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Allina Health Services v. Price

United States Court of Appeals, District of Columbia Circuit

July 25, 2017

Allina Health Services, doing business as United Hospital, doing business as Unity Hospital, doing business as Abbott Northwestern Hospital, et al., Appellants
v.
Thomas E. Price, Secretary, United States Department of Health and Human Services, Appellee

          Argued May 11, 2017

         Appeal from the United States District Court for the District of Columbia (No. 1:14-cv-01415)

          Stephanie A. Webster argued the cause for appellants. With her on the briefs were Pratik A. Shah, Christopher L. Keough, James H. Richards, and Hyland Hunt.

          Stephanie R. Marcus, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief was Mark B. Stern, Attorney.

          Before: Henderson, Kavanaugh, and Millett, Circuit Judges.

          OPINION

          KAVANAUGH, CIRCUIT JUDGE

         Several hospitals have challenged the formula used by the Department of Health and Human Services for calculating certain Medicare reimbursement adjustments for fiscal year 2012. As relevant here, the hospitals argued before the District Court that HHS violated the Medicare Act by changing the reimbursement adjustment formula without providing the public with notice and opportunity for comment.

         The District Court ruled that HHS did not violate the Medicare Act's procedural requirements. The District Court reasoned that (i) the Medicare Act incorporates the Administrative Procedure Act's exception to notice-and-comment rulemaking for interpretive rules and (ii) HHS's issuance of the reimbursement adjustment formula here constituted an interpretive rule. The District Court granted summary judgment to HHS.

         We disagree with the District Court. We conclude that HHS violated the Medicare Act when it changed its reimbursement adjustment formula without providing notice and opportunity for comment. We reverse the judgment of the District Court and remand for proceedings consistent with this opinion.

         I

         A

         Through the Medicare program, the Federal Government provides health insurance to Americans who are 65 or older, as well as to disabled Americans. See generally Social Security Amendments of 1965, Pub. L. No. 89-97, sec. 102, 79 Stat. 286, 291-332 (codified as amended at 42 U.S.C. § 1395 et seq.). The Department of Health and Human Services administers and oversees Medicare. Patients can obtain insurance under different Medicare "parts." Two of those parts are relevant here. Medicare Part A provides Medicare enrollees with government-administered health insurance through which the Government makes direct payments to hospitals for healthcare services provided. See 42 U.S.C. §§ 1395c to 1395i-5. Part C provides enrollees with government-subsidized enrollment in private insurance plans. See id. §§ 1395w-21 to 1395w-29.

         HHS contracts with companies known as fiscal intermediaries to reimburse healthcare service providers for services rendered to Medicare Part A patients. Fiscal intermediaries make initial payments to hospitals for a given cost year. Those initial payments are based on estimates of the hospitals' actual costs. The initial payments are later adjusted based on providers' actual cost reports.

         A provider who disagrees with a fiscal intermediary's reimbursement or adjustment decision may appeal that decision to the Provider Reimbursement Review Board within HHS. See 42 U.S.C. § 1395oo. The Board may affirm, modify, or reverse the fiscal intermediary's decision. Id. § 1395oo(d). But importantly, the Board does not have the authority to declare statutes or regulations invalid. See Bethesda Hospital Association v. Bowen, 485 U.S. 399, 406 (1988); 42 C.F.R. § 405.1842(f)(2)(ii).

         As relevant here, the Medicare Act authorizes reimbursement adjustments in order to increase payments to hospitals that treat a disproportionately high number of low-income patients. See 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). That adjustment is known as the "disproportionate share hospital adjustment." The adjustment is calculated for each hospital by adding two fractions that together approximate the proportion of low-income patients treated at that hospital over a certain time period. See id. § 1395ww(d)(5)(F)(vi). HHS calculates and publishes one of those fractions - the Medicare fraction - for each hospital in the Nation every year. HHS requires the fiscal intermediaries to use HHS's published Medicare fractions in calculating each hospital's final reimbursement adjustment. See 42 C.F.R. § 412.106(b)(2), (5).

         Among other things, the Medicare fraction incorporates the number of each hospital's patient days for patients "entitled to benefits under part A" of Medicare. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). The meaning of that phrase has been the subject of much debate (and litigation). The dispute is over whether the phrase "entitled to benefits under Part A" should be read to refer not only to Part A enrollees, but also to patients enrolled in a Part C plan.

         For reasons that are beyond the scope of this opinion, HHS now believes that the phrase "entitled to benefits under Part A" should also include patients enrolled in a Part C plan. HHS therefore contends that Part C patient days should be included in the Medicare fractions. Many hospitals disagree. They argue that Part C enrollees are not "entitled to benefits under Part A" and that Part C days therefore should not be included in Medicare fractions.

         That difference in interpretation makes a huge difference in the real world. Part C enrollees tend to be wealthier than Part A enrollees. Including Part C days in Medicare fractions therefore tends to lead to lower reimbursement rates. Ultimately, hundreds of millions of dollars are at stake for the Government and the hospitals. See Northeast Hospital Corp. v. Sebelius, 657 F.3d 1, 5 (D.C. Cir. 2011).

         Before 2004, HHS had not treated Part C enrollees as "entitled to benefits under Part A." See id. at 15. In 2004, however, HHS promulgated a rule announcing that Part C enrollees are "entitled to benefits under Part A" and that HHS would therefore include Part C days in Medicare fractions. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg. 48, 916, 49, 099 (Aug. 11, 2004). That 2004 rule would have applied HHS's changed interpretation prospectively to all Medicare fraction calculations from fiscal year 2005 onward. However, this Court vacated the 2004 rule on the grounds that it was not a logical outgrowth of the proposed rule and had therefore been improperly issued without notice and opportunity for comment. See Allina Health Services v. Sebelius, 746 F.3d 1102, 1107-09 (D.C. Cir. 2014). As a result, HHS can no longer rely on the 2004 interpretation.

         In 2013, HHS promulgated a new rule again announcing that HHS would treat Part C enrollees as "entitled to benefits under Part A" and that HHS would therefore include Part C days in Medicare fractions. See 78 Fed. Reg. 50, 496, 50, 614 (Aug. 19, 2013). The 2013 rule is prospective only: It applies to Medicare fractions calculated for fiscal year 2014 and beyond. Id. at 50, 619. It does not address the definition of "entitled to benefits under Part A" for any fiscal years before 2014. In sum, HHS has no ...


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