Following several lines of litigation, a federal court has again ordered the HHS Secretary to justify his FY 2004 outlier rulemaking in light of Administrative Procedure Act requirements. In District Hospital Partners v. Azar, No. 16-cv-528, the U.S. District Court for the District of Columbia ordered that the Secretary must provide further explanation regarding his decision to include so-called “turbo-charging” hospitals in setting the FY 2004 outlier cost-to-charge threshold. Though the remand order comes at the request of the parties, it gives the Secretary another chance for correction, rather than outright vacatur of his rule or recalculation of the data.
Under 42 U.S.C. § 1395ww(d)(5)(A), hospitals treating patients whose charges, adjusted to cost, exceed an HHS-set threshold, above the national average DRG rate, are entitled to additional outlier payments. In the FY 2004 “outlier correction” proposed rule, the Secretary claimed that 123 “turbo-charging” hospitals were manipulating the outlier payment system to overestimate their costs and receive additional payments, taking advantage of the time lag between bill submission and the cost-to-charge ratio in the settled cost report. The Secretary specifically highlighted those hospitals whose percentage of outlier payments increased by at least five percent from 1999 to 2001. See 68 Fed. Reg. 10420 (Mar. 5, 2003). In the final outlier correction rule, the Secretary required that a hospital’s cost-to-charge ratio be calculated using more recent cost reports, and that outlier payments must be reconciled when the relevant cost report is ultimately settled if the actual cost-to-charge ratio varies by 10 percent from that used in calculating the outlier payment. 68 Fed. Reg. 34494 (June 9, 2003).
In previous litigation, the plaintiffs in District Hospital Partners alleged that the threshold set by the Secretary was too high, leading to reduced outlier payments. The D.C. Circuit found that the promulgation of the FY 2004 outlier threshold violated the APA, given that the Secretary had previously identified 123 turbo-chargers in the proposed outlier correction rule, but did not specify how those hospitals might have been taken into account in setting the FY 2004 threshold amount. Rather, the FY 2004 threshold rulemaking referred to 50 hospitals whose cost-to-charge ratios would trigger reconciliation, having been “consistently overpaid recently for outliers.” 68 Fed. Reg. 45346, 45476 (Aug. 1, 2003). The court found the cited 50 versus 123 hospitals to be an “unexplained inconsistency” and remanded to the Secretary to provide an adequate explanation for his rulemaking. See Dist. Hosp. Partners v. Burwell, 786 F.3d 46 (D.C. Cir. 2015).
That explanation was issued in 2016 and attempted to explain why the Secretary did not exclude the 123 turbo-chargers from the calculation, why only 50 of 123 were subject to reconciliation and why projecting the cost-to-charge ratios with the turbo-charging hospital had no “distorting effect” on the threshold calculation. See 81 Fed. Reg. 3727 (Jan. 22, 2016). The District Hospital Partners plaintiffs filed suit, again alleging arbitrary and capricious action by the Secretary in violation of the Administrative Procedure Act.
Plaintiffs, however, requested a stay while similar litigation played out. Following a challenge by another set of plaintiff hospitals, the D.C. Circuit found fault with the Secretary’s explanations. Specifically, the court found that the Secretary had “inadequately explained [his] failure to exclude turbo-chargers from [his] calculation of the annual rate of charge inflation.” That is, once the turbo-chargers had been identified, the Secretary’s “decision to project future charges using turbo-charging-infected data foreseeably allowed the effects of this inappropriate redistribution to continue into the future.” Finally, the court found that it was irrational for the Secretary not to adjust the projected cost-to-charge ratios downward when it applied a charge-inflation factor. See Banner Health v. Price, 867 F.3d 1323 (D.C. Cir. 2017). The court remanded both issues again to the Secretary for a “satisfactory explanation for including the turbo-charged data,” but threatened vacatur if unsatisfactory.
Upon lifting the stay in District Hospital Partners, the D.C. district court rejected certain of the hospitals’ challenges in light of Banner Health. However, at the request of the parties, and following a dispute related to scope, the court issued another remand order for “further explanation of the FY 2004 determination” consistent with the Banner Health decision related to turbo-charging hospitals.
The Banner Health D.C. Circuit decision is available here. The prior D.C. Circuit decision in District Hospital Partners is available here. The latest District Hospital Partners D.C. district court decision is available here.
