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H. Lee Moffitt Cancer Center and Research Institute Hospital, Inc. v. Azar

United States District Court, District of Columbia

July 18, 2018

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



         Defendant Alex M. Azar II, sued here in his official capacity as head of the Department of Health and Human Services (and referred to as “HHS”), oversees Medicare, a government health insurance program for the elderly and disabled. The Outpatient Prospective Payment System (“OPPS”) is a component of Medicare that deals with payments to hospitals for outpatient treatment services. This agency-review case concerns a statutory amendment to OPPS made in 2010 by the Patient Protection and Affordable Care Act (the “ACA”), Pub. L. No. 111-148, 124 Stat. 119 (2010). Under the amendment, HHS was required to study certain costs incurred by a small group of hospitals that focus on cancer research and treatment (commonly referred to as the “cancer hospitals”). If HHS determined that the cancer hospitals' costs were higher than other hospitals', it was required to make an “appropriate adjustment” to payments to the cancer hospitals “effective for services furnished on or after January 1, 2011.” HHS ultimately did find that the cancer hospitals' costs were higher and warranted an increase in OPPS payments to them. But HHS did not issue a final regulation containing the cancer-hospital adjustment until well into 2011, and made the adjustment effective only as of January 1, 2012.

         Plaintiff H. Lee Moffitt Cancer Center and Research Institute Hospital, Inc. (“Moffitt”) is a cancer hospital. It has challenged HHS's failure to make higher OPPS payments to cancer hospitals for 2011, claiming HHS thereby violated its statutory mandate. HHS defends its actions as reasonable, and also argues that the adjustment it made is not subject to judicial review. Each party has moved for summary judgment. ECF No. 13; ECF No. 16; see also ECF No. 13-1 (“Pl.'s Br ”); ECF No. 16-1 (“Def's Br ”); ECF No. 19 (“Pl.'s Reply”); ECF No. 21 (“Def's Reply”). As explained below, the Court agrees with Moffitt that HHS failed to comply with the statute's directive to make an adjustment effective for services furnished during the 2011 calendar year. Therefore, the Court will enter summary judgment for Moffitt and remand the case to HHS so that it can consider and make an “appropriate adjustment.”

         I. Legislative and Regulatory Background

         A. Medicare and OPPS

         Medicare, created in 1965, is a health insurance program run by the federal government for the elderly and disabled. See Univ. of Tex. M.D. Anderson Cancer Ctr. v. Sebelius (“M.D. Anderson”), 650 F.3d 685, 686 (D.C. Cir. 2011); Amgen, Inc. v. Smith, 357 F.3d 103, 105 (D.C. Cir. 2004). Funding the program “has posed a massive challenge for the U.S. Government, as the costs of Medicare have grown significantly over time.” M.D. Anderson, 650 F.3d at 686. Therefore, Congress has tried various measures to “rein in” those costs over time. Id.

         In 1997, Congress made a major change to Medicare intended to reduce the cost of outpatient services. Up to that point, “hospitals treated outpatients, and then informed Medicare of the cost of the treatment, and then received money to cover costs that were ‘reasonable.' Not surprisingly, costs exploded under this system because there was little check on the services and costs for which hospitals received reimbursement.” Id. at 688. The Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 251, replaced that system of cost-based payments with OPPS, which requires “payments for outpatient hospital care to be made based on predetermined rates.” Amgen, 357 F.3d at 106.

         The statutory provision governing OPPS, codified at 42 U.S.C. § 1395l(t), imposes a number of different requirements with which HHS must comply in setting prospective rates for outpatient services. Subsection (t)(2)(E) also provides HHS a broad discretionary authority to make “adjustments” to those rates:

[T]he Secretary shall establish, in a budget neutral manner, outlier adjustments under paragraph (5) and transitional pass-through payments under paragraph (6) and other adjustments as determined to be necessary to ensure equitable payments, such as adjustments for certain classes of hospitals[.]

