13‐4179‐cv
Barrows v. Burwell
In the
United States Court of Appeals
for the Second Circuit
AUGUST TERM 2014
No. 13‐4179‐cv
LEE BARROWS, ET AL.,
individually and on behalf of all others similarly situated,
Plaintiffs‐Appellants,
v.
SYLVIA MATHEWS BURWELL,
Secretary of Health and Human Services,
Defendant‐Appellee.
Appeal from the United States District Court
for the District of Connecticut.
No. 3:11‐cv‐1703―Michael P. Shea, Judge.
ARGUED: OCTOBER 23, 2014
DECIDED: JANUARY 22, 2015
Before: WINTER, WALKER, and CABRANES, Circuit Judges.
In this putative class action lawsuit, plaintiffs‐appellants sue
the Secretary of Health and Human Services (“Secretary”) on behalf
of Medicare beneficiaries who were placed into “observation status”
by their hospitals rather than being admitted as “inpatients.”
Because “inpatients” are covered by Medicare Part A, while patients
in “observation status” are covered by Medicare Part B, placement
into “observation status” allegedly caused these beneficiaries to pay
thousands of dollars more for their medical care than they would
have had they formally been admitted as “inpatients” to their
hospitals.
The United States District Court for the District of Connecticut
(Michael P. Shea, Judge) granted the Secretary’s motion to dismiss
the complaint in its entirety. Plaintiffs now appeal the dismissal of
two of their nine claims, which together assert that the Secretary
violated the Medicare Act and the federal Due Process Clause by
failing to provide expedited notice of the decisions to place them
into “observation status,” or an expedited opportunity to challenge
these decisions.
For the reasons that follow, the District Court’s judgment is
affirmed in part and vacated in part. Specifically, we affirm the
dismissal of plaintiffs’ Medicare Act claims for substantially the
reasons stated in the District Court’s opinion; we vacate, however,
the dismissal of plaintiffs’ Due Process claims. The District Court
erred in concluding that plaintiffs lacked a property interest in being
treated as “inpatients,” because, in so concluding, the District Court
accepted as true the Secretary’s assertion that a hospital’s decision to
2
formally admit a patient is “a complex medical judgment” left to the
doctor’s discretion. That conclusion, however, constituted an
impermissible finding of fact, which in any event is inconsistent
with the complaint’s allegations that the decision to admit is, in
practice, guided by fixed and objective criteria set forth in
“commercial screening guides” issued by the Centers for Medicare
& Medicaid Services (“CMS”). Treating the complaint’s allegations
as true, as we must at this stage, plaintiffs‐appellants have arguably
asserted a property interest protected by the federal Due Process
Clause.
Accordingly, the District Court’s judgment is AFFIRMED in
part, insofar as it dismissed plaintiffs’ Medicare Act claims, and
VACATED in part, insofar as it dismissed plaintiffs’ Due Process
Clause claims. The cause is REMANDED to the District Court, with
instructions to permit a period of limited discovery, focused on
whether plaintiffs in fact possessed a property interest in being
admitted to their hospitals as “inpatients.” In the interest of judicial
economy, any future appeals taken from the District Court’s
decisions shall be referred to this panel.
ALICE BERS (Gill Deford, Center for
Medicare Advocacy, Inc., Willimantic, CT;
Anna Rich, National Senior Citizens Law
Center, Oakland, CA, on the brief), Center
for Medicare Advocacy, Inc., Willimantic,
CT, for Barrows, et al., Plaintiffs‐Appellants.
3
JEFFREY A. CLAIR (Stuart F. Delery,
Assistant Attorney General, Adam C. Jed,
Michael S. Raab, United States Department
of Justice, Civil Division, Appellate Staff,
Washington, DC; Deirdre M. Daly, United
States Attorney for the District of
Connecticut, on the brief), United States
Department of Justice, Civil Division,
Appellate Staff, Washington, DC, for
Burwell, Defendant‐Appellee.
Mark G. Arnold, Husch Blackwell LLP,
Clayton, MO, for Amicus Curiae American
Health Care Association.
Edith M. Kalls, Whatley Kallas, LLP, New
York, NY, for Amici Curiae American
Medical Association, et al.
Catherine E. Stetson, Hogan Lovells US
LLP, Washington, DC, for Amicus Curiae
American Hospital Association.
