Petition for Writ of Certiorari — Banner Health, et al., Petitioners v. Alex M. Azar, II, Secretary of Health and Human Services
Supreme Court briefJan 16, 2018
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No. 17-___
IN THE
Supreme Court of the United States
————
BANNER HEALTH, et al.,
Petitioners,
v.
ERIC HARGAN, ACTING SECRETARY OF HEALTH AND
HUMAN SERVICES,
Respondent.
————
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the District of Columbia Circuit
————
PETITION FOR A WRIT OF CERTIORARI
————
STEPHEN P. NASH
Counsel of Record
SVEN COLLINS
SQUIRE PATTON BOGGS (US) LLP
1801 California Street
Suite 4900
Denver, CO 80202
(303) 830-1776
stephen.nash@squirepb.com
Counsel for Petitioners
January 16, 2018
WILSON-EPES PRINTING CO., INC. – (202) 789-0096 – WASHINGTON, D. C. 20002
QUESTIONS PRESENTED
This petition presents two questions:
1. When a statute mandates that payments must
approximate the recipient’s marginal costs, but the
paying agency’s regulations facilitate claims that the
agency admits do not satisfy that requirement, is it
within the agency’s authority to pay those claims and
reasonable for the agency to regard the payments as
ordinary and lawful, when doing so reduces the
amounts available to other claimants?
2. Is an agency’s decision to maintain a prior policy,
after soliciting and considering comments and
analyzing fresh evidence, subject to judicial review
under the Administrative Procedure Act?
(i)
ii
CORPORATE DISCLOSURE STATEMENT
Hospital Appellant
Parent(s)
Publicly
held
company
that has a
10% or
greater
ownership
interest in
the entity
BANNER HEALTH,
f/b/o Banner Good
Samaritan Medical
Center (now known
as Banner University
Medical Center
Phoenix)
Banner
Health
None
BANNER HEALTH,
f/b/o North Colorado
Medical Center
Banner
Health
None
BANNER HEALTH,
f/b/o McKee Medical
Center
Banner
Health
None
BANNER HEALTH,
Banner
Health
None
Banner
Health
None
f/b/o Banner
Thunderbird Medical
Center
BANNER HEALTH,
f/b/o Banner Mesa
Medical Center
iii
Hospital Appellant
Parent(s)
Publicly
held
company
that has a
10% or
greater
ownership
interest in
the entity
BANNER HEALTH,
f/b/o Banner Desert
Medical Center
Banner
Health
None
BANNER HEALTH,
f/b/o Banner Estrella
Medical Center
Banner
Health
None
BANNER HEALTH,
f/b/o Banner
Baywood Medical
Center
Banner
Health
None
BANNER HEALTH,
f/b/o Banner Heart
Hospital
Banner
Health
None
BANNER HEALTH,
f/b/o Banner Boswell
Medical Center
Banner
Health
None
ABBOTT
NORTHWESTERN
HOSPITAL
Allina
Health
None
BUFFALO
HOSPITAL
Allina
Health
None
CAMBRIDGE
MEDICAL CENTER
Allina
Health
None
iv
Hospital Appellant
Parent(s)
Publicly
held
company
that has a
10% or
greater
ownership
interest in
the entity
MERCY HOSPITAL
Allina
Health
None
NEW ULM
MEDICAL CENTER
Allina
Health
None
OWATONNA
HOSPITAL
Allina
Health
None
ST. FRANCIS
REGIONAL
MEDICAL CENTER
Allina
Health
None
UNITED HOSPITAL
Allina
Health
None
UNITY HOSPITAL
Allina
Health
None
BILLINGS CLINIC
None
None
CABELLHUNTINGTON
HOSPITAL
None
None
CHARLESTON
AREA MEDICAL
CENTER
None
None
v
Hospital Appellant
Parent(s)
Publicly
held
company
that has a
10% or
greater
ownership
interest in
the entity
DENVER HEALTH
AND HOSPITAL
AUTHORITY
None
None
GOOD SAMARITAN
HOSPITAL
None
None
HALIFAX
COMMUNITY
HEALTH SYSTEM,
a/k/a Halifax Medical
Center
None
None
MEMORIAL
HEALTH SYSTEM
COLORADO
SPRINGS, a/k/a
Memorial Health
System Foundation
UCHealth
None
PARKVIEW
MEDICAL CENTER
None
None
VALLEY VIEW
HOSPITAL
None
None
WEST VIRGINIA
UNIVERSITY
HOSPITAL
None
None
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ...............................
i
CORPORATE DISCLOSURE STATEMENT .....
ii
TABLE OF AUTHORITIES ................................
ix
OPINION BELOW ..............................................
1
JURISDICTION ..................................................
1
STATUTORY PROVISIONS INVOLVED ..........
1
STATEMENT ......................................................
2
REASONS FOR GRANTING THE PETITION ...
16
A. The Opinion Below Departed From This
Court’s Precedents on the Scope of Agency
Authority ...................................................
16
B. The Opinion Below Widened a Split
Among the Circuits About When an
Agency Has Reopened a Previous
Decision .....................................................
21
CONCLUSION ....................................................
26
APPENDIX
APPENDIX A: JUDGMENT, U.S. Court of
Appeals, District of Columbia Circuit (August
18, 2017) ...........................................................
1a
APPENDIX B: OPINION, U.S. Court of
Appeals, District of Columbia Circuit
(August 18, 2017) .............................................
3a
APPENDIX C: ORDER, U.S. Court of
Appeals, District of Columbia Circuit
(October 17, 2017) ............................................
65a
(vii)
viii
TABLE OF CONTENTS—Continued
Page
APPENDIX D: ORDER, U.S. Court of
Appeals, District of Columbia Circuit
(October 17, 2017) ............................................
67a
APPENDIX E: MEMORANDUM OPINION,
U.S. District Court, District of Columbia
(September 2, 2015) .........................................
