Univ. of Colo. Health at Mem'l Hosp. v. Becerra

• Decision Date: 17 June 2022
• Docket Number: Civil Action 14-1220 (RC)
• Parties: UNIVERSITY OF COLORADO HEALTH AT MEMORIAL HOSPITAL, et al., Plaintiffs, v. XAVIER BECERRA, Secretary of Health and Human Services, Defendant.
• Court: United States District Courts. United States District Court (Columbia)

UNIVERSITY OF COLORADO HEALTH AT MEMORIAL HOSPITAL, et al., Plaintiffs,
v.
XAVIER BECERRA, Secretary of Health and Human Services, Defendant.

Civil Action No. 14-1220 (RC)

United States District Court, District of Columbia

June 17, 2022

Re Document Nos.: 184, 185, 188

MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT; GRANTING IN PART AND DENYING IN PART DEFENDANT'S CROSS- MOTION FOR SUMMARY JUDGMENT; AND GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO COMPLETE ADMINISTRATIVE RECORDS

RUDOLPH CONTRERAS United States District Judge.

I. INTRODUCTION

In advance of each fiscal year (“FY”), the Secretary of the Department of Health and Human Services (“HHS” or the “Secretary”) engages in a notice-and-comment rulemaking process to establish a number that will play a significant part in determining the extent to which hospitals will receive Medicare reimbursement payments for certain extraordinarily costly services performed during the fiscal year. Plaintiffs, a group of hospitals, ask the Court to vacate the rules for FYs 2007-2013 because of alleged procedural and/or substantive defects in HHS's rulemaking proceedings for these years. The Court holds that the Secretary's explanations of certain decisions reached in the FY 2012 and FY 2013 rules were inadequate under the Administrative Procedure Act; accordingly, it remands these rules to the Secretary for further

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explanation. Otherwise, the Court holds that the Secretary acted lawfully in promulgating the remaining challenged rules.

II. BACKGROUND

A. Regulatory Framework

The Court assumes familiarity with its detailed descriptions of the regulations governing the Medicare outlier payments program found in prior opinions in this case. See Mem. Op. Granting in Part and Denying in Part Def.'s Partial Mot. Dismiss and Granting in Part and Denying in Part Pls.' Mot. Suppl. Admin. R. (“Mot. Dismiss Op.”), ECF No. 155; Mem. Op. Granting Def.'s Mot. Leave to Suppl. Answer (“Mem. Op. Suppl.”), ECF No. 89; Mem. Op. Granting Def.'s Mot. for Clarification (“Clarification Op.”), ECF No. 57; Mem. Op. Granting in Part and Denying in Part Pls.' Mot. to Compel Prod. of Complete Admin. R. (“Suppl. Rec. Op.”), ECF No. 47. And it will provide additional detail as necessary throughout its analysis. Still, for orientation, the Court directly repeats, with some modifications, part of the background it provided in its most recent opinion in this case. Mot. Dismiss Op. at 1-9.

Under Medicare, the federal government reimburses hospitals for supplying medical services to the elderly and disabled. See Social Security Amendments of 1965 (“Medicare Act”), Pub. L. No. 89-97, tit. XVIII, 79 Stat. 286, 291.^[1] Providers are not reimbursed for the full costs that they incur; instead, they are paid at fixed rates for different categories of services and treatments, known as “diagnosis-related groups” (“DRGs”). See Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018) (citation omitted). However, hospitals are also eligible for certain outlier payments as a form of protection against unusually complicated and costly cases. Id. at 304 (citing 42 U.S.C. § 1395ww(d)(5)(A)(ii)). These payments become available when the

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provider's (1) “cost-adjusted charges” for a case exceed (2) the sum of (2a) the default reimbursement payment and (2b) a fixed dollar amount (known as the “outlier threshold” or the “fixed loss threshold” (FLT) and determined by the Secretary through an annual rulemaking process). Id. at 304 (citation omitted).

That first figure-the provider's “cost-adjusted charges”-is intended to estimate the provider's real cost of care, without any markups, and is calculated by multiplying a provider's actual charges by a historical “cost-to-charge ratio.” Id. at 304-05 (citation omitted). The second figure-the sum of the base reimbursement plus the fixed loss threshold-is known as the “fixed-loss cost threshold.” Id. at 304 (citation omitted). Cost-adjusted charges above the fixed-loss cost threshold are reimbursed at a rate intended to approximate the marginal cost of care, currently set at 80 percent in most cases. Id. at 305 (citation omitted).

