consistent with the text of a statute or
regulation is not a reason to sidestep Medicare’s notice-and-comment requirements if
the rule that emerges “is simply too attenuated to represent an interpretation of those
terms[,]”
Catholic Health Initiatives
,
Finally, the Secretary argues that the qualifying criteria are distinguishable from
the reimbursement instructions at issue in
Catholic Health Initiatives
because the
investment instructions in
Catholic Health Initiatives
were mandatory whereas the
qualifying criteria for the outlier-payment reconciliation process do not necessarily
result in reconciliation—in this regard, the agency emphasizes that the CMS manual
builds in an extra layer of discretion whereby CMS must approve reconciliation once a
hospital has been shortlisted. ( Def.’s Mem. at 33–34.)
See also
Ctrs. for Medicare
& Medicaid Servs., Pub. No. 100-04, Medicare Claims Processing Manual, Ch. 3
§ 20.1.2.5 (providing that reconciliation of any hospitals that satisfy the qualifying
criteria will be “[s]ubject to the approval of the CMS Central Office”). However, the
mandatory-versus-discretionary distinction between the investment instructions in
Catholic Health Initiatives
and the qualifying criteria for outlier-payment reconciliation
does not bear on the fundamental question of whether the challenged provisions are tied
to any reasonably specific statutory or regulatory language, or whether those provisions
reflect a substantive policy judgment. In other words, when a rule is plainly not
interpretive in light of the ordinary criteria for making this designation, its mandatory
or voluntary nature is of no moment.
Cf. Catholic Health Initiatives
,
B. The Medicare Statute Does Not Provide For A Procedural-Rule Exemption And, In Any Event, The Qualifying Criteria Are Not A Procedural Rule
1. There Is No Express Exemption For Procedural Rules In The Medicare
Statute And One Cannot Reasonably Be Inferred
Procedural rules are agency provisions that are “primarily directed toward
improving the efficient and effective operations of an agency, not toward a
determination of the rights [or] interests of affected parties.”
Mendoza
, 754 F.3d at
1023 (quoting
Batterton v. Marshall
,
As mentioned, the Medicare statute does not contain any express exemption from
notice-and-comment rulemaking for procedural rules, unlike the APA. 42 U.S.C.
§ 1395hh(b)(2). That fact would ordinarily be sufficient to dispose of the issue of the
applicability of the procedural-rule exemption to the qualifying criteria for the outlier-
payment reconciliation process, but it is at least theoretically possible that an exemption
for procedural rules could be read into the Medicare statute just as the exemption for
interpretive rules has been.
Cf. Monmouth Med. Ctr.
,
First of all, given that the Medicare statute expressly provides for some of the
exemptions contained in the APA but not the exemption for procedural rules,
see
42
U.S.C. § 1395hh(b)(2)(C), the canon
expressio unius est exclusio alterius
—“the
expression of one is the exclusion of others[,]”
Adirondack Med. Ctr. v. Sebelius
, 740
F.3d 692, 696 (D.C. Cir. 2014)—strongly suggests this Court should treat the exclusion
of procedural rules from the list of exemptions to Medicare’s notice-and-comment
requirement as an intentional policy choice,
see United States v. Vonn
,
To be sure, the D.C. Circuit has indicated that the
expressio unius
canon has
limited utility in the administrative law context.
See Adirondack Med. Ctr.
, 740 F.3d at
697. But it can still be relevant where there are no other reasonable explanations for
the exclusion,
see Indep. Ins. Agents of Am., Inc. v. Hawke
,
The text and structure of the Medicare statute also supports the conclusion that
there is no procedural-rule exemption in the Medicare context. First, and foremost,
Medicare’s notice-and-comment provisions are plainly distinguishable from those that
appear in the APA, which means that exemption conformity cannot be assumed.
Allina Health Servs. v. Sebelius
,
The Secretary is certainly correct to point out that courts have found that certain
APA exemptions have been
implicitly
incorporated into the Medicare statute under
similar circumstances ( Def.’s Suppl. Br. at 21), as this Court acknowledges above.
See, e.g.
