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Saint Francis Medical Center v. Price

United States District Court, District of Columbia

March 10, 2017

THOMAS E. PRICE, Secretary of the U.S. Department of Health and Human Services.[1] Defendant.



         The formula that the Department of Health and Human Services uses to determine Medicare payment rates for hospitals incorporates data on the number of hospital discharges in 1981. This data helps form the base rate, which is then adjusted and used to determine the current hospital payment rates. The plaintiffs here-almost 300 hospitals that participate in the Medicare program-believe that the 1981 data is faulty. Under the prior version of the applicable regulation-42 C.F.R. § 405.1885-a provider could only challenge reimbursement determinations within three years, but could challenge the predicate facts that formed the basis of the reimbursement rate even if those facts dated from more than three years prior. In other words, a provider could only challenge its payment amount within three years, but could challenge errors in even much older data that was used to determine that amount. In 2013, however, the Department promulgated a regulation (“the 2013 Amendment”) stating that the three-year limit on reopening reimbursement determinations applied to predicate facts as well as actual payments.

         Plaintiffs contend that the 2013 Amendment is unlawful under the Administrative Procedure Act, 5 U.S.C. § 706, and the Medicare Act, 42 U.S.C. § 1395 et seq., because it is an unlawful retroactive rule, because the agency's decision to apply it to their pending claims was arbitrary and capricious, and because even if the rule is applied only prospectively, it is still arbitrary and capricious to do so. The agency, on the other hand, maintains that the 2013 Amendment is not retroactive as applied to plaintiffs' pending Board appeals; that even if it is, the agency has the power to enact the rule retroactively; that the Board was correct to apply it to their pending appeals; and that the 2013 Amendment is not arbitrary and capricious when applied prospectively. The Court will assume without deciding that the rule is retroactive as applied here, but determines that the agency exercised its statutory authority to apply the rule retroactively. Further, the Court concludes that the Board was not arbitrary and capricious in applying the 2013 Amendment to plaintiffs' pending claims, nor is the rule as a whole arbitrary and capricious when applied prospectively. Therefore, the Court will grant the Secretary's cross-motion for summary judgment and deny the hospitals' motion for summary judgment.


         I. Statutory Background

         A. The Medicare Act, the Inpatient Prospective Payment System, and the 1981 Data

         In 1965, Congress enacted the Medicare Act, which provides health insurance for the elderly and disabled. See 42 U.S.C. § 1395 et seq. Initially, Medicare reimbursed hospitals for the actual “reasonable costs” of the inpatient services they provided. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (citing 42 U.S.C. § 1395f(b) (1988)). Then in 1983, Congress “completely revised the scheme for reimbursing Medicare hospitals.” Id. Under the new payment system, known as the Inpatient Prospective Payment System, hospitals are paid a fixed amount for each Medicare beneficiary that they treat, “regardless of the actual operating costs they incur.” See Sebelius v. Auburn Reg'l Med. Ctr., 133 S.Ct. 817, 822 (2013). This fixed amount is calculated by starting with a base rate that is then adjusted in various ways for each specific beneficiary at each specific hospital. See 42 U.S.C. § 1395ww(d)(2). The base rate uses 1981 hospital cost reporting data, and was first developed in 1983 for use in the 1984 fiscal year. See id. § 1395ww(d). This 1983 base rate, using 1981 data, still forms the building block of Medicare payments to hospitals today.

         The problem with the 1981 data, according to plaintiffs, is that it does not distinguish between discharges and transfers. A discharge is when the patient leaves the hospital, whereas a transfer is when the patient is moved to a different care setting. Prior to 1984, both were classified as “discharges”; after 1984 they were classified differently because the distinction mattered for the hospital's payment amount. The result is that the 1981 data and hence the base rate overcounts discharges. This overcounting matters because the base rate is determined, in part, by the average cost-per-discharge. See id. § 1395ww(d)(2). Thus, an artificially high number of discharges means a lower average cost-per-discharge-in other words, plaintiffs claim that overcounting discharges in 1981 has led to underpaying hospitals in every year since. The agency acknowledges that the 1981 data does not distinguish between discharges and transfers, but disagrees that this presents a problem. See Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. 234, 246 (Jan. 3, 1984) (Final Rule) (describing discharge/transfer issue as a “small discrepancy” expected to have “no significant effect” on payment rates). This case centers on whether the providers can correct the 1981 data several decades later.

