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From Health Law Daily, May 17, 2013

Court compels Sebelius to submit additional documents in hospitals’ lawsuit challenging outlier payment regulations

By Sarah E. Baumann, JD

A district court ordered HHS Secretary Kathleen Sebelius to file specific documents relevant to the agency’s decisions to promulgate certain regulations relating to outlier payments for fiscal years (FYs) 1998 through 2006 as part of the administrative record (Banner Health v Sebelius, May 16, 2013, Kollar-Kotelly, C). Twenty-nine organizations that owned or operated hospitals participating in the Medicare program, led by Banner Health (collectively Banner), alleged that HHS’ outlier payment and fixed loss threshold regulations were inherently flawed and ultimately deprived them of more than $350 million in outlier payments. The court granted the organizations’ motion to compel in part and denied it in part.

Outlier payments. In an effort to encourage hospitals to limit costs, Medicare reimburses qualifying hospitals according to a prospective payment system that is based on a standardized rate, geographic wage differences, and diagnosis-related groups (DRGs). The final figure used to calculate payment is referred to as the DRG prospective payment rate. However, Medicare recognizes that in some instances, hospitals will care for patients who accrue unusually high costs or have lengthy stays. The statute thus provides for hospitals to receive additional payments, referred to as outlier payments, in cases where their actual costs exceed both the DRG prospective payment rate and a fixed loss threshold set by the Secretary. Each year, the Secretary calculates the fixed loss threshold, based in part on historical data, above which hospitals will receive outlier payments. The threshold, itself, is the amount of loss that hospitals are expected to absorb.

Background. Banner was dissatisfied with fiscal intermediaries’ decisions denying hospitals outlier payments for fiscal years ending 1998 through 2006. Banner appealed to the Provider Reimbursement Review Board (PRRB), which determined that it did not have jurisdiction over claims regarding the validity of the Secretary’s regulations and authorized expedited judicial review. Banner then filed suit against the Secretary, ultimately alleging that the she deprived them of $350 million in outlier payments through improper outlier payment determinations; invalid fixed loss threshold regulations; invalid outlier payment regulations; and the Secretary’s failure to account for underpayments resulting from invalid regulations that considered inaccurate historical data.

Regulations at issue. Banner alleged that the outlier payment regulations, which established methods for calculating outlier payments, utilized calculations based on “inherently inaccurate and unaudited data,” defaulted a hospital’s cost-to-charge ratio to a statewide average when that ratio fell more than three standard deviations above or below the national mean, and failed to allow for the auditing and adjustment of outlier payments by fiscal intermediaries. Banner further alleged that the fixed loss threshold regulations, which set the threshold for each upcoming fiscal year, made “enormous, unprecedented and irrational increases” in the fixed loss threshold because they did not differentiate between inflation in legitimate versus illegitimate reimbursement claims, did not correlate the increase in the fixed loss threshold with the rate of cost inflation, and did not compare the rate of increase between the two. Banner noted that, while cost inflation was modest between FY 1997 and FY 2003, the fixed loss threshold increased by 246 percent.

Banner filed a motion to (1) compel the Secretary to supplement the administrative record with all documents before the HHS with respect to its rulemaking; (2) supplement the record with thirty-six specific categories of missing documents and data files; and (3) certify that the administrative record was complete.

Motion to compel. Although, “an agency is entitled to a strong presumption of regularity, that it properly designated the administrative record,” it may not exclude unfavorable information or other information that it did not rely on in reaching its final decision. Supplementing the administrative record by including evidence that was excluded by the agency is appropriate only where plaintiffs demonstrate that (1) the agency intentionally excluded documents that may have been adverse to its decision, (2) background information is necessary to determine whether the agency considered all relevant factors, or (3) the agency failed to explain its action so as to frustrate judicial review. Plaintiffs must also identify documents with specificity and demonstrate that the documents were actually known to the decision-makers.

The court granted the motion with respect to a sixty-page Interim Final Rule signed by former Secretary Tommy Thompson and sent to the Office of Management and Budget (OMB) in early 2003. In a Final Rule published shortly thereafter, the Secretary left the threshold at its previous level of $33,560. However, Banner argued that the Interim Final Rule concluded that the public interest required HHS to lower the threshold by 62 percent to $20,760. In that document, HHS acknowledged that a prior increase in the threshold resulted from a small number of hospitals with extraordinary rates of increase in charges. Because Banner sufficiently demonstrated that HHS intentionally excluded this specific adverse document, which was signed by both the CMS Administrator and the Secretary of HHS, the court granted the motion with respect to this document.

The court also granted the motion with respect to “Impact Files”—Microsoft Excel spreadsheets and documents related to 1988 and 2003 amendments to outlier payment regulations that contained hospitals’ assumed specific cost-to-charge ratios used to calculate projected outlier case payments. The court viewed these as necessary to determine whether HHS considered all relevant factors in implementing the regulations. The court also granted the motion as to certain tables containing statewide averages of hospitals’ operating and capital cost-to-charge ratios, and letters and program memoranda addressing to adverse comments submitted to HHS. However, it rejected a number of other requests that did not meet any of the three factors listed above, were not specifically identified, or were not necessarily seen by decision-makers.

The court also quickly denied Banner’s motion with respect to its request to compel the Secretary to certify that the record was complete, stating that no law requires such certification and that Banner failed to argue otherwise. It also denied the motion with respect to Banner’s request that the court order the Secretary to complete the record with certain documents that the Secretary acknowledged losing, finding that the acknowledged loss did not defeat the presumption of regularity to which the administrative record is entitled.

The case number is 10-01638 (CKK).

Attorneys: Stephen P. Nash (Patton Boggs, LLP) for Banner Health, f/b/o Banner Good Samaritan Medical Center, North Colorado Medical Center, McKee Medical Center, Banner Thunderbird Medical Center, Banner Mesa Medical Center, Banner Desert Medical Center, Banner Estrella Medical Center, Banner Heart Hospital, Banner Boswell Medical Center, and Banner Baywood Medical Center; Abbott Northwestern Hospital; Buffalo Hospital; Cambridge Medical Center; Mercy Hospital; New Ulm Medical Center; Owatonna Hospital; St. Francis Regional Medical Center; United Hospital; Unity Hospital; Billings Clinic; Cabell-Huntington Hospital; Charleston Area Medical Center; Denver Health and Hospital Authority; Good Samaritan Hospital; Halifax Community Health System a/k/a Halifax Medical Center; Memorial Health System Colorado Springs a/k/a Memorial Health System Foundation; Parkview Medical Center; Valley View Hospital; and West Virginia University Hospitals. James C. Luh, U.S. Department of Justice, for Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services.

Companies: Banner Health; Banner Good Samaritan Medical Center; North Colorado Medical Center; McKee Medical Center; Banner Thunderbird Medical Center; Banner Mesa Medical Center; Banner Desert Medical Center; Banner Estrella Medical Center; Banner Heart Hospital; Banner Boswell Medical Center; Banner Baywood Medical Center; Abbott Northwestern Hospital; Buffalo Hospital; Cambridge Medical Center; Mercy Hospital; New Ulm Medical Center; Owatonna Hospital; St. Francis Regional Medical Center; United Hospital; Unity Hospital; Billings Clinic; Cabell-Huntington Hospital; Charleston Area Medical Center; Denver Health and Hospital Authority; Good Samaritan Hospital; Halifax Community Health System a/k/a Halifax Medical Center; Memorial Health System Colorado Springs a/k/a Memorial Health System Foundation; Parkview Medical Center; Valley View Hospital; West Virginia University Hospitals; U.S. Department of Health and Human Services

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