42 U.S.C. § 1395l(t)(2)(E). Because adjustments under § (t)(2)(E) are required to be “budget neutral, ” HHS must offset any increased payments to some hospitals with reduced payments to others. See Amgen, 357 F.3d at 112. HHS must review these adjustments at least annually. See 42 U.S.C. § 1395l(t)(9)(A).

         At the time OPPS was enacted, “some hospitals would receive significantly less money” under OPPS than under the old system. M.D. Anderson, 650 F.3d at 689. To soften the blow, Congress provided transitional outpatient payments (“TOPs”) to hospitals during OPPS's first few years. See 42 U.S.C. § 1395l(t)(7); M.D. Anderson, 650 F.3d at 689. Congress made special provision for the cancer hospitals, which consist of eleven hospitals (including Moffitt). See 42 U.S.C. § 1395ww(d)(1)(B)(v); ECF No. 1 (“Compl.”) ¶ 21; Def.'s Br. at 5. For cancer hospitals, TOPs remained available permanently. See 42 U.S.C. § 1395l(t)(7)(D)(ii). These payments effectively guarantee that cancer hospitals will be reimbursed for their costs to the same extent as under the old, pre-1997 system. See M.D. Anderson, 650 F.3d at 689. Moreover, unlike adjustments under § (t)(2)(E), TOPs are not required to be budget neutral. See 42 U.S.C. § 1395l(t)(7)(I).

         B. ACA Section 3138 and HHS's Regulations

         In Section 3138 of the ACA, enacted in March 2010, Congress added another special provision for cancer hospitals to the OPPS statute. The provision ordered HHS to undertake a study of whether cancer hospitals' costs for delivering outpatient services exceeded other hospitals' costs. See 42 U.S.C. § 1395l(t)(18)(A). “Insofar as” HHS made such a determination, it was to “provide for an appropriate adjustment under paragraph (2)(E) to reflect those higher costs effective for services furnished on or after January 1, 2011.” Id. § 1395l(t)(18)(B).

         HHS first addressed this requirement in an August 2010 proposed rulemaking regarding OPPS payment rates for 2011. Medicare Program; Proposed Changes to Hospital Outpatient Prospective Payment System and CY 2011 Payment Rates, 75 Fed. Reg. 46, 170 (proposed rule Aug. 3, 2010). The agency explained its study of the cancer hospitals' costs, which showed that the cancer hospitals did in fact have significantly higher costs. See Id. at 46, 233-34. HHS then discussed its approach to crafting an adjustment to reflect those costs. Id. at 46, 235-37. It explained that it had not considered TOPs in crafting the proposed adjustment. Id. at 46, 235. Its reasons were two-fold: First, the proposed adjustment had to be made under § (t)(2)(E) and thus had to be budget neutral; therefore, the agency believed it was “appropriate to assess costliness and payments within the budget neutral payment system, ” which does not include TOPs. Id. Second, TOPs are paid on an aggregate basis, and thus could not could not be weighted on a per-service basis, as the proposed adjustment would be. See id.

         Based on its analysis, HHS proposed “a hospital-specific payment adjustment” designed “to raise each cancer hospital's PCR [‘payment to cost ratio'] to the weighted average PCR for all other hospitals.” Id. Overall, this would increase cancer hospitals' OPPS payments by 41.2%, and in order to be “budget neutral, ” OPPS payments to other hospitals would have to be 0.66% lower. See Id. at 46, 225, 46, 236. Cancer hospitals would still receive retroactive TOPs if their cost recovery fell below pre-1997 levels; however, because the up-front OPPS payments would be higher, HHS estimated that only one cancer hospital would continue to receive TOPs if the proposal went into effect. See Id. at 46, 237.

