Shands Jacksonville Med. Ctr. v. Burwell, Consolidated Civil Case Nos. 14–263

• Decision Date: 21 September 2015
• Docket Number: 14–607,14–503,Consolidated Civil Case Nos. 14–263,14–536,14–1477,14–976
• Citation: 139 F.Supp.3d 240
• Parties: Shands Jacksonville Medical Center, et al., Plaintiffs, v. Sylvia M. Burwell, Secretary, United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

139 F.Supp.3d 240

Shands Jacksonville Medical Center, et al., Plaintiffs,

v.Sylvia M. Burwell, Secretary, United States Department of Health and Human Services, Defendant.

Consolidated Civil Case Nos. 14–263

14–503

14–536

14–607

14–976

14–1477

United States District Court, District of Columbia.

Signed September 21, 2015

Christopher L. Keough, Akin Gump Strauss Hauer & Feld LLP, Ethan Price Davis, Mark D. Polston, Daniel J. Hettich, King & Spalding, LLP, Washington, DC, for Plaintiffs.

Daniel Edward Bensing, Jacqueline E. Coleman Snead, Matthew J.B. Lawrence, U.S. Department of Justice, Benjamin R. Dryden, Foley & Lardner, LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

RANDOLPH D. MOSS

, United States District Judge

Under the Medicare system, participating hospitals are paid for services provided to Medicare-eligible patients. Medicare Part A provides compensation for services provided on an inpatient basis, while Medicare Part B provides compensation for outpatient services. In general, hospitals are paid more for inpatient stays.

Prior to 2013, Medicare guidance stated that it was generally appropriate for hospitals to admit a Medicare beneficiary as an inpatient if the patient was expected to stay for 24 hours or more. But the guidance also stressed that length of stay was not the only relevant factor in the "complex medical judgment" whether to admit a Medicare beneficiary for inpatient care. Because this open-ended approach generated uncertainty among providers and, at times, discouraged hospitals from treating Medicare beneficiaries as inpatients, in May 2013, the Department of Health and Human Services ("HHS" or "Department") proposed a new standard for inpatient admissions. This new standard—the "2–midnight benchmark"—authorized inpatient admission if the patient's stay was expected to span at least two midnights. See Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Long–Term Care Hospital Prospective Payment System and Proposed Fiscal Year 2014 Rates, 78 Fed.Reg. 27486, 27645, 27648 (May 10, 2013)

(proposed rules). To reduce uncertainty, the proposed rule then provided that "Medicare's external review contractors would presume that hospital inpatient admissions are reasonable and necessary for beneficiaries who" satisfy the 2–midnight benchmark. Id . at 27645.

The Secretary of HHS predicted that in fiscal year 2014 the new 2–midnight benchmark and the related presumption would result in "a net shift of 40,000 encounters" from outpatient status to inpatient status, id. at 27649

, at an estimated cost of $220 million to the Medicare program, id . She proposed to offset this cost by making adjustments that would effect an across-the-board reduction in compensation for inpatient services. Id. at 27650, 27651. The final rule—including the 2–midnight benchmark, related policies, and the reduction in compensation for inpatient services—was published in August 2013. See Medicare Program; Hospital Inpatient Prospective Payment Systems For Acute Care Hospitals ... Payment Policies Related to Patient Status, 78 Fed.Reg. 50496, 50965 (Aug. 19, 2013) (final rule), codified as amended at 42 C.F.R. § 412.3(d)(1).

Plaintiffs in these consolidated actions challenge only one aspect of the final rule: the reduction in compensation for inpatient services. They argue, among other things, that this reduction is invalid for three independent reasons: (1) it exceeds the Secretary's general "exceptions and adjustments" authority under the Medicare Act, see 42 U.S.C. § 1395ww(d)(5)(I)(i)

; (2) it was promulgated without adequate notice or a meaningful opportunity to comment, in violation of the Administrative Procedure Act; and (3) it is arbitrary and capricious.

This matter is presently before the Court on Plaintiffs' motions for summary judgment, Dkts. 15, 16, 17, 18, 19, and the Secretary's motion to dismiss and for summary judgment, Dkt. 23. For the reasons given below, the Secretary's motion is DENIED. The Plaintiffs' motions for partial summary judgment are GRANTED in part and DENIED in part, and this matter is REMANDED to the Secretary for further proceedings.

I. BACKGROUND

The Medicare Act, 42 U.S.C. §§ 1395 et seq.,

provides medical care for the elderly and disabled. As relevant here, Medicare Part A reimburses hospitals for inpatient services on a prospective basis, see 42 U.S.C. §§ 1395c et seq., while Medicare Part B pays for services not covered by Part A, including hospital outpatient services and visits to the doctor, see 42 U.S.C. §§ 1395j, 1395l (t) ; see generally Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205–07 (D.C.Cir.2011). The amount of compensation that a hospital receives from the Medicare program, as well as the cost to the Medicare beneficiary, varies in part depending on whether the beneficiary was admitted to the hospital as an outpatient or an inpatient.

