Stringfellow Memorial Hospital v. Azar

          MEMORANDUM OPINION

          BERYL A. HOWELL CHIEF JUDGE.

         Pending before the Court are cross-motions for summary judgment from the plaintiffs, several hospitals that offer inpatient and outpatient hospital services to patients entitled to benefits under the Medicare program, Pls.' Mot. Summ. J. (“Pls.' Mot.”), ECF No. 15, and the defendant, the Secretary of Health and Human Services (“HHS”), who is sued in his official capacity, Def.'s Cross-Mot. Summ. J. (“Def.'s Mot.”), ECF No. 17.^[1] The plaintiffs seek judicial review of a final adverse agency decision by HHS and the vacatur of a 2005 final rule that allegedly reduced the payments that the plaintiffs should have received from HHS to compensate them for the disproportionate number of low-income patients served in their hospitals. See Pls.' Mot. at 1. The plaintiffs allege that the final rule at issue violates the Administrative Procedure Act (“APA”), 5 U.S.C. § 706, because the rule is procedurally defective and arbitrary and capricious. See Compl. ¶¶ 81-88, ECF No. 1; Pls.' Mem. Supp. Mot. Summ. J. (“Pls.' Mem.”) at 2, ECF No. 15-1. The defendant counters that the final rule was a logical outgrowth of the proposed rule and that the adoption of the rule was the result of a reasoned deliberative process. See Def.'s Mem. Supp. Cross-Mot. Summ. J. & Opp'n Pls.' Mot. Summ. J. (“Def.'s Mem.”) at 1, ECF No. 17-1. For the reasons set forth below, the plaintiffs' motions are denied and the defendant's motions are granted.

         I. BACKGROUND

         Resolving the instant motions requires examining the “labyrinthine world of Medicare reimbursements.” Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 48 (D.C. Cir. 2015) (internal quotation marks omitted). The relevant portions of the Medicare statute are explained first, followed by the rulemaking challenged by the plaintiffs.

         A. Statutory Framework

         Medicare is a federal program that pays for health-care services furnished to eligible beneficiaries, who are generally individuals over the age of sixty-five or individuals with disabilities. See 42 U.S.C. § 1395c. The Centers for Medicare and Medicaid Services (“CMS”) is the component of HHS that administers the Medicare program. See St. Elizabeth's Med. Ctr. of Bos., Inc. v. Thompson, 396 F.3d 1228, 1230 (D.C. Cir. 2005). CMS reimburses health-care providers for, inter alia, “the reasonable cost” of services provided to Medicare beneficiaries. See 42 U.S.C. § 1395f(b)(1).^[2]

         The Medicare statute has five parts, two of which are relevant to this case. Part A “establishes the requirements that individuals must meet to be eligible for Medicare benefits and provides such individuals insurance for hospital and hospital-related services.” Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013) (citing 42 U.S.C. § 1395c). Such benefits include coverage for “inpatient hospital services, ” including overnight stays in a hospital. 42 U.S.C. § 1395d. Part A benefits are limited to a certain number of days, however, and after those days have been used, Part A coverage is “exhausted.” Catholic Health, 718 F.3d at 916. “Specifically, Medicare beneficiaries are entitled to coverage for the first 90 days of their stay, and they may then elect to use up to 60 ‘lifetime reserve days' beyond the first 90 days.” Id. (quoting 42 C.F.R. § 409.61(a)); see also 42 U.S.C. § 1395d.

         Part E, which sets out “Miscellaneous Provisions, ” works in tandem with Part A to provide a “prospective payment system for reimbursing hospitals that provide inpatient hospital services covered under Part A.” Catholic Health, 718 F.3d at 916 (citing 42 U.S.C. § 1395ww(d)). As relevant to this case, Part E mandates that any hospital serving “a significantly disproportionate number of low-income patients” is entitled to a payment adjustment, known as the “disproportionate share hospital” (“DSH”) adjustment, which is an upward adjustment to a hospital's reimbursement amount to account for the hospital's treatment of a disproportionately high number of low-income patients. 42 U.S.C. § 1395ww(d)(5)(F)(i)(I); see also Id. § 1395ww(d)(2); Pls.' Mem. at 4 (“The DSH adjustment is an upward adjustment to standard rates to compensate hospitals for the generally higher per-patient costs of low-income patients.”). As the D.C. Circuit has recognized, the DSH adjustment “is based on Congress's judgment that low-income patients are often in poorer health, and therefore costlier for hospitals to treat.” Catholic Health, 718 F.3d at 916 (citing Adena Reg'l Med. Ctr. v. Leavitt, 527 F.3d 176, 177-78 (D.C. Cir. 2008)).

