Baystate Franklin Med. Ctr. v. Azar, No. 18-5264

• Decision Date: 11 February 2020
• Docket Number: No. 18-5264
• Citation: 950 F.3d 84
• Parties: BAYSTATE FRANKLIN MEDICAL CENTER, et al., Appellants v. Alex Michael AZAR, II, As Secretary of the Department of Health and Human Services, Appellee
• Court: U.S. Court of Appeals — District of Columbia Circuit

950 F.3d 84

BAYSTATE FRANKLIN MEDICAL CENTER, et al., Appellants

v.Alex Michael AZAR, II, As Secretary of the Department of Health and Human Services, Appellee

No. 18-5264

United States Court of Appeals, District of Columbia Circuit.

Argued October 25, 2019

Decided February 11, 2020

Rachel M. Wertheimer, Portland, ME, argued the cause and filed the briefs for appellants.

Edward Himmelfarb, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Alisa B. Klein, Attorney.

Before: Millett and Katsas, Circuit Judges, and Sentelle, Senior Circuit Judge.

Sentelle, Senior Circuit Judge:

Appellants, Baystate Franklin Medical Center, Baystate Medical Center, Baystate Noble Hospital, and Baystate Wing Hospital (collectively, "Baystate"), brought suit against the Secretary of the Department of Health and Human Services ("HHS") related to his promulgation of a final rule calculating the wage index for hospital reimbursements in 2017. Baystate claimed that the final rule was unreasonable and arbitrary and capricious because the Secretary failed to comply with the statutory requirement to calculate a wage index that reflected the actual wage levels in Massachusetts, relied on data that he knew to be false, and entirely failed to consider an important aspect of the problem. Both parties moved for summary judgment. The district court held that the final rule reflected a permissible construction of the Medicare statute, and the decision was not arbitrary and capricious. Accordingly, the district court granted summary judgment in favor of the Secretary. Baystate filed the present appeal.

For the following reasons, we affirm the decision of the district court.

I. BACKGROUND

A. Statutory and Regulatory Background

Medicare is a federally funded health insurance program available to the elderly and individuals with disabilities. See 42 U.S.C. § 1395 et seq. Under the current Medicare program, the Secretary uses a Prospective Payment System ("PPS") to reimburse certain hospitals for treating Medicare beneficiaries. See Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Policy Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 56,762, 56,776 (Aug. 22, 2016) ("FY2017 PPS Final Rule"). The PPS requires the Secretary to reimburse hospitals at a "predetermined, specific rate[ ] for each hospital discharge," id. , rather than assessing the actual costs incurred by the provider for each patient, see Anna Jacques Hosp. v. Burwell , 797 F.3d 1155, 1158 (D.C. Cir. 2015).

The PPS payments are broken down into two components: a labor-related share and a nonlabor-related share. See FY2017 PPS Final Rule, 81 Fed. Reg. at 56,776. The statute requires the Secretary to adjust the labor-related share of the payments to account for geographic variations in hospital wage expenses. See 42 U.S.C. § 1395ww(d)(3)(E)(i) ; see also Anna Jacques Hosp. , 797 F.3d at 1158. To do so, the Secretary must calculate a "factor ... reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level." 42 U.S.C. § 1395ww(d)(3)(E)(i). This factor is known as the "wage index," and it must be updated annually. Anna Jacques Hosp. , 797 F.3d at 1158.

For purposes of calculating the wage index, the geographic area of a hospital is determined by reference to the "Metropolitan Statistical Area[s]" defined by the Office of Management and Budget. 42 U.S.C. § 1395ww(d)(2)(D). Any hospital not within a Metropolitan Statistical Area is designated as in a "rural area." Id. The wage index for any given hospital in a state cannot be lower than the wage index applicable to the rural hospitals in that state. Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4410(a), 111 Stat. 251, 402 ( 42 U.S.C. § 1395ww note). This is referred to as the "rural floor."

The Centers for Medicare and Medicaid Services ("CMS") is the component of HHS that is responsible for calculating the wage index each year. To start the process, CMS requires hospitals to submit cost reports to Medicare administrative contractors ("MACs"). 42 C.F.R. § 413.20(b). The MACs and the hospitals then review and revise the data through an iterative process, which is outlined in a timetable published by CMS. App. at 49–53; see also Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Proposed Policy Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 24,946, 25,073 (proposed Apr. 27, 2016) ("FY2017 PPS Proposed Rule") ("We created the processes previously described to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2017 payment rates."). CMS uses this data to calculate an average hourly wage rate for every geographic area. Anna Jacques Hosp. , 797 F.3d at 1159. Then, it calculates the national average hourly wage rate and divides each geographic area’s wage rate by the national average wage rate to determine each geographic area’s wage index. Id.

