Clarian Health West, LLC v. Burwell
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Opinion
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
) CLARIAN HEALTH WEST, LLC, ) ) Plaintiff, ) ) v. ) Civil Action No. 14-cv-0339 (KBJ) ) SYLVIA MATHEWS BURWELL, ) ) Defendant. ) )
MEMORANDUM OPINION
The Centers for Medicare and Medicaid Services (“CMS”) is the sub-agency
within the Department of Health and Human Services (“HHS”) that administers the
federal health insurance program known as Medicare. In 2012, an agent of CMS
informed Plaintiff Clarian Health West, LLC (“Clarian”), an Indiana hospital, that it
needed to repay more than $2 million in Medicare reimbursement funds that the hospital
had received under the Medicare program, due to a reconciliation process that CMS had
performed with respect to certain Medicare payments. Clarian objected to CMS’s
repayment demand, and filed the instant action against Sylvia Mathews Burwell, the
Secretary of HHS, to contest the agency’s contentions. Clarian’s one-count complaint
cites the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701–706, and the
Medicare statute’s review provisions, 42 U.S.C. § 1395oo(f)(1), and asserts that the
agency lacks the statutory and regulatory authority to make Clarian repay the money
because the regulation that authorizes the reconciliation process (“the 2003 Rule”) and
the guidelines that implement that rule (“the 2010 guidelines” or “the 2010 manual”) were improperly promulgated and are contrary to the terms of the Medicare statute.
Before this Court at present are the parties’ cross-motions for summary
judgment. (Pl.’s Mot. for Summ. J. (“Pl.’s Mot.”), ECF No. 13; Def.’s Mot. for Summ.
J. (“Def.’s Mot.”), ECF No. 14.) In its motion, Clarian contends, among other things,
that CMS’s decision to recoup the $2 million was procedurally defective because the
agency failed to employ required notice-and-comment procedures prior to adopting the
guidelines that establish the criteria for identifying which hospitals should be subjected
to the reconciliation process. (See Pl.’s Mem. in Supp. of Pl.’s Mot. (“Pl.’s Mem.”),
ECF No. 13-1, at 29–36.) 1 The Secretary’s cross-motion argues that there is nothing
procedurally or substantively improper about the rule that relates to the reconciliation
process or its implementation. (See Def.’s Mem. in Supp. of Def.’s Mot. (“Def.’s
Mem.”), ECF No. 14-1, at 24–49.)
Upon consideration of the parties’ arguments, this Court agrees with Clarian that
the qualifying criteria contained in the implementing manual were the sort of
substantive rule that must go through notice-and-comment rulemaking, and on that
ground alone, Clarian’s motion for summary judgment will be GRANTED, and the
Secretary’s motion for summary judgment will be DENIED. A separate order
consistent with this opinion will follow.
I. BACKGROUND
A. The Applicable Statutory And Regulatory Framework
The Medicare program “was established in 1965 and provides health care
1 Page numbers herein refer to those that the Court’s electronic case filing system automatically assigns.
2 coverage for persons age 65 and older, disabled persons, and persons with end stage
renal disease who meet certain eligibility requirements.” Allina Health Servs. v.
Burwell, No. 14-cv-1415, 2016 WL 4409181, at *1 (D.D.C. Aug. 17, 2016) (citing 42
U.S.C. §§ 426, 426a). Medicare reimbursements are governed by federal law, and the
obtuse text of the Medicare statute has produced much inspired grappling among
judges, many of whom have described the legal provisions that govern the Medicare
system as a “maze[,]” Hall v. Sebelius, 667 F.3d 1293, 1301 n.9 (D.C. Cir. 2012)
(Henderson, J., dissenting), a “legislative and regulatory thicket[,]” Adirondack Med.
Ctr. v. Sebelius, 29 F. Supp. 3d 25, 28 (D.D.C. 2014), aff’d sub nom. Adirondack Med.
Ctr. v. Burwell, 782 F.3d 707 (D.C. Cir. 2015), and a “labyrinth[,]” Biloxi Reg’l Med.
Ctr. v. Bowen, 835 F.2d 345, 349 (D.C. Cir. 1987), among other things. 2 The instant
lawsuit centers on the government’s reimbursement of inpatient hospital care under
Medicare Part A, pursuant to which the federal government provides direct
reimbursements to healthcare providers to cover the bulk of the expenses that a patient
with Medicare insurance (called a “beneficiary”) incurs for inpatient hospital care. See
42 U.S.C. § 1395d; see also Ctrs. for Medicare & Medicaid Servs., Pub. No. 100-01,
Medicare General Information, Eligibility, and Entitlement Manual, Ch. 3 §§ 10.2–10.3.
1. Medicare’s Prospective Payment System
The complexity of the Medicare scheme is partly due to the intricacies of the
prospective payment system that Congress has adopted with respect to Part A
2 See also Rehab. Ass’n of Va. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994) (calling the Medicare statute “among the most completely impenetrable texts within human experience”); Catholic Health Initiatives-Iowa, Corp. v. Sebelius, 841 F. Supp. 2d 270, 271 (D.D.C. 2012) (inviting the reader to “[p]icture a law written by James Joyce and edited by E.E. Cummings[,]” and remarking that “[s]uch is the Medicare statute”), rev’d, 718 F.3d 914 (D.C. Cir. 2013).
3 reimbursements—a payment system that Congress developed in reaction to the failures
of the cost-based payment system that was used when Medicare was first enacted. See
Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015). Under the
prior regime, hospitals and other health care providers were reimbursed for all
“reasonable costs” that the provider incurred in treating beneficiaries, Good Samaritan
Hosp. v. Shalala, 508 U.S. 402, 405 (1993), but that cost-based system “deteriorated
over time . . . because it provided little incentive for hospitals to keep costs down, as
the more they spent, the more they were reimbursed[,]” Dist. Hosp. Partners, 786 F.3d
at 49 (internal quotation marks and citation omitted); see also H.R. Rep. No. 98-25, at
132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351 (asserting that the cost-based
payment system “lack[ed] incentives for efficiency” because the federal government
would “simply respond[] to hospital cost increases by providing increased
reimbursement”). In 1983, Congress replaced Medicare’s cost-based payment system
with the prospective payment scheme that has given rise to many legal disputes and that
is at the heart of the present action. See Social Security Amendments of 1983, Pub. L.
No. 98-21, § 601, 97 Stat. 65, 149-63.
Under the prospective payment system, in contrast to the cost-based system, the
federal government pays the hospital a set reimbursement amount that is established in
advance of the hospital’s expenditures and that is generally based upon the
government’s ex ante assessment of what it costs to care for an individual with the
Medicare beneficiary’s specific diagnosis, regardless of how much the hospital actually
spends to care for a beneficiary. See Cape Cod Hosp. v.
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
) CLARIAN HEALTH WEST, LLC, ) ) Plaintiff, ) ) v. ) Civil Action No. 14-cv-0339 (KBJ) ) SYLVIA MATHEWS BURWELL, ) ) Defendant. ) )
MEMORANDUM OPINION
The Centers for Medicare and Medicaid Services (“CMS”) is the sub-agency
within the Department of Health and Human Services (“HHS”) that administers the
federal health insurance program known as Medicare. In 2012, an agent of CMS
informed Plaintiff Clarian Health West, LLC (“Clarian”), an Indiana hospital, that it
needed to repay more than $2 million in Medicare reimbursement funds that the hospital
had received under the Medicare program, due to a reconciliation process that CMS had
performed with respect to certain Medicare payments. Clarian objected to CMS’s
repayment demand, and filed the instant action against Sylvia Mathews Burwell, the
Secretary of HHS, to contest the agency’s contentions. Clarian’s one-count complaint
cites the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 701–706, and the
Medicare statute’s review provisions, 42 U.S.C. § 1395oo(f)(1), and asserts that the
agency lacks the statutory and regulatory authority to make Clarian repay the money
because the regulation that authorizes the reconciliation process (“the 2003 Rule”) and
the guidelines that implement that rule (“the 2010 guidelines” or “the 2010 manual”) were improperly promulgated and are contrary to the terms of the Medicare statute.
Before this Court at present are the parties’ cross-motions for summary
judgment. (Pl.’s Mot. for Summ. J. (“Pl.’s Mot.”), ECF No. 13; Def.’s Mot. for Summ.
J. (“Def.’s Mot.”), ECF No. 14.) In its motion, Clarian contends, among other things,
that CMS’s decision to recoup the $2 million was procedurally defective because the
agency failed to employ required notice-and-comment procedures prior to adopting the
guidelines that establish the criteria for identifying which hospitals should be subjected
to the reconciliation process. (See Pl.’s Mem. in Supp. of Pl.’s Mot. (“Pl.’s Mem.”),
ECF No. 13-1, at 29–36.) 1 The Secretary’s cross-motion argues that there is nothing
procedurally or substantively improper about the rule that relates to the reconciliation
process or its implementation. (See Def.’s Mem. in Supp. of Def.’s Mot. (“Def.’s
Mem.”), ECF No. 14-1, at 24–49.)
Upon consideration of the parties’ arguments, this Court agrees with Clarian that
the qualifying criteria contained in the implementing manual were the sort of
substantive rule that must go through notice-and-comment rulemaking, and on that
ground alone, Clarian’s motion for summary judgment will be GRANTED, and the
Secretary’s motion for summary judgment will be DENIED. A separate order
consistent with this opinion will follow.
I. BACKGROUND
A. The Applicable Statutory And Regulatory Framework
The Medicare program “was established in 1965 and provides health care
1 Page numbers herein refer to those that the Court’s electronic case filing system automatically assigns.
2 coverage for persons age 65 and older, disabled persons, and persons with end stage
renal disease who meet certain eligibility requirements.” Allina Health Servs. v.
Burwell, No. 14-cv-1415, 2016 WL 4409181, at *1 (D.D.C. Aug. 17, 2016) (citing 42
U.S.C. §§ 426, 426a). Medicare reimbursements are governed by federal law, and the
obtuse text of the Medicare statute has produced much inspired grappling among
judges, many of whom have described the legal provisions that govern the Medicare
system as a “maze[,]” Hall v. Sebelius, 667 F.3d 1293, 1301 n.9 (D.C. Cir. 2012)
(Henderson, J., dissenting), a “legislative and regulatory thicket[,]” Adirondack Med.
Ctr. v. Sebelius, 29 F. Supp. 3d 25, 28 (D.D.C. 2014), aff’d sub nom. Adirondack Med.
Ctr. v. Burwell, 782 F.3d 707 (D.C. Cir. 2015), and a “labyrinth[,]” Biloxi Reg’l Med.
Ctr. v. Bowen, 835 F.2d 345, 349 (D.C. Cir. 1987), among other things. 2 The instant
lawsuit centers on the government’s reimbursement of inpatient hospital care under
Medicare Part A, pursuant to which the federal government provides direct
reimbursements to healthcare providers to cover the bulk of the expenses that a patient
with Medicare insurance (called a “beneficiary”) incurs for inpatient hospital care. See
42 U.S.C. § 1395d; see also Ctrs. for Medicare & Medicaid Servs., Pub. No. 100-01,
Medicare General Information, Eligibility, and Entitlement Manual, Ch. 3 §§ 10.2–10.3.
