New Lifecare Hosps. of Chester Cnty. LLC v. Azar

• Decision Date: 30 September 2019
• Docket Number: Civ. No. 19-705 (EGS)
• Citation: 417 F.Supp.3d 31
• Parties: NEW LIFECARE HOSPITALS OF CHESTER COUNTY LLC, et al., Plaintiffs, v. Alex M. AZAR II, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

417 F.Supp.3d 31

NEW LIFECARE HOSPITALS OF CHESTER COUNTY LLC, et al., Plaintiffs,

v.Alex M. AZAR II, Secretary of Health and Human Services, Defendant.

Civ. No. 19-705 (EGS)

United States District Court, District of Columbia.

Signed September 30, 2019

Jason M. Healy, Law Office of Jason M. Healy, PLLC, Washington, DC, for Plaintiffs.

Joshua M. Kolsky, U.S. Attorney's Office for the District of Columbia, Washington, DC, for Defendant.

MEMORANDUM OPINION

Emmet G. Sullivan, United States District Judge

This case concerns the Medicare system, a federal program that helps to cover the cost of providing medical care to qualified individuals. Under Medicare, the government generally reimburses hospitals at a predetermined fixed rate whenever a patient is discharged, regardless of the actual cost of services. Because some hospital stays will be exceptionally costly, Congress has allowed for a high cost outlier ("HCO") which offsets extremely high costs that a hospital may incur when treating certain cases. In such cases, provided that statutory conditions are met, the hospital simply requests additional payment. However, Congress has mandated that these payments cannot increase the payment obligations of the federal government to an amount that is higher than the predetermined prospective rates. In other words, the government calculates an amount it expects to pay based on the number of expected discharges at the prospective payment rate; and the hospital's requests for additional payments due to HCOs cannot increase that amount. Id. Therefore, to keep the budget neutral, the government reduces the prospective payment rate by a percentage based on the expected outlier payments for that year. This reduction is commonly referred to as the budget neutrality adjustment ("BNA").

Plaintiffs, a group of over 100 long-term care hospitals ("LTCH"), bring this action pursuant to, inter alia , the Administrative Procedure Act ("APA"), 5 U.S.C. § 706, alleging that defendant Alex M. Azar II, Secretary of Health and Human Services ("HHS") applies the BNA to LTCH stays in an unlawfully duplicative manner. Specifically, this lawsuit challenges a final rule that defines how the budget neutrality adjustment is applied to LTCH hospital stays that are paid out at a site neutral rate. Plaintiffs allege that, because the formula to calculate the site neutral rate already takes into account a 5.1 percent adjustment for the expected HCO payments, the Secretary incorrectly applies a 5.1 percent budget neutrality adjustment to site neutral rates. Thus, plaintiffs argue the Secretary's actions are duplicative and therefore violate the APA.

Pending before the Court are the parties' cross-motions for summary judgment. The parties agree that the formula for site neutral payments is mandated by Congress, and that CMS may apply a BNA to site neutral payments to insure the government's overall LTCH payment obligations are not increased due to the cost outlier payments. The parties also agree that there are multiple BNAs that play a role in the formula to determine the site neutral rate. Where the parties disagree is whether the BNA applied to the site neutral rate is duplicative or merely a reasonable application of the Secretary's authority to balance the budget. Upon careful consideration of the parties' submissions, the applicable law, and the entire record herein, the Court finds that the Secretary's methodology in applying the BNA to site neutral LTCH stays is a reasonable interpretation of the applicable statutes and regulations. Therefore, the Court GRANTS defendant's cross-motion for summary judgment, and DENIES the plaintiffs' motion for summary judgment.

I. Background

A. Statutory and Regulatory Background

1. Medicare Reimbursements to Hospitals

The Centers for Medicare and Medicaid Services ("CMS"), a division of HHS, is in charge of administering the Medicare program under the direction of the Secretary. Until 1983, Medicare reimbursed participating hospitals for inpatient services provided to Medicare patients based on the "reasonable costs" incurred by the hospital. Methodist Hosp. of Sacramento v. Shalala , 38 F.3d 1225, 1227 (D.C. Cir. 1994). Concerned about escalating costs, Congress, in 1983, directed HHS to implement a prospective payment system under which hospitals would not receive actual costs, but rather would receive fixed payments based on the type of inpatient services rendered. Id. "Congress designed this system to encourage health care providers to improve efficiency and reduce operating costs." Id.

