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Mercy Hospital, Inc. v. Azar

United States Court of Appeals, District of Columbia Circuit

June 8, 2018

Mercy Hospital, Inc., Appellant
Alex M. Azar II, Secretary, United States Department of Health and Human Services, Appellee

          Argued October 24, 2017

          Appeal 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.

          Abby C. Wright, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief was Michael S. Raab, Attorney.

          Before: Tatel, Griffith and Millett, Circuit Judges.



         The 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 court.



         In 42 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 step two.

         Paragraph (3) of subsection (j) sets forth five adjustments (the "statutory adjustments") that CMS applies in step two to calculate each hospital's particular reimbursement.[1] Each of the first four of these adjustments is described elsewhere in subsection (j).[2] 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.

         CMS 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.


         Appellant 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).

         The 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.

         On June 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 ...

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