University of Colorado Health at Memorial Hospital v. Burwell , 151 F. Supp. 3d 1 ( 2015 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNIVERSITY OF COLORADO HEALTH :
AT MEMORIAL HOSPITAL, et al., :
:
Plaintiffs, : Civil Action No.: 14-1220 (RC)
:
v. : Re Document No.: 29
:
SYLVIA M. BURWELL, Secretary, :
United States Department of :
Health and Human Services, :
:
Defendant. :
MEMORANDUM OPINION
GRANTING IN PART AND DENYING IN PART PLAINTIFFS’ MOTION TO COMPEL PRODUCTION OF
THE COMPLETE ADMINISTRATIVE RECORD
I. INTRODUCTION
This case is one in a series of cases in which various hospitals have challenged
regulations promulgated by the Department of Health and Human Services (“HHS”) to
implement the Outlier Payment System, which provides for supplemental Medicare payments to
hospitals when a particular patient’s hospitalization and care is unusually costly. Plaintiffs here,
a group of thirty-five acute care hospitals, seek review of the Medicare reimbursements awarded
to them under that system. Before the Court is Plaintiffs’ motion to compel production of the
complete administrative record (ECF No. 29). This issue is well-traveled ground. In several
other cases challenging HHS’s outlier payment regulations, courts in this district have similarly
considered motions to supplement the administrative record that sought many of the same
materials Plaintiffs seek here. See generally Lee Mem’l Hosp. v. Burwell, No. 13-643, 2015 WL
3631811 (D.D.C. June 11, 2015); Dist. Hosp. Partners v. Sebelius, 971 F. Supp. 2d 15 (D.D.C.
2013), aff’d, 786 F.3d 46 (D.C. Cir. 2015); Banner Health v. Sebelius, 945 F. Supp. 2d 1 (D.D.C.
2013). Upon consideration of the parties’ filings, and for the reasons stated below, the Court will
grant in part and deny in part Plaintiffs’ motion to compel production.
II. FACTUAL BACKGROUND
A. The Outlier Payment System
To comprehend the parties’ dispute about the administrative record’s contents, one must
have a keen understanding of the complex, and at times technical, Medicare Outlier Payment
System. Hospitals were originally reimbursed under Medicare for the “reasonable costs” that
they incurred when treating patients. See Dist. Hosp. Partners, L.P. v. Burwell, 786 F.3d 46, 49
(D.C. Cir. 2015). Under that model, “[t]he more [hospitals] spent, the more they were
reimbursed.” Id. (first alteration in original) (quoting Cnty. of L.A. v. Shalala, 192 F.3d 1005,
1008 (D.C. Cir. 1999)). By 1983, however, Congress had determined that a reasonable cost
system failed to provide adequate incentives for hospitals to operate efficiently. Id. To remedy
the potential for over-spending and to reward cost-effective hospital practices Congress passed as
section 1886(d) of the Social Security Act (“Section 1886(d)”) what is called the Inpatient
Prospective Payment System (“IPPS”), administered by the Centers for Medicaid and Medicare
Services (“CMS”). See Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011); see
also 42 U.S.C. § 1395ww(d). Instead of reimbursing a hospital simply for its reasonable costs,
Congress directed CMS to calculate a “standardized amount” representing the average operating
cost for inpatient hospital services. Cape Cod Hosp., 630 F.3d at 205. Section 1886(d) then
provides that Medicare reimbursements made to hospitals are to be based on that standardized
amount, regardless of the particular costs a hospital incurs in an individual case. See id.
2
Congress did recognize that different illnesses may necessarily involve more or less
costly care, however. To account for those variations, Congress also directed the Secretary of
Health and Human Services (the “Secretary”) to modify the standardized amount based on a
number of diagnosis-related groups (“DRGs”). DRGs are “group[s] of related illnesses to which
the Secretary assigns a weight representing ‘the relationship between the costs of treating
patients within that group and the average cost of treating all Medicare patients.’” Dist. Hosp.
Partners, 786 F.3d at 49 (quoting Cape Cod Hosp., 630 F.3d at 205–06).
Congress further recognized that, notwithstanding the standardized reimbursement
system, “health-care providers would inevitably care for some patients whose hospitalization
would be extraordinarily costly or lengthy.” Cnty. of L.A., 192 F.3d at 1009. To account for
those situations, Congress created the Outlier Payment Program, which permits a hospital to
recoup an additional payment, referred to as an “outlier payment,” if the costs incurred during
the care of a particular patient exceed a certain dollar amount. Id. As relevant here, section
1886(d) provides that a hospital “may request additional payments in any case where charges,
adjusted to cost, . . . exceed the sum of the applicable DRG prospective payment rate . . . plus a
fixed dollar amount determined by the Secretary.” 42 U.S.C. § 1395ww(d)(5)(A)(ii). That fixed
dollar amount—referred to as the “fixed loss threshold”—“serves as the cutoff point triggering
eligibility for outlier payments.” Banner Health, 945 F. Supp. 2d at 8.
Section 1886(d) further mandates that the aggregate amount of outlier payments made in
any one fiscal year “may not be less than 5 percent nor more than 6 percent of the total payments
projected or estimated to be made based on DRG prospective payment rates for discharges in
that year.” 42 U.S.C. § 1395ww(d)(5)(A)(iv). During each fiscal year at issue in this case, the
3
Secretary has endeavored to establish payment rates and policies that will produce outlier
payments equaling 5.1% of total projected IPPS payments. 1
Hence, it is somewhat of an understatement to say that “calculating outlier payments is an
elaborate process.” Dist. Hosp. Partners, 786 F.3d at 49. For simplicity’s sake “three particular
numbers are important: (1) the cost-to-charge ratio, (2) the fixed loss threshold, and (3) the
outlier threshold.” Id. The cost-to-charge ratio, or “CCR,” is calculated on an individual
hospital level and represents the average differential between the charges that a particular
hospital lists on a patient’s invoice and the actual costs that hospital incurs in treating a patient.
In essence, the figure represents the hospital’s “average markup” on its services. Id. at 50. To
calculate a hospital’s CCR, the Secretary considers the hospital’s “most recent settled cost report
or the most recent tentative settled cost report, whichever is from the latest cost reporting
period.” See 42 C.F.R. § 412.84(i)(2).
As indicated above, the fixed loss threshold is the “fixed dollar amount” above the DGR
prospective payment rate that the cost of a patient’s care must exceed before a hospital becomes
eligible for an outlier payment. 42 U.S.C. § 1395ww(d)(5)(A)(ii). The fixed loss threshold
“‘acts like an insurance deductible because the hospital is responsible for that portion of the
treatment’s excessive cost’ above the applicable DRG rate.” Dist. Hosp. Partners, 786 F.3d at
1
See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems
and Fiscal Year 2007 Rates, 71 Fed. Reg. 47,870, 48,149 (Aug. 18, 2006) [hereinafter “FY 2007
Final Rule”]; Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 2008 Rates, 72 Fed. Reg. 47,130, 47,419 (Aug. 22, 2007) [hereinafter
“FY 2008 Final Rule”]; Medicare Program; Hospital Inpatient Prospective Payment Systems for
Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System Changes
and FY 2011 Rates, 75 Fed. Reg. 50,042, 50,430 (Aug. 16, 2010) [hereinafter “FY 2011 Final
Rule”]; Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care
Hospitals and the Long-Term Care Hospital Prospective Payment System and FY 2012 Rates, 76
Fed. Reg. 51,476, 51,795 (Aug. 18, 2011) [hereinafter “FY 2012 Final Rule”].
4
50 (quoting Boca Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229
(11th Cir. 2009)). A hospital is simply expected to absorb the additional costs that fall above the
DGR but below the fixed loss threshold. The fixed loss threshold is calculated annually and a
new threshold is set for each fiscal year. Id. at 50.
The third number, the “outlier threshold,” is calculated by adding the DRG rate for a
particular illness to the fixed loss threshold. Id. Any costs a hospital incurs above the outlier
threshold may be reimbursed through an outlier payment, although CMS only reimburses a
hospital for a fixed percentage of the hospital’s costs above that outlier threshold. Since at least
2003, CMS has reimbursed hospitals for 80% of their adjusted costs above the outlier threshold.
Id. (citing Medicare Program; Changes to the Hospital Inpatient Prospective Payment System
and Fiscal Year 2004 Rates, 68 Fed. Reg. 45,346, 45,476 (Aug. 1, 2003); 42 C.F.R. § 412.84(k)).
It is important to note that outlier payments do not provide hospitals with additional
funding that is not already allocated to the Medicare program. Instead, outlier payments simply
redistribute a portion of IPPS payments that would normally flow to hospitals as reimbursement
for typical DRG patients to those hospitals that treat outlier patients. See 42 U.S.C. §
1395ww(d)(3)(B). To compensate for the anticipated percentage of outlier payments to be made
during the fiscal year, the reimbursements that hospitals receive for ordinary cases under the
IPPS program are therefore subject to a percentage reduction “by a factor equal to the proportion
of [outlier] payments.” Id.
B. The Challenged Regulations
Plaintiffs’ claims implicate two types of regulations that HHS has promulgated to
implement the outlier payment system. The first is the 2003 Outlier Payment Regulations (the
5
“Payment Regulations”), 2 which establish the general model for calculating whether a hospital’s
treatment of a particular patient qualifies for an outlier payment. See Medicare Program; Change
in Methodology for Determining Payment for Extraordinarily High-Cost Cases (Cost Outliers)
Under the Acute Care Hospital Inpatient and Long-Term Care Hospital Prospective Payment
Systems, 68 Fed. Reg. 34,494 (June 9, 2003) [hereinafter “2003 Payment Regulations”].
As noted above, IPPS payments are based on the costs a hospital incurs in treating a
patient, not the charges as actually listed on a patient’s invoice. Dist. Hosp. Partners, 786 F.3d
at 49–50. CMS adjusts a hospital’s charges to reflect actual costs using a hospital’s cost reports.
Id. at 49–50, 51. But there is an inevitable time delay between the charges a hospital incurs
today and the point at which those charges, as adjusted to cost, will be reflected in a cost report.
See 2003 Payment Regulations, 68 Fed. Reg. at 34,496. By 2003, it became clear that several
hospitals had learned how to exploit this time lag. Id. Specifically, if a hospital “dramatically
increased charges between past cost reports and the patient costs for which reimbursement is
sought, [that hospital’s] cost-to-charge ratio would be too high and would overestimate the
hospital’s costs.” Dist. Hosp. Partners, 786 F.3d at 51 (internal quotation marks omitted). Such
overestimation “may result in some cases receiving outlier payments when th[ose] cases, in
actuality, are not high-cost cases.” 2003 Payment Regulations, 68 Fed. Reg. at 34,497. This
practice is referred to as turbo-charging. Dist. Hosp. Partners, 786 F.3d at 51.
In an effort to remedy this problem and to prevent turbo-charging in the future, HHS
modified its payment methodology in 2003 to, among other things, provide for the use of “the
2
Plaintiffs refer to these regulations interchangeably as the “Payment Regulations” and
the “Outlier Payment Regulation.” Compare, Pls.’ Mem. Supp. Mot. to Compel Produc. at 5,
ECF No. 29, with Fourth Am. Compl. ¶ 77. The Court will refer to the 2003 regulations as the
“Payment Regulations.”
6
most recent tentative settled cost report,” in lieu of a settled cost report, when calculating a
hospital’s CCR. See 2003 Payment Regulations, 68 Fed. Reg. at 34,497. HHS projected that the
use of tentative reports would “reduce[] the time lag for updating cost-to-charge ratios by a year
or more.” Id. The Payment Regulations also provided that “outlier payments would become
subject to reconciliation when hospitals’ cost reports are settled.” Id. at 34,501. HHS did not
propose to retroactively adjust the fixed loss threshold for prior fiscal years in light of the
reconciled cost reports, however. Id. Instead, HHS explained that it continued to believe that the
threshold “should be based on projected payments using the latest available data without
retroactive adjustment.” Id.
Using this updated methodology, HHS calculates a new fixed loss threshold each fiscal
year to govern hospitals’ eligibility for outlier payments during that fiscal year (collectively, the
“Threshold Regulations”). The Threshold Regulations for certain fiscal years (2007, 2008, 2011,
and 2012) are the second type of regulations challenged in this case. Using the fiscal year 2008
as an illustration, HHS typically arrives at the upcoming fiscal year’s fixed loss threshold
through the following process: 3
First, the agency “simulate[s] payments” that will be made under the IPPS program
during the upcoming fiscal year. FY 2008 Final Rule, 72 Fed. Reg. at 47,267. In 2008, the
agency simulated payments with reference to the actual cases and discharges made two years
earlier (during fiscal year 2006); that data is set forth in what is called the “MedPAR file,” which
contains “fully coded diagnostic and procedure data for all Medicare inpatient hospital bills.” Id.
Before simulating the projected payments for the fiscal year, however, the agency omits
3
In their respective memoranda the parties often use the 2008 rulemaking as an
illustration. The Court follows suit, reserving additional detail with respect to certain aspects of
HHS’s methodology for the analysis, below.
7
inaccurate data from the file—a process that is referred to as “trimming” the data. 4 Id. The
trimmed data forms the universe of cases upon which the next fiscal year’s projected payments
will be based. The agency then adjusts those charges for anticipated inflation. For 2008, HHS
“inflated the charges on the MedPAR claims by 2 years, from FY 2006 to FY 2008.” Id. at
47,417. The agency calculates “the 1 year average annualized rate-of-change in charges-per-
case” by comparing the charges over the first two quarters of the relevant fiscal year (e.g., 2006)
to charges over first two quarters of the following fiscal year (e.g., 2007). Id. at 47,418. That
average annual rate of change is referred to as the “charge inflation factor,” and that factor is
applied to the 2006 cases to determine the anticipated charges in 2008. Id. at 47,417.
Because charges submitted for reimbursement will ultimately be adjusted to costs,
however, the agency also projects hospitals’ CCRs for the upcoming fiscal year. The agency
starts with the “most recent available data at the time of the [proposed or final] rule,” as
contained in a particular update to what is called the “Provider Specific File (PSF).” Id. at
47,417, 47,418. For the 2008 final rulemaking, the agency used the data contained in the “March
2007 update to the PSF.” Id. at 47,418. That PSF data for all Medicaid providers is compiled
into a single, aggregated electronic file referred to as an “Impact File.” The Impact File provides
“a static snapshot of the actual variables that CMS used in the rate-setting and payment modeling
work for the rule with which the impact file is associated.” See Cheng. Decl. ¶ 10, ECF No. 32–
1. Those CCRs are then adjusted for anticipated inflation by applying what is called a “CCR
adjustment factor.” FY 2008 Final Rule, 72 Fed. Reg. at 47,418.
4
For example, among other alterations, HHS subtracts “organ acquisition costs” from the
charges for certain types of organ transplants, deletes claims with total charges or total lengths of
stay less than or equal to zero, and removes statistical outliers from the data sets. See FY 2008
Final Rule, 72 Fed Reg. at 47,268.
8
In 2008, using the 2006 MedPAR charges and the March 2007 CCRs, both as adjusted
for inflation, HHS simulated payments for the upcoming fiscal year and determined that a fixed
loss threshold of $22,635 would ensure outlier payments equaling “5.1% of total IPPS
payments” during the fiscal year. Id. at 47,419. Of course, the agency’s projections are
dependent on tentative cost reports from prior fiscal years, which may be subject to
reconciliation once a final cost report is finalized. See 2003 Payment Regulations, 68 Fed. Reg.
at 34,501. Despite this possibility, HHS has repeatedly elected not to adjust its annual
projections to account for the possibility that a hospital’s CