United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 12, 2020 Decided May 26, 2020
No. 19-5087
SHANDS JACKSONVILLE MEDICAL CENTER, INC., DOING
BUSINESS AS UF HEALTH JACKSONVILLE, ET AL.,
APPELLEES
AFFINITY HOSPITAL, LLC, DOING BUSINESS AS TRINITY
MEDICAL CENTER, ET AL.,
APPELLANTS
v.
ALEX MICHAEL AZAR, II, SECRETARY OF HEALTH AND
HUMAN SERVICES,
APPELLEE
Consolidated with 19-5227
Appeals from the United States District Court
for the District of Columbia
(No. 1:14-cv-00263)
Lori A. Rubin argued the cause for appellants. With her on
the briefs was Donald H. Romano. Robert L. Roth entered an
appearance.
2
Thomas G. Pulham, Attorney, U.S. Department of Justice,
argued the cause for federal appellee. With him on the brief
was Abby C. Wright, Attorney.
Before: ROGERS, GARLAND and KATSAS, Circuit Judges.
Opinion for the Court by Circuit Judge ROGERS.
ROGERS, Circuit Judge: In response to the challenge by a
group of hospitals to a 0.2% reduction in Medicare
reimbursement rates for inpatient hospital services, the district
court remanded the Fiscal Year 2014 Rule to the Secretary of
Health and Human Services without vacating the Rule. After
curing the procedural deficiencies on remand and eliminating
the rate reduction prospectively, beginning in Fiscal Year 2017,
the Secretary increased the Medicare inpatient rates by 0.6%
for Fiscal Year 2017 to offset the past effects of the abandoned
rate reduction. The district court granted summary judgment
for the Secretary. Some hospitals appeal, contending that the
district court erred in failing to vacate the FY 2014 Rule or at
least require the Secretary to provide make whole relief for
each individual hospital. Because the district court was not
required to vacate the Rule or order make whole relief as the
hospitals sought, and the remedy on remand reasonably
addressed the problem, we affirm the grant of summary
judgment. The district court also did not err in partially
granting and denying statutory interest to certain hospitals in
accord with this court’s precedent. Accordingly, we affirm.
I.
The Medicare program reimburses healthcare providers
for a portion of costs incurred in treating Medicare
beneficiaries. See Title XVIII of the Social Security Act, Pub.
3
L. No. 89–97, 79 Stat. 291 (1965) (codified as amended at 42
U.S.C. § 1395 et seq.). Under a “complex statutory and
regulatory regime,” Good Samaritan Hosp. v. Shalala, 508
U.S. 402, 404 (1993), hospitals are reimbursed through a
prospective payment system that fixes standard, nationwide
reimbursement rates for categories of treatment, subject to
various adjustments. See Social Security Amendments of
1983, Pub. L. No. 98–21, § 601, 97 Stat. 65, 149 (1983); see
also Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225,
1227 (D.C. Cir. 1994). The payment system for inpatient
hospital care under Medicare Part A, see 42 U.S.C. §§ 1395c–
1395i-5, is known as the Inpatient Prospective Payment System
(“IPPS”).
The Secretary of Health and Human Services adjusts IPPS
reimbursement rates in annual rulemakings. Cape Cod Hosp.
v. Sebelius, 630 F.3d 203, 205–06 (D.C. Cir. 2011); see, e.g.,
42 U.S.C. §§ 1395ww(b)(3)(B), (d)(3)(A)–(C), (E); 42 C.F.R.
§ 412.64(d). Hospitals may seek review of IPPS rates before
the Provider Reimbursement Review Board. 42 U.S.C. §
1395oo(a)(1)(A)(ii). If the Board determines that it lacks
authority to decide a relevant “question of law or regulations,”
then a hospital may file a civil action in the federal district court
within sixty days of notice of the Board’s determination. Id. §
1395oo(f)(1). The reviewing court shall award annual interest
on the amount in controversy if the hospital prevails. Id. §
1395oo(f)(2).
