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Banner Health F/B/O Banner Good Samaritan Medical Center, Et v. Kathleen Sebelius

July 15, 2011

BANNER HEALTH F/B/O BANNER GOOD SAMARITAN MEDICAL CENTER, ET AL., PLAINTIFFS,
v.
KATHLEEN SEBELIUS, SECRETARY OF THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, DEFENDANT.



The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge

MEMORANDUM OPINION

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the Medicare program. They have sued the Secretary of the Department of Health and Human Services (the "Secretary"), challenging an array of actions taken by the Secretary in the course of administering Medicare's "outlier" payment system. The Secretary has filed a [17] Motion to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim ("Motion to Dismiss"), seeking the dismissal of this action in its entirety. Upon a searching review of the parties' submissions, the relevant authorities, and the record as a whole, the motion will be granted in part and denied in part.

I. STATUTORY AND REGULATORY FRAMEWORK

Medicare "provides federally funded health insurance for the elderly and disabled," Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226-27 (D.C. Cir. 1994), through a "complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402 (1993). The program is administered by the Secretary through the Centers for Medicare and Medicaid Services. Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011).

From its inception in 1965 until 1983, Medicare reimbursed hospitals based on "the 'reasonable costs' of the inpatient services that they furnished." Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quoting 42 U.S.C. § 1395f(b)), cert. denied, 530 U.S. 1204 (2000). However, "[e]xperience proved . . . that this system bred 'little incentive for hospitals to keep costs down' because '[t]he more they spent, the more they were reimbursed.'" Id. (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991)).

In 1983, with the aim of "stem[ming] the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology." Cnty. of Los Angeles, 192 F.3d at 1008 (citing Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149). Since then, the Prospective Payment System, as the overhauled regime is known, has reimbursed qualifying hospitals at prospectively fixed rates. Id.

By enacting this overhaul, Congress sought to "reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost[-]effective hospital practices." H.R. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.

A. Calculating Prospective Payment Rates

In calculating prospective payment rates, the Secretary begins with the "standardized amount," a figure that approximates the average cost incurred by hospitals nationwide for each treated patient. See 42 U.S.C. § 1395ww(d)(2). Following Congress's directive, the Secretary "does not calculate the standardized amount from scratch each year," but "[i]nstead . . . calculated the standardized amount for a base year and . . . carrie[s] that figure forward, updating it annually for inflation." Cape Cod, 630 F.3d at 205 (citing, inter alia, 42 U.S.C. § 1395ww(b)(3)(B)(I), (d)(2), (d)(3)(A)(iv)(II); 42 C.F.R. § 412.64(c)-(d)).

To account for regional variations in labor costs, the Secretary then "determines the proportion of the standardized amount attributable to wages and wage-related costs and then multiples that labor-related proportion by a wage index that reflects the relation between the local average of hospital wages and the national average of hospital wages." Cape Cod, 630 F.3d at 205 (internal quotation marks omitted; citing, inter alia, 42 U.S.C. § 1395ww(d)(2)(H), (d)(3)(E)). "Unlike the standardized amount, wage indexes are calculated anew each year." Id. Finally, the standardized amount is weighted to "reflect[] the disparate hospital resources required to treat major and minor illnesses." Cnty. of Los Angeles, 192 F.3d at 1008 (citing 42 U.S.C. § 1395ww(d)(4)). Specifically, "Medicare patients are classified into different groups based on their diagnoses, and each of these 'diagnosis-related groups'*fn1 is assigned a particular 'weight' representing the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients." Cape Cod, 630 F.3d at 205-06 (citing 42 U.S.C. § 1395ww(d)(4)).

Therefore, to calculate how much a hospital should be paid for treating a particular case, the Secretary "takes the [standardized amount], adjusts it according to the wage index, and then multiplies it by the weight assigned to the patient's [diagnosis-related group]." Cnty. of Los Angeles, 192 F.3d at 1009.*fn2 The result is commonly referred to as the "DRG prospective payment rate." Id.

