District Hospital Partners, et al v. Kathleen Sebeliu

Filing

OPINION filed [1553129] (Pages: 31) for the Court by Judge Henderson. [14-5061]

USCA Case #14-5061

Document #1553129

Filed: 05/19/2015

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 12, 2015

Decided May 19, 2015

No. 14-5061
DISTRICT HOSPITAL PARTNERS, L.P., DOING BUSINESS AS
GEORGE WASHINGTON UNIVERSITY HOSPITAL, ET AL.,
APPELLANTS
v.
SYLVIA MATHEWS BURWELL, SECRETARY OF THE UNITED
STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE

Appeal from the United States District Court
for the District of Columbia
(No. 1:11-cv-00116)

Robert L. Roth argued the cause for the appellants. James
F. Segroves and John R. Hellow were with him on brief.
John L. Oberdorfer, Pierre H. Bergeron, Stephen P. Nash
and Sven C. Collins were on brief for the amici curiae
Non-Profit Hospitals in support of the appellants.
James C. Luh, Trial Attorney, United States Department
of Justice, argued the cause for the appellee. Stuart F. Delery,
Assistant Attorney General, Ronald C. Machen, Jr., U.S.
Attorney, and H. Thomas Byron III, Attorney, were with him
on brief.

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Before: HENDERSON, ROGERS and BROWN, Circuit
Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: This case
requires us to slough through the “labyrinthine world” of
Medicare reimbursements. Adirondack Med. Ctr. v. Sebelius,
740 F.3d 692, 694 (D.C. Cir. 2014). Under the current
system, hospitals are reimbursed for treating a Medicare
patient based on the average treatment cost for that patient’s
ailment/condition.
Some patients, however, require
protracted care that far outpaces an illness’s average cost of
treatment.
To account for this, hospitals can request
“additional payments,” known as outlier payments, if the cost
of treating a particular patient is sufficiently high. 42 U.S.C.
§ 1395ww(d)(5)(A). Every year, the Secretary of Health and
Human Services (HHS) sets a monetary threshold above which
outlier payments may be recovered.
A group of 186 hospitals that participates in Medicare
believes that the HHS Secretary set the monetary threshold for
outlier payments too high in 2004, 2005 and 2006. Led by
District Hospital Partners (DHP), the hospitals sued the
Secretary in federal district court, claiming that she violated the
Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et seq.,
by engaging in arbitrary and capricious decision-making.
They also moved to supplement the administrative record.
The district court denied the motion to supplement in part and
rejected DHP’s APA challenges to each outlier threshold. We
affirm the district court’s partial denial of the motion to
supplement and its rejection of the APA challenges to the 2005
and 2006 outlier thresholds. Its conclusion that the 2004
threshold is adequately explained, however, is erroneous and

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we therefore reverse its summary judgment grant to the
Secretary on this claim and remand to the district court with
instructions to remand to the Secretary for further proceedings.
See Miller v. Dep’t of Navy, 476 F.3d 936, 939–40 (D.C. Cir.
2007).
I. BACKGROUND
A. THE OUTLIER PAYMENT SYSTEM
Medicare was “[e]stablished in 1965 as part of the Social
Security Act.” Fischer v. United States, 529 U.S. 667, 671
(2000). It operates as a “federally funded medical insurance
program for the elderly and disabled,” id., and is managed by
the HHS Secretary, 42 U.S.C. § 1395kk(a). The program
originally reimbursed hospitals for the “reasonable costs” of
services provided to Medicare patients. Cnty. of L.A. v.
Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). That system
deteriorated over time, however, because it provided “little
incentive for hospitals to keep costs down,” as “[t]he more they
spent, the more they were reimbursed.” Id. In 1983, the
Congress became particularly concerned “that hospitals
reimbursed on a reasonable cost basis lacked incentives to
operate efficiently.” Transitional Hosps. Corp. of La., Inc. v.
Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000).
To rectify the problem, the Congress shifted to a
prospective payment system that reimburses hospitals based on
the average rate of “operating costs [for] inpatient hospital
services.” Cnty. of L.A., 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. Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C.
Cir. 2011). 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

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average cost of treating all Medicare patients.” Id. 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.” Cnty. of L.A., 192 F.3d at 1009.
The major innovation of the prospective payment system
is that hospitals are “reimbursed at a fixed amount per patient,
regardless of the actual operating costs they incur in rendering
[those] services.” Sebelius v. Auburn Reg’l Med. Ctr., 133
S. Ct. 817, 822 (2013) (emphasis added). The new system
incentivizes hospitals to keep costs as low as possible. But the
“Congress recognized that health-care providers would
inevitably care for some patients whose hospitalization would
be extraordinarily costly or lengthy.” Cnty. of L.A., 192 F.3d
at 1009. To account for costly patients, the Congress allows
hospitals to request outlier payments.
See 42 U.S.C.
§ 1395ww(d)(5)(A)(ii). A hospital is eligible for an outlier
payment “in any case where charges, adjusted to cost, exceed .
. . the sum of the applicable DRG prospective payment rate . . .
plus a fixed dollar amount determined by the Secretary.” Id.
Although calculating outlier payments is an elaborate
process, three particular numbers are important: (1) the
cost-to-charge ratio, (2) the fixed loss threshold, and (3) the
outlier threshold.
A hospital’s cost-to-charge ratio is
calculated from data in its most recent cost report. See 42
C.F.R. § 412.84(i)(2). The ratio represents a hospital’s
“average markup.” Appalachian Reg’l Healthcare, Inc. v.
Shalala, 131 F.3d 1050, 1052 (D.C. Cir. 1997). Markup is
key because outlier payments are available only “where
charges, adjusted to cost, exceed” the applicable DRG rate by a
fixed amount. 42 U.S.C. § 1395ww(d)(5)(A)(ii) (emphasis
added). The ratio ensures that the Secretary does not simply
reimburse a hospital for the charges reflected on a patient’s

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invoice but instead only for charges that are “adjusted to cost.”
Id.
Applying the cost-to-charge ratio in practice is
straightforward. For example, if a hospital’s cost-to-charge
ratio is 75% (total costs are approximately 75% of total
charges), the Secretary multiplies the hospital’s charges by
75% to calculate the hospital’s cost. See Boca Raton Cmty.
Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229
n.3 (11th Cir. 2009).
The second important number is the fixed loss threshold.
A hospital can request an outlier payment if its charges exceed
the “DRG prospective payment rate . . . plus a fixed dollar
amount determined by the Secretary.”
42 U.S.C.
§ 1395ww(d)(5)(A)(ii) (emphasis added). The italicized
portion—“a fixed dollar amount”—is known as the fixed loss
threshold. In effect, this threshold “acts like an insurance
deductible because the hospital is responsible for that portion
of the treatment’s excessive cost” above the applicable DRG
rate. Boca Raton Cmty. Hosp., 582 F.3d at 1229. The
Secretary calculates a new fixed loss threshold for each fiscal
year. See 42 U.S.C. § 1395ww(d)(6).
The third number is the outlier threshold. The Secretary
calculates it by adding the DRG rate for a certain illness or
condition to the fixed loss threshold. 1 See Cnty. of L.A., 192
1

We have simplified the calculation. Although the outlier
threshold is calculated by adding the applicable DRG rate to the
fixed loss threshold, there are other variables that must be added to
that amount as well. These include “any IME and DSH payments,
and any add-on payments for new technology.” 68 Fed. Reg.
45,346, 45,477 (Aug. 1, 2003). IME is an acronym for indirect
costs of medical education, which the Secretary must consider in
disbursing outlier payments. See 42 U.S.C. § 1395ww(d)(5)(B).
DSH is an acronym for a disproportionate share hospital, which
considers whether a hospital serves a disproportionate share of

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F.3d at 1009. Any cost-adjusted charges imposed above the
outlier threshold are eligible for reimbursement under the
outlier
payment
provision.
See
42
U.S.C.
§ 1395ww(d)(5)(A)(ii). Since 2003, outlier payments have
been 80% of the difference between a hospital’s adjusted
charges and the outlier threshold. See 68 Fed. Reg. at 45,476;
42 C.F.R. § 412.84(k).
We can tie this all together with an example. Assume that
the Secretary sets the fixed loss threshold at $10,000. Assume
also that a hospital treats a Medicare patient for a broken bone
and that the DRG rate for the treatment is $3,000. The
Medicare patient required unusually extensive treatment which
caused the hospital to impose $23,000 in cost-adjusted charges.
If no other statutory factor is triggered, see supra n.1, the
hospital is eligible for an outlier payment of $8,000, which is
80% of the difference between its cost-adjusted charges
($23,000) and the outlier threshold ($13,000). See generally
62 Fed. Reg. 45,966, 45,997 (Aug. 29, 1997) (explaining
similar example).
Apart from calculating individual reimbursements, the
Secretary must also ensure that total outlier payments are
neither “less than 5 percent nor more than 6 percent” of the
total DRG-related payments in a given year. 42 U.S.C.
low-income patients.
See id. § 1395ww(d)(5)(F).
And
technological add-on payments refer to the Secretary’s obligation to
consider whether the applicable DRG rate takes into account the
expenses of “a new medical service or technology.”
Id.
§ 1395ww(d)(5)(K)(ii)(I).
None
of
these
additional
variables—IME, DSH and technology add-on payments—is
relevant here. For convenience, then, we refer to the outlier
threshold as the sum of the applicable DRG rate and the fixed loss
threshold.

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§ 1395ww(d)(5)(A)(iv). The Secretary complies with this
provision by selecting 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.” Cnty. of L.A., 192 F.3d at 1013.
Nevertheless, testing against historical data is only a predictive
exercise. Id. at 1009. Accordingly, the Secretary does not
take corrective action once the fiscal year ends even if outlier
payments fall outside the five-to-six per cent range. Id. We
have upheld this practice. Id. at 1020.
B. THE OUTLIER CORRECTION RULE
The outlier payment system began to break down in the
late 1990s. Outlier payments were supposed to be made “only
in situations where the cost of care is extraordinarily high in
relation to the average cost of treating comparable conditions
or illnesses.” 68 Fed. Reg. 10,420, 10,423 (Mar. 5, 2003).
But hospitals could manipulate the outlier regulations if their
charges were “not sufficiently comparable in magnitude to
their costs.” Id. The Secretary issued a notice of proposed
rulemaking (NPRM) to address these concerns. Id. at 10,420.
In the NPRM, the Secretary described how a hospital
could use “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. A hospital knows
that its cost-to-charge ratio is based on data submitted in past
cost reports. Id. 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.” Id. Some
hospitals took advantage of this weakness in the system. The
Secretary identified “123 hospitals whose percentage of outlier
payments relative to total DRG payments increased by at least

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5 percentage points” between fiscal years 1999 and 2001. Id.
The adjusted charges at those 123 hospitals “increased at a rate
at or above the 95th percentile rate of charge increase for all
hospitals . . . over the same period.” Id. And during that
time, the 123 hospitals had a “mean rate of increase in charges
[of] 70 percent” alongside a decrease of “only 2 percent” in
their cost-to-charge ratios. Id. at 10,424. The 123 hospitals
are referred to as turbo-chargers.
The Secretary published the final rule three months after
the NPRM. See 68 Fed. Reg. 34,494 (June 9, 2003) (outlier
correction rule). As relevant here, the Secretary adopted two
new provisions to close the gaps in the outlier payment system.
First, a hospital’s cost-to-charge ratio was to be calculated
using more recent cost reports. Id. at 34,497–99 (codified at
42 C.F.R. § 412.84(i)(1)–(2)). This change reduced “the time
lag for updating cost-to-charge ratios by a year or more” and
ensured that those ratios accurately reflected a hospital’s costs.
Id. at 34,497. Second, a hospital’s outlier payments were to
be subject to reconciliation when its “cost report[] coinciding
with the discharge is settled.” Id. at 34,504 (codified at 42
C.F.R. § 412.84(i)(4)). Outlier payments were still disbursed
based on the “best information available at that time.” Id. at
34,501. They were adjusted after the fact, however, if the
“actual cost-to-charge ratios [were] found to be plus or minus
10 percentage points from the cost-to-charge ratio” used to
calculate the outlier payments. Id. at 34,503.
C. THE CHALLENGED RULES
Once the Secretary promulgated the outlier correction
rule, she initiated rulemakings to set the outlier thresholds for
2004, 2005 and 2006, respectively. See 68 Fed. Reg. 45,346;
69 Fed. Reg. 48,916 (Aug. 11, 2004); 70 Fed. Reg. 47,278
(Aug. 12, 2005). DHP challenges all three rules. Each one is

