The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge
Plaintiffs, forty-nine hospitals ("Hospitals") that receive reimbursements under the Medicare Act for services provided to Medicare beneficiaries, brought this mandamus action against the Secretary of the Department of Health and Human Services ("Secretary" or the "Government") seeking to compel the recalculation of payments computed under 42 C.F.R. § 413.124(a), which provides for a 5.8 percent reduction in the reimbursement rates for "outpatient hospital services." The Secretary originally interpreted "outpatient hospital services" to include certain services provided to inpatients but reimbursed through Medicare Part B, which, broadly speaking, covers outpatient services. In 2001, the Secretary issued a memorandum that purported to change that view, reinterpreting "outpatient hospital services" to exclude such inpatient services, meaning that they would no longer be subject to the 5.8 percent reduction. That memorandum, however, foreclosed retroactive application of the new interpretation to settled reimbursement claims. In this action, the Hospitals seek to apply this later, more favorable interpretation to their closed claims.
Before the Court are the Secretary's motion to dismiss and the Hospitals' motion for summary judgment, each of which is fully briefed and ripe for decision. Because circuit law requires that an agency engage in notice and comment rulemaking when it wishes to change a valid, authoritative interpretation of a regulation, the Court finds that the Secretary's attempt to change his original interpretation of 42 C.F.R. § 413.124(a) - without providing notice and an opportunity for public comment - was unlawful. Thus, the new interpretation is invalid and provides no basis for mandamus relief. Accordingly, the Secretary's motion to dismiss will be granted, and the Hospitals' motion for summary judgment denied.
A. Statutory and Regulatory Framework
Medicare is a "massive" and "complex" health-insurance program that processes millions of claims per year pursuant to "hundreds of pages of statutes and thousands of pages of often interrelated regulations." Shalala v. Ill. Council on Long Term Care Inc., 529 U.S. 1, 13 (2000). Luckily, a full understanding of the program is not needed to resolve the instant dispute, though some background is critical. As the D.C. Circuit recently summarized:
Pursuant to the Medicare Act, the Secretary of Health and Human Services reimburses hospitals for the "operating costs of inpatient . . . services" provided to Medicare and Medicaid beneficiaries. See 42 U.S.C. § 1395ww. At the end of each fiscal year, eligible hospitals file cost reports with their "fiscal intermediaries," see 42 C.F.R. § 413.20(b); Monmouth Med. Ctr. v. Thompson, 257 F.3d 807, 809 (D.C. Cir. 2001) - usually insurance companies that serve as the Secretary's agents for purposes of reimbursing health care providers, 42 C.F.R. §§ 421.1, 421.3; see generally id. § 421.100-421.128. After auditing the reports, intermediaries issue "Notice of Program Reimbursements" ("NPRs") in which they determine the amount owed to the hospitals for the fiscal year at issue. See id. § 405.1803(a)(2). Hospitals unhappy with their fiscal intermediary's award have 180 days to appeal to the Provider Reimbursement Review Board ("the Review Board"), 42 U.S.C. § 1395oo(a), which issues a decision that the Secretary may "reverse, affirm, or modify" within 60 days, id. § 1395oo(f)(1). Hospitals remaining dissatisfied after the Review Board or Secretary issues a final decision may seek "judicial review" by filing suit in the appropriate U.S. District Court. Id.
In Re Medicare Reimbursement Litigation Baystate Health Systems v. Leavitt, 414 F.3d 7, 8 (D.C. Cir. 2005) (alterations and omissions in original).
The Secretary has delegated authority to administer the Medicare Act to the Center for Medicare and Medicaid Services ("CMS"),*fn2 which has promulgated regulations that permit or require that NPRs be reopened under certain circumstances. Three reopening provisions are pertinent here. The first, 42 C.F.R. § 405.1885(a), provides that "an [NPR] or a decision by the Review Board or Secretary 'may be reopened' if its issuer or the affected hospital moves to do so within three years of the date of the determination or decision." In Re Medicare Reim. Litig., 414 F.3d at 9. The second, 42 C.F.R. § 405.1885(b), provided, at all times relevant here,*fn3 that "an [NPR] shall be reopened and revised by the intermediary if, within the [same] 3-year period, [CMS] notifies the intermediary that such determination or decision is inconsistent with the applicable law, regulations, or general instructions." Id. And the third, 42 C.F.R. § 405.1885(d), provides that an NPR or a decision of the Review Board or Secretary "shall be reopened and revised at any time if it is established that such determination or decision was procured by fraud or similar fault of any party to the determination or decision." 42 C.F.R. § 405.1885(d). As will later be explained in greater detail, the Hospitals argue here that reopening is required under the latter two provisions.