CMS pays most hospitals for inpatient services furnished to Medicare beneficiaries at these fixed rates through the Inpatient Prospective Payment System ("IPPS"). See generally Dist. Hosp. Partners, L.P. v. Burwell , 786 F.3d 46, 49 (D.C. Cir. 2015). The IPPS divides medical conditions into categories of related illnesses called "diagnosis-related groups" ("DRGs"). Dist. Hosp. Partners , 786 F.3d at 49. Once a Medicare beneficiary is discharged under IPPS, Medicare reimburses the hospital at a preset rate that depends on the patient's DRG and other factors not relevant to this case. See 42 U.S.C. §§ 1395ww(d), (g) ; 42 C.F.R. §§ 412.64, 412.312 ; Cape Cod Hosp. v. Sebelius , 630 F.3d 203, 205-06 (D.C. Cir. 2011) (explaining prospective payment rate calculation). The payment amount for each DRG is intended to reflect the estimated average cost of treating a patient whose condition falls within that DRG, see 42 U.S.C. § 1395ww(d), even though the actual cost the hospital incurs in treating that patient may be higher or lower.

This case concerns long-term care hospital reimbursements. In 1999, Congress directed the Secretary to "develop a per discharge prospective payment system for payment for inpatient hospital services of long-term care hospitals[.]"¹ Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA"), Pub. L. No. 106-113, § 123, 113 Stat. 1501, 1501A330 (1999)(codified at 42 U.S.C. § 1395ww, note). Congress also mandated that this payment system "shall maintain budget neutrality." Id. The following year, Congress further provided that the Secretary "shall examine and may provide for appropriate adjustments to the long-term hospital payment system, including ... outliers[.]" Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"), Pub. L. No. 106-554, § 307(b)(1), 114 Stat. 2763, 2763A497 (2000)(codified at 42 U.S.C. § 1395ww, note).

Because some inpatient stays will be exceptionally costly, Congress provided for additional "high cost outlier" payments to partly offset extremely high costs that hospitals incur in both inpatient and LTCH settings. See 42 U.S.C. § 1395ww(d) (5)(A)(ii). Accordingly, a qualifying hospital may request additional payments for outlier cases in certain statutorily defined circumstances. Id. These outlier payments, however, cannot be projected to increase the overall Medicare payment obligations of the federal government. See id. § 1395ww(d)(3)(B). Therefore, to account for the higher outlier payments, CMS reduces the IPPS and LTCH payment rates by, each fiscal year, prospectively estimating the proportion of outlier payments and then prospectively reducing those rates to account for the outlier payments. Id. This rate must be projected to be between 5 and 6 percent of the total projected IPPS payments for that year. Id. § 1395ww(d)(5)(A)(iv).

2. Reimbursement for LTCHs Under Dual-Rate System

The Medicare reimbursement system for LTCHs, the LTCH PPS, is based on different levels of cost than the inpatient hospital prospective payment system. For a hospital to be reimbursed under the LTCH PPS, it must have an average Medicare inpatient length of stay that is greater than twenty-five days, which reflects the medically complex cases treated in LTCHs. See Pl.s' Mot. ECF No. 21 at 15. Each patient discharged from a LTCH is assigned to a distinct Medicare severity long-term care diagnosis related group ("MS-LTC-DRG"), and the LTCH is generally paid a predetermined fixed amount applicable to the assigned MS-LTC-DRG (adjusted for area wage differences). Id. Although the DRG's for LTCH's are the same as DRG's for acute care hospitals, the weights assigned to the groups are generally higher. Additionally, the federal standard rate has been much higher for LTCH's than for acute care hospitals because of the complexity of the cases and the longer average length of stay. Id. The payment amount for each MS-LTC-DRG is intended to reflect the average cost of treating a Medicare patient assigned to that MS-LTC-DRG in a LTCH. Id.

CMS implemented the LTCH PPS on October 1, 2002, which marked the beginning of Federal Fiscal Year 2003. 67 Fed. Reg. 55954 (Aug. 30, 2002). The Secretary modeled the LTCH PPS after IPPS. See generally 42 C.F.R. ch. IV, subch. B, pt. 412, subpt. O (setting forth the rules governing LTCH PPS). As in IPPS, the Secretary established a flat national rate for LTCH PPS, now known as the "standard Federal rate." Id. § 412.523(c)(1). This was the rate that LTCHs received upon patient discharge depending on the patient's DRG.

In 2013, Congress implemented a dual rate structure for LTCHs. Concerned that LTCHs were admitting some patients who instead could be safely and efficiently treated in a lower-cost setting, Congress required the Secretary to create a separate payment rate for such patients that would generally be lower than the standard Federal rate, known as the "site neutral" rate. See Bipartisan Budget Act of 2013, Pub. L. No. 113-67, § 1206, 127 Stat. 1165 ; 80 Fed. Reg. 49326, 49601-23 (Aug. 17, 2005). Pursuant to this congressional mandate, CMS implemented this dual-rate payment structure for the LTCH PPS in 2015 (for Fiscal Year 2016), and the structure remains in place today.

Under this dual-rate structure, generally a LTCH is no longer reimbursed at the standard Federal rate if the patient did not spend at least three days in a hospital's...