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Abington Memorial Hospital v. Burwell

United States District Court, District of Columbia

October 26, 2016

ABINGTON MEMORIAL HOSPITAL, et al., Plaintiffs,
v.
SYLVIA MATHEWS BURWELL, in her official capacity as Secretary of the United States Department of Health and Human Services, Defendant.

          MEMORANDUM OPINION

          KETANJI BROWN JACKSON United States District Judge

         With its enactment of the Medicare Act in 1965, Congress created a complex national system that insures healthcare services for the elderly and the disabled. The Secretary of the Department of Health and Human Services (“HHS”) administers the Medicare program through the Centers for Medicare & Medicaid Services (“CMS”), see 42 U.S.C. §§ 1395ff(a)(1), 1395hh(a)(1), and CMS employs the Prospective Payment System (“PPS”) to reimburse hospitals for the inpatient medical services that they provide to Medicare beneficiaries, see Id. § 1395ww(d); Anna Jacques Hosp. v. Burwell, 797 F.3d 1155, 1157-58 (D.C. Cir. 2015); Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011). PPS reimbursements are pegged to a complicated formula that requires the Secretary to account for a hospital's wages and wage-related costs, such as salaries, health insurance, and pension plans. Moreover, because such wage-related costs can vary across geographic areas, Congress has required the Secretary to adjust PPS payments regionally based on a wage index that the agency calculates annually using data that regional hospitals report to HHS and its agents. The direct relationship between the wage index and PPS reimbursement payments often spawns litigation regarding how the index is calculated; the instant matter is one such case. Plaintiffs are a large group of inpatient hospitals that believe the PPS payments that HHS made to them were improper primarily due to certain allegedly inappropriate changes that the Secretary made that affected the wage-index calculation, beginning in 2005.

         Plaintiffs' primary bone of contention is with a final rule that HHS proposed in May of 2005 and promulgated in August of 2005. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2006 Rates (the “2005 Final Rule”), 70 Fed. Reg. 47, 278, 47, 278 (Aug. 12, 2005). The 2005 Final Rule altered how certain labor-related data is to be reported and calculated for the purpose of creating the wage index. According to Plaintiffs, the proposal for this rule provided insufficient notice of the changed methodology, the change itself was insufficiently explained and inherently contrary to the Medicare statute, and the 2005 Final Rule ultimately resulted in the agency's creation of defective regional wage indices because the HHS agents that collect and evaluate the wage data hospitals submit applied the Secretary's policies erratically. Plaintiffs also challenge the Secretary's decision to change certain wage-related nomenclature in an important Medicare handbook in 2008: they argue that HHS failed to employ required notice-and-comment procedures when it issued “Transmittal 436” (the memorandum that effectuated the handbook changes). Plaintiffs further allege that HHS ultimately applied both the 2005 Final Rule and the Medicare handbook changes in an impermissibly retroactive manner, because the agency applied those new policies when it evaluated certain data that Plaintiffs had submitted long before the rule and handbook changes became operative.

         Before this Court at present are the parties' cross-motions for summary judgment. (See Pls.' Mot. for Summ. J. (“Pls.' Mot.”), ECF No. 14; Def.'s Cross-Mot. for Summ. J. & Opp'n to Pls.' Mot. for Summ. J. (“Def.'s Mem.”), ECF No. 16.) On September 30, 2016, this Court issued an Order in which it DENIED Plaintiffs' summary judgment motion and GRANTED the Secretary's cross-motion. (See Order, ECF No. 25.) This Memorandum Opinion explains the reasons for that order. In short, and as explained fully below, this Court rejects Plaintiffs' myriad assertions regarding the agency's alleged production of deficient regional wage indices after the Secretary's rule change in 2005, and it also concludes that the application of the wage indices that the agency used to generate Plaintiffs' PPS payments between 2007 and 2011 did not have an impermissibly retroactive effect.

         I. BACKGROUND

         A. Medicare Payments, The PPS Scheme, And The Manner In Which HHS Creates And Uses Regional Wage Indices

         1. Medicare Payments For Inpatient Hospital Care Are Based On Fixed Rates That Are Set Prospectively And Adjusted For Regional Variations In Labor-Related Costs

         The rise of the PPS reimbursement system, which is the federal government's current scheme for paying hospitals for inpatient services rendered to Medicare beneficiaries, has been well-documented. See, e.g., Anna Jacques Hosp., 797 F.3d at 1158-59; Cape Cod Hosp., 630 F.3d at 205; Clarian Health West, LLC v. Burwell, No. 14-339, 2016 WL 4506969, at *2 (D.D.C. Aug. 26, 2016). In short, until 1983, reimbursements for inpatient medical care for Medicare beneficiaries who required at least a one-night stay in the hospital “were based on the ‘reasonable costs' of [the] inpatient services” actually provided, so long as those costs fell within certain limits. Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (citing 42 U.S.C. § 1395f(b)); see also 42 U.S.C. § 1395ww(d)(1)(B) (defining class of covered hospitals); Anna Jaques Hosp. v. Sebelius, 583 F.3d 1, 2 (D.C. Cir. 2009). This meant that hospitals had little ex ante incentive to keep costs low, and that Medicare costs escalated as hospital costs increased. See Methodist Hosp., 38 F.3d at 1227. But Congress overhauled the cost-based system for inpatient hospital care in 1983; the new reimbursement scheme that Congress adopted-the PPS-is a system that “relies on prospectively fixed rates for each category of treatment rendered.” Id. (citing Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149 (1983)). The PPS system “improve[s] efficiency and reduce[s] operating costs” because hospitals are given advance notice of the pre-established rates at which inpatient services will be reimbursed and are ultimately reimbursed at those pre-set rates, irrespective of the costs the hospital actually incurs. Id.; see also Anna Jacques Hosp., 797 F.3d at 1157-58 (citing 42 U.S.C. § 1395ww(d)).

         Notably, the prospectively set rates that hospitals are paid under the PPS scheme “are tied to the national average cost of treating a patient in a particular ‘diagnosis-related group' (DRG).” Southeast Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914 (D.C. Cir. 2009) (quoting 42 U.S.C. § 1395ww(d)).[1] The national average cost of treating patients in a given DRG is a “standardized amount[, ]” Cape Cod Hosp., 630 F.3d at 205; however, Congress has recognized that the costs of treating patients can vary regionally based on the relative costs of labor in various parts of the country, so the Medicare statute requires HHS to adjust PPS payments to smooth out regional differences related to such costs, see 42 U.S.C. § 1395ww(d)(3)(E)(i) (stating that “the Secretary shall adjust the proportion, (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the DRG prospective payment rates . . . for area differences in hospital wage levels”). In fact, a “significant component” of the PPS payment that a qualifying inpatient hospital receives for treating Medicare beneficiaries relates to “‘wages and wage-related costs[, ]'” Anna Jaques Hosp., 583 F.3d at 2 (quoting 42 U.S.C. § 1395ww(d)(3)(E)(i))-which are collectively referred to as a hospital's “labor-related share, ” Southeast Ala. Med. Ctr., 572 F.3d at 914-15-and, therefore, the prospective payment amounts that HHS pays to hospitals that provide inpatient treatment for similar Medicare beneficiaries can vary significantly by region. The instant case concerns the mechanism by which the Secretary calculates the labor-related variable that it applies to the national average cost when the reimbursement amount due to a particular hospital is determined.

         2. HHS Creates And Applies Regional Wage Indices To Ensure Equitable Nationwide PPS Payments

         Per the Medicare statute, the required labor-related adjustment to the national average cost of treating a patient in a particular DRG must be made “by [employing] a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” 42 U.S.C. § 1395ww(d)(3)(E)(i). “HHS has traditionally referred to . . . [this] ‘factor' . . . as the ‘wage index.'” Southeast Ala. Med. Ctr., 572 F.3d at 914-15. It is critically important to understand the symbiotic relationship that exists between hospitals and HHS with respect to the creation and application of the regional wage indices: generally speaking, HHS creates the required regional indices based on wage-related data that the agency gleans from cost reports that hospitals submit when they seek Medicare reimbursements, and then, once the indices are created (which can take years, as explained below), HHS applies the regional wage indices to the cost reports that hospitals submit regarding their expenses in order to determine the particular prospective amounts that are paid to individual hospitals for the eligible services they provide in a given fiscal year. Of course, as with many complex systems, the devil is in the details, which can be described generally as follows.

         a. How The Wage Indices Are Created

         By statute, the Secretary develops new wage indices annually and by region “on the basis of a survey . . . of the wages and wage-related costs of subsection (d) hospitals in the United States.” 42 U.S.C. § 1395ww(d)(3)(E)(i); see also Anna Jacques Hosp., 797 F.3d at 1158.[2] The survey reflects wage information that is derived from the cost reports that hospitals submit every year to “Medicare administrative contractors” (“MACs”), which are private entities that are also known as “intermediaries” and that act as the Secretary's agents for the purpose of calculating PPS payments. See Palisades Gen. Hosp. Inc. v. Leavitt, 426 F.3d 400, 401 (D.C. Cir. 2005). For the purpose of the creation of the wage indices, the relevant information dwells in a portion of a hospital's cost report called “Worksheet S-3, ” which solicits detailed data about the wages the hospital paid, its wage-related costs, and the hours its employees worked during a particular reporting period. Regents of the Univ. of Cal. v. Burwell, 155 F.Supp.3d 31, 38 (D.D.C. 2016); see 2005 Final Rule, 70 Fed. Reg. at 47, 373.

         The wage indices are developed based on a multistep process. See, e.g., Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates (“FFY 2007 PPS Changes”), 71 Fed. Reg. 47, 870, 48, 016 (Aug. 18, 2006) (describing the process). First, the MACs audit the data that the hospitals provide in their cost reports in order to ensure that it complies with all applicable formatting requirements before it is passed on to the Secretary. See Regents of the Univ. of Cal., 155 F.Supp.3d at 41-42; Owensboro Health, Inc. v. Burwell, No. 14-95, 2016 WL 4361527, at *5 (W.D. Ky. Aug. 12, 2016); Parkview Med. Assocs., L.P v. Shalala, No. 94-1941, 1997 WL 470107, at *10 (D.D.C. Aug. 13, 1997), aff'd, 158 F.3d 146 (D.C. Cir. 1998); 2005 Final Rule, 70 Fed. Reg. at 47, 369, 47, 372, 47, 384; (see also Compl., ECF No. 1, ¶ 10). Then-after the MACs inform the hospitals of “the results of their review” and the hospitals respond, FFY 2007 PPS Changes, 71 Fed. Reg. at 48, 016-the Secretary “scrubs” the data that the MACs forward to the agency, removing data “that fail to meet certain criteria for reasonableness, including data that are ‘incomplete[, ] inaccurate . . ., or otherwise aberrant[, ]'” Anna Jaques Hosp., 583 F.3d at 3 (quoting Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg. 48, 916, 49, 049 (Aug. 11, 2004)) (first and second alterations in original); see also 2005 Final Rule, 70 Fed. Reg. at 47, 372 (describing the post-intermediary removal of data). The Secretary then compares the average hourly wage of the hospitals in each region of the country against the national average hourly wage, and thereby computes each region's wage index. And once this lengthy wage-data collection and cleaning process is done, the Secretary publishes for public comment a proposed rule that includes the updated wage indices, which is followed by the agency's publication of a final rule that contains the particular wage indices that will govern the PPS payments that will be calculated and distributed during the next fiscal year. See Anna Jacques Hosp., 797 F.3d at 1159; see also Southeast Ala. Med. Ctr., 572 F.3d at 914 (confirming that the Secretary updates the wage index annually, through notice-and-comment rulemaking).

         Significantly for present purposes, because this complex process takes time, the set of regional wage indices that the Secretary promulgates each year is based on wage data from cost-reporting periods that took place several years (generally three or four years) prior. See Regents of the Univ. of Cal., 155 F.Supp.3d at 38; see also Anna Jaques Hosp., 583 F.3d at 3; 2005 Final Rule, 70 Fed. Reg. at 47, 368 (explaining that the federal fiscal year 2006 wage index was based on cost reports for reporting periods beginning in federal fiscal year 2002); (Compl. ¶ 68 (“The . . . determinations regarding the [fiscal year] 2006-2011 wage indices were based upon data gleaned from Hospitals' cost reports for [fiscal years] 2002-2007, respectively.”)). Furthermore, because the agency updates the wage index on an annual basis, the MACs must take care to use the applicable wage index for the relevant fiscal period when they undertake to calculate the prospective payments that will be made to a hospital for any given fiscal year, as explained below.

         b. How The Wage Indices Are Applied

         A bird's eye view of the manner in which the MACs use the regional wage indices to calculate PPS payments brings individual hospital cost reports, once again, into focus. “At the end of its fiscal year, a hospital submits to its intermediaries a cost report setting forth all costs for which it claims reimbursement[, ]” and it is “[b]ased on these costs and the hospital's wage index[ that] the fiscal intermediary calculates the amount of reimbursement due to the hospital.” Palisades Gen. Hosp., 426 F.3d at 401; see also 42 C.F.R. § 405.1801(b)(1) (“In order to be paid for covered services furnished to Medicare beneficiaries, a provider must file a cost report with its contractor[.]”); id. §§ 405.1801(a), 413.24(f). When it comes time to pay, the Secretary (through her agents) uses the pertinent regional wage index to “adjust” the portion of the base payment rate that corresponds to the hospital's labor-related share. 42 U.S.C. § 1395ww(d)(3)(E)(i); see also Cape Cod Hosp., 630 F.3d at 205-06; Palisades Gen. Hosp., 426 F.3d at 401; Anna Jacques Hosp., 797 F.3d at 1159; Southeast Ala. Med. Ctr., 572 F.3d at 914-15. This adjustment essentially entails multiplying the hospital's labor-related share by the applicable regional wage index factor. See Cape Cod Hosp., 630 F.3d at 205-06. Then, that adjusted labor-related share replaces the “standardized” labor-related share in the summation of the hospital's total operating expenses for purposes of the complex PPS payment calculation that determines the amount the hospital is paid. See Id. at 206.

         With respect to the matter of identifying which wage index is to be used to calculate a hospital's PPS payments for a given fiscal year, it is important to note that hospital cost-reporting periods are not necessarily coextensive with the federal fiscal year, which runs from October 1st of the calendar year preceding the fiscal year to September 30th of the next (e.g., federal fiscal year 2007 ran from October 1, 2006 to September 30, 2007). See 42 C.F.R. § 51.2. Accordingly, with exceptions not relevant here, hospitals receive PPS payments based on the wage index in effect during the federal fiscal year when the inpatient discharge for which the hospital seeks reimbursement occurred. See, e.g., 2005 Final Rule, 70 Fed. Reg. at 47, 368; 42 C.F.R. § 412.64(a).[3]

         This all means that hospital cost reports serve at least two relevant functions: they provide the information pursuant to which HHS doles out PPS payments for inpatient treatment that a particular hospital provides to Medicare beneficiaries during a given fiscal year, and they also add to the data set that the agency uses to construct future wage indices, which, in turn, will impact the PPS reimbursement amounts that are tendered to hospitals in future years. See Kaiser Found. Hosps. v. Sebelius, 708 F.3d 226, 228 (D.C. Cir. 2013); Palisades Gen. Hosp., 426 F.3d at 401; see also 42 C.F.R. § 405.1803. Thus, inpatient hospitals are understandably interested in the process by which HHS constructs and applies the regional wage indices, and they generally proceed in the hope that the wage data the agency gathers from the cost reports will be used to create indices that will yield the highest possible reimbursement amount in the future. See, e.g., Southeast Ala. Med. Ctr., 572 F.3d at 915 & n.4 (giving example). Moreover, because the process described above depends in large part on a hospital's self-reporting of its own labor-related share, hospitals necessarily spend considerable time and energy on ensuring that their wages and wage-related costs are accurately measured and reported.

         B. The Secretary's Changing Wage-Index Rules And Guidance

         The dispute in this case stems from certain actions the Secretary took, beginning in 2005, that allegedly affected the wage indices that the MACs applied when Plaintiffs submitted their cost reports seeking PPS payments in federal fiscal years 2007 through 2011. In order to understand the agency's rule changes and Plaintiffs' arguments about them, one must have some knowledge of the prior state of affairs-i.e., the governing standards before 2005.

         1. The Wage Reporting Rules In Effect from 1995 to 2005

         a. The 1994 Final Rule

         In 1994, the Secretary promulgated a final rule that addressed “the amounts and factors necessary to determine prospective payment rates for Medicare hospital inpatient services for operating costs and capital-related costs”; as relevant here, the 1994 Final Rule specifically required inpatient hospitals “to follow Generally Accepted Accounting Principles (GAAP) in developing . . . wage-related costs” for the Worksheet S-3. Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1995 Rates (“1994 Final Rule”), 59 Fed. Reg. 45, 330, 45, 330, 45, 357 (Sept. 1, 1994). This change affected the range of permissible methods of reporting pension costs when the hospitals reported wage-related costs on their worksheets. See Regents of the Univ. of Cal., 155 F.Supp.3d at 41 (explaining that, “under GAAP, there are differing-indeed, conflicting-rules pertaining to the reporting of pension costs depending on the set of standards applied”); see also Id. n.3 (observing different “GAAP” standards for pension reporting); cf. Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 101 (1995) (observing the indeterminacy of GAAP).[4] And the 1994 Final Rule also explicitly rejected the idea that “applicable Medicare principles (which may differ from GAAP)” should govern; the Secretary explained that it was the agency's view that GAAP would “more accurately reflect relative labor costs, because certain wage-related costs (such as pension costs) as recorded under GAAP tend to be more static from year to year.” 59 Fed. Reg. at 45, 357. Thus, adopting GAAP would likely avoid large annual “swings in these costs, ” thereby preventing a situation in which the “wage index . . . does not accurately reflect relative labor costs.” Id.

         Although the changes in this rule generally applied after October 1, 1994-i.e., for federal fiscal year 1995-the Secretary explained that the GAAP adoption would not go into effect until federal fiscal year 1999. See Id. at 45, 330, 45, 359. This determination was made for three reasons: (1) the “data necessary to institute [the] changes immediately [were] not available”; (2) it had been agency policy “not to apply policy changes retroactively” and it would be unfair to require hospitals to “retroactively revise their recordkeeping systems to accommodate these changes”; and (3) a delayed implementation would “allow[] time for hospitals that m[ight] be adversely affected to adjust their fiscal plan.” Id. at 45, 359.

         b. The 1995 Final Rule

         Just under a year later, the Secretary promulgated a final rule in a slightly different context that is significant for present purposes because it addressed HHS's view of GAAP and Medicare accounting principles as they relate to the reporting of costs. See Medicare Program; Clarification of Medicare's Accrual Basis of Accounting Policy (“1995 Final Rule”), 60 Fed. Reg. 33, 126, 33, 126 (June 27, 1995); see also Regents of the Univ. of Cal., 155 F.Supp.3d at 39 (discussing the 1995 Final Rule). The 1995 Final Rule arose from the fact that, even though Congress had adopted the prospective payment system for the provision of inpatient hospital services, certain other services provided by hospitals were still being reimbursed under the “reasonable costs” methodology-i.e., reimbursement payments were based on the costs “actually incurred” for the services rendered. 1995 Final Rule, 60 Fed. Reg. at 33, 126; see also Regents of the Univ. of Cal., 155 F.Supp.3d at 39. Under the accrual basis of accounting, which governed how the expenses related to those other services were reported, providers were required to report expenses in “the period in which they are incurred, regardless of when they are paid.” 1995 Final Rule, 60 Fed. Reg. at 33, 126. But the Secretary had noticed a problem: some providers were using that definition to claim costs “without evidence of having incurred actual expenditures or the assurance that liabilities associated with accrued costs w[ould] ever be fully liquidated through an actual expenditure of funds.” Id.[5] To address this problem, the Secretary decided that the cost-reporting rules should be adjusted “to incorporate longstanding Medicare policy regarding timely liquidation of liabilities[.]” Id. at 33, 126; see also Id. at 33, 126-27 (explaining that the Medicare Provider Reimbursement Manual had long stated that providers who did not “timely liquidate” liabilities-however timely liquidation was defined for that particular liability-could not claim reimbursements for those costs).

         Significantly for present purposes, when the Secretary first proposed the 1995 Final Rule, commenters complained that it would conflict with GAAP. Id. at 33, 127. In response, the Secretary explained that “Medicare payment policy does not always follow GAAP exactly because Medicare payment policy and GAAP have different objectives.” Id. That is, while “Medicare's objective for cost payment purposes is to pay providers appropriately for the reasonable and proper cost of furnishing services to Medicare beneficiaries in a specific fiscal period[, ]” the “primary goal of GAAP is the full and proper presentation of accounting data through statements and reports.” Id. Moreover, according to the Secretary, at least in this context, GAAP had to be subordinated to Medicare payment policy where the two conflict. See Id. at 33, 128; see also Id. (“The fact that Medicare payment policies may at times differ from GAAP is neither unusual nor unintentional.”). The Secretary also stressed that the agency was not saying that GAAP was irrelevant, but simply clarifying that GAAP could not be used to undermine Medicare policy. See Id. at 33, 129 (explaining that, to comply, providers needed only to record their costs in accordance with GAAP and then “make necessary reclassifications and adjustments in their Medicare cost reports to conform with Medicare policy”).

         The 1995 Final Rule was ultimately codified at 42 C.F.R. § 413.100, but it was explicitly made inapplicable to inpatient care that was subject to the PPS payment scheme. See Regents of the Univ. of Cal., 155 F.Supp.3d at 39 (citing, inter alia, 1995 Final Rule, 60 Fed. Reg. at 33, 126); see also 1995 Final Rule, 60 Fed. Reg. at 33, 126 (“This policy pertains to all services furnished by providers other than inpatient hospital services . . . and certain inpatient routine services furnished by skilled nursing facilities[.]” (emphasis added)). Thus, between 1995 and 2005, hospitals continued to report their wage-related costs in accordance with GAAP with respect to reimbursements for inpatient services, while the expenses that were not subject to the prospective payment system were reported only if they were timely liquidated.

         2. The 2003 PRM Instruction And The 2005 Proposed Rule

         In 2003, HHS attempted to address what the agency saw as potential wage-related reporting abuses by hospitals seeking reimbursement for inpatient services under the PPS system. The Secretary inserted a directive into one of the provider instructions in the Medicare Provider Reimbursement Manual (“the PRM”), which is a manual that “contains ‘guidelines and policies to implement [the] Medicare regulations [that] set forth principles for determining the reasonable cost of provider services, ' but . . . ‘does not have the effect of regulations.'” Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491 (D.C. Cir. 2010) (quoting Ctrs. for Medicare and Medicaid Servs., Provider Reimbursement Manual, Part 1, Foreword, at I); see also 2005 Final Rule, 70 Fed. Reg. at 47, 369 (noting that the Secretary's GAAP-related statement appeared in Part II of the PRM, at section 3605.2). The instruction stated that, “[a]lthough hospitals should use GAAP in developing wage related costs, the amount reported for wage index purposes must meet the reasonable costs provisions of Medicare.” Regents of the Univ. of Cal., 155 F.Supp.3d at 39 (emphasis added) (alteration in original) (internal quotation marks and citation omitted).

         Then, on May 4, 2005, the Secretary went even further: in the proposed rule that introduced the wage index for federal fiscal year 2006, the agency outlined its “propos[al] to revise the Medicare hospital inpatient prospective payment systems . . . to implement changes arising from [HHS's] continuing experience with th[o]se systems.” Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Systems and Fiscal Year 2006 Rates (“2005 Proposed Rule”), 70 Fed. Reg. 23, 306, 23, 306 (May 5, 2005). The summary section of the 2005 Proposed Rule specifically mentioned the Secretary's intention to change “the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs.” Id. And the summary also set forth a long list of proposed “policy changes[, ]” including changes related to “wage data, including the occupational mix data, used to compute the wage index[.]” Id.

         In a subsection of the 2005 Proposed Rule that was titled “Worksheet S-3 Wage Data for the Proposed FY 2006 Wage Index Update[, ]” id. at 23, 371, the Secretary recounted the 1994 Final Rule and explained that HHS had “instructed hospitals to use [GAAP] in developing wage-related costs for the wage index, ” in large part because the agency had believed that “the application of GAAP[] for purposes of compiling data on wage-related costs used to construct the wage index [would] more accurately reflect relative labor costs, because certain wage-related costs (such as pension costs), as recorded under GAAP[], tend to be more static from year to year.” Id. (quoting 1994 Final Rule, 59 Fed. Reg. at 45, 357). Since then, however, HHS had “periodically received inquiries for more specific guidance on developing wage-related costs for the wage index[, ]” and in response, the agency had provided several attempted clarifications, including the 2003 PRM Instruction. Id. Nevertheless, the Secretary remained concerned about “inconsistent reporting and overreporting of pension and other deferred compensation plan costs, ” which was a problem that also had been highlighted in “an ongoing Office of Inspector General review[.]” Id.; see also Regents of the Univ. of Cal., 155 F.Supp.3d at 40 (“In May 2005, the Office of Inspector General . . . alerted [the Secretary] to . . . preliminary findings regarding hospitals' inconsistent reporting of pensions and other postretirement benefit costs as wage data in their cost reports.” (third alteration in original) (internal quotation marks and citations omitted)). Therefore, the summary section of the 2005 Proposed Rule stated that

we are clarifying in this proposed rule that hospitals must comply with the PRM, Part I, sections 2140[, ] 2141, and 2142 and related Medicare program instructions for developing pension and other deferred compensation plan costs as wage-related costs for the wage index. The Medicare instructions for pension costs and other deferred compensation costs combine GAAPs, Medicare payment principles, and other Federal labor requirements. We believe that the Medicare instructions allow for consistent reporting among hospitals and for the development of reasonable deferred compensation plan costs for purposes of the wage index.
Beginning with the FY 2007 wage index, hospitals and fiscal intermediaries must ensure that pension, post-retirement health benefits, and other deferred compensation plan costs for the wage index are developed according to the above terms.

2005 Proposed Rule, 70 Fed. Reg. at 23, 371. With this language, the 2005 Proposed Rule required hospitals to move away from the GAAP-only approach to reporting their wage-related costs for wage-index purposes and to report those costs in accordance with “Medicare instructions, ” which are also known as “Medicare Reasonable Cost Principles, ” or “MRCP.” (Admin. R. App. (“AR”), ECF Nos. 22-1-20, 960; Def.'s Mem. at 17.) The 2005 Proposed Rule also imposed a one-year lag with respect to the effective date of this change; only the Worksheet S-3 data that the agency would rely upon to construct the 2007 wage indices (and beyond) would need to comport with MRCP. See 2005 Proposed Rule, 70 Fed. Reg. at 23, 371.

         Thus, the Secretary proposed that MRCP govern what hospitals would report on their wage-data worksheets, as well as what the Secretary would accept with respect to those costs beginning in 2007, and explained that, by establishing this requirement, it was the agency's intention to support the development of a more accurate wage index based on consistent reporting of wage-related costs. See Id. The Secretary received 555 written comments regarding the 2005 Proposed Rule during ...


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