COLLEEN KOLLAR-KOTELLY, United States District Judge.
Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the Medicare program. They have sued the Secretary of the Department of Health and Human Services (the "Secretary"), purporting to challenge various actions taken by the Secretary in the course of administering Medicare's "outlier" payment system, the system which provides additional payments to hospitals for extremely high cost cases. Plaintiffs challenge a series of regulations that, together, govern outlier payments for federal fiscal year ("FY") 1997 through FY 2007. Specifically, they challenge 14 regulations: outlier payment regulations promulgated in 1988, 1994 and 2003, and 11 annual fixed loss threshold regulations issued for FY 1997 through FY 2007.
Presently before the Court are Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Summary Judgment, Plaintiffs' [127/142] Motion for Summary Judgment, and Plaintiffs' [128] Motion (Related to Their Motion For Summary Judgment) for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief. Upon consideration of the pleadings,
As an initial matter, the Court concludes that it has subject matter jurisdiction over all of the claims in this action. With respect to the FY 2004 fixed loss threshold rule, the Court REMANDS the rule to the agency to allow the agency to explain its decision regarding its treatment of certain data — or to recalculate the fixed loss threshold if necessary — as explained further below. In all other respects, the Court DENIES Plaintiffs' challenges to all of the regulations at issue in this case.
With respect to Plaintiffs' [128] Motion for Judicial Notice and/or Extra-Record Consideration of Documents and Other Related Relief, the Court DENIES Plaintiffs' request to supplement the record and for extra-record consideration of documents, but the Court GRANTS the motion insofar as the Court will take judicial notice of the publicly available materials subject to the motion, as relevant. The Court DENIES Plaintiffs' request to submit three additional tables and STRIKES from the record exhibits 5, 7, and 8 to Plaintiffs' Motion for Summary Judgment. The Court will retain jurisdiction pending the limited remand to the agency regarding the FY 2004 rulemaking.
While this action emerges from Plaintiffs' challenge to the outlier payments they received for FY 1997 through FY 2007, the hospitals do not challenge the calculation of the individual outlier payments; instead, they level their substantive challenges at the 14 regulations that established the formulas for outlier payments in each of the relevant years. Plaintiffs challenge two sets of interrelated
Because of the wide-ranging nature of Plaintiffs' challenge — challenging 11 annual fixed loss threshold regulations and out-lier payment regulations issued over the course of three decades — and because of the technical complexity of the program involved — it is necessary to review the history of the program in some detail.
Medicare "provides federally funded health insurance for the elderly and disabled," Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226-27 (D.C.Cir. 1994), through a "complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). The program is administered by the Secretary through the Centers for Medicare and
From its inception in 1965 until 1983, Medicare reimbursed hospitals based on "the `reasonable costs' of the inpatient services that they furnished." Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir.1999) (quoting 42 U.S.C. § 1395f(b)), cert. denied, 530 U.S. 1204, 120 S.Ct. 2197, 147 L.Ed.2d 233 (2000). However, "[e]xperience proved ... that this system bred `little incentive for hospitals to keep costs down' because `[t]he more they spent, the more they were reimbursed.'" Id. (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C.Cir. 1991)).
In 1983, with the aim of "stem[ming] the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology." Cnty. of Los Angeles, 192 F.3d at 1008 (citing Social Security Amendments of 1983, Pub.L. No. 98-21, § 601, 97 Stat. 65, 149). Since then, the Prospective Payment System, as the overhauled regime is known, has reimbursed qualifying hospitals at prospectively fixed rates. Id. By enacting this overhaul, Congress sought to "reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost[-]effective hospital practices." H.R.Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.
Under the Prospective Payment System, Hospitals are reimbursed "based on the average rate of `operating costs [for] inpatient hospital services.'" Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49 (D.C.Cir.2015) (quoting Cnty. of Los Angeles, 192 F.3d at 1008). "Because different illnesses entail varying costs of treatment, the Secretary uses diagnosis-related groups (DRGs) to `modif[y]' the average rate." Id. (quoting Cape Cod Hosp., 630 F.3d at 205). "A DRG is a group of related illnesses to which the Secretary assigns a weight representing the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients.'" Id. (quoting Cape Cod Hosp., 630 F.3d at 205-06). "To calculate a specific reimbursement, the Secretary `takes the [average] rate, adjusts it [to account for regional labor costs], and then multiplies it by the weight assigned to the patient's DRG.'" Id. (quoting Cnty. of Los Angeles, 192 F.3d at 1009) (alteration in original).
"Congress recognized that health-care providers would inevitably care for some patients whose hospitalization would be extraordinarily costly or lengthy" and devised a means to "insulate hospitals from bearing a disproportionate share of these atypical costs." Cnty. of Los Angeles, 192 F.3d at 1009. Specifically, Congress authorized the Secretary to make supplemental "outlier" payments to eligible providers. Id. While relatively simple in concept — hospitals receive additional payments for extremely high cost treatments — implementing the outlier payment concept entails a complex process, which has evolved substantially in the more than three decades since outlier payments were introduced. Because Plaintiffs challenge aspects of the implementation of the scheme that cover all three decades, it is necessary to review how the program has evolved over time.
Pursuant to the 1983 legislation, the program provided for outlier payments for "day outliers" and "cost outliers." Cnty. of Los Angeles, 192 F.3d at 1009 (citing 42 U.S.C. § 1395ww(d)(5)(A)(i)-(ii) (Supp. IV 1986)). Day outliers are those patients whose "length of stay exceeded the mean length of stay for that particular DRG by a
Since the introduction of the Prospective Payment System, the applicable statutory provision has provided for cost outlier payments only when "charges, adjusted to cost," exceed a certain cutoff. 42 U.S.C. § 1395ww(d)(5)(A)(ii). Because hospitals "markup" their costs in their billing, a calculation is necessary in order to estimate the actual costs of a given treatment based on the amount charged by a medical facility. See Dist. Hosp. Partners, 786 F.3d at 50. Until 1988, the agency used a standard cost-to-charge ratio for all facilities. See 53 Fed.Reg. 38,476, 38,502 (Sept. 30, 1988) ("We currently determine the cost of the discharge to be equal to 66 percent of the billed charges for covered services based on the average ratio of operating costs to charges for Medicare discharges nationwide."). However, in 1988 the agency decided to shift to using hospital-specific cost-to-charge ratios, reasoning that "[t]he use of hospital-specific cost-to-charge ratios should greatly enhance the
53 Fed.Reg. at 38,529 (providing text of provision codified at 42 C.F.R. § 412.84(h)). In explaining the choice to use the "latest available settled cost report," the Secretary reasoned that "the hospital-specific cost-to-charge ratios should be developed using the most current and accurate data available." 53 Fed. Reg. at 38,507. Furthermore, the Secretary reasoned that, "[w]hile the latest filed cost report represents the most current data, we have found that Medicare costs are generally overstated on the filed cost report and are subsequently reduced as a result of audit." Id. The agency considered the range of reasonable cost-to-charge ratios to be "3.0 standard deviations (plus or minus) from the mean of the log distribution of cost-to-charge ratios for all hospitals." Id. The agency explained that it "believe[d] that ratios falling out-side this range are unreasonable and are probably due to faulty data reporting or entry." Id. at 38,507-08. In other words, pursuant to the 1988 regulation, to determine whether a hospital's cases qualified for outlier payments, the agency would use the ratio between the latest available settled cost report — that is, the most recent audited cost report — and the associated charges. But if the cost-to-charge ratio was either extremely high or extremely low in comparison to the other hospitals, the agency would use the statewide average cost-to-charge ratio in determining whether outlier payments were warranted. These two aspects of the formula for calculating outlier payments — the use of the latest available settled cost reports and the statewide average default — remained applicable until they were modified by regulation in 2003. See 68 Fed.Reg. 34,494, 34,497-500 (June 9, 2003); 42 C.F.R. § 412.84(i)(3) (2003).
In 1993, Congress amended the statutory provisions establishing the outlier payment framework — or FY 1995 and beyond — through Section 13501(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66). 59 Fed.Reg. 45,330, 45,368 (Sept. 1, 1994). Previously a "hospital [could] receive payment for a cost outlier if the adjusted costs for a discharge exceed the greater of a fixed dollar amount or a fixed multiple of the DRG payment for the case." Id. Pursuant to the 1993 legislation, for discharges on or after October 1, 1994, a hospital can request an outlier payment when the charges, adjusted to cost, "exceed the sum of the applicable DRG prospective payment rate ... plus a fixed dollar amount determined by the Secretary."
To implement the amended statutory provisions, the agency amended its outlier payment regulations — promulgating the second regulation challenged by Plaintiffs in this action. For all discharges on or after October 1, 1994, cost outlier payments would be available when charges, adjusted to cost, "exceed the DRG payment for the case plus a fixed dollar amount." 59 Fed.Reg. 45,330, 45398 (Sept. 1, 1994) (amending 42 C.F.R. § 412.80). The agency acknowledged that the language of the statutory amendment contained some ambiguity as to whether the new formula was required for future discharges or whether it provided an optional alternative to the previous outlier payment formula. See id. at 45,370. But the agency concluded that adopting the new fixed loss cost methodology exclusively was both substantively appropriate and consistent with the intent of Congress in amending the relevant statutory provisions. See id.
In this same regulation, the agency set the fixed loss threshold for FY 1995 at $20,500. See id. at 45,407. Pursuant to section 1395ww(d)(5)(A)(iii), there is a requirement that the outlier payment "approximate the marginal cost of care beyond the cutoff point." For FY 1995, the agency set the marginal cost factor for cost outliers at 80 percent.
The final prong of the statutory scheme is that the payments based on the DRG prospective payment rates — non-outlier payments — are reduced each year by a percentage equal to the percentage established by the Secretary for outlier payments for that year. See 42 U.S.C. § 1395ww(d)(3)(B). This reduction offsets, approximately, the cost of the outlier payments for each year. Accordingly, for those years where the Secretary set the fixed loss threshold such that outlier payments were projected to be 5.1 percent of the total DRG-based payments, the payments based on the DRG prospective payment rates were reduced by 5.1 percent. See 62 Fed.Reg. 45,966, 46,011 (Aug. 29, 1997) ("Thus, for example, we set outlier thresholds so that the outlier payments for operating costs are projected to equal 5.1 percent of total DRG operating payments, and we adjust the operating standardized amounts correspondingly. We do not set aside a pool of money to fund outlier cases."). However, there is no guarantee that the actual total outlier payments will equal the reduction in DRG payments. See Cnty. of Los Angeles, 192 F.3d at 1019-20.
Because Plaintiffs challenge each of the fixed loss thresholds set for FY 1997 through FY 2007, the Court reviews each of the rulemakings in which those thresholds were set. As explained above, under the Secretary's interpretation of the statute, which has been upheld by the United States Court of Appeals for the District of Columbia Circuit, "she must establish the fixed [loss] thresholds beyond which hospitals will qualify for outlier payments" at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d at 1009. For each of these fiscal years, the agency modeled the expected payments for that upcoming fiscal year and set the fixed loss threshold at a rate such that the level of outlier payments was predicted to be 5.1 percent of the anticipated total payments based on the DRG rates, which is within the 5 to 6 percent range of total DRG-based payments set by the statute. See Cnty. of Los Angeles, 192 F.3d at 1009. As explained in further detail below, the year 2003 was a critical pivot point in the outlier payment program. Based on the discovery of abusive charging practices by certain hospitals, the agency set out to change the rules for outlier payments to curb these abuses, ultimately modifying the regulations governing outlier payments in a regulation promulgated in June 2003. See Dist. Hosp. Partners, 786 F.3d at 51-52. Accordingly, for the annual fixed loss threshold rulemakings between FY 1997 and FY 2003, the agency applied the outlier payment
In a proposed rule published in the Federal Register on May 31, 1996, the agency proposed a fixed loss threshold of $11,050 and proposed to maintain the marginal cost factor for cost outliers at 80 percent.
In a proposed rule issued on June 2, 1997, the agency proposed a fixed loss threshold for cost outliers of $7,600. See 62 Fed.Reg. 29,902, 29,946 (June 2, 1997). The agency proposed to maintain the marginal cost factor for cost outliers of 80 percent. Id. Once again, the agency set the threshold so that the projected outlier payments would be 5.1 percent of the projected total DRG-based payments. See id. The proposed fixed loss threshold was premised on continued cost deflation — which the agency derived by analyzing cost
In a proposed rule issued on May 8, 1998, the agency proposed a fixed loss threshold for cost outliers of $11,350. 63 Fed.Reg. 25,576 (May 8, 1998). The agency proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total projected DRG-based payments. Id. As in previous years, these calculations were made using a cost inflation methodology. See id. at 25,611. In the agency's proposed rule, the projections were based on an annual cost inflation factor of minus 1.831 percent. See id. In a final rule promulgated on July 31, 1998, the agency established a fixed loss threshold for FY 1999 of $11,100 and maintained the marginal cost factor at 80 percent. 63 Fed.Reg. 40,954, 41,008 (July 31, 1998). The agency continued to use a cost inflation methodology but used an updated cost inflation factor of minus 1.724 percent, which was suggested by the more recent data available at the time of the promulgation of the final rule. See id. The agency calculated that the projected cost outlier payments using the fixed loss threshold of $11,100 would be 5.1 percent of the total projected DRG-based payments. See id.
In a proposed rule issued on May 7, 1999, the agency proposed a fixed loss threshold of $14,575. 64 Fed.Reg. 24,716, 24,754 (May 7, 1999). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations
In a proposed rule issued on May 5, 2000, the agency proposed a fixed loss threshold of $17,250. 65 Fed.Reg. 26,282, 26,329 (May 5, 2000). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations were made using a cost-inflation methodology. See id. For FY 2001, the agency proposed using a 1.0 percent inflation factor. The use of a 1.0 percent inflation factor "reflects [the agency's] analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 1999, is higher than [] projected before the beginning of FY 1999, and that the percentage of actual outlier payments for FY 2000 will likely be higher than [] projected before the beginning of FY 2000." Id. In a final rule promulgated on August 1, 2000, the agency established a fixed loss threshold for FY 2001 of $17,550 and maintained the marginal cost factor at 80 percent. 65 Fed.Reg. 47,054, 47,113 (Aug. 1, 2000). The agency used a 1.8 percent inflation factor — as opposed to the proposed inflation factor of 1.0 percent — reflecting the latest cost report data, as well as the relationship of actual outlier payments to the previously projected outlier payments for FY 1999 and FY 2000, as discussed in the FY 2001 proposed rule. Id.
In a proposed rule issued on May 4, 2001, the agency proposed a fixed loss threshold of $21,000. 66 Fed.Reg. 22,646, 22,726-27 (May 4, 2001). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. at 22,727. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. Once again, these calculations were made using a cost-inflation methodology. See id. For FY 2002, the agency proposed using a 5.5 percent inflation factor. The use of the 5.5 percent inflation factor "reflects [the agency's] analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 2000, is higher than [] projected before
In a proposed rule issued on May 9, 2002, the agency proposed a fixed loss threshold of $33,450. 67 Fed.Reg. 31,404, 31,510 (May 9, 2002). The agency also proposed maintaining the marginal cost factor of 80 percent. Id. at 22,727. The agency calculated the proposed outlier threshold so that the projected outlier payments would be 5.1 percent of the total DRG-based payments. Id. While these calculations were made using a cost-inflation methodology, the agency proposed a calculation that differed from those employed in previous years because of the data that was available at the time of the FY 2003 proposed rule. See id. The agency noted that, previously, "inflation factors have been calculated by measuring the percent change in costs using the two most recently available cost report files." Id. For example, for FY 2002, those were the FY 1998 and FY 1999 cost reports. Id. However, when the agency was proposing the threshold for FY 2003, the FY 2000 cost reports were not available because of processing delays. See id. Therefore, the agency proposed projecting the cost inflation factor by constructing an averaging model based on the changes to the data available from FY 1995 through FY 1999, the most recent cost data available. See id. The agency emphasized that this proposal was based on the unavailability of the FY 2000 data. See id. As a result of the model, the agency proposed applying a 15 percent cost inflation factor to the FY 2001 data to generate the projected FY 2003 data. See id.