         A hospital's DSH adjustment is based on its “disproportionate patient percentage” (“DPP”). 42 U.S.C. § 1395ww(d)(5)(F)(v). To qualify for a DSH adjustment, a hospital's DPP typically must exceed 15 percent, although the qualifying percentage varies depending on the size of the hospital and whether it is located in an urban or a rural area. See Id. Generally, “a higher DPP means greater reimbursements because the hospital is serving more low-income patients.” Catholic Health, 718 F.3d at 916. The DPP is a “‘proxy measure' for the number of low-income patients a hospital serves and represents the sum of two fractions, commonly called the ‘Medicare fraction' and the ‘Medicaid fraction.'” Ne. Hosp. Corp. v. Sebelius, 657 F.3d 1, 3 (D.C. Cir. 2011) (internal citation omitted) (quoting H.R. Rep. No. 99-241, pt. 1, at 17 (1985)). The Medicare fraction is statutorily defined as:

[T]he fraction (expressed as a percentage), the numerator of which is the number of such hospital's patient days for such period which were made up of patients who (for such days) were entitled to benefits under [Medicare] part A . . . and were entitled to supplementary security income [(“SSI”)] benefits . . ., and the denominator of which is the number of such hospital's patient days for such fiscal year which were made up of patients who (for such days) were entitled to benefits under [Medicare] part A.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). The Medicaid fraction is defined as:

[T]he fraction (expressed as a percentage), the numerator of which is the number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State [Medicaid] plan . . . but who were not entitled to benefits under [Medicare] part A . . ., and the denominator of which is the total number of the hospital's patient days for such period.

Id. § 1395ww(d)(5)(F)(vi)(II).

         As the D.C. Circuit has noted, “[t]his language is downright byzantine and its meaning not easily discernible.” Catholic Health, 718 F.3d at 917. In essence, “[t]he Medicare and Medicaid fractions represent two distinct and separate measures of low income-SSI (i.e., welfare) and Medicaid, respectively-that when summed together, provide a proxy for the total low-income patient percentage.” Id. The D.C. Circuit has often used the following visual representation to distill these formulas:

	Medicare Fraction	Medicaid Fraction
Numerator	Patient days for patients “entitled to benefits under part A” and “entitled to SSI benefits”	Patient days for patients “eligible for [Medicaid]” but not “entitled to benefits under part A”
Denominator	Patient days for patients “entitled to benefits under part A”	Total number of patient days

Id.; see also Ne. Hosp., 657 F.3d at 3. The denominator of the Medicaid fraction-total number of patient days-is larger than the denominator of the Medicare fraction, which contains only patient days for those patients “entitled to benefits under part A.” Thus, shifting patient days from the numerator of the Medicaid fraction to the numerator of the Medicare fraction will generally have a larger impact on a hospital's DPP and, accordingly, on its DSH adjustment.

         A “fiscal intermediary, ” such as a private insurance company that has a contract with CMS, is responsible for “[d]etermining the amount of payments to be made to providers for covered services furnished to Medicare beneficiaries” and then “[m]aking the payments” to the hospitals. 42 C.F.R. § 421.100(a)(1)-(2); see also Id. § 421.3. If a hospital providing covered services “is dissatisfied with a final determination of the organization serving as its fiscal intermediary” regarding “the amount of total program reimbursement due the provider, ” the hospital “may obtain a hearing with respect to such [determination] by a Provider Reimbursement Review Board” (“PRRB”). 42 U.S.C. § 1395oo(a)(1)(A)(i). To obtain such review, the hospital must “file[ ] a request for a hearing with 180 days after notice of the intermediary's final determination.” Id. § 1395oo(a)(3). The PRRB may then “affirm, modify, or reverse a final determination of the fiscal intermediary.” Id. § 1395oo(d); see also Ne. Hosp., 657 F.3d at 3-4.

         PRRB decisions “shall be final unless the Secretary, on his own motion, and within 60 days after the provider of services is notified of the [PRRB's] decision, reverses, affirms, or modifies” the PRRB's decision. 42 U.S.C. §1395oo(f)(1). Notably, however, the PRRB lacks the authority to declare statutes, regulations, or rules invalid. See Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399, 406 & n.4 (1988) (citing 42 U.S.C. § 1395oo(d)); 42 C.F.R. § 405.1867 (instructing that the PRRB “shall afford great weight to interpretive rules, general statements of policy, and rules of agency organization, procedure, or practice established by CMS”). Thus, when a hospital seeks to challenge the validity of a rule or regulation, the challenger must first obtain a determination by the PRRB, either on a petition or sua sponte, that the PRRB “lacks the authority to decide the legal question.” 42 C.F.R. § 405.1842(a)(1) (citing 42 C.F.R. § 405.1867). The hospital may then “request a [PRRB] decision that the provider is entitled to seek” expedited judicial review (“EJR”) of the issue. Id. § 405.1842(a)(2). If the PRRB grants EJR, “the provider may file a complaint in Federal district court in order to obtain EJR of the legal question.” Id. §405.1842(g)(2).

