The D.C. Circuit Court of Appeals recently issued a partially favorable ruling for hospitals seeking additional outlier payments under the Medicare program.  In District Hospital Partners v. Burwell, a three-judge panel held that the outlier payment threshold set by the Secretary for FY 2004 violated the Administrative Procedure Act (APA), and remanded the case to the Secretary to provide an adequate explanation for her rulemaking.  If the Secretary ultimately recalculates and lowers the threshold, hospitals may be eligible for additional outlier payments to compensate them for treating extraordinarily costly patients.  By contrast, the court upheld the lower court’s decision that her FYs 2005 and 2006 rulemakings were proper, but noted that the 2004 recalculation may ultimately affect the 2005 and 2006 threshold amounts.  

Under 42 U.S.C. § 1395ww(d)(5)(A), hospitals treating patients whose charges, adjusted to cost, exceed an HHS-set threshold, above the national average DRG rate, are entitled to additional outlier payments.  In the FY 2004 “outlier correction” proposed rule, the Secretary claimed that 123 “turbo-charging” hospitals were manipulating the outlier payment system to overestimate their costs and receive additional payments, taking advantage of the time lag between bill submission and the cost-to-charge ratio in the settled cost report.  The Secretary specifically highlighted those hospitals whose percentage of outlier payments increased by at least five percent from 1999 to 2001.  See 68 Fed. Reg. 10420 (Mar. 5, 2003).  In the final outlier correction rule, the Secretary required that a hospital’s cost-to-charge ratio be calculated using more recent cost reports, and that outlier payments must be reconciled when the relevant cost report is ultimately settled if the actual cost-to-charge ratio varies by 10 percent from that used in calculating the outlier payment.  68 Fed. Reg. 34494 (June 9, 2003). 

Subsequent to the outlier correction rule, the Secretary set the outlier payment thresholds for FYs 2004 through 2006—that is, the dollar amount representing the DRG prospective payment rate plus the fixed loss threshold amount for which the hospital is responsible.  The 186 hospitals in District Hospital Partners alleged that, for those fiscal years, the threshold set by the Secretary was too high, leading to reduced outlier payments.  This arbitrary and capricious rulemaking, the hospitals argued, violated the APA. 

The D.C. Circuit found that the promulgation of the FY 2004 outlier threshold did violate the APA, given that the Secretary had previously identified 123 turbo-chargers in the proposed outlier correction rule, but did not specify how those hospitals might have been taken into account in setting the FY 2004 threshold amount.  Rather, the FY 2004 threshold rulemaking referred to 50 hospitals whose cost-to-charge ratios would trigger reconciliation, having been “consistently overpaid recently for outliers.”  68 Fed. Reg. 45346, 45476 (Aug. 1, 2003).  The court found the cited 50 versus 123 hospitals to be an “unexplained inconsistency.”  Although the Secretary noted in the final rule that the FY 2004 fixed loss threshold fell from $50,200 to $31,000 “reflecting the changes made to outliers from the [outlier correction rule],” the Secretary did not explain how the inclusion or exclusion of the 123 (or 50) hospitals affected this figure.  See id. at 45477.  Thus, according to the D.C. Circuit, the Secretary did not “examine the relevant data and articulate a satisfactory explanation” for her action, as required by the Supreme Court’s holding in Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

Accordingly, the court remanded the FY 2004 outlier threshold rulemaking to the Secretary to produce sufficient explanation regarding the change in turbo-charging hospital numbers and what effect those hospitals had on the dataset utilized in the 2004 rulemaking.  Furthermore, if the Secretary finds that it is appropriate to recalculate the 2004 outlier threshold, she must also decide what effect, if any, that had on 2005 and 2006 outlier thresholds.

The court upheld the Secretary’s 2005 and 2006 threshold rulemaking.  The methodology for 2005, the court found, “obviated any need to eliminate the turbo-charging hospitals from her dataset,” because it relied on more recent cost-to-charge ratios to calculate the appropriate inflation factor.  Half of these data were pulled after the outlier correction rule came into effect, which arguably corrected for the turbo-charging hospitals.  Thus, although the methodology was imperfect, it was not arbitrary and capricious for the Secretary to not fully account for turbo-charging hospitals in the dataset.  The court also found the 2006 rulemaking to be proper, which utilized only data collected after the outlier correction rule was in effect, and that “the specter of turbo-charging was nil.”

The opinion is dated May 19, 2015, and is available here.