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Shands Jacksonville Medical Center, Inc. v. Azar

United States District Court, District of Columbia

December 28, 2018

SHANDS JACKSONVILLE MEDICAL CENTER, INC., et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. DIGNITY HEALTH, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ATHENS REGIONAL MEDICAL CENTER INC., et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. AMERICAN HOSPITAL ASSOCIATION, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. BAKERSFIELD HEART HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ST. HELENA HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. AHMC MONTEREY PARK HOSPITAL LP, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ANTELOPE VALLEY HOSPITAL, Plaintiff,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ADVENTIST BOLINGBROOK HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. LONG BEACH MEMORIAL MEDICAL CENTER, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. FLOWER MOUND HOSPITAL PARTNERS, LLC, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. AMERICAN LEGION HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ASANTE ASHLAND COMMUNITY HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ASANTE ASHLAND COMMUNITY HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. ST. HELENA HOSPITAL, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant. AUBURN MEDICAL CENTER, et al., Plaintiffs,
v.
ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant.

          MEMORANDUM OPINION

          RANDOLPH D. MOSS UNITED STATES DISTRICT JUDGE

         These consolidated cases are before the Court following an earlier decision holding that the Department of Health and Human Services failed to provide a meaningful opportunity for public comment on a rule that imposed a 0.2 percent, across-the-board reduction in inpatient prospective payment system rates used to compensate hospitals for FY 2014 under the Medicare program. See Shands Jacksonville Medical Center v. Burwell, 139 F.Supp.3d 240 (D.D.C. 2015) (“Shands I”). The issue now before the Court is the lawfulness of the Secretary's actions on remand following the Court's earlier decision.

         As the Court explained in its prior opinion, in August 2013, the Secretary of Health and Human Services[1] adopted a new policy-known as the “2-midnight policy”-to distinguish between inpatient and outpatient hospital visits. In the Secretary's view, that change in policy came with significant budgetary consequences; the Department's actuaries estimated that adoption of the 2-midnight policy would cause a net utilization shift of approximately 40, 000 “encounters . . . from outpatient to inpatient” status and, because inpatient stays typically cost the Medicare program more than outpatient visits, it would increase Medicare expenditures by approximately $220 million in 2014. Medicare Program, 78 Fed. Reg. 50, 496, 50, 953 (Aug. 19, 2013) (“FY 2014 rule”). In light of the “magnitude and breadth” of this “utilization shift, ” the Secretary concluded that it was appropriate to exercise her exceptions and adjustments authority to offset the cost to the program, and she thus adopted the 0.2 percent rate reduction. Id. at 50, 953-54.

         In response, an array of hospitals brought suit under the Administrative Procedure Act (“APA”), 5 U.S.C. § 701 et seq. They argued that the Secretary lacked statutory authority to adopt the rate reduction; that the FY 2014 rule failed to comply with the procedural requirements of the APA; and that the 0.2 percent rate reduction was arbitrary and capricious. Although the Court rejected the hospitals' challenge to the Secretary's statutory authority and declined to reach their arbitrary and capricious challenge, it held that the Secretary did not reveal key actuarial assumptions until after the close of the comment period and thereby deprived the hospitals of a meaningful opportunity to comment on the rate reduction. Shands I, 139 F.Supp.3d at 260-66. The Court, accordingly, remanded the matter (without vacatur) to allow the Secretary to identify the assumptions the Department's actuaries applied and to provide an opportunity for meaningful public comment. Id. at 266-71.

         On remand, the Secretary published a notice describing the assumptions that the Department's actuaries used in calculating the “utilization shift” and invited public comment. See Medicare Program, 80 Fed. Reg. 75, 107 (Dec. 1, 2015) (“December 2015 notice”). Then, after receiving and considering those comments, the Secretary did an about-face, abandoning the Department's effort to sustain the 0.2 percent reduction for FY 2014 (and other years) and, instead, proposing that the Department no longer impose the rate reduction going forward and adopt a one-time 0.6 percent rate increase for FY 2017 “to address the effect of the 0.2 percent reduction to the rates in effect for FY 2014, ” FY 2015, and FY 2016. See Medicare Program, 81 Fed. Reg. 24, 946, 25, 138 (proposed April 27, 2016) (“FY 2017 proposed rule”). Four months later, the Department finalized that rule. See Medicare Program, 81 Fed. Reg. 56, 762 (Aug. 22, 2016) (“FY 2017 rule”).