1. Medicare’s Prospective Payment System
The complexity of the Medicare scheme is partly due to the intricacies of the
prospective payment system that Congress has adopted with respect to Part A
2 See also Rehab. Ass’n of Va. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994) (calling the Medicare statute “among the most completely impenetrable texts within human experience”); Catholic Health Initiatives-Iowa, Corp. v. Sebelius, 841 F. Supp. 2d 270, 271 (D.D.C. 2012) (inviting the reader to “[p]icture a law written by James Joyce and edited by E.E. Cummings[,]” and remarking that “[s]uch is the Medicare statute”), rev’d, 718 F.3d 914 (D.C. Cir. 2013).
3 reimbursements—a payment system that Congress developed in reaction to the failures
of the cost-based payment system that was used when Medicare was first enacted. See
Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015). Under the
prior regime, hospitals and other health care providers were reimbursed for all
“reasonable costs” that the provider incurred in treating beneficiaries, Good Samaritan
Hosp. v. Shalala, 508 U.S. 402, 405 (1993), but that cost-based system “deteriorated
over time . . . because it provided little incentive for hospitals to keep costs down, as
the more they spent, the more they were reimbursed[,]” Dist. Hosp. Partners, 786 F.3d
at 49 (internal quotation marks and citation omitted); see also H.R. Rep. No. 98-25, at
132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351 (asserting that the cost-based
payment system “lack[ed] incentives for efficiency” because the federal government
would “simply respond[] to hospital cost increases by providing increased
reimbursement”). In 1983, Congress replaced Medicare’s cost-based payment system
with the prospective payment scheme that has given rise to many legal disputes and that
is at the heart of the present action. See Social Security Amendments of 1983, Pub. L.
No. 98-21, § 601, 97 Stat. 65, 149-63.
Under the prospective payment system, in contrast to the cost-based system, the
federal government pays the hospital a set reimbursement amount that is established in
advance of the hospital’s expenditures and that is generally based upon the
government’s ex ante assessment of what it costs to care for an individual with the
Medicare beneficiary’s specific diagnosis, regardless of how much the hospital actually
spends to care for a beneficiary. See Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205
(D.C. Cir. 2011); see also Dist. Hosp. Partners, 786 F.3d at 49 (explaining that
4 prospective payments incentivize hospitals to reduce the cost of inpatient care because
any reduction in cost directly profits the hospitals, while increases in the cost of care
beyond the predetermined amount are borne by the hospitals rather than the federal
government). The prospective payments that hospitals receive for treating Medicare
patients are calculated by private health care insurers known as Medicare
Administrative Contractors (“MACs”) pursuant to a multifactor formula that begins
with a “standardized amount,” which generally “reflects the average cost incurred by
hospitals nationwide for each patient they treat and then discharge.” Cape Cod Hosp.,
630 F.3d at 205. 3
In order to ensure that the prospective payment system fairly approximates the
actual cost of the care provided, the MACs adjust the standardized amount to account
for various factors, including the relative cost of the care associated with different
patient diagnoses. See Dist. Hosp. Partners, 786 F.3d at 49; Cape Cod Hosp., 630 F.3d
at 205. Per the Medicare statute, HHS has classified the care that can be afforded to
every type of hospital patient into Diagnosis Related Groups (“DRGs”), see 42 U.S.C.
§ 1395ww(d)(4)(A), and each DRG is weighted in accordance with “the estimated
relative cost of hospital resources used with respect to discharges classified within that
group compared to discharges classified within other groups[,]” 42 C.F.R. § 412.60(b). 4
This means, for example, that the DRG classification that includes a heart transplant
3 The standardized amount was initially determined as of 1984, after the prospective payment system came into being; this baseline has been adjusted for inflation each year subsequently. See Cape Cod Hosp., 630 F.3d at 205. 4 There are other factors that contribute to the calculation of the DRG weight, see, e.g., Adirondack Med. Ctr. v. Sebelius, 935 F. Supp. 2d 121, 123–24 (D.D.C. 2013) (describing the need for a budget neutrality adjustment), but these details are not relevant to this case.
5 will be weighted more heavily than one for a non-invasive procedure—i.e., the “DRG
weight” will be greater—because heart surgery uses more resources and imposes higher
costs on the hospital. Cty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir.
1999). And the greater the DRG weight, the higher the rate of reimbursement; indeed,
the DRG weight adjustment is such an important factor in determining the rate of
reimbursement under the prospective payment system that the Medicare statute itself
refers to reimbursements as the “DRG prospective payment rate.” See, e.g., 42 U.S.C.
§ 1395ww(d)(5)(A)(ii).
Significantly for present purposes, Medicare’s prospective payment system not
only seems to provide incentives for hospitals to control costs while accounting for the
variable care costs that are associated with different patient diagnoses, it also
recognizes that the costs of healthcare can sometimes be unpredictable, and that a
purely prospective system would unfairly omit reimbursements for the high costs a
hospital can incur when a particular beneficiary’s care ends up being unduly expensive
through no fault of the hospital, as sometimes happens. See Cty. of Los Angeles, 192
F.3d at 1009 (“Despite the anticipated virtues of [the prospective payment system],
Congress recognized that health-care providers would inevitably care for some patients
whose hospitalization would be extraordinarily costly or lengthy.”). To prevent
hospitals from facing significant losses for providing care to patients in such “outlier”
cases—i.e., situations in which the cost of the care provided to a Medicare beneficiary
far exceeds the prospective reimbursement rate for a particular diagnosis—Congress
authorized HHS to reimburse hospitals for these costs through a system of “outlier
payments.” See 42 U.S.C. § 1395ww(d)(5)(A); H.R. Rep. No. 98-25, at 154, reprinted
6 in 1983 U.S.C.C.A.N. 219, 373. It is the manner in which CMS calculates, assesses,
and retroactively reconciles such outlier payments that is at issue in this case.
2. Outlier-Payment Calculations
Section 1395ww(d)(5)(A)(ii) of Title 42 of the U.S. Code permits a hospital to
“request additional payments” (above and beyond the standardized payments that are
provided pursuant to the prospective payment system) in certain instances, and the
statute identifies the particular circumstances under which such a request is warranted.
Specifically, per the statute, “[a] hospital is eligible for an outlier payment ‘in any case
where charges, adjusted to cost, exceed . . . the sum of the applicable DRG prospective
payment rate . . . plus a fixed dollar amount determined by the Secretary.’” Dist. Hosp.
Partners, 786 F.3d at 49 (alterations in original) (quoting 42 U.S.C.
§ 1395ww(d)(5)(A)(ii)); see also 42 U.S.C. § 1395ww(d)(5)(A)(iii) (stating that the
amount of the outlier payment “shall be determined by the Secretary and shall . . .
approximate the marginal cost of care beyond” the otherwise applicable “cutoff point”).
In practice, this statutory command has spawned an “elaborate process” for calculating
outlier payments, which involves the intersection of three distinct concepts: (1) charges,
adjusted to cost, (2) the outlier threshold, and (3) the marginal cost factor. Dist. Hosp.
Partners, 786 F.3d at 49.
The “charges, adjusted to cost” figure ensures that the outlier payment reflects
the actual cost of the care provided to a beneficiary, and that the government “does not
simply reimburse a hospital for the charges reflected on a patient’s invoice[.]” Dist.
Hosp. Partners, 786 F.3d at 50. It is calculated by multiplying two different numbers:
the first is the amount that the hospital charged for the service provided to the
beneficiary, and the second is the “cost-to-charge ratio,” which is “a fraction that
7 represents the estimated amount that [a hospital] incurs in costs for every dollar that it
bills in charges.” (Def.’s Mem. at 13.) In other words, the cost-to-charge ratio is “a
number representing a hospital’s average markup[.]” Appalachian Reg’l Healthcare,
Inc. v. Shalala, 131 F.3d 1050, 1052 (D.C. Cir. 1997).
The outlier threshold is also a combination of numbers, but the numbers are
added rather than multiplied. 5 The first figure is “the applicable DRG prospective
payment rate[,]” 42 U.S.C. § 1395ww(d)(5)(A)(ii), which is the payment that the
hospital would ordinarily receive under Medicare’s reimbursement process for a non-
outlier case. The second number is the “fixed loss threshold,” which is a fixed amount
that the Secretary sets anew each year. Dist. Hosp. Partners, 786 F.3d at 50. 6 The
fixed loss threshold essentially “acts like an insurance deductible[,]” id. (quoting Boca
Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229 (11th Cir.
2009)) (internal quotation mark omitted), in that it reflects an amount that the hospital
simply has to bear in order to receive any outlier payments.
The final component that factors into the calculation of an outlier payment is the
marginal cost factor. This factor represents the “marginal cost” of offering extra care to
outlier patients, 42 U.S.C. § 1395ww(d)(5)(A)(iii), and by regulation, this factor is set
at 80%, see 42 C.F.R. § 412.84(k).
5 The outlier threshold can include a number of other factors beyond the two discussed here, such as when a hospital has a disproportionate share of low-income patients, see 42 U.S.C. § 1395ww(d)(5)(F), or is a teaching hospital, see id. § 1395ww(d)(5)(B). Because none of these additional factors are implicated by the present case, discussion of them has been omitted. 6 The fixed loss threshold is calculated such that outlier payments for the following year will amount to between 5% and 6% of the Medicare system’s total aggregate reimbursement. See 42 U.S.C. § 1395ww(d)(5)(iv).
8 Putting these all together, the amount of an outlier payment is determined by
taking the cost-adjusted charges (which are determined by multiplying the charge for
the outlier treatment by the hospital’s cost-to-charge ratio), subtracting the outlier
threshold (which is determined by adding the standard reimbursement payment for the
services provided and the fixed loss threshold), and multiplying that number by the
marginal cost factor (which is always 80%). 7 In a recent opinion, the D.C. Circuit
provided a helpful example that explains how this formula works in practice, and also
illustrates the fact that outlier payments cover some, but not all, of the costs associated
with treating outlier cases :
Assume that the Secretary sets the fixed loss threshold at $10,000. Assume also that a hospital treats a Medicare patient for a broken bone and that the DRG rate for the treatment is $3,000. The Medicare patient required unusually extensive treatment which caused the hospital to impose $23,000 in cost-adjusted charges. If no other statutory factor is triggered, . . . the hospital is eligible for an outlier payment of $8,000, which is 80% of the difference between its cost-adjusted charges ($23,000) and the outlier threshold ($13,000).
Dist. Hosp. Partners, 786 F.3d at 50–51.