B. Outlier Payments and the Fixed Loss Threshold

By design, the Prospective Payment System does not reimburse hospitals for the actual costs of the care that they provide to individual Medicare patients. Depending on how the costs incurred by a hospital in a particular case align with the DRG prospective payment rate, the hospital "may be over- or under-compensated for any given procedure." Dist. Hosp. Partners, L.P. v. Sebelius, __ F. Supp. 2d __, No. 11 Civ. 116 (ESH), 2011 WL 2621000, at *1 (D.D.C. July 5, 2011). However, "[d]espite 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" and devised a means to "insulate hospitals from bearing a disproportionate share of these atypical costs." Cnty. of Los Angeles, 192 F.3d at 1009. Specifically, Congress authorized the Secretary to make supplemental "outlier" payments to eligible providers. Id.

Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A), which provides, in relevant part, as follows:

(ii) . . . [A] hospital [paid under the Prospective Payment System] may request additional payments in any case where charges, adjusted to cost, . . . exceed the sum of the applicable DRG prospective payment rate plus any amounts payable unde r subparagraphs (B) and (F)*fn3 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 under clause . . . (ii).

42 U.S.C. § 1395ww(d)(5)(A); see also 42 C.F.R. §§ 412.80-412.86 (implementing regulations). Each fiscal year, the Secretary determines a fixed dollar amount that, when added to the DRG prospective payment, serves as the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii), (iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar amount is known as the "fixed loss threshold." If a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. § 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that a hospital must absorb in any case in which the hospital incurs estimated actual costs in treating a patient above and beyond the DRG prospective payment rate. An increase in the fixed loss threshold reduces the number of cases that will qualify for outlier payments as well as the amount of payments for qualifying cases.

In designing the Prospective Payment System, Congress provided that "[t]he total amount of the additional [outlier] payments . . . for discharges in a fiscal year may not be 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." 42 U.S.C. § 1395ww(d)(5)(iv). Under the Secretary's interpretation of the statute, which has been upheld by the United States Court of Appeals for the District of Columbia Circuit, "she must establish the fixed [loss] thresholds beyond which hospitals will qualify for outlier payments" at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d at 1009. To do so, the Secretary first makes a predictive judgment about the total amount of payments that can be expected to be paid based on DRG prospective payment rates. Cnty. of Los Angeles, 192 F.3d at 1009. She then examines historical data to determine the threshold that "would probably yield total outlier payments falling within the five-to-six-percent range." Id. For obvious reasons, "[w]hether the Secretary's projections prove to be correct will depend, in large part, on the predictive value of the historical data on which she bases her calculations." Id. In each of the fiscal years at issue in this action, the Secretary set fixed loss thresholds at a level so that the anticipated total of outlier payments would equal 5.1% of the anticipated total of payments based on DRG prospective payment rates.

As aforementioned, if a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii);

42 C.F.R. § 412.80(a)(2)-(3). The amount of the outlier payment is "determined by the Secretary" and must "approximate the marginal cost of care" beyond the fixed loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). During the time period relevant to this action, the implementing regulations generally provided for outlier payments equal to eighty percent of the difference between the hospital's estimated operating and capital costs and the fixed loss threshold. See 42 C.F.R. § 412.84(k). In this way, "[t]he amount of the outlier payment is proportional to the amount by which the hospital's loss exceeds the [fixed loss] threshold." Dist. Hosp. Partners, 2011 WL 2621000, at *2 (citing 42 C.F.R. § 412.84(k)).

