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Hays Medical Center v. Burwell

United States District Court, D. Kansas

August 31, 2017

HAYS MEDICAL CENTER, et al., Plaintiffs,
v.
SYLVIA MATHEWS BURWELL, Secretary In Her Official Capacity as Secretary of Health and Human Services, Defendant.

          MEMORANDUM AND ORDER

          J. Thomas Marten, Judge.

         Plaintiffs are Medicare-participating hospitals challenging, under the Administrative Procedure Act (“APA”), the calculation of their hospital-specific Medicare payment rates by defendant Sylvia Mathews Burwell, the Secretary of the Department of Health and Human Services (“the Secretary”). Plaintiffs allege that the Secretary erroneously calculated their reimbursement payments under the Medicare Act-specifically, she is applying the budget neutrality adjustments twice in her calculation of their new base-year hospital-specific rates. Plaintiffs argue that the Secretary's calculation violates the Medicare statute of the Social Security Act (“SSA”) and is arbitrary and capricious.

         The Secretary disagrees that she is double counting the budget neutrality adjustments, and argues that her method is a policy choice that enables her to reach budget neutrality-a statutory requirement. The question before the court is whether the Secretary's methodology is a rational interpretation of the Medicare Act to which the court should defer. Because the court answers this question affirmatively, it will grant summary judgment to the Secretary.

         I. Uncontroverted Facts

         Plaintiffs own or operate hospitals that participate in the Medicare program, and are designated as either Sole-Community Hospitals[1] (“SCHs”) or Medicare Dependent Hospitals[2] (“MDHs”) under the Medicare Act. 42 U.S.C. §§ 1395ww(d)(5)(D)(iii), (d)(5)(G)(iv). Plaintiffs are eligible to be paid based on what is known as a “hospital-specific” rate.[3]

         Defendant Sylvia Mathews Burwell is the Secretary of the United States Department of Health and Human Services (“HHS”) and administers the Medicare program. The Centers for Medicare and Medicaid Services (“CMS”), a component of HHS, is responsible for operating the program.

         Each plaintiff filed administrative appeals with the Provider Reimbursement Review Board (the “Board”) challenging the Secretary's calculation of their respective hospital-specific rates used in calculating their Medicare payments. Plaintiffs bring the following lawsuit after the Board determined it did not have authority to grant the relief requested by plaintiffs, and granted expedited judicial review.

         II. Summary Judgment Standards

         Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact, and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). A fact is “material” when it is essential to the claim, and the issues of fact are “genuine” if the proffered evidence permits a reasonable jury to decide the issue in either party's favor. Haynes v. Level 3 Communs., 456 F.3d 1215, 1219 (10th Cir. 2006). The movant bears the initial burden of proof and must show the lack of evidence on an essential element of the claim. Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2004) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). The nonmovant must then bring forth specific facts showing a genuine issue for trial. Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). The court views all evidence and reasonable inferences in the light most favorable to the non-moving party. LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

         III. Medicare Reimbursement

         “The Secretary. . . is charged by Congress with administering the Medicare statute.” Sunshine Haven Nursing Operations, LLC v. U.S. Dep't of Health & Human Servs., Ctrs. for Medicare & Medicaid Servs., 742 F.3d 1239, 1244 (10th Cir. 2014). Medicare reimburses the vast majority of hospitals, including plaintiffs, for the operating costs of inpatient hospital services through the inpatient prospective payment system (“IPPS”). Under IPPS, the Secretary informs all hospitals, before a fiscal year begins, of the “rates at which their services will be reimbursed, regardless of costs actually incurred.” See 42 U.S.C. § 1395ww(d). This “predetermined payment . . . is calculated based on a complex statutory formula.” Rapid City Reg'l Hosp. v. Sebelius, 681 F.Supp.2d 56, 58 (D.D.C. 2010). “[T]he Secretary must maintain budget neutrality when recalibrating reimbursements under the [Medicare] statute.” Adirondack Med. Ctr. v. Burwell, 782 F.3d 707, 710 (D.C. Cir. 2015); 42 U.S.C. § 1395ww(d)(4)(C)(iii) (the Secretary must “assure[ ] that the aggregate payments . . . are not greater or less than those that would have been made for discharges in the year without [the annual group weight] adjustment[s][]”). Two factors used in calculating prospective Medicare reimbursement rates are Diagnosis-Related Groups (“DRG”) and budget neutrality adjustments.

         A. Diagnosis-Related Groups

         DRGs are categories of inpatient treatment that reflect the varying costs associated with treating a particular diagnosis, relative to other diagnoses. Adirondack Med. Ctr. v. Sebelius, 29 F.Supp.3d 25, 29-30 (D.D.C. 2014). “Medicare patients are assigned a DRG based on their diagnosis at the time of discharge. Each DRG is associated with “a particular ‘weight' [that] represent[s] the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients.'” Id. at 30 (quoting Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011)); 42 U.S.C. § 1395ww(d)(4). DRG weights vary from less than 1.000 to more than 7.000, and are structured such that the cost in caring for a patient assigned a DRG weight of 2.000 is twice the cost for a patient assigned a DRG weight of 1.000. Id. In other words, the more complex the patient's diagnosis-requiring more resources to treat the patient-the higher the DRG weight assigned for reimbursement.[4]

         The Secretary is responsible for adjusting the DRG weighting factors annually “to reflect changes in treatment patterns, technology . . ., and other factors which may change the relative use of hospital resources.” 42 U.S.C. § 1395ww(d)(4)(C)(i). But the Secretary's annual DRG recalibration must “be made in a manner that assures budget neutrality. 42 U.S.C. § 1395ww(d)(4)(C)(iii). This subsection of Medicare stands for the proposition that other factors might increase the cost of Medicare reimbursements, but the Secretary must ensure that annual changes to DRG weights have a budget-neutral effect.

         “In connection with recalibrating DRG weights each year, the Secretary ‘normalizes' the weights so that the ‘average case weight after recalibration is equal to the average case weight prior to recalibration.'” Adirondack Med. Ctr., 29 F.Supp.3d at 30-31 (quoting 74 Fed. Reg. 24080 (May 22, 2009)). But normalization alone does not achieve budget neutrality for recalibrated DRGs, and “the Secretary calculates an additional adjustment-a so-called Budget Neutrality Adjustment-to satisfy the congressional directive that changes to DRG weighting factors not increase projected aggregate IPPS payments.” Id. at 31. (“While [normalization] is intended to ensure that recalibration does not affect total payments to hospitals, . . . [the Secretary's] analysis . . . indicate[s] that the normalization adjustment does not achieve budget neutrality with respect to aggregate payments to hospitals . . . .”).

         B. The Budget Neutrality Adjustment

         “The Secretary calculates the budget neutrality adjustment by way of payment simulations. She computes a budget neutrality factor by comparing ‘estimated aggregate payments using the current year's relative weights and factors to aggregate payments using the prior year's relative weights and factors.'” Id. (quoting 74 Fed. Reg. 24080 (May 22, 2009)). The Secretary calculates and applies the budget neutrality factor for a future fiscal year; however, no attempt is made to remove the effect of prior years' neutrality adjustments-resulting in a cumulative adjustment policy. See 58 Fed. Reg. 46270, 46346 (Sept. 1, 1993). “In the Secretary's view, a cumulative budget neutrality adjustment is mandated by the language of 42 U.S.C. § 1395ww(d)(4)(C)(iii) and the nature of the hospital-specific rate[ ]” because if she removed the prior budget neutrality adjustment the hospital-specific amounts would be artificially high, thereby resulting in higher aggregate payments than permitted under the statute. Adirondack Med. Ctr., 29 F.Supp.3d at 31. The Secretary has applied a cumulative budget neutrality adjustment in each successive fiscal year since 1994. In other words, she has not removed the effects of prior years' adjustments when calculating the budget neutrality adjustment for the upcoming fiscal year.

         Here, plaintiffs argue that the Secretary is applying the adjustment twice to each plaintiff's hospital-specific rate, which is contrary to the statutory commands to recalibrate the DRG weights in a budget neutral manner and to calculate a base-year rate using “100 percent” of a hospital's allowable operating costs of inpatient hospital services.

         C. Hospital-Specific Rates

         SCHs are paid either the federal rate[5] or their hospital-specific rate, whichever is higher. Adirondack Med. Ctr., 29 F.Supp.3d at 32 (quoting Adirondack Med. Ctr. v. Sebelius, 740 F.3d 692, 695 n.2 (D.C. Cir. 2014). MDHs are paid a rate that is calculated by taking the federal rate plus 75% of the difference, if any, between the federal rate payment and their hospital-specific rate payment. Id. at 32-33. The hospital-specific rate is particular to each hospital-calculated with a base amount derived from the historic operating costs at each individual ...


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