         B. Determining and Challenging Payment Amounts

         The Centers for Medicare and Medicaid Services (CMS), an agency within the Department of Health and Human Services, administers the Medicare program. It contracts with entities known as Medicare Administrative Contractors (“MACs” or “contractors”) to process provider payments. (Prior to the Medicare Modernization Act of 2003, these entities were known as “fiscal intermediaries.” See 42 U.S.C. § 1395h; Note to id. § 1395kk-1). At the end of every fiscal year, each provider gives its MAC a cost report, and the MAC in turn calculates the hospital-specific adjustments and determines the amount owed to that provider for the prior fiscal year. See 42 C.F.R. § 405.1803. This is known as the Notice of Amount of Program Reimbursement. See id.

         If a provider disputes the Notice of Program Reimbursement, it may appeal through CMS's internal review process. Generally, a provider may appeal to the Provider Reimbursement Review Board “within 180 days after notice of the [MAC's] final determination.” 42 U.S.C. § 1395oo(a)(3); see also 42 C.F.R. § 405.1835. A decision by the Board becomes final after 60 days unless the Secretary “reverses, affirms, or modifies” it. 42 U.S.C. § 1395oo(f). Once the decision is final, the provider may seek review in a district court. Id.

         In addition to this appeal process, both the current and the prior version of the CMS regulations at issue in this case allow a MAC to reopen an otherwise-closed final reimbursement determination within three years of the final determination. See 42 C.F.R. § 405.1885(a)-(b); see also Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999). This reimbursement determination may be reopened on a motion of CMS, the MAC itself, or the provider. 42 C.F.R. § 405.1885(a)(2), (b). After three years, however, the determination is closed and cannot be reopened. See id. § 405.1885(b); see also Regions Hosp. v. Shalala, 522 U.S. 448, 455 (1998). As we will see, the issue here is how that reopening regulation applies to this case.

         C. Predicate Facts, the Kaiser Decision, and the 2013 Amendment

         In 2011, a district court held that the version of § 405.1885 in effect at the time did not prohibit challenging “predicate facts” that are more than three years old, as long as the only reimbursement years at issue are within the three-year reopening period. See Kaiser Found. Hosps. v. Sebelius, 828 F.Supp.2d 193 (D.D.C. 2011), aff'd, 708 F.3d 226 (D.C. Cir. 2013). A predicate fact is a factual determination that is used to determine the reimbursement amount. For example, the number of discharges that a hospital had in 1981 is a predicate fact that is used to determine the reimbursement amount in later years.

         The version of § 405.1885(a)(1) in effect at the time of the Kaiser decision stated:

A Secretary determination, an intermediary determination, or a decision by a reviewing entity . . . may be reopened, for findings on matters at issue in a determination or decision, by CMS[, ] . . . by the intermediary[, ] . . . or by the reviewing entity that made the decision[.]”

42 C.F.R. § 405.1885(a)(1) (2011). Subsections (b)(1) and (b)(2) specified that “reopenings” may only occur within three years of the challenged determination. See id. § 405.1885(b)(1)-(2). The Kaiser decision held that the term “findings on matters at issue in a determination or decision” in § 405.1885(a)(1) did not include predicate facts, and that the agency's contrary interpretation was not supported by the text, and was arbitrary and capricious because the agency had taken conflicting positions in various cases. See Kaiser Found. Hosps., 828 F.Supp.2d at 199-203; see also Kaiser Found. Hosps. 708 F.3d at 231-33.

         Following the Kaiser decision, the agency revised the regulation to make clear that predicate facts are subject to the three-year time limit. The parties call this revision “the 2013 Amendment.” The 2013 Amendment added § 405.1885(a)(1)(iii), which states:

A specific finding on a matter at issue may include a predicate fact, which is a finding of fact based on a factual matter that first arose in or was first determined for a cost reporting period that predates the period at issue . . . and once determined, was used to determine an aspect of the ...

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