,
Vencor Nursing Centers, L.P. v. Shalala
,
The Secretary’s suggestion that this Court should infer that a procedural-rule
exemption exists in the Medicare сontext nevertheless, because the D.C. Circuit appears
to have done so in
American Hospital Association v. Bowen
,
Nor is this Court persuaded by fact that more recent decisions from this district
have relied upon a procedural-rule exemption in the Medicare context. (
See
Def.’s
Suppl. Br. at 22 (citing
Sierra-Nevada Mem’l-Miners Hosp., Inc. v. Shalala
, No. 91-cv-
2198,
Finally, this Court rejects the Secretary’s suggestion that a procedural-rule
exemption must necessarily be implied because an agency’s ability to develop
procedural rules is a “basic tenet of administrative law[.]” (Def.’s Suppl. Br. at 20
(quoting
Perez v. Mortg. Bankers Ass’n
,
2. Even If The Medicare Statute Could Be Read To Contain A
Procedural-Rule Exemption, The Qualifying Criteria For
Reconciliation Are Not Procedural Rules
The two qualifying criteria for the initiation of the reconciliation process that the
Secretary adopted in the 2010 manual—(1) that a hospital’s actual cost-to-charge ratio
for a given year is “plus or minus 10 percentage points” from the cost-to-charge ratio
that was used to calculate the hospital’s outlier payments for that year, and (2) that the
hospital’s “[t]otal outlier payments in that cost reporting period exceed[ed]
$500,000[,]” Ctrs. for Medicare & Medicaid Servs., Pub. No. 100-04, Medicare Claims
Processing Manual, Ch. 3 § 20.1.2.5(A)—unquestionably “encode[] a substantive value
judgment” about the hospital’s charges and cost reporting for Medicare reimbursements
and “put[] a stamp of . . . disapproval” on the hospitals that are singled out by the rule.
Am. Hosp. Ass’n
,
In its supplemental briefing, the agency makes a valiant effort, nevertheless. The Secretary contends, in essence, that the qualifying criteria are procedural for two reasons: first, because they are a “type[] of agency guidance” that merely “ provide[s] details as to the operational aspects of reconciliation” (Def.’s Suppl. Br. at 17), and second, because the qualifying criteria are not the final say in determining whether a hospital’s outlier payments are reconciled because reconciliation is still subject to the approval of CMS ( see id. at 16–17). The first argument is belied by the analysis above, and in particular, by this Court’s finding that the qualifying criteria initiate the process pursuant to which the agency disgorges prior Medicare payments and thereby visits opprobrium upon a hospital, and insofar as the criteria speak to which hospitals may be subjected to this treatment, they represent substantive policy choices on the part of the agency. The Secretary’s second contention fails because it is the flip -side of the (misguided) argument that the mandatory nature of a rule makes it less non- substantive, which is an assertion that this Court has already rejected. See supra Part III.A.2.
What is more, the D.C. Circuit has already held that agency discretion does not,
alone, transform an otherwise substantive rule into a procedural one. In
Electronic Privacy
Information Center v. U.S. Dep’t of Homeland Sec.
,
C. The Qualifying Criteria Have The Typical Characteristics Of A
Substantive Rule Because They Govern The Scope Of Benefits
Having determined that the qualifying criteria for reconciliation of outlier payments
that the Secretary adopted in the 2010 manual are neither interpretive nor procedural as the
Secretary claims, and seeing no other exemption in the Medicare statute under which these
guidelines might fit, this Court has already effectively deemed those criteria substantive.
