Lee Mem'l Health Sys. v. Burwell

206 F.Supp.3d 307

LEE MEMORIAL HEALTH SYSTEM f/b/o Lee Memorial Hospital, et al., Plaintiffs,

v.Sylvia M. BURWELL, Secretary of the U.S. Department of Health & Human Services, Defendant.

Civil Action No. 13-cv-643 (RMC)

United States District Court, District of Columbia.

Signed September 7, 2016

Michihiro M. Tsuda, Mimi Hu Brouillette, Sven C. Collins, Stephen P. Nash, Squire Patton Boggs, Denver, CO, for Plaintiffs.

Caroline Lewis Wolverton, U.S. Department of Justice, Washington, DC, for Defendant.

OPINION

ROSEMARY M. COLLYER, United States District Judge

In these consolidated cases, Plaintiff hospitals challenge the methods used by the Department of Health & Human Services to calculate the "fixed-loss threshold," a term integral to reimbursement under the Medicare program. Because the Center for Medicare and Medicaid Services, a constituent agency of HHS, followed the notice and comment rulemaking process and is entitled to a highly deferential standard of review, the Court cannot say that it has acted arbitrarily or capriciously. The regulations will stand.

I. FACTS

Plaintiffs, a group of non-profit organizations that own and operate acute care hospitals participating in the Medicare program (Hospitals),¹ contend that the Center for Medicare and Medicaid Services (CMS), led by Secretary Sylvia Burwell (the Secretary), has underpaid them for Medicare services provided during the fiscal years ending in 2008, 2009, 2010, and 2011. Plaintiffs challenge CMS's administration of the outlier payment system, which pays eligible hospitals a percentage of their costs above the typical threshold for treating a Medicare patient. Plaintiffs challenge the "fixed loss threshold" rulemakings promulgated in fiscal years 2008 through 2011, as well as the 2003 amendment to the outlier payment regulations.

Presently before the Court are Defendant's Motion to Dismiss or, in the alternative, for Summary Judgment, Dkt. 73, and Plaintiffs' Motion for Summary Judgment, Dkt. 74.

A. Statutory Background

Medicare is a federal program that provides health insurance to the elderly and the disabled. See generally 42 U.S.C. §§ 1395 et seq. Generally speaking, hospitals provide care to Medicare beneficiaries and then seek reimbursement from CMS.

Reimbursement is not a precise exercise. Instead of reimbursing the providers dollar for dollar, CMS pays fixed rates through the Inpatient Prospective Payment System (IPPS).² Under IPPS, inpatient services are divided into categories called "diagnosis related groups" or "DRGs." See 42 U.S.C. § 1395ww(d). Each DRG merits a standard payment rate, intended to reflect the estimated average cost of treating the service(s) provided. See id. Because these DRGs correspond to the given patient's diagnosis upon discharge, the rates may vary from the costs actually incurred by the provider.

In some cases, the rates may drastically understate a hospital's costs. To compensate providers for exceptionally costly cases, Congress established the "outlier" payment system. See generally 42 U.S.C. § 1395ww(d)(5)(A). If the cost of health care in a given case exceeds the DRG payment "plus a fixed dollar amount determined by the Secretary," then the hospital is eligible for an outlier payment. Id. § 1395ww(d)(5)(A)(ii).³ Taken together, the DRG plus the "fixed dollar amount determined by the Secretary" represents the "outlier threshold." 42 U.S.C. § 1395ww(d)(5)(A)(ii) ; see also Cnty. of L.A. , 192 F.3d at 1010. If a case qualifies, the provider receives 80% of the costs that exceed the outlier threshold. 42 C.F.R. § 412.84(k). This 80% is called the "additional payment" or "outlier payment." E.g., id. §§ 412.80(a)(3), (c).⁴

The key phrase for present purposes is the "fixed dollar amount," which is to be "determined by the Secretary" and "specified by CMS." 42 U.S.C. § 1395ww(d)(5)(A)(ii) ; 42 C.F.R. § 412.80(a)(3). The parties refer to this as the "fixed-loss threshold" or "FLT." The Fixed Loss Threshold functions as an "insurance deductible" of sorts. Boca Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp. , 582 F.3d 1227, 1229 (11th Cir.2009). When the cost of care exceeds the predetermined DRG payment, the provider must absorb the entire Fixed Loss Threshold amount before it can recoup any outlier payments from CMS. The parties' interests are thus diametrically opposed: CMS benefits from a higher Fixed Loss Threshold and the Hospitals benefit from a lower Fixed Loss Threshold.

