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Post Acute Medical At Hammond, LLC v. Azar

United States District Court, District of Columbia

May 22, 2018

ALEX M. AZAR II, Defendant.



         Post Acute Medical at Hammond, a hospital that qualifies as a provider of services under the Medicare Act, challenges a rule promulgated by the U.S. Health and Human Services (HHS) that reduced Post Acute's reimbursement amount for services provided in 2016. Post Acute claims that the rule violates the Administrative Procedure Act and the Medicare Act because it is arbitrary and capricious and was promulgated with insufficient notice. Before the Court are Post Acute's Motion for Summary Judgment, Dkt. 16, and HHS Secretary Alex M. Azar II's Cross-Motion for Summary Judgment, Dkt. 17.[1] For the reasons that follow, the Court will deny Post Acute's motion and grant the Secretary's motion.

         I. BACKGROUND

         Medicare is a federal health insurance program administered by HHS that primarily serves elderly or disabled people. Under the Medicare Act, when a long-term care hospital discharges a Medicare beneficiary, HHS pays the hospital with predetermined standard rates rather than reimbursing actual costs. See Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act, Pub. L. No. 106-113, § 123 (1999) (codified as a note to 42 U.S.C. § 1395ww) (directing the HHS Secretary to “develop a per discharge prospective payment system for payment for inpatient hospital services of long-term care hospitals”). The hospital receives a certain fixed amount per patient no matter what it actually spends on the patient.

         In implementing this prospective payment system, HHS calculates a long-term care hospital's reimbursement amount by approximating the costs that a typical, similarly situated hospital would incur. HHS estimates the per patient average cost incurred by hospitals nationwide, then factors in several adjustments. See generally 42 C.F.R. §§ 412.513, 412.515, 412.517, 412.523. The most prominent of these adjustments accounts for a patient's diagnosis. See Id. § 412.515. Another adjustment-central to this case-is a labor-cost adjustment that accounts for the varying wage levels across the country. Id. § 412.523(d)(4); see also Pub. L. No. 106-113, § 123 (codified as a note to 42 U.S.C. § 1395ww) (requiring the prospective payment system to “include an adequate patient classification system that is based on diagnosis-related groups . . . and that reflects the differences in patient resource use and costs”); Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act, Pub. L. No. 106-554, § 307(b)(1) (2000) (codified as a note to 42 U.S.C. § 1395ww) (“The Secretary shall examine and may provide for appropriate adjustments to the long-term hospital payment system, including adjustments to [diagnosis-related groups] weights [and] area wage adjustments.”). A hospital's labor-cost adjustment does not reflect the actual wages it pays; instead the adjustment reflects the average wages paid by hospitals in the area. See 42 C.F.R. § 412.523(d)(4); id. § 412.525(c)(1). If a particular geographic area has high hospital labor costs, a hospital in that area will receive a correspondingly higher Medicare reimbursement.

         To determine a hospital's labor-cost adjustment, HHS must assign it to a geographic area. HHS does this by using geographic classifications issued by the Office of Management and Budget (OMB). The OMB defines “Metropolitan Statistical Area” as consisting of an “urbanized area of 50, 000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core.” Office of Mgmt. & Budget, Bulletin No. 15-01 (July 15, 2015). Meanwhile, the OMB defines a “Micropolitan Statistical Area” identically to Metropolitan Statistical Areas except with a smaller urbanized area: the urbanized area contains at least 10, 000 but fewer than 50, 000 people. Id. HHS defines Metropolitan Statistical Areas as urban areas and all other areas as rural areas. 42 C.F.R. § 412.503. For a hospital located within a Metropolitan Statistical Area, HHS classifies the hospital's labor-market area as that Metropolitan Statistical Area. For a rural hospital, HHS classifies the hospital's labor-market area as the entirety of the rural area of the state. See Fiscal Year 2003 Rule, 67 Fed. Reg. 55, 954, 56, 015-19, 56, 057-75 (Aug. 30, 2002). HHS collects wage data from acute care hospitals to determine the labor-cost adjustment for each labor-market area. See Fiscal Year 2016 Rule, 80 Fed. Reg. 49, 326, 49, 797 (Aug. 17, 2015).

         This system has been in place for more than a decade. More recently, HHS's only relevant changes have been in response to OMB's reclassification of the country's geographic areas based on the 2010 census. With the new census, certain areas moved between the Metropolitan Statistical Area and rural categories. HHS adopted these reclassifications for fiscal year 2015. See Fiscal Year 2015 Rule, 79 Fed. Reg. 49, 854, 50, 180-85, 50, 391-96 (Aug. 22, 2014).[2] The Rule challenged here, which concerns fiscal year 2016, carried over the geographic classifications from the 2015 fiscal year (that were based on the 2010 census). See 80 Fed. Reg. 49, 326.