         The matter has now returned to this Court, where two groups of plaintiffs raise separate challenges to the Secretary's actions on remand. The first group-the “Bakersfield Plaintiffs”- argue that the Court in Shands I remanded the matter to the Secretary to provide her with an opportunity “to cure the [FY 2014] rule's deficiencies” and, because the Secretary did not do so, the Court should vacate that rule.[2] Dkt. 82 at 8. The Secretary's adoption of the 0.6 percent increase for FY 2017, in their view, did not redress this problem for two reasons. First, the administrative record fails to establish that the 0.6 percent rate increase made the Bakersfield Plaintiffs whole; a decline in inpatient visits to a particular hospital over the FY 2014 to FY 2016 period, for example, would mean that the rate increase in later years would not fully compensate that hospital for the rate decrease in earlier years. Second, and more importantly, the FY 2017 rule is only “forward-looking” and did not “repeal, amend, or supersede the FY 2014 [r]ule.” Dkt. 82 at 25. The FY 2014 rule, they therefore argue, remains in effect and, because it was neither adopted in conformity with APA procedural requirements nor remedied on remand, it must be set aside.

         The second group of hospitals-the “Athens Plaintiffs”-take a different tack.[3] While the Bakersfield Plaintiffs treat the FY 2017 rule as immaterial-and, indeed, suggest that the Court lacks jurisdiction to consider that separate rulemaking-the Athens Plaintiffs engage with the FY 2017 rule and acknowledge that the Secretary took a step in the right direction by adopting the 0.6 percent rate increase. But that step, in their view, was far too small. They contend that the data that was before the Department did not merely show that the Secretary erred in hypothesizing that the 2-midnight rule would result in a net increase in inpatient encounters; it actually showed that the 2-midnight policy would decrease inpatient encounters and would, accordingly, decrease Medicare payments to hospitals. Dkt. 84-2 at 23. For this reason, they argued in the administrative process that the Secretary should have adopted an across-the-board rate increase to compensate hospitals for the reduced payments. Because the Secretary failed to consider the data and comments supporting a rate increase, they contend that the Court should once again remand the matter but, this time, should vacate the FY 2014 rule and direct that the Secretary (1) consider Plaintiffs' comments and data and (2) “budget neutralize any replacement rule.” Dkt. 84-2 at 9.

         Both the Bakersfield and Athens Plaintiffs have moved for summary judgment, and the Secretary has cross-moved for summary judgment. For the reasons explained below, the Court will DENY the Plaintiffs' motions for summary judgment and will GRANT the Secretary's cross-motion.

         I. BACKGROUND

         A. Statutory Framework

         The Medicare program provides federally-funded health insurance for elderly and disabled individuals. 42 U.S.C. §§ 1395 et seq. The program is divided into two main parts: Part A provides insurance for inpatient services, see 42 U.S.C. §§ 1395c et seq., while Part B provides additional insurance for services not covered by Part A, including hospital outpatient services and visits to a doctor, see Id. §§ 1395j-1395w. The amount of compensation a hospital receives from the Medicare program depends on whether the beneficiary was admitted to the hospital as an inpatient or an outpatient; generally speaking, payments for inpatient treatment under Part A are higher than payments for outpatient treatment under Part B. Shands I, 139 F.Supp.3d at 243; Medicare Program, 78 Fed. Reg. 27, 486, 27, 649-50 (proposed May 10, 2013) (“FY 2014 proposed rule”).

