United States District Court, District of Columbia
DISTRICT HOSPITAL PARTNERS, L.P., d/b/a the George Washington University Hospital, et al., Plaintiffs,
KATHLEEN SEBELIUS, Secretary, Department of Health and Human Services, Defendant
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For DISTRICT HOSPITAL PARTNERS, L.P., doing business as GEORGE WASHINGTON UNIVERSITY HOSPITAL, AIKEN REGIONAL MEDICAL CENTERS, INC., doing business as AIKEN REGIONAL MEDICAL CENTER, AUBURN REGIONAL MEDICAL CENTER, INC., doing business as AUBURN REGIONAL MEDICAL CENTER, CENTRAL MONTGOMERY MEDICAL CENTER, L.L.C., doing business as CENTRAL MONTGOMERY MEDICAL CENTER, UHS-CORONA, INC., doing business as CORONA REGIONAL MEDICAL CENTER, VALLEY HEALTH SYSTEM, LLC, doing business as DESERT SPRING HOSPITAL, doing business as SPRING VALLEY HOSPITAL MEDICAL CENTER, doing business as VALLEY HOSPITAL MEDICAL CENTER, LAREDO REGIONAL MEDICAL CENTER, doing business as DOCTORS HOSPITAL OF LAREDO, LANCASTER HOSPITAL CORPORATION, doing business as LANCASTER COMMUNITY HOSPITAL, MANATEE MEMORIAL HOSPITAL, L.P., doing business as MANATEE MEMORIAL HOSPITAL, doing business as LAKEWOOD RANCH MEDICAL CENTER, MCALLEN HOSPITAL, L.P., doing business as MCALLEN HEART HOSPITAL, also known as MCALLEN MEDICAL HEART HOSPITAL, SPARKS FAMILY HOSPITAL, INC., doing business as NORTHERN NEVADA MEDICAL CENTER, NORTHWEST TEXAS HEALTHCARE SYSTEM, INC., doing business as NORTHWEST TEXAS HOSPITAL, UHS OF OKLAHOMA, INC., doing business as ST. MARY'S REGIONAL MEDICAL CENTER, UNIVERSAL HEALTH SERVICES OF RANCHO SPRINGS, INC., doing business as SOUTHWEST HEALTHCARE SYSTEM, SUMMERLIN HOSPITAL MEDICAL CENTER, L.P., doing business as SUMMERLIN HOSPITAL MEDICAL CENTER, WELLINGTON REGIONAL MEDICAL CENTER, INC., doing business as WELLINGTON REGIONAL MEDICAL CENTER, CHALMETTE MEDICAL CENTER, INC., doing business as CHALMETTE MEDICAL CENTER, UHS OF PUERTO RICO, INC., doing business as HOSPITAL SAN PABLO, doing business as HOSPITAL SAN PABLO DEL ESTE, PENDLETON METHODIST HOSPITAL, L.L.C., doing business as METHODIST HOSPITAL, GALEN HOSPITAL ALASKA, INC., doing business as ALASKA REGIONAL HOSPITAL, RIVERSIDE HEALTHCARE SYSTEM, L.P., doing business as RIVERSIDE COMMUNITY HOSPITAL, SAN JOSE HEALTHCARE SYSTEM, L.P., doing business as REGIONAL MEDICAL CENTER OF SAN JOSE, SAN JOSE HOSPITAL, L.P., doing business as SAN JOSE MEDICAL CENTER, GOOD SAMARITAN HOSPITAL, L.P., (qualified in California under the name GS Hospitals, L.P.), doing business as GOOD SAMARITAN HOSPITAL, WEST HILLS HOSPITAL, doing business as WEST HILLS HOSPITAL AND MEDICAL CENTER, LOS ROBLES REGIONAL MEDICAL CENTER, doing business as LOS ROBLES HOSPITAL AND MEDICAL CENTER, HCA-HEALTHONE, LLC, doing business as PRESBYTERIAN/ST. LUKE'S MEDICAL CENTER, doing business as ROSE MEDICAL CENTER, doing business as SWEDISH MEDICAL CENTER, doing business as NORTH SUBURBAN MEDICAL CENTER, doing business as MEDICAL CENTER OF AURORA, doing business as SKY RIDGE MEDICAL CENTER, CEDARS HEALTHCARE GROUP, LTD., doing business as CEDARS MEDICAL CENTER, OKALOOSA HOSPITAL, INC., doing business as TWIN CITIES HOSPITAL, JFK MEDICAL CENTER LIMITED PARTNERSHIP, doing business as JFK MEDICAL CENTER, OSCEOLA REGIONAL HOSPITAL, INC., doing business as OSCEOLA REGIONAL MEDICAL CENTER, MIAMI BEACH HEALTHCARE GROUP, LTD., doing business as AVENTURA HOSPITAL AND MEDICAL CENTER, ALL PLAINTIFFS, Plaintiffs: Robert L. Roth, LEAD ATTORNEY, HOOPER, LUNDY & BOOKMAN, P.C., Washington, DC; John R. Hellow, PRO HAC VICE, HOOPER, LUNDY & BOOKMAN, PC, Los Angeles, CA.