         B. Rulemaking History Leading to the 2005 Final Rule

         At issue in this lawsuit is the treatment of patient days in the Medicare fraction or the Medicaid fraction for individuals who were eligible for both programs-“dual eligible” individuals-but for whom Medicare did not pay for care, either because the patient had exhausted his or her Part A benefits for that period of hospitalization or because an entity other than the Medicare Trust Fund paid for that care. See Pls.' Mem. at 1; Def.'s Mem. at 4. Specifically, this dispute centers on whether such “dual-eligible exhausted days” should be counted in the Medicare fraction or instead in the Medicaid fraction. If dual-eligible exhausted days were included in the Medicare fraction, they would be added to the denominator of the Medicaid fraction and, if the patient had been entitled to SSI benefits, also to the numerator. If dual-eligible exhausted days were included in the Medicaid fraction, they would be added to the numerator of the Medicaid fraction. The denominator of the Medicaid fraction is not at issue, because that value includes all patient days regardless of eligibility or exhaustion.

         This distinction matters, because the denominator of the Medicaid fraction (total patient days) is greater than the denominator of the Medicare fraction (patient days for patients “entitled to benefits under part A”). Thus, including dual-eligible exhausted days in the Medicare fraction denominator (and, when appropriate, numerator) rather than in the Medicaid fraction numerator will often tend to give those days more of an impact on a hospital's DPP and, correspondingly, on its DSH adjustment. The relevant rulemaking history is described next.

         1. 2004 Proposed Rule

         In 2003, the Secretary issued a proposed rule for the 2004 fiscal year outlining “proposed changes to the hospital inpatient prospective payment systems and fiscal year 2004 rates” for the Medicare program. Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates (“2004 Proposed Rule”), 68 Fed. Reg. 27, 154, 27, 154 (May 19, 2003) (capitalization omitted). As it relates to this lawsuit, the Secretary proposed to revise the manner in which dual-eligible exhausted patient days are counted in the Medicare and Medicaid fractions. The 2004 Proposed Rule explained that currently, “[i]f a patient is a Medicare beneficiary who is also eligible for Medicaid, the patient is considered dual-eligible and the patient days are included in the Medicare fraction of the DSH patient percentage but not the Medicaid fraction.” Id. at 27, 207. Importantly, the 2004 Proposed Rule emphasized that:

This policy currently applies even after the patient's Medicare coverage is exhausted. In other words, if a dual-eligible patient is admitted without any Medicare Part A coverage remaining, or exhausts Medicare Part A coverage while an inpatient, his or her patient days are counted in the Medicare fraction before and after Medicare coverage is exhausted. This is consistent with our inclusion of Medicaid patient days even after the patient's Medicaid coverage is exhausted.

Id. That is, under the stated status quo, dual-eligible days were to be counted in the denominator of the Medicare fraction (and, if the patient were entitled to SSI benefits, also in the numerator of the Medicare fraction), regardless of whether the patient had exhausted his or her available Medicare Part A coverage. The Secretary then explained that he was contemplating a change in the way dual-eligible exhausted days would be counted:

We are proposing to change our policy, to begin to count in the Medicaid fraction of the DSH patient percentage the patient days of dual-eligible Medicare beneficiaries whose Medicare coverage has expired. . . . As noted above, our current policy regarding dual-eligible patient days is that they are counted in the Medicare fraction and excluded from the Medicaid fraction, even if the patient's Medicare Part A coverage has been exhausted. . . . [I]n order to facilitate consistent handling of these days across all hospitals, we are proposing that the days of patients who have exhausted their Medicare Part A coverage will no longer be included in the Medicare fraction. Instead, we are proposing these days should be included in the Medicaid fraction of the DSH calculation.

Id. at 27, 207-08. In other words, the Secretary proposed adopting the opposite of the stated current policy: rather than continue to count dual-eligible days, regardless of whether Part A coverage had been exhausted, in the appropriate parts of the Medicare fraction, the Secretary proposed to begin counting only dual-eligible unexhausted days in the Medicare fraction while counting dual-eligible exhausted days in the Medicaid fraction.