In a rulemaking on IPPS rates for Fiscal Year 2014, the
Secretary adopted the “2-midnight” policy to guide hospitals in
determining when to admit Medicare beneficiaries for inpatient
care and qualify for reimbursement under Medicare Part A. See
Medicare Program; Hospital Inpatient Prospective Payment
Systems for Acute Care Hospitals and the Long-Term Care
Hospital Prospective Payment System and Fiscal Year 2014
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Rates, 78 Fed. Reg. 50,496, 50,949–50 (Aug. 19, 2013) (“FY
2014 Rule”). Costs for hospital stays of at least two midnights
are presumptively appropriate for reimbursement at inpatient
rates. Id. at 50,949. Because the actuaries had estimated this
policy change would increase annual IPPS expenditures by
approximately $220 million, id. at 50,952, the Secretary
reduced IPPS rates by 0.2% to offset the predicted increase, id.
at 50,953–54; see 42 U.S.C. § 1395ww(d)(5)(I)(i).
Hospitals challenged the rate reduction in the FY 2014
Rule. Among other things, they argued that that the Secretary
had failed to provide sufficient notice of the actuarial
assumptions and methodologies used to support the reduction,
and that the rate reduction was arbitrary and capricious and
should be vacated. The district court remanded the Rule to the
Secretary for further administrative proceedings without
vacating the Rule. Shands Jacksonville Med. Ctr. v. Burwell
(“Shands I”), 139 F. Supp. 3d 240, 271 (D.D.C. 2015). The
court observed that on remand the Secretary’s decision and
accompanying explanation may change. Id. at 266.
On remand, the Secretary issued a supplemental notice that
described the methodology used to predict the $220 million
cost increase of the 2-midnight policy. The notice requested
comments on the methodology and other aspects of the rate
reduction. Since the 2-midnight policy was implemented, the
exceptions had been revised and new actuarial estimates
showed that the policy’s impact varied between savings and
cost between FY 2014 and FY 2015. Upon considering the
comments received in response to the supplemental notice, the
Secretary explained in proposing changes to the Rule that “the
original estimate for the 0.2 percent reduction had a much
greater degree of uncertainty than usual.” Medicare Program;
Hospital Inpatient Prospective Payment Systems for Acute
Care Hospitals and the Long-Term Care Hospital Prospective
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Payment System and Proposed Policy Changes and Fiscal Year
2017 Rates, 81 Fed. Reg. 24,946, 25,137 (Apr. 27, 2016) (“FY
2017 Proposed Rule”). In the preamble to the final rule, the
Secretary acknowledged “no longer [being] confident that the
effect of the 2-midnight policy . . . may be measured in this
context.” Medicare Program; Hospital Inpatient Prospective
Payment Systems for Acute Care Hospitals and the Long-Term
Care Hospital Prospective Payment System and Policy
Changes and Fiscal Year 2017 Rates, 81 Fed. Reg. 56,762,
57,060 (Aug. 22, 2016) (“FY 2017 Rule”). The Secretary,
therefore, eliminated the 0.2% rate reduction for all future
years and increased the IPPS rates for FY 2017 by 0.6% to
account for the three years the reduction was in effect. Id. at
57,059–60. Commenters noted that closed or converted
hospitals would not benefit from the rate increase and the
Secretary determined the cost report settlement process would
be used for those hospitals. Id. at 57,060. The Secretary also
stated that hospitals with pending cases challenging the rate
reduction were entitled to statutory interest and would receive
a slight, incremental increase to the rate adjustment by a factor
consistent with interest rates in effect for the relevant time
periods. Id.