For KATHLEEN SEBELIUS, Secretary of the United States Department of Health and Human Services, Defendant: James C. Luh, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Washington, DC.
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 fixed loss thresholds for outlier payments to their hospitals, under the Medicare Act, 42 U.S.C. § 1395 et seq., was arbitrary and capricious for the Inpatient Prospective Payment System (" IPPS" ) rules for federal fiscal years (" FFYs" ) 2004, 2005, and 2006. The factual and procedural history of this case has been set forth in this Court's earlier Memorandum Opinions.
Now before the Court are the parties' cross-motions for summary judgment. Plaintiffs challenge the Secretary's methodology for calculating the fixed loss threshold determinations for FFYs 2004-2006, claiming that she used historical charge inflation data and cost-to-charge ratios that failed to account for the June 9, 2003 Outlier Correction Rule and thereby resulted in underpayments to participating hospitals. Having considered the administrative record and the parties' briefings, the Court concludes that the Secretary made reasonable methodological choices in determining the fixed loss thresholds for FFYs 2004-2006. Accordingly, the Court will grant the Secretary's motion for summary judgment and deny plaintiffs' motion.
I. LEGAL STANDARDS
Medicare is a federally funded system of health insurance for the aged and disabled. It is administered by Centers for Medicare and Medicaid Services (" CMS" ) 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, 338 U.S.App. D.C. 168 (D.C. Cir.
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 the Secretary's setting of thresholds that determine 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, 393 U.S.App. D.C. 1 (D.C. Cir. 2010). These " fiscal intermediaries" 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  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." (Def.'s Mot. at 3.) 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, 327 U.S.App. D.C. 396 (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. 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).
The outlier threshold represents the sum of two amounts: the DRG prospective payment rate and the fixed loss threshold. Only the fixed loss threshold is at issue in this case. In calculating the fixed loss threshold, the Secretary applies section 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.
The Secretary sets a fixed loss threshold for each FFY as part of massive annual IPPS rulemakings that often span over four hundred pages in the Federal Register. For the three rulemakings at issue in this case, the Secretary calculated the fixed loss threshold as follows. First, the Secretary adjusted historical charge data using an inflation factor (also based on historical data) to approximate hospitals charges in the upcoming FFY. Next, the Secretary multiplied the inflation-adjusted charge universe by hospital-specific cost-to-charge ratios, thereby projecting hospital costs for each case in the model. Third, the Secretary, after making other adjustments not relevant to this case, modeled the effect different fixed loss thresholds would have on outlier payments. ( See Def.'s Mot. at 7; Pls.' Mot. at 17-18.) Finally, the Secretary selected a fixed loss threshold that she projected would satisfy the statutory target under section 1395ww(d)(5)(A)(iv).
The Secretary's methodology reveals three relevant arithmetic axioms. First, all things being equal, a higher charge inflation factor will result in a higher fixed loss threshold. Second, all things being equal, higher cost-to-charge ratios will result in a higher fixed loss threshold. And finally, again all things being equal, a higher fixed loss threshold will result in a higher outlier threshold and thus lower outlier payments to participating hospitals. (Pls.' Mot. at 18.)
