Scott & White Health Plan v. Becerra

693 F.Supp.3d 1

SCOTT & WHITE HEALTH PLAN d/b/a Barylor Scott & White Health Plan, Plaintiff, v. Xavier BECERRA, Defendant.

Case No. 22-cv-3202 (CRC)

United States District Court, District of Columbia

Signed September 19, 2023

Stephanie A. Webster, Ropes & Gray LLP, Washington, DC, for Plaintiff.

Sean Michael Tepe, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

CHRISTOPHER R. COOPER, United States District Judge

Plaintiff Scott & White Health Plan ("Scott & White" or "the Plan") is a Texas-based health maintenance organization ("HMO") that furnishes services to Medicare beneficiaries. In exchange, Medicare reimburses Scott & White on an annualized basis for the share of the Plan's costs attributable to Medicare patients. When filing its year-end cost reports for 2012 and 2013, Scott & White tabulated and allocated its total costs to calculate the Medicare-eligible share, in accordance with 42 C.F.R. § 417.560(c). In mid-2013, however, the Centers for Medicare and Medicaid Services ("CMS") issued a "[c]orrection" to its cost-tabulation instructions stating that "carrier-paid claims"—claims billed to and paid by a Medicare administrator or other intermediary rather than an HMO—should not be considered in the cost apportionment process. Consistent with this guidance, CMS audited Scott & White and sought to recoup nearly $10 million in past payments. Following an appeal and a decision by a hearing officer, the CMS Administrator upheld those adjustments.

Scott & White then sued the Secretary of Health & Human Services ("HHS"), contending that the Administrator's decision was contrary to the controlling regulation, 42 C.F.R. § 417.560(c), and otherwise arbitrary and capricious in violation of 5 U.S.C. § 706. Both sides have moved for summary judgment. After parsing § 417.560(c)'s text in the relevant context, the Court agrees that the regulation favors Scott & White. It accordingly grants the Plan's motion for summary judgment and denies the Secretary's cross motion.

I. Background

A. Legal Background

Medicare is a federally funded health insurance program that provides care to elderly and disabled individuals. See 42 U.S.C. § 1395 et seq. As originally enacted, Medicare was split into two parts. Part A covers "the costs of hospital, related post-hospital, home health services, and hospice care," id. § 1395c, while Part B covers a variety of outpatient "medical and other health services," id. § 1395k(a)(2)(B). This case concerns Medicare Part B.¹

Under a traditional Medicare Part B fee-for-service program, the Government directly reimburses providers and suppliers for necessary care furnished to Medicare beneficiaries. Id. § 13951. Those direct payments are processed by Medicare administrators called "carriers." See id. § 1395u. Since the 1970s, the HHS Secretary also may enter cost-reimbursement contracts with HMOs, which provide or arrange for the provision of Medicare-covered health services. See id. § 1395mm. HMOs, in turn, can either provide covered services directly to patients or through contractual arrangements with institutional providers, such as hospitals, as well as physicians and other healthcare suppliers that agree to provide care to the HMO's customers. See id. After providing care to Medicare beneficiaries, third-party providers and suppliers are supposed to bill their HMO partner, which then pays these entities based on pre-specified prices for each service. Administrative Record ("AR") at 12.

HMOs, for their part, are entitled by statute to reimbursement for the "reasonable cost[s]" of the covered services that they provide to Medicare beneficiaries. See 42 U.S.C. § 1395mm(h)(2). The Medicare Act defines "reasonable cost" 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). It further specifies that reasonable costs "shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs." Id. These regulations, the Act mandates, shall "take into account both direct and indirect costs" while also avoiding cross-subsidization. Id. That is, the regulations must ensure that "the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs." Id. The mechanism of separating the costs for Medicare patients from those for non-covered patients is commonly known as "apportionment." Within these broad brushstrokes, the Act grants the Secretary significant authority to color in the details through regulations. Id.

