UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

NEW LIFECARE HOSPITALS OF CHESTER COUNTY LLC, et al.,

Plaintiffs,

v. Civ. No. 19-705 (EGS)

ALEX M. AZAR II, Secretary of Health and Human Services

Defendant.

MEMORANDUM OPINION

This case concerns the Medicare system, a federal program

that helps to cover the cost of providing medical care to

qualified individuals. Under Medicare, the government generally

reimburses hospitals at a predetermined fixed rate whenever a

patient is discharged, regardless of the actual cost of

services. Because some hospital stays will be exceptionally

costly, Congress has allowed for a high cost outlier (“HCO”)

which offsets extremely high costs that a hospital may incur

when treating certain cases. In such cases, provided that

statutory conditions are met, the hospital simply requests

additional payment. However, Congress has mandated that these

payments cannot increase the payment obligations of the federal

government to an amount that is higher than the predetermined

prospective rates. In other words, the government calculates an

amount it expects to pay based on the number of expected discharges at the prospective payment rate; and the hospital’s

requests for additional payments due to HCOs cannot increase

that amount. Id. Therefore, to keep the budget neutral, the

government reduces the prospective payment rate by a percentage

based on the expected outlier payments for that year. This

reduction is commonly referred to as the budget neutrality

adjustment (“BNA”).

Plaintiffs, a group of over 100 long-term care hospitals

(“LTCH”), bring this action pursuant to, inter alia, the

Administrative Procedure Act (“APA”),

, alleging

that defendant Alex M. Azar II, Secretary of Health and Human

Services (“HHS”) applies the BNA to LTCH stays in an unlawfully

duplicative manner. Specifically, this lawsuit challenges a

final rule that defines how the budget neutrality adjustment is

applied to LTCH hospital stays that are paid out at a site

neutral rate. Plaintiffs allege that, because the formula to

calculate the site neutral rate already takes into account a 5.1

percent adjustment for the expected HCO payments, the Secretary

incorrectly applies a 5.1 percent budget neutrality adjustment

to site neutral rates. Thus, plaintiffs argue the Secretary’s

actions are duplicative and therefore violate the APA.

Pending before the Court are the parties’ cross-motions for

summary judgment. The parties agree that the formula for site

neutral payments is mandated by Congress, and that CMS may apply

2 a BNA to site neutral payments to insure the government’s

overall LTCH payment obligations are not increased due to the

cost outlier payments. The parties also agree that there are

multiple BNAs that play a role in the formula to determine the

site neutral rate. Where the parties disagree is whether the BNA

applied to the site neutral rate is duplicative or merely a

reasonable application of the Secretary’s authority to balance

the budget. Upon careful consideration of the parties’

submissions, the applicable law, and the entire record herein,

the Court finds that the Secretary’s methodology in applying the

BNA to site neutral LTCH stays is a reasonable interpretation of

the applicable statues and regulations. Therefore, the Court

GRANTS defendant’s cross-motion for summary judgment, and DENIES

the plaintiffs’ motion for summary judgment.

I. Background

A. Statutory and Regulatory Background

1. Medicare Reimbursements to Hospitals

The Centers for Medicare and Medicaid Services (“CMS”), a

division of HHS, is in charge of administering the Medicare

program under the direction of the Secretary. Until 1983,

Medicare reimbursed participating hospitals for inpatient

services provided to Medicare patients based on the “reasonable

costs” incurred by the hospital. Methodist Hosp. of Sacramento

v. Shalala,

(D.C. Cir. 1994). Concerned about

3 escalating costs, Congress, in 1983, directed HHS to implement a

prospective payment system under which hospitals would not

receive actual costs, but rather would receive fixed payments

based on the type of inpatient services rendered.

“Congress

designed this system to encourage health care providers to

improve efficiency and reduce operating costs.”

CMS pays most hospitals for inpatient services furnished to

Medicare beneficiaries at these fixed rates through the

Inpatient Prospective Payment System (IPPS”). See generally

Dist. Hosp. Partners, L.P. v. Burwell,

(D.C.

Cir. 2015). The IPPS divides medical conditions into categories

of related illnesses called “diagnosis-related groups” (“DRGs”).

Dist. Hosp. Partners,

. Once a Medicare

beneficiary is discharged under IPPS, Medicare reimburses the

hospital at a preset rate that depends on the patient’s DRG and

other factors not relevant to this case. See 42 U.S.C. §§

1395ww(d),(g);

, 412.312; Cape Cod Hosp. v.

Sebelius,

(D.C. Cir. 2011)(explaining

prospective payment rate calculation). The payment amount for

each DRG is intended to reflect the estimated average cost of

treating a patient whose condition falls within that DRG, see 42

U.S.C. § 1395ww(d), even though the actual cost the hospital

incurs in treating that patient may be higher or lower.

4 This case concerns long-term care hospital reimbursements.

In 1999, Congress directed the Secretary to “develop a per

discharge prospective payment system for payment for inpatient

hospital services of long-term care hospitals[.]” 1 Medicare,

Medicaid, and SCHIP Balanced Budget Refinement Act of 1999

(“BBRA”),

,

, 1501A330

(1999)(codified at 42 U.S.C. § 1395ww, note). Congress also

mandated that this payment system “shall maintain budget

neutrality.” Id. The following year, Congress further provided

that the Secretary “shall examine and may provide for

appropriate adjustments to the long-term hospital payment

system, including . . . outliers[.]” Medicare, Medicaid, and

SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”),

(b)(1),

, 2763A497

(2000)(codified at 42 U.S.C. § 1395ww, note).

Because some inpatient stays will be exceptionally costly,

Congress provided for additional “high cost outlier” payments to

partly offset extremely high costs that hospitals incur in both

inpatient and LTCH settings. See 42 U.S.C. § 1395ww(d)

(5)(A)(ii). Accordingly, a qualifying hospital may request

additional payments for outlier cases in certain statutorily

1 The prospective payment system implemented in 1983 did not apply to LTCH which continued to be paid for inpatient services at a reasonable rate.

