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Rocky Mountain Health Maintenance Organization, Inc. v. Azar

United States District Court, District of Columbia

April 29, 2019

ALEX M. AZAR, II,[1] Defendant.


          Amit P. Mehta United States District Court Judge.


         Plaintiff Rocky Mountain Health Maintenance Organization challenges an adverse decision by the Administrator of the Centers for Medicare & Medicaid Services (“CMS”), finding that Plaintiff received nearly $16 million in excess Medicare reimbursement over a four-year period. Following an initial round of summary judgment briefing, the court declined to reach the merits of the parties' dispute and instead remanded the matter to the agency to resolve two issues. The first was whether the Administrator had the authority to review and reverse the decision of two CMS Hearing Officers, who held that CMS had not over-reimbursed Plaintiff. The second was whether, under the relevant regulations, the Administrator's failure to complete review of the Hearing Officers' ruling within 60 days caused the Hearing Officers' decision to become final. The Administrator answered the court's first question “yes” and the second question “no.” In other words, the Administrator ruled that she possessed the authority to review the CMS Hearing Officers' decision, but that their decision did not become final merely because the Administrator took more than 60 days to overrule it.

         This case now returns to the court, with Plaintiff also contesting the Administrator's rulings on the two remanded issues. Once again, the court does not reach the merits of the Administrator's decision that Plaintiff received excessive reimbursement. Instead, the court finds that, under controlling CMS regulations, the CMS Hearing Officers' decision became final when the Administrator failed to act within 60 days of Plaintiff's receipt of the ruling. The Administrator's reversal determination therefore exceeded her authority. Consequently, the court grants summary judgment in favor of Plaintiff and against Defendant.


         A. Factual Background

         A full recitation of the factual background in this matter may be found in the court's March 22, 2018, Memorandum Opinion and Order. See March 22, 2018 Mem. Op. and Order, ECF No. 22 [hereinafter Mem. Op. and Order]. The court sets forth only an abbreviated factual background section here.

         Plaintiff is only one of 20 cost-reimbursed HMOs in the country. See Pl.'s Mot. for Summ. J., ECF No. 14, Mem. in Supp., ECF No. 14-1 [hereinafter Pl.'s Mem.], at 3-4; Def.'s Cross-Mot. for Summ. J., ECF No. 15, Def.'s Mem. in Supp., ECF No. 15-1 [hereinafter Def.'s Mem.], at 5. Plaintiff does not employ its own health care specialists to deliver services. Rather, it supplies services to its members indirectly through agreements with physicians, physician groups, and other health care specialists, who are the direct providers of medical services. Joint Appendix, ECF No. 20 [hereinafter JA], at 42.[2]

         Plaintiff's members include both Medicare and non-Medicare enrollees. As a cost-reimbursed HMO, Plaintiff is entitled under the Medicare Act to reimbursement for the “reasonable cost” of the covered services it provides to its Medicare beneficiaries. See generally 42 U.S.C. § 1395mm(h). The Act defines the “reasonable cost” of reimbursable services, in relevant part, as “the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services.” Id. § 1395x(v)(1)(A). A cost-reimbursed HMO's “cost actually incurred” is determined by a formula specified by agency regulation. The regulation in question-the “Cost Apportionment Regulation”-provides:

Medical services furnished under an arrangement that provides for the HMO . . . to pay on a fee-for-service basis. The Medicare share of the cost of Part B physician and supplier services furnished to Medicare enrollees under arrangements, and paid for by the HMO . . . on a fee-for-service basis, is determined by multiplying the total amount for all such services by the ratio of charges for covered services furnished to Medicare enrollees to the total charges for all such services.

42 C.F.R. § 417.560(c). So, under the Cost Apportionment Regulation, cost-reimbursed HMOs do not bill Medicare on a “paid claims” basis, that is, they do not bill Medicare for the actual amount the HMO pays to providers for services rendered. Rather, the Regulation takes a different approach: It employs a ratio to apportion the “costs actually incurred” between Medicare enrollees and non- Medicare enrollees. See JA at 9.

