Billings Clinic v. Azar, No. 17-5006

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtMillett, Circuit Judge
Citation901 F.3d 301
Parties BILLINGS CLINIC, et al., Appellants v. Alex Michael AZAR, II, Secretary, U.S. Department of Health and Human Services, Appellee
Docket NumberNo. 17-5006
Decision Date10 August 2018

901 F.3d 301

BILLINGS CLINIC, et al., Appellants
v.
Alex Michael AZAR, II, Secretary, U.S. Department of Health and Human Services, Appellee

No. 17-5006

United States Court of Appeals, District of Columbia Circuit.

Argued December 15, 2017
Decided August 10, 2018
Rehearing En Banc Denied October 16, 2018


Sven C. Collins argued the cause for appellants. With him on the briefs was Stephen P. Nash.

Sydney Foster, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief were Jessie K. Liu, U.S. Attorney, and Michael S. Raab, Attorney.

Before: Garland, Chief Judge, and Srinivasan and Millett, Circuit Judges.

Opinion for the Court filed by Circuit Judge Millett.

Millett, Circuit Judge:

Several hospitals challenge the methodology that the Department of Health and Human Services used to calculate the "outlier payment" component of their Medicare reimbursements for 2008, 2009, 2010, and 2011. Following this court's decision in Banner Health v. Price , 867 F.3d 1323 (D.C. Cir. 2017) (per curiam)—which upheld the challenged methodology at its inception in 2007—the primary question before us is whether the Department's decision to continue with its methodology after the 2007 fiscal year was arbitrary in light of accumulating data about the methodology's

901 F.3d 303

generally sub-par performance. Because the Department had, at best, only limited additional data for 2008 and 2009, and because the 2009 data suggested that hospitals were paid more than expected, the Department's decision to wait a bit longer before reevaluating its complex predictive model was reasonable.

On appeal, the Hospitals also challenge the Department's failure to publish a proposed, but later abandoned, draft rule during the 2003 rulemaking process. As the parties now acknowledge, Banner Health decided this issue in favor of the Department. That prior circuit precedent controls here.

I

A

Congress first established Medicare in 1965 as part of the Social Security Act, Pub. L. 89–97, Title XVIII, 79 Stat. 286, 291 (1965), as a "federally funded medical insurance program for the elderly and disabled," Fischer v. United States , 529 U.S. 667, 671, 120 S.Ct. 1780, 146 L.Ed.2d 707 (2000). In its early years, Medicare paid its claims much like most other insurance providers, reimbursing hospitals for the "reasonable costs" of services provided to Medicare patients. County of L.A. v. Shalala , 192 F.3d 1005, 1008 (D.C. Cir. 1999).

But over time, that system broke down. The "reasonable cost" payment structure provided little incentive for hospitals to husband their costs. The more they spent, the more they would receive. County of L.A. , 192 F.3d at 1008. So healthcare costs rose, driving up the costs of the Medicare program. See id.

In 1983, Congress confronted the problem of rising costs. To better align the providers' incentives, it constructed a new "prospective" payment system that reimbursed hospitals based on the average rate of "operating costs [for] inpatient hospital services." County of L.A. , 192 F.3d at 1008. After adopting this new scheme, the Department of Health and Human Services began to reimburse hospitals "at a fixed amount per patient, regardless of the actual operating costs they incur in rendering [those] services." Sebelius v. Auburn Reg'l Med. Ctr. , 568 U.S. 145, 149, 133 S.Ct. 817, 184 L.Ed.2d 627 (2013).

Generally speaking, this reimbursement system operates as follows:

First, the Secretary of Health and Human Services calculates a base payment rate. See 71 Fed. Reg. 47,870, 47,876 (Aug. 18, 2006) (codified at 42 C.F.R. §§ 412.308, 412.312 ). This rate contains both a labor and a non-labor cost component. Id. The Secretary then adjusts the labor-related component to account for labor costs in the area where the hospital is located. Id.