After receiving a significant numbers of comments regarding the methodology proposed for accounting for inflation — which was proposed in light of the unavailability of the FY 2000 cost data — the agency declined to adopt the proposed cost inflation methodology in the final FY 2003 fixed loss threshold regulation. 67 Fed.Reg. 49,982, 50,124 (Aug. 1, 2002). Instead, in the final rule promulgated on August 1, 2002, the agency adopted a charge inflation methodology. See id. The agency reasoned that, because of substantial increases in the growth of charges, which were increasing faster than costs, predicting future payments using a charge inflation methodology would be more accurate than using a cost inflation methodology. See id. Accordingly, in order to determine the fixed loss threshold for FY 2003, the agency calculated the rate of charge inflation from FY 1999 to FY 2000 and from FY 2000 to FY 2001 and applied this two-year rate of inflation — a total of 17.6398 percent — to the FY 2001 charge data to generate a set of projected FY 2003 charge data. See id. The agency adjusted these projected charges to cost for use in modeling outlier payments for FY 2003. See id. Using this charge inflation methodology, as well as continuing to use a marginal cost factor of 80 percent, the agency set the fixed loss threshold at $33,560 for FY 2003. See id. With this fixed loss threshold, the agency predicted that outlier payments would be
By 2003, it appeared that the outlier payment system was breaking down. See Dist. Hosp. Partners, 786 F.3d at 51. In particular, concerns emerged that hospitals "could manipulate the outlier regulations if their charges were `not sufficiently comparable in magnitude to their costs.'" Id. (quoting 68 Fed.Reg. 10,420, 10,423 (Mar. 5, 2003)). In February 2003, the Secretary transmitted a draft interim final rule discussing several possible changes to the outlier payment system to the Office of Management and Budget ("OMB").
Instead, on March 5, 2003, the agency published a notice of proposed rulemaking that proposed several of the same changes to the outlier payment system suggested in the draft interim final rule. See 68 Fed.Reg. at 10,420. In the notice of proposed rulemaking, the agency described how a hospital could take advantage of "the time lag between the current charges on a submitted bill and the cost-to-charge ratio taken from the most recent settled cost report." Id. at 10,423. As the D.C. Circuit Court of Appeals described in District Hospital Partners, "[a] hospital knows that its cost-to-charge ratio is based on data submitted in past cost reports. If it dramatically increased charges between past cost reports and the patient costs for which reimbursement is sought, its cost-to-charge ratio would `be too high' and would `overestimate the hospital's costs.'" 786 F.3d at 51 (quoting 68 Fed.Reg. at 10,423). Reviewing actual outlier payments from several previous years, the agency discovered "123 hospitals whose percentage of outlier payments relative to total DRG payments increased by at least 5 percentage points" from FY 1999 to FY 2001. 68 Fed.Reg. at 10,423. Furthermore, for those 123 hospitals, "the mean rate of increase in charges was 70 percent." Id. at 10,424. Yet, cost-to-charge ratios for these hospitals, which were based upon cost reports from prior periods, declined by only 2 percent." Id. (emphasis added). While charges were increasing rapidly, the cost-to-charge ratios did not reflect this change because they were based on earlier time periods. These hospitals, with rapidly increasing charges, have become called turbo-chargers. Dist. Hosp. Partners, 786 F.3d at 51.
To address these concerns, the agency proposed three changes to the outlier payment regulations. First, whereas previously the regulations — promulgated in 1988 — required using the most recent settled cost report when determining the
On June 9, 2003, the agency promulgated a final rule, which included the three major changes to the outlier payment regime proposed in the March 2003 notice of proposed rulemaking. See 68 Fed.Reg. 34,494, 34,497-503 (June 9, 2003). First, for all discharges on or after October 1, 2003, the cost-to-charge ratios would be based on more recent data — based on tentatively settled cost reports rather than on final settled cost reports. See id. at 34,497-99, 34,515 (codified at 42 C.F.R. § 412.84(i)(1)-(2)). Second, for discharges on or after August 8, 2003, the agency would not default to statewide averages for hospitals with low cost-to-charge ratios. See id. at 34,500 (codified at 42 C.F.R. §§ 412.84(h) and (i)(1)). Third, for discharges on or after August 8, 2003, outlier payments would "become subject to adjustment when hospitals' cost reports coinciding with the discharge are settled."
Plaintiffs challenge four annual fixed loss threshold rules — for FY 2004 through FY 2007 — issued after the agency promulgated the 2003 regulations that changed
In a proposed rule issued May 19, 2003, the agency proposed setting the fixed loss threshold for FY 2004 at $50,645. 68 Fed. Reg. 27,154, 27,235 (May 19, 2003). The agency proposed using a charge inflation rate of 12.8083 percent annually (27.3 percent over two years). Id. The agency also proposed maintaining the marginal cost factor at 80 percent. Id. Notably this proposed rule was published prior to the promulgation of the revised outlier payment regulations — finalized on June 9, 2003 — and therefore used the methodology that was in place before the 2003 changes to the outlier payment regulations. See id. In issuing the proposed fixed loss threshold rule, the agency noted that "any final rule subsequent to the March 5, 2003 proposed rule that implements changes to the outlier payment methodology is likely to affect how we will calculate the final FY 2004 outlier threshold." Id. The agency further noted that "the final FY 2004 threshold is likely to be different from this proposed threshold, as a result of any changes subsequent to the March 5, 2003 proposed rule." Id.
The final fixed loss threshold rule for FY 2004 was issued on August 1, 2003 — two months after the changes to the outlier payment regulations were promulgated. 68 Fed. at 45,346. The final fixed loss threshold rule took account of the revised outlier payment regulations, which would govern outlier payments for discharges occurring in FY 2004 and beyond. See id. Specifically, using the charge inflation methodology that the agency had re-introduced in the FY 2003 rulemaking, the agency used charge data from 2002 and inflated it by a two-year charge inflation rate to project charges for FY 2004. Id. The agency used "the 2-year average annual rate of change in charges per case," from FY 2000 to FY 2001 and from FY 2001 to FY 2002, which was 12.5978 percent annually (or 26.8 percent over two years). Id. To calculate projected costs for FY 2004, the agency adjusted the projected charges by hospital-specific cost-to-charge ratios. In doing so, the agency implemented changes introduced by the 2003 revisions to the outlier payment regulations. First, the agency adjusted its methodology to use more recent data to generate the cost-to-charge ratios because, in issuing the outlier payments for FY 2004, the latest tentatively settled cost reports would be used rather than the latest
The final change introduced by the 2003 outlier payment regulations was that outlier payments would become subject to reconciliation "at the time of cost report final settlement if a hospital's actual ... cost-to-charge ratios are found to be substantially different from the cost-to-charge ratios used during that time period to make outlier payments." Id. The agency noted that it was "difficult to project which hospitals will be subject to reconciliation of their outlier payments using available data." Id. The agency also noted that "resources necessary to undertake reconciliation will ultimately influence the number of hospitals reconciled." Id. For all of those reasons, it was "difficult to predict the number of hospitals that [would] be reconciled." Nonetheless, based on previous data, the agency "identified approximately 50 hospitals [it] believe[d] will be reconciled." Id. For these hospitals, the agency attempted to integrate the effects of reconciliation in the predictive model for FY 2004 by using a modified methodology for projecting outlier payments for FY 2004. See id. at 45,476-77. Using this revised methodology, in light of the changes to the outlier payment regulations in 2003, the agency established a fixed loss outlier of $31,000. Id. at 45,477.
In a proposed rule issued May 18, 2004, the agency proposed a fixed loss threshold of $35,085. 69 Fed.Reg. 28,196, 28,376 (May 18, 2004). To arrive at this proposed threshold, the agency once again used a charge inflation methodology. The agency took FY 2003 charge data and inflated it two years — based on the two-year average annual rate of change in charges from FY 2001 to FY 2002 and FY 2002 to FY 2003, which was 14.5083 percent annually. See id. Pursuant to the 2003 changes to the outlier payment regulations, the agency then used hospital-specific cost-to-charge ratios that reflected the most recent settled or the most recent tentatively settled cost reports, whichever was more recent, for each hospital. See id. In proposing this threshold, the agency acknowledged that the inflation data "derive[d] from the years just prior to the adoption of the policy changes, when some hospitals were increasing charges at a rapid rate in order to increase their outlier payments." Id. As a result, the agency noted that they "represent rates of increase that may be higher than the rates of increase under our new policy." Id. Accordingly, the agency welcomed suggestions that might enable predictions that "better reflect current trends in charge increases." Id.
Given these concerns, as well as comments received in response to the proposed rule, the agency adjusted the methodology for predicting FY 2005 data in order to set the final FY 2005 fixed loss threshold. See 69 Fed.Reg. at 49,277. In the final rule promulgated on August 11,
In a proposed rule issued May 4, 2005, the agency proposed a fixed loss threshold of $26,675. 70 Fed.Reg. 23,306, 23,469 (May 4, 2005). In order to account for changes in the rate of charge inflation, the agency generated projected data for FY 2006 using FY 2004 charge data as a baseline. See id. The agency calculated the rate of charge inflation from the combination of the last quarter of FY 2003 and the first quarter of FY 2004 to the combination of the last quarter of FY 2004 and the first quarter of FY 2005. See id. For this period, the agency calculated an annual rate of charge inflation of 8.65 percent, or 18.04 percent over two years. See id. The agency then inflated the FY 2004 charge data by this two-year inflation factor. See id. To derive projected cost data, the agency adjusted the projected charge data by the hospital-specific charge ratios from the most recent update to the Provider Specific File (for December 2004), which reflected the 2003 changes to the outlier payment regulations. See id.
For the final rule, promulgated August 12, 2005, the agency calculated the FY 2006 fixed loss threshold "using the methodology proposed in the proposed rule, but using updated data." 70 Fed.Reg. at 47,494. Specifically, the agency calculated a charge inflation factor based on a comparison between the first six months of FY 2004 and the first six months of FY 2005. Id. Using this data, the agency calculated a two-year charge inflation factor of 14.94 percent. Id. The agency used this inflation factor to inflate charges from FY 2004, id. at 47,495, and then adjusted the projected charges to projected costs using hospital-specific cost-to-charge ratios from the March 2005 update of the Provider
In a proposed rule issued on April 25, 2006, the agency proposed a fixed loss threshold of $25,530. 71 Fed.Reg. 23,996, 24,150 (Apr. 25, 2006). The agency proposed to use the same methodology to calculate the fixed loss threshold as it had in the past. Specifically, it proposed to inflate FY 2005 charge data by two years of charge inflation. Id. at 24,149. The agency calculated the rate of charge inflation by calculating the one-year average annual rate of change from the combination of the last quarter of FY 2004 with the first quarter of FY 2005 to the combination of the last quarter of FY 2005 with the first quarter of FY 2006. Id. at 24,149-50. For this period, the agency calculated a one-year inflation rate of 7.57 percent, or 15.15 percent over two years. Id. at 24,150. The agency inflated the FY 2005 charge data by this two-year rate and then adjusted it to cost using the hospital-specific cost-to-charge ratios from the most recent update to the Provider Specific File. Id.
For the final rule, promulgated on August 18, 2006, the agency calculated the FY 2007 fixed loss threshold "using the same methodology [] proposed, except [] using more recent data to determine the charge inflation factor." 71 Fed.Reg. at 48,150. In addition, however, the agency also "appl[ied] an adjustment factor to the [cost-to-charge ratios] to account for cost and charge inflation." Id. Specifically, the agency calculated a charge inflation factor based on a comparison between the first six months of FY 2005 and the first six months of FY 2006. Id. Using this data, the agency calculated a two-year charge inflation factor of 16.42 percent. Id. The agency used this inflation factor to inflate charges from FY 2005. Id. As in previous years, the agency used hospital-specific cost-to-charge ratios to adjust the projected FY 2007 charges to cost. Id. However, in response to comments submitted, the agency agreed "that it is appropriate to apply an adjustment factor to the [cost-to-charge ratios] so that the [cost-to-charge ratios] we are using in our simulation more closely reflect the [cost-to-charge ratios] that will be used in FY 2007." Id. The agency calculated the ratio between the one-year change in costs and the one-year change in charges, and derived an adjustment factor of 0.9973. Id. The agency applied this adjustment factor to the cost-to-charge ratios contained in the Provider Specific File, which itself was based on the most recent tentatively settled cost reports. Id. The agency then used these adjusted cost-to-charge ratios to adjust the projected FY 2007 charges, generating projected FY 2007 costs. See id. Finally, just as in calculating the FY 2005 and FY 2006 fixed loss thresholds, the agency did not adjust its methodology to explicitly account for reconciliation in establishing the FY 2007 threshold. Id. at 48,149. Following this methodology, the agency adopted a tentative fixed loss threshold of $24,475. Id. at 48,151.
In sum, for each fiscal year between 1997 and 2007, the Secretary determined the fixed loss threshold, a fixed dollar amount that, when added to the DRG prospective payment rate, serves as the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii), (iv); 42 C.F.R. § 412.80(a)(2)-(3). When a hospital's approximate costs actually incurred in treating a patient exceed the sum of the DRG prospective payment rate applicable to that patient and the fixed loss threshold, the hospital would be eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. § 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that a hospital must absorb in any case in which the hospital incurs estimated actual costs for treating a patient that are above the DRG prospective payment rate. The amount of the outlier payment is "determined by the Secretary" and must "approximate the marginal cost of care" beyond the fixed loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). During the time period relevant to this action, the implementing regulations generally provided for outlier payments equal to eighty percent of the difference between the hospital's estimated operating and capital costs and the fixed loss threshold. See 42 C.F.R. § 412.84(k). Accordingly, an increase in the fixed loss threshold reduces the number of cases that will qualify for outlier payments, as well as the amounts of such payments for qualifying cases. In light of this scheme, Plaintiffs challenge the rulemakings revising the outlier payment regulations and the annual fixed loss threshold rulemakings that are applicable to the payment determinations — for FY 1997 through FY 2007 — that are challenged in this action.
The procedural history is long and complex, and the Court limits its presentation of the procedural history to the relevant facts for resolving the motions before the Court. Additional procedural history can be found in the Court's previous opinions in this case. See Banner Health v. Sebelius ("Banner Health I"), 797 F.Supp.2d 97 (D.D.C.2011); Banner Health v. Sebelius ("Banner Health II"), 905 F.Supp.2d 174 (D.D.C.2012); Banner Health v. Sebelius ("Banner Health III"), 945 F.Supp.2d 1 (D.D.C.2013).
Plaintiffs in this case challenge outlier payment determinations for fiscal years 1997 through 2007. As required by statute, Plaintiffs filed various appeals with the Provider Reimbursement Review Board ("PRRB"), each challenging the
PRRB Rs. at 29. The legal requests presented in the two other separate requests for expedited review did not differ in any substantive matter from the consolidated request. See PRRB Rs. at 5633; PRRB R. (Case No. 11-0026) at 211. Because Plaintiffs' administrative appeals called into question the underlying validity of regulations promulgated by the Secretary, the PRRB determined that it was without authority to resolve the matters raised and authorized expedited judicial review pursuant to 42 U.S.C. § 1395oo(f)(1). See PRRB Rs. at 1-3; PRRB R. (Case No. 11-0026) at 208-10.