As an example: imagine a hospital charges $100, 000 for an unusually complicated procedure.^[2] The $100, 000 will be multiplied by a cost-to-charge ratio (“CCR”) (imagine it's 72:100 or 72 percent, which HHS will have calculated based on historical data), leaving $72, 000 of cost-adjusted charges. Imagine too that the standard DRG reimbursement rate for this kind of procedure is $8, 000, and the fixed loss threshold set by the Secretary that year is $11, 000. The hospital will automatically receive the base reimbursement of $8, 000. And because the cost-adjusted charges ($72, 000) are greater than the fixed-loss cost threshold ($19, 000), the hospital is also eligible for an outlier payment. That payment will be 80 percent of the difference between the cost-adjusted charges ($72, 000) and the fixed-loss cost threshold ($19, 000), or $42, 400.

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Notice that when the fixed loss threshold is smaller, it is more likely that a hospital will receive an outlier payment and that any outlier payment received will be greater.

That leaves an important question: how does the Secretary determine each fiscal year's fixed loss threshold? Well, Congress has limited the aggregate amount of Medicare outlier payments to a narrow range: it “may not be 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.” 42 U.S.C. § 1395ww(d)(5)(A)(iv). To satisfy this directive, HHS 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 (more on that later). See Billings Clinic, 901 F.3d at 306-07 (citation omitted). Specifically, since 1989, HHS has attempted to set an annual threshold that will result in total outlier payments being 5.1 percent of all Medicare payments. Id. at 307. Crucial to the Secretary's projections are the providers' estimated future cost-to-charge ratios. Id. For instance, if HHS overestimates a future year's cost-to-charge ratios (expecting, say, 90 percent when it turns out to be 72 percent), then reimbursable, cost-adjusted charges will be lower than expected-meaning that HHS may have set the fixed loss threshold too high and therefore be at risk of undershooting its 5.1 percent payment target.

This is all the more important because, in order to fund outlier payments, the Secretary withholds the predicted 5.1 percent from all other standard reimbursements. See 42 U.S.C. § 1395ww(d)(3)(B). And the Secretary need not take corrective action when the actual outlier payments differ from the 5.1 percent target. See Dist. Hosp. Partners L.P. v. Burwell, 786 F.3d 46, 51 (D.C. Cir. 2015) (citing County of Los Angeles v. Shalala, 192 F.3d 1005, 1020 (D.C. Cir. 1999)). As a result, undershooting the 5.1 percent target results in a net loss of payments to providers as a whole.

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Procedurally, healthcare providers are reimbursed on a rolling basis, but at the end of their fiscal years, they submit annual cost reports to so-called “medicare administrative contractors” or “fiscal intermediaries.”^[3] See 42 U.S.C. § 1395h(a); 42 U.S.C. § 1395kk-1(a)(3)-(a)(4)(B); 42 C.F.R. § 413.20(b). Fiscal intermediaries then issue a total reimbursement determination for the entire year^[4] through a Notice of Program Reimbursement (“NPR”). 42 C.F.R. § 405.1803(a). Hospitals are permitted to challenge an NPR by appealing to the Provider Reimbursement Review Board (“PRRB”), a specialized administrative body. 42 U.S.C. § 1395oo(a). Hospitals can in turn seek judicial review of a PRRB's final decision. § 1395oo(f)(1). Providers also “have the right to obtain judicial review of any action of the fiscal intermediary which involves a question of law or regulations relevant to the matters in controversy whenever the [PRRB] determines . . . that it is without authority to decide the question”; such determinations for expedited review can be made sua sponte by the PRRB or at the request of a provider. Id. In either case, a district court reviews the challenged action “pursuant to the applicable provisions” of the Administrative Procedure Act (“APA”). Id.

One other feature of the process bears mentioning at this stage. In the early 2000s, the Secretary would determine a hospital's cost-to-charge ratio using “cost and charge data from the ‘latest available settled cost report' without any forward projections.” Billings Clinic, 901 F.3d at 305. But this approach proved problematic, because

cost reports take several years to settle. And that time lag generated opportunities for abuse. Hospitals could manipulate their outlier payments by inflating current

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charges so that the historic cost-to-charge ratio employed to calculate outlier payments did not reflect the hospital's true costs. In those situations, the hospital's cost-to-charge ratio would overstate actual costs, resulting in an inflated cost estimate for the current year's claims.

Id. This trick came to be known as “turbo-charging.” Id. at 306. The Secretary responded to the turbo-charging problem in 2003 by enacting a series of reforms, including “reserv[ing] the right to recalculate a hospital's eligibility [for an outlier payment] using actual cost data at the time of settlement. Through this process, known as reconciliation, the agency [can] claw-back undue outlier payments.” Id.(citations omitted).

B. Procedural History

Many of the plaintiff hospitals here were plaintiffs in two other related cases. Banner Health v. Azar, No. 10-cv-1638 (D.D.C.) was filed in 2010. In addition to advancing some other claims, the Banner Health plaintiffs challenged the fixed loss...