On June 29, 2018, the U.S. District Court for the District of Columbia decided Stringfellow Memorial Hospital et al. v. Azar by granting summary judgment to the Secretary of HHS in his defense of the FY 2005 Inpatient Prospective Payment System (IPPS) final rule (the Final Rule). The Final Rule counts patient days for dual-eligible individuals (eligible for both Medicare and Medicaid) who have exhausted their Medicare Part A days in the Medicare fraction of the DSH calculation. The plaintiff-hospitals contended that, as a result of the Final Rule, they received lesser DSH payments than the DSH amounts to which they were entitled. The plaintiffs challenged the FY 2005 Final Rule on both procedural and substantive grounds, alleging that the Final Rule was not a logical outgrowth of the proposed rule and that is was not a product of reasoned decision-making. In ruling for the Secretary on cross motions for summary judgment, the court held that the Final Rule was indeed both procedurally sound and the product of reasoned decision-making.
Background of the Challenged FY 2005 Final Rule
The disputed issue centers on whether “dual-eligible exhausted days” should be counted in the Medicare fraction or, instead, in the Medicaid fraction of the DSH calculation.
Before discussing the merits, the court discussed the complicated history leading to the Final Rule in which the Secretary badly misstated his current policy and ultimately finalized a policy to count dual-eligible exhausted days in the Medicare fraction and exclude them from the Medicaid fraction, which was the opposite of what he had proposed. The new policy was codified at 42 C.F.R. § 412.106(b)(2)(i).
The court’s decision here is different from Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013), in which the D.C. Circuit rejected a similar challenge regarding the Secretary’s treatment of dual-eligible exhausted days, because that case dealt with a 1997 fiscal year and the court there only upheld the exclusion of such days from the Medicaid fraction without deciding whether their inclusion in the Medicare fraction would also be licit.
The Court’s Decision Regarding the Providers’ Challenge to the Final Rule
The plaintiffs challenged the Final Rule on procedural and substantive grounds. First, the plaintiffs argued that the Final Rule is procedurally deficient under the Administrative Procedure Act (APA) and the Medicare Act because the Final Rule was not a logical outgrowth of the proposed rules, thereby depriving affected hospitals of fair notice and the ability to submit comments. Second, the plaintiffs contended that the Final Rule is substantively invalid because it was not the result of reasoned decision-making.
Procedural Grounds
The court, in siding with the Secretary, held that, “[n]otwithstanding the sloppy and confusing misstatements” in the proposed rule, the Final Rule was a logical outgrowth. In particular, the court reasoned that the 2004 proposed rule plainly identified that either dual-eligible days would be counted in the Medicare fraction or the Medicaid fraction, putting parties on notice that either one was a possible outcome. The fact that the Secretary grossly misstated its own current policy was not fatal to the Secretary’s argument. Indeed, the court noted that “[e]ven though the stated ‘current policy’ was, in fact, not the Secretary’s actual policy, the 2004 Proposed Rule gave interested parties notice that the mistaken current policy might be adopted, because “[o]ne logical outgrowth of a proposal is surely . . . to refrain from taking the proposed step.’” The court continued, “The Secretary’s allegedly “negative[] mention” of the policy that was ultimately adopted does not preclude the Secretary from changing his outlook after reviewing comments on the virtues of that policy.”
The court distinguished its holding from that of the well-known Allina case, where hospitals successfully challenged a similar 180-degree reversal by the Secretary. In Allina, the Secretary proposed to “clarify” that once a beneficiary elects Medicare Part C, those patient days attributable to the beneficiary should not be included in the Medicare fraction but should instead be included in the Medicaid fraction. In the corresponding final rule, however, the Secretary instead adopted a policy to include the patient days for Part C beneficiaries in the Medicare fraction—the exact opposite of the policy the Secretary had proposed to clarify. The D.C. Circuit concluded that this result was not a logical outgrowth of the Secretary’s proposed rule. In the present case, however, the court found that the 2004 proposed rule clearly indicated that the Secretary was “proposing to change our policy” which was unlike the mere “clarification” in the Allina case. The court further reasoned that the proposal at issue here put interested parties on notice not only that a change was possible but also that the proffered change might be rejected in favor of the alleged current policy. The court therefore concluded that the Final Rule was promulgated with adequate notice and comment procedures and is not procedurally defective.
Substantive Grounds
The plaintiffs also argued that the policy finalized in the Final Rule was arbitrary and capricious agency action. Under this framework, the court explained that agencies are free to change their existing policies as long as they provide a reasoned explanation for the change, which means the agency must at least “display awareness that it is changing position” and “show that there are good reasons for the new policy.”
First, the plaintiffs argued that the Secretary did not provide much by way of an explanation for his about-face in proposing to count exhausted days in the Medicare fraction. On this point, the court found that the Secretary’s responses to relevant comments in the rulemaking were indicative of a reasoned decision. Second, the plaintiffs argued that the Secretary relied on a flawed understanding regarding the policy’s impact on DSH patient percentage calculations. However, the court disposed of this argument by finding that the Secretary had provided sufficient discussion in the rulemaking to demonstrate that he was aware of the effects of counting dual-eligible individuals in either the Medicare or Medicaid fractions. Most notably, the plaintiffs argued that the Secretary could not have provided adequate notice of a change in policy because the Secretary himself was confused about his then-current policy and his new policy. The court determined that while the Secretary could have been clearer throughout the rulemaking process regarding the current policy and the proposed changes to the current policy, the Secretary did acknowledge that the policy was changing, as required by the APA, by acknowledging that he “inadvertently misstated” the current policy in the 2004 proposed rule and posting on the CMS website regarding that misstatement. For these reasons, the court held that the challenged portion of the Final Rule was not the product of arbitrary and capricious rulemaking and is therefore valid.
The court’s memorandum opinion is available here.
