Hays Med. Ctr. v. Azar

• Decision Date: 21 April 2020
• Docket Number: No. 17-3232,17-3232
• Citation: 956 F.3d 1247
• Parties: HAYS MEDICAL CENTER; Mercy Hospital Lebanon; Mercy Hospital Ardmore, Inc. ; North Platte Nebraska Hospital Corporation, d/b/a Great Plains Medical Center ; Hanover Hospital, Inc.; Knox Community Hospital; Labette County Medical Center; Memorial Hospital of Sweetwater County; Newman Memorial County Hospital, d/b/a Newman Regional Health; Northwestern Medical Center, Inc.; Pocatello Hospital, LLC, d/b/a Portneuf Medical Center, Plaintiffs - Appellants, and Richland Memorial Hospital, Plaintiff, v. Alex M. AZAR, II, in his official capacity as Secretary of Health and Human Services, Defendant - Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

956 F.3d 1247

HAYS MEDICAL CENTER; Mercy Hospital Lebanon; Mercy Hospital Ardmore, Inc. ; North Platte Nebraska Hospital Corporation, d/b/a Great Plains Medical Center ; Hanover Hospital, Inc.; Knox Community Hospital; Labette County Medical Center; Memorial Hospital of Sweetwater County; Newman Memorial County Hospital, d/b/a Newman Regional Health; Northwestern Medical Center, Inc.; Pocatello Hospital, LLC, d/b/a Portneuf Medical Center, Plaintiffs - Appellants,andRichland Memorial Hospital, Plaintiff,

v.Alex M. AZAR, II, in his official capacity as Secretary of Health and Human Services,^* Defendant - Appellee.

No. 17-3232

United States Court of Appeals, Tenth Circuit.

FILED April 21, 2020

Daniel J. Hettich (Elizabeth N. Swayne with him on the briefs), King & Spalding LLP, Washington D.C., for Plaintiffs - Appellants.

Carleen M. Zubrzycki, Attorney, Appellate Staff (Chad A. Readler, Acting Assistant Attorney General, Stephen McAllister, United States Attorney, and Michael S. Raab and Abby Wright, Attorneys, with her on the brief), United States Department of Justice, Washington, D.C., for Defendant - Appellee.

Before TYMKOVICH, Chief Judge, HOLMES and PHILLIPS, Circuit Judges.

HOLMES, Circuit Judge.

Plaintiff-Appellants are eleven rural hospitals (the "Hospitals"). They challenge the methodology that the U.S. Secretary of Health and Human Services (the "Secretary") uses to calculate their Medicare reimbursements. The question before us is whether that methodology is arbitrary and capricious. We hold that it is not. Accordingly, exercising jurisdiction under 28 U.S.C. § 1291, we affirm the district court’s judgment.

I

This case plunges us into the "labyrinthine world" of Medicare reimbursement. Adirondack Med. Ctr. v. Sebelius , 740 F.3d 692, 694 (D.C. Cir. 2014).² In order to navigate this world, we first lay out the necessary background, which we do in three steps. First , we outline the basics of the Medicare reimbursement system. Second , we explain the Secretary’s methodology at issue and trace its application over the years. Third , we recount how this appeal unfolded.

A

The Medicare program provides federally funded healthcare to persons over sixty-five years old, as well as to disabled persons. See Social Security Amendments of 1965, Pub. L. No. 89-97, § 102, 79 Stat. 291 (1965) (codified as amended at 42 U.S.C. § 1395 et seq. ). Medicare enrollees obtain their healthcare through different "parts." This case involves what is known as Medicare Part A. See 42 U.S.C. §§ 1395c – 1395i-5.³ That part provides eligible persons with insurance covering, among other things, certain inpatient hospital services. See id. § 1395d(a). The Secretary administers this program through the Centers for Medicare & Medicaid Services ("CMS"),⁴ a division of the Department of Health and Human Services.

The Secretary reimburses participating hospitals for certain inpatient care they provide to Medicare Part A patients through what is called the "inpatient prospective payment system," a regime established by Congress in the 1980s aimed at encouraging more cost-efficient management of medical care by hospitals. See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149 (1983) (codified as amended at 42 U.S.C. § 1395ww ). Through this system, the Secretary reimburses hospitals for inpatient services on a prospective basis, doing so "at a fixed amount per patient, regardless of the actual operating costs they incur in rendering these services." Sebelius v. Auburn Reg’l Med. Ctr. , 568 U.S. 145, 149, 133 S.Ct. 817, 184 L.Ed.2d 627 (2013). "By establishing predetermined reimbursement rates that remain static regardless of the costs incurred by a hospital, Congress sought ‘to reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost/effective hospital practices.’ " County of Los Angeles v. Shalala , 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quoting H.R. REP. NO. 98–25, at 132 (1983), as reprinted in 1983 U.S.C.C.A.N. 219, 351).

