Case 1:21-cv-01455-TJK Document 1 Filed 05/28/21 Page 1 of 23
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`UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF COLUMBIA
`
`SHARP CHULA VISTA MEDICAL
`CENTER,
`751 Medical Center Court
`Chula Vista, CA 91911,
`
`GROSSMONT HOSPITAL
`CORPORATION, dba Sharp Grossmont
`Hospital,
`5555 Grossmont Center Drive
`La Mesa, CA 91942, and
`
`SHARP MEMORIAL HOSPITAL,
`7901 Frost Street
`San Diego, CA 92123,
`
`Plaintiffs,
`
`v.
`
`XAVIER BECERRA, Secretary,
`United States Department of Health and
`Human Services,
`200 Independence Avenue, S.W.
`Washington, D.C. 20201,
`
`Defendant.
`
`Civil Action No. __________
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`COMPLAINT FOR DECLARATORY RELIEF
`AND SUMS DUE UNDER THE MEDICARE ACT
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`The above-captioned three Plaintiff hospitals (“the Hospitals”), by and through their
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`undersigned attorneys, bring this action against defendant Xavier Becerra, in his official capacity
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`as the Secretary (“the Secretary”) of the Department of Health and Human Services (“HHS”), and
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`state as follows:
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`INTRODUCTION
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`1.
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`The Hospitals bring this action to recover additional Medicare program payments
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`owed by the federal government as reimbursement for inpatient hospital services they provided to
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`aged, disabled, and other Medicare beneficiaries relating to Federal Fiscal Years (“FYs”) 2004 and
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`2005. Specifically, the Hospitals seek to recover supplemental payments that Congress mandated
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`to help pay hospitals for extraordinarily costly Medicare “outlier” patient cases.
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`2.
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`Medicare reimbursement for most inpatient hospital services is provided through
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`the Inpatient Prospective Payment System (“IPPS”). The IPPS reimburses hospitals, in part,
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`through a prospectively determined rate based on the category of diagnosis for each patient at the
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`time of discharge, regardless of the cost of treatment. But to protect hospitals that incur
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`extraordinarily high costs in certain cases when compared to the norm for patients with similar
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`diagnoses, known as “outlier” cases, Congress determined that extra payments should be made.
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`To fund these payments for outlier cases, Congress requires the Secretary annually to select a target
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`percentage for aggregate outlier payments of between 5 and 6 percent of total standard IPPS
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`payments and to reduce the standard IPPS payment rate by that target percentage. At all times
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`relevant to this action, the Secretary set this target at 5.1%. The Secretary also is required to set a
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`cost “threshold” for each FY to identify the costs of inpatient stays above which hospitals are
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`entitled to receive outlier payments. The Secretary must set the threshold so that projected
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`aggregate outlier payments for each FY equal the target percentage of 5.1% of projected standard
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`IPPS payments.
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`3.
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`The Secretary improperly set thresholds that were too high for FYs 2004 and 2005.
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`Thus, for FYs 2004 and 2005, IPPS hospitals, including the Hospitals, were underpaid on their
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`outlier claims and substantial portions of the funds resulting from reductions to the standard IPPS
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`rates were never paid out to IPPS hospitals as outlier payments. As a result, the Secretary failed
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`to provide the Hospitals the outlier reimbursement Congress intended, and provided for, under the
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`Medicare Act.
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`4.
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`In two separate cases claiming, as here, that the Secretary invalidly set the FYs
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`2004 and 2005 outlier thresholds, the U.S. Court of Appeals for the District of Columbia Circuit
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`has twice reviewed and twice remanded these thresholds to the Secretary for additional
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`explanation. See Banner Health v. Price, 867 F.3d 1323 (D.C. Cir. 2017) (“Banner Health”);
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`District Hospital Partners, L.P., v. Burwell, 786 F.3d 46 (D.C. Cir. 2015) (“District Hospital
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`Partners”). The Secretary twice issued explanations on remand. The first explanation, issued in
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`response to the remand order in District Hospital Partners, was rejected by the D.C. Circuit in
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`Banner Health. The Secretary’s second explanation, issued in June 2019 in response to Banner
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`Health, fares no better.
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`5.
