Barrows v. Becerra

20-1642-cv
Barrows v. Becerra

In the
United States Court of Appeals
For the Second Circuit
________

AUGUST TERM 2021

ARGUED: OCTOBER 6, 2021
DECIDED: JANUARY 25, 2022

No. 20-1642-cv

Lee Barrows, on behalf of herself and all others similarly situated,
Michael Savage, on behalf of himself and all others similarly
situated, George Renshaw, on behalf of himself and all others
similarly situated, Shirley Burton, on behalf of herself and all others
similarly situated, Denise Rugman, on behalf of herself and all
others similarly situated, Ann Pelow, Executor of the Estate of
Richard Bagnall, James Mulcahy, Executor of the Estate of Sarah
Mulcahy,
Plaintiffs-Appellees,

Brenda Hardy, Executrix of the Estate of Loretta Jackson, Gary
Goodman, Estate of Dorothy Goodman, Christina Alexander,
Representative of the Estate of Bernice Morse, Mary Smith,
Representative of the Estate of Martha Leyanna, Peggy Leider, for
Irma Becker, William Hodges, for Louis Dziadzia, Michael Holt,
Executor of the Estate of Charles Holt,
Intervenors-Plaintiffs-Appellees,

Richard Bagnall, on behalf of himself and all others similarly
situated, Sarah Mulcahy, on behalf of herself and all others similarly
situated,
Plaintiffs,
2 No. 20-1642-cv

Jessie Ruschmann, Representative of the Estate of Frederick
Ruschmann, Bernice Morse, Frederick Ruschmann, Louis Dziadzia,
Loretta Jackson, Martha Leyanna, Charles Holt, on behalf of
themselves and all others similarly situated, Irma Becker, Dorothy
Goodman, on behalf of herself and all others similarly situated,
Intervenors-Plaintiffs,

v.

Xavier Becerra, Secretary of Health and Human Services,
Defendant-Appellant. ∗
________

Appeal from the United States District Court
for the District of Connecticut
________

Before: WALKER, CALABRESI, AND CABRANES, Circuit Judges.
________

The plaintiff-appellee class members are Medicare Part A
beneficiaries who are formally admitted to a hospital as “inpatients”
before their subsequent reclassification as outpatients receiving
“observation services.” Plaintiffs brought this suit alleging, inter alia,
that defendant-appellant Xavier Becerra, the Secretary of the United
States Department of Health and Human Services (“HHS”), violates
their due process rights by declining to provide them with an
administrative review process for the reclassification decision.
Following a bench trial, the United States District Court for the
District of Connecticut (Michael P. Shea, J.) entered an injunction that
ordered the creation of such a process. On appeal, the Secretary
challenges: (1) the finding that the plaintiff class had standing, (2) the

∗
The Clerk of Court is directed to amend the caption as set forth above.
3 No. 20-1642-cv

certification of the plaintiff class, and (3) the conclusion that plaintiffs’
due process rights are violated by the current administrative
procedures available to Medicare beneficiaries. For the reasons that
follow, we find no merit in these challenges. We therefore AFFIRM.

________

ALICE BERS (Wey-Wey Kwok, on the brief), Center
for Medicare Advocacy, Willimantic, CT; David J.
Berger, Steven Guggenheim, on the brief, Wilson
Sonsini Goodrich & Rosati, Palo Alto, CA; Regan
Bailey, Carol Wong, on the brief, Justice in Aging,
Washington, D.C., for Plaintiffs-Appellees and
Intervenors-Plaintiffs-Appellees

ADAM C. JED (Michael S. Raab, on the brief),
Attorneys, Appellate Staff, for Brian M. Boynton,
Acting Assistant Attorney General, Civil Division,
United States Department of Justice, Washington,
D.C., for Defendant-Appellant

M. Geron Gadd, Kelly Bagby, William Alvarado
Rivera, on the brief, AARP Foundation,
Washington, D.C.; Kasey Considine, on the brief,
Disability Rights Connecticut, Hartford, CT, for
amici curiae AARP, AARP Foundation, National
Disability Rights Network, and Disability Rights
Connecticut

Erin G. Sutton, on the brief, American Medical
Association, Chicago, IL, for amici curiae The
American Medical Association and Connecticut State
Medical Society

James F. Segroves, on the brief, Reed Smith LLP,
Washington, D.C., for amicus curiae The American
Health Care Association
4 No. 20-1642-cv

________

JOHN M. WALKER, JR., Circuit Judge:

The plaintiff-appellee class members are Medicare Part A
beneficiaries who are formally admitted to a hospital as “inpatients”
before their subsequent reclassification as outpatients receiving
“observation services.” Plaintiffs brought this suit alleging, inter alia,
that defendant-appellant Xavier Becerra, the Secretary of the United
States Department of Health and Human Services (“HHS”), violates
their due process rights by declining to provide them with an
administrative review process for the reclassification decision.
Following a bench trial, the United States District Court for the
District of Connecticut (Michael P. Shea, J.) entered an injunction that
ordered the creation of such a process. On appeal, the Secretary
challenges: (1) the finding that the plaintiff class had standing, (2) the
certification of the plaintiff class, and (3) the conclusion that plaintiffs’
due process rights are violated by the current administrative
procedures available to Medicare beneficiaries. For the reasons that
follow, we find no merit in these challenges. We therefore AFFIRM.

BACKGROUND

This eleven-year litigation stems from the different ways in
which a Medicare beneficiary may be classified when she stays at a
hospital. Whether a hospital classifies her as an inpatient or an
outpatient has major consequences in terms of the coverage provided
by Medicare. As a general matter, an inpatient’s hospital and post-
hospital extended care is eligible for coverage under Medicare Part A,
while that of an outpatient is not. Accordingly, a hospital’s decision
to reclassify a Medicare beneficiary from an inpatient to an outpatient
in some cases will have a significant negative impact on the amount
5 No. 20-1642-cv

of care a patient receives that Medicare will pay for. The plaintiffs
here challenge the lack of a process to appeal that decision.

Given the underlying statutory complexities presented by this
case, we begin by explaining the operation and costs related to both
inpatient services that are covered under Medicare Part A and
outpatient services that are not.

I. Statutory Overview

Medicare is a federally funded health insurance program for
the elderly. One of its plans, Medicare Part A, “provides basic
protection against the costs of hospital, related post-hospital, home
health services, and hospice care.” 1 More specifically, Part A covers
“inpatient hospital services,” which includes both services “furnished
to an inpatient of a hospital” and “post-hospital extended care,” such
as skilled-nursing facility (“SNF”) care “after [a patient’s] transfer
from a hospital in which [she] was an inpatient for not less than 3
consecutive days.” 2 Although “inpatient” is undefined in the
Medicare statute, we have held that only a Medicare beneficiary who
is “formally admitted” to a hospital can qualify as such. 3 Many Part
A beneficiaries do not pay a premium to participate in the program. 4
However, when beneficiaries are admitted to the hospital as

1 42 U.S.C. § 1395c.
2 Id. §§ 1395d(a), 1395x(b), 1395x(h), 1395x(i).
3 Est. of Landers v. Leavitt, 545 F.3d 98, 111 (2d Cir. 2008); see also 42 C.F.R.

§ 412.3(a).
4 Medicare General Information, Eligibility, and Entitlement Manual,

CMS Pub. No. 100-01, Ch. 1, § 20.1 (2015),
https://www.cms.gov/Regulations-and-
Guidance/Guidance/Manuals/Downloads/ge101c01.pdf (last visited Jan.
24, 2022).
6 No. 20-1642-cv

inpatients, they are responsible for paying an inpatient deductible. 5

By contrast, Medicare Part B is a program that covers outpatient
services. 6 Those services can be provided both outside of a hospital
setting, such as at a doctor’s office, or within a hospital. The Centers
for Medicare & Medicaid Services (“CMS”), a department of HHS that
administers Medicare, defines a hospital outpatient as “a person who
has not been admitted to the hospital as an inpatient” but receives
services from the hospital. 7 One form of outpatient services is
referred to as “observation services.” 8 Observation services “include
ongoing short term treatment, assessment, and reassessment before a
decision can be made whether patients will require further treatment
as hospital inpatients” or can be discharged.9 Observation services
may include the same services that are also provided to inpatients. 10

Unlike Part A, Part B is a supplemental program for which
Medicare beneficiaries must pay a monthly premium in order to
participate. 11 Part B beneficiaries who receive observation services in

5 42 U.S.C. § 1395e. In 2018, the deductible for the first 60 days of an
inpatient hospital stay was $1,340. App’x at 2582–83 (Medicare General
Information, Eligibility, and Entitlement Manual, Ch. 3, § 10.3 (2018)).
6 42 U.S.C. § 1395k(a); Matthews v. Leavitt, 452 F.3d 145, 146 n.1 (2d Cir.

2006).
7 App’x at 2082 (Medicare Benefit Policy Manual, CMS Pub. No. 100-02,

Ch. 6, § 20.2 (2015)).
8 Observation services are also sometimes referred to as “observation

status.” We use these terms interchangeably.
9 App’x at 2093.

