On March 10, 2017, Judge John Bates of the U.S. District Court for the District of Columbia upheld CMS’s three-year cost report reopening limitation, as applied to “predicate fact” determinations.  The regulation at issue is 42 C.F.R. § 405.1885, which allows specific legal and factual findings by CMS, Medicare Administrative Contractors or the Provider Reimbursement Review Board to be reopened and revised within three years of the decision, or longer if based on fraud or similar fault.  Effective in 2013 following the Kaiser Found. Hosps. v. Sebelius litigation, predicate facts, like payment determinations, are explicitly limited to the three-year reopening window.  42 C.F.R. § 405.1885(a)(1)(iii).  The 300+ hospitals in the case before the D.C. District Court argued that the updated regulation was impermissibly retroactive to their pending challenge of the 1981 base rate data used to set inpatient prospective payment rates.  Judge Bates granted summary judgment for the Secretary, finding that the Secretary properly exercised his statutory authority to apply the rule retroactively and, even if applied only prospectively, the Secretary did not act arbitrarily or capriciously.

A “predicate fact” is “a finding of fact based on a factual matter that first arose in . . . a cost reporting period that predates the period at issue . . . and, once determined, was used to determine an aspect of the provider’s reimbursement for one or more later cost reporting periods.”  42 C.F.R. § 405.1885(a)(1)(iii) (2013 onward).  The predicate fact in the D.C. District Court case is the 1981 cost reporting data, used as the base rate in developing IPPS rates ever year thereafter.  The hospitals argued that the 1981 data did not appropriately distinguish between discharges and transfers, resulting in an artificially low cost-per-discharge and lower inpatient payment rates.  The hospitals filed consolidated appeals of their 2002 through 2015 cost reporting periods—all well-after the 1981 discharge data was finalized and incorporated into the base payment rates.

In separate 2011 litigation, the D.C. Circuit Court held that the regulatory language “finding on matters at issue in a determination or decision” did not include predicate facts and thus the three-year re-opening limitation did not apply.  See Kaiser Found. Hosps. v. Sebelius, 404 U.S. App. D.C. 148 (D.C. Cir. 2013).  In response, CMS amended the re-opening regulations to specifically incorporate predicate facts.  See 42 C.F.R. § 405.1885(a)(1)(iii) (effective 2013).  In enacting the changes, CMS stated that the 2013 amendment applied to all appeals “pending on or after the effective date of the final rule.”  78 Fed. Reg. 74826, 75265 (Dec. 10, 2013).

The litigants argued to the D.C. District Court that the Secretary’s 2013 rulemaking was impermissibly retroactive, and, even if applied prospectively, was arbitrary and capricious.  Judge Bates disagreed.  Finding that the Secretary properly invoked the required statutory authority to enact a retroactive rule, Judge Bates found that the “2013 Amendment represents a policy choice between the competing values of finality and accuracy” and was a decision “ultimately reasonable and reasonably explained.” (internal quotation omitted).  Judge Bates noted that the Secretary’s rulemaking was not “robust,” but held nonetheless that the 2013 regulation was lawful.  The court also found that the 2013 change made “crystal clear” that it applied to pending appeals, such as those filed by the litigants.  Moreover, the court decided that even when applied prospectively, the 2013 amendment was not arbitrary and capricious.  According to Judge Bates, the 2013 change was not an inconsistent interpretation of prior policy, but a wholesale change to the regulation at issue.  To hold that CMS could never enact new regulations contradictory to prior regulations would mean that the agency could never adopt a new policy approach, and that, in the end, “this argument boils down to a disagreement with the agency’s decision to prioritize finality over accuracy in the hospital base rate,” and the Secretary’s decision-making was lawful.

The case, Saint Francis Med. Ctr. v. Price,No. 15-1659, is available here.  Plaintiffs have yet to docket an appeal in the U.S. Court of Appeals for the D.C. Circuit.