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`For the reasons set forth in District Hospital Partners and Banner Health, and as
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`set forth below, the Secretary’s outlier thresholds for FYs 2004 and 2005 are arbitrary, capricious,
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`and otherwise unlawful, and must now finally be vacated. The Secretary should be ordered to (a)
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`reset the thresholds using appropriate methods and data, (b) recalculate the Hospitals’ outlier
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`payments for FYs 2004 and 2005 using the reset thresholds, and (c) pay the amounts due to the
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`Hospitals, with interest determined in accordance with 42 U.S.C. §1395oo(f)(2) and/or 42 U.S.C.
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`§1395g(d).
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`JURISDICTION AND VENUE
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`6.
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`This is a civil action arising under Title XVIII of the Social Security Act, as
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`amended, 42 U.S.C. §§1395 et seq. (the “Medicare Act”), 5 U.S.C. §§551 et seq. (the
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`“Administrative Procedure Act” or “APA”), and 28 U.S.C. §2201 (the “Declaratory Judgment
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`Act”) to obtain judicial review of final decisions of the Secretary denying the Hospitals’ request
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`for additional Medicare reimbursement relating to FYs 2004 and 2005.
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`7.
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`This Court has jurisdiction under 42 U.S.C. §1395oo(f)(1) (appeal of final
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`Medicare program agency decision), 28 U.S.C. §1331 (federal question), and 28 U.S.C. §1361
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`(mandamus).
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`8.
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`9.
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`Venue lies in this judicial district under 42 U.S.C. §1395oo(f) and 28 U.S.C. §1391.
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`PARTIES
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`At all times relevant to this action, the Hospitals were qualified as Medicare-
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`participating providers of hospital services under the federal Medicare program pursuant to the
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`Medicare Act.
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`a.
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`Plaintiff Sharp Chula Vista Medical Center, Medicare provider number 05-
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`0222, is located in Chula Vista, California, and is appealing its Medicare outlier payments
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`with respect to discharges during its fiscal year ending September 30, 2005.
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`b.
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`Plaintiff Sharp Grossmont Hospital, Medicare provider number 05-0026, is
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`located in La Mesa, California, and is appealing its Medicare outlier payments with respect
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`to discharges during its fiscal year ending September 30, 2005.
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`c.
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`Plaintiff Sharp Memorial Hospital, Medicare provider number 05-0100, is
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`located in San Diego, California, and is appealing its Medicare outlier payments with
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`respect to discharges during its two fiscal years ending September 30, 2004, and September
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`30, 2005.
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`Each of the Hospitals’ fiscal years for Medicare payment purposes have the same start and end
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`dates as the Federal fiscal year (October 1 through September 30). Thus, the reference to the
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`Federal Fiscal Years and the Hospitals’ fiscal years are interchangeable for purposes of this action.
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`10.
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`Defendant Xavier Becerra is the Secretary of the Department of Health and Human
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`Services, the federal department which contains the Centers for Medicare & Medicaid Services
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`(“CMS”). The Secretary, the federal official responsible for administration of the Medicare
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`program, has delegated the responsibility to administer that program to CMS.
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`GENERAL BACKGROUND OF THE MEDICARE PROGRAM
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`11.
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`The Medicare Act establishes a system of health insurance for the aged, disabled,
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`and individuals with end-stage renal disease. The Medicare program consists of Part A, which
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`covers inpatient hospital services and certain other institutional services; Part B, which covers
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`physician services and certain outpatient services; Part C, which covers managed health care plans;
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`and Part D, which provides prescription drug coverage. Only Part A is at issue in this action.
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`12.
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`Part A services are furnished to Medicare beneficiaries by “providers” of services
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`that have entered into written provider agreements with the Secretary, pursuant to 42 U.S.C.
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`§1395cc, to furnish hospital services to Medicare beneficiaries. Each of the Hospitals has entered
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`into provider agreements with the Secretary.
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`13.
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`The Medicare Act requires that “[n]o rule, requirement, or other statement of policy
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`. . . that establishes or changes a substantive legal standard governing the scope of benefits [or] the
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`payment for services . . . [under Medicare] shall take effect unless it is promulgated by the
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`Secretary by regulation . . . .” 42 U.S.C. §1395hh(a)(2).
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`14.
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`Prior to October 1, 1983, most hospitals were reimbursed for inpatient services
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`provided to Medicare beneficiaries based on the “reasonable cost” of such services. Effective
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`October l, 1983, and in effect during FYs 2004 and 2005, Congress enacted IPPS to reimburse
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`hospitals for providing inpatient services to Medicare beneficiaries at a predetermined rate based
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`on the diagnosis-related group (“DRG”) to which a patient is assigned. See generally 42 U.S.C.
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`§1395ww(d).
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`15.
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`Each DRG represents the average resources that are required to provide the
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`inpatient services described by the particular DRG category relative to the national per case
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`average for all inpatient hospital services. 42 U.S.C. §1395ww(d)(4). Hospitals generally cannot
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`receive Medicare payment above the prospective predetermined rate for the applicable DRG. As
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`a result, hospitals are at financial risk for costs that may exceed those rates, even when those costs
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`were incurred as a result of circumstances beyond the control of the hospital, such as caring for a
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`patient that is more expensive to treat because of medical conditions not typically present in the
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`“average” patient.
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`EXPLANATION OF MEDICARE IPPS OUTLIER PAYMENTS
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`16.
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`In order to protect hospitals and their Medicare patients when the cost of inpatient
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`hospital services significantly exceeds the DRG payment, Congress established a special
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`additional payment mechanism under IPPS for such patient cases, known as outlier cases. This
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`reflected a concern by Congress that the financial health of hospitals treating outlier patients might
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`be endangered or that the quality of care could be adversely affected.
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`17.
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`If a case qualifies as an outlier, the hospital receives an additional payment based
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`on the formula established by the Secretary. 42 U.S.C. §1395ww(d)(5)(A)(iii). The funding for
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`outlier payments comes from the amount budgeted by the Secretary for total IPPS reimbursement.
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`Congress specified that the amount set aside for outlier payments “for discharges in a fiscal year
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`may not be less than 5 percent nor more than 6 percent of the total payments projected or estimated
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`to be made based on DRG prospective payment rates for discharges in that year.” 42 U.S.C.
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`§1395ww(d)(5)(A)(iv). The Secretary implements this requirement by setting the outlier threshold
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`generally (and for FYs 2004 and 2005) so that outlier payments are projected to equal 5.1% of
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`projected total DRG payments (see Medicare Program; Changes to the Hospital Inpatient
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`Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed. Reg. 45,346, 45,477 (Aug. 1,
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`2003) (“FY 2004 IPPS Final Rule”); Medicare Program; Changes to the Hospital Inpatient
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`Prospective Payment Systems and Fiscal Year 2005 Rates (“FY 2005 IPPS Final Rule”), 69 Fed.
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`Reg. 48,916, 49,278 (Aug. 11, 2004)), and correspondingly reduces the standardized IPPS
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`payment rate by 5.1%. See 42 U.S.C. § 1395ww(d)(3)(B). The Secretary interprets his statutory
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`obligations regarding outlier payments as requiring that the agency set the outlier threshold at a
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`level that is “likely” to produce total outlier payments in the same amount that has been withheld
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`from the standard DRG payments. Congress did not intend that the outlier payment system would
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`become a source of Medicare savings over time.
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`18.
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`The Secretary implements the outlier statute through a payment methodology that
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`is contained in his regulations, but the annual outlier thresholds are determined based on
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`methodology and data set forth in the IPPS final rules annually adopted by the Secretary under 42
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`C.F.R. §§412.8(b) and 412.80(c). See, e.g., FY 2004 IPPS Final Rule, 68 Fed. Reg. at 45,477; FY
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`2005 IPPS Final Rule, 69 Fed. Reg. at 48,916.
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`19.
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`“To qualify for outlier payments, a case must have costs above a fixed-loss cost
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`threshold amount (a dollar amount by which the costs of a case must exceed payments in order to
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`qualify for outlier payments).” 68 Fed. Reg. at 45,476. The outlier fixed-loss cost threshold is
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`computed by adding the sum of the prospective payment rate for the DRG, any indirect medical
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`education payments, any disproportionate share hospital payments, any additional payment for
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`new technology, and a specific dollar amount. With the exception of the specific dollar amount,
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`the components of the threshold are reimbursement amounts that have been set for reasons that are
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`completely independent of the outlier threshold. As a result, the rulemaking that establishes the
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`threshold is, in fact, setting only the dollar amount threshold for that FY, which is generally called,
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`and herein referred to as, the “outlier threshold.” The Secretary separately establishes outlier
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`thresholds that are applicable to hospital inpatient operating costs and hospital inpatient capital-
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`related costs.
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`20.
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`Each year during the IPPS rulemaking process, hospitals and hospital organizations
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`submit public comments specifically addressing the Secretary’s proposed outlier threshold and
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`policies. The comments submitted by industry members and representatives for FYs 2004 and
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`2005 specifically addressed the significant problems with the Secretary’s methodology and data
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`used to calculate the outlier thresholds, and suggested ways in which the flaws in the Secretary’s
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`methodology and data could be corrected.
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`SHORTFALLS IN OUTLIER PAYMENTS FOR FYS 2004 and 2005
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`21.
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`The Secretary set the outlier threshold at $31,000 for FY 2004 and $25,800 for FY
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`2005. 68 Fed. Reg. at 45,477; 69 Fed. Reg. at 49,278. During FY 2004, the dollar amount was
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`changed to $30,150 for discharges occurring on or after April 1, 2004 through September 30, 2004,
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`as the result of underlying payment changes made by the Medicare Prescription Drug,
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`Improvement, and Modernization Act of 2003. Pub. L. No. 108-173, §§ 401, 402 and 504, 117
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`Stat. 2066; One-Time Notification Manual, CMS Pub. No 100-20, Transmittal No. 64, March 26,
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`2004, CCH ¶ 154,122. As the Secretary has generally done for other FYs, for FYs 2004 and 2005,
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`the Secretary chose in advance to set outlier payments at 5.1 percent of operating DRG payments
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`and, with respect to the capital-related costs, the Secretary set outlier payments at 4.85 percent and
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`4.9385 percent of capital payments based on the federal rate for FYs 2004 and 2005, respectively.
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`See 68 Fed. Reg. at 45,478; 69 Fed. Reg. at 49,278. In order to fund these outlier payments, the
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`Secretary reduced the IPPS rates and the national capital federal rates for FYs 2004 and 2005 by
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`these same percentages.
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`22.
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`This complaint arises because, for FYs 2004 and 2005, the Secretary’s outlier
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`methodology and data caused the outlier thresholds to be set too high, which caused all of the
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`outlier payments made for FYs 2004 and 2005 to be too low. For FYs 2004 and 2005, outlier
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`payments were not only below the 5.1 percent target set by the Secretary, but also substantially
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`below the minimum 5 percent established by Congress. According to estimates published by the
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`Secretary, outlier payments equaled just 3.52 percent of total IPPS payments for FY 2004 (which
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`amounts to a FY 2004 outlier underpayment of approximately $1.5 billion for all IPPS hospitals
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`nationwide) and 3.96 percent of total IPPS payments for FY 2005 (which amounts to a FY 2005
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`outlier underpayment of approximately $1.1 billion for all IPPS hospitals nationwide). See
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`Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal
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`Year 2006 Rates, 70 Fed. Reg. 47,278, 47,496 (Aug. 12, 2005); Medicare Program; Changes to
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`the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates, 71 Fed. Reg.
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`47,870, 48,152 (Aug. 18, 2006). Thus, there is no factual dispute that the Secretary did not meet
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`the target percentage.
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`23.
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`As a result of these shortfalls, a significant amount of the reduction in the IPPS
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`rates used to fund the outlier payment mechanism for FYs 2004 and 2005 was not paid back to the
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`IPPS hospitals and was, instead, retained by the Medicare program. Thus, the Secretary failed to
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`pay out the total amount of the outlier “pool” created by a reduction in IPPS payments to fund the
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`FYs 2004 and 2005 outlier payments, and the Secretary’s FYs 2004 and 2005 outlier payments
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`were otherwise unlawful. This meant that the Hospitals, and other IPPS hospitals throughout the
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`country, failed to receive outlier payments in accordance with law.
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`LITIGATION ADDRESSING OUTLIER UNDERPAYMENTS FOR FYS 2004 AND 2005
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`24.
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`The Hospitals are challenging the Secretary’s outlier payment methodology and
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`data for FYs 2004 and 2005 because, inter alia, various elements of the methodology and data
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`used to project the outlier thresholds and payments were arbitrary and capricious.
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`25.
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`The outlier methodology/threshold/data issues have been litigated in the D.C.
