Palm Valley Health Care, Inc. v. Alex Azar, II, Se

Case: 18-41067 Document: 00515273342 Page: 1 Date Filed: 01/15/2020

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

January 15, 2020

No. 18-41067

Lyle W. Cayce

Clerk

PALM VALLEY HEALTH CARE, INCORPORATED,

Plaintiff-Appellant

v.

ALEX M. AZAR II, SECRETARY, U.S. DEPARTMENT OF HEALTH AND

HUMAN SERVICES; PALMETTO GBA, L.L.C.,

Defendants-Appellees

Appeal from the United States District Court

for the Southern District of Texas

Before OWEN, Chief Judge, and HAYNES and COSTA, Circuit Judges.

GREGG COSTA, Circuit Judge:

With annual spending topping half a trillion dollars, Medicare is the

largest recipient of federal funds after Social Security and defense. 1 With so

many tax dollars at stake, Congress created an administrative process through

which Medicare can recover overpayments. Because of the massive number of

claims, an audit of each one is not feasible. So federal law allows Medicare to

investigate a select number of claims from a provider. If the audit of that

sample reveals “a sustained or high level of payment error,” Medicare can

1 Leigh Angres & Jorge Salazar, The Federal Budget in 2018, Congressional Budget

Office (June 2019), https://www.cbo.gov/system/files/2019-06/55342-2018-budget.pdf.

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extrapolate that overpayment rate to a larger number of similar claims. 42

U.S.C. § 1395ddd(f)(3)(A).

An audit of Palm Valley Health Care, a home health care provider,

revealed that a significant percentage of the sampled claims did not meet

Medicare coverage requirements. Extrapolating that overpayment rate to all

claims paid over the relevant time period resulted in a repayment demand of

more than $12 million. Palm Valley brings constitutional, statutory, and

evidentiary challenges to that decision. Finding no error, we AFFIRM.

I.

The Department of Health and Human Services (HHS), acting through

a Medicare contractor, audited claims Palm Valley submitted between July 1,

2006, and January 31, 2009. Palm Valley was selected for review because it

had submitted an unusually large number of claims involving five or more

consecutive home health care episodes. An episode is sixty days long and the

typical claim involves two consecutive episodes. During the audit period, Palm

Valley submitted 10,699 Medicare claims.

Out of those thousands, the contractor sampled 54 and concluded that

29 of them provided services to beneficiaries who were not eligible for home

health care. Medicare will cover home health services if the beneficiary is

homebound, under the care of a physician, in need of skilled services, and

under a plan of care. 42 C.F.R. § 409.42. Based on interviews of beneficiaries

and their friends and families, as well as a review of medical records, the

contractor concluded that the 29 beneficiaries either were not homebound or

did not need skilled care. 2 As a general matter, an individual is homebound if

she has a condition restricting her ability to leave home without assistance. 42

U.S.C. § 1395f(a). The overpayment for those 29 claims was $81,681.03.

2 Palm Valley does not appeal the agency’s determinations that various beneficiaries

did not need skilled care.

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Extrapolation turned that figure into a total repayment demand of

$12,589,185.

Palm Valley sought review of the overpayment finding. It argued that

the beneficiaries qualified as homebound and thus were eligible for home

health services. It also challenged the sample the auditor used and the

extrapolation methodology used to reach the $12 million repayment figure.

Notably, however, Palm Valley did not press a defense Medicare allows for a

provider that “did not know, and could not reasonably have been expected to

know” that it was receiving overpayments. 3 42 U.S.C. § 1395pp(a)(2); see also

Caring Hearts Pers. Home Servs. v. Burwell, 824 F.3d 968, 970 (10th Cir. 2016)

(Gorsuch, J.) (calling this “[a] sort of good faith affirmative defense”).

For the arguments Palm Valley was asserting, it had many opportunities

to make them. Administrative review of overpayment decisions has several

stages. The first allows a provider to seek a redetermination from the auditor.

42 U.S.C. § 1395ff(a)(3)(A). The auditor must complete its redetermination

within 60 days. Id. § 1395ff(a)(3)(C)(ii). If the redetermination is unfavorable,

the provider may then seek reconsideration from a qualified independent

contractor, which likewise has a 60-day deadline. Id. § 1395ff(c)(3)(B)(i),

(c)(3)(C)(i). The next step is an appeal to an administrative law judge (ALJ),

who holds a hearing and reviews the overpayment finding de novo. See id. §

1395ff(d)(1)(A). The ALJ must render a decision within 90 days. Id. An

unfavorable ALJ decision may be appealed to the Medicare Appeals Council,

which also faces a 90-day deadline. Id. § 1395ff(d)(2)(A). If the provider fails

3 In response to questioning at oral argument about the overpayment scheme, the

government noted the availability of this defense and Palm Valley’s failure to raise it before

the Appeals Council. That led Palm Valley to file a postargument motion for leave to file a

supplemental brief on its interpretation of yet another statute (42 U.S.C. § 1395gg) that it

did not invoke before the Appeals Council. That motion is denied.