         2. Initial Comment Period for the 2004 Proposed Rule

         The comment period on the 2004 Proposed Rule remained open through July 18, 2003. Id. at 27, 154. Many commenters supported the policy that the Secretary had described as the existing policy-namely, the inclusion of dual-eligible days in the denominator (and, when entitled to SSI benefits, also in the numerator) of the Medicare fraction, regardless of whether the patient's Part A coverage had been exhausted-and opposed the proposed change to begin including dual-eligible exhausted days in the numerator of the Medicaid fraction. As discussed below, this is the policy that the Secretary ultimately adopted in the 2005 Final Rule. The American Hospital Association (“AHA”) opposed the proposed change because “CMS provide[d] no justified reason for making this change, and there are clear reasons not to make this change.” Administrative Record (“AR”) at 754R, ECF No. 30-1 (emphasis in original). The AHA noted that “CMS clearly states in the proposed rule that the current formula is consistent with statutory intent” and that “the proposed change would place a significant new regulatory and administrative burden on hospitals.” Id. In addition, the AHA explained that “it is likely that this proposed change would result in reduced DSH payments to hospitals” because “[a]ny transfer of a particular patient day from the Medicare fraction (based on total Medicare patient days) to the Medicaid fraction (based on total patient days) will dilute the value of that day, and therefore reduce the overall patient percentage and the resulting DSH adjustment. Thus the calculation of dual-eligible days must not be changed.” Id. at 754-55R (emphasis in original). Other commenters likewise emphasized that the stated current policy was consistent with statutory intent and that the change would result in large administrative burdens for hospitals. See, e.g., id. at 486R (comments of Association of American Medical Colleges that “current policy is consistent with statutory intent” and that proposed policy will impose a “new administrative burden . . . on hospitals to provide documentation”); id. at 583R (comments of Healthcare Association of New York State that “it will be difficult for hospitals to provide the data required under this proposal”); id. at 718R (comments of University of Pittsburgh Medical Center Health System opposing the proposal “due to the additional workload that will be applied to the providers' limited resources”); id. at 816R (comments of National Association of Public Hospitals and Health Systems noting the “significant new regulatory and administrative burden on hospitals” imposed by proposed rule).

         Other commenters emphasized the likelihood that DSH payments would decrease under the proposed rule. For example, the National Association of Public Hospitals and Health Systems noted that the proposed rule would “have the effect of reducing DSH payments across-the-board” because “the transfer of any particular patient day from the Medicare to the Medicaid fraction will always dilute the value of that day and therefore reduce the overall patient percentage and the resulting DSH adjustment.” Id. at 816R; see also Id. at 683R (comments of Mercy Hospital that “[t]he result will be a loss ranging from approximately ($500, 000) to ($800, 000) for each 1, 000 days adjusted based on a varied Medicaid eligibility percentage from 100% to 0%”); id. at 789R (comments of Federation of American Hospitals that “the proposed policy would result in a reduction of DSH payments when Exhausted Days are removed from the Medicare fraction”).

         In addition, the Federation of American Hospitals alleged that “CMS lacks statutory authority to implement the proposed policy regarding Exhausted Days” because “Exhausted Days patients remain entitled to” certain Part A benefits even though they have “reached their coverage limit for inpatient hospital services.” Id. at 789R. The Federation contended that, “[u]nder CMS's proposed interpretation of the DSH statute, it is impossible to reconcile the position that these patients are not entitled to Medicare Part A when they can receive other Part A services, such as skilled nursing services, ” id. at 790R, and “strongly urge[d] CMS not to finalize this policy, ” id.

         Only one commenter, the BlueCross BlueShield Association, wrote in support of the proposed rule. BlueCross noted that it “agree[d] with the proposed change to include in the Medicaid percentage the patient days of dual eligible Medicare beneficiaries whose Medicare coverage has expired, ” but the Association nevertheless recommended “eliminating the requirement that the hospital submit documentation to the fiscal intermediary that justifies including the days in the Medicaid fraction.” Id. at 566R.

         Notably, two commenters wrote to express confusion about the Secretary's statement of the existing policy. The law firm Vinson & Elkins wrote, on its own behalf, in support of the proposed rule but “disagree[d] . . . that CMS' description of its past practice is correct.” Id. at 860R. Specifically, Vinson & Elkins noted that the proposed rule was “at odds with the plain language of the regulation” governing the DSH adjustment, which stated that the Medicare fraction included “‘covered patient days' only”-in other words, unexhausted days only. Id. at 861R (quoting 42 C.F.R. § 412.106(b)(2)(i) (2003)). That is, the Secretary's stated proposed rule was actually the manner in which dual-eligible exhausted days were currently being handled and the exact opposite of the policy the Secretary had put forth as the status quo. Vinson & Elkins urged CMS to correct its misstatement, arguing that if ...