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`Circuit in two cases and, in both, the Court remanded the FY 2004 threshold to the Secretary for
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`additional explanation. See Banner Health v. Price, 867 F.3d at 1357; see also District Hospital
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`Partners, 786 F.3d at 60. In District Hospital Partners, the Court’s remand instructions to the
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`Secretary stated:
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`On remand, the Secretary should explain why she corrected for only 50 turbo-
`charging hospitals in the 2004 rulemaking rather than for the 123 she had identified
`in the NPRM [i.e., the FY 2004 Notice of Proposed Rulemaking published in the
`Federal Register on March 5, 2003]. She should also explain what additional
`measures (if any) were taken to account for the distorting effect that turbo-charging
`hospitals had on the dataset for the 2004 rulemaking. And if she decides that it is
`appropriate to recalculate the 2004 outlier threshold, she should also decide what
`effect (if any) the recalculation has on the 2005 and 2006 outlier and fixed loss
`thresholds.
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`Id. at 60 (emphasis added).
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`26.
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`The Secretary issued the ordered remand explanation, and the D.C. Circuit in
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`Banner Health rejected it:
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`We note that HHS has already attempted to rectify one of the flaws identified in
`District Hospital Partners. As explained above, we are unconvinced by the
`Remand Explanation’s stated reasons for having used vastly unrepresentative
`charge data to inform the FY 2004 charge-inflation factor. In these highly unusual
`circumstances—in which an apparent methodological flaw that HHS has not yet
`had an opportunity to explain must be addressed before it could reasonably
`recalculate various fiscal years’ fixed-loss
`thresholds—we remand both
`successfully challenged aspects of the FY 2004 Final Rule to be considered in the
`same posture. If HHS is again unable to supply a satisfactory explanation for
`including the turbo-charged data, that portion of the 2004 Rule will be subject to
`vacatur.
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`Accordingly, for the foregoing reasons, we reverse the district court’s grant of
`summary judgment with respect to the successfully challenged aspects of the FY
`2004, 2005, and 2006 Final Rules, and remand for further proceedings consistent
`with this opinion. . . .
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`867 F.3d at 1357. The Banner Health decision remanded the Secretary’s outlier thresholds for
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`FYs 2004, 2005 and 2006 for further explanation regarding the agency’s use of “warped data
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`points” for the 2004 threshold (867 F.3d at 1346) and the agency’s failure to account for a known
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`trend in the outlier payment variables in its projections, “thereby leading many hospitals to be
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`underpaid for outlier cases” for FYs 2004, 2005, and 2006 (867 F.3d at 1349).
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`27.
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`In District Hospital Partners, L.P. v Azar (“DHP Outlier Payments II”), this Court
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`likewise remanded the FY 2004 IPPS final rule “consistent with Parts VI.B and VI.D of Banner
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`Health, 867 F.3d at 1345-46, 1348-49.” 320 F. Supp. 3d 42, 47 (D.D.C. 2018).
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`28.
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`On June 6, 2019, the Secretary published in the Federal Register his response to the
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`remand orders in Banner Health and DHP Outlier Payments II in a document entitled “Medicare
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`Program; Explanation of Federal Fiscal Year (FY) 2004, 2005, and 2006 Outlier Fixed-Loss
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`Thresholds as Required by Court Rulings” in the Federal Register. 84 Fed. Reg. 26,360-63
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`(“Second Remand Explanation”). The Second Remand Explanation is the Secretary’s third
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`attempt to articulate a reasoned explanation for using skewed data to set the FY 2004 threshold
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`and second attempt to articulate a reasoned explanation for failing to make necessary changes to
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`its method to set the FYs 2004-2006 thresholds. The Secretary’s Second Remand Explanation
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`fares no better than the earlier attempts.
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`SECRETARY’S FINAL DETERMINATIONS OF THE OUTLIER THRESHOLDS FOR
`FYS 2004 AND 2005 ARE UNLAWFUL
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`29.
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`The Secretary’s final determinations of outlier payments for FYs 2004 and 2005
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`are arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law within the
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`meaning of 5 U.S.C. §706(2)(A), and is short of statutory rights within the meaning of 5 U.S.C.
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`§706(2)(c), because the Secretary acted in an arbitrary and capricious manner and abused his
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`discretion when setting the outlier thresholds and calculating outlier payments for FYs 2004 and
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`2005. The Secretary failed inter alia to (a) consider relevant factors and data which should have
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`been taken into account when setting the thresholds, (b) consider alternative methodologies when
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`establishing the thresholds, (c) demonstrate a reasonable connection between the thresholds and
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`the factors considered, and (d) adequately explain his actions.
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`30.
