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Shands Jacksonville Medical Center, Inc. v. Azar

United States District Court, District of Columbia

March 15, 2019

ALEX AZAR, Secretary, U.S. Department of Health and Human Services, Defendant.



         Plaintiffs-over a thousand hospitals-brought these consolidated cases to challenge a regulation promulgated by the Secretary of Health and Human Services that imposed a 0.2 percent, across-the-board reduction in the inpatient prospective payment system rates used to compensate hospitals under the Medicare program. After a prior decision by this Court remanding the matter for further administrative proceedings, see Shands Jacksonville Med. Ctr. v. Burwell, 139 F.Supp.3d 240 (D.D.C. 2015) (“Shands I”); the Secretary's decision on remand to abandon the 0.2 percent rate adjustment, see Medicare Program, Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 56, 762 (Aug. 22, 2016) (“FY 2017 Rule”); and a further decision by this Court upholding the Secretary's actions on remand, see Shands Jacksonville Med. Ctr. v. Azar, ___ F.Supp.3d ___, 2018 WL 6831167 (Dec. 28, 2018) (“Shands II”), all that remains for resolution are three motions seeking the award of interest on the amount in controversy for FYs 2014-2016. Dkt. 69, Dkt. 70, Dkt. 71.

         The first of these motions is brought on behalf of those plaintiffs represented by Hooper, Lundy & Bookman, P.C. and Akin Gump Strauss Hauer & Feld, LLP (“Hooper and Akin Plaintiffs”);[1] the second on behalf of those plaintiffs represented by Foley & Lardner, LLP (“Foley & Lardner Plaintiffs”);[2] and the third on behalf of those plaintiffs represented by King & Spalding LLP (“Athens Plaintiffs”).[3] All three groups (collectively “Plaintiffs”) contend that they are “prevailing parties” within the meaning of 42 U.S.C. § 1395oo(f)(2) and, as a result, are entitled to interest for each of the three fiscal years at issue. The Hooper and Akin Plaintiffs also argue that, should the Court conclude that they are not entitled to interest under 42 U.S.C. § 1395oo(f)(2) for any of the years at issue, the Court should direct the Secretary to award interest pursuant to another provision of the Medicare statute, 42 U.S.C. § 1395g(d).

         In response, the Secretary agrees that some interest is due and, indeed, represented on remand that the “hospitals that are party to . . . Shands Jacksonville Medical Center, Inc. v. Burwell, No. 14-263 (D.D.C.)” or to any other case challenging the 0.2 percent rate reduction that was pending on the date the final FY 2017 Rule issued-August 2, 2016-“should receive interest under” 42 U.S.C. § 1395oo(f)(2). FY 2017 Rule, 81 Fed. Reg. at 57, 060; see also Dkt. 72 at 12-13. But the Secretary opposes the award of interest to the extent the specific hospital did not have a challenge to its Medicare payment rate for the specific fiscal year at issue pending on the day the FY 2017 Rule, granting them relief from the 0.2 percent reduction, was promulgated. See Dkt. 72 at 12-14. That cutoff makes a difference because, on that day, August 2, 2016, not all of the plaintiff-hospitals had challenges pending with respect to each of the three fiscal years at issue; some, for example, had challenges pending before this Court with respect to their FY 2014 and FY 2015 inpatient prospective payment system rate determinations, but no equivalent challenges with respect to FY 2016. The Secretary further contends that 42 U.S.C. § 1395g(d) does not accord the relief that the Hooper and Akin Plaintiffs seek and, albeit belatedly, also argues that the Court lacks jurisdiction to consider their § 1395g(d) claim because it was not presented to the Secretary or exhausted through available administrative processes.

         As explained below, the Court agrees with the parties that those hospitals that had challenges with respect to a given fiscal year pending before this Court on or before August 2, 2016 are entitled to an award of interest pursuant to § 1395oo(f)(2) for that fiscal year. Section § 1395oo(f)(2), however, does not support an award of interest to those hospitals that did not have a challenge to the relevant fiscal year pending on that date. Finally, the Court is unpersuaded by the Hooper and Akin Plaintiffs' alternative theory because, unlike § 1395oo(f)(2), see Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 981 (D.C. Cir. 1991) (hereinafter “Tucson”), § 1395g(d) does not authorize the judiciary, in the first instance, to award interest to a prevailing party; the statute, instead, imposes the payment obligation on the Secretary. Because the Hooper and Akin Plaintiffs never requested payment from the Secretary under § 1395g(d), there is no administrative determination for the Court to review.

         The Court will, accordingly, GRANT in part and DENY in part Plaintiffs' motions for an award of interest.

