Banner Health v. Burwell

Decision Date02 September 2015
Docket NumberCivil Action No. 10–1638 (CKK)
Citation126 F.Supp.3d 28
Parties Banner Health f/b/o Banner Good Samaritan Medical Center, et al., Plaintiffs v. Sylvia M. Burwell, Secretary of the U.S. Department of Health and Human Services, Defendant
CourtU.S. District Court — District of Columbia

Stephen P. Nash, Michihiro M. Tsuda, Mimi Hu Brouillette, Sven C. Collins, Squire Patton Boggs, Denver, CO, John Louis Oberdorfer, Samantha R. Petrich, Squire Patton Boggs (US) LLP, Washington, DC, for Plaintiff.

James C. Luh, U.S. Department of Justice, Washington, DC, for Defendant.


COLLEEN KOLLAR–KOTELLY, United States District Judge

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the Medicare program. They have sued the Secretary of the Department of Health and Human Services (the "Secretary"), purporting to challenge various actions taken by the Secretary in the course of administering Medicare's "outlier" payment system, the system which provides additional payments to hospitals for extremely high cost cases. Plaintiffs challenge a series of regulations that, together, govern outlier payments for federal fiscal year ("FY") 1997 through FY 2007. Specifically, they challenge 14 regulations: outlier payment regulations promulgated in 1988, 1994 and 2003, and 11 annual fixed loss threshold regulations issued for FY 1997 through FY 2007.1 As explained in more detail below, the combination of the applicable outlier payment regulations and the applicable annual fixed loss threshold establishes the formula for calculating the outlier payments made to individual hospitals, including payments to Plaintiffs and to the facilities controlled by Plaintiffs, during each fiscal year. Plaintiffs challenge the individual outlier payments made by applying those 14 regulations, as well.2

Presently before the Court are Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Summary Judgment, Plaintiffs' [127/142] Motion for Summary Judgment, and Plaintiffs' [128] Motion (Related to Their Motion For Summary Judgment) for Judicial Notice and/or for Extra–Record Consideration of Documents and Other Related Relief. Upon consideration of the pleadings,3 the relevant legal authorities, and the record as a whole, the Court DENIES Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction, GRANTS IN PART and DENIES IN PART Defendant's [126] Motion for Summary Judgment, GRANTS IN PART and DENIES IN PART Plaintiffs' [127/142] Motion for Summary Judgment, and GRANTS IN PART and DENIES IN PART Plaintiffs' [128] Motion for Judicial Notice and/or for Extra–Record Consideration of Documents and Other Related Relief.

As an initial matter, the Court concludes that it has subject matter jurisdiction over all of the claims in this action. With respect to the FY 2004 fixed loss threshold rule, the Court REMANDS the rule to the agency to allow the agency to explain its decision regarding its treatment of certain data—or to recalculate the fixed loss threshold if necessary—as explained further below. In all other respects, the Court DENIES Plaintiffs' challenges to all of the regulations at issue in this case.

With respect to Plaintiffs' [128] Motion for Judicial Notice and/or Extra–Record Consideration of Documents and Other Related Relief, the Court DENIES Plaintiffs' request to supplement the record and for extra-record consideration of documents, but the Court GRANTS the motion insofar as the Court will take judicial notice of the publicly available materials subject to the motion, as relevant. The Court DENIES Plaintiffs' request to submit three additional tables and STRIKES from the record exhibits 5, 7, and 8 to Plaintiffs' Motion for Summary Judgment. The Court will retain jurisdiction pending the limited remand to the agency regarding the FY 2004 rulemaking.