5 defined circumstances. Id. These outlier payments, however,

cannot be projected to increase the overall Medicare payment

obligations of the federal government. See id. §

1395ww(d)(3)(B). Therefore, to account for the higher outlier

payments, CMS reduces the IPPS and LTCH payment rates by, each

fiscal year, prospectively estimating the proportion of outlier

payments and then prospectively reducing those rates to account

for the outlier payments. Id. This rate must be projected to be

between 5 and 6 percent of the total projected IPPS payments for

that year. Id. § 1395ww(d)(5)(A)(iv).

2. Reimbursement for LTCHs Under Dual-Rate System

The Medicare reimbursement system for LTCHs, the LTCH PPS,

is based on different levels of cost than the inpatient hospital

prospective payment system. For a hospital to be reimbursed

under the LTCH PPS, it must have an average Medicare inpatient

length of stay that is greater than twenty-five days, which

reflects the medically complex cases treated in LTCHs. See Pl.s’

Mot. ECF No. 21 at 15. Each patient discharged from a LTCH is

assigned to a distinct Medicare severity long-term care

diagnosis related group (“MS-LTC-DRG”), and the LTCH is

generally paid a predetermined fixed amount applicable to the

assigned MS-LTC-DRG (adjusted for area wage differences). Id.

Although the DRG’s for LTCH’s are the same as DRG’s for acute

care hospitals, the weights assigned to the groups are generally

6 higher. Additionally, the federal standard rate has been much

higher for LTCH’s than for acute care hospitals because of the

complexity of the cases and the longer average length of stay.

Id. The payment amount for each MS-LTC-DRG is intended to

reflect the average cost of treating a Medicare patient assigned

to that MS-LTC-DRG in a LTCH. Id.

CMS implemented the LTCH PPS on October 1, 2002, which

marked the beginning of Federal Fiscal Year 2003.

(Aug. 30, 2002). The Secretary modeled the LTCH PPS after

IPPS. See generally 42 C.F.R. ch. IV, subch. B, pt. 412, subpt.

O (setting forth the rules governing LTCH PPS). As in IPPS, the

Secretary established a flat national rate for LTCH PPS, now

known as the “standard Federal rate.”

§ 412.523(c)(1). This

was the rate that LTCHs received upon patient discharge

depending on the patient’s DRG.

In 2013, Congress implemented a dual rate structure for

LTCHs. Concerned that LTCHs were admitting some patients who

instead could be safely and efficiently treated in a lower-cost

setting, Congress required the Secretary to create a separate

payment rate for such patients that would generally be lower

than the standard Federal rate, known as the “site neutral”

rate. See Bipartisan Budget Act of 2013,

,

;

, 49601-23 (Aug. 17,

2005). Pursuant to this congressional mandate, CMS implemented

7 this dual-rate payment structure for the LTCH PPS in 2015 (for

Fiscal Year 2016), and the structure remains in place today.

Under this dual-rate structure, generally a LTCH is no

longer reimbursed at the standard Federal rate if the patient

did not spend at least three days in a hospital’s intensive care

unit immediately preceding the LTCH care, or did not receive at

least 96 hours of respiratory ventilation services during the

LTCH stay. 42 U.S.C. § 1395ww(m)(6)(A). If the patient does not

meet either of these criteria then the hospital gets the site

neutral rate which is statutorily defined as the lower of (1)

“the IPPS comparable per diem amount determined under [

(d)(4)], including any applicable outlier payments

under [

]” or (2) “100 percent of the

estimated cost for the services involved.” 42 U.S.C. §

1395ww(m)(6)(B)(ii); see also

(c)(1).

The “IPPS comparable per diem amount” is at the heart of

the dispute in this case. The amount is determined based on a

formula that uses IPPS rates –- the operating IPPS standardized

amount and the capital IPPS Federal rate -- for the calculation.

See

(d)(4). Those IPPS rates are nationally-

applicable values set annually by CMS through a complex

computation. See 83 Fed. Reg. at 41724-25 (identifying FY 2019

operating standardized amounts); id. at 41729 (identifying FY

2019 capital Federal rate). The rates reflect the application of

8 several adjustments, see id. at 41712-13, 41727-29, including

the IPPS BNA for outliers, see id. at 41723, 41728; see also

(f) (IPPS BNA is applied when calculating

standardized amount);

§ 412.308(c)(2) (IPPS BNA is applied

when calculating Federal rate). After the site neutral rate is

calculated, CMS makes certain adjustments including an

adjustment to account for outlier payments paid to site neutral

cases in the LTCH PPS.

(c)(2);

§

412.525(a).

Finally, the regulations provide a framework through which

a provider can appeal the Secretary’s reimbursement decision.

Hospitals’ payments for Medicare services are calculated and

processed by Medicare administrative contractors. See 42 U.S.C.

§ 1395h(a). After receiving a determination as to the amount of

a hospital’s payments, the hospital can appeal the determination

to the Provider Reimbursement Review Board (“PRRB” or ”Board”),

an administrative tribunal within HHS. Id. § 1395oo(a); see also

id. § 1395oo(b)(providing for group appeals by multiple

providers). If a hospital believes the PRRB lacks authority to

decide a “question of law or regulation[] relevant to the

matters in controversy,” it can request that the PRRB make a

determination “that it is without authority to decide the

question” and authorize expedited judicial review in federal

district court. Id. § 1395oo(f)(1). In seeking the PRRB’s

9 authorization, the Medicare provider must specify each “question

of law or regulations” that it intends to present to the

district court. Id. The regulation implementing the statute

similarly speaks of a provider obtaining review of individual

“legal question[s].”

(a)(1); see also

§

405.1842(g)(2) (“If the Board grants[expedited judicial review],

the provider may file a complaint in a Federal district court in

order to obtain [judicial review] of the legal question.”).

