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New Lifecare Hospitals of Chester County LLC v. Azar

United States District Court, District of Columbia

September 30, 2019

ALEX M. AZAR II, Secretary of Health and Human Services Defendant.


          Emmet G. Sullivan United States District Judge.

         This case concerns the Medicare system, a federal program that helps to cover the cost of providing medical care to qualified individuals. Under Medicare, the government generally reimburses hospitals at a predetermined fixed rate whenever a patient is discharged, regardless of the actual cost of services. Because some hospital stays will be exceptionally costly, Congress has allowed for a high cost outlier (“HCO”) which offsets extremely high costs that a hospital may incur when treating certain cases. In such cases, provided that statutory conditions are met, the hospital simply requests additional payment. However, Congress has mandated that these payments cannot increase the payment obligations of the federal government to an amount that is higher than the predetermined prospective rates. In other words, the government calculates an amount it expects to pay based on the number of expected discharges at the prospective payment rate; and the hospital’s requests for additional payments due to HCOs cannot increase that amount. Id. Therefore, to keep the budget neutral, the government reduces the prospective payment rate by a percentage based on the expected outlier payments for that year. This reduction is commonly referred to as the budget neutrality adjustment (“BNA”).

         Plaintiffs, a group of over 100 long-term care hospitals (“LTCH”), bring this action pursuant to, inter alia, the Administrative Procedure Act (“APA”), 5 U.S.C. § 706, alleging that defendant Alex M. Azar II, Secretary of Health and Human Services (“HHS”) applies the BNA to LTCH stays in an unlawfully duplicative manner. Specifically, this lawsuit challenges a final rule that defines how the budget neutrality adjustment is applied to LTCH hospital stays that are paid out at a site neutral rate. Plaintiffs allege that, because the formula to calculate the site neutral rate already takes into account a 5.1 percent adjustment for the expected HCO payments, the Secretary incorrectly applies a 5.1 percent budget neutrality adjustment to site neutral rates. Thus, plaintiffs argue the Secretary’s actions are duplicative and therefore violate the APA.

         Pending before the Court are the parties’ cross-motions for summary judgment. The parties agree that the formula for site neutral payments is mandated by Congress, and that CMS may apply a BNA to site neutral payments to insure the government’s overall LTCH payment obligations are not increased due to the cost outlier payments. The parties also agree that there are multiple BNAs that play a role in the formula to determine the site neutral rate. Where the parties disagree is whether the BNA applied to the site neutral rate is duplicative or merely a reasonable application of the Secretary’s authority to balance the budget. Upon careful consideration of the parties’ submissions, the applicable law, and the entire record herein, the Court finds that the Secretary’s methodology in applying the BNA to site neutral LTCH stays is a reasonable interpretation of the applicable statues and regulations. Therefore, the Court GRANTS defendant’s cross-motion for summary judgment, and DENIES the plaintiffs’ motion for summary judgment.

         I. Background

         A. Statutory and Regulatory Background

         1. Medicare Reimbursements to Hospitals

         The Centers for Medicare and Medicaid Services (“CMS”), a division of HHS, is in charge of administering the Medicare program under the direction of the Secretary. Until 1983, Medicare reimbursed participating hospitals for inpatient services provided to Medicare patients based on the “reasonable costs” incurred by the hospital. Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994). Concerned about escalating costs, Congress, in 1983, directed HHS to implement a prospective payment system under which hospitals would not receive actual costs, but rather would receive fixed payments based on the type of inpatient services rendered. Id. “Congress designed this system to encourage health care providers to improve efficiency and reduce operating costs.” Id.

         CMS pays most hospitals for inpatient services furnished to Medicare beneficiaries at these fixed rates through the Inpatient Prospective Payment System (IPPS”). See generally Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015). The IPPS divides medical conditions into categories of related illnesses called “diagnosis-related groups” (“DRGs”). Dist. Hosp. Partners, 786 F.3d at 49. Once a Medicare beneficiary is discharged under IPPS, Medicare reimburses the hospital at a preset rate that depends on the patient’s DRG and other factors not relevant to this case. See 42 U.S.C. §§ 1395ww(d), (g); 42 C.F.R. §§ 412.64, 412.312; Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205-06 (D.C. Cir. 2011)(explaining prospective payment rate calculation). The payment amount for each DRG is intended to reflect the estimated average cost of treating a patient whose condition falls within that DRG, see 42 U.S.C. § 1395ww(d), even though the actual cost the hospital incurs in treating that patient may be higher or lower.

         This case concerns long-term care hospital reimbursements. In 1999, Congress directed the Secretary to “develop a per discharge prospective payment system for payment for inpatient hospital services of long-term care hospitals[.]”[1] Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (“BBRA”), Pub. L. No. 106-113, § 123, 113 Stat. 1501, 1501A330 (1999)(codified at 42 U.S.C. § 1395ww, note). Congress also mandated that this payment system “shall maintain budget neutrality.” Id. The following year, Congress further provided that the Secretary “shall examine and may provide for appropriate adjustments to the long-term hospital payment system, including . . . outliers[.]” Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”), Pub. L. No. 106-554, § 307(b)(1), 114 Stat. 2763, 2763A497 (2000)(codified at 42 U.S.C. § 1395ww, note).