Finally, the Medicare Act requires that in any fiscal year "[t]he total amount of the [outlier] payments ... may not be less than 5 percent nor more than 6 percent of the total payments projected or estimated to be made based on DRG prospective payment rates for discharges in that year." 42 U.S.C. § 1395ww(d)(5)(A)(iv). Thus, although the Fixed Loss Threshold is "determined by the Secretary," she must set a Fixed Loss Threshold high enough to ensure that projected outlier payments do not exceed 6% of the projected DRG payments, but not so high that projected outlier payments are less than 5% of the projected DRG.⁵ Although the statute's command is unequivocal, Fixed Loss Threshold rulemakings are predictive. Id. (requiring outlier payments to be within 5-6 "percent of the total payments projected or estimated to be made based on DRG prospective payment rates for discharges") (emphasis added); 42 C.F.R. § 412.80(c) ("CMS will issue threshold criteria for determining outlier payment in the annual notice of the prospective payment rates published in accordance with § 412.8(b)."). As a result, there is no obvious way for CMS to guarantee that annually prescribed rates and thresholds will yield outlier payments that are between 5% and 6% of total DRG payments in the next federal fiscal year. Nor must it take corrective action if its predictions fall short. See Cnty. of L.A. , 192 F.3d at 1020. The D.C. Circuit has upheld this practice. See Dist. Hosp. Partners , 786 F.3d at 51.

B. Regulatory Background

2003 was a watershed year for the outlier-payment system. The system had been manipulated in the late 1990s by some hospitals which exploited certain regulatory vulnerabilities, arising from "the time lag between the current charges on a submitted bill and the cost-to-charge ratio taken from the most recent settled cost report," which predated current charges. Notice of Proposed Rulemaking, 68 Fed. Reg. 10,420, 10,423 (Mar. 5, 2003) (3/5/03 NPRM). The outlier payment system depends on calculating "charges, adjusted to cost," including overhead and capital costs. 42 U.S.C. § 1395ww(d)(5)(A)(ii) (emphasis added). That adjustment is made using the "cost-to-charge ratio" (CCR) mentioned in the Notice of Proposed Rulemaking. Because hospitals knew that CCRs were based on past cost reports, some hospitals increased their charges for patient care between past cost reports and current reimbursement requests, yielding a CCR that would "be too high" and thus "overestimate the hospital's costs." 3/5/2003 NPRM at 10,423. Some 123 hospitals were found to have increased their charges by 70 percent, while only decreasing their CCRs by two percent. Id. at 10,424. This became known as "turbo-charging." Dist. Hosp. Partners , 786 F.3d at 51 (describing turbochargers).

1. The February 2003 Draft Interim Final Rule

The Hospitals rely heavily on a Draft Interim Final Rule proposed in February 2003—before the Notice of Proposed Rulemaking cited above—and obtained by them through a Freedom of Information Act (FOIA) request. Hosp. Mot. [Dkt. 74] at 11 (citing AR S3595-S3659) (Draft); see also Joint Appendix, Ex. 4 [Dkt. 81-4] at 97-161 (same). The 63-page Draft included a number of findings and proposed various solutions.⁶ The Draft found that turbocharging caused "nearly all of the increase in the FY 2003 threshold from FY 2002 ($21,025 to $33,560)." AR S3610. It also described the effect of turbocharging on the Fixed Loss Threshold: "Because the fixed-loss threshold is determined based on hospitals' historical charge data, hospitals that have been inappropriately maximizing their outlier payments have caused the threshold to increase dramatically for FY 2003." AR S3610.

To prevent future turbocharging, the Draft said that CMS "need[ed] to make revisions to [its] outlier payment methodology," primarily by "updating cost-to-charge ratios [CCRs]." 3/5/2003 NPRM at 10,421, 10,423. See also generally AR S3612-15. More specifically, the Draft proposed to amend CMS's payment regulations so that "fiscal intermediaries"—insurance companies who examine Medicare payment claims under contract with CMS—could "use either the most recent settled or the most recent tentative settled cost report, whichever is from the latest cost reporting period." AR S3614. But reducing the lag time alone would not be enough, because some hospitals could still "increase charges much faster than costs during the time between the tentative settled cost report period and the time when the claim is processed.... [T]here will still be a lag of 1 to 2 years." AR S3614-15. To counter this possibility, the Draft proposed a new regulatory provision that would allow CMS to increase a hospital's CCR if "more recent charge data indicate that a hospital's charges have been increasing at an excessive rate (relative to the rate of increase among other hospitals)." AR S3615. The hospitals could also have requested a modified CCR if they presented substantial evidence that the ratios were inaccurate. AR S3615.

Further, the Draft reconsidered CMS's previous policy "that payment determinations [were] made on the basis of the best information available at the time a claim is processed and [were] not revised, upward or downward, based upon updated data." AR S3620. Acknowledging that "some hospitals have taken advantage of the current outlier policy," AR S3620, the Draft resolved to reconcile processed payments with hospital cost reports once they were ultimately settled. AR S3621; see also AR 3626 ("[W]e believe the only way to eliminate...