         I. BACKGROUND A.

         Statutory and Regulatory Background

         1. Medicare Prospective Payment System

         The federal Medicare program provides health insurance to the aged, blind, and disabled under Title XVIII of the Social Security Act. 42 U.S.C. § 1395 et seq. Medicare consists of five parts, two of which are relevant here: Part A covers inpatient hospital services, id. § 1395d(a)(1), and Part B covers services not covered by Part A, including hospital outpatient services and visits to a doctor, id. §§ 1395j-1395w. See generally Ne. Hosp. Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011). The Secretary administers the program through the Centers for Medicare and Medicaid Services (“CMS”). “Prior to October 1983, Medicare reimbursements [to hospitals] 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)). In 1983, however, Congress “completely revised the scheme for reimbursing Medicare hospitals, ” establishing 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.” Shands II, 2018 WL 6831167, at *3; see also 42 U.S.C. § 1395ww(d)(3)(D)(iii). One important element used in calculating the applicable payment rate is the “standardized amount, ” which is set each year by CMS, acting on behalf of the Secretary. See 42 U.S.C. § 1395ww(d)(3). “Roughly speaking, the standardized amount represents the average per-patient operating costs across all hospitals, see 42 C.F.R. § 412.64, modified to account for various economic and other factors.” Shands I, 139 F.Supp.3d at 244. The statute prescribes the calculation of the standardized amount in detail, mandating that the rate for a given fiscal year “is equal to” an amount calculated by the Secretary based on specific determinations that the Secretary “shall” make. 42 U.S.C. §§ 1395ww(d)(1), (3). “CMS does not calculate the standardized amount from scratch each year.” Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011). Rather, CMS “calculated the standardized amount for a base year and has since carried that figure forward, updating it annually for inflation.” Id.; see also 42 U.S.C. §§ 1395ww(b)(3)(B)(i), (d)(2), (d)(3)(A)(iv)(II); 42 C.F.R. §§ 412.64(c)-(d).

         CMS then applies “various statutory adjustments” to the standardized amount. Shands II, 2018 WL 6831167, at *3. For example, to account for the fact that costs of labor vary across the country, CMS “determines the proportion of the standardized amount attributable to wages and wage-related costs and then multiplies that labor-related proportion by a ‘wage index' that reflects ‘the relation between the local average of hospital wages and the national average of hospital wages.'” Cape Cod Hosp., 630 F.3d at 205. The statute also grants the Secretary authority to establish other appropriate adjustments and exceptions by regulation. 42 U.S.C. § 1395ww(d)(5)(I).

         2. Judicial Review of Rate Determinations

         Medicare providers submit annual cost reports to “[M]edicare administrative contractors, ” previously referred to as “fiscal intermediaries, ” which determine the total payment due the provider for the period covered by the report and issue “a written notice reflecting the contractor's final determination.” 42 C.F.R. § 405.1803(a); see also 42 U.S.C. § 1395h(a); 42 C.F.R. § 405.1801. For hospitals “that receive[] payments for inpatient hospital services under the prospective payment system . . ., the contractor must include in the notice [1] its determination of the total amount of the payments due the hospital under that system for the cost reporting period covered by the notice” and [2] its explanation regarding “any difference in the amount determined to be due, and the amounts received by the hospital during the cost reporting period covered by the notice.” 42 C.F.R. §405.1803(a)(2). The notice must also include “appropriate references to law, regulations, CMS Rulings, or program instructions to explain why the contractor's determination of the amount of program reimbursement for the period differs from the amount the provider claimed.” Id. § 405.1803(b).

         A hospital may appeal a contractor's final determination to the Provider Reimbursement Review Board (“PRRB”). See 42 U.S.C. § 1395oo(a). If dissatisfied with the PRRB's final decision regarding the contractor's determination, a provider may “obtain judicial review” of that decision by commencing a civil action within 60 days. 42 U.S.C. § 1395oo(f)(1). When a provider challenges the validity of a regulation, which the Medicare administrative contractor merely applied in the process of determining the total payment due to the provider, the relevant process is somewhat different. Because the PRRB is bound by the Department's regulations, see 42 C.F.R. § 405.1867, it cannot adjudicate a challenge to the validity of a regulation. To obtain judicial review in those circumstances, the provider may seek a determination by the PRRB that the PRRB “is without authority to decide the question, ” and the PRRB may then grant expedited judicial review (“EJR”), allowing the provider to commence a civil action “within sixty days of the date on which notification of such determination is received.” 42 U.S.C. §1395oo(f)(1). If the PRRB grants EJR, that “determination shall be considered [the] final decision” of the Department. Id. A provider that seeks judicial review and “prevail[s]” is entitled an “annual interest” on “the amount in controversy.” 42 U.S.C. § 1395oo(f)(2).

         B. Procedural History

         1. 0.2 Percent Rate Reduction and 2-Midnight Rule

         The roots of the present dispute stretch back to the Secretary's decision in FY 2014 to modify the rules used to determine when a Medicare beneficiary should be admitted for inpatient care. “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.'” Shands II, 2018 WL 6831167, at *3 (internal citation omitted). Prior to FY 2014, CMS “advised physicians to ‘use a 24-hour period as a benchmark, '” along with several other factors, “and to ‘order [inpatient] admission for patients who are expected to need hospital care for 24 hours or more.'” Shands I, 139 F.Supp.3d at 245 (alteration in original) (quoting Medicare Benefit Policy Manual, CMS Pub. 100-02, Ch. 1, § 10 (2003)). Over time, the Secretary became concerned that this approach-considering the length of stay as only one factor in whether to admit a Medicare beneficiary for inpatient care-“engendered provider uncertainty and ‘considerable variation' in billing decisions.” Shands II, 2018 WL 6831167 at *3 (quoting Medicare Program, Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Fiscal Year 2014 Rates, 78 Fed. Reg. 27, 486, 27, 648 (proposed May 10, 2013) (“FY 2014 Proposed Rule”)).