By design, "each hospital’s wage data affects the ultimate wage index for all hospitals in the area, and thus data errors or omissions by one hospital can [decrease] (or increase) PPS rates for other hospitals in its area." Dignity Health v. Price , 243 F. Supp. 3d 43, 46 (D.D.C. 2017). Similarly, because CMS must calculate a national average wage rate to develop the wage index, and because changes in the wage index must be budget neutral, 42 U.S.C. § 1395ww(d)(3)(E)(i), "a change in any single wage index can affect the reimbursement rate of each hospital in the country." Methodist Hosp. of Sacramento v. Shalala , 38 F.3d 1225, 1228 (D.C. Cir. 1994).

For the 2017 wage index, CMS released its preliminary wage data files on May 15, 2015. CMS expected to use the data in those files to develop the 2017 wage index. Hospitals were required to notify MACs of any "revisions to the wage index data as reflected in the preliminary files" by September 2, 2015. App. at 49. The wage index development process provided no opportunity for third-party hospitals to review or contest any other hospital’s wage data. Following several rounds of review and revision between the hospitals and the MACs, the proposed rule was expected to be published for notice and comment in April or May 2016. The final rule was then expected to be published on August 1, 2016.

B. Factual and Procedural History

The Baystate hospitals are located in Massachusetts. The only rural hospital in Massachusetts is Nantucket Cottage Hospital ("Nantucket"). Nantucket accordingly sets the rural floor for all hospitals in the state. The data that Nantucket submitted to CMS to calculate the 2017 wage index allegedly contained several errors that deflated Nantucket’s hourly wage rate. On April 4, 2016, nearly seven months after the deadline to request revisions to the preliminary wage data had passed, Nantucket notified CMS by letter of the errors and sought to correct them. App. at 40–46. The hospital estimated that the corrections would "increase [its] average hourly wage from $43.78 to $60.50." App. at 45.

On April 27, 2016, the Secretary published the proposed 2017 wage index in the Federal Register before responding to Nantucket’s letter. See FY2017 PPS Proposed Rule, 81 Fed. Reg. 24,946. The Secretary stated that "[i]f a hospital wished to request a change to its data as shown in May 15, 2015 wage data files and May 15, 2015 occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its MAC by September 2, 2015." Id. at 25,072. The Secretary also emphasized that "[h]ospitals were notified of this deadline and of all other deadlines and requirements, including the requirement to review and verify their data as posted in the preliminary wage index data files." Id.

During the notice-and-comment period, many Massachusetts hospitals submitted comments to the Secretary urging him to accept Nantucket’s corrected wage data because failure to do so would result in a major reduction in reimbursements for hospitals across the state. This precise problem is acute in Massachusetts because, unlike most states, Nantucket’s wage index, which alone sets the rural floor in Massachusetts, is typically significantly higher than the wage index for other geographic areas in the state. See, e.g. , Baystate Franklin Med. Ctr. v. Azar , 319 F. Supp. 3d 514, 522 (D.D.C. 2018). For example, Baystate Health’s public comment estimated that "the impact of the data errors alone is a loss of $115 million in Medicare inpatient and outpatient reimbursement to 39 Massachusetts hospitals in 2017." App. at 99. Conversely, other commenters suggested that if the Secretary modified the rule based on Nantucket’s late filing, it "would establish a ‘troubling’ precedent by disregarding CMS rules and regulations, which provide ample opportunity to correct wage data through the agency’s normal review process and deadlines." FY2017 PPS Final Rule, 81 Fed. Reg. at 56,920.

Ultimately, the Secretary enforced the deadline and refused to accept Nantucket’s proposed revisions in calculating the final wage index. Id. The Secretary explained, "It is our intent to ensure that the wage index is calculated from the best available data, consistent with our wage index policies and development timeline." Id. He emphasized that the deadlines "play[ ] an important role in maintaining the integrity and fairness of the wage index calculation." Id. He further noted that CMS has "consistently stated in annual [In-Patient] PPS rulemaking that hospitals that do not meet the procedural deadlines set forth in the [In-Patient] PPS rule will not be afforded a later opportunity to submit wage index data corrections or to dispute the MAC’s decision with respect to requested...