United States Court of Appeals, District of Columbia Circuit
October 24, 2017
from the United States District Court for the District of
Columbia (No. 1:15-cv-01236)
Stephanie A. Webster argued the cause for appellant. With her
on the briefs was Christopher L. Keough. James H. Richards
entered an appearance.
C. Wright, Attorney, U.S. Department of Justice, argued the
cause for appellee. With her on the brief was Michael S.
Before: Tatel, Griffith and Millett, Circuit Judges.
GRIFFITH, CIRCUIT JUDGE:
Centers for Medicare and Medicaid Services (CMS), a division
of the Department of Health and Human Services (HHS),
administers Medicare reimbursements to eligible hospitals
that provide inpatient rehabilitation services. The
Administrator of CMS declined to hear Mercy Hospital's
challenge to its reimbursement rate for fiscal years 2002
through 2004 because he interpreted a statutory provision
that precluded administrative and judicial review of the
reimbursement rate to also preclude review of the underlying
formula that helped determine that rate. Mercy Hospital
appealed his decision to the district court, which agreed
with the Administrator and dismissed the challenge for lack
of subject-matter jurisdiction. We agree with the district
U.S.C. § 1395ww(j), Congress directs CMS to set rates
for Medicare reimbursements for inpatient rehabilitation
services in two steps. The first step takes place before the
beginning of the fiscal year, when CMS generates a
standardized reimbursement rate for each discharged patient,
called a payment unit, based on the average estimated costs
of operating inpatient facilities and treating patients for
the upcoming year. The second step takes place after the
fiscal year ends, when CMS adjusts the standardized rates to
reflect the particular circumstances of each hospital for
that year. Typically, CMS hires independent contractors (the
"Medicare Contractors") to calculate each
hospital's final payment from the standardized rates
established at step one and subsequent adjustments made at
(3) of subsection (j) sets forth five adjustments (the
"statutory adjustments") that CMS applies in step
two to calculate each hospital's particular
reimbursement. Each of the first four of these
adjustments is described elsewhere in subsection
The last adjustment we call a "residual" clause,
which allows CMS to create any additional adjustments
"necessary to properly reflect variations in necessary
costs of treatment among rehabilitation facilities."
§ 1395ww(j)(3)(A)(v). Alone among the statutory
adjustments, the meaning of the residual clause is not set
forth in the text of the statute but in rules of CMS's
own making. Id.
invoked the residual clause in 2001 to create a low-income
percentage (LIP) adjustment, which increases hospital
payments based on the number of low-income patients served
during the preceding fiscal year. 42 C.F.R. §
412.624(e)(2); Prospective Payment System, 66 Fed. Reg. 41,
315, 41, 360 (Aug. 7, 2001). In 2004, CMS changed how to
determine which patients should be included in a particular
variable that is used in the LIP formula. Changes to the
Hospital Inpatient Prospective Payment Systems, 68 Fed. Reg.
48, 916, 49, 099 (Aug. 11, 2004). As a result, some hospitals
would receive a lower LIP payment than before. In
Northeast Hospital Corp. v. Sebelius, 657 F.3d 1
(D.C. Cir. 2011), we reviewed a different Medicare rate and
held that CMS could use the 2004 version of that variable
only for fiscal years 2005 and forward. Id. at 18.
Mercy Hospital operates an inpatient rehabilitation facility
that is eligible for Medicare reimbursements. For fiscal
years 2002 through 2004, the Medicare Contractor used the
amended LIP formula to adjust Mercy Hospital's step-one
reimbursement rate. Mercy Hospital appealed this adjustment
to the Provider Reimbursement Review Board (the
"Board"), which is the CMS oversight panel for
hospital reimbursements, 42 U.S.C. § 1395oo(a)(1)(A)(i),
arguing that our decision in Northeast Hospital
precluded use of the 2004 formula for years before 2005.
Mercy Hosp. v. First Coast Serv. Options, Inc.,
P.R.R.B. Dec. No. 2015-D7, 2015 WL 10381780 (Apr. 3, 2015).
Medicare Contractor argued that the Board had no jurisdiction
to consider the hospital's challenge because §
1395ww(j)(8)(B) bars administrative and judicial review of
"prospective payment rates." Id. at *2.
The Medicare Contractor explained that "prospective
payment rates" means reimbursement rates calculated at
step two, and that by precluding their review, (8)(B)
necessarily bars review of how the LIP adjustments are
calculated. Id. On April 3, 2015, the Board rejected
that challenge to its jurisdiction and ordered that the
Medicare Contractor recalculate Mercy Hospital's
reimbursement using the original, pre-2004 LIP formula.
Id. at *7.
1, 2015, the Administrator of CMS in his role as the highest
administrative review authority reversed the Board's
finding of jurisdiction and adopted the Medicare
Contractor's interpretation of "prospective payment
rates" that barred review of step-two rates and the LIP
formula. Mercy Hosp. v. First Coast Serv. Options,
Inc., Review of P.R.R.B. Dec. No. 2015-D7, 2015 WL
3760091, at *11 (June 1, 2015). Mercy Hospital brought suit
in the district court challenging the Administrator's
decision. The district court agreed with the
Administrator's interpretation of the ...