The district court thereafter granted summary judgment to
the Secretary. Shands Jacksonville Med. Ctr., Inc. v. Azar
(“Shands II”), 366 F. Supp. 3d 32, 40 (D.D.C. 2018). Upon
returning to the district court, the hospitals argued that because
the Secretary no longer defended the rate reduction, the district
court was required to vacate the Rule and order make whole
relief on an individual hospital basis or, alternatively, order
make whole relief even without vacatur. The district court,
noting the absence of such a statutory make whole requirement,
reasoned that having “lost confidence” in the actuarial
assumptions underlying the rate reduction, id. at 51, the
Secretary was not required to rescind the rate reduction
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formally and could adopt another “reasonable means of
undoing” its effects, id. at 54. In the district court’s view, even
if some hospitals came out ahead and some were not made
whole and came out behind, id. at 51–52, the Secretary’s
chosen remedy overall “was reasonably calibrated to address
the problem it sought to remedy,” id. at 53.
The district court also, upon applying Tucson Medical
Center v. Sullivan, 947 F.2d 971 (D.C. Cir 1991), partially
granted and denied the hospitals’ motions for an award of
statutory interest on the amount in controversy for the three
years the rate reduction was in effect. Shands Jacksonville
Med. Ctr., Inc. v. Azar (“Shands III”), No. 14–263, 2019 WL
1228061, at *2 (D.D.C. Mar. 15, 2019).
II.
Certain hospitals (hereinafter, “the Hospitals”) appeal the
grant of summary judgment to the Secretary and the partial
denial of statutory interest. Their challenge to summary
judgment focuses on the inadequacy of less than a make whole
remedy. The procedural invalidity pointed to the substantive
invalidity of the FY 2014 Rule and, therefore, they contend that
the district court should have “set aside” and vacated the Rule
or at least ensured full refunds to each hospital. Appellants’ Br.
19, 28, 30–31 (quoting 5 U.S.C. § 706(2)). Additionally, the
Hospitals maintain that the rate increase in the FY 2017 Rule
may not be taken into account because they challenge only the
FY 2014 Rule. Consequently, “[t]he only proper consideration
of the rate increase is as to what relief is left to be granted (i.e.,
the impact of vacatur).” Id. at 42 (emphasis removed).
The court reviews de novo both the district court’s grant of
summary judgment, Palisades Gen. Hosp. Inc. v. Leavitt, 426
F.3d 400, 403 (D.C. Cir. 2005), and the denials of statutory
7
interest, which “rest[] on ‘an interpretation of the statutory
terms that define eligibility for an award,’” Davy v. Cent.
Intelligence Agency, 456 F.3d 162, 164 (D.C. Cir. 2006)
(quoting Edmonds v. Fed. Bureau of Investigation, 417 F.3d
1319, 1322 (D.C. Cir. 2005)). As to the Secretary’s actions on
remand, however, the court’s review is limited to determining
whether they were “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” Palisades
Gen. Hosp., 426 F.3d at 403 (quoting 5 U.S.C. § 706(2)(A));
see 42 U.S.C. § 1395oo(f)(1).
A.
On the merits, the Hospitals contend that because the
Secretary no longer defends the rate reduction in the FY 2014
Rule, it had to be vacated and each individual hospital restored
at least to the position it would have occupied had the rate
reduction never taken effect, or alternatively, make whole relief
was required even without vacatur. In their view, the grant of
summary judgment was error because “there is no third option
if the agency is unable or unwilling to rehabilitate its rule on
remand, and the agency has not fully compensated aggrieved
parties.” Appellants’ Br. 19.
It is well settled that “[a]n inadequately supported rule . . .
need not necessarily be vacated,” Allied-Signal, Inc. v. U.S.
Nuclear Regulatory Comm’n, 988 F.2d 146, 150 (D.C. Cir.