B. The 2003 Rule And The 2010 Implementation
1. The Road To Reconciliation Of Past Outlier Payments
In the early 2000s, many hospitals were attempting to game the outlier-payment
process through a sophisticated form of overbilling known as “turbocharging.” See
Banner Health v. Burwell, 126 F. Supp. 3d 28, 48 (D.D.C. 2015). Through the practice
of turbocharging, which exploits a tension that arises when the cost-adjusted charges
7 The following formula generally captures the interaction between these various concepts:
Outlier Payment = (Cost-Adjusted Charges – Outlier Threshold) x Marginal Cost Factor
9 are calculated, a hospital can generate outlier payments that are significantly greater
than would otherwise be expected under the formula discussed above. This can happen
because, as explained, the cost-adjusted charges are determined by multiplying the
amount the hospital actually charged for a particular type of care by the hospital’s cost-
to-charge ratio. However, there can be a temporal disconnect between these two
numbers, given that the amount charged for a type of care is determined as of the time
that the care is provided, while the cost-to-charge ratio is based on the most recently
settled cost report, and cost reports can take several years to settle. See Dist. Hosp.
Partners, L.P. v. Sebelius, 973 F. Supp. 2d 1, 14 (D.D.C. 2014), aff’d in part, rev’d in
part sub nom. Dist. Hosp. Partners, 786 F.3d 46. Thus, the cost-to-charge ratio that is
used for purposes of calculating outlier payments in any given year is based on data that
lags behind the hospital’s actual cost-to-charge ratio for that year, see id., and a
hospital can manipulate the cost-adjusted charge factor in the outlier-payment
calculation by drastically increasing the amount that it charges for inpatient care, out of
all proportion to the actual increase in costs associated with that care. In other words,
when current (heavily inflated) charges are multiplied by an out-of-date (relatively
deflated) cost-to-charge ratio, the hospital’s cost-adjusted charges figure increases, and
the hospital ends up being reimbursed for outlier payments at ever higher rates despite
no obvious increase in the quality or cost of care. (See Pl.’s Mem. at 15–17.) See also
Elizabeth A. Weeks, Gauging the Cost of Loopholes: Health Care Pricing and
Medicare Regulation in the Post-Enron Era, 40 Wake Forest L. Rev. 1215, 1248–50
(2005) (describing this process). 8
8 Notably, the outlier-payment system is uniquely susceptible to this kind of manipulation because, as explained above, outlier payments are partially cost-based—i.e., outlier payments reference the amount
10 By 2003, HHS had discovered that turbocharging practices were widespread
among hospitals, and issued a proposed rule regarding a change in the methodology for
determining outlier payments partly to address the turbocharging problem. See
Medicare Program; Proposed Change in Methodology for Determining Payment for
Extraordinarily High-Cost Cases (Cost Outlier) Under the Acute Care Hospital Inpatient
Prospective Payment System, 68 Fed. Reg. 10,420 (March 5, 2003). The agency
received notice and comment, and promulgated the final rule—referred to herein as the
“2003 Rule”—on June 9, 2003. See Medicare Program; Change in Methodology for
Determining Payment for Extraordinarily High-Cost Cases (Cost Outliers) Under the
Acute Care Hospital Inpatient and Long-Term Care Hospital Prospective Payment
Systems, 68 Fed. Reg. 34,494 (June 9, 2003).
The 2003 Rule revised “the methodology for determining payments for
extraordinarily high-cost cases (cost outliers) . . . under the . . . prospective payment
system[.]” Id. at 34,494. Notably, the 2003 Rule did not alter the underlying formula
for calculating outlier payments, but it did include a host of measures designed to
combat turbocharging. For example, instead of relying on the most recent settled cost
report, the rule provided that a MAC can consider “the most recent tentative settled cost
report” when determining the applicable cost-to-charge ratio for the following year.
See id. at 34,499 (emphasis added); see also 42 C.F.R. § 412.84. 9 Furthermore, and
that a hospital actually charges for patient care rather than by a predetermined, standardized amount— and cost-based repayment systems tend to incentivize providers to increase the cost of care, unmoored from any improvements in the quality of care being offered. Cf. Alice G. Gosfield, Medicare and Medicaid Fraud and Abuse § 1:7 (2014) (describing various types of Medicare fraud and abuse in the context of physician reimbursement, which is governed by a cost-based reimbursement system).
9 Using the most recent tentative report results in less of a lag time between the cost-to-charge ratio applied to a provider and that provider’s actual cost-to-charge ratio.
11 most relevant to the present case, the 2003 Rule provided for the “reconciliation” of
outlier payments after the cost report for the relevant period has been finalized. See
Change in Methodology, 68 Fed. Reg. at 34,501 (“[W]e proposed to add a provision to
our regulations to provide that outlier payments would become subject to reconciliation
when hospitals’ cost reports are settled.”); 42 C.F.R. § 412.84(i)(4) (“[A]ny
reconciliation of outlier payments will be based on operating and capital cost-to-charge
ratios calculated based on a ratio of costs to charges computed from the relevant cost
report and charge data determined at the time the cost report coinciding with the
discharge is settled.”). Pursuant to this new reconciliation process, MACs were
authorized to revisit outlier payments once a hospital’s actual cost-to-charge ratio for a
particular year had been determined—despite the fact that the necessary data for making
that determination is ordinarily not available until years after the pertinent outlier
payments have been disbursed—and to revise outlier payments retroactively.
2. The 2010 CMS Manual And The Qualifying Criteria For Being Subjected To The Outlier Payment Reconciliation Process
The core of Clarian’s complaint revolves around the fact that the 2003 Rule only
generally authorized the reconciliation process and specified that any reconciliation
would be based on the cost and charge data contained in the hospital’s final settled cost
report, and did not proceed to detail how the reconciliation process would operate in
practice. See 42 C.F.R. § 412.84(i)(4). In fact, in response to a number of comments
that asked the agency to set certain “parameters” in order to guide the implementation
of the newly authorized reconciliation process, the Secretary expressly acknowledged
that the agency would not be addressing the specific circumstances under which
reconciliation would be appropriate at the time the rule was promulgated. See Change
12 in Methodology, 68 Fed. Reg. at 34,503. The Secretary made crystal clear that the
agency’s plan was to issue implementation guidelines at some later point in time, id.
(stating that HHS “intend[s] to issue a program instruction in the near future . . .
[containing] thresholds for fiscal intermediates to reconcile outlier payments for other
hospitals during FY 2003”) and, in the context of the 2003 Rule, the Secretary’s
preamble merely mentioned that the agency was “considering” certain thresholds for
“cost reporting periods beginning during FY 2004[,]” id.
In December of 2010—more than seven years after the 2003 Rule took effect—
the HHS finally provided specific standards for MACs to use when administering the
reconciliation process: it published instructions for reconciliation in a CMS manual
governing Medicare claims processing. See Ctrs. for Medicare & Medicaid Servs., Pub.
No. 100-04, Medicare Claims Processing Manual, Ch. 3 § 20.1.2.5. Importantly,
according to this 2010 manual, a hospital’s outlier payments are potentially subject to
reconciliation if two criteria are met:
(1) the provider’s “actual operating [cost-to-charge ratio] is found to be plus or minus 10 percentage points from the [cost-to-charge ratio] used [to calculate a provider’s] outlier payments,” and
(2) the provider’s “[t]otal outlier payments in that cost reporting period exceed $500,000.”
Id. § 20.1.2.5(A). The manual instructs that a MAC must follow a step-by-step
procedure for initiating reconciliation if these two criteria are satisfied. See id. (“If the
criteria for reconciliation are met, Medicare contractors shall follow the instructions
below in § 20.1.2.7.”); see also id. § 20.1.2.7 (detailing the 14-step reconciliation
process). And as part of that process, the MAC must alert the CMS Central Office that
the offending hospital has met the reconciliation criteria and provide a bevy of
13 information about the hospital. See id. § 20.1.2.7. If CMS gives the go-ahead, the
MAC must then calculate the difference between the original and revised outlier
payments, finalize the hospital’s cost report, issue a Notice of Program Reimbursement,
and “make the necessary adjustment from or to the provider.” Id. The manual is less
clear about what happens if a hospital does not meet the reconciliation criteria after the
cost report for a given year settles: on the one hand, it suggests that no reconciliation
will occur because “the cost report shall be finalized[;]” on the other hand, it notes that
“[e]ven if a hospital does not meet the criteria for reconciliation . . . the Medicare
contractor has the discretion to request that a hospital’s outlier payments . . . be
reconciled if the hospital’s most recent cost and charge data indicate that the outlier
payments to the hospital were significantly inaccurate.” Id. § 20.1.2.5(A).
Notably, as mentioned, the Secretary’s statement in the preamble to the 2003
Rule hinted at the possibility that the agency might eventually adopt these two
qualifying criteria for initiating reconciliation, see Change in Methodology, 68 Fed.
Reg. at 34,503, but these reconciliation standards did not become official agency policy
until the 2010 claims processing manual was published. It is undisputed that the 2010
manual was produced without notice or an opportunity for the public to comment on the
selected standards, and the manual contains no statement from the agency that sets forth
any justification for these particular criteria. The only record evidence regarding the
agency’s reasoning appears in the preamble to the 2003 Rule, which notes the agency’s
general view that these thresholds “would appropriately capture those hospitals whose
outlier payments will be substantially inaccurate when using the ratio from the
contemporaneous cost reporting period.” Change in Methodology, 68 Fed. Reg. at
14 34,503.
C. Instant Facts And Procedural History 10
Clarian West Medical Center is a 127-bed hospital that is located in Avon,
Indiana. (See Compl., ECF No. 1, ¶ 8.) Clarian began operating in December of 2004
(see id. ¶ 48), and according to the complaint, in its relatively brief existence, Clarian
has already been subjected to the whims of the outlier-payment reconciliation process
twice. The first instance (which Clarian is not challenging in the instant lawsuit)
purportedly occurred in 2005; Clarian maintains that its outlier payments for that year
should have been—but were not—reconciled, and as a result, the hospital lost out on $1
million in outlier payments. (See Compl. ¶¶ 48–49; Pl.’s Mem. at 23–24.) 11 It is the
second instance of alleged unfairness with respect to the outlier-payment reconciliation
process that is the subject of the instant dispute; specifically, Clarian insists that the
agency has improperly identified it as a turbocharger under the criteria laid out in the
2010 manual, and then subjected its outlier payments for the year 2007 to
reconciliation, which has wrongly resulted in a recoupment demand of more than $2
million. (See id. at 24–25.)
The problem, according to Clarian, was the agency’s alleged failure to recognize
that the cost-to-charge ratio for new hospitals starts high and inevitably decreases in the
10 The Secretary has not disputed any of the factual allegations contained in Clarian’s complaint and this Court therefore accepts these facts as true for purposes of analyzing the cross-motions for summary judgment. See Lee v. United States, 570 F. Supp. 2d 142, 152 (D.D.C. 2008). 11 Under the 2003 Rule, outlier payments for new hospitals (like Clarian) are calculated according to the statewide average cost-to-charge ratio, rather than the hospital’s actual cost-to-charge ratio, because, by its very nature, a brand new hospital has not submitted any cost reports from which a genuine cost-to-charge ratio can be predicted. See 42 C.F.R. § 412.84(i)(3). Clarian asserts that if its actual cost-to-charge ratio in 2005 had been considered, then the reconciliation criteria would have been met, and it would have netted an extra $1 million worth of outlier payments for that year as a result of the reconciliation process. (See Compl. ¶ 49.)
15 first few years of operation, not because of turbocharging but because initial hospital
operations are inherently costly when evaluated on a per-patient basis. (See Compl.
¶ 50.) 12 Per standard practice, the cost-to-charge ratio that was used to calculate
Clarian’s outlier payments for 2007 was based on Clarian’s cost reports from 2005 and
2006; those cost reports necessarily generated a higher cost-to-charge ratio than
Clarian’s actual (decreased) cost-to-charge ratio for 2007. (See Pl.’s Mem. at 24.)
Consequently, the MAC that undertook the retrospective evaluation of Clarian’s 2007
outlier payment once the cost reports for that year had settled determined that the two
qualifying criteria for reconciliation were met, and on March 30, 2012, the MAC
informed Clarian that its outlier payments from 2007 were being revised downward to
reflect updated information regarding Clarian’s actual cost-to-charge ratio for that year.
(See Compl. ¶ 52.) The upshot of Clarian’s claim is that, due to the reconciliation
process, the agency demanded that Clarian pay back more than $2.4 million worth of
outlier payments that it had received during the period at issue, when, according to
Clarian, reconciliation should not have been undertaken in the first place. (See id.
¶ 53.)
To challenge the agency’s recoupment demand, Clarian appealed the repayment
decision to the Provider Reimbursement Review Board (“PRRB”), which is the
administrative tribunal that Congress has authorized to review cost-report disputes
between MACs and service providers. See 42 U.S.C. § 1395oo; 42 C.F.R.
12 This is apparently because new hospitals see a sharp increase in the “patient utilization rate” in the first few years, which decreases their “per-unit costs[.]” (Compl. ¶ 50; see Pl.’s Mem. at 24, 38.) Put another way, all other things being equal, a new hospital with few patients has higher costs per patient than a more established hospital with more patients, and as a hospital gains patients, its average costs decrease even as the amount it charges stays constant, which results in a decrease in its cost-to-charge ratio. (See Compl. ¶ 50.)
16 §§ 405.1835–77. Clarian requested expedited judicial review of the dispute pursuant to
42 U.S.C. § 1395oo(f)(1) (see Pl.’s Mem. at 25), and on January 3, 2014, the PRRB
permitted expedited judicial review of some of Clarian’s arguments, paving the way for
the instant action (see id.). 13
Clarian’s one-count complaint, which was filed in this Court on March 3, 2014,
asserts that “the Secretary’s 2012 [reconciliation] determination, and the agency rules
governing that determination, are invalid and should be set aside” because they violate
the Administrative Procedure Act and the Medicare statute. (Compl. ¶ 58; see id. ¶ 60.)
Thus, Clarian challenges not only the $2.4 million recoupment demand but also the
administrative acts that form the backbone of that repayment determination: the 2003
Rule that authorizes reconciliation and the 2010 guidelines that implement that rule.
And Clarian’s memorandum of law in support of its motion for summary judgment,
which was filed October 10, 2014, clarifies that it seeks to attack these regulatory
enactments on three fronts.
First, Clarian argues that the Secretary failed to adhere to the Medicare statute’s
notice-and-comment rulemaking requirements when the agency adopted the standards
13 Expedited judicial review permits the PRRB to grant an appellant access to federal court when the PRRB has jurisdiction over an appeal but lacks the authority to decide the controlling question of law. See 42 U.S.C. § 1395oo(f)(1); Three Lower Ctys. Cmty. Health Servs., Inc. v. U.S. Dep’t of Health & Human Servs., 517 F. Supp. 2d 431, 435 n.4 (D.D.C. 2007), aff’d, 317 F. App’x 1 (D.C. Cir. 2009). In this instance, the PRRB decided that it lacked jurisdiction over three of Clarian’s claims; as to the other three, including the key claim that the governing reconciliation standards “were not adopted in accordance with the notice and comment rulemaking requirements mandated by the [APA] and Medicare Act” (Administrative Record (“AR”), ECF No. 19, at 10), the PRRB concluded that it possessed jurisdiction but lacked the authority to decide the question of law, and granted Plaintiff’s request for expedited judicial review. (See id. at 11–12.) When a party challenges the PRRB’s determination that it lacks jurisdiction over an issue, the Court “must limit its review to the PRRB’s jurisdiction determination” and not reach the merits of the claim. Eagle Healthcare, Inc. v. Sebelius, 969 F. Supp. 2d 38, 45 (D.D.C. 2013). However, in this case, the Court addresses only the merits of the claims over which the PRRB granted expedited judicial review, and addressing these claims is sufficient to resolve the case. Therefore, there is no need for this Court to assess whether the PRRB was correct in its determination that it lacked jurisdiction over some of Clarian’s claims.
17 for reconciliation that appear in the 2010 manual. (Pl.’s Mem. at 29–30, 32–33.) 14
Second, Clarian argues that the Secretary’s decision to authorize reconciliation for
outlier payments in the 2003 Rule was not the product of reasoned decision making,
because the Secretary improperly failed to consider a host of factors, including the
effect of reconciliation on new hospitals (id. at 37–40); the procedures for
implementing the reconciliation rules (id. at 40–43); and whether the retrospective
reconciliation process was justified, given the broader prospective payment scheme (id.
at 43–45). (See also id. at 47–49 (arguing that the Secretary did not have sufficient
evidence from which to conclude that retroactively correcting cost-to-charge ratios
through reconciliation would actually lead to more accurate outlier payments).) Third,
and finally, Clarian argues that, to the extent that the 2003 Rule and the 2010
implementing guidelines permit MACs to recover interest on payments owed as a result
of the reconciliation process (see id. at 50–53) and transgress certain statute of
limitations and beneficiary notification requirements (see id. at 33–36), these agency
pronouncements are inconsistent with the Medicare statute.
The Secretary filed a cross-motion for summary judgment on October 10, 2014.
In that motion, the Secretary argues that the agency fully complied with the procedural
requirements of the Medicare statute’s notice-and-comment rulemaking provision when
it promulgated the 2003 Rule and undertook the 2010 implementation. (See Def.’s
14 Clarian specifically objects to the two qualifying criteria for initiating the reconciliation process that the agency adopted in the 2010 manual (see Pl.’s Mem. at 29–35), and it also challenges the Secretary’s decision “to use an ‘offline’ process ‘to reprice outlier claims’ [and thereby] make[] hospitals subject to retroactive outlier adjustments to prior outlier-payment determinations even after expiration of the four-year reopening period for those determinations” (id. at 33). Clarian’s attack is procedural in nature, because it maintains that these guidelines for the implementation of the authorized reconciliation process are substantive rules and thus the agency should only have adopted them after undertaking adequate notice-and-comment procedures. (See id. at 29–30.)
18 Mem. at 26–34.) The Secretary further argues that the substance of the 2003 Rule is
entirely consistent with the terms of the Medicare statute. In particular, the Secretary
contends that there is nothing improper about using an “offline” process for reconciling
outlier payments (id. at 35–37), or in requiring that interest be paid on all reconciled
outlier payments (id. at 46–49). Finally, the Secretary defends the 2003 Rule’s
emphasis on revising bloated cost-to-charge ratios without altering other elements of
the outlier-payment formula, and also the fact that it does not exempt new hospitals
from the outlier-payment reconciliation process. (Id. at 37–42, 44–46.)
This Court held oral argument on the parties’ cross-motions for summary
judgment on February 10, 2015, and it took the motions under advisement at that time.
On March 9, 2015, the Court ordered the parties to submit supplemental briefs on
significant questions of law regarding the Medicare statute and the agency conduct at
issue here. (See Order, ECF No. 20.) Those supplemental briefs became ripe on May 1,
2015. (See Pl.’s Supplemental Brief (“Pl.’s Suppl. Br.”), ECF No. 21; Def.’s
Supplemental Brief (“Def.’s Suppl. Br.”), ECF No. 22.)
II. LEGAL STANDARDS
A. Motions For Summary Judgment In APA Cases
“Summary judgment is the proper mechanism for deciding, as a matter of law,
whether an agency action is supported by the administrative record and consistent with
the APA standard of review.” Hill Dermaceuticals, Inc. v. FDA, No. 11-cv-1950, 2012
WL 5914516, at *7 (D.D.C. May 18, 2012) (citing Richard v. INS, 554 F.2d 1173, 1177
& n.28 (D.C. Cir. 1977)); see also Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077,
1083–84 (D.C. Cir. 2001) (collecting cases). Although, in general, a court will grant
19 summary judgment “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law[,]” Fed. R. Civ.
P. 56(a), due to the limited role a court plays in reviewing the administrative record, the
typical summary judgment standards set forth in Rule 56(c) are not applicable in APA
cases, see Stuttering Found. of Am. v. Springer, 498 F. Supp. 2d 203, 207 (D.D.C.
2007). Rather, “[u]nder the APA, it is the role of the agency to resolve factual issues to
arrive at a decision that is supported by the administrative record, whereas ‘the function
of the district court is to determine whether or not as a matter of law the evidence in the
administrative record permitted the agency to make the decision it did.’” Id. (quoting
Occidental Eng’g Co. v. INS, 753 F.2d 766, 769 (9th Cir. 1985)). In other words,
“when a party seeks review of agency action under the APA, the district judge sits as an
appellate tribunal[,]” and “[t]he ‘entire case’ on review is a question of law.” Am.
Bioscience, 269 F.3d at 1083 (footnote and citations omitted); see also Motor Vehicle
Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (explaining that a
reviewing court cannot “substitute its judgment for that of the agency”).
This Court’s review of the Secretary’s interpretation of the Medicare Act is
governed by the familiar two-step test that the Supreme Court adopted in Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843–44 (1984).
Under that test, a court first determines “whether Congress has directly spoken to the
precise question at issue[,]” id. at 842; and if not, the court defers to the agency’s
interpretation so long as it is permissible and reasonable, see id. at 843–44. However,
when the question posed is whether or not a particular agency enactment should have
been subjected to notice-and-comment rulemaking or is exempted from that
20 requirement, no deference is owed to an agency’s characterization of its own rule. See
Am. Hosp. Ass’n v. Bowen, 834 F.2d 1037, 1056 (D.C. Cir. 1987) (“[W]e are not
compelled to defer to agency characterizations of rules as [being exempt from notice
and comment.]”); Citizens to Save Spencer Cty. v. U.S. Envtl. Prot. Agency, 600 F.2d
844, 879 n.171 (D.C. Cir. 1979) (“The . . . characterizations of these rules as
interpretive by EPA counsel are of no avail. . . . The label that the particular agency
puts upon its given exercise of administrative power is not, for our purposes,
conclusive; rather it is what the agency does in fact.” (internal quotation marks and
citation omitted)).
B. Medicare’s Notice-and-Comment Requirements
In the APA, Congress requires that agency policymaking be subjected to notice-
and-comment procedures (unless an exemption applies) in order “to reintroduce public
participation” and “assure[] that the agency will have before it the facts and information
relevant to a particular administrative problem, as well as suggestions for alternative
solutions.” Am. Hosp. Ass’n, 834 F.2d at 1044 (internal quotation marks and citations
omitted); see also id. (explaining that notice-and-comment requirements instantiate
“policy goals of maximum participation and full information”). In the Medicare
context, the HHS generally must proceed by notice-and-comment rulemaking, but the
notice-and-comment mandate emerges from the Medicare statute itself rather than the
APA. 15 Section 1395hh(a)(1) of the Medicare statute authorizes the Secretary to
“prescribe such regulations as may be necessary to carry out the administration” of the
15 Medicare is, in fact, statutorily exempt from the APA’s notice-and-comment requirements because those requirements do not apply to “matter[s] relating to . . . benefits[.]” 5 U.S.C. § 553.
21 Medicare statute, 42 U.S.C. § 1395hh(a)(1), and Section 1395hh(b)(1) states that,
“[e]xcept as [otherwise] provided . . . , before issuing in final form any regulation under
subsection (a) of this section, the Secretary shall provide for notice of the proposed
regulation in the Federal Register and a period of not less than 60 days for public
comment therein[,]” id. § 1395hh(b)(1). The Secretary’s rulemaking power
encompasses any “rule, requirement, or other statement of policy . . . that establishes or
changes a substantive legal standard governing the scope of benefits, the payment for
services, or the eligibility of individuals, entities, or organizations to furnish or receive
services or benefits[,]” id. § 1395hh(a)(2)—a Medicare-related policy pronouncement
that falls within this definition and that is not subject to an exemption in the Medicare
statute is considered to be a “substantive” rule with respect to which the HHS must
provide notice and an opportunity for comment prior to its adoption. See Allina Health,
2016 WL 4409181, at *8.
As a general matter, courts use the APA’s standards for determining whether or
not a particular Medicare rule is a “substantive” one for notice-and-comment purposes.
See Monmouth Med. Ctr. v. Thompson, 257 F.3d 807, 814 (D.C. Cir. 2001); Adirondack
Med. Ctr. v. Sebelius, 935 F. Supp. 2d 121, 130 (D.D.C. 2013). This is because the
Medicare statute’s notice-and-comment rulemaking requirements are substantially
similar to those of the APA; however, the two statutes’ notice-and-comment provisions
do differ in certain respects, most notably with respect to the recognized exemptions.
The APA provides four exemptions to notice-and-comment rulemaking: three under
Section 553(b)(A) of Title 5 of the U.S. Code and one under Section 553(b)(B). See 5
U.S.C. § 553(b). The three exemptions under Section 553(b)(A) are for interpretive
22 rules, policy statements, and procedural rules. See id. § 553(b)(A). 16 And the APA
exemption in Section 553(b)(B) is for situations in which a federal agency finds that
notice-and-comment rulemaking would be “impracticable, unnecessary, or contrary to
the public interest.” Id. § 553(b)(B). The D.C. Circuit has cautioned that “Congress
intended the exceptions to § 553’s notice and comment requirements to be narrow
ones[,]” Am. Hosp. Ass’n, 834 F.2d at 1044; therefore, rules that do not fit into any one
of these four categories are typically deemed “substantive” rules and, as such, must be
subjected to notice-and-comment procedures, see U.S. Telecom Ass’n v. FCC, 400 F.3d
29, 34 (D.C. Cir. 2005).
The Medicare statute expressly exempts the HHS from notice-and-comment
rulemaking in three circumstances: (1) when a statutory provision permits an interim
regulation to be issued, see 42 U.S.C. § 1395hh(b)(2)(A); (2) when a statutory provision
requires that a rule be promulgated within 150 days of the passage of that provision, see
id. § 1395hh(b)(2)(B); and (3) when the rule at issue would be exempt under the APA’s
Section 553(b)(B) exemption, see id. § 1395hh(b)(2)(C). The Medicare statute thus
expressly incorporates only the APA’s exemption for situations where notice and
comment would be impracticable, unnecessary, or contrary to the public interest, but it
does not contain any provision that expressly contains or references the APA’s
exemptions for interpretive rules, policy statements, and procedural rules.
Nevertheless, courts have interpreted the Medicare statute to import the APA’s
16 Although courts sometimes use the term “interpretive rules” as a catchall term to encompass all three exceptions contained in 5 U.S.C. § 553(b)(A), see, e.g., Cent. Tex. Tel. Co-op., Inc. v. FCC, 402 F.3d 205, 210 (D.C. Cir. 2005), the instant Memorandum Opinion differentiates between these three different exemptions; the opinion’s references to “interpretive rules” are intended to address that exemption alone.
23 exemption for interpretive rules because one of the Medicare statute’s provisions
requires that the Secretary publish certain material in the Federal Register and indicates
that “manual instructions, interpretative rules, statements of policy, and guidelines of
general applicability,” 42 U.S.C. § 1395hh(c)(1) (emphasis added), may not fit the
definition of a “regulation” under Section 1395hh(a)(1). See Monmouth Med. Ctr., 257
F.3d at 814 n.2 (“Although no explicit exception to those requirements is made for
‘interpretive rules,’ an exception is implicit in the provision for periodic publication for
such rules, see 42 U.S.C. § 1395hh(c), and courts generally have assumed the
exception.”). Thus, while the Medicare Act has been interpreted to incorporate the
APA’s distinction between substantive and interpretive rules, this Court is not aware of
any case that squarely holds that the Medicare statute should be read to incorporate the
other exemptions contained in APA Section 553(b)(A)—i.e., policy statements and
procedural rules.
III. ANALYSIS
By pressing a bevy of legal arguments about the agency’s reconciliation process
and the rules that undergird it, Clarian seeks to challenge the Secretary’s decision to
recoup from Clarian the $2.4 million that the agency previously provided to the hospital
for outlier payments under Medicare’s prospective payment system. As explained
above, Clarian’s opening salvo is its contention that the agency guidelines that establish
the criteria for eligibility for reconciliation and other specifics regarding the mechanics
of the reconciliation process constitute a substantive rule, and as such, can only be valid
if promulgated through notice-and-comment rulemaking, which indisputably did not
occur when the Secretary adopted those guidelines in 2010. (See Pl.’s Mem. at 29–32.)
24 If Clarian is right about this threshold issue, then there is no need for this Court to
proceed to consider the merits of Clarian’s myriad contentions regarding the unlawful
and/or improper substance of the guidelines; it can vacate the agency’s recoupment
decision and remand this matter to the agency simply and solely because of the
agency’s failure to comply with required notice-and-comment procedures. See, e.g.,
Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 497 (D.C. Cir. 2010); United
Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int’l
Union v. Fed. Highway Admin., 151 F. Supp. 3d 76, 89, 91–92, 94 (D.D.C. 2015).
Consequently, the parties have devoted a considerable amount of time and effort to the
notice-and-comment inquiry—and have even engaged in a round of supplemental
briefing—in an attempt to persuade this Court that the qualifying criteria and other
standards regarding the reconciliation process that the Secretary adopted long after
promulgating the reconciliation rule are substantive provisions that required notice-and-
comment procedures (Clarian’s argument), or, alternatively, are the types of enactments
that the Medicare statute exempts from notice-and-comment rulemaking (the
Secretary’s position). 17
This Court has evaluated the legal standards for characterizing agency guidelines
such as those at issue here, and, in particular, the requirement that notice-and-comment
17 Prior to oral argument on the cross-motions for summary judgment, the Secretary had argued only that the 2010 guidelines qualify as an interpretive rule, and as a result, that it was proper for the agency to adopt them without notice and comment. (See Def.’s Mem. at 30–34.) Following oral argument, it became clear that it might also be feasible to consider the 2010 guidelines exempt from notice-and- comment rulemaking as a so-called procedural rule, but only if the Medicare statute, like the APA, contains an exemption for procedural rules. On March 9, 2015, this Court ordered the parties to submit supplemental briefing on two questions related to the applicability of the procedural-rule exemption: first, whether the guidelines for reconciliation established in the 2010 manual fall within the procedural-rule exemption as contained in the APA, and if so, second, whether the procedural-rule exemption is available under the Medicare statute’s notice-and-comment provision.
25 procedures be afforded unless the agency’s pronouncement is interpretive, procedural,
or otherwise fits into one of the statutory exemptions from notice-and-comment
rulemaking. For the reasons explained below, the Court concludes that the qualifying
criteria for being subjected to the outlier-payment reconciliation process that the agency
adopted in the 2010 manual and applied to Clarian do not qualify as an interpretive rule
or a procedural rule (even assuming that there is a procedural-rule exemption in the
Medicare statute), and thus, must be deemed a substantive rule that should have been
promulgated through notice-and-comment rulemaking. Accordingly, and without
characterizing the other reconciliation standards that Clarian challenges or reaching the
merits of Clarian’s arguments regarding the propriety of the policies that the guidelines
embody, this Court will grant Clarian’s motion for summary judgment and remand this
matter to the agency for proceedings consistent with the findings in this opinion. 18
A. The Qualifying Criteria For Reconciliation That CMS Established In The 2010 Guidelines Are Not Interpretive Rules
1. Interpretive Rules Must Relate To Specific Text In A Statute Or A Regulation
As noted, this Court’s determination regarding whether or not the qualifying
criteria in the 2010 manual are “substantive” rules involves eliminating the possibility
18 To be clear, Clarian’s notice and comment–based challenge is broader than the Court’s holding in this case: Clarian challenges not only the two criteria governing the determination of which hospitals undergo reconciliation but also the rules governing retroactive adjustments to payments following reconciliation (including the use of a so-called “offline” re-pricing process), on the ground that the guidelines did not undergo notice and comment. (See Pl.’s Mem. at 32–36.) The Court addresses only the validity of the qualifying criteria, which alone is sufficient to merit judgment for the Plaintiff. See Catholic Health Initiatives, 617 F.3d at 494 (declining to reach a plaintiff’s various other challenges to an agency’s policy where the court determined, as an “antecedent” matter, that the rule was substantive yet did not undergo notice and comment); cf. PDK Labs. Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004) (Roberts, J., concurring) (stating where there “is a sufficient ground for deciding th[e] case,” the “cardinal principle of judicial restraint—if it is not necessary to decide more, it is necessary not to decide more—counsels [the Court] to go no further”).
26 that these guidelines are the type of pronouncement that is exempted from notice-and-
comment procedures by statute, because a substantive rule is defined in opposition to
the various exemptions. Cf. Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014)
(defining substantive rules as “the category of rules to which the notice and comment
requirements do apply”); U.S. Telecom Ass’n, 400 F.3d at 34 (same). Put another way,
a substantive rule is any rule that is not interpretive, procedural, or otherwise subject to
an exemption, and because the statutory exemptions represent a departure from the
default notice-and-comment requirement, the D.C. Circuit has instructed that “the
various exceptions . . . will be narrowly construed and only reluctantly countenanced.”
N.J., Dep’t of Envtl. Prot. v. U.S. Envtl. Prot. Agency, 626 F.2d 1038, 1045 (D.C. Cir.