         “Prior to October 1983, Medicare reimbursements were based on the ‘reasonable costs' of inpatient services furnished to Medicare patients.” Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (quoting 42 U.S.C. § 1395f(b) (1988)). In 1983, however, Congress “completely revised the scheme for reimbursing Medicare hospitals.” Id. In place of the cost-reimbursement system, Congress established the Prospective Payment System, which “relies on prospectively fixed rates for each category of treatment rendered.” Id. The Inpatient Prospective Payment System-or “IPPS”-compensates hospitals based on the number of patients they discharge and each patient's primary diagnosis at that time. See 42 U.S.C. § 1395ww(d)(3)(D)(iii). In calculating IPPS rates, the Center for Medicare and Medicaid Services (“CMS”) starts with the “standardized amount, ” “which roughly reflects the average cost incurred by hospitals nationwide for each patient they treat and then discharge.” Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011). It then applies various statutory adjustments, including adjustments to account for differentials “between the local average of hospital wages and the national average of hospital wages” and “to account for the fact that the costs of treating patients varies based on the patients' diagnoses.” Id. (internal quotation omitted).

         Most hospitals are compensated for Medicare inpatient services according to this rate, which is referred to in the regulations as the “federal rate.” Shands I, 139 F.Supp.3d at 244; see also 42 U.S.C. § 412.64. “A minority of hospitals, including those providing treatment to underserved communities, ” however, “are compensated in part on hospital-specific rates.” Shands I, 139 F.Supp.3d at 245 (internal quotation omitted). Those rates are “calculated with a base amount derived not from national data, but from historic operating costs at an individual hospital.” Adirondack Med. Ctr. v. Sebelius, 740 F.3d 692, 695 (D.C. Cir. 2014). Finally, CMS “also sets a Puerto Rico-specific rate[, ] which is calculated using a Puerto Rico-specific base amount.” Shands I, 139 F.Supp.3d at 245 (internal quotation omitted).

         B. The 2-Midnight Policy

         Although the payments that the Medicare program makes vary depending on whether a Medicare beneficiary is treated on an “inpatient” or an “outpatient” basis, the Medicare Act does not define either term and does not “specify when inpatient admission is appropriate.” Id. Before 2013, Medicare guidance “advised physicians to ‘use a 24-hour period as a benchmark' and to ‘order [inpatient] admission for patients who are expected to need hospital care for 24 hours or more.'” Id. (quoting Medicare Benefit Policy Manual, CMS Pub. 100-02, Ch. 1, § 10 (2003)). The expected length of stay, however, was only one factor in the “complex medical judgment” whether to admit a Medicare beneficiary for inpatient care. FY 2014 proposed rule, 78 Fed. Reg. at 27, 645. Over time, the Secretary became concerned that this open-ended approach engendered provider uncertainty and “considerable variation” in billing decisions. Id. at 27, 648. The Secretary observed an increase in the number of Medicare beneficiaries who were kept as outpatients for long periods of observation, for example, and “heard from various stakeholders that hospitals appear to be responding to the financial risk of admitting Medicare beneficiaries for inpatient stays that may later be denied . . ., by electing to treat beneficiaries as outpatients receiving observation services.” Hospital Outpatient Prospective and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 77 Fed. Reg. 45, 061, 45, 156 (proposed July 30, 2012). More generally, the Secretary concluded that “the appropriate determination of a beneficiary's patient status” had become “a systemic and widespread issue” and that Medicare contractors had “recovered more than $1.6 billion in improper payments because of inappropriate beneficiary patient status.” FY 2014 proposed rule, 78 Fed. Reg. at 27, 649.

         To clarify the standard for inpatient treatment, the Secretary proposed the 2-midnight policy in May of 2013. Id. at 27, 645. Under that policy, “in addition to services designated . . . as inpatient only, surgical procedures, diagnostic tests, and other treatment would be generally appropriate for inpatient hospital payment under Medicare Part A when the physician expects the patient to require a stay that crosses at least 2 midnights and admits the patient to the hospital on that expectation.” Id. at 27, 648. “Conversely, when a patient enters a hospital” for care not specified as inpatient only and the stay is expected to last “a limited period of time that does not cross 2 midnights, the services would be generally inappropriate for payment under Medicare Part A.” Id. To further increase predictability, the Secretary also proposed a “2-midnight presumption, ” directing that Medicare contractors “presume that inpatient hospital admissions are reasonable and necessary for beneficiaries” whose hospital stays “cross[] 2 ‘midnights.'” Id. at 27, 645. Absent evidence that the hospital was abusing the new benchmark, the presumption would control. Id. at 27, 645-46. “For shorter stays, reviewers would consider whether the attending physician who authorized the inpatient admission reasonably expected the patient's stay to” cross “at least two midnights.” Shands I, 139 F.Supp.3d at 247. After considering public comments, the Secretary adopted both the 2-midnight policy and the presumption in a final rule, which was published in August 2013. FY 2014 rule, 78 Fed. Reg. at 50, 965, codified as amended at 42 C.F.R. § 412.3(d)(1).