1993) (citations omitted), because an agency may be able to
rehabilitate its rule on remand, and the consequences of vacatur
“may be quite disruptive,” id. at 151. The district court’s
decision to remand was based on agreement with the hospitals’
procedural objection that the FY 2014 rulemaking failed to
provide notice of the underlying methodology. See Shands I,
139 F. Supp. 3d at 263, 266–71. The Hospitals do not dispute
that on remand the Secretary cured the Rule’s procedural
8
deficiencies, by disclosing the actuarial assumptions
underlying the predicted cost increase as a result of the 2-
midnight policy and providing the public an opportunity to
comment. See Shands II, 366 F. Supp. 3d at 50. The Secretary
subsequently determined not to defend the substance of the
Rule and adopted a remedy designed to compensate hospitals
for its past effects. Even when a court sets aside an unlawful
agency action under the APA, it is ordinarily “the prerogative
of the agency to decide in the first instance how best to provide
relief.” Bennett v. Donovan, 703 F.3d 582, 589 (D.C. Cir.
2013) (citation omitted); see also Palisades Gen. Hosp., 426
F.3d at 403. Regulated entities then “of course . . . have the
option to seek review on the ground that” the agency’s remedy
“w[as] ‘arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.’” Bennett, 703 F.3d at
589 (quoting 5 U.S.C. § 706(2)(A)). These principles apply
with no less force when an agency voluntarily abandons its own
action in the course of correcting procedural deficiencies, as
occurred here. The limits of review of the Secretary’s action
are consistent with the “heightened deference” that courts are
to accord “the Secretary’s interpretation of a ‘complex and
highly technical regulatory program’ such as Medicare.”
Methodist Hosp., 38 F.3d at 1229 (quoting Thomas Jefferson
Univ. v. Shalala, 512 U.S. 504, 512 (1994)).
The Hospitals’ purported precedential support for their
position that the district court erred in failing to vacate the FY
2014 Rule, or at least order make whole relief once the
Secretary acknowledged the rate reduction was unsupported,
does not withstand analysis. They point to Comcast Corp. v.
Federal Communications Commission, 579 F.3d 1, 9 (D.C. Cir.
2009), where the court vacated a deficient rule that was not
supported on remand. For the proposition that vacatur requires
restoring the status quo ante, the Hospitals point to Allied-
Signal, 988 F.2d at 151. But the agencies in those cases
9
continued to defend the validity of the challenged rules going
forward. See Comcast, 579 F.3d at 5; Allied-Signal, 988 F.2d
at 149–50. Neither Comcast nor Allied-Signal addressed
whether vacatur or make whole relief is required where an
agency concedes the invalidity of its rule and the sole issue
before the court is the adequacy of the remedy that the agency
devised.
The Hospitals press on, contending that there is no
compelling case here for the creation of precedent permitting a
deficient rule to remain on the books. Acknowledging that
remand without vacatur may sometimes be appropriate while
an agency works to rehabilitate the rule or fully compensate
aggrieved parties, the Hospitals point out that the FY 2014 Rule
cannot be rehabilitated and the Secretary has mistakenly, in
their view, said insufficient compensation is enough. The
Hospitals point to precedent rejecting agency attempts in
correcting a mistake to deprive aggrieved parties of full
compensation. In Cape Cod Hospital, 630 F.3d at 213
(emphasis added), this court rejected the Secretary’s view that
there was no requirement to correct past computational errors
in Medicare payments for inpatient services because the
cumulative methodology the Secretary had adopted meant that
past errors “ha[d] the effect of overly deflating current
aggregate payments in violation of [a statutory] budget-
neutrality mandate.” Here, the past rate reduction has no such
effect on current IPPS reimbursement rates, nor is budget
neutrality required in this context, as the Hospitals
acknowledge. Appellants’ Br. 40 (citing Shands II, 366 F.