JOSÉ A. CABRANES, Circuit Judge:
In this putative class action lawsuit, plaintiffs‐appellants sue
the Secretary of Health and Human Services (“Secretary”) on behalf
of Medicare beneficiaries who were placed into “observation status”
by their hospitals rather than being admitted as “inpatients.”
4
Because “inpatients” are covered by Medicare Part A, while patients
in “observation status” are covered by Medicare Part B, placement
into “observation status” allegedly caused these beneficiaries to pay
thousands of dollars more for their medical care than they would
have had they formally been admitted as “inpatients” to their
hospitals.
The United States District Court for the District of Connecticut
(Michael P. Shea, Judge) granted the Secretary’s motion to dismiss
the complaint in its entirety. Plaintiffs now appeal the dismissal of
two of their nine claims, which together assert that the Secretary
violated the Medicare Act and the federal Due Process Clause by
failing to provide expedited notice of the decisions to place them
into “observation status,” or an expedited opportunity to challenge
these decisions.
For the reasons that follow, the District Court’s judgment is
affirmed in part and vacated in part. Specifically, we affirm the
dismissal of plaintiffs’ Medicare Act claims for substantially the
reasons stated in the District Court’s opinion; we vacate, however,
the dismissal of plaintiffs’ Due Process claims. The District Court
erred in concluding that plaintiffs lacked a property interest in being
treated as “inpatients,” because, in so concluding, the District Court
accepted as true the Secretary’s assertion that a hospital’s decision to
formally admit a patient is “a complex medical judgment” left to the
doctor’s discretion. That conclusion, however, constituted an
impermissible finding of fact, which in any event is inconsistent
with the complaint’s allegations that the decision to admit is, in
5
practice, guided by fixed and objective criteria set forth in
“commercial screening guides” issued by the Centers for Medicare
& Medicaid Services (“CMS”). Treating the complaint’s allegations
as true, as we must at this stage, plaintiffs‐appellants have arguably
asserted a property interest protected by the federal Due Process
Clause.
I. BACKGROUND
A. Statutory Framework
Medicare is “the federal government’s health‐insurance
program for the elderly.”1 It contains four distinct programs, of
which two are relevant here.
The first, Medicare Part A, is titled “Hospital Insurance
Benefits for Aged and Disabled.”2 It “provides basic protection
against the costs of hospital, related post‐hospital, home health
services, and hospice care for, among others, eligible people over 65
years of age.”3 Most relevant to this case, Part A creates an
entitlement to coverage for “inpatient hospital services” and “post‐
hospital extended care services.”4 The term “inpatient” is undefined
1 Conn. Dep’t of Soc. Servs. v. Leavitt, 428 F.3d 138, 141 (2d Cir. 2005) (citing
Medicare Act (Title XVIII of the Social Security Act), 42 U.S.C. § 1395 et seq.).
2 42 U.S.C. §§ 1395c–1395i‐5.
3 Estate of Landers v. Leavitt, 545 F.3d 98, 103 (2d Cir. 2008) (internal
quotation marks omitted).
6
in the statute, but the Secretary, through CMS—an office within the
Department of Health and Human Services that administers
Medicare—has defined an inpatient as “a person who has been
admitted to a hospital for bed occupancy for purposes of receiving
inpatient hospital services.”5 In Estate of Landers, we treated the CMS
definition as “persuasive” under Skidmore v. Swift & Co.,6 and held
that “a Medicare beneficiary is not an inpatient within the meaning
4 42 U.S.C § 1395d(a).
5 Medicare Benefit Policy Manual, CMS Pub. No. 100‐02, (“Medicare
Policy Manual”) Ch. 1, § 10; see also id. (“Generally, a patient is considered an
inpatient if formally admitted as inpatient with the expectation that he or she
will remain at least overnight and occupy a bed even though it later develops
that the patient can be discharged or transferred to another hospital and not
actually use a hospital bed overnight.”).
6 In Estate of Landers, we explained that under so‐called “Skidmore
deference,” we give effect to an agency’s non‐legislative interpretation of a
statute “to the extent we find it persuasive.” 545 F.3d at 105 (citing Skidmore v.
Swift & Co., 323 U.S. 134 (1944)); see also id. at 107 (“An agency interpretation that
does not qualify for Chevron deference is still entitled to ‘respect according to its
persuasiveness,’ . . . as evidenced by ‘the thoroughness evident in [the agency’s]
consideration, the validity of its reasoning, its consistency with earlier and later
pronouncements, and all those factors which give it power to persuade[.]’”