         As explained in its FY 2014 notice of proposed rulemaking, the Department's actuaries estimated that the 2-midnight policy would result in a net utilization shift of 40, 000 “encounters” from outpatient to inpatient status. FY 2014 proposed rule, 78 Fed. Reg. at 27, 649. “Because hospitals are typically paid more for inpatient stays, the Secretary estimated that this ‘net shift of 40, 000 encounters' would cost the Medicare program an additional $220 million over the course of . . . fiscal year” 2014. Shands I, 139 F.Supp.3d at 247-48. To offset that cost, the Secretary proposed to use her “exceptions and adjustments authority, ” 42 U.S.C. § 1395ww(d)(5)(I)(i), to adopt a 0.2 percent reduction to the “the operating IPPS standardized amount, the hospital-specific amount, and the Puerto Rico-specific amount.” FY 2014 proposed rule, 78 Fed. Reg. at 27, 651.

         Commenters objected on multiple grounds, including the Secretary's failure to explain or to support the methodology the Department's actuaries employed to conclude that replacing the 24-hour benchmark with the 2-midnight policy would lead to a net decrease in IPPS encounters. Shands I, 139 F.Supp.3d at 248. According to many commenters, the Secretary's assessment not only lacked transparency but also lacked common sense. Id. In their view, the Secretary “profoundly underestimated the volume of [outpatient] encounters” that would result from the change in policy, and they predicted that the change would, instead, lead to a net decrease in inpatient encounters. Id. (quoting JA 299).

         Notwithstanding these comments, the Secretary adopted the 0.2 percent rate reduction in the final FY 2014 IPPS rule. FY 2014 rule, 78 Fed. Reg. at 50, 953-54. The Secretary “disagree[d] with commenters who indicated that [the Department's] actuaries estimated increase in IPPS expenditures of $220 million was unsupported and insufficiently explained to allow for meaningful comment.” Id. at 50, 953. The Secretary explained, as she did in the proposed rule, that the Department's actuaries estimated that approximately 360, 000 “encounters” would shift from inpatient to outpatient, and that approximately 400, 000 “encounters” would shift from outpatient to inpatient, yielding a 40, 000 “encounter” increase in net inpatient “encounters.” Id. But, this time, the Secretary disclosed two aspects of the actuaries' methodology that were not disclosed in the proposed rule: first, when estimating the number of “encounters” expected to shift from outpatient to inpatient status under the new policy, the actuaries excluded “[c]laims not containing observation or a major procedure, ” and, second, when estimating the number of “encounters” expected to shift from inpatient to outpatient status, the actuaries excluded claims involving “medical”-as opposed to “surgical”-diagnostic-related groups (“DRGs”). Id. On the same day the Secretary published the final rule, the CMS Office of the Actuary released a memorandum that further elaborated on this methodology, explaining that the actuaries assumed that the excluded “encounters” “‘would be unaffected by the policy change.'” Shands I, 139 F.Supp.3d at 249 (quoting JA 208-10).

         The Secretary also “disagree[d] with commenters who indicated that [the Department had] not provide[d] sufficient rationale for the use of [its] exceptions and adjustments authority” to adopt the 0.2 percent reduction. FY 2014 rule, 78 Fed. Reg. at 50, 953. She noted that “the issue of patient status ha[d] a substantial impact on improper payments under Medicare Part A for short-stay inpatient hospital claims” and that this concern was “not isolated to a few hospitals.” Id. In light of “the systemic and widespread nature of this issue, ” the Secretary adhered to the position that “an overall adjustment to the IPPS rates” was “justifie[d].” Id. While stressing that “[p]olicy clarifications such as this do not usually result in utilization shifts of sufficient magnitude and breadth to significantly impact the IPPS, ” the Secretary concluded that the utilization shift resulting from the 2-midnights policy was “unique” and that “it would be inappropriate to ignore such a utilization shift in the development of the IPPS payment rates.” Id. at 50, 953-54. The Secretary, accordingly, included the 0.2 percent IPPS rate reduction in the final FY 2014 rule. Id. at 50, 968.

