Adirondack Med. Ctr. v. Sebelius

• Decision Date: 27 March 2013
• Docket Number: Civil Action No. 11–313 (RMC).
• Citation: 935 F.Supp.2d 121
• Parties: ADIRONDACK MEDICAL CENTER, et al., Plaintiffs, v. Kathleen SEBELIUS, Secretary, Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

935 F.Supp.2d 121

ADIRONDACK MEDICAL CENTER, et al., Plaintiffs,

v.Kathleen SEBELIUS, Secretary, Department of Health and Human Services, Defendant.

Civil Action No. 11–313 (RMC).

United States District Court, District of Columbia.

March 27, 2013.

Ankur Jayant Goel, Johnny H. Walker, III, McDermott, Will & Emery, Washington, DC, for Plaintiffs.

Kathryn L. Wyer, U.S. Department of Justice, Washington, DC, for Defendant.

OPINION

ROSEMARY M. COLLYER, District Judge.

Plaintiff Hospitals ¹ sue Kathleen Sebelius, Secretary of Health and Human Services, challenging her application of certain adjustments to Medicare reimbursement rates for sole community hospitals and Medicare-dependent, small rural hospitals. The Hospitals assert that the Secretary's actions are both ultra vires and arbitrary and capricious in violation of the Administrative Procedure Act, 5 U.S.C. § 706. The parties also litigate whether the Secretary violated the APA by failing to comply with notice and comment rulemaking procedures when she issued payment instructions affecting sole community hospitals for fiscal year (“FY”) 2009 and FY2010. The Secretary counters that her actions are within her authority and consistent with the APA. Before the Court are the parties' cross-motions for summary judgment. The Court will grant in part and deny in part the Secretary's motion for summary judgment. The Court will grant the Secretary's motion for summary judgment on the issue of whether the Secretary was required to engage in rulemaking when issuing the second 2008 rebasing instruction for sole community hospitals and deny Plaintiffs' motion for summary judgment on this issue. The Court will deny both the Secretary's and Plaintiffs' motions for summary judgment without prejudice on the issue of whether the Secretary's application of a cumulative budget neutrality adjustment for sole community hospitals in FY2009 and FY2010, and for Medicare-dependent, small rural hospitals in FY2010, violates the APA and order further briefing.

I. FACTS

A. Background

1. Inpatient Prospective Payment System

Medicare is a federal health insurance program for the elderly and the disabled. See42 U.S.C. § 1395 et seq. It is administered by the Centers for Medicare and Medicaid Services (“CMS”), a division of the Department of Health and Human Services (“HHS”), under the executive management of Defendant Kathleen Sebelius, Secretary of HHS, who is sued in her official capacity.

Plaintiff Hospitals provide acute inpatient medical care to residents of small or rural communities. Each Hospital has been designated a “sole community hospital” (“SCH”) or a “medicare-dependent, small rural hospital” (“MDH”) under Medicare. See42 U.S.C. § 1395ww(d)(5)(D)(iii) (defining sole community hospital); id. § 1395ww(d)(5)(G)(iv) (defining Medicare-dependent, small rural hospital). Because they are critical to providing hospital services in remote and rural areas and to the uninsured poor, the Hospitals are covered by special cost reimbursement protections for services under Medicare. Id. §§ 1395ww(d)(5)(D) & 1395ww(d)(5)(G).

To provide an incentive for all hospitals serving Medicare patients to control costs, Congress directed the Secretary in 1983 to create an “inpatient prospective payment system” (IPPS), whereby CMS pays prospectively a fixed payment for each anticipated patient discharge, depending on anticipated diagnosis, necessary treatment, and the like, as described at 42 U.S.C. § 1395ww(d). See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226–27 (D.C.Cir.1994) (describing the transition in 1983 to a prospective payment system for hospitals reimbursed under Medicare). The payment rates are set before the fiscal year begins and control reimbursements for specified services without regard to the actual cost of providing that medical care to hospitalized Medicare patients. Id. “Congress designed this system to encourage health care providers to improve efficiency and reduce operating costs.” Id.

IPPS depends, in part, on patient diagnoses. Diagnoses are assigned to a “diagnosis-related group” (“DRG”), and each DRG is assigned a weight that is multipliedby a base dollar amount to determine actual payment. 42 C.F.R. § 412.60(b); id. § 412.64(g). CMS annually identifies hundreds of different DRGs, assigning each “a numeric weight reflecting the amount of resources needed, on average, to treat a patient with the corresponding diagnosis,” relative to other diagnoses. Florida v. Tenet Healthcare Corp., 420 F.Supp.2d 1288, 1293 (S.D.Fla.2005); see42 U.S.C. § 1395ww(d)(4)(A)-(B); 42 C.F.R. § 412.60. The Amici ² advised that DRG weights range from less than 1 up to 7. Transcript of Feb. 25, 2013 Hearing [Dkt. 38], 8:1–3. Starting in fiscal year (“FY”) 1988, Congress required the Secretary to adjust DRG weighting factors every year “to reflect changes in treatment patterns, technology ..., and other factors which may change the relative use of hospital resources.” 42 U.S.C. § 1395ww(d)(4)(C)(i). Starting in FY1991, Congress also required the Secretary to ensure that annual adjustments to DRG weighting factors not result in an overall increase to Medicare spending. Id. § 1395ww(d)(4)(C)(iii). The law specifies:

Any such adjustment [to diagnosis-related groups] ... for discharges in a fiscal year ... shall be made in a manner that assures that the aggregate payments under this subsection for discharges in the fiscal year are not greater or less than those that would have been made for discharges in the year without such adjustment.

Id. The parties agree that this subsection of Medicare stands for the proposition that other factors might increase the cost of Medicare coverage but the Secretary must ensure that annual changes to DRG weights have a budget-neutral effect.

Consequently, in addition to adjusting DRG weights to reflect changes in treatment patterns and technology each year, the Secretary also adjusts new DRG weights so that the average case after the annual adjustment has the same DRG weighting factor as the average case before adjustment. This normalization, however, does not achieve full budget neutrality in overall payments because the “average” cannot capture the full range of diagnoses and treatments. SeeFY 1991 Proposed Rule, 55 Fed.Reg. 19,426, 19,466 (May 9, 1990) (“While [normalization] is intended to ensure that recalibration does not affect total payments to hospitals, our analysis indicates that the normalization adjustment does not achieve budget neutrality with respect to aggregate payments to hospitals.”). As a result, the Secretary calculates an additional adjustment—a so-called DRG budget neutrality adjustment—to satisfy the congressional directive that changes to DRG weighting factors not be a cause of increases in Medicare costs. Id. The Secretary insists that she has implemented the budget neutrality adjustment in a cumulative manner since 1994, i.e., the Secretary does not remove the effects of prior years' budget neutrality adjustments when adding the current year's budget neutrality adjustment. See FY 1994 Final Rule, 58 Fed.Reg. 46,270, 46,346 (Sept. 1, 1993) (“Th[e] budget neutrality adjustment factor is applied to the standardized amounts without removing the effects of the [prior year's] budget neutrality adjustment. We do not remove the prior budget neutrality adjustment because the statute requires that aggregate payments after the changes in the DRG relative weights and wage index equal estimated payments prior to the changes. If we removed the prior year adjustment, we would not be able to satisfy this condition.”). Notably, however, the budget neutrality adjustment—although called a DRG budget neutrality adjustment by the parties—is actually applied by the Secretary to the payment rate applicable to the Hospitals and not to the DRG weights themselves. See, e.g., FY1994 Proposed Rule, 58 Fed.Reg. 30,222, 30,269 (May 26, 1993) (“In addition, we are proposing to continue to apply the same FY 1994 [budget neutrality] adjustment factor to the hospital-specific rates ... to ensure that we meet the statutory requirement that aggregate payments neither increase nor decrease as a result of the implementation of the DRG weights and updated wage index.”).

2. Methodology for Calculating Payment Rates for SCHs and MDHs

Most hospitals are paid according to what the regulations call the “federal rate” for each Medicare beneficiary.³See42 C.F.R. § 412.64. The starting point in calculating the federal rate in a given year is the “average standardized amount,” essentially the average operating cost per patient discharge for all IPPS hospitals ⁴ in a given time period, irrespective of diagnosis. See42 U.S.C. § 1395ww(d)(3)(A). The average standardized amount is case-mix adjusted, which means that the average cost is divided by the average DRG weight for all IPPS hospitals in the relevant year. Id.; see also id. § 1395ww(d)(2)(C). For a new year, the average standardized rate of the previous year is updated for inflation, 42 U.S.C. § 1395ww(b)(3)(B), and multiplied by a budget neutrality adjustment for the new year. See, e.g.,58 Fed.Reg. 30,269. To calculate the reimbursement rate for a specific discharged beneficiary, this product is multiplied by the DRG weighting factor that applies to the diagnosis of the discharged patient. See42 U.S.C. § 1395ww(d)(3)(D). The result is the federal rate payment for that diagnosis as of discharge. However, in light of the financial burden of addressing the needs of their small-community or rural-patient populations, the Medicare Act provides a special method for calculating reimbursement rates for SCHs and MDHs.

SCHs and MDHs are paid according to the federal rate or according to each hospital's distinct “hospital-specific rate,” depending on which rate will result in a higher payment.⁵ An MDH is paid the federal rate plus 75% of the difference, if any, between its federal rate payment and its hospital-specific...