SHANDS JACKSONVILLE MEDICAL CENTER, INC. et al v. SEBELIUS
MEMORANDUM AND OPINION denying Defendant's motion 23 , granting in part and denying in part Plaintiffs' motions 15 , 16 , 17 , 18 , 19 . The parties shall confer and propose to the Court no later than October 1, 2015, a timetable for administrative proceedings on remand. See document for details. Signed by Judge Randolph D. Moss on September 21, 2015. (lcrdm1, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
SHANDS JACKSONVILLE MEDICAL
CENTER, et al.,
SYLVIA M. BURWELL, Secretary, United
States Department of Health and Human
Consolidated Civil Case Nos. 14-263, 14-503,
14-536, 14-607, 14-976, 14-1477
Under the Medicare system, participating hospitals are paid for services provided to
Medicare-eligible patients. Medicare Part A provides compensation for services provided on an
inpatient basis, while Medicare Part B provides compensation for outpatient services. In general,
hospitals are paid more for inpatient stays.
Prior to 2013, Medicare guidance stated that it was generally appropriate for hospitals to
admit a Medicare beneficiary as an inpatient if the patient was expected to stay for 24 hours or
more. But the guidance also stressed that length of stay was not the only relevant factor in the
“complex medical judgment” whether to admit a Medicare beneficiary for inpatient care.
Because this open-ended approach generated uncertainty among providers and, at times,
discouraged hospitals from treating Medicare beneficiaries as inpatients, in May 2013, the
Department of Health and Human Services (“HHS” or “Department”) proposed a new standard
for inpatient admissions. This new standard—the “2-midnight benchmark”—authorized
inpatient admission if the patient’s stay was expected to span at least two midnights. See
Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals
and Long-Term Care Hospital Prospective Payment System and Proposed Fiscal Year 2014
Rates, 78 Fed. Reg. 27486, 27645, 27648 (May 10, 2013) (proposed rules). To reduce
uncertainty, the proposed rule then provided that “Medicare’s external review contractors would
presume that hospital inpatient admissions are reasonable and necessary for beneficiaries who”
satisfy the 2-midnight benchmark. Id. at 27645.
The Secretary of HHS predicted that in fiscal year 2014 the new 2-midnight benchmark
and the related presumption would result in “a net shift of 40,000 encounters” from outpatient
status to inpatient status, id. at 27649, at an estimated cost of $220 million to the Medicare
program, id. She proposed to offset this cost by making adjustments that would effect an acrossthe-board reduction in compensation for inpatient services. Id. at 27650, 27651. The final
rule—including the 2-midnight benchmark, related policies, and the reduction in compensation
for inpatient services—was published in August 2013. See Medicare Program; Hospital
Inpatient Prospective Payment Systems For Acute Care Hospitals . . . Payment Policies Related
to Patient Status, 78 Fed. Reg. 50496, 50965 (Aug. 19, 2013) (final rule), codified as amended at
42 C.F.R. § 412.3(d)(1).
Plaintiffs in these consolidated actions challenge only one aspect of the final rule: the
reduction in compensation for inpatient services. They argue, among other things, that this
reduction is invalid for three independent reasons: (1) it exceeds the Secretary’s general
“exceptions and adjustments” authority under the Medicare Act, see 42 U.S.C.
§ 1395ww(d)(5)(I)(i); (2) it was promulgated without adequate notice or a meaningful
opportunity to comment, in violation of the Administrative Procedure Act; and (3) it is arbitrary
This matter is presently before the Court on Plaintiffs’ motions for summary judgment,
Dkts. 15, 16, 17, 18, 19, and the Secretary’s motion to dismiss and for summary judgment, Dkt.
23. For the reasons given below, the Secretary’s motion is DENIED. The Plaintiffs’ motions
for partial summary judgment are GRANTED in part and DENIED in part, and this matter is
REMANDED to the Secretary for further proceedings.
The Medicare Act, 42 U.S.C. §§ 1395 et seq., provides medical care for the elderly and
disabled. As relevant here, Medicare Part A reimburses hospitals for inpatient services on a
prospective basis, see 42 U.S.C. §§ 1395c et seq., while Medicare Part B pays for services not
covered by Part A, including hospital outpatient services and visits to the doctor, see 42 U.S.C.
§§ 1395j, 1395l(t); see generally Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205-07 (D.C. Cir.
2011). The amount of compensation that a hospital receives from the Medicare program, as well
as the cost to the Medicare beneficiary, varies in part depending on whether the beneficiary was
admitted to the hospital as an outpatient or an inpatient.
Under the Medicare Inpatient Prospective Payment System (“IPPS”), hospitals are
prospectively compensated for inpatient services at a fixed rate that is not based on the actual
cost of the services provided. See Methodist Hosp. of. Sacramento v. Shalala, 38 F.3d 1225,
1226-27 (D.C. Cir. 1994) (explaining that Congress enacted the prospective payment system to
promote efficiency and discourage the provision of unnecessary services); Good Samaritan
Hosp. v. Shalala, 508 U.S. 402, 405-06, 406 n.3 (1993). The rates used to calculate these
payments are set annually by the Secretary according to the Medicare Act’s “‘complex statutory
and regulatory regime.’” Methodist Hosp., 38 F.3d at 1226 (quoting Good Samaritan, 508 U.S.
One important element in the statutory scheme is the “standardized amount,” which is set
each year by the Center for Medicare and Medicaid Services (“CMS”), acting on behalf of the
Secretary. See 42 U.S.C. § 1395ww(d)(3). Roughly speaking, the standardized amount
represents the average per-patient operating costs across all hospitals, see 42 C.F.R. § 412.64,
modified to account for various economic and other factors. Most hospitals are compensated for
Medicare inpatient services according to the “federal rate,” which is “a formula that takes [the]
standardized base amount . . . and multiplies it by a weight associated with a diagnosis-related
group.” Adirondack Med. Ctr. v. Sebelius (“Adirondack”), 740 F.3d 692, 694 (D.C. Cir. 2014);
see also Methodist Hosp., 38 F.3d at 1227, 42 U.S.C. § 1395ww(d)(3)(D). A “diagnosis-related
group” (“DRG”) is “a category of inpatient treatment.” Adirondack, 740 F.3d at 694 n.1; see 42
U.S.C. § 1395ww(d)(4)(A). Each group is assigned a weight reflecting the relative amount of
resources expended with respect to discharges in that group. See id. § 1395ww(d)(4)(B). “The
upshot of applying a DRG weighting factor is that a hospital will be paid more for patients
diagnosed with a heart condition requiring surgery than for those diagnosed with a sprained
ankle.” Adirondack Med. Ctr. v. Sebelius, 29 F. Supp. 3d 25, 30 (D.D.C. 2014) (quotation marks
and citation omitted). A 2007 rule refined the DRG system by implementing “Medicare severity
diagnosis related groups” (“MS-DRGs”), which are intended to better account for severity of
illness in Medicare payments. See generally Medicare Program; Changes to the Hospital
Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates, 72 Fed. Reg. 47130 (Aug.
22, 2007) (final rule).
A minority of hospitals, including those providing treatment to underserved communities,
are compensated based in part on “hospital-specific rates.” See Adirondack, 740 F.3d at 694-95;
42 U.S.C. §§ 1395ww(d)(5)(D) & (G). These “hospital-specific rates” are calculated using a
hospital-specific base amount that reflects historical per-patient operating costs at that particular
hospital. See Adirondack, 740 F.3d at 695. The Secretary also sets a “Puerto Rico-specific rate”
which is calculated using a Puerto Rico-specific base amount. See 42 C.F.R. § 412.212; 42
U.S.C. § 1395ww(d)(9)(A).
The Medicare Act does not define the term “inpatient” or specify when inpatient
admission is appropriate. The Secretary, however, has issued both formal and informal guidance
on the subject. Her regulations specify that certain procedures should be provided on an
inpatient basis. See 42 C.F.R. § 419.22(n). She has also issued guidance explaining that patients
should be admitted on an inpatient basis only where the admitting physician determines that
certain criteria are satisfied. Prior to 2013, the Secretary advised physicians to “use a 24-hour
period as a benchmark” and to “order [inpatient] admission for patients who are expected to need
hospital care for 24 hours or more.” See AR 1451 (Medicare Benefit Policy Manual, CMS Pub.
100-02, Ch. 1, § 10 (2003)). The guidance acknowledged that the admitting physician’s decision
involves “complex medical judgment” and should not be made solely on the expected length of
hospitalization, see id., but cautioned that a hospital stay expected to last “only a few hours (less
than 24)” did not justify inpatient admission, even if it was expected to be an overnight stay. See
id. (explaining that patients with known diagnoses admitted for less than 24 hours should be
admitted as “outpatients for coverage purposes regardless of: . . . whether they remained in the
hospital past midnight”) (emphasis in original); see also 78 Fed. Reg. at 27645, 27648
(describing the Secretary’s prior policy on inpatient admissions).
The Secretary became concerned, however, that there were systemic problems with
inpatient admissions under the 24-hour benchmark. In 2012 she observed an increase in the
number of Medicare beneficiaries who were kept as outpatients for long periods of observation.
See Hospital Outpatient Prospective and Ambulatory Surgical Center Payment Systems and
Quality Reporting Programs, 77 Fed. Reg. 45061, 45155 (July 30, 2012) (proposed rule).
Admissions for long periods of outpatient observation may have “significant financial
implications for Medicare beneficiaries,” because the patient’s copayments, deductibles, and
eligibility for certain post-hospitalization services will depend in part on whether the patient was
admitted as an inpatient or an outpatient. Id. at 45156. 1 The Secretary had “heard from various
stakeholders that hospitals appear to be responding to the financial risk of admitting Medicare
beneficiaries for inpatient stays that may later be denied upon contractor review, by electing to
treat beneficiaries as outpatients receiving observation services, often for longer periods of time,
rather than admit them.” Id.; see also AR 3509-3510 (public comment in a subsequent
rulemaking describing ongoing concerns that inpatient claims would be denied). 2 A 2012 review
of Medicare claims found a high rate of payment denials associated with short inpatient stays.
See 78 Fed. Reg. at 27647-27649 (describing findings of the Secretary’s Comprehensive Error
Rate Testing contractor). In 2013, the Secretary observed that Medicare contractors had
“recovered more than $1.6 billion in improper payments because of inappropriate beneficiary
patient status.” Id. at 27649.
See also “Find out if you’re an inpatient or an outpatient—it affects what you pay,” available
at https://www.medicare.gov/what-medicare-covers/part-a/inpatient-or-outpatient.html (last
visited Sept. 17, 2015).
Citations are to the administrative record (“AR”).
Against this backdrop, the Secretary solicited public comments on “[p]otential policy
changes . . . to improve clarity and consensus among providers, Medicare, and other stakeholders
regarding the relationship between admission decisions and appropriate Medicare payment, such
as when a Medicare beneficiary is appropriately admitted to the hospital as an inpatient and the
cost to hospitals associated with making this decision.” 77 Fed. Reg. at 45155. She asked
whether “alternative approaches to defining inpatient status” could provide clarity,
“consider[ing] opportunities for inappropriately taking advantage of the Medicare system that
time-based . . . criteria for patient status may create.” Id. at 45157. The Secretary received over
three hundred public comments on this issue. 78 Fed. Reg. at 27649; see also Medicare and
Medicaid Programs: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center
Payment Systems and Quality Reporting Programs, 77 Fed. Reg. 68210, 68430-68431 (Nov. 15,
2012) (summarizing comments).