         Because some inpatient stays will be exceptionally costly, Congress provided for additional “high cost outlier” payments to partly offset extremely high costs that hospitals incur in both inpatient and LTCH settings. See 42 U.S.C. § 1395ww(d) (5)(A)(ii). Accordingly, a qualifying hospital may request additional payments for outlier cases in certain statutorily defined circumstances. Id. These outlier payments, however, cannot be projected to increase the overall Medicare payment obligations of the federal government. See Id . § 1395ww(d)(3)(B). Therefore, to account for the higher outlier payments, CMS reduces the IPPS and LTCH payment rates by, each fiscal year, prospectively estimating the proportion of outlier payments and then prospectively reducing those rates to account for the outlier payments. Id. This rate must be projected to be between 5 and 6 percent of the total projected IPPS payments for that year. Id. § 1395ww(d)(5)(A)(iv).

         2. Reimbursement for LTCHs Under Dual-Rate System

         The Medicare reimbursement system for LTCHs, the LTCH PPS, is based on different levels of cost than the inpatient hospital prospective payment system. For a hospital to be reimbursed under the LTCH PPS, it must have an average Medicare inpatient length of stay that is greater than twenty-five days, which reflects the medically complex cases treated in LTCHs. See Pl.s’ Mot. ECF No. 21 at 15. Each patient discharged from a LTCH is assigned to a distinct Medicare severity long-term care diagnosis related group (“MS-LTC-DRG”), and the LTCH is generally paid a predetermined fixed amount applicable to the assigned MS-LTC-DRG (adjusted for area wage differences). Id. Although the DRG’s for LTCH’s are the same as DRG’s for acute care hospitals, the weights assigned to the groups are generally higher. Additionally, the federal standard rate has been much higher for LTCH’s than for acute care hospitals because of the complexity of the cases and the longer average length of stay. Id. The payment amount for each MS-LTC-DRG is intended to reflect the average cost of treating a Medicare patient assigned to that MS-LTC-DRG in a LTCH. Id.

         CMS implemented the LTCH PPS on October 1, 2002, which marked the beginning of Federal Fiscal Year 2003. 67 Fed. Reg. 55954 (Aug. 30, 2002). The Secretary modeled the LTCH PPS after IPPS. See generally 42 C.F.R. ch. IV, subch. B, pt. 412, subpt. O (setting forth the rules governing LTCH PPS). As in IPPS, the Secretary established a flat national rate for LTCH PPS, now known as the “standard Federal rate.” Id. § 412.523(c)(1). This was the rate that LTCHs received upon patient discharge depending on the patient’s DRG.

         In 2013, Congress implemented a dual rate structure for LTCHs. Concerned that LTCHs were admitting some patients who instead could be safely and efficiently treated in a lower-cost setting, Congress required the Secretary to create a separate payment rate for such patients that would generally be lower than the standard Federal rate, known as the “site neutral” rate. See Bipartisan Budget Act of 2013, Pub. L. No. 113-67, § 1206, 127 Stat. 1165; 80 Fed. Reg. 49326, 49601-23 (Aug. 17, 2005). Pursuant to this congressional mandate, CMS implemented this dual-rate payment structure for the LTCH PPS in 2015 (for Fiscal Year 2016), and the structure remains in place today.

         Under this dual-rate structure, generally a LTCH is no longer reimbursed at the standard Federal rate if the patient did not spend at least three days in a hospital’s intensive care unit immediately preceding the LTCH care, or did not receive at least 96 hours of respiratory ventilation services during the LTCH stay. 42 U.S.C. § 1395ww(m)(6)(A). If the patient does not meet either of these criteria then the hospital gets the site neutral rate which is statutorily defined as the lower of (1) “the IPPS comparable per diem amount determined under [42 C.F.R. § 412.529(d)(4)], including any applicable outlier payments under [42 C.F.R. § 412.525]” or (2) “100 percent of the estimated cost for the services involved.” 42 U.S.C. § 1395ww(m)(6)(B)(ii); see also 42 C.F.R. § 412.522(c)(1).

         The “IPPS comparable per diem amount” is at the heart of the dispute in this case. The amount is determined based on a formula that uses IPPS rates –- the operating IPPS standardized amount and the capital IPPS Federal rate __ for the calculation. See 42 C.F.R. § 412.529(d)(4). Those IPPS rates are nationally-applicable values set annually by CMS through a complex computation. See 83 Fed. Reg. at 41724-25 (identifying FY 2019 operating standardized amounts); id. at 41729 (identifying FY 2019 capital Federal rate). The rates reflect the application of several adjustments, see Id . at 41712-13, 41727-29, including the IPPS BNA for outliers, see Id . at 41723, 41728; see also 42 C.F.R. § 412.64(f) (IPPS BNA is applied when calculating standardized amount); id. § 412.308(c)(2) (IPPS BNA is applied when calculating Federal rate). After the site neutral rate is calculated, CMS makes certain adjustments including an adjustment to account for outlier payments paid to site neutral cases in the LTCH PPS. 42 C.F.R. § 412.552(c)(2); id. § 412.525(a).