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quite long and has its own context. We therefore summarize
them individually.
In the 2004 rule, the Secretary established the outlier
threshold at “the prospective payment rate for the DRG . . . plus
$31,000.” 68 Fed. Reg. at 45,477. To arrive at the $31,000
threshold, the Secretary had to “simulate[] payments” for 2004.
Id. at 45,476. In order to simulate 2004 payments, the
Secretary used cost and charge data from 2002 and “inflate[d]”
it by two years to predict charges for 2004. Id. The
Secretary inflated the 2002 data using the “2-year average
annual rate of change in charges per case” between 2000 and
2002. Id. The average annual rate of change is sometimes
referred to as the “charge inflation factor.” Id. at 45,477.
The charge data used to calculate the charge inflation factor
came from all hospitals’ “cost-to-charge ratios.” Id. at
45,476.
The Secretary also made adjustments in the 2004
rulemaking to account for the outlier correction rule. One
change was to use “more recent cost-to-charge ratios” in order
to best “approximate” the “latest tentative settled cost reports.”
Id. Another change took account of the possibility that
hospitals’ outlier payments were subject to the reconciliation
process set forth in the outlier correction rule. 2 Id.
2

As discussed, supra p. 8, the reconciliation process corrects for
hospitals that take advantage of the time lag in updating
cost-to-charge ratios. See 68 Fed. Reg. at 34,500–01. The outlier
correction rule reduced “the opportunity for hospitals to manipulate
the system to maximize outlier payments.” Id. at 34,501. But the
Secretary recognized that the outlier correction rule did not eliminate
“all such opportunity.” Id. A hospital could still skew the system
by increasing charges for current invoices because the Secretary
used past cost-to-charge ratios that did not capture the most recent
charge increases. See id. To account for this asymmetry, the

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Specifically, the Secretary made preliminary calculations and
found “approximately 50 hospitals [she] believe[d] will be
reconciled.” Id. To avoid understating the rate of charge
inflation for these hospitals, the Secretary “attempted to project
each hospital’s cost-to-charge ratio” using “its rate of increase
in charges per case based on [fiscal year] 2002 charges,
compared to costs.” Id. at 45,477.
One commenter asked the Secretary to “factor in the
calculation of the [outlier] threshold the fact that certain
hospitals have distorted their charges significantly.” Id. at
45,477. In other words, the commenter wanted the 2004
outlier threshold to account for the turbo-chargers. The
Secretary answered this concern by noting that the 2004
threshold “reflect[s] the changes made to outliers from the
[outlier correction] rule.” Id. Had the Secretary not
accounted for the changes, the 2004 fixed loss threshold would
have been “approximately $50,200.” Id. The difference
between this amount and the one selected—$31,000—allowed
hospitals “to qualify for higher outlier payments due to the
lower threshold.” Id. The Secretary therefore saw no harm
to hospitals because “the [2004] threshold ha[d] fallen
significantly from the proposed threshold.” Id.

Secretary created the reconciliation process. Outlier payments are
still disbursed based on the most recently available “cost-to-charge
ratios.” Id. at 34,504. But once the cost report “coinciding with
the discharge is settled”—which occurs after the outlier payment for
that discharge is disbursed—the Secretary will reconcile (i.e., adjust)
outlier payments after the fact. Id. at 34,504. Reconciliation
occurs if the hospital’s actual cost-to-charge ratio is “plus or minus
10 percentage points from the cost-to-charge ratio used during that
time period to make outlier payments.”
Id. at 34,503.
Consequently, any interim gains from turbo-charging are erased
through post-disbursement reconciliation.

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In the 2005 rule, the Secretary established that the outlier
threshold was to be “equal to the prospective payment rate for
the DRG . . . plus $25,800.” 69 Fed. Reg. at 49,278. But she
arrived at that threshold only after a number of commenters
urged her to adopt a methodology different from the one set
forth in the proposed rule. The proposed rule provided that
the 2005 outlier threshold was to be the applicable DRG rate
“plus $35,085.” Id. at 49,276. Some commenters worried
that raising the fixed loss threshold from $31,000 to $35,085
“would make it more difficult for hospitals to qualify for
outlier payments and put them at greater risk when treating
high cost cases.” Id. The Secretary considered these
concerns and revised the methodology “in order to calculate
the [fiscal year] 2005 outlier thresholds.” Id. at 49,277. Her
revision accounted for the changes in the outlier correction rule
and the “exceptionally high rate of hospital charge inflation
[i.e., turbo-charging] that is reflected in the data” for 2001,
2002 and 2003. Id. The Secretary was unable to anticipate
these changes in 2004 because she had “insufficient data” due
to the “limited time from the publication of [the outlier
correction rule] to the publication” of the 2004 outlier
threshold. Id.
As she did one year earlier, the Secretary had to
“simulate[] payments” for 2005 using past data based on
“hospital cost-to-charge ratios.” Id. But “[i]nstead of using
the 2-year average annual rate of change in charges per case”
between 2001 and 2003, the Secretary took the “unprecedented
step” of using data from the most recent fiscal year. Id. This
innovation required her to calculate “the 1-year average annual
rate of change in charges per case from the first half of [fiscal
year] 2003 to the first half of [fiscal year] 2004.” Id. She
believed that these changes would lead to a “more accurate
determination of the rate of change in charges per case”
between 2003 and 2005. Id. The Secretary also decided

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there was no need to account for the effect of reconciliation;
given the outlier correction rule, she declared, “the majority of
hospitals’ cost-to-charge ratios will not fluctuate significantly
enough . . . to meet the criteria to trigger reconciliation of their
outlier payments.” Id. at 49,278.
For 2006, the Secretary established that the outlier
threshold was to be “equal to the prospective payment rate for
the DRG . . . plus $23,600.” 70 Fed. Reg. at 47,494. As with
the earlier rules, the Secretary had to “simulate payments” for
2006 using past data. Id. But she worried that data from
2002 and 2003 was skewed by “the atypically high rate of
hospital charge inflation” during that time. Id. To ensure the
data was not tainted by charge inflation, she opted to calculate
the “charge inflation factor based on the first six months of
[fiscal year] 2005 relative to [the] same period for [fiscal year]
2004.” Id. The data for 2004 and 2005 was “taken from the
most recent tentatively settled cost reports of hospitals.” Id.
Her choice was significant because the outlier correction rule
was in effect for the entire period, meaning that the past data
“fully incorporate[d] implementation of the new outlier
policy.” Id.
D. PROCEDURAL HISTORY
DHP asserts that, had the Secretary “established more
accurate outlier thresholds for federal fiscal years 2004, 2005
and 2006, [it] would have received substantially more in outlier
payments.” Compl. ¶ 20. After pursuing administrative
remedies for some claims, see 42 U.S.C. § 1395oo(a), it filed
suit in federal district court. The Secretary moved to dismiss
the complaint on the grounds of failure to exhaust
administrative remedies and failure to state a claim for relief.
See Dist. Hosp. Partners, LP v. Sebelius, 794 F. Supp. 2d 162,
164 (D.D.C. 2011).
The district court dismissed the

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unexhausted claims but concluded that the APA challenges to
the outlier thresholds should be resolved on summary
judgment. Id. at 173.
The parties subsequently proceeded to discovery but could
not agree on the contents of the administrative record. DHP
eventually filed a motion to compel the Secretary to
supplement the record. See Dist. Hosp. Partners, LP v.
Sebelius, 971 F. Supp. 2d 15, 18–19 (D.D.C. 2013). The
district court supplemented the 2004 rulemaking record with
two documents: (1) a public comment on the 2004 outlier
threshold; and (2) a version of the outlier correction rule the
Secretary had sent to the Office of Management and Budget
(OMB) for review but eventually abandoned. Id. at 28, 31.
See generally Exec. Order No. 12,866 § 6(a)(3)(B)(i), 58 Fed.
Reg. 51,735 (Sept. 30, 1993) (requiring agencies taking
“significant regulatory action” to send OMB “[t]he text of the
draft regulatory action” before publication in the Federal
Register).
After discovery concluded, the parties
cross-moved for summary judgment.
See Dist. Hosp.
Partners, LP v. Sebelius, 973 F. Supp. 2d 1, 5 (D.D.C. 2014).
The district court granted summary judgment to the Secretary
because she “made reasonable methodological choices in
determining the fixed loss thresholds” for 2004, 2005 and
2006. Id. DHP timely appealed.
II. ANALYSIS
We review a grant of summary judgment de novo.
Deppenbrook v. PBGC, 778 F.3d 166, 171 (D.C. Cir. 2015).
Summary judgment may be granted “if the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” FED. R.
CIV. P. 56(a). “Our inquiry is more nuanced, however, if the
dispute involves the review of agency action.” Deppenbrook,

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778 F.3d at 171. If so, “we review the administrative record”
directly and “accord no particular deference to the judgment of
the District Court.” Id. (quotation mark omitted). We will
affirm summary judgment for the agency unless it “violated the
Administrative Procedure Act by taking action that is
‘arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.’ ” Id. (quoting 5 U.S.C. § 706(2)).
We review the district court’s “refusal to supplement the
administrative record for abuse of discretion.” Am. Wildlands
v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008).
DHP makes three arguments on appeal. First, it claims
that the district court should have ordered the Secretary to
supplement the administrative record with additional
documents. Second, it contends that the Secretary violated
the APA by failing to use the best available data. And third, it
argues that the outlier thresholds for 2004, 2005 and 2006 were
set too high and are therefore arbitrary and capricious. We
address each argument in turn.
A. SUPPLEMENTING THE ADMINISTRATIVE RECORD
DHP claims that the district court abused its discretion by
not including additional materials in all three rulemaking
records. We disagree. 3
In evaluating agency action under the APA, our review
must “be based on the full administrative record that was
before the Secretary” when she made her decision.
Kempthorne, 530 F.3d at 1002. To ensure that we review only
3

The Secretary also asks us to reverse the district court’s decision
to supplement the 2004 rulemaking record with the OMB draft
outlier correction rule. We decline to do so because the district
court did not abuse its discretion in partially supplementing the 2004
rulemaking record.

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those documents that were before the agency, we “do not allow
parties to supplement the record unless they can demonstrate
unusual circumstances justifying a departure from this general
rule.” Id. (quotation mark omitted). We have identified
three “unusual circumstances”:
(1) the agency deliberately or negligently excluded
documents that may have been adverse to its decision;
(2) the district court needed to supplement the record
with background information in order to determine
whether the agency considered all of the relevant
factors; or (3) the agency failed to explain
administrative action so as to frustrate judicial review.
Id. (quotation marks, citations and alteration omitted); see also
City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir.
2010) (denying motion to supplement administrative record
because “[n]one of these [three] conditions is met”).
DHP complains that the district court should have
supplemented the administrative record with source data used
to approximate cost-to-charge ratios for 2004. But it does not
explain—or even try to explain—how its request falls into one
of the three unusual circumstances elucidated in Kempthorne.
The Secretary did not frustrate judicial review by saying too
little; the 2004 rulemaking explained at length how she
calculated cost-to-charge ratios in light of the outlier correction
rule. See 68 Fed. Reg. at 45,476 (explaining “three steps”
used to calculate “updated cost-to-charge ratios”). Nor does
the source data constitute critical background information.
See James Madison Ltd. ex rel. Hecht v. Ludwig, 82 F.3d 1085,
1095–96 (D.C. Cir. 1996) (unnecessary to supplement
administrative record with underlying source documents
because record contained “detailed memoranda describing the
[agency’s] findings and recommendations”). DHP has also

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failed to establish that this source data was deliberately or
negligently excluded by the Secretary.
Meeting this
exception requires a “strong showing of [agency] bad faith”
and the “conclusory statements” in DHP’s brief “fall far short”
of that high threshold. Id. at 1095 (quotation mark omitted).
DHP next argues that the district court should have
supplemented the administrative record with the “trimmed”
version of hospital charge data. Appellants’ Br. 55. It says
that the trimmed data is different from the “complete data sets”
the Secretary provided to the public, which allegedly left it in
the dark as to how the Secretary in fact calculated
cost-to-charge ratios. Id. DHP is wrong: “[T]he process of
‘trimming’ involved neither the modification of the [data] files
currently in the administrative record, nor the creation of new
[data] files not in the record.” Dist. Hosp. Partners, 971 F.
Supp. 2d at 25. Moreover, the trimmed files are similar to
source data and therefore are neither background information
nor material that is needed because the agency failed to explain
itself. See James Madison, 82 F.3d at 1095–96. Again, DHP
makes no showing that the exclusion of the trimmed files was
done in bad faith.
DHP’s final claim is that the administrative record should
have been supplemented with the congressional testimony of a
former HHS official. 4 This material also fails to fall within
one of Kempthorne’s three exceptions. We are not reviewing
4

Although DHP also asserts that the district court should have
supplemented the 2005 and 2006 rulemaking records with the OMB
draft, its argument on this point consists of only one sentence in its
opening brief and is therefore forfeited. See Bryant v. Gates, 532
F.3d 888, 898 (D.C. Cir. 2008) (appellant forfeited argument
supported by “only [a] single, conclusory statement” in opening
brief).

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agency rules that say so little they “frustrate judicial review”
and the congressional testimony is not “background
information” that illustrates the Secretary’s decision-making.
Kempthorne, 530 F.3d at 1002. Nor was this document
excluded in bad faith because it was not withheld: As the
Secretary points out, the testimony is a “matter of public
record.” Appellee’s Br. 55.
Accordingly, the district court did not abuse its discretion
in limiting supplementation to the 2004 rulemaking record
with only the draft rule sent to OMB and a 2004 public
comment.
B. USING THE BEST AVAILABLE DATA
DHP asserts that the Secretary was obligated to use the
best available data in formulating the outlier thresholds for
2004, 2005 and 2006. While some statutes require an agency
to use the best available data when taking certain action, 5 DHP
has not identified a similar statute constraining the Secretary’s
discretion in setting outlier thresholds. DHP also claims that
the Secretary herself required the agency to always use the best
available data. See 65 Fed. Reg. 47,026, 47,038 (Aug. 1,
2000). But she simply noted that she “use[s] the best
available cost reporting data” for a specific calculation, id., but
did not impose as a freestanding regulatory obligation the use
of the best available data in every rulemaking.

5

See, e.g., 16 U.S.C. § 1533(b)(1)(A) (Interior Secretary must use
“the best scientific and commercial data available to him” in
determining “whether any species is an endangered species or a
threatened species”); 42 U.S.C. § 13256(b) (Energy Secretary must
prepare “technical and policy analysis” on alternative fuels “based
on the best available data and information obtainable by the
Secretary”).

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DHP attempts to resuscitate its claim by arguing that, in
Gas Appliance Manufacturers Ass’n, Inc. v. DOE (GAMA),
998 F.2d 1041 (D.C. Cir. 1993), we imposed a generic
obligation on agencies to always use the best available data.
DHP is in error. Nowhere in GAMA did we require agencies
to collect and use only the best available data. Instead, we
reversed the Energy Department’s decision because it was not
adequately explained. Id. at 1046–48, 1049–51. We also
rejected a specific calculation Energy had made because it did
not explain why it used two different data sets for the same
inquiry.
Id. at 1048.
But far from imposing a
best-available-data obligation on all agencies, GAMA was
simply a routine APA case in which we found the challenged
agency action arbitrary and capricious. See NRDC v. Daley,
209 F.3d 747, 752 (D.C. Cir. 2000).
To be clear, agencies do not have free rein to use
inaccurate data. An agency is required to “examine the
relevant data and articulate a satisfactory explanation for its
action including a rational connection between the facts found
and the choice made.” Motor Vehicle Mfrs. Ass’n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (emphasis
added; quotation mark omitted). If an agency fails to examine
the relevant data—which examination could reveal, inter alia,
that the figures being used are erroneous—it has failed to
comply with the APA. Moreover, an agency cannot “fail[] to
consider an important aspect of the problem” or “offer[] an
explanation for its decision that runs counter to the evidence”
before it. Id. These requirements underscore that an agency
cannot ignore new and better data. See Catawba Cnty., NC v.
EPA, 571 F.3d 20, 46 (D.C. Cir. 2009) (agencies “have an
obligation to deal with newly acquired evidence in some
reasonable fashion”); see also New Orleans v. SEC, 969 F.2d
1163, 1167 (D.C. Cir. 1992) (“an agency’s reliance on a report
or study without ascertaining the accuracy of the data

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contained in the study or the methodology used to collect the
data is arbitrary” (quotation mark omitted)).
Whether an agency has arbitrarily used deficient data
depends on the specific facts of a particular case, as “the
parameters of the arbitrary and capricious standard of review
will vary with the context of the case.” WWHT, Inc. v. FCC,
656 F.2d 807, 817 (D.C. Cir. 1981) (quotation marks omitted);
see also Maggard v. O’Connell, 671 F.2d 568, 571 (D.C. Cir.
1982) (“the concept of arbitrary and capricious review defies
generalized application and must be contextually tailored”
(quotation marks omitted)). It is to that inquiry we now turn.
C. SETTING THE OUTLIER THRESHOLDS
DHP contends that the Secretary acted arbitrarily and
capriciously by setting the outlier thresholds too high in 2004,
2005 and 2006. Because the Secretary dealt with different
considerations in each rulemaking, we discuss them separately.
1. The 2004 Rule
The Secretary established that the 2004 outlier threshold
was the applicable DRG rate “plus $31,000.” 68 Fed. Reg. at
45,477. As discussed above, the Secretary selected this
number by first simulating 2004 outlier payments using data
from 2002. Id. at 45,476. She inflated the 2002 data using
“the 2-year average annual rate of change in charges per case”
between 2000 and 2002, which calculation was made from all
hospitals’ “cost-to-charge ratios.” Id. And she accounted for
the effects of reconciliation by identifying “approximately 50
[turbo-charging] hospitals” that were likely to be reconciled.
Id. For each of the 50 hospitals, the Secretary sought to

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project its “cost-to-charge ratio based on its rate of increase in
charges per case” in 2002. 6 Id. at 45,477.
DHP argues that the Secretary, in calculating the charge
inflation factor, should have excluded the data from the 123
turbo-charging hospitals identified in the NPRM. The
Secretary excluded them in the OMB draft rule and DHP faults
the Secretary for not explaining why she changed course in the
2004 rulemaking and opted to include turbo-chargers’ data.
But, as already noted, HHS abandoned the OMB draft rule and
never published it in the Federal Register. Relying on the
OMB draft rule to impugn the 2004 rulemaking, then, presents
a problem. The Supreme Court recently iterated that “federal
courts ordinarily are empowered to review only an agency’s
final action.” Nat’l Ass’n of Home Builders v. Defenders of
Wildlife, 551 U.S. 644, 659 (2007). Deviations from a
6

At oral argument, counsel for DHP intimated that the charge
inflation factor and cost-to-charge ratios come from two different
datasets. Oral Arg. Tr. at 11–12, 14–15, 38. Because this data is
separate, DHP asserted, the Secretary could make adjustments to one
group but not the other. We do not believe the intimation is
supported by the record. In each rulemaking, the Secretary
specified that she derived the charge inflation factor from the
cost-to-charge ratios for individual hospitals. See 70 Fed. Reg. at
47,494 (Secretary calculated “a charge inflation factor of 14.94
percent . . . us[ing] updated cost-to-charge ratios from the March
2005 update” of hospital files); 69 Fed. Reg. at 49,277 (“[t]he 1-year
average annual rate of change in charges per case . . . was 8.9772
percent, or 18.76 percent over 2 years. As discussed above, as we
have done in the past, we used hospital cost-to-charge ratios” from
hospital files (emphasis added)); 68 Fed. Reg. at 45,476 (charge
inflation factor is derived from “the 2-year average annual rate of
change in charges per case” and is based on “cost-to-charge ratios”
from hospital files). Accordingly, any adjustment to cost-to-charge
ratios is reflected in the charge inflation factor.

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“preliminary determination” that was subsequently “overruled
at a higher level . . . does not render the decisionmaking
process arbitrary and capricious.” Id. It is true, of course,
that an agency cannot “depart from a prior policy sub silentio
or simply disregard rules that are still on the books.” FCC v.
Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). But
this principle is inapplicable here—the OMB draft was never
“on the books” in the first place. Id.
We held as much in Kennecott Utah Copper Corp. v. DOI,
88 F.3d 1191 (D.C. Cir. 1996). That case involved, among
other things, draft regulations that were sent by a Department
of Interior (Interior) official to the Office of the Federal
Register (OFR) for publication. Id. at 1200. Before they
were published, however, Interior switched course and
withdrew the draft from publication. Id. at 1200–01. Interior
then proposed and eventually published a new set of
regulations. Id. at 1201. Certain Kennecott petitioners
challenged the published regulations because they supposedly
“repealed and modified” the never-published draft regulations
without a new round of notice and comment. Id. at 1207.
We disagreed and held that the published regulations did not
“repeal or modify” anything because the draft “never became a
binding rule requiring repeal or modification.” Id. at 1208.
The APA requires notice and comment only when
“formulating, amending, or repealing a rule,” 5 U.S.C.
§ 551(5), and the “agency was in no sense ‘formulating’ a rule”
by “discarding” the earlier draft, Kennecott, 88 F.3d at 1209.
Nevertheless—and without regard to the OMB draft—we
believe that the Secretary’s promulgation of the 2004 outlier
threshold violated the APA. In the NPRM—a formal agency
document that was published in the Federal Register—the
Secretary identified 123 turbo-charging hospitals. 68 Fed.
Reg. at 10,423–24. The 123 hospitals reported adjusted

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charges that “increased at a rate at or above the 95th percentile
rate of charge increase for all hospitals” between 1999 and
2001. Id. at 10,423. The Secretary also noted that the 123
hospitals were the principal beneficiaries of the outlier
payment system: Their “mean rate of increase in charges was
70 percent” for that two-year period while their cost-to-charge
ratios “declined by only 2 percent.” Id. at 10,424.
The 123 hospitals are nowhere to be found in the 2004
rulemaking. Granted, the Secretary identified 50 hospitals
“that have been consistently overpaid recently for outliers.”
68 Fed. Reg. at 45,476. But she did not explain how the 50
hospitals differed from the 123 she identified in the NPRM.
This unexplained inconsistency is significant because factoring
in the outlier correction rule “resulted in a substantial
reduction in the outlier threshold from the proposed level.”
Id. at 45,477 (emphasis added). The changes, in fact, caused
the actual 2004 fixed loss threshold to fall from $50,200 in the
proposed rule to $31,000 in the final rule. Id. Had the
Secretary accounted for more turbo-charging hospitals in the
2004 rule, perhaps the 2004 outlier threshold would have been
even lower. Or perhaps not. Either way, we have no way to
know for sure because there was scarcely a word about the 123
turbo-chargers in the 2004 rule. 7

7

Although the NPRM was not technically part of the 2004
rulemaking record, it was sufficiently similar to, and
contemporaneous with, the 2004 rulemaking as to require the
Secretary to explain inconsistencies in the data. See Portland
Cement Ass’n v. EPA, 665 F.3d 177, 187 (D.C. Cir. 2011) (agency
must account for and explain changes that affect “a
contemporaneous and closely related rulemaking”); Ala. Power Co.
v. FCC, 773 F.2d 362, 371 (D.C. Cir. 1985) (noting that agency
adopted “inconsistent” principles in different but related orders and

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Our conclusion follows naturally from the Supreme
Court’s holding in State Farm. There, the Court stated that an
agency “must examine the relevant data and articulate a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made.”
463 U.S. at 43 (emphases added; quotation mark omitted).
The Secretary failed to do so here. She identified only 50
turbo-charging hospitals despite that figure being “counter to
the evidence” before her, id., namely the 123 hospitals in the
NPRM. The inconsistency went unresolved in the 2004
rulemaking because the Secretary never discussed it. We
have often declined to affirm an agency decision if there are
unexplained inconsistencies in the final rule. See, e.g., Engine
Mfrs. Ass’n v. EPA, 20 F.3d 1177, 1182 (D.C. Cir. 1994)
(noting that “unexplained inconsistency” in final rule was “not
reasonable”); Gulf Power Co. v. FERC, 983 F.2d 1095, 1101
(D.C. Cir. 1993) (“[W]hen an agency takes inconsistent
positions . . . it must explain its reasoning.”); General Chem.
Corp. v. United States, 817 F.2d 844, 846 (D.C. Cir. 1987)
(agency action was arbitrary and capricious because its
analysis was “internally inconsistent and inadequately
explained”). Nor do we uphold agency action if it fails to
consider “significant and viable and obvious alternatives.”
Nat’l Shooting Sports Found., Inc. v. Jones, 716 F.3d 200, 215
(D.C. Cir. 2013) (quotation marks omitted). The analysis of
the 123 turbo-charging hospitals identified in the NPRM was a
significant and obvious alternative to the 50 hospitals the
Secretary ultimately considered in the 2004 final rule.
The Secretary maintains that she had no obligation to
explain the inconsistency given our holding in Bell Atlantic
Telephone Cos. v. FCC, 79 F.3d 1195 (D.C. Cir. 1996). But
remanding to agency for further explanation “[i]n light of this
unexplained inconsistency”).

