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Lee Memorial Hospital v. Burwell

United States District Court, District of Columbia

June 11, 2015

LEE MEMORIAL HOSPITAL, et al., Plaintiffs,
SYLVIA M. BURWELL, Secretary, U.S. Department of Health and Human Services, Defendant.


ROSEMARY M. COLLYER, District Judge.

Plaintiffs, a group of non-profit organizations that own and operate acute care hospitals participating in the Medicare program, [1] contend that the Department of Health and Human Services has underpaid them for Medicare services provided during the fiscal years ending in 2008-2010. The dispute requires a huge leap into Medicare and its regulations, but, in essence, Plaintiffs allege that the Secretary knew that her basic approach and formulas produced the wrong results but continued to underpay them for years, notwithstanding.

At issue here is Plaintiffs' Motion to Compel: the Secretary has produced an Administrative Record, which Plaintiffs complain is incomplete. The Secretary of Health and Human Services repeatedly insists the record is more than sufficient for judicial review. For the reasons set forth below, Plaintiffs' motion will be granted in part and denied in part.


It is not necessary to take a reader through the underlying dispute in this case. There are, however, a few fundamental points. Under Medicare, certain hospitals may be reimbursed in part for their operating costs per patient. "Because different illnesses entail varying costs of treatment, the Secretary uses diagnosis-related groups (DRGs) to modif[y]' the average rate.'" Dist. Hosp. Partners, L.P. v. Burwell, No. 14-5061, 2015 WL 2365718, at *1 (D.C. Cir. May 19, 2015) (quoting Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205-06 (D.C. Cir. 2011)). Hospitals are paid at fixed rates determined by the Secretary based on DRG prospective payment rates, which are intended to reflect the estimated average cost of treating a patient whose condition falls within that DRG. See 42 U.S.C. § 1395ww(d). When patient costs become extraordinarily high, hospitals may request 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." 42 U.S.C. § 1395ww(d)(5)(A)(ii).

"[T]hree particular numbers are important" in calculating outlier payments: "(1) the cost-to-charge ratio, (2) the fixed loss threshold, and (3) the outlier threshold." Dist. Hosp. Partners, 2015 WL 2365718, at *2. First, a hospital's cost-to-charge ratio "represents a hospital's average markup" and "is calculated from data in its most recent cost report." Id. (internal quotations and citations omitted); see also Def. Mem. in Opp. to Pl. Mot. to Compel (Def. Opp.) [Dkt. 53] at 4 ("The Secretary estimates a hospital's costs for a case by multiplying the hospital's charges by a cost-to-charge ratio, which is a fraction that represents the estimated amount that the hospital incurs in costs for every dollar that the hospital bills in charges."). A hospital's cost-to-charge ratio is generally calculated specifically for that hospital based on data contained in its prior cost reports. Def. Opp. at 4 (citing 42 C.F.R. § 412.84(i)).

Second, as noted above, a hospital can request an outlier payment if its charges exceed the sum of the DRG payment rate and a "fixed dollar amount." 42 U.S.C. § 1395ww(d)(5)(A)(ii). The "fixed dollar amount" is otherwise known as the "fixed loss threshold." The fixed loss threshold "acts like an insurance deductible because the hospital is responsible for that portion of the treatment's excessive cost' above the applicable DRG rate." Dist. Hosp. Partners, 2015 WL 2365718, at *2 (quoting Boca Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229 (11th Cir. 2009)); see also Def. Opp. at 5 ("The fixed loss threshold essentially represents the loss that a hospital must absorb before it is eligible to receive an outlier payment."). The fixed loss threshold is set annually in advance of each fiscal year based on projections about aggregate payments to hospitals and a consideration of past charges. Def. Opp. at 5. The Secretary determines the figure in part by looking at historical data on charges actually submitted by hospitals and then applies an inflation adjustment factor to the data to produce an approximation of what hospital charges might look like in the future. Id. The Department of Health and Human Services (HHS) attempts to set the fixed loss threshold at a level such that total outlier payments for the upcoming year will represent 5.1% of projected total DRG payments. Pl. Mem. in Support of Mot. to Compel Complete Admin. Record (Pl. Mem.) [Dkt. 51] at 2 (citing 72 Fed. Reg. 47, 130 at 47, 419).