B. Procedural Background

1. CMS Rule Making FY 2016–2019

Since the implementation of the site neutral payment rate

to LTCHs, plaintiffs have attempted to alert the Secretary that

his actions in applying the BNA to the site neutral rate were,

in their view, unlawful. When the rule was first proposed in

Fiscal Year 2016 “[c]ommenters objected to the proposed site

neutral payment rate HCO budget neutrality adjustment, claiming

that it would result in savings [to Medicare] instead of being

budget neutral.” 80 Fed. Reg. at 49622. “The commenters’ primary

objection was based on their belief that, because the IPPS base

rates used in the IPPS comparable per diem amount calculation of

the site neutral payment rate include a budget neutrality

adjustment for IPPS HCO payments (for example, a 5.1 percent

adjustment on the operating IPPS standardized amount), an

‘additional’ budget neutrality factor is not necessary and is,

10 in fact, duplicative.” Id. CMS disagreed and explained why it

believed that there was no duplication:

While the commenters are correct that the IPPS base rates that are used in site neutral payment rate calculation include a budget neutrality adjustment for IPPS HCO payments, that adjustment is merely a part of the calculation of one of the inputs (that is, the IPPS base rates) that are used in the LTCH PPS computation of site neutral payment rate. The HCO budget neutrality factor that is applied in determining the IPPS base rates is intended to fund estimated HCO payment made under the IPPS, and is therefore determined based on estimated payments made under the IPPS. As such, the HCO budget neutrality factor that is applied to the IPPS base rates does not account for the additional HCO payments that would be made to site neutral payment rate cases under the LTCH PPS.

Id. CMS further explained why it believed the 5.1 percent BNA

was necessary to account for outlier payments in LTCH PPS:

Without a budget neutrality adjustment when determining payment for a case under the LTCH PPS, any HCO payment payable to site neutral payment rate cases would increase aggregate LTCH PPS payments above the level of expenditure if there were no HCO payments for site neutral payment rate cases. Therefore, our proposed approach appropriately results in LTCH PPS payments to site neutral payment rate cases that are budget neutral relative to a policy with no HCO payments to site neutral payment rate cases. Id.

The commenters renewed their objections in Fiscal Year

2017, arguing that the proposed 5.1 percent BNA for the LTCH

11 site neutral payment rate was duplicative. CMS responded with

the following explanation:

Section 1206 of

defined the site neutral payment rate as the lower of the estimated cost of the case or the IPPS comparable per diem amount determined under paragraph (d)(4) of § 412.529, including any applicable outlier payments under § 412.525. The term “IPPS comparable per diem amount” was not new at the time of enactment. That term had already previously been defined under § 412.529(d)(4), which has been in effect since July 1, 2006, and used as a component of the payment adjustment formula for LTCH PPS SSO [short stay outlier] cases. From the July 1, 2006 inception of the IPPS comparable component of the LTCH PPS’ SSO payment formula, we have budget neutralized the estimated HCO payments that we expected to pay to SSO cases including those paid based on the IPPS comparable per diem amount. Congress was also well aware of how we had implemented our “IPPS comparable per diem amount” concept in the SSO context at the time of the enactment of section 1206 of

As such, we believe Congress left us with the discretion to continue to treat the “IPPS comparable per diem amount” in the site neutral payment rate context as we have historically done with respect to LTCH PPS HCO payments made to discharges paid using the “IPPS comparable per diem amount,” that is, to adopt a policy in the site neutral context to budget neutralize HCO payments made to LTCH PPS discharges including those paid using the “IPPS comparable per diem amount.”

, 57308 (Aug. 22, 2016). CMS further explained

why it believed that applying a BNA to the site neutral rate is

consistent with its treatment of standard Federal rate within

the LTCH PPS:

12 We have made a budget neutrality adjustment for estimated HCO payments under the LTCH PPS under § 412.525 every year since its inception in FY [Federal fiscal year] 2003. Specifically, at § 412.523(d)(1), under the broad authority provided by section 123 of

and section 307 of

which includes the authority to establish adjustments, we established that the standard Federal rate (now termed the LTCH PPS standard Federal payment rate under the new dual rate system) would be adjusted by a reduction factor of 8 percent, the estimated proportion of outlier payments under the LTCH PPS (

). Thus, Congress was well aware of how we had implemented our HCO policy under the LTCH PPS under § 412.525 at the time of the enactment of section 1206 of

CMS proposed the same 5.1 percent BNA for the LTCH site

neutral payment rate, and received similar objections as it did

in prior years. Compl., ECF No. 1 ¶ 31. CMS explained its

disagreement:

As we discussed in response to similar comments (

through 57309 and

through 49622), we have the authority to adopt the site neutral payment rate HCO policy in a budget neutral manner. More importantly, we continue to believe this budget neutrality adjustment is appropriate for reasons outlined in our response to the nearly identical comments in the FY 2017 IPPS/LTCH PPS final rule (

through 57309) and our response to similar comments in the FY 2016 IPPS/LTCH PPS final rule (

through 49622).

, 38545-38546 (Aug. 14, 2017).

13 For Fiscal Year 2019, commenters similarly objected to

CMS’s proposal of a 5.1% BNA for the LTCH site neutral payment

rate. Compl. ¶¶ 34-36. CMS responded as follows:

We continue to disagree with the commenters that a budget neutrality adjustment for site neutral payment rate HCO payments is inappropriate, unnecessary, or duplicative. As we discussed in response to similar comments (

through 38546,

through 57309, and

through 49622), we have the authority to adopt the site neutral payment rate HCO policy in a budget neutral manner. More importantly, we continue to believe this budget neutrality adjustment is appropriate for reasons outlined in our response to the nearly identical comments in the FY 2017 IPPS/LTCH PPS final rule (

through 57309)and our response to similar comments in the FY 2016 IPPS/LTCH PPS final rule (

through 49622).

, 41738 (Aug. 17, 2018). CMS finalized the

proposal in August 2018, and the Rule became effective on

October 1, 2018.

Fiscal Year 2020 is of significant importance to this case.

To allow LTCHs to transition to the dual rate payment structure,

Congress directed that for discharges in cost reporting periods

beginning in Fiscal Year 2019 or earlier, LTCHs are to be paid

at a blended rate for site neutral cases, 42 U.S.C. §

1395ww(m)(6)(B)(i)(I), which is equal to one-half of the site

neutral payment rate and one-half of the LTCH PPS standard

Federal payment rate, id. § 1395ww(m)(6)(B)(ii). Effective for

14 discharges in cost reporting periods beginning in Fiscal Year

2020 or later, site neutral cases will be paid at 100 percent of

the site neutral payment rate, which is a significant decrease

from the blended rate.

2. Administrative Appeal and Civil Law Suit

Plaintiffs had hoped that CMS would correct the alleged

errors before the end of the LTCH site neutral transition period

(i.e., before September 30, 2019). Failing to persuade CMS to

change its position on its methodology in its application of the

BNA to site neutral LTCH payment rates, plaintiffs filed an

appeal with the PRRB. See Administrative Record (“AR”), ECF No.

27-1 at 83–84. In its appeal, plaintiffs filed a Request for

Expedited Judicial Review “challenging a budget neutrality

adjustment published in the August 17, 2018 FY 2019 IPPS/LTCH

PPS Final Rule.” Id. at 83.

The Board determined that it was “without authority to

decide the legal question of [whether] the Secretary incorrectly

applied the [BNA] twice to the LTCH site neutral case payments

for FFY 2019 as delineated in the August 17, 2018 Federal

Register.” AR, ECF No. 27-1 at 7. Accordingly, the board granted

the plaintiffs’ Request for Expedited Judicial Review “for the

issue and the subject year.” Id.

Plaintiffs then filed this Complaint challenging the

alleged duplicative BNA on March 13, 2019. See Compl., ECF No.

15 1. On April 5, 2019, Plaintiffs filed an application for a

preliminary injunction with this Court to prevent CMS from

applying the duplicative BNA during this litigation. See PI

Mot., ECF No. 8. The parties consented to a consolidation of the

motion for injunctive relief with a hearing on the merits

pursuant to Fed. R. Civ. P. 65(a)(2), thereby converting

plaintiffs’ motion to one for summary judgment. 2 The parties have

fully briefed the issues in their cross-motions for summary

judgment. This case is ripe for adjudication.

II. Legal Standard

Although both parties have moved for summary judgment, the

parties seek review of an administrative decision under the

Administrative Procedure Act (“APA”). See

.

Therefore, the standard articulated in Federal Rule of Civil

Procedure 56 is inapplicable because the Court has a more

limited role in reviewing the administrative record. Wilhelmus

v. Geren,

(D.D.C. 2011)(internal

citation omitted). “[T]he function of the district court is to

determine whether or not as a matter of law the evidence in the

administrative record permitted the agency to make the decision

it did.” See Sierra Club v. Mainella,

, 90

2 Because the Court has consolidated Plaintiffs' preliminary injunction motion with a decision on the merits, the Court “need not decide the preliminary injunction.” Pharm. Research & Mfrs. of Am. v. HHS,

(D.D.C. 2014).

16 (D.D.C. 2006)(internal quotation marks and citations omitted).

“Summary judgment thus serves as the mechanism for deciding, as

a matter of law, whether the agency action is supported by the

administrative record and otherwise consistent with the APA

standard of review.” Wilhelmus,

(internal

citation omitted).

Under the APA, a court must set aside an agency action that

is “arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law.”

(2)(A); Tourus

Records, Inc. v. DEA,

(D.C. Cir. 2001). Review

of agency action is generally deferential, Blanton v. Office of

the Comptroller of the Currency,

(D.C. Cir.

2018)(citing Safari Club Int’l v. Zinke,

(D.C. Cir. 2017)), as long as the agency examines the relevant

facts and articulates a satisfactory explanation for its

decision including a “rational connection between the facts

found and the choice made.” Motor Vehicle Mfr.’s Ass’n v. State

Farm Mut. Auto. Ins. Co.,

(1983)(citation

omitted); Iaccarino v. Duke,

(D.D.C.

2018). The “scope of review under the arbitrary and capricious

standard is narrow and a court is not to substitute its judgment

for that of the agency.” Iaccarino,

(internal quotation marks omitted)(citing State Farm,

). In Medicare cases, the “‘tremendous complexity of the

17 Medicare statute . . . adds to the deference which is due to the

Secretary’s decision.’” Dist. Hosp. Partners,

(quoting Methodist Hospital,

); see also Alaska

Airlines, Inc. v. TSA,

(D.C. Cir. 2009)

(stating agency decisions involving “complex judgments about . .

. data analysis that are within the agency’s technical

expertise” receive “an extreme degree of deference”) (citation

omitted).

III. Analysis

The Court will first address whether it has jurisdiction to

hear the claims in this case. After finding that it indeed does

have jurisdiction, the Court next turns to the plaintiffs’

arguments that the Secretary has violated the APA and other

federal laws.

A. Jurisdiction

“The Medicare Act places strict limits on the jurisdiction

of federal courts to decide ‘any claims arising under’ the Act.”

Am. Orthotic & Prosthetic Ass’n, Inc. v. Sebelius,

(D.D.C. 2014)(citing

(h)) There are two

elements that a plaintiff must establish to obtain judicial

review. See Am. Chiropractic Ass’n, Inc. v. Leavitt,

(D.C. Cir. 2005)(“Judicial review may be had only after

the claim has been presented to the Secretary and administrative

remedies have been exhausted.”). First, the plaintiff must have

18 “presented” the claim to the Secretary; this requirement is not

waivable, because without presentment “there can be no

‘decision’ of any type,” which § 405(g) clearly requires.

Mathews v. Eldridge,

(1976). The second

element is the waivable “requirement that the administrative

remedies prescribed by the Secretary be exhausted.” Eldridge,

.

Defendant argues that, with the exception of Fiscal Year

2019, the Court lacks jurisdiction to review plaintiffs’ claims

because plaintiffs did not present those claims to the PRRB.

Def.’s Cross-Mot., ECF No. 22 at 22–25. Plaintiffs counter that

the PRRB’s decision notes that plaintiffs objected to the

alleged duplicative BNA that CMS applied in FY 2016 and

subsequent years. Pl.s’ Mot., ECF No. 21 at 33. Plaintiffs also

point to their Request for Expedited Judicial Review which

mentions that Plaintiffs took issue with the BNA from the first

year of its adoption in the FY 2016 IPPS/LTCH PPS Final Rule.

citing (AR at 37-49).

The Court is persuaded that it only has jurisdiction over

plaintiffs’ claim for Fiscal Year 2019. In this case, although

plaintiffs’ PRRB Appeal Request and their Request for Expedited

Judicial Review mentioned that the Secretary allegedly applied

an erroneous BNA to LTCH site neutral payments in years prior to

Fiscal Year 2019, plaintiffs only appealed the BNA for Fiscal

19 Year 2019. AR, ECF No. 27-1 at 83. Their Appeal Request

expressly stated: “The Providers in this group are challenging a

budget neutrality adjustment published in the August 17, 2018 FY

2019 IPPS/LTCH PPS Final Rule.”

(emphasis added). Although

plaintiffs noted that they had objected to the prior iterations

of the rule, these objections were not concrete challenges in

the “context of a fiscal year reimbursement claim.” See Three

Lower Ctys. Cmty. Health Servs., Inc. v. U.S. Dep't of Health &

Human Servs.,

, 3 (D.C. Cir. 2009). Moreover, in

addition to the Appeal Request’s focus on Fiscal Year 2019,

plaintiffs’ Request for Expedited Judicial Review also focused

on that same year. AR, ECF No. 27-1 at 52. Plaintiffs stated in

their request that the “Providers are directly challenging the

FY 2019 LTCH PPS site neutral HCO budget neutrality adjustment

in the final rule.” Id.; see also id. at 53 (“[T]he legal

question in these appeals is a challenge to the substantive and

procedural validity of a regulation--the BNA in the FY 2019

Final Rule.”).

The Court’s conclusion that it only has jurisdiction over

plaintiffs’ claims regarding FY 2019 is further supported by the

PRRB’s jurisdictional requirements. Under PRRB rules, an

applicant is required to file an appeal within 180 days of the

federal fiscal year end, (i.e., September 30), for the claimed

erroneous payment. See PRRB Rule 4.3; 7.1 , see also AR, ECF No.

20 27-1 at 83 (referencing 180-day appeal period). Plaintiffs had

only done so for FY 2019; indeed they listed the “final agency

determination” they were challenging as the “FY 2019 IPPS/LTCH

PPS Final Rule.” AR, ECF No. 27-1 at 88. Plaintiffs’ further

acknowledged that the Board had jurisdiction to hear a direct

appeal from the Final Rule; id., and it is clear from the record

that the only Final Rule that was timely challenged was the FY

2019 IPPS/LTCH PPS Final Rule published in the Federal Register

on August 17, 2018. Id. Accordingly, the PRRB only had

jurisdiction over the FY 2019 Rule, and the fact that the PRRB

lacked jurisdiction over any prior fiscal year further supports

the Court’s finding that the plaintiffs had failed to present

their claims for those years. See id. at 83 (referencing Fiscal

Year 2019 and explicitly stating plaintiffs challenged “FY2019

IPPS/LTCH PPS Final Rule.”). 3

Plaintiffs expressly limited their claim to FY 2019. Id.

Accordingly, the PRRB granted expedited judicial review only for

the Fiscal Year 2019. Id at 7. In granting the application, the

Board stated the issue as follows: “the legal question of

3 The FY 2020 rule became final on August 16, 2019.

(Aug. 16, 2019) The FY 2020 IPPS/LTCH PPS Final Rule contains budget neutrality adjustments that is identical to the BNAs CMS adopted in FY 2019. Although plaintiffs have failed to present its claim relating to the FY 2020 Rule to the PRRB, they seek to challenge the rule in this lawsuit. The Court need not decide whether this claim is ripe because, as the Court will explain, the identical 2019 FY Rule does not violate the APA.

21 [whether] the Secretary incorrectly applied the outlier budget

neutrality adjustment twice to the LTCH site neutral case

payments for FFY [Federal Fiscal Year] 2019 as delineated in the

August 17, 2018 Federal Register”.

The PRRB further made the

explicit finding that it had “jurisdiction over the matter for

the subject year and the Providers in these appeals are entitled

to a hearing before the Board.”

(emphasis added).

Because the only claim that was presented to the PRRB was the

claim of alleged erroneous application of the BNA to the Fiscal

Year 2019 (i.e., the “subject year”), the Court concludes that

it only has jurisdiction to review the issues arising under that

claim. 4

B. APA Claims

Plaintiffs advance two general arguments, one procedural

and one substantive. Plaintiffs’ first argument relates to the

requirements for notice and commenting under the APA. The second

argument relates to the alleged arbitrary and capricious actions

by the Secretary. The Court addresses each issue in turn.

1. Notice and Comment Obligations

Plaintiffs’ procedural argument is that the Secretary

failed to respond adequately to comments about the Secretary’s

4 The exhaustion requirement is not at issue in this case, PRRB granted plaintiffs’ request for expedited judicial review of the 2018 rule, thereby exhausting plaintiffs’ administrative remedies.

22 methodology for applying the BNA to the LTCH site neutral

payment rate. Pl.s’ Mot., ECF No. 21 at 40-41. A regulation will

be deemed arbitrary and capricious, if the issuing agency fails

to address significant comments raised by the challengers to a

rule during the notice and comment period. C.f. PPL Wallingford

Energy LLC v. FERC,

(D.C. Cir. 2005)(“An

agency's failure to respond meaningfully to objections raised by

a party renders its decision arbitrary and capricious.”).

Although an agency “need not address every comment” during the

notice and comment period, “it must respond in a reasoned manner

to those that raise significant problems.” Huntco Pawn Holdings,

LLC v. U.S. Dep’t of Defense,

(D.D.C.

2016)(citation and internal quotation marks omitted). However,

an agency’s obligation to respond to comments related to

proposed rulemaking is “not ‘particularly demanding.’” Ass’n of

Private Sector Colls. & Univs. v. Duncan,

, 441–42

(D.C. Cir. 2012)(quoting Pub. Citizen, Inc. v. FAA,

(D.C. Cir. 1993)). The agency's response to public

comments need only “enable us to see what major issues of policy

were ventilated . . . and why the agency reacted to them as it

did.” Auto. Parts & Accessories Ass'n v. Boyd,

(D.C. Cir. 1968). “[T]he failure to respond to comments is

significant only insofar as it demonstrates that the agency's

decision was not based on a consideration of the relevant

23 factors.” Texas Mun. Power Agency v. EPA,

(D.C.

Cir. 1996)(citation and internal quotation marks omitted).