Second, the Secretary develops a list of "diagnosis-related groups." 71 Fed. Reg. at 47,876. These groups encompass numerous related medical diagnoses that the Secretary believes impose a similar cost on the provider hospital. Id. To reflect the average cost of treatment for patients in each diagnosis group, the Secretary establishes a unique "relative weight" for that group. Id.

Third, the base payment rate is multiplied by the relative weight to create a generic payment amount for each diagnosis-related group. 71 Fed. Reg. at 47,876. That is:

 Base Payment Rate × Relative Weight =
                 Generic Prospective Payment
                
901 F.3d 304

Fourth, qualifying hospitals can receive various payment "add-ons." For example, if a hospital treats a high proportion of low-income patients, it receives a percentage increase in Medicare payments known as the "disproportionate share hospital (DSH) adjustment." 71 Fed. Reg. at 47,876. Likewise, if the hospital serves as an approved teaching hospital, it can receive a percentage add-on payment, known as the indirect medical education adjustment. Id. Hospitals also can receive additional payments for cases involving the use of new technologies. Id.

Fifth, even with those add-ons, Congress recognized that healthcare providers would encounter patients with needs well outside the norm. County of L.A. , 192 F.3d at 1009. To account for those abnormally costly cases and to protect against large financial losses for hospitals, the statute permits hospitals to request additional "outlier payments." See 42 U.S.C. § 1395ww(d)(5)(A)(ii). Hospitals may seek such payments where "charges, adjusted to cost, * * * exceed the sum of the applicable [diagnosis-related group] prospective payment rate plus any amounts payable under [the payment adjustment provisions] plus a fixed dollar amount determined by the Secretary." Id. In other words, hospitals are eligible for outlier payments where:

 Charges, Adjusted to Cost > (Generic Prospective Payment +
                 Any Payment Adjustments +
                 Additional Buffer Amount (set by the Secretary))
                

Any cost-adjusted charges above the applicable threshold are eligible for outlier compensation. Charges below the threshold are not. For that reason, the latter half of the above formula—the generic prospective payment, adjustments, and additional buffer (or "outlier threshold")—is collectively referred to as the "fixed-loss cost threshold." 72 Fed. Reg. 47,130, 47,417 (Aug. 22, 2007) (codified at 42 C.F.R. pt. 412). The Department can control the threshold (and thus the number of cases eligible for outlier payments) by adjusting the additional buffer amount up or down at the start of the year.

The first figure in the formula, "charges, adjusted to cost," represents the estimated cost of care for the patient at issue. Since the Department will not know the hospital's actual cost of care at the time of payment, it can only estimate the hospital's costs using historical information about the hospital's past costs in relation to its prior charges.1 The Department estimates costs as follows:

 Historical Costs
                 Charges, Adjusted to Cost = Actual Charges × __________________
                 Historical Charges
                

See 53 Fed. Reg. 38,476, 38,503 (Sept. 30, 1988).

901 F.3d 305

The final piece of this formula—historical costs/historical charges—is known as the hospital's "cost-to-charge ratio." It reflects the percentage of that hospital's charges attributable to actual costs. To illustrate: If a hospital submits a bill for $1,000, the Department will look to see whether the hospital's estimated costs (or, as the Department refers to them, "charges, adjusted to cost") exceed the fixed-loss cost threshold. To do so, it will first need to know the costs embedded in that $1,000 charge. That is where the cost-to-charge ratio enters in. If the hospital charged $500 for this procedure in prior years, and its costs were $375, the hospital would have a cost-to-charge ratio of $375/$500 or .75. Put another way, in the past, 75% of the hospital's charges reflected its costs of care. Knowing that, the current costs of care can be estimated as follows:

 $1,000 × .75 = $750
                

In this instance, the hospital's "charges, adjusted to costs" would be $750, and that number can be weighed against the fixed-loss cost threshold for that patient's diagnosis-related group to determine whether the hospital should receive an outlier payment.

