United States District Court, District of Columbia
UNIVERSITY OF COLORADO HEALTH AT MEMORIAL HOSPITAL, et al., Plaintiffs,
SYLVIA M. BURWELL, Secretary, United States Department of Health and Human Services, Defendant. Re Document Nos. 65, 80
MEMORANDUM OPINION GRANTING DEFENDANT'S MOTION
FOR LEAVE TO SUPPLEMENT HER ANSWER TO THE FOURTH AMENDED
COMPLAINT; GRANTING DEFENDANT'S MOTION FOR LEAVE TO
FURTHER SUPPLEMENT HER ANSWER TO THE FOURTH AMENDED COMPLAINT
AND MOVE FOR SUMMARY JUDGMENT OUT OF TIME; STAYING
RUDOLPH CONTRERAS United States District Judge
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
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. 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.
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
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.
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.
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.
Parties and claims
hospitals are plaintiffs in this action,  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.
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. See Compl., ECF No. 1.
plaintiff hospitals here, in Banner Health, and in
Lee Memorial describe their claims in nearly
identical language as challenges to the Secretary's
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
FLTs for FYs 1997, 1998, 1999, 2000, 2001, 2002,
2003, 2004, 2005, and 2006
FLT for FY 2007
FLT for FY 2007
FLT for FY 2008 
FLT for FY 2008
FLTs for FYs 2009 and 2010
FLT for FY 2011
FLT for FY 2011
FLT for FY 2012
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. 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.
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).
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
Leave to Assert the Preclusive Effect of Banner
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. 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.
Secretary argues that claim preclusion should bar the
seventeen affected hospitalsfrom 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
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
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 . . . .”).
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.
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 ...