In May 2013, the Secretary proposed a new rule “to clarify our longstanding policy on
how Medicare review contractors review inpatient hospital admissions for payment under
Medicare Part A [and] issue revised guidance to physicians and hospitals regarding when a
hospital inpatient admission should be ordered.” 78 Fed. Reg. at 27647. She observed that
“there [had] been considerable variation in the interpretation” of her prior inpatient admissions
guidance and the 24-hour benchmark, see 78 Fed. Reg. at 27648, and that “[t]he majority of
improper payments under Medicare Part A for short-stay inpatient hospital claims have been due
to inappropriate patient status (that is, the services furnished were reasonable and necessary, but
should have been furnished on a hospital outpatient, rather than hospital inpatient, basis),” id. at
27647. “Inpatient hospital short-stay claim errors are frequently related to minor surgical
procedures or diagnostic tests. In such situations, the beneficiary is typically admitted as a
hospital inpatient after the procedure is completed on an outpatient basis, monitored overnight as
an inpatient, and discharged from the hospital in the morning. Medicare review contractors
typically find that while the underlying services provided were reasonable and necessary, the
inpatient hospitalization following the procedure was not.” Id. at 27647.
To address these issues, the Secretary proposed a new inpatient admissions policy based
on a “2-midnight benchmark.” See id. at 27645-27649. Under the 2-midnight benchmark, “in
addition to services designated . . . as inpatient only, surgical procedures, diagnostic tests, and
other treatment would be generally appropriate for inpatient hospital payment under Medicare
Part A when the physician expects the patient to require a stay that crosses at least 2 midnights
and admits the patient to the hospital based on that expectation.” Id. at 27648. “Conversely,
when a patient enters a hospital” for care not specified as inpatient only and the stay is expected
to last “a limited period of time that does not cross 2 midnights, the services would be generally
inappropriate for payment under Medicare Part A.” Id.
To provide increased predictability, the Secretary also proposed a “2-midnight
presumption” to be applied by Medicare reviewers. See id. at 27645-27649. It provided that
reviewers “would presume that inpatient hospital admissions are reasonable and necessary for
beneficiaries” whose hospital stay “cross[ed] 2 ‘midnights,’” unless the hospital was found to be
“abusing this 2-midnight presumption.” Id. at 27645; 27648-27649. For shorter stays, reviewers
would consider whether the attending physician who authorized the inpatient admission
reasonably expected the patient’s stay to last at least two midnights. See id. The 2-midnight
benchmark and the 2-midnight presumption were included in the final rule published in August
2013. See 78 Fed. Reg. at 50965, codified as amended at 42 C.F.R. § 412.3(d)(1). 3
This action does not challenge the 2-midnight benchmark, the 2-midnight presumption,
or the other aspects of the final rule that relate to the Secretary’s inpatient admissions guidance.
Rather, Plaintiffs challenge a different aspect of the final rule: an across-the-board reduction in
payments to hospitals for inpatient services. This reduction was premised on the Secretary’s
expectation that, in fiscal year 2014, the new rule would result in “a net shift of 40,000
encounters” from outpatient to inpatient status. 78 Fed. Reg. at 27649.
As explained in the notice of proposed rulemaking,
Our actuaries have estimated that our proposed policy . . . would increase IPPS
expenditures by approximately $220 million. These additional expenditures result
from an expected net increase in hospital inpatient encounters due to some
encounters spanning more than 2 midnights moving to the IPPS from the
[Outpatient Prospective Payment System (“OPPS”)], and some encounters of less
than 2 midnights moving from the IPPS to the OPPS. Specifically, our actuaries
examined FY 2009 through FY 2011 Medicare claims data for extended hospital
outpatient encounters and shorter stay hospital inpatient encounters and estimated
that approximately 400,000 encounters would shift from outpatient to inpatient
and approximately 360,000 encounters would shift from inpatient to outpatient,
causing a net shift of 40,000 encounters.
78 Fed. Reg. at 27649. The predicted “net shift of 40,000 encounters” “represent[ed] an increase
of approximately 1.2 percent in the number of shorter stay hospital inpatient encounters.” Id.
Because hospitals are typically paid more for inpatient stays, the Secretary estimated that this
“net shift of 40,000 encounters” would cost the Medicare program an additional $220 million
over the course of the fiscal year. Id. at 27649-27650.
The 2-midnight policy was originally codified at 42 C.F.R. § 412.3(e)(1). The regulation was
subsequently amended in other respects, see Medicare and Medicaid Programs: Hospital
Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems, 79 Fed.
Reg. 66770, 67030 (Nov. 10, 2014) (effective Jan. 1, 2015), and as a result, the provision now
appears at 42 C.F.R. § 412.3(d)(1).
The Secretary reasoned that the additional cost of the new rule should be offset by an
across-the-board reduction to payments for inpatient services. Thus, she proposed to use her
“exceptions and adjustments authority” under the Medicare Act, see 42 U.S.C.
§ 1395ww(d)(5)(I)(i), “to offset the estimated $220 million in additional . . . expenditures” by
adopting 0.2 percent reductions to “the operating IPPS standardized amount, the hospital-specific
rates, and the Puerto Rico-specific standardized amount.” Id. at 27651. Likewise, she proposed
to invoke her “broad authority” under § 1395ww(g) to reduce “the national capital Federal rate
and Puerto-Rico specific capital rate” by 0.2 percent. 78 Fed. Reg. at 27651.
“Commenters generally did not support the proposed -0.2% payment adjustment.” 78
Fed. Reg. at 50953. The comments raised two principal concerns of relevance here. First, they
questioned whether the Secretary possessed the statutory authority to make the proposed acrossthe-board reductions. Id.; see AR 4411 (“it is questionable whether CMS has the authority to
reduce the standardized amount by 0.2 percent”); AR 4998 (“these reductions are an
inappropriate use of CMS’s special exceptions and adjustments authority”); AR 4265 (same);
AR 5672 (noting that this authority “has been used exceedingly sparingly” and its use “in this
context, . . . seems unprecedented”); see also AR 4528, 4497, 4713, 5473. Second, they
questioned the underlying basis for the reductions, specifically, the Secretary’s prediction that
the new policy would cause a net increase in inpatient cases at a cost of $220 million in 2014.
With respect to the latter concern, the commenters raised a number of different
objections. As noted in the final rule, they argued that the Secretary’s analysis was “unsupported
and insufficiently explained to allow for meaningful comment.” 78 Fed. Reg. at 50953; see AR
5010 (“CMS has not been transparent in identifying the criteria used by the actuaries to identify
the patient status shifts that would occur.”); AR 5312 (“we are very concerned that CMS has not
released any data or even its methodology for determining that a -0.2% payment adjustment is
warranted”); AR 4654-4655; 4411. Some commenters asked for additional information, see AR
4883-4884, 5672, while others attempted to replicate the Secretary’s analysis without success,
see AR 4653-4655; see also AR 4411 (observing that “it has not been possible to replicate the
[Secretary’s] finding[s]”), AR 5235 (similar). The commenters also criticized the prediction
resulting from that analysis. They argued that “CMS has profoundly underestimated the volume
of [outpatient] encounters” that would result from the two-midnight rule, see AR 4654; predicted
that there would instead be a net increase in outpatient encounters, see id., see also AR 5010; and
argued that Medicare reimbursement to hospitals would decrease significantly if inpatient rates
were cut, see AR 4306.
The notice of final rulemaking did not engage with these comments in detail. The
Secretary expressed her view that in light of the “widespread impact” of the new 2-midnight
policy, the proposed adjustments were an appropriate use of her statutory exceptions and
adjustments authority. See 78 Fed. Reg. at 50953. She explained that “while we generally agree
with commenters that it is not necessary to routinely estimate utilization shifts to ensure
appropriate IPPS payments, this is a unique situation. Policy clarifications such as this do not
usually result in utilization shifts of sufficient magnitude and breadth to significantly impact the
IPPS.” Id. at 50953-50954. The Secretary did not receive any comments “that specifically
addressed [her] proposal to make the -0.2 percent adjustment to the national capital Federal rate
and Puerto Rico-specific capital rate.” Id. at 50746.
With respect to the methodology used to predict the net shift and its cost, the Secretary
acknowledged that “there is a certain degree of uncertainty surrounding any cost estimate,” but
maintained that “our actuaries have determined that the methodology, data, and assumptions
used are reasonable for the purpose of estimating the overall impact of our proposed policy.” Id.
at 50953. She further stated that “we specifically discussed the methodology used and the
components of the estimate” and “[i]n addition to the opportunity to comment on the estimate,
any component of the estimate, or the methodology, commenters had an opportunity to provide
alternative estimates for us to consider.” Id.
In addition, the Secretary revealed two aspects of her methodology that were not
disclosed in the notice of proposed rulemaking. First, she explained that when estimating the
number of cases expected to shift from outpatient to inpatient status under the new rule, her
actuaries excluded “[c]laims not containing observation or a major procedure”:
In determining the estimate of the number of encounters that would shift from
outpatient to inpatient, our actuaries examined outpatient claims for observation
or a major procedure. Claims not containing observation or a major procedure
were excluded. . . .
Id. (emphasis added). Second, when calculating the number of cases expected to shift in the
opposite direction, her actuaries excluded different claims. In particular, they examined claims
involving surgical MS-DRGs, and excluded claims involving medical MS-DRGs:
In determining the estimate of the number of encounters that would shift from
inpatient to outpatient, our actuaries examined inpatient claims containing a
surgical MS–DRG. Claims containing medical MS-DRGs were excluded. . . .
Id. (emphasis added).
On the same day that the final rule was published, the CMS Office of the Actuary issued
a memorandum entitled “Estimated Financial Effects of Two Midnight Policy,” which
“summarizes [its] financial estimate for clarifying inpatient vs. outpatient hospital services when
all stays which span two midnights will be presumed to be inpatient.” AR 2046-2048. The
memorandum explains that “[s]everal assumptions were made to estimate the financial impact of
this policy change.” AR 2047 (describing these “key assumptions”). Notably, when calculating
the number of cases expected to shift from outpatient to inpatient status, “stays . . . not for
observation care or for a major procedure were excluded because it was assumed that these cases
would be unaffected by the policy change,” id., and when calculating the cases expected to shift
from inpatient to outpatient status, claims containing a medical MS-DRG were excluded
“because it was assumed that those cases would be unaffected by the policy change,” see id. The
memorandum did not explain, however, why the actuaries assumed that the excluded cases
“would be unaffected by the policy change.” Id.
The notice of final rulemaking confirmed that “after consideration of the comments we
received . . . we are finalizing a reduction to the standardized amount, the hospital specific rates,
and the Puerto Rico-specific standardized amount of -0.2 percent to offset the additional $220
million in expenditures,” 78 Fed. Reg. at 50954; see also id. at 50746, and similarly “finalizing
the proposed 0.2 percent reduction . . . to the national capital Federal rate and Puerto Ricospecific capital rate,” id. at 50756.
After the final rule was published, the Plaintiff hospitals timely challenged the 0.2
percent reduction “to the . . . standardized amount, the hospital-specific rates, and the Puerto
Rico-specific standardized amount” (collectively, “the 0.2 percent reduction”). 78 Fed. Reg. at
50746. The Provider Reimbursement Review Board granted Plaintiffs’ requests for expedited
judicial review pursuant to 42 U.S.C. § 1395oo(f)(1). AR 1-7. Plaintiffs then filed these actions
against the Secretary in her official capacity, pursuant to the Administrative Procedure Act
(“APA”) and the Medicare Act. See Case No. 14-cv-263, Dkt. 1; Case No. 14-cv-503, Dkt. 1;
Case No. 14-cv-536, Dkt. 1; Case No. 14-cv-607, Dkt. 1; Case No. 14-cv-976, Dkt. 1; Case No.
14-cv-1477, Dkt. 1. 4
The Court consolidated the actions and set a schedule for dispositive briefing. See May
23, 2014, Minute Order; July 23, 2014, Minute Order; Aug. 13, 2014, Scheduling Order; Sept. 9,
2014, Minute Order. Plaintiffs moved for summary judgment, see Dkts. 15, 16, 17, 18, 19, and
the Secretary cross-moved for summary judgment, and—with respect to the St. Helena Plaintiffs
only—moved to dismiss for failure to state a claim, see Dkt. 23.
On August 3, 2015, the Court held oral argument on the parties’ cross-motions. At the
oral argument, the Court raised the issue of appropriate remedy should it conclude that the
Secretary promulgated the 0.2 percent reduction in violation of the APA, and it invited the
parties to submit supplemental briefs on that issue. The parties filed supplemental briefs, see
Dkts. 42, 43, and replies, see Dkts. 44, 45, 47. The Secretary moved for leave to file a surreply,
Dkt. 49, which the Court granted, see Sept. 21, 2015, Minute Order.
Plaintiffs’ motions for summary judgment present three principal arguments. First, they
argue that the Medicare Act does not authorize the Secretary to make an across-the-board 0.2
percent reduction to compensation for inpatient services. Second, they argue that the Secretary
failed to comply with the procedural requirements of the APA, 5 U.S.C. § 706(2)(A), in
promulgating the 0.2 percent reduction, because she failed to disclose critical information about
her methodology, and thus deprived Plaintiffs of a meaningful opportunity for comment; she
These actions were originally brought against Secretary Kathleen Sebelius. Pursuant to
Federal Rule of Civil Procedure 25(d), however, Secretary Burwell is automatically substituted
for Secretary Sebelius.
failed to offer meaningful responses to substantial comments; and she failed to offer a reasoned
basis for her final rule. Third, they argue that the 0.2 percent reduction is arbitrary and
capricious and that it is ineffective because it merely appeared in the preamble to the final
regulation. The Court starts with Plaintiffs’ challenge to the Secretary’s statutory authority.
A. The Secretary’s “Exceptions And Adjustments” Authority
The Medicare inpatient prospective payment system is governed by a complex statutory
scheme. See 42 U.S.C. § 1395ww(d). Among other things, § 1395ww(d)(3) instructs the
Secretary how to set the standardized amount that is used to calculate inpatient prospective
payments for most hospitals. Section 1395ww(d)(5) authorizes her to make additional payments,
exceptions, and adjustments, most of which relate to atypical circumstances or particular types of
hospitals. For example, the Secretary is authorized to “provide for an additional payment” (an
“outlier” payment) when the duration of a patient stay exceeds that typical for patients with that
diagnosis group. See 42 U.S.C. § 1395ww(d)(5)(A). She is also authorized to make additional
payments to hospitals serving “a significantly disproportionate number of low-income patients,”
see id. § 1395ww(d)(5)(F)(i)(I), and to teaching hospitals, see id. § 1395ww(d)(5)(B). And she
is authorized to make “exceptions and adjustments” to payments to “rural referral” hospitals, see
id. § 1395ww(d)(5)(C)(i); and to make “adjustments . . . to take into account the unique
circumstances of hospitals located in Alaska and Hawaii,” see id. § 1395ww(d)(5)(H).
The provision at issue in this case, § 1395ww(d)(5)(I)(i), is a catch-all provision that the
Court of Appeals has described as a “broad-spectrum grant of authority.” Adirondack, 740 F.3d
at 694. The provision states:
The Secretary shall provide by regulation for such other exceptions and
adjustments to such payment amounts under this subsection as the Secretary
42 U.S.C. § 1395ww(d)(5)(I)(i). According to the Secretary, this “exceptions and adjustments”
provision unambiguously authorizes her to effect an across-the-board 0.2 percent reduction to the
standardized amount, the hospital-specific rates, and the Puerto Rico-specific rate. In the
Secretary’s view, if Congress did not intend to include such adjustments in
§ 1395ww(d)(5)(I)(ii)’s “broad-spectrum grant of authority,” see 740 F.3d at 694, it would have
included express language to that effect, see Dkt. 35 at 11 (“nothing in the statute precludes the
Secretary from making an across-the-board adjustment”).
Plaintiffs, for their part, argue that this provision does not authorize the Secretary to make
an across-the-board reduction by adjusting the standardized amount. They concede that
§ 1395ww(d)(5)(I)(i) does not expressly exclude adjustments to the standardized amount, but
argue that the Secretary errs by reading § 1395ww(d)(5)(I)(i) in isolation. See Dkt. 17-1 at 2026; Dkt. 15 at 34-35; Dkt. 18-1 at 22-27. They point out that other provisions in § 1395ww(d)(5)
only authorize the Secretary to adjust reimbursement rates in unique circumstances or to avoid
disproportionately affecting certain kinds of hospitals. Thus, they argue, basic tenets of statutory
interpretation compel the conclusion that the general exceptions and adjustments provision does
not confer the sweeping authority that the Secretary invoked here. Plaintiffs further argue that to
the extent the statutory language is ambiguous, the Secretary’s broad interpretation is
irreconcilable with the rest of the Medicare Act’s inpatient payment scheme, because it enables
her to override the mandatory payment-setting framework established in § 1395ww(d)(3). For
these reasons, they argue that the Act, read as a whole, unambiguously does not authorize the
challenged 0.2 percent reduction.
In reviewing the Secretary’s interpretation of the Medicare Act, the Court follows the
two-step framework set forth in Chevron, U.S.A., Inc. v. Nat’l Res. Defense Council, 467 U.S.
837, 842-45 (1984), see, e.g., Cape Cod Hosp. v. Sebelius, 630 F.3d 203 (D.C. Cir. 2011), and
first asks “whether Congress has directly spoken to the precise question at issue,” Chevron, 467
U.S. at 842. If so, the Court must “give effect to the unambiguously expressed intent of
Congress.” Id. at 843. If the statute is “silent or ambiguous with respect to the specific issue,”
the Court next asks “whether the agency’s answer is based on a permissible construction of the
1. Whether The “Exceptions And Adjustments” Provision Is Ambiguous
“In evaluating the first Chevron inquiry, [courts] use ‘traditional tools of statutory
construction’ to determine whether Congress has unambiguously expressed its intent.” Serono
Labs., Inc. v. Shalala, 158 F.3d 1313, 1319 (D.C. Cir. 1998) (quoting Chevron, 467 U.S. at 843
n.9). To this end, the Court looks to the statute as a whole, recognizing that “[t]he meaning—or
ambiguity—of certain words or phrases may only become evident when placed in context.”
FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000); see also Cnty. of Los
Angeles v. Shalala, 192 F.3d 1005, 1014 (D.C. Cir. 1999) (“Under Chevron step one, [courts]
consider not only the language of the particular provision under scrutiny, but also the structure
and context of the statutory scheme of which it is a part.”) (quotation marks omitted).
The plain language of the general exceptions and adjustments provision is sweeping. As
long as she acts by regulation, the Secretary is authorized to make “such other exceptions and
adjustments to [the] payment amounts under this subsection as [she] deems appropriate.” 42
U.S.C. § 1395ww(d)(5)(I)(i). Given its plain meaning, this language includes adjustments to the
standardized amount: the standardized amount is a “payment amount[ ] under this subsection,”
id., and it is evident that the word “adjustments” can describe modifications to the standardized
amount, because Congress uses it that way elsewhere, see 42 U.S.C. §§ 1395ww(d)(5)(I)(ii),
1395ww(d)(3)(A)(vi). Although Congress spoke with particularity in defining the scope of other
adjustments authorized by § 1395ww(d), including other adjustments to the standardized
amount, see id. §§ 1395ww(d)(5)(I)(ii), 1395ww(d)(3)(A)(vi), the only limit contained in the
general exceptions and adjustments provision is that the exception or adjustment must be
“appropriate.” The plain language of this provision thus supports the Secretary’s contention that
she has the authority to make the adjustments at issue here.
Notwithstanding this broad language, Plaintiffs contend that the Secretary’s authority is
more limited. In particular, they seek to turn the contrast between the broad language of
§ 1395ww(d)(5)(I)(i) and the more specific provisions elsewhere in the statute to their favor,
arguing that limits on the Secretary’s general exceptions and adjustments authority can—and
should—be inferred from the very detail contained in these other provisions. In support of this
contention, they first rely on the ejusdem generis canon, which posits that “where general words
follow specific words, the general words are construed to embrace only objects similar in nature
to those objects enumerated by the preceding specific words.” Cement Kiln Recycling Coalition
v. EPA, 493 F.3d 207, 221 (D.C. Cir. 2007) (quotation marks and alterations omitted). They
contend that ejusdem generis is applicable here because “[t]he provision for ‘other exceptions
and adjustments’ in (d)(5)(I) follows a list of specific exceptions and adjustments that are
enumerated in (d)(5),” and “[a]ll of these exceptions or adjustments relate to particular categories
of hospitals or unique cases.” Dkt. 17-1 at 22. For this reason, they argue, the “adjustments”
authorized by § 1395ww(d)(5)(I)(i) must be similarly limited.
It is difficult to reconcile Plaintiffs’ characterization of the general exceptions and
adjustments authority as the final item on a list of specific terms with the actual hodgepodge of
provisions gathered under the umbrella of § 1395ww(d)(5). Section 1395ww(d)(5) occupies
almost seven pages of the U.S. Code. It contains dozens of subparagraphs. It deals with subjects
big and small. Not all the provisions in § 1395ww(d)(5) relate to unique circumstances or
special types of hospitals; § 1395ww(d)(5)(E)(ii), for example, authorizes an “adjustment” of
general applicability. 5 Other provisions do not speak to “adjustments” but, rather, authorize
“additional payment[s].” See 42 U.S.C. § 1395ww(d)(5)(A)(i). The “[c]anons of construction,”
moreover, are merely “aids in the process of statutory construction, nothing more, nothing less.”
Eagle-Picher Indus. v. United States EPA, 759 F.2d 922, 927 n.6 (D.C. Cir. 1985). Here, the
ejusdem generis canon reveals little, if anything, about congressional intent, and it certainly does
not provide sufficient clarity to foreclose the Secretary’s interpretation at Chevron step one. See
Chevron, 467 U.S. at 842-43.
Second, and more persuasively, Plaintiffs rely on the canon against surplusage. But they
still fail to show that Congress unambiguously foreclosed the Secretary’s interpretation. See id.
In particular, they argue that the Secretary’s construction of the first clause of § 1395ww(d)(5)(I)
renders the second clause meaningless. Added by Congress in 1994, see Pub. L. No. 103-432,
tit. I, § 109, the second clause expressly confers on the Secretary the authority, when making
adjustments for “transfer cases,” to adjust the standardized amounts to achieve budget neutrality:
(ii) In making adjustments under clause (i) for transfer cases (as defined by the
Secretary) in a fiscal year, not taking in account the effect of subparagraph (J), the
Secretary may make adjustments to each of the average standardized amounts
determined under paragraph (3) to assure that the aggregate payments made under
this subsection for such fiscal year are not greater or lesser than those that would
have otherwise been made in such fiscal year.
Section 1395ww(d)(5)(E) provides that “(i) The Secretary shall estimate the amount of
reimbursement made for services described in [§ 1395y(a)(14)] with respect to which payment
was made . . . and . . . is no longer being made. (ii) The Secretary shall provide for an
adjustment to the payment for subsection (d) hospitals in each fiscal year so as appropriately to
reflect the net amount described in clause (i).” Section 1395y(a)(14) bars Medicare repayment
for certain nonphysician services “which are furnished to an individual who is a patient of a
hospital or critical access hospital by [another] entity.”
