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From Health Law Daily, September 3, 2015

Close enough for government work, court rejects challenges to 13 of 14 outlier payment rules

By Michelle L. Oxman, J.D., LL.M.

Challenges to 13 of 14 Medicare outlier payment regulations going back to 1988 failed—and the challenge that did succeed was due to a previous appellate court ruling in favor of hospitals. A group of organizations that own or operate hospitals claimed that CMS and its predecessor, the Health Care Financing Administration (HCFA), failed to comply with the statute and acted arbitrarily and capriciously when they adopted the regulations governing the determination of outlier payments in 1988, 1994, 2003, and, in particular, calculation of the fixed loss threshold for fiscal years (FY) 1997 through 2007. The district court ruled that the agency’s actions were valid with respect to every final rule except for FY 2004, which was already ruled invalid (see Further explanation of the 2004 Medicare outlier threshold calculation ordered, May 20, 2015)(Banner Health v. Burwell, September 2, 2015, Kollar-Kotelly, C.).

Background. Soc. Sec. Act sec. 1886(d)(5)(A) provides for additional payments to hospitals for outlier cases, discharges that with cost-adjusted charges that are significantly higher than expected for the diagnosis-related group (DRG). It requires that CMS set a threshold of excess costs, either a multiple of the DRG-based payment or a fixed-dollar amount that the hospitals must exceed in order to qualify for outlier payments, and to make a payment that would approximate the loss. CMS must determine the threshold and calculate the outlier payments to keep outlier payments between 5 percent and 6 percent of DRG-based payments. The agency’s regulations have generally aimed for outlier payments to comprise 5.1 percent of DRG-based payments and provided for payment of 80 percent of the loss that exceeds the threshold.

The hospitals’ arguments. Twenty-nine hospitals claimed that the agency made fundamental errors when it adopted the outlier payment threshold regulations. Specifically, they claimed that the agency acted arbitrarily and capriciously and failed to follow Soc. Sec. Act sec. 1886(d)(5)(A) by:

  1. choosing to use the most recent finalized cost reports, and later changing to the most recent tentatively settled cost reports;

  2. changing from costs to charges, and back to costs, to calculate the threshold;

  3. using statewide averages for hospitals with costs that are much higher or lower than average;

  4. changing inflation factors and/or the fixed loss threshold between the proposed and final rules; and

  5. including in the calculations for FY 2004 the costs and charges reported by 123 hospitals that were known to have "turbocharged," manipulated their cost reports in order to qualify for excessive outlier payments.

Jurisdictional issue. Before it could reach the merits, the court first addressed the government’s argument that it had no jurisdiction over the case, in part, because the hospitals had not challenged the rules earlier during the comment period after the Proposed rule was published. The court rejected that argument. Traditional standing doctrine requires injury as the result of application of a regulation, and there has never been a requirement that a party have raised a challenge to a regulation during the rulemaking process.

No second-guessing. Courts hearing challenges to agency actions must start by deferring to the agency’s interpretation of the law as long as it is one of the possible reasonable interpretations; this is referred to as Chevron deference. Chevron deference is especially required when an agency has been charged with administering a very complex statute and the language of the statute is ambiguous enough that more than one reasonable interpretation is possible.

The court discussed in detail the history of the prospective payment system (PPS) in general and the outlier payment regulations in particular. It noted that Congress enacted the PPS because costs had risen too high, too fast, under the original cost-based payment system. The agency’s initial choices were reasonable interpretations of the statute, which refers to cost-adjusted charges. As the agency developed experience with the PPS, and as Congress occasionally amended the statute, the agency amended its regulations. On several occasions, especially in 2003, the agency revisited its choices and selected a method it had rejected earlier. The hospitals contended that the changes showed that the earlier choices had been wrong or that the later choice was arbitrary and capricious.

Basic principles. In upholding the regulations, the court applied fundamental principles of logic and common sense. First and foremost, the agency’s actions must be judged only with the information that it had at the time. If experience later shows that a policy decision was unwise, and the agency changes its position, the change does not invalidate the earlier decision. For the same reason, the court refused to consider outside materials that the hospitals tried to introduce, including a report by the HHS Office of Inspector General and testimony of a former CMS Administrator before a Congressional committee. Second, the agency may choose among competing alternatives, and the court will uphold its actions as long as it shows that there was a reasoned decision. In addition, only the documents published in the Federal Register are relevant to a rule challenge. When the agency circulated a draft but published a very different proposed rule, only the published proposal is relevant. The agency does not have to justify its departure from the earlier draft.

The invalid rule. The court ruled that the agency had not made a reasoned decision to include in its calculations the cost reports of 123 hospitals that it had determined had manipulated their cost reports. The Court of Appeals had determined in May 2015 that the same regulation was arbitrary and capricious for that reason. The court followed that decision and remanded that issue to the agency to explain further and recalculate the fixed cost threshold for FY 2004, if necessary.

The case is Civil Action No. 10-1638 (CKK).

Attorneys: Stephen P. Nash (Squire Patton Boggs) for Banner Health, Abbott Northwestern Hospital, Buffalo Hospital, Cambridge Medical Center, Mercy Hospital, and New ULM Medical Center. James C. Luh, U.S. Department of Justice, for Sylvia M. Burwell, Secretary, U.S. Department of Health and Human Services.

Companies: Banner Health; Banner Good Samaritan Medical Center; Abbott Northwestern Hospital; Buffalo Hospital; Cambridge Medical Center; Mercy Hospital; New ULM Medical Center; U.S. Department of Health and Human Services

MainStory: TopStory IPPSNews PaymentNews CMSNews BillingNews CostReportNews PartANews DistrictofColumbiaNews

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