American Hospital Association v. Azar

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA __________________________________ ) AMERICAN HOSPITAL ) ASSOCIATION, et al., ) ) Plaintiffs, ) ) v. ) Civil Action No. 18-2841 (RMC) ) ALEX M. AZAR II, ) Secretary of the Department of Health ) and Human Services, ) ) Defendant. ) __________________________________ )

MEMORANDUM OPINION

Previously, the Court held that the Centers for Medicare & Medicaid Services

(CMS) exceeded its statutory authority when it selectively reduced by Final Rule reimbursement

rates under the Outpatient Prospective Payment System (OPPS) to off-campus provider-based

departments for certain outpatient department (OPD) services. See Am. Hosp. Ass’n v. Azar, No.

18-2841, 2019 WL 4451984 (D.D.C. Sept. 17, 2019); 83 Fed. Reg. 58,818 (Nov. 21, 2018)

(Final Rule). Specifically, the Court determined that the addition of a non-budget-neutral rate

reduction for Evaluation and Management (E&M) services at such facilities—separate from the

normal OPPS reimbursement schedule—conflicted with the overall statute. Am. Hosp. Ass’n,

2019 WL 4451984, at *8-12. Accordingly, the Court vacated the relevant portions of the Final

Rule, left intact the rest of the OPPS reimbursement schedule, and remanded the matter back to

the agency for proceedings consistent with its decision. Id. at *12. However, given the

complexities of setting and administering Medicare payments rates, the Court also ordered the

parties to submit a status report to determine if additional briefing was required. Id.

1 CMS now asks the Court to modify its Order and to instead remand the matter to

the agency to develop a remedy in the first instance, without vacatur. Alternatively, CMS asks

for a 60-day stay of the Order while it considers whether or not to appeal. Plaintiffs oppose. 1

For the reasons below, the Court will neither modify nor stay the Order.

I. ANALYSIS

A. Vacatur

The D.C. Circuit has “made clear that ‘[w]hen a reviewing court determines that

agency regulations are unlawful, the ordinary result is that the rules are vacated.’” Nat’l Min.

Ass’n v. U.S. Army Corps of Eng’rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998) (quoting Harmon v.

Thornburgh, 878 F.2d 484, 495 n.21 (D.C. Cir. 1989)). That said, a court has discretion to

remand an unlawful rule without vacatur depending on (1) “the seriousness of the [rule]’s

deficiencies (and thus the extent of doubt whether the agency chose correctly)” and (2) “the

disruptive consequences of an interim change that may itself be changed.” Allied-Signal, Inc. v.

U.S. Nuclear-Regulatory Comm’n, 988 F.2d 146, 150-51 (D.C. Cir. 1993). Neither factor is

dispositive. “Rather, resolution of the question turns on the Court’s assessment of the overall

equities and practicality of the alternatives.” Shands Jacksonville Med. Ctr. v. Burwell, 139 F.

Supp. 3d 240, 270 (D.D.C. 2015) (Shands I).

As to the first factor, CMS “respectfully disagrees” with the Court’s decision and

maintains that its rate cut was a permissible “method for controlling unnecessary increases in the

volume of covered OPD services.” See 42 U.S.C. § 1395l(t)(2)(F). CMS thus argues that there

is a live question regarding “whether the agency chose correctly” that may be resolved on appeal.

1 See 9/17/2019 Order [Dkt. 32]; Mot. to Modify Order (Mot.) [Dkt. 33]; Pls.’ Opp’n to Def.’s Mot. to Modify Order [Dkt. 34]; Mem. of the Univ. of Kansas Hosp. Auth. Pls. in Opp’n to Mot. to Modify [Dkt. 35]; Reply in Supp. of Mot. to Modify Order (Reply) [Dkt. 37].

2 CMS devotes little space to this argument. This factor may weigh in the government’s favor

when a decision within the agency’s discretion was potentially lawful but insufficiently

explained. See Heartland Reg’l Ctr. v. Sebelius, 566 F.3d 193, 198 (D.C. Cir. 2009) (“When an

agency may be able readily to cure a defect in its explanation of a decision, the first factor in

Allied-Signal counsels remand without vacatur.”); see, e.g., Allied Signal, 988 F.2d at 151 (“It is

conceivable that the Commission may be able to explain how the principles supporting an

exemption for education institutions do not justify a similar exemption for domestic UF 6

converters.”); cf. Am. Hosp. Ass’n v. Azar, 385 F. Supp. 3d 1, 13 (D.D.C. 2019) (finding a CMS

rule could not be justified because the necessary data did not exist). But here the Court

determined that CMS put forth an impermissible interpretation of the statutory scheme; no

amount of new data or reasoning on remand can save its interpretation. See Humane Soc’y of the

U.S. v. Jewell, 76 F. Supp. 3d 69, 137 (D.D.C. 2014) (“[T]he Court is certain that the agency

cannot arrive at the same conclusions reached in the Final Rule because the actions taken were

not statutorily authorized.”). Nor does its hope of reversal on appeal help because “[p]ossible

success on appeal would weigh against vacatur in every case, given that reversal is always a

possibility.” Am. Hosp. Ass’n, 385 F. Supp. 3d at 13. The first factor clearly favors vacatur.