         To clarify the standard for inpatient status, the Secretary proposed the “2-midnight policy, ” under which, “in addition to services designated . . . as inpatient only, ” other services “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 upon that expectation.” FY 2014 Proposed Rule, 78 Fed. Reg. at 27, 648. Moreover, because 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, and because inpatient “encounters” typically cost the Medicare program more than outpatient “encounters, ” the Secretary proposed to offset the additional cost by using 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 rates, and the Puerto Rico-specific standardized amount.” FY 2014 Proposed Rule, 78 Fed. Reg. at 27, 649-51. The 0.2 percent amount was premised on the estimation of the Department's actuaries that, because of this anticipated utilization shift, adoption of the 2-midnight policy would result in “an estimated cost of $220 million to the Medicare program.” Shands I, 139 F.Supp.2d at 243.

         Commenters objected to the proposed 0.2 percent rate adjustment “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 II, 2018 WL 6831167, at *4. Despite these objections, the Secretary adopted the 0.2 percent rate reduction in the final FY 2014 Rule. Medicare Program, Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2014 Rates, 78 Fed. Reg. 50, 496, 50, 953-54 (Aug. 19, 2013) (“FY 2014 Rule”). Multiple groups of hospitals timely challenged the rate reduction before the PRRB, which concluded that it lacked authority to decide the legal question presented and, accordingly, granted the hospitals' “request[s] 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.

         2. Shands I

         Over a thousand hospitals then brought multiple lawsuits in this Court challenging the FY 2014 Rule under the Administrative Procedure Act (“APA”), 5 U.S.C. § 701 et seq. See Shands I, 139 F.Supp.3d at 250 (listing cases). Among other things, the plaintiffs in those actions argued that the Secretary lacked statutory authority to adopt the rate reduction; that the Secretary adopted the FY 2014 Rule in violation of the procedural requirements of the APA; and that the 0.2 percent rate reduction was arbitrary and capricious. The Court rejected the challenge to the Secretary's statutory “exceptions and adjustment” authority and declined to reach their arbitrary and capricious challenge, but held that the Secretary adopted the FY 2014 Rule in violation of the APA because she failed to disclose important information about the methodology the Department's actuaries applied. Shands I, 139 F.Supp.3d at 263. As the Court explained, “the Secretary's failure to disclose the critical assumptions relied upon by the HHS actuaries deprived Plaintiffs and other members of the public of a meaningful opportunity to comment on the proposed 0.2 percent reduction.” Id. 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.

         3. Actions on Remand

         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; Inpatient Prospective Payment Systems; 0.2 Percent Reduction, 80 Fed. Reg. 75, 107 (Dec. 1, 2015) (“December 2015 Notice”). “By April 2016, however, the Department's confidence in the 0.2 percent rate reduction had waned, ” and the Secretary issued a proposed rule that would remove the adjustment going forward beginning in FY 2017 and that would address the effects of the 0.2 percent reductions for FYs 2014, 2015, and 2016 by adopting a one-time 0.6 percent rate increase for FY 2017. Shands II, 2018 WL 683117 at * 7. The Secretary explained that, although the Department “generally do[es] not believe it is appropriate in a prospective system, ” like the IPPS, “to retrospectively adjust rates even where . . . a prospective change in policy is warranted, ” she was proposing the 0.6 percent adjustment in light of this Court's remand order in Shands I. Id. (alteration in original).

         After providing an opportunity for public comment on this new proposal, the Department finalized the rule, including the one-time 0.6 percent rate increase. See FY 2017 Rule, 81 Fed. Reg. 56, 762. Of particular relevance to the motions now pending before the Court, a number of commenters objected that the proposed 0.6 percent rate adjustment would “not compensate hospitals that are party to the lawsuit for interest and/or all hospitals for the time value of money.” Id. at 57, 060. In the final rule, the Secretary responded as follows:

We will not contest that hospitals that are party to . . . Shands Jacksonville Medical Center, Inc. v. Burwell, No. 14-263 (D.D.C.) and other currently pending cases that challenge the -0.2 percent adjustment should receive interest under [42 U.S.C. § 1395oo(f)(2)]. For these hospitals, we will slightly increase the 1.006 factor by a uniform factor consistent with the interest used for this purpose in effect for the relevant time periods for paying interest. We disagree with commenters who indicated that we should pay all hospitals interest or for the time value of money.


         4. Shands II

         The matter then returned to this Court, where two groups of plaintiffs raised distinct challenges to the ...

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