A. Factual Background

While this action emerges from Plaintiffs' challenge to the outlier payments they received for FY 1997 through FY 2007, the hospitals do not challenge the calculation of the individual outlier payments; instead, they level their substantive challenges at the 14 regulations that established the formulas for outlier payments in each of the relevant years. Plaintiffs challenge two sets of interrelated regulations that, taken together, create a formula that generates the actual outlier payments paid each year. With these regulations in hand, the calculations of the actual outlier payments are effectively a ministerial task. The first set of regulations consists of three rules—promulgated in 1988, 1994, and 2004—revising the outlier payment regulations, which are codified at 42 C.F.R. § 412.84. As presented below in greater detail, these regulations set a formula for how individual outlier payments will be calculated for each fiscal year, a formula that was revised over the course of time by these regulations. For all of the years after 1994, including the years for which outlier payments are at issue in this litigation, that formula involved a fixed loss threshold that was set annually. As described below in greater detail, the fixed loss threshold represents the dollar amount of loss that a hospital must absorb in any case in which the hospital incurs estimated costs for treating a patient above and beyond the payment rate set for that type of case. Accordingly, the second set of regulations challenged in this action consists of 11 annual fixed loss threshold rulemakings issued for FY 1997 to FY 2007. In each of those annual rulemakings, the agency established a methodology for setting a fixed loss threshold and set the dollar value of the fixed loss threshold itself.4 The outlier payment regulations that were applicable for the relevant fiscal year are effectively inputs for the fixed loss threshold rulemakings. That is, using the methodology selected for the fiscal year, the agency uses the applicable outlier payment regulations together with selected past data to generate an annual fixed loss threshold that complies with the statutory requirements.

Because of the wide-ranging nature of Plaintiffs' challenge—challenging 11 annual fixed loss threshold regulations and outlier payment regulations issued over the course of three decades—and because of the technical complexity of the program involved—it is necessary to review the history of the program in some detail.5 Moreover, it is important that significant changes to the program occurred over the course of the years covered in this challenge. Because Plaintiffs challenge rulemakings that occurred as early as 1988, it is necessary to explain the changes that occurred as the outlier payment program unfolded over time. That said, the Court provides the greatest detail on fiscal years 1997 through 2007 that are the core of the claims in this case. The Court reserves certain details for its discussion of the discrete issues presented by the parties below.

The Statutory Framework

Medicare "provides federally funded health insurance for the elderly and disabled," Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226–27 (D.C.Cir.1994), through a "complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). The program is administered by the Secretary through the Centers for Medicare and Medicaid Services ("CMS"). Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C.Cir.2011).

From its inception in 1965 until 1983, Medicare reimbursed hospitals based on "the ‘reasonable costs' of the inpatient services that they furnished." Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir.1999) (quoting 42 U.S.C. § 1395f(b) ), cert. denied, 530 U.S. 1204, 120 S.Ct. 2197, 147 L.Ed.2d 233 (2000). However, "[e]xperience proved ... that this system bred ‘little incentive for hospitals to keep costs down’ because [t]he more they spent, the more they were reimbursed.’ " Id. (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C.Cir.1991) ).

In 1983, with the aim of "stem[ming] the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology." Cnty. of Los Angeles, 192 F.3d at 1008 (citing Social Security Amendments of 1983, Pub.L. No. 98–21, § 601, 97 Stat. 65, 149). Since then, the Prospective Payment System, as the overhauled regime is known, has reimbursed qualifying hospitals at prospectively fixed rates. Id. By enacting this overhaul, Congress sought to "reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost[-]effective hospital practices." H.R.Rep. No. 98–25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.

Under the Prospective Payment System, Hospitals are reimbursed "based on the average rate of ‘operating costs [for] inpatient hospital services.’ " Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C.Cir.2015) (quoting Cnty. of Los Angeles, 192 F.3d at 1008 ). "Because different illnesses entail varying costs of treatment, the Secretary uses diagnosis-related groups (DRGs) to ‘modif[y] the average rate." Id. (quoting Cape Cod Hosp., 630 F.3d at 205 ). "A DRG is a group of related illnesses to which the Secretary assigns a weight representing ‘the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients.’ " Id. (quoting Cape Cod Hosp., 630 F.3d at 205–06 ). "To calculate a specific reimbursement, the Secretary ‘takes the [average] rate, adjusts it [to account for regional labor costs], and then multiplies it by the weight assigned to the patient's DRG.’ " Id. (quoting Cnty. of Los Angeles, 192 F.3d at 1009 ) (alteration in original).

"Congress recognized that health-care providers would inevitably care for some patients whose hospitalization would be extraordinarily costly or lengthy" and devised a means to "insulate hospitals from bearing a...

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