Banner Health v. Sebelius

• Citation: 797 F.Supp.2d 97
• Decision Date: 15 July 2011
• Docket Number: Civil Action No. 10–01638 (CKK).
• Parties: BANNER HEALTH f/b/o Banner Good Samaritan Medical Center, et al., Plaintiffs, v. Kathleen SEBELIUS, Secretary of the U.S. Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

797 F.Supp.2d 97

BANNER HEALTH f/b/o Banner Good Samaritan Medical Center, et al., Plaintiffs,

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

Civil Action No. 10–01638 (CKK).

United States District Court, District of Columbia.

July 15, 2011.

Stephen P. Nash, John Voorhees, Michihiro M. Tsuda, Mimi D. Hu, Sven Collins, Patton Boggs, LLP, Denver, CO, for Plaintiffs.

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

MEMORANDUM OPINION

COLLEEN KOLLAR–KOTELLY, 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”), challenging an array of actions taken by the Secretary in the course of administering Medicare's “outlier” payment system. The Secretary has filed a [17] Motion to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim (“Motion to Dismiss”), seeking the dismissal of this action in its entirety. Upon a searching review of the parties' submissions, the relevant authorities, and the record as a whole, the motion will be granted in part and denied in part.

I. STATUTORY AND REGULATORY 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. 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.

A. Calculating Prospective Payment Rates

In calculating prospective payment rates, the Secretary begins with the “standardized amount,” a figure that approximates the average cost incurred by hospitals nationwide for each treated patient. See 42 U.S.C. § 1395ww(d)(2). Following Congress's directive, the Secretary “does not calculate the standardized amount from scratch each year,” but “[i]nstead ... calculated the standardized amount for a base year and ... carrie[s] that figure forward, updating it annually for inflation.” Cape Cod, 630 F.3d at 205 (citing, inter alia, 42 U.S.C. § 1395ww(b)(3)(B)(i), (d)(2), (d)(3)(A)(iv)(II); 42 C.F.R. § 412.64(c)-(d)).

To account for regional variations in labor costs, the Secretary then “determines the proportion of the standardized amount attributable to wages and wage-related costs and then multiples that labor-related proportion by a wage index that reflects the relation between the local average of hospital wages and the national average of hospital wages.” Cape Cod, 630 F.3d at 205 (internal quotation marks omitted; citing, inter alia, 42 U.S.C. § 1395ww(d)(2)(H), (d)(3)(E)). “Unlike the standardized amount, wage indexes are calculated anew each year.” Id.

Finally, the standardized amount is weighted to “reflect[ ] the disparate hospital resources required to treat major and minor illnesses.” Cnty. of Los Angeles, 192 F.3d at 1008 (citing 42 U.S.C. § 1395ww(d)(4)). Specifically, “Medicare patients are classified into different groups based on their diagnoses, and each of these ‘diagnosis-related groups' ¹ is assigned a particular ‘weight’ representing the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients.” Cape Cod, 630 F.3d at 205–06 (citing 42 U.S.C. § 1395ww(d)(4)).

Therefore, to calculate how much a hospital should be paid for treating a particular case, the Secretary “takes the [standardized amount], adjusts it according to the wage index, and then multiplies it by the weight assigned to the patient's [diagnosis-related group].” Cnty. of Los Angeles, 192 F.3d at 1009.² The result is commonly referred to as the “DRG prospective payment rate.” Id.

B. Outlier Payments and the Fixed Loss Threshold

By design, the Prospective Payment System does not reimburse hospitals for the actual costs of the care that they provide to individual Medicare patients. Depending on how the costs incurred by a hospital in a particular case align with the DRG prospective payment rate, the hospital “may be over- or under-compensated for any given procedure.” Dist. Hosp. Partners, L.P. v. Sebelius, 794 F.Supp.2d 162, 164, No. 11 Civ. 116(ESH), 2011 WL 2621000, at *1 (D.D.C. July 5, 2011). However, “[d]espite the anticipated virtues of [the Prospective Payment System], 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 disproportionate share of these atypical costs.” Cnty. of Los Angeles, 192 F.3d at 1009. Specifically, Congress authorized the Secretary to make supplemental “outlier” payments to eligible providers. Id.

Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A), which provides, in relevant part, as follows:

(ii) ... [A] hospital [paid under the Prospective Payment System] may request additional payments in any case where charges, adjusted to cost, ... exceed the sum of the applicable DRG prospective payment rate plus any amounts payable under subparagraphs (B) and (F) ³ plus a fixed dollar amount determined by the Secretary.

(iii) The amount of such additional payment ... shall be determined by the Secretary and shall ... approximate the marginal cost of care beyond the cutoff point applicable under clause ... (ii).42 U.S.C. § 1395ww(d)(5)(A); see also 42 C.F.R. §§ 412.80–412.86 (implementing regulations).

Each fiscal year, the Secretary determines a fixed dollar amount that, when added to the DRG prospective payment, serves as the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii), (iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar amount is known as the “fixed loss threshold.” If a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. § 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that a hospital must absorb in any case in which the hospital incurs estimated actual costs in treating a patient above and beyond the DRG prospective payment rate. An increase in the fixed loss threshold reduces the number of cases that will qualify for outlier payments as well as the amount of payments for qualifying cases.

In designing the Prospective Payment System, Congress provided that “[t]he total amount of the additional [outlier] payments ... for discharges in a fiscal year 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). Under the Secretary's interpretation of the statute, which has been upheld by the United States Court of Appeals for the District of Columbia Circuit, “she must establish the fixed [loss] thresholds beyond which hospitals will qualify for outlier payments” at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d at 1009. To do so, the Secretary first makes a predictive judgment about the total amount of payments that can be expected to be paid based on DRG prospective payment rates. Cnty. of Los Angeles, 192 F.3d at 1009. She then examines historical data to determine the threshold that “would probably yield total outlier payments falling within the five-to-six-percent range.” Id. For obvious reasons, “[w]hether the Secretary's projections prove to be correct will depend, in large part, on the predictive value of the historical data on which she bases her calculations.” Id. In each of the fiscal years at issue in this action, the Secretary set fixed loss thresholds at a level so that the anticipated total of outlier payments would equal 5.1% of the anticipated total of payments based on DRG prospective payment rates.

As aforementioned, if a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. § 412.80(a)(2)-(3). The amount of the outlier payment is “determined by the Secretary” and must “approximate the marginal cost of care” beyond the fixed loss threshold. 42...