On August 13, 2018, the United States District Court for the Eastern District of Washington decided Empire Health Foundation v. Price by vacating the Secretary’s policy of counting exhausted patient days and Medicare Secondary Payor (MSP) as days “entitled to benefits under [Medicare] Part A” in the disproportionate share hospital (DSH) statute. Empire challenged the DSH regulation promulgated in the Secretary’s FY 2005 Inpatient Prospective Payment System (IPPS) final rule (FY 2005 Final Rule) on both substantive and procedural grounds, alleging that the Secretary’s interpretation unlawfully reduced the DSH payments for Empire’s hospital. The court held on summary judgment that the Secretary’s rulemaking was procedurally invalid as not a logical outgrowth of the proposed rule and inadequate under the rulemaking requirements under the Administrative Procedure Act (APA). King & Spalding partner Dan Hettich represented Empire in this matter and presented oral argument before the court. The Empire decision breaks from the D.C. district court’s recent Stringfellow decision on this same issue.
Background of the Challenged FY 2005 Final Rule
The Medicare program reimburses providers for inpatient services based on the Prospective Payment System (PPS) with payment adjustments based on certain hospital-specific factors. One such payment adjustment is the DSH adjustment, designed for hospitals serving high numbers of low-income patients. A hospital’s DSH adjustment is determined by its disproportionate patient percentage (DPP). Established by the DSH statute, the DPP is the sum of two fractions, commonly referred to as the Medicare fraction and Medicaid fraction. The Medicare fraction counts beneficiaries who were “entitled to benefits under [Medicare] Part A” while the Medicaid fraction excludes such beneficiaries.
The disputed issue in this case was whether CMS’s attempt to amend the DSH regulation to include not just “covered,” i.e., paid, Medicare Part A days, but also unpaid Part A days (such as exhausted and MSP days), was valid. Medicare beneficiaries will, e.g., “exhaust” their Part A coverage when their hospitalization episode exceeds 90 days and they have depleted their lifetime reserve of 60 days.
The Court’s Decision Regarding Empire’s Challenge to the Final Rule
Empire alleged that the FY 2005 Final Rule amending 42 C.F.R. § 412.106(b)(2) is substantively and procedurally invalid and that the agency should be enjoined from applying the FY 2005 Final Rule against the hospital. The court heard the case after the Provider Reimbursement Review Board granted expedited judicial review of the legal questions raised by the hospital in its appeal. On the substantive grounds, the court sided with the Secretary’s interpretation of “entitled to benefits under [Medicare] Part A” under the familiar Chevron two-step analysis, giving substantial deference to the agency’s interpretation of its statute when Congress has not spoken directly to the issue.
Vacatur of the Secretary’s Policy on Procedural Grounds
The court’s vacatur of the Secretary’s policy, codified at 42 C.F.R. § 412.106(b)(2)(i), flows from the complicated history leading to the FY 2005 Final Rule. In sum, the Secretary misstated the agency’s then-existing policy in the proposed rulemaking; claiming that his current policy was to count patient-days in the Medicare fraction even if the patient was not receiving Medicare Part A benefits. Despite receiving comments of the statement’s inaccuracy, and having multiple prior opportunities to correct his misstatement, the Secretary did not correct this misstatement until just a few days before the comment period closed.
The court held that the Secretary’s gross misstatement of the agency’s then-existing policy, and failure to allow time for comments after the Secretary corrected this misstatement, undermined the validity of the rule under the fair notice requirements of the APA. Specifically, the court found that interested parties could not have understood the essential attributes of the proposed rule when the Secretary misunderstood and misstated them. The court also found that a new round of notice and comment was necessary to provide the first meaningful opportunity for interested parties to offer comments on the clarified policy.
For these same reasons, the court also held that the Secretary’s policy in the FY 2005 Final Rule was not a logical outgrowth of the proposed rule, stating that the Secretary’s finalized policy “cannot be presumed to be a logical outgrowth of the proposal, because the inaccuracy of the policy statement necessarily distorts the context of the proposed rule.”
In short, the court found that although 42 C.F.R. § 412.106(b)(2) is substantively valid, it is procedurally invalid under the APA because the Secretary’s notice and comment opportunity was inadequate and that the FY 2005 Final Rule was not a logical outgrowth of the proposed rule.
The Effect of Vacatur on the Secretary’s Policy
The court’s opinion granted summary judgment in favor of Empire, and vacated the amendment of 42 C.F.R. § 412.106(b)(2) in the FY 2005 Final Rule. The opinion enjoined the Secretary from applying to the plaintiff hospital the FY 2005 Final Rule policy that unpaid Medicare Part A days are patient-days “entitled to benefits under [Medicare] Part A” for the purposes of assessing the Medicare fraction of the DPP.
Generally, the consequence of vacatur is that the rule is no longer in effect. When a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated on a nationwide basis. See Nat'l Min. Ass'n v. U.S. Army Corps of Eng'rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998). The court’s order in this case, however, could be read narrowly as only prohibiting the Secretary from applying his policy to the plaintiff hospital, not creating a nationwide injunction. Furthermore, the court’s decision stands in contrast to the D.C. district court’s recent decision in Stringfellow Mem’l Hosp. v. Azar, Civil Action No. 17-309 (D.D.C. June 29, 2018) (discussed here), in which the court concluded that the FY 2005 Final Rule was promulgated with adequate notice and comment procedures and was not procedurally defective. The Secretary is likely to appeal the Empire decision. Given these ambiguities and uncertainties, providers will have to consider their specific circumstances to determine how this decision may affect them.
The court’s opinion can be found here.
