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Dignity Health v. Price

United States District Court, District of Columbia

March 21, 2017

THOMAS E. PRICE, M.D., [1] in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant.


          RANDOLPH D. MOSS United States District Judge.

         This case is before the Court on plaintiff Dignity Health's motion for summary judgment, Dkt. 13, and the government's cross-motion for summary judgment, Dkt. 15. Dignity challenges the Secretary of Health and Human Services's calculation of the Medicare “wage index, ” which is used to adjust Medicare payment rates to reflect differences in wage costs between different geographic areas, for the Santa Cruz area in 2004. Another hospital in the area failed to provide documentation to support its wage rates for the time period in question, leading to lower Medicare reimbursement rates for all hospitals in the area, including Dignity. Dignity's complaint asserts a single count, challenging the accuracy of the wage data the Secretary relied on in formulating the wage index. Dkt. 1 at 8-10 (Compl. ¶¶ 35-45). For the reasons explained below, the Court concludes that Dignity lacks Article III standing. The Court will, accordingly, dismiss the complaint for lack of subject matter jurisdiction and will deny both Dignity's motion for summary judgment, Dkt. 13, and the Secretary's cross-motion for summary judgment, Dkt. 15, as moot.

         I. BACKGROUND

         A. Statutory and Regulatory Background

         Medicare is a federally funded nationwide health insurance program for people aged sixty-five or older, those with disabilities, and those with end-stage renal disease. See 42 U.S.C. §§ 1395 et seq. For acute-care inpatient services, Medicare reimbursement operates under the Prospective Payment System (“PPS”). Id. § 1395ww(d); see also Shands Jacksonville Med. Ctr. v. Burwell, 139 F.Supp.3d 240, 244-45 (D.D.C. 2015). That system compensates hospitals on the basis of a pre-established formula tied to the national average cost of treating a given ailment or condition, rather than on the basis of the actual costs incurred in treating patients. See 42 U.S.C. § 1395ww(d). Congress intended for this system to “reform the financial incentives hospitals face and [to] promote efficiency in the provision of services.” Anna Jacques Hosp. v. Burwell, 797 F.3d 1155');">797 F.3d 1155, 1158 (D.C. Cir. 2015) (alterations and citation omitted). The system thus aims to avoid rewarding hospitals for operating at higher-than-average cost.

         At the same time, however, the system was not intended to penalize hospitals for operating in high-cost areas. Wages and wage-related costs, in particular, “are a significant component of the Medicare payment that qualifying hospitals receive, ” and those costs “vary widely across the country.” Regents of the Univ. of Cal. v. Burwell, 155 F.Supp.3d 31, 37 (D.D.C. 2016) (citation omitted), aff'd mem., No. 16-5098 (D.C. Cir. March 2, 2017). In recognition of this reality, Congress directed the Secretary of Health and Human Services to adjust the “proportion” of PPS payments attributable to “wages and wage-related costs” for “area differences in hospital wage levels[.]” 42 U.S.C. § 1395ww(d)(3)(E)(i). To do so, the Secretary must compute a “factor” that “reflect[s] the relative hospital wage level in the geographic area of the hospital compared to the national average, ” id., which is commonly referred to as the “wage index, ” Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914-15 (D.C. Cir. 2009). In most cases, the geographic area for which a wage index is calculated corresponds to one of the “metropolitan statistical areas” (“MSAs”) defined by the Office of Management and Budget. 42 C.F.R. §§ 412.63(b), 412.64(b). The wage index is a ratio of costs in a geographic area to national average costs. A wage index of 1.0 means a given area is average; an index above 1.0 indicates higher than average wage costs, and thus a correspondingly higher payment level through the PPS, and an index below 1.0 means a lower than average cost area, with lower PPS payments. See Anna Jacques Hosp., 797 F.3d at 1159. Because there are typically multiple hospitals in any MSA, each hospital's wage data affects the ultimate wage index for all hospitals in the area, and thus data errors or omissions by one hospital can lower (or increase) PPS rates for other hospitals in its area.

         The Centers for Medicare and Medicaid Services (“CMS”), the component of the Department of Health and Human Services responsible for administering Medicare, calculates the wage index each year “on the basis of a survey.” 42 U.S.C. § 1395ww(d)(3)(E)(i). To gather the necessary information, CMS requires hospitals to submit their cost data to their “fiscal intermediaries, ”-third party organizations, usually insurance companies, under contract with CMS to handle much of the direct administration of Medicare.[2] See Regents of the Univ. of Cal., 155 F.Supp.3d at 38. Because it takes time for hospitals to complete and submit their cost reports, the wage index for any given year typically reflects costs actually incurred a few years before. See, e.g., 2005 IPPS Final Rule, 69 Fed. Reg. 48916, 49049 (Aug. 11, 2004) (calculating fiscal year 2005 wage index based on fiscal year 2001 data); Regents of the Univ. of Cal., 155 F.Supp.3d at 38.

         The process of calculating the annual wage index begins with the cost data-including total salaries and total paid hours-that hospitals must file annually with their fiscal intermediaries on Worksheet S-3. See Regents of the Univ. of Cal., 155 F.Supp.3d at 38; Parkview Med. Assocs. L.P. v. Shalala, 94-cv-1941, 1997 WL 470107, at *2 (D.D.C. Aug. 13, 1997). The fiscal intermediaries conduct a “desk review” of that data to determine, among other things, whether the percentage cost increase reported by a hospital exceeds certain predetermined (but confidential) “edit thresholds.” CMS, Program Memorandum: Intermediaries, Annual Desk Review Program for Hospital Wage Data: Cost Reporting Periods Beginning on or after October 1, 1999, through September 30, 2000 (For FY 2004 Wage Index) (Oct. 4, 2002), Dkt. 21-1 at 352-54. If any items “fall outside the established [edit] threshold[], ” the fiscal intermediary must “address” those items and, where “necessary, ” make “adjustments.” Id. at 353. “If adjustments are necessary, ” the fiscal intermediary “must communicate them to the affected hospitals” and must provide them with “an opportunity to respond.” Id. The fiscal intermediary is also required to inform the relevant state hospital association if any hospital fails to respond to issues raised in the desk review process and to alert the association that “a hospital's failure to respond to matters raised by the [fiscal intermediary] can result in lowering an area's wage index value.” Id. The fiscal intermediary must complete its review and transmit the relevant data- including any adjustments-to CMS by mid-November. Id. at 352.

         CMS then compiles and publishes a “preliminary public use” file containing the cost data from all hospitals in a given area, and it instructs the fiscal intermediaries to inform their hospitals that the file is available and about the procedures and deadlines for requesting revisions to the data. See, e.g., Proposed Changes to the Hospital Inpatient Prospective Payment System and Fiscal Year 2004 Rates, 68 Fed. Reg. 27, 154, 27, 193 (May 19, 2003) (“Proposed 2004 Rule”). CMS publishes the “preliminary public use” file on its website, and hospitals have a period of time to propose corrections to the data by submitting “complete, detailed supporting documentation” to their fiscal intermediaries. Id. The fiscal intermediaries then (1) revise the data, (2) notify hospitals whether they have accepted the proposed revisions and (3) explain why, before sending the revised data to CMS. Id. If a hospital continues to disagree with its fiscal intermediary's determination, it may raise the issue with CMS by the specified deadline. Id. 27, 193-94. In conducting its review, however, CMS does “not consider issues such as the adequacy of a hospital's supporting documentation, ” because CMS “believe[s] that fiscal intermediaries are generally in the best position to make evaluations regarding the appropriateness of these types of issues (which should have been resolved earlier in the process).” Id. at 27, 194.