At its most basic, a hospital’s reimbursement for a given Medicare Part A patient is the mathematical product of two figures—the payment rate and the patient’s diagnosis-related group weight. We turn first to providing an overview of the latter figure, the diagnosis-related group weight (the payment rate is explored in the immediately succeeding subsection infra ). Ascertaining this figure begins with the Secretary sorting the Medicare Part A patient into a "diagnosis-related group" (periodically referred to hereinafter as "DRG"). These groups are essentially "categor[ies] of inpatient treatment" that reflect the differing costs of treating various types of diagnoses, with each Part A patient being sorted into a group at the time of discharge, based on that patient’s diagnosis. Adirondack Med. Ctr. , 740 F.3d at 694 n.1 ; see also 42 U.S.C. § 1395ww(d)(4)(A). The Secretary assigns each diagnosis-related group a "weighting factor" that "reflects the relative hospital resources used" to treat patients in that group "compared to [patients] classified within other groups." § 1395ww(d)(4)(B). There are several hundred different diagnosis-related groups, with individual weights "ranging from less than 1.000 to more than 7.000." Adirondack Med. Ctr. v. Sebelius (Adirondack II) , 29 F. Supp. 3d 25, 30 (D.D.C. 2014). The more complicated and expensive the diagnoses, "the greater the weight assigned to that particular [diagnosis-related group] will be." County of Los Angeles , 192 F.3d at 1008. The Secretary then multiplies the Medicare Part A patient’s diagnosis-related group weight by the payment rate (again, we discuss this latter figure infra ). The product of that calculation is the hospital’s reimbursement for treating a particular patient.⁵ See id. ; see also 42 U.S.C. § 1395ww(d)(3)(D).

In order to account for changes in resource consumption, Congress recognized that it would be necessary to periodically recalculate the diagnosis-related group weighting factors. Changes to the Inpatient Hospital Prospective Payment System and Fiscal Year 1991 Rates, 55 Fed. Reg. 35,990, 36,008 ("FY 1991 Final Rule"). Accordingly, at Congress’s direction, the Secretary annually "adjust[s]" the diagnosis-related group "classifications and weighting factors." Id. (citing § 1395ww(d)(4)(C)(i) ); see also Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2010 Rates, 74 Fed. Reg. 43,754, 43,895 (Aug. 27, 2009) ("FY 2010 Final Rule") (noting that the Secretary makes "changes to the [diagnosis-related-group] classifications and weighting factors"). This adjustment in the classifications and weighting factors is designed "to reflect changes in treatment patterns, technology ..., and other factors which may change the relative use of hospital resources." § 1395ww(d)(4)(C)(i).⁶

We focus here on the Secretary’s annual adjustment of the diagnosis-related group weighting factors, or, in the common parlance of regulators, his "recalibration" of the weights. The Secretary starts this process by assembling "a dataset of recent patients." J.A. at 159 (Mem. in Opp’n to Pls.’ Mot. for Summ. J. & in Supp. of Def.’s Cross-Mot. for Summ. J., filed Oct. 20, 2016); see also 55 Fed. Reg. at 36,033 (FY 1991 Final Rule) ("One of the basic issues in recalibration is the choice of a data base that allows us to construct relative DRG weights that most accurately reflect current relative resource use."). Based on this dataset, the Secretary then calculates the average cost of treating patients across all diagnosis-related groups and "the average cost of treating a patient in each diagnosis-related group." J.A. at 159. The Secretary then divides the average cost for each diagnosis-related group by the overall average cost. See id. Using this ratio, he then assigns a new weighting factor to each diagnosis-related group. See id. ; see also 42 C.F.R. § 412.60(a) (noting that the Secretary "assigns, for each DRG, an appropriate weighting factor that reflects the estimated relative cost of hospital resources used with respect to discharges classified within that group compared to discharges classified within other groups").⁷

The recalibration process has the potential of leading to higher payments to hospitals systemwide. However, Congress requires the Secretary to recalibrate "in a manner that assures that the aggregate payments ... are no greater or less than those that would have been made [pre-recalibration]." 42 U.S.C. § 1395ww(d)(4)(C)(iii). In other words, Congress mandates that aggregate payments remain budget neutral notwithstanding recalibration. See, e.g. , Adirondack II , 29 F. Supp. 3d at 32 ("[T]he annual DRG recalibration must ‘be made in a manner that assures that the aggregate payments ... for discharges in the fiscal year are not greater or less than those that would have been made for discharges in the year without such adjustment.’ " (omission in original) (quoting § 1395ww(d)(4)(C)(iii) ), aff’d sub nom. Adirondack Med. Ctr. v. Burwell , 782 F.3d 707 (D.C. Cir. 2015) ).

To achieve budget neutrality in aggregate payments, the Secretary takes two steps. The Secretary’s first step is to "normalize" the recalibrated diagnosis-related group weights to offset any change in the average weight caused by recalibration. 74 Fed. Reg. at 4395 (FY 2010 Final Rule). The Secretary has explained that normalization negates any increase in average diagnosis-related group weights by "equating the average case weight after recalibration to the average case weight before recalibration." Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1994 Rates, 58 Fed. Reg. 46,270, 46,291 (Sept. 1, 1993) ("FY 1994 Final Rule").⁸ More specifically, the Secretary applies a numerical adjustment "in order to ensure that the average [diagnosis-related group] weight after recalibration is equal to the average [diagnosis-related group] weight prior to...