Clarian Health W., LLC v. Burwell

Decision Date26 August 2016
Docket NumberCivil Action No. 14-cv-0339 (KBJ)
Parties CLARIAN HEALTH WEST, LLC, Plaintiff, v. Sylvia Mathews BURWELL, Defendant.
CourtU.S. District Court — District of Columbia

Ze-Wen Julius Chen, Christopher L. Keough, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, for Plaintiff.

Peter T. Wechsler, United States Department of Justice, Washington, DC, for Defendant.


KETANJI BROWN JACKSON, United States District Judge

The Centers for Medicare and Medicaid Services ("CMS") is the sub-agency within the Department of Health and Human Services ("HHS") that administers the federal health insurance program known as Medicare. In 2012, an agent of CMS informed Plaintiff Clarian Health West, LLC ("Clarian"), an Indiana hospital, that it needed to repay more than $2 million in Medicare reimbursement funds that the hospital had received under the Medicare program, due to a reconciliation process that CMS had performed with respect to certain Medicare payments. Clarian objected to CMS's repayment demand, and filed the instant action against Sylvia Mathews Burwell, the Secretary of HHS, to contest the agency's contentions. Clarian's one-count complaint cites the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 –706, and the Medicare statute's review provisions, 42 U.S.C. § 1395oo (f)(1), and asserts that the agency lacks the statutory and regulatory authority to make Clarian repay the money because the regulation that authorizes the reconciliation process ("the 2003 Rule") and the guidelines that implement that rule ("the 2010 guidelines" or "the 2010 manual") were improperly promulgated and are contrary to the terms of the Medicare statute.

Before this Court at present are the parties' cross-motions for summary judgment. (Pl.'s Mot. for Summ. J. ("Pl.'s Mot."), ECF No. 13; Def.'s Mot. for Summ. J. ("Def.'s Mot."), ECF No. 14.) In its motion, Clarian contends, among other things, that CMS's decision to recoup the $2 million was procedurally defective because the agency failed to employ required notice-and-comment procedures prior to adopting the guidelines that establish the criteria for identifying which hospitals should be subjected to the reconciliation process. (See Pl.'s Mem. in Supp. of Pl.'s Mot. ("Pl.'s Mem."), ECF No. 13-1, at 29–36.)1 The Secretary's cross-motion argues that there is nothing procedurally or substantively improper about the rule that relates to the reconciliation process or its implementation. (See Def.'s Mem. in Supp. of Def.'s Mot. ("Def.'s Mem."), ECF No. 14-1, at 24–49.)

Upon consideration of the parties' arguments, this Court agrees with Clarian that the qualifying criteria contained in the implementing manual were the sort of substantive rule that must go through notice-and-comment rulemaking, and on that ground alone, Clarian's motion for summary judgment will be GRANTED , and the Secretary's motion for summary judgment will be DENIED . A separate order consistent with this opinion will follow.

A. The Applicable Statutory And Regulatory Framework

The Medicare program "was established in 1965 and provides health care coverage for persons age 65 and older, disabled persons, and persons with end stage renal disease who meet certain eligibility requirements." Allina Health Servs. v. Burwell , No. 14–cv–1415, 201 F.Supp.3d 94, 1140–41, 2016 WL 4409181, at *1 (D.D.C. Aug. 17, 2016) (citing 42 U.S.C. §§ 426, 426a ). Medicare reimbursements are governed by federal law, and the obtuse text of the Medicare statute has produced much inspired grappling among judges, many of whom have described the legal provisions that govern the Medicare system as a "maze[,]" Hall v. Sebelius , 667 F.3d 1293, 1301 n. 9 (D.C.Cir.2012) (Henderson, J., dissenting), a "legislative and regulatory thicket[,]" Adirondack Med. Ctr. v. Sebelius , 29 F.Supp.3d 25, 28 (D.D.C.2014), aff'd sub nom. Adirondack Med. Ctr. v. Burwell , 782 F.3d 707 (D.C.Cir.2015), and a "labyrinth[,]" Biloxi Reg'l Med. Ctr. v. Bowen , 835 F.2d 345, 349 (D.C.Cir.1987), among other things.2 The instant lawsuit centers on the government's reimbursement of inpatient hospital care under Medicare Part A, pursuant to which the federal government provides direct reimbursements to healthcare providers to cover the bulk of the expenses that a patient with Medicare insurance (called a "beneficiary") incurs for inpatient hospital care. See 42 U.S.C. § 1395d ; see also Ctrs. for Medicare & Medicaid Servs., Pub. No. 100–01, Medicare General Information, Eligibility, and Entitlement Manual, Ch. 3 §§ 10.2–10.3.

1. Medicare's Prospective Payment System

The complexity of the Medicare scheme is partly due to the intricacies of the prospective payment system that Congress has adopted with respect to Part A reimbursements—a payment system that Congress developed in reaction to the failures of the cost-based payment system that was used when Medicare was first enacted. See Dist. Hosp. Partners, L.P. v. Burwell , 786 F.3d 46, 49 (D.C.Cir.2015). Under the prior regime, hospitals and other health care providers were reimbursed for all "reasonable costs" that the provider incurred in treating beneficiaries, Good Samaritan Hosp. v. Shalala , 508 U.S. 402, 405, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993), but that cost-based system "deteriorated over time ... because it provided little incentive for hospitals to keep costs down, as the more they spent, the more they were reimbursed[,]" Dist. Hosp. Partners , 786 F.3d at 49 (internal quotation marks and citation omitted); see also H.R. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351 (asserting that the cost-based payment system "lack[ed] incentives for efficiency" because the federal government would "simply respond[ ] to hospital cost increases by providing increased reimbursement"). In 1983, Congress replaced Medicare's cost-based payment system with the prospective payment scheme that has given rise to many legal disputes and that is at the heart of the present action. See Social Security Amendments of 1983, Pub. L. No. 98–21, § 601, 97 Stat. 65, 149-63.

Under the prospective payment system, in contrast to the cost-based system, the federal government pays the hospital a set reimbursement amount that is established in advance of the hospital's expenditures and that is generally based upon the government's ex ante assessment of what it costs to care for an individual with the Medicare beneficiary's specific diagnosis, regardless of how much the hospital actually spends to care for a beneficiary. See Cape Cod Hosp. v. Sebelius , 630 F.3d 203, 205 (D.C.Cir.2011) ; see also Dist. Hosp. Partners , 786 F.3d at 49 (explaining that prospective payments incentivize hospitals to reduce the cost of inpatient care because any reduction in cost directly profits the hospitals, while increases in the cost of care beyond the predetermined amount are borne by the hospitals rather than the federal government). The prospective payments that hospitals receive for treating Medicare patients are calculated by private health care insurers known as Medicare Administrative Contractors ("MACs") pursuant to a multifactor formula that begins with a "standardized amount," which generally "reflects the average cost incurred by hospitals nationwide for each patient they treat and then discharge." Cape Cod Hosp. , 630 F.3d at 205.3

In order to ensure that the prospective payment system fairly approximates the actual cost of the care provided, the MACs adjust the standardized amount to account for various factors, including the relative cost of the care associated with different patient diagnoses. See Dist. Hosp. Partners , 786 F.3d at 49 ; Cape Cod Hosp. , 630 F.3d at 205. Per the Medicare statute, HHS has classified the care that can be afforded to every type of hospital patient into Diagnosis Related Groups ("DRGs"), see 42 U.S.C. § 1395ww(d)(4)(A), and each DRG is weighted in accordance with "the estimated relative cost of hospital resources used with respect to discharges classified within that group compared to discharges classified within other groups[,]" 42 C.F.R. § 412.60(b).4 This means, for example, that the DRG classification that includes a heart transplant will be weighted more heavily than one for a non-invasive procedure—i.e., the "DRG weight" will be greater—because heart surgery uses more resources and imposes higher costs on the hospital. Cty. of Los Angeles v. Shalala , 192 F.3d 1005, 1008 (D.C.Cir.1999). And the greater the DRG weight, the higher the rate of reimbursement; indeed, the DRG weight adjustment is such an important factor in determining the rate of reimbursement under the prospective payment system that the Medicare statute itself refers to reimbursements as the "DRG prospective payment rate." See, e.g. , 42 U.S.C. § 1395ww(d)(5)(A)(ii).

Significantly for present purposes, Medicare's prospective payment system not only seems to provide incentives for hospitals to control costs while accounting for the variable care costs that are associated with different patient diagnoses, it also recognizes that the costs of healthcare can sometimes be unpredictable, and that a purely prospective system would unfairly omit reimbursements for the high costs a hospital can incur when a particular beneficiary's care ends up being unduly expensive through no fault of the hospital, as sometimes happens. See Cty. of Los Angeles , 192 F.3d at 1009 ("Despite 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."). To prevent hospitals from facing significant losses for providing care to patients in such "outlier" cases—i.e., situations in which the cost of the care provided to a Medicare beneficiary far exceeds the prospective reimbursement rate for a particular diagnosis—Congress authorized HHS to reimburse hospitals for...

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