(quoting United States v. Mead Corp., 533 U.S. 218, 221 (2001))). By contrast,
“Chevron deference” is given to an administrative implementation of a statute
“’when it appears that Congress delegated authority to the agency generally to
make rules carrying the force of law, and that the agency interpretation claiming
deference was promulgated in the exercise of that authority.’” Rotimi v. Gonzales,
473 F.3d 55, 57 (2d Cir. 2007) (quoting Mead, 533 U.S. at 226–27); see Chevron,
U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984).
7
of § 1395x(i) unless he or she has been formally admitted to a
hospital.”7
The second program, Medicare Part B, is titled
“Supplementary Medical Insurance Benefits for Aged and
Disabled.”8 It is “a voluntary program offering supplemental
insurance coverage for those persons already enrolled in the
Medicare ‘Part A’ program.”9 Part B “covers visits to doctors and
certain other outpatient treatment.”10 Because patients who are
placed into “observation status” are treated as “outpatients” by
CMS, their care is covered by Medicare Part B.11 Therefore, a
Medicare beneficiary’s coverage under Part A or Part B turns on
7 545 F.3d at 111 (emphasis supplied).
8 42 U.S.C. §§ 1395j–1395w‐5.
9 Furlong v. Shalala, 238 F.3d 227, 229 (2d Cir. 2001).
10 Matthews v. Leavitt, 452 F.3d 145, 146 n.1 (2d Cir. 2006) (emphasis
supplied).
11 42 U.S.C. § 1395k; see also Medicare Policy Manual, Ch. 6, § 20.6(B)
(“When a physician orders that a patient receive observation care, the patient’s
status is that of an outpatient.”); id. § 20.6(A) (defining “Outpatient Observation
Services” as a “set of specific, clinically appropriate services, which include
ongoing short term treatment, assessment, and reassessment before a decision
can be made regarding whether patients will require further treatment as
hospital inpatients or if they are able to be discharged from the hospital”); id.
§ 20.2 (“A hospital outpatient is a person who has not been admitted by the
hospital as an inpatient but is registered on the hospital records as an outpatient
and receives services (rather than supplies alone) from the hospital . . . .”).
8
whether hospital services were provided on an “inpatient” or
“outpatient” basis. And as noted above, this distinction turns
entirely on whether the patient was “formally admitted” to the
hospital. It is possible for a patient to spend several days and nights
in a hospital without ever being formally admitted; such a patient,
for Medicare purposes, would be treated as an “outpatient” and his
or her care would be covered by Part B.
The amount that a Medicare beneficiary pays out of pocket
varies significantly based on whether the services provided were
covered under Part A or Part B. For instance, if a beneficiary receives
hospital services as an inpatient under Part A, there is a one‐time
deductible for the first 60 days in the hospital.12 By contrast, if a
beneficiary receives hospital services as an outpatient under Part B,
he or she will owe a co‐payment for each service received.13
Moreover, Medicare will only cover the cost of post‐hospitalization
care at a skilled nursing facility (“SNF”) if such treatment is
provided “after transfer from a hospital in which [the individual]
was an inpatient for not less than 3 consecutive days before his
discharge.”14 Therefore, patients who are placed into “observation
status” and never formally admitted to the hospital will not qualify
12 42 U.S.C. § 1395e.
13 See id. § 1395cc(a)(2)(A).
14 Id. § 1395x(i) (emphasis supplied).
9
for Medicare‐covered SNF care, even if they are hospitalized for
three or more consecutive days.15
B. Facts and Procedural History
On November 3, 2011, plaintiffs filed this putative class action
complaint, which asserts, inter alia, that the Secretary’s use of
“observation status” deprived them of the Part A coverage to which
they were entitled. Each named plaintiff alleges that they were
charged hundreds of dollars in co‐payments under Medicare Part B,
as well as thousands of dollars more for their post‐hospitalization
SNF care, despite the fact that they received hospital services
substantially similar to those provided to “inpatients” for three or
more consecutive days. For example, plaintiff Sarah Mulcahy alleges
that, in June 2010 (when she was 96 years old), she was taken to the
emergency room after suffering severe pain, urinary incontinence,
and nausea resulting from a fall.16 She was hospitalized in
“observation status” for five days, during which time she received
intravenous medications, chest and rib X‐rays, and a CT scan of her
head. She later received a Medicare Summary Notice (“MSN”)
15 See also Estate of Landers, 545 F.3d at 112 (“[I]n determining whether a
Medicare beneficiary has met the statutory three‐day hospital stay requirement
needed to qualify for post‐hospitalization SNF benefits under Part A, the time
that the patient spends in the emergency room or on observation status before
being formally admitted to the hospital does not count.”) (emphasis supplied).