B. JUDICIAL REVIEW
Judicial review of plaintiffs' claims under the Medicare Act rests on 42 U.S.C. § 1395oo(f)(1), which incorporates the Administrative Procedure Act (" APA" ). See 42 U.S.C. § 1395oo(f)(1) (" Such action[s] . . . shall be tried pursuant to the applicable provisions under chapter 7 of Title 5." ). The Court accordingly reviews the Secretary's actions under the APA, " pursuant to which [it] will uphold them unless they are 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'" Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 916-17, 387 U.S.App. D.C. 267 (D.C. Cir. 2009) (quoting 5 U.S.C. § 706(2)(A)); see also St. Elizabeth's Med. Ctr. of Boston, Inc. v. Thompson, 396 F.3d 1228, 1233, 364 U.S.App. D.C. 492 (D.C. Cir. 2005) (" [J]udicial review of HHS reimbursement decisions shall be made under APA standards" ). " An agency decision is arbitrary and capricious if it 'relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.'" Cablevision Sys. Corp. v. F.C.C., 649 F.3d 695, 714, 396 U.S.App. D.C. 314 (D.C. Cir. 2011) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983)). The Court's inquiry must focus on the " reasonableness of the agency's decisionmaking process," and the Court " will not
substitute [its] judgment for that of the agency." Rural Cellular Ass'n v. FCC, 588 F.3d 1095, 1105, 388 U.S.App. D.C. 421 (D.C. Cir. 2009). The Court has a " limited" role and its review is " particularly deferential" where the agency's decision is " primarily predictive." Id. Thus, the Court will " 'defer to the agency's decision on how to balance the cost and complexity of a more elaborate model against the oversimplification of a simpler model,'" West Virginia v. E.P.A., 362 F.3d 861, 868, 360 U.S.App. D.C. 419 (D.C. Cir. 2004) (quoting Small Refiner Lead Phase-Down Task Force v. E.P.A., 705 F.2d 506, 535, 227 U.S.App. D.C. 201 (D.C. Cir. 1983), and " require[s] only that the agency acknowledge factual uncertainties and identify the considerations it found persuasive."  Rural Cellular Ass'n, 588 F.3d at 1105. With these principles in mind, the Court will now address each of plaintiffs' challenges to the fixed loss threshold determinations.
II. FFY 2004 FIXED LOSS THRESHOLD DETERMINATION
In the FFY 2004 IPPS Rule, the Secretary established a fixed loss threshold of $31,000. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates (" FFY 2004 IPPS Rule" ), 68 Fed. Reg. 45346, 45476-78 (Aug. 1, 2003). Although the Secretary had proposed a $50,645 fixed loss threshold for FFY 2004, id. at 45476, she " lowered the [final] outlier threshold in response to the new provisions on outliers" promulgated two months earlier in the
June 9, 2003 Outlier Correction Rule. See id. at 45478; see also id. at 45477.
The Secretary calculated the charge inflation factor for the FFY 2004 fixed loss threshold by utilizing " the 2-year average annual rate of change in charges per case," the same method she had used for FFY 2003. Id. at 45476. For FFY 2004, the Secretary calculated the rate of change using charge data from FFY 2000 to 2001 and FFY 2001 to 2002. Id.
In contrast, the Secretary adopted a new method for calculating cost-to-charge ratios. Id. The Secretary explained: " [a]fter the changes in policy enacted by the final [Outlier Correction Rule] this year, it is necessary to calculate more recent cost-to-charge ratios because fiscal intermediaries will now use the latest tentatively settled cost report instead of the latest settled cost report to determine a hospital's cost-to-charge ratio." Id. As a result, the Secretary " approximated the latest tentatively settled cost reports" by
match[ing] charges-per-case to costs-per-case from the most recent cost reporting year; . . . then divid[ing] each hospital's costs by its charges to calculate the cost-to-charge ratio for each hospital; and . . . [then] multipl[ying] charges from each case in the FY 2002 MedPAR (inflated ...