Plaintiffs argue that the Secretary’s terse “three

sentence” response during the notice and comment period for the

FY 2019 IPPS/LTCH PPS Final Rule establishes that the agency

disregarded major issues raised by commenters about the

Secretary’s application of the BNA. Pl.s’ Mot., ECF No. 21 at

53–54. According to plaintiffs, “[t]here was no effort by CMS to

develop a substantive response to the commenters, who provided

additional information for CMS to consider and responded to CMS’

previous statements, and explain why the BNA is not duplicative

of the adjustment already applied to the IPPS payment rate used

to determine the IPPS comparable per diem amount.”

at 53

Plaintiffs’ contentions are belied by the administrative

record in this case. Although plaintiffs disagree with CMS’s

reasoning, CMS did provide a detailed explanation for why it

chose to apply the BNA to site neutral LTCH cases in every

fiscal year that the rule was applied. For Fiscal Years 2016-

2018, CMS provided a detailed analysis on why it disagreed with

the plaintiffs. See e.g.,

, 57308. For Fiscal

Year 2019, the only year at issue in this case, CMS expressly

referenced CMS’s earlier substantive responses and incorporated

the “reasons outlined in [CMS’s] response to the nearly

identical comments in the FY 2017 IPPS/LTCH PPS final rule (81

through 57309) and [CMS’s] response to similar comments

in the FY 2016 IPPS/LTCH PPS final rule (

through

49622).” 83 Fed. Reg. at 41738.

For each year CMS received comments regarding the budget

neutral adjustment methodology, CMS responded by indicating its

reasons for applying the BNA to the LTCH site neutral rate . See

id. For comments related to FY 2019, because its rationale had

not waivered, CMS simply referenced its prior responses to

nearly identical comments that it received in prior years.

at 41738. This Court finds CMS's acknowledgement

and consideration of the comments reasonable. CMS's responses

identified the major issues raised by the commenters and stated

the main reasons for its decisions. Accordingly, the Secretary

did not act arbitrary and capriciously for failure to adequately

respond to comments.

2.Secretary’s Interpretation of the Statute

In reviewing an agency's interpretation of a statute it is

charged with administering, a court must apply the framework of

Chevron USA, Inc. v. Natural Resources Defense Council, Inc.,

(1984). See Halverson v. Slater,

(D.C. Cir. 1997). Under the familiar Chevron two-step test, the

first step is to ask “whether Congress has directly spoken to

the precise question at issue. If the intent of Congress is

clear, that is the end of the matter; for the court, as well as

25 the agency, must give effect to the unambiguously expressed

intent of Congress.” Chevron, 467 U.S. at 842–43,

. In making that determination, the reviewing court “must

first exhaust the ‘traditional tools of statutory construction’

to determine whether Congress has spoken to the precise question

at issue.” Natural Res. Def. Council, Inc. v. Daley,

(2000)(citation omitted). The traditional tools of

statutory construction include “examination of the statute's

text, legislative history, and structure . . . as well as its

purpose.”

(internal citations omitted). If these tools lead

to a clear result, “then Congress has expressed its intention as

to the question, and deference is not appropriate.”

a. Chevron Step One

The Court’s first question is whether Congress has directly

spoken to the precise question at issue. As the plaintiffs have

pointed out, Congress has not spoken directly on the issue of

the methodology for applying the BNA to the LTCH PPS site

neutral payment rate. See Pl.s’ Mot., ECF No. 21 at 37. The

statute at issue defines the formula for site neutral payment

rate as the lower of the “IPPS comparable per diem amount

determined under paragraph (d)(4) of section 412.529(d)(4) of

title 42, Code of Federal Regulations, including any applicable

outlier payments under 412.15 of such title” or “100% of the

estimated cost for the services involved.”

1395WW(m)(6)(B)(ii). The referenced regulation in turn requires

the Secretary to calculate the site neutral payment using the

IPPS standardized amount and the IPPS Federal rate, both of

which incorporate the IPPS BNA. 42 C.F.R. 412.529(d)(4).

However, the statute is silent on the issue of whether it is

necessary to apply a BNA to the site neutral payment rate after

that rate is determined. Accordingly, the Court must move to

Chevron Step two and ask whether the Secretary’s interpretation

is reasonable.

b. Chevron Step Two

If a court finds that the statute is silent or ambiguous

with respect to a particular issue, then Congress has not spoken

clearly on the subject and a court is required to proceed to the

second step of the Chevron framework. Chevron,

.

Under Chevron step two, a court's task is to determine if the

agency's approach is “based on a permissible construction of the

statute.”

To make that determination, a court again employs

the traditional tools of statutory interpretation, including

reviewing the text, structure, and purpose of the statute. See

Troy Corp. v. Browder,

(D.C. Cir. 1997)(noting

that an agency's interpretation must “be reasonable and

consistent with the statutory purpose”). Ultimately, “[n]o

matter how it is framed, the question a court faces when

confronted with an agency’s interpretation of a statute it

27 administers is always, simply, whether the agency has stayed

within the bounds of its statutory authority.” District of

Columbia v. Dep't of Labor,

(D.C. Cir.

2016)(citation omitted).

The scope of review under both Chevron step two and the

APA's arbitrary and capricious standard are concededly narrow.

See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut.

Auto. Ins. Co.,

(1983)(stating “scope of review

under the ‘arbitrary and capricious’ standard is narrow and a

court is not to substitute its judgment for that of the

agency”); see also Judulang v. Holder,

, 52 n.7

(2011)(stating the Chevron step two analysis overlaps with

arbitrary and capricious review under the APA because under

Chevron step two a court asks “whether an agency interpretation

is ‘arbitrary or capricious in substance’”). Additionally, in

Medicare cases such as this, the “‘tremendous complexity of the

Medicare statute . . . adds to the deference which is due to the

Secretary’s decision.’” Dist. Hosp. Partners,

(quoting Methodist Hospital,

); see also Alaska

Airlines, Inc. v. TSA,

(D.C. Cir. 2009)

(agency decisions involving “complex judgments about . . . data

analysis that are within the agency’s technical expertise”

receive “an extreme degree of deference”)(citation omitted).

Ultimately, for such cases, the question for the Court is

28 whether “the Secretary’s methodology [is] a rational

interpretation of the Medicare Act to which the Court should

defer[.]” Adirondack Medical Center v. Sebelius,

(D.D.C. 2014).

