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Health v. Burwell

United States District Court, D. Columbia.

September 2, 2015

BANNER HEALTH f/b/o BANNER GOOD SAMARITAN MEDICAL CENTER, et al., Plaintiffs
v.
SYLVIA M. BURWELL, Secretary of the U.S. Department of Health and Human Services, Defendant

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          For BANNER HEALTH, fbo other BANNER GOOD SAMARITAN MEDICAL CENTER, other NORTH COLORADO MEDICAL CENTER, other MCKEE MEDICAL CENTER, other BANNER THUNDERBIRD MEDICAL CENTER, other BANNER MESA MEDICAL CENTER, other BANNER DESERT MEDICAL CENTER, other BANNER ESTRELLA MEDICAL CENTER, other BANNER HEART HOSPITAL, other BANNER BOSWELL MEDICAL CENTER, other BANNER BAYWOOD MEDICAL CENTER, Plaintiff: Stephen P. Nash, LEAD ATTORNEY, SQUIRE PATTON BOGGS, Denver, CO; John Louis Oberdorfer, SQUIRE PATTON BOGGS (U.S.) LLP, Washington, DC; Michihiro M. Tsuda, Mimi Hu Brouillette, Sven C. Collins, PRO HAC VICE, SQUIRE PATTON BOGGS, Denver, CO.

         For ABBOTT NORTHWESTERN HOSPITAL, BUFFALO HOSPITAL, CAMBRIDGE MEDICAL CENTER, MERCY HOSPITAL, NEW ULM MEDICAL CENTER, OWATONNA HOSPITAL, ST. FRANCIS REGIONAL MEDICAL CENTER, UNITED HOSPITAL, UNITY HOSPITAL, BILLINGS CLINIC, CABELL-HUNTINGTON HOSPITAL, CHARLESTON AREA MEDICAL CENTER, DENVER HEALTH AND HOSPITAL AUTHORITY, GOOD SAMARITAN HOSPITAL, HALIFAX COMMUNITY HEALTH SYSTEM, also known as HALIFAX MEDICAL CENTER, MEMORIAL HEALTH SYSTEM COLORADO SPRINGS, also known as MEMORIAL HEALTH SYSTEM FOUNDATION, PARKVIEW MEDICAL CENTER, VALLEY VIEW HOSPITAL, WEST VIRGINIA UNIVERSITY HOSPITALS, Plaintiffs: Stephen P. Nash, LEAD ATTORNEY, SQUIRE PATTON BOGGS, Denver, CO.

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         MEMORANDUM OPINION

         COLLEEN KOLLAR-KOTELLY, United States District Judge.

         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" ), purporting to challenge various actions taken by the Secretary in the course of administering Medicare's " outlier" payment system, the system which provides additional payments to hospitals for extremely high cost cases. Plaintiffs challenge a series of regulations that, together, govern outlier payments for federal fiscal year (" FY" ) 1997 through FY 2007. Specifically, they challenge 14 regulations: outlier payment regulations promulgated in 1988, 1994 and 2003, and 11 annual fixed loss threshold regulations issued for FY 1997 through FY 2007.[1] As explained in more detail below, the combination of the applicable outlier payment regulations and the applicable annual fixed loss threshold establishes the formula for calculating the outlier payments made to individual hospitals, including payments to Plaintiffs and to the facilities controlled by Plaintiffs, during each fiscal year. Plaintiffs challenge the individual outlier payments made by applying those 14 regulations, as well.[2]

         Presently before the Court are Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Summary Judgment, Plaintiffs' [127/142] Motion for Summary Judgment, and Plaintiffs' [128] Motion (Related to Their Motion For Summary Judgment) for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief. Upon consideration of the pleadings,[3] the relevant legal authorities,

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and the record as a whole, the Court DENIES Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction, GRANTS IN PART and DENIES IN PART Defendant's [126] Motion for Summary Judgment, GRANTS IN PART and DENIES IN PART Plaintiffs' [127/142] Motion for Summary Judgment, and GRANTS IN PART and DENIES IN PART Plaintiffs' [128] Motion for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief.

         As an initial matter, the Court concludes that it has subject matter jurisdiction over all of the claims in this action. With respect to the FY 2004 fixed loss threshold rule, the Court REMANDS the rule to the agency to allow the agency to explain its decision regarding its treatment of certain data--or to recalculate the fixed loss threshold if necessary--as explained further below. In all other respects, the Court DENIES Plaintiffs' challenges to all of the regulations at issue in this case.

         With respect to Plaintiffs'[128] Motion for Judicial Notice and/or Extra-Record Consideration of Documents and Other Related Relief, the Court DENIES Plaintiffs' request to supplement the record and for extra-record consideration of documents, but the Court GRANTS the motion insofar as the Court will take judicial notice of the publicly available materials subject to the motion, as relevant. The Court DENIES Plaintiffs' request to submit three additional tables and STRIKES from the record exhibits 5, 7, and 8 to Plaintiffs' Motion for Summary Judgment. The Court will retain jurisdiction pending the limited remand to the agency regarding the FY 2004 rulemaking.

         I. BACKGROUND

         A. Factual Background

         While this action emerges from Plaintiffs' challenge to the outlier payments they received for FY 1997 through FY 2007, the hospitals do not challenge the calculation of the individual outlier payments; instead, they level their substantive challenges at the 14 regulations that established the formulas for outlier payments in each of the relevant years. Plaintiffs challenge two sets of interrelated

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regulations that, taken together, create a formula that generates the actual outlier payments paid each year. With these regulations in hand, the calculations of the actual outlier payments are effectively a ministerial task. The first set of regulations consists of three rules--promulgated in 1988, 1994, and 2004--revising the outlier payment regulations, which are codified at 42 C.F.R. § 412.84. As presented below in greater detail, these regulations set a formula for how individual outlier payments will be calculated for each fiscal year, a formula that was revised over the course of time by these regulations. For all of the years after 1994, including the years for which outlier payments are at issue in this litigation, that formula involved a fixed loss threshold that was set annually. As described below in greater detail, the fixed loss threshold represents the dollar amount of loss that a hospital must absorb in any case in which the hospital incurs estimated costs for treating a patient above and beyond the payment rate set for that type of case. Accordingly, the second set of regulations challenged in this action consists of 11 annual fixed loss threshold rulemakings issued for FY 1997 to FY 2007. In each of those annual rulemakings, the agency established a methodology for setting a fixed loss threshold and set the dollar value of the fixed loss threshold itself.[4] The outlier payment regulations that were applicable for the relevant fiscal year are effectively inputs for the fixed loss threshold rulemakings. That is, using the methodology selected for the fiscal year, the agency uses the applicable outlier payment regulations together with selected past data to generate an annual fixed loss threshold that complies with the statutory requirements.

         Because of the wide-ranging nature of Plaintiffs' challenge--challenging 11 annual fixed loss threshold regulations and outlier payment regulations issued over the course of three decades--and because of the technical complexity of the program involved--it is necessary to review the history of the program in some detail.[5] Moreover, it is important that significant changes to the program occurred over the course of the years covered in this challenge. Because Plaintiffs challenge rulemakings that occurred as early as 1988, it is necessary to explain the changes that occurred as the outlier payment program unfolded over time. That said, the Court provides the greatest detail on fiscal years 1997 through 2007 that are the core of the claims in this case. The Court reserves certain details for its discussion of the discrete issues presented by the parties below.

         The Statutory Framework

         Medicare " provides federally funded health insurance for the elderly and disabled," Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226-27, 309 U.S. App.D.C. 37 (D.C. Cir. 1994), through a " complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). The program is administered by the Secretary through the Centers for Medicare and

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Medicaid Services (" CMS" ). Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205, 394 U.S. App.D.C. 59 (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, 338 U.S. App.D.C. 168 (D.C. Cir. 1999) (quoting 42 U.S.C. § 1395f(b)), cert. denied, 530 U.S. 1204, 120 S.Ct. 2197, 147 L.Ed.2d 233 (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, 292 U.S. App.D.C. 105 (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.

         Under the Prospective Payment System, Hospitals are reimbursed " based on the average rate of 'operating costs [for] inpatient hospital services.'" Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015) (quoting Cnty. of Los Angeles, 192 F.3d at 1008). " Because different illnesses entail varying costs of treatment, the Secretary uses diagnosis-related groups (DRGs) to 'modif[y]' the average rate." Id. (quoting Cape Cod Hosp., 630 F.3d at 205). " A DRG is a group of related illnesses to which the Secretary assigns a weight representing 'the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients.'" Id. (quoting Cape Cod Hosp., 630 F.3d at 205-06). " To calculate a specific reimbursement, the Secretary 'takes the [average] rate, adjusts it [to account for regional labor costs], and then multiplies it by the weight assigned to the patient's DRG.'" Id. (quoting Cnty. of Los Angeles, 192 F.3d at 1009) (alteration in original).

         " 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. While relatively simple in concept--hospitals receive additional payments for extremely high cost treatments--implementing the outlier payment concept entails a complex process, which has evolved substantially in the more than three decades since outlier payments were introduced. Because Plaintiffs challenge aspects of the implementation of the scheme that cover all three decades, it is necessary to review how the program has evolved over time.

         Pursuant to the 1983 legislation, the program provided for outlier payments for " day outliers" and " cost outliers." Cnty. of Los Angeles, 192 F.3d at 1009 (citing 42 U.S.C. § 1395ww(d)(5)(A)(i)-(ii) (Supp. IV 1986)). Day outliers are those patients whose " length of stay exceeded the mean length of stay for that particular DRG by a

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fixed number of days or standard deviations." Cnty. of Los Angeles, 192 F.3d at 1009 (citing 42 U.S.C. § 1395ww(d)(5)(A)(i) (Supp. IV 1986)). In other words, day outlier payments cover patients with extraordinarily lengthy hospital stays. Day outlier payments for extraordinary lengthy stays were subsequently eliminated by Congress and are not at issue in this litigation. See 42 U.S.C. § 1395ww(d)(5)(A)(i) (day outlier payments only available for discharges occurring " during fiscal years ending on or before September 30, 1997" ). As specified by Congress in 1983, cost outlier payments covered situations where " a hospital's cost-adjusted charges surpassed either a fixed multiple of the applicable DRG prospective-payment rate or such other fixed dollar amount that the Secretary established." [6] Cnty. of Los Angeles, 192 F.3d at 1009 (citing 42 U.S.C. § 1395ww(d)(5)(A)(ii) (Supp. IV 1986)). The 1983 statute further specified that the amount of the outlier payments " shall be determined by the Secretary and shall approximate the marginal cost of care beyond the cutoff point applicable" to day outliers or to cost outliers. 42 U.S.C. § 1395ww(d)(5)(A)(iii); see also Cnty. of Los Angeles, 192 F.3d at 1009. Finally, the statute provides that " [t]he total amount of the additional [outlier] payments made under this subparagraph 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)(A)(iv). In County of Los Angeles, the D.C. Circuit Court of Appeals approved the Secretary's interpretation of that final provision--regarding the 5 to 6 percent range--under which the agency was required to set the outlier threshold in advance such that the projected outlier payments would be between 5 and 6 percent of the total projected payments. See 192 F.3d at 1020. The Court of Appeals concluded that the agency was not required to retroactively adjust the outlier thresholds such that the actual outlier payments would be between 5 and 6 percent of the total payments. See id. at 1019-20.

         Since the introduction of the Prospective Payment System, the applicable statutory provision has provided for cost outlier payments only when " charges, adjusted to cost," exceed a certain cutoff. 42 U.S.C. § 1395ww(d)(5)(A)(ii). Because hospitals " markup" their costs in their billing, a calculation is necessary in order to estimate the actual costs of a given treatment based on the amount charged by a medical facility. See Dist. Hosp. Partners, 786 F.3d at 50. Until 1988, the agency used a standard cost-to-charge ratio for all facilities. See 53 Fed.Reg. 38,476, 38,502 (Sept. 30, 1988) (" We currently determine the cost of the discharge to be equal to 66 percent of the billed charges for covered services based on the average ratio of operating costs to charges for Medicare discharges nationwide." ). However, in 1988 the agency decided to shift to using hospital-specific cost-to-charge ratios, reasoning that " [t]he use of hospital-specific cost-to-charge ratios should greatly enhance the

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accuracy with which outlier cases are identified and outlier payments are computed, since there is wide variation among hospitals in these cost-to-charge ratios." Id. at 38,503. Accordingly, the agency codified that change by adding the following provision to the Code of Federal Regulations specifying that that hospital-specific cost-to-charge ratios would be used:

The cost-to-charge ratio used to adjust covered charges is computed annually by the intermediary for each hospital based on the latest available settled cost report for that hospital and charge data for the same time period as that covered by the cost report. Statewide cost-to-charge ratios are used in those instances in which a hospital's cost-to-charge ratio falls outside reasonable parameters. HCFA sets forth these parameters and the Statewide cost-to-charge ratios in each year's annual notice of prospective payment rates published under § 412.8(b).

53 Fed.Reg. at 38,529 (providing text of provision codified at 42 C.F.R. § 412.84(h)). In explaining the choice to use the " latest available settled cost report," the Secretary reasoned that " the hospital-specific cost-to-charge ratios should be developed using the most current and accurate data available." 53 Fed.Reg. at 38,507. Furthermore, the Secretary reasoned that, " [w]hile the latest filed cost report represents the most current data, we have found that Medicare costs are generally overstated on the filed cost report and are subsequently reduced as a result of audit." Id. The agency considered the range of reasonable cost-to-charge ratios to be " 3.0 standard deviations (plus or minus) from the mean of the log distribution of cost-to-charge ratios for all hospitals." Id. The agency explained that it " believe[d] that ratios falling outside this range are unreasonable and are probably due to faulty data reporting or entry." Id. at 38,507-08. In other words, pursuant to the 1988 regulation, to determine whether a hospital's cases qualified for outlier payments, the agency would use the ratio between the latest available settled cost report--that is, the most recent audited cost report--and the associated charges. But if the cost-to-charge ratio was either extremely high or extremely low in comparison to the other hospitals, the agency would use the statewide average cost-to-charge ratio in determining whether outlier payments were warranted. These two aspects of the formula for calculating outlier payments--the use of the latest available settled cost reports and the statewide average default--remained applicable until they were modified by regulation in 2003. See 68 Fed.Reg. 34,494, 34,497-500 (June 9, 2003); 42 C.F.R. § 412.84(i)(3) (2003).

         In 1993, Congress amended the statutory provisions establishing the outlier payment framework--for FY 1995 and beyond--through Section 13501(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66). 59 Fed.Reg. 45,330, 45,368 (Sept. 1, 1994). Previously a " hospital [could] receive payment for a cost outlier if the adjusted costs for a discharge exceed the greater of a fixed dollar amount or a fixed multiple of the DRG payment for the case." Id. Pursuant to the 1993 legislation, for discharges on or after October 1, 1994, a hospital can request an outlier payment when the charges, adjusted to cost, " exceed the sum of the applicable DRG prospective payment rate ... plus a fixed dollar amount determined by the Secretary." [7]

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42 U.S.C. § 1395ww(d)(5)(A)(ii); see also 59 Fed.Reg. at 45,368. The " fixed dollar amount" is known as the fixed loss threshold. " In effect, this 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, 786 F.3d at 50 (quoting Boca Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229 (11th Cir. 2009)). The fixed loss threshold is set by the Secretary each fiscal year. Id. The agency must set that fixed loss threshold such that the projected outlier payments are between 5 and 6 percent of the total projected DRG-based payments for the applicable fiscal year. See Cnty. of Los Angeles, 192 F.3d at 1020.

         To implement the amended statutory provisions, the agency amended its outlier payment regulations--promulgating the second regulation challenged by Plaintiffs in this action. For all discharges on or after October 1, 1994, cost outlier payments would be available when charges, adjusted to cost, " exceed the DRG payment for the case plus a fixed dollar amount." 59 Fed.Reg. 45,330, 45398 (Sept. 1, 1994) (amending 42 C.F.R. § 412.80). The agency acknowledged that the language of the statutory amendment contained some ambiguity as to whether the new formula was required for future discharges or whether it provided an optional alternative to the previous outlier payment formula. See id. at 45,370. But the agency concluded that adopting the new fixed loss cost methodology exclusively was both substantively appropriate and consistent with the intent of Congress in amending the relevant statutory provisions. See id.

         In this same regulation, the agency set the fixed loss threshold for FY 1995 at $20,500. See id. at 45,407. Pursuant to section 1395ww(d)(5)(A)(iii), there is a requirement that the outlier payment " approximate the marginal cost of care beyond the cutoff point." For FY 1995, the agency set the marginal cost factor for cost outliers at 80 percent.[8] 59 Fed.Reg. at 45,407. Accordingly, cost outlier payments would be provided where a charge, adjusted to cost, was greater than the applicable DRG rate plus $20,500. In such a circumstance, the amount of the cost outlier payment would be 80 percent of the difference between the charges, adjusted to cost, and the sum of the DRG rate and $20,500. For FY 1995, the agency set the fixed loss threshold such that " estimated outlier payments equal 5.1 percent of estimated DRG payments." Id. The 5.1 percent level satisfies the statutory requirement that the predicted outlier payments be between 5 and 6 percent of the total DRG payments. See Cnty. of Los Angeles, 192 F.3d at 1020. In order to set the fixed loss threshold such that outlier payments would meet this 5.1 percent level, it was necessary to model the outlier and DRG payments for the upcoming fiscal year. Whereas the agency had used a charge inflation methodology through FY 1993, the agency used a cost inflation methodology for FY 1995 as it had done the previous fiscal year.[9] See 59 Fed.Reg. at 45,407. In modeling the outlier payments for FY 1994, the agency concluded that a cost inflation methodology would be more accurate

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than a charge inflation methodology. 58 Fed.Reg. 46,270, 46,347 (Sept. 1, 1993). Specifically, the agency reasoned that, because charges were rising faster than costs and because the cost-to-charge ratios used could be " as much as 2 years old" due to the use of the latest available settled cost reports, a charge inflation methodology could be leading to " overestimating outlier payments in setting the thresholds." Id. The agency continued to use the cost inflation methodology in FY 1995 and through FY 2002. See 68 Fed.Reg. 45,346, 45,476 (Aug. 1, 2003). Under the cost inflation methodology, to generate a data set of projected costs for FY 1995, the agency first took the FY 1993 charge data and adjusted the charges by the applicable cost-to-charge ratios. Id. Then the agency inflated those costs to account for two years of cost inflation. Id. The agency then used this data set to determine what fixed loss threshold would generate projected outlier payments that were 5.1 percent of the total projected DRG payments for FY 1995.

         The final prong of the statutory scheme is that the payments based on the DRG prospective payment rates--non-outlier payments--are reduced each year by a percentage equal to the percentage established by the Secretary for outlier payments for that year. See 42 U.S.C. § 1395ww(d)(3)(B). This reduction offsets, approximately, the cost of the outlier payments for each year. Accordingly, for those years where the Secretary set the fixed loss threshold such that outlier payments were projected to be 5.1 percent of the total DRG-based payments, the payments based on the DRG prospective payment rates were reduced by 5.1 percent. See 62 Fed.Reg. 45,966, 46,011 (Aug. 29, 1997) (" Thus, for example, we set outlier thresholds so that the outlier payments for operating costs are projected to equal 5.1 percent of total DRG operating payments, and we adjust the operating standardized amounts correspondingly. We do not set aside a pool of money to fund outlier cases." ). However, there is no guarantee that the actual total outlier payments will equal the reduction in DRG payments. See Cnty. of Los Angeles, 192 F.3d at 1019-20.

         Outlier Payments and Fixed Loss Thresholds: FY 1997 through FY 2003

         Because Plaintiffs challenge each of the fixed loss thresholds set for FY 1997 through FY 2007, the Court reviews each of the rulemakings in which those thresholds were set. As explained above, 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. For each of these fiscal years, the agency modeled the expected payments for that upcoming fiscal year and set the fixed loss threshold at a rate such that the level of outlier payments was predicted to be 5.1 percent of the anticipated total payments based on the DRG rates, which is within the 5 to 6 percent range of total DRG-based payments set by the statute. See Cnty. of Los Angeles, 192 F.3d at 1009. As explained in further detail below, the year 2003 was a critical pivot point in the outlier payment program. Based on the discovery of abusive charging practices by certain hospitals, the agency set out to change the rules for outlier payments to curb these abuses, ultimately modifying the regulations governing outlier payments in a regulation promulgated in June 2003. See Dist. Hosp. Partners, 786 F.3d at 51-52. Accordingly, for the annual fixed loss threshold rulemakings between FY 1997 and FY 2003, the agency applied the outlier payment

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regulations promulgated in 1988 and in 1994, both discussed above. For the annual fixed loss threshold rulemakings for FY 2004 through FY 2007, the agency applied the outlier payment regulations as modified by the June 2003 regulation. The Court first reviews, briefly, each of the fixed loss threshold rulemakings for FY 1997 through FY 2003. After reviewing the 2003 changes to the outlier payment regulations, the Court turns to the four challenged fixed loss threshold rulemakings following those changes, for FY 2004 through FY 2007.

         Fixed Loss Threshold Rulemaking for FY 1997[10]

         In a proposed rule published in the Federal Register on May 31, 1996, the agency proposed a fixed loss threshold of $11,050 and proposed to maintain the marginal cost factor for cost outliers at 80 percent.[11] 61 Fed.Reg. 27,444, 27,495 (May 31, 1996). The agency calculated the outlier thresholds so that outlier payments were projected to equal 5.1 percent of the total projected DRG payments. Id. In a final rule promulgated on August 30, 1996, the agency concluded that a fixed loss threshold of $9,700 was appropriate in order to satisfy the 5.1 percent projection. See 61 Fed.Reg. 46,166, 46,228 (Aug. 30, 1996). The agency maintained the 80 percent marginal cost factor as proposed. Id. The agency concluded that a $9,700 fixed loss threshold was appropriate because of updated cost inflation data. Specifically, the agency noted that " [t]he latest available Medicare cost reports indicate that hospital cost per case decreased from FY 1993 to FY 1994 as well as from FY 1994 to FY 1995." Id. The agency concluded that the data " suggests a continued trend in cost deflation," whereas the agency had assumed zero cost inflation in the proposed rule. Id. (emphasis in original). Accordingly, in order to project the costs and the associated Medicare payments for FY 1997, the agency used a negative annual inflation factor of 1.906 percent. Id. Specifically, the agency deflated the cost data for 1995 by 1.906 percent, twice, to generate a set of projected cost data for FY 1997. Because of the predicted cost deflation, it was necessary to lower the fixed loss threshold, in comparison to the proposed threshold, so that the outlier payments would be 5.1 percent of the total DRG-based payments. See id. at 46,228-29.

         Fixed Loss Threshold Rulemaking for FY 1998

         In a proposed rule issued on June 2, 1997, the agency proposed a fixed loss threshold for cost outliers of $7,600. See 62 Fed.Reg. 29,902, 29,946 (June 2, 1997). The agency proposed to maintain the marginal cost factor for cost outliers of 80 percent. Id. Once again, the agency set the threshold so that the projected outlier payments would be 5.1 percent of the projected total DRG-based payments. See id. The proposed fixed loss threshold was premised on continued cost deflation--which the agency derived by analyzing cost

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data from previous years--and the agency used an annual cost deflation factor of 1.969 percent to project costs for FY 1998. See id. In a final rule issued August 29, 1997, the agency selected a fixed loss threshold of $11,050, such that outlier payments were projected to be 5.1 percent of the projected total DRG-based payments.[12] 62 Fed.Reg. at 46,040. The increase in comparison to the proposed threshold was due, in part, to amendments to the outlier payment provisions of the statute, which required adjusting the outlier payment model to account for other factors not relevant to the issues in this action.[13] Cf. Dist. Hosp. Partners, 786 F.3d at 50, n.1 (noting that these factors were immaterial to the analysis of challenges to outlier payments). Based on more recent data available at the time of the promulgation of the final rule, which showed continued declining costs, the agency used an annual cost inflation factor of minus 2.005 percent. See 62 Fed.Reg. at 46,041. Accordingly, for FY 1998, the fixed loss threshold was set at $11,050.

         Fixed Loss Threshold Rulemaking for FY 1999

         In a proposed rule issued on May 8, 1998, the agency proposed a fixed loss threshold for cost outliers of $11,350. 63 Fed.Reg. 25,576 (May 8, 1998). The agency proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total projected DRG-based payments. Id. As in previous years, these calculations were made using a cost inflation methodology. See id. at 25,611. In the agency's proposed rule, the projections were based on an annual cost inflation factor of minus 1.831 percent. See id. In a final rule promulgated on July 31, 1998, the agency established a fixed loss threshold for FY 1999 of $11,100 and maintained the marginal cost factor at 80 percent. 63 Fed.Reg. 40,954, 41,008 (July 31, 1998). The agency continued to use a cost inflation methodology but used an updated cost inflation factor of minus 1.724 percent, which was suggested by the more recent data available at the time of the promulgation of the final rule. See id. The agency calculated that the projected cost outlier payments using the fixed loss threshold of $11,100 would be 5.1 percent of the total projected DRG-based payments. See id.

         Fixed Loss Threshold Rulemaking for FY 2000

         In a proposed rule issued on May 7, 1999, the agency proposed a fixed loss threshold of $14,575. 64 Fed.Reg. 24,716, 24,754 (May 7, 1999). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations

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were made using a cost-inflation methodology. See id. For FY 2000, the agency proposed using a zero inflation factor. The use of a zero inflation factor " reflects [the agency's] analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 1998, is higher than [] projected before the beginning of FY 1998, and that the percentage of actual outlier payments for FY 1999 will likely be higher than [] projected before the beginning of FY 1999." Id. In a final rule promulgated on July 30, 1999, the agency established a fixed loss threshold for FY 2000 of $14,050 and maintained the marginal cost factor at 80 percent. 64 Fed.Reg. 41,490, 41,546 (July 30, 1999). The agency used a zero inflation factor, as proposed, reflecting the latest cost report data, as well as the relationship of actual outlier payments to the previously projected outlier payments for FY 1998 and FY 1999, as discussed in the FY 2000 proposed rule. Id. The agency noted that it was " attempting to improve [its] estimate of payments for FY 2000 by using a cost inflation factor of zero percent rather than a negative inflation factor," as the agency had done for several years prior to FY 2000. Id. at 41,547.

         Fixed Loss Threshold Rulemaking for FY 2001

         In a proposed rule issued on May 5, 2000, the agency proposed a fixed loss threshold of $17,250. 65 Fed.Reg. 26,282, 26,329 (May 5, 2000). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations were made using a cost-inflation methodology. See id. For FY 2001, the agency proposed using a 1.0 percent inflation factor. The use of a 1.0 percent inflation factor " reflects [the agency's] analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 1999, is higher than [] projected before the beginning of FY 1999, and that the percentage of actual outlier payments for FY 2000 will likely be higher than [] projected before

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the beginning of FY 2000." Id. In a final rule promulgated on August 1, 2000, the agency established a fixed loss threshold for FY 2001 of $17,550 and maintained the marginal cost factor at 80 percent. 65 Fed.Reg. 47,054, 47,113 (Aug. 1, 2000). The agency used a 1.8 percent inflation factor--as opposed to the proposed inflation factor of 1.0 percent--reflecting the latest cost report data, as well as the relationship of actual outlier payments to the previously projected outlier payments for FY 1999 and FY 2000, as discussed in the FY 2001 proposed rule. Id.

         Fixed Loss Threshold Rulemaking for FY 2002

         In a proposed rule issued on May 4, 2001, the agency proposed a fixed loss threshold of $21,000. 66 Fed.Reg. 22,646, 22,726-27 (May 4, 2001). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. at 22,727. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations were made using a cost-inflation methodology. See id. For FY 2002, the agency proposed using a 5.5 percent inflation factor. The use of the 5.5 percent inflation factor " reflects [the agency's] analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 2000, is higher than [] projected before the beginning of FY 2000, and that the percentage of actual outlier payments for FY 2001 will likely be higher than [] projected before the beginning of FY 2001." Id. In a final rule promulgated on August 1, 2001, the agency established a fixed loss threshold for FY 2002 of $21,025 and maintained the marginal cost factor at 80 percent. 66 Fed.Reg. 39,828, 39,941 (Aug. 1, 2001). The agency used a 2.8 percent inflation factor--as opposed to the proposed inflation factor of 5.5 percent--reflecting the latest cost report data, as well as the relationship of actual outlier payments to the previously projected outlier payments for FY 2000 and FY 2001, as discussed in the FY 2002 proposed rule.

         Fixed Loss Threshold Rulemaking for FY 2003: Shift from Cost Inflation to Charge Inflation Methodology

         In a proposed rule issued on May 9, 2002, the agency proposed a fixed loss threshold of $33,450. 67 Fed.Reg. 31,404, 31,510 (May 9, 2002). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. at 22,727. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. While these calculations were made using a cost-inflation methodology, the agency proposed a calculation that differed from those employed in previous years because of the data that was available at the time of the FY 2003 proposed rule. See id. The agency noted that, previously, " inflation factors have been calculated by measuring the percent change in costs using the two most recently available cost report files." Id. For example, for FY 2002, those were the FY 1998 and FY 1999 cost reports. Id. However, when the agency was proposing the threshold for FY 2003, the FY 2000 cost reports were not available because of processing delays. See id. Therefore, the agency proposed projecting the cost inflation factor by constructing an averaging model based on the changes to the data available from FY 1995 through FY 1999, the most recent cost data available. See id. The agency emphasized that this proposal was based on the unavailability of the FY 2000 data. See id. As a result of the model, the agency proposed applying a 15 percent cost inflation factor to the FY 2001 data to generate the projected FY 2003 data. See id.

         After receiving a significant numbers of comments regarding the methodology proposed for accounting for inflation--which was proposed in light of the unavailability of the FY 2000 cost data--the agency declined to adopt the proposed cost inflation methodology in the final FY 2003 fixed loss threshold regulation. 67 Fed.Reg. 49,982, 50,124 (Aug. 1, 2002). Instead, in the final rule promulgated on August 1, 2002, the agency adopted a charge inflation methodology. See id. The agency reasoned that, because of substantial increases in the growth of charges, which were increasing faster than costs, predicting future payments using a charge inflation methodology would be more accurate than using a cost inflation methodology. See id. Accordingly, in order to determine the fixed loss threshold for FY 2003, the agency calculated the rate of charge inflation from FY 1999 to FY 2000 and from FY 2000 to FY 2001 and applied this two-year rate of inflation--a total of 17.6398 percent--to the FY 2001 charge data to generate a set of projected FY 2003 charge data. See id. The agency adjusted these projected charges to cost for use in modeling outlier payments for FY 2003. See id. Using this charge inflation methodology, as well as continuing to use a marginal cost factor of 80 percent, the agency set the fixed loss threshold at $33,560 for FY 2003. See id. With this fixed loss threshold, the agency predicted that outlier payments would be

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5.1 percent of the total DRG-based payments. See id.

         Changes to the Outlier Payment Program in 2003

         By 2003, it appeared that the outlier payment system was breaking down. See Dist. Hosp. Partners, 786 F.3d at 51. In particular, concerns emerged that hospitals " could manipulate the outlier regulations if their charges were 'not sufficiently comparable in magnitude to their costs.'" Id. (quoting 68 Fed.Reg. 10,420, 10,423 (Mar. 5, 2003)). In February 2003, the Secretary transmitted a draft interim final rule discussing several possible changes to the outlier payment system to the Office of Management and Budget (" OMB" ).[14] See AR (2003 amendments) 4417.338. Based on analysis of trends in the cost and charge data, the draft also would have revised the previously-established fixed loss threshold for FY 2003, lowering it to $20,760 for discharges occurring between the would-be date of publication of the interim final rule and the end of FY 2003. See AR (2003 amendments) 4417.376. Specifically, the draft highlighted 123 hospitals that had rapidly increased their charges between FY 1999 and FY 2001 and whose outlier payments were a disproportionately high percentage of their total DRG payments. See AR (2003 amendments) 4417.373. However, the Secretary later abandoned this draft rule and never published it in the Federal Register. See Dist. Hosp. Partners, 786 F.3d at 54, 58.

