American Hospital Association v. Alex M. Azar II

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 4, 2018 Decided July 17, 2018

No. 18-5004

AMERICAN HOSPITAL ASSOCIATION, ET AL.,

APPELLANTS

v.

ALEX MICHAEL AZAR II, IN HIS OFFICIAL CAPACITY AS THE

SECRETARY OF HEALTH AND HUMAN SERVICES AND UNITED

STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:17-cv-02447)

Michael R. Smith argued the cause for appellants. With

him on the briefs were Carlos T. Angulo and Wen W. Shen.

Chad I. Golder and Sarah G. Boyce were on the brief for

amici curiae 35 State and Regional Hospital Associations in

support of plaintiff-appellants.

Laura Myron, Attorney, U.S. Department of Justice,

argued the cause for appellees. With her on the brief were

Chad A. Readler, Acting Assistant Attorney General, Jessie K.

Liu, U.S. Attorney, and Mark B. Stern, Attorney, Robert P.

Charrow, General Counsel, U.S. Department of Health and

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Human Services, Kelly M. Cleary, Deputy General Counsel,

Janice L. Hoffman, Associate General Counsel, Susan M.

Lyons, Deputy Associate General Counsel for Litigation, and

Robert W. Balderston, Attorney.

Before: SRINIVASAN, MILLETT, and KATSAS, Circuit

Judges.

Opinion for the Court filed by Circuit Judge KATSAS.

KATSAS, Circuit Judge: To obtain judicial review of

claims arising under the Medicare Act, a plaintiff must first

present the claims to the Secretary of Health and Human

Services. In this case, we consider whether a plaintiff may

satisfy this presentment requirement by filing comments in an

informal rulemaking. We also consider whether a plaintiff may

cure any failure to present through administrative filings made

while a case is pending on appeal.

I

The Medicare program provides federally-funded health

insurance to qualifying elderly and disabled individuals. 42

U.S.C. § 1395 et seq. Part A of Medicare covers primarily

inpatient hospital services, while Part B includes coverage for

outpatient hospital care. See id. §§ 1395c, 1395j, 1395k.

The Outpatient Prospective Payment System (“OPPS”), a

component of Part B, reimburses hospitals that provide covered

outpatient services. Id. § 1395l(t). Under the OPPS, hospitals

receive set payments for particular services rendered, as

determined under a formula that is fixed in advance and

adjusted annually. See id. A hospital seeking reimbursement

must file an administrative claim with a Medicare

administrative contractor (also known as a “fiscal

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intermediary”) acting on behalf of the Secretary. 42 C.F.R.

§ 424.32. If dissatisfied with the contractor’s initial

determination, the hospital then may pursue within HHS

various other avenues for redetermination, reconsideration,

hearings, and appeals. See 42 U.S.C. § 1395ff; 42 C.F.R.

§ 405.904. Congress has precluded judicial review of various

classifications, calculations, and adjustments of the OPPS

reimbursement rates. See id. § 1395l(t)(12).

This case involves the so-called “340B Program,” which

allows certain hospitals to purchase outpatient drugs from

manufacturers at or below specified prices. See Public Health

Services Act § 340B, 42 U.S.C. § 256b. When hospitals treat

Medicare beneficiaries with these drugs, they are reimbursed

through OPPS.

In setting the annual reimbursement rates for drugs

obtained through the 340B Program, the Secretary must use

either the “average acquisition cost” of the drug, taking into

account “hospital acquisition cost survey data,” or, if those data

are unavailable, the “average price” of the drug, as established

under different provisions of Medicare. 42 U.S.C.

§ 1395l(t)(14)(A)(iii). The relevant cross-referenced provision

fixes payment rates at 106% of the average sales price. See id.

§ 1395w-3a(b). If the average-price metric is used, this 106%

figure may be “adjusted by the Secretary as necessary for

purposes of [OPPS].” Id. § 1395l(t)(14)(A)(iii)(II). The

Secretary does not have acquisition cost survey data, so he

historically has set the OPPS reimbursement rate for drugs

purchased through the 340B Program at 106% of the average

sales price, without any adjustments. See Hospital Outpatient

Prospective Payment and Ambulatory Surgical Center

Payment Systems and Quality Reporting Programs, 77 Fed.

Reg. 68,210, 68,382–86 (Nov. 15, 2012).

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The regulation at issue here sets the OPPS reimbursement

rate for these drugs for 2018. It reduces the rate from 106% to

77.5% of the average sales price. Hospital Outpatient

Prospective Payment and Ambulatory Surgical Center

Payment Systems and Quality Reporting Programs, 82 Fed.

Reg. 52,356, 52,493–511 (Nov. 13, 2017). In reducing the rate,

the Secretary invoked his authority to adjust the average-price

determination for OPPS purposes. See id. at 52,496. To justify

the reduction, he cited various studies indicating that hospitals

participating in the 340B Program are able to buy covered

drugs at amounts significantly below the average sales price.

See id. at 52,494.

The plaintiffs in this case are three hospitals and three

hospital associations. They sued to challenge the regulation on

November 13, 2017, the very day it was published in the

Federal Register, and before its effective date of January 1,

2018. The plaintiffs claimed that, under 42 U.S.C.

§ 1395l(t)(14)(A)(iii), the Secretary lacked authority to

establish an average-price metric keyed to estimates of average

acquisition costs, rather than actual survey data of those costs.

Further, they claimed that a nearly 30% reduction cannot

qualify as a mere payment adjustment. Without submitting any

individual claims for reimbursement to HHS, they sought

declaratory and injunctive relief against the new regulation.

The district court held that the plaintiffs had failed to

present claims for reimbursement to the Secretary, as required

to obtain judicial review of claims under Medicare, and it

therefore dismissed the complaint for lack of subject-matter

jurisdiction. Am. Hospital Ass’n v. Hargan, 289 F. Supp. 3d

45 (D.D.C. 2017).

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II

We review de novo a dismissal for lack of subject-matter

jurisdiction. See, e.g., Fla. Health Scis. Ctr. v. Sec’y of Health

& Human Servs., 830 F.3d 515, 518 (D.C. Cir. 2016).

Three statutes create the scheme for obtaining judicial

review of Medicare claims. First, 42 U.S.C. § 405(h) divests

the district courts of federal-question jurisdiction “on any claim

arising under” Title II of the Social Security Act, and it bars

any “decision of the Commissioner of Social Security” from

being judicially reviewed, “except as herein provided” in other

Title II provisions. Second, 42 U.S.C. § 405(g) provides for

judicial review of Social Security Act claims, thus creating the

exception “herein provided.” In pertinent part, it permits any

person to file a civil action, “after any final decision of the

Commissioner of Social Security made after a hearing to which

he was a party,” to “obtain a review of such decision” in federal

district court. Third, 42 U.S.C. § 1395ii states that certain

provisions in § 405 and elsewhere in Title II “shall also apply

with respect to” Title XVIII of the Social Security Act—i.e.,

the Medicare Act—“to the same extent as they are applicable

with respect to” Title II, with any reference to the

“Commissioner of Social Security” considered as one to the

Secretary of HHS. See, e.g., Shalala v. Ill. Council on Long

Term Care, Inc., 529 U.S. 1, 7–9 (2000); Heckler v. Ringer,

466 U.S. 602, 614–15 (1984); Nat’l Kidney Patients Ass’n v.

Sullivan, 958 F.2d 1127, 1130–31 (D.C. Cir. 1992). Although

§ 1395ii does not specifically enumerate § 405(g) as one of the

incorporated Title II provisions, these decisions treat it as such,

presumably on the theory that expressly incorporating the

judicial-review bar in § 405(h) also effectively incorporates the

exception “herein provided” in § 405(g). See United States v.

Blue Cross & Blue Shield of Ala., Inc., 156 F.3d 1098, 1103

(11th Cir. 1998).

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Two preliminary points are undisputed. First, despite

these channeling provisions for Medicare claims, federal-

question jurisdiction remains available where necessary to

preserve an opportunity for judicial review. See, e.g., Ill.

Council, 529 U.S. at 19–20. But the hospitals do not, and could

not, contend that this is such a case. The question presented

here is not whether they may obtain review of their challenges

to the new OPPS reimbursement regulation, but when and how

they may do so through the special-review scheme for

Medicare claims. Second, there is no dispute that the hospitals’

claims arise under the Medicare Act for purposes of § 405(h),

which provides the “substantive basis” for the claims. See Ill.

Council, 529 U.S. at 12 (quoting Ringer, 466 U.S. at 615).

The Supreme Court has held that § 405(g) imposes two

distinct preconditions for obtaining judicial review of covered

Medicare claims. First, the plaintiff must have “presented” the

claim to the Secretary; this requirement is not waivable,

because without presentment “there can be no ‘decision’ of any

type,” which § 405(g) clearly requires. Mathews v. Eldridge,

424 U.S. 319, 328 (1976). Second, the plaintiff must fully

exhaust all available administrative remedies, though this more

demanding requirement is waivable. See id. Here, the district

court concluded that the plaintiffs had not satisfied the

presentment requirement. We agree.

When the plaintiffs filed this lawsuit, neither the hospital

plaintiffs, nor any members of the hospital-association

plaintiffs, had challenged the new reimbursement regulation in

the context of a specific administrative claim for payment. Nor

could they have done so, for the new regulation had not yet

even become effective. Therefore, they had neither presented

their claim nor obtained any administrative decision at all,

much less the “final decision” required under § 405(g).

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The hospitals contend that they satisfied the presentment

requirement by filing comments opposing the regulation during

the rulemaking. This argument is hard to square with the text

of § 405(g)—a regulation cannot easily be described as a “final

decision,” and a notice-and-comment rulemaking cannot easily

be described as a “hearing” in which all commenters have

assumed “party” status. To the contrary, a “final decision” is

akin to a “final disposition,” which the Administrative

Procedure Act labels an “order” and distinguishes from a

regulation or “rule.” 5 U.S.C. § 551(6). The APA also

distinguishes the notice-and-comment procedures at issue here

from formal rulemaking procedures requiring a “hearing.” Id.

§ 553(c). And it distinguishes between commenters in

informal rulemaking, who have only an “opportunity to

participate” in the proceeding, id., and those involved in formal

rulemaking, who assume “party” status, id. § 556(d).

The hospitals’ argument is also foreclosed by precedent,

which makes clear that the presentment requirement generally

prevents anticipatory legal challenges to Medicare rules and

regulations. For example, in Ringer, the Supreme Court held

that § 405(g) barred a patient from seeking prospective relief

to establish that a particular kind of surgery was “‘reasonable

and necessary’ within the meaning of the Medicare Act.” 466

U.S. at 620. The Court reasoned that the presentment

requirement applied to claims “for future benefits,” and

required the plaintiff to “give[] the Secretary an opportunity to

rule on a concrete claim for reimbursement.” Id. at 621–22. In

this context, the requisite “concrete claim for reimbursement”

must have meant a claim seeking specific payments through the

reticulated Medicare scheme for administrative claims, see 42

C.F.R. § 424.32, and appeals, see id. § 405.904, rather than

merely general comments filed in an informal rulemaking.

8

Likewise, in Illinois Council, the Supreme Court held that

an association of providers was barred from “claiming that

certain Medicare-related regulations violated various statutes

and the Constitution.” 529 U.S. at 5. The Court explained that

§ 405(g) and (h) channel “most, if not all, Medicare claims

through this special review system,” id. at 8, including

“virtually all legal attacks” on regulations, id. at 13. The Court

rejected proposed limitations to these channeling provisions

“based upon the ‘potential future’ versus the ‘actual present’

nature of the claim, the ‘general legal’ versus the ‘fact-specific’

nature of the challenge, the ‘collateral’ versus ‘noncollateral’

nature of the issues, or the ‘declaratory’ versus ‘injunctive’

nature of the relief sought,” as well as “a distinction that limits

the scope of § 405(h) to claims for monetary benefits.” Id. at

13–14. None of this would make sense if the overarching

“special review system” were nothing more than notice-and-

comment rulemaking.

Finally, in National Kidney Patients’ Association, this

Court held that § 405(g) blocked Medicare providers from

challenging a “rate reduction” in a new regulation by

“proceed[ing] directly to district court, seeking a preliminary

injunction” against the regulation. 958 F.2d at 1129–30. We

identified the problem not as the plaintiffs’ failure to participate

in the rulemaking, but as their bypassing “initial administrative

determination” in the “concrete setting” of a specific

reimbursement decision. Id. at 1133. See also Three Lower

Ctys. Cmty. Health Servs., Inc. v. U.S. Dep’t of Health &

Human Servs., 317 F. App’x 1, 3 (D.C. Cir. 2009) (per curiam)

(“The Medicare Act … requires that parties present all such

challenges to the agency in the context of a fiscal year

reimbursement claim.”).

Against all of this, the plaintiffs invoke Eldridge and

Action Alliance of Senior Citizens v. Sebelius, 607 F.3d 860

9

(D.C. Cir. 2010). Neither decision suggests that filing

comments in an informal rulemaking can constitute

presentment. In Eldridge, the named plaintiffs had “fully

presented” specific claims for disability benefits—to both a

district and regional Social Security Office—and had secured

an agency decision denying the benefits. 424 U.S. at 329. In

Action Alliance, our entire discussion of presentment was a

statement that the plaintiffs had “cured” their prior failure to

present. 607 F.3d at 862 n.1. Because we did not explain what

constituted the cure, the decision has no precedential value on

that specific point. See United States v. Sheffield, 832 F.3d 296,

308 n.3 (D.C. Cir. 2016). In any event, the plaintiffs in Action

Alliance were embroiled with HHS in a specific payment

dispute, which arose from the agency’s efforts to recover

Medicare payments erroneously made to them. See 607 F.3d

at 861. The presentment “cure” presumably consisted of

letters, sent to HHS on behalf of each plaintiff, invoking an

alleged statutory right to a waiver. See Action Alliance of

Senior Citizens v. Johnson, 607 F. Supp. 2d 33, 37–38 (D.D.C.

2009). And the result was an agency decision denying the

waivers. See id. at 38. Neither case suggests that submitting

comments in response to a proposed rule about reimbursement

rates—wholly detached from any specific payment dispute—is

the kind of “concrete claim for reimbursement” required for

presentment. See Ringer, 466 U.S. at 622.

Alternatively, the hospitals contend that they cured their

presentment problem through payment demands made to HHS

during the pendency of this appeal. Those demands come too

late to establish subject-matter jurisdiction in the district court.

“It has long been the case that ‘the jurisdiction of the court

depends upon the state of things at the time of the action

brought.’” Grupo Dataflux v. Atlas Global Grp., 541 U.S. 567,

570 (2004) (quoting Mollan v. Torrance, 22 U.S. (9 Wheat.)

537, 539 (1824)). And when this action was brought, no

10

plaintiff had presented any concrete claim for reimbursement

implicating the new regulation, which had not even become

effective.

The hospitals respond that, under Mathews v. Diaz, 426

U.S. 67 (1976), defects in subject-matter jurisdiction can be

cured at any time, even on appeal. Diaz does not reach that far.

There, the plaintiff satisfied the presentment requirement

“while the case was pending in the District Court”—at a time

when leave to supplement the complaint could still have been

granted. See id. at 75. No motion to supplement had been filed,

but the Court solved that problem under 28 U.S.C. § 1653,

which provides that “[d]efective allegations of jurisdiction may

be amended, upon terms, in the trial or appellate courts.” See

426 U.S. at 75 & n.9. Here, where the alleged presentment

occurred only when the case was on appeal, the district court

could not have granted leave to amend or supplement to reflect

any post-filing presentment. As for § 1653, that provision

merely allows appellate courts to consider additional

allegations that the district court did in fact have jurisdiction.

It does not allow for the retroactive creation of district-court

jurisdiction based on new facts that occurred only during an

appeal. See, e.g., Novak v. Capital Mgmt. & Dev. Corp., 452

F.3d 902, 906–07 (D.C. Cir. 2006) (on appeal, plaintiffs added

allegations regarding diversity of citizenship when the

complaint was filed); D.C. ex rel. Am. Combustion, Inc. v.

Transamerica Ins. Co., 797 F.2d 1041, 1044 (D.C. Cir. 1986)

(on appeal, plaintiff added allegations “that diversity was

present” below); Fry v. Layne-Western Co., 282 F.2d 97, 99

(8th Cir. 1960) (per curiam) (on appeal, parties were permitted

to add allegations “to show, if possible, that federal jurisdiction

did, in fact, exist” below).

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III

Because the plaintiffs failed to satisfy the presentment

requirement of 42 U.S.C. § 405(g), the district court properly

dismissed this case for lack of subject-matter jurisdiction.

Given our disposition, we need not consider whether the

plaintiffs’ failure to satisfy the exhaustion requirement of

§ 405(g) falls within any futility or other exception. We also

need not consider the Secretary’s alternative threshold

contention that 42 U.S.C. § 1395l(t)(12) would foreclose

judicial review of the claims at issue even if the plaintiffs had

satisfied the presentment and exhaustion requirements.

Finally, because subject-matter jurisdiction was lacking here,

we have no authority to consider the merits.

Affirmed.