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our holding there is off point. In Bell Atlantic, the FCC was
required by regulations to set a price cap for telephone carriers
that included an offset based on “productivity growth” in the
telecommunications industry. Id. at 1198. In a 1990 order,
the Commission included data from a controversial study and
arrived at a productivity offset that was relatively low. See id.
at 1200. Then, in 1995, the Commission reversed course and
excluded the data from that same study, which led to a higher
productivity offset. Id. at 1200–01. We held that it was
reasonable for “[o]ne Commission . . . to include a suspicious
data point because it was relevant, [and] a later Commission
. . . to exclude a relevant data point because it was suspicious.”
Id. at 1203 (first alteration in original). Neither decision
should “be viewed as more rational” than the other. Id.
The same circumstances do not exist here. In Bell
Atlantic, the later Commission acknowledged the inclusion of
suspect data in the past and explained why it decided to
exclude that information in calculating the 1995 price cap. Id.
at 1200–03. In the 2004 rulemaking, however, the Secretary
never even acknowledged the possibility of excluding the 123
turbo-charging hospitals from the dataset. Her muteness
makes Bell Atlantic inapposite. Indeed, as we explained in
that case: “Everyone agrees that an agency’s change of mind
does not itself render the agency’s action arbitrary. What
matters is the Commission’s explanation for its decision.” Id.
at 1202 (emphasis added; citations omitted).
The Secretary also claims that our deferential standard of
review tilts in favor of upholding the 2004 outlier threshold.
We have stated that “in framing the scope of review, the court
takes special note of the tremendous complexity of the
Medicare statute. That complexity adds to the deference
which is due to the Secretary’s decision.” Methodist Hosp. of
Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C. Cir. 1994).

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We do not retreat from that statement. The Secretary’s task of
collecting and analyzing hospital charge data remains
challenging. And when agency decisions “involve complex
judgments about sampling methodology and data analysis that
are within the agency’s technical expertise,” they receive “an
extreme degree of deference.” Alaska Airlines, Inc. v. TSA,
588 F.3d 1116, 1120 (D.C. Cir. 2009). But our deference “is
not unlimited” and we will remand to the agency if it fails to
apply its “expertise in a reasoned manner.” Cape Cod Hosp.,
630 F.3d at 206.
Having decided that the Secretary’s explanation is
insufficient, the question becomes one of remedy. “If the
record before the agency does not support the agency action
. . . the proper course, except in rare circumstances, is to
remand to the agency for additional investigation or
explanation.” Fla. Power & Light Co. v. Lorion, 470 U.S.
729, 744 (1985). We have likewise held that “bedrock
principles of administrative law preclude us from declaring
definitively that [the Secretary’s] decision was arbitrary and
capricious without first affording her an opportunity to
articulate, if possible, a better explanation.” Cnty. of L.A., 192
F.3d at 1023; see also New York v. Reilly, 969 F.2d 1147, 1153
(D.C. Cir. 1992) (remanding “for more reasoned
decisionmaking” because agency failed to “adequately
explain” its final rule). We follow that well-worn path here
and remand to the Secretary for additional explanation. On
remand, the Secretary should explain why she corrected for
only 50 turbo-charging hospitals in the 2004 rulemaking rather
than for the 123 she had identified in the NPRM. She should
also explain what additional measures (if any) were taken to
account for the distorting effect that turbo-charging hospitals
had on the dataset for the 2004 rulemaking. And if she
decides that it is appropriate to recalculate the 2004 outlier
threshold, she should also decide what effect (if any) the

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recalculation has on the 2005 and 2006 outlier and fixed loss
thresholds.
2. The 2005 Rule
The Secretary set the 2005 outlier threshold as the
applicable DRG rate “plus $25,800.” 69 Fed. Reg. at 49,278.
In arriving at this number, she considered the suggestions of
numerous commenters and ultimately adopted a methodology
in the final rule that was different from that in the proposed
rule. Id. at 49,277. The Secretary said that she had to use
more recent data to address both the outlier correction rule and
the “exceptionally high rate of hospital charge inflation that is
reflected in the data for [fiscal years] 2001, 2002, and 2003.”
Id. Although the data in the revised methodology was more
recent, it still had to be inflated to accurately predict charges
for 2005. Id. Instead of using the “2-year average annual
rate of change in charges per case,” the Secretary took “the
unprecedented step of using the first half-year of data from
[fiscal year] 2003 and comparing this data to the first half year
of data for [fiscal year] 2004.” Id.
The Secretary’s methodology in the 2005 rulemaking
obviated any need to eliminate the turbo-charging hospitals
from her dataset. She opted to use the most recent
cost-to-charge ratios in calculating the 2005 charge inflation
factor, half of which were from the “first half year of data for
[fiscal year] 2004.” Id. This data came after the effective
date of the outlier correction rule; it was not infected by
turbo-charging because the outlier correction rule had by then
corrected the flaw in the outlier payment system that created
the opportunity—and incentive—to turbo-charge. See id. at
49,278; see also supra pp. 7–8. The ratios were therefore
based on “either the most recent settled cost report or the most
recent tentative settled cost report, whichever is from the latest

