Galen Hosp. Alaska, Inc. v. Azar

• Decision Date: 21 July 2020
• Docket Number: Civil Action No. 18-728 (RBW)
• Citation: 474 F.Supp.3d 214
• Parties: GALEN HOSPITAL ALASKA, INC. d/b/a Alaska Regional Hospital, et al., Plaintiffs, v. Alex M. AZAR, II, in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

474 F.Supp.3d 214

GALEN HOSPITAL ALASKA, INC. d/b/a Alaska Regional Hospital, et al., Plaintiffs,

v.Alex M. AZAR, II, in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant.

Civil Action No. 18-728 (RBW)

United States District Court, District of Columbia.

Signed July 21, 2020

Robert L. Roth, Hooper Lundy & Bookman, PC, Washington, DC, for Plaintiffs.

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

MEMORANDUM OPINION

REGGIE B. WALTON, United States District Judge

The plaintiffs, 168 hospitals, bring this civil action against the defendant, Alex M. Azar, II (the "Secretary"), in his official capacity as the Secretary of the United States Department of Health and Human Services (the "Department"), pursuant to Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395 – 1395lll (2018) ; the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 – 706 (2018) ; and the Declaratory Judgment Act, 28 U.S.C. §§ 2201 – 2202 (2018). See Complaint for Declaratory Relief and Sums Due Under the Medicare Act ("Compl." or the "Complaint") ¶ 5. Currently pending before the Court are (1) the Secretary's Motion to Dismiss for Failure to State a Claim ("Def.’s Mot." or the "motion to dismiss") and (2) the Plaintiffs’ Motion for Leave to File Supplemental Complaint[ ] ("Pls.’ Mot." or the "motion to supplement"). Upon careful consideration of the parties’ submissions,¹ the Court concludes for the following reasons that it must deny the Secretary's motion to dismiss and grant the plaintiffs’ motion to supplement.

I. BACKGROUND

A. Statutory Background

1. Medicare Outlier Payments

Established under Title XVIII of the Social Security Act, the Medicare program provides federally funded medical insurance to elderly and disabled persons. See generally 42 U.S.C. §§ 1395 – 1395lll. Under this program, 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 System"). See generally 42 U.S.C. § 1395ww(d). Pursuant to the Payment System, the Secretary defines categories of medical conditions known as "diagnosis-related groups[,]" Billings Clinic, 901 F.3d at 303, and, for each diagnosis-related group, the Secretary sets a standard payment amount known as the "[diagnosis-related group] prospective payment rate[,]" id. at 304. This payment amount for any given diagnosis-related group is calculated to reflect the estimated average cost of treating a patient with that diagnosis, but in any individual case, the actual cost that the hospital incurs in providing care to the patient may be higher or lower than the diagnosis-related group payment amount. See id.

When Congress enacted the Payment System, it "recognized that healthcare providers would encounter patients with needs well outside the norm." Id. "To account for those abnormally costly cases and to protect against large financial losses for hospitals, ... hospitals [ ] [can] request additional ‘outlier payments.’ " Id. (quoting 42 U.S.C. § 1395ww(d)(5)(A)(ii) ). A hospital may seek these outlier payments when its "cost-adjusted charges"² for a case exceed the "fixed-loss cost threshold[,]" which is defined as the sum of (a) the diagnosis-related group prospective payment rate, (b) any payment adjustments, and (c) a fixed dollar amount that is determined by the Secretary through an annual rulemaking process for each federal fiscal year ("FFY"). Id. at 304 ; see Univ. of Colo. Health v. Azar, Civ. Action No. 14-1220 (RC), ––– F.Supp.3d ––––, ––––, 2020 WL 1557134, at *1 (D.D.C. Mar. 31, 2020). Any cost-adjusted charges above the fixed-loss cost threshold are eligible for outlier compensation, see Billings Clinic, 901 F.3d at 305, and are "reimbursed at a rate intended to approximate the marginal cost of care, currently set at [eighty] percent in most cases," Univ. of Colo. Health, ––– F.Supp.3d at ––––, 2020 WL 1557134, at *1.

"[T]he Medicare statute also limits the total amount of all outlier payments the Department can make in a given fiscal year[.]" Billings Clinic, 901 F.3d at 306. Under the Medicare program, the total amount of outlier payments made in a fiscal year "may not be less than [five] percent nor more than [six] percent of the total payments projected or estimated to be made based on [the diagnosis-related group] prospective payment rates for discharges in that year." 42 U.S.C. § 1395ww(d)(5)(A)(iv). "To satisfy this directive, [the Department] conducts an annual rulemaking to set the fixed loss threshold at a level that it estimates will result in total payments within the statutorily-determined range." Univ. of Colorado Health, ––– F.Supp.3d at ––––, 2020 WL 1557134, at *2. "[S]ince 1989, [the] [Department] has attempted to set an annual threshold that will result in total outlier payments being 5.1 percent of all Medicare payments." Id.