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at this fourth and final stage of administrative review, it may seek review in

federal district court. Id. § 1395ff(b)(1)(A).

Although each stage of administrative review has a statutory deadline,

HHS routinely fails to meet those dates. From start to finish, the average

appeal takes about five years, far in excess of the statute’s approximately one

year. Maxmed Healthcare, Inc. v. Price, 860 F.3d 335, 344−45 (5th Cir. 2017).

The statute recognizes that the agency may not meet the deadlines. If HHS

fails to meet the review deadline at any stage, a provider may escalate its

appeal and immediately jump to the next stage of review. 42 U.S.C.

§§ 1395ff(c)(3)(C)(ii), (d)(3)(A)−(B).

Palm Valley appealed through the entire administrative process. At the

redetermination stage, the contractor determined that one partial denial

among the 29 was in error. At the reconsideration stage, the independent

contractor found that Medicare did not cover the claims for 29 beneficiaries.

The ALJ subsequently reviewed the overpayment determinations and

concluded that 27 claims in the sample of 54 should not have been paid. The

Medicare Appeals Council mostly affirmed the ALJ’s decision, but concluded

that the claims for two beneficiaries previously found to be uncovered were

eligible claims. Full administrative review thus reduced the number of

ineligible claims from 29 to 25, shaving a meaningful amount off the $12

million that Palm Valley originally owed.

Consistent with recent practice, the ALJ and Medicare Appeals Council

issued their decisions roughly one-and-a-half years and three years after Palm

Valley sought their review. Although HHS did not come close to meeting either

90-day deadline, Palm Valley did not escalate its appeal.

Palm Valley finally sought review in district court. The court affirmed

the decision of the Medicare Appeals Council.

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II.

Palm Valley argues that HHS violated due process by failing to meet the

statutory deadlines at each stage of the administrative process. We have

difficulty seeing how Palm Valley was denied due process.

Due process typically requires “some form of hearing . . . before an

individual is finally deprived of a property interest.” Matthews v. Eldridge,

424 U.S. 319, 333 (1976). Palm Valley received a hearing before it had to give

any money back to Medicare. Its argument is essentially that it had too many

hearings—really too many appeals of a hearing—and that they took too long.

It does not cite any Supreme Court or circuit level authority finding a due

process violation for delays occurring during an administrative appeals

process. 4 And violation of a statutory deadline does not automatically mean a

lack of due process; the Constitution, not statutes, determine the minimum

procedures that due process requires. See Cleveland Bd. of Educ. v.

Loudermill, 470 U.S. 532, 538, 538−39, 542 (1985) (recognizing that state

statute created a property interest but applying Matthews’ balancing test to

determine what level of process the Due Process Clause required).

Even assuming the possibility of a due process violation arising from

prolonged appeals of a hearing, Palm Valley failed to take advantage of the

statutory escalation procedure that would have allowed it to expedite the

process. Nor did it seek a federal court injunction to try and prevent

recoupment. See Family Rehab., Inc. v. Azar, 886 F.3d 496 (5th Cir. 2018).

One problem with allowing this after-the-fact complaint about delay is that it

lets the provider have it both ways. Palm Valley took advantage of every

4 It relies on American Hospital Association v. Burwell, 812 F.3d 183 (D.C. Cir. 2016),

but that case does not address due process. If anything, it shows that Medicare providers

may have another option when facing violations of the statutory deadline: mandamus relief.

Id. at 132–34.

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opportunity it had to undo the overpayment finding, and it took some bites out

of the apple with partial success on some appeals. Only now, after going

through every appeal, does it challenge the delay. Contrast id. (involving

provider that brought action in district court once recoupment began because

it faced a three-year delay before an ALJ).

The timing of Palm Valley’s due process challenge also means it cannot

show the substantial prejudice that is necessary for a due process claim to

succeed. United States v. Lober, 630 F.2d 335, 337−38 (5th Cir. 1980) (per

curiam). Palm Valley does not brief any theory of substantial prejudice, and

none is apparent from the record. The roughly four-year delay did not affect

HHS’s ability to evaluate Palm Valley’s claims, as the evidence that the agency

drew on at each stage existed when Palm Valley first requested

redetermination. Nor did the delay cause financial harm to Palm Valley.

During the slow appeals process, HHS was not engaging in recoupment, the

process by which Medicare holds back payments on new claims to cover

overpayment findings that are still being appealed and thus may be

overturned. Contrast Family Rehab., 886 F.3d at 503 (holding that a district

court had subject matter jurisdiction to consider a due process claim that a

plaintiff subject to recoupment brought). In other words, HHS did not seek to

recover any overpayment until the end of the appeals process. And as we have

noted, Palm Valley preferred repeated review—with each level providing a new

opportunity to succeed—to expeditious resolution of its claims. That choice to

pursue each level of review shows that Palm Valley saw some benefit from

pursuing multiple appeals despite the known delay each phase caused. Palm

Valley has not established substantial prejudice from the delay.

The district court correctly rejected the due process claim.

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III.

Turning from the process of the agency review to its substance, we

consider Palm Valley’s argument that the ALJ and Medicare Appeals Council

applied the wrong definition of “homebound.” An individual is homebound if

he or she “has a condition . . . that restricts the ability of the individual to

leave his or her home except with the assistance of another individual or the

aid of a supportive device . . . or if the individual has a condition such that

leaving his or her home is medically contraindicated.” 42 U.S.C. § 1395f(a).

The statute further explains that “[w]hile an individual does not have to be

bedridden to be considered ‘confined to his home,’ the condition of the

individual should be such that there exists a normal inability to leave home

and that leaving home requires a considerable and taxing effort by the

individual.” Id. The ALJ and Medicare Appeals Council, citing the statute as

well as Medicare Program Integrity Manuals, stated in their reviews that a

homebound person must have a normal inability to leave home and leaving

home must “require[] a considerable and taxing effort.”

Palm Valley argues this was too demanding a standard. It argues that

for an individual to qualify as homebound, the condition of the person

“should”—but not must—“be such that there exists a normal inability to leave

home and that leaving home requires a considerable and taxing effort by the

individual.” 42 U.S.C. § 1395f(a); see also Caring Hearts, 824 F.3d at 973

(recognizing that “should” indicates a normal inability to leave home without

a taxing effort is a useful, but not dispositive, test for homebound status). 5

Under Palm Valley’s reading of section 1395f(a), whether an individual

actually left home is largely irrelevant, as the inquiry must turn on whether

5 Palm Valley repeatedly analogizes this case to Caring Hearts, 824 F.3d at 970−71.

It does not mention that Caring Hearts decided whether the section 1395pp good-faith

defense, which Palm Valley did not assert, applied.

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the beneficiary has a condition restricting his or her ability to leave home

without assistance.

But Palm Valley raised this argument for the first time in the district

court. A federal court reviewing an agency determination will not ordinarily

consider arguments that a litigant could have raised before the agency but

chose not to. Gulf Restoration Network v. Salazar, 683 F.3d 158, 174–75 (5th

Cir. 2012). HHS limits the Medicare Appeals Council’s review to objections a

represented party asserts challenging the ALJ’s ruling. 42 C.F.R. §

405.1112(c). The regulation tells a party that it must inform the Appeals

Council if it believes the ALJ’s ruling “is inconsistent with a statute,

regulation, CMS ruling, or other authority.” Id. § 405.1112(b). That covers the

“homebound” argument Palm Valley raises now but did not mention before the

Appeals Council. To allow Palm Valley to litigate an issue in federal court that

it did not present to the Appeals Council would inappropriately “bypass[]” the

agency’s internal requirement. 6 Sims v. Apfel, 530 U.S. 103, 108 (2000); see

also, e.g., Medwin Family Med. & Rehab., P.L.L.C. v. Burwell, 2017 WL

685696, at *17 (Jan. 31, 2017 S.D. Tex. 2017) (declining to consider issues not

raised before the Medicare Appeals Council). A failure to dispute the governing

legal standard before the agency is especially problematic given that the issue

permeates the review process. Raising the “must” versus “should” issue before

6 When a court decides whether to impose an “issue-exhaustion requirement even in

the absence of a statute or regulation,” it considers how much the administrative proceeding

resembles “normal adversarial litigation.” Sims v. Apfel, 530 U.S. 103, 108−09 (2000).

Because there is a regulation requiring parties to identify specific ALJ errors before the

Appeals Council, id. at 108, we need not decide whether the Medicare overpayment appeals

process is sufficiently adversarial to require exhaustion. See, e.g., id.; Vermont Dept. of Pub.

Serv. v. United States, 684 F.3d 149, 157–58 (D.C. Cir. 2012) (applying exhaustion

requirement, without assessing whether the administrative process qualified as

“adversarial,” because regulation required exhaustion in agency proceedings); Wolfe v.

Barnhart, 446 F.3d 1096, 1103 n.5 (10th Cir. 2006) (summarizing Sims as recognizing that

“exhaustion is generally required in review of adversarial administrative proceedings or

where exhaustion is mandated by agency regulation”).

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the agency would have allowed it to determine whether there is any practical

daylight between those standards on these facts, something that is far from

apparent. While judicial review of agency decisions plays an important role in

correcting agency errors, it does not allow an inefficient redo based on

arguments never presented to the agency the first time around. Because Palm

Valley failed to exhaust its challenge to the “homebound” standard, we cannot

consider the question.

IV.

We next consider Palm Valley’s argument that HHS lacked substantial

evidence for its finding that 25 beneficiaries were not homebound. Substantial

evidence 7 supports a finding that a patient is not homebound if “more than a

mere scintilla” of evidence support the determination. Salmond v. Berryhill,

892 F.3d 812, 817 (5th Cir. 2018) (quotation omitted).

That low evidentiary bar was met. The main thrust of Palm Valley’s

evidentiary challenge is that the Medicare Appeals Council and ALJ relied too

heavily on interviews of individuals (including the beneficiaries themselves),

who indicated the beneficiaries were not homebound. That testimony was

unreliable, Palm Valley argues, because a significant amount of time,

sometimes several years, had passed between the claims and the interviews.

As a general matter, Palm Valley is right that memories often fade over

time. Basic principles of our legal system, like statutes of limitations and the

right to a speedy trial, reflect that view. But the fact that passage of time may

be grounds for impeaching testimony does not render that testimony

7 We apply the substantial evidence standard rather than the Administrative

Procedures Act’s arbitrary and capricious standard because the parties agree that the former

applies. We thus do not resolve which applies. Cf. Baylor Cty. Hosp. Dist. v. Price, 850 F.3d

257, 261 (5th Cir. 2017) (“assum[ing] only for the sake of argument that the APA’s arbitrary

and capricious standard applie[d]” and noting that “it probably ma[de] no difference” which

deferential standard applied on review of Medicare’s refusal to designate a hospital as a

“critical access hospital”).

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irrelevant. This is the difference evidence law recognizes between relevancy

and probative value. Compare FED. R. EVID. 401 (evidence is relevant if it

makes a fact any more or less probable), with FED. R. EVID. 403 (excluding

evidence if its tendency to make a fact more or less likely is too small relative

to the costs of presenting it to the jury). Passage of time goes to the latter, not

the former. Because even dated firsthand or eyewitness testimony about a

beneficiary’s health makes it more or less likely that the beneficiary was

homebound, the interviews were undoubtedly relevant. In terms of probative

value, as with impeachment evidence generally, the factfinder decides how

much the passage of time undermines the credibility of testimony, if at all.

Many considerations—including the level of detail the witness provides, the

number of times the witness observed the beneficiary, and whether there is

corroboration in the form of other witnesses or documents—will impact the

reliability of the testimony.

The Appeals Council considered these factors when evaluating the

interviews as part of its claim-by-claim review of the homebound question.

Take, for instance, beneficiary R.L. The Council’s determination that R.L. was

not homebound relied in part on an interview with R.L.’s daughter two years

after the dates of service. R.L.’s daughter described how two years earlier R.L.

was able to drive to the barbershop and to visit his daughters. Also consider

beneficiary F.D. Interviews with F.D. and a staff member in the building

where F.D. lived revealed that F.D. was alert and frequently traveled outside

the home, without assistance, for activities like shopping and visiting friends.

For both these claimants, contemporary records corroborated the testimony.

Clinical records demonstrated that R.L.’s medication changes could be

managed without skilled care at home and that his diagnoses were unlikely to

leave him confined to home. And Palm Valley’s records showed multiple days

when it had sent someone to F.D.’s residence, but the patient was not home.

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Palm Valley’s critique of the interviews is unavailing given the

deferential standard of review. The Appeals Council carefully evaluated the

evidence on each claim in an 86-page opinion. Substantial evidence supports

HHS’s determination that many beneficiaries were not homebound.

V.

The agency finding we have just upheld—that 25 claims were not eligible

for payment because the patients were not homebound—does not on its own

cause Palm Valley much financial harm. But the extrapolation of that

overpayment rate to Palm Valley’s more than 10,000 claims does. It thus is

not surprising that Palm Valley also challenges that statistical analysis.

As we noted at the outset, HHS may use statistical extrapolation to

determine overpayment amounts when the Secretary determines that “there

is a sustained or high level of payment error.” 42 U.S.C. § 1395ddd(f)(3)(A); see

also Maxmed, 860 F.3d at 344−45. The threshold determination that there are

“sustained or high levels of payment errors” is not reviewable. 42 U.S.C.

§ 1395ddd(f)(3).

Palm Valley thus challenges not whether it was appropriate to use

sampling and extrapolation, but the statistical methods the agency uses when

performing those tasks. It contends that the methodology does not pass muster

under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993),

because it has not been peer reviewed or generally accepted in the relevant

scientific community. Daubert, however, does not apply in agency proceedings.

See Nat’l Taxpayers Union v. U.S. Soc. Sec. Admin., 302 F. App’x. 115, 121 (3d

Cir. 2008); Bayliss v. Barnhart, 427 F.3d 1211, 1218 n.4 (9th Cir. 2005); Niam

v. Ashcroft, 354 F.3d 652, 660 (7th Cir. 2004). It interprets Federal Rule of

Evidence 702, and the federal rules of evidence do not govern agencies. Niam,

354 F.3d at 660; see also 42 U.S.C. § 405(b)(1) (allowing evidence to be received

in Social Security hearings “even though inadmissible under rules of evidence

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to court procedure”). What is more, the procedural “gatekeeping” aspects of

Daubert, aimed as they are at preventing the jury from being tainted by

unreliable evidence, do not translate to agency proceedings for the same reason

they do not fully translate to bench trials: in reaching a decision, a judge will

only rely on evidence the judge deems reliable. See Whitehouse Hotel Ltd.

P’ship v. Comm’r, 615 F.3d 321, 330 (5th Cir. 2010) (recognizing that we have

“noted that the importance of the trial court’s gatekeeper role is significantly

diminished in bench trials . . . because, there being no jury, there is no risk of

tainting the trial by exposing a jury to unreliable evidence” (citing Gibbs v.

Gibbs, 210 F.3d 491, 500 (5th Cir. 2000)). Whether a judge’s reliability finding

was correct will be tied up in the substantive review of the decision. That is

why some courts recognize that the substantive aspect of Daubert, with its

focus on reliability, is practically speaking already part of substantive review

of agency decisions. See Donahue v. Barnhart, 279 F.3d 441 (7th Cir. 2002)

(explaining that Daubert’s “idea that experts should use reliable methods . . .

plays a role in the administrative process because every decision must be

supported by substantial evidence”).

In looking at the extrapolation from that substantive standpoint, we see

no reversible error. The methodology that the agency employed resulted in a

random sample of 54 of the 10,699 claims, the audit of which provided an

unbiased estimate of the actual average overpayment for all 10,699 claims. See

MEDICARE PROGRAM INTEGRITY MANUAL § 8.4.1.3. Palm Valley’s own expert

testified that the sample was a valid probability sample and that the agency

applied the correct formulas to extrapolate an aggregate overpayment amount

from that sample.

Palm Valley argues that the sample was too imprecise—or more simply,

that the Medicare contractor did not use a large enough sample. But as the

Medicare Appeals Council recognized, demanding a larger sample to

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marginally increase the precision of an estimate “ignore[s] real world

constraints imposed by conflicting demands on limited public funds,

constraints which CMS chose to incorporate into the statistical sampling

guidelines.” The extrapolation methodology may be imperfect, but it is the

product of a complex balance of interests. At a minimum, it constitutes

substantial evidence in support of the agency’s decision. Cf. Maxmed, 860 F.3d

at 343 (“Congress clearly envisioned extrapolation in overpayment

determinations involving home health agencies like [the plaintiff], and the

Secretary’s reliance on extrapolation as a tool was justified.”). If anything, the

extrapolation methodology is provider friendly. The extrapolation does not

assume that the average overpayment in the random sample occurred for the

universe of claims. Rather, the agency assumes that the average overpayment

for all claims is equal to a number that there is a 90% chance is smaller than

the actual overpayment. See MEDICARE PROGRAM INTEGRITY MANUAL § 8.4.5.1

(explaining that the agency uses the lower limit of a 90% confidence interval

as its overpayment estimate). That means that there is a 90% probability that

the amount that Palm Valley was overpaid is greater than the approximately

$12 million that the contractor initially calculated. See id. (“[I]t yields a

demand amount for recovery that is very likely less than the true amount of

overpayment . . . .”); see also JAN KMENTA, ELEMENTS OF ECONOMETRICS

188−89 (2d ed. 1997) (demonstrating the properties of confidence intervals).

We see no error in the extrapolation.

* * *

The judgment is AFFIRMED.

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