The process of reimbursing HMOs takes place on an annual basis. Each contract year, CMS "makes monthly advance payments equivalent to the HMO's . . . interim per capita rate for each beneficiary who is registered in CMS records as a Medicare enrollee of the HMO." 42 C.F.R. § 417.570(a)(1). The "interim per capita rate is determined annually by CMS on the basis of the HMO's . . . annual operating and enrollment forecast," id. § 417.570(b), which the HMO submits "at least 90 days before the beginning of each contract period," id. § 417.572(a). Within 180 days of the end of the contract year, an HMO must file a cost report which CMS will use to make retroactive adjustments for the prior year and to calculate advanced payments for the next one. See 42 U.S.C. § 1395mm(h)(3)-(4); 42 C.F.R. § 417.576(b)(1), (c)(1). That year-end report must detail the HMO's "per capita costs incurred in furnishing covered services to Medicare enrollees" and explain its "methods of apportioning cost among Medicare enrollees, and nonenrolled patients," as required by the Act and corresponding regulations to prevent cross-subsidization. 42 C.F.R. § 417.576(b)(2). CMS then makes "suitable retroactive corrective adjustments" if the previous year's advance payments were either "inadequate or excessive," 42 U.S.C. § 1395x(v)(1)(A); see also id. § 1395mm(h)(3) (stating that payments are subject to "appropriate retroactive corrective adjustment at the end of each contract year so as to assure that [an] organization is paid for the reasonable cost actually incurred"); 42 C.F.R. § 417.576 (detailing rules for "final settlement" of payments). These end-of-year payment adjustments come in the form of a Notice of Program Reimbursement, "which represents CMS'[s] determination of the reasonable costs owed to the plan for the cost period" and either authorizes compensation for underpayments or claws back any overpayments. AR at 11.

Particularly relevant here, CMS has promulgated regulations setting forth formulas that HMOs must use when apportioning costs between Medicare and non-Medicare patients in their year-end reports. See 42 C.F.R. § 417.552(a) (requiring that plans use "methods approved by CMS" when apportioning costs). Those formulas differ depending on whether the service was furnished by a "provider" (such as a hospital) or by a "supplier" (such as a physician).² See id. § 417.556 (provider apportionment formula); Id. § 417.560 (supplier apportionment formula). The regulation at the center of this case, 42 C.F.R. § 417.560(c), defines the process of allocating the reasonable costs of supplier-furnished services between Medicare and non-Medicare patients as follows:

Medical services furnished under an arrangement that provides for the HMO or CMP 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 or CMP 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.³

Under this regulation, rather than tallying up HMOs' costs for physician services attributable to Medicare enrollees, HMOs use a "statistical proxy formula" to apportion costs that the plan "actually incurred" between Medicare enrollees and non-Medicare enrollees. AR at 13. HMOs first calculate all direct costs associated with furnishing a service to Medicare and non-Medicare enrollees as well as the indirect costs not tied to particular services—such as accounting, facility, and processing expenses. AR at 10-11. That base figure is then multiplied by "a statistical ratio that represents the Medicare program's share of utilization (numerator) out of a larger set of the organization total utilization (denominator)." AR at 13; see also Rocky Mountain Health Maint. Org., Inc. v. Azar, 384 F. Supp. 3d 80, 84 (D.D.C. 2019) (describing the apportionment process as multiplying the base figure of all direct and indirect costs incurred "by the ratio of charges for covered services furnished to Medicare enrollees relative to the total charges for all covered services").

To assist HMOs in complying with this apportionment process, CMS has published budget forecast worksheets and cost report instructions. See Mot. for Summ. J. ("MSJ") at 8. The instructions for Worksheet E direct HMOs to total "the cost of services incurred by the plan" and furnished by suppliers. AR at 1169-70. HMOs are then told to import these cost figures into Worksheet K to allocate those costs between Medicare enrollees and other patients using apportionment statistics calculated in Worksheet D. See id. at 1164-68 (instructions for Worksheet D); id. at 1180-81 (instructions for Worksheet K). During the period at issue, the Worksheet D instructions advised HMOs to report "the number of days or statistical units used by Medicare enrollees for which Medicare has primary liability and the days or statistical units that are covered by the Medicare program." Id. at 1165-66....