         After issuing the proposed rule, HHS received several comments criticizing its approach. See Medicare Program: Hospital Outpatient Prospective Payment System and CY 2011 Payment Rates, 75 Fed. Reg. 71, 800, 71, 886-87 (Nov. 24, 2010) (summarizing comments). In particular, many commenters argued that HHS's approach was inequitable: cancer hospitals would receive only a small net benefit (because most of the increases to their up-front OPPS payments would be offset by lower TOPs down the line), while other hospitals would receive a larger net loss (because every dollar spent on higher OPPS payments to the cancer hospitals had to be neutralized by lower OPPS payments to other hospitals). See JA at 30-31, 33-34, 39-40, 43, 63-64, 67, 73-74, 77-80, 82-83, 86-87, 90, 92-93, 95-96, 98-100.[1] These commenters argued such an adjustment would not be budget neutral when taking TOPs into account, but would instead result in reduced overall spending. See, e.g., JA at 31. Some commenters also argued that the way HHS proposed to implement the adjustment could lead to higher co-payments for Medicare beneficiaries. JA at 45-46, 83, 87, 96-97, 101. Yet another commenter urged a delay in implementing the regulation. See JA at 70.

         Even the cancer hospitals themselves-while requesting a more generous net adjustment-agreed with some of these criticisms. See JA at 57-60. They argued that HHS could use its “exceedingly broad” equitable authority under § (t)(2)(E) to structure the adjustment so as to avoid harming Medicare beneficiaries and other hospitals. JA at 59.

         One commenter also took aim at HHS's cost study. It argued that no adjustment was appropriate, because cancer hospitals and other hospitals had comparable cost-recovery ratios when TOPs were considered. See JA at 40. That same commenter also described HHS's cost analysis as “flawed, ” arguing that it had failed to control for many factors, and that the perceived cost difference could be due to inefficiency on the part of the cancer hospitals. See JA 38-39.

         In the face of these comments, HHS punted. In its final rule regarding OPPS payments for 2011, HHS acknowledged the “broad range of very important issues and concerns” that commenters had raised. 75 Fed. Reg. at 71, 887. It therefore determined to undertake “further study and deliberation” on the cancer-hospital adjustment, which would “take a longer period of time than is permitted in order for us to meet the publication deadline of this final rule with comment period.” Id.

         HHS revisited the issue in its proposed rulemaking for 2012 OPPS payment rates. Medicare and Medicaid Programs: Hospital Outpatient Prospective Payment, 76 Fed. Reg. 42, 170 (proposed rule July 18, 2011). Despite the comments it had received, HHS proposed essentially the same approach as before: upward adjustments to prospective OPPS payments for cancer hospitals based on each hospital's costs, representing a net increase of 39% across all eleven. See Id. at 42, 220-21. HHS estimated that, as a result of that increase, no cancer hospitals would receive TOPs. Id. at 42, 221. To accommodate these increases, HHS once again proposed a reduction in other hospitals' payments (this time by 0.73%). See Id. at 42, 210. Commenters again criticized this approach, largely along the same lines as before. See JA at 109-12, 119-21, 127-29, 132, 170-71, 173-74, 187-89.

         The cancer hospitals, while continuing to urge an even greater increase, yet again asked HHS to exercise its “exceedingly broad” authority to mitigate negative effects on others. JA at 153-54 & n.34; see JA at 147-57. The cancer hospitals also argued Section 3138 of the ACA compelled HHS to make any adjustments apply retroactively to services furnished since January 1, 2011. See JA at 157.

         In November 2011, HHS finalized the proposed adjustment, but substantially altered its approach. See Medicare and Medicaid Programs: Hospital Outpatient Prospective Payment, 76 Fed. Reg. 74, 122, 74, 203-07 (Nov. 30, 2011). HHS yielded to comments urging it to consider the net gain to cancer hospitals (that is, both the increased prospective OPPS payments and the resulting decreases in TOPs) in calculating the offsetting decrease in OPPS payments to other hospitals. See Id. at 74, 204. When taking TOPs into account, the resulting increase to payments for cancer hospitals was 9.5% overall (the exact amount varying for each individual cancer hospital). Id. at 74, 206. The offsetting decrease for other hospitals was only 0.22%, much smaller than the 0.73% in the proposed rule. See Id. at 74, 190, 74, 204. In order to avoid increased copayments for Medicare ...

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