         Finally, the regulations provide a framework through which a provider can appeal the Secretary’s reimbursement decision. Hospitals’ payments for Medicare services are calculated and processed by Medicare administrative contractors. See 42 U.S.C. § 1395h(a). After receiving a determination as to the amount of a hospital’s payments, the hospital can appeal the determination to the Provider Reimbursement Review Board (“PRRB” or ”Board”), an administrative tribunal within HHS. Id. § 1395oo(a); see also id. § 1395oo(b)(providing for group appeals by multiple providers). If a hospital believes the PRRB lacks authority to decide a “question of law or regulation[] relevant to the matters in controversy, ” it can request that the PRRB make a determination “that it is without authority to decide the question” and authorize expedited judicial review in federal district court. Id. § 1395oo(f)(1). In seeking the PRRB’s authorization, the Medicare provider must specify each “question of law or regulations” that it intends to present to the district court. Id. The regulation implementing the statute similarly speaks of a provider obtaining review of individual “legal question[s].” 42 C.F.R. § 405.1842(a)(1); see also id. § 405.1842(g)(2) (“If the Board grants[expedited judicial review], the provider may file a complaint in a Federal district court in order to obtain [judicial review] of the legal question.”).

         B. Procedural Background

         1. CMS Rule Making FY 2016–2019

         Since the implementation of the site neutral payment rate to LTCHs, plaintiffs have attempted to alert the Secretary that his actions in applying the BNA to the site neutral rate were, in their view, unlawful. When the rule was first proposed in Fiscal Year 2016 “[c]ommenters objected to the proposed site neutral payment rate HCO budget neutrality adjustment, claiming that it would result in savings [to Medicare] instead of being budget neutral.” 80 Fed. Reg. at 49622. “The commenters’ primary objection was based on their belief that, because the IPPS base rates used in the IPPS comparable per diem amount calculation of the site neutral payment rate include a budget neutrality adjustment for IPPS HCO payments (for example, a 5.1 percent adjustment on the operating IPPS standardized amount), an ‘additional’ budget neutrality factor is not necessary and is, in fact, duplicative.” Id. CMS disagreed and explained why it believed that there was no duplication:

While the commenters are correct that the IPPS base rates that are used in site neutral payment rate calculation include a budget neutrality adjustment for IPPS HCO payments, that adjustment is merely a part of the calculation of one of the inputs (that is, the IPPS base rates) that are used in the LTCH PPS computation of site neutral payment rate. The HCO budget neutrality factor that is applied in determining the IPPS base rates is intended to fund estimated HCO payment made under the IPPS, and is therefore determined based on estimated payments made under the IPPS. As such, the HCO budget neutrality factor that is applied to the IPPS base rates does not account for the additional HCO payments that would be made to site neutral payment rate cases under the LTCH PPS.

Id. CMS further explained why it believed the 5.1 percent BNA was necessary to account for outlier payments in LTCH PPS:

Without a budget neutrality adjustment when determining payment for a case under the LTCH PPS, any HCO payment payable to site neutral payment rate cases would increase aggregate LTCH PPS payments above the level of expenditure if there were no HCO payments for site neutral payment rate cases. Therefore, our proposed approach appropriately results in LTCH PPS payments to site neutral payment rate cases that are budget neutral relative to a policy with no HCO payments to site neutral payment rate cases.


         The commenters renewed their objections in Fiscal Year 2017, arguing that the proposed 5.1 percent BNA for the LTCH site neutral payment rate was duplicative. CMS responded with the following explanation:

Section 1206 of Public Law 113-67 defined the site neutral payment rate as the lower of the estimated cost of the case or the IPPS comparable per diem amount determined under paragraph (d)(4) of § 412.529, including any applicable outlier payments under § 412.525. The term “IPPS comparable per diem amount” was not new at the time of enactment. That term had already previously been defined under § 412.529(d)(4), which has been in effect since July 1, 2006, and used as a component of the payment adjustment formula for LTCH PPS SSO [short stay outlier] cases. From the July 1, 2006 inception of the IPPS comparable component of the LTCH PPS’ SSO payment formula, we have budget neutralized the estimated HCO payments that we expected to pay to SSO cases including those paid based on the IPPS comparable per diem amount. Congress was also well aware of how we had implemented our “IPPS comparable per diem amount” concept in the SSO context at the time of the enactment of section 1206 of Public Law 113-67. As such, we believe Congress left us with the discretion to continue to treat the “IPPS comparable per diem amount” in the site neutral payment rate context as we have historically done ...

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