Banner Health v. Sebelius

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

BANNER HEALTH f/b/o BANNER GOOD

SAMARITAN MEDICAL CENTER, et al.,

Plaintiffs,

v. Civil Action No. 10-01638 (CKK)

SYLVIA M. BURWELL, Secretary,

Department of Health and Human Services,

Defendant.

MEMORANDUM OPINION

(July 7, 2014)

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the

Medicare program. They have sued the Secretary of the Department of Health and Human

Services (the “Secretary”), challenging certain regulatory actions taken by her in the course of

administering Medicare’s reimbursement scheme. 1 Plaintiffs allege that as a result of the

Secretary’s flawed promulgation and implementation of various payment regulations, they were

deprived of more than $350 million dollars in Medicare “outlier” payments for services provided

during fiscal years ending 1998 through 2006. Presently before the Court is Plaintiffs’ [108]

Motion for Leave to Further Amend and Supplement First Amended Complaint. Plaintiffs seek

to add allegations and claims under 5 U.S.C. § 553 regarding the Secretary’s failure to disclose a

2003 Interim Final Rule. Upon a review of the parties’ submissions 2, the applicable authorities,

1

Pursuant to Fed. R. Civ. P. 25(d), Sylvia Mathews Burwell has been automatically

substituted for Kathleen Sebelius, whom the parties’ pleadings name as Defendant.

2

Pls.’ Mot. for Leave to Further Amend and Supplement First Am. Compl., ECF No.

[108] (“Pls.’ Mot.”); Pls.’ Mem. of P. & A. in Supp. of Pls.’ Mot. for Leave to Further Amend

and Supplement First Am. Compl., ECF No. [108] (“Pls.’ Mem.”); Pls.’ Amendments and

and the record as a whole, the Court shall GRANT IN PART and DENY IN PART Plaintiffs’

motion to amend the complaint. The Court denies Plaintiffs leave to amend their complaint to

include claims that the Secretary’s failure to disclose the Interim Final Rule and its contents

violated 5 U.S.C. § 553. However, the Court grants Plaintiffs leave to amend their complaint to

include factual allegations concerning the Interim Final Rule.

I. BACKGROUND

The relevant statutory and regulatory background underlying Plaintiffs’ claims and the

lengthy procedural history of this litigation are set out in detail in the Court’s prior opinions. See

Banner Health v. Sebelius, 797 F. Supp. 2d 97 (D.D.C. 2011); id., 905 F.Supp.2d 174 (D.D.C.

2012); id., 945 F.Supp.2d 1 (D.D.C. 2013). Accordingly, the Court provides herein only a brief

summary of the facts and history of this case, as relevant to the present motion.

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the

Medicare program. Am. Compl., ECF No. [16], ¶ 22. On December 23, 2010, Plaintiffs filed

their Amended Complaint, which remains the operative iteration of the Complaint in this action.

See Am. Compl., ECF No. [16]. As this Court has previously observed, Plaintiffs’ Amended

Complaint is “sprawling”; it contains over two hundred paragraphs, spans fifty-nine pages, and

appends two lengthy exhibits. Plaintiffs challenge the validity of a series of regulations

establishing the methodology for calculating outlier payments (the “Outlier Payment

Regulations”), 42 C.F.R. §§ 412.80-412.86, as well as the Secretary’s annual promulgation of the

Supplements to First Am. Compl., ECF No. [108-1] (“Pls.’ Proposed Amendments”); Def.’s

Mem. of P. & A. in Opp’n to Pls.’ Mot. for Leave to Amend. Compl., ECF No. [109] (“Def.’s

Opp’n”); Pls.’ Reply to Def.’s Opp’n Regarding Leave to Amend the Compl., ECF No. [110]

(“Pls.’ Reply”); Pls.’ Notice of Suppl. Auth., ECF No. [112] (“Pls.’ Notice”); Def.’s Resp. to

Pls.’ Notice of Suppl. Auth., ECF No. [113] (“Def.’s Notice Resp.”).

2

regulations through which she set the fixed loss threshold for the upcoming fiscal year, for fiscal

years 1998 through 2006 (the “Fixed Loss Threshold Regulations”). 3

In enacting a system for Medicare reimbursement, “Congress recognized that health-care

providers would inevitably care for some patients whose hospitalization would be extraordinarily

costly or lengthy” and devised a means to “insulate hospitals from bearing a disproportionate

share of these atypical costs.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009 (D.C. Cir.

1999). Specifically, Congress authorized the Secretary to make supplemental “outlier” payments

to eligible providers. Id. Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A). See

also 42 C.F.R. §§ 412.80-412.86 (implementing regulations). Each fiscal year, the Secretary

determines a fixed dollar amount that, when added to the DRG prospective payment – the

standardized calculation for how much a hospital is paid for treating a particular case – serves as

the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii),

(iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar amount is known as the “fixed loss

threshold.” If a hospital’s approximate costs actually incurred in treating a patient exceed the

sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is

3

See MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE

PAYMENT SYSTEMS AND FISCAL YEAR 1998 RATES, 62 Fed. Reg. 45,966 (Aug. 29, 1997);

MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS

AND FISCAL YEAR 1999 RATES, 63 Fed. Reg. 40,954 (July 31, 1998); CHANGES TO THE HOSPITAL

INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2000 RATES, 64 Fed. Reg. 41,490

(July 30, 1999); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND

FISCAL YEAR 2001 RATES, 65 Fed. Reg. 47,054 (Aug. 1, 2000); CHANGES TO THE HOSPITAL

INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND RATES AND COSTS OF GRADUATE MEDICAL

EDUCATION: FISCAL YEAR 2002 RATES, 66 Fed. Reg. 39,828 (Aug. 1, 2001); CHANGES TO THE

HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2003 RATES, 67 Fed.

Reg. 49,982 (Aug. 1, 2002); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT

SYSTEMS AND FISCAL YEAR 2004 RATES, 68 Fed. Reg. 45,346 (Aug. 1, 2003); CHANGES TO THE

HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2005 RATES, 69 Fed.

Reg. 48,916 (Aug. 11, 2004); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT

SYSTEMS AND FISCAL YEAR 2006 RATES, 70 Fed. Reg. 47,278 (Aug. 12, 2005).

3

eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R.

§ 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that

a hospital must absorb in any case in which the hospital incurs estimated actual costs in treating a

patient above and beyond the DRG prospective payment rate. An increase in the fixed loss

threshold reduces the number of cases that will qualify for outlier payments as well as the

amount of payments for qualifying cases.

As noted, the Secretary “establish[es] the fixed [loss] thresholds beyond which hospitals

will qualify for outlier payments” at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d

at 1009. In each of the fiscal years at issue in this action, the Secretary set fixed loss thresholds

at a level so that the anticipated total of outlier payments would equal 5.1% of the anticipated

total of payments based on DRG prospective payment rates. Similarly, the amount of the outlier

payment is “determined by the Secretary” and must “approximate the marginal cost of care”

beyond the fixed loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). During the time period

relevant to this action, the implementing regulations generally provided for outlier payments

equal to eighty percent of the difference between the hospital’s estimated operating and capital

costs and the fixed loss threshold. See 42 C.F.R. § 412.84(k).

In this litigation, Plaintiffs claim that the Outlier Payment Regulations, in the form they

existed prior to 2003, 4 contained “vulnerabilities” that made them “uniquely susceptible to

manipulation” by unscrupulous hospitals. Am. Compl. ¶¶ 52-98, 138. According to Plaintiffs,

4

The Outlier Payment Regulations were first enacted in 1985 and have been revisited

periodically over the years, most notably in 1988 and 2003. See MEDICARE PROGRAM; CHANGES

TO IMPLEMENT THE INPATIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM AND FISCAL YEAR

1989 RATES, 53 Fed. Reg. 38,476 (Sept. 30, 1988); MEDICARE PROGRAM; CHANGE IN

METHODOLOGY FOR DETERMINING PAYMENT FOR EXTRAORDINARILY HIGH-COST CASES (COST

OUTLIERS), 68 Fed. Reg. 34,494 (June 9, 2003). Plaintiffs’ allegations are directed principally

towards the regulations in the form in which they were enacted in 1988. See, e.g., Am. Compl.

¶¶ 75-85, 98, 107-10.

4

these “vulnerabilities” in the Outlier Payment Regulations allowed unscrupulous hospitals to

submit excessive reimbursement claims, “led to massive overpayments” to the wrong hospitals,

prompted the Secretary to raise the fixed loss threshold at the beginning of each fiscal year as a

misguided countermeasure, and ended with Plaintiffs being denied the outlier payments “to

which they were entitled.” Id. ¶ 55.

Regarding the Fixed Loss Threshold Regulations, Plaintiffs contend that the Secretary,

faced with an “aberrantly high” level of projected outlier payments caused by a flood of

excessive reimbursement claims, made no attempt to diagnose the actual source of the problem

but instead, as a misguided countermeasure, made “enormous, unprecedented and irrational

increases” in the fixed loss threshold for the fiscal years at issue in this action, and did so without

providing an adequate, reasoned explanation for the increases. See id. ¶¶ 14, 69, 112, 114, 119,

121, 125-26, 129-38, 147-48, 155-61. Plaintiffs contend that the Secretary’s failure to account

for flaws in the Fixed Loss Threshold Regulations led to an irrational increase in the fixed loss

thresholds for fiscal years 1998 through 2006, which allegedly had the ultimate effect of

reducing the number of Plaintiffs’ cases that qualified for outlier payments and the amount of

payments for those cases that did qualify. Id. ¶ 50.

Accordingly, Plaintiffs challenge the promulgation and implementation of the following

agency actions: three sets of Outlier Payment Regulations promulgated in 1988, 1994, and 2003;

and eleven sets of Fixed Loss Threshold Regulations for federal fiscal years 1997 through 2007.

In addition, Plaintiffs challenge outlier payment determinations specific to each of the hospital

Plaintiffs.

On March 23, 2012, Plaintiffs filed a motion to compel, requesting that the Court order

the Secretary to file the “complete administrative record,” by supplementing the records she had

5

previously filed with various documents, including certain data files, identified by Plaintiffs and

all other documents that were before the agency in connection with its rulemakings, and further

order the Secretary to certify to the Court and Plaintiffs the completeness of the administrative

record. See Pls.’ Renewed Mot. to Compel Def. to File the Complete Admin. Record and to

Certify Same, ECF No. [60]. On May 16, 2013, the Court granted-in-part and denied-in-part

Plaintiffs’ motion to compel, and ordered the Secretary to supplement the administrative record

in this matter with several categories of materials. See Banner Health, 945 F.Supp.2d 1; Order

(May 16, 2013), ECF No. [82]. Among the materials the Court ordered added to the

administrative record was a February 2003 draft interim final rule (“Interim Final Rule”). As

discussed at length in the Court’s prior Memorandum Opinion, the Interim Final Rule was

“exchanged between HHS and [the Office of Management and Budget (“OMB”)][5] pursuant to

Executive Order 12866, which requires HHS to submit major rulemakings to OMB for review”

and which “also requires that, after the regulation becomes final, OMB must make available to

the public all documents exchanged between it and the agency during the interagency review.”

Banner Health, 945 F.Supp.2d at 24 (citing 58 Fed. Reg. 51735, Exec. Order No. 12866 §

6(b)(4)(D)). Plaintiffs learned of the Interim Final Rule in February 2012 in response to a

Freedom of Information Act request to OMB. Pls.’ Mem. at 1. The document itself is a “sixty-

page Interim Final Rule sent, over the signature of then HHS Secretary, Tommy G. Thompson,

to OMB for review and approval in early 2003.” Banner Health, 945 F.Supp.2d at 24.

The Court explained the significance of the Interim Final Rule as follows:

5

OMB is tasked with carrying out coordinated review of agency rulemaking to ensure

that regulations are consistent with applicable law, the priorities of the President, and the

principles set forth in Executive Order 12866. See 58 Fed. Reg. 51735, Exec. Order No. 12866 §

2(b).

6

[O]f the many agency actions challenged in this case is the Secretary’s

promulgation and application, in 2003, of invalid amended Outlier Payment

Regulations and Fixed Loss Threshold Regulations. Plaintiffs argue that, in the

Federal Register sections related to the rulemakings challenged in this case, the

Secretary has variously stated that (a) there were no critical flaws in its Outlier

Payment Regulations – and then, in 2003, that there were three fatal flaws, (b)

that the agency had always used the best available data – and then, in 2003, that

other data, which had previously been available and was better, should be used,

and (c) that it would not make retroactive corrections to outlier payments – and

then, in 2003, that retroactive corrections would be made. Plaintiffs further

contend that in mid-2003, while the agency was in the process of reversing its

position on each of these points, the Secretary should have taken the opportunity

to lower the fixed loss threshold to correct for what the agency openly

acknowledged had been the improper distribution of outlier funds to “turbo

charging” hospitals, but instead, in June of 2003, promulgated amended

regulations which left the threshold at its previous level, $33,560. As

explanation, [the Centers for Medicare and Medicaid Services (“CMS”)][6]

stated that “in light of the relatively small difference between the current

threshold and our revised estimate, and the limited amount of time remaining in

the fiscal year, we have concluded it is more appropriate to maintain the

threshold at $ 33,560.” A.R. at 4408 (68 Fed. Reg. at 34506).

Plaintiffs contend that the Interim Rule, which was approved by Secretary

Thompson on February 6, 2003 and submitted for OMB’s review on February

12, 2003, tells a different story. Specifically, Plaintiffs explain that the Interim

Final Rule contains HHS’s conclusion, with supporting facts and analysis, that

the public interest required it, mid-year, to lower its FY 2003 fixed loss

threshold from $33,560 to $20,760 – in other words, that the threshold was

approximately 62% higher than it should have been. Upon the Court’s own

review of the document, HHS does appear to have proposed to OMB a

reduction of the outlier threshold to $20,760, to be effective as of the date of

publication of the interim rule. Further, HHS acknowledged that the prior

increase in the threshold was due to relatively few hospitals with extraordinary

rates of increase in their charges, causing many truly high-cost cases not to

qualify for outlier payments; HHS therefore proposed that the Interim Final

Rule reducing the threshold be implemented without prior notice and comment

procedures, so as not to extend the duration of these payment inequities.

Plaintiffs observe, however, that the Secretary’s proposed rule, issued on

February 28, 2003 – just over two weeks after HHS submitted the Interim Final

Rule to OMB – makes no mention of the data and analysis stated in the Interim

Final Rule. … [See] [ ] A.R. at 4386-4395 (68 Fed. Reg. at 10420-10429).[7]

Therefore, Plaintiffs argue, inclusion of the Interim Final Rule in the

administrative record is necessary to show significant alternatives, facts, other

6

The Medicare program is administered by the Secretary through CMS.

7

The proposed rule was issued by HHS for publication on February 28, 2003, and

subsequently published on March 5, 2003. See A.R. at 4395 (68 Fed. Reg. at 10429).

7

data and analyses that HHS considered in the rulemaking process, but that were

directly contrary to its published regulations which maintained the threshold at

$33,650. Plaintiffs also argue that this document goes to the heart of

establishing the Secretary’s promulgation of and continued application of

invalid Fixed Loss Threshold Regulations as arbitrary and capricious, because it

demonstrates that the agency knew that lowering the threshold would correct the

problems engendered by its earlier regulations and believed it was obligated to

do so immediately, but did not.

Id. at 25-26 (internal citations to the parties’ pleadings omitted).

In view of the foregoing, the Court found that Plaintiffs had “made a sufficient showing

that ‘unusual circumstances’ warrant supplementation of the administrative record – namely, that

‘the agency deliberately or negligently excluded documents that may have been adverse to its

decision.’” Id. at 26 (citing City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010)).

On July 30, 2013, the Court denied the Secretary’s motion for reconsideration of the decision to

require inclusion of the Interim Final Rule in the administrative record. See Order (July 30,

2013), ECF No. [96]. The Secretary filed the administrative record in this action on July 31,

2013.

After the Court resolved issues relating to the completeness of the administrative record,

this case moved to the scheduling of summary judgment briefing. Subsequently, however, the

Secretary sought leave to file an additional motion to dismiss for lack of subject matter

jurisdiction. See Def.’s Mot. for Leave to File Mot. to Dismiss for Lack of Subject Matter

Jurisdiction, ECF No. [99]. The Court granted the Secretary’s request, but ordered that the

Secretary file this motion “simultaneously with, and in the alternative to, Defendant’s cross-

motion for summary judgment.” Order (Aug. 13, 2013), ECF No. [102] at 1. The Court set a

deadline of October 25, 2013 for the parties’ initial summary judgment briefs and directed the

parties to file a joint status report by October 4, 2013 “(a) outlining in bullet-point format the

arguments the parties intend to raise in support of or in opposition to summary judgment; and (b)

8

indicating the extent to which there is a need to expand the page limits placed on memoranda of

points and authorities by the Local Rules of this Court.” Id. at 4. In this subsequently filed Joint

Status Report 8, Plaintiffs indicated, for the first time, their intention to file a Motion for Leave to

Further Amend and Supplement the First Amended Complaint in light of the addition of the

Interim Final Rule to the administrative record. See Joint Status Report and Mot. to Reset

Briefing Schedule, ECF No. [107]. In light of this request, the Court delayed the scheduled

summary judgment briefing pending resolution of Plaintiffs’ motion to amend. See Minute

Order (Oct. 22, 2013). Plaintiffs subsequently filed their Motion for Leave to Further Amend

and Supplement First Amended Complaint. Defendant filed an Opposition, and Plaintiffs filed a

Reply. Accordingly, the motion is now ripe for review.

II. LEGAL STANDARD

Under the Federal Rules of Civil Procedure, a party may amend its pleadings once as a

matter of course within a prescribed time period. See Fed. R. Civ. P. 15(a)(1). Where, as here, a

party seeks to amend its pleadings outside that time period, it may do so only with the opposing

party’s written consent or the district court’s leave. See Fed. R. Civ. P. 15(a)(2). The decision

whether to grant leave to amend a complaint is entrusted to the sound discretion of the district

court, but leave “should be freely given unless there is a good reason, such as futility, to the

contrary.” Willoughby v. Potomac Elec. Power Co., 100 F.3d 999, 1003 (D.C. Cir. 1996), cert.

denied, 520 U.S. 1197 (1997). As the Supreme Court has observed:

If the underlying facts or circumstances relied upon by a plaintiff may be a proper

subject of relief, he ought to be afforded an opportunity to test his claim on the

merits. In the absence of any apparent or declared reason—such as undue delay,

bad faith or dilatory motive on the part of the movant, repeated failure to cure

8

In light of the lapse of appropriations for the Department of Justice from October 1,

2013 through October 16, 2013, the deadline for this joint status report was subsequently

extended to October 21, 2013. See Minute Order (Oct. 18, 2013).

9

deficiencies by amendments previously allowed, undue prejudice to the opposing

party by virtue of allowance of the amendment, futility of amendment, etc. – the

leave sought should, as the rules require, be “freely given.”

Foman v. Davis, 371 U.S. 178, 182 (1962). “[A] district court has discretion to deny a motion to

amend on grounds of futility where the proposed pleading would not survive a motion to

dismiss.” Nat’l Wrestling Coaches Ass’n v. Dep’t of Educ., 366 F.3d 930, 945 (D.C. Cir. 2004),

cert. denied, 545 U.S. 1104 (2005). Review for futility is practically “identical to review of a

Rule 12(b)(6) dismissal based on the allegations in the amended complaint.” In re Interbank

Funding Corp. Secs. Litig., 629 F.3d 213, 215-16 (D.C. Cir. 2010) (quotation marks omitted).

Because leave to amend should be liberally granted, the party opposing amendment bears the

burden of coming forward with a colorable basis for denying leave to amend. Abdullah v.

Washington, 530 F.Supp.2d 112, 115 (D.D.C. 2008). 9

III. DISCUSSION

Plaintiffs’ proposed motion to amend consists of two components. First, Plaintiffs seek

to add claims under 5 U.S.C. § 553 that “the Secretary did not allow for meaningful public

comment when she failed to disclose data, analysis and conclusions which had been set forth in

the Interim Final Rule, and were adverse to the determinations the Secretary later proposed and

9

Plaintiffs argue that the Court should also apply Rule 15(d), under which “the court

may, on just terms, permit a party to serve a supplemental pleading setting out any transaction,

occurrence, or event that happened after the date of the pleading to be supplemented.” Fed. R.

Civ. P. 15(d). Plaintiffs argue Rule 15(d) is applicable here because they are seeking to add

allegations concerning when they became aware of the Interim Final Rule, an event that occurred

in February 2012, after the filing of the First Amended Complaint. Pls.’ Mem. at 2-3.

Defendant, by contrast, argues Plaintiffs’ motion only implicates Rule 15(a) and that Rule 15(d)

does not apply here “because the proposed amendments pertain to events before the filing of the

action.” Def.’s Opp’n at 3 n.1. The Court need not resolve this dispute because, as both parties

concede, “[c]ourts resolve Rule 15(d) motions under the same standard as they resolve motions

to amend under Rule 15(a).” Tereschuk v. Bureau of Prisons, 851 F.Supp.2d 157, 162 n. 6

(D.D.C. 2012). See also Wildearth Guardians v. Kempthorne, 592 F.Supp.2d 18, 23 (D.D.C.

2008). Accordingly, whether considered under Rule 15(a) or Rule 15(d), the same standard

governs Plaintiffs’ requests.

10

finalized in her subsequent published rulemakings relating to the Outlier Payment Regulations

and the [Fixed Loss Threshold] Regulations in 2003 through 2007.” Pls.’ Proposed

Amendments at 1. Second, Plaintiffs seek to add factual allegations relating to when they

became aware of the Interim Final Rule. Pls.’ Mem. at 2. For the reasons discussed below, the

Court concludes that the former proposed amendment is improper while the latter is appropriate.

A. Proposed Additional Claims Under 5 U.S.C. § 553

Defendant argues that Plaintiffs’ motion should be denied because the proposed

additional claims under 5 U.S.C. § 553 are futile as contrary to D.C. Circuit precedent. Def.’s

Opp’n at 8. The Court agrees that Plaintiffs’ claims are not appropriate under § 553, and for this

reason, leave to amend the complaint to add these additional claims is denied.

In their proposed Amended Complaint, Plaintiffs state that by failing to disclose data,

analysis, and conclusions which had been set forth in the Interim Final Rule which were adverse

to the determinations the Secretary later proposed and finalized in her subsequent published

rulemakings relating to the Outlier Payment Regulations and the [Fixed Loss Threshold]

Regulations in 2003 through 2007, the Secretary violated 5 U.S.C. § 553 by preventing

meaningful public comment on these rulemakings. Pls.’ Proposed Amendments at 1. The D.C.

Circuit has long adhered to the principle that “[i]t is not consonant with the purpose of a rule-

making procedure to promulgate rules on the basis of inadequate data, or on data that, [to a]

critical degree, is known only to the agency.” Portland Cement Ass’n v. Ruckelshaus, 486 F.2d

375, 393 (D.C. Cir. 1973). Therefore, “an agency’s failure to disclose critical material, on which

it relies, deprives commenters of a right under § 553 ‘to participate in rulemaking.’” Allina

11

Health Svcs. v. Sebelius, 746 F.3d 1102, 1110 (D.C. Cir. 2014) (quoting Air Transp. Ass’n of Am.

v. F.A.A., 169 F.3d 1, 7 (D.C. Cir. 1999)). 10

The D.C. Circuit’s most recent comprehensive discussion of this doctrine came in

American Radio Relay League, Inc. v. Federal Communication Commission, 524 F.3d 227 (D.C.

Cir. 2008), where the panel concluded that the FCC “failed to satisfy the notice and comment

requirements of [§ 553] by redacting studies on which it relied in promulgating the rule . . . .” In

that case, the FCC placed five technical studies on which it had relied in promulgating the rule at

issue into the rulemaking record, but only in redacted form. Id. at 237. The court found that

these redactions violated § 553 and ordered the FCC, on remand, to “make available the

unredacted ‘technical studies and data that it has employed in reaching [its] decisions.’” Id. at

240 (quoting Conn. Light & Power Co. v. Nuclear Regulatory Comm’n, 673 F.2d 525, 530 (D.C.

Cir. 1982)). On this point, the panel found:

The Commission has chosen to rely on the data in those studies and to place the

redacted studies in the rulemaking record. Individual pages relied upon by the

10

As Defendant notes, there is considerable debate as to whether this doctrine conflicts

with the Supreme Court’s decision in Vermont Yankee Nuclear Power Corp. v. Natural Res. Def.

Council, 435 U.S. 519 (1978), which limited a court’s power to order additional procedures in

rulemaking beyond those imposed by the Administrative Procedures Act. See Am. Radio Relay

League, Inc. v. FCC, 524 F.3d 227, 245 (Kavanaugh, J., dissenting); Allina Health Svcs., 746

F.3d at 1110 (noting “the possible tension between Vermont Yankee and our critical material

doctrine”). See also Jack M. Beermann & Gary Lawson, Reprocessing Vermont Yankee, 75

GEO. WASH. L. REV. 856, 892 (2007); Richard L. Pierce, Waiting for Vermont Yankee III, IV,

and V?, 75 GEO. WASH. L. REV. 902, 916 (2007). Yet to the extent Defendant argues that this

debate renders Plaintiffs’ proposed claims futile, her argument must be rejected. The Portland

Cement doctrine remains the prevailing law of this Circuit, and this Court is bound to follow it.

Nevertheless, in light of this tension, the Court is reluctant to read the doctrine more broadly than

the D.C. Circuit has in past cases. Indeed, even while upholding its continued application, the

D.C. Circuit has emphasized the narrowness of this doctrine, perhaps out of a concern that a

broader doctrine would more clearly run afoul of Vermont Yankee. See Am. Radio Relay League,

Inc., 524 F.3d at 239 (“The narrowness of our holding under section 553 of the APA is

manifest.”); Allina Health Svcs., 746 F.3d at 1110 (“Perhaps because of the possible tension

between Vermont Yankee and our critical material doctrine, we have more carefully examined

whether a failure to disclose such material actually harmed a petitioner.”).

12

Commission reveal that the unredacted portions are likely to contain evidence that

could call into question the Commission’s decision to promulgate the rule. Under

the circumstances, the Commission can point to no authority allowing it to rely on

the studies in a rulemaking but hide from the public parts of the studies that may

contain contrary evidence, inconvenient qualifications, or relevant explanations of

the methodology employed.

Id. at 239. The focal point of this analysis was the Commission’s reliance on materials that were

undisclosed, or that were disclosed only in part with redactions. Importantly, American Radio

Relay League distinguished cases where the agency did not rely on the undisclosed materials,

such as EchoStar Satellite LLC v. Federal Communications Commission, 457 F.3d 31, 40 (D.C.

Cir. 2006), in which “the non-disclosed staff analysis represented ‘merely . . . cogitations upon

the evidence’ that was part of the rulemaking record.” Am. Radio Relay League, Inc., 524 F.3d

at 238. “By contrast, the challenged orders” in American Radio Relay, “were, according to the

Commission, a central source of data for its critical determinations.” Id. Moreover, the court

concluded that its conclusions were “not inconsistent with the view that ‘the Portland Cement

doctrine should be limited to studies on which the agency actually relies to support its final

rule.’” Id. at 240 (quoting 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW TREATISE 437 (4th

ed. 2002)) (emphasis added in original). See also 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE

LAW TREATISE 584 (5th ed. 2010) (“If an agency does not attempt to support its final rule by

reference to an undisclosed study, it seems apparent that the agency was not required to make the

study available to potential commentators. Thus, the Portland Cement doctrine should be

limited to studies on which the agency actually relies to support its final rule.”)

Here, according to Plaintiffs’ proposed Amended Complaint, the relevant undisclosed

material at the time of the rulemakings is the “data, analysis and conclusions which had been set

forth in the Interim Final Rule [which] were adverse to the determinations the Secretary later

proposed and finalized in her subsequent published rulemakings.” Pls.’ Proposed Amendments

13

at 1. The parties disagree in their present briefing as to whether the Secretary “relied” on this

material in the challenged rulemakings, such that her failure to disclose these materials runs

afoul of § 553 under the Portland Cement doctrine. Compare Pls.’ Reply at 1-2 with Def.’s

Opp’n at 8. As support for the proposition that the Secretary relied on the Interim Final Rule and

the supporting materials, Plaintiffs look to this Court’s decision to include the Interim Final Rule

in the administrative record. Pls.’ Mem. at 3; Pls.’ Reply at 2. Plaintiffs cite the Court’s

statement that “there can be little doubt that the Interim Final Rule reflects views adverse to

those finally adopted by the Secretary and that the Secretary considered – and indeed proposed to

OMB – the Interim Final Rule as an alternative in its path to promulgation of the 2003 amended

Outlier Payment Regulations now challenged by Plaintiffs.” Pls.’ Mem. at 3 (quoting Banner

Health, 945 F.Supp.2d at 27). Yet such language does not show that the Secretary relied on

these materials. In fact, it shows the opposite – that the Secretary in all likelihood discounted

these materials in issuing the Proposed Rule.

Plaintiffs attempt to bring this case within the ambit of American Radio Relay League by

arguing in their Reply brief that the 2003 Proposed Rule reflects portions of the Interim Final

Rule favorable to the agency, but excludes unfavorable portions, just as the FCC included

favorable portions of studies in American Relay while redacting unfavorable portions. Pls.’

Reply at 1-2. Yet Plaintiffs’ prior briefing in this case, and the Court’s conclusions based on this

briefing contradict this newfound argument. As noted in the Court’s prior Memorandum

Opinion, Plaintiffs themselves have previously pointed out the sharp disconnect between the

Interim Final Rule and the Proposed Rule. Indeed, the Court’s previous Memorandum Opinion

includes the following language: “Plaintiffs observe, however, that the Secretary’s proposed rule,

issued on February 28, 2003 – just over two weeks after HHS submitted the Interim Final Rule to

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OMB – makes no mention of the data and analysis stated in the Interim Final Rule.” Banner

Health, 945 F.Supp.2d at 25 (emphasis added). Plaintiffs’ instant attempt to argue a contrary

position – that the Secretary cherry-picked data and analysis that was utilized in the Interim Final

Rule – is unpersuasive. 11 Indeed, the position asserted in Plaintiffs’ Reply brief is similarly

undercut by Plaintiffs’ proposed Amended Complaint. This proposed filing likewise contends

that the Secretary did not rely on the Interim Final Rule and its supporting materials, and further

undermines application of the Portland Cement doctrine here. On this point, Plaintiffs state:

In the published Proposed Rule, the Secretary made no mention of the IFR and

did not include much of the data, methodological changes and analysis that the

Secretary had included in the IFR relating to the agency’s conclusion that the

fixed-loss outlier threshold should be recalculated and set immediately at $20,760

(plus the additional payments referenced above in paragraph 198.5.b). Among

other things, the Proposed Rule failed to mention the Secretary’s analysis

quantifying the impact of hospitals identified as having “taken advantage of two

vulnerabilities” in the Secretary’s regulations, the agency’s obligation to

recalculate the fixed loss threshold, methodological changes the Secretary used

for the recalculation, and the agency’s findings regarding the public interest. All

of these topics were discussed in the IFR.

Pls.’ Proposed Amendments at 2. Consequently, despite their present briefing to the contrary,

Plaintiffs’ proposed amendments and their previous statements in this case show that they are not

alleging that the Secretary relied on these materials and failed to disclose them. Rather, they

appear to contend that she improperly considered and then did not rely on these materials, and

11

Plaintiffs’ prior briefing includes additional language revealing the disconnect between

the Interim Final Rule and the Proposed Final Rule. See Pls.’ Mem. of P. & A. in Supp. of

Renewed Motion to Compel Def. to File the Complete Admin. Record and to Certify Same, ECF

No. [60] at 16 (“In stark contrast, HHS’s published rulemaking . . . conspicuously lacks the

foregoing data, other facts, analysis.”); id. at 17 (noting that exclusion of the Interim Final Rule

“would only serve to conceal significant alternatives, facts, other data and analyses that HHS

considered in the rulemaking process, but that were contrary to its published regulations.”); id. at

18 (arguing that “the data and other facts used, and analysis undertaken, by HHS in reaching its

conclusions in the Interim Final Rule” “bear upon options that HHS considered, but did not

disclose or address in the Federal Register, when the agency was revising the Outlier Payment

Regulations.”)

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that the contrary conclusions and information contained in the Interim Final Rule undercut the

alternative conclusions set forth in the Proposed Rule. This is not the sort of undisclosed basis

for a rule that triggers the Portland Cement doctrine. See 1 RICHARD J. PIERCE, JR.,

ADMINISTRATIVE LAW TREATISE 583-84 (5th ed. 2010). (“[A]ccess to the data that putatively

supports a proposed rule is critical to the right to comment on the rule and, hence, is part of the

notice required by § 553(b).”) (emphasis added). Instead these allegations more properly go to

the question of whether the Secretary’s actions, taken in apparent disregard of contrary data and

analysis, were arbitrary and capricious, and thus substantively invalid. Id. at 584-85 (noting that

it is consistent with Portland Cement for “[a] reviewing court [to] require an agency to add to the

rulemaking record documents in the agency’s possession that contradict the predicates for a rule .

. . and then use those documents to support a holding that the rule is arbitrary and capricious.”).

For this reason, this Court’s decision to include the Interim Final Rule in the administrative

record – for purposes of assessing the substantive validity of the Secretary’s regulations – does

not establish that the Secretary relied on these undisclosed materials. Compliance with § 553 is

an issue distinct from the completeness of the administrative record.

Accordingly, because the Court concludes that Plaintiffs’ have failed to assert proper

claims under 5 U.S.C. § 553 based on non-disclosure of the Interim Final Rule and the

underlying data and analysis, Plaintiffs’ proposed amendment to add these claims is denied as

futile. 12

12

In light of the Court’s conclusion that Plaintiffs’ proposed § 553 claims fall outside of D.C.

Circuit precedent, the Court does not reach the Secretary’s alternative argument for futility – that

the Court lacks subject matter jurisdiction over the § 553 claims because they were not properly

presented in administrative proceedings. See Def.’s Opp’n at 6-8. While the Supreme Court has

held that a court should address jurisdictional questions such as Article III standing prior to

addressing any question on the merits, see Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83,

101 (1998), that doctrine is inapplicable here, where Defendant’s jurisdictional argument is

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B. Proposed Additional Factual Allegations

Although the Court concludes that Plaintiffs’ proposed additional claims are futile, this

does not doom the entirety of Plaintiffs’ motion. Defendant’s futility arguments go only to the

additional claims asserted by Plaintiffs and not to the additional factual allegations raised in the

proposed Amended Complaint. Indeed, in making her futility argument, Defendant nowhere

contends that these allegations themselves are futile as additional factual background for

Plaintiffs’ existing claims. Def.’s Opp’n at 6-8. Accordingly, in the absence of a futility

argument, the Court looks to whether there are other reasons – such as prejudicial delay – to

deny leave to add these additional allegations. For the reasons discussed below, the Court finds

Plaintiffs’ delay in seeking leave to add these allegations, although lengthy, was not prejudicial

or in bad faith. Therefore, the Court permits Plaintiffs to add these additional allegations as

support for their existing claims.

“Only limited circumstances justify a district court’s refusal to grant [ ] leave to amend:

undue delay, bad faith on the part of the moving party, or undue prejudice to the opposing party.”

Sinclair v. Kleindienst, 645 F.2d 1080, 1085 (D.C. Cir. 1981). Moreover, “[t]o warrant denial of

leave to amend, any delay in seeking leave must be accompanied by a showing of bad faith or

prejudice.” Council on American-Islamic Relations Action Network, Inc. v. Gaubatz, 891

premised on a lack of statutory, rather than constitutional, jurisdiction. “Steel Co. requires that

we prioritize the jurisdictional issue only when the existence of Article III jurisdiction is in

doubt; that decision ‘explicitly recognized the propriety of addressing the merits where doing so

made it possible to avoid a doubtful issue of statutory jurisdiction.’” Chalabi v. Hashemite

Kingdom of Jordan, 543 F.3d 725, 728 (D.C. Cir. 2008) (quoting Kramer v. Gates, 481 F.3d 788,

791 (D.C. Cir. 2007)). Here, Defendant does not raise an issue of Article III jurisdiction in

arguing for futility. Rather, the Secretary argues that this Court lacks statutory subject matter

jurisdiction to rule on claims that may not have been properly channeled through the “expedited

judicial review” process of 42 U.S.C. § 1395oo(f)(1), which allows for judicial review in the

absence of prior exhaustion before the Medicare Provider Reimbursement Review Board. Def.’s

Opp’n at 6-7. Accordingly, the Court may rule on alternative bases for futility without

addressing Defendant’s statutory jurisdiction argument.

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F.Supp.2d 13, 33 (D.D.C. 2012) (citing Caribbean Broad. Sys., Ltd. v. Cable & Wireless P.L.C.,

148 F.3d 1080, 1084 (D.C. Cir. 1998)). Defendant, as the party opposing amendment, bears the

burden of establishing bad faith or prejudice. City of New York v. Group Health, Inc., 649 F.3d

151, 157 (2d Cir. 2011); Abdullah, 530 F.Supp.2d at 115.

Here, the Court finds that Defendant has not met her burden of showing that Plaintiffs’

delay in adding these additional allegations is accompanied by bad faith or prejudice. Certainly,

Defendant is correct that Plaintiffs have known about the Interim Final Rule since February 2012

and could have moved to add these additional factual allegations to support her claims far

sooner. Def.’s Opp’n at 4. But Defendant points to no prejudice from the failure to add these

allegations earlier. See Estate of Gaither ex rel. Gaither v. Dist. of Columbia, 272 F.R.D. 248,

252 (D.D.C. 2011) (“the mere passage of time does not preclude amendment – the delay must

result in some prejudice to the judicial system or the opposing party.”). Indeed, the Secretary’s

entire prejudice argument addresses the harm from allowing Plaintiffs to add new claims – rather

than new factual allegations to existing claims – at this stage of the litigation. Def.’s Opp’n at 5-

6. Yet the Court has already rejected the proposed additional claims as futile. In the absence of

a new claim, Defendant does not provide any reason to believe that she would be prejudiced by

allowing the addition of new factual allegations concerning the Interim Final Rule to Plaintiffs’

existing claims. Nor can the Court discern any, as leave to add clarifying factual allegations to

existing claims is typically freely given. See Council on American-Islamic Relations Action

Network, Inc., 793 F.Supp.2d at 324 (“Plaintiffs’ factual allegations merely fine-tune the basis

for the relief Plaintiffs seek in this action. Factual allegations of this kind, which clarify but do

not reshape the action, are rarely a bad thing.”). See also Harrison v. Rubin, 174 F.3d 249, 253

(D.C. Cir. 1999) (stating that technical corrections and clarifications of legal theories without a

18

showing of prejudice are not sufficient grounds for denying a motion). Here, these allegations

merely explain the discovery and content of the Interim Final Rule, and provide additional basis

for Plaintiffs’ arguments that certain actions taken by the Secretary were substantively invalid.

Pls.’ Proposed Amendments at 1-2.

The Court is also unpersuaded by Defendant’s accusations that Plaintiffs have acted in

bad faith. Def.’s Opp’n at 5. Defendant contends that “[t]he most likely explanation for the

plaintiffs’ motion is that after seeing which of their claims survived the Court’s July 2011 and

November 2012 rulings and which did not, and then seeing which of their multifarious

challenges to the administrative records succeeded and which did not, the plaintiffs decided to

shift their bets in hopes of improving their overall chances in this litigation.” Id. Again, this

accusation goes mainly to Plaintiffs’ proposal to add new claims, rather than new factual

allegations to existing claims. Accordingly, it does not provide a basis to reject these

supplemental allegations.

Therefore, although it denies Plaintiffs leave to add new claims pursuant to 5 U.S.C. §

553, the Court will grant Plaintiffs leave to add factual allegations concerning the Interim Final

Rule. Accordingly, Plaintiffs may amend their complaint to include the allegations contained in

sub-paragraphs 198.5(a)-(e) of their Proposed Amendments. 13 See Pls.’ Proposed Amendments

at 1-2. These allegations, though arguably untimely, are not accompanied by bad faith or

prejudice.

IV. CONCLUSION

For all of the reasons stated herein, the Court GRANTS IN PART and DENIES IN

PART Plaintiffs’ [108] Motion for Leave to Further Amend and Supplement First Amended

13

Plaintiffs may not add the heading paragraph 198.5, which contains the proposed

claims under 5 U.S.C. § 553. Pls.’ Proposed Amendments at 1.

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Complaint. The Court denies Plaintiffs leave to amend their complaint to include claims that the

Secretary’s failure to disclose the Interim Final Rule and its contents violated 5 U.S.C. § 553.

However, the Court grants Plaintiffs leave to amend their complaint to include factual allegations

concerning the Interim Final Rule. An appropriate Order accompanies this Memorandum

Opinion.

Date: July 7, 2014

_______ /s/__________________

COLLEEN KOLLAR-KOTELLY

United States District Judge

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