         Post Acute is located in Tangipahoa Parish, Louisiana, and was reclassified from a rural category into the Hammond, Louisiana Metropolitan Statistical Area after the 2010 census. For fiscal year 2014-the last year with the pre-census classifications-the Louisiana statewide rural labor-market area wage index was .7585. Dkt. 17-1. For fiscal year 2015, the Hammond wage index was .9452. Dkt. 17-2. For fiscal year 2016, the Hammond wage index was .8167. Dkt. 17-6. In sum, Post Acute's labor-costs adjustment rose significantly when it transitioned from rural to urban, but dropped from fiscal year 2015 to fiscal year 2016. The labor-cost adjustment for 2016 resulted in a reimbursement approximately $1, 046, 874 lower than it would have been with the 2015 Hammond wage index (though approximately $983, 840 higher than it would have been with the 2016 Louisiana rural index). See Post Acute Mot. Summ. J. at 19, Dkt. 16; Dkt. 17-7. The fluctuation is explained partly by the fact that the Hammond Metropolitan Statistical Area has only two acute care hospitals from which HHS collects wage data. Dkt. 17-8. The smaller the number of hospitals going into the calculation, the more volatile an area's wage index will be-the shifting wages of a single hospital will have a more noticeable effect.

         Post Acute filed this suit in June 2016. It claims that in promulgating the Fiscal Year 2016 Rule, HHS violated the notice-and-comment requirements of the Administrative Procedure Act and the Medicare Act. See 5 U.S.C. § 553; 42 U.S.C. § 1395hh(b)(1). Specifically, the complaint alleges that HHS failed to provide adequate notice of the “potential for significant variability in the wage index for hospitals that are located in regions with only a few hospitals” resulting from HHS's “decision to retain for [fiscal year] 2016 the revised labor market delineations that were adopted in the [fiscal year] 2015 final rule.” Compl. ¶ 43, Dkt. 1. Post Acute also claims that HHS acted arbitrarily and capriciously (1) by failing to adopt policies to reduce year-to-year wage-index volatility for areas with few hospitals; and (2) by categorizing long-term care hospitals in Micropolitan Statistical Areas as rural (and thus decreasing their year-to-year wage index volatility) while not decreasing the wage-index volatility for hospitals like Post Acute located in Metropolitan Statistical Areas with few hospitals. Id. ¶¶ 53, 58. Both Post Acute and the HHS Secretary filed motions for summary judgment. Dkt. 16; Dkt. 17. This case was transferred to the undersigned judge on December 4, 2017.


         A court grants summary judgment if the moving party “shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A “material” fact is one with potential to change the substantive outcome of the litigation. See Liberty Lobby, 477 U.S. at 248; Holcomb v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). A dispute is “genuine” if a reasonable jury could determine that the evidence warrants a verdict for the nonmoving party. See Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895.

         Here the plaintiff seeks review of an agency's final rule, invoking the Administrative Procedure Act's requirement that a court “hold unlawful and set aside” any aspect of the rule that is “arbitrary [and] capricious” or “otherwise not in accordance with law.” 5 U.S.C. § 706(2). In an APA case, summary judgment “serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review.” Sierra Club v. Mainella, 459 F.Supp.2d 76, 90 (D.D.C. 2006). In other words, “the entire case . . . is a question of law” and the district court “sits as an appellate tribunal.” Am. Biosci., Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001) (quotation marks and footnote omitted).

         In an arbitrary and capricious challenge, the core question is whether the agency's decision was “the product of reasoned decisionmaking.” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 52 (1983); see also Nat'l Telephone Co-op. Ass'n v. FCC, 563 F.3d 536, 540 (“The APA's arbitrary-and-capricious standard requires that agency rules be reasonable and reasonably explained.”). The court's review is “fundamentally deferential-especially with respect to matters relating to an agency's areas of technical expertise, ” Fox v. Clinton, 684 F.3d 67, 75 (D.C. Cir. 2012) (quotation marks and alteration omitted); the court “is not to substitute its judgment for that of the agency, ” State Farm, 463 U.S. at 43. An agency action is arbitrary and capricious if the agency “entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before [it], or [the explanation] is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” State Farm, 463 U.S. at 43. While an agency “has discretion to design rules that can be broadly applied, sacrificing some measure of fit for administrability, ” Leather Indus. of Am. v. EPA, 40 F.3d 392, 403 (D.C. Cir. 1994) (internal quotation marks omitted), the agency must “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made, ” State Farm, 463 U.S. at 43 (internal quotation marks omitted). The court will sustain the agency action, however, unless the agency has committed a “clear error in judgment.” Marsh v. Oregon Nat'l Res. Council, 490 U.S. 360, 378 (1989) (internal quotation marks omitted). The party challenging an agency's action as arbitrary and capricious bears the burden of proof. Pierce v. SEC, 786 F.3d 1027, 1035 (D.C. Cir. 2015).

         III. ...

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