An example may be helpful. Imagine that it is fiscal year 1998 and a hospital has incurred an estimated $72,000 in actual costs in providing a patient covered by Medicare with a pituitary procedure.*fn4 In fiscal year 1998, the DRG prospective payment for pituitary procedures was $8,002.49 and the established fixed loss threshold was $11,050. Because the hospital's estimated actual costs ($72,000) exceed the sum of those two figures ($19,052.49), the case would be eligible for an outlier payment. To determine the amount of the outlier payment, the difference between the hospital's estimated actual costs ($72,000) and the sum of the DRG prospective payment and the fixed loss threshold ($19,052.49) is considered, which results in an amount of $52,947.51. That figure, in turn, is multiplied by the percentage established by regulation intended to approximate the hospital's marginal cost of care beyond the fixed loss threshold (80%), resulting in an outlier payment in the amount of $42,358.01.

What does this mean from the hospital's perspective? The hospital is paid the DRG prospective payment of $8.002.49 and the outlier payment specific to the patient's case in the amount of $42,358.01, a total of $50,360.50. Meanwhile, the hospital must cover the fixed loss threshold of $11,050 and the unreimbursed twenty percent of the hospital's cost of care beyond the fixed loss threshold of $10,589.50, a total of $21,639.50.

In the absence of the outlier payment system, the hospital would have $63,997.51 in unreimbursed estimated costs-far more than the $21,639.50 contemplated by this hypothetical. Which is just to say that outlier payments play an important role in the way healthcare providers are compensated, and explains why they are so often the subject of litigation.

II. PROCEDURAL BACKGROUND

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the Medicare program. Am. Compl., ECF No. [16], ¶ 22.Plaintiffs contend that during fiscal years 1998 through 2006, they were deprived of more than $350 million in outlier payments. Id. ¶ 17.Plaintiffs filed appeals with the Provider Reimbursement Review Board ("PRRB"), each challenging the Secretary's final outlier payment determinations for the fiscal years in question. Id. ¶¶ 191-92. Because Plaintiffs' administrative appeals called into question the underlying validity of regulations promulgated by the Secretary, the PRRB determined that it was without authority to resolve the matters raised and, upon Plaintiffs' petition, authorized expedited judicial review pursuant to 42 U.S.C. § 1395oo(f)(1). Id. ¶¶ 193-95 & Exs. A-B.

Plaintiffs commenced this action on September 27, 2010, claiming that this Court has jurisdiction under the Medicare Act, 42 U.S.C. § 1395oo(f)(1), and the Mandamus Act, 28 U.S.C. § 1361. See Compl., ECF No. [1]. On December 23, 2010, they filed an Amended Complaint as a matter of right, which remains the operative iteration of the Complaint in this action. See Am. Compl., ECF No. [16]. On January 28, 2011, the Secretary filed the pending Motion to Dismiss. See Def.'s Mem. of P. & A. in Supp. of Mot. to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim ("Def.'s Mem."), ECF No. [17-1]. On March 16, 2011, Plaintiffs filed their opposition. See Pls.' Mem. of P. & A. in Opp'n to Def.'s Mot. to Dismiss ("Pls.' Opp'n"), ECF No. [19]. On April 4, 2011, the Secretary filed a reply. See Def.'s Reply Mem. in Supp. of Mot. to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim ("Def.'s Reply"), ECF No. [21]. The motion is therefore fully briefed and ripe for adjudication.

III. THE AMENDED COMPLAINT

By any reasonable measure, the Amended Complaint is sprawling; it consists of over two hundred paragraphs (several with discrete sub-parts), spans fifty-nine pages, and is accompanied by two lengthy exhibits.In the opening paragraph, Plaintiffs claim to seek "judicial review of the final administrative decisions of the Secretary . . . as to the amount of Medicare 'outlier' payments due Plaintiffs for services provided under the Medicare program for fiscal years 1998 -2006," Am. Compl. ΒΆ 1, but this rather discrete description is misleading, as the allegations in the Amended Complaint sweep much more broadly. Indeed, as described by Plaintiffs themselves, at the "heart" of their case is a wide-ranging challenge to the way the Secretary "implemented" the outlier payment system. Pls.' Opp'n at 6 ...


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