2. Judicial Review

Under the Social Security Act, " ‘[n]o findings of fact or decision of the [Secretary] shall be reviewed by any person, tribunal, or governmental agency’ except as the [Social Security] Act itself provides jurisdiction." Billings Clinic v. Azar, 901 F.3d 301, 312 (D.C. Cir. 2018) (citing 42 U.S.C. § 405(h) ). Here, the relevant source of judicial jurisdiction provided by the Social Security Act is 42 U.S.C. § 1395oo(f). See id. at 312. "That provision allows providers to seek review of a final decision of the Provider Reimbursement Review Board [ (the ‘Board’) ] and to seek expedited judicial review where the Board lacks ‘authority to decide’ a question of law relevant to the matter at [issue]." Id. (citing 42 U.S.C. § 1395oo(f) ).

"When a hospital seeks Medicare payments from the Department, it must first submit its request to a fiscal intermediary—that is, a contracted entity to which the Department has delegated payment determinations." Id. at 311 (citing 42 U.S.C. §§ 1395kk-1, 1395oo(a) ). "If the hospital is unsatisfied with the intermediary's final determination, it may appeal the decision to the ... Board." Id. Normally, "the Board would review the claim, and the hospital would retain the right to seek ‘judicial review of any final decision of the Board.’ " Id. (quoting 42 U.S.C. § 1395oo(f)(1) ).

However, in cases where "the hospital's claim ‘involves a question of law or regulations relevant to the matters in controversy ... [that the Board] is without authority to decide,’ the hospital can request that the Board permit it to proceed directly to district court." Id. (alterations in original) (first quoting 42 U.S.C. § 1395oo(f)(1) ; then citing 42 C.F.R. § 405.1842 ). "If the Board agrees, it will certify the question for immediate judicial review." Id. Additionally, the Board can certify a case for expedited review sua sponte. See id.

B. Other Litigation Addressing Outlier Payments for FFYs 2005 and 2006

1. District Hospital Partners I

In 2011, 186 hospitals filed suit in an earlier case challenging the Secretary's fixed loss threshold calculations for FFYs 2004, 2005, and 2006. District Hosp. Partners, L.P. v. Sebelius (District Hospital Partners I ), 973 F. Supp. 2d 1, 23 (D.D.C. 2014), aff'd in part, rev'd in part and remanded sub nom. District Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015). Of those 186 plaintiff hospitals in District Hospital Partners I, 158 of the plaintiff hospitals (including their predecessors-in-interest) are also plaintiffs in this case. See Pls.’ Opp'n at 10–11 n.3; Def.’s Reply at 7.

In January 2014, another member of this Court granted the Secretary's motion for summary judgment in the prior case. See District Hospital Partners I, 973 F. Supp. 2d at 23. The district court in that case rejected the plaintiffs’ arguments that the Secretary's "methodology for setting fixed loss thresholds for outlier payments to their hospitals ... was arbitrary and capricious for ... [FFYs] 2004, 2005, and 2006," and concluded that "the Secretary made reasonable methodological choices in determining the fixed loss thresholds" for each of these three FFYs. Id. at 1, 5.

On appeal, the District of Columbia Circuit affirmed in part and reversed in part the district court's decision. See District Hosp. Partners, 786 F.3d at 63. The Circuit agreed with the plaintiffs’ argument that the Secretary, in calculating the charge inflation factor used in the FFY 2004 determination, should have excluded data pertaining to 123 hospitals that had been described in a March 5, 2003 notice of proposed rulemaking as likely to have engaged in "turbo-charging," id. at 58, which is a practice where hospitals artificially inflate their billed charges, making it appear that they were incurring greater costs and were entitled to greater outlier payments, see Billings Clinic, 901 F.3d at 306. Specifically, the Circuit held that

[o]n remand, the Secretary should explain why [ ]he corrected for only [fifty] turbo-charging hospitals in the 2004 rulemaking rather than for the 123 [ ]he had identified in the [notice of proposed rulemaking]. [H]e should also explain what additional measures (if any) were taken to account for the distorting effect that turbo-charging hospitals had on the dataset for the 2004 rulemaking. And if [ ]he decides that it is appropriate to recalculate the 2004 outlier threshold, [ ]he should also decide what effect (if any) the recalculation has on the 2005 and 2006 outlier and fixed loss thresholds.

District Hosp. Partners, 786 F.3d at 60. Therefore, the Circuit reversed the district court's decision with respect to the FFY 2004 rule and remanded the case to the Department for additional explanation regarding its rulemaking for that year.

See id. However, the Circuit affirmed the district court's rejection of the plaintiffs’ challenges to the FFYs 2005 and 2006 outlier thresholds as...