Plaintiffs make several arguments all of which can be

distilled to one question: whether the Secretary’s methodology

for applying the BNA to the LTCH site neutral payment rate is a

reasonable interpretation of the Medicare statute. The parties

disagree as to the effect of the application of the BNA to the

site neutral rate. Plaintiffs argue that the BNA must be

duplicative because the Secretary applies the 5.1 percent BNA

reduction when calculating the site neutral payment rate and

then again once the rate has been calculated for a total of a

10.2 percent reduction. Pl.s’ Mot., ECF No. 21 at 38. Plaintiffs

concede, as they must, that the statute which prescribes the

formula for determining the IPPS comparable per diem rate (i.e.,

the site neutral rate) for LTCH cases requires the Secretary to

use the IPPS standard amount and the IPPS federal rate for the

calculation, both of which include a BNA.

. However,

plaintiffs argue, nowhere in the statute does it “say to use the

outlier BNAs” that are applied to those two calculations “nor

does it say to apply a separate BNA for outlier payments.”

The more reasonable approach, plaintiffs argue, would be to

either apply the negative 5.1 percent reduction to the IPPS rate

29 when calculating the site neutral payment rate, or apply the 5.1

percent to the final equation (the IPPS comparable per diem

amount without the BNA adjustments incorporated into the federal

rate and capital rate), but not both.

42–43.

The Secretary argues that plaintiffs misunderstand the

function of the IPPS BNA which is reflected in the site neutral

rate. Def.’s Cross-Mot, ECF No. 22 at 40. The Secretary further

explains that the IPPS BNA does not, and cannot, account for the

LTCH HCO because the IPPS is an altogether different payment

system than the LTCH PPS.

at 40–41. Rather, the Secretary

argues the IPPS reflects high cost outlier payments within IPPS,

but does not relate to the estimated amount CMS will pay for

HCOs related to the lengthier, more costly, LTCH stays. See

.

The Court cannot conclude that the Secretary’s explanation

for why he applies the BNA to the site neutral rate when

analyzing budget neutrality was an unreasonable or otherwise

arbitrary and capricious interpretation of 42 U.S.C. §

1395WW(m)(6)(B)(ii). In coming to this determination, the Court

recognizes that CMS has substantial discretion in implementing

the budget neutrality adjustment. See BIPA,

(b)(1),

, 2763A497 (2000) (codified at 42

U.S.C. § 1395ww, note)(granting discretion to the Secretary to

“provide for appropriate adjustments to the long-term hospital

30 payment system”); Adirondack Med. Ctr., 782 F.3d at 710

(addressing the Secretary’s “wide discretion” in “determining

how to meet Medicare’s budget neutrality requirements” in IPPS).

As the CMS has explained, while “the IPPS base rates that

are used in site neutral payment rate calculation include a

budget neutrality adjustment for IPPS HCO [high cost outlier]

payments, that adjustment is merely a part of the calculation of

one of the inputs (that is, the IPPS base rates) that are used

in the LTCH PPS computation of site neutral payment rate.” 80

Fed. Reg. at 49622. Critically, CMS has articulated its

reasoning for its view that the BNA that is incorporated into

the formula to determine the IPPS comparable per diem amount

does not account for LTCH outlier payments : “[t]he HCO budget

neutrality factor that is applied in determining the IPPS base

rates is intended to fund estimated HCO payment made under the

IPPS,” and “[a]s such, the HCO budget neutrality factor that is

applied to the IPPS base rates does not account for the

additional HCO payments that would be made to site neutral

payment rate cases under the LTCH PPS.” Id.

The Secretary determined that to maintain budget neutrality

within LTCH PPS, it is not sufficient to merely rely on

adjustments incorporated into certain of the inputs for the

calculation of the site neutral payment rate which account only

for outliers in IPPS hospitals. The Secretary’s solution to this

31 problem was to adjust for outlier payments in LTCH PPS, by

adjusting the site neutral payment rate amount itself.

(c)(2). As CMS further explained, “[w]ithout a budget

neutrality adjustment when determining payment for a case under

the LTCH PPS, any HCO payment payable to site neutral payment

rate cases would increase aggregate LTCH PPS payments” to a

level that disrupts budget neutrality. Such a result would

violate the congressional mandate to maintain budget neutrality.

BBRA,

,

, 1501A330

(1999)(codified at 42 U.S.C. § 1395ww, note)(stating that the

LTCH PPS “shall maintain budget neutrality.”).

Although Plaintiffs take issue with CMS’s classification of

the IPPS BNA as an ‘input’ to determine the site neutral rate,

their problem is with Congress not CMS. It was Congress that

determined that those would be the inputs to the site neutral

rate calculation. 42 U.S.C. § 1395ww(m)(6)(B)(ii)(stating that

the operating IPPS standardized amount and the capital IPPS

Federal rate would be used for the calculation of the per diem

comparable amount). Plaintiffs argue that Congress was not aware

that the Secretary would budget neutralize the high cost outlier

payments made to site neutral payment cases. See Pl.s’ Mot., ECF

No. 21 at 27. But Congress conferred broad authority on CMS and,

given CMS’s longstanding practice of budget neutralizing outlier

payments throughout the various Medicare payment systems,

32 including within the LTCH PPS (for standard Federal rate cases).

Under this backdrop, Congress expected the Secretary to do so in

site neutral case payments as well. Indeed, Congress required

the Secretary to calculate site neutral payment rates using

amounts that incorporate the IPPS BNA. 42 U.S.C. §

1395ww(m)(6)(B)(ii).

Furthermore, as the Secretary has explained, the term “IPPS

comparable per diem amount” was not new when Congress, in 2013,

directed CMS to compute that amount using the calculation

described at

(d)(4). 81 Fed. Reg. at 57308.