         Various groups of hospitals timely challenged the FY 2014 adjustment before the Provider Reimbursement Review Board, which concluded that it lacked authority to decide the legal question presented and thus granted the hospitals' “request for expedited judicial review for the issue and the subject year [FY 2014].” JA 1-7, 27-33, 52-58, 61-68, 70-76, 79-85, 90-98, 100-08, 110-18, 120-26; Dkt. 23-1 at 22 n.4. Over a thousand hospitals-including the Bakersfield and Athens Plaintiffs-then brought six separate actions in this Court challenging the FY 2014 rule.[4] See Shands I, 139 F.Supp.3d at 250 (listing cases). The Court consolidated the six actions, and Plaintiffs and the Department filed cross-motions for summary judgment. Dkts. 15, 16, 17, 18, 19 & 23.

         C. Shands I

         Plaintiffs raised three arguments in support of their motions for summary judgment: (1) the Secretary was not authorized under the Medicare Act to make the 0.2 percent rate adjustment; (2) the Secretary violated the procedural requirements of the APA by failing to disclose critical information about the methodology the Department's actuaries applied, failing to offer meaningful responses to substantial comments, and failing to offer a reasoned basis for the final rule; and (3) the 0.2 percent rate reduction was arbitrary and capricious. Shands I, 139 F.Supp.3d at 250.

         With respect to the first of these arguments, the Court held that the Department reasonably construed 42 U.S.C. § 1395ww(d)(5)(I)(i) to authorize the Secretary to adopt an across-the-board 0.2 percent reduction to the standardized amount, the hospital-specific rates, and the Puerto Rico-specific rate. Id. at 250-60. As the Court explained, the language of § 1395ww(d)(5)(I)(i) is “‘[a]t the very least' ambiguous for purposes of Chevron step one, ” Shands I, 139 F.Supp.3d at 256 (quoting Adirondack, 740 F.3d at 700), and the Secretary's use of her general exceptions and adjustment authority to adopt the 0.2 percent reduction was neither unreasonable nor at odds “with the overall statutory scheme, ” id. at 259.

         Plaintiffs' second set of arguments, in contrast, proved more successful. As explained above, the Department's actuaries concluded that approximately 40, 000 hospital discharges would shift to inpatient status in 2014 due to the change from the 24-hour benchmark to the 2-midnight policy and presumption. In the view of various commenters, that was a remarkable and counterintuitive conclusion. It was not until the Secretary announced the final FY 2014 rule that the commenters came to understand that the actuaries examined only “outpatient claims for observation or a major procedure” when they estimated the likely shift from outpatient to inpatient encounters, and that they examined only “claims containing a surgical MS-DRG” in estimating the likely shift from inpatient to outpatient encounters. Id. at 262-63. The Court held that the Secretary's failure to disclose these critical assumptions before issuing the final rule deprived “Plaintiffs and other members of the public of a meaningful opportunity to comment on the proposed 0.2 percent reduction” and thus violated the APA. Id. at 263-65.

         Given that conclusion, the Court decided that it was both unnecessary and premature to reach Plaintiffs' third argument-that the 0.2 percent reduction was arbitrary and capricious. Id. at 266. In short, because the Secretary did not timely disclose the assumptions that the Department's actuaries applied, commenters did not have the opportunity to explain to the Secretary why the Department's analysis was flawed, and the Secretary did not have the opportunity to consider and to respond to those comments. As a result, the administrative record was insufficiently developed to permit the type of arbitrary and capricious review that Plaintiffs raised. Id.

         Finally, the Court considered the question of remedy. Applying the test established in Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm'n, 988 F.2d 146, 150-51 (D.C. Cir. 1993), the Court held “that the flaw in the notice and comment process was substantial and that it [was] possible that the procedural error affected the Secretary's final decision to adopt the 0.2 percent reduction.” Shands I, 139 F.Supp.3d at 268. But the Court also found that a remand with vacatur would have serious “disruptive consequences” and “would, in effect, dictate a substantive outcome based on a procedural error.” Id. at 269-70. Accordingly, although a close question, the Court remanded the FY 2014 rule to the Department without vacatur but set “a timetable for administrative proceedings on remand.” Id. at 271. See also Dkt. 53; Minute Order (March 17, 2016). The Court cautioned, however, that “vacatur may be appropriate in a future proceeding” if the Secretary failed “on remand to give meaningful consideration to significant comments.” Shands I, 139 F.Supp.3d at 270-71.

         D. Further Administrative Proceedings on Remand

         In accordance with the Court's remand order, the Secretary published a notice describing “the basis for the 0.2 percent reduction and [the actuaries'] underlying assumptions and invite[d] comments on the same in order to facilitate [its] further consideration of the FY 2014 reduction.” December 2015 Notice, 80 Fed. Reg. at 75, 107. The notice explained that “[t]he task of modeling the impact of the 2-midnight policy on hospital payments beg[an] with a recognition that some cases that were previously outpatient cases will become inpatient cases and vice versa” and that the actuaries, therefore, needed “to develop a model that determined the net effect of the number of cases that would move in each direction.” Id. at 75, 108. The model the actuaries used analyzed calendar year (“CY”) 2011 data; assumed that, in general, payments made for outpatient stays would be substantially smaller than payments made for inpatient stays and that outpatient beneficiaries would pay 20 percent of the Part B (outpatient) cost; and, as discussed above, analyzed spending for observation care and major procedures when measuring the shift to inpatient encounters and analyzed spending for surgical MS-DRGs when measuring the shift to outpatient encounters. Id. at 75, 108-09.

         As relevant to this litigation, the Secretary explained why the Department excluded certain encounters from its analysis. With respect to the decision to consider only spending for observation care and medical procedures in analyzing the shift from outpatient to inpatient encounters, the Secretary stated: “This was done in order to remove claims with diagnostic services and minor procedures that would be less likely to trigger an encounter in which there was a continuous stay.” Id. at 75, 109. Although the Secretary continued to embrace this assumption, she noted that the definition of “observation care” that the Department had previously used “may have been overly conservative” and that, had the Department used a more expansive definition, it would have identified 50, 000 additional “cases shifting to inpatient status.” Id. The Secretary also questioned whether the Department should have applied a more expansive measure of length of care, which-when combined with the more expansive definition of “observation care”-would have resulted in an estimate of “570, 000 cases shifting from the outpatient to the inpatient setting . . . instead of the 400, 000 cases used in the [actuaries' original] estimate.” Id. at 75, 109-10.

         With respect to the decision to consider only surgical-and not medical-cases in measuring the utilization shift from inpatient to outpatient encounters, the Secretary explained that the Department sought to account for “behavioral changes by hospitals and admitting practitioners.” Id. at 75, 110. “Claims containing medical MS-DRGs were excluded because” the Department's actuaries “believed that due to [these] behavioral changes . . . most inpatient medical encounters spanning less than 2 midnights before the current 2-midnight policy was implemented might be reasonably expected to extend past 2 midnights after its implementation and would thus still be considered inpatient.” Id. Apparently, in the view of the actuaries and CMS's medical staff, “the clinical assessments and protocols used by physicians to develop an expected length of stay for medical cases were, in general, more variable and less defined than those used to develop an expected length of stay for surgical cases.” Id. The Secretary further explained that this distinction between medical and surgical cases was supported by “proprietary utilization review tools such as the Milliman Care Guidelines . . . and InterQual, ” both of which “reflect [this] same type[] of distinction[].” Id. To be sure, “all guidelines” recognize that “individuals vary in their post-operative courses, [but] there are predictable post-operative courses that are based on such factors as whether or not the abdominal cavity or the pleural cavity are entered, the expected time for recovery from anesthesia, the expected time to resume urinary [or bowel] function, . . . the expected time to regain mobility, and the typical period for common post-operative interventions.” Id. In contrast, “for medical admissions a single diagnosis typically covers a much broader spectrum of possibilities, ” and thus “the medical diagnosis does not imply a reasonably consistent set of activities.” Id.

         Finally, the Secretary observed that the Department's actuaries were in the process of analyzing “claims experience for FY 2014 and FY 2015 in light of available data, ” and sought “comment on whether [it] should await the completion of the actuaries' analysis of FY 2014 and FY 2015 data before resolution of th[e] [remand] proceeding.” Id. In addition to potentially shedding light on the actuaries' assumptions, that data-according to the Secretary-might also reflect “factors that” the actuaries “could not [have] anticipated, ” “such as the prohibition on Recovery Audit post-payment reviews that became effective October 1, 2013.” Id. at 75, 111.

         By April 2016, however, the Department's confidence in the 0.2 percent rate reduction had waned. At that time, the Department published a proposed rule that, among other things, addressed the Shands I remand and the comments the Department received in response to the December 2015 notice. FY 2017 proposed rule, 81 Fed. Reg. 24, 946. The Secretary first explained that “[t]he 2-midnight policy itself and [the Department's] implementation of it [had] evolved over time as a result of a combination of statutory, regulatory, and operational changes.” Id. at 25, 137. Congress, for example, “extended the prohibition on Recovery Auditor reviews of inpatient hospital status . . . absent evidence of systematic gaming, fraud, abuse or delays in the provision of care by a provider of services, ” and the Department “modified the original ‘rare and unusual' exceptions policy under the 2-midnight policy to allow for Medicare Part A payment on a case-by-case basis for inpatient admissions that do not satisfy the 2-midnight benchmark.” Id. “[I]n reviewing the public comments . . . received on the 0.2 percent reduction, ” moreover, the Secretary “recognized” that the “estimate for the 0.2 percent reduction had a much greater degree of uncertainty than usual.” Id. Because the “estimate depended critically on the assumed utilization changes in the inpatient and outpatient hospital settings, relatively small changes would have a disproportionate effect on the estimated net costs, ” and thus “the actual results could differ significantly from the estimate.” Id. Finally, “in reviewing the public comments [it] received” in response to “the December 1, 2015 notice, ” the Secretary “also considered the fact that [the Department's] actuaries' most recent estimate of the impact of the 2-midnight policy varies between a savings and a cost of the FY 2016 to FY 2015 time period.” Id. at 25, 137-38.

         “[T]aking all [these] factors into account, ” the Secretary proposed that the Department “remove” the 0.2 percent rate reduction “beginning in FY 2017.” Id. at 25, 138. Of greater relevance here, the Secretary also proposed that the Department adopt a one-time rate increase for FY 2017 “to address the effect of the 0.2 percent reduction to the rates in effect for 2014, the 0.2 percent reduction to the rates in effect for FY 2015 . . ., and the 0.2 percent reduction in rates in effect for FY 2016.” Id. The Secretary proposed “that the most transparent, expedient, and administratively feasible method” to compensate for these reductions was to adopt “a temporary one-time prospective increase for FY 2017 rates of 0.6 percent (= 0.2 percent 0.2 percent 0.2 percent).” Id. As the Secretary explained, although the Department “generally do[es] not believe it is appropriate in a prospective system, ” like Medicare, “to retrospectively adjust rates even where . . . a prospective change in policy is warranted, ” she was proposing “this action in the specific context . . . in which [it was] ordered by a Federal court to further explain the basis of an adjustment [it had] imposed for past years.” Id.

         The Secretary adopted the proposed adjustments in a final rule, which was promulgated in August 2016. FY 2017 rule, 81 Fed. Reg. 56, 762. “The vast majority of commenters, ” according to the Secretary, “recognized the unique nature of this situation and supported prospectively removing the 0.2 percent reduction to the rates and making a temporary one-time prospective increase to the FY 2017 rates to address the effect of the 0.2 percent reduction to the rates for FYs 2014 through 2016.” Id. at 57, 059. “Some commenters, ” however, “raised concerns about the adequacy of the proposed adjustment relative to their estimates of the impact of the 2-midnight policy to date.” Id. Most significantly, some commenters maintained that adoption of the 2-midnight policy actually caused a net utilization shift from inpatient to outpatient status and thus resulted in “a net ...


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