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University of Colorado Health at Memorial Hospital v. Burwell

United States District Court, District of Columbia

February 9, 2017

SYLVIA M. BURWELL, Secretary, United States Department of Health and Human Services, Defendant. Re Document Nos. 65, 80


          RUDOLPH CONTRERAS United States District Judge


         Plaintiffs, a group of acute care hospitals (Hospitals), have challenged several regulations governing outlier payment reimbursements under Medicare. Before the Court is the Secretary of Health and Human Services's (Secretary) motion to supplement her answer with the affirmative defense of preclusion based on Banner Health v. Burwell, 174 F.Supp.3d 206 (D.D.C. 2016). Also before the Court is the Secretary's motion to supplement her answer with the affirmative defense of preclusion based on Lee Memorial Health System v. Burwell, ___ F.Supp.3d ___, No. 13-cv-643, 2016 WL 4687072 (D.D.C. Sept. 7, 2016) and to move for summary judgment out of time on the same grounds. For the reasons discussed below, the Court concludes that the Secretary's proposed amendments would not be futile and thus grants leave to supplement the answer to include both defenses. Because the Secretary has shown good cause and the Hospitals would not be prejudiced, the Court further grants the Secretary leave to move for summary judgment out of time. Finally, having determined that the affirmative defense of preclusion is not futile, the Court stays this action until the D.C. Circuit completes its review of Banner Health and, if an appeal is taken, of Lee Memorial.[1]


         This case concerns the Hospitals' challenges to the Secretary's system for calculating outlier payments under Medicare. In particular, the Hospitals challenge the “fixed loss threshold” rulemakings for fiscal years (FY) 2007, 2008, 2011, and 2012. The parties dispute whether Plaintiffs also challenge the 2003 amendments to the outlier payment regulations.[2] The Court assumes familiarity with the facts and its previous opinions, see generally Mem. Op., ECF No. 57; Mem. Op., ECF No. 47, and focuses only on the most relevant background.

         A. Statutory background

         Medicare is a federal program that provides health insurance to the elderly and the disabled. See 42 U.S.C. §§ 1395 et seq. After hospitals provide covered care, they are reimbursed through the Inpatient Prospective Payment System (IPPS). The IPPS provides reimbursements in two ways. First, IPPS provides the lion's share of reimbursements at a fixed rate for each category of service, aiming to thereby incentivize hospitals to reduce costs. Lee Memorial Health System v. Burwell, ___ F.Supp.3d ___, No. 13-cv-643, 2016 WL 4687072, at *1-2 (D.D.C. Sept. 7, 2016). Second, hospitals' reimbursements may be supplemented with “outlier payments” to compensate for “patients whose hospitalization [is] extraordinarily costly or lengthy.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009 (D.C. Cir. 1999). An outlier payment is triggered when cost of caring for a particular patient exceeds the fixed loss threshold (FLT), a dollar amount that the Secretary sets each year.[3] Banner Health v. Sebelius, 945 F.Supp.2d 1, 8 (D.D.C. 2013), vacated in part, 2013 WL 11241368 (D.D.C. Jul. 30, 2013). The instant case challenges reimbursements under the FLTs for FYs 2007, 2008, 2011, and 2012. The outlier payment system is also governed by a set of overall regulations, codified at 42 C.F.R. § 412.84. These regulations are not updated every year, and the 2003 amendments apply to the reimbursements at issue here. 4th Am. Compl. at ¶ 29, ECF No. 41.

         Setting the FLT is a complicated task. Congress has instructed the Secretary that outlier payments should constitute between five and six percent of total IPPS reimbursements. 42 U.S.C. § 1395ww(d)(5)(A)(iv). To this end, the Secretary sets the FLT for each upcoming year prospectively, so that “when tested against historical data, [it] will likely produce aggregate outlier payments totaling between five and six percent of projected . . . payments.” Cnty. of Los Angeles, 192 F.3d at 1013. After setting the FLT, the Secretary then withholds the predicted total amount of outlier payments in advance from all other IPPS reimbursements, such that the hospitals are essentially sharing the risk of encountering unusually costly patients. See 42 U.S.C. § 1395ww(d)(3)(B). For example, in many recent years the Secretary has aimed to pay 5.1% of the total reimbursements in outlier payments, see Banner Health v. Burwell, 126 F.Supp.3d 28, 42-43 (D.D.C. 2015), and has therefore prospectively reduced all non-outlier payments by 5.1%, id. at 43.