         After receiving the revised data from the fiscal intermediaries, the Secretary publishes a proposed wage index in the federal register as part of the proposed annual PPS rule. Id. At that point, a hospital may request changes to data only “in those very limited situations involving an error by the intermediary or CMS that the hospital could not have known about before its review of the final wage data file.” Id. The Secretary then publishes the final wage index. Id. After the final index has been published, it is still possible for a hospital to seek a mid-year correction, but only “if [the] hospital can show that the intermediary or CMS made an error in tabulating its data.” Id. A hospital may not seek a mid-year correction “to revise another hospital's data that may be affecting the requesting hospital's wage index.” Id.

         B. The 2004 Santa Cruz Wage Index

         This case concerns the wage index for the Santa Cruz MSA for fiscal year 2004. Three hospitals operated in the Santa Cruz MSA at the relevant time: Dominican Hospital, operated by Dignity Health, the plaintiff in this action; Watsonville Community Hospital; and Sutter Maternity & Surgery Center. Dkt. 21-1 at 5. The 2004 wage index was based on data compiled for fiscal year 2000. Id. The hospitals submitted their initial data in the fall of 2002, and on October 4, 2002, CMS issued a memorandum to the fiscal intermediaries outlining the process and timeline for processing that year's data and ultimately publishing the final wage index. Dkt. 21-1 at 403. The memorandum gave fiscal intermediaries until November 15, 2002, to complete and submit their desk reviews, and until early to mid-December to notify state hospital associations about any area hospitals that failed to respond to issues raised in the desk review process; it gave CMS until January 10, 2003, to publish the “preliminary public use” file on its website, and gave hospitals one month, until February 10, 2003, to request revisions to that data “and to provide documentation to support the request;” it gave fiscal intermediaries until April 4, 2003, to submit revised Worksheet S-3 wage data to CMS, gave hospitals until that same date to request CMS's intervention where they disagreed with the intermediaries' conclusions, and provided that the proposed rule would be published around early April; it provided that the final wage data “public use” file was to be released on May 9, 2003, and gave hospitals until June 6, 2003, to submit final correction requests to CMS and the fiscal intermediaries; and it set August 1, 2003, as the publication date and October 1, 2003, as the effective date for the final 2004 wage index. Id. at 413-15.

         Watsonville's cost report for fiscal year ending July 31, 2001 reported average hourly wages of $26.78. Dkt. 21-1 at 107. That figure exceeded its as-reported hourly average of $24.87 for fiscal year ending July 31, 2000, id. at 106, by 7.68%. But Watsonville's as-adjusted hourly wage costs for fiscal year 2000 was $23.02. Id. at 126. Watsonville's as-reported 2001 figure thus exceeded its as-adjusted 2000 figure by 16.33%. Although the precise edit threshold remains confidential, there is no dispute that the 16.33% variance exceeded the threshold.[3] Dkt. 21-1 at 205. Watsonville's fiscal intermediary, United Government Services (“UGS”), accordingly, reduced Watsonville's average hourly wage from $26.78 (the as-reported average) to $23.02 (the as-adjusted rate from the most recent year for which a final adjusted figure was available) “pending an explanation from” Watsonville. Dkt. 21-1 at 6; see also Id. at 204-05.

         CMS notified Watsonville of the proposed adjustment in a letter dated November 11, 2002 (and received by Watsonville on November 14, 2002). Dkt. 21-1 at 356. That letter gave Watsonville ten days to dispute the adjustment and to provide “explanations and documentation for any disagreed items.” Id. Watsonville did not respond. Dkt. 13-1 at 11; Dkt. 15-1 at 14. A month later, on December 13, 2002, CMS wrote to the California Healthcare Association (“CHA” or the “Association”), the state hospital association that represents Santa Cruz-area hospitals, to alert the Association that Watsonville had not responded to the request for more information stemming from the desk review and to “advise the hospital association to inform its member hospitals that a hospital's failure to respond to matters raised by the intermediary can result in the data being disallowed, thereby, possibly lowering an area's wage index ...

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