The third relevant number-the outlier threshold-is the sum of the fixed loss threshold and the DRG rate. Dist. Hosp. Partners, 2015 WL 2365718, at *2. "Any cost-adjusted charges imposed above the outlier threshold are eligible for reimbursement under the outlier payment provision." Id. (citing 42 U.S.C. § 1395ww(d)(5)(A)(ii)).[2]

These figures are set by HHS each fiscal year. In this case, Plaintiffs challenge HHS administrative regulations governing outlier payments and the fixed loss thresholds, asserting that those regulations led to an incorrect determination of their outlier payment amounts for 2008-2011. Specifically, they allege that HHS improperly applied two sets of regulations: (1) "Payment Regulations, " which establish a model for determining whether individual hospital cases qualify for outlier payments; and (2) "Threshold Regulations, " which set the annual fixed loss threshold. Pl. Mem. at 5. They also take issue with HHS amendments to the rules governing outlier payments made in 2003, maintaining that those amendments form the basis for how the fixed loss thresholds were set in 2008-2011. Id.

In their Motion to Compel, Plaintiffs argue that HHS failed to produce information used by the agency in determining the fixed loss threshold. They seek the following materials: (1) the draft Interim Final Rule from the 2003 amendments to the payment regulations; (2) the formulas used to calculate the fixed loss thresholds; (3) data used to calculate a cost-to-charge adjustment factor and an inflation factor, which were then used to calculate the fixed loss thresholds; (4) the formulas and data that HHS used to calculate estimated outlier payments, made during previous fiscal years, which HHS considered in determining the fixed loss thresholds for the relevant years; (5) the supporting data which HHS used to determine certain key assumptions for projected outlier payment calculations as set forth in HHS's Impact Files; (6) materials supporting HHS's regulatory impact analysis considered in each of the fixed loss threshold regulations; and (7) materials supporting HHS's statements in the fixed loss threshold regulations that it would not consider the mandatory reconciliation of outlier payments in setting the fixed loss thresholds.[3] Pl. Mem. at 3. The parties conferred extensively but were unable to resolve this dispute. HHS contends that the materials sought were properly excluded from the Administrative Record and avers that "HHS has provided certified administrative records of the rulemaking proceedings for regulations concerning the establishment of fixed loss thresholds for 2008 through 2011 which contain: the agency's proposed rule and final rule; the comments received; and the data that the agency considered in developing the outlier payment amount and rule and the fixed-loss threshold." Def. Opp. at 8 (citing Ex. A, Decl. of Ing-Jye Cheng, Director, Division of Acute Care, Hospital and Ambulatory Care Group, Centers for Medicare and Medicaid Services (CMS), HHS [Dkt. 53-1] (Cheng Decl.) ¶¶ 2-3).


A. Jurisdiction and Venue

This Court has jurisdiction to review Plaintiffs' challenge to the agency regulations under the Medicare Act, which incorporates the Administrative Procedure Act (APA). See 42 U.S.C. § 1395oo(f)(1); 5 U.S.C. § 706. Venue is proper under 42 U.S.C. § 1395oo(f) and 28 U.S.C. § 1391(c).

B. Standard of Review for Supplementation of Administrative Record

The Administrative Procedure Act requires reviewing courts to "set aside agency action, findings, and conclusions found to be... arbitrary, capricious, abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706. In reviewing agency rulemakings, the APA requires courts to "review the whole record or those parts of it cited by a party." Id. "If a court is to review an agency's action fairly, it should have before it neither more nor less information than did the agency when it made its decision." Walter O. Boswell Mem'l Hosp. v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984); see also Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 420 (1971), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99 (1977) (APA requires courts to review "the full administrative record that was before the Secretary at the time he made his decision").