B. Reimbursement of Ancillary Inpatient Services
The reimbursements at issue involve the intersection of two components of the Medicare program: Part A and Part B. Broadly speaking, Part A covers "inpatient hospital services," 42 U.S.C. § 1395d(a), which include bed and board, nursing services, facility charges, and other inpatient treatment costs, id. § 1395x(b). Part A coverage is limited, however, to a certain number of days per "spell of illness." Id. § 1395d(a). Thus, an extended hospital stay might exhaust the Part A benefits of an otherwise eligible beneficiary.
Part B provides supplementary coverage for certain "medical and other health services" not reimbursable under Part A, id. §§ 1395d(b), 1395k, including physician services (both in and out of the hospital) and various outpatient services, id. § 1395x(s). To address the needs of Medicare beneficiaries who have exhausted their Part A benefits, since 1968 the Secretary has interpreted the Medicare Act as allowing a patient enrolled in Part B to use his Part B benefits to pay for services that would have been covered under Part A but for the exhaustion of benefits. "In other words, the Part A services provided to these patients were treated as if they had been provided on an outpatient basis and reimbursed under Part B." St. Barnabas Hosp. v. Thompson, 139 F. Supp. 2d 540, 542-43 (S.D.N.Y. 2001). These post-exhaustion services are also known as "inpatient ancillary services."
C. The Prospective Payment System and 5.8 Percent Reduction
In earlier years, hospitals were reimbursed under both Part A and Part B for the "reasonable cost" of providing medical services. Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991); see also 42 U.S.C. § 1395f(b) (1988). As a result, hospitals had little incentive to economize, since "[t]he more they spent, the more they were reimbursed." Tucson, 947 F.2d at 974. As costs escalated, Congress sought a way to control the call on the public fisc. It did so by adopting a new regime, dubbed the Prospective Payment System ("PPS"), whereby hospitals are reimbursed for most services on the basis of rate schedules set in advance for different diagnostic categories of cases. Methodist Hosp. v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994); see also 42 U.S.C. § 1395ww. "In contrast to hospital reimbursements under the reasonable-cost method, PPS rates do not vary in individual cases[,] . . . regardless of costs actually incurred." Id. This system was intended "to create incentives for hospitals to operate in a more efficient manner, since [they] would be allowed to keep payment amounts in excess of their costs and would be required to absorb any costs in excess of the [prospectively fixed] rates." S. Rep. No. 98-23, at 53 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 193. The PPS scheme took effect for inpatient services in 1983; at that time, payments under Part B continued to be made on a reasonable-cost basis. See Methodist Hosp., 38 F.3d at 1227.
Perhaps unsurprisingly, following the advent of inpatient PPS, services that were traditionally performed in the hospital were increasingly delivered as outpatient care, for which reimbursement was not so limited.*fn4 Congress then moved toward a PPS for outpatient services. See Amgen Inc. v. Smith, 357 F.3d 103, 106 (D.C. Cir. 2004); St. Barnabas Hosp., 139 F. Supp. 2d at 542. Of particular importance here, for the years preceding the shift to outpatient PPS, Congress imposed a 5.8 percent across-the-board reduction on the reimbursement rates for "outpatient hospital services." Specifically, Congress amended the Medicare Act to provide:
The Secretary shall reduce the reasonable cost of outpatient hospital services (other than the capital-related costs of such services) otherwise determined pursuant to [42 U.S.C. § 1395l(a)(2)(B)(i)(I)] by 5.8 percent for payments attributable to portions of cost reporting periods occurring during fiscal years 1991 through 1999 and until the first date that the prospective payment system under [42 U.S.C. § 1395l(t)] is implemented.
42 U.S.C. § 1395x(v)(1)(S)(ii)(II). The Secretary adopted an implementing regulation that closely tracked the statutory language:
[T]he reasonable costs of outpatient hospital services (other than capital-related costs of these services) are reduced by 5.8 percent for services furnished during portions of cost reporting periods occurring on or after October 1, 1990[,] and until the first date that the prospective payment system under [42 C.F.R. § 419] is implemented.
42 C.F.R. § 413.124(a). The outpatient PPS scheme was implemented in 2000. 65 Fed. Reg. at 18,434.
As the Government explains in its motion to dismiss, after the 5.8 percent reduction was enacted, the question arose "whether Congress intended that [inpatient] ancillary services, which had theretofore been treated for purposes of claims processing 'as if' they had been provided on an outpatient basis, should be thought of as being included withing the universe of 'outpatient' services subject to the statutory 5.8 percent reduction or [as] a separate kind of inpatient care." Def.'s Mem. at 10. In other words, should the 5.8 percent reduction apply strictly to "true" outpatient services, or also to inpatient ancillary services reimbursed under Part B? "The Secretary took the position that [inpatient] ancillary services fell within the scope of the reduction." Id. Although the parties have not indicated whether this "position" ...