42 U.S.C. § 1395ww(d)(5)(I)(ii). Plaintiffs argue that this clause would be superfluous, and the
amendment adding it unnecessary, if the first clause already authorized adjustments to the
standardized amounts to achieve budget neutrality. They urge a narrow construction of the first
clause to avoid this anomalous result.
Although the parties do not cite to any legislative history that sheds light on Congress’s
intent in enacting the second clause of § 1395ww(d)(5)(I), the circumstances surrounding the
amendment are consistent with—but do not compel—Plaintiffs’ reading. Because a hospital
discharge triggers eligibility for payments under the prospective payment system, the Medicare
program was required to decide how to handle cases where a patient is transferred from one
facility to another before the patient’s final discharge. See Medicare Program; Changes to the
Hospital Inpatient Prospective Payment Systems and Fiscal Year 1994 Rates, 58 Fed. Reg.
30222, 30244 (May 26, 1993) (proposed rule). In 1992 and 1993, the Prospective Payment
Assessment Commission (“ProPAC”) issued two reports to Congress that included
recommendations regarding transfer cases. See id. at 30223, 30245. As relevant here, ProPAC
recommended that the Secretary change the “flat per diem methodology” then in use, id. at
30245, and further “recommended that Congress provide authority to the Secretary to implement
a graduated per diem in a budget neutral manner,” id. In September 1993, the Secretary “noted”
the ProPAC recommendation and stated that “we intend to seek that authority” from Congress.
Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal
Year 1994 Rates, 58 Fed. Reg. 46270, 46308 (Sept. 1, 1993) (final rule). Then, in 1994, the
Secretary declined “to change the transfer payment methodology absent an offsetting savings
provision,” and noted that Congress had yet to act on the ProPAC recommendation. See
Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal
Year 1995 Rates, 59 Fed. Reg. 45330, 45366 (Sept. 1, 1994). Subsequently, Congress enacted
§ 1395ww(d)(5)(I)(ii). See Pub. L. No. 103-432, tit. I, § 109 (Oct. 31, 1994). “In light of this
authority,” the Secretary then acted, explaining that the amendment “authorized [her] to make
adjustments to the prospective payment system standardized amounts so that adjustments to the
payment policy for transfer cases do not affect aggregate payments.” See Medicare Program;
Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1996 Rates, 60
Fed. Reg. 45778, 45805 (Sept. 1, 1995) (final rule).
This history shows that the Secretary was not prepared to adopt a change in the
methodology for calculating transfer payments, along with adjustments in the standardized
amount to achieve budget neutrality, without specific congressional authorization. But nowhere
along the way did the Secretary expressly disavow the authority that she now asserts under the
first clause of § 1395ww(d)(5)(I), nor did Congress declare that the specific authority was
required. In dealing with a massive program, where modest changes can affect hundreds of
millions of dollars of federal expenditures, and where the success of the program turns on annual
appropriations, it is not surprising that the Secretary would conclude that it was prudent—even if
not legally required—to obtain the express approval of Congress before acting. The fact that she
did so with respect to transfer payments, and the fact that Congress provided express authority,
could mean that the general authority already provided in the first clause of § 1395ww(d)(5)(I)
was insufficient—or it might not. As the Court of Appeals has recognized, “Congress . . .
sometimes drafts provisions that appear duplicative of others simply, in Macbeth’s words, ‘to
make assurance double sure.’” Shook v. Dist. of Columbia Fin. Responsibility & Mgmt.
Assistance Auth., 132 F.3d 775, 782 (D.C. Cir. 1998). And just as Congress might seek “to
clarify what might be doubtful,” id. at 782, the Secretary might seek comfort that a consequential
administrative decision will not prompt a congressional backlash or criticism.
The Court of Appeals’ analysis of § 1395ww(d)(5)(I)(i) in Adirondack Med. Ctr. v.
Sebelius, 740 F.3d 692 (D.C. Cir. 2014), is instructive. Adirondack also involved a challenge to
the Secretary’s use of her exceptions and adjustments authority. In that case, the Secretary made
revisions to the DRG classification system and sought ways to offset the corresponding increases
in aggregate payments. See 740 F.3d at 694-96; see also, e.g., Medicare Program; Changes to
the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2001 Rates, 65 Fed. Reg.
47054, 47103 (Aug. 1, 2000). Congress expressly granted her the authority to make the needed
offset by “adjust[ing] the average standardized amounts.” See Pub. L. No. 106–554, § 301(e)(1)
(Dec. 21, 2000); codified at 42 U.S.C. § 1395ww(d)(3)(A)(vi). But reducing only the
standardized amounts would not have reduced payments to hospitals reimbursed based on
hospital-specific rates. See Adirondack, 740 F.3d at 695-96. Resolving that “the fiscal pain”
resulting from the changes to the DRG classification system “should be shared,” id. at 694, the
Secretary used her general adjustment authority under § 1395ww(d)(5)(I)(i) also to reduce the
hospital-specific rates, thereby achieving an across-the-board reduction. Id. at 694-96.
Hospitals reimbursed pursuant to the hospital-specific rate sued, arguing that the
Secretary exceeded her authority under § 1395ww(d)(5)(I)(i). They first argued that, under the
expressio unius canon, the express grant of statutory authority to offset “the effect of . . . coding
or classification changes” through adjustments to the standardized amounts, id. at 695 (quoting
42 U.S.C. § 1395ww(d)(3)(A)(vi)), impliedly precluded the use of the Secretary’s general
(d)(5)(I)(i) authority to adjust the hospital-specific rate for the same purpose, see id. at 697. The
Court of Appeals disagreed. The Court held that “the once-obscure grant of authority in
§ 1395ww(d)(5)(I)(i)” is ambiguous, and it thus deferred to the Secretary’s interpretation. Id. at
696-99, 701. In reaching this conclusion, the Court of Appeals recognized that, as here, the
plaintiffs’ constrained interpretation of § 1395ww(d)(5)(I)(i) “may be a reasonable reading of the
statute.” Id. at 697. But the Court also recognized that a “reasonable” construction of a statute,
standing alone, is not enough to thwart an agency at Chevron step one. Id. Even more
importantly for present purposes, the Court also held that the application of the expressio unius
canon “offers too thin a reed to support the conclusion that Congress has clearly resolved an
issue.” Id. (quotation marks omitted). It is, in the words of an earlier opinion from the Court of
Appeals, a “feeble helper in an administrative setting, where Congress is presumed to have left to
reasonable agency discretion questions that it has not directly resolved.” Id. (quoting Cheney
R.R. Co. v. ICC, 902 F.2d 66, 68-69 (D.C. Cir. 1990)). “And when countervailed,” as here, “by a
broad grant of authority contained within the same statutory scheme, the canon is a poor
indicator of Congress’ intent.” Id.
Adirondack goes on, moreover, to offer guidance directly responsive to the Plaintiffs’
surplusage argument. As Plaintiffs do here, the Adirondack plaintiffs argued that the Secretary’s
broad construction of § 1395ww(d)(5)(I)(i) rendered other “parts of the statutory scheme . . .
meaningless excess.” Id. at 699. Again, the Court of Appeals rejected the plaintiffs’ contention,
concluding that “[t]he surplusage canon is neither inviolable nor insurmountable,” especially
“when agency authority is at stake.” Id. at 699. This conclusion, moreover, is particularly true
when some surplusage will remain under either of the competing interpretations. Id. at 699.
Because Congress may simply have intended “to clarify—not once, but twice—what the
Secretary was permitted to do,” the Court of Appeals, “[a]t the very least, . . . remain[ed]
unconvinced the statutory scheme [was] unambiguous in evincing Congress’ intent.” Id. at 700.
A similar conclusion follows here. The Court of Appeals has not only held that
§ 1395ww(d)(5)(I)(i) is ambiguous, it has approved the same kind of broad construction that the
Secretary defends here, and it has rejected arguments that—if not identical—are
indistinguishable from those Plaintiffs now make. In short, the plain language of
§ 1395ww(d)(5)(I)(i) grants the Secretary broad discretion to make exceptions and adjustments
as she “deems appropriate.” Although various canons of interpretation may support a
constrained reading of this authority, Plaintiffs offer no construction of the provision that would
avoid all redundancy in the statute, and the Court of Appeals has held that, in this context, the
canons offer little basis for rejecting the presumption that Congress has left the administrative
agency with discretion to read the provision more broadly. Id. at 697-99. As in Adirondack, the
Court, accordingly, concludes that the language is “[a]t the very least” ambiguous for purposes
of Chevron step one. Id. at 700.
The Court also concludes that the scant legislative history cited by the parties is
equivocal. As originally enacted in 1983, the general exceptions and adjustments provision
The Secretary shall provide by regulation for such other exceptions and
adjustments to such payment amounts under this subsection as the Secretary
deems appropriate (including exceptions and adjustments that may be appropriate
with respect to hospitals involved extensively in treatment for and research on
Pub. L. No. 98-21, tit. VI, § 601, 97 Stat. 158 (originally codified as 42 U.S.C.
§ 1395ww(d)(5)(C)(iii)). The accompanying conference report explains that the conference
agreement followed the House bill, which authorized “such exceptions and adjustments as [the
Secretary] deems appropriate (including those that may be appropriate with respect to public and
teaching hospitals and hospitals involved extensively in treatment for, and research on, cancer),”
but omitted “the requirement with respect to public and teaching hospitals,” H.R. Rep. No. 9847, 195 (Conf. Rep.). The conference report states that “[t]he conferees wish to make it clear
that this authority permits the Secretary to provide for such exceptions and adjustments as may
be appropriate with respect to hospitals experiencing special problems because of their location
in a particular census division.” Id. The report thus indicates that the conferees expected the
Secretary to use her authority to address payment disparities affecting certain kinds of hospitals,
e.g., cancer hospitals, see id.; but it does not indicate that the conferees intended to restrict her
authority to that circumstance.
The parenthetical relating to cancer hospitals was deleted in 1989, when cancer hospitals
were removed from the prospective payment system. See Pub. L. No. 101-239, tit. VI, § 6004,
103 Stat. 2159. The Secretary argues that this amendment had, if anything, a broadening effect,
but because the amendment did not reflect legislative attention to the scope of the Secretary’s
adjustments authority, it does not cut either way.
Congress has also added provisions expressly authorizing adjustments to the standardized
amounts. For example, as discussed above, in 1984 Congress provided the Secretary with
authority to adjust the standardized amounts to offset transfer-related costs, see
§ 1395ww(d)(5)(I)(ii), and in 2000, Congress provided the Secretary with authority to adjust the
standardized amounts to offset changes to the DRG classification system, see
§ 1395ww(d)(3)(A)(vi). But the legislative and administrative materials cited by the parties do
not explain why the Secretary concluded that she needed express legislative authority to make
these offsets, nor is it clear that Congress enacted these provisions on the understanding that the
Secretary’s general adjustment authority did not authorize her to adjust the standardized
amounts. Plaintiffs are correct that the Secretary has previously used her authority under
§ 1395ww(d)(5)(I)(i) only for targeted adjustments. See, e.g., Medicare Program; Changes to the
Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg.
48916, 49106-49108 (Aug. 11, 2004) (adjusting wage index assignments in light of “unique and
temporary” circumstances adversely affecting small community hospitals). They cite no case,
however, holding that a “broad-spectrum grant of authority” atrophies merely because it goes
unused. See Adirondack, 740 F.3d at 694, 695-96.
Accordingly, as the Court of Appeals held in Adirondack, see 740 F.3d at 700-01, the
Court concludes that the general exceptions and adjustments provision is ambiguous with respect
to whether it provides a broad grant of authority untethered from the more specific provisions of
§ 1395ww(d)(5), and thus proceeds to Chevron’s second step. See id.; see, e.g., Regions Hosp. v.
Shalala, 522 U.S. 448, 460 (1998) (“Because the Hospital’s construction is not an inevitable one,
we turn to the Secretary’s position, examining its reasonableness as an interpretation of the
Finally, the St. Helena and Bakersfield Plaintiffs separately contend that the Secretary
exceeded her statutory authority under 42 U.S.C. § 1395ww(g) when she reduced the national
capital Federal rate and Puerto Rico-specific capital rate by 0.2 percent. See Dkt. 18-1 at 29-30;
Dkt. 15 at 34-35; see also 78 Fed. Reg. at 27651, 50746. Section 1395ww(g), like
§ 1395ww(d)(5)(I)(i), authorizes certain “exceptions” and “adjustment[s],” but the two
provisions are not identical. The St. Helena Plaintiffs’ opening brief does not explain why the
text of § 1395ww(g) compels their reading, see Dkt. 18-1 at 29-30, and the Bakersfield
Plaintiffs’ opening brief does not analyze the text of § 1395ww(g) at all, see Dkt. 15 at 34-35.
The Secretary’s briefing also fails to grapple with this question. See Dkt. 23-1 at n.5, Dkt. 35 at
18-19. The Court thus concludes that this issue is not sufficiently briefed to permit resolution at
this time. Accordingly, to the extent Plaintiffs raise an independent challenge to the Secretary’s
reduction of the capital rates, the parties’ motions are denied without prejudice. 6
2. Whether The Secretary’s Interpretation Is Reasonable
At Chevron’s second step the question for the reviewing court is whether the agency’s
interpretation is a reasonable one. The court, accordingly, will “uphold the Secretary’s judgment
as long as it is a permissible construction of the statute, even if it differs from how the court
would have interpreted the statute in the absence of an agency regulation.” Sebelius v. Auburn
Reg’l Med. Ctr., 133 S. Ct. 817, 826-27 (2013). “[G]iven the tremendous complexity of the
Medicare statute,” moreover, courts “accord particular deference to the Secretary’s
interpretation” of the statute’s detailed provisions. Cnty. of Los Angeles, 192 F.3d at 1014.
According to Plaintiffs, however, that usual deference is unwarranted here, because the Secretary
has purportedly abandoned the “more limited interpretation of . . . § 1395ww(d)(5)(I)” that she
espoused in prior rulemakings. Dkt. 17-1 at 27, see also Dkt. 27 at 10-13. The Court disagrees.
An agency is “not estopped from changing” its interpretation of a statute. Good
Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993); see also Perez v. Mortgage Bankers
Ass’n, 135 S. Ct. 1199, 1207-09 (2015). When it does so, however, the reviewing court should
consider that change in position as “a factor in assessing the weight that” the agency’s new
position is due. Good Samaritan Hosp., 508 U.S. at 417. At times, the change may require that
the court accord the new interpretation “considerably less deference than a consistently held
agency view.” Thomas Jefferson Univ., 512 U.S. 504, 515 (1994) (quotation marks and citation
Should the parties seek to revisit this issue, they should address whether such a challenge is
properly before the Court. See 78 Fed. Reg. at 50746 (final rule, stating that the Secretary “did
not receive any comments that specifically addressed [her] proposal to make the -0.2 percent
adjustment to the national capital Federal rate and Puerto Rico specific capital rate” during the
omitted). But, this proviso is not absolute, and its application turns on “the facts of individual
cases.” Good Samaritan Hosp., 508 U.S. at 417.
Here, the Court concludes that the prior occasions when the Secretary declined to rely on
her general adjustment and exception authority, and where she, instead, waited for specific
congressional authorization to act, do not undercut her current claim to deference. First, unlike
the cases on which they rely, Plaintiffs have not identified any prior actions in which the
Secretary expressly interpreted or applied § 1395ww(d)(5)(I) in a manner that conflicts with her
current reading. It is true, as discussed above, that she has previously declined to rely on that
provision where, under her current reading, she might have invoked it. But the fact that the
Secretary, at one time, “expressed doubts about [her] ability to” make adjustments without
specific legislative authority to do so does not mean that a later, expansive construction of her
general adjustment authority is not entitled to deference. Adirondack, 740 F.3d at 698. That is
particularly true in this context, since the Secretary never expressly construed
§ 1395ww(d)(5)(I)(i) in a manner inconsistent with her current reading.
Plaintiffs invoke Dillmon v. Nat’l Transp. Safety Bd., 588 F.3d 1085, 1089-90 (D.C. Cir.
2009), where the Court of Appeals held that an agency must explain its changed interpretation in
order “to ensure [that] the agency’s ‘prior policies and standards are being deliberately changed,
not casually ignored.’” see Dkt. 17-1 at 27. And they assert, correctly, that an agency may not
“‘depart from a prior policy sub silentio, or simply disregard rules that are still on the books.’”
Dillmon, 588 F.3d at 1089 (quoting FCC v. Fox TV Stations, Inc., 556 U.S. 502, 515 (2009)).
Here, however, it is far from clear that the Secretary previously articulated a policy or
interpretation from which she now departs. There certainly was no reasoned explanation of how
the Secretary construed § 1395ww(d)(5)(I)(i) or why she read the statute in that manner. Indeed,
the Secretary made no mention whatsoever of § 1395ww(d)(5)(I)(i) in the administrative actions
on which Plaintiffs rely. Those actions, accordingly, hardly represent the type of established
administrative policy that requires some justification to discard. See, e.g., Dillmon, 588 at 108990; King Broad. Co. v. FCC, 860 F.2d 465, 470 (D.C. Cir. 1988) (refusing to defer to an
interpretation that could not be reconciled with the agency’s prior interpretation of the same
provision); Northpoint Tech., Ltd. v. FCC, 412 F.3d 145, 152-56 (D.C. Cir. 2005) (refusing to
defer to an interpretation that could not be reconciled with “prior [agency] policy and practice”).
Plaintiffs further argue that, even if entitled to deference, the Secretary’s use of her
adjustment authority to adopt “an across-the-board reduction” cannot be reconciled with the
overall statutory scheme. See, e.g., Dkt. 17-1 at 30. They argue that “the Secretary has made no
attempt to explain how this system wide payment reduction serves any statutory purposes,
rendering her interpretation unreasonable.” Id. (emphasis added). This contention, however,
merely repeats the arguments already rejected at Chevron step one—and, for that matter, already
rejected in Adirondack, 740 F.3d at 700. It is true that the Secretary’s reading of
§ 1395ww(d)(5)(I)(i) invites overlap with other portions of § 1395ww(d)(5). But a general
exception or waiver authority, by its nature, will always—or will frequently—overlap with more
specific authorities. At least in the context of § 1395ww(d)(5), the Court of Appeals has already
opined that such “superfluity” is not unreasonable. 740 F.3d at 699-700; cf. Adirondack Med.
Ctr. v. Burwell, 782 F.3d 707, 710 (D.C. Cir. 2015) (per curiam) (concluding that an
“adjust[ment to] the hospital-specific rates” was not arbitrary and capricious because “the
Secretary reasonably chose to achieve budget neutrality pursuant to a method that spreads the
cost of budget neutrality fairly between . . . hospitals”). And, even if the overall structure of the
Medicare Act and § 1395ww(d)(5) might be read implicitly to limit this broad grant of authority,
the Secretary’s decision to give the expansive language of § 1395ww(d)(5)(I)(i) its plain
meaning cannot be described as “unreasonable.”
Plaintiffs also argue that the 0.2 percent reduction effectively negates payment for the
additional inpatients that hospitals are expected to treat and that this violates the Medicare Act.
See, e.g., Dkt. 17-1 at 23-24. In this respect, Plaintiffs argue that this case is unlike Adirondack,
which involved the Secretary’s effort to address an “artificial” increase in payments to hospitals.
740 F.3d at 700. The Secretary correctly responds that nothing in the final rule departs from the
per-discharge structure of the payment scheme—providers are paid for each patient treated and
discharged, and providers who treat additional inpatients are reimbursed pursuant to the inpatient
prospective payment system. See Dkt. 23-1 at 25-27. It is, of course, possible that the 0.2
percent reduction does deny providers reimbursement in the aggregate for the additional
inpatient stays. But, Plaintiffs point to no evidence in the record supporting actual increased
provider costs, and, in any event, to the extent those additional costs exist, they are shared across
the inpatient prospective payment system. As a result, the 0.2 percent reduction does not differ
in application from the numerous other adjustments made to the standardized rate. The
Secretary’s use of her general exceptions and adjustments authority in this manner may be
unusual, but it is not unreasonable.
Finally, Plaintiffs argue with some force that any interpretation of the Act that grants the
Secretary unfettered adjustment authority would conflict with the overall statutory scheme. The
Court agrees that the “exceptions and adjustments” provision does not give the Secretary carte
blanche to override the rest of the Act. The Court is not persuaded, however, that the reduction
at issue in this case raises that concern. Cf. Marshall Cnty. Health Care Auth. v. Shalala, 988
F.2d 1221, 1224 (D.C. Cir. 1993) (holding that “[t]he Secretary may” invoke her exceptions and
adjustments authority to “vary the definition” of “urban areas” under the prospective payment
system, even though it was possible to “hypothesize forms of regulatory amendments that could
be thought unreasonable in light of the statute”). In Amgen Inc. v. Smith, for example, the Court
of Appeals held that an “adjustment . . . involving only the payment amount for a single drug[ ]
does not work ‘basic and fundamental changes in the scheme’ Congress created in the Medicare
Act.” 357 F.3d 103, 118 (D.C. Cir. 2004) (quoting MCI Telecomm. Corp. v. Am. Tel. & Tel. Co.,
512 U.S. 218, 225 (1994)). The Court of Appeals reasoned that “the statutory requirement that
the Secretary ‘shall’ develop certain aspects of the payment system is qualified by the
Secretary’s authority to ‘adjust[ ]’ those payment amounts.” Id. (modifications in original)
(quoting 42 U.S.C. §§ 1395l(t)(2)(E), 1395l(t)(12)(A)). It cautioned that “a more substantial
departure from the default amounts would, at some point, violate the Secretary’s obligation to
make such payments and cease to be an adjustment[ ],” but concluded that it had “no occasion”
to draw that line. Id. (emphasis added).
The same is true here. Nothing in this case requires the Court “to engage in line drawing
to determine when ‘adjustments’ cease being ‘adjustments.’” Amgen, 357 F.3d at 117. The
challenged 0.2 percent reduction, which is smaller than the 2.9 percent reduction upheld in
Adirondack, see 740 F.3d at 700, does not present a fundamental conflict with the Act’s inpatient
prospective payment scheme. For present purposes, it therefore suffices to conclude that the
Secretary’s interpretation of the exceptions and adjustments provision is a reasonable one.
B. APA Challenges To The 0.2 Percent Reduction
Plaintiffs further argue that, even if the Secretary had the statutory authority to make the
across-the-board 0.2 percent reduction, the process she employed was riddled with procedural
and other errors. As already discussed, the Secretary estimated that the new 2-midnight rule
would result in a net shift of 40,000 cases to inpatient status in fiscal year 2014, at a cost of $220
million. On this basis, she adjusted the standardized amount, the hospital-specific rates, and the
Puerto Rico-specific standardized amount downward by 0.2 percent, effecting an across-theboard 0.2 percent reduction to compensation for inpatient services. See 78 Fed. Reg. at 50746.