69a
APPENDIX F: Medicare Program; 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 (June 9, 2003) 213a
APPENDIX G: Medicare Program; Proposed
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 System
(March 5, 2003) ................................................ 283a
ix
TABLE OF AUTHORITIES
CASES
Page(s)
Am. Hosp. Ass’n v. Price,
867 F.3d 160 (D.C. Cir. 2017) ...................
20
Barnhart v. Sigmon Coal Co.,
534 U.S. 438 (2002) ...................................
19
Brannan v. Stark,
342 U.S. 451 (1952) ............................. 17, 18, 19
California v. FCC,
905 F.2d 1217 (9th Cir. 1990) ...................
22
Cent. Hudson Gas & Elec. Corp. v. FERC,
783 F.3d 92 (2d Cir. 2015) ........................
23
CTIA-The Wireless Ass’n v. FCC,
466 F.3d 105 (D.C. Cir. 2006) ...................
23
Cty. of L.A. v. Shalala,
192 F.3d 1005 (D.C. Cir. 1999) .................
8
Dixon v. United States,
381 U.S. 68 (1965) ..................................... 16, 17
EPA v. EME Homer City Generation, LP,
134 S. Ct. 1584 (2014) ...............................
19
Grant Med. Ctr. v. Hargan,
875 F.3d 701 (D.C. Cir. 2017) ...................
20
Guardian Angels Med. Serv. Dogs, Inc.
v. United States,
809 F.3d 1244 (Fed. Cir. 2016) ................. 22, 23
ICC v. Brotherhood of Locomotive Engineers,
482 U.S. 270 (1987) ....................... 21, 22, 24, 25
x
TABLE OF AUTHORITIES—Continued
Page(s)
Miller v. United States,
294 U.S. 435 (1935) ...................................
17
Ohio Pub. Interest Research Grp. v. Whitman,
386 F.3d 792 (6th Cir. 2004) .....................
22
Thomas Jefferson Univ. v. Shalala,
512 U.S. 504 (1994) ...................................
20
Treasure State Res. Indus. Ass’n v. EPA,
805 F.3d 300 (D.C. Cir. 2017) ...................
25
Universal Health Servs., Inc. v. United
States ex rel. Escobar,
136 S. Ct. 1989 (2016) ...............................
19
Wis. Cent. Ry. Co. v. United States,
164 U.S. 190 (1896) ...................................
17
STATUTES AND REGULATIONS
28 U.S.C. § 1254(1) .......................................
1
28 U.S.C. § 1331 ...........................................
13
42 U.S.C. § 1395oo(a)-(b) ..............................
12
42 U.S.C. § 1395oo(f) ....................................
13
42 U.S.C. § 1395x(v)(1)(A) ............................
20
42 U.S.C. § 1395ww(d)(3)(B) ........................
9
42 U.S.C. § 1395ww(d)(5)(A) ........................ 1, 6, 8
42 C.F.R. § 405.1842(f)(1)(ii) ........................
13
79 Fed. Reg. 49,854 (Aug. 22, 2014) ............
4
xi
TABLE OF AUTHORITIES—Continued
OTHER AUTHORITIES
Page(s)
Boca Raton Cmty. Hosp. v. Tenet
Healthcare Corp., 9:05-cv80183-PAS,
ECF No. 49 (S.D. Fla. May 17, 2005) .......
7
Ctr. for Medicare & Medicaid Servs., HHS,
Ann. Fin. Rep. FY 2017, Publ’n No.
952016 (2016) ............................................
3
1 GAO, Principles of Federal Appropriations Law (3d ed. 1991) .............................
17
Testimony of Thomas Scully, CMS Administrator, Medicare Outlier Payments to
Hospitals: Hearing Before Subcomm. on
Labor, Health & Human Servs., &
Education, 108th Cong. 108-268 (2003) ... 10, 19
U.S. Health & Human Servs., Office of
the Inspector Gen., OEI-06-10-00520,
Medicare Hospital Outlier Payments
Warrant Increased Scrutiny (2013) .........
3-4
PETITION FOR A WRIT OF CERTIORARI
Banner Health, along with the 28 hospitals that
joined it in the appeal below, respectfully petitions
for a writ of certiorari to review the judgment of the
United States Court of Appeals for the District of
Columbia Circuit. The respondent is Eric Hargan, in
his official capacity as the head of the United States
Department of Health and Human Services.
OPINION BELOW
The opinion of the court of appeals, affirming in
part and reversing in part the district court’s judgment, is reported at 867 F.3d 1323 (D.C. Cir. 2017) and
reprinted at Appendix B. The order of the district
court granting summary judgment to respondent is
reported at 126 F. Supp. 3d 28 (D.D.C. 2015) and
reprinted at Appendix E.
JURISDICTION
The judgment of the court of appeals was entered on
August 18, 2017; the court denied petitioner’s request
for rehearing on October 17, 2017. The jurisdiction of
this Court is invoked under 28 U.S.C. § 1254(1).
STATUTORY PROVISIONS INVOLVED
Section 1886 of the Social Security Act (the “Act”),
codified at 42 U.S.C. § 1395ww(d)(5)(A), provides, in
relevant part, as follows:
(ii) For cases which are not included in
clause (i), a subsection (d) hospital may
request additional payments in any case where
charges, adjusted to cost, exceed a fixed
multiple of the applicable DRG prospective
payment rate, or exceed such other fixed
dollar amount, whichever is greater, or, for
discharges in fiscal years beginning on or
2
after October 1, 1994, exceed the sum of the
applicable DRG prospective payment rate
plus any amounts payable under subparagraphs (B) and (F) plus a fixed dollar amount
determined by the Secretary.
(iii) The amount of such additional
payment under clauses (i) and (ii) shall be
determined by the Secretary and shall (except
as payments under clause (i) are required to
be reduced to take into account the requirements of clause (v)) approximate the marginal
cost of care beyond the cutoff point applicable
under clause (i) or (ii).
(iv) The total amount of the additional payments made under this subparagraph for
discharges in a fiscal year may not be less
than 5 percent nor more than 6 percent of the
total payments projected or estimated to be
made based on DRG prospective payment
rates for discharges in that year.
STATEMENT
This case presents a fundamental question about
an agency’s obligations in handling the public money
entrusted to it. The Department of Health and
Human Services administers the Medicare program,
which reimburses hospitals and other care providers
for their services. The Department’s payment regulations were defective, in that they enabled unscrupulous
hospitals to submit payment claims that ostensibly
complied with the Department’s regulations but actually violated a key statutory criterion. The D.C.
Circuit, in the decision below, held that even though
the payment requests were improper, the Department’s payments were lawful. Evidently, the D.C.
3
Circuit reasoned the agency had fulfilled its duties
because the payments conformed to the regulation.
See Appendix (“App.”) 31a-32a (holding the Department could make payments based on claims it
acknowledged were inflated by certain hospitals).
That conclusion presents serious tension with this
Court’s precedents. The Court has generally held that
limitations in a statute, including eligibility criteria
for payments, circumscribe an agency’s authority. An
agency should not be able to make a payment that
contravenes a statutory limitation; and an agency
regulatory scheme that purports to allow such a
payment must be invalid to the extent of the
inconsistency. The D.C. Circuit overlooked these basic
principles to focus on its concern about the administrative difficulty of correcting past erroneous payments.
The question, then, is whether an agency can simply
apply its regulations to legitimate payments that—by
the agency’s admission—the claimants could not, under
the governing statute, lawfully request. This question
has significant consequences for the administration of
Medicare, a program that accounts for roughly one
fifth of health care spending in this country. Ctr. for
Medicare & Medicaid Servs., HHS, Ann. Fin. Rep. FY
2017, Publ’n No. 952016, at 2 (2016). And the sort of
discrepancy between regulation and statute that this
case has presented is not an isolated incident. Indeed,
the Department’s Inspector General has identified
additional apparently improper claims, from recent
years, in the particular program that gave rise to this
case; and the Department’s response, just as in the
rulemaking at issue here, was that the claims are
acceptable “no matter how high” so long as they
appear to comply with departmental regulations.
Compare U.S. Health & Human Servs., Office of the
4
Inspector Gen., OEI-06-10-00520, Medicare Hospital
Outlier Payments Warrant Increased Scrutiny (2013),
with 79 Fed. Reg. 49,854, 50,377-78 (Aug. 22, 2014).
The decision below licenses the Department to ignore
such problems. In this case, the Department’s treatment of the dubious payments as lawful led it to remove
over a billion dollars—the amount of the improper
payments in fiscal year 2003, about a fifth of the
program—from being available to reimburse law-abiding
hospitals. The overall hospital-reimbursement system
handles roughly $120 billion each year, and in the
Medicare system as a whole the Department oversees
almost $700 billion per year. Unknown portions of
that staggering sum are vulnerable to misallocation
under the lower court’s holding.
This case also presents an important question about
judicial review under the Administrative Procedure
Act, a question that has generated confusion and
uncertainty among the lower courts. It often happens
that an agency reevaluates a past action, such as an
existing rule, in light of changing circumstances and
considers one or more changes. If after reevaluation
the agency rejects those changes and decides to retain
the rule as it was, the courts of appeal are divided
about whether, and in what circumstances, a court
may review that decision. In the Second Circuit, the
decision would be reviewable if the agency’s explanation showed it had reconsidered the issue. In the Sixth
and Ninth Circuits, what matters is whether the
agency provided a new opportunity to comment on an
issue. While the D.C. Circuit has on occasion considered various factors relevant, the decision below
squarely used a standard like the latter.
The independent reviewability of an agency’s reconsideration of an existing policy and rejection of
5
potential changes is a critical, often dispositive,
threshold inquiry that determines (1) the applicable
statute of limitations and (2) the scope of the administrative record in a regulatory challenge. If the
reconsideration is not independently reviewable, then
a statute of limitations will often bar review of the
policy. And, even if the original adoption of the rule
can still be challenged, the court will be limited to the
record before the agency during that original adoption,
i.e. unable to review the materials (including evidence
of changed circumstances and new comments) that
the agency considered later, in deciding to retain the
policy.
The facts of this case demonstrate how important
the question of reviewability is. The Department of
Health and Human Services adopted a rule in August
2002 that governed the allocation of about $5 billion in
public money. In June 2003, the Department decided
to maintain the rule, even though the record revealed
fresh facts that undermined key premises of the 2002
decision. The policy at issue applies nationwide. Yet
in some circuits, a court would review the June 2003
decision with the full record before the agency at that
time, while in others it would consider only the record
materials as of August 2002.
1. The petition involves hospitals’ requests for
payments from Medicare. Under the Act, a qualifying
hospital that treats an eligible patient receives reimbursement from the Department of Health and Human
Services (through a contractor to the Department
called a fiscal intermediary) according to tables of rates
applicable to various categories of medical diagnosis.
The Centers for Medicare and Medicaid Services, a
division of the Department, establishes those rates,
6
along with ancillary elements of the reimbursement
calculation.
A patient might for various reasons need extraordinarily costly care. A hospital can receive additional
reimbursement for such a case by submitting an
“outlier” claim. A case is potentially eligible for outlier
reimbursement if the hospital’s “charges, adjusted to
cost, exceed” a figure that is the sum of the established
rate for cases of that type, certain other amounts
set forth in the statute, and “a fixed dollar amount
determined [typically, once a year] by the Secretary.”
42 U.S.C. § 1395ww(d)(5)(A)(ii). The amount of the
outlier payment “shall . . . approximate the marginal
cost of care beyond the cutoff point.” 42 U.S.C.
§ 1395ww(d)(5)(A)(iii). HHS refers to this cutoff point,
which corresponds to the threshold at which a hospital
is allowed to submit an outlier claim, as the fixed-loss
threshold. See, e.g., App. 217a.
2. Hospital costs per case (which depend on several
factors) are estimated under the Department’s payment regulations for purposes of calculating outlier
payments. App. 218a, 221a-222a, 247a. Since 1988,
the Department’s payment regulations have directed
that costs for a case be calculated by multiplying a
hospital’s billed charges by its average “cost-to-charge”
ratio. App. 217a. However, the Department’s payment mechanism was vulnerable to abuse, because an
unscrupulous hospital could submit inflated charges
that would gain it payments wildly in excess of its
actual costs. This practice, which came to be called
“turbo-charging,” took advantage of defects in how the
Department assigned cost-to-charge ratios.
First, the 1988 regulations set a floor for hospital
cost-to-charge ratios. Whenever they fell below that
floor (set at three standard deviations below the
7
national average), an intermediary was required to
replace the actual ratio with a much higher average
ratio for hospitals in the same state. App. 237a. For
example, in 2003 if a hospital’s actual cost-to-charge
ratio fell below 0.194 (i.e., its costs were historically
about one fifth of its charges), the hospital would
receive outlier payments based on the relevant statewide
average ratio (as though its costs were actually one
third of its charges). Perforce, the substituted cost-tocharge ratio, and the resulting outlier payments, bore
no relation to the hospital’s actual costs, App. 237a239a; and a turbo-charging hospital could enjoy that
substituted ratio regardless of how much it continued
to inflate its charges.
Second, the 1988 regulations required that cost-tocharge ratios be calculated from data that lagged
hospital charges by two to four years. App. 296a-297a.
These outdated cost-to-charge ratios would not reflect
a hospital’s more recent charge manipulation. So, in a
given year, a hospital could inflate its charges and
take advantage of the old, higher cost-to-charge ratio
to receive payments that grossly overstated costs per
case. Id.
Manipulative claims of the sort just described were
formally consistent with the Department’s payment
regulations. But they did not comply with the statutory mandate that outlier payments “shall . . .
approximate the marginal cost of care above the
cutoff.” For that reason, the Department has characterized the claims as unlawful, see 31a-32a (citing
Department’s statements in Boca Raton Cmty. Hosp.
v. Tenet Healthcare Corp., 9:05-cv80183-PAS, ECF No.
49 (S.D. Fla. May 17, 2005)), and the Government has
recovered at least $1.2 billion through settling False
Claims Act cases against turbo-charging hospitals.
8
3. The amount a hospital receives on an outlier
claim also depends on the fixed-loss threshold; a
hospital receives payment only for costs above the
threshold. This petition involves the rules through
which the Department sets the fixed-loss threshold,
typically every August to apply to the upcoming fiscal
year.
The Act specifies that “[t]he total amount of the
additional payments made under this subparagraph
for discharges in a fiscal year may not be less than
5 percent nor more than 6 percent of the total
payments projected . . . in that year.” 42 U.S.C.
§ 1395ww(d)(5)(A)(iv). The Department has consistently interpreted this language as an instruction
about how to choose the fixed-loss threshold. A higher
threshold means fewer cases are eligible for outlier
claims and less is paid for those that are eligible.
Conversely a lower threshold permits more and larger
outlier payments.
The Department reads the statute to mean only that
it must set a threshold that is “likely” to result in total
outlier payments for a coming fiscal year that are
between the 5 and 6 percent boundaries. In practice,
the Department chooses the threshold it concludes is
likely to achieve outlier payments at 5.1% of total
payments. If actual outlier payments end up being
above or below the 5.1% target, the Department does
not make any retroactive correction. Under the
Department’s interpretation, no correction is required
because the statute requires no more than a projection
that payments resulting from a given threshold will
likely be within the 5-6 percent boundaries. The D.C.
Circuit has held that the Department’s interpretation
on this point deserves deference. Cty. of L.A. v.
Shalala, 192 F.3d 1005, 1019 (D.C. Cir. 1999).
9
In accordance with the Act, the Department reduces
the payment rate for regular case payments by the
same 5.1% percentage amount that it forecasts it will
pay for outlier cases. 42 U.S.C. § 1395ww(d)(3)(B).
Essentially, all hospitals fund outlier payments by
undergoing a deduction on their regular cases. However, the Department does not withdraw additional
amounts from regular payments for a fiscal year if
outlier payments exceed its prediction or restore funds
if outlier payments are below forecast.
4. From 1998 through 2003, outlier payments as
recorded by the Department repeatedly exceeded the
5.1% target and even the 6% boundary, by increasing
amounts—from 6.5% of total payments in 1998 to 7.9%
of total payments in 2002. Compared to the 5.1%
target that the Department had set for itself, these
recorded payments represented (according to the
agency’s estimate) an excess of $9 billion over the
years 1997 through 2002. App. 224a.
For each year, the Department responded to the
apparent excess of payments in the prior year by
increasing the fixed-loss threshold. After using a
$9,700 threshold in fiscal year 1997, the Department
set a threshold of $11,050 for 1998, $17,500 for 2001,
and $21,025 for 2002. The agency asserted that these
threshold increases were necessary to prevent outlier
payments from exceeding its target. See, e.g., D.C.
Circuit Joint Appendix (“JA”) 641.
These increases in the threshold necessarily eliminated many cases from qualifying for outlier payments
and cut the amount paid for those cases that managed
to qualify.
5. In August 2002, the Department increased the
threshold for fiscal year 2003 by almost 60% to
10
$33,560, in a further effort to curb the excessive outlier
payments it had been making. However, early in fiscal
2003, the Department realized that the excessive
payments had resulted from the manipulative
turbo-charging described above. The agency’s analysis
found that a set of 123 hospitals—representing about
2% of the population of hospitals participating in
Medicare—had already received 21.7% of all outlier
payments partway through 2003 and had caused
nearly all of the increase in the threshold for 2003. JA
686. For example, these hospitals had increased their
charges on average by 70% over a short period but
their assigned cost-to-charge ratios had decreased by
only 2% in the same period. Id. The Administrator of
the Centers for Medicare and Medicaid Services
testified to a congressional committee that these hospitals enjoyed a “hugely disproportionate share” of
outlier payments, while other hospitals submitting
only legitimate charges were “forced to absorb the costs
of the complex cases they treat.” Medicare Outlier
Payments to Hospitals: Hearing Before Subcomm. on
Labor, Health & Human Servs., & Education, 108th
Cong. 108-268, at 7 (2003) (testimony of Thomas
Scully, CMS Administrator) (“Scully Testimony”).
In March 2003, the Department proposed to overhaul its payment regulations to prevent turbo-charging.
Among other changes, the agency proposed to eliminate the practice of substituting statewide averages
for hospitals that fell below a floor on cost-to-charge
ratios and to use more recent, tentatively settled cost
report data to establish the ratios. The Department
would also be able to adjust individual hospital costto-charge ratios in response to any ongoing excessive
charge increases. See App. 295a-307a.
11
6. When the Department proposed these changes,
it also considered whether to adjust the fixed-loss
threshold for 2003. App. 309a-310a. To be clear, the
proposal did not suggest the Department might make
a retroactive change, i.e. change the threshold applicable to cases treated before the eventual final rule.
Rather, the Department indicated it might change the
threshold to be used for the remainder of the fiscal
year. However, the Department decided it would
continue to pay turbo-charged claims until the
changes were effective. So it proposed to leave the
threshold unchanged, and noted it would evaluate
fresh data about payments during the year to decide
what to do with the threshold. The proposal solicited
comments on the question. App. 262a.
The final rule was published on June 9, 2003, and
most of the changes described above were effective on
August 8. Regarding the level of the threshold for the
balance of the fiscal year, the Department received
“many comment[s].” App. 262a. However, it decided
to maintain the threshold at the level it had set at the
beginning of the fiscal year. The agency noted it did
“have the authority to revise the threshold.” App.
265a. It recalled that it had “solicited comments and
data” on whether to change the threshold; had said it
would analyze the most recent data on payments; and
had promised to consider, “based upon that analysis
and the comments,” whether to adjust the threshold.
App. 262a. The final rule reported the Department’s
fresh analysis “reestimat[ing] the fixed-loss threshold”
using “more recent data.” App. 264a. The Department
concluded it was continuing to make outlier payments
well above the 5.1 percent target—it cited estimated
outlier payments at 6.1 percent of total payments thus
far in 2003. So its model produced a slightly higher
threshold. The agency then decided to maintain the
12
threshold at $33,500—the level it had set at the
beginning of the fiscal year—rather than increase it in
accordance with the model, mainly to avoid disrupting
hospital budgets. App. 264a-265a.
The record for the rule included the analysis, mentioned above, concluding that 123 hospitals had been
receiving 21.7 percent of outlier payments in 2003. JA
686. Comparing that proportion to the excess—6.1
percent is about 20% more than 5.1 percent—it is
evident that turbo-charging hospitals accounted for
essentially all the excess payments that motivated the
Department to keep the same threshold. Similarly,
the final rule expressed concern that turbo-charging
hospitals might have increased their charges even
further in the months since the Department published
its proposal; that possibility, as well, affected the
agency’s modeling. The final rule also noted that the
improper claims of turbo-charging hospitals had
caused the increase in threshold from the 2002 to the
2003 level. App. 223a. In sum, the Department’s
decision to maintain a threshold of $33,500 for the
final third of 2003 was based principally on the
amount it was paying on improperly turbo-charged
claims.
7. Petitioners are hospitals that participate in
Medicare and submitted claims for outlier payments
in fiscal years 1998 through 2007. Absent the
excessively high fixed-loss thresholds for those years,
they would have received substantially more outlier
payments. Pursuant to the Medicare program’s administrative review scheme, petitioners appealed their
outlier underpayments to the Provider Reimbursement
Review Board. 42 U.S.C. § 1395oo(a)-(b). Petitioners
charged, among other defects, that the thresholds
13
were improper because they violated the APA and
were contrary to the Act.
Under Department regulations, the Board does not
have authority to decide a legal question challenging
the validity of a rule. 42 C.F.R. § 405.1842(f)(1)(ii).
Instead, the Board can issue a determination that
it lacks authority to consider the issue and grant
expedited judicial review. 42 U.S.C. § 1395oo(f). The
Board made such determinations with respect to
petitioners’ challenges to the 1998 through 2007 fixedloss thresholds. After the determinations, petitioners
filed timely actions in the U.S. District Court for the
District of Columbia challenging the threshold rules.
Petitioners invoked the jurisdiction of the court under
28 U.S.C. § 1331 and 42 U.S.C. § 1395oo(f).
8. The District Court denied respondent’s motion
to dismiss the case for lack of jurisdiction. First,
respondent contended that petitioners are essentially
challenging the payment regulations that enabled
turbo-charging and that they lack standing for such a
case. The District Court recognized that petitioners
are actually contesting the reimbursements they
received, which they contend were too low because of
improper fixed-loss thresholds. Second, respondent
argued that the Board’s “no authority” determination
did not cover petitioners’ challenge to the mid-2003
decision to maintain the threshold. Reading carefully
petitioners’ filings before the Board and the Board’s
determination, the District Court concluded that the
determination covered each claim petitioners presented to the court.
On the merits of the decision, petitioners argued (as
most relevant here) that the Department’s reasoning
was arbitrary and unlawful because of how it handled
turbo-charged payments. The mid-2003 rule recog-
14
nized that a substantial quantity of 2003 payments
had resulted and were resulting from turbo-charging,
and yet counted those payments in its analysis as
though they were legitimate.
The District Court, disagreeing with the premise of
petitioners’ argument, held that the payments were
legitimate. As set forth above, a hospital can submit a
claim if its “charges, adjusted to cost,” exceed a
threshold. Noting that “adjusted” is ambiguous, the
court held that the existing payment regulations—
even though they enabled turbo-charging—were a
reasonable implementation of the term. See App.
147a, 149a-150a. The amount of an outlier payment,
under the statute, must “approximate . . . marginal
cost.” However, the District Court held that whatever
method the Department prescribes to “adjust[]”
charges to cost will automatically be the proper way to
approximate cost. Thus, while the court acknowledged
that the mid-2003 threshold decision was subject to
judicial review, it considered the decision reasonable.
App. 154a-155a. The court granted summary judgment to respondent.
9. Petitioners timely appealed to the United States
Court of Appeals for the District of Columbia Circuit.
a. The court of appeals concluded, just as the
District Court had, that petitioners have standing.
App. 16a-17a. Respondent argued that petitioners
were challenging the overall payment regulations
even though they had not harmed them. (Respondent
did not raise the argument it had made before the
district court about the scope of the Board’s determination that led to expedited judicial review.) The
court of appeals, though recognizing that the operation
of the payment regulations is relevant to the case,
noted that at bottom petitioners are contesting the
15
Department’s threshold-setting decisions. Petitioners
claim the Department set the fixed-loss thresholds too
high and those decisions caused petitioners to receive
too little reimbursement.
b. The court of appeals remanded the thresholdsetting rules for years 2004 through 2006, for reasons
unrelated to this petition. It affirmed the district
court’s judgment with respect to the 1998-2003 and
2007 rules.
c. Petitioners contended that when the Department
reevaluated the threshold in mid-2003, the agency
should not have counted payments that the record
showed were turbo-charged. Departing from the district
court, respondent disavowed any notion that the
claims themselves were permissible. Turbo-charging
hospitals had “massively and improperly inflated”
their charges; “it was improper for a hospital to submit
a claim for an outlier payment when . . . its charges
had no relationship to its costs”; and the Government
had recovered over $1.2 billion in settlements “for
what the government has understood to be illegal
actions.” Final Brief for Appellee at 13, 49, Banner
Health v. Price, 867 F.3d 1323 (2017) (No. 16-5129).
In accordance with respondent’s representation, the
court of appeals accepted that turbo-charged claims
were unlawful. Yet, the court held, “it does not follow
that [the Department] unlawfully issued” the corresponding payments. App. 31a-32a. The opinion noted
the statutory mandate that outlier payments “approximate the marginal cost of care”—the criterion that,
according to respondent, the turbo-charged claims
violated. But the court held that because outlier
payments are prospective, and because it would be
difficult for the Department to scrutinize past claims
using additional information, the Department could
16
lawfully pay those claims even though they were based
on false cost estimates in violation of the statutory
criterion. App. 32a.
d. The court also held the Department had no
obligation to adjust the threshold because the level of
the threshold was a settled issue. Simply responding
to comments by providing new reasons to maintain the
existing threshold did not, the opinion said, “open[] the
door to a challenge.” App. 30a-31a.
REASONS FOR GRANTING THE PETITION
This case presents two important questions about
the operation of federal agencies and judicial oversight
of their decisionmaking. On the first, the D.C. Circuit
has strayed from longstanding precedent of this Court
by placing more weight on an agency’s regulation (and
on administrative convenience) than on the statute the
regulation was intended to implement. On the second,
the D.C. Circuit has widened a split on whether and
when to review an agency’s decision, after reevaluation, to maintain a policy it previously adopted. Each
of these questions warrants this Court’s review.
A. The Opinion Below Departed From This
Court’s Precedents on the Scope of Agency
Authority
1. “A regulation which . . . operates to create a rule
out of harmony with the statute, is a mere nullity.”
Dixon v. United States, 381 U.S. 68, 74 (1965) (citation
omitted). “The power of an administrative officer or
board to administer a federal statute and to prescribe
rules and regulations to that end is not the power to
make law . . . but the power to adopt regulations to
carry into effect the will of Congress as expressed by
the statute.” Id. It should be axiomatic, therefore, that
“an agency may not expend public funds . . . based on
17
a regulation,” unless the expenditure is within the
authority conferred on the agency by statute. 1 GAO,
Principles of Federal Appropriations Law, at 3-16 (3d
ed. 1991).
Repeatedly over the decades, this Court has disapproved of agency decisions to make payments or provide
benefits beyond statutory authority, and agency regulations have been no excuse. See, e.g., Dixon, 381 U.S.
at 72-73; Miller v. United States, 294 U.S. 435, 439
(1935) (regulation extending insurance benefits was
“invalid because not within the authority conferred by
the statute”); Wis. Cent. Ry. Co. v. United States, 164
U.S. 190, 210 (1896) (“[T]he government cannot be
bound by the action of its officers, who must be held to
the performance of their duties within the strict limits
of their legal authority, where by misconstruction of
the law under which they have assumed to act,
unauthorized payments are made.”).
2. In a closely analogous case, milk producers challenged a program in which the Agriculture Department,
when setting the price that producers would receive,
deducted an amount to be paid to certain cooperative
associations. See generally Brannan v. Stark, 342 U.S.
451 (1952). The Agriculture Department offered a
range of sensible policy reasons for those payments,
but those justifications were beside the point. The
statute said milk marketing orders could contain
certain provisions and “no others,” and the required
provisions included uniformity in the prices paid by
buyers and in the prices received by producers. Id. at
456. “When the directly relevant provisions of the Act
thus demonstrate lack of authority for the payments
to cooperatives, no power to require them can be
implied” from the agency’s general authority to administer the program. Id. at 464.
18
This case presented a comparable situation under a
different statute. Regulations of the Department
of Health and Human Services purported to let
turbo-charging hospitals receive payments that violated the unambiguous statutory requirement that
outlier payments “shall approximate the marginal cost
of care beyond” the Department’s fixed-loss threshold.
The Department’s mid-2003 rule expressly acknowledged that turbo-charged claims are inconsistent
with that requirement, App. 222a, 245a-246a, and
pinpointed 123 turbo-chargers which had caused
the agency to increase the threshold nearly 60% from
2002 to 2003. App. 223a, 296a; JA 686. But the agency
nonchalantly permitted turbo-charged payments to
continue until its amendments to the payment scheme
became effective. And when it re-calculated the fixedloss threshold likely to result in payments at its target
(5.1% of overall system payments), it counted the past
turbo-charged payments and those it anticipated
making in the coming months.
3. Under this Court’s precedents, the fact that
turbo-charged payments did not—even in the loosest
sense of the word—approximate marginal cost should
have been dispositive. Yet, in the opinion below, the
D.C. Circuit reached a conclusion opposite from this
Court’s in Brannan. The lower court recognized that,
under the statute, outlier payments are supposed to
approximate marginal cost; and, in light of respondent’s concession, it accepted that turbo-charged
payments violated that condition. App. 31a-32a. But
the court held that making the payments was lawful.
The opinion reasoned that the Department was “using
cost-to-charge ration [sic] data in its possession at the
time of payment” and “[i]t would be inconsistent with
the prospectivity of the outlier-payment program to
require [the Department] to ‘reevaluate anew each
19
of the millions of outlier payments it made” because
its method was flawed. App. 32a. This rationale is
comparable to the policy reasons that, in Brannan,
this Court refused to accept as justifications for
departing from clear statutory language. See 342 U.S.
at 462-63 (rejecting petitioner’s contention that “the
contested provisions are of such basic importance that
their validity may be crucial to the success of the . . .
program”). Cf. EPA v. EME Homer City Generation,
LP, 134 S. Ct. 1584, 1601 (2014) (“The practical difficulties cited by the Court of Appeals do not justify
departure from the Act’s plain text.”); Universal Health
Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct.
1989, 2002 (2016) (“[P]olicy arguments cannot supersede the clear statutory text.”); Barnhart v. Sigmon
Coal Co., 534 U.S. 438, 462 (2002) (“We will not alter
the text in order to satisfy the policy preferences of the
Commissioner.”).
4. The question presented is exceptionally important,
because it involves the basic nature of the Department’s responsibilities to administer the Medicare
program—a system that represents roughly one fifth
of health care spending in the United States. The
Department’s regulations had enabled billions of
dollars of improper outlier payments, and as a consequence had deprived law-abiding hospitals of those
funds. Scully Testimony at 4-5, 7. The D.C. Circuit
perceived that the agency faced administrative challenges dealing with that problem. But instead of
expecting the agency to address the issue notwithstanding the difficulty, the decision below simply
absolved the Department of its statutory obligation.1
1
To be clear, petitioners have not suggested what remedy the
Department should seek with respect to the hospitals to which it
made improper payments. Cf. Final Reply Brief for the Appel-
20
When the circumstances (including the agency’s flawed
regulations) made it inconvenient to ensure that outlier payments approximated marginal cost, the opinion
says, it was lawful to make payments that did not.
The tension between statutory mandates and administrative operations runs throughout the Medicare
program. The program is undeniably “complex and
highly technical,” Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 512 (1994), involving $700 billion a year
and regulations that specify in intricate detail how
various types of payments should be made, see, e.g.,
Grant Med. Ctr. v. Hargan, 875 F.3d 701, 701 (D.C.
Cir. 2017) (“[C]ounting beds is no simple matter.”). In
many ways, the Act leaves room for the Department to
develop administratively feasible processes and rules.
See, e.g., 42 U.S.C. § 1395x(v)(1)(A) (reimbursement
available for “reasonable cost[s]”). But the statute
also, in some areas, imposes specific requirements;
and the lower courts sometimes struggle with the
agency’s implementation of those requirements given
the practical realities of the program. For example,
the D.C. Circuit recently vacated a writ of mandamus
ordering the Department to comply with a statutory
deadline for adjudicating certain reimbursement appeals,
because the court held there was a serious possibility
the Department would as a practical matter be unable
to comply. Am. Hosp. Ass’n v. Price, 867 F.3d 160, 168
(D.C. Cir. 2017).
lants at 7-8, Banner Health v. Price, 867 F.3d 1323 (2017) (No.
16-5129). Rather, petitioners contend that in setting the threshold that determines what payments other hospitals receive, the
Department had to account rationally for the fact that just over
20% of its payments were unlawful. Instead, the lower court held
that those turbo-charged payments were actually lawful.
21
The question at stake, then, is how to reconcile the
tension that arises when unambiguous language in
the Act is at odds with the administrative machinery
of the program as developed by the Department. The
decision below solved that problem by treating the
statutory language as only hortatory, at least with
respect to the agency. Petitioners respectfully suggest
that the D.C. Circuit needs guidance so that it does not
perpetuate this approach.
B. The Opinion Below Widened a Split Among
the Circuits About When an Agency Has
Reopened a Previous Decision
1. In ICC v. Brotherhood of Locomotive Engineers,
482 U.S. 270, 278 (1987), this Court set forth the basic
difference between refusing to reconsider a past decision
and reaffirming the decision after reconsideration.
When the Commission reopens a proceeding
for any reason and, after reconsideration, issues
a new and final order setting forth the rights
and obligations of the parties, that order —
even if it merely reaffirms the rights and obligations set forth in the original order — is
reviewable on its merits. See, e.g., United
States v. Seatrain Lines, Inc., 329 U. S. 424
(1947). Where, however, the Commission refuses
to reopen a proceeding, what is reviewable is
merely the lawfulness of the refusal.
2. While several circuit courts have followed the
dictum about reopening in Brotherhood of Locomotive
Engineers, the courts have split about how to determine whether an agency has reopened an issue,
particularly in the context of rulemaking.
a. Brotherhood of Locomotive Engineers indicated
that what matters is an agency’s “formal action, rather
22
than its discussion.” 482 U.S. at 281. The ICC’s order
discussed the merits of the issues at some length, but
it was styled as a refusal of reconsideration. Therefore, the Court reasoned, it should be reviewed, at
most, for whether that refusal was an abuse of
discretion. Id. at 278-80. In the rulemaking context,
the closest analog to a formal denial of reconsideration
is the denial of a petition for rulemaking. But often an
agency raises an issue on its own, without a petition.
In that context, the instruction to focus on “formal
action, rather than its discussion” does not provide
enough guidance.
b. The Ninth Circuit holds that reopener applies
“when an agency itself initiates a new rulemaking
proceeding which reopens, and seeks public comment
on, issues decided in the previous proceedings. In such
circumstances, a litigant may seek review of the new
proceeding even if the agency ultimately reaffirms its
earlier decision.” California v. FCC, 905 F.2d 1217,
1245 (9th Cir. 1990). The Sixth Circuit also focuses on
the substance of an agency’s proposal. “[T]he period
for seeking judicial review may be made to run anew
when the agency in question by some new
promulgation creates the opportunity for renewed
comment and objection.” Ohio Pub. Interest Research
Grp. v. Whitman, 386 F.3d 792, 799-801 (6th Cir.
2004). While these two cases reached opposite conclusions on the merits, both courts focused on the
substance of the agencies’ proposals.
Similarly but in the adjudication context, the
Federal Circuit has held that an issue remains open if
the agency indicates it is willing to consider additional
evidence. Guardian Angels Med. Serv. Dogs, Inc. v.
United States, 809 F.3d 1244, 1249-51 (Fed. Cir. 2016).
A later refusal to reconsider the decision “does not
23
alter this result,” because that later recharacterization
“cannot override or erase the fact that” an agency
previously “agreed to review and respond to additional
evidence . . . .” Id. at 1251.
c. The Second Circuit holds that “[a]n agency reopens
an issue decided in a previous order . . . when in
responding to comments the agency uses language
that shows that it did in fact reconsider an issue.”
Cent. Hudson Gas & Elec. Corp. v. FERC, 783 F.3d 92,
106 (2d Cir. 2015) (internal quotation marks omitted).
Thus, the focus is on whether the final rule provided
additional facts or reasons justifying an existing
policy, as opposed to whether the proposal had invited
the public to comment on the policy. In Central
Hudson, the court concluded that “FERC reopened the
issue . . . by articulating a different rationale than the
one it relied on” in the prior rule. Id.
d. The D.C. Circuit has considered both the
proposal and the explanation in the final rule relevant.
For example, in CTIA-The Wireless Ass’n v. FCC, 466
F.3d 105, 111 (D.C. Cir. 2006), it noted both the
content of the proposal and the fact that the agency
offered new justifications for its policy. Either of
these, the court said, could be a relevant factor as part
of the “entire context.” Id.
3. The decision below adopted an analysis like the
Sixth Circuit’s. The opinion explained that when an
“agency merely responds to unsolicited comment[s] by
reaffirming its prior position,” the agency does not
reopen the issue. The court noted that the Department “explain[ed] its decision not to make a midyear
change,” and that decision relied on the evolving regulatory context (namely the impact of a mid-year
change on hospital budgets). App. 30a-31a. Under the
Second Circuit’s standard, that fresh explanation
24
would have been subject to review. After all, the
Department recalculated the threshold, using new
data about payments in the previous six months.
Nonetheless, according to the opinion below, the
Department’s decision was not open to challenge
because the comments were “unsolicited.”2
4. The question how to determine whether an
agency has reopened an issue recurs frequently. Clarity
on the standards for reopening a rulemaking issue is
important for letting agencies and the public understand when a decision becomes newly susceptible to
review. Often this issue arises with respect to timeliness. A challenger might not sue on a first decision
within a limitations period, in part because it is
pursuing the possibility that the agency will reconsider its policy. In such a case, whether the agency’s
later decision to leave a policy unaltered is reviewable
will determine whether the policy can be reviewed at
all.
Perhaps more significantly, the question directly
affects the substance of judicial review and agency
decisionmaking.
As Brotherhood of Locomotive
Engineers demonstrated, there is a significant difference between reviewing the merits of a policy decision
and simply assessing whether the agency abused its
discretion by declining to reconsider it. See 482 U.S.
at 279-80 (describing circumstances under which a
court should not review a denial of reconsideration at
all). For example, the D.C. Circuit has held that a
2
Petitioners do not concede that the comments were unsolicited. In fact, the Department’s mid-2003 rule explicitly acknowledged
that “[w]e solicited comments” on whether to maintain the fixedloss threshold at $33,560, and “[w]e indicated . . . that, based upon
[fresh] analysis and the comments received, . . . we would adjust
the threshold accordingly . . . .” App. 262a.
25
simple desire for finality is a valid reason for an
agency to refuse to reconsider a rule, even in the face
of new information. See Treasure State Res. Indus.
Ass’n v. EPA, 805 F.3d 300, 306 (D.C. Cir. 2017). By
contrast, once an agency has undertaken a reevaluation, those sorts of concerns are not usually sound reasons
for maintaining a policy in the face of contrary evidence.
When an agency reconsiders a previous policy,
rejects potential changes, and then declines to alter a
previous policy, it usually does so on the basis of a
record containing fresh information about how well
the policy has worked. This case is a powerful
illustration: When the Department reassessed the
threshold in mid-2003, it had evidence that over 20%
of its payments in the outlier program were to
turbo-charging hospitals and it had acknowledged
those improper payments drove its threshold policy.
The “reopener” concept should have obligated the
Department to give serious consideration to that
information.
In sum, determining when an agency has reopened
a past issue is a central question in many rulemaking
cases. The lower courts have developed a confusing
variety of standards, and this Court has not offered
guidance since its 1987 decision in Brotherhood of
Locomotive Engineers.
26
CONCLUSION
The petition for certiorari should be granted.
Respectfully submitted,
STEPHEN P. NASH
Counsel of Record
SVEN COLLINS
SQUIRE PATTON BOGGS (US) LLP
1801 California Street
Suite 4900
Denver, CO 80202
(303) 830-1776
stephen.nash@squirepb.com
Counsel for Petitioners
January 16, 2018
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.