1980).
Beginning with the Court’s consideration of whether the qualifying criteria are
interpretive in nature, the Court notes that agency rules are deemed interpretive when
the particular promulgation “clarif[ies] a statutory or regulatory term, remind[s] parties
of existing statutory or regulatory duties, or merely track[s] preexisting requirements
and explain[s] something the statute or regulation already required.” Mendoza, 754
F.3d at 1021 (internal quotation marks and citation omitted). “To fall within the
category of interpretive, the rule must derive a proposition from an existing document
whose meaning compels or logically justifies the proposition[,]” and “[t]he substance of
the derived proposition must flow fairly from the substance of the existing document.”
Catholic Health Initiatives, 617 F.3d at 494 (internal quotation marks and citation
omitted). Courts have warned that “the spectrum between a clearly interpretive rule and
a clearly substantive one is a hazy continuum,” Am. Hosp. Ass’n, 834 F.2d at 1045;
27 consequently, any analysis that seeks to categorize agency action as interpretive or
substantive is necessarily “an extraordinarily case-specific endeavor[,]” id. There are
some guideposts, however; for example, an interpretive rule must be grounded in the
specific text of a statute or a regulation. See Catholic Health Initiatives, 617 F.3d at
494 (“If the rule cannot fairly be seen as interpreting a statute or a regulation, and if (as
here) it is enforced, the rule is not an interpretive rule exempt from notice-and-comment
rulemaking.” (internal quotation marks and citation omitted)); Cent. Tex. Tel. Co-op.,
Inc. v. FCC, 402 F.3d 205, 212 (D.C. Cir. 2005) (“If, despite an agency’s claim, a rule
cannot fairly be viewed as interpreting—even incorrectly—a statute or a regulation, the
rule is not an interpretive rule exempt from notice-and-comment rulemaking.”). Failure
to meet this requirement is fatal to the contention that the 2010 guidelines constitute an
interpretive rule.
2. The Purported Textual Basis For The Qualifying Criteria Is Too Broad And Attenuated To Render These Guidelines Merely Interpretive
The Secretary’s cross-motion for summary judgment suggests only one textual
reference point that potentially could support the agency’s contention that the
qualifying criteria for reconciliation that were adopted in the 2010 manual are
interpretive rules: the statement in Section 1395ww(d)(5)(A)(iii) that outlier payments
must “‘approximate the marginal cost of care beyond’ the fixed-loss threshold.” (Def.’s
Mem. at 30 (quoting 42 U.S.C. § 1395ww(d)(5)(A)(iii)). But under binding precedent,
this statutory language is too broad to support the invocation of the interpretive-rule
exemption to Medicare’s notice-and-comment requirements, and the link between it and
the technical details of a reconciliation program is too attenuated. See Catholic Health
28 Initiatives, 617 F.3d at 496; United Steel, Paper & Forestry, Rubber, Mfg., Energy,
Allied Indus. & Serv. Workers Int’l Union, 151 F. Supp. 3d at 89.
The D.C. Circuit’s opinion in Catholic Health Initiatives v. Sebelius, 617 F.3d
490 (D.C. Cir. 2010), requires this conclusion. That case involved an agency manual
that provided for the reimbursement of a hospital’s insurance costs, see id. at 491–92,
but the relevant statutory and regulatory language said only that the government would
reimburse a hospital’s “reasonable costs” and left the determination of what costs are
“reasonable” to the Secretary, id. at 491. The Secretary subsequently determined that
insurance costs were in the realm of reasonable costs, and also permitted reimbursement
of insurance costs even where those costs were paid to so-called “captive” insurers—
i.e., insurers that were actually a wholly owned subsidiary of the hospital—but the
agency expressly differentiated between “domestic” captives and “offshore” captives,
with insurance costs paid to offshore captives being reimbursable only if those captives
satisfied a series of requirements not imposed on domestic captives. See id. at 492
(noting that, unlike domestic captives, a covered offshore captive could not invest more
than ten percent of its assets in equity securities). Significantly for present purposes,
when setting out the additional coverage requirements for offshore captives, the
Secretary did not use notice-and-comment rulemaking, see id. at 493, and the D.C.
Circuit held that the requirements that the agency imposed on offshore captives had to
be promulgated through notice-and-comment rulemaking because the requirements were
substantive and not interpretive, see id. at 497.
Two principles undergirded the Circuit’s conclusion in Catholic Health
Initiatives and are instructive here. First, the panel reasoned that, if the statutory or
29 regulatory language that is purportedly being interpreted is sufficiently broad, then any
attempt by the agency to implement that language would necessarily involve making
substantive policy judgments that require notice-and-comment rulemaking. See id. at
494–95. In the context of the Catholic Health Initiatives case, the Circuit concluded
that the statutory term “reasonable cost” was so broad that “the sort of detailed—and
rigid—investment code” that the agency imposed when it determined which offshore
captives would be covered could not have been derived from an act of interpretation.
Id. at 496. Second, the Catholic Health Initiatives Court noted that, if an interpretive
rule imposes “arbitrary” numeric criteria, then it likely reflects a substantive, rather
than interpretive, policy judgment. See id. at 495-96. By “arbitrary,” the Circuit meant
numeric criteria that represented just one “choice among [many] methods of
implementation[,]” id. at 495 (quoting Hoctor v. U.S. Dep’t of Agric., 82 F.3d 165, 170
(7th Cir. 1996)) (internal quotation marks omitted), and the panel viewed the manual’s
requirement that equity securities not exceed ten percent of an offshore captive’s assets
as precisely the sort of numeric requirement that reflects an agency’s substantive policy
determination rather than mere interpretation of statutory provisions, see id. at 496.
Applying these two principles to the circumstances at issue in the instant case,
this Court concludes that the qualifying criteria for the outlier-payment reconciliation
process that the agency adopted in the 2010 manual are not merely interpretive of
Congress’s command that outlier payments must “approximate the marginal cost of care
beyond” the fixed-loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). This is so
because the statutory phrase “marginal cost of care”—much like “reasonable cost”—is
quite broad and does not, on its own, suggest any particular application. Furthermore,
30 as the complicated nature of the outlier-payment formula demonstrates, giving effect to
that term requires a series of interlocking policy and technical considerations, see Dist.
Hosp. Partners, 786 F.3d at 49–51, which means that the Secretary’s identification and
adoption of the two qualifying criteria inherently involved the sort of “reasonable but
arbitrary . . . choice among methods” that the D.C. Circuit found to be substantive in
Catholic Health Initiatives. 617 F.3d at 495 (quoting Hoctor, 82 F.3d at 170). The
numeric thresholds that the agency has selected also plainly reflect an arbitrary policy
determination, because nothing in the language of “marginal cost of care” suggests that
a ten percent change in cost-to-charge ratios should trigger the reconciliation process,
as opposed to a five percent or fifteen percent change. And however solid the
Secretary’s reasons for adopting those specific numeric requirements might have been,
the fact that the agency’s policy choice is supported and justified does not make its
decision merely interpretive (i.e., less substantive).
The Secretary objects to this conclusion on a number of grounds, none of which
succeeds. Starting with the most sweeping contention, the agency argues that the
qualifying criteria must be deemed interpretive rules simply and solely because they are
set forth in CMS instruction manuals. (See Def.’s Reply, ECF No. 18, at 12–13
(“Courts construing [Medicare Provider Reimbursement Manual] provisions have
concluded that they are interpretive rules and do not require notice and comment
rulemaking.” (internal quotation marks and citation omitted).) The D.C. Circuit’s
Catholic Health Initiatives case belies this contention; the provisions under review in
that case were contained in a CMS manual and were nevertheless found to be
substantive, not interpretive. See Catholic Health Initiatives, 617 F.3d at 497.
31 Undaunted, the Secretary further insists that the qualifying criteria and other,
similar manual instructions provide “technical details of issues such as calculation
methodologies” in order “to help intermediaries and providers better understand the
regulations” and are exempt from Medicare’s notice-and-comment requirements on that
basis as well. (Def.’s Mem. at 31 (internal quotation marks and citations omitted)).
Even if this is an accurate statement regarding the agency’s intentions, it does not help
the Secretary, because the particular criteria that Clarian challenges are much more than
mere “technical details”—they reflect substantive policy decisions, as explained further
below. See infra Part III.C. Moreover, as discussed above, the two qualifying criteria
are not sufficiently grounded in the statutory phrase “marginal cost of care” for them to
amount to an implementation of that language, and their seeming consistency with
Medicare’s outlier-payment provisions and/or the text of the 2003 Rule (see Def.’s
Mem. at 32–33) is beside the point; it is well established that an agency’s well-
intentioned efforts to adopt provisions that are consistent with the text of a statute or
regulation is not a reason to sidestep Medicare’s notice-and-comment requirements if
the rule that emerges “is simply too attenuated to represent an interpretation of those
terms[,]” Catholic Health Initiatives, 617 F.3d at 496.
Finally, the Secretary argues that the qualifying criteria are distinguishable from
the reimbursement instructions at issue in Catholic Health Initiatives because the
investment instructions in Catholic Health Initiatives were mandatory whereas the
qualifying criteria for the outlier-payment reconciliation process do not necessarily
result in reconciliation—in this regard, the agency emphasizes that the CMS manual
builds in an extra layer of discretion whereby CMS must approve reconciliation once a
32 hospital has been shortlisted. (See Def.’s Mem. at 33–34.) See also Ctrs. for Medicare
& Medicaid Servs., Pub. No. 100-04, Medicare Claims Processing Manual, Ch. 3
§ 20.1.2.5 (providing that reconciliation of any hospitals that satisfy the qualifying
criteria will be “[s]ubject to the approval of the CMS Central Office”). However, the
mandatory-versus-discretionary distinction between the investment instructions in
Catholic Health Initiatives and the qualifying criteria for outlier-payment reconciliation
does not bear on the fundamental question of whether the challenged provisions are tied
to any reasonably specific statutory or regulatory language, or whether those provisions
reflect a substantive policy judgment. In other words, when a rule is plainly not
interpretive in light of the ordinary criteria for making this designation, its mandatory
or voluntary nature is of no moment. Cf. Catholic Health Initiatives, 617 F.3d at 494–
97 (holding that the agency instruction is a substantive rule without reference to its
mandatory nature). Thus, in this Court’s view, the difference between the qualifying
criteria and the agency instructions in Catholic Health Initiatives that the Secretary has
identified is not a meaningful one for the purpose of determining whether the former are
interpretive rules, and the D.C. Circuit’s analysis compels the conclusion that the
qualifying criteria cannot be labeled as such.
B. The Medicare Statute Does Not Provide For A Procedural-Rule Exemption And, In Any Event, The Qualifying Criteria Are Not A Procedural Rule
1. There Is No Express Exemption For Procedural Rules In The Medicare Statute And One Cannot Reasonably Be Inferred
Procedural rules are agency provisions that are “primarily directed toward
improving the efficient and effective operations of an agency, not toward a
determination of the rights [or] interests of affected parties.” Mendoza, 754 F.3d at
33 1023 (quoting Batterton v. Marshall, 648 F.2d 694, 702 n.34 (D.C. Cir. 1980))
(alteration in original, internal quotation marks omitted). According to the D.C.