Plaintiffs contend that the notice of proposed rulemaking omitted important information about
the Secretary’s methodology, thereby depriving them of a meaningful opportunity to comment.
They further argue that the Secretary failed to provide a reasoned response to the relevant
comments that they were able to make and that the final rule fails to provide a sufficient
explanation for the agency’s action. 7 Plaintiffs also argue that the 0.2 percent reduction is
arbitrary and capricious and, that it violates the Medicare Act’s requirement that an adjustment
be promulgated as a “regulation.”
Pursuant to the Medicare Act, 42 U.S.C. § 1395oo(f)(1), this Court reviews the
Secretary’s action under the familiar provisions of the APA, 5 U.S.C. § 706(2)(A). The APA, in
turn, requires an agency 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.”
The Medicare Act includes several budget neutrality provisions, see, e.g., 42 U.S.C.
§§ 1395ww(d)(8)(D), 1395ww(d)(4)(C)(iii), 1395l(t)(2)(E), and the Court of Appeals has held
that the Secretary has “wide discretion” to invoke her exceptions and adjustments authority, see
Adirondack Med. Ctr., 782 F.3d at 709-11. The Secretary concedes that none of the Act’s
budget neutrality provisions required her to offset the added costs of the 2-midnight rule, see
Dkt. 43 at 18-19, but argues that the offset was appropriate in light of Congress’ general
preference for budget-neutral Medicare rule changes and in the interests of sound management of
the public fisc. In their supplemental briefs, Plaintiffs argue that the rate reduction is arbitrary
because “no statutory authority exists here for true budget neutrality.” See Dkt. 44 at 3-4. But to
the extent Plaintiffs raised a similar argument in their opening briefs, it was in relation to the
interpretation of the Secretary’s adjustment authority under § 1395ww(d)(5)(I)(i), not Plaintiffs’
substantive APA challenge, see, e.g., Dkt. 17-1 at 23-24, 27-29. Accordingly, this argument is
not properly presented. See, e.g., New York v. EPA, 413 F.3d 3, 20 (D.C. Cir. 2005) (argument
not raised in opening brief is waived).
Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 56-57 (D.C. Cir. 2015) (quoting Motor
Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) (emphasis
omitted). The agency must also provide the public with a meaningful opportunity to comment
on a proposed rule and must offer reasoned responses to significant comments. Id.; Connecticut
Light & Power Co. v. Nuclear Reg. Comm., 673 F.2d 525, 528, 530 (D.C. Cir. 1982). Here, all
agree that the basis for the challenged 0.2 percent reduction was the predicted shift of 40,000
stays to inpatient status in fiscal year 2014, at an estimated cost of $220 million. The actuarial
basis for this prediction, and the extent to which the Secretary was required to disclose and
explain the underlying assumptions, however, are subject to substantial dispute.
As explained below, the Court agrees with Plaintiffs that the Secretary did not provide
sufficient notice of the actuarial assumptions and methodology she employed and that disclosure
of this information was essential to communicate the basis for the proposed adjustments and to
permit meaningful public comment. The Court further concludes that this error was not
harmless. Finally, in light of these conclusions, the Court determines that it need not reach
Plaintiffs’ remaining challenges.
1. Opportunity For Meaningful Notice And Comment
“The APA sets forth several steps an agency must take when engaged in rulemaking: it
must publish a general notice of proposed rulemaking in the Federal Register; give an
opportunity for interested persons to participate in the rulemaking through submission of written
data, views, or arguments; and issue publication of a concise general statement of the rule’s basis
and purpose.” Sugar Cane Growers Coop. of Fla. v. Veneman, 289 F.3d 89, 95 (D.C. Cir. 2002).
“[T]he opportunity for interested parties to participate in a meaningful way in the discussion and
final formulation of rules” is a “particularly important component” of this process. Connecticut
Light & Power, 673 F.2d at 528. “The purpose of the comment period is to allow interested
members of the public to communicate information, concerns, and criticisms to the agency
during the rule-making process. If the notice of proposed rule-making fails to provide an
accurate picture of the reasoning that has led the agency to the proposed rule, interested parties
will not be able to comment meaningfully upon the agency’s proposals. As a result, the agency
may operate with a one-sided or mistaken picture of the issues at stake in a rule-making.” Id. at
Given the APA’s requirement that an agency “examine the relevant data and articulate a
satisfactory explanation for its action,” see Dist. Hosp. Partners, 786 F.3d at 56-57 (quotation
marks, citation, and emphasis omitted), “it is especially important for the agency to identify and
make available technical studies and data that it has employed” prior to the comment period, see
Connecticut Light & Power, 673 F.2d at 530. “[A]n agency cannot rest a rule on data that, in
critical degree, is known only to the agency.” Time Warner Entm’t Co., L.P. v. FCC, 240 F.3d
1126, 1140 (D.C. Cir. 2001) (quotation marks, citation, and alterations omitted). Rather, “‘[t]he
most critical factual material that is used to support the agency’s position on review must have
been made public in the proceeding and exposed to refutation.’” Owner-Operator Indep.
Drivers v. FMCSA, 494 F.3d 188, 199 (D.C. Cir. 2007) (quoting Ass’n of Data Processing Serv.
Orgs. v. Bd. of Governors of the Fed. Reserve Sys., 745 F.2d 677, 684 (D.C. Cir. 1984))
(emphasis omitted); see also Am. Radio Relay League, Inc. v. FCC, 524 F.3d 227, 237 (D.C. Cir.
2008); Wisconsin Power & Light Co. v. FERC, 363 F.3d 453, 463 (D.C. Cir. 2004).
The “critical factual material” that the agency must disclose and “expose[ ] to refutation”
includes the models and methodology used by an agency to support its action. See OwnerOperator Indep. Drivers, 494 F.3d at 199, 201. In Owner-Operator Independent Drivers, the
Court of Appeals invalidated a final rule because the agency had failed to disclose “the model
and methodology” it used “to determine the benefits and costs of [the] regulatory options.” 494
F.3d at 201. As the Court of Appeals explained, “because the output of that model was central to
[the agency’s] decision to adopt the [final] [r]ule . . . [,] the model and its methodology were
unquestionably among the most critical factual material that was used to support the agency’s
position.” 494 F.3d at 201 (quotation marks, citation and alterations omitted); see also Small
Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506, 535 (D.C. Cir. 1983) (where an
agency chooses to use a predictive model, it “must explain the assumptions and methodology
used in preparing the model and, if the methodology is challenged, must provide a complete
analytic defense.”) (quotation marks and citation omitted).
Borrowing a metaphor from the Court of Appeals, Plaintiffs contend that the Secretary
engaged in a game of “hunt the peanut” by failing to disclose critical aspects of her methodology
until after the comment period. See Dkt. 16 at 24 (quoting Connecticut Light & Power, 673 F.2d
at 530); see also Dkt. 19-1 at 26, Dkt. 18-1 at 33. In particular, they contend that she failed to
reveal key assumptions applied by the HHS actuaries in concluding that the change from the 24hour rule to the 2-midnight rule would actually increase the number of inpatient stays, and that it
would do so by 40,000 stays in fiscal year 2014. Most significantly, according to Plaintiffs, see
Dkt. 16 at 24; Dkt. 19-1 at 19; Dkt. 18-1 at 31-33, it was not until the final rule was announced
that the Secretary disclosed that (1) in estimating the number of “encounters” that would likely
shift from outpatient to inpatient status, the actuaries examined only “outpatient claims for
observation or a major procedure,” and (2) in estimating the number of “encounters” likely to
shift from inpatient to outpatient status, the actuaries examined only “claims containing a
surgical MS-DRG.” 78 Fed. Reg. at 50,953. Plaintiffs contend that these methodological steps
were both unjustifiable and consequential. The decision to consider only surgical MS-DRGs
when estimating the number of cases predicted to move to outpatient status, and thus the
exclusion of medical MS-DRGs, eliminated “hundreds of thousands of cases that could
potentially shift from inpatient to outpatient” from the Secretary’s analysis. Dkt. 16 at 31.
According to Plaintiffs, approximately “half of the roughly 1.5 million short stays involve
medical MS-DRGs,” and “five medical MS-DRGs alone . . . represent nearly 160,000 short stay
cases.” Id. at 30. Many of the excluded stays, moreover, were short and thus likely to be
classified as outpatient stays under the new rule. “The medical MS-DRG for chest pain, for
example, has an average length of stay of 1.8 days.” Dkt. 19-1 at 17. Plaintiffs argue that
because these assumptions were not revealed prior to the close of the notice and comment period,
“hospitals and other stakeholders—including Plaintiffs—could not meaningfully critique the
actuaries’ estimates or attempt to reproduce or assess the reliability of CMS’s results.” Dkt. 16
at 23; see also Dkt. 19-1 at 19.
The Court agrees that the Secretary’s failure to disclose the critical assumptions relied
upon by the HHS actuaries deprived Plaintiffs and other members of the public of a meaningful
opportunity to comment on the proposed 0.2 percent reduction. The undisclosed information
was central to the analysis that led to the Secretary’s conclusion that 40,000 discharges would
shift to inpatient status in 2014, and, without that information, commenters had no basis to
understand or to critique the Secretary’s conclusion.
In the final rule, the Secretary asserted that the proposed rule “specifically discussed the
methodology used and the components of the estimate.” 78 Fed. Reg. at 50953. That is
incorrect. The proposed rule stated only that the Secretary analyzed “FY 2009 through FY 2011
Medicare claims data for extended hospital outpatient encounters and shorter stay hospital
inpatient encounters.” 78 Fed. Reg. at 27649. That was far from sufficient to permit meaningful
comment on the actuarial predictions or to put the public on notice of the basis for the proposed
adjustments. Where an agency disregards a significant portion of the information on which it
claims to have based its analysis, the APA requires some disclosure and explanation. Cf. Dist.
Hosp. Partners, 786 F.3d at 56-57 (“If an agency fails to examine the relevant data . . . it has
failed to comply with the APA.”).
Even accepting the fact that she did not disclose the key assumptions applied by the
actuaries, the Secretary contends that the proposed rule satisfied APA standards because
interested parties had access to all of the information that, in her view, they needed. In
particular, the notice of proposed rulemaking identified the data set the Secretary used in her
analysis—“FY 2009 through FY 2011 Medicare claims data for extended hospital outpatient
encounters and shorter stay hospital inpatient encounters,” 78 Fed. Reg. at 27649—and this data
set was publicly available, see Dkt. 23-1 at 38-39. Thus, she argues, interested parties could
perform their own analyses of the same data and, to the extent they obtained different results,
submit comments to that effect. See, e.g., AR 4653-4655.
The Secretary is correct that an agency is not invariably required to disclose information
on which it relies, at least as long as the public already has that information. In Connecticut
Light & Power, 673 F.2d at 532, for example, the Court of Appeals concluded that a notice of
proposed rulemaking passed muster—although only barely so—even though it failed to disclose
information upon which the agency relied. This was because the undisclosed information
included studies that “had already been subject to widespread public comment” and because the
commenters were aware “of problems that had recurred in plant after plant and of reports that
had been publicly filed.” Id. at 531-32. Given that the “rule-making process took place against a
background of five years during which the Commission explored safety proposals in a public
forum and exposed the important technical studies to adversarial comment,” the Court of
Appeals held that, although “it would have been better practice for the [agency] to have
identified these technical materials specifically in the notice of proposed rule-making,” “the
technical background of the rules was sufficiently identified to allow for meaningful comment
during the rule-making process.” Id.