Mendoza
,
First, thе qualifying criteria for reconciliation of outlier payments clearly effect a change in agency policy. In the Secretary’s notice of proposed rulemaking for the 2003 Rule, the Secretary stated that reconciliation was adopted for a singular purpose: “to correct those situations in which hospitals would otherwise receive overpayments for outlier cases due to excessive charge increases.” Proposed Change in Methodology, 68 Fed. Reg. at 10,421. The Secretary emphasized the agency’s findings regarding the substantial number of hospitals that it deemed guilty of engaging in the practice of drastically increasing charges for care provided to beneficiaries in order to decrease the cost-to-charge ratio, and explained the agency’s view that combatting such turbocharging justified the new reconciliation process. See id. at 10,428 (“[W]e have identified 123 hospitals that appear to have been most aggressively gaming the current policy.”). But the qualifying criteria that the agency subsequently adopted do not plainly distinguish between turbocharging hospitals and those hospitals that experience a significant change in their cost-to-charge ratio for different reasons, as Clarian asserts. Indeed, the qualifying criteria are such that hospitals whose cost -to-charge ratio increases (i.e., the opposite of turbocharging) by 10 percentage points or more, as well as hospitals whose cost-to-charge ratio decreases by that much because of a decrease in costs rather than an increase in charges, are also implicated. The qualifying criteria thus brоaden the applicability of the outlier-payment reconciliation process beyond the specific problem of turbocharging, and while that approach may well be justified for reasons of policy and practicality, it clearly represents a substantive departure from the purposes of the reconciliation process that were identified when the 2003 Rule was proposed.
The qualifying criteria also plainly “implicate the policy interests animating
notice-and-comment rulemaking.”
Elec. Privacy Info. Ctr.
,
Thus, in addition to the fact that the qualifying criteria are neither interpretive nor procedural—which is sufficient to trigger the requirement of notice-and-comment rulemaking standing alone—this Court finds that the criteria also share at least two of the characteristics that courts have established as being indicative of a substantive rule.
IV. CONCLUSION
Clarian has sustained its contention that the qualifying criteria CMS issued to MACs in the 2010 manual, which were used to identify Clarian as a candidate for the outlier-payment reconciliation process, needed to be subjected to notice-and-comment rulemaking prior to their adoption. This is because, for the reasons explained above, the criteria are not sufficiently grounded in any statutory or regulatory text to fall within the interpretive-rule exemption, and the qualifying criteria cannot be construed as a procedural rule, even assuming that the procedural-rule еxemption applies in the Medicare context. (The Court concludes herein that it does not.) The inapplicability of these exemptions means that the qualifying criteria count as a substantive rule, and the fact that the criteria also exhibit the characteristics of substantive rules further reinforces that conclusion.
Accordingly, and as set forth in the accompanying order, Clarian’s motion for summary judgment will be GRANTED , the Secretary’s motion for summary judgment will be DENIED , the matter will be REMANDED to the Secretary for further proceedings consistent with this opinion. Ketanji Brown Jackson
DATE: August 26, 2016 KETANJI BROWN JACKSON
United States District Judge
Notes
[1] Page numbers herein refer to those that the Court’s electronic case filing system automatically assigns.
[2]
See also Rehab. Ass’n of Va. v. Kozlowski
,
[3] The standardized amount was initially determined as of 1984, after the prospective payment system
came into being; this baseline has been adjusted for inflation each year subsequently.
See Cape Cod
Hosp.
,
[4] There are other factors that contribute to the calculation of the DRG weight,
see, e.g.
,
Adirondack
Med. Ctr. v. Sebelius
,
[5] The outlier threshold can include a number of other factors beyond the two discussed here, such as when a hospital has a disproportionate share of low-income patients, see 42 U.S.C. § 1395ww(d)(5)(F), or is a teaching hospital, id. § 1395ww(d)(5)(B). Because none of these additional factors are implicated by the present case, discussion of them has been omitted.
[6] The fixed loss threshold is calculated such that outlier payments for the following year will amount to between 5% and 6% of the Medicare system’s total aggregate reimbursement. 42 U.S.C. § 1395ww(d)(5)(iv).
[7] The following formula generally captures the interaction between these various concepts: Outlier Payment = (Cost-Adjusted Charges – Outlier Threshold) x Marginal Cost Factor
[8] Notably, the outlier-payment system is uniquely susceptible to this kind of manipulation because, as explained above, outlier payments are partially cost-based—i.e., outlier payments reference the amount
[10] The Secretary has not disputed any of the factual allegations contained in Clarian’s complaint and
this Court therefore accepts these facts as true for purposes of analyzing the cross-motions for summary
judgment.
