Clarian Health West, LLC v. Eric Hargan

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 12, 2017 Decided December 26, 2017

No. 16-5307

CLARIAN HEALTH WEST, LLC, DOING BUSINESS AS CLARIAN

WEST MEDICAL CENTER,

APPELLEE

v.

ERIC HARGAN, ACTING SECRETARY, U.S. DEPARTMENT OF

HEALTH AND HUMAN SERVICES,

APPELLANT

Appeal from the United States District Court

for the District of Columbia

(No. 1:14-cv-00339)

Katherine Twomey Allen, Attorney, U.S. Department of

Justice, argued the cause for appellant. With her on the briefs

was Michael S. Raab, Attorney.

Z.W. Julius Chen argued the cause for appellee. With him

on the briefs were Christopher L. Keough and Stephanie A.

Webster.

Before: GARLAND, Chief Judge, HENDERSON, Circuit

Judge, and EDWARDS, Senior Circuit Judge.

2

Opinion for the Court filed by Senior Circuit Judge

EDWARDS.

EDWARDS, Senior Circuit Judge: This case involves a

challenge to the legality of a Department of Health and Human

Services (“HHS”) decision to set forth certain policies

regarding the means of calculating reimbursements for

Medicare providers in an instruction manual without engaging

in notice-and-comment rulemaking. Because we find that

nothing required the agency to proceed otherwise, we must

respect its selected approach. See Perez v. Mortg. Bankers

Ass’n, 135 S. Ct. 1199, 1206 (2015) (emphasizing that courts

may not “improperly impose[] on agencies an obligation

beyond the ‘maximum procedural requirements’ specified by

[statute or regulation]” (quoting Vermont Yankee Nuclear

Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 524

(1978))).

Under Part A of the Medicare program, hospitals are

compensated prospectively based on the estimated likely cost

of patient care. Prospective Payment for Medicare Inpatient

Hospital Services, 49 Fed. Reg. 234 (Jan. 3, 1984); 42 U.S.C.

§ 1395ww(d)(2). On some occasions, when the prospective

payments appear to have been insufficient, hospitals also

receive supplemental or “outlier” payments. 42 U.S.C.

§ 1395ww(d)(5)(A)(ii); see also Dist. Hosp. Partners, L.P. v.

Burwell, 786 F.3d 46, 49 (D.C. Cir. 2015).

In 2003, the Secretary of HHS promulgated a regulation,

through notice-and-comment rule making, that altered the way

such “outlier payments” are calculated. Change in

Methodology for Determining Payment for Extraordinarily

High-Cost Cases (Cost Outliers) Under the Acute Care

Hospital Inpatient and Long-Term Care Hospital Prospective

Payment Systems, 68 Fed. Reg. 34,494 (June 9, 2003). As part

3

of the regulation, HHS determined that the payments should be

subject to recalculation—or “reconciliation”—after certain

hospital cost reports were finalized in order to ensure that the

payments corresponded with the hospitals’ actual experienced

costs. See id. at 34,501; 42 C.F.R. § 412.84(i)(4). The

regulation did not determine how hospitals would be selected

for this reconciliation procedure.

In 2010, HHS established instructions governing the

selection process. Set forth in a manual for Medicare payment

contractors, the instructions provided two criteria for payments

that should be recalculated and reconciled. Medicare Claims

Processing Manual, ch. 3, § 20.1.2.5(A) (Dec. 3, 2010),

reprinted in Joint Appendix (“J.A.”) 129-30 [hereinafter CMS

Manual]. In 2012, HHS and its contractor determined that

Appellee Clarian Health West (“Clarian” or “Appellee”) met

the criteria for outlier payments made to it for services provided

in fiscal year 2007. The hospital was subjected to

reconciliation, and it was ultimately required to pay back over

$2 million in outlier payments.

Clarian challenged the 2010 Manual instructions before

the District Court. It asserted, inter alia, that both the

Administrative Procedure Act (“APA”), 5 U.S.C. § 553, and

the Medicare Act, 42 U.S.C. §§ 1395hh(a)(1), (b)(1), required

HHS to promulgate the criteria for selecting hospitals for

reconciliation by regulation after notice-and-comment rule

making. And because the Manual instructions were not

established in that manner, Clarian claimed that both the

instructions and the reconciliation taken pursuant to them were

procedurally invalid.

The District Court found merit in Clarian’s procedural

challenge and granted its motion for summary judgment.

Clarian Health West, LLC v. Burwell, 206 F. Supp. 3d 393

4

(D.D.C. 2016). It concluded that the Medicare statute’s

procedural requirement was broader than the APA’s and

determined that, because the instructions did not fall within any

of the APA’s exceptions to notice-and-comment rule making,

they were necessarily procedurally invalid under the Medicare

Act. See id. at 420. HHS appealed the District Court’s

judgment to this court.

We conclude that the Manual instructions embody a

general statement of policy, not a legislative rule, setting forth

HHS’s enforcement priorities. Policy statements do not

establish binding norms. Pac. Gas & Elec. Co. v. Fed. Power

Comm’n, 506 F.2d 33, 38 (D.C. Cir. 1974). And they are not

“rules” that must be issued through notice-and-comment rule

making. Perez, 135 S. Ct. at 1203. Nor are the instructions

subject to the Medicare Act’s independent notice-and-

comment requirement because they do not establish or change

a substantive legal standard. Because neither the APA nor the

Medicare Act required that the Manual instructions be

established by regulation, we reverse the decision of the

District Court.

I. Background

A. Statutory and Regulatory Background

Congress established the Medicare program in 1965 to

“provide[] federally funded health insurance for the elderly and

disabled.” Methodist Hosp. of Sacramento v. Shalala, 38 F.3d

1225, 1226-27 (D.C. Cir. 1994); 42 U.S.C. § 1395 et seq. HHS

administers the program through the Centers for Medicare and

Medicaid Services (“CMS”). It originally reimbursed hospitals

based on the “reasonable costs they incurred in providing

services to Medicare patients.” Cape Cod Hosp. v. Sebelius,

630 F.3d 203, 205 (D.C. Cir. 2011). Members of Congress

5

became concerned that this system failed to effectively

incentivize hospitals to control their costs. To address this

issue, in 1983 Congress adopted a “prospective payment

system” under which hospitals receive a fixed payment for

inpatient services. Id. “Congress believed that [this system]

would encourage efficiency ‘by rewarding cost-effective

hospital practices.’” Id. (quoting Methodist Hosp. of

Sacramento, 38 F.3d at 1227).

Under the prospective payment system, CMS pays

hospitals a set amount per patient which is adjusted to roughly

reflect the average cost incurred by hospitals nationwide for

treating patients with the same diagnosis. 42 U.S.C.

§ 1395ww(d)(2), (4); see also Cape Cod Hosp., 630 F.3d at

205-06 (explaining the payment-calculation process). These

payments are calculated by private healthcare insurers, known

as Medicare Administrative Contractors (“MACs”), under

contract with CMS. See 42 U.S.C. § 1395h(a).

Congress recognized, however, that in some

circumstances, treatment for patients would be extraordinarily

costly. See Cty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009

(D.C. Cir. 1999). Congress thus authorized HHS to make

supplemental “outlier payments” to hospitals to account for

these disparate costs. 42 U.S.C. § 1395ww(d)(5)(A). Under the

statute, a hospital is eligible for an outlier payment “in any case

where charges, adjusted to cost, exceed . . . the sum of the

applicable [adjusted standardized prospective rate] plus a fixed

dollar amount determined by the Secretary.” Id.

§ 1395ww(d)(5)(A)(ii). This case deals with the manner in

which CMS calculates such payments.

6

1. Outlier Payment Formula

The Medicare Act and HHS’s implementing regulations

establish the general formula for outlier payment calculations.

First, CMS instructs MACs to calculate the hospital’s “cost-to-

charge ratio,” which represents the amount the hospital on

average incurs in costs for every dollar that it bills. 42 C.F.R.

§ 412.84(i)(2). The MAC then multiplies the total amount

billed by the cost-to-charge ratio to determine the hospital’s

actual costs. Id. § 412.84(g). If the difference between this

number and the amount that the hospital received as a

prospective payment exceeds the “fixed-loss threshold” set by

the Secretary, the hospital can request an outlier payment. Id.

§ 412.84(k). The amount of the payment is calculated using the

amount by which the actual costs exceed the prospective

payment plus the fixed-loss threshold. That number is

multiplied by the “marginal cost factor,” which is set by

regulation at 80%. Id. Under this process, a hospital may

ultimately recover 80% of the difference between its cost-

adjusted charges and the outlier threshold. Id.; see also Dist.

Hosp. Partners, 786 F.3d at 49-51 (providing an example

calculation).

In the 2000s, HHS determined that hospitals were

manipulating their charges in order to inflate their cost-to-

charge ratios. See Proposed Change in Methodology for

Determining Payment for Extraordinarily High-Cost Cases

(Cost Outliers) Under the Acute Care Hospital Inpatient

Prospective Payment System, 68 Fed. Reg. 10,420, 10,423

(Mar. 5, 2003). This process of “turbocharging” was made

possible by the temporal disconnect between the time when the

costs were incurred and the time period used to determine the

hospital’s cost-to-charge ratio. See id. For many years, MACs

calculated the cost-to-charge ratio using the hospital’s most

recently settled cost report, which was typically three years old.

7

Id. By rapidly increasing the amount it charged for services, a

hospital could take advantage of the higher out-of-date cost-to-

charge ratio which, when multiplied by the inflated charges,

would result in a higher outlier payment divorced from any

increase in actual cost of care. See id.

2. The 2003 Rule

In 2003, HHS responded to the “turbocharging” problem

by promulgating a rule, after notice-and-comment rule making,

which included several changes to the methodology for

determining outlier payments. 68 Fed. Reg. 34,494. For

example, the rule permitted MACs to consider “the most recent

tentative settled cost report” to determine the applicable cost-

to-charge ratio, moderately reducing the lag time. Id. at 34,499;

42 C.F.R. § 412.84(i)(2).

Most relevant to this case, the 2003 rule also provided for

“reconciliation” of outlier payments. Reconciliation authorizes

MACs to revisit outlier payments for a specific year using the

cost report for the year in which the service was actually

provided once it has been finalized. 68 Fed. Reg. at 34,501; 42

C.F.R. § 412.84(i)(4). HHS indicated that reconciliation would

be done only on a limited basis, but the agency declined to

prescribe the precise circumstances when reconciliation would

be appropriate. 68 Fed. Reg. at 34,503.

3. The 2010 Guidance

In 2010, HHS adopted a policy for MACs to use when

administering the reconciliation process. The policy appeared

in published instructions in a CMS Manual that covers

Medicare claims processing. See CMS Manual, Ch. 3

§ 20.1.2.5, J.A. 129-30. According to the Manual,

8

Subject to the approval of the CMS Central

Office, a hospital’s outlier claims will be

reconciled at the time of cost report final

settlement if they meet the following criteria:

1. The actual operating [cost-to-charge

ratio] is found to be plus or minus 10

percentage points from the [ratio] used

during that time period to make outlier

payments, and

2. Total outlier payments in that cost

reporting period exceed $500,000.

Id., J.A. 129. The Manual instructs MACs to calculate a revised

cost-to-charge ratio for the hospital. “If the criteria for

reconciliation are not met, the cost report shall be finalized. If

the criteria for reconciliation are met, [MACs] shall follow [the

procedures to perform and record outlier reconciliation

adjustments].” Id. It also provides that “[e]ven if a hospital does

not meet the criteria for reconciliation, subject to approval of

the Regional and Central Office, the [MAC] has the discretion

to request that a hospital’s outlier payments . . . be reconciled

if the hospital’s most recent cost and charge data indicate that

the outlier payments to the hospital were significantly

inaccurate.” Id., J.A. 129-30.

HHS did not engage in notice-and-comment rule making

procedures before issuing the instructions in the Manual.

9

B. Facts and Procedural History

Clarian West Medical Center is a hospital located in Avon,

Indiana that began operating in December 2004. Because

Clarian treated relatively few patients in its first years, its

outlier payments from 2007 were based on a 92.2% cost-to-

charge ratio from 2005 that differed significantly from its final

ratio of 50.5% for 2007. As a result, Clarian’s MAC

determined upon a retrospective evaluation that the hospital

was eligible for reconciliation under the 2010 Manual

instructions. The MAC concluded that although Clarian had

received approximately $2.8 million in outlier payments for

that period, it was actually owed less than $700,000. Following

approval from CMS, the MAC issued a Notice of Program

Reimbursement stating that Clarian was required to repay $2.4

million (including $200,000 for the time value of the money).

Clarian filed a petition for review with HHS’s Provider

Reimbursement Review Board (“Board”). Clarian alleged,

inter alia, the reconciliation was unlawful because the Manual

instructions were procedurally invalid. Although the Board has

authority to affirm, modify, or reverse a MAC’s reimbursement

decision, it lacks authority to declare statutes or regulations

invalid. 42 C.F.R. § 405.1842(f)(1)(ii), (g)(1)(iii). However, a

provision of the Medicare Act permits a provider to bring suit

in district court without proceeding through the full Board

review process when the Board certifies that it does not have

authority to resolve a provider’s challenge. 42 U.S.C.

§ 1395oo(f)(1). Clarian thus sought certification for expedited

judicial review of the reconciliation decision. The Board

granted Clarian’s request for expedited review, concluding that

it lacked authority to grant the relief sought “with respect to

those issues involving the validity of 42 C.F.R. § 412.84(h).”

Dep’t of Health & Human Servs., Provider Reimbursement

10

Review Board, Case No. 12-0629, J.A. 31 [hereinafter

P.R.R.B. Decision].

On March 3, 2014, Clarian filed suit in the District Court,

alleging, inter alia, that “the Secretary’s 2012 [reconciliation]

determination, and the agency rules governing that

determination, are invalid and should be set aside” because

they violate the APA and the Medicare statute’s procedural

requirements. Complaint ¶¶ 58, 60, J.A. 20-21. As is relevant

on appeal, Clarian sought recoupment of the $2.4 million and

invalidation of the 2010 Manual instructions. Id. ¶ 64, J.A. 23-

24. The parties filed cross-motions for summary judgment.

The District Court concluded that, under the Medicare Act,

HHS was required to promulgate the 2010 instructions through

notice-and-comment rule making. Clarian Health West, LLC,

206 F. Supp. 3d at 420. It granted Clarian’s summary judgment

motion, denied the Secretary’s, and remanded the matter to

HHS for further proceedings. Id. The Government then filed an

appeal with this court.

The parties’ initial briefs to this Court addressed only

whether the 2010 Manual instructions were procedurally

invalid. In its reply brief, the Government for the first time

raised a potential jurisdictional issue. It asserted that the

Board’s expedited judicial review certification did not cover

the question Clarian had ultimately pressed before the District

Court, and that as a result the District Court lacked jurisdiction

to hear the case. Clarian then filed an unopposed motion for

leave to file a supplemental brief addressing the court’s

jurisdiction, which the court granted on September 15, 2017.

While the case was pending, this court resolved a similar

jurisdictional issue in Allina Health Servs. v. Price, 863 F.3d

937, 941 (D.C. Cir. 2017), on July 25, 2017.

11

II. Discussion

A. Standard of Review

This Court reviews the District Court’s grant of summary

judgment de novo. See Southeast Alabama Med. Ctr. v.

Sebelius, 572 F.3d 912, 916 (D.C. Cir. 2009). In determining

what procedures an agency was required to employ in adopting

a specific policy, we may consider the agency’s

characterization of its own rule or statement, but we are not

compelled to defer on this question. Am. Hosp. Ass’n v. Bowen,

834 F.2d 1037, 1056 (D.C. Cir. 1987).

B. Jurisdiction

Before we address Clarian’s procedural challenge to the

Manual instructions, we must determine whether this court and

the District Court may properly assert jurisdiction over the

matter. Clarian asserted jurisdiction under 28 U.S.C. § 1331

and the expedited judicial review provision of the Medicare

Act, 42 U.S.C. § 1395oo(f)(1). See Complaint ¶ 12, J.A. 9.

However, the Medicare Act expressly forecloses jurisdiction

under § 1331. Your Home Visiting Nurse Servs., Inc. v. Shalala,

525 U.S. 449, 456 (1999) (“42 U.S.C. § 405(h) [is] applicable

to the Medicare Act by operation of § 1395ii, which provides

that ‘[n]o action against . . . the [Secretary] or any officer or

employee thereof shall be brought under section 1331 . . . .”).

The Government contends that the expedited judicial review

provision is equally inapplicable to Clarian’s claims. We

disagree.

The Medicare Act’s expedited judicial review provision

states, in relevant part, that,

12

Providers shall also have the right to obtain

judicial review of any action of the fiscal

intermediary which involves a question of law

or regulations relevant to the matters in

controversy whenever the Board determines (on

its own motion or at the request of a provider of

services as described in the following sentence)

that it is without authority to decide the

question[.] . . . The Board shall render such

determination in writing within thirty days after

the Board receives the request . . . . If the Board

fails to render such determination within such

period, the provider may bring a civil action

(within sixty days of the end of such period)

with respect to the matter in controversy

contained in such request for a hearing.

42 U.S.C. § 1395oo(f)(1). In the motion that Clarian submitted

to the Board pursuant to this provision, it requested expedited

judicial review over “Question 2.” Question 2 asked:

Whether the reconciliation process established

under outlier regulation, 42 C.F.R. § 412.84(h),

is procedurally and substantively invalid

because the regulation establishes no standards

governing the exceptions process and related

program instructions were not adopted in

accordance with the notice and comment

rulemaking requirements mandated by the

Administrative Procedure Act and Medicare

Act.

Provider’s Petition for Expedited Review at 14 (Dec. 5, 2013),

J.A. 48. In its decision, the Board concluded that “questions 1,

2 and 4, regarding the validity of 42 C.F.R. § 412.84(h)

13

properly fall[] within” the Medicare Act’s expedited review

provision, and it “grant[ed] the Provider’s request for expedited

judicial review with respect to those matter[s].” P.R.R.B.

Decision at 7, J.A. 32.

The Government’s first argument focuses on its

interpretation of the Board’s decision. It reads the decision to

grant review over only the validity of the 2003 regulation itself,

not the 2010 Manual instructions. Because Clarian’s challenge

before this court and the court below asserted the illegality of

the latter, the Government argues that the challenge falls

outside of the “specific legal question” covered by the Board’s

limited grant of expedited judicial review. The Government

next argues, in the alternative, that even if the court understands

the Board’s decision to have granted review over Clarian’s

challenge to the Manual instructions, the court still lacks

jurisdiction on the ground that the “the Board’s decision was

erroneous because the Board did have authority to decide that

challenge.” Gov’t Reply Br. 6. Under both theories, the

Government asserts that the District Court should have

dismissed Clarian’s claim for lack of subject-matter

jurisdiction and that we must now vacate that court’s decision

and dismiss.

As Clarian notes in its supplemental brief, the

Government’s second argument is squarely foreclosed by this

court’s recent decision in Allina Health Servs., 863 F.3d at 941.

There, the court held that the Medicare Act does not permit

courts to revisit the Board’s decision to grant expedited judicial

review, or to question the Board’s determination that it lacked

authority over a question or claim. See id. It is thus irrelevant

whether the Board correctly determined that it lacked authority

over Clarian’s challenge to the Manual instructions.

14

Furthermore, it is apparent from the face of the Medicare

Act that the Government’s primary jurisdictional argument is

similarly unavailing. The expedited judicial review provision

makes it clear that “if the Board fails to render [a]

determination” on its authority within 30 days, “the provider

may bring a civil action . . . with respect to the matter in

controversy contained in such request for a hearing.” 42 U.S.C.

§ 1395oo(f)(1). Because the Government does not contend that

Clarian failed to raise its argument that the 2010 Manual

instructions were procedurally invalid in its motion before the

Board, and the Board has not since held a hearing on that

question, there is no reading of the Board’s Order that could

deprive this court, or the District Court of jurisdiction. Either

the Board granted expedited review over the question

presented, or it failed to decide Clarian’s request for expedited

judicial review of the question within thirty days. In either

event, Clarian had a right to seek review in the District Court,

and we have appellate jurisdiction over that court’s decision

pursuant to 28 U.S.C. § 1291. We accordingly may proceed to

the merits of Clarian’s challenge.

C. Clarian’s Claim Under the Medicare Act

The Medicare Act provides that “[n]o rule, requirement or

other statement of policy . . . that establishes or changes a

substantive legal standard governing . . . the payment for

services . . . shall take effect unless it is promulgated by the

Secretary by regulation.” 42 U.S.C. § 1395hh(a)(2).

Regulations become final only after the Secretary provides an

opportunity for public notice and comment. Id. § 1395hh(b)(1).

The District Court concluded that the Manual instructions were

invalid under this provision because HHS did not issue them

by regulation after providing opportunity for notice and

comment. Clarian Health West, LLC, 206 F. Supp. 3d at 420.

As it did before that court, the Government argues on appeal

15

that the instructions fall outside of § 1395hh(a)(2)’s procedural

requirement. It does not dispute that the Manual instructions

constitute a “rule, requirement, or other statement of policy”

governing “the payment of services.” Rather, it argues only that

the instructions do not “establish[] or change[] a substantive

legal standard.”

This court has defined a “substantive legal standard” under

the Act to include “at [] minimum . . . a standard that creates,

defines, and regulates the rights, duties, and powers of parties.”

Allina Health Servs., 863 F.3d at 943. The Government asserts

two reasons that HHS’s Manual instructions do not qualify

under that standard: First, it argues that the instructions “do not

alter the substantive legal standard for determining whether an

outlier payment is warranted or the amount of an outlier

payment” because the 2003 regulation subjected all outlier

payments to reconciliation and set forth the formula for

calculating payments during the reconciliation process. Gov’t

Br. 14. On this theory, the Manual instructions “merely instruct

Medicare contractors to identify hospitals whose outlier

payments in a given year meet certain criteria . . . [and] seek

approval from the agency to recalculate those payments,”

therefore “reflect[ing] the agency’s policy about how best to

deploy its contractors’ limited resources.” Id. at 14-15. Second,

the Government argues that “the [M]anual instructions do not

compel the agency to order reconciliation in any particular

case” and, thus, “are not binding on the agency.” Id. at 15. Both

assertions cast the instructions as guidelines that amplify the

agency’s enforcement discretion—discretion that stems from

the statute, the 2003 legislative rule, and 42 C.F.R.

§ 412.84(i)(4).

Clarian, in turn, responds that the 2003 rule merely set

forth the data that should be used in a reconciliation, but it

failed to determine which outlier payments would be subjected

16

to retroactive adjustment. In its view, only the 2010

instructions make that determination and, thus, they establish

the substantive legal standard that determines the amount that

the providers will ultimately be reimbursed. This type of “gap-

filling” in the reconciliation scheme, Clarian urges, is covered

by § 1395hh(a)(2). Further, Clarian argues that the Manual

instructions are mandatory and binding, as they employ the

words “will” and “shall.”

It cannot be seriously disputed that HHS’s authority to

reconcile outlier payments alters providers’ legal rights. As in

this case, the decision to recalculate a provider’s

reimbursement pursuant to the reconciliation method may

mean that a hospital receives millions of dollars less in

payments than it otherwise would. But this change in

providers’ rights results from the Medicare Act and its

implementing regulations—not the 2010 Manual instructions.

Together, the Act and the regulations establish the

standard that governs hospitals’ eligibility for outlier

payments: The Act authorizes hospitals to request outlier

payments in cases where “charges, adjusted to cost” exceed

certain specified amounts. 42 U.S.C. § 1395ww(d)(5)(A)(ii). It

also authorizes the Secretary to determine the amount of such

payments, and establishes that they shall “approximate the

marginal cost of care beyond the [applicable] cutoff point.” Id.

§ 1395ww(d)(5)(A)(iii). The regulations, in turn, set forth the

criteria for calculating those payments. See 42 C.F.R.

§§ 412.80(a)(1), 412.84. The 2003 rule specifically authorizes

the agency to adjust the payments pursuant to the reconciliation

calculation procedures set forth at 42 C.F.R. 412.84(i)(4). See

68 Fed. Reg. at 34,504 (“We are adding § 412.84(i)([4]) to

provide that, effective 60 calendar days after the date of

publication of this final rule, outlier payments will become

subject to adjustment when hospitals’ cost reports coinciding

17

with the discharge are settled.”). As Clarian’s counsel agreed,

see Recording of Oral Arg. 27:30-29:12, these statutory and

regulatory provisions, of their own force, provide the agency

with authority to engage in reconciliation for any outlier

payment. Therefore these provisions establish the substantive

legal standards governing provider reimbursement.

The Manual instructions do not alter the applicable legal

standards. This is not to say that they have no practical effect.

Rather, the important point is that the agency maintains the

same authority to reconcile any outlier payment that it had prior

to the adoption of the Manual instructions. The instructions

merely set forth an enforcement policy that determines when

MACs will report hospitals for reconciliation. They do not

change the legal standards that govern the hospitals, and they

do not change the legal standards that govern the agency.

Indeed, the instructions bind neither CMS nor the Board in

adjudications. In adjudicated cases, CMS and the Board apply

the formulas described in the regulations, not the thresholds

contained in the Manual instructions, in determining hospitals’

outlier-payment totals. See CMS Manual at 34-35, J.A. 129-30

(“Even if a hospital does not meet the criteria . . . the Medicare

contractor has the discretion to request that a hospital’s outlier

payments in a cost reporting period be reconciled . . . .”); id. at

34, J.A. 129 (“Subject to the approval of the CMS Central

Office, a hospital’s outlier claims will be reconciled . . . if they

meet the . . . criteria.”); 42 C.F.R. § 405.1867 (explaining that

the Board must “afford great weight” to CMS policy

statements, but is not bound by such statements as it is by

regulations).

To put it simply, reconciliation can be initiated in any

situation in which CMS deems it appropriate, irrespective of

whether the criteria in the Manual instructions are met. When

18

read in context, it is clear that the Manual’s use of the words

“will” and “shall” does not indicate otherwise. See CMS

Manual at 34-35, J.A. 129-30. The agency’s authority is

accordingly exactly as it would be if the Manual instructions

did not exist. The hospitals’ legal entitlement to outlier

payments is likewise unchanged. A hospital may pursue an

action with the Board to challenge an agency decision to

subject it to reconciliation without regard to whether it

allegedly satisfied the criteria in the 2010 Manual instructions.

The instructions thus did not alter or establish a substantive

legal standard and the Medicare Act did not require HHS to

promulgate the instructions by regulation.

D. Clarian’s Claim Under the Administrative Procedure

Act

Clarian also argues that the Manual instructions are

procedurally invalid because they fail to comply with the

APA’s independent notice-and-comment procedural

requirements. See 5 U.S.C. § 553. The APA mandates that

substantive, legislative rules be promulgated only after public

notice and comment, but it does not extend that requirement to

“interpretive rules, general statements of policy, or rules of

agency organization, procedure, or practice.” Id.

§ 553(b)(3)(A). The Government argues that the Manual

instructions fall within each of those exempted categories and

so were not subject to the APA’s constraint. Clarian responds

that the instructions fall within none of them.

In addition to arguing that HHS’s instructions are

encompassed by § 553(b)(3)(A)’s non-legislative rule

exemptions, the Government appears to make an additional

threshold argument that the APA’s procedural requirements do

not apply to this case at all. For this assertion, it points to a

separate exception for “matter[s] relating to . . . benefits,” 5

19

U.S.C. § 553(a)(2), which has been interpreted to cover

Medicare reimbursement determinations, see Humana of S.

Carolina v. Califano, 590 F.2d 1070, 1082 (D.C. Cir. 1978).

The Government recognizes that, in 1971, the Secretary

voluntarily waived the § 553(a)(2) exception and subjected

itself to the statute’s procedural requirements. Public

Participation in Rule Making, 36 Fed. Reg. 2532 (Feb. 5,

1971). Yet, it appears to contest the assertion that this waiver

binds the agency. See Gov’t Reply Br. 8 & n.3. The

Government provides no basis for this argument, however, and

it fails to address this court’s and the Supreme Court’s cases

treating this or other such waivers as binding. See Samaritan

Health Serv. v. Bowen, 811 F.2d 1524, 1529 & n.14 (D.C. Cir.

1987); Humana of S. Carolina, 590 F.2d at 1084; Rodway v.

U.S. Dep’t of Agric., 514 F.2d 809, 814 (D.C. Cir. 1975)

(“[T]he regulation fully bound the Secretary to comply

thereafter with the procedural demands of the APA.”); see also

Service v. Dulles, 354 U.S. 363, 388 (1957).

Nonetheless, to the extent that, and in whatever form the

APA’s procedural rulemaking requirements bind HHS, they

did not require that the Manual instructions be promulgated

after notice and comment. As noted above, the instructions

constitute a general statement of policy setting forth the

agency’s enforcement priorities that binds neither CMS nor the

Board. They are accordingly exempt from § 553’s notice-and-

comment requirement.

The distinguishing line between legislative rules and

general statements of policy has long been described as

“fuzzy.” See Pac. Gas & Elec. Co., 506 F.2d at 37 (quoting 1

K. Davis, Administrative Law Treatise § 5.01, at 290 (1958)).

Indeed, we have noted that “know[ing] how to classify an

agency action as a legislative rule, interpretive rule, or general

statement of policy . . . turns out to be quite difficult and

20

confused” and that, “given all of the consequences that flow”

from that determination, “[i]t should not be that way.” Nat’l

Mining Ass’n v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014).

Here, however, it is clear that the Manual instructions

constitute a policy statement for the same reason that they do

not create or amend a substantive legal standard—they have no

binding legal effect.

Our case law sets out “two lines of inquiry” to guide the

determination of whether an action constitutes a legislative rule

or a general statement of policy. Wilderness Soc’y v.

Norton, 434 F.3d 584, 595 (D.C. Cir. 2006). “One line of

analysis considers the effects of an agency’s action, inquiring

whether the agency has ‘(1) impose[d] any rights and

obligations, or (2) genuinely [left] the agency and its

decisionmakers free to exercise discretion.’” Ctr. for Auto

Safety v. Nat’l Highway Traffic Safety Admin., 452 F.3d 798,

806 (D.C. Cir. 2006) (quoting CropLife Am. v. EPA, 329 F.3d

876, 883 (D.C. Cir. 2003)). The second “looks to the agency’s

expressed intentions,” including “consideration of three

factors: ‘(1) the [a]gency’s own characterization of the action;

(2) whether the action was published in the Federal Register or

the Code of Federal Regulations; and (3) whether the action has

binding effects on private parties or on the agency.’” Id. at 806-

07 (quoting Molycorp, Inc. v. EPA, 197 F.3d 543, 545 (D.C.

Cir. 1999)). As we have noted, the two lines of analysis overlap

at the inquiry into whether the action has binding effect, see

General Elec. Co. v. EPA, 290 F.3d 377, 382 (D.C. Cir. 2002),

and we have consistently emphasized that this factor is the most

important, see Nat’l Mining Ass’n, 758 F.3d at 252 (collecting

cases).

Applying these criteria, it is clear that the Manual

instructions are a general statement of policy. Under the first

line of inquiry, the Manual instructions “impose[] [no] rights

21

[or] obligations” on providers. CropLife Am., 329 F.3d at 883.

As explained above, the legal effects on providers stem from

the Medicare Act and its implementing regulations as well as

the reconciliation actions taken pursuant to those authorities.

Under the second line of inquiry, it is noteworthy that HHS has

characterized its instructions as mere guidance, see 68 Fed.

Reg. at 34,504. The instructions were not published in either

the Federal Register or the Code of Federal Regulations. And,

finally, critical under both lines of analysis, the instructions

have no binding effect on either CMS or the Board. The agency

is free to determine that reconciliation is or is not appropriate

regardless of whether the criteria in the instructions are met.

CMS Manual at 34-35, J.A. 129-30. The agency is “genuinely

le[ft] . . . free to exercise discretion.” CropLife Am., 329 F.3d

at 883.

Put simply, the Manual instructions “merely explain[] how

the agency will enforce a statute or regulation—in other words,

how it will exercise its broad enforcement discretion.” Nat’l

Mining Ass’n, 758 F.3d at 252. Namely, they describe the way

in which CMS, through its MACs, will implement the

reconciliation authority from the 2003 rule. They provide that,

as a general matter, the agency believes that it will best

accomplish its goal of ensuring that outlier payments

“approximate the marginal cost of care,” 42 U.S.C.

§ 1395ww(d)(5)(A)(iii), by focusing its limited resources on

reconciling payments for hospitals whose actual cost-to-charge

ratio for the period of service is at least 10% higher or lower

than its cost-to-charge ratio for the time period used to calculate

the outlier payment, and whose total outlier payments for that

period exceed $500,000. But HHS has expressly retained

discretion to deviate from these criteria where it determines

that doing so would further the aims of the statute. See CMS

Manual at 34-35, J.A. 129-30.

22

Clarian argues that the instructions cannot qualify as a

policy statement because they “do not invite the Secretary’s

exercise of informed discretion as to a subset of otherwise

retroactively adjustable outlier payments; they define the scope

of outlier payments that are subject to retroactive adjustment in

theory and in practice.” Appellee Br. 45. But, as we have

already explained, Clarian acknowledges that the Act and

regulations provided CMS with authority to reconcile

payments prior to the Manual instructions’ issuance, and the

Manual itself makes clear that the agency retains the discretion

to deviate from the criteria that it set forth. Thus, the

instructions are not, as Clarian asserts, “a so-called policy

statement [that] in purpose or likely effect . . . narrowly limits

administrative discretion, [which must] be taken for what it

is—a binding rule of substantive law.” Guardian Fed. Sav. &

Loan Ass’n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658, 666-

67 (D.C. Cir. 1978). To the contrary, they do not cabin the

agency’s discretion.

Finally, Clarian argues that HHS has forfeited the

argument that the instructions are merely a policy statement

because it relied only on the interpretive and procedural rule

exceptions under § 553(b)(3)(A) in its arguments before the

District Court. However, the Government argued below that its

instructions were “guidance” that “need not go through []

notice-and-comment rulemaking.” Gov’t Memo. in Supp. of

Mot. Summ. J. at 25. The District Court rejected that argument.

See Clarian Health West, LLC, 206 F. Supp. 3d at 420. A

litigant may “adduce[] additional support for [its] side of an

issue upon which the district court did rule.” Koch v. Cox, 489

F.3d 384, 391 (D.C. Cir. 2007); see Yee v. City of Escondido,

503 U.S. 519, 534 (1992) (“Once a federal claim is properly

presented, a party can make any argument in support of that

claim; parties are not limited to the precise arguments they

made below.”). The Government’s reliance on the general

23

policy statement exception is within the scope of the argument

it made below that the instructions were procedurally valid

under § 553. The claim was therefore preserved for our review.

The APA leaves to agencies the decision of how to

establish policy. If the agency so chooses, it may forego notice-

and-comment procedures and announce through a policy

statement its intentions for future adjudications. It is not up to

the court to second-guess the agency’s decision to proceed in

that manner, so long as the policy statement is not, in truth, a

legislative rule. Because we conclude that the Manual

instructions are not, the APA, like the Medicare Act, poses no

procedural barrier to the course that HHS took here.

E. This Appeal Does Not Present a Challenge to the

Validity of the Manual Instructions on Substantive

Grounds

Lest there be any confusion on this point, we want to make

it clear that this appeal merely involves a challenge to the

agency’s failure to follow notice-and-comment procedures

when it adopted its Manual instructions. The Government has

appealed the District Court’s determination that the

instructions were procedurally invalid. The District Court did

not assess the validity of the Manual instructions or the

agency’s reconciliation determination on substantive grounds.

Therefore, these matters are not in issue on this appeal.

The adoption of the Manual instructions without notice-

and-comment rule making did not pretermit any possibility of

judicial scrutiny of the disputed criteria. An agency election to

adopt a policy statement rather than promulgate a legislative

rule simply determines how, when, and under what standard

the criteria might be reviewed. See M. Elizabeth Magill,

Agency Choice of Policymaking Form, 71 U. CHI. L. REV.

24

1383, 1395-97 (2004); see also Christensen v. Harris Cty., 529

U.S. 576, 587-88 (2000). When an agency adopts a legislative

rule after notice-and-comment rule making, it may be subject

to challenge for only a specified period of time. See, e.g., Sierra

Club de Puerto Rico v. EPA, 815 F.3d 22, 26-28 (D.C. Cir.

2016); Mendoza v. Perez, 754 F.3d 1002, 1018 (D.C. Cir.

2014); Harris v. FAA, 353 F.3d 1006, 1009-10 (D.C. Cir.

2004). In contrast, although a policy statement is not subject to

review upon adoption, it may be challenged if it is applied in

an enforcement action against a regulated party. Nat’l Mining

Ass’n, 758 F.3d at 253 (quoting Pac. Gas & Elec. Co, 506 F.2d

at 38). If this appeal had concerned a claim by Clarian that the

agency’s reconciliation determination was invalid on

substantive grounds, we might have been required to determine

whether HHS’s criteria and their application were arbitrary and

capricious. See, e.g., ExxonMobil Oil Corp. v. FERC, 487 F.3d

945, 950-51 (D.C. Cir. 2007); U.S. Telephone Ass’n v. FCC, 28

F.3d 1232, 1235 (D.C. Cir. 2004); Bechtel v. FCC, 10 F.3d 875,

878 (D.C. Cir. 1993) (“Sooner or later, the agency must meet

its obligation to respond to criticisms.”).

This appeal presents only the procedural claim, however.

And because neither the APA nor the Medicare Act mandated

that HHS promulgate the reconciliation selection criteria in the

2010 Manual instructions through regulation after notice and

comment, the agency’s decision not to go that route was

permissible.

III. Conclusion

For the reasons stated above, we reverse the decision of

the District Court and remand for further proceedings

consistent with this opinion.

So ordered.