         Under this approach, a cost-reimbursed HMO calculates the sum for which Medicare is responsible by first identifying the total cost of all services, which includes both: (1) the direct costs associated with furnishing services to Medicare and non-Medicare enrollees, and (2) certain indirect costs, such as enrollment and operations costs. 42 C.F.R. § 417.560(c). That sum is then multiplied by the ratio of charges for covered services furnished to Medicare enrollees relative to the total charges for all covered services. Id. The product of that calculation results in the HMO's reimbursable “costs actually incurred.” See JA at 41-42, 46; see also 42 C.F.R. § 417.534(a) (defining “[a]llowable costs”).

         The dispute at hand concerns a category of costs that Plaintiff historically has included in its reimbursement calculations. Ordinarily, a health care supplier that contracts with Plaintiff will send its bill for services directly to Plaintiff, which in turn pays the supplier. Sometimes, however, instead of billing Plaintiff directly for the services rendered, a health care supplier will send its bill to a Medicare contractor, known as a “carrier, ” and the carrier will issue payment without involving Plaintiff. JA at 42. These direct-bill transactions are known as “carrier-paid claims.” Id. Since 1986, Plaintiff has understood the Cost Apportionment Regulation to allow carrier-paid claims to be included in its cost reports, even though Plaintiff incurs little or no out-of-pocket expense for these types of claims. See id. at 42, 714-29. This practice has resulted in larger reimbursements than if Plaintiff had excluded carrier-paid claims from the calculus. See id. at 43. Until recently, CMS had never objected to Plaintiff's inclusion of carrier-paid claims in its cost reports.

         CMS broke its silence in 2013. During an audit of Plaintiff's cost reports for the 2006- 2009 fiscal years, CMS reviewed Plaintiff's inclusion of carrier-paid claims and, for the first time ever, deemed such claims not to be a “reasonable cost incurred.” The consequence of this decision was to lower the apportionment ratio and thereby reduce retroactively the amount of reimbursement due to Plaintiff during the relevant four years by nearly $16 million. Id. at 42-43 & n. 3, 715-29; Compl. ¶ 4, ECF No. 1 [hereinafter Compl.]. Stunned by this result, Plaintiff sought its reversal through administrative appeal.

         B. Procedural Background

         1.Administrative Proceedings

         Before recapping the administrative proceedings, some background is in order. For purposes of appealing an unfavorable reimbursement decision, the Medicare Act makes a distinction between “providers of services” and nonproviders of services. “Provider of services” is a defined term that includes, among other entities, hospitals, skilled nursing facilities, rehabilitation facilities, and hospice programs. 42 U.S.C. § 1395x(u). A provider who is dissatisfied with a reimbursement determination has a statutory right of appeal to the Provider Reimbursement Review Board (“Board”). See generally Id. § 1395oo. The Administrator of CMS has the power to reverse or modify the decision of the Board, but it must do so within 60 days of the provider receiving notice of the Board's decision, otherwise the Board's decision becomes final. Id. § 1395oo(f)(1).

         As a cost-reimbursed HMO, Plaintiff does not meet the statutory definition of “provider of services.” It therefore cannot seek Board review of an unfavorable reimbursement determination. Cost-reimbursed HMOs are not without recourse, however. CMS regulations grant “nonproviders, ” like Plaintiff, “some other hearing” to challenge a reimbursement decision. 42 C.F.R. § 405.1801(b)(2)(iii). CMS Hearing Officers conduct the “some other hearing, ” not the Board. Yet, the regulations provide that the “procedural rules for a Board hearing set forth in” subpart R of CMS regulations[3] apply to nonprovider hearings “to the maximum extent possible.” Id. § 405.1801(b)(2)(iv). One of the rules set forth in subpart R is that a Board decision becomes final no later than 60 days after a provider receives the Board's decision. Id. §§ 405.1871(b)(1); 405.1875(a)(1). The Administrator nevertheless takes the position that this 60-day rule does not apply to her review of nonprovider hearing decisions. Such rulings, unlike Board rulings, remain non-final even after the passage of 60 days, according to the Administrator.