See Lee v. United States
,
[11] Under the 2003 Rule, outlier payments for new hospitals (like Clarian) are calculated according to the statewide average cost-to-charge ratio, rather than the hospital’s actual cost-to-charge ratio, because, by its very nature, a brand new hospital has not submitted any cost reports from which a genuine cost-to-charge ratio can be predicted. See 42 C.F.R. § 412.84(i)(3). Clarian asserts that if its actual cost-to-charge ratio in 2005 had been considered, then the reconciliation criteria would have been met, and it would have netted an extra $1 million worth of outlier payments for that year as a result of the reconciliation process. ( Compl. ¶ 49.)
[12] This is apparently because new hospitals see a sharp increase in the “patient utilization rate” in the first few years, which decreases their “per-unit costs[.]” (Compl. ¶ 50; Pl.’s Mem. at 24, 38.) Put another way, all other things being equal, a new hospital with few patients has higher costs per patient than a more established hospital with more patients, and as a hospital gains patients, its average costs decrease even as the amount it charges stays constant, which results in a decrease in its cost-to-charge ratio. ( Compl. ¶ 50 . )
[13] Expedited judicial review permits the PRRB to grant an appellant access to federal court when the
PRRB has jurisdiction over an appeal but lacks the authority to decide the controlling question of law.
42 U.S.C. § 1395oo(f)(1);
Three Lower Ctys. Cmty. Health Servs., Inc. v. U.S. Dep’t of Health &
Human Servs.
,
[14] Clarian specifically objects to the two qualifying criteria for initiating the reconciliation process that the agency adopted in the 2010 manual ( Pl.’s Mem. at 29–35), and it also challenges the Secretary’s decision “tо use an ‘offline’ process ‘to reprice outlier claims’ [and thereby] make[] hospitals subject to retroactive outlier adjustments to prior outlier-payment determinations even after expiration of the four-year reopening period for those determinations” ( id . at 33). Clarian’s attack is procedural in nature, because it maintains that these guidelines for the implementation of the authorized reconciliation process are substantive rules and thus the agency should only have adopted them after undertaking adequate notice-and-comment procedures. ( See id . at 29–30.)
[15] Medicare is, in fact, statutorily exempt from the APA’s notice-and-comment requirements because those requirements do not apply to “matter[s] relating to . . . benefits[.]” 5 U.S.C. § 553.
[16] Although courts sometimes use the term “interpretive rules” as a catchall term to encompass all three exceptions contained in 5 U.S.C. § 553(b)(A), see, e.g. , Cent. Tex. Tel. Co-op., Inc. v. FCC , 402 F.3d 205, 210 (D.C. Cir. 2005), the instant Memorandum Opinion differentiates between these three different exemptions; the opinion’s references to “interpretive rules” are intended to address that exemption alone.
[17] Prior to oral argument on the cross-motions for summary judgment, the Secretary had argued only that the 2010 guidelines qualify as an interpretive rule, and as a result, that it was proper for the agency to adopt them without notice and comment. ( Def.’s Mem. at 30–34.) Following oral argument, it became clear that it might also be feasible to consider the 2010 guidelines exempt from notice-and- comment rulemaking as a so-called procedural rule, but only if the Medicare statute, like the APA, contains an exemption for procedural rules. On March 9, 2015, this Court ordered the parties to submit supplemental briefing on two questions related to the applicability of the procedural-rule exemption: first, whether the guidelines for reconciliation established in the 2010 manual fall within the procedural-rule exemption as contained in the APA, and if so, second, whether the procedural-rule exemption is available under the Medicare statute’s notice-and-comment provision.
[18] To be clear, Clarian’s notice and comment–based challenge is broader than the Court’s holding in
this case: Clarian challenges not only the two criteria governing the determination of which hospitals
undergo reconciliation but also the rules governing retroactive adjustments to payments following
reconciliation (including the use of a so-called “offline” re-pricing process), on the ground that the
guidelines did not undergo notice and comment. ( Pl.’s Mem. at 32–36.) The Court addresses only
the validity of the qualifying criteria, which alone is sufficient to merit judgment for the Plaintiff.
See
Catholic Health Initiatives
,
[19] The discretion argument that was addressed in the
EPIC
case arose in the context of a dispute about
whether the introduction of the screening machine fell within the APA’s policy statement exemption,
but the circuit panel also addressed the government’s attempt to rely on the procedural -rule exemption.
Elec. Privacy Info. Ctr.
,