Supp. 3d at 65). In Tallahassee Memorial Regional Medical
Center v. Bowen, 815 F.2d 1435, 1456 (11th Cir. 1987), the
Eleventh Circuit rejected the Secretary’s attempt to apply
retroactively a new rule concerning reimbursement rates for
malpractice insurance “only to hospitals whose claims” that the
prior rule was invalid “[we]re still being reviewed,” even
10
though other hospitals challenging the same prior rule had
received reimbursement at different rates. Here, the rate
increase applied equally to all hospitals, not solely those with
pending lawsuits challenging the validity of the rate reduction,
so the same concerns regarding “potential abuse” that animated
the Eleventh Circuit in Tallahassee are not present. Id.
Of course, the Hospitals maintain that the rate increase in
the FY 2017 Rule is not properly considered, except in
considering the greater relief vacatur would have provided.
After all, the Hospitals state, they have challenged only the FY
2014 Rule. But instead of vacating the rate reduction in the FY
2014 Rule, the district court directed further proceedings by the
Secretary. The Secretary’s substantive responses to the remand
order are reflected in the FY 2017 Rule, 81 Fed. Reg. at 57,058
(citing Shands I, 139 F. Supp. 3d 240). Contrary to the
Hospitals’ position, the relevant parts of that Rule are a
continuation of the FY 2014 Rule proceedings and could
properly be considered by the district court in determining the
reasonableness of the Secretary’s remedy on remand.
The Hospitals further urge that this is not a case where
providing full compensation would result in enormous
disruptive consequences as to render partial relief “good
enough.” Appellants’ Br. 38. So they maintain that Methodist
Hospital, 38 F.3d at 1226, on which the district court relied, is
inapposite because there was no APA violation requiring that
the deficient agency action be set aside, and given the more
significant disruptive consequences. Here, in the Hospitals’
view, “it would have been easy enough and not particularly
disruptive for the Secretary to make hospitals whole” by
identifying the claims paid for Fiscal Years 2014 through 2016
and multiplying the paid amounts by 1.002. Appellants’ Br.
40.
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The Hospitals fail to show that the Secretary did not make
“a reasonable choice between the competing values of finality
and accuracy” in adopting the rate increase as an appropriate
remedy for the deficient rate reduction. Methodist Hosp., 38
F.3d at 1235 (citation omitted). The Secretary explained that a
one-year rate increase was “the most transparent, expedient,
and administratively feasible method” to address the past
effects of the rate reduction. FY 2017 Proposed Rule, 81 Fed.
Reg. at 25,138. Indeed, a significant advantage of the rate
increase compared to other proposed approaches was that it
allowed hospitals to receive compensation in the “nearest
prospective time period,” namely the next fiscal year. FY 2017
Rule, 81 Fed. Reg. at 57,059. By contrast, the Hospitals’
preferred approach would require the Secretary to recalculate
each individual claim paid under the reduced rate between
Fiscal Years 2014 and 2016. Not only would this create a
significant administrative burden from the Secretary’s
perspective, but several years could pass before IPPS payments
become final. The Hospitals do not dispute that at the time the
0.2% rate reduction was abandoned certain payments to
individual hospitals under that rate were not yet final. These
payments, the Secretary points out, could not be recalculated
immediately under an adjusted rate. Thus, a one-year, across-
the-board increase, as opposed to recalculation of individual
claims, allowed hospitals to receive compensation more
quickly, as well as creating a more efficient process for the
Secretary.
The Secretary acknowledged that the rate increase in FY
2017 would not precisely compensate each hospital for
payments that were reduced under the FY 2014 Rule. FY 2017
Rule, 81 Fed. Reg. at 57,060. The one-year, 0.6% rate increase
was calculated to offset the 0.2% rate reduction that was in
effect for three years (0.6% = 0.2% + 0.2% + 0.2%). FY 2017
Proposed Rule, 81 Fed. Reg. at 25,138. Despite this
12
mathematical symmetry, due to annual fluctuations in the
number of inpatient admissions to individual hospitals, the
combination of the rate reduction and increase could leave
some hospitals slightly better off and others slightly worse off
than they would have been had the rate reduction never taken
effect. FY 2017 Rule, 81 Fed. Reg. at 57,060. The Hospitals
seek a status quo ante remedy but nowhere suggest that the
better-off hospitals would return the excess funds. Still, the
Hospitals have not demonstrated that the rate increase was so
imprecise a remedy as to be arbitrary and capricious. They
have pointed to nothing in the record, much less presented an
argument in their briefs, that the rate increase significantly
undercompensated any hospital that had not closed or
converted, and for closed and converted hospitals the Secretary
established an alternative remedy. Id. Although compensation
sufficient in the aggregate could be distributed so unevenly as
to be arbitrary and capricious, there is no reason to conclude
that is the situation here.