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`Among other things, the Secretary failed to (a) consider relevant data which showed
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`that the rate of increase in hospital costs per discharge was trending downward and that the
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`relationship of hospital costs to hospital charges was changing, (b) exclude charge data for the 123
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`historical turbochargers from its FY 2004 charge-inflation calculation, which also affected FY
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`2005 because the charge inflation inherent in the behavior of the turbocharging hospitals in periods
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`that preceded the regulatory fix to turbocharging was still contained in the historical data CMS
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`used to calculate charge inflation for FY 2005, and (c) adequately explain why he did not adjust
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`the projection cost-to-charge ratios downward when establishing the outlier thresholds for FYs
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`2004 and 2005. The Secretary thus failed to take into account the established pattern of declining
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`cost-to-charge ratios, which play a significant part in the projection of, and calculation of, outlier
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`payments, despite this problem being repeatedly pointed out in comments along with proposed
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`methods to account for this phenomenon and to more accurately estimate outlier payments so that
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`outlier thresholds could be set more accurately.
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`31.
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`These deficiencies in the Secretary’s methodology were identified in the
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`rulemaking comments submitted for the FYs at issue. By ignoring the flaws in his methodology
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`and data, the Secretary failed to act reasonably in projecting and calculating the amounts of outlier
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`payments to which hospitals were entitled for FYs 2004 and 2005. As a result of these arbitrary
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`and capricious actions, the thresholds were set too high, the resulting amount of outlier payments
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`each FY fell short of the percentage required by the Medicare Act and the Secretary’s own
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`regulations, and the Hospitals did not receive the amount of outlier payments that Congress
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`intended and required.
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`32.
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`In his Second Remand Explanation, the Secretary again failed to supply a reasoned
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`explanation for the Secretary’s methodology in setting the outlier threshold and calculating outlier
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`payments for FYs 2004 and 2005. As but one example, with respect to the FY 2004 outlier
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`threshold, the Second Remand Explanation only asserts reasons why exclusion of the 123
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`turbocharging hospitals would not have perfectly accounted for the problem of turbocharging-
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`infected data, 84 Fed. Reg. at 2361, but fails to provide any explanation as to whether the
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`exclusion of the 123 turbocharging hospitals would have yielded a more accurate projection than
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`the method used by the Secretary or whether it was reasonable for the Secretary to “assume[] that
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`the rate at which charges had inflated between FYs 2000 and 2002 would accurately approximate
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`charge growth during a period that included an entire year (FY 2004) in which the anti-turbo-
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`charging reforms would be in effect,” Banner Health, 867 F.3d at 1345. The D.C. Circuit first
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`instructed the Secretary to “explain what additional measures (if any) were taken to account for
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`the distorting effect that turbo-charging hospitals had on the dataset for the 2004 rulemaking” in
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`its 2015 decision in District Hospital Partners, 786 F.3d at 60. The Secretary failed to offer an
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`adequate explanation of such measures in its 2016 document entitled “Medicare Program;
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`Explanation of FY 2004 Outlier Fixed-Loss Threshold as Required by Court Rulings,” 81 Fed.
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`Reg. 3727-29 (Jan. 22, 2016) (hereinafter “First Remand Explanation”), and he does not endeavor
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`to identify any such additional measures in his Second Remand Explanation. The use of
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`turbocharging-infected data continued to impact outlier payments in FY 2005, and as the D.C.
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`Circuit acknowledged in District Hospital Partners, L.P. v. Burwell, any recalculation of the FY
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`2004 outlier threshold may affect the FY 2005 outlier threshold.
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`33.
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`The Secretary likewise fails in the Second Remand Explanation to supply a
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`reasoned explanation for his failure to account for the expected decline in hospital cost-to-charge
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`ratios when settling the outlier thresholds for FYs 2004 and 2005. The Secretary’s Second Remand
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`Explanation sets forth three factors that he contends explains his decision to fail to account for the
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`expected decline in hospital cost-to-charge ratios during these years: “(1) The fundamental
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`differences in the nature and properties of charges and cost-to-charge ratios; (2) the complexity of
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`simulating the updating of cost-to-charge ratios; and (3) our desire to focus on monitoring the
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`aftermath of the 2003 rule changes.” Second Remand Explanation, 84 Fed. Reg. at 26,363. With
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`respect to FY 2005, the Secretary also cites his “lack of experience with [the] task” of adjusting
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`the projection cost-to-charge ratio to address the expected decline in the ratio. Id. The reasons set
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`forth by the Secretary in the Second Remand Explanation confirm that the Secretary’s approach
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`to projection cost-to-charge ratios was “internally inconsistent and inadequately explained,” Dist.