Circuit, a “prototypical procedural rule” is an agency’s determination that it will not
search for documents produced after the date of a requester’s letter when responding to
a FOIA request, Pub. Citizen v. Dep’t of State, 276 F.3d 634, 641 (D.C. Cir. 2002); but
“the distinction between substantive and procedural rules” is not always that clear,
Elec. Privacy Info. Ctr. v. U.S. Dep’t of Homeland Sec., 653 F.3d 1, 5 (D.C. Cir. 2011),
and the difference can be “one of degree depending upon whether the substantive effect
is sufficiently grave so that notice and comment are needed to safeguard the policies
underlying the APA[,]” id. at 5–6 (internal quotation marks and citation omitted).
Generally speaking, to determine whether or not a rule qualifies as procedural, courts
often inquire into “whether the agency action . . . encodes a substantive value judgment
or puts a stamp of approval or disapproval on a given type of behavior.” Am. Hosp.
Ass’n, 834 F.2d at 1047.
As mentioned, the Medicare statute does not contain any express exemption from
notice-and-comment rulemaking for procedural rules, unlike the APA. See 42 U.S.C.
§ 1395hh(b)(2). That fact would ordinarily be sufficient to dispose of the issue of the
applicability of the procedural-rule exemption to the qualifying criteria for the outlier-
payment reconciliation process, but it is at least theoretically possible that an exemption
for procedural rules could be read into the Medicare statute just as the exemption for
interpretive rules has been. Cf. Monmouth Med. Ctr., 257 F.3d at 814 n.2 (holding that
the interpretive-rule exemption exists in the Medicare Act despite its absence from the
Act’s express exemptions). This Court has reviewed the parties’ submissions regarding
34 this possibility (see Order, ECF No. 20; see also Pl.’s Suppl. Br., ECF No. 21; Def.’s
Suppl. Br., ECF No. 22), and concludes that the language and structure of Medicare’s
notice-and-comment requirements foreclose any such reading, for several reasons.
First of all, given that the Medicare statute expressly provides for some of the
exemptions contained in the APA but not the exemption for procedural rules, see 42
U.S.C. § 1395hh(b)(2)(C), the canon expressio unius est exclusio alterius—“the
expression of one is the exclusion of others[,]” Adirondack Med. Ctr. v. Sebelius, 740
F.3d 692, 696 (D.C. Cir. 2014)—strongly suggests this Court should treat the exclusion
of procedural rules from the list of exemptions to Medicare’s notice-and-comment
requirement as an intentional policy choice, see United States v. Vonn, 535 U.S. 55, 65
(2002) (explaining that, under this canon of interpretation, the legislature’s
“expressi[ion of] one item of a commonly associated group or series” is considered the
intentional “exclu[sion of] another left unmentioned”). Of course, this canon applies
only where “it is fair to suppose that Congress considered the unnamed possibility and
meant to say no to it[.]” Marx v. Gen. Revenue Corp., 133 S. Ct. 1166, 1175 (2013)
(internal quotation marks and citation omitted). And so it is here, because Congress has
expressly incorporated into the Medicare statute one of the four express APA
exemptions, see 42 U.S.C. § 1395hh(b)(2)(C), which makes it entirely plausible that
Congress actually considered—and rejected—the possibility of incorporating the APA’s
other exemptions, including the one for procedural rules. Cf. Council for Urological
Interests v. Burwell, 790 F.3d 212, 221 (D.C. Cir. 2015) (“Congress knew how to
permit per-click payments explicitly, suggesting that the omission in this particular
context was deliberate.”). In addition, the exemptions that Congress expressly included
35 in Section 1395hh(b)(2) of the Medicare statute are all of a common type—that is,
exemptions to notice-and-comment rulemaking—and the procedural-rules exemption is
also of that type, which makes application of the expressio unius canon even more
reasonable. See Barnhart v. Peabody Coal Co., 537 U.S. 149, 168 (2003) (asserting
that the expressio unius canon “has force only when the items expressed are members of
an ‘associated group or series,’ justifying the inference that items not mentioned were
excluded by deliberate choice, not inadvertence”).
To be sure, the D.C. Circuit has indicated that the expressio unius canon has
limited utility in the administrative law context. See Adirondack Med. Ctr., 740 F.3d at
697. But it can still be relevant where there are no other reasonable explanations for
the exclusion, see Indep. Ins. Agents of Am., Inc. v. Hawke, 211 F.3d 638, 644 (D.C.
Cir. 2000), and, here, the Secretary has offered none (see Def.’s Suppl. Br. at 20–22
(arguing that the procedural-rule exemption should be read into the Medicare statute
without providing any rationale for importing this exemption)). Thus, the expressio
unius canon provides a clear and compelling reason to find that the Medicare statute
does not incorporate the APA’s procedural-rule exemption.
The text and structure of the Medicare statute also supports the conclusion that
there is no procedural-rule exemption in the Medicare context. First, and foremost,
Medicare’s notice-and-comment provisions are plainly distinguishable from those that
appear in the APA, which means that exemption conformity cannot be assumed. See
Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1109 (D.C. Cir. 2014) (noting that the
fact “that the Medicare statute is similar to the APA hardly means it is identical”).
Moreover, Section 1395hh(b) proceeds in definitive terms, and those terms provide no
36 indication that any exemptions beyond the three specified in that section are applicable.
See 42 U.S.C. § 1395hh(b)(1) (stating that notice-and-comment rulemaking shall apply
“[e]xcept as provided” by the three enumerated exemptions). And Congress’s silence
regarding procedural rules is especially telling in light of the fact that the Medicare
statute expressly cross-references one of the APA’s exemptions, see 42 U.S.C.
§ 1395hh(b)(2)(C); that is, Congress has specified in the clearest possible terms that the
APA exemption contained in 5 U.S.C. § 553(b)(B) applies, but says nothing of the
exemptions contained in 5 U.S.C. § 553(b)(A). Couple this with the fact that the
Medicare statute expressly recognizes that “statements of policy” may not constitute
regulations subject to Medicare’s notice-and-comment procedures, see 42 U.S.C.
§ 1395hh(c)(1), but makes no such references to the types of non-policy procedural
pronouncements that are sometimes needed in order to effectuate the agency’s policy
statements, and one is left with the distinct impression that the exemptions in
Medicare’s notice-and-comment procedures were not intended to incorporate procedural
rules.
The Secretary is certainly correct to point out that courts have found that certain
APA exemptions have been implicitly incorporated into the Medicare statute under
similar circumstances (see Def.’s Suppl. Br. at 21), as this Court acknowledges above.
See, e.g., Vencor Nursing Centers, L.P. v. Shalala, 63 F. Supp. 2d 1, 11 (D.D.C. 1999)
(“The court treats the Medicare Act’s exemption for interpretive rules as identical to the
APA’s.”). However, courts have made this finding based on a separate subsection of
the Medicare statute that expressly references “interpretative rules[.]” 42 U.S.C. §
1395hh(c)(1) (emphasis added); see Monmouth Med. Ctr., 257 F.3d at 814 (“[I]t seems
37 fair to infer that, as the Medicare Act was drafted after the APA, § 1385hh(c)’s
reference to ‘interpretive rules’ without any further definition adopted an exemption at
least similar in scope to that of the APA.”); see also id. at 814 n.2 (“Although no
explicit exception to those requirements is made for ‘interpretive rules,’ an exception is
implicit in the provision for periodic publication for such rules . . . .”). The Secretary
has not demonstrated that procedural rules are likewise specifically referenced in
another provision of the Medicare statute; therefore, this Court doubts that the
reasoning that has compelled several courts to infer an exemption for interpretive rules
actually supports the conclusion that the Medicare statute has, sub silentio, adopted an
additional exemption for procedural rules.
The Secretary’s suggestion that this Court should infer that a procedural-rule
exemption exists in the Medicare context nevertheless, because the D.C. Circuit appears
to have done so in American Hospital Association v. Bowen, 834 F.2d 1037 (D.C. Cir.
1987), is also unavailing, and it fails for one simple reason: the challenged agency
action in the American Hospital Association case occurred before the passage of the
Medicare statute’s notice-and-comment provision—at a time when the Secretary had
voluntarily adopted the APA’s notice-and-comment requirements, including the APA’s
exemptions. See 36 Fed. Reg. 2532 (Feb. 5, 1971) (directing agencies “to utilize the
public participation procedures of the APA, 5 U.S.C. 553”); see also Timothy Stoltzfus
Jost, Governing Medicare, 51 Admin. L. Rev. 39, 88 & n.272 (1999). Thus, while it
was entirely appropriate for the D.C. Circuit to apply a procedural-rule exemption in
the American Hospital Association case, that case says nothing about the applicability
of a procedural-rule exemption to Medicare’s current notice-and-comment provisions.
38 Nor is this Court persuaded by fact that more recent decisions from this district
have relied upon a procedural-rule exemption in the Medicare context. (See Def.’s
Suppl. Br. at 22 (citing Sierra-Nevada Mem’l-Miners Hosp., Inc. v. Shalala, No. 91-cv-
2198, 1994 WL 675720, at *4–6 (D.D.C. Nov. 21, 1994); Beverly Health & Rehab.
Servs. v. Thompson, 223 F. Supp. 2d 73, 99–101 (D.D.C. 2002); and Gentiva
Healthcare Corp. v. Sebelius, 857 F. Supp. 2d 1, 13 (D.D.C. 2012)).) “[A] decision
from another Judge in this District is not controlling authority on this [Court.]” Carik
v. U.S. Dep’t of Health & Human Servs., 4 F. Supp. 3d 41, 54 n.8 (D.D.C. 2013)
(internal quotation marks and citation omitted); see also Cmty. Health Sys., Inc. v.
Burwell, No. 14-cv-1432, 2015 WL 4104644, at *20 n.22 (D.D.C. July 7, 2015) (noting
that, “[w]hile potentially persuasive,” other District Court “decisions are not binding”).
And it appears that the opinions on which the Secretary relies merely assumed the
applicability of a procedural-rule exemption to Medicare’s notice-and-comment
requirement, without specifically analyzing the issue. See Sierra-Nevada Mem’l-Miners
Hosp., 1994 WL 675720 at *4; Beverly Health & Rehab. Servs., 223 F. Supp. 2d at 99;
Gentiva Healthcare Corp., 857 F. Supp. 2d at 13.
Finally, this Court rejects the Secretary’s suggestion that a procedural-rule
exemption must necessarily be implied because an agency’s ability to develop
procedural rules is a “basic tenet of administrative law[.]” (Def.’s Suppl. Br. at 20
(quoting Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1207 (2015)) (internal
quotation marks omitted).) It is no doubt true that an agency must have the capacity to
provide for the implementation of the policies it adopts, especially in the APA context,
see 5 U.S.C. § 553(b)(A), but that is beside the point; what matters for present purposes
39 is whether Congress intended to excuse the agency from its duty to provide the public
with notice of any such procedural command, and an opportunity to comment on it,
prior to its adoption. And the fact that a rule is procedural in nature (and thus important
to the agency’s function) does not, in itself, establish that Congress implicitly desired to
permit the agency to forgo the public vetting that it has otherwise prescribed.