Plaintiffs commenced this action on September 27, 2010, claiming that this Court has jurisdiction under the Medicare Act, 42 U.S.C. § 1395oo(f)(1), and the Mandamus Act, 28 U.S.C. § 1361. See Compl., ECF No. 1. On December 23, 2010, Plaintiffs filed an Amended Complaint as a matter of right, which remains the operative iteration of the Complaint in this action (with a minor exception discussed below). See Am. Compl., ECF No. 16. As this Court has previously observed, Plaintiffs' Amended Complaint was "sprawling," containing over two hundred paragraphs, spanning fifty-nine pages, and including two lengthy exhibits. See Banner Health III, 945 F.Supp.2d at 9-10. On January 28, 2011, the Secretary filed a motion to dismiss Plaintiffs' Amended Complaint, which this Court granted in part and denied in part. See Banner Health I, 797 F.Supp.2d at 97. Specifically, the Court first concluded that Plaintiffs' allegations were sufficient, for the pleading stage, to establish their standing to challenge the several actions at issue in this case. See id. at 109. The Court noted that this conclusion was not intended to foreclose the Secretary from raising standing arguments upon filing motions for summary judgment, after the record had been developed. See id. However, the Court dismissed — for failure to state a plausible claim for relief — Plaintiffs' claims seeking payments under the Mandamus Act, 28 U.S.C. § 1361, as well as Plaintiffs' claims under the Medicare Act to the extent that such claims relied on vague allegations challenging the Secretary's "implementation" and "enforcement" of the outlier payment system that are "unconnected to any discrete agency action." See id. at 118. The Court otherwise denied the Secretary's motion to dismiss. Looking forward, the Court concluded that, in light of the extraordinary breadth of the allegations in the Amended Complaint, proceeding immediately to the filing of the administrative record and the subsequent briefing of motions for summary judgment would not be the most expeditious manner of proceeding in the action. Rather, in order to gain further
On July 27, 2011, Plaintiffs filed their Notice of Claims, which enumerated the claims Plaintiffs were bringing in this action. Plaintiffs' Notice of Claims likewise listed among the challenged agency actions "the Secretary's directions, starting in late 2002, to CMS's fiscal intermediaries to reopen hospital cost reports only for purposes of reconciling and recovering outlier overpayments, but not for purposes of reconciling and recovering outlier underpayments, as set forth in the Secretary's issuance, through CMS, of Program Memorandum A-02-122 (December 3, 2002), Program Memorandum A-02-126 (December 20, 2002), Program Memorandum A-03-058 (July 3, 2003)[, and] Transmittal 707 (Medicare Claims Processing Manual, Chapter 3, § 20.1.2.5(A))." However, on November 26, 2012, the Court granted the Secretary's motion to dismiss all claims premised on this agency action because, among other reasons, Plaintiffs failed to rebut the Secretary's well-reasoned jurisdictional arguments and in fact expressly disclaimed any intent to bring a direct challenge to reopening determinations or instructions as such. See Banner Health I, 797 F.Supp.2d at 97; Banner Health II, 905 F.Supp.2d at 174. The Court held it would not allow Plaintiffs to achieve supplementation of the administrative record by injecting the action with ill-defined claims, but rather, whether the administrative record should be supplemented to include the CMS documents was a question more appropriately addressed in the context of the Court's consideration of Plaintiffs' motion to compel. Id. In light of the Notice of Claims, in addition to the outlier payment determinations specific to each of the hospital plaintiffs, the remaining claims in this action may be succinctly summarized as challenging the promulgation and implementation of the following agency actions: three rulemakings revising the outlier payment regulations, which were promulgated in 1988, 1994, and 2003; and eleven rulemakings establishing the annual fixed loss threshold for federal fiscal years 1997 through 2007. See Banner Health III, 945 F.Supp.2d at 13.
After Plaintiffs filed their Notice of Claims, the Court ordered the Secretary to file the complete administrative record — which did not include any record relating to Plaintiffs' dismissed claims regarding the four directives issued by CMS — by December 14, 2011. See Scheduling and Procedures Order (Aug. 19, 2011), ECF No. 29. The Secretary filed the administrative records for the fourteen challenged agency actions on November 8, 2011, November 23, 2011, December 14, 2011, and December 28, 2011. See Banner Health III, 945 F.Supp.2d at 13 (citing ECF filings).
On February 22, 2012, Plaintiffs filed a motion to compel, challenging the completeness of the administrative record, Pls.' Mot. to Compel Def. to File the Complete
On March 23, 2012, Plaintiffs filed a renewed motion to compel, requesting that the Court order the Secretary to file the "complete administrative record," by supplementing the records she had previously filed with various documents, including certain data files identified by Plaintiffs and all other documents that were before the agency in connection with its rulemakings, and further requesting that the Court order the Secretary to certify to the Court and Plaintiffs that the administrative record is complete. See Pls.' Mem. of P. & A. in Supp. of Renewed Mot. to Compel Def. to File the Complete Admin. R. and to Certify Same, ECF No. 60, at 37. After the filing of several supplements by the parties, the Court granted in part and denied in part the motion. See Banner Health III, 945 F.Supp.2d at 39. The Court granted the motion and ordered supplementation with respect to all or part of eight of the 36 discrete items subject to Plaintiffs' motion.
After the Secretary filed the required supplementation of the Administrative record, the Court granted the Secretary's [99] Motion for Leave to File Motion to Dismiss for Lack of Subject Matter Jurisdiction. However, instead of allowing Defendant to file the motion separately, the Court ordered Defendant to file the motion simultaneously and, in the alternative to, its motion for summary judgment. See Order and Docket Entry, dated August 13, 3013, ECF No. 102. On July 7, 2014, the Court granted in part and denied in part Plaintiffs' [108] Motion for Leave to Further Amend and Supplement First Amended Complaint. Specifically, the Court denied Plaintiffs' request to include claims that the Secretary's failure to disclose the draft 2003 interim final rule violated 5 U.S.C. § 553, but granted Plaintiffs' request to amend their Complaint to include factual allegations concerning the draft interim final rule. See Banner Health v. Burwell, 55 F.Supp.3d 1, 3 (D.D.C.2014). Specifically, the Court allowed Plaintiffs to
On September 9, 2014, Defendant filed her [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Summary Judgment, and Plaintiffs filed their [127] Motion for Summary Judgment. That same day, Plaintiffs also filed their [128] Motion (Related to Their Motion For Summary Judgment) for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief. The parties briefed these motions and both, subsequently, filed notices of supplemental authority. These motions are now ripe for resolution.
Judicial review of Plaintiffs' claims under the Medicare Act rests on 42 U.S.C. § 1395oo(f)(1), which incorporates the APA. See 42 U.S.C. § 1395oo(f)(1) ("Such action[s] ... shall be tried pursuant to the applicable provisions under chapter 7 of Title 5."); see also Abington Crest Nursing & Rehab. Ctr. v. Sebelius, 575 F.3d 717, 719 (D.C.Cir.2009).
The Administrative Procedure Act directs the Court to "review the whole record or those parts of it cited by a party." 5 U.S.C. § 706. This requires the Court to review "the full administrative record that was before the Secretary at the time he made his decision." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 420, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977). Courts in this Circuit have "interpreted the `whole record' to include all documents and materials that the agency directly or indirectly considered... [and nothing] more nor less." Pac. Shores Subdivision, Cal. Water Dist. v. U.S. Army Corps of Eng'rs, 448 F.Supp.2d 1, 4 (D.D.C.2006) (citation omitted). "In other words, the administrative record `should not include materials that were not considered by agency decisionmakers.'" Id. (citation omitted). "[A]bsent clear evidence, an agency is entitled to a strong presumption of regularity, that it properly designated the administrative record." Id. at 5.
"Supplementation of the administrative record is the exception, not the rule." Pac. Shores, 448 F.Supp.2d at 5 (quoting Motor & Equip. Mfrs. Ass'n, Inc. v. EPA, 627 F.2d 1095, 1105 (D.C.Cir. 1979)); Franks v. Salazar, 751 F.Supp.2d 62, 67 (D.D.C.2010) ("A court that orders an administrative agency to supplement the record of its decision is a rare bird."). This is because "an agency is entitled to a strong presumption of regularity, that it properly designated the administrative record." Pac. Shores, 448 F.Supp.2d at 5. "The rationale for this rule derives from a commonsense understanding of the court's functional role in the administrative state[:] `Were courts cavalierly to supplement the record, they would be tempted to second-guess agency decisions in the belief that they were better informed than the administrators empowered by Congress and appointed by the President.'" Amfac Resorts, L.L.C. v. Dep't of Interior, 143 F.Supp.2d 7, 11 (D.D.C.2001) (quoting San Luis Obispo Mothers for Peace v. Nuclear Regulatory Comm'n, 751 F.2d 1287, 1325-26 (D.C.Cir.1984)). However, an agency "may not skew the record by excluding unfavorable information but must produce the full record that was before the agency at the time the decision was made." Blue Ocean Inst. v. Gutierrez, 503 F.Supp.2d 366, 369 (D.D.C.2007). The agency may not exclude information from the record
Federal Rule of Civil Procedure 12(h)(3) provides that "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed. R. Civ. P. 12(h)(3). In assessing its jurisdiction over the subject matter of the claims presented, a court "must accept as true all of the factual allegations contained in the complaint" and draw all reasonable inferences in favor of the plaintiff, Brown v. District of Columbia, 514 F.3d 1279, 1283 (D.C.Cir.2008) (internal quotation marks omitted), but courts are "not required ... to accept inferences unsupported by the facts alleged or legal conclusions that are cast as factual allegations." Rann v. Chao, 154 F.Supp.2d 61, 64 (D.D.C.2001). Ultimately, the plaintiff bears the burden of establishing the Court's subject matter jurisdiction, Arpaio v. Obama, 797 F.3d 11, 18-19, 2015 WL 4772774, at *5 (D.C.Cir.2015), and where subject-matter jurisdiction does not exist, "the court cannot proceed at all in any cause." Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998).
Under Rule 56(a) of the Federal Rules of Civil Procedure, "[t]he court shall grant 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." However, "when a party seeks review of agency action under the APA [before a district court], the district judge sits as an appellate tribunal. The `entire case' on review is a question of law." Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C.Cir.2001). Accordingly, "the standard set forth in Rule 56[] does not apply because of the limited role of a court in reviewing the administrative record.... Summary judgment is [] the mechanism for deciding whether as a matter of law the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review." Southeast Conference v. Vilsack, 684 F.Supp.2d 135, 142 (D.D.C.2010).
The APA "sets forth the full extent of judicial authority to review executive agency action for procedural correctness." FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513, 129 S.Ct. 1800, 173 L.Ed.2d 738 (2009). It requires courts to "hold unlawful and set aside agency action, findings, and conclusions" that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). "This is a `narrow' standard of review as courts defer to the agency's expertise." Ctr. for Food Safety v. Salazar, 898 F.Supp.2d 130, 138 (D.D.C. 2012) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins.
This action entails Plaintiffs' challenges to 14 rulemakings, three rulemakings revising the outlier payment regulations and 11 annual fixed loss threshold rulemakings. The parties filed cross-motions for summary judgment, and Defendant moved to dismiss for lack of subject matter jurisdiction with respect to certain claims. In addition, Plaintiffs moved the Court to take judicial notice and/or extra-record consideration of certain other materials, as well as specified other relief. The Court begins by considering Plaintiffs' motion requesting the consideration of additional materials because the resolution of that motion determines the scope of the materials examined with respect to the other motions resolved today. The Court then turns to Defendant's arguments that this Court lacks subject matter jurisdiction over certain claims. Finally, having resolved those issues, the Court addresses the cross-motions for summary judgment and resolves the merits of this dispute.
On the same date that the parties filed their dispositive cross-motions — on the deadline previously set by the Court for those cross-motions, see Scheduling and Procedures Order, ECF No. 122 — Plaintiffs filed a motion asking the Court to consider additional materials in resolving the cross-motions filed that day. Plaintiffs asked the Court (1) to take judicial notice of six identified documents, or in the alternative to consider them as extra-record materials, (2) to supplement the administrative record with a comment to the FY 2004 fixed loss threshold rulemaking, and (3) to "receive" three tables as demonstrative exhibits that exceed the allowed page limits set by the Court for the briefing. Defendant opposes each of these requests.
As an initial matter, the Court notes that it considers this request to be tardy. Asking the Court for permission to consider additional materials on the very day on which the dispositive motions are filed is simply too late. Doing so meant that Plaintiffs precluded Defendant from effectively objecting to the inclusion of these materials before Plaintiffs relied on them in their briefing. At the same time, by waiting until the last moment to present these materials, Defendant was prevented from being able to rely on them in her initial briefing. To say that Defendant could file an opposition to this motion after the fact and could respond to the proposed materials in the subsequent briefing is no answer at all. The orderly management of this litigation requires the resolution of questions regarding the materials on which the parties may rely — and on which the Court will base its ultimate decision — before the submission of the parties' arguments
Plaintiffs ask the Court to take judicial notice "as a matter of adjudicative fact" or, in the alternative, to consider as extra-record evidence six documents (falling into four categories): (1) two versions of a statement given by Thomas A. Scully, former Administrator of the Centers for Medicare and Medicaid Services ("CMS"), on March 11, 2003, before a Senate subcommittee; (2) a report of the Office of Inspector General of the Department of Health and Human Services regarding the reconciliation of outlier payments
The Court agrees — as does Defendant — that parties may cite to publicly available documents and that the Court may take judicial notice of such documents. See Pharm. Research & Manufacturers of Am. v. United States Dep't of Health & Human Servs., 43 F.Supp.3d 28, 33 (D.D.C.2014). Each of the identified documents is publicly available, and the Court considers it proper to take judicial notice of them. While Plaintiffs frame their request for judicial notice as an alternative to their request for extra-record consideration of these documents, Plaintiffs have revealed their hand. It appears that, regardless of Plaintiffs' framing, Plaintiffs are effectively asking the Court to consider these materials as extra-record evidence serving as the basis for the Court's review of the agency actions challenged here. Insofar as Plaintiffs seek to base their challenge upon these extra-record materials, even those available to the public of which the Court could take judicial notice, the Court concludes that it is necessary to apply the standard for considering extra-record evidence.
It is "black-letter administrative law that in an [Administrative Procedure Act] case, a reviewing court `should have before it neither more nor less information than did the agency when it made its decision.'" Hill Dermaceuticals, Inc. v. FDA, 709 F.3d 44, 47 (D.C.Cir.2013) (quoting Walter O. Boswell Mem'l Hosp. v. Heckler, 749 F.2d 788, 792 (D.C.Cir.1984)). As the D.C. Circuit Court of Appeals has recently reiterated, "exceptions to that rule are quite narrow and rarely invoked." CTS Corp. v. EPA, 759 F.3d 52, 64 (D.C.Cir.2014). "They are primarily limited to cases where `the procedural validity of the agency's action remains in serious question,' or the agency affirmatively excluded relevant evidence." Id. (citations omitted). Plaintiffs have not even attempted to show that this standard is met in this case. Plaintiffs emphasize that these documents should be considered because they are "needed to assist the court's review." Pls.' Extra-Record Mot. at 9 (quoting Nat'l Mining Ass'n v. Jackson, 856 F.Supp.2d 150, 156-57 (D.D.C. 2012). But that is not enough. As the D.C. Circuit has emphasized, consideration of such extra-record materials "at most []
Plaintiffs seek to supplement the administrative record for the FY 2004 fiscal loss threshold rulemaking with a comment by the Federation of American Hospitals. The Court concludes that it is too late to — once again — expand the administrative record in this case. The Court previously set a deadline of March 23, 2012, for Plaintiffs' motion to compel regarding the contents of the administrative record in this case. See Minute Order dated February 24, 2012. After numerous supplemental filings, the Court resolved Plaintiffs' motion to compel on May 16, 2013, addressing a wide variety of challenges to the administrative record filed. See Banner Health, 945 F.Supp.2d at 6. Subsequently, the Court granted Defendant's [93] Motion for Partial Reconsideration or Clarification and modified its previous order compelling the supplementation of the administrative record with respect to certain materials. See Order dated July 30, 2013, ECF No. 96. Meanwhile, on September 19, 2013, another judge in this district accepted the comment in question into the administrative record in an outlier case proceeding in parallel to this one. See Dist. Hosp. Partners, L.P. v. Sebelius, 971 F.Supp.2d 15, 27 (D.D.C.2013) aff'd in part and rev'd in part sub nom. Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C.Cir.2015). It is undisputed that the parties in this case were aware of the proceedings in District Hospital Partners; indeed, from time to time, the parties reported to this Court regarding those parallel proceedings, particularly regarding disputes over the administrative record in that case. See, e.g., Plaintiffs' Notice of the Conclusion of Previously Reported Discovery Proceedings in the District Hospital Partners Case, dated April 12, 2013, ECF No. 81. Despite the fact that Federation of American Hospitals comment was added to the record in District Hospital Partners approximately one year before the dispositive motions in this case were due, Plaintiffs never sought leave to add the Federation of American Hospitals comment to this case until the day they filed their dispositive motion.