16 See Joint App’x 38–39 (Compl. ¶¶ 78–82).
10
stating that she owed approximately $335 in Part B co‐insurance
payments.17 Moreover, because the hospital never formally admitted
her, she bore the entire cost of her subsequent SNF care from June 29
to October 7, 2010—a total of approximately $30,000.
Plaintiffs also allege that the Secretary is, at a minimum,
indirectly responsible for these harms. First, plaintiffs assert that the
frequency with which Medicare beneficiaries are placed on
observation status, as well as the average time spent on observation
status, have both increased “dramatically” in recent years.18
Plaintiffs attribute these increases, in part, to the financial incentives
created by a Medicare billing rule—namely that, “[i]f a beneficiary is
admitted but that admission is later found to be improper, the
17 As the District Court noted,
[p]laintiffs received notice of Part B coverage and
coinsurance charges via [MSNs], which they
typically received several weeks or months after
being discharged from the hospital. It is a fair
inference from the Complaint that many of the
Plaintiffs were not aware, during their period of
hospitalization, that they were on observation
status rather than admitted inpatients. For most, if
not all, of the Plaintiffs, the MSN was the first
indication that the services would be covered
under Part B, not Part A.
Bagnall v. Sebelius, No. 11 Civ. 1703, 2013 WL 5346659, at *4 n.2 (D. Conn. Sept. 23,
2013).
18 See Joint App’x 20 (Compl. ¶ 5).
11
hospital must refund the Part A payment to Medicare but cannot
rebill under Part B.”19 This rule allegedly gives hospitals “an
incentive to place patients on observation status because that
placement at least ensures that the hospital will receive some
payment for the stay in the hospital.”20 Moreover, according to
plaintiffs, hospitals have become increasingly concerned with post‐
payment reviews, because “Recovery Audit Contractors have been
carefully reviewing admissions, especially short‐term admissions.”21
Based on these and other factual allegations, the complaint
pleads nine causes of action against the Secretary, including
violations of the Medicare Act,22 the Administrative Procedure Act,23
the Freedom of Information Act,24 and the Due Process Clause.25 The
19 Joint App’x 30 (Compl. ¶ 46). After this complaint was filed, the
Secretary promulgated a rule designed to curb this financial incentive. See 42
C.F.R. § 414.5. Under the new rule, if a hospital determines that the beneficiary’s
inpatient admission was not reasonable and necessary, and that the beneficiary
should have been treated as an outpatient, hospitals may nonetheless seek
reimbursement under Part B, provided that the beneficiary is enrolled in
Medicare Part B and the hospital timely submits a Part B claim.
20 Id.
21 Id.
See Joint App’x 44–46 (Compl. ¶¶ 99, 101, 104–07) (citing 42 U.S.C.
22
§§ 1395, 1395d(a), 1395hh(a)(2), 1395ff & 1395w‐22(g)).
23 See Joint App’x 44–45 (Compl. ¶¶ 100, 103) (citing 5 U.S.C. §§ 553 &
706(2)(A)).
24 See Joint App’x 45 (Compl. ¶ 102) (citing 5 U.S.C. § 552(a)(1)(D)).
12
principal relief sought is a permanent injunction that would:
(1) prohibit the Secretary “from allowing Medicare beneficiaries to
be placed on observation status and thus to deprive them of
Medicare Part A coverage to which they are entitled”; (2) direct the
Secretary “to provide written notification, or to ensure that written
notification is provided, to any Medicare beneficiary who is placed
on observation status of the nature of the action, of the consequences
for Medicare coverage, and of the right to administrative and
judicial review of that action”; and (3) direct the Secretary “to
establish a procedure for administrative review of a decision to place
a Medicare beneficiary on observation status, including the right to
expedited review.”26
On January 9, 2012, the Secretary moved to dismiss the
complaint in its entirety, and on September 23, 2013, the District
Court granted the motion. On October 10, 2013, the District Court
entered final judgment for the Secretary.
Plaintiffs timely appealed the District Court’s dismissal of
claims six and seven of the complaint.27 Claim six asserts that the
Secretary’s “failure to provide written notification to Medicare
25 See Joint App’x 46 (Compl. ¶¶ 104–05) (citing the “Due Process Clause
of the Fifth Amendment,” which states “[n]o person shall be . . . deprived of life,
liberty, or property, without due process of law”).
26 Joint App’x 47.
27 Plaintiffs did not appeal the dismissal of their other seven claims.
13
beneficiaries, or to require that they receive written notification, of
their placement on observation status, of the consequences of that
placement for their Medicare coverage, and of their right to
challenge that placement[,] violates the Medicare statute, 42 U.S.C.
§§ 1395ff and 1395w‐22(g), and the Due Process Clause of the Fifth
Amendment.”28 Claim seven asserts that the Secretary’s “policy of
not providing Medicare beneficiaries with the right to
administrative review, including expedited review, of their
placement on observation status violates the Medicare statute, 42
U.S.C. §§ 1395ff and 1395w‐22(g), and the Due Process Clause of the
Fifth Amendment.”29
Therefore, considered together, the two claims appealed by
plaintiffs allege that the Secretary’s failure to provide an expedited
system of notice and administrative review regarding the placement
of Medicare beneficiaries into “observation status” violated: (1) the
Medicare Act and (2) the Due Process Clause. The sole question on
appeal is whether the District Court erred in dismissing these two
claims.
II. DISCUSSION
We review de novo a district court’s dismissal of a complaint
pursuant to Federal Rule of Civil Procedure 12(b)(6), accepting as
28 Joint App’x 46 (Compl. ¶ 104).
29 Id. (Compl. ¶ 105).
14
true all factual allegations in the complaint, and drawing all
reasonable inferences in the plaintiff’s favor.30 To survive a Rule
12(b)(6) motion to dismiss, the complaint must plead “enough facts
to state a claim to relief that is plausible on its face.”31
A. Medicare Act Claims
As to the District Court’s dismissal of plaintiffs’ Medicare Act
claims, we affirm substantially for the reasons articulated in the
District Court’s thorough opinion. First, plaintiffs lack standing to
challenge the adequacy of the notices they received. Second, nothing
in the statute entitles plaintiffs to the process changes they seek—i.e.,
expedited notice of their placement into observation status, and an
expedited hearing to challenge this placement.
As the District Court explained, the Medicare Act only
requires that beneficiaries receive written notice of the receipt of a
claim for benefits, which must state whether the beneficiary is
entitled to Medicare coverage, and whether such coverage will be
provided under Part A or Part B.32 This written notice is called a
30 Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227,
232 (2d Cir. 2014).
31 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
32 See 42 U.S.C. § 1395ff(a)(1) (stating in relevant part that “[t]he Secretary
shall . . . make initial determinations with respect to benefits under part A of this
subchapter or part B of this subchapter in accordance with those regulations for
the following: (A) [t]he initial determination of whether an individual is entitled
to benefits under such parts[;] (B) [t]he initial determination of the amount of
15
Medicare Summary Notice (“MSN”), and it summarizes the
patient’s Medicare activity for the most recent three‐month period. If
an MSN states that benefits have been denied, then it must state:
(1) the reasons for the denial; (2) the procedures for obtaining
additional information concerning the denial; and (3) notification of
the right to seek a redetermination or to otherwise appeal the
determination.33 The MSN also informs beneficiaries of their right to
challenge the determination that they received observation services
covered under Part B. It is undisputed that the Secretary has
complied with these and other requirements.
Plaintiffs’ sole argument on the merits is that 42 U.S.C.
§ 1395ff(b)(1)(F) entitles a beneficiary who is placed on “observation
status” to expedited notice or administrative review. This provision,
however, only applies when a hospital seeks “to terminate services”
or “to discharge the individual from the provider of services.”34 It is
clear from both the statute and our precedent that a beneficiary who
is in “observation status” has not yet been formally admitted to the
hospital. He or she has therefore not experienced a termination of
services or a discharge.35 Accordingly, § 1395ff(b)(1)(F) does not
benefits available to the individual under such parts[; and] (C) [a]ny other initial
determination with respect to a claim for benefits under such parts . . . .”).
33 See id. § 1395ff(a)(4)(A).
34 See id. § 1395ff(b)(1)(F) (providing expedited proceedings to individuals
who have received notice that their provider of services plans “to terminate
services” or “to discharge” them).
16
entitle beneficiaries who are immediately or initially placed into
“observation status” to any form of expedited process or
administrative review.36
Because plaintiffs have failed to allege a plausible statutory
violation, we affirm the District Court’s dismissal of claims six and
seven, to the extent that these claims assert violations of the
Medicare Act.
B. Due Process Claims
Claims six and seven also allege that the Secretary violated
plaintiffs’ rights under the federal Due Process Clause by: (1) failing
to provide, or to require hospitals to provide, written notification
informing beneficiaries that they were placed on “observation
status”; and (2) failing to provide Medicare beneficiaries with the
right to expedited administrative review of their placement on
35 See 42 C.F.R. § 405.1205(a)(2) (defining “discharge” as the “formal
release of a beneficiary from an inpatient hospital”).
36 The Secretary concedes that beneficiaries who are downgraded from
“inpatient” to “observation status” are entitled to expedited process under 42
C.F.R. § 405.1206(a). As to this requirement, however, the complaint only alleges
that: (1) a plaintiff who had his status changed did not receive the requisite
notice; and (2) another plaintiff who received such notice was not informed of
her appeal rights. As the District Court correctly noted, however, “these
allegations do not state claims against the Secretary,” because the hospitals are
charged with providing the requisite notice. Bagnall, 2013 WL 5346659, at *19 .
Accordingly, plaintiffs have failed to allege a plausible claim that, in these two
cases, the Secretary violated the Medicare Act or any implementing regulation by
providing inadequate notice.
17
“observation status.” The District Court dismissed these claims on
the sole ground that plaintiffs did not possess a property interest in
being admitted to their hospitals as “inpatients.” Because this
determination relied upon a factual finding that could not be made
on a motion to dismiss, we vacate the District Court’s dismissal of
plaintiffs’ Due Process claims and remand for limited discovery.
1. Legal Standards
The Due Process Clause “imposes constraints on
governmental decisions which deprive individuals of ‘liberty’ or
‘property’ interests within the meaning” of the Fifth Amendment.37
To state a Due Process claim, a plaintiff must show that: (1) state
action (2) deprived him or her of liberty or property (3) without due
process of law.38 Here, the District Court solely focused on whether
plaintiffs were deprived of a protected interest in property or
liberty.39
We have long held that procedural due process protections
“attach where state or federal law confers an entitlement to
benefits.”40 A “mere ‘unilateral expectation’” of receiving a benefit,
37 Mathews v. Eldridge, 424 U.S. 319, 332 (1976).
38 See Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59 (1999).
39 Because the District Court concluded that plaintiffs lacked a property
interest sufficient to support their Due Process claim, it did not address the other
two prongs of the analysis—i.e., state action and due process.
18
however, is not enough—“a property interest arises only where one
has a ‘legitimate claim of entitlement’ to the benefit.”41 In
determining whether a given benefits regime creates a “legitimate
claim of entitlement” to such benefits, we ask whether the statutes
and regulations governing the distribution of benefits
“’meaningfully channel[] official discretion by mandating a defined
administrative outcome.’”42 If official discretion is so limited, then
the beneficiaries of the governmental program may possess a
property interest protected by the Due Process Clause.
For example, in Kapps, applicants for New York’s Home
Energy Assistance Program (“HEAP”) claimed that the
administrators of HEAP violated their procedural due process rights
when they denied their applications for HEAP benefits without a
hearing. We found that New York law set “fixed” and “objective”
eligibility criteria for the receipt of HEAP benefits—such as income,
40 Kapps v. Wing, 404 F.3d 105, 113 (2d Cir. 2005) (citation omitted); see also
Goldberg v. Kelly, 397 U.S. 254, 262 (1970) (procedural due process applies to the
termination of welfare benefits because they are “a matter of statutory
entitlement for persons qualified to receive them”); Kraemer v. Heckler, 737 F.2d
214, 222 (2d Cir. 1984).
