The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge
Plaintiffs own and operate 186 hospitals that participate in the Medicare program. They have sued the Secretary of the Department of Health and Human Services ("Secretary") in her official capacity, alleging that her methodology for setting thresholds for outlier payments to their hospitals, under the Medicare Act, 42 U.S.C. § 1395 et seq., was arbitrary and capricious. Plaintiffs seek a declaration that the Secretary's actions violated the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701, 706, and that they are entitled to additional outlier payments. The Secretary has moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing that the Court lacks jurisdiction to consider those allegations that were not exhausted and that plaintiffs' remaining allegations fail to state a claim upon which relief can be granted. For the following reasons, the motion will be granted in part and denied in part.
A. Outlier Payments and the Outlier Threshold
Medicare is a federally funded system of health insurance for the aged and disabled. It is administered by Centers for Medicare and Medicaid Services, under the direction of the Secretary. 42 U.S.C. § 1395kk; 42 C.F.R. § 400.200 et seq. When Medicare providers treat the program's beneficiaries, they receive coinsurance and deductible payments from the patient and then seek reimbursement for remaining costs from the Medicare program. Foothill Hosp. - Morris L. Johnston Mem'l v. Leavitt, 558 F. Supp. 2d 1, 2 (D.D.C. 2008).
Rather than pay hospitals for the specific cost of treating each Medicare patient, Medicare uses a "Prospective Payment System" ("PPS"), which compensates them at a fixed "federal rate" that is based on the "average operating costs of inpatient hospital services." Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). Because Medicare payments are standardized in this way, hospitals may be over- or under-compensated for any given procedure. The Secretary therefore provides hospitals with additional "outlier payments" to compensate for patients "whose hospitalization would be extraordinarily costly or lengthy." Id. at 1009. This case is about these outlier payments.
The Secretary enters into contracts with private firms to "review provider reimbursement claims and determine the amount due." Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491 (D.C. Cir. 2010). Formerly known as "fiscal intermediaries," these "Medicare administrative contractors" determine the outlier payments awarded to the hospitals. See id. & n.1. Outlier payments are intended to "approximate the marginal cost of care beyond certain thresholds." Lenox Hill Hosp. v. Shalala, 131 F. Supp. 2d 136, 138 (D.D.C. 2000) (internal quotation marks omitted). The Medicare statute provides that
(ii) . . . [A hospital paid under the PPS] may request additional payments in any case where charges, adjusted to cost . . . exceed the sum of the applicable DRG*fn1 prospective payment rate plus any amounts payable under subparagraphs (B) and (F) plus a fixed dollar amount determined by the Secretary.
(iii) The amount of such additional payment . . . shall be determined by the Secretary and shall . . . approximate the marginal cost of care beyond the cutoff point applicable . . . .
42 U.S.C. § 1395ww(d)(5)(A). The phrase "charges, adjusted to cost" refers to the Secretary's duty to "estimate a hospital's costs based on the charges the hospital has billed for covered services in the case." (Mot. to Dismiss for Lack of Subject Matter Jurisdiction & Failure to State a Claim ("Def.'s Mot.") at 5.) Cost is estimated by multiplying the amount that the hospital charges by a "cost to charge ratio," which is a number that represents a "hospital's average markup." Appalachian Reg'l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1052 (D.C. Cir. 1997). The estimate of the hospital's costs in a given case is then compared to the sum of two other factors (the "outlier threshold"). 42 U.S.C. § 1395ww(d)(5)(A)(ii). If the estimate of the costs is greater than the outlier threshold, the hospital is eligible for an outlier payment.*fn2 See id.
The amount of the outlier payment is proportional to the amount by which the hospital's loss exceeds the outlier threshold. Currently, hospitals are entitled to reimbursement of eighty percent of costs above the outlier threshold. 42 C.F.R. § 412.84(k). Thus, if the outlier threshold is $20,000 and a hospital's cost estimate is $80,000, the hospital will be entitled to eighty percent of $60,000 (the difference between the costs and the outlier threshold).
In calculating the fixed loss threshold, the Secretary is also governed by 42 U.S.C. § 1395ww(d)(5)(A)(iv), which requires the "total amount of the additional" outlier payments to be not "less than 5 percent nor more than 6 percent" of the total payments "projected or estimated to be made based on DRG prospective payment rates for discharges in that year." See Cnty. of Los Angeles, 192 F.3d at 1013. The Secretary has interpreted this provision to require her to "select outlier thresholds which, when tested against historical data, will likely produce aggregate outlier payments totaling between five and six percent of projected or estimated DRG-related payments." Id. She has also interpreted the provision to mean that "she has no obligation to ensure that actual outlier payments for the year total five percent of projected DRG-related payments." Id.
To fund outlier payments, ordinary Medicare payments made to hospitals are reduced by a percentage equal to the projected percentage of outlier payments (i.e., by between five and six percent). 42 U.S.C. § 1395ww(d)(3)(B). Plaintiffs refer to the funds deducted from ordinary payments as the "outlier pool." (Compl. Ex. A at 1.) However, because the percentage deducted is based on the Secretary's projections, the amount deducted "may be-and indeed, almost certainly will be-either greater than or less than the total amount of funds subtracted from payments." ...