Plaintiffs argue that Defendant cannot be prejudiced because the agency knew about this comment, but that misses the point. Defendant had no reason to believe that Plaintiffs would — at the very last minute — seek to add this particular comment to the record given that the administrative
Plaintiffs ask the court to "receive" three tables that are appended to Plaintiffs' Motion for Summary Judgment. Plaintiffs explain that "[a]ll three tables summarize data in the Impact Files that are already part of the administrative record and concisely encapsulate what would otherwise require resorting to a voluminous portion of the administrative records." Pls.' Extra-Record Mot. at 7. They argue that, because these tables "merely restate information already contained in the administrative record," they should not be included in the page limitations previously ordered by the Court. Id. at 7-8. Plaintiffs further state that the "tables are intended to aid the parties and the Court by presenting visually concise data that would otherwise only be accessible in cumbersome spreadsheets." Id. at 8. Defendant responds that Plaintiffs' request to submit the tables was untimely, that the additional pages should not be exempt from the page limit because they effectively present argument rather than materials from the administrative record, and that the Court should not allow an expansion of the page limits. The Court agrees with Defendant.
First, pursuant to Local Civil Rule 7(e), Plaintiffs should have requested leave to exceed the page limits-or to submit what they believe should not be counted towards the page limits — prior to the deadline for filing their briefs. Presenting this request simultaneous with the filing of those briefs is neither fair — Defendant did not have an opportunity to file an expanded brief — nor conducive to the orderly administration of this action.
Second, the Court concludes that the appended tables are not exempt from the page limit. Contrary to Plaintiffs' suggestion, the exhibits are not like a Joint Appendix. A Joint Appendix contains excerpts of the unadorned administrative record to facilitate the Court's review of those portions of the administrative record on which the parties rely, which is particularly useful in cases like this one with a voluminous record. See LCvR 7(n). A Joint Appendix does not provide an opportunity for the parties to add analysis or commentary regarding the meaning of the administrative record. The Court agrees that, as a general matter, charts or graphs may be a helpful way to present complex information. See generally Edward Tufte, Beautiful Evidence (2006). They also can be an effective way to present an argument. See id. However, the question is not whether or not the charts are helpful. Any material describing the administrative record that is not a faithful reproduction of the unadorned administrative record belongs in a memorandum of points and authorities in support of, or in opposition to, a motion. Indeed, that is essentially what a factual or background section of a memorandum is: it is a description of a voluminous record to set the groundwork for a party's legal arguments about the meaning of that record. Whether the charts themselves are more like a background section of a brief or the argument section itself is immaterial for present purposes; it is
In that light, the Court arrives at the page limitation itself. The Court's Scheduling and Procedures Order, dated July 17, 2014, established a 70-page limit for Plaintiffs' motion for summary judgment. See ECF No. 122, at 3. In that Order, the Court also stated that the "page limits identified above are similarly generous and equally firm," just as the briefing schedule set that day was generous and firm. Id. at 4. The Court also "caution[ed] the parties that any attempt to subvert these page limits by including additional briefing in appendices will be rejected, and such appendices will be stricken from the record." Id. (citing Hajjar-Nejad v. George Washington Univ., 37 F.Supp.3d 90, 114 (D.D.C. 2014)). Despite their arguments to the contrary, Plaintiffs have done precisely that. Plaintiffs submitted a memorandum of points and authorities in support of their motion for summary judgment of 70 pages. In addition, they submitted three tables — exhibits 5, 7, and 8 — that purport to summarize relevant data in the administrative record. These exhibits are properly considered portions of Plaintiffs' memorandum and, therefore, exceed the page limit.
Plaintiffs' suggestion — as a basis for submitting the separate exhibits — that they could not have effectively cited to the administrative record is immaterial. Insofar as they believe they effectively cited to the record in their charts, and then relied on these charts in their briefing, they could have simply included these charts within their briefing itself.
Having resolved these preliminary issues, the Court proceeds to consider the Secretary's arguments that this Court does not have subject matter jurisdiction over certain claims in this action.
The Secretary argues that several of Plaintiffs' claims should be dismissed for lack of subject matter jurisdiction. The Court reviews each of those arguments in turn and concludes that it has jurisdiction over the claims in this action.
First, the Secretary argues that Plaintiffs lack standing to pursue claims that rely on speculation about how hospitals — other than Plaintiffs — would behave under a different set of regulations. To satisfy the standing requirements of Article III, a plaintiff "must show (1) it has suffered an `injury in fact' that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative,
As described above, in Banner Health I, in resolving the Secretary's motion to dismiss, the Court concluded that Plaintiffs' allegations were sufficient, for the pleading stage, to establish their standing over all of the claims that survived the motion to dismiss stage.
Essentially, the Secretary's standing argument amounts to a claim that the challenged regulations were not arbitrary or capricious, or otherwise not in accordance with law, because Plaintiffs' arguments rely on predictions about actions of third parties. As the Court said previously, this argument is best considered on the merits because, even if the Secretary's arguments are correct, they would not undermine Plaintiffs' standing to bring the challenges in this action in the first instance. See id. at 108 n. 11. Notwithstanding the subsequent development of the record and of the parties' arguments, the Court's conclusion that the Plaintiffs have standing to bring the claims in this action is unchanged.
Second, the Secretary argues that this Court has no subject matter jurisdiction over Plaintiffs' claim that it was arbitrary and capricious for the agency to fail to make a mid-year adjustment to the FY 2003 fixed loss threshold because the PRRB had not approved that question for judicial review. Plaintiffs respond that the question of the propriety of a mid-year adjustment to the FY 2003 fixed loss
Under the Medicare Act, "[j]udicial review may be had only after the claim has been presented to the Secretary and administrative remedies have been exhausted." Am. Chiropractic Ass'n, Inc. v. Leavitt, 431 F.3d 812, 816 (D.C.Cir.2005). In this case, Plaintiffs presented requests for judicial review with respect to all of the payment determinations at issue in this case. The question for which Plaintiffs requested judicial review was framed broadly:
PRRB Rs. 28. Plaintiffs' request made it clear that they were challenging the 2003 rulemaking promulgating amendments to the outlier payment regulations. See id. It is that rulemaking that encompasses Plaintiffs' mid-year adjustment claim — whereby Plaintiffs argue that the decision not to lower the FY 2003 fixed loss threshold in a mid-year adjustment was arbitrary and capricious. The Secretary argues that Plaintiffs' request for judicial review does not include the mid-year adjustment claim because Plaintiffs' request included discussion of several other specific questions — not including the mid-year adjustment question — and references to several specific Federal Register pages — which did not include the pages on which the decision not to adjust the FY 2003 fixed loss threshold was explained. However, the Court does not read Plaintiffs' request so narrowly so as to exclude a challenge to the decision to refrain from a mid-year adjustment to the FY 2003 threshold.
The decision in District Hospital Partners, 794 F.Supp.2d at 162, is not to the contrary. In District Hospital Partners — another outlier case — another judge in this district concluded that the court did not have subject matter jurisdiction over the claims of the hospital-plaintiffs in that case, arguing that the agency had failed to adjust the fixed loss thresholds for FY 2004 through FY 2006, because those plaintiffs had not presented the mid-year adjustment claims to the agency, as required. See id. at 168-69. At the outset, it is important that different mid-year adjustments were challenged in the two cases: the FY 2003 threshold in this case, and the FY 2004, FY 2005, and FY 2006 thresholds in District Hospital Partners. See id. at 167. In that case, "[t]he question the Board certified was whether the `various elements used to project the outlier thresholds were arbitrary and capricious.'" Id. at 168 (citing Complaint Ex. A at 1). That court determined the plaintiffs' request did not encompass any decisions not to adjust the thresholds after the fact — which necessarily occurred after the setting of the fixed loss thresholds for the applicable years. See id. In this case, however, Plaintiffs' challenge encompassed a challenge to the validity of the 2003 regulation, which promulgated changes to the outlier payment regulations and encompassed the decision not to lower the FY 2003 fixed loss threshold after the fact. The two cases, therefore, are distinguishable. Accordingly, the Court concludes that Plaintiffs' challenge to the June 9, 2003, decision to forego a mid-year adjustment of the FY 2003 fixed loss threshold was within the scope of the questions approved by the PRRB and, therefore, that it is within the scope of this Court's subject
Furthermore, insofar as the Secretary's argument that this Court lacks subject jurisdiction is directed at "any other claims that were not properly channeled through the PRRB," that argument is unavailing as well. Def.'s Mot. at 30. Not only has the Secretary failed to identify any other claims in this action that were not presented to the PRRB, but the Court concludes, because it must assure itself of jurisdiction over the claims in this action, that each was adequately presented to the PRRB. As explained above, the legal question presented to the PRRB was framed broadly, referring to each of the revisions to the outlier payment regulations and each of the fixed loss threshold regulations at issue for the payment years in question-that is, each of the regulations challenged in this action. See PRRB Rs. at 29. Accordingly, Plaintiffs have complied with the jurisdictional requirements of the Medicare Act, and the Court has subject matter jurisdiction over each of the claims in this action.
Third, and finally, the Secretary argues that claims aimed at increasing Plaintiffs' outlier payments rather than at correcting an identifiable error would be barred by sovereign immunity. It is true that Plaintiffs cannot bring a claim under the Medicare Act, which incorporates the APA's standard of review, in order to simply increase Plaintiffs' payments that they receive from the government. However, Plaintiffs are not doing so: they have brought claims identifying what they argue are legal errors in each of the 14 rulemakings at issue in this case. That is enough to fall within the government's waiver of sovereign immunity.
Having concluded that the Court has subject matter jurisdiction over the claims in this action, the Court turns to those claims — the legal errors Plaintiffs purport to identify with respect to the 14 regulations in question — in the remainder of this Memorandum Opinion. However, before addressing the individual claims, in light of the multitude of arguments that Plaintiffs present with respect to the 14 regulations at issue in this case and the variety of arguments that the Secretary presents in response, the Court reviews several fundamental principles regarding the parameters of its review.
Essentially, Plaintiffs present two sets of challenges in this case. First, Plaintiffs argue that certain of the challenged regulations — specifically the outlier payment regulations from 1988 and 1994 and all of the fixed loss threshold regulations at issue — are at odds with the language of the Medicare Act.
Of these several framing questions, the Court first addresses Defendant's argument that Plaintiffs are barred from raising various arguments by failing to raise them in comments before the agency at the time of the various rulemakings or, at a minimum, being able to point to other parties who raised those arguments before the agency at the proper time. The Court disagrees. The Medicare Act allows judicial review of legal issues pertaining to regulations pursuant to the scheme described above: by filing timely appeals of payment determinations with the PRRB and seeking judicial review on legal issues outside the scope of the PRRB's authority. See 42 U.S.C. § 1395oo(a)(3); id. § 1395oo(f)(1). Plaintiffs have done so here. Indeed, Defendant does not contest the timeliness of Plaintiffs' challenges to the payment determinations from the relevant fiscal years. Nor does Defendant contend that a challenge to those payment determination cannot be the appropriate vehicle for challenging the regulations on which those payment determinations depend. However, Defendant argues, nonetheless, that various arguments by Plaintiffs are barred because they were never placed before the agency during the various rulemaking proceedings subject to challenge in this action. In support of this proposition, they cite to various cases that stand for the proposition that arguments must be raised before an agency before they can be raised in court. See, e.g., Nuclear Energy Inst., Inc., v. EPA, 373 F.3d 1251, 1298 (D.C.Cir. 2004). But those cases do not tell the whole story. Even where a party has waived its opportunity to pursue facial review of a regulation by failing to comment during a rulemaking proceeding,
However, this conclusion is not the end of the story. Just because Plaintiffs are not barred from raising at this time arguments that were not previously raised before the agency does not mean that they will prevail on them. Indeed, whether comments have been presented to the agency matters in applying the arbitrary and capricious standard of review. In addition to other potential bases for determining that an agency action was arbitrary or capricious, discussed further below, this Court cannot "uphold agency action if it fails to consider `significant and viable and obvious alternatives.'" Dist. Hosp. Partners, 786 F.3d at 59 (quoting Nat'l Shooting Sports Found., Inc. v. Jones, 716 F.3d 200, 215 (D.C.Cir.2013) (internal quotation marks omitted)). Determining whether comments have been presented to the agency regarding a specific challenge is thus part — but not all — of the calculus entailed in determining whether the agency has failed to consider "significant and viable and obvious alternatives." The Court will apply that standard below, as required, in resolving Plaintiffs' arbitrary and capricious claims.
One particular application of that rule is worth explaining at this point because of its general relevance to this case. Many of Plaintiffs' arguments are dependent, in some form, on the differences between the draft interim final rule sent to the Office of Management and Budget in 2003 and the subsequent rulemakings undertaken by the agency. However, the Court of Appeals has determined that Plaintiffs cannot "[r]ely[] on the OMB draft rule to impugn the 2004 rulemaking." Dist. Hosp. Partners, 786 F.3d at 58. Because "the OMB draft was never `on the books' in the first place" — that is to say, never published in the Federal Register — the Court of Appeals concluded that the agency had no obligation to explain its departure from the provisions of that internal draft. Id. That conclusion is wholly applicable here.
Furthermore, as the Court of Appeals recently clarified in District Hospital Partners, contrary to Plaintiffs' arguments here, the agency does not have an obligation to use the "best available data" above and beyond the requirements of arbitrary and capricious review. See id. at 56 (rejecting argument that Gas Appliance Manufacturers Ass'n, Inc. v. DOE, 998 F.2d 1041 (D.C.Cir.1993), "imposed a generic obligation on agencies to always use the best available data").
Next, the Court turns to the basis for its review of the various agency actions challenged here. A fundamental principle of judicial review of agency actions is that such review is based on — and limited to — the record before the agency at the time of
Here, Plaintiffs are challenging 14 discrete regulations. Only the information that was before the agency at the time of each of those individual rulemakings can be used to challenge that action. In evaluating each rulemaking, the Court must exclude all information that pertains to events after that rulemaking, including information in the administrative records for subsequent rulemakings. For example, in evaluating the FY 2004 fixed loss threshold rulemaking, anything outside of the administrative record for that rulemaking — including information in the administrative records for subsequent fixed loss threshold rulemakings — cannot be considered. The same result applies to the Court's evaluation of each of the three outlier payment rulemakings and the 11 fixed loss threshold rulemakings challenged in this action.
Furthermore, notwithstanding Plaintiffs' suggestions to the contrary, the mere fact that a subsequent rulemaking relied on a prior rulemaking does not mean that the earlier rulemaking becomes open to challenge as a result of information before the agency at the time of the subsequent rulemaking. See Biggerstaff v. FCC, 511 F.3d 178, 184 (D.C.Cir.2007) (describing reopening doctrine). Plaintiffs are correct that the issue directly before the Court of Appeals in Biggerstaff was whether the petitioners in that case were time barred from challenging an earlier agency action, which those petitioners claimed was encompassed in a later rulemaking. As Plaintiffs argue, the issue of timeliness is not before this Court because Plaintiffs' challenges to each of the 14 regulations on which the challenged payment determinations rely are timely, as explained above. However, the Court concludes that the reasoning in Biggerstaff, and the associated line of reopening cases, is equally applicable here. In Biggerstaff, the Court of Appeals concluded that, "for the court to examine the merits of his contention, [plaintiff] must demonstrate that in the [subsequent] rulemaking the Commission reopened consideration of its authority to adopt the [earlier-adopted] exemption, for otherwise his challenge is untimely." Biggerstaff, 511 F.3d at 185. The Court of Appeals also concluded that the agency's "intention to initiate a reopening must be clear from the administrative record." Id. It is sensible to apply this standard to determine whether actions taken in an earlier rulemaking can be evaluated in light of the information in front of the agency at a later date. If the agency effectively reopened an earlier rulemaking, such earlier decisions can be subject to challenge as a result of the later rulemaking. Similarly, it is sensible that decisions made earlier can be challenged based on information before the agency at the time of a later rulemaking only if the later rulemaking actually considered and adopted, anew, the results of the earlier rulemaking — and only with respect to applications
Despite Plaintiffs' suggestions that the reopening line of cases is inapposite, Plaintiffs have pointed to no authority suggesting an exception to the general rule that judicial review of an agency action is limited to the record before the agency at the time of the agency action. Accordingly, in the analysis below, the Court will evaluate the decisions made in each rulemaking by analyzing the record before the agency at the time of each of those rulemakings. Only in the limited circumstance where Plaintiffs have shown that one of the rules challenged has been reopened and adopted through a later rulemaking will the Court review the later adopted rule pursuant to the record before the agency at that later time, as well.