         In this case, Plaintiff invoked its right to “some other hearing” and administratively appealed the auditor's decision to exclude carrier-paid claims from its reimbursement calculation. Plaintiff received a hearing before a panel of two CMS Hearing Officers. See JA at 40-49. In a decision dated September 22, 2016, the Hearing Officers concluded that a “literal reading” of the Cost Apportionment Regulation allows carrier-paid claims to be included in the “ratio of charges for covered services furnished to Medicare enrollees.” Id. at 45 (quoting 42 C.F.R. § 417.560(c)). At the same time, the Hearing Officers rejected Plaintiff's contention that CMS was aware of Plaintiff's practice of including carrier-paid claims in its apportionment ratio-an argument based on CMS' approval of all reimbursement requests since 1986. See id. at 43 n.3. In the end, based on their reading of the Cost Apportionment Regulation, the Hearing Officers ruled in favor of Plaintiff and against CMS.

         Plaintiff's victory turned out to be short-lived. CMS appealed the Hearing Officers' ruling to the CMS Administrator, who reversed. In a decision issued on December 8, 2016-77 days after the Hearing Officers' ruling-the Administrator found that the auditors had correctly determined that Plaintiff's inclusion of carrier-paid claims was improper and that the $16 million adjustment for the four years in question was appropriate. JA at 2, 14. Although she issued her ruling more than 60 days after the Hearing Officers' decision, the Administrator nevertheless stated that she had conducted her review “during the 60-day period mandated in § 1878(f)(1) of the Social Security Act [42 U.S.C. § 1395oo(f)(1)].” See Id. at 2.

         2.This Action

         On February 3, 2017, Plaintiff filed this action under the Administrative Procedure Act (“APA”). See generally Compl. The Complaint advances three grounds for vacating the Administrator's ruling. See generally Pl.'s Mem. First, it avers that the Administrator's interpretation of the Cost Apportionment Regulation is contrary to the Regulation's plain text and thus the decision to remove carrier-paid claims from its reimbursement requests must be overturned. Id. at 24-31. Second, Plaintiff contends that, even if the Administrator's interpretation of the Cost Apportionment Regulation is held to be reasonable, the “fair notice doctrine” forecloses CMS from applying that interpretation to the four years in question. See id. at 31-39. Under the “fair notice” doctrine, before an agency's interpretation can operate as a penalty, the affected party must have “fair notice” of that interpretation before its application. See Howmet Corp. v. EPA, 614 F.3d 544, 553-54 (D.C. Cir. 2010); Ark. Dep't of Human Servs. v. Sebelius, 818 F.Supp.2d 107, 120-22 (D.D.C. 2011). Finally, Plaintiff advances two process challenges to the Administrator's decision. Plaintiff maintains that the Administrator lacked the power to overturn the Hearing Officers' decision, because the Medicare Act does not expressly provide for such review. Additionally, Plaintiff avers that the Administrator's failure to act within 60 days rendered the Hearing Officers' decision final and unreviewable. See Pl.'s Mem. at 39-45. As to the latter argument, Plaintiff acknowledges that the 60-day rule reflected in the Medicare Act does not apply directly to cost-reimbursed HMOs, as such entities do not qualify as “providers” under the Act; instead, Plaintiff contends, because CMS regulations make nonprovider hearings subject to the same procedural rules as Board hearings to the “maximum extent possible, ” the 60-day time limitation on Administrator review of Board hearing decisions likewise applies to review of nonprovider hearing decisions. See id.

         Because the court rests its decision on the Administrator's failure to act within 60 days, this Memorandum Opinion does not address any of the other grounds advanced by Plaintiff to overturn the Administrator's decision.

         3. March ...

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