As to the second factor, CMS argues more forcefully that for several reasons the

disruption caused by vacating the rule weighs heavily in favor of remand only. First, CMS

contends that without the rule “there is currently no extant methodology under which the

Secretary may pay off-campus provider-based departments for the . . . services that the

challenged portion of the Rule addressed.” Mot. at 5. CMS similarly contends that “there is no

methodology available for affected off-campus provider-based departments to calculate

appropriate patient co-payments.” Id.

3 These contentions fail to convince. Because CMS believed that it had authority to

implement the E&M rate reduction independent of its authority to review and adjust OPPS

relative payment weights, it developed underlying OPPS reimbursement rates and then tacked

the E&M rate reduction on at the end. See Final Rule at 59,014 (applying the reduced E&M

rates to the “final payment rates” for OPPS). As Plaintiffs describe it, CMS created an exception

to OPPS reimbursement rates for only E&M services and only at applicable off-campus

provider-based departments; vacating the rate reduction for E&M services at off-campus

provider-based departments merely reverted such off-campus provider-based departments to the

general rule. Indeed, CMS admits that there are extant OPPS reimbursement rates for on-campus

provider-based departments which the relevant off-campus provider-based departments would

have been subject to but for the Final Rule.2 See Mot. at 6.

Anticipating this, CMS argues that vacatur leaves behind no OPPS reimbursement

rates because the rate reduction for E&M services “cannot be severed from the rest of the OPPS

rates set forth in the [Final] Rule.” Id. at 5. The D.C. Circuit has held that “[s]everance and

affirmance of a portion of an administrative regulation is improper if there is ‘substantial doubt’

that the agency would have adopted the severed portion on its own.” Davis Cty. Solid Waste

Mgmt. v. EPA, 108 F.3d 1454, 1459 (D.C. Cir 1997). CMS asserts that it accounted for its

projected $300 million in projected savings when developing the underlying OPPS

2 CMS argues that payments to off-campus provider-based departments for E&M services would not revert to the general rule because such services have been carved out and reduced. See Reply at 3. Only the challenged rate reduction carved E&M services out of the general rule; all other patient services at off-campus provider-based departments continue to be paid at OPPS rates. The rate reduction was vacated as beyond the authority of CMS; therefore, such selected services are no longer carved out and should be paid according to the general rule.

4 reimbursement rates, and that without the rate reduction for E&M services it might have utilized

other statutory means to accomplish the same ends or cut reimbursement rates across the board.

There is not nearly enough evidence to find “‘substantial doubt’ that the agency

would have adopted the severed portion on its own.” Id. To start, that the rate reduction for

E&M services can be so easily severed from the Final Rule as a practical matter strongly

suggests that severance is appropriate as a legal matter. See Am. Petroleum Inst. v. EPA, 862

F.3d 50, 72 (D.C. Cir. 2017) (“Thus we have severed provisions when ‘they operate[d] entirely

independently of one another.’”) (quoting Davis Cty., 108 F.3d at 1459). That is, unlike other

cases, the underlying OPPS reimbursement rates here were not “expressly conditioned” on rate

reduction for E&M services. North Carolina v. FERC, 730 F.2d 790, 796 (D.C. Cir. 1984).

Further, this is not a case where the remaining rule starts to lose meaning without the severed

portion. See MD/DC/DE Broadcasters Ass’n v. FCC, 253 F.3d 732, 740 (D.C. Cir. 2001)

(examining “whether a statute’s function would be impaired if, after invaliding a portion of an

implementing regulation, the Court left the rest of the regulation in place”). Indeed, there is no

evidence at all that CMS considered the underlying OPPS reimbursement scheme when it

decided to reduce rates for E&M services at off-campus provider-based departments, other than

to note that the OPPS reimbursement rates were higher than comparable rates at physician

offices. Rather, the reduced rate for E&M services “operate[d] entirely independently” of the

underlying OPPS reimbursement scheme and was “not in any way ‘intertwined’” with CMS’s

obligation to review and set those underlying OPPS reimbursement rates. Davis Cty., 108 F.3d

at 1459 (quoting Tel. & Data Sys., Inc. v. FCC, 19 F.3d 42, 50 (D.C. Cir. 1994)). In fact, that

independence was CMS’s explanation for why budget neutrality did not apply. See Def.’s Opp’n

to Pls.’ Mot. for Summ. J. & Mem. in Supp. of Mot. to Dismiss or, in the Alternative, Cross-

5 Mot. for Summ. J. [Dkt. 20-1] at 14-15. Regardless of what CMS hypothetically might have

done, nothing in the Final Rule implies that the E&M rate reduction and underlying OPPS

reimbursement rates were intended to be inseparable.

The Court further notes that the only material difference between the Proposed

Rule and the Final Rule is that CMS chose to implement the rate reduction for E&M services

over two years instead of one. Compare 83 Fed. Reg. 37,046, 37,143 (July 31, 2018) (Proposed

Rule), with Final Rule at 59,013-14. CMS thus projected it would save only $300 million due to

the Final Rule, or half of the $600 million originally projected. See Final Rule at 59,014. Yet

CMS did not change the underlying OPPS reimbursement rates in the Final Rule to account for

the $300 million shortfall caused by phased implementation. CMS does not explain why the

$300 million shortfall caused by vacatur should be treated differently. CMS’s silence in the

Final Rule indicates that it would have implemented the underlying OPPS reimbursement rates

even without a rate reduction for E&M services and also favors vacatur. Cf. North Carolina, 730

F.2d at 796 (severing a regulation despite resulting “nominal effects”).

Second, CMS argues that vacating the Final Rule would prove disruptive if CMS

were to succeed on appeal because, as a practical matter, it would be difficult for CMS to claw

back any overpayments due to the administrative costs of doing so. See Mot. at 6. However, if

CMS were to lose on appeal, this disruption would not come to pass. That may seem obvious,

but the point is that CMS’s argument has nothing to do with the appropriateness of vacatur in

this case, only its timing; CMS’s argument better supports its request for a stay pending appeal

and is addressed below.3

3 Although the D.C. Circuit has noted “the havoc that piecemeal review of OPPS payments could bring about,” Amgen, Inc. v. Smith, 357 F.3d 103, 112 (D.C. Cir. 2004), that havoc is born of the

6 Finally, CMS argues that the Court should grant CMS the opportunity to develop

a remedy in the first instance, in recognition of the “substantial deference that Courts owe to the

Secretary in the administration of such a ‘complex statutory and regulatory regime.’” Shands

Jacksonville Med. Ctr., Inc. v. Azar, 366 F. Supp. 3d 32, 54 (D.D.C. 2018) (quoting Good

Samartian Hosp. v. Shalala, 508 U.S. 402, 404 (1993)); see also N. Air Cargo v. U.S. Postal

Serv., 674 F.3d 852, 861 (D.C. Cir. 2012). But in each of the cases cited by CMS, deference was

not an independent reason to remand without vacatur. Rather, remand without vacatur was

found appropriate only after application of the Allied-Signal factors. See N. Air Cargo, 674 F.3d

at 860-61; Am. Hosp. Ass’n, 385 F. Supp. 3d at 12-15; Shands I, 139 F. Supp. at 269-70. For the

reasons above, those factors do not favor CMS here.

B. Stay of the Order

District courts generally have the authority to stay their orders pending appeal.

See Hilton v. Braunskill, 481 U.S. 770, 776 (1987); Fed. R. Civ. P. 62(c). But in determining

whether to grant a stay, courts consider four factors: “(1) whether the stay applicant has made a

strong showing that he is likely to succeed on the merits; (2) whether the applicant will be

irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the

other parties interested in the proceeding; and (4) where the public interest lies.” Hilton, 481

U.S. at 776. At most, CMS has only hinted at irreparable harm. But cf. Tataranowicz v.

Sullivan, No. 90-0935, 1991 WL 57005, at *1 (D.D.C. Feb. 26, 1991) (finding disbursement of

prospective and budget neutral elements of the statutory scheme, neither of which is implicated here. Vacating the select rate reduction does not directly affect the broader reimbursement scheme. Cf. Am. Hosp. Ass’n, 385 F. Supp. 3d at 12-15 (declining to vacate an ultra vires budget neutral rule).

7 Medicare payments and administrative costs of recoupment are not irreparable harm). It has

completely ignored the other factors. Without more, CMS has not satisfied its burden.

II. CONCLUSION

The ultra vires consequences of the Final Rule are not so complex that they

cannot be directly redressed or undone. Vacatur and remand are the correct remedies and CMS

has not established that a stay is appropriate at this time. The government’s Motion to Modify

Order, Dkt. 33, will be denied. The Court will enter final judgment. A memorializing Order

accompanies this Memorandum Opinion.

Date: October 21, 2019 ROSEMARY M. COLLYER United States District Judge