A final word is necessary regarding Plaintiffs' framing of their challenges. While Plaintiffs frame their Chevron arguments as a separate set of challenges, distinct from their arbitrary and capricious arguments, Chevron does not provide an independent basis for reviewing the agency's actions. See Ass'n of Private Sector Colleges & Universities, 681 F.3d at 441. Pursuant to the APA standard of review that is adopted by the Medicare Act, the Court reviews agency actions, as relevant here, to determine whether they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(a), or "in excess of statutory jurisdiction, authority, or limitations, or short of statutory right," id. § 706(2)(C).
Plaintiffs argue that the outlier payment model as a whole in effect for the fiscal years in question was inconsistent with the outlier payment provisions of the Medicare Act, 42 U.S.C. § 1395ww(5)(A). Specifically, Plaintiffs claim that the payment model was inconsistent with what they claim was the statute's mandate to reimburse only for high cost cases because, they claim, the agency actually reimbursed hospitals for high charge cases. Pls.' Mot. at 25. Defendant argues that the agency's actions were a reasonable means of implementing the statutory provisions. Defendant also argues that Plaintiffs' challenges are barred because they were not presented to the agency previously. With respect to the latter argument, the Court concludes that, for the reasons stated above, Plaintiffs may raise these arguments here even if they were not presented in comments to the agency because this is a timely challenge to the regulations as applied in outlier payment determinations challenged in this action. See Koretoff, 707 F.3d at 399 (arguments not raised before agency may be raised in timely challenge to application of rule). With respect to the former argument, the Court agrees with Defendant: each of the agency actions challenged as inconsistent with the statute entailed a reasonable, interpretation of the statute. The Court reviews Plaintiffs' arguments to the contrary here.
With respect to FY 1997 through FY 2003, the gravamen of Plaintiffs' claim appears to be that the agency made outlier payments for these years where the hospitals' actual costs were below the "cut off point," 42 U.S.C. § 1395ww(5)(A)(iii), and that such payments are barred by the language of the statute. There are several fatal flaws with Plaintiffs' argument. First, Plaintiffs persist in referring to the outlier payment regulations and the fixed loss threshold rulemakings applicable in these fiscal years as a bundle. Plaintiffs do not pinpoint explicit decisions in the nine agency rulemakings at play for this set of fiscal years — the revisions to the outlier payment regulations promulgated in 1988 and 1994, as well the fixed loss threshold rulemakings for these seven fiscal years — that are inconsistent with the requirements of the statute. As the Court has stated previously, Plaintiffs' challenges must be tethered to specific agency actions. See Banner Health I, 797 F.Supp.2d at 106. Plaintiffs' failure to do so adequately at this point would be enough, without more, to make Plaintiffs' statutory challenge fail. However, in the interest of thoroughness, the Court considers whether the underlying rulemakings are inconsistent with the statute. For the reasons stated below, the Court concludes that they are not inconsistent because the statute does not require what Plaintiffs claim it requires.
With these remarkably few words, Congress established the framework for the outlier payment scheme, leaving the details to be fleshed out by the agency. Cf. Cnty. of L.A., 192 F.3d at 1016 ("Where, as here, Congress enacts an ambiguous provision within a statute entrusted to the agency's expertise, it has `implicitly delegated to the agency the power to fill those gaps.'") (quoting National Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563, 1569 (D.C.Cir.1987)). Specifically, the statute establishes the framework for determining both when outlier payments should be made and what amounts those payments should be. But the details necessary to implement the statutory framework and to fulfill the statutory mandate are left to the agency.
Plaintiffs argue that the agency wrongly based outlier payments on cases with high charges rather than high costs. See, e.g., Pls.' Mot. at 25. However, notwithstanding Plaintiffs' cut-and-paste citations of the statute, they ignore key language in the relevant statutory provision. The statute specifies that outlier payments are available where "charges, adjusted to cost" exceed the cutoff point. 42 U.S.C. § 1395ww(5)(A)(ii). In other words, the statute requires the agency to make the determination of when an outlier payment should be made based on "charges, adjusted to cost," not based on hospital costs in the abstract. The statute does not specify how to adjust charges to cost, but the statute clearly requires the agency take charges and adjust them to cost, in some manner, in order to make that determination.
None of these conclusions are inconsistent with the statute. The statute plainly indicates that charges adjusted to cost should be used to determine whether an outlier payment is applicable for an individual case. See 42 U.S.C. § 1395ww(5)(A)(ii). The statute is just as plainly ambiguous regarding the method of adjusting charges to cost. Because the statute is ambiguous, the Court "defers to the agency's interpretation as long as it is based on a permissible construction of the statute." Chevron, 467 U.S. at 843, 104 S.Ct. 2778. "The question for a reviewing court is whether in doing so the agency has acted reasonably and thus has `stayed within the bounds of its statutory authority.'" Natural Res. Def. Council v. EPA, 777 F.3d 456, 463 (D.C.Cir.2014) (quoting City of Arlington v. FCC, ___ U.S. ___, 133 S.Ct. 1863, 1868, ___ L.Ed.2d ___ (2013)). The Court concludes that each decision in the 1988 regulation regarding the adjustment of charges to cost was reasonable.
The agency's decision to adjust charges to cost by looking at hospital-specific data was reasonable. See 53 Fed.Reg. at 38,503 (describing conclusion that "use of hospital-specific cost-to-charge ratios should greatly enhance the accuracy with which outlier cases are identified and outlier payments are computed, since there is wide variation among hospitals in these cost-to-charge ratios"). So, too, was the agency's decision to adjust charges to cost using historic cost-to-charge ratios that are based on the latest settled cost reports. See 53 Fed.Reg. at 38,507 (explaining decision to use this dataset). As explained further below, just because the agency later concluded — in 2003 — that using somewhat more recent data (the tentatively settled cost reports) was more sensible in light of the agency's experience does not make the earlier decision to use settled cost reports unreasonable. See 68 Fed. Reg. at 34,497-99. Similarly, the agency's decision to use statewide average data for hospitals with extremely high or low cost-to-charge ratios was also reasonable. See 53 Fed.Reg. at 38,507-08 (explaining agency's assessment that "that ratios falling outside this range are unreasonable and are probably due to faulty data reporting or entry"). Just because the agency later concluded — in 2003 — that it would be more sensible in light of the agency's experience to use hospital-specific charge ratios for hospitals with low cost-to-charge ratios rather than statewide averages, see 68
The same considerations apply with respect to the "amount of such additional payment" under section 1395ww(5)(A)(iii). The statute requires that that amount "approximate the marginal cost of care beyond the cutoff point applicable under clause (i) or clause (ii)." 42 U.S.C. § 1395ww(5)(A)(iii). In a 1983 regulation not challenged in this action, the agency determined that the amount of a cost outlier payment would be determined by applying a marginal cost factor to the difference between charges, adjusted to cost, and the applicable threshold.
It is important that this clause requiring that the "amount of such additional payment... shall approximate the marginal cost of care beyond the cutoff point applicable" is applicable both to day outliers and to cost outliers. 42 U.S.C. § 1395ww(5)(A)(iii). The language of this clause is necessarily capacious enough to accommodate both forms of outliers.
In District Hospital Partners, the D.C. Circuit Court of Appeals used an example to explain how outlier payments were generated for FY 2004 through FY 2006 and to explain the relationship among fixed loss thresholds, cost-adjusted charges, and outlier payments for those fiscal years. 786 F.3d at 50-51 (citing 62 Fed.Reg. at 45,997). Similarly, an example may be helpful in explaining the relationship between the determination whether a specific case qualifies for an outlier payment and the determination of the amount of any such outlier payment — with respect to the years at issue in this action.
Turning to the 1994 rulemaking, only a brief discussion is necessary. In 1993, Congress introduced the fixed loss threshold as the method of determining the applicable cutoff point used to determine whether an outlier payment is available for
Finally, the Court turns to the seven fixed loss threshold rulemakings for FY 1997 through FY 2003 — when the 1988 and 1994 regulations were operative. Critically, each of those rulemakings took the formula for outlier payments established by the applicable outlier payment regulations — as amended in 1988 and then in 1994 — as a given. For each year, taking those formulas as given, the agency calculated a fixed loss threshold that was predicted to generate outlier payments that would be 5.1 percent of total DRG-based payments. See 61 Fed.Reg. at 46,228 (FY 1997 rulemaking); 62 Fed.Reg. at 46,040 (FY 1998 rulemaking); 63 Fed.Reg. at 41,008 (FY 1999 rulemaking); 64 Fed. Reg. at 41,546 (FY 2000 rulemaking); 65 Fed.Reg. at 47,113 (FY 2001 rulemaking); 66 Fed.Reg. at 39,941 (FY 2002 rulemaking); 67 Fed.Reg. at 50,124 (FY 2003 rulemaking). This approach was approved by the D.C. Circuit Court of Appeals in County of Los Angeles, 192 F.3d at 1013. The agency is not required to adjust the fixed loss thresholds in retrospect to ensure that actual outlier payments are between 5 and 6 percent of actual DRG-based payments. Id. The agency is only required to select threshold that "when tested against historical data, will likely produce aggregate out-lier payments totaling between five and six percent of projected ... DRG-related payments." Id. Although the D.C. Circuit did not address this particular issue in County of Los Angeles, it is plainly reasonable to use the then-applicable formula for generating outlier payments, which would be used to calculate the actual outlier payments for these several fiscal years, to determine the fixed loss threshold for those years.
Plaintiffs argue that outlier payments during FY 2003, in particular, were inconsistent with the statute because the agency was aware of "turbo-charging" practices by certain hospitals. See Pls.' Mot. at 30. The only evidence of this
In sum, for the fiscal years between 1997 and 2003, the agency made outlier payments based on the methodology established by the then-applicable outlier payment regulations, revised in both 1988 and 1994; pursuant to that methodology, the fixed loss threshold chosen in an annual fixed loss threshold rulemaking was a key input in determining the actual outlier payments. As described above, each of those regulations is consistent with the statute. Plaintiffs have identified no other ways in which the outlier payments for these years were inconsistent with the statute. With respect to these seven fiscal years, Plaintiffs' arguments amount to a claim that the agency ultimately ended up making outlier payments to hospitals that had high charges rather than hospitals that had high costs. As regrettable as that result may be, insofar as it is true, that result does not show that the agency actions challenged here were incompatible with the statute.
Next, Plaintiffs make a cursory argument that the agency violated the statute's requirement that outlier payments "shall ... approximate the marginal cost of care beyond the cutoff point applicable," 42 U.S.C. § 1395ww(5)(A)(iii), by failing to conduct reconciliation or to account for reconciliation in setting the fixed
Just as reconciliation itself is not mandated by the statute, neither does the statute mandate that the agency account for reconciliation in setting the annual fixed loss threshold. Because reconciliation became simply an option rather than a requirement, it would be irrational to conclude that the statute actually required the agency to account for reconciliation explicitly in calculating the fixed loss threshold. In addition, Plaintiffs wholly ignore the fact that, for FY 2004, the agency considered the impact of reconciliation in setting the fixed loss threshold. See 68 F. at 45,476-77. The agency's methodology for that fiscal year integrated its estimate that reconciliation would occur for approximately 50 hospitals — based on past hospital behavior and based on the resources that would be available for reconciliation. Id. For FY 2005 through FY 2007, the agency reasonably concluded that, given other changes introduced by the 2003 revisions to the outlier payment regulations and given uncertainty regarding future behavior, considering reconciliation in setting the fixed loss threshold was not warranted. See 69 Fed.Reg. at 49,278 (FY 2005 rulemaking); 70 Fed.Reg. at 47,495 (FY 2006 rulemaking); 71 Fed.Reg. at 48,151 (FY 2007 rulemaking). In sum, the agency's failure to reconcile and its failure to explicitly account for reconciliation in fixed loss rule rulemakings for these years do not make those rulemakings — or the outlier payments calculated pursuant to them — inconsistent with the statute.
With respect to the fixed loss threshold rulemakings for FY 2004 through FY 2006,
The Court notes that Plaintiffs repeat this claim in their argument that each of these three fixed loss threshold rulemakings were arbitrary and capricious. The Court fully addresses the agency's responses to proposed alternatives regarding the adjustment of cost-to-charge ratios in discussing Plaintiffs' arguments that these fixed loss threshold rulemakings were arbitrary and capricious. But in evaluating the consistency of these three annual rulemakings with the statute, it is important that the agency thoroughly explained why it chose not to adjust the methodology to account for any declines in cost-to-charge ratios:
69 Fed.Reg. at 49,277. With respect to FY 2005, the agency concluded that other changes to the outlier payment regulations and to the fixed loss threshold methodology adequately accounted for the decline in cost-to-charge ratios such that an additional adjustment of the cost-to-charge ratios was not necessary. As explained below, the agency adequately explained similar choices for FY 2004 and FY 2006. See 68 Fed.Reg. at 45,476-77; 70 Fed.Reg. at 47,495. Moreover, it is proper to "`defer to the agency's decision on how to balance the cost and complexity of a more elaborate model against the oversimplification of a simpler model,'" West Virginia v. EPA, 362 F.3d 861, 868 (D.C.Cir.2004) (quoting Small Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506, 535 (D.C.Cir.1983)). Therefore, the Court will defer to the agency's choice to use actual historical data for the cost-to-charge ratios rather than to add an unknown adjustment factor. See Disp. Hosp. Partners, 973 F.Supp.2d at 16. The Court concludes that the agency's decision to use the actual cost-to-charge ratios in order to set the FY 2004 through FY 2006 fixed loss thresholds, rather than adjusting those ratios to account for possible continued declines, was reasonable. Accordingly, in these rulemakings, the agency has fulfilled the requirement that it set "outlier thresholds that, `when tested against historical data, will likely produce aggregate outlier payments totaling between five and six percent of projected ... DRG-related payments.'" Dist. Hosp. Partners, 786 F.3d
In sum, the Court concludes that each of Plaintiffs' statutory arguments fails because the regulations challenged are consistent with the requirements of the Medicare Act. Each regulation promulgated by the agency represents a reasonable interpretation of the outlier provisions of the Medicare Act. Therefore, the outlier payments determined pursuant to these regulations are necessarily consistent with the statute, as well. The Court now turns to Plaintiffs' arguments that the regulations challenged here were arbitrary and capricious.
In addition to Plaintiffs' claim that the several agency actions challenged here are inconsistent with the statute, Plaintiffs argue that each of the regulations challenged here — the revisions to the outlier payment regulations and the annual fixed loss threshold rulemakings — were arbitrary and capricious.
Plaintiffs present three challenges to what they call the "Outlier Payment Model." As explained above, the outlier payment regulations — amended in 1988, 1994, and 2003 — establish the methodology for the determination of annual payments. Plaintiffs challenge two features of the out-lier payment regulations that were introduced in 1988 and then eliminated in revisions to the outlier payment regulations in 2003. First, they challenge the use of "older" data — that is, the use of the latest settled cost reports — to establish the hospital-specific cost-to-charge ratios, which are used to adjust charges to cost.
In 1988, the agency concluded that, because cost-to-charge ratios differed among hospitals, it would be preferable to use hospital-specific cost-to-charge ratios rather than a single nationwide estimate,
The agency's choice to use the latest settled cost reports was codified in amendments to the regulations governing outlier payments. 53 Fed.Reg. at 38,529 (codified at 42 C.F.R. § 412.84(h) ("The cost-to-charge ratio used to adjust covered charges is computed annually by the intermediary for each hospital based on the latest available settled cost report for that hospital and charge data for the same time period as that covered by the cost report."). The agency did not revisit this choice until 2003, when the agency ultimately decided to made a different choice — using the latest tentatively settled cost reports (when they were more recently updated than the settled cost reports). See 68 Fed.Reg. at 34,497-99. Plaintiffs challenge only the earlier choice, and, as stated above, this Court's review is limited to the record before the agency in 1988. Nothing that occurred later or that was presented to the agency later — even if it ultimately convinced the agency to make a different policy choice — can be ammunition for challenging the 1988 decision to use the latest settled cost reports. In that light, the Court reviews Plaintiffs' several arguments in support of their claim that this decision was arbitrary and capricious.
Plaintiffs claim that the agency ignored the warning of commenters that using settled cost report data — rather than more recent data — would introduce inaccuracies into the calculation of outlier payments. See AR (1988 Rulemaking) 7156, 7387. However, the agency responded to this concern, acknowledging that settled cost reports did not represent the most recent data but explaining that the agency "found that Medicare costs are generally overstated on the filed cost report and are subsequently reduced as a result of audit." 53 Fed.Reg. at 38,503. Therefore, the agency chose the older-but-audited data instead of the most recent raw data. See id.
Plaintiffs next argue that, in choosing to use the settled cost reports, the agency disregarded comments indicating that charges were rising faster than costs.
Plaintiffs also argue that the choice to use settled cost reports was unreasonable because, even using settled cost reports, the agency's calculation would necessarily involve unaudited data. Plaintiffs point out that calculating outlier payments involves adjusting current charges, which are unaudited, by a ratio that is calculated from historic cost data, which has been audited, and historic charge data, which has not been audited. Accordingly, Plaintiffs argue that it was irrational to choose older data, which includes audited cost data, at the expense of the timeliness of the data, when they would nonetheless be using some unaudited data. The Court first notes that the Secretary had no need to respond to this concern because Plaintiffs do not point to anything in the record suggesting that this concern was before the agency at the time of the 1988 rulemaking. Moreover, as the Secretary argues, it was not irrational to use a data source that included some audited data and some unaudited data. In particular, the agency emphasized the importance of using the audited cost data in light of its finding "that Medicare costs are generally overstated on the filed cost report and are subsequently reduced as a result of audit." 53 Fed.Reg. at 38,503. Accordingly, it was reasonable to choose to use an older data source on account of the fact that it included audited cost data even while the charge data used was not audited.
Next, Plaintiffs argue that the agency disregarded its own previous statements — in years prior to adopting the hospital-specific cost-to-charge ratio methodology — that "using hospital-specific [cost-to-charge ratios] came with the risks of introducing data with poor predictive value." Pls.' Mot. at 42. However, the several statements that Plaintiffs cite do not show that the agency's 1988 decision was arbitrary or capricious.
The first set of statements that Plaintiffs identify is a pair of statements in the 1986 rulemaking, in which the agency declined to shift from using a national cost-to-charge ratio to using hospital-specific cost-to-charge ratios, as a commenter had then suggested. See 51 Fed.Reg. 31,454, 31,526 (1986). First, the agency noted that "[t]he use of hospital-specific cost-to-charge ratios to compute outlier payments would require that they be frequently revised to account for changes in the mix and scope of services provided." Id. This statement reflects the (undisputed) additional administrative burden entailed by calculating hospital-specific ratios. Notwithstanding the administrative burden associated with the methodology, in 1988, the agency ultimately chose to adopt hospital-specific cost-to-charge ratios because it concluded that they would be more accurate than a single nationwide ratio. See 53 Fed.Reg. at 38,503. The agency's 1986 statement does not reveal anything arbitrary or capricious about the 1988 decision.
The second statement that Plaintiffs identify is a statement in the 1987 rulemaking in which the agency explained why it decided once again not to adopt hospital-specific cost-to-charge ratios at that time. It is important to set this decision in its context. The decision not to adopt hospital-specific cost-to-charge ratios in 1987 was part of a larger decision to delay broader changes to the outlier program, which would have shifted the emphasis from day outliers (patients with extremely long stays in the hospital) to cost outliers (extremely high cost cases), until the agency could complete its analysis of the relevant factors. See 52 Fed.Reg. at 33,04748. The agency described its reasoning as follows:
52 Fed.Reg. at 33,048. In part, the agency was highlighting an administrative and technical problem regarding transitioning to a new system. Just as with the administrative burdens highlighted in the 1986 rulemaking, these administrative and technical details were not simply brushed aside in the 1988 rulemaking; rather, the agency concluded that the administrative burden was worthwhile and decided that it was necessary to overcome the technical difficulties entailed in the transition. The agency also identified a specific challenge with using hospital-specific data: that the ratios used in setting the thresholds for outlier payments, in advance, would not be the same as those used to calculate the actual outlier payments. Id. In retrospect, there is no doubt this phenomenon has been a challenge for the agency, and the agency ultimately changed several policy choices in 2003 in light of its experience over the past three decades. However, in deciding to use hospital-specific ratios in 1988, the agency adequately addressed the issue it has raised the previous year. The agency did not conclude that using the settled cost reports would be a perfect solution, but as described above, the agency reasonably concluded that it would be better than the available alternatives. See 53 Fed.Reg. at 38,503; cf. Dist. Hosp. Partners, 786 F.3d at 59 (agency must address "significant and viable and obvious alternatives").
The third statement that Plaintiffs identify is a statement in the 1988 rulemaking promulgating changes to the outlier payment regulations, which Plaintiffs claim shows that the agency did not adequately address problems with the decision to use hospital-specific cost-to-charge ratios. See Pls.' Mot. at 42-43 (citing 53 Fed.Reg. at 38,509). Because Plaintiffs' claim regarding this statement extracts it from its essential
53 Fed.Reg. at 38,510. Most importantly, in this response, the agency appears to be responding to a comment regarding a major shift to the outlier payment regime introduced in 1988 that is not challenged in this action: a shift from a system focused on day outliers (extremely lengthy stays) to cost outliers (extremely costly cases). The agency appears to be responding to a comment that suggests that a shift to cost outliers would encourage system participants to manipulate the system to increase their own payments — undermining a core purpose of shifting to the Prospective Payment System in 1983 in the first place. In essence, in response, the agency (1) acknowledges why the changes could allow participants to manipulate the system, (2) explains why the agency believed that such manipulation was less likely than it appeared, and (3) emphasized that there were incentives to manipulate both a day outlier and a cost outlier system, such that manipulation per se was not a reason to refrain from shifting from a focus on day outliers to a focus on cost outliers. The Court concludes that the agency sufficiently responded to the issues presented and explained its decision to, as relevant here, adopt an approach using hospital-specific
One final point is worth emphasizing with respect to this excerpt from the 1988 rulemaking. As the Court has reiterated before, judicial review of the 1988 regulation requires using the judicial time machine and focusing on the record before the agency in 1988. Plaintiffs interpret this comment as if the statement in the 1988 Federal Register about potential manipulation referred to a small set of hospitals that could manipulate the system by raising charges. However, that interpretation appears infected by hindsight. While the agency discovered in 2003 that a small set of 123 hospitals had manipulated outlier payments by increasing charges-hospitals that became known as "turbo-chargers," see Dist. Hosp. Partners, 786 F.3d at 51 — there is no indication that the agency, in 1988, was referring to a subset of bad actor hospitals. Instead, it appears equally possible — if not likely — that the agency was referring to the possibility that the new system would incentivize hospitals, as a whole, to increase their charges. Indeed, that would be consistent with the problem that Congress attempted to solve just five years beforehand in introducing the Prospective Payment System — the incentives in a cost-based system to encourage hospitals generally to increase their costs in order to increase their payments. See Cnty. of Los Angeles, 192 F.3d at 1008. Particularly in light of this possibility, the agency rationally explained how it understood that increases in charges would be mitigated and why, under this understanding, it chose to shift towards an approach focusing on cost outliers, including the use of hospital-specific cost-to-charge ratios, rather than on day outliers.
Finally, in addition to pointing to comments by the agency that Plaintiffs' claim are inconsistent with the use of settled cost reports, Plaintiffs argue that the agency could have made outlier payments subject to adjustment after cost reports for the applicable payment period were finally settled — a process that the agency adopted in 2003 under the label reconciliation. However, once again, Plaintiffs point to nothing in the record that shows that this possibility was before the agency in 1988. Because Plaintiffs have not shown that this proposal was a "significant and viable and obvious alternative[]" at the time of the 1988 rulemaking, this claim fails. Nat'l Shooting Sports Found., Inc. v. Jones, 716 F.3d at 215.
In sum, the agency's decision to use hospital-specific cost-to-charge ratios based on the latest settled cost reports was neither arbitrary nor capricious. The agency rationally concluded that this choice was the best among the "significant and viable and obvious alternatives" and sufficiently explained its decision to do so.
Plaintiffs argue that it was arbitrary and capricious to use statewide average cost-to-charge ratios for hospitals where their individual cost-to-charge ratios were extremely low. As a reminder, when the agency instituted the use of hospital-specific cost-to-charge ratios in 1988, it concluded that "Statewide cost-to-charge ratios [would be] used in those instances in which a hospital's cost-to-charge ratio falls outside reasonable parameters."
In the 1988 rulemaking, the agency determined that "[t]he range of reasonable cost-to-charge ratios represents 3.0 standard deviations (plus or minus) from the mean of the log distribution of cost-to-charge ratios for all hospitals." Id. at 38,503. The agency also calculated the upper and lower boundaries for cost-to-charge ratios. Id. The agency explained its reasoning:
53 Fed.Reg. at 38,507-08. This explanation was reasonable.
Once again, the fact that the agency later came to the conclusion that the use of statewide cost-to-charge ratios allowed "turbo-chargers" to reap benefits from increasing charges does not mean that the decision was arbitrary or capricious when made in 1988. Plaintiffs can point to nothing that suggests that this decision was arbitrary and capricious when the regulation was promulgated. Plaintiffs point only to a comment submitted in the context of the 1994 rulemaking, claiming that the use of statewide ratios for hospitals with extremely low costs created an incentive to inflate charges. See 59 Fed.Reg. at 45,407-08. While that concern ultimately appears prescient, a comment raised in 1994 cannot be used, after the fact, to challenge the regulation promulgated in 1988. In the 1994 rulemaking, the agency promulgated changes to the outlier payment regulations to comply with the changes to the Medicare Act that Congress had recently enacted. However, the agency never considered whether to eliminate the use of statewide averages in that rulemaking. See 59 Fed.Reg. 27,708, 27,737-69 (May 27, 1994). As explained before, just because the agency received and responded to comments outside of the scope of the rulemaking does not expand the scope of that rulemaking. See Biggerstaff, 511 F.3d at 186. In addition, insofar as the comment was presented in the context of setting the rates for FY 1995, including the "reasonable parameters" outside of which statewide ratios would be used, Plaintiffs have not challenged any payment determinations from FY 1995 in this action. Moreover, Plaintiffs do not show any way in which decisions made specifically for FY 1995 infect subsequent fixed loss threshold rulemakings. Therefore, they are not relevant to Plaintiffs' challenges to payment determinations in subsequent fiscal years. In any event, the agency provided an adequate response to the comment on which Plaintiffs rely. The agency stated that it did "not believe hospitals are setting their charges just to manipulate their cost-to-charge ratios." 59 Fed.Reg. at 45,408. The agency further explained its reasoning, explaining that "contrary to the commenter's contention, the incentives a hospital would have to maximize outlier payments, if any, would be to lower charges in order to increase its cost-to-charge ratio." Id. While Plaintiffs claim that the logic behind this explanation is faulty, the Court would conclude — even if this comment were relevant to proceedings at issue in this case — that it was an adequate response to the issue raised, particularly given the agency's expertise in implementing the complex statutory scheme with which the agency is entrusted. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C.Cir.1994) ("[I]n framing the scope of
Plaintiffs also argue that the agency did not implement the statewide cost-to-charge ratio policy correctly. The Secretary responds that Plaintiffs incorrectly understand the record and argue that the agency did not commit the alleged errors. The Court agrees with the Secretary.
First, Plaintiffs argue that the agency improperly used the statewide ratios from prior years in calculating the fixed loss thresholds. Plaintiffs state that the Impact Files that the agency used to calculate the fixed loss thresholds include the statewide ratio from a prior year for certain hospitals. The Secretary acknowledges that the Impact Files include prior-year statewide averages. However, she explains that, during the process of calculating the fixed loss threshold, updated statewide averages were calculated and used in setting the fixed loss threshold. While the administrative record does not include the computer programs used to perform the calculations, the Court has no basis to doubt the Secretary's representation. Moreover, the agency adequately described the sources of the data for the model in the challenged rulemakings. For example, the agency explained that to calculate FY 2003 fixed loss threshold, it "simulated payments by applying FY 2003 rates and policies to the March 2002 update of the FY 2001 MedPAR file and the March 2002 update of the Provider-Specific File." 67 Fed.Reg. at 50,122. The agency further explained that, for hospitals where the hospital-specific cost-to-charge ratio was more than 3.0 standard deviations above or below the mean of the log distribution of cost-to-charge ratios for all hospitals, the agency used the statewide average cost-to-charge ratios found in Tables 8A and 8B of the rulemaking. Id. at 50,125. In the FY 2002 rulemaking, as with the other annual rulemakings, the agency used input from the several sources enumerated here to calculate the fixed loss threshold and to calculate the statewide averages, all of which were promulgated in that rulemaking. See id. at 50,122, 50,263 (promulgating Tables 8A and 8B for FY 2002). This fact is consistent with the agency's explanation in its briefing that the agency calculated the statewide averages in the course of the modeling that generated the fixed loss threshold and then used these revised averages in generating the fixed loss threshold. The agency need not have done any more.
Second, Plaintiffs claim that, for certain hospitals, the agency used the statewide averages themselves, instead of the hospital-specific cost-to-charge ratios, to compute the statewide averages. The agency once again responds that this is incorrect. Plaintiffs do not point to any support in the record for this claim. They point only to a document in the record showing those facilities that defaulted to the statewide cost-to-charge ratios, A.R. (2003 amendments) 4417.332, and to the list of statewide ratios for the FY 2003 rulemaking, A.R. (FY 2003) 4819.001. Once again, the Court has no reason to disbelieve the agency's representation that it did not use statewide averages to calculate those averages themselves.
In sum, while the agency ultimately decided to change the features of the outlier payment scheme that Plaintiffs challenge here — the use of settled cost reports and the use of statewide averages for hospitals with low cost-to-charge ratios — the agency's decision to implement these features in the first instance was neither arbitrary
Plaintiffs present two groups of challenges to the six fixed loss thresholds for FY 1998 through 2003. First, they claim that, for these fiscal years, the agency kept increasing the fixed loss threshold despite evidence that the model "had no rational relationship to the real world." Pls.' Mot. at 47. Second, Plaintiffs claim that the agency wrongly used "fudge factors" for FY 2001 through FY 2003. Neither arguments succeeds. Before addressing these two claims, the Court notes that, notwithstanding Plaintiffs' claim that they are challenging each fixed loss threshold rulemaking from FY 1997 through FY 2003, they have clarified that they "do not claim underpayments with respect to the FY 1997 [fixed loss threshold]." Pls.' Mot. 48 n.38. Because they are not claiming underpayments for that fiscal year, the Court does not understand Plaintiffs to be arguing that the FY 1997 fixed loss threshold rulemaking was arbitrary or capricious. In any event, Plaintiffs would have no basis to do so because they are not challenging any payment determinations for that year.
In presenting their claim that the agency continued to increase the fixed loss threshold between FY 1997 and FY 2003 despite evidence that the "model had no rational relationship to the real world," id., Plaintiffs have failed to heed the Court's instruction — and the fundamental principle of judicial review of agency action — that their challenges must be directed at discrete agency actions and that they must be based on the administrative record before the agency at the time of the respective actions. Plaintiffs tell a story of continually increasing fixed loss threshold in the face of contradictory data, but do not show how any of these seven rulemakings were arbitrary and capricious based on the record before the agency at the time of the rulemaking.
First, Plaintiffs emphasize how the agency kept missing its target for out-lier payments despite the increasing fixed loss thresholds. Plaintiffs are correct that, for several years, the agency increased the fixed loss threshold, but nonetheless the outlier payments for that year exceeded the 5.1 percent estimate.
First, Plaintiffs claim that it should have been obvious to the agency that the increase in outlier payments was caused by increases in charges. As the basis for this argument, Plaintiffs rely on the following syllogism. The agency was aware that charges were rising faster than costs, and thus that cost-to-charge ratios were (necessarily) declining. The agency had previously explained that using a cost-inflation methodology automatically accounted for changes in the cost-to-charge ratios "since the relevant variable is the costs estimated for a given case." 59 Fed.Reg. at 45,407. Therefore, Plaintiffs say, it should have been obvious that the actual increase in outlier payments "was attributable to the principal remaining variable: hospital charges." Pls.' Mot. at 50-51. The Court disagrees. Under this complex statutory and regulatory scheme, the Court would not conclude that the source of the increases was so obvious such that the agency was under an obligation to address it sua sponte, without being prompted by a public comment. Yet, despite Plaintiffs' claim that the agency did not address the problem "[d]espite warnings," Plaintiffs do not point to any place in the record where such warnings were made with respect to the relevant fiscal years. Pls.' Mot. at 51.
Second, Plaintiffs claim that there was evidence that the model was producing irrational results because several hospitals were projected to receive outlier payments that would be a high percentage of the DRG-based payments. This argument fails for several reasons. Most fundamentally, Plaintiffs cannot point to anywhere in the record where this phenomenon was brought to the attention of the agency. Simply because the agency possessed data that could reveal this phenomenon does not mean that the agency had an obligation to change its methodology or to explain why it did not do so. In addition, Plaintiffs do not even attempt to explain how they generated the calculations on which they rely for this argument.
Third, Plaintiffs claim that the agency asserted, "in total contradiction of the record, that there was no evidence of any
In sum, Plaintiffs have failed to show that any of the fixed loss threshold rulemakings from FY 1997 to FY 2003 were arbitrary or capricious because of the purported trend of escalating fixed loss thresholds combined with outlier payments that continued to exceed the agency's projections.
Plaintiffs claim that the agency used unexplained "fudge factors" in setting the fixed loss thresholds for FY 2001 through FY 2003. The Court disagrees.
Plaintiffs first claim that the agency used an unexplained "fudge factor" in setting the FY 2001 fixed loss threshold. This is simply at odds with the record. As the agency recounted in finalizing the FY 2001 fixed loss threshold, the agency had used a cost inflation factor of negative 1.724 percent in projecting the costs for FY 1999, and the agency had used a zero inflation factor in projecting the costs for FY 2000. See 65 Fed.Reg. at 47,113. For FY 2001, the agency had proposed an inflation factor of 1.0 percent, but ultimately decided that a factor of 1.8 percent was proper. See id. The agency explained the reasoning for using this inflation factor: "This factor reflects our analysis of the best available cost report data as well as calculations (using the best available data) indicating that the percentage of actual outlier payments for FY 1999 is higher than we projected before the beginning of FY 1999, and that the percentage of actual outlier payments for FY 2000 will likely be higher than we projected before the beginning of FY 2000." Id. In other words, the agency explained why it used the higher inflation factor in light of its experience in previous years. This is neither arbitrary nor capricious. The agency explained why it used this factor, and it need not explain in any further detail exactly how its analysis of the underlying data generated the 1.8 percent figure. See Tex. Mun. Power v. EPA, 89 F.3d 858, 869-70 (D.C.Cir.1996) ("And though the EPA did not explain its precise method for calculating a rate based on a statewide average that was used in this case until after the close of general proceedings before the agency, the failure of an agency to identify every detail of a process before it is used does not automatically require judicial interference in matters that must be thought to lie within the agency's expertise.").
Finally, with respect to this set of years, Plaintiffs argue that the decision in the FY 2003 fixed loss threshold rulemaking to switch from cost inflation to charge inflation was arbitrary and capricious. Plaintiffs primarily rely on the agency's prior decision, in 1994, to switch from charge inflation to cost inflation. Neither choice was arbitrary or capricious. To explain why, it is necessary to explain briefly the differences in the two methodologies. Under the charge inflation methodology, which the agency introduced for FY 2003, the agency calculated a measure of past charge inflation based on historical data and used this measure to inflate past charges in order to generate a dataset of projected charges for the fiscal year in question; the agency then adjusted these charges to projected future costs using cost-to-charge ratios. See 70 Fed.Reg. at 47,495. By contrast, under the cost inflation methodology, which was used for FY 1994 through FY 2002, the agency adjusted past charges by cost-to-charge ratios to estimate past costs, and then used a cost inflation factor derived from historical data to inflate the estimated costs and generate projected future costs. See 58 Fed.Reg. at 46,347. Under either methodology, the agency ultimately used the projected future costs to simulate outlier payments for the fiscal year in question.
In 1994, the agency determined that it was best to switch from a charge inflation methodology to a cost inflation methodology. 58 Fed.Reg. at 46,347. The agency reasoned:
Id. Plaintiffs do not challenge this choice. Almost ten years later, the agency determined that, in light of the agency's experience, it would be preferable to make the opposite choice and use a charge inflation methodology. See 67 Fed.Reg. at 50,124. The agency explained its decision:
Id. In short, even though the agency was trying to resolve challenges in accounting for cost and charge inflation at both junctures, neither approach was arbitrary or capricious. The agency adequately explained its decision in both circumstances, and the agency's hands were not tied in 2002 simply because it had previously decided to switch from charge inflation to cost inflation. See Fox Television Stations, 556 U.S. at 515, 129 S.Ct. 1800 ("But [an agency] need not demonstrate to a court's satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates."). Accordingly, the agency's decision to adopt a charge inflation methodology in 2003 was neither arbitrary nor capricious.
In sum, none of Plaintiffs' challenges to the fixed loss threshold rulemakings from FY 1997 through FY 2003 are successful. Plaintiffs have not shown, based on the record, that any of those rulemakings were arbitrary or capricious.
As described above, in 2003, the agency promulgated several changes to the outlier payment regulations to address problems that had been discovered regarding the outlier payment program. In short, the agency introduced three changes: (1) more recent data would be used to derive the cost-to-charge ratios (specifically, tentatively settled cost reports would be used when they were more recent than settled cost reports), (2) the agency would no longer use statewide cost-to-charge ratios for hospitals with extremely low cost-to-charge ratios, and (3) outlier payments would become subject to adjustment, in an after-the-fact reconciliation process, when the actual cost-to-charge ratios deviated substantially from the ratios used to make the outlier payments. See 68 Fed.Reg. at 34,497-503. These changes were in effect for FY 2004 and beyond.
Plaintiffs raise three general arguments with respect to these four rulemakings. First, they claim that, because the charge data on which these rulemakings were based was from the "turbo-charging" era, the agency should have adjusted the data in setting the fixed loss thresholds. Pls.' Mot. at 55. Second, Plaintiffs argue that, even with the use of more recent data to derive the cost-to-charge ratios (from tentatively settled cost reports), because of the lag between the setting of the fixed loss threshold and the calculation of actual outlier payments, the agency should have adjusted the cost-to-charge ratios to account for continuing declines in those ratios. Id. at 55-56. Third, Plaintiffs argue that the fixed loss threshold for each of these years was flawed because the agency failed to account for reconciliation. Id. at 56. Because each of these arguments applies differently to the four fixed loss threshold rulemakings during this period, it is necessary to evaluate Plaintiffs' specific arguments directed at each of the annual rulemakings in light of the data before the agency at the relevant times. Before doing so, it is necessary to resolve one preliminary issue. Several of Plaintiffs' challenges are based on the draft interim final rule that was sent to the Office of Management and Budget in 2003. See id. at 56-57. However, the Court of Appeals confirmed that the draft rule cannot be used to challenge any agency rulemakings because it was never published in the Federal Register. See Dist. Hosp. Partners, 786 F.3d at 58. Accordingly, insofar as Plaintiffs' challenges are based on the draft interim final rule, they cannot succeed. With this in mind, the Court first addresses Plaintiffs' challenge to the agency's decision not to undertake a mid-year adjustment to the FY 2003 fixed loss threshold and then addresses, in turn, Plaintiffs' specific challenges to the fixed loss threshold rulemakings for FY 2004 through FY 2007.
In the agency's 2003 rulemaking promulgating changes to the outlier payment regulations, the agency responded to comments suggesting that the agency make a mid-year adjustment to the FY 2003 fixed loss threshold and explained why it decided not to make such an adjustment. 68 Fed.Reg. at 34,505. Plaintiffs now argue that it was arbitrary and capricious for the agency to decline to make such a mid-year adjustment.
Plaintiffs' arguments are largely based on the draft interim final rule that the agency transmitted to the Office of Management and Budget in February 2003. See AR (2003 amendments) 4417.338. However, the agency abandoned the plan to promulgate an interim final rule and never published such a rule in the Federal Register. Accordingly, the agency had no obligation to explain its departure from
Nonetheless, in response to public comments the agency received, the agency considered the appropriateness of a mid-year adjustment. To determine whether an adjustment was appropriate, the agency re-estimated the fixed loss threshold for FY 2003 using the more recent data then available — FY 2002 data rather than data from earlier fiscal years — and taking into account the fact that some of the changes to the outlier payment regulations promulgated in that same rule would be in effect during the last two months of FY 2003. 68 Fed.Reg. at 34,505. The agency estimated the "threshold would be only slightly higher than the current threshold [$33,560] (by approximately $600)." Id.
Plaintiffs argue that the analysis that generated this conclusion was arbitrary and capricious, but their arguments fail. They argue that the agency improperly applied the "old" fixed loss threshold model, by which they appear to mean the model that was used to calculate the fixed loss thresholds for the fiscal years prior to the 2003 revisions to outlier payment regulations. However, none of the purported flaws that they identify show that the agency's choice of model was arbitrary or capricious. First, Plaintiffs claim that the model provided "statutorily unauthorized payments" to turbo-charging hospitals. However, as the Court explained above with respect to Plaintiffs' challenges invoking Chevron, payments to turbo-chargers were not in fact statutorily prohibited. Second, Plaintiffs claim that the agency wrongly included the data pertaining to the turbo-chargers — the hospitals that rapidly increased their charges — in computing its inflation factor. Third, Plaintiffs argue that the agency mistakenly failed to account for continuing declines in the cost-to-charge ratios when it decided not to adjust those ratios. However, with respect to Plaintiffs' second and third arguments, Plaintiffs do not point to anywhere in the administrative record for the 2003 rulemaking where these issues were raised before the agency. While the agency discussed several comments regarding a mid-year adjustment to the FY 2003 threshold, none of the comments raised the specific issues that Plaintiffs now raise. Accordingly, the agency had no obligation to consider these specific issues in re-estimating the FY 2003 fixed loss threshold. Plaintiffs also highlight the agency's statement that it "inflated charges from the FY 2002 Medicare Provider Analysis and Review (MedPAR) file by the 2-year average annual rate of change in charges per case to predict charges for FY 2004." 68 Fed. Reg. at 34,505 (emphasis added). As the agency explains, this reference to FY 2004 is self-evidently a typographical error. Every other reference in the discussion was to the proper year, including its statement that the agency concluded "it would be appropriate to use FY 2002 data to reestimate the FY 2003 threshold." Id. There is no reason to believe that, contrary to the agency's representation in its briefing, that the agency inflated data in order to project cost for FY 2004 rather than for FY 2003.
Aside from Plaintiffs' specific claims regarding the purported flaws with the agency's re-calculation of the FY 2003 fixed loss threshold, Plaintiffs ignore the fact that the 2003 revisions to the outlier payment
In light of its conclusion that a re-estimated fixed loss threshold would be slightly higher than the existing threshold for FY 2003, the agency explained why it concluded that a mid-year adjustment was not warranted:
Id. at 34,506. This explanation is adequate on its own terms, and there is no need to consider it further. Indeed, Plaintiffs do not challenge the agency's decision not to raise the fixed loss threshold; they only argue that, if the fixed loss threshold had been "properly" re-calculated, it should have been lowered. Accordingly, the Court concludes that the agency's decision not to implement a mid-year adjustment to the FY 2003 fixed loss threshold was not arbitrary or capricious.
With respect to the FY 2004 — the first full fiscal year where the 2003 revisions to the outlier payment regulations were applicable — Plaintiffs argue that the decision to set the fixed loss threshold at $31,000 was arbitrary and capricious (1) because the data used to set the fixed loss threshold included data infected by turbo-charging, (2) because the agency failed to adjust the cost-to-charge ratios to account for continuing declines in cost-to-charge ratios, and (3) because the agency failed to
Before addressing the individual arguments, the Court notes that, once again, Plaintiffs rely substantially on the draft interim final rule to impugn the FY 2004 fixed loss threshold rulemaking. However, they may not do so because that rule was never published in the Federal Register. See Dist. Hosp. Partners, 786 F.3d at 58. Similarly, Plaintiffs may not rely on testimony given by Thomas Scully, Administrator of the Center for Medicare and Medicaid Services, before a Congressional subcommittee to impugn subsequent rulemakings. Plaintiffs cite a statement of Scully in testimony before the Senate Appropriations Subcommittee on Labor, Health and Human Services, and Education, and Related Agencies, on March 11, 2003, that "the correct number [for the fixed loss threshold] probably is in the midtwenties." See Medicare Outlier Payments to Hospitals: Hearing Before Subcomms. On Appropriations and Labor, Health & Human Services, and Education, 108th Cong. 108-268, at 13 (2003) (statement of Thomas A. Scully, Adm'r, Centers for Medicare & Medicaid Servs., Dep't of Health & Human Servs.), available at http://www.gpo.gov/fdsys/pkg/CHRG-108shrg85832/pdf/CHRG-108shrg85832.pdf (last visited on Aug. 3, 2015). It appears that this testimony represents Scully's personal opinion rather than the official position of the agency. See id. ("I happen to believe, and our actuaries believe that the correct number probably is in the midtwenties, if we fix the program abuses, I really think that fixing this will provide the other 97 percent of the hospitals that have not abused more money from it. And so I do think the outlier threshold — my personal opinion is that it probably, if we fix the abuses, would be too high, but I can understand the skepticism from our budget analysts to say we have been wrong 5 years in a row by a couple of billion dollars, how could we possibly think we are right now?") (emphasis added). In any event, Scully's speculation about the appropriate level for the fixed loss threshold cannot be used to attack the FY 2004 fixed loss threshold that was ultimately promulgated, particularly when he testified before the promulgation of the final 2003 revisions to the outlier payment regulations — which governed FY 2004 and beyond — and before the agency conducted the analysis that resulted in the fixed loss threshold promulgated for FY 2004. Furthermore, the agency has no obligation to explain why the fixed loss threshold for this fiscal year deviated from the administrator's previous speculations. Cf. Dist. Hosp. Partners, 786 F.3d at 58 (no obligation to explain deviation from policy that was never "on the books"). With that in mind, the Court addresses the substance of Plaintiffs' three challenges regarding the FY 2004 fixed loss threshold.
First, Plaintiffs argue that the agency should have excluded the data that was related to turbo-chargers from the charge inflation calculation. In addition to their reliance on the findings of the draft interim final rule, Plaintiffs argue that the agency never responded to a comment presenting such a suggestion. Indeed, the record reflects that one commenter "requested that CMS factor in the calculation of the threshold the fact that certain hospitals have distorted their charges significantly." 68 Fed.Reg. at 45,477. Plaintiffs argue that the agency did not adequately respond to this comment and did not explain why it chose to include data from the turbo-chargers when calculating the charge inflation factor for FY 2004. In District Hospital Partners, the D.C. Circuit Court of Appeals concluded that the agency had not adequately explained why it did not exclude the 123 turbo-charging
Second, Plaintiffs claim that the agency improperly failed to include an adjustment factor in the cost-to-charge ratio despite the fact that cost-to-charge ratios continued to decline. Aside from Plaintiffs' impermissible reliance on the interim final rule, they support this argument by pointing to a single comment submitted by the Federation of American Hospitals on July 8, 2003. Above, the Court concluded that it would not be proper, at this point, to supplement the administrative record with this comment because of its untimely submission. Without that comment, Plaintiffs' cannot point to any evidence in the record showing that the use of an adjustment factor with respect to the cost-to-charge ratios was a "`significant and viable and obvious alternative[]'" at the time of the agency's decision. Dist. Hosp. Partners, 786 F.3d at 59 (citation omitted). For that reason alone, the Court concludes that this particular challenge fails.
In any event, even if the Court considered the Federation of American Hospitals comment, which the Court has excluded from the record, the Court would conclude that the agency's decision not to apply an adjustment factor to the cost-to-charge ratios across the board was neither arbitrary nor capricious. See Dist. Hosp. Partners, 973 F.Supp.2d at 15-16. Notably, the agency did, in fact, attempt to account for declining cost-to-charge ratios with respect to a certain subset of hospitals "that ha[d] been consistently overpaid recently for outliers." 68 Fed.Reg. at 45,476. For those hospitals, the agency "attempted to project each hospital's cost-to-charge ratio based on its rate of increase in charges per case based on FY 2002 charges, compared to costs (inflated to FY 2002 using actual market basket increases)." Id. at 45,477. For other hospitals, the agency used the cost data from the most recent cost-reporting year to approximate the cost-to-charge ratios that would be used for actual outlier payments in FY 2004, which would be based on the latest tentatively settled cost reports. See id. at 45,476. It was rational for the agency to limit its attempt to project future decreases in cost-to-charge ratios to a small subset of hospitals where recent history strongly suggested that the ratios for those hospitals would continue to decrease — but to continue to use actual data in deriving the cost-to-charge ratios for all other hospitals. In light of the Court's deferential standard of review, see West Virginia, 362 F.3d at 868, even if the Court were to consider 2004 Federation of American Hospitals comment as part of the administrative record, the Court would not invalidate the agency's decision to use actual historical data and to limit its projections of future data changes to a small subset of Medicare facilities.
Id. at 45,476-77. The agency also noted that "the amount of fiscal intermediary resources necessary to undertake reconciliation will ultimately influence the number of hospitals reconciled." Id. at 45,476. Taken together, these statements adequately explain why the agency accounted for reconciliation with respect to the set of 50 hospitals rather than with respect to all 123 hospitals previously identified as turbo-chargers.
For all of these reasons, the Court remands the FY 2004 fixed loss threshold rulemaking to the agency to allow it to explain further why the agency did not exclude the 123 turbo-charging hospitals from its calculation of charge inflation. See Dist. Hosp. Partners, 786 F.3d at 60 (concluding that remand is appropriate to allow agency to articulate better explanation of decision). The Court rejects all of Plaintiffs' other challenges to the FY 2004 fixed loss threshold.
With respect to the FY 2005 fixed loss threshold rulemaking, Plaintiffs raise once again the challenges that they raise with respect to the FY 2004 fixed loss threshold rulemaking — that the agency used data infected by turbo-charging when the setting the fixed loss threshold, that the agency should have used an adjustment factor to account for declining cost-to-charge ratios, and that the agency failed to account for reconciliation. In addition, Plaintiffs argue that the agency should have used a cost inflation methodology rather than a charge inflation methodology. The Court addresses these arguments in turn.
First, Plaintiffs argue that the agency failed to address the trend of declining cost-to-charge ratios. However, in responding to a comment suggesting the use of such an adjustment factor, the agency explained why it concluded it was not necessary to use such a factor:
69 Fed.Reg. at 49,277. While Plaintiffs critique this explanation, the Court concludes it is sufficient. It is not for the Court to second guess the agency's choices when it has, as here, provided a cogent explanation for those choices. Indeed, while Plaintiffs suggest that it was irrational for the agency to prefer to use actual cost-to-charge ratios over projected ratios when it was already using projected data, the Court disagrees. It is reasonable for the agency to prefer to use only projected data for certain factors, as it has explained here. In addition, the agency explained that it had addressed the most significant factor regarding declining cost-to-charge ratios by using more recent data. Altogether the agency sufficiently explained its conclusion that an adjustment factor was not necessary.
Second, Plaintiffs argue that the charge inflation factor used was flawed. Plaintiffs argue that the charge inflation factor was distorted by data from turbo-charging hospitals and that the agency did not adequately address its choice to continue using a charge inflation methodology rather than reverting to a cost inflation methodology.
To assess these arguments, a brief review of the agency's methodology to establish the fixed loss threshold for FY 2005 is necessary. The agency used the FY 2003 charge data as a baseline. 69 Fed.Reg. at 49,277. To develop a charge inflation factor, the agency took the "unprecedented step of using the first half-year of data from FY 2003 and comparing data to the first half year of FY 2004." Id. Using this data, the agency calculated a one-year annual rate of charge inflation of 8.9772, or 18.76 percent over two years, and then inflated the FY 2003 data by this two-year charge inflation figure. Id. The agency then converted these projected charges into projected costs by using hospital-specific cost-to-charge ratios from the April 2004 update to the Provider Specific File. Id.
The D.C. Circuit Court of Appeals already considered and rejected the argument presented by Plaintiffs here: that it was arbitrary and capricious to fail to exclude the turbo-charging data from the calculation of a charge inflation factor for FY 2005. See Dist. Hosp. Partners, 786 F.3d at 61-62. In District Hospital Partners, the Court of Appeals noted that, while the data from the first half of FY 2003 was affected by turbo-charging, the charge data from the first half of FY 2004 was not similarly affected because the underlying discharges had occurred after the implementation of the 2003 changes to the outlier payment regulations. Id. at 61. The Court of Appeals approved the agency's decision to retain the turbo-chargers in the dataset in order to ensure that the FY 2003 and FY 2004 datasets were comparable. See id. So, too, here. As stated by the Court of Appeals in District Hospital Partners, it was not arbitrary or capricious to include the turbo-chargers in the datasets used to calculate the charge inflation factor for FY 2005.
Plaintiffs also argue that it was arbitrary and capricious for the agency to reject a suggestion that the agency ought to revert to a cost inflation methodology, which the agency had used through FY 2002. In explaining its choice to continue using a charge inflation methodology, the
Third, Plaintiffs argue that the FY 2005 fixed loss threshold rulemaking was arbitrary and capricious because the agency failed to account for reconciliation. However, the agency explained at length why it was not accounting for reconciliation:
69 Fed.Reg. at 49,278. This explanation is more than adequate. Plaintiffs emphasize that reconciliation never occurred for FY 2005. However, that does not undermine the agency's explanation, which emphasizes uncertainty regarding reconciliation and reflects the agency's belief that the other changes to the outlier payment regulations obviated much of the need for reconciliation. The agency has explained why it chose not to account for reconciliation given the data that was available and given uncertainty about the implementation of the reconciliation provision.
For all of these reasons, the Court concludes that none of Plaintiffs' challenges to the FY fixed loss threshold rulemaking succeed and that the FY 2005 fixed loss threshold rulemaking was neither arbitrary nor capricious.
Next, the Court turns to Plaintiffs' challenges to the FY 2006 fixed loss threshold rulemaking. Before addressing Plaintiffs' individual challenges, the Court notes that
Nonetheless, the Court addresses the three arguments Plaintiffs present, which largely recapitulate the arguments they lodged with respect to the FY 2005 fixed loss threshold. Specifically, Plaintiffs argue (1) that the agency did not adequately explain its use of a charge inflation methodology, (2) that the agency did not adequately account for the decline of the cost-to-charge ratios over time, and (3) that the agency did not adequately account for reconciliation. Pls.' Mot. at 66-68. As with Plaintiffs' challenge to the FY 2005 rulemaking, none of these arguments are persuasive.
First, Plaintiffs argue that the agency did not adequately respond to comments suggesting a return to the use of a cost inflation methodology and did not adequately explain the continued use of a charge inflation methodology. The Court disagrees. The agency responded to those comments and explained that it "continue[d] to believe that using charge inflation, rather than cost inflation, will more likely result in an outlier threshold that leads to outlier payments equaling 5.1 percent of total [Prospective Payment System] payments." 70 Fed.Reg. at 47,495. The agency further explained why it was appropriate to use a charge inflation methodology in establishing the fixed loss threshold. See id. Notably, in their brief, Plaintiffs do not argue that a cost inflation methodology would have been superior; they simply argue that the agency failed to adequately explain why it used this methodology when it had previously had concluded that a cost inflation methodology was more accurate. However, the agency adequately explained its use of the charge inflation methodology. Moreover, as the Court explained above, the fact that the agency previously arrived at a different conclusion regarding the optimal inflation methodology does not make arbitrary or capricious its subsequent conclusion that a charge inflation methodology was preferable.
Second, Plaintiffs argue that the agency failed to account for the decline of cost-to-charge ratios over time. However, the agency explained its reasons for, once again, declining to apply an adjustment factor to cost-to-charge ratios. It is worth reproducing the agency's thorough explanation at length:
70 Fed.Reg. at 47,495. This explanation adequately justifies the agency's decision not to adjust the cost-to-charge ratios. As the district court explained in District Hospital Partners, "[a]lthough the Secretary's rationale in []FY 2006 was distinct from that given in []FY 2005, it is no less reasonable." 973 F.Supp.2d at 22. "Indeed, the fact that the cost-to-charge ratios used to calculate the fixed loss threshold are actually used, for some portion of the fiscal year, to calculate outlier payments, is a strong reason to not adjust the cost-to-charge ratios downward based on speculation regarding the continued downward trend in cost-to-charge ratios." Id. Although Plaintiffs claim that the agency's statement that lies underneath this conclusion has no basis in the administrative record, it is actually Plaintiffs' claim that cost-to-charge ratios would be updated before the start of FY 2006 that is not tethered to anything in the record. Absent any evidence to the contrary, the agency need not further justify its own understanding, as promulgated in the Federal Register, of the complicated statutory scheme that it administers.
Third, Plaintiffs argue, once again, that the agency failed to account for reconciliation in setting the fixed loss threshold. However, the agency did explain why it did not alter its methodology to account for reconciliation:
70 Fed.Reg. 47,495. This thorough explanation is certainly adequate to explain the agency's decision not to account for reconciliation in setting the fixed loss threshold. Indeed, Plaintiffs point to no reason why this explanation is not adequate; they simply make the conclusory claim that the agency's explanation is conclusory and lacking in a factual basis.
In sum, the Court concludes that none of Plaintiffs' challenges to the FY 2006 fixed loss threshold are successful.
Lastly, the Court turns to Plaintiffs' more modest challenges to the FY 2007 fixed loss threshold rulemaking. Plaintiffs' primary challenge is that, when the agency finally implemented an adjustment to the cost-to-charge ratios in this year, the level of the adjustment was insufficient. Plaintiffs also argue that it was arbitrary and capricious not to account for reconciliation. With respect to the latter challenge, for the same reasons stated beforehand with respect to the prior fiscal years, the agency adequately explained its decision not to adjust its methodology to account for reconciliation explicitly. See 71 Fed.Reg. at 48,149. Because the agency's response is similar to that offered the previous year, and because Plaintiffs have offered no additional reasons why this response is inadequate, no further analysis is necessary for the Court to conclude that the agency's decision was neither arbitrary nor capricious. The Court now turns to the adjustment factor implemented for FY 2007.
For FY 2007, the agency applied an adjustment factor of 0.9973 to the otherwise applicable hospital-specific cost-to-charge ratios. See 71 Fed.Reg. at 48,150. To develop this adjustment factor, the agency assessed the relationship between previous changes to costs and previous changes to charges. See id. The agency explained thoroughly and adequately how it developed this methodology and applied it in setting the FY 2007 fixed loss threshold. See id. In arguing that the adjustment factor was inconsistent with the national average rates of change in cost-to-charge ratios across previous years, Plaintiffs rely on the Exhibit 5, which they submitted along with their motion. However, the Court previously concluded that Plaintiffs may not rely on that exhibit because it is properly considered part of Plaintiffs' brief and because it exceeds the page limit previously set by the Court for briefing in this case. In any event, even if the Court were to consider Plaintiffs' exhibit, Plaintiffs cannot point to any "`significant and viable and obvious alternatives'" regarding the calculation of an adjustment factor that were before the agency at the time of the rulemaking. Dist. Hosp. Partners, 786 F.3d at 59 (citation omitted). Plaintiffs' argument that the chosen adjustment factor was arbitrary and capricious is unavailing. Accordingly, Plaintiffs' claim that the FY 2007 fixed loss threshold rulemaking was arbitrary and capricious fails.
Ultimately, while the Court concludes that it has jurisdiction over all of the claims in this action, of all of Plaintiffs' claims, only one is successful: the claim that the agency failed to explain why it
For the foregoing reasons, the Court DENIES Defendant's [126] Motion to Dismiss for Lack of Subject Matter Jurisdiction, GRANTS IN PART and DENIES IN PART Defendant's [126] Motion for Summary Judgment, GRANTS IN PART and DENIES IN PART Plaintiffs' [127/142] Motion for Summary Judgment, and GRANTS IN PART and DENIES IN PART Plaintiffs' [128] Motion for Judicial Notice and/or for Extra-Record Consideration of Documents and Other Related Relief. The Court first concludes that it has subject matter jurisdiction over all of the claims in this action. With respect to Plaintiffs' request for the Court to consider additional documents not part of the administrative record, the Court takes judicial notice of those publicly available documents as necessary, but denies Plaintiffs' request for extra-record consideration of those documents. The Court also denies Plaintiffs' request to add an additional comment to the administrative record because of the untimeliness of the request. The Court denies Plaintiffs' request to submit three additional tables and strikes from the record exhibits 5, 7, and 8 to Plaintiffs' Motion for Summary Judgment. With respect to the cross-motions for summary judgment, the Court GRANTS Plaintiffs' Motion and DENIES Defendant's Motion with respect to the claim that the agency failed to explain its decision to include 123 turbo-charging hospitals in the dataset used to derive the inflation factor used for calculating the FY 2004 fixed loss threshold; the Court DENIES Plaintiffs' Motion and GRANTS Defendant's Motion in all other respects.
Accordingly, the FY 2004 fixed loss threshold rule is REMANDED to the agency to provide the agency an opportunity to explain why the agency included the turbo-charging hospitals in the data used to derive the inflation factor used to determine the FY 2004 fixed loss threshold — or to recalculate the fixed loss threshold if necessary. In all other respects, summary judgment is GRANTED to Defendant. The Court will retain jurisdiction pending the limited remand to the agency regarding the FY 2004 rulemaking. See Cobell v. Norton, 240 F.3d 1081, 1109 (D.C.Cir.2001) (district court has authority to retain jurisdiction pending remand to agency).
An appropriate Order accompanies this Memorandum Opinion.
In light of the voluminous administrative record pertaining to numerous regulations, the Court cites to the administrative record by referring to the specific agency action for which that portion of the administrative record was assembled, e.g., "A.R. (FY 2004)" or "A.R. (2003 amendments)." In an exercise of its discretion, the Court finds that holding oral argument in this action would not be of assistance in rendering a decision. See LCvR 7(f).
Id. at 48,149. Although the final fixed loss threshold was set at a later time, the methodology, which is at issue in this case, was final as of the promulgation of the August 2006 regulation.