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`Hosp. Partners, L.P., 786 F.3d at 59 (internal citation omitted), and thus the promulgation of the
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`FYs 2004 and 2005 outlier thresholds violates the Medicare Act and the APA. As but one
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`example, the Secretary seeks to distinguish between the projection of costs and charges and the
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`projection of cost-to-charge ratios saying that a “cost-to-charge ratio is different in kind,” 84 Fed.
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`Reg. at 26,362, notwithstanding the fact that the cost-to-charge ratio is a simple ratio of two
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`values: costs and charges. Moreover, the Second Remand Explanation underscores the
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`importance of meaningful engagement with commenters—the Secretary acted arbitrarily and
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`capriciously in setting the FYs 2004 through 2006 outlier thresholds in part because of his failure
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`to consider comments concerning the outlier methodology in good faith despite his “lack of
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`expertise” and the “complexity” of projecting cost-to-charge ratios. The Second Remand
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`Explanation asserts reasons the Secretary did not adjust the methods to set the FYs 2004 and 2005
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`outlier thresholds that are counter to the record facts before the Secretary and/or that unreasonably
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`disregard or minimize those facts.
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`34.
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`The Second Remand Explanation also notes that several commenters, who had
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`advocated for adjustments to account for cost-to-charge ratio updates, calculated the following FY
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`2005 thresholds using the data available at the time of the proposed rule: $26,600, $28,455, and
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`“no higher than $27,000.” Id. at 26,363. The Secretary notes that these fixed-loss threshold
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`estimates were “considerably higher than the $25,800 level” he ultimately finalized. Id. These
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`fixed-loss thresholds, however, were well below the $35,085 threshold the Secretary had proposed
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`for FY 2005. See 69 Fed. Reg. at 49,276 (proposing threshold of $35,085 for FY 2005). In the
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`final rule, the Secretary used updated, more-recent charge inflation data, including data from the
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`first half of FY 2004, and more recent cost-to-charge ratios, which was previously unavailable to
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`the commenters. Id. at 49,277. In his Second Remand Explanation, the Secretary does not dispute
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`that applying commenters’ methodology to this more recent and complete data would have
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`produced a lower outlier threshold and outlier payments closer to the Secretary’s target percentage
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`for FY 2005.
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`APPEALS UNDER THE MEDICARE PROGRAM
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`35.
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`A Medicare-participating hospital that is dissatisfied with a final determination of
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`the Medicare Program regarding the hospital’s IPPS payments for a “cost reporting period” (i.e.,
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`the provider's fiscal year, see 42 C.F.R. §413.24(f)) may appeal that determination to the Provider
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`Reimbursement Review Board (the “PRRB”) if the amount in controversy is at least $10,000 and
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`the appeal is timely presented. The PRRB is an administrative tribunal within HHS. See 42 U.S.C.
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`§1395oo(a). A group of hospitals may bring such an appeal together, if the matter in controversy
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`involves a common question of fact or interpretation of law or regulations and the amount in
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`controversy is, in the aggregate, $50,000 or more, and other requirements are met. 42 U.S.C.
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`§1395oo(b).
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`36.
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`The PRRB lacks the authority to adjudicate the validity of the Secretary’s
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`regulations and CMS Rulings. 42 C.F.R. §405.1867. When a hospital is entitled to a PRRB
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`hearing, the hospital may request that the PRRB determine whether it has the authority to decide
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`the question of law or regulations relevant to the appeal. 42 U.S.C. §1395oo(f)(l). If the PRRB
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`determines that the legal issues raised are outside the scope of its own authority, it must certify the
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`case for “expedited judicial review” (“EJR”). Id. In that event, the hospital has exhausted its
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`administrative remedies, the Secretary’s determination is final, and the hospital may commence a
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`civil action for judicial review of the final decision of the Secretary. See 42 U.S.C. §1395oo(f)(1);
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`42 C.F.R. §405.1842. An EJR determination is not subject to review by the Secretary or the CMS
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`Administrator but, rather, allows the hospital to proceed directly to court.
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`37.
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`A hospital may obtain judicial review by filing suit within 60 days of receipt of the
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`Secretary’s final administrative decision, or an EJR determination, in the United States District
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`Court for the judicial district in which the hospital is located or in the United S