Under the Medicare Inpatient Prospective Payment System ("IPPS"), hospitals are prospectively compensated for inpatient services at a fixed rate that is not based on the actual cost of the services provided. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226–27 (D.C.Cir.1994)

(explaining that Congress enacted the prospective payment system to promote efficiency and discourage the provision of unnecessary services); Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 405–06, 406 n. 3, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). The rates used to calculate these payments are set annually by the Secretary according to the Medicare Act's " ‘complex statutory and regulatory regime.’ " Methodist Hosp., 38 F.3d at 1226 (quoting Good Samaritan, 508 U.S. at 404, 113 S.Ct. 2151 ).

One important element in the statutory scheme is the "standardized amount," which is set each year by the Center for Medicare and Medicaid Services ("CMS"), acting on behalf of the Secretary. See 42 U.S.C. § 1395ww(d)(3)

. Roughly speaking, the standardized amount represents the average per-patient operating costs across all hospitals, see 42 C.F.R. § 412.64, modified to account for various economic and other factors. Most hospitals are compensated for Medicare inpatient services according to the "federal rate," which is "a formula that takes [the] standardized base amount ... and multiplies it by a weight associated with a diagnosis-related group." Adirondack Med. Ctr. v. Sebelius ("Adirondack "), 740 F.3d 692, 694 (D.C.Cir.2014) ; see also Methodist Hosp., 38 F.3d at 1227, 42 U.S.C. § 1395ww(d)(3)(D). A "diagnosis-related group" ("DRG") is "a category of inpatient treatment." Adirondack, 740 F.3d at 694 n. 1 ; see 42 U.S.C. § 1395ww(d)(4)(A). Each group is assigned a weight reflecting the relative amount of resources expended with respect to discharges in that group.

See id. § 1395ww(d)(4)(B)

. "The upshot of applying a DRG weighting factor is that a hospital will be paid more for patients diagnosed with a heart condition requiring surgery than for those diagnosed with a sprained ankle." Adirondack Med. Ctr. v. Sebelius, 29 F.Supp.3d 25, 30 (D.D.C.2014) (quotation marks and citation omitted). A 2007 rule refined the DRG system by implementing "Medicare severity diagnosis related groups" ("MS–DRGs"), which are intended to better account for severity of illness in Medicare payments. See generally Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates, 72 Fed.Reg. 47130 (Aug. 22, 2007) (final rule).

A minority of hospitals, including those providing treatment to underserved communities, are compensated based in part on "hospital-specific rates." See Adirondack, 740 F.3d at 694–95

; 42 U.S.C. §§ 1395ww(d)(5)(D) & (G). These "hospital-specific rates" are calculated using a hospital-specific base amount that reflects historical per-patient operating costs at that particular hospital. See Adirondack, 740 F.3d at 695. The Secretary also sets a "Puerto Rico-specific rate" which is calculated using a Puerto Rico-specific base amount. See 42 C.F.R. § 412.212 ; 42 U.S.C. § 1395ww(d)(9)(A).

The Medicare Act does not define the term "inpatient" or specify when inpatient admission is appropriate. The Secretary, however, has issued both formal and informal guidance on the subject. Her regulations specify that certain procedures should be provided on an inpatient basis. See 42 C.F.R. § 419.22(n)

. She has also issued guidance explaining that patients should be admitted on an inpatient basis only where the admitting physician determines that certain criteria are satisfied. Prior to 2013, the Secretary advised physicians to "use a 24–hour period as a benchmark" and to "order [inpatient] admission for patients who are expected to need hospital care for 24 hours or more." See AR 1451 (Medicare Benefit Policy Manual, CMS Pub. 100–02, Ch. 1, § 10 (2003)). The guidance acknowledged that the admitting physician's decision involves "complex medical judgment" and should not be made solely on the expected length of hospitalization, see id., but cautioned that a hospital stay expected to last "only a few hours (less than 24)" did not justify inpatient admission, even if it was expected to be an overnight stay. See id. (explaining that patients with known diagnoses admitted for less than 24 hours should be admitted as "outpatients for coverage purposes regardless of: ... whether they remained in the hospital past midnight") (emphasis in original); see also 78 Fed.Reg. at 27645, 27648 (describing the Secretary's prior policy on inpatient admissions).

The Secretary became concerned, however, that there were systemic problems with inpatient admissions under the 24–hour benchmark. In 2012 she observed an increase in the number of Medicare beneficiaries who were kept as outpatients for long periods of observation. See Hospital Outpatient Prospective and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 77 Fed.Reg. 45061, 45155 (July 30, 2012)

(proposed rule). Admissions for long periods of outpatient...