         Instead, on March 5, 2003, the agency published a notice of proposed rulemaking that proposed several of the same changes to the outlier payment system suggested in the draft interim final rule. See 68 Fed.Reg. at 10,420. In the notice of proposed rulemaking, the agency described how a hospital could take advantage of " the time lag between the current charges on a submitted bill and the cost-to-charge ratio taken from the most recent settled cost report." Id. at 10,423. As the D.C. Circuit Court of Appeals described in District Hospital Partners, " [a] hospital knows that its cost-to-charge ratio is based on data submitted in past cost reports. If it dramatically increased charges between past cost reports and the patient costs for which reimbursement is sought, its cost-to-charge ratio would 'be too high' and would 'overestimate the hospital's costs.'" 786 F.3d at 51 (quoting 68 Fed.Reg. at 10,423). Reviewing actual outlier payments from several previous years, the agency discovered " 123 hospitals whose percentage of outlier payments relative to total DRG payments increased by at least 5 percentage points" from FY 1999 to FY 2001. 68 Fed.Reg. at 10,423. Furthermore, for those 123 hospitals, " the mean rate of increase in charges was 70 percent." Id. at 10,424. Yet, cost-to-charge ratios for these hospitals, which were based upon cost reports from prior periods, declined by only 2 percent." Id. (emphasis added). While charges were increasing rapidly, the cost-to-charge ratios did not reflect this change because they were based on earlier time periods. These hospitals, with rapidly increasing charges, have become called turbo-chargers. Dist. Hosp. Partners, 786 F.3d at 51.

         To address these concerns, the agency proposed three changes to the outlier payment regulations. First, whereas previously the regulations--promulgated in 1988--required using the most recent settled cost report when determining the

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cost-to-charge ratios for hospitals, the agency proposed to use either the tentatively settled cost report or the final settled cost report, whichever would be from the later cost reporting period. Id. at 10,423-24. Because it can take 12 to 24 months between the tentative settling of a cost report and the final settling of that cost report, allowing the use of the tentatively settled cost reports would allow more up-to-date data to be used in determining the outlier payments. See id. at 10,424. Second, the agency proposed that it would no longer default to statewide average cost-to-charge ratios for hospitals with low cost-to-charge ratios. See id. Previously the regulations--again, promulgated in 1988--specified that, for hospitals with extremely high or extremely low cost-to-charge ratios, the statewide average cost-to-charge ratio would be used in determining outlier payments. See id. The agency proposed that the statewide average would still be used for hospitals that had not yet filed cost reports and situations where the hospital-specific cost-to-charge ratios would exceed the upper threshold, id., which had previously been set at three standard deviations above the mean of the log distribution of cost-to-charge ratios for all hospitals. See 53 Fed.Reg. at 38,507. But for hospitals that had low cost-to-charge ratios, they would " receive their actual cost-to-charge ratios, no matter how low their ratios fall." 68 Fed.Reg. at 10,424. Third, the agency proposed reconciling outlier payments after settled cost reports were issued. Id. at 10,424-25. The agency proposed adding a provision to the regulations such that outlier payments would " become subject to adjustment when hospitals' cost reports are settled." Id. at 10,425. Beyond three major changes, in contrast to the draft interim final rule, the agency did not propose a mid-year correction for the FY 2003 fixed loss threshold because of uncertainty regarding charging practices during FY 2003. See id. at 10,426-27.

         On June 9, 2003, the agency promulgated a final rule, which included the three major changes to the outlier payment regime proposed in the March 2003 notice of proposed rulemaking. See 68 Fed.Reg. 34,494, 34,497-503 (June 9, 2003). First, for all discharges on or after October 1, 2003, the cost-to-charge ratios would be based on more recent data--based on tentatively settled cost reports rather than on final settled cost reports. See id. at 34,497-99, 34,515 (codified at 42 C.F.R. § 412.84(i)(1)-(2)). Second, for discharges on or after August 8, 2003, the agency would not default to statewide averages for hospitals with low cost-to-charge ratios. See id. at 34,500 (codified at 42 C.F.R. § § 412.84(h) and (i)(1)). Third, for discharges on or after August 8, 2003, outlier payments would " become subject to adjustment when hospitals' cost reports coinciding with the discharge are settled." [15] Id. at 34,504 (codified at 42 C.F.R. § 412.84(i)(4)). Finally, consistent with the agency's suggestion in the notice of proposed rulemaking, the agency concluded that adjusting the fixed loss threshold for the remainder of FY 2003 was not warranted. See id. at 34,506.

         Fixed Loss Threshold Rulemakings for FY 2004 through 2007

         Plaintiffs challenge four annual fixed loss threshold rules--for FY 2004 through FY 2007--issued after the agency promulgated the 2003 regulations that changed

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the methodology for calculating outlier payments. As with the fixed loss thresholds for FY 1997 through FY 2003, the agency was required to set the fixed loss threshold in order that the projected outlier payments would be between 5 and 6 percent of the total projected DRG-based payments for the applicable fiscal years. See Cnty. of Los Angeles, 192 F.3d at 1020. Each of the annual fixed loss thresholds for FY 2004 through FY 2007 was set using the outlier payment methodology updated in 2003. In setting each of these thresholds, the agency used a charge inflation methodology, which had been reintroduced in 2003. For each of these years, the agency set the fixed loss threshold so as to result in outlier payments being 5.1 percent of total DRG-based payments and, for each of these years, the agency adopted a marginal cost factor of 80 percent. See 68 Fed.Reg. 45,346, 45,478 (Aug. 1, 2003); 69 Fed.Reg. 48,916, 49,278 (Aug. 11, 2004); 70 Fed.Reg. 47,278, 47,495 (Aug. 12, 2005); 71 Fed.Reg. 47,870, 48,151 (Aug. 18, 2006). However, there are differences in the setting of each of these fixed loss thresholds, particularly regarding the data sets that were used to calculate the threshold for each year. The Court, therefore, reviews how the fixed loss threshold was set for each of these fiscal years.

         Fixed Loss Threshold Rulemaking for FY 2004

         In a proposed rule issued May 19, 2003, the agency proposed setting the fixed loss threshold for FY 2004 at $50,645. 68 Fed.Reg. 27,154, 27,235 (May 19, 2003). The agency proposed using a charge inflation rate of 12.8083 percent annually (27.3 percent over two years). Id. The agency also proposed maintaining the marginal cost factor at 80 percent. Id. Notably this proposed rule was published prior to the promulgation of the revised outlier payment regulations--finalized on June 9, 2003--and therefore used the methodology that was in place before the 2003 changes to the outlier payment regulations. See id. In issuing the proposed fixed loss threshold rule, the agency noted that " any final rule subsequent to the March 5, 2003 proposed rule that implements changes to the outlier payment methodology is likely to affect how we will calculate the final FY 2004 outlier threshold." Id. The agency further noted that " the final FY 2004 threshold is likely to be different from this proposed threshold, as a result of any changes subsequent to the March 5, 2003 proposed rule." Id.

         The final fixed loss threshold rule for FY 2004 was issued on August 1, 2003--two months after the changes to the outlier payment regulations were promulgated. 68 Fed. at 45,346. The final fixed loss threshold rule took account of the revised outlier payment regulations, which would govern outlier payments for discharges occurring in FY 2004 and beyond. See id. Specifically, using the charge inflation methodology that the agency had re-introduced in the FY 2003 rulemaking, the agency used charge data from 2002 and inflated it by a two-year charge inflation rate to project charges for FY 2004. Id. The agency used " the 2-year average annual rate of change in charges per case," from FY 2000 to FY 2001 and from FY 2001 to FY 2002, which was 12.5978 percent annually (or 26.8 percent over two years). Id. To calculate projected costs for FY 2004, the agency adjusted the projected charges by hospital-specific cost-to-charge ratios. In doing so, the agency implemented changes introduced by the 2003 revisions to the outlier payment regulations. First, the agency adjusted its methodology to use more recent data to generate the cost-to-charge ratios because, in issuing the outlier payments for FY 2004, the latest tentatively settled cost reports would be used rather than the latest

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settled cost reports. See id. Therefore, whereas the agency had previously used cost-to-charge ratios from the Provider Specific File to calculate the fixed loss threshold, the agency instead " matched charges-per-case to costs-per-case from the most recent cost reporting year" and " then divided each hospital's costs by its charges to calculate the cost-to-charge ratio for each hospital." Id. Second, whereas previously the agency had used a statewide average cost-to-charge ratio for hospitals with low cost-to-charge ratios, the revised outlier payment regulations specified that the hospital-specific cost-to-charge ratio would be used " no matter how low their ratios actually fall." Id. The agency used the resultant hospital-specific cost-to-charge ratios to adjust the projected FY 2004 charges to costs for that fiscal year. See id.

         The final change introduced by the 2003 outlier payment regulations was that outlier payments would become subject to reconciliation " at the time of cost report final settlement if a hospital's actual ... cost-to-charge ratios are found to be substantially different from the cost-to-charge ratios used during that time period to make outlier payments." Id. The agency noted that it was " difficult to project which hospitals will be subject to reconciliation of their outlier payments using available data." Id. The agency also noted that " resources necessary to undertake reconciliation will ultimately influence the number of hospitals reconciled." Id. For all of those reasons, it was " difficult to predict the number of hospitals that [would] be reconciled." Nonetheless, based on previous data, the agency " identified approximately 50 hospitals [it] believe[d] will be reconciled." Id. For these hospitals, the agency attempted to integrate the effects of reconciliation in the predictive model for FY 2004 by using a modified methodology for projecting outlier payments for FY 2004. See id. at 45,476-77. Using this revised methodology, in light of the changes to the outlier payment regulations in 2003, the agency established a fixed loss outlier of $31,000. Id. at 45,477.

         Fixed Loss Threshold Rulemaking for FY 2005

         In a proposed rule issued May 18, 2004, the agency proposed a fixed loss threshold of $35,085. 69 Fed.Reg. 28,196, 28,376 (May 18, 2004). To arrive at this proposed threshold, the agency once again used a charge inflation methodology. The agency took FY 2003 charge data and inflated it two years--based on the two-year average annual rate of change in charges from FY 2001 to FY 2002 and FY 2002 to FY 2003, which was 14.5083 percent annually. See id. Pursuant to the 2003 changes to the outlier payment regulations, the agency then used hospital-specific cost-to-charge ratios that reflected the most recent settled or the most recent tentatively settled cost reports, whichever was more recent, for each hospital. See id. In proposing this threshold, the agency acknowledged that the inflation data " derive[d] from the years just prior to the adoption of the policy changes, when some hospitals were increasing charges at a rapid rate in order to increase their outlier payments." Id. As a result, the agency noted that they " represent rates of increase that may be higher than the rates of increase under our new policy." Id. Accordingly, the agency welcomed suggestions that might enable predictions that " better reflect current trends in charge increases." Id.

         Given these concerns, as well as comments received in response to the proposed rule, the agency adjusted the methodology for predicting FY 2005 data in order to set the final FY 2005 fixed loss threshold. See 69 Fed.Reg. at 49,277. In the final rule promulgated on August 11,

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2004, the agency used the FY 2003 charge data as a baseline. Id. To derive an inflation factor, the agency took the " unprecedented step of using the first half-year of data from FY 2003 and comparing this data to the first half year of FY 2004." Id. The agency concluded that " this comparison will result in a more accurate determination of the rate of change in charges per case between FY 2003 and FY 2005." Id. Using this data, the agency calculated a one-year annual rate of charge inflation of 8.9772, or 18.76 percent over two years, and then inflated the FY 2003 data by this two-year charge inflation figure. Id. The agency then converted the projected charge data to costs using hospital-specific cost-to-charge ratios from the April 2004 update of the Provider Specific File. Id. As with the calculation of the cost-to-charge ratios for the setting of the FY 2004 fixed loss threshold, this analysis incorporated the changes introduced by the 2003 revisions to the outlier payment regulations, specifically the use of tentatively settled cost reports and the use of hospital-specific ratios even for hospitals with extremely low cost-to-charge ratios. See id. However, unlike the FY 2004 fixed loss threshold calculation, the agency did not change its methodology to explicitly account for the possibility of reconciliation in setting the FY 2005 threshold. See id. at 49,278. The agency concluded that " due to changes in hospital charging practices following implementation of the new outlier regulations in the June 9, 2003 final rule, the majority of hospitals' cost-to-charge ratios will not fluctuate significantly enough between the tentatively settled cost report and the final settled cost report to meet the criteria to trigger reconciliation of their outlier payments." Id. Moreover, the agency noted that it would be " difficult to predict which specific hospitals may be subject to reconciliation in any given year." Id. Using this methodology, the agency established a fixed loss threshold of $25,800 for FY 2005. Id.

         Fixed Loss Threshold Rulemaking for FY 2006

         In a proposed rule issued May 4, 2005, the agency proposed a fixed loss threshold of $26,675. 70 Fed.Reg. 23,306, 23,469 (May 4, 2005). In order to account for changes in the rate of charge inflation, the agency generated projected data for FY 2006 using FY 2004 charge data as a baseline. See id. The agency calculated the rate of charge inflation from the combination of the last quarter of FY 2003 and the first quarter of FY 2004 to the combination of the last quarter of FY 2004 and the first quarter of FY 2005. See id. For this period, the agency calculated an annual rate of charge inflation of 8.65 percent, or 18.04 percent over two years. See id. The agency then inflated the FY 2004 charge data by this two-year inflation factor. See id. To derive projected cost data, the agency adjusted the projected charge data by the hospital-specific charge ratios from the most recent update to the Provider Specific File (for December 2004), which reflected the 2003 changes to the outlier payment regulations. See id.

         For the final rule, promulgated August 12, 2005, the agency calculated the FY 2006 fixed loss threshold " using the methodology proposed in the proposed rule, but using updated data." 70 Fed.Reg. at 47,494. Specifically, the agency calculated a charge inflation factor based on a comparison between the first six months of FY 2004 and the first six months of FY 2005. Id. Using this data, the agency calculated a two-year charge inflation factor of 14.94 percent. Id. The agency used this inflation factor to inflate charges from FY 2004, id. at 47,495, and then adjusted the projected charges to projected costs using hospital-specific cost-to-charge ratios from the March 2005 update of the Provider

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Specific File, which included cost-to-charge ratios based on the most recent tentatively settled cost reports, id. at 47,494. Just as in calculating the FY 2005 fixed loss threshold, the agency did not adjust its methodology to explicitly account for reconciliation in establishing the FY 2006 threshold. Id. at 47,495. Based on this methodology, the agency established a fixed loss threshold of $23,600. Id.

         Fixed Loss Threshold Rulemaking for FY 2007

         In a proposed rule issued on April 25, 2006, the agency proposed a fixed loss threshold of $25,530. 71 Fed.Reg. 23,996, 24,150 (Apr. 25, 2006). The agency proposed to use the same methodology to calculate the fixed loss threshold as it had in the past. Specifically, it proposed to inflate FY 2005 charge data by two years of charge inflation. Id. at 24,149. The agency calculated the rate of charge inflation by calculating the one-year average annual rate of change from the combination of the last quarter of FY 2004 with the first quarter of FY 2005 to the combination of the last quarter of FY 2005 with the first quarter of FY 2006. Id. at 24,149-50. For this period, the agency calculated a one-year inflation rate of 7.57 percent, or 15.15 percent over two years. Id. at 24,150. The agency inflated the FY 2005 charge data by this two-year rate and then adjusted it to cost using the hospital-specific cost-to-charge ratios from the most recent update to the Provider Specific File. Id.

         For the final rule, promulgated on August 18, 2006, the agency calculated the FY 2007 fixed loss threshold " using the same methodology [] proposed, except [] using more recent data to determine the charge inflation factor." 71 Fed.Reg. at 48,150. In addition, however, the agency also " appl[ied] an adjustment factor to the [cost-to-charge ratios] to account for cost and charge inflation." Id. Specifically, the agency calculated a charge inflation factor based on a comparison between the first six months of FY 2005 and the first six months of FY 2006. Id. Using this data, the agency calculated a two-year charge inflation factor of 16.42 percent. Id. The agency used this inflation factor to inflate charges from FY 2005. Id. As in previous years, the agency used hospital-specific cost-to-charge ratios to adjust the projected FY 2007 charges to cost. Id. However, in response to comments submitted, the agency agreed " that it is appropriate to apply an adjustment factor to the [cost-to-charge ratios] so that the [cost-to-charge ratios] we are using in our simulation more closely reflect the [cost-to-charge ratios] that will be used in FY 2007." Id. The agency calculated the ratio between the one-year change in costs and the one-year change in charges, and derived an adjustment factor of 0.9973. Id. The agency applied this adjustment factor to the cost-to-charge ratios contained in the Provider Specific File, which itself was based on the most recent tentatively settled cost reports. Id. The agency then used these adjusted cost-to-charge ratios to adjust the projected FY 2007 charges, generating projected FY 2007 costs. See id. Finally, just as in calculating the FY 2005 and FY 2006 fixed loss thresholds, the agency did not adjust its methodology to explicitly account for reconciliation in establishing the FY 2007 threshold. Id. at 48,149. Following this methodology, the agency adopted a tentative fixed loss threshold of $24,475. Id. at 48,151.[16]

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          * * *

         In sum, for each fiscal year between 1997 and 2007, the Secretary determined the fixed loss threshold, a fixed dollar amount that, when added to the DRG prospective payment rate, 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). When a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate applicable to that patient and the fixed loss threshold, the hospital would be 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 for treating a patient that are above the DRG prospective payment rate. 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). Accordingly, an increase in the fixed loss threshold reduces the number of cases that will qualify for outlier payments, as well as the amounts of such payments for qualifying cases. In light of this scheme, Plaintiffs challenge the rulemakings revising the outlier payment regulations and the annual fixed loss threshold rulemakings that are applicable to the payment determinations--for FY 1997 through FY 2007--that are challenged in this action.

         B. Procedural Background

         The procedural history is long and complex, and the Court limits its presentation of the procedural history to the relevant facts for resolving the motions before the Court. Additional procedural history can be found in the Court's previous opinions in this case. See Banner Health v. Sebelius (" Banner Health I " ), 797 F.Supp.2d 97 (D.D.C. 2011); Banner Health v. Sebelius (" Banner Health II " ), 905 F.Supp.2d 174 (D.D.C. 2012); Banner Health v. Sebelius (" Banner Health III " ), 945 F.Supp.2d 1 (D.D.C. 2013).

         Plaintiffs in this case challenge outlier payment determinations for fiscal years 1997 through 2007. As required by statute, Plaintiffs filed various appeals with the Provider Reimbursement Review Board (" PRRB" ), each challenging the

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Secretary's final outlier payment determinations for the fiscal years in question, and Plaintiffs requested expedited judicial review in those appeals. All but two of Plaintiffs' requests for expedited judicial review were made in a consolidated filing dated June 25, 2010. See PRRB Rs. at 27, 172, 428, 647, 980, 1304, 1771, 2410, 2831, 3125, 3556, 4091, 4594, 5037, 5383. Two additional requests were filed, on June 25, 2010, and on September 7, 2011, that were subsequently consolidated in this action. See PRRB Rs. at 5633; PRRB R. (Case No. 11-0026) at 211. The June 25, 2010, request identified the legal question at issue as follows:

Whether the Medicare Outlier Regulations, and the " fixed loss thresholds" thereunder established by the Secretary of Health and Human Services (the " Secretary" ), and its Center for Medicare and Medicaid Services (" CMS" ) and as in effect for the Appealed Years, are substantively and/or procedurally invalid?

PRRB Rs. at 29. The legal requests presented in the two other separate requests for expedited review did not differ in any substantive matter from the consolidated request. See PRRB Rs. at 5633; PRRB R. (Case No. 11-0026) at 211. 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 authorized expedited judicial review pursuant to 42 U.S.C. § 1395 oo (f)(1). See PRRB Rs. at 1-3; PRRB R. (Case No. 11-0026) at 208-10.

         Plaintiffs commenced this action on September 27, 2010, claiming that this Court has jurisdiction under the Medicare Act, 42 U.S.C. § 1395 oo (f)(1), and the Mandamus Act, 28 U.S.C. § 1361. See Compl., ECF No. 1. On December 23, 2010, Plaintiffs filed an Amended Complaint as a matter of right, which remains the operative iteration of the Complaint in this action (with a minor exception discussed below). See Am. Compl., ECF No. 16. As this Court has previously observed, Plaintiffs' Amended Complaint was " sprawling," containing over two hundred paragraphs, spanning fifty-nine pages, and including two lengthy exhibits. See Banner Health III, 945 F.Supp.2d at 9-10. On January 28, 2011, the Secretary filed a motion to dismiss Plaintiffs' Amended Complaint, which this Court granted in part and denied in part. See Banner Health I, 797 F.Supp.2d at 97. Specifically, the Court first concluded that Plaintiffs' allegations were sufficient, for the pleading stage, to establish their standing to challenge the several actions at issue in this case. See id. at 109. The Court noted that this conclusion was not intended to foreclose the Secretary from raising standing arguments upon filing motions for summary judgment, after the record had been developed. See id. However, the Court dismissed--for failure to state a plausible claim for relief--Plaintiffs' claims seeking payments under the Mandamus Act, 28 U.S.C. § 1361, as well as Plaintiffs' claims under the Medicare Act to the extent that such claims relied on vague allegations challenging the Secretary's " implementation" and " enforcement" of the outlier payment system that are " unconnected to any discrete agency action." See id. at 118. The Court otherwise denied the Secretary's motion to dismiss. Looking forward, the Court concluded that, in light of the extraordinary breadth of the allegations in the Amended Complaint, proceeding immediately to the filing of the administrative record and the subsequent briefing of motions for summary judgment would not be the most expeditious manner of proceeding in the action. Rather, in order to gain further

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clarity as to the precise contours of Plaintiffs' claims, the Court ordered Plaintiffs to file a " notice of claims," identifying, in bullet-point format, each circumscribed, discrete agency action that Plaintiffs intended to challenge. Id. at 117-18.

         On July 27, 2011, Plaintiffs filed their Notice of Claims, which enumerated the claims Plaintiffs were bringing in this action. Plaintiffs' Notice of Claims likewise listed among the challenged agency actions " the Secretary's directions, starting in late 2002, to CMS's fiscal intermediaries to reopen hospital cost reports only for purposes of reconciling and recovering outlier overpayments, but not for purposes of reconciling and recovering outlier underpayments, as set forth in the Secretary's issuance, through CMS, of Program Memorandum A--02-122 (December 3, 2002), Program Memorandum A--02-126 (December 20, 2002), Program Memorandum A--03-058 (July 3, 2003)[, and] Transmittal 707 (Medicare Claims Processing Manual, Chapter 3, § 20.1.2.5(A))." However, on November 26, 2012, the Court granted the Secretary's motion to dismiss all claims premised on this agency action because, among other reasons, Plaintiffs failed to rebut the Secretary's well-reasoned jurisdictional arguments and in fact expressly disclaimed any intent to bring a direct challenge to reopening determinations or instructions as such. See Banner Health I, 797 F.Supp.2d at 97; Banner Health II, 905 F.Supp.2d at 174. The Court held it would not allow Plaintiffs to achieve supplementation of the administrative record by injecting the action with ill-defined claims, but rather, whether the administrative record should be supplemented to include the CMS documents was a question more appropriately addressed in the context of the Court's consideration of Plaintiffs' motion to compel. Id. In light of the Notice of Claims, in addition to the outlier payment determinations specific to each of the hospital plaintiffs, the remaining claims in this action may be succinctly summarized as challenging the promulgation and implementation of the following agency actions: three rulemakings revising the outlier payment regulations, which were promulgated in 1988, 1994, and 2003; and eleven rulemakings establishing the annual fixed loss threshold for federal fiscal years 1997 through 2007. See Banner Health III, 945 F.Supp.2d at 13.

         After Plaintiffs filed their Notice of Claims, the Court ordered the Secretary to file the complete administrative record--which did not include any record relating to Plaintiffs' dismissed claims regarding the four directives issued by CMS--by December 14, 2011. See Scheduling and Procedures Order (Aug. 19, 2011), ECF No. 29. The Secretary filed the administrative records for the fourteen challenged agency actions on November 8, 2011, November 23, 2011, December 14, 2011, and December 28, 2011. See Banner Health III, 945 F.Supp.2d at 13 (citing ECF filings).[17] On January 6, 2012, the Secretary supplemented these productions with additional data in electronic form after the Court entered a protective order pertaining to such data. All together, the administrative records filed by the Secretary constitute over 10,000 pages of documents, as well as tens of thousands of megabytes of electronic data that have been produced to Plaintiffs.

         On February 22, 2012, Plaintiffs filed a motion to compel, challenging the completeness of the administrative record, Pls.' Mot. to Compel Def. to File the Complete

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Administrative R. and to Certify Same, ECF No. 52, which the Court dismissed without prejudice to renew, in light of the Secretary's represented intent to file supplements to the record. See Min. Order (Feb. 24, 2012). The Secretary subsequently filed two additional supplements. See Def.'s Notice of Filing Supplements to Admin. R., ECF No. 57; Def.'s Notice of Filing Supplements to Admin. R., ECF No. 58; see also Def.'s Notice of Filing Certified Copies of Previously Filed Supplements to Admin. R., ECF No. 59.

         On March 23, 2012, Plaintiffs filed a renewed motion to compel, requesting that the Court order the Secretary to file the " complete administrative record," by supplementing the records she had previously filed with various documents, including certain data files identified by Plaintiffs and all other documents that were before the agency in connection with its rulemakings, and further requesting that the Court order the Secretary to certify to the Court and Plaintiffs that the administrative record is complete. See Pls.' Mem. of P. & A. in Supp. of Renewed Mot. to Compel Def. to File the Complete Admin. R. and to Certify Same, ECF No. 60, at 37. After the filing of several supplements by the parties, the Court granted in part and denied in part the motion. See Banner Health III, 945 F.Supp.2d at 39. The Court granted the motion and ordered supplementation with respect to all or part of eight of the 36 discrete items subject to Plaintiffs' motion.[18] See id. at 24-39. The Court denied Plaintiffs' motion in all other respects. See id.

         After the Secretary filed the required supplementation of the Administrative record, the Court granted the Secretary's [99] Motion for Leave to File Motion to Dismiss for Lack of Subject Matter Jurisdiction. However, instead of allowing Defendant to file the motion separately, the Court ordered Defendant to file the motion simultaneously and, in the alternative to, its motion for summary judgment. See Order and Docket Entry, dated August 13, 3013, ECF No. 102. On July 7, 2014, the Court granted in part and denied in part Plaintiffs' [108] Motion for Leave to Further Amend and Supplement First Amended Complaint. Specifically, the Court denied Plaintiffs' request to include claims that the Secretary's failure to disclose the draft 2003 interim final rule violated 5 U.S.C. § 553, but granted Plaintiffs' request to amend their Complaint to include factual allegations concerning the draft interim final rule. See Banner Health v. Burwell, 55 F.Supp.3d 1, 3 (D.D.C. 2014). Specifically, the Court allowed Plaintiffs to

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amend their Complaint to include the allegations contained in sub-paragraphs 198.5(a)-(e) of their Proposed Amendments. See id. at 14.

         On September 9, 2014, Defendant filed her [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Summary Judgment, and Plaintiffs filed their [127] Motion for Summary Judgment. That same day, Plaintiffs also filed their [128] Motion (Related to Their Motion For Summary Judgment) for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief. The parties briefed these motions and both, subsequently, filed notices of supplemental authority. These motions are now ripe for resolution.

         II. LEGAL STANDARD

          Judicial review of Plaintiffs' claims under the Medicare Act rests on 42 U.S.C. § 1395 oo (f)(1), which incorporates the APA. See 42 U.S.C. § 1395 oo (f)(1) (" Such action[s] ... shall be tried pursuant to the applicable provisions under chapter 7 of Title 5." ); see also Abington Crest Nursing & Rehab. Ctr. v. Sebelius, 575 F.3d 717, 719, 388 U.S. App.D.C. 19 (D.C. Cir. 2009).

         A. Supplementation of the Record

         The Administrative Procedure Act directs the Court to " review the whole record or those parts of it cited by a party." 5 U.S.C. § 706. This requires the Court to review " the full administrative record that was before the Secretary at the time he made his decision." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 420, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977). 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." Pac. Shores Subdivision, Cal. Water Dist. v. U.S. Army Corps of Eng'rs, 448 F.Supp.2d 1, 4 (D.D.C. 2006) (citation omitted). " In other words, the administrative record 'should not include materials that were not considered by agency decisionmakers.'" Id. (citation omitted). " [A]bsent clear evidence, an agency is entitled to a strong presumption of regularity, that it properly designated the administrative record." Id. at 5.

          " Supplementation of the administrative record is the exception, not the rule." Pac. Shores, 448 F.Supp.2d at 5 (quoting Motor & Equip. Mfrs. Ass'n, Inc. v. EPA, 627 F.2d 1095, 1105, 201 U.S. App.D.C. 109 (D.C. Cir. 1979)); Franks v. Salazar, 751 F.Supp.2d 62, 67 (D.D.C. 2010) (" A court that orders an administrative agency to supplement the record of its decision is a rare bird." ). This is because " an agency is entitled to a strong presumption of regularity, that it properly designated the administrative record." Pac. Shores, 448 F.Supp.2d at 5. " The rationale for this rule derives from a commonsense understanding of the court's functional role in the administrative state[:] 'Were courts cavalierly to supplement the record, they would be tempted to second-guess agency decisions in the belief that they were better informed than the administrators empowered by Congress and appointed by the President.'" Amfac Resorts, L.L.C. v. Dep't of Interior, 143 F.Supp.2d 7, 11 (D.D.C. 2001) (quoting San Luis Obispo Mothers for Peace v. Nuclear Regulatory Comm'n, 751 F.2d 1287, 1325-26, 243 U.S. App.D.C. 68 (D.C. Cir. 1984)). However, 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). The agency may not exclude information from the record

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simply because it did not " rely" on the excluded information in its final decision. Maritel, Inc. v. Collins, 422 F.Supp.2d 188, 196 (D.D.C. 2006). Rather, " a complete administrative record should include all materials that might have influenced the agency's decision[.]" Amfac Resorts, 143 F.Supp.2d at 12 (citations omitted). " [W]hile it is true that data and analysis compiled by subordinates may be properly part of the administrative record despite not having actually passed before the eyes of the Secretary," to be included in the Administrative Record, " the data or analysis must be sufficiently integral to the final analysis that was considered by the [agency], and the [agency's] reliance thereon sufficiently heavy, so as to suggest that the decisionmaker constructively considered it." Banner Health III, 945 F.Supp.2d at 28.

         B. Motion to Dismiss for Lack of Subject Matter Jurisdiction

          Federal Rule of Civil Procedure 12(h)(3) provides that " [i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed.R.Civ.P. 12(h)(3). In assessing its jurisdiction over the subject matter of the claims presented, a court " must accept as true all of the factual allegations contained in the complaint" and draw all reasonable inferences in favor of the plaintiff, Brown v. District of Columbia, 514 F.3d 1279, 1283, 379 U.S. App.D.C. 370 (D.C. Cir. 2008) (internal quotation marks omitted), but courts are " not required ... to accept inferences unsupported by the facts alleged or legal conclusions that are cast as factual allegations." Rann v. Chao, 154 F.Supp.2d 61, 64 (D.D.C. 2001). Ultimately, the plaintiff bears the burden of establishing the Court's subject matter jurisdiction, Arpaio v. Obama, No. 14-5325, 797 F.3d 11, 2015 WL 4772774, at *5 (D.C. Cir. Aug. 14, 2015), and where subject-matter jurisdiction does not exist, " the court cannot proceed at all in any cause." Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998).

         C. Motions for Summary Judgment

          Under Rule 56(a) of the Federal Rules of Civil Procedure, " [t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." However, " when a party seeks review of agency action under the APA [before a district court], the district judge sits as an appellate tribunal. The 'entire case' on review is a question of law." Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083, 348 U.S. App.D.C. 77 (D.C. Cir. 2001). Accordingly, " the standard set forth in Rule 56[] does not apply because of the limited role of a court in reviewing the administrative record.... Summary judgment is [] the mechanism for deciding whether as a matter of law the agency ...


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