Finally, the statute provides that the total outlier payment for a given hospital "shall be determined by the Secretary and shall * * * approximate the marginal cost of care beyond the [applicable] cutoff point." 42 U.S.C § 1395ww(d)(5)(A)(iii). To implement this objective, the Department currently pays 80% of all costs above the applicable threshold. 42 C.F.R. § 412.84(k).

Continuing the previous example: If the fixed-loss cost threshold was $500, but the estimated cost of a patient's care was $750, the hospital would be eligible for an outlier payment of $200 (or 80% of $250, the amount falling above the $500 threshold). If, however, the threshold was $1,000, the hospital would receive no payment at all.

B

Over the years, the Department has taken various approaches to the cost-to-charge ratio data used to calculate the cost-adjusted...

To continue reading

Request your trial
9 practice notes
  • Hays Med. Ctr. v. Azar, No. 17-3232
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • April 21, 2020
    ...system quickly became unwieldy; "[t]he more [hospitals] spent, the more they would receive" in reimbursement. Billings Clinic v. Azar , 901 F.3d 301, 303 (D.C. Cir. 2018). Consequently, Congress replaced the old system with the inpatient prospective payment system. See Social Security Act A......
  • Univ. of Colo. Health v. Azar, Civil Action No. 14-1220 (RC)
    • United States
    • U.S. District Court — District of Columbia
    • March 31, 2020
    ...rates for different categories of services and treatments, known as "diagnosis-related groups" ("DRGs"). See Billings Clinic v. Azar , 901 F.3d 301, 303 (D.C. Cir. 2018) (citation omitted). However, hospitals are also eligible for certain outlier payments as a form of protection against unu......
  • Galen Hosp. Alaska, Inc. v. Azar, Civil Action No. 18-728 (RBW)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • July 21, 2020
    ...hospitals are not reimbursed for the actual operating costs that they incur in providing inpatient care. See Billings Clinic v. Azar, 901 F.3d 301, 304 (D.C. Cir. 2018). Instead, hospitals are paid at fixed rates under a scheme known as the Inpatient Prospective Payment System (the "Payment......
  • Univ. of Colo. Health at Mem'l Hosp. v. Becerra, Civil Action 14-1220 (RC)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • June 17, 2022
    ...rates for different categories of services and treatments, known as “diagnosis-related groups” (“DRGs”). See Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018) (citation omitted). However, hospitals are also eligible for certain outlier payments as a form of protection against unus......
  • Request a trial to view additional results
9 cases
  • Hays Med. Ctr. v. Azar, No. 17-3232
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • April 21, 2020
    ...system quickly became unwieldy; "[t]he more [hospitals] spent, the more they would receive" in reimbursement. Billings Clinic v. Azar , 901 F.3d 301, 303 (D.C. Cir. 2018). Consequently, Congress replaced the old system with the inpatient prospective payment system. See Social Security Act A......
  • Univ. of Colo. Health v. Azar, Civil Action No. 14-1220 (RC)
    • United States
    • U.S. District Court — District of Columbia
    • March 31, 2020
    ...rates for different categories of services and treatments, known as "diagnosis-related groups" ("DRGs"). See Billings Clinic v. Azar , 901 F.3d 301, 303 (D.C. Cir. 2018) (citation omitted). However, hospitals are also eligible for certain outlier payments as a form of protection against unu......
  • Galen Hosp. Alaska, Inc. v. Azar, Civil Action No. 18-728 (RBW)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • July 21, 2020
    ...hospitals are not reimbursed for the actual operating costs that they incur in providing inpatient care. See Billings Clinic v. Azar, 901 F.3d 301, 304 (D.C. Cir. 2018). Instead, hospitals are paid at fixed rates under a scheme known as the Inpatient Prospective Payment System (the "Payment......
  • Univ. of Colo. Health at Mem'l Hosp. v. Becerra, Civil Action 14-1220 (RC)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • June 17, 2022
    ...rates for different categories of services and treatments, known as “diagnosis-related groups” (“DRGs”). See Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018) (citation omitted). However, hospitals are also eligible for certain outlier payments as a form of protection against unus......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT