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Blue Valley Hospital, Inc. v. Azar

United States District Court, D. Kansas

June 7, 2018

BLUE VALLEY HOSPITAL, INC., Plaintiff,
v.
ALEX M. AZAR II, in his official capacity as Secretary, United States Department of Health and Human Services, SEEMA VERMA, Administrator for the Center of Medicare and Medicaid Services, and JEFF HINSON, Regional Administrator for Region 7 the Center for Medicare and Medicaid Services, Defendants.

          MEMORANDUM AND ORDER

          JULIE A. ROBINSON, CHIEF UNITED STATES DISTRICT JUDGE

         Plaintiff Blue Valley Hospital, Inc. (“BVH”) seeks injunctive relief to prevent Defendants, the Department of Health and Human Services (“HHS”) and the Centers for Medicare and Medicaid Services (“CMS”), from terminating BVH's Medicare certification and provider contracts pending review by an administrative appeals board and any subsequent judicial review. BVH also seeks to enjoin Defendants from publishing, disseminating, or communicating to third parties or the public any notice or communication suggesting that BVH's Medicare participation rights have been or will be decertified or terminated. Before the Court is BVH's Motion for Preliminary Injunction, as supplemented (Docs. 3, 24) and Defendants' response seeking dismissal of the case under Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, as supplemented (Docs. 8, 25). BVH has responded to the motion to dismiss (Docs. 15, 24) and the Court is now prepared to rule. As described more fully below, the Court dismisses the case for lack of jurisdiction.

         I. Background

         The following facts are alleged in the Amended Verified Complaint and/or presented in BVH's Motion for Emergency TRO and Preliminary Injunction and the parties' subsequent briefing.

         BVH is an acute care hospital located in Overland Park, Kansas. It is a licensed facility and was recently accredited by the Healthcare Facilities Accreditation Program (“HFAP”). BVH offers a wide variety of services, including bariatric and spine surgery, general hospitalist services, inpatient care, therapy services, and specialty consults. In particular, BVH provides “unique and specialized bariatric and intervention services to the underserved surrounding community and region.”[1]

         Since 2015, BVH had been certified by CMS as a provider under the Medicare Program.

         On September 6, 2017, CMS issued S&C Memo 17-44.[2] The memo states the statutory rule that a hospital must be primarily engaged in providing certain care “to inpatients.”[3] It then identifies factors that could be used in making that determination:

CMS considers multiple factors and will make a final determination based on an evaluation of the facility in totality. Such factors include, but are not limited to [average daily census], [average length of stay], the number of off-campus outpatient locations, the number of provider based emergency departments, the number of inpatient beds related to the size of the facility and scope of services offered, volume of outpatient surgical procedures compared to inpatient surgical procedures, staffing patterns, patterns of [average daily census] by day of week, etc. Hospitals are not required to have a specific inpatient to outpatient ratio in order to meet the definition of primarily engaged.[4]

         The memo states that, “for surveyors to determine whether or not a hospital is in compliance with the statutory and regulatory requirements of Medicare participation, including the definition of a hospital, they must observe the provision of care;” if there are no inpatients to observe, only then do surveyors turn to census data, and only then so that they can decide how to proceed.[5] If the numbers add up, a second survey is attempted at a later date so that patient care can be observed.[6] A facility is not penalized just because they don't have inpatients at the time of the survey as long as census data suggests that, on average, they are primarily engaged in providing care to inpatients, that is, patients who stay two midnights[7]

         The memo goes on to state that when the facility does not have the inpatient numbers, the surveyors are instructed to determine whether a second survey should be attempted or whether to recommend termination of the provider agreement. Factors that go into that determination are:

. the number of off-campus emergency departments;
. the number of inpatient beds in relation to the size of the facility and services offered;
. the volume of outpatient surgical procedures compared to inpatient surgical procedures;
. if the facility is a “surgical” hospital, are most procedures outpatients, are they routinely scheduled early in the week, and are most patients discharged before the weekend;
. patterns and trends in the average daily census by day of week;
. staffing patterns; and . how the facility holds itself out to the community[8]

         The memo states that the determination of whether a facility meets the definition of a hospital “will not be based on a single factor, such as failing to have two inpatients at the time of the survey.”[9]

         On November 13 and 14, 2017, the Kansas Department of Health and Environment (“KDHE”), pursuant to direction from CMS, conducted an onsite survey of BVH to validate the findings of BVH's recent accreditation by HFAP.[10] The KDHE survey was conducted unannounced and without prior notice to BVH. On February 2, 2018, CMS informed BVH of the results of the survey and issued a Statement of Deficiencies regarding whether BVH meets the definition of “primarily engaged” in providing inpatient services, and tagging BVH with operating an outpatient surgical center with little to no inpatient census.[11] In support CMS relied on historical data and statistics relating to the average daily census (“ADC”) and average length of stay (“ALOS”) of admitted patients. CMS found that BVH did not meet the two patient ADC and two-night AKOS requirements.[12] BVH alleges that this new criteria was issued in the S&C Memo and sought to impose new standards for determining compliance without following statutory rule-making procedures, including public notice and opportunity for comment.[13]

         These deficiencies were “determined to be of such serious nature as to substantially limit the hospital's capacity to render adequate care and services and prevent it from being in compliance with all the [Conditions of Participation] for hospitals.”[14] Because BVH was found to be out of compliance with one or more of the Conditions of Participation, CMS decided to terminate the Medicare provider agreement for BVH as of May 3, 2018.[15] The Noncompliance Notice indicated that “[t]ermination can only be averted by correction of the enclosed deficiencies, ” and requested BVH submit a plan of correction within ten days. The Noncompliance Notice further stated that, upon review of the Plan of Correction, CMS would conduct another survey to verify that the necessary corrections had been implemented and would then communicate the findings to BVH in writing.[16]

         On February 12, 2018, BVH submitted a Plan of Correction outlining the specific measures it had taken and would be taking to remedy the alleged deficiencies, as well as a Statement of Compliance.[17] On March 27, 2018, CMS sent BVH a final notice that it was terminating its provider agreement effective April 11, 2018.[18] CMS stated that BVH still had not met the definition of a hospital as required by certain regulations, and concluded that the Plan of Correction submitted by BVH lacked any specific dates as to when BVH would come into compliance and was “aspirational only.”[19] BVH was told how to claim payments for services through the date of termination and how to appeal the termination decision to an Administrative Law Judge and the Departmental Appeals Board.

         Following receipt of the Termination Notice, BVH submitted additional documents and information to CMS and made numerous requests for CMS to reconsider its decision and conduct a second survey. Over the following weeks, BVH believed CMS would reconsider its termination decision and would be conducting another survey. On April 11, 2018, the effective date of termination, CMS's regional counsel advised BVH that CMS would not be reconsidering or conducting another survey, and that “the termination will take effect today as scheduled.” On April 12, 2018, BVH requested an expedited administrative appeal of the termination decision.[20] That same date, BVH filed this lawsuit seeking a temporary restraining order and injunction enjoining CMS from terminating BVH's Medicare participation rights pending the aforementioned administrative process and any subsequent judicial review. The Verified Complaint alleged one count: injunctive relief pending its administrative appeal and any subsequent judicial review. Citing the “lack of merit to CMS's determination and the lack of due process, ”[21] the prayer for relief sought a temporary restraining order/preliminary injunction pending the duration of BVH's administrative appeal and any subsequent judicial review process, prohibiting Defendants from denying BVH's Medicare participation rights, decertifying BVH's Medicare rights and terminating its Medicare provider agreement, and publishing, disseminating, or communicating to third parties any notice or communication suggesting BVH has or will be decertified under Medicare or its provider agreement.[22]

         The Court set the matter for hearing on the motion for TRO and ordered expedited briefing from the parties.[23] After CMS agreed to postpone the termination date to the original stated date of termination, May 3, 2018, and to re-evaluate BVH in the interim, counsel for BVH requested continuation of the TRO hearing until the re-evaluation had been completed. The Court notified the parties it would convert the motion for TRO to one for preliminary injunction. At a status conference on April 24, 2018, CMS confirmed that it would postpone the termination date until the Court could conduct a preliminary injunction hearing. The Court then set the matter for hearing on May 11, 2018, and ordered briefing on Defendants' motion to dismiss under Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, as raised in its response to the TRO/Preliminary Injunction motion.[24]

         At 5:01 p.m. on May 10, 2018, AUSA Christopher Allman sent an email to the Court and counsel for BVH that stated: “CMS has authorized me to inform all of you of the results of its revisit of BVH: BVH is not in compliance with Medicare conditions of participation and will be terminated. Formal notice and the Form CMS-2567 Statement of Deficiencies will be issued by CMS in the near future-but probably not before tomorrow's scheduled hearing.” At the hearing the next morning, Defendants confirmed that CMS's latest formal Notice and Statement of Deficiencies had yet to be issued, but purportedly made additional findings relative to BVH's status as a qualified hospital under Medicare rules and definitions. Defendants also confirmed that the notice would not give BVH the opportunity to present a Plan of Correction, and that the termination date would be the next day, May 12, 2018. BVH, which came prepared to present evidence on the administrative process it had received from CMS with respect to the November 2017 onsite survey and the February 2018 Notice and Statement of Deficiencies, claimed surprise over the termination date, and argued for continuance of the hearing until it had the opportunity to review the re-survey Statement of Deficiencies and reasoning behind them. In addition, despite the characterization of its due process claim set out in its Verified Complaint, its Motion for TRO and Preliminary Injunction, and its response to Defendants' motion to dismiss, BVH urged that the relief it seeks includes a due process right to a pre-termination hearing. Accordingly, the Court continued the hearing to June 11, 2018, directed BVH to amend its complaint to identify precisely what constitutional claim it was asserting, and stayed the May 12 termination date in the interim.[25] The Court also directed supplemental briefing on the jurisdictional and preliminary injunction issues.[26]

         BVH filed its Amended Verified Complaint on May 25, 2018.[27] Although it suggests at various points it has the constitutional right to a pre-termination hearing, BVH continues to assert arguments challenging the agency's underlying rule-making process and lack of notice-and-comment, and the application of those rules to BVH as the “most noteworthy” grounds for its due process claim.[28]

         In its Amended Complaint, BVH also alleges the re-survey conducted from April 22 through 25, 2018 was “orchestrated, ” a “total sham, ” and far from “due process.”[29] BVH further complains that the re-survey suffers from the same procedural issues and unfairness as the first survey, and continues to use and rely on historical statistical averages to determine BVH's compliance with ADC and ALOS requirements, relying on data from approximately three to four years before the purported new rules went into effect to determine statistical averages.[30]

         The re-survey Statement of Deficiencies, which Defendants attach to their supplemental brief, identifies thirty-seven pages of deficiencies, including issues that directly affect patient care.[31] In addition, updated deficiencies in the re-survey listed problems taken directly from medical records, staff comments, and surveyor observations. The revised findings include admissions by BVH's leadership acknowledging that BVH knew it was not in compliance, and that to get its numbers up, a discount was offered to employees and their friends and families to incentivize them to have surgery so BVH could increase its census numbers.[32] Interviews with former employees suggest they quit working at BVH because they were told to falsify medical records to make it appear that the patient needed to stay two nights, so BVH could justify keeping patients longer to inflate their inpatient numbers.[33] The re-survey found that BVH “failed to use safe practices for medication administration, ” and cited examples of failing to document or properly monitor medication administration, including medications that BVH routinely allowed patients to bring from home, leading to “the potential for medication errors, drug overdose, adverse drug reactions, and ineffective medication management.”[34] The re-survey noted inconsistencies in one patient's record, [35] and found that BVH contracts with a grocery store to provide food for patients, but does not verify nutritional value or ensure safe food handling.[36] CMS did not accept a Plan of Correction or any other attempt by BVH to respond or comply with the findings.

         In response, Defendants renew their request for dismissal of the case for lack of subject matter jurisdiction.[37]

         II. Subject Matter Jurisdiction

         Before the Court can address the issue of whether BVH meets the requirements for issuance of a preliminary injunction, it must determine that it has subject matter jurisdiction to grant its request. BVH argues that jurisdiction lies under 42 U.S.C. § 1331 or alternatively, because its claim meets the “total denial of review” exception to administrative exhaustion and/or is “entirely collateral” to the administrative claim presented to the Secretary. The Court addresses each issue in turn.

         A. Channeling/Exhaustion Requirement

         Federal courts are courts of limited jurisdiction and, as such, must have a statutory or constitutional basis to exercise jurisdiction.[38] When the United States, one of its agencies, or its employees named in their official capacities are named as defendants, a waiver of sovereign immunity is required before the court can assume subject matter jurisdiction.[39] A court lacking jurisdiction must dismiss the case, regardless of the stage of the proceeding, when it becomes apparent that jurisdiction is lacking.[40] The party who seeks to invoke federal jurisdiction bears the burden of establishing that such jurisdiction is proper.[41] “Thus, plaintiff bears the burden of showing why the case should not be dismissed.”[42] Mere conclusory allegations of jurisdiction are not enough.[43]

         The Medicare Act incorporates two key provisions of the Social Security Act dealing with judicial review of agency actions. 42 U.S.C. § 1395cc(b)(2) provides that, after the Secretary has determined that a Medicare provider fails to comply substantially with provisions of its provider agreement, or with certain provisions of the Medicare Act or its regulations, the Secretary may terminate the provider agreement. 42 U.S.C. § 1395cc(h)(1)(a), in turn, provides that an institution dissatisfied with a determination by the Secretary under § 1395cc(b)(2) is entitled to a hearing to the same extent as provided in 42 U.S.C. § 405(b), “and to judicial review of the Secretary's final decision after such hearing as provided in 42 U.S.C. § 405(g).” Section 405(g) provides for a strict administrative exhaustion requirement as a prerequisite to judicial review:

Any individual, after any final decision of [the Secretary] made after a hearing to which he was a party . . . may obtain a review of such decision by a civil action commenced within sixty days after the mailing to him of a notice of such decision. . . . The findings of [the Secretary] as to any fact, if supported by substantial evidence, shall be conclusive. . . . The judgment of the court shall be final except that it shall be subject to review in the same manner as a judgment in other civil actions.

         Congress expressly incorporated this provision to govern various Medicare matters, including enrollment-related and provider-termination decisions.[44]

         The second key judicial review provision of the Social Security Act incorporated in the Medicare Act is 42 U.S.C. § 405(h), which provides that judicial review under § 405(g) is the sole and exclusive basis for any court's jurisdiction:

The findings and decision of the Commissioner of Social Security after a hearing shall be binding upon all individuals who were parties to such hearing. No. findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No. action against the United States, the Commissioner of Social Security or any officer or employee thereof shall be brought under section 1331 or 1346 of title 28 to recover on any claim arising under this subchapter.

“The second sentence of § 405(h) thus precludes judicial review of the Secretary's determinations under the Medicare Act pursuant to § 405(g) unless its exhaustion requirements are met. The third sentence forecloses alternative routes of review under federal question jurisdiction or jurisdiction based on the United States' status as a defendant.”[45]

         Despite this statutory scheme, BVH contends that the exhaustion requirement does not apply because it is not challenging the merits of a final agency termination decision, but merely seeking injunctive relief, and thus the Court has jurisdiction under 28 U.S.C. § 1331.[46] In other words, BVH argues, “administrative channeling and exhaustion only apply to actions where plaintiff seeks judicial review of the merits of a Medicare termination decision itself, i.e., where the plaintiff is asking the Court to review and reverse the merits of the termination decision (the factual findings of noncompliance.”)[47] This argument is misplaced.

         BVH focuses on the nature of the interim injunction relief it seeks, and characterizes its action as merely seeking a stay to preserve the status quo pending the administrative review process. But the Supreme Court has repeatedly upheld the jurisdictional bar in Medicare-related matters. In Heckler v. Ringer, the Court recognized that the Medicare statute provided “the sole avenue of judicial review” for any matter “arising under” the Medicare Act.[48] And in Shalala v. Illinois Long Term Care, Inc., the Court stressed that § 405(h) “demands the ‘channeling' of virtually all legal attacks through the agency.[49] Clearly, BVH's constitutional challenge to the Secretary's authority to terminate its provider agreement under the Act during the pendency of an administrative hearing process prescribed by the Act should be deemed to “arise under” the Medicare Act, as that term is applied by the Supreme Court. BVH cannot avoid this requirement by arguing that it only requests the Court's jurisdiction in the form of a preliminary injunction against CMS, and has identified no authorities holding that actions akin to this one do not arise under the Medicare Act for § 405(h) purposes.[50] Indeed, this interpretation would effectively allow any party who wanted to stop proposed agency action to simply seek injunctive relief in federal court, which would render the “strict administrative exhaustion requirement” of § 405 a nullity. Thus, in accordance with federal law, this Court lacks jurisdiction to entertain BVH's request unless BVH can satisfy the so-called Michigan Academy or Eldridge exceptions to the channeling requirements of § 405(g) recognized by the Supreme Court.

         B.Michigan Academy” Exception

         In Shalala v. Illinois Council on Long Term Care, Inc., the Supreme Court determined that Congress intended an exception to the administrative channeling requirement in § 405(h), “where it would not simply channel review through the agency, but would mean no review at all.”[51] This so called Michigan Academy exception is narrowly circumscribed, as the Supreme Court made clear that hardship caused by the practical effects of administrative channeling is not the test, but rather an actual lack of review.[52] The Court cautioned, “we do not hold that an individual party could circumvent § 1395ii's channeling requirement simply because that party shows that postponement would mean added inconvenience or cost in an isolated, particular case.”[53] The Court has consistently drawn a distinction between “a total preclusion of review and postponement of review.”[54]

         BVH argues that if the termination of its Medicare provider agreement was allowed to go forward, it would cause BVH to close due to a lack of Medicare dollars, effectively foreclosing its financial ability to pursue administrative remedies and challenge Defendants' conduct. Although BVH makes the conclusory statement that other small hospitals would be similarly foreclosed from review, [55] it focuses exclusively on the specific financial inconvenience to BVH if it is not granted injunctive relief pending review of termination of its Medicare provider agreement. Because BVH is explicitly entitled to administrative and judicial review of the agency's decision to terminate its provider agreement, and because the harm to BVH is an isolated, delay-related harm, the Michigan Academy exception does not apply.[56]

         C. “Entirely Collateral” Basis for Exercising Jurisdiction

         Alternatively, BVH invokes the so-called Eldridge “entirely collateral” exception. In Matthews v. Eldridge, [57] the Supreme Court explained that the requirement under § 405(g) that there be a final decision by the Secretary after a hearing as a condition to federal jurisdiction consists of a waivable and nonwaivable element:

The waivable element is the requirement that the administrative remedies prescribed by the Secretary be exhausted. The nonwaivable element is the requirement that a claim . . . shall have been presented to the Secretary. Absent such a claim there can be no “decision” of any type. And some decision by the Secretary is clearly required by the statute.[58]

         Here, BVH has fulfilled the nonwaivable element of administrative exhaustion by presenting its appeal of the termination decision to the Secretary. Thus, the Court determines if the remaining steps of administrative exhaustion required in § 405(g) should be waived.

         Although Defendants have clearly not waived exhaustion here, “agency waiver may be, in the court's discretion, deemed improperly withheld where the plaintiff's interest in prompt resolution is so great that deference to the agency's judgment on the utility of exhaustion is appropriate.”[59] Eldridge did not create an exception to the channeling requirements in § 405(g)

         but instead found that the “final decision” requirement would be deemed satisfied as to a claim where “(1) the plaintiff asserts a colorable constitutional claim that is collateral to the substantive issues of the administrative proceedings, (2) exhaustion would result in irreparable harm, and (3) exhaustion would be futile.”[60] “The plaintiff bears the burden of establishing these elements.”[61]As to the first element, while Defendants believe there is significant overlap between the relief requested by BVH here and the arguments pending in the administrative appeal, in their supplemental briefing they assume for the sake of argument that BVH's claim is entirely collateral.[62] The Court remains unconvinced that BVH's claim is “entirely collateral” for purposes of the Eldridge exception. In Eldridge, the Court deemed as collateral the plaintiff's constitutional claim demanding a pre-termination hearing; plaintiff's constitutional claim regarding his procedural rights involved an analysis of Supreme Court jurisprudence on the Due Process Clause, which involved completely separate issues from his challenge to the Secretary's decision to terminate benefits.[63] Since then, due process “claims to a deprivation hearing as a matter of constitutional right” have fit under this narrow exemption; multiple courts, including this Court, have likewise held that the “entirely collateral” requirement applies when a plaintiff is asserting a constitutional challenge demanding that a pre-termination hearing take place.[64]

         The Amended Complaint in this case asserts a broad due process claim that BVH characterizes as:

the failure to follow statutory-rulemaking procedures, lack of notice and opportunity to be heard, the use and application of erroneous, arbitrary and capricious procedures and rules, the failure to provide BVH review in a meaningful time and manner, failure to allow BVH a reasonable opportunity to comply with new rules imposed without notice or grace period, and general widespread procedural unfairness.[65]

         The gravamen of BVH's due process challenge continues to focus on CMS's reliance on newly-issued, arbitrary and invalid agency rules, which BVH contends were improperly issued without following statutory “notice and comment” rule-making requirements.[66] BVH concludes, “[a]ccordingly, the CMS improperly relied upon invalid rules in rendering its decision against BVH. The erroneous application of these invalid rules without affording a pre-termination hearing constituted an abuse of CMS's ...


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