Mercy Hospital, Inc. v. Alex M. Azar II

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 24, 2017 Decided June 8, 2018

No. 16-5267

MERCY HOSPITAL, INC.,

APPELLANT

v.

ALEX M. AZAR II, SECRETARY, UNITED STATES DEPARTMENT

OF HEALTH AND HUMAN SERVICES,

APPELLEE

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.

Opinion for the Court filed by Circuit Judge GRIFFITH.

2

GRIFFITH, Circuit Judge: 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.

I

A

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.

3

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

1

The adjustments are: (i) the “increase factor” adjustment,

which reflects price increases in the relevant market; (ii) the “outlier”

adjustment, which qualifies a hospital for additional payments for

patients with uncommonly high expenses; (iii) the “area wage”

adjustment, which reflects the cost of labor in the hospital’s area; (iv)

the “case mix” adjustment, which accounts for the types of patients

the hospital treated; and (v) the “residual” clause authorizing CMS

to create additional adjustments. See § 1395ww(j)(3)(A)(i)-(v).

2

For example, § 1395ww(j)(4)(A)(i) defines the outlier

adjustment as a payment “based upon the patient being classified as

an outlier based on an usual length of stay, costs, or other factors.”

Clause (j)(3)(A)(ii) then directs CMS to make that adjustment when

determining the step-two rate.

4

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.

B

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

5

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 statute and dismissed the

suit for lack of subject-matter jurisdiction. Mercy Hosp., Inc. v.

Burwell, 206 F. Supp. 3d 93, 102-03 (D.D.C. 2016). We affirm.

II

The district court had jurisdiction to review the

Administrator’s decision under 42 U.S.C. § 1395oo(f)(1), and

we review the district court’s decision under 28 U.S.C. § 1291.

We review de novo the district court’s dismissal for lack of

subject-matter jurisdiction. Council for Urological Interests v.

Sebelius, 668 F.3d 704, 707 (D.C. Cir. 2011). We presume that

we have the power to review agency action unless there is clear

and convincing evidence that Congress directed otherwise.

Cuozzo Speed Techs., LLC v. Lee, 136 S. Ct. 2131, 2140

(2016); see also, e.g., Knapp Med. Ctr. v. Hargan, 875 F.3d

1125, 1128 (D.C. Cir. 2017) (applying the presumption in favor

of review when considering whether a statutory provision

barred the panel from reviewing a hospital’s challenge to a

CMS decision); Tex. Alliance for Home Care Servs. v.

Sebelius, 681 F.3d 402, 408 (D.C. Cir. 2012) (same). But this

presumption, “like all presumptions used in interpreting

statutes, may be overcome by specific [statutory] language.”

Block v. Cmty. Nutrition Inst., 467 U.S. 340, 349 (1984).

6

III

Paragraph (8) expressly shields from administrative and

judicial review “prospective payment rates” and most of the

statutory adjustments used to calculate them. HHS reads

“prospective payment rates” to mean the step-two rates

calculated by adjusting the step-one rates. Mercy Hospital

reads “prospective payment rates” to mean the unadjusted rates

set at step one.

We begin with the text of the preclusion paragraph:

There shall be no administrative or judicial review . . . of

the establishment of—

(A) case mix groups, of the methodology for the

classification of patients within such groups, and of the

appropriate weighting factors thereof under

paragraph (2),

(B) the prospective payment rates under paragraph (3),

(C) outlier and special payments under paragraph (4),

and

(D) area wage adjustments under paragraph (6).

§ 1395ww(j)(8) (emphasis added).

Subparagraph (8)(B) directs us to paragraph (3), which

describes the “prospective payment rate”:

The Secretary shall determine a prospective payment rate

for each payment unit for which such rehabilitation facility

is entitled to receive payment under this subchapter.

Subject to subparagraph [(3)](B), such rate for payment

units occurring during a fiscal year shall be based on the

average payment per payment unit under this subchapter

for inpatient operating and capital costs of rehabilitation

7

facilities using the most recent data available (as estimated

by the Secretary as of the date of establishment of the

system) adjusted [by the statutory adjustments].

§ 1395ww(j)(3)(A).

We think a careful read of the provision makes plain what

“prospective payment rate” means. Paragraph (3) boils down

to the following: “The Secretary shall determine a prospective

payment rate . . . based on the average payment . . . [as]

adjusted . . . .” The prospective payment rate is only based on,

not equal to, the average payment; it is the average payment

that is adjusted to produce the prospective payment rate. As the

district court explained, “there is simply no doubt that Congress

used the term ‘prospective payment rate’ here in paragraph (3)

to mean the ultimate payment rate, after the adjustments are

factored in.” Mercy Hosp., 206 F. Supp. 3d at 98. We conclude

that the statute defines “prospective payment rate” as the step-

two, not the step-one, rate.

If the bar on reviewing the prospective payment rate

protects the rate determined at step two, that bar must also

include the adjustments used to calculate that rate. We

considered how far a bar on review extends in Florida Health

Sciences Center, Inc. v. HHS, 830 F.3d 515 (D.C. Cir. 2016).

In that case, a hospital challenged the data HHS used to

calculate its reimbursement for treating low-income patients

who could not pay their own medical bills. Id. at 518. Although

the hospital agreed that the statute barred review of the

agency’s final estimate of the reimbursement owed, it asserted

that the bar did not extend to the underlying data the agency

used to reach that estimate. Id. at 519. We rejected the

hospital’s argument and found that the estimate was

“inextricably intertwined” with the underlying data because a

court could not find fault with the data without also finding

8

fault with the final estimate, which relied on the data. Id. We

held that bars to review extend far enough to prevent indirect

challenges to agency decisions that Congress expressly

shielded from review. Id. (“[W]e [are] concerned with the close

connection between the element being challenged and the

decision that could not be challenged in court.” (citing Tex.

Alliance, 681 F.3d at 409-11)).

As both a textual and a practical matter, the LIP adjustment

is inextricably intertwined with the step-two rate, and so the

shield that protects the step-two rate from review protects the

LIP adjustment as well. The language of the statute ties

together the prospective payment rate and the statutory

adjustments. Paragraph (8) incorporates the prospective

payment rate by citing paragraph (3), which is also the

paragraph that directs the agency to apply each statutory

adjustment. See § 1395ww(j)(8)(B) (“the prospective payment

rates under paragraph (3)”). By citing paragraph (3), the statute

indicates that the step-two, final rate is integrated with the

statutory adjustments.

And realistically, a court cannot review any of those

adjustments without also reviewing the step-two rate. A flawed

LIP formula would mean that a step-two rate incorporating that

formula must be incorrect because that rate depends in part on

the flawed formula. A hospital that asks for review of the LIP

adjustment used to calculate its reimbursement would be

asking the court to remand the step-two rate to be recalculated

with a different LIP formula. But remanding the step-two rate

would require the court to first find that incorporating a flawed

LIP formula made the step-two rate improper. This is the same

determination that, if a hospital directly challenged its step-two

rate for relying on an improper LIP formula, would be clearly

barred by paragraph (8). Designing a pleading so that it

circumvents a statutory bar to review will not override

9

Congress’s decision to deny jurisdiction. See Palisades Gen.

Hosp. Inc. v. Leavitt, 426 F.3d 400, 405 (D.C. Cir. 2005).

Because reviewing a formula used by the prospective payment

rate would effectively review the rate itself, we cannot review

the former if we cannot review the latter.

Although the plain text of the preclusion and payment rate

provisions define “prospective payment rates” as step-two

rates, Mercy Hospital argues that neighboring provisions not

invoked by the preclusion paragraph suggest a different

meaning. Mercy Hospital’s strongest example describes the

area wage adjustment: “The Secretary shall adjust the

proportion . . . of rehabilitation facilities’ costs which are

attributable to wages and wage-related costs, of the prospective

payment rates computed under paragraph (3) for area

differences . . . .” § 1395ww(j)(6). 3 According to Mercy

Hospital, this is an instruction to adjust the prospective

payment rate by area wage differences. Because the area wage

adjustment is one of the statutory adjustments listed in

paragraph (3), Mercy Hospital thinks the prospective payment

rate must be the step-one rate, which is subject to adjustments,

instead of the step-two rate, which cannot be adjusted further.

3

The first full sentence of § 1395ww(j)(6), without the

omissions we made for clarity, is:

The Secretary shall adjust the proportion (as estimated by the

Secretary from time to time) of rehabilitation facilities’ costs

which are attributable to wages and wage-related costs, of the

prospective payment rates computed under paragraph (3) for

area differences in wage levels by a factor (established by the

Secretary) reflecting the relative hospital wage level in the

geographic area of the rehabilitation facility compared to the

national average wage level for such facilities.

10

Although an instruction to adjust the prospective payment

rate might suggest that the rate is the unadjusted, step-one rate,

it is not the prospective payment rate that is adjusted for area

wages. Instead, the “Secretary shall adjust the proportion.”

§ 1395ww(j)(6) (emphasis added). Despite nonstandard

punctuation obscuring on which side of that proportion the

prospective payment rate belongs, the sentence structure makes

clear that the area wage adjustment applies to only the

proportion and not the variables related by that proportion. By

contrast, Mercy Hospital’s reading that the “Secretary shall

adjust the . . . prospective payment rates” by that proportion

switches the placement of “rates” and “proportion” and inverts

the natural reading of the provision. Id. We are sure that the

area wage does not affect the prospective payment rate, and so

we remain confident in the meaning supplied by paragraph (3).

Mercy Hospital next urges us to apply the canon against

surplusage, which “cautions against interpreting one provision

in a way that renders another redundant.” Fla. Health, 830 F.3d

at 520. We presume that Congress did not “include words that

have no effect,” and so we generally “avoid a reading that

renders some words altogether redundant.” Antonin Scalia &

Bryan A. Garner, Reading Law: The Interpretation of Legal

Texts 176-77 (2012). Although choosing the reading that

reduces redundancies is a helpful rule when interpreting

ambiguous text, it does not apply when the text’s meaning is

plain. See Lamie v. U.S. Tr., 540 U.S. 526, 536 (2004). We find

redundancies that are subtle or pitted against otherwise plain

meanings to be feeble interpretative clues.

Both weaknesses appear in the surplusage that Mercy

Hospital proposes is fatal to our interpretation that prospective

payment rates are step-two rates. Mercy Hospital contends that

Congress carefully selected the adjustments shielded from

review. Paragraph (8) expressly elects certain adjustments for

11

protection, so Mercy Hospital reasons that it would be

redundant to also list the step-two rate that incorporates those

adjustments. See § 1395ww(j)(3)(A). The surplusage canon,

Mercy Hospital concludes, directs us to avoid that

interpretation because it would in practical effect erase the

clauses that shield the three statutory adjustments from review.

See § 1395ww(j)(8)(A), (C)-(D).

We agree that reading “prospective payment rates” to

mean step-two rates means accepting some redundancy, but we

see no cause for alarm. A little overlap, either by accident or

design, is to be expected in any complex statutory scheme with

interdependent provisions. See Adirondack Med. Ctr. v.

Sebelius, 740 F.3d 692, 699 (D.C. Cir. 2014). The overlap may

very well exist to make “double sure” that the statutory

adjustments remain above the fray of litigation. Fla. Health,

830 F.3d at 520 (quoting Shook v. D.C. Fin. Responsibility &

Mgmt. Assistance Auth., 132 F.3d 775, 782 (D.C. Cir. 1998)).

After all, courts apply a high level of scrutiny when

determining whether a statute precludes review of an agency’s

decision. See supra Part II. Judging from the many recent cases

involving challenges to CMS decisions covered by similar bars

to review, Congress had good reason to worry that challengers

might test the strength of provisions that preclude review of

Medicare-related decisions. See, e.g., Knapp Med. Ctr., 875

F.3d 1125; Fla. Health, 830 F.3d 515; Tex. Alliance., 661 F.3d

402.

Mercy Hospital contends the preclusion paragraph’s

incomplete coverage of the statutory adjustments undermines

the “double sure” theory. Three clauses in the preclusion

12

paragraph cite different statutory adjustments, 4 but two

statutory adjustments are absent from the list: the increase

factor and the residual clause. Under the step-two reading of

“prospective payment rates,” the LIP adjustment has only one

layer of protection while the enumerated adjustments like area

wage have two layers. The sloppy edges of the overlapping

provisions suggest to Mercy Hospital that Congress did not

intend them.

That paragraph (8) does not build a redundant bar to

review for each statutory adjustment is inconsequential

because we do not rely on the precision of a “double sure”

design to dismiss Mercy Hospital’s surplusage theory. Even if

the preclusion paragraph expressly covered each statutory

adjustment, still looming would be the inconsistent language

between the preclusion paragraph and the adjustment list.

Compare § 1395ww(j)(3)(A)(iv) (“by the [case mix] weighting

factors established under paragraph (2)(B)”), with

§ 1395ww(j)(8)(A) (“case mix groups, of the methodology for

the classification of patients within such groups, and of the

appropriate weighting factors thereof under paragraph (2)”).

Our point is not that the statute built twin barriers to review for

each adjustment so that the second line of defense could step

up where the first line fell. Instead, we recognize that Congress

may use overlapping language to sweep up technicalities that

more precise provisions may leave behind. Sloppy edges do not

imperil the clear definition of “prospective payment rates” as

step-two rates. See Loving v. IRS, 742 F.3d 1013, 1019 (D.C.

Cir. 2014).

4

For those keeping score, subparagraph (8)(A) precludes

review of case mix groups, which are cited as an adjustment in clause

(3)(A)(iv); subparagraph (8)(C) precludes review of outlier

payments, which are cited as an adjustment in clause (3)(A)(ii); and

subparagraph (8)(D) precludes review of area wage adjustments,

which are cited as an adjustment in clause (3)(A)(iii).

13

Mercy Hospital also invokes the negative-implication

canon to suggest that by expressly including some, but not all,

adjustments in the preclusion paragraph, the statute implies that

the missing adjustments are excluded from review protection.

Sometimes called expressio unius est exclusio alterius, the

canon suggests that “expressing one item of [an] associated

group or series excludes another left unmentioned.” Chevron

U.S.A. Inc. v. Echazabal, 536 U.S. 73, 80 (2002) (alteration in

original) (quoting United States v. Vonn, 535 U.S. 55, 65

(2002)). The Supreme Court recently explained, “If a sign at

the entrance to a zoo says ‘come see the elephant, lion, hippo,

and giraffe,’ and a temporary sign is added saying ‘the giraffe

is sick,’ you would reasonably assume that the others are in

good health.” NLRB v. SW Gen., Inc., 137 S. Ct. 929, 940

(2017). Finding the negative implication of a statute is a

context-specific exercise. Id. It becomes an unnecessary one

when, like with the surplusage canon, the statute’s meaning is

otherwise plain. See Vonn, 535 U.S. at 65.

There is no need for us to rely on what the statute did not

say to infer the scope of its review protection because the scope

is made clear through its plain language. The preclusion

paragraph directs readers to the adjustment paragraph, which

explains that prospective payment rates are the step-two rates.

Moreover, the complexity of the statute and the reasons for

making the scope of the preclusion paragraph comprehensive

instead of spare give us confidence that Congress did not create

the preclusion paragraph with the kind of precision that invites

inferences from what is carefully left unsaid.

Mercy Hospital briefly offers several additional reasons

to read “unadjusted” into “prospective payment rates,” but

none undermines the statute’s plain language. First, Mercy

Hospital notes that before it brought its reimbursement

14

challenge, CMS had previously assumed jurisdiction to review

hospitals’ challenges to LIP adjustments without offering any

explanation for its view. See Prospective Payment System for

Federal Fiscal Year 2014, 78 Fed. Reg. 47,860, 47,900-01

(Aug. 6, 2013). Mercy Hospital suggests that CMS’s historical

practice of reviewing the adjustments implies that the step-one

reading of “prospective payment rates” must be reasonable

because it is the reading that the agency itself had previously

presumed. CMS denies ever reading the statute that way and

chalks up its past practice to a misreading of its own

regulations. 78 Fed. Reg. at 47,900. Even if CMS had at one

point adopted a different reading of the statute, this certainly

would not be the first time an agency found ambiguity where

there was none. See, e.g., Kingdomware Techs., Inc. v. United

States, 136 S. Ct. 1969, 1976-77 (2016). We aren’t persuaded

that the agency’s practice, which it has since disclaimed as

error, reveals anything about the clarity of the text.

Second, Mercy Hospital argues that preventing hospitals

from seeking recourse for arbitrary and capricious adjustments

would be “fundamental[ly] unfair[].” Mercy Hosp. Br. 54.

Even if true, we cannot overlook a statutory provision’s plain

meaning simply because we might disagree with the policy it

creates. See Burrage v. United States, 134 S. Ct. 881, 892

(2014). We can only interpret statutes, not rewrite them.

Because of our limited role, we have consistently upheld broad

bars to review in similar Medicare provisions without

considering whether Congress’s clear choice to preclude

review disadvantaged hospitals. See, e.g., Knapp Med. Ctr.,

875 F.3d at 1130. Moreover, a hospital remains free to make

an ultra vires claim that the agency’s reimbursement decision

was so unreasonable that CMS must have used and applied

criteria and reasoning that Congress did not permit in the

governing statute, see Fla. Health, 830 F.3d at 522, but Mercy

Hospital made no such argument here.

15

Third, Mercy Hospital contends that the preclusion

paragraph does not apply to individual determinations because

it applies only to “the establishment of . . . the prospective

payment rates.” § 1395ww(j)(8)(B) (emphasis added). Mercy

Hospital interprets “establishment” to mean the initial

promulgation of generally applicable standards and not the

individual determinations for hospitals. Even if we accepted

that “establishment” limited the precluded subject matter, the

distinction would not help the hospital here. Though Mercy

Hospital purports to challenge the rate determination, what it

really challenges is the agency’s de facto establishment of a

new LIP adjustment formula. The fact that the agency made

this change informally does not make this any less of an

established formula. As is often true in Medicare, the proof is

in the details. When the agency calculated Mercy Hospital’s

LIP adjustment, it did not make a mistake. It applied the

formula it wanted to apply, the formula it had selected. Absent

an argument that the agency acted outside its statutory

authority in setting that framework, the statute precludes

review.

Finally, Mercy Hospital alleges that a prospective payment

rate can include only components known before the fiscal year

begins. But interpreting “prospective” to exclude any

component that is determined after the fiscal year would be

unfaithful to the statute. “Prospective” is a term of art that often

appears in statutes and regulations to describe a system based

on anticipating events that have yet to pass. Subsection (j) is an

example of a “prospective payment system,”

§ 1395ww(j)(3)(B), which is designed to reimburse hospitals

using formulas that are set before all the costs are known, see

Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227

(D.C. Cir. 1994) (explaining that a prospective payment system

is a regime that “relies on prospectively fixed rates for each

16

category of treatment rendered”). A rate within a prospective

payment system could easily be called a “prospective payment

rate” despite relying on some variables, like the number of low-

income patients served, that could not be filled in until after the

year ended. Even if “prospective” were not couched in the

well-established context of prospective payment systems,

Mercy Hospital would still be reading too much into a single

word that Congress defined as part of the full phrase

“prospective payment rate” in paragraph (3).

We conclude from the statute’s plain language that

“prospective payment rates” means step-two rates. Because the

preclusion paragraph bars review of step-two rates and the

statutory adjustments, we affirm the district court’s dismissal

of Mercy Hospital’s challenge to the Medicare Contractor’s

LIP adjustments for fiscal years 2002 through 2004 for lack of

subject-matter jurisdiction.

So ordered.