B.
The Medicare statute provides that where a rate is
challenged in the district court, “the amount in controversy
shall be subject to annual interest . . . to be awarded by the
reviewing court in favor of the prevailing party.” 42 U.S.C. §
1395oo(f)(2). In Tucson Medical Center, 947 F.2d at 979
(citations omitted), the court concluded that “the doctrine of
sovereign immunity limits the . . . rights to interest on claims
for Medicare reimbursement to that which is expressly
authorized by statute,” meaning the statutory authorization
“must be strictly construed in favor of the government.”
Eligibility for § 1395oo(f)(2) interest thus turns on a four-part
inquiry: “First, whether [the Hospitals] sought judicial review
pursuant to 42 U.S.C. § 1395oo(f)(1); second, whether there
was an ‘amount in controversy’; . . . third, whether [the
Hospitals] were the ‘prevailing part[ies],’” id. (fourth alteration
13
in original), and fourth, whether the Hospitals had exhausted
their administrative remedies for the fiscal year at issue, id. at
979 n.10 (citing Riley Hosp. & Benevolent Ass’n v. Bowen, 804
F.2d 302 (5th Cir. 1986); Nat’l Med. Enters., Inc. v. Sullivan,
No. 89–5165, 1990 WL 169276 (C.D. Cal. July 5, 1990)).
By the statute’s plain text, the Hospitals are entitled to
interest for each fiscal year that they challenged the rate
reduction in court by August 2, 2016, when the Secretary
promulgated the FY 2017 rate increase. But this is true only to
the extent the Hospitals had filed separate judicial challenges
for Fiscal Years 2014, 2015, and 2016, by that date. Shands
III, 2019 WL 1228061, at *10. Nevertheless they contend that
claims are eligible for interest for all three fiscal years the rate
reduction was in effect regardless of which years’ rates they
challenged in district court or when they filed their lawsuits
because the FY 2014 rate reduction carried forward into future
years, until it was eliminated in the FY 2017 Rule.
The administrative actions that the Hospitals challenged in
the district court were the rules setting the annual IPPS
reimbursement rates. Consequently, the Secretary explains,
“[i]t is not possible to challenge the rates applied in fiscal year
2015 or 2016 through an appeal of the FY 2014 IPPS Rule
because that [R]ule does not set the reimbursement rate for any
other year.” Appellee’s Br. 44. The Board’s grant to the
Hospitals of expedited judicial review, pursuant to 42 U.S.C. §
1395oo(f)(1), confirms that the legal question on the validity of
the rate reduction was limited to the particular “subject year.”
The Hospitals, therefore, had exhausted their administrative
remedies only to the extent of their individual fiscal year IPPS
rates challenges. See Tucson, 947 F.2d at 979 n.10.
Claims that challenged reduced IPPS reimbursement rates
after August 2, 2016, when the Secretary promulgated the 0.6%
14
rate increase, were moot when filed in the district court. See
id. at 978. Claims for additional compensation through
recalculation of past payments do not satisfy the “prevailing
party” requirement of 42 U.S.C. § 1395oo(f)(2) because no
court has awarded “the disputed amount.” Id. at 982.
Accordingly, we affirm the grant of summary judgment to
the Secretary and the partial award and denial of statutory
interest.