"The whole' administrative record... consists of all documents and materials directly or indirectly considered by agency decision-makers and includes evidence contrary to the agency's position." Stainback v. Sec'y of Navy, 520 F.Supp.2d 181, 185 (D.D.C. 2007) (internal quotation omitted); see also Banner Health v. Sebelius, 945 F.Supp.2d 1, 15 (D.D.C. 2013) ("Courts in this Circuit have interpreted the whole record to include all documents and materials that the agency directly or indirectly considered... [and nothing] more nor less.") (internal quotations omitted). The record must include "all materials that might have influenced the agency's decision, [] not merely those on which the agency relied in its final decision." Stainback, 520 F.Supp.2d at 186 (internal quotation omitted). An "agency may not skew the record by excluding unfavorable information but must produce the full record that was before the agency at the time the decision was made." Blue Ocean Inst. v. Gutierrez, 503 F.Supp.2d 366, 369 (D.D.C. 2007). "[A]n agency may exclude arguably relevant information that is not contained in the agency's files but that may be available from third parties" and "generally may exclude material that reflects internal deliberations." Fund for Animals v. Williams, 391 F.Supp.2d 191, 197 (D.D.C. 2005).

"Although an agency may not unilaterally determine what constitutes the administrative record, the agency enjoys a presumption that it properly designated the administrative record absent clear evidence to the contrary." Id.; Pac. Shores Subdivision, Cal. Water Dist. v. U.S. Army Corps of Eng'rs, 448 F.Supp.2d 1, 5 (D.D.C. 2006) ("[A]n agency is entitled to a strong presumption of regularity that it properly designated the administrative record."). Accordingly, "[s]upplementation of the administrative record is the exception, not the rule." Pac. Shores, 448 F.Supp.2d at 5.

The D.C. Circuit has held that supplementation of the record is only permitted in one of three "unusual circumstances": "(1) the agency deliberately or negligently excluded documents that may have been adverse to its decision; (2) the district court needed to supplement the record with background information in order to determine whether the agency considered all of the relevant factors; or (3) the agency failed to explain administrative action so as to frustrate judicial review.'" Dist. Hosp. Partners, 2015 WL 2365718, at *7 (quoting American Wildlands v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008)); see also City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010). "To rebut the presumption of regularity, the party seeking supplementation must introduce concrete evidence' to prove' that the specific documents allegedly missing from the record were before the actual decisionmakers' involved in the challenged agency action." Banner Health, 945 F.Supp. at 16-17 (quoting Pac. Shores, 448 F.Supp.2d at 6). In making this showing, the party seeking to supplement the record "must identify the materials allegedly omitted from the record with sufficient specificity, as opposed to merely proffering broad categories of documents and data that are likely' to exist as a result of other documents that are included in the administrative record." Id. at 17. A district court's refusal to supplement the administrative record is reviewed for abuse of discretion. Kempthorne, 530 F.3d at 1002.


Plaintiffs seek to compel several types of information from HHS, arguing that the materials should be supplemented to the Administrative Record because they meet one or more of the Kempthorne criteria.

A. 2003 Draft Interim Rule

In 2003, HHS initiated a rulemaking for Medicare payment regulations in order to more accurately compensate hospitals for their costs exceeding the fixed loss threshold. In February 2003, then-HHS Secretary Tommy H. Thompson executed a draft Interim Rule and sent it to the Office of Management and Budget (OMB) for its review. The Interim Rule recognized that a small group of hospitals had gamed the system by rapidly inflating charges, making it appear that they had incurred greater costs, so that they would obtain greater outlier payments. As a result, HHS set falsely high fixed loss thresholds, thereby causing insufficient payments to be made to other hospitals that had not inflated their charges but that still provided care that was more expensive than the set Medicare rate.[4] According to Plaintiffs, the Interim Rule concluded that HHS should immediately lower the ...

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