         Because Medicare reimbursements-and the hospital-provided care that triggers them- are highly complex, the Secretary's predictions frequently differ from what actually transpires, and the actual outlier repayments are either higher or lower than the amount withheld. The Secretary need not take corrective action when the actual outlier payments vary from the projected values. Dist. Hosp. Partners L.P. v. Burwell, 786 F.3d 46, 51 (D.C. Cir. 2015). This creates competing incentives between hospitals and the Secretary-hospitals prefer a lower FLT, with the concomitant possibility that it will be “too low” and hospitals as a group will receive more in outlier payments than they lost in withholding; while the Secretary on the other hand, may prefer a higher FLT, because if the FLT is “too high” then the total outlier payments will be less than the amount the Secretary withheld to pay for them. If the mismatch between the Secretary's prediction and the actual outlier payments is small as a percentage of IPPS payments, it can still be large in magnitude due to the scale of Medicare. For example, in the period from FY 1997 to FY 2003, IPPS paid out more than $9 billion in excess of its projections. Pls.' Mem. P. & A. Supp. Mot. Summ. J. at 8, ECF No. 64. This motivated several reforms to the outlier payment system, including the 2003 amendments to the overall regulations. In the following years from FY 2004 to FY 2012, IPPS repeatedly paid out less than it projected in outlier payments, for a $6 billion shortfall. Pls.' Mem. Points Auth. Supp. Mot. Summ. J. at 2. This system sets the stage for claims like those at issue here, in which hospitals argue that the Secretary set the FLT too low, denying them outlier reimbursements they should have received.

         B. Parties and claims

         Thirty-five hospitals are plaintiffs in this action, [4] and some of these hospitals were also plaintiffs in Banner Health v. Burwell, 126 F.Supp.3d 28 (D.D.C. 2015), and Lee Memorial, ___F.Supp.3d ___, No. 13-cv-643, 2016 WL 4687072 (D.D.C. Sept. 7, 2016). The Secretary asserts that, because Banner Health and Lee Memorial involved challenges to some of the same FLTs at issue here, the repeated plaintiffs should be precluded from challenging those FLTs in this case. The Hospitals argue that, because this case involves the appeal of different reimbursements, the overlap in the FLTs that governed those reimbursements is immaterial.

         First, the Court discusses the context of the FLTs and reimbursements at issue as it relates to the claims here and in the prior cases. In Banner Health and Lee Memorial, the hospitals appealed different reimbursements than those at issue here, but reimbursements that were governed by the same FLTs. Because the federal fiscal year ends on September 31, and determines which FLT applies, one FLT will govern different sets of reimbursements. Pls.' Opp'n Def.'s Mot. Suppl. 4th Am. Compl. Mem. P. & A. Suppl. at 2-3 (Pls.' 1st Opp'n), ECF 67. For example, Banner Health involved reimbursements from October 1 to December 31, 2006, and those reimbursements were governed by the FY 2007 FLT. Pls.' 1st Opp'n at 10, ECF No. 67. This case involves reimbursements from January 1 to September 30, 2007, which are also governed by the FY 2007 FLT.[5] See Compl., ECF No. 1.

         The plaintiff hospitals here, in Banner Health, and in Lee Memorial describe their claims in nearly identical language as challenges to the Secretary's regulations.[6] They principally differ as to the years involved, because each case arose out of the appeal of different reimbursements to the hospitals.

The instant case

Banner Health

Lee Memorial

FLTs for FYs 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, and 2006

FLT for FY 2007[7]

FLT for FY 2007

FLT for FY 2008 [8]

FLT for FY 2008

FLTs for FYs 2009 and 2010

FLT for FY 2011[9]

FLT for FY 2011

FLT for FY 2012

2003 amendments[10]

2003 amendments

2003 amendments

         C. Procedural history

         The Secretary has sought the leave of the Court to amend her answer to include the affirmative defense of preclusion as to the effects of both Banner Health and Lee Memorial, and also to move for summary judgment out of time on the preclusive effects of Lee Memorial.[11] See generally Def.'s Mot. Suppl. Answer 4th Am. Compl. Mem. P. & A. Supp. (Def.'s 1st Mot. Suppl.), ECF No. 65; Def.'s Mot. Suppl. Answer 4th Am. Compl. Move Summ. J. Out of Time Mem. Points Auth. Supp. (Def.'s 2d Mot. Suppl.), ECF No. 80. The Hospitals oppose both motions. Because the matter is ripe for decision, this Court proceeds to consider both motions.


         When a party seeks to amend a pleading outside of certain permitted time periods, it may do so “only with the opposing party's written consent or the court's leave.” Fed.R.Civ.P. 15(a)(2). In this case, the Hospitals have not consented to either supplementation, and the decision is thus “committed to [the] district court's discretion.” Firestone v. Firestone, 76 F.3d 1205, 1208 (D.C. Cir. 1996). The Federal Rules instruct that “[t]he court should freely give leave [to amend] when justice so requires.” Fed.R.Civ.P. 15(a)(2). This is a generous standard, although the Supreme Court has provided several examples of situations in which leave to amend should be denied: “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962).