That regulation has been used since 2006 to calculate short stay

outlier (“SSO”) payments. Id. Short stay outliers are cases

where the length of stay is significantly less than the average,

(a), and those cases may be eligible for high

cost outlier payments if their costs are sufficiently high,

§ 412.525(a). To maintain budget neutrality for high cost

outlier payments for SSO cases (and also for high cost outlier

payments for non-SSO standard Federal rate cases), CMS applies a

BNA to the standard Federal rate, reducing it by 8%. id. §

412.523(d)(1). CMS does so even though the short stay outlier

calculation uses inputs that already reflect an application of

the IPPS BNA. Congress was well aware of how CMS had implemented

the “IPPS comparable per diem amount” language in the short stay

outlier context. Thus, in using that same term to define the

33 site neutral payment rate and in providing that the IPPS

comparable per diem amount is to include “any applicable outlier

payments,” Congress presumably understood that CMS would budget

neutralize the high cost outlier payments for site neutral

cases, just as CMS had been doing for years for SSO cases. See

Lorillard v. Pons,

(1978) (“[W]here, as here,

Congress adopts a new law incorporating sections of a prior law,

Congress normally can be presumed to have had knowledge of the

interpretation given to the incorporated law, at least insofar

as it affects the new statute.”).

Moreover, even assuming an alternative approach to budget

neutrality in LTCH PPS exists and could be considered preferable

to the Secretary’s approach, an agency “is not required to

choose the best solution, only a reasonable one.” Petal Gas

Storage, L.L.C. v. FERC,

(D.C. Cir. 2007); see

also North Carolina v. FERC,

(D.C. Cir.

1997)(stating that although certain estimates an agency used may

have been less reasonable than other available data, “the fact

that these estimates were less ‘reasonable’ does not necessarily

make them unreasonable or arbitrary”). For these reasons, the

Court concludes that the Secretary reasonably determined that

the BNA for site neutral payments is an “appropriate

adjustment[]” that maintains budget neutrality within LTCH PPS.

BIPA, § 307(b)(1); see also Entergy Corp. v. Riverkeeper, Inc.,

34

(2009) (the agency’s “view governs if it is a

reasonable interpretation of the statute—not necessarily the

only possible interpretation, nor even the interpretation deemed

most reasonable by the courts.”).

Plaintiffs make several arguments that require minimal

attention by the Court because they all rest on the faulty

premise that the Secretary has applied a duplicative BNA. First,

plaintiffs’ argument that the Secretary failed to take a hard

look at the issue is belied by the extensive responses during

the notice and comment period. Second, plaintiffs’ argument that

the Secretary’s decision to apply the BNA is internally

inconsistent is based on the flawed assumption that the

challenged BNA reduces site neutral payments to a level that is

below the budget neutral baseline. Finally, plaintiffs’ general

argument that the Secretary made a clear error of judgment fails

because the plaintiffs have not identified an error “so clear as

to deprive the agency’s decision of a rational basis.” See Ethyl

Corp v. EPA,

, 34 n.74 (D.C. Cir. 1976). 5

5 Plaintiffs also argue that the Secretary’s decision was not supported by substantial evidence. This standard, however, “does not apply in the rule making context. See Select Specialty Hosp. Akron, LLC v. Sebelius,

(D.D.C. 2011) (stating substantial evidence standard only applies to agency findings of fact made after a hearing). Indeed, there is no evidence or findings of fact for this Court to review in this case.

35 C. Federal Law Claims

The Court will briefly address plaintiffs’ arguments that

the Secretary’s interpretation violates federal law. Plaintiffs

principal arguments are that the BNA violates the Social

Security Act’s dual-rate structure, and that it violates

Medicare’s prohibition on cost-shifting. Pl.s.’ Mot. ECF No. 21

at 56–57.

Plaintiffs first argue that, by applying an alleged

duplicative BNA, the Secretary is paying LTCH site neutral cases

at a rate other than the site neutral rate contemplated by the

statute.

. Further, plaintiffs argue, because LTCHs

alleged may receive lower payments to which they are entitled

the Secretary’s methodology violates the statutory mandate that

site neutral payments be comparable to IPPS payments when

compared to a per diem basis.

The problem with this argument

is that the statute does not require exact payment equality but

rather just comparable payments. Indeed, the statutory

requirement in 42 U.S.C. § 1395ww(m)(6)(B)(ii) that CMS pays the

estimated cost for the services involved for a site neutral case

if that cost is lower than the comparable IPPS per diem amount

already creates a differential. See 80 Fed. Reg. at 49619.

Moreover, when Congress wants LTCHs to be paid equivalently to

IPPS hospitals it has used clear language requiring identical

payments. See 42 U.S.C. § 1395ww(m)(6)(C)(directing hospital to

36 pay, in certain circumstances, “amount that would apply under

[the subsection pertaining to IPPS hospitals] for the discharge

if the hospital were a [IPPS hospital.]”).

Plaintiffs second argument is that the Secretary violates

Medicare’s prohibition on cost-shifting. Pl.s’ Mot. ECF No. 21

at 57. This prohibition mandates that the costs of delivering

services may not be borne by individuals who are not covered by

Medicare. 42 U.S.C. § 1395x(v)(1)(A). Plaintiffs argue that the

allegedly duplicative BNA violates the cost-shifting prohibition

because it results in Medicare costs being borne by non-Medicare

beneficiaries. However, the cost shifting prohibition applies

only to reimbursements based on “reasonable costs” and therefore

is not relevant to this case. See 42 U.S.C. §

1395x(v)(1)(A)(explaining that in determining reasonable costs

the necessary costs of efficiently delivering covered services

will not be borne by individuals not covered by Medicare); see

also Abington Crest Nursing & Rehab. Ctr. v. Sebelius,

(D.C. Cir. 2009). Moreover, plaintiffs cite no evidence

that shows that any costs are borne by non-Medicare

beneficiaries due to the Secretary’s methodology for budget

neutrality.

In sum, plaintiffs have failed to show that the Secretary’s

interpretation of the Medicare statue was unreasonable or

otherwise contrary to law. The Secretary has provided reasoned

37 explanations for his view that failure to apply a BNA to the

site neutral rate for LTCHs will result in a failure to account

for HCOs in those settings. Although plaintiffs may disagree

with the Secretary, they have not shown that his policy is

“unworthy of deference, inadequately explained, or an

unreasonable decision disconnected from the realities of

hospital reimbursements under Medicare.” See Adirondack Med.

Ctr.,

. Accordingly the Court GRANTS

defendant’s cross-motion for summary judgment and DENIES

plaintiffs’ motion.

IV. Conclusion

For the foregoing reasons the Court GRANTS defendant’s

cross-motion for summary judgment, and DENIES plaintiffs’

motion.

SO ORDERED.

Signed: Emmet G. Sullivan United States District Judge September 30, 2019

38