2. Even If The Medicare Statute Could Be Read To Contain A Procedural-Rule Exemption, The Qualifying Criteria For Reconciliation Are Not Procedural Rules
The two qualifying criteria for the initiation of the reconciliation process that the
Secretary adopted in the 2010 manual—(1) that a hospital’s actual cost-to-charge ratio
for a given year is “plus or minus 10 percentage points” from the cost-to-charge ratio
that was used to calculate the hospital’s outlier payments for that year, and (2) that the
hospital’s “[t]otal outlier payments in that cost reporting period exceed[ed]
$500,000[,]” Ctrs. for Medicare & Medicaid Servs., Pub. No. 100-04, Medicare Claims
Processing Manual, Ch. 3 § 20.1.2.5(A)—unquestionably “encode[] a substantive value
judgment” about the hospital’s charges and cost reporting for Medicare reimbursements
and “put[] a stamp of . . . disapproval” on the hospitals that are singled out by the rule.
Am. Hosp. Ass’n, 834 F.2d at 1047. Indeed, according to the Secretary, the entire
purpose of the reconciliation process was to prevent the manipulation of outlier
payments by nefarious turbochargers, see 68 Fed. Reg. at 34,5001 (claiming that
reconciliation process was needed to “completely eliminate” the ability of “hospitals to
manipulate the system to maximize outlier payments”), and the selected criteria
purportedly reflect the agency’s substantive judgment regarding how best to
“appropriately capture those hospitals whose outlier payments will be substantially
inaccurate when using the ratio from the contemporaneous cost reporting period.” Id. at
40 34,503. In other words, because the qualifying criteria are the mechanism by which the
agency identifies those hospitals that it has deemed potentially worthy of this
metaphorical “stamp of . . . disapproval[,]” Am. Hosp. Ass’n, 834 F.2d at 1047, the
Secretary is hard-pressed to make a convincing argument that the qualifying criteria fall
within the category of agency actions that properly can be deemed mere “procedural”
In its supplemental briefing, the agency makes a valiant effort, nevertheless. The
Secretary contends, in essence, that the qualifying criteria are procedural for two
reasons: first, because they are a “type[] of agency guidance” that merely “ provide[s]
details as to the operational aspects of reconciliation” (Def.’s Suppl. Br. at 17), and second,
because the qualifying criteria are not the final say in determining whether a hospital’s
outlier payments are reconciled because reconciliation is still subject to the approval of
CMS (see id. at 16–17). The first argument is belied by the analysis above, and in
particular, by this Court’s finding that the qualifying criteria initiate the process pursuant
to which the agency disgorges prior Medicare payments and thereby visits opprobrium
upon a hospital, and insofar as the criteria speak to which hospitals may be subjected to
this treatment, they represent substantive policy choices on the part of the agency. The
Secretary’s second contention fails because it is the flip-side of the (misguided) argument
that the mandatory nature of a rule makes it less non-substantive, which is an assertion that
this Court has already rejected. See supra Part III.A.2.
What is more, the D.C. Circuit has already held that agency discretion does not,
alone, transform an otherwise substantive rule into a procedural one. In Electronic Privacy
Information Center v. U.S. Dep’t of Homeland Sec. , 653 F.3d 1 (D.C. Cir. 2011), the
government sought to defend the introduction of a new type of security-screening machine
41 at airports without going through notice-and-comment rulemaking, on the ground that
“there are no [machines] at some airports and the agency retains the discretion to stop
using the scanners where they are in place.” Id. at 7. 19 The D.C. Circuit rejected this
argument, noting that, although the government retained discretion to use the machines or
not, “[m]ore clearly significant is that a passenger is bound to comply with whatever
screening procedure the TSA is using on the date he is to fly at the airport from which his
flight departs.” Id. In other words, the D.C. Circuit has made clear that the existence of
agency discretion to adopt a rule that mandates certain procedures (or not) does not
ameliorate the fact that the rule has consequences for those subject to its terms, and this
Court finds that principle fully applicable here. That is, although CMS may, in its
discretion, decide not to reconcile a hospital’s outlier payments despite the fact that the
qualifying criteria are satisfied, those criteria have a very real effect on those hospitals that
do not receive the benefit of the agency’s discretionary determination that reconciliation is
not warranted, and thus, the discretionary nature of the challenged criteria is of no moment
with respect to the characterization of those agency pronouncements as of the type that
requires notice-and-comment rulemaking.
C. The Qualifying Criteria Have The Typical Characteristics Of A Substantive Rule Because They Govern The Scope Of Benefits
Having determined that the qualifying criteria for reconciliation of outlier payments
that the Secretary adopted in the 2010 manual are neither interpretive nor procedural as the
Secretary claims, and seeing no other exemption in the Medicare statute under which these
19 The discretion argument that was addressed in the EPIC case arose in the context of a dispute about whether the introduction of the screening machine fell within the APA’s policy statement exemption, but the circuit panel also addressed the government’s attempt to rely on the procedural-rule exemption. See Elec. Privacy Info. Ctr., 653 F.3d at 5–6. Thus, the fact that the rule contemplated agency discretion did not transform it into a procedural rule.
42 guidelines might fit, this Court has already effectively deemed those criteria substantive.
See Mendoza, 754 F.3d at 1021; U.S. Telecom Ass’n, 400 F.3d at 34. Because courts
have also articulated a number of positive characteristics that tend to indicate that a rule
is substantive rather than interpretive or procedural, see, e.g., Mendoza, 754 F.3d at
1021 (explaining that a rule is likely substantive if it “supplements a statute, adopts a
new position inconsistent with existing regulations, or otherwise effects a substantive
change in existing law or policy”); Syncor Int’l Corp. v. Shalala, 127 F.3d 90, 95 (D.C.
Cir. 1997) (noting that a substantive rule “modifies or adds to a legal norm based on the
agency’s own authority”), this Court observes additionally that the qualifying criteria in
the instant case have at least two quintessential “substantive rule” characteristics.
First, the qualifying criteria for reconciliation of outlier payments clearly effect a
change in agency policy. In the Secretary’s notice of proposed rulemaking for the 2003
Rule, the Secretary stated that reconciliation was adopted for a singular purpose: “to
correct those situations in which hospitals would otherwise receive overpayments for
outlier cases due to excessive charge increases.” Proposed Change in Methodology, 68
Fed. Reg. at 10,421. The Secretary emphasized the agency’s findings regarding the
substantial number of hospitals that it deemed guilty of engaging in the practice of
drastically increasing charges for care provided to beneficiaries in order to decrease the
cost-to-charge ratio, and explained the agency’s view that combatting such
turbocharging justified the new reconciliation process. See id. at 10,428 (“[W]e have
identified 123 hospitals that appear to have been most aggressively gaming the current
policy.”). But the qualifying criteria that the agency subsequently adopted do not
plainly distinguish between turbocharging hospitals and those hospitals that experience
a significant change in their cost-to-charge ratio for different reasons, as Clarian
43 asserts. Indeed, the qualifying criteria are such that hospitals whose cost-to-charge
ratio increases (i.e., the opposite of turbocharging) by 10 percentage points or more, as
well as hospitals whose cost-to-charge ratio decreases by that much because of a
decrease in costs rather than an increase in charges, are also implicated. The qualifying
criteria thus broaden the applicability of the outlier-payment reconciliation process
beyond the specific problem of turbocharging, and while that approach may well be
justified for reasons of policy and practicality, it clearly represents a substantive
departure from the purposes of the reconciliation process that were identified when the
2003 Rule was proposed.
The qualifying criteria also plainly “implicate the policy interests animating
notice-and-comment rulemaking.” Elec. Privacy Info. Ctr., 653 F.3d at 6. The purpose
of notice-and-comment rulemaking is “(1) to reintroduce public participation and
fairness to affected parties after governmental authority has been delegated to
unrepresentative agencies; and (2) to assure that the agency will have before it the facts
and information relevant to a particular administrative problem.” MCI Telecomm.
Corp. v. FCC, 57 F.3d 1136, 1141 (D.C. Cir. 1995) (internal quotation marks and
citation omitted); accord Am. Hosp. Ass’n, 834 F.2d at 1044. There were a number of
public comments that addressed how the reconciliation process would be applied during
the 2003 Rule’s notice-and-comment period, despite the fact that the notice of proposed
rulemaking did not discuss how the reconciliation process would be implemented. See
Change in Methodology, 68 Fed. Reg. at 34,503 (“Some commenters suggested that we
clarify how reconciliation will be implemented and only reconcile outlier payments to
those providers whose cost-to-charge ratios increased or decreased outside of certain
44 parameters.”). And not only was there a desire among members of the public to
comment on the specific criteria that would subject a hospital to reconciliation, there is
also reason to think that subjecting those criteria to notice and comment may have led
the agency to a different result. For example, and as noted above, the current
qualifying criteria do not take into account fluctuations in the cost-to-charge ratio that
are caused by decreasing costs rather than increases in the amount that a hospital
charges beneficiaries. According to Clarian, this scenario is common among new
hospitals in particular (see Pl.’s Mem. at 37–40), and notice-and-comment rulemaking
would have allowed the Secretary to respond to these concerns and/or develop a rule
that accounted for this circumstance.
Thus, in addition to the fact that the qualifying criteria are neither interpretive
nor procedural—which is sufficient to trigger the requirement of notice-and-comment
rulemaking standing alone—this Court finds that the criteria also share at least two of
the characteristics that courts have established as being indicative of a substantive rule.
IV. CONCLUSION
Clarian has sustained its contention that the qualifying criteria CMS issued to
MACs in the 2010 manual, which were used to identify Clarian as a candidate for the
outlier-payment reconciliation process, needed to be subjected to notice-and-comment
rulemaking prior to their adoption. This is because, for the reasons explained above,
the criteria are not sufficiently grounded in any statutory or regulatory text to fall
within the interpretive-rule exemption, and the qualifying criteria cannot be construed
as a procedural rule, even assuming that the procedural-rule exemption applies in the
Medicare context. (The Court concludes herein that it does not.) The inapplicability of
45 these exemptions means that the qualifying criteria count as a substantive rule, and the
fact that the criteria also exhibit the characteristics of substantive rules further
reinforces that conclusion.
Accordingly, and as set forth in the accompanying order, Clarian’s motion for
summary judgment will be GRANTED, the Secretary’s motion for summary judgment
will be DENIED, the matter will be REMANDED to the Secretary for further
proceedings consistent with this opinion.
DATE: August 26, 2016 Ketanji Brown Jackson KETANJI BROWN JACKSON United States District Judge
Related
Cite This Page — Counsel Stack
Clarian Health West, LLC v. Burwell, Counsel Stack Legal Research, https://law.counselstack.com/opinion/clarian-health-west-llc-v-burwell-dcd-2016.