41 Kapps, 404 F.3d at 113 (quoting Board of Regents of State Colleges v. Roth,
408 U.S. 456, 577 (1972)).
42 Id. (quoting Sealed v. Sealed, 332 F.3d 51, 56 (2d Cir. 2003)); see also Ky.
Dep’t of Corr. v. Thompson, 490 U.S. 454, 460, 462 (1989) (a “legitimate claim of
entitlement” is created by “placing substantive limitations on official discretion”
(internal quotation marks omitted)).
19
household size, and enrollment in other welfare programs—and that
anyone who met these eligibility criteria was entitled to receive
HEAP benefits. Because these criteria were “precisely the type of
discretion‐limiting ‘substantive predicates’ that are the hallmarks of
protected property rights,” we held that plaintiffs possessed “a valid
property interest in the receipt of regular HEAP benefits.”43
2. Analysis
Here, the District Court held that plaintiffs lacked a property
interest in being admitted to a hospital as “inpatients,” because that
decision—whether to admit a patient—is “a complex medical
judgment” left to the doctor’s discretion. In so concluding, the
District Court relied primarily on the Medicare Policy Manual,
which states that:
The physician or other practitioner
responsible for a patient’s care at the
hospital is also responsible for deciding
whether the patient should be admitted as
an inpatient. Physicians should use a 24‐
hour period as a benchmark, i.e., they
should order admission for patients who
are expected to need hospital care for 24
hours or more, and treat other patients on
an outpatient basis. However, the decision
to admit a patient is a complex medical
43 Kapps, 404 F.3d at 113, 118.
20
judgment which can be made only after the
physician has considered a number of
factors, including the patient’s medical
history and current medical needs, the
types of facilities available to inpatients and
to outpatients, the hospital’s by‐laws and
admissions policies, and the relative
appropriateness of treatment in each
setting.44
The District Court therefore accepted as true the Secretary’s
assertion that a hospital’s decision whether to admit a Medicare
beneficiary as an “inpatient” was left to the discretion and “medical
judgment” of the treating physician.
However, plaintiffs’ complaint contains plausible allegations
that, increasingly, admission decisions are not left to the discretion
or judgment of treating physicians. Specifically, the complaint
alleges that the decision to admit a patient to a hospital is—in
practice—made through rote application of “commercially available
screening tools,” as directed by the centers for Medicare and
Medicaid Services (“CMS”), which substitutes for the medical
judgment of treating physicians.45 Plaintiffs also allege that CMS
exerts pressure on hospitals through its billing policies and through
its retroactive “Recovery Audit Contractor” reviews, which give
hospitals the incentive—as a cost‐saving or compliance measure—to
44 Medicare Policy Manual, Ch. 1, § 10.
45 Joint App’x 28 (Compl. ¶ 40).
21
place more Medicare beneficiaries into “observation status” for
longer periods of time.46 Therefore, drawing all reasonable
inferences in favor of plaintiffs,47 these allegations show that the
Secretary—acting through CMS—has effectively established fixed
and objective criteria for when to admit Medicare beneficiaries as
“inpatients,” and that, notwithstanding the Medicare Policy
Manual’s guidance, hospitals apply these criteria when making
admissions decisions, rather than relying on the judgment of their
treating physicians.
Therefore, the dispositive issue—whether plaintiffs possess a
property interest sufficient to state a Due Process claim—turns on
facts that are, at this stage, contested. If plaintiffs are able to prove
their allegation that CMS “meaningfully channels” the discretion of
doctors by providing fixed or objective criteria for when patients
should be admitted, then they could arguably show that qualifying
Medicare beneficiaries have a protected property interest in being
treated as “inpatients.” However, if the Secretary is correct and, in
fact, admission decisions are vested in the medical judgment of
treating physicians, then Medicare beneficiaries would lack any such
46 Joint App’x 30 (Compl. ¶¶ 45–50).
See Carpenters Pension Trust, 750 F.3d at 232; see also Leeds v. Meltz, 85
47
F.3d 51, 53 (2d Cir. 1996) (“We take all well‐plead factual allegations as true, and
all reasonable inferences are drawn and viewed in a light most favorable to the
plaintiffs.”).
22
property interest.48 At this stage, it is simply unknown how, in
practice, the relevant admissions decisions are made.
The District Court therefore erred in dismissing plaintiffs’ Due
Process claims at the motion‐to‐dismiss stage on the sole ground
that plaintiffs had failed to satisfy the “property interest” prong of
the due process analysis.
To be clear, we take no position on whether plaintiffs
ultimately will be able to establish that these hospitals, at the behest
of CMS, admitted patients using “fixed” criteria, or that, if they did,
these plaintiffs in fact met those criteria. Moreover, we take no
position regarding whether plaintiffs have pleaded facts sufficient to
establish the other two prongs of the due process analysis which the
District Court did not address and are not challenged on appeal—
i.e., that the “inpatient” decision constituted state action, and that the
process provided to challenge the “inpatient” decision was
inadequate. Finally, we take no position regarding what form of
notice or administrative review, expedited or otherwise, would be
required if Medicare beneficiaries who satisfy the “fixed” criteria are
denied admission to a hospital as an “inpatient.” However, because
plaintiffs have stated a plausible claim that they possessed a
property interest in being admitted to their hospitals as “inpatients,”
they are entitled to test these factual allegations in discovery.
48 See Sealed, 332 F.3d at 56 (if the administrative scheme “does not require
a certain outcome, but merely authorizes particular actions and remedies, the
scheme does not create ‘entitlements’ that receive constitutional protection”).
23
Accordingly, we vacate the District Court’s dismissal of claims six
and seven, to the extent that these claims assert violations of the Due
Process Clause.
On remand, the District Court is directed to supervise a
limited period of discovery. This discovery period will be focused
on the sole issue of whether plaintiffs possessed a property interest
in being admitted to their hospitals as “inpatients,” which, as stated
above, turns on a factual determination—namely, whether the
decision to admit these patients to these hospitals was a “complex
medical judgment” left to the treating physicians’ discretion, or
whether, in practice, the decision was made by applying fixed
criteria set by the federal government. The District Court will then,
in the first instance, determine whether the evidence adduced in
discovery establishes that Medicare beneficiaries possess a property
interested in being admitted to their hospitals as “inpatients.”
In the interest of judicial economy, any renewed appeal in this
case will be assigned to this panel. We will, however, only authorize
the appeal of a final judgment. If, after this period of discovery, the
District Court grants summary judgment to the Secretary on the
ground that the evidence fails to establish a property interest, an
appeal will then be authorized in the normal course.49 However, if
49 See 28 U.S.C. § 1291 (“The courts of appeals . . . shall have jurisdiction of
appeals from all final decisions of the district courts of the United States . . . .”).
However, an exception to the final judgment rule is provided by the “collateral
order doctrine,” under which there can be an interlocutory appeal of an order
that: (1) conclusively determines the disputed question; (2) resolves an important
24
the District Court concludes that the evidence establishes that
plaintiffs do have a property interest, or that there are material
issues of fact that preclude summary judgment as to that issue, it is
directed to analyze whether the complaint is properly dismissed on
the other two prongs of the due process analysis—i.e., “state action”
and “due process.” If this analysis leads the District Court to dismiss
the complaint on either of those two prongs, plaintiffs may also
renew their appeal in the normal course.
However, if material issues of disputed fact preclude the grant
of summary judgment to either party on the “property interest”
prong, and if dismissal is not appropriate on either of the other two
prongs, the District Court may permit the parties, to the extent
necessary, to engage in additional discovery regarding “state action”
and “due process.” At the completion of this discovery period, the
case shall return to us only upon a final judgment entered by the
District Court—either in response to a motion for summary
judgment or at the conclusion of whatever trial proceeding is
deemed appropriate by the District Court.
CONCLUSION
For the reasons set forth above, we AFFIRM the District
Court’s judgment of October 10, 2013 in part, insofar as it dismissed
issue completely separate from the merits of the action; and (3) is effectively
unreviewable on appeal from a final judgment. MasterCard Int’l Inc. v. Visa Int’l
Serv. Ass’n, Inc., 471 F.3d 377, 383–84 (2d Cir. 2006); see also Coopers & Lybrand v.
Livesay, 437 U.S. 463, 468 (1978).
25
plaintiffs’ Medicare Act claims, and VACATE in part, insofar as it
dismissed plaintiffs’ Due Process Clause claims, and REMAND the
cause to the District Court for further proceedings consistent with
this opinion. In the interest of judicial economy, any future appeals
taken from the District Court’s decisions shall be referred to this
panel.
26