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cost reporting period.” 42 C.F.R. § 412.84(i)(2). This data
was “more recent” than previous data used by the Secretary.
69 Fed. Reg. at 49,278. Her revised methodology, she
believed, would “account for the[] changes” resulting from the
outlier correction rule. Id. at 49,277.
It is true that the data from the “first half-year” of 2003
was affected by turbo-charging. Id. But it makes little sense
to remove turbo-charging hospitals from this half of the dataset
without making similar adjustments to the other half of the
dataset (i.e., the first half-year of data from fiscal year 2004).
As discussed, there was no need to modify the 2004 data
because that information was collected while the outlier
correction rule was in effect. With no need to change the 2004
data, the Secretary reasonably left both halves unaltered. See
id. (stating that it is “optimal to employ comparable periods in
determining the rate of change from one year to the next”).
Indeed, if the Secretary had removed turbo-chargers from the
2003 dataset, she would have had to project how that decision
affected the 2004 dataset. If that projection indicated
significant effects, she would have had to undertake further
statistical adjustments and perhaps remove hospitals from the
2004 dataset. The Secretary sensibly opted for a simpler
approach that did not entail piling projections atop projections.
See id. (noting her preference “to employ actual data rather
than projections in estimating the outlier threshold because we
employ actual data in updating charges[] themselves”); see
also Ashland Exploration, Inc. v. FERC, 631 F.2d 817, 822
(D.C. Cir. 1980) (agencies “may rationally turn to simplicity
. . . and administrative convenience”).
Moreover, even if this dataset was less than perfect,
imperfection alone does not amount to arbitrary
decision-making. See, e.g., White Stallion Energy Ctr., LLC
v. EPA, 748 F.3d 1222, 1248 (D.C. Cir. 2014) (agency’s

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“data-collection process was reasonable, even if it may not
have resulted in a perfect dataset”); In re Polar Bear ESA
Listing, 709 F.3d 1, 13 (D.C. Cir. 2013) (“That a model is
limited or imperfect is not, in itself, a reason to remand agency
decisions based upon it.”); Allied Local and Reg’l Mfrs.
Caucus v. EPA, 215 F.3d 61, 71 (D.C. Cir. 2000) (“[w]e
generally defer to an agency’s decision to proceed on the basis
of imperfect scientific information”); North Carolina v. FERC,
112 F.3d 1175, 1190 (D.C. Cir. 1997) (“The mere fact that the
Commission relied on necessarily imperfect information . . .
does not render [its decision] arbitrary.”); Chemical Mfrs.
Ass’n v. EPA, 28 F.3d 1259, 1265 (D.C. Cir. 1994) (agency
may nonetheless use model “even when faced with data
indicating that it is not a perfect fit”). This precedent further
supports the Secretary’s conclusion that removing
turbo-charging hospitals from both datasets in the 2005
rulemaking was not a “significant and viable and obvious
alternative[].” Nat’l Shooting Sports Found., 716 F.3d at 215
(quotation marks omitted).
DHP claims that our holding in County of Los Angeles
supports its argument. We disagree. In pertinent part, we
held there that the Secretary’s 1985 and 1986 outlier thresholds
were arbitrary and capricious. 192 F.3d at 1021–23. To set
the thresholds, the Secretary used data that was collected when
hospitals were still reimbursed based on the reasonable cost of
their services rather than the average cost of treatment. Id. at
1020. She did so even though she had a wealth of readily
available
data
collected
under
the
new
average-cost-of-treatment regime. Id. at 1021. The more
recent data, unlike the older numbers, also accounted for a
downward “trend” in outlier payments that was caused by the
new reimbursement scheme. Id. The Secretary nevertheless
concluded that “there [was] no evidence to suggest that total
outlier payments” decreased under the new system. Id. We

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held that her failure to account for the contrary evidence in the
record—as well as her refusal to use more recent data—were
arbitrary and capricious actions. Id. at 1023.
Here, by contrast, the Secretary did not reject a more
recent dataset; she stated time and again that the revised
methodology “use[d] the most recent charge data available.”
69 Fed. Reg. at 49,277. She also stated that the revised
methodology for calculating the 2005 outlier threshold
“address[ed] both the changes to the outlier payment
methodology and the exceptionally high rate of hospital charge
inflation” between 2001 and 2003. Id. Thus, unlike in
County of Los Angeles, the Secretary here used the most recent
data that accounted for the outlier correction rule’s effects.
Accordingly, we reject DHP’s APA challenge to the 2005
outlier threshold.
3. The 2006 Rule
We need not linger with this rulemaking because the 2006
outlier threshold was plainly reasonable. The Secretary set it
at the applicable DRG rate “plus $23,600.” 70 Fed. Reg. at
47,494. She settled on $23,600 by simulating 2006 payments
using a charge inflation factor. Id. The data used to compute
this factor was taken—as in the earlier rules—from “updated
cost-to-charge ratios” included in “the most recent tentatively
settled cost reports of hospitals.” Id. With this data in hand,
the Secretary compared charges from the “first six months of
[fiscal year] 2005 relative to [the] same period for [fiscal year]
2004.” Id. Importantly, the Secretary noted that the entire
period (i.e., both six-month sets) occurred while the outlier
correction rule was in effect. Id.
Because all of the charge data for the 2006 rule was
collected with the outlier correction rule in effect, the specter
of turbo-charging was nil. Indeed, the Secretary noted in the

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2006 rulemaking that the outlier correction rule worked as
predicted: “The actual rate of charge inflation subsided
significantly in [fiscal year] 2004 after we made significant
changes to our outlier policy.” Id. In other words, “hospitals
changed their charging practices as a result” of the outlier
correction rule. Id. The Secretary reasonably weighed the
evidence and concluded that there was no need to account for
turbo-chargers because turbo-charging was no longer
occurring. See El Conejo Americano of Texas, Inc. v. DOT,
278 F.3d 17, 20 (D.C. Cir. 2002) (courts do not “reweigh the
evidence” if agency’s “conclusion was reasonable”). And, to
state the obvious, excluding data from those hospitals was
neither a significant nor an obvious alternative the Secretary
had to consider. See Nat’l Shooting Sports Found., 716 F.3d at
215–16.
We are perplexed by DHP’s objection to the 2006 outlier
threshold. DHP cites favorably a comment submitted during
the 2006 rulemaking that advocated a fixed loss threshold of
$24,050, using the methodology the Secretary in fact
employed. Moreover, at oral argument, DHP’s counsel
suggested that the fixed loss threshold for 2006 should have
been in the “low twenties.” Oral Arg. Tr. at 35–36. That is
exactly where it ended up: $23,600. 70 Fed. Reg. at 47,494.
Accordingly, we conclude that the Secretary’s calculation of
the 2006 fixed loss threshold was neither arbitrary nor
capricious.
For the foregoing reasons, we affirm the district court’s
partial supplementation of the 2004 rulemaking record and its
rejection of the APA challenges to the 2005 and 2006 outlier
thresholds. We reverse its ruling upholding the 2004 outlier
threshold because that threshold is inadequately explained and
remand to the district court with instructions to remand the

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2004 rule to the Secretary for further proceedings consistent
with this opinion.
So ordered.

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