10 Some hospitals have dedicated observation units to provide

observation services, but a majority do not distinguish between observation
and inpatient services in terms of location and delivery of care. App’x at
2688–89.
11 Mathews v. Diaz, 426 U.S. 67, 70 n.1 (1976).
7 No. 20-1642-cv

a hospital must make a copayment of 20% of the cost of the services. 12
Part B beneficiaries receiving observation services, in contrast to
inpatients covered under Part A, are also responsible for the cost of
self-administered medications and any SNF care following
hospitalization. 13

After a hospital treats a Medicare beneficiary, it submits a claim
for reimbursement to Medicare. If a hospital admits a beneficiary as
an inpatient but Medicare believes that person should not have been
formally admitted, Medicare will not reimburse the hospital under
Part A. If Medicare initially reimburses the hospital, but upon further
review, finds the admission to have been erroneous, Medicare will
seek to recover its payment from the hospital. 14 A hospital can bill
Medicare for observation services provided to a Part B beneficiary
only after a physician has entered a formal observation order. Thus,
if a hospital admits a patient as an inpatient and is later denied
reimbursement by Medicare, it cannot reclassify the care provided to
the patient as observation services and re-bill Medicare under Part
B. 15 Medicare has historically reimbursed hospitals at a higher

12 App’x at 2589 (Medicare General Information, Eligibility, and
Entitlement Manual, Ch. 3, § 20.3). Since 2016, CMS has established a pre-
set bundled cost for all covered observation services provided during most
hospital stays. In 2018, the bundled cost was $2,349.66. App’x at 1527.
13 42 U.S.C. § 1395x(i) (SNF care is only covered by Medicare if it is

provided “after transfer from a hospital in which [the patient] was an
inpatient for not less than 3 consecutive days before his discharge”)
(emphasis added)). Medicare beneficiaries may pay out of pocket for such
care or through non-Medicare insurance, such as commercial insurance,
veterans’ benefits, or Medicaid. App’x at 1529–30.
14 App’x at 1710–11.

15 Medicare Claims Processing Manual, Ch. 1, § 50.3.2 (2021),

https://www.cms.gov/Regulations-and-
Guidance/Guidance/Manuals/Downloads/clm104c01.pdf (last visited Jan.
24, 2022) (“[I]n accordance with the general Medicare requirements for
8 No. 20-1642-cv

average rate for Part A inpatient claims than for Part B observation
services claims.

In reviewing a hospital’s reimbursement submissions, CMS
utilizes various private contractors to ensure that the claims are
properly supported and payable under Medicare guidelines—that is,
that a physician’s order meets the coverage requirements for
payment. In addition to their own clinical judgment, contractors may
use commercial screening tools, manuals, or software, setting forth
criteria for inpatient admissions, to identify claims for further review
and to focus their efforts. And as a result of such reviews, CMS may
subject hospitals to audits concerning their billing practices and may
recoup past improper payments. Additionally, a hospital’s inpatient
claims can also be investigated by HHS’s Office of the Inspector
General and even by the Department of Justice. Finally, hospitals, but
not plaintiff class members who, because of their reclassification
never have a Part A claim submitted on their behalf to Medicare, may
administratively appeal the denial of Part A reimbursement claims
through a multi-level appeal system if CMS determines that an
inpatient admission did not meet the criteria for Part A payment. 16

services furnished to beneficiaries and billed to Medicare, . . . hospitals may
not report observation services using [the observation services Medicare
billing code] for observation services furnished during a hospital encounter
prior to a physician’s order for observation services. Medicare does not
permit retroactive orders or the inference of physician orders.”). A hospital
may be able to re-bill Medicare under Part B for other types of outpatient
services that had been provided to the patient. 42 C.F.R. § 414.5.
16 A hospital may first ask for a redetermination from the same

contractor that denied payment. It may then seek reconsideration by a
different contractor. If a certain minimum amount-in-controversy is
satisfied, then the hospital may appeal that second contractor’s decision to
an administrative law judge. In some instances the administrative law
judge’s decision may be appealed to the Medicare Appeals Council.
9 No. 20-1642-cv

II. Classification Procedures

During the class period, January 1, 2009 to date, guidance from
CMS regarding who should be admitted as an inpatient in order to
receive Part A coverage changed. Prior to 2013, CMS directed that
“[p]hysicians should use a 24-hour period as a benchmark, i.e., they
should order [inpatient] admission for patients who are expected to
need hospital care for 24 hours or more, and treat other patients on an
outpatient basis.” 17 Physicians were also advised that “the decision
to admit a patient is a complex medical judgment” and were
instructed to consider 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.” 18

In 2013, CMS promulgated its so-called “Two Midnight Rule,”
which stated that inpatient admission is generally appropriate for
payment under Medicare Part A when the physician reasonably
expects the patient to require medically necessary hospital care that
will span two midnights after the patient arrives at the hospital. 19 A
patient’s treating physician makes the initial status determination as
to whether the patient will meet the Two Midnight Rule. Physicians
are instructed to apply the Two Midnight Rule “based on such
complex medical factors as patient history and comorbidities, the
severity of signs and symptoms, current medical needs, and the risk

Finally, if certain requirements are met, judicial review may also be
available. See 42 C.F.R. §§ 405.920-405.1140.
17 App’x at 2007.

18 Id.

19 42 C.F.R. § 412.3(d)(1).
10 No. 20-1642-cv

of an adverse event.” 20 The factors leading to a physician’s conclusion
must be documented in the medical record. 21

The Medicare statute also requires hospitals to implement a
“utilization review plan,” whereby hospitals internally review
admissions for medical necessity to ensure they meet CMS criteria for
reimbursement. 22 The utilization review committee (“URC”), the
entity responsible for implementing the utilization review plan,
reviews the initial status determination under CMS regulations. 23 A
URC is composed of hospital staff and must include at least two
physician members. 24 Hospitals also typically employ case
management staff and utilization review staff who assist the URC
members in their admission reviews, advise on and monitor inpatient
admissions for medical necessity, and ensure that decisions are
appropriately documented. 25 As part of their review, URC members
and utilization review staff may use the same commercial screening
tools utilized by Medicare contractors.

As a result of its review of the initial decision, a URC may
change a patient’s status from inpatient to outpatient or vice versa.
According to the regulations, “[b]efore making a determination that
an [inpatient] admission or continued stay is not medically necessary,

20 Id. Inpatient admission is also considered appropriate for Part A
payment for certain surgical procedures. Id. § 412.3(d)(2). In addition, on
certain occasions, “based on the clinical judgment of the admitting
physician and medical record,” an inpatient admission may be appropriate
for payment under Part A even if the admitting physician expects a patient
to require hospital care for a period of time that does not cross two
midnights. Id. § 412.3(d)(3).
21 Id. § 412.3(d)(1).

22 42 U.S.C. § 1395x(e)(6)(A), (k); 42 U.S.C. § 482.30; App’x at 2988.

23 42 U.S.C. § 482.30.

24 Id.

25 Medicare Claims Processing Manual, Ch. 1, § 50.3.1.
11 No. 20-1642-cv

the [URC] must consult the practitioner or practitioners responsible
for the care of the patient . . . and afford the practitioner or
practitioners the opportunity to present their views.” 26 Moreover,
although review staff may assist in the decision, a determination that
inpatient admission is not medically necessary may be made only by
members of the URC itself. 27

Critical to this appeal, a patient currently has no way to
challenge her reclassification by the URC from an inpatient to
someone receiving observation services and the subsequent loss of
Part A coverage. Medicare beneficiaries are, however, required to
receive notice of having been placed on observation status. 28 That
notice is a “Medicare Outpatient Observation Notice” (“MOON”).
An appeals process is available for Medicare beneficiaries who face
discharge from a hospital and cessation of services covered under
Part A after a hospital stay, 29 but that process is unavailable for class

2642 U.S.C. § 482.30(d)(2).
27Specifically, “[t]he determination that an admission or continued stay
is not medically necessary - (i) [m]ay be made be made by one member of
the [URC] if the practitioner or practitioners responsible for the care of the
patient . . . concur with the determination or fail to present their views when
afforded the opportunity; and (ii) [m]ust be made by at least two members
of the [URC] in all other cases.” 42 C.F.R. § 482.30(d).
28 42 U.S.C. § 1395cc(a)(1)(Y).

29 42 C.F.R. §§ 405.1205–405.1206. In addition, if Medicare makes an

initial determination denying a Part A claim submitted by a hospital, a
beneficiary may appeal through the same standard appeals process that a
hospital can use. See supra note 16; 42 U.S.C. § 1395ff(a)-(b); 42 C.F.R.
§§ 405.920–405.1140. In the class members’ cases, a Part A claim is never
submitted by the hospital to Medicare and so is never rejected by Medicare,
and thus they cannot utilize this process.
12 No. 20-1642-cv

members here—patients who have been reclassified as receiving
observation services before the hospital bills Medicare for their care.

III. Procedural History

In 2011, a group of Medicare Part A beneficiaries filed this class
action against the Secretary alleging, inter alia, that their Fifth
Amendment Due Process rights are violated when they are classified
as receiving observation services in the hospital rather than being
classified as inpatients. In 2013 the district court dismissed the suit,
finding in part that plaintiffs failed to allege a property interest
protected by the Due Process Clause. 30 In 2015 we vacated in part,
concluding that plaintiffs’ claim that they possessed a protected
property interest “in being treated as ‘inpatients’” was sufficiently
pleaded to survive a motion to dismiss. 31 We remanded to the district
court to consider whether they possessed such an interest. Over the
next four years, the district court denied two more motions to dismiss
and each party’s summary judgment motion. The district court also
certified a nationwide plaintiff class under Federal Rule of Civil
Procedure 23(b)(2). 32

In August 2019, the district court held a seven-day bench trial.
After post-trial briefing, the court issued its decision on March 24,

30Bagnall v. Sebelius, No. 3:11CV1703 (MPS), 2013 WL 5346659 (D. Conn.
Sept. 23, 2013), aff’d in part, vacated in part, remanded sub nom. Barrows v.
Burwell, 777 F.3d 106 (2d Cir. 2015).
31 Barrows v. Burwell, 777 F.3d 106, 108 (2d Cir. 2015). The panel (Circuit

Judges Ralph K. Winter, John M. Walker, Jr., and José A. Cabranes) retained
jurisdiction over any future appeals in the case. Judge Winter died on
December 8, 2020. Circuit Judge Guido Calabresi has replaced Judge
Winter on the panel for this appeal. See 2d Cir. IOP E(b).
32 Alexander v. Azar, 370 F. Supp. 3d 302, 329–30 (D. Conn. 2019).
13 No. 20-1642-cv

2020. 33 It held that the Secretary violates the Due Process Clause by
failing to provide an appeals process for Medicare beneficiaries
whose inpatient admission is changed to observation status by a
hospital’s URC. The district court concluded that: (1) a URC
determination to reclassify a patient who is initially admitted as an
inpatient to an outpatient receiving observation services is a state
action; (2) class members have a property interest in “Part A hospital
coverage,” and when patients are reclassified after URC review they
are deprived of that interest; and (3) this deprivation occurs without
the process that is required under the Fifth Amendment.34 As a result,
the district court issued an injunction ordering the Secretary to create
a process for members of the class to appeal their reclassification
decision. 35

This appeal by the Secretary followed.

DISCUSSION

On appeal, the Secretary argues that (1) plaintiffs lack
constitutional standing, (2) the case did not properly proceed as a
class action, (3) the district court abused its discretion by redefining
the due process analysis after trial, and (4) the Due Process Clause
does not require government-administered appeals of a hospital’s
reclassification decision. We find no merit in these arguments and
thus affirm the district court’s judgment.

I. Constitutional Standing

Alexander v. Azar, No. 3:11-CV-1703 (MPS), 2020 WL 1430089 (D. Conn.
33

Mar. 24, 2020).
34 Id. at *38, *48–51.

35 Id. at *52–53. The complete text of the injunction is provided in the

Appendix.
14 No. 20-1642-cv

This court reviews the question of standing de novo. 36 A
plaintiff establishes Article III standing by demonstrating (1) an
“injury in fact” that is (2) fairly traceable to the challenged action of
the defendant and is (3) likely to be redressed by a favorable
decision. 37 Where, as here, multiple plaintiffs seek the same relief,
“the presence of one party with standing is sufficient to satisfy Article
III’s case-or-controversy requirement.” 38 At trial, a plaintiff bears the
burden of proof to demonstrate the elements of standing. 39

A. Standing of a Named Plaintiff

The Secretary contends that no named plaintiff established
standing, and therefore that the case must be dismissed. In particular,
he alleges that no named plaintiff demonstrated that he or she
suffered any financial injury as a result of being reclassified as
receiving observation services.

Plaintiffs, however, identify the named plaintiff Martha
Leyanna as satisfying the standing requirement. Ms. Leyanna was
initially admitted to the hospital as an inpatient, but after URC
review, her status was changed to observation. Ms. Leyanna
subsequently received care at an SNF, but because she lacked a
preceding three-day inpatient hospital stay, the SNF care was not
covered under Medicare Part A, and she personally had to pay over
$10,000. The Secretary contends that Ms. Leyanna did not prove at
trial that her SNF care was “reasonable and necessary,” as is required
for all services covered under Medicare. 40 Accordingly, he argues

Shain v. Ellison, 356 F.3d 211, 214 (2d Cir. 2004).
36

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992).
37

38 Centro de la Comunidad Hispana de Locust Valley v. Town of Oyster Bay,

868 F.3d 104, 109 (2d Cir. 2017) (internal quotation omitted).
39 Lujan, 504 U.S. at 561.

40 42 CFR § 409.30; 42 U.S.C § 1395x(i).
15 No. 20-1642-cv

that even if Ms. Leyanna should have been classified as an inpatient,
she did not demonstrate that the injury she suffered by not having her
SNF care covered under Part A can be attributed to the classification
error as opposed to the possibility that the SNF care was not
“reasonable and necessary.”

The evidence in the record refutes the Secretary’s argument and
demonstrates that Ms. Leyanna would have received Part A coverage
for the SNF care if she had been classified as an inpatient. At trial,
plaintiffs introduced a written document by CMS informing Ms.
Leyanna that coverage under Part A for her SNF care would be denied
because she was not classified as an inpatient during her hospital
stay. 41 The letter further stated that the claim denial “can be changed”
by “get[ting] the Medical Director involved and the attending doctors
that admitted her to change the admittance type to inpatient services”
and then “rebill[ing] it to” CMS. 42 Thus, according to CMS—the
entity responsible for coverage decisions—the problem with Ms.
Leyanna’s Part A claim was that she was not admitted to the hospital
as an inpatient, not that the SNF services she received were not
“reasonable and necessary.” Ms. Leyanna sufficiently demonstrated
that the injury she suffered by not receiving Part A coverage for her
SNF care can be traced back to the Secretary, and she therefore
satisfies the Article III standing requirement as a named plaintiff.

Relatedly, the Secretary also argues that the plaintiff class
includes members who have not and will not suffer any injury. “We
do not require that each member of a class submit evidence of
personal standing,” but “no class may be certified that contains
members lacking Article III standing.” 43 In particular, the Secretary

41 App’x at 2730–34.
42 App’x at 2731.

43 Denney v. Deutsche Bank AG, 443 F.3d 253, 263–64 (2d Cir. 2006).
16 No. 20-1642-cv

argues that for class members with Part B coverage, a reclassification
decision will actually save them money, because they will not have to
pay the inpatient deductible under Part A. 44 But whether or not an
individual class member suffers a bottom-line financial injury in a
given instance, all members of the class are deprived of their property
interest in coverage under Part A. Class members’ Part A benefits
represent a concrete property interest 45—funds with which they
assert a right to have their medical bills paid. We do not believe that
a beneficiary is uninjured when she is forced to use a different
payment for services that properly should have been covered under
Medicare Part A, regardless of her “out of pocket” expenses. 46

B. Class Standing

The Secretary also alleges that the named plaintiffs do not have
standing to pursue the injunction ordered by the district court. The
appeal procedures created by the injunction include both an after-the-
fact review process for patients who have been discharged, and an
“expedited process” for current hospital patients to appeal a
reclassification decision if they stayed (or will have stayed) at the
hospital for three or more consecutive days. 47 The named plaintiffs
have all left the hospital, and so they have claims premised on after-
the-fact review. The Secretary argues that because none of them
would benefit from an expedited review process, the named plaintiffs
do not have “class standing” to pursue such a procedure.

See App’x at 1523–35, 2607–08.
44

See Part IV.B of this discussion, infra.
45

46 C.f. NB ex rel. Peacock v. District of Columbia, 682 F.3d 77, 82–83 (D.C.

Cir. 2012) (noting that a plaintiff suffered an injury when he was forced to
resort to a different form of payment when he was improperly denied
Medicaid coverage).
47 Alexander, 2020 WL 1430089, at *52.
17 No. 20-1642-cv

A plaintiff “must maintain a personal interest in the dispute . . .
for each form of relief sought.” 48 Currently, no named plaintiff has an
ongoing need for an expedited review of reclassification decisions
during a hospital stay as other class members do. 49 But a named
plaintiff may have class standing to assert claims on behalf of other
class members if “he plausibly alleges (1) that he personally has
suffered some actual injury as a result of the putatively illegal conduct
of the defendant, and (2) that such conduct implicates the same set of
concerns as the conduct alleged to have caused injury to other
members of the putative class by the same defendants.” 50 That test is
met here. The named plaintiffs were harmed by being reclassified
without an appeals process; indeed, many reasonably may have been
harmed as well by not having an expedited review process. In
addition, the reclassification decision and absence of an appeals
process also causes an injury to class members who will be
reclassified.

The Secretary analogizes this case to Retirement Board of the
Policemen’s Annuity & Benefit Fund of the City of Chicago v. Bank of New
York Mellon, 51 in which we found the named plaintiffs did not have
class standing to bring claims based on the injuries of absent class
members. But in that case, the named plaintiffs did not have standing
to challenge the defendant’s actions related to certificates issued by
trusts in which those plaintiffs had never invested and which

Uzuegbunam v. Preczewski, 141 S. Ct. 792, 801 (2021); see also Lewis v.
48

Casey, 518 U.S. 343, 359 (1996) (internal quotation marks omitted).
49 It is very difficult to conceive of a named plaintiff who could have such

an ongoing interest—it is unlikely for a class action litigation such as this to
be decided in the time that a plaintiff would remain hospitalized.
50 NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d

145, 162 (2d Cir. 2012) (internal quotation marks, citation, and alteration
omitted).
51 775 F.3d 154 (2d Cir. 2014).
18 No. 20-1642-cv

therefore did not “implicate[] the same set of concerns” as the
defendant’s actions for trusts in which they did invest. 52 Here, on the
other hand, the failure of the Secretary to provide an appeals process
for the reclassification decision implicates the same set of concerns—
namely, a loss of Part A coverage—for both the named plaintiffs and
the absent class members. Accordingly, the “litigation incentives are
sufficiently aligned” so that the named plaintiffs can properly assert
claims on behalf of those class members who will be hospitalized in
the future. 53

II. Class Certification

The Secretary argues next that the district court improperly
certified the plaintiff class. 54 We review a district court’s certification

Id. at 159, 161.
52

Id. at 161. The Secretary also briefly contends that the injunction may
53

result in Part A benefits being improperly provided to a reclassified patient
for outpatient-only services covered only under Part B. The Secretary
misstates the relief granted. The injunction orders that if the class member
prevails in showing that the reclassification decision was erroneous, the
Secretary shall disregard the reclassification “for the purposes of
determining Part A benefits.” Alexander, 2020 WL 1430089, at *52 (emphasis
added). Thus, the injunction does not order the Secretary to provide Part
A benefits for all services provided to a patient who was improperly
reclassified as an outpatient receiving observation services. Instead, it
orders that, if there were services provided that would have qualified for
Part A coverage had the patient been classified as an inpatient, then those
should be covered by Part A.
54 The final class certified by the district court includes: “All Medicare

beneficiaries who, on or after January 1, 2009: (1) have been or will have
been formally admitted as a hospital inpatient, (2) have been or will have
been subsequently reclassified as an outpatient receiving ‘observation
services’; (3) have received or will have received an initial determination or
Medicare Outpatient Observation Notice (MOON) indicating that the
observation services are not covered under Medicare Part A; and (4) either
(a) were not enrolled in Part B coverage at the time of their hospitalization;
19 No. 20-1642-cv

decision for abuse of discretion. 55 A court abuses its discretion when
it rests its decision on a clearly erroneous finding of fact or makes an
error of law. 56 “We accord greater deference to district court decisions
granting class certification than to decisions declining to certify a
class.” 57

To proceed properly as a class action under Rule 23(a), a
plaintiff must show that (1) “the class is so numerous that joinder of
all members is impracticable” (numerosity); (2) “there are questions
of law or fact common to the class” (commonality); (3) “the claims or
defenses of the representative parties are typical of the claims or
defenses of the class” (typicality); and (4) “the representative parties
will fairly and adequately protect the interests of the class”
(adequacy). 58 Here, as a class certified under Rule 23(b)(2), plaintiffs
must also show that the Secretary “acted or refused to act on grounds
that apply generally to the class, so that final injunctive relief or
corresponding declaratory relief is appropriate respecting the class as
a whole.” 59 The Secretary challenges the findings that the class
satisfies the commonality and typicality requirements.

A. Commonality

or (b) stayed at the hospital for three or more consecutive days but were
designated as inpatients for fewer than three days, unless more than 30
days has passed after the hospital stay without the beneficiary’s having
been admitted to a skilled nursing facility. Medicare beneficiaries who
meet the requirements of the foregoing sentence but who pursued an
administrative appeal and received a final decision of the Secretary before
September 4, 2011, are excluded from this definition.” Alexander, 2020 WL
1430089, at *2.
55 Johnson v. Nextel Commc’ns Inc., 780 F.3d 128, 137 (2d Cir. 2015).

56 S.C. Johnson & Son, Inc. v. Clorox Co., 241 F.3d 232, 237 (2d Cir. 2001).

57 Nextel Commc’ns. Inc., 780 F.3d at 137.

58 Fed. R. Civ. P. 23(a).

59 Id. 23(b)(2).
20 No. 20-1642-cv

“Commonality requires the plaintiff to demonstrate that the
class members have suffered the same injury.” 60 The district court did
not abuse its discretion in finding the commonality requirement met.
Here, all class members claim to have suffered the same injury—they
were denied Medicare Part A coverage that they were entitled to
because they were unable to challenge their reclassifications from
inpatients to outpatients receiving observation services. As the
Secretary notes, some class members were harmed because their
hospital costs were not reimbursed, while others were harmed
because their post-hospitalization SNF care was not covered. But
“[t]he claims for relief need not be identical for them to be common.” 61
That the injury arising from the absence of an appeals process may
manifest itself differently depending on a beneficiary’s medical
situation does not defeat the commonality of the class’s injury.

The Secretary also contends that there are no questions of law
or fact common to the class. But “[w]hat matters to class certification
is not the raising of common questions . . . but rather, the capacity of
a class-wide proceeding to generate common answers apt to drive the
resolution of the litigation.” 62 To demonstrate such a capacity, “Rule
23(a)(2) simply requires that there be issues whose resolution will
affect all or a significant number of the putative class members.” 63
The common questions raised in the lawsuit have the capacity to
generate class-wide answers: (1) Does a URC decision to reclassify a
patient constitute state action because CMS’s national guidelines and
regulations significantly encourage or coerce URC behavior? (2) Are
there concrete and objective factors that dictate Part A coverage such

Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 349–50 (2011) (internal
60

quotation marks omitted).
61 Nextel Commc’ns. Inc., 780 F.3d at 137.

62 Wal-Mart, 564 U.S. at 350 (alteration, citation, and internal quotation

marks omitted).
63 Nextel Commc’ns. Inc., 780 F.3d at 137.
21 No. 20-1642-cv

that beneficiaries have a protected property interest in Part A? (3) Are
beneficiaries entitled to an appeals process in the reclassification
decision? 64 Each of these questions focuses on the centralized actions
of CMS and the Secretary. “Where the same conduct or practice by
the same defendant gives rise to the same kind of claims from all class
members, there is a common question.” 65 We therefore conclude that
the district court did not abuse its discretion in finding that the
commonality requirement was met.

B. Typicality

Contrary to the Secretary’s position, the district court also
properly found that the class representatives met the typicality
requirement. “Typicality requires that the claims of the class
representatives be typical of those of the class, and is satisfied when
each member’s claim arises from the same course of events, and each
class member makes similar legal arguments to prove the defendant’s
liability.” 66 The Secretary argues that because the named plaintiffs
were previously hospitalized, they are not typical of the class members
who are going to be hospitalized and who therefore have a stronger
interest in the expedited appeals process for currently-hospitalized

64See Brown v. Kelly, 609 F.3d 467, 483–84 (2d Cir. 2010) (finding a class
properly certified under the heightened standard of Rule 23(b)(3) when
common questions included whether New York City had a policy of
enforcing an unconstitutional statute even though other issues would
require individualized inquiries); In re U.S. Foodservice Inc. Pricing Litig., 729
F.3d 108, 131 (2d Cir. 2013) (affirming class certification when “[d]espite the
size and geographic scope of [the] class,” the “uniform nature” of the
defendant’s actions put each class member in the “same position” and
“ensure[d] the cohesiveness of the class”).
65 Nextel Commc’ns. Inc., 780 F.3d at 137–38 (internal quotation marks

omitted).
66 Robinson v. Metro-North Commuter R.R. Co., 267 F.3d 147, 155 (2d Cir.

2001) (internal quotations omitted).
22 No. 20-1642-cv

individuals. Although the named plaintiffs can only now seek
retroactive review of their reclassification decision, their claims are
still typical of those of future hospital patients because they arise from
the same conduct. The Secretary’s failure to provide an appeals
process leads to the claims of both groups. 67 In addition, the legal
arguments in support of the finding that the lack of an appeals process
violates the Due Process Clause, including that hospital decisions
constitute state action and that patients have a protected property
interest in Part A coverage, are the same whether a plaintiff seeks an
expedited or retroactive review process. We thus reject the
Secretary’s argument that the named plaintiffs’ claims were atypical
of those of the other class members.

C. Certification Under Rule 23(b)(2)

The Secretary further contends that the plaintiff class was
improperly certified under Rule 23(b)(2). For a class to be
appropriately certified under that rule, a defendant must have acted
on grounds that apply generally to the class “so that final injunctive
relief or corresponding declaratory relief is appropriate respecting the
class as a whole.” 68 Thus, a class cannot be certified “when each
individual class member would be entitled to a different injunction or
declaratory judgment against the defendant.” 69 The Secretary argues
that the “wide variation” among plaintiffs precludes the applicability
of Rule 23(b)(2). 70 In particular, he again emphasizes the fact that

67See Marisol A. v. Giuliani, 126 F.3d 372, 377 (2d Cir. 1997) (per curiam)
(concluding that, although plaintiffs challenged different aspects of the
child welfare system, because they alleged their injuries derived from a
“unitary course of conduct by a single system,” they met the typicality
requirement).
68 Fed. R. Civ. P. 23(b)(2).

69 Wal-Mart, 564 U.S. at 360.

70 Appellant Br. at 39.
23 No. 20-1642-cv

some plaintiffs have already been hospitalized, and thus would
benefit from the after-the-fact appeal procedure created by the
injunction, while others have yet to be hospitalized and so would
benefit from the expedited review process.

We are not persuaded. Rule 23(b)(2) does not require that “the
relief to each member of the class be identical, only that it be
beneficial.” 71 “That means that different class members can benefit
differently from an injunction.” 72 Here, all class members benefit
from the injunction ordered by the district court: each now has the
ability to appeal the denial of Part A coverage when they are
reclassified from an inpatient to an outpatient receiving observation
care. That the injunction includes both a mechanism for retroactive
review and prospective review does not make the class unsuitable for
relief under Rule 23(b)(2). 73 Because this lawsuit is predicated on
“acts and omissions” of the Secretary that apply generally to the class,
the class was properly certified under Rule 23(b)(2). 74

71Sykes v. Mel S. Harris & Assocs. LLC, 780 F.3d 70, 97 (2d Cir. 2015).
72Berni v. Barilla S.p.A., 964 F.3d 141, 147 n.28 (2d Cir. 2020).
73 See, e.g., Amara v. CIGNA Corp., 775 F.3d 510, 522 (2d Cir. 2014)

(affirming a district court’s certification of a class under Rule 23(b)(2) where
some members would receive new retirement benefits and others would
benefit from new notice of provisions of the retirement plan).
74 See Comer v. Cisneros, 37 F.3d 775, 796 (2d Cir. 1994) (A plaintiff class

that “seek[s] injunctive relief and . . . predicate[s] the lawsuit on the
defendants’ acts and omissions” satisfies Rule 23(b)(2).). The Secretary also
contends that the district court abused its discretion in limiting the class
after trial to include only patients who were or will be reclassified from
inpatients to outpatients receiving observation services (as opposed to also
including patients initially classified as receiving observation services). But
courts have an affirmative duty to monitor class decisions as the case
develops. See Mazzei v. Money Store, 829 F.3d 260, 266 (2d Cir. 2016); Fed. R.
Civ. P. 23(c)(1)(C) (a certification order may be altered or amended before
final judgment). The district court determined from the evidence
24 No. 20-1642-cv

III. Shift in the Due Process Theory

The Secretary next contends that the district court “abused its
discretion by materially changing the focus of the case after the close
of evidence.” 75 He objects to (1) the district court’s identification of
Medicare Part A benefits as plaintiffs’ protected property interest
under the Due Process Clause and (2) the district court’s identification
of the URC decision to reclassify a patient as the pertinent act for the
state action analysis. While the issue of adequate notice to the party
of a shift of focus by the district court presents a close question, we
conclude that the district court did not abuse its discretion in either
instance.

First, the Secretary argues the district court improperly
characterized plaintiffs’ property interest as the entitlement to
Medicare Part A benefits, as opposed to the entitlement of being
classified as hospital inpatients (what he characterizes as the property
interest plaintiffs advocated for before and during trial). However, as
the district court explained, “the gravamen of the Plaintiffs’ complaint
is precisely the deprivation of Part A coverage, and not simply the
denial of inpatient admission in itself.” 76 The first paragraph of the
original complaint reinforces the point: “The plaintiffs are Medicare
beneficiaries who received in-patient hospital services, but were
deprived of Medicare Part A coverage by being improperly classified as
outpatients.” 77 In addition, at trial plaintiffs continued to make clear

introduced at trial that only patients who were reclassified from inpatients
to outpatients were deprived of a property interest protected by the Due
Process Clause. It then properly modified the class to include only those
beneficiaries. We see no error in that decision.
75 Appellant Br. at 41.

76 Alexander, 2020 WL 1430089, at *39; see also Avant Petroleum, Inc. v.

Banque Paribas, 853 F.2d 140, 143 (2d Cir. 1998) (“The issues are defined by
the pleadings of the parties before the court . . . .”).
77 App’x at 93 (emphasis added).
25 No. 20-1642-cv

that they intended to prove that they had a property interest in Part
A coverage. 78 Accordingly, the district court did not err or abuse its
discretion in framing the question of whether plaintiffs suffered a due
process violation by determining whether plaintiffs had a protected
property interest in Part A coverage.

We also reject the Secretary’s claim that the district court
abused its discretion in evaluating the URC decision to reclassify a
patient, and not the initial decision to classify a patient as receiving
observation services, as the decision that could be considered a state
action for purposes of the due process analysis. The Secretary argues
that he was prejudiced by the district court’s choice because he did
not, but could have, “presented evidence focused on the decision to
reclassify patients.” 79

While we can appreciate the Secretary’s argument here, the
Secretary was aware from the very beginning of this eleven-year
litigation that members of the plaintiff class were first admitted as
inpatients and then subsequently reclassified as outpatients receiving
observation services. 80 In fact, some of the named plaintiffs fell into

App’x at 762 (plaintiffs’ opening statement that “the evidence will
78

show . . . that class members have a protected property interest by being
entitled to Part A benefits”). Indeed, we note that being classified as an
inpatient has no apparent value for plaintiffs in and of itself—rather, the
import of the inpatient classification is its effect on Part A coverage.
79 Appellant Br. at 44.

80 App’x at 93 (original complaint: “In some instances, beneficiaries who

have been formally admitted have their status retroactively changed to
observation”); id. at 102–03 (original complaint: “A patient who has been
formally admitted may be reclassified, while still in the hospital, as an
outpatient on observation status by the hospital’s utilization review
committee (URC)”).
26 No. 20-1642-cv

this very category. 81 In addition, a plaintiff testified at trial that he
was reclassified from an inpatient to one receiving observation
services. 82 Thus, contrary to his allegations, the Secretary was on
notice that a focus of the litigation was on the reclassification decision
and its effect on plaintiffs. The district court did not, therefore,
effectively “amend” plaintiffs’ complaint by analyzing the URC
reclassification process, as the Secretary argues.

Moreover, as described more fully in our discussion on the
merits of the due process claim, both the Secretary and plaintiffs did
introduce evidence on this topic; so much so that there was sufficient
evidence for the district court to conclude that the URC
reclassification decision constituted state action. Accordingly, the
Secretary has not shown that he was prejudiced by the district court’s
analysis. 83 He was aware that the role of the URCs in reclassifying
patients was a focus of the plaintiffs’ claims, and he was free to offer
any evidence and argument on the subject that he had acquired over
this lengthy litigation.

To be sure, the seven-day trial encompassed testimony on more
than just the reclassification question. The Secretary notes that
plaintiffs argued in post-trial briefing that other classification
decisions made in hospitals constitute state action. 84 But the district
court was not constrained in its decision by either party’s legal
arguments. Rather, the district court was entitled to decide, based on

App’x at 96 (original complaint: “Plaintiff LEE BARROWS . . . was
81

formally admitted before July 8, [but] on July 8 his status was changed to
observation status, retroactive to when he had been formally admitted”).
82 App’x at 814–17.

83 See United States v. Certain Real Prop. & Premises, 945 F.2d 1252, 1257

(2d Cir. 1991) (noting that a party is not prejudiced when he has a fair
opportunity to defend himself from the claim).
84 App’x at 627–29.
27 No. 20-1642-cv

the evidence presented at trial, whether one decision—the URC
decision—constituted state action. To do so was not an abuse of
discretion.

IV. Merits of the Due Process Claim

We now turn to the merits of the plaintiffs’ claim that the
current Medicare structure violates their due process rights. 85 The
district court concluded it does. “On appeal from a judgment after a
bench trial, we review the district court’s finding of fact for clear error
and its conclusions of law de novo.” 86 Mixed questions of law and fact
are reviewed de novo. 87 Under clear error review we can properly
reject a district court’s factual findings only if we are “left with the
definite and firm conviction that a mistake has been committed.” 88

In order for plaintiffs to establish a due process violation they
must show that (1) state action (2) deprived them of a protected
interest in liberty or property (3) without due process of law. 89

A. State Action

To succeed on a Due Process Clause claim, plaintiffs must first
demonstrate that the challenged activity leading to their
constitutional deprivation is “fairly attributable” to the state. 90
“Actions of a private entity are attributable to the State if there is a
sufficiently close nexus between the State and the challenged action

“No person shall . . . be deprived of life, liberty, or property, without
85

due process of law.” U.S. CONST. amend. V.
86 Kreisler v. Second Ave. Diner Corp., 731 F.3d 184, 187 n.2 (2d Cir. 2013)

(per curiam) (quotation omitted).
87 Id. at 187 n.3.

88 U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).

89 See Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59 (1999).

90 Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass’n, 531 U.S. 288, 295

(2001).
28 No. 20-1642-cv

of the entity so that the action of the latter may be fairly treated as that
of the State itself.” 91 There are “a host of facts that can bear on the
fairness of” such an attribution. 92 Accordingly, this court has
identified three “main tests” to determine whether a private entity’s
action is fairly attribute to the state: “(1) when the entity acts pursuant
to the coercive power of the state or is controlled by the state (‘the
compulsion test’); (2) when the state provides significant
encouragement to the entity, the entity is a willful participant in joint
activity with the state, or the entity’s functions are entwined with state
policies (‘the joint action test’ or ‘close nexus test’); [and] (3) when the
entity has been delegated a public function by the state (‘the public
function test’).” 93

The district court concluded that once a physician has signed
an inpatient admission order, a subsequent decision by a URC that
the patient’s status should be changed to that of an outpatient
receiving observation services constitutes action fairly attributable to
the state. 94 It found that CMS “put[s] significant pressure on hospitals
to submit only payable inpatient admission claims for Part A
payment” by “audit[ing] hospital inpatient admissions for
compliance with CMS’s inpatient criteria,” “ensuring that statutorily
mandated URCs review inpatient admissions for compliance with
CMS criteria and change the status of patients believed to be ineligible
for Part A payment,” and educating hospitals on proper inpatient
admission practices. 95 Thus, it found that under either of the first or
second tests articulated by this court, “compulsion” or “significant

91Cooper v. U.S. Postal Serv., 577 F.3d 479, 491 (2d Cir. 2009) (internal
quotation marks and alteration omitted).
92 Id. (internal quotation marks omitted).

93 Fabrikant v. French, 691 F.3d 193, 207 (2d Cir. 2012) (alteration and

internal citation omitted).
94 Alexander, 2020 WL 1430089, at *45–48.

95 Id. at *45, *48.
29 No. 20-1642-cv

encouragement,” the private hospitals’ actions are fairly attributable
to the state. 96 We agree.

i. Factual Findings

To reach this conclusion, we first must address the Secretary’s
factual challenges. The Secretary contends that the district court’s use
of specific items of evidence to support its findings about URCs was
clearly erroneous. He contends that the district court improperly
conflated evidence about other hospital staff, such as case review
managers or utilization review staff, with the URCs themselves. The
district court, however, supported its conclusions by analyzing the
CMS regulations and guidance that specifically pertain to URCs. In
addition, it cited the Medicare Claims Processing Manual as evidence
that CMS “encourages and expects hospitals to employ case
management staff to . . . assist the [URC] in the decision-making
process.” 97 Accordingly, and based on other trial testimony, the
district court concluded that “in practice, utilization review is often
conducted not by the URC as a formal body, but by the utilization
review team, which includes individual members of the URC as well
as other utilization review personnel.” 98 For example, one physician
testified that a “team of staff” reviews her orders to make sure they
are compliant with Medicare, 99 and another hospital’s Utilization
Management Plan stated that its Utilization Management Committee
“[d]elegate[d] responsibility for implementation of the Plan to [its]
Utilization Management department,” which included an operations
manager and a nurse. 100 Based on our review of the record, we do not

96Id. at *44.
97Id. at *19, *47 n.74 (quoting Medicare Claims Processing Manual, Ch.
1, § 50.3.1).
98 Id. at *47 n.74.

99 App’x at 1038.

100 App’x at 3064, 3069.
30 No. 20-1642-cv

find we are “left with the definite and firm conviction that a mistake
has been committed” in the district court’s interpretation of the
decision-making process, 101 and thus its evaluation of evidence
concerning hospital review staff in the state action analysis was not
clearly erroneous.

The Secretary also challenges the district court’s factual
conclusion that URCs, as opposed to a patient’s attending physician,
have a “decisive influence” on the reclassification decision. 102 We do
not find that conclusion to be clearly erroneous.

We note that there is some inconsistency on this point in the
record. According to the regulations, a patient status change requires
concurrence by the treating physician. 103 A case management nurse
also testified that only the treating physician could change a patient’s
status at her hospital. 104

But other evidence in the record points to the critical influence
of the URC in the reclassification decision. One treating physician
testified that she did not have the final decision as to whether the Two
Midnight determination was met and thus to classify a patient as an
inpatient. 105 She stated that “doctors generally defer to that team of
experts who are charged—it’s their job to review these orders. They
have expertise in this order review. And we defer to them as far as
the guidance on writing a compliant order with CMS regulations.” 106
Another treating physician testified that she “had initially changed [a
patient’s] status to observation based on the pressure that [she] was

101 U.S. Gypsum Co., 333 U.S. at 395.
102 Alexander, 2020 WL 1430089, at *22.
103 Medicare Claims Processing Manual, Ch. 1, § 50.3.2.

104 App’x at 1385–86.

105 App’x at 1130–31.

106 App’x at 1131.
31 No. 20-1642-cv

getting from the hospital,” and that “we’re pretty much coached that
you follow what [the reviewers] tell you.” 107 Still another treating
physician stated that there were instances involving a patient whom
he had admitted as an inpatient but whose status was then changed
to observation services without informing the treating physician. 108
In addition, a utilization management program specialist testified
that if there is a lack of agreement between the treating physician and
the utilization management review the hospital is not allowed to bill
for inpatient reimbursement. 109

“[C]lear error review mandates that we defer to the District
Court’s factual findings,” 110 and “we may not reverse a finding even
though convinced that had we been sitting as the trier of fact, we
would have weighed the evidence differently.” 111 There is more than
sufficient evidence supporting the district court’s finding that URCs
have a decisive influence in the reclassification decision. And thus,
the district court’s finding was not clearly erroneous.

ii. Legal Conclusions

We now address the Secretary’s challenge that the
reclassification decision does not constitute state action. First, like the
district court, we conclude that the result in this case is not dictated
by Blum v. Yaretsky. 112 There, the Supreme Court held that discharges
or transfers of Medicare beneficiaries from nursing homes to lower-
care facilities initiated by attending physicians or nursing home

107App’x at 865, 863.
108App’x at 1750.
109 App’x at 1172.

110 Hamilton Int’l Ltd. v. Vortic LLC, 13 F.4th 264, 277 (2d Cir. 2021)

(internal quotation marks omitted).
111 Atl. Specialty Ins. Co. v. Coastal Env’t Grp. Inc., 945 F.3d 53, 63 (2d Cir.

2019) (internal quotation marks and alterations omitted).
112 457 U.S. 991 (1982).
32 No. 20-1642-cv

administrators did not constitute state action. 113 As in this case, each
nursing home was required to establish a URC that periodically
assessed whether each patient’s continued stay in the nursing home
was justified. 114 Critically, however, the transfer decisions at issue in
Blum were made by the attending physicians or nursing home
administrators, and not by the URC, as is the case here. 115 The
Supreme Court thus found that the transfer decision was based only
on medical decisions by healthcare professionals without interference
by the government. 116

Because the claimed due process violation here occurs where
there is a URC-initiated decision, Blum is not controlling. Upon
review, we conclude that the URC decision to reclassify an inpatient
to an outpatient receiving observation services is fairly attributable to
the state.

To start, the Medicare statute expressly requires hospitals to
form and utilize URCs in admission decisions. 117 Furthermore, the
decision-making process that URCs engage in is governed largely by
statute and regulation, a factor that weighs in favor of finding state
action. 118 Moreover, CMS pressures URCs to adhere closely to those

113Id. at 1003, 1012.
114Id. at 994–95.
115 Id. at 1007 n.17; see also Kramer v. Heckler, 737 F.2d 214, 219 (2d Cir.

1984) (concluding that Blum was not controlling on the question of whether
a URC decision constituted state action).
116 Blum, 457 U.S. at 1008 n.18 (noting that although the nursing homes

had to complete patient care assessment forms designed by the state, the
regulations did not require the nursing homes to rely on those forms in
making discharge or transfer decisions).
117 42 U.S.C. § 482.30.

118 See Kramer, 737 F.2d at 220–21 (declining to determine the state-action

question, but explaining that there appeared to be a strong basis for finding
state action in the decisions of URCs that evaluate entitlement to Medicare
33 No. 20-1642-cv

regulations so that hospitals only submit claims for reimbursement
that the regulations direct are appropriate for payment by Medicare
(for inpatient admissions and thus Part A payment, those patients
who satisfy the Two Midnight Rule). CMS applies that pressure in
part by engaging in audits and post-payment reviews of a hospital’s
inpatient claims.119 The process for appealing a post-payment audit
is costly for a hospital. 120 In addition, one witness testified at trial that
Medicare contractors audited his hospital’s claims for inpatient
admission at a significantly higher frequency than it did for
outpatient claims, 121 which supports the finding that CMS strongly
regulates inpatient admission decisions. Because a hospital faces a
risk that it will not be reimbursed for services it already provided to
a patient if it improperly classifies that patient as an inpatient, URCs
are strongly incentivized to make decisions that conform to CMS
guidance. That CMS pressures hospitals in their decision making is
further supported by CMS’s own acknowledgment of observers’
“concerns,” submitted during rulemaking, that “hospitals appear[ed]
to be responding to the financial risk of admitting Medicare
beneficiaries for inpatient stays that might later be denied upon
contractor review by electing to treat beneficiaries as outpatients
receiving observation services, rather than admitting them as
inpatients.” 122

Evidence at trial showed that CMS encouraged hospitals to
respond to this pressure by implementing the Two Midnight Rule in
a uniform fashion. The strong link between CMS and the URCs was
evidenced by the extensive education and training materials

benefits, in part because the decision-making process was governed
“largely by statute, regulation, HCFA manual, and transmittal letters”).
119 See, e.g., App’x at 911–12, 1694.

120 App’x at 925.

121 App’x at 915–16.

122 Suppl. App’x at 211 (78 Fed. Reg. 509455, 50922 (Aug. 19, 2013)).
34 No. 20-1642-cv

provided by CMS on the standards it uses to determine the
appropriateness of inpatient claims to help ensure URC conformity
with CMS policy. 123 Hospital URCs may even use the same
commercial screening tools to review inpatient claims as Medicare
contractors. 124

The Secretary responds that a URC’s decision as to whether
someone should remain an inpatient is a result of independent
medical judgment and cannot be traced back to CMS. But the
evidence shows CMS exerts pressure on URCs to submit claims only
for inpatient admissions that CMS would characterize as inpatient
admissions, and to apply the Two Midnight Rule to patients in a
substantially similar manner that it does. 125 Therefore, when a URC
determines that a patient does not meet the inpatient criteria and so

123App’x at 3451 (a Medicare contractor stating on an educational call
with hospital providers that its “goal [was] to assist providers in reaching
[a] 90% or greater compliance standard of the Two-Midnight Rule”); id. at
3546 (after a Medicare contractor presented on the Two Midnight Rule on
an educational call with hospital providers a provider noting “it seem[ed]
that they should change how they approach their team and how to educate
their physicians” on the Rule).
124 App’x at 1375.

125 C.f. Catanzano v. Dowling, 60 F.3d 113, 119 (2d Cir. 1995) (holding that

decisions by certified home health agencies constitute state action when
they are not purely medical judgments but are instead compelled by a
government regulation). The present scenario is thus dissimilar to Albert v.
Carovano, 851 F.2d 561 (2d Cir. 1988) (en banc), relied upon by the Secretary.
There, the court held that a private college’s decision to discipline a student
did not constitute state action simply because the college had adopted
disciplinary rules in response to a state law directing colleges to promulgate
“regulations for the maintenance of public order.” Albert, 851 F.2d at 563.
There was no evidence in that case that any state official had “ever sought
to affect disciplinary measures taken by private college administrators, or
ha[d] ever even inquired into such a matter.” Id. at 570. The degree of
interference by the state here bears little resemblance to Albert.
35 No. 20-1642-cv

reclassifies the patient, it “may be fairly treated as [a reclassification]
of the State itself.” 126

B. Property Interest

The Secretary next challenges the district court’s conclusion
that plaintiffs have a protected property interest in Medicare Part A
coverage. “To have a property interest in a benefit, a person clearly
must have more than an abstract need or desire for it. He must have
more than a unilateral expectation of it. He must, instead, have a
legitimate claim of entitlement to it.” 127 A benefits regime, such as
Medicare, creates a “legitimate claim of entitlement” when the
statutes and regulations governing the distribution of benefits
“meaningfully channel official discretion by mandating a defined
administrative outcome.” 128 In addition, even though an official may
have to “use judgment in applying” a standard, that does not
preclude the existence of a protected interest. 129

The district court held that the “decision to provide Part A
payment, and thus coverage, is governed by mandatory criteria that
meaningfully channel official discretion” and so beneficiaries have a
“protected property interest in Part A coverage.” 130 In particular, it
found that “when the regulatory regime is viewed as a whole,
including CMS’s sub-regulatory guidance, its enforcement practice,
and other statutory provisions, it is clear that the Two Midnight Rule

Brentwood Acad., 531 U.S. at 295 (internal quotation marks omitted).
126

Bd. of Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972).
127

128 Barrows, 777 F.3d at 113 (internal quotation marks and alterations

omitted).
129 Bd. of Pardons v. Allen, 482 U.S. 369, 375–76 (1987) (internal quotation

marks omitted).
130 Alexander, 2020 WL 1430089, at *35.
36 No. 20-1642-cv

does require CMS to cover inpatient admissions that satisfy the
Rule.” 131

Upon review of the evidence, we agree with the district court
that the Two Midnight Rule (and the 24-hour rule in the period before
the Two Midnight Rule was promulgated) adequately channels
official discretion such that if a patient meets this benchmark,
Medicare will provide coverage under Part A for services provided to
him. The record demonstrates that CMS’s guidelines require its
contractors to approve claims that satisfy the Rule. 132 In addition,
CMS expresses to hospital providers that if the Rule is satisfied, a
claim for Part A benefits will be granted. 133 Like the district court, we
find no evidence that CMS denies coverage under Part A for claims
satisfying the Two Midnight Rule as a result of its own discretion.
Accordingly, the Two Midnight Rule and its surrounding guidance
“mandate[] a defined administrative outcome” in terms of Part A
coverage such that a Medicare beneficiary has a legitimate claim of
entitlement to that coverage. 134

131Id. The district court concluded the same with respect to the 24-hour
rule used in the period before the Two Midnight Rule was promulgated.
Id. at *42.
132 See, e.g., App’x at 3043 (a flowchart promulgated by CMS showing

that if “it was reasonable for the admitting physician to expect the patient
to require medically necessary hospital services for 2 Midnights or longer”
then the “[c]laim is [p]ayable [u]nder Part A ([a]ssuming all other
requirements are met)” (emphasis added)).
133 See App’x at 2619 (CMS guidance that when a “physician expects the

beneficiary will require medically necessary hospital services for 2 or more
midnights . . . and orders admission based upon that expectation, the
services are generally appropriate for inpatient payment under Medicare
Part A. QIOs [Medicare contractors] will approve these cases so long as
other requirements are met”).
134 Barrows, 777 F.3d at 113 (internal quotation marks omitted).
37 No. 20-1642-cv

The Secretary responds that the physicians who make up the
URCs must use their medical judgment in applying the Two Midnight
Rule to determine whether they expect a patient to require hospital
care that crosses two midnights. 135 But their use of judgment to make
that determination does not mean their discretion is not adequately
channeled for purposes of discerning a property interest. When a
private official uses judgment in applying the standards set by the
state, so long as an administrative action is “required after the [private
entity] determines (in its broad discretion) that the necessary
prerequisites exist,” a property interest exists in the benefits regime.136
Here, after the URC physicians use their medical judgment in
determining that the requirements of the Rule are met, the services
provided to the patient are considered appropriate for coverage
under Medicare Part A.

We therefore conclude that plaintiffs have a property interest
in coverage under Medicare Part A that is cognizable under the Due
Process Clause.

C. The Process That is Due

After establishing state action and a property interest to which
they are entitled, plaintiffs must lastly show they have been deprived
of that property interest without due process of law. 137 To determine
whether a deprivation has been made without the process required,
the court must engage in the familiar three-factor test first articulated
in Mathews v. Eldridge. 138 “This test requires that we balance: (1) the

135Appellant Br. at 62 (citing 42 C.F.R. § 412.3(d), which states that the
Two Midnight Rule determination must be based on complex medical
factors).
136 Allen, 482 U.S. at 376.

137 Am. Mfrs. Mut. Ins. Co., 526 U.S. at 59.

138 424 U.S. 319, 335 (1976).
38 No. 20-1642-cv

private interest at stake; (2) the risk of an erroneous deprivation of
that interest through the procedures used and the probable value (if
any) of alternative procedures; [and] (3) the government’s interest,
including the possible burdens of alternative procedures.” 139

We first conclude that there is a substantial private interest at
stake in this case. This court has already recognized in the context of
Medicare Part A coverage the “astronomical nature of medical
costs.” 140 The record presented here is also replete with evidence of
the significant financial costs borne by patients who do have their care
covered by Medicare Part A. 141 CMS itself has acknowledged that
denial of Part A coverage can have “significant financial implications”
for Medicare beneficiaries. 142 The Secretary contends that the district
court improperly used $10,000, the average cost of post-
hospitalization SNF care, as a measure of the private interest at stake
when only a small number of Medicare patients need such care. A
witness testified that only 4% of patients who spend three days in a
hospital but less than three days as inpatients receive post-hospital
extended care. 143 But the same witness also testified that as many as
about five times more patients are recommended to receive SNF care

139Kuck v. Danaher, 600 F.3d 159, 163 (2d Cir. 2010) (internal quotation
marks omitted).
140 Kramer, 737 F.2d at 222.

141 See App’x 3083–87 (hospital bill of Andrew Roney, a testifying

witness, showing an out-of-pocket cost of $3,501.84 for hospital services
after he was reclassified from an inpatient to one receiving observation
services); see also Amicus Curiae AARP et al. Br. at 18 (“The financial
consequences of outpatient observation classifications can be catastrophic
for Medicare beneficiaries who can face staggering, and often surprising,
bills for hospital stays and subsequent SNF stays not covered by Medicare
Part A.”).
142 App’x at 2763.

143 App’x at 1530–31 (citing App’x at 2609–10).
39 No. 20-1642-cv

after their hospitalization than actually receive it. 144 It is therefore
appropriate to consider the cost of post-hospitalization SNF care as a
measure of the private interest at stake because such care is needed
by a substantial portion of the class. The evidence presented at trial
also demonstrated the emotional and psychological costs, beyond the
financial costs, for a patient who is denied Medicare Part A
coverage. 145 Furthermore, some patients may have to endure lower-
quality medical care or even forgo it altogether as a result of the Part
A deprivation. 146 The private interest in this case is thus highly
significant.

We also conclude that there currently exists a serious risk that
Medicare beneficiaries are erroneously deprived of Part A coverage
to which they are entitled by URC reclassification decisions that they
are unable to challenge. Evidence presented at trial showed that
when hospitals appeal the denial by a CMS contractor of claims
submitted for reimbursement under Medicare Part A (for services
provided to a patient the hospital classified as an inpatient), hospitals
have a high rate of success in obtaining a reversal of that denial. 147
Accordingly, there is a high rate of error in the reviews performed by

144App’x at 1534.
145App’x at 857 (a patient said to her doctor, “I just want to die” rather
than “bankrupt my family” because her medical treatment was not covered
under Part A).
146 See, e.g., App’x at 786–87, 807 (plaintiff Leyanna’s granddaughter

testifying that her grandmother could not afford to pay out of pocket for
SNF care after a certain period of time and so had to move to a facility less
well-equipped for treating her injuries); App’x at 1091 (a physician
testifying that without Medicare Part A coverage “a lot of those patients
will forgo necessary care, and they’ll go home to an unsafe situation
because they can’t or they won’t burden their families with this amount of
cost”).
147 App’x at 1134 (CMS reported a 37.5% overturn rate for Part A claims

in 2016).
40 No. 20-1642-cv

CMS contractors of inpatient admissions as to whether a patient
properly qualifies for Part A coverage under CMS guidelines. Like
the district court, this leads us to conclude that there is a similarly
high risk of error in a URC’s determination of whether a patient
qualifies as an inpatient and thus receives Part A coverage. The URC
review of attending physician inpatient admission decisions closely
resembles the CMS contractor reviews of hospital inpatient admission
decisions. CMS contractors conducting reviews do so under the same
criteria established by CMS for classifying patients as inpatients—the
Two Midnight Rule—as URC personnel reviewing an inpatient
determination. 148 In addition, the same types of commercial screening
tools are utilized by CMS contractors and URCs to aid their
decisions. 149 Thus, the error rate of one group of reviewers (the CMS
contractors) likely mirrors the error rate of another group of reviewers
(the URCs).

In addition, CMS has acknowledged that there may be an
“unexpected” “large number of long outpatient stays” submitted by
hospitals which “likely met the 2-midnight policy’s expected-length-
of-stay requirement for inpatient admissions.” 150 That also indicates
that there is a large risk of erroneous deprivation of Part A services.
The appeals process currently afforded to hospitals substantially
mitigates the risk that their inpatient claims are improperly denied for
reimbursement. An appeals process for the URC reclassification

App’x at 1133–34 (trial testimony that when hospital providers appeal
148

CMS contractor decisions they are appealing under the Two Midnight
Standard).
149 Compare App’x at 3065 (a hospital’s reference to “[n]ationally

accepted evidence based criteria” indicating that it uses commercial
screening tools), with App’x at 2252 (CMS’s manual directing that a
“reviewer shall use a screening tool as part of their medical review”).
150 App’x at 3013.
41 No. 20-1642-cv

decision would similarly likely improve the accuracy of properly
covering patients’ care under Part A.

As to the third factor, there is no doubt that the Secretary would
be burdened by the creation of the appeals procedures advocated for
by plaintiffs. The government would have to promulgate new
regulatory and sub-regulatory guidance, draft new or modify existing
contracts, develop appropriate educational and training materials,
secure appropriations from Congress, and draft and approve a new
notice to beneficiaries. 151 Thus, creating an appeals process would
certainly impose some costs on the Secretary. But “[f]inancial cost
alone is not a controlling weight in determining whether due process
requires a particular procedural safeguard.” 152 And courts have
previously required procedures to be implemented that result in a
significant financial burden on an agency in order to remedy a due
process violation. 153

Moreover, the Secretary has already established an appeals and
expedited appeals process for hospitals and beneficiaries to challenge
other Medicare Part A payment and coverage denials. 154 It is possible
that the Secretary could leverage some of that infrastructure for a
process to appeal the decision to reclassify a patient from an inpatient
to an outpatient receiving observation services. Thus, although the
Secretary would have to expend financial resources to create an
appeals process for this plaintiff class, the burden on the Secretary is

151See Alexander, 2020 WL 1430089, at *51.
152Mathews, 424 U.S. at 348.
153 See, e.g., Goldberg v. Kelly, 397 U.S. 254, 267–70 (1970) (holding that a

recipient of public benefits needs to be provided with an opportunity to
confront and cross-examine the witnesses relied on by the department in
the termination of their benefits).
154 42 C.F.R. §§ 405.1205–405.1206; 42 U.S.C. § 1395ff(a)-(b); 42 C.F.R.

§§ 405.920–405.1140.
42 No. 20-1642-cv

lessened somewhat by the existence of similar Medicare appeal
procedures.

Ultimately, in balancing the three Mathews factors, we hold that
plaintiffs’ substantial interests, the current material risk of erroneous
deprivation, and the likely benefit of additional procedures outweigh
the burden on the Secretary, which is mitigated somewhat by the
existence of similar appeal procedures, in instituting an appeals
process to challenge the URC reclassification decision. The decision
to reclassify a hospital patient from an inpatient to one receiving
observation services may have significant and detrimental impacts on
plaintiffs’ financial, psychological, and physical well-being. That
there is currently no recourse available to challenge that decision also
weighs heavily in favor of a finding that plaintiffs have not been
afforded the process required by the Constitution. 155

In sum, plaintiffs have demonstrated that the Secretary violates
their due process rights when URCs reclassify them from inpatients
to those receiving observation services without providing a
mechanism to appeal that decision.

CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of the
district court and its grant of injunctive relief. 156

155See, e.g., Doolen v. Wormuth, 5 F.4th 125, 134 (2d Cir. 2021) (concluding
that there was no due process violation when defendant “provid[ed] [a]
robust combination of pre- and post-deprivation procedures” for plaintiffs
challenging a decision).
156 The Secretary previously filed a motion to stay the district court’s

injunction pending a decision in this appeal. On July 16, 2021, the court
granted a temporary stay of the injunction pending decision on the motion.
We now DENY the Secretary’s motion for a stay as moot.
43 No. 20-1642-cv

APPENDIX

Injunction Entered by the District Court in Alexander v. Azar, No.
3:11-CV-1703 (MPS), 2020 WL 1430089 (D. Conn. Mar. 24, 2020):

1. The Secretary shall permit all members of the modified class to
appeal the denial of their Part A coverage.

2. For class members who have stayed, or will have stayed, at the
hospital for three or more consecutive days, but who were
designated as inpatients for fewer than three days, the
Secretary shall permit appeals through an expedited appeal
process substantially similar to the existing expedited process
for challenging hospital discharges.

3. In the appeals to be established under this order, the Secretary
shall permit class members to argue that their inpatient
admission satisfied the relevant criteria for Part A coverage—
for example, that the medical record supported a reasonable
expectation of a medically necessary two-midnight stay at the
time of the physician’s initial inpatient order, in the case of a
post-Two Midnight Rule hospital stay—and that the URC’s
determination to the contrary was therefore erroneous. If the
class member prevails, the Secretary shall disregard, for the
purposes of determining Part A benefits, including both Part A
hospital coverage and Part A SNF coverage, the beneficiary’s
reclassification as an outpatient that resulted from the URC’s
erroneous determination.

4. The Secretary shall provide class members with timely notice
of the procedural rights described above.

5. For those class members whose due process rights were
violated, or will have been violated, prior to the availability of
44 No. 20-1642-cv

the procedural protections set forth above, the Secretary shall
provide a meaningful opportunity to appeal the denial of their
Part A coverage, as well as effective notice of this right.

6. The Secretary may provide greater procedural protections than
the ones described above, and may provide these protections to
a broader class of beneficiaries, provided that the due process
rights of the class members are fully protected as set forth
above.