         The Hospitals argue that both of the Secretary's proposed amendments would be futile. Pls.' 1st Opp'n at 7; Pls.' 2d Opp'n at 4-8. Courts in this circuit have held that affirmative defenses are futile when those defenses are “insufficient as a matter of law.” Attorneys Title Corp. v. Chase Home Mortg. Corp., 1996 U.S. Dist. LEXIS 11712 *5, 1996 WL 470375, at *2 (D.D.C. Aug. 12, 1996). Of course, at this stage the Court has no occasion to actually determine the merits of any preclusion claim, but it must determine whether it appears that it would be “futile” for Defendant to assert its proposed defenses.

         IV. ANALYSIS

         A. Leave to Assert the Preclusive Effect of Banner Health

         As a general matter, the Hospitals argue that Banner Health should not trigger claim preclusion or issue preclusion because neither would increase the “efficiency” of the action due to the presence of non-precluded plaintiffs. See Pls.' 1st Opp'n at 14. The parties agree that not every plaintiff is precluded.[12] See Def.'s 1st Reply at 8 & n.3, . The Hospitals thus argue that preclusion will not improve efficiency because the Court will still need to resolve the claims of the non-precluded hospitals as to the FY 2007 regulation. Pls.' 1st Opp'n at 14; Pls.' Surreply Opp'n Def.'s Mot. Suppl. Answer 4th Am. Compl. at 10 (Pls.' Surreply), ECF No. 72. However, the Hospitals cite no authority for the proposition that a court may decline to apply preclusion due to a lack of efficiency. Nor have other courts in similar circumstances found such an obstacle to granting preclusion to some, but not all, plaintiffs. See, e.g., Collins v. E.I. DuPont de Nemours & Co., 34 F.3d 172, 176-77 (3d Cir. 1994) (allowing one plaintiff to proceed while precluding the other forty-eight plaintiffs). The Court thus does not find that potential lack of efficiency suffices to bar preclusion as on only a subset of the plaintiffs.

         1. Claim Preclusion

         The Secretary argues that claim preclusion should bar the seventeen affected hospitals[13]from challenging the “fiscal year [] 2007 outlier payment pursuant to the FY 2007 fixed loss threshold rulemaking” or arguing that “the Secretary erred in not attempting to account for reconciliation in [the FY 2007] fixed loss threshold rulemaking[].” Def.'s 1st Mot. Suppl. at 2; see also Def.'s 1st Reply at 2 n.1. “A subsequent lawsuit is barred by [claim preclusion] ‘if there has been prior litigation (1) involving the same claims or cause of action, (2) between the same parties or their privies, and (3) there has been a final, valid judgment on the merits, (4) by a court of competent jurisdiction.'” Alaska Forest Ass'n v. Vilsack, 883 F.Supp.2d 136, 141 (D.D.C. 2012) (internal quotation marks and citations omitted).

         The Hospitals argue that the Secretary's attempt to argue preclusion is futile, because the first element-that the same claim or cause of action be involved-is absent. The question thus turns on the proper definition of a claim or cause of action.

         The Hospitals assert that each separate reimbursement, separately appealed to the Board, defines a claim. See Pls.' 1st Opp'n at 14. As discussed above, the reimbursements here did not overlap with those in Banner Health, although both sets relied on the FY 2007 regulation. See Pls.' 1st Opp'n at 10, ECF No. 67 (“Banner Health disposed of [the hospitals'] claims challenging outlier payment determinations from the three month period October 1-December 31, 2006. However, in the instant case, these same hospitals are challenging outlier payment determinations from the later nine month period, January 1-September 30, 2007. There is no overlap in claims . . . .”).

         The Secretary argues instead that any challenge to the same federal regulation, in this case the FY 2007 rule, is one claim. See Def.'s 1st Reply at 4 (“Plaintiffs' cause of action is not defined by the hospital fiscal year, as Plaintiffs contend. It is directed to the rulemaking that produced that threshold amount.”). Thus, according to the Secretary, “[t]hat those Plaintiffs previously presented their challenge based on different cost reports . . . does not alter the key point that they already pursued, and lost, their challenge to the validity of the FY 2007 rule.” Def.'s 1st Reply at 1. As discussed above, the Hospitals do not dispute that the FY 2007 rule was involved in the Banner Health case.

         To resolve this dispute, the Court must consider the appropriate measure of a claim for preclusion purposes. “The District of Columbia, like the majority of jurisdictions, has adopted the Second Restatement's ‘transactional' approach under which a ‘cause of action, ' for purposes of claim preclusion, comprises ‘all rights of the plaintiff to remedies against the Secretary with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.'” Stanton v. D.C. Court of Appeals, 127 F.3d 72, 78 (D.C. Cir. 1997) (citations omitted). Whether two claims are the same ...

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