The circumstances here, however, are very different. Plaintiffs are not arguing that the
Secretary needed to disclose the publicly available Medicare claims data the actuaries used in
their analysis. They are arguing that she was required to disclose what the actuaries did with that
data. It is that deficiency that precluded meaningful public comment, and, unlike in Connecticut
Light & Power, the Secretary offers no reason to believe that commenters had any idea what the
actuaries did. Indeed, at least one commenter endeavored—without success—to recreate the
Secretary’s conclusions. See AR 4653-4655; see also AR 4411 (observing that “it has not been
possible to replicate the [Secretary’s] finding[s]”), AR 5235 (similar). Under these
circumstances, public access to the underlying data does not save the rule.
Nor does public awareness regarding the longstanding agency concern about inpatient
admissions alter this result. The Secretary, for example, points to discussion contained in the
proposed rule itself, the Secretary’s 2012 request for comment on inpatient admissions, and a
2013 report by the HHS Office of Inspector General addressing “Hospitals’ Use of Observation
Stays and Short Inpatient Stays.” 8 Although the public may have been aware of the various
The Secretary concedes that the Inspector General report was not published until after the
comment period had already closed, see Dkt. 35 at 23 n.6, but argues that it represents “further
evidence of her very public study of the systemic nature of the issue of hospital inpatient
determinations,” id. (quotation marks omitted).
considerations that prompted the Secretary to propose the 2-midnight rule, the basis for that rule
is not the question. The question is whether the public was aware of the methodology the HHS
actuaries used to predict the effects of that policy. And that is where the Secretary’s argument
At oral argument, counsel for the Secretary argued for the first time that it should have
been “self-evident” that the medical MS-DRG cases would be unaffected by the new rule and,
accordingly, could be excluded. See Dkt. 40 at 38-41. Given the ample evidence that interested
parties did not find that assumption self-evident, see AR 4653-4655; 4883-4884; 4411; 5010;
5235; 5672, the Court is not persuaded. This is not a case where a “decision of less than ideal
clarity” may be upheld because “the agency’s path may reasonably be discerned.” State Farm
Mut. Auto. Ins. Co., 463 U.S. at 43. To the contrary, there is no hint of this “self-evident”
rationale in the administrative record—or elsewhere.
The Secretary also argues that “the APA does not impose . . . the obligation to explain
every element of her actuaries’ analysis,” down to “every last detail and all granular
considerations of the actuaries’ calculations.” Dkt. 35 at 22-23 (citing Combs v. Classic Coal
Corp., 931 F.2d 96, 99-100 (D.C. Cir. 1991)). Maybe so, but the APA does require the
disclosure of assumptions critical to the agency’s decision, in order to facilitate meaningful
comment and allow a “genuine interchange” of views. See Connecticut Light & Power, 673 F.2d
at 530. Here, neither Plaintiffs nor other members of the public ever had an opportunity to offer
meaningful comments on the Secretary’s proposal, and thus the 0.2 percent reduction that the
Secretary proposed, and ultimately adopted, fails to pass muster under the APA.
2. Harmless Error
The Secretary further argues that any flaw in the notice and comment process was
“harmless” and that, accordingly, the rule should be sustained under the prejudicial-error
doctrine. The Secretary is correct that the APA “instructs reviewing courts to take ‘due account
. . . of the rule of prejudicial error.’” PDK Labs. Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004)
(quoting 5 U.S.C. § 706). As a general matter, however, the Court of Appeals has “not been
hospitable to government claims of harmless error in cases” involving a failure of notice and
comment. Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1109 (D.C. Cir. 2014). Merely
“technical” failures with respect to notice and comment may be harmless, see Sugar Cane
Growers, 289 F.3d at 96; United States Telecom Ass’n v. FCC, 400 F.3d 29, 40-41 (D.C. Cir.
2005) (holding that even if the mislabeling of a published notice violated the APA, that violation
was harmless), while “an utter failure to comply with notice and comment cannot be considered
harmless if there is any uncertainty at all as to the effect of that failure,” Sugar Cane Growers,
289 F.3d at 96. Here, the question is whether Plaintiffs have “show[n] that an opportunity to
comment regarding an agency’s important information created ‘enough uncertainty’ as to its
possible effect on the agency’s disposition.” Allina Health Servs., 746 F.3d at 1110 (quoting
Chamber of Commerce v. SEC, 443 F.3d 890, 904-06 (D.C. Cir. 2006)). There is no doubt that
they have made this showing.
Although this case does not involve an “utter failure” to provide notice and an
opportunity for comment, see Sugar Cane Growers, 289 F.3d at 96, it does involve a significant
defect. The 0.2 percent reduction was the product of the Secretary’s conclusion that the 2midnight rule would result in an increase of 40,000 inpatient stays. Until the actuarial
assumptions were disclosed, however, the Secretary’s thought process was a black box—and
even then, her analysis was not fully explained. The Secretary, once again, insists that her
“alleged failure to disclose additional details about her actuaries’ estimates” “did not preclude
the submission of comments” on those estimates. Dkt. 23-1 at 46. But there is a vast difference
between announcing a conclusion and articulating the reasons for that conclusion. One can
disagree with a conclusion, but, absent some insight into how the conclusion was reached, it is
not possible to explain where and why the agency went wrong.
To the extent the Secretary argues that her undisclosed assumptions made no difference
to the outcome, the Court also disagrees. The assumptions the HHS actuaries applied
substantially curtailed the universe of hospital stays the Secretary considered and likely affected
the outcome of the Secretary’s analysis. The validity of those assumptions, moreover, is far from
self-evident. Against this background, the Court cannot conclude that the Secretary’s failure to
provide the public with the opportunity to offer meaningful comment on the assumptions and
methodology used to derive the 0.2 percent reduction was harmless.
To be clear, this is not to say that the Court has concluded that the Secretary’s
assumptions and methodology were unreasonable. Plaintiffs contend that the predicted increase
in inpatient cases “defies reason” and “common sense” because it will be harder to satisfy the
new 2-midnight benchmark than the old 24-hour benchmark. See Dkt. 29 at 18; Dkt. 15 at 32;
Dkt. 17-1 at 35-36. That likely overstates their case. They ignore the fact, for example, that the
increased predictability supplied by the 2-midnight presumption might lead to an increase in
inpatient stays. The reasonableness of the Secretary’s assumptions and methodology, however,
is a question that should be considered first, if at all, on remand. For present purposes, it is
sufficient to conclude that the Secretary’s failure to provide an opportunity for meaningful
comment “created enough uncertainty as to its possible effect on the agency’s disposition,”
Allina Health Servs., 746 F.3d at 1110 (quotation marks omitted), to preclude reliance on the
prejudicial-error doctrine. As in Owner-Operator Independent Drivers, 494 F.3d at 202, the
Court has “no difficulty in concluding that the agency’s failure to disclose the methodology of
[its] model in time for comment was prejudicial.”
Remaining APA Challenges
A number of Plaintiffs’ other APA-style challenges are closely related to the Secretary’s
failure to provide an opportunity for meaningful comment on her actuarial assumptions.
Plaintiffs argue, among other things, that after the Secretary unjustifiably excluded certain claims
in estimating the outpatient-to-inpatient and inpatient-to-outpatient shift, she also made
inappropriate comparisons of estimates based on different types of claims, failed to grapple with
the uncertainties in her analysis, and improperly calculated the cost of the net increase in
inpatient cases. Because commenters were not able to raise all these concerns in response to the
deficient notice of proposed rulemaking, however, no administrative record was ever developed
for the Court to review. Thus, the Court concludes that these arguments should be addressed, if
at all, after further proceedings at the administrative level and an opportunity for additional
Plaintiffs also contend that the Secretary failed to provide meaningful responses to the
substantial comments they did make and that her final conclusions are not accompanied by a
reasoned explanation of her methodology. In addition, they argue that the 0.2 percent reduction
is invalid because it was announced in the preamble to the rule, and not in a separate
“regulation.” In light of the Court’s conclusion that the Secretary failed to provide adequate
notice of the underlying basis for the proposed reduction, and thereby deprived the public of a
meaningful opportunity to comment on that proposal, it is unnecessary to reach these additional
grounds. The Secretary’s decision and accompanying explanation may change on remand, and
she will have an opportunity to address whatever comments are made, to explain whatever
decision she reaches, and to decide whether to include any adjustment in the body of a
C. The Appropriate Remedy
There remains the question of appropriate remedy. Where a rule is adopted “without
observance of procedure required by law,” the APA directs that the court shall “hold unlawful
and set aside [the] agency action.” 5 U.S.C. § 706(2). Courts in this Circuit, however, have long
recognized that “when equity demands, an unlawfully promulgated regulation can be left in place
while the agency provides the proper procedural remedy.” 9 Fertilizer Institute v. EPA, 935 F.2d
1303, 1312 (D.C. Cir. 1991); see, e.g., EME Homer City Generation, L.P. v. EPA, No. 11-1302,
2015 WL 4528137, at *9 (D.C. Cir. July 28, 2015).
Although acknowledging this general rule, Plaintiffs contend that it has no application
here, since the Court of Appeals has repeatedly held that “[f]ailure to provide the required notice
and to invite public comment . . . is a fundamental flaw that ‘normally’ requires vacatur of the
rule.” Heartland Reg’l Med. Ctr. v. Sebelius, 566 F.3d 193, 199 (D.C. Cir. 2009) (citing Sugar
Cane Growers, 289 F.3d at 97). That proposition, however, is not absolute. The Court of
Appeals has, at times, remanded without vacatur despite a failure to provide adequate notice or
opportunity for comment. See Am. Radio Relay League, Inc., 524 F.3d at 242 (remanding for the
agency to “afford a reasonable opportunity for public comment on the unredacted studies on
Exceptions to this equitable doctrine do exist. 42 U.S.C. § 1395hh(a)(4), for example, states
that if “a final regulation . . . is not a logical outgrowth of . . . a . . . notice . . . [it] shall not take
effect,” and the Court of Appeals has suggested in dicta that this provision requires vacatur. See
Allina Health Servs., 746 F.3d at 1111 n.5. This provision, however, is not applicable here.
which it relied in promulgating the rule, make the studies part of the rulemaking record, and
provide a reasoned explanation of its choice”); Am. Med. Ass’n v. Reno, 57 F.3d 1129, 1135 &
n.4 (D.C. Cir. 1995) (“Because the inadequately explained rules are imposing an immediate
monetary burden on fee-payers, we assume that the agency will act with due haste to provide the
requisite opportunity for meaningful comment and explanation.”).
In the absence of a per se rule, the Court must turn to the standard articulated by the
Court of Appeals in Allied-Signal, Inc. v. U.S. Nuclear Regulatory Commission, 988 F.2d 146
(D.C. Cir. 1993); see, e.g., Heartland Reg’l Med. Ctr., 566 F.3d at 197-99; Sugar Cane Growers,
289 F.3d at 97. Although Plaintiffs question whether the Allied-Signal test should apply to
rulemaking cases, see Dkt. 42 at 9 & n.2, the Court of Appeals has repeatedly applied that test in
such cases, see, e.g., Sugar Cane Growers, 289 F.3d at 97-98; Chamber of Commerce, 443 F.3d
at 908. The inquiry will, of course, vary with context, but the starting point is the same. The
Court, accordingly, must weigh (1) “the seriousness of the order’s deficiencies (and thus the
extent of doubt whether the agency chose correctly) and” (2) “the disruptive consequences of an
interim change that may itself be changed.” Allied-Signal, 988 F.2d at 150-51 (quotation marks
and citation omitted).
1. The Final Rule’s Deficiencies
The first Allied-Signal factor is “the seriousness of the [rule’s] deficiencies (and thus the
extent of doubt whether the agency chose correctly).” 988 F.2d at 150-51. As the Court of
Appeals has explained, “[t]here is a fine line between agency reasoning that is ‘so crippled as to
be unlawful’ and action that is potentially lawful but insufficiently or inappropriately explained.”
Radio-Television News Directors Ass’n, 184 F.3d 872, 888 (D.C. Cir. 1999) (quoting Checkosky
v. SEC, 23 F.3d 452, 464 (D.C. Cir. 1994) (separate opinion of Silberman, J.)). “In the former
circumstance, the court’s practice is to vacate the agency’s order, while in the later the court
frequently remands for further explanation (including discussion of relevant factors and
precedents) while withholding judgment on the lawfulness of the agency’s proposed action.” Id.
As Plaintiffs stress, “the court typically vacates when an agency ‘entirely fails’ to provide notice
and comment.” Daimler Trucks North America LLC v. EPA, 737 F.3d 95, 103 (D.C. Cir. 2013)
(quoting Shell Oil Co. v. EPA, 950 F.2d 741, 752 (D.C. Cir. 1991)) (alteration omitted). That is
presumably because, where an agency has completely bypassed the notice and comment
procedure, there is substantial basis to “doubt whether the agency chose correctly,” AlliedSignal, 988 F.2d at 150-51, and the agency’s decision lacks the legitimacy that comes with
following the APA-mandated procedures for creating binding legal obligations.
The flaws present here do not rise to that level, but they are nonetheless substantial. This
is not a case where the agency simply failed to provide sufficient detail in its explanation for its
action or failed to address a discrete comment. See, e.g., La. Fed. Land Bank Ass’n v. Farm
Credit Admin., 336 F.3d 1075, 1085 (D.C. Cir. 2003). Rather, the Secretary omitted “critical
material on which it relie[d],” and thus “deprive[d] commenters of a right under [the APA] ‘to
participate in rulemaking.’” Allina Health Servs., 746 F.3d at 1110. In this respect, the case is
similar to Owner-Operator Independent Drivers, where the Court of Appeals vacated a rule on
the ground that the agency failed “to disclose the methodology of the . . . model” on which it
relied “in time for comment,” 494 F.3d at 202. At the same time, the Court is not convinced that
the Secretary would be unable to “justify” her decision on remand, see Heartland, 566 F.3d at
197—nor is the Court convinced that she would be able to do so. But the Court’s uncertainty on
that point merely highlights the magnitude of the procedural violation. The Court is unable to
evaluate whether the Secretary’s decision was reasonable because her omission prevented the
public from offering meaningful comments. 10 The Plaintiffs never had the opportunity to
explain where, in their view, she went wrong, and, thus, the Secretary never had to provide a
reasoned justification of her position.
With respect to the first Allied-Signal factor, all that the Court can conclude is that the
flaw in the notice and comment process was substantial and that it is possible that the procedural
error affected the Secretary’s final decision to adopt the 0.2 percent reduction. To the extent the
Secretary bears the burden of demonstrating that the “normal remedy” of vacatur does not apply,
Allina Health Servs., 746 F.3d at 1110, she has failed to show that the flaw in the rule was not
Plaintiffs further argue that the deficiencies in the rule are exacerbated by the addition of
other errors that they have alleged, including the failure of the Secretary to respond to significant
comments or to offer an adequate explanation for the final rule containing the 0.2 percent
reduction. Given the Court’s conclusion that the failure to provide a meaningful opportunity for
public comment was “serious” for purposes of the Allied-Signal test, it is not clear that these
additional alleged errors add significantly to the Court’s conclusions. Indeed, assuming for
present purposes that Plaintiffs are correct about these additional flaws, their presence does not
fundamentally change the seriousness of the deficiencies in the rule. They are, if anything, an
unsurprising outgrowth of the Secretary’s failure to treat the actuarial methodology as a critical
The Secretary concedes that on remand, she will have to provide a fuller explanation of her
analysis and respond to the challenges that are raised, see Dkt. 43 at 10, and argues that she will
be able to provide an explanation justifying both her methodology and her conclusions. As
support, she cites her notice of proposed rulemaking for FY 2016. Id. (citing 80 Fed. Reg.
39200, 39369 (July 8, 2015)). The rationale stated in the FY 2016 notice is no basis for
affirmance in the present case and plays no role in the Court’s decision.
component of her decision. It is that failure that was at the core of the problem here, and the
Court concludes that that failure is—however manifest—a serious one.
2. Disruptive Consequences
That does not end the inquiry. The Court must also consider “the disruptive
consequences” of vacating the 0.2 percent reduction. Sugar Cane Growers, 289 F.3d at 97
(quoting Allied-Signal, 988 F.2d at 151). The Court of Appeals’ decision in Heartland Regional
Medical Center is particularly instructive. And, for the reasons given in that decision, the
Secretary fares better on this factor.
In Heartland, a district court had concluded in a prior action that the Secretary’s “rural
local rule” was invalid, but did not expressly address whether the ensuing remand was with or
without vacatur. 566 F.3d at 196-97. In light of intervening events, the Court of Appeals was
called upon to characterize the remand in retrospect. 566 F.3d at 197. Applying Allied-Signal,
the Court first concluded that the administrative error identified in the earlier case—failure to
respond to reasonable alternatives—could be cured on remand. See id. at 197-98. Turning to the
second factor, the Court of Appeals noted that vacatur “likely would have required HHS to make
payments to [certain] hospitals for [the relevant] years . . . until the agency repromulgated the
same rule and gave an adequate reason for rejecting the alternatives.” Id. at 198. This posed a
significant consequence: in light of the presumption against retroactive rulemaking, see Bowen v.
Georgetown Univ. Hosp., 488 U.S. 204, 207, 215 (1988) (rejecting the Secretary’s attempt to
promulgate a retroactive rule that would allow her to recoup payments made in response to
vacatur of a rule), “vacatur . . . would have raised substantial doubt about HHS’s ability to
recoup payments it made for years prior to reinstatement of that requirement,” 566 F.3d at 198.
That “substantial doubt” was sufficient, in the view of the Court of Appeals, to conclude that
vacatur would have had “disruptive consequences” under Allied-Signal. Id.
The consequences of remand in the present action do not rise to the level of the
“scrambled egg” at issue in Sugar-Cane Growers, 289 F.3d at 97, where “crops were plowed
under” and there was no “way to restore the status quo ante,” id. The consequences are,
however, very similar to the disruptive consequences relied upon in Heartland, 566 F.3d at 198.
As in Heartland, it is unclear whether the presumption against retroactive rulemaking would
apply. Plaintiffs say it would, see Dkt. 42 at 9, 14, while the Secretary disputes that, see Dkt. 43
at 20-22. But even the Secretary expresses substantial doubt that, if the rule were vacated, she
would attempt to reinstate the reduction for fiscal year 2014—particularly in light of the same
“reliance” interests that animate the presumption against retroactive rulemaking in circumstances
where it applies, see Dkt. 43 at 21.
Plaintiffs attempt to turn the presumption against retroactive rulemaking to their favor,
arguing that the inability of the Secretary to reissue the rule means that there will be little
“disruption” on remand—there is no risk, in Plaintiffs’ view, that hospitals will receive
additional payments that they might someday be required to return. See Dkt. 42 at 9. In the
abstract, that contention might have some appeal. But it is directly at odds with the Court of
Appeals’ decision in Heartland, which concluded that a “substantial doubt about HHS’s ability
to recoup payments” favored remand without vacatur. 566 F.3d at 198; see also Allied-Signal,
988 F.2d at 151 (observing that “the consequences [of vacatur] may be quite disruptive” because
“the Commission would need to refund . . . fees collected . . . [and] it evidently would be unable
to recover those fees under a later-enacted rule”).
Plaintiffs also argue that the potential costs to the Medicare program of providing further
reimbursement to providers do not counsel against vacatur. See Dkt. 42 at 15. They cite In re
Medicare Reimbursement Litigation, 414 F.3d 7 (D.C. Cir. 2005), in which the Court of Appeals
observed that “[h]aving to pay a sum one owes can hardly amount to an equitable reason for not
requiring payment,” id. at 13. That language, however, was addressed to a very different
situation; it involved the Secretary’s refusal to reopen past proceedings that would have allowed
the plaintiff hospitals to recover certain funds. See id. Counsel for the Secretary had “rightly
conceded at oral argument” that the Secretary had “a clear statutory duty to pay [plaintiff]
hospitals [those] funds.” Id. But the Secretary nonetheless opposed reopening the proceedings,
citing “the extraordinary sums at stake.” Id. Here, in contrast, the Secretary has not conceded
that the hospitals have a right to additional inpatient compensation for fiscal year 2014, but rather
maintains that the 0.2 percent reduction is justified and that it would be contrary to the public
interest to pay hospitals at the pre-reduction level.
The Court, accordingly, concludes that the second Allied-Signal factor supports remand
Having concluded that the first Allied-Signal factor favors Plaintiffs, while the second
favors the Secretary, the Court must weigh these competing considerations. There is no rule
requiring either the proponent or opponent of vacatur to prevail on both factors. See, e.g., North
Carolina v. EPA, 550 F.3d 1176, 1178 (D.C. Cir. 2008) (remanding without vacatur, despite
serious flaws in rule, where vacatur would be disruptive); Fox Television Stations, Inc. v. FCC,
280 F.3d 1027, 1048-49 (D.C. Cir. 2002) (remanding without vacatur even though “the
disruptive consequences of vacatur might not be great”), amended in other respects by Fox
Television Stations, Inc. v. FCC, 293 F.3d 537, 540 (D.C. Cir. 2002); U.S. Telecom Ass’n v. FBI,
276 F.3d 620, 626-27 (D.C. Cir. 2002) (remanding several rules but vacating only one in light of
the first Allied-Signal factor). Rather, resolution of the question turns on the Court’s assessment
of the overall equities and practicality of the alternatives. Taking the parties at their word, the
Court assumes that a remand with vacatur would, in effect, dictate a substantive outcome based
on a procedural error, and thus concludes that the disruptive consequences would be
considerable. Although the deficiencies in the rule are serious, the Court is not convinced that
they are so grave that the Secretary should be precluded from taking corrective steps with respect
to the 2014 inpatient prospective payment system. In addition, the Secretary has indicated her
willingness to abide by a timetable and to expedite proceedings on remand. See Dkt. 43 at 1011. If the Secretary fails to comply with that timetable, her failure may counsel in favor of
vacatur of the rule at a future time. Similarly, to the extent the Secretary fails on remand to give
meaningful consideration to significant comments, vacatur may be appropriate in a future
proceeding. The Court concludes for now, however, that the Secretary should be given this
Accordingly, the Court concludes that the remand should be without vacatur. The parties
are directed to confer and to propose to the Court no later than October 1, 2015, a timetable for
repromulgation of the proposed rule and an opportunity for further comment.
For the reasons given above, the Secretary’s motion for summary judgment is DENIED.
The Plaintiffs’ motions for partial summary judgment are GRANTED in part and DENIED in
part, and this matter is REMANDED to the Secretary for further proceedings. The parties are
ORDERED to confer and propose, no later than October 1, 2015, a timetable for administrative
proceedings on remand.
An appropriate Order will issue after the parties have submitted a proposed timetable.
/s/ Randolph D. Moss
RANDOLPH D. MOSS
United States District Judge
Date: September 21, 2015
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?