Dist. Hosp. Partners, L.P. v. Sebelius, Civil Action No. 11–0116 (ESH)

• Decision Date: 06 January 2014
• Docket Number: Civil Action No. 11–0116 (ESH)
• Citation: 973 F.Supp.2d 1
• Court: U.S. District Court — District of Columbia
• Parties: District Hospital Partners, L.P., d/b/a The George Washington University Hospital, et al., Plaintiffs, v. Kathleen Sebelius, Secretary, Department of Health and Human Services, Defendant.

973 F.Supp.2d 1

District Hospital Partners, L.P., d/b/a The George Washington University Hospital, et al., Plaintiffs,

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

Civil Action No. 11–0116 (ESH)

United States District Court, District of Columbia.

January 6, 2014

Robert L. Roth, Hooper, Lundy & Bookman, P.C., Washington, DC, John R. Hellow, Hooper, Lundy & Bookman, PC, Los Angeles, CA, for Plaintiffs.

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

MEMORANDUM OPINION

ELLEN SEGAL HUVELLE, United States District Judge

Plaintiffs own and operate 186 hospitals that participate in the Medicare program. They have sued the Secretary of the Department of Health and Human Services (“Secretary”) in her official capacity, alleging that her methodology for setting fixed loss thresholds for outlier payments to their hospitals, under the Medicare Act, 42 U.S.C. § 1395 et seq., was arbitrary and capricious for the Inpatient Prospective Payment System (“IPPS”) rules for federal fiscal years (“FFYs”) 2004, 2005, and 2006. The factual and procedural history of this case has been set forth in this Court's earlier Memorandum Opinions.¹

Now before the Court are the parties' cross-motions for summary judgment. ² Plaintiffs challenge the Secretary's methodology for calculating the fixed loss threshold determinations for FFYs 2004–2006, claiming that she used historical charge inflation data and cost-to-charge ratios that failed to account for the June 9, 2003 Outlier Correction Rule and thereby resulted in underpayments to participating hospitals. Having considered the administrative record and the parties' briefings, the Court concludes that the Secretary made reasonable methodological choices in determining the fixed loss thresholds for FFYs 2004–2006. Accordingly, the Court will grant the Secretary's motion for summary judgment and deny plaintiffs' motion.

ANALYSIS

I. LEGAL STANDARDS

A. MEDICARE

Medicare is a federally funded system of health insurance for the aged and disabled. It is administered by Centers for Medicare and Medicaid Services (“CMS”) under the direction of the Secretary. 42 U.S.C. § 1395kk; 42 C.F.R. § 400.200 et seq. When Medicare providers treat the program's beneficiaries, they receive coinsurance and deductible payments from the patient and then seek reimbursement for remaining costs from the Medicare program. Foothill Hosp.—Morris L. Johnston Mem'l v. Leavitt, 558 F.Supp.2d 1, 2 (D.D.C.2008).

Rather than pay hospitals for the specific cost of treating each Medicare patient, Medicare uses a “Prospective Payment System” (“PPS”), which compensates them at a fixed “federal rate” that is based on the “average operating costs of inpatient hospital services.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir.1999). Because Medicare payments are standardized in this way, hospitals may be over- or under-compensated for any given procedure. The Secretary therefore provides hospitals with additional “outlier payments” to compensate for patients “whose hospitalization would be extraordinarily costly or lengthy.” Id. at 1009. This case is about the Secretary's setting of thresholds that determine these outlier payments.

The Secretary enters into contracts with private firms to “review provider reimbursement claims and determine the amount due.” Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491 (D.C.Cir.2010). These “fiscal intermediaries” determine the outlier payments awarded to the hospitals. See id. & n. 1. Outlier payments are intended to “approximate the marginal cost of care beyond certain thresholds.” Lenox Hill Hosp. v. Shalala, 131 F.Supp.2d 136, 138 (D.D.C.2000) (internal quotation marks omitted). The Medicare statute provides that

(ii) ... [A hospital paid under the PPS] may request additional payments in any case where charges, adjusted to cost ... exceed the sum of the applicable DRG ³ prospective payment rate plus any amounts payable under subparagraphs (B) and (F) 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....

42 U.S.C. § 1395ww(d)(5)(A). The phrase “charges, adjusted to cost” refers to the Secretary's duty to “estimate a hospital's costs based on the charges the hospital has billed for covered services in the case.” (Def.'s Mot. at 3.) Cost is estimated by multiplying the amount that the hospital charges by a “cost-to-charge ratio,” which is a number that represents a “hospital's average markup.” Appalachian Reg'l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1052 (D.C.Cir.1997). The estimate of the hospital's costs in a given case is then compared to the sum of two other factors (the “outlier threshold”).⁴42 U.S.C. § 1395ww(d)(5)(A)(ii). If the estimate of the costs is greater than the outlier threshold, the hospital is eligible for an outlier payment. See id.

The amount of the outlier payment is proportional to the amount by which the hospital's loss exceeds the outlier threshold. Currently, hospitals are entitled to reimbursement of eighty percent of costs above the outlier threshold. 42 C.F.R. § 412.84(k). Thus, if the outlier threshold is $20,000 and a hospital's cost estimate is $80,000, the hospital will be entitled to eighty percent of $60,000 (the difference between the costs and the outlier threshold).

The outlier threshold represents the sum of two amounts: the DRG prospective payment rate and the fixed loss threshold. Only the fixed loss threshold is at issue in this case. In calculating the fixed loss threshold, the Secretary applies section 1395ww(d)(5)(A)(iv), which requires the “total amount of the additional” outlier payments to be not “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.” See Cnty. of Los Angeles, 192 F.3d at 1013. The Secretary has interpreted this provision to require her to “select outlier thresholds which, when tested against historical data, will likely produce aggregate outlier payments totaling between five and six percent of projected or estimated DRG-related payments.” Id. She has also interpreted the provision to mean that “she has no obligation to ensure that actual outlier payments for the year total five percent of projected DRG-related payments.” Id.

The Secretary sets a fixed loss threshold for each FFY as part of massive annual IPPS rulemakings that often span over four hundred pages in the Federal Register. For the three rulemakings at issue in this case, the Secretary calculated the fixed loss threshold as follows. First, the Secretary adjusted historical charge data using an inflation factor (also based on historical data) to approximate hospitals charges in the upcoming FFY. Next, the Secretary multiplied the inflation-adjusted charge universe by hospital-specific cost-to-charge ratios, thereby projecting hospital costs for each case in the model. Third, the Secretary, after making other adjustments not relevant to this case, modeled the effect different fixed loss thresholds would have on outlier payments. ( See Def.'s Mot. at 7; Pls.' Mot. at 17–18.) Finally, the Secretary selected a fixed loss threshold that she projected would satisfy the statutory target under section 1395ww(d)(5)(A)(iv).

The Secretary's methodology reveals three relevant arithmetic axioms. First, all things being equal, a higher charge inflation factor will result in a higher fixed loss threshold. Second, all things being equal, higher cost-to-charge ratios will result in a higher fixed loss threshold. And finally, again all things being equal, a higher fixed loss threshold will result in a higher outlier threshold and thus lower outlier payments to participating hospitals. (Pls.' Mot. at 18.)

B. JUDICIAL REVIEW

Judicial review of plaintiffs' claims under the Medicare Act rests on 42 U.S.C. § 1395oo(f)(1), which incorporates the Administrative Procedure Act (“APA”). See 42 U.S.C. § 1395oo(f)(1) (“Such action[s] ... shall be tried pursuant to the applicable provisions under chapter 7 of Title 5.”). The Court accordingly reviews the Secretary's actions under the APA, “pursuant to which [it] will uphold them unless they are ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ ” Se.Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 916–17 (D.C.Cir.2009) (quoting 5 U.S.C. § 706(2)(A)); see alsoSt. Elizabeth's Med. Ctr. of Boston, Inc. v. Thompson, 396 F.3d 1228, 1233 (D.C.Cir.2005) ( “[J]udicial review of HHS reimbursement decisions shall be made under APA standards”). “An agency decision is arbitrary and capricious if it ‘relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.’ ” Cablevision Sys. Corp. v. F.C.C., 649 F.3d 695, 714 (D.C.Cir.2011) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983)). The Court's inquiry must focus on the “reasonableness of the agency's decisionmaking process,” and the Court “will not substitute [its] judgment for that of the agency.” Rural Cellular Ass'n v. FCC, 588 F.3d 1095, 1105 (D.C.Cir.2009). The Court has a “limited” role and its review is “particularly deferential” where the agency's decision is “primarily predictive.” Id. Thus, the Court will “ ‘defer to the agency's decision on how to balance the cost and complexity of a more elaborate model against the oversimplification of a simpler model,’ ” West Virginia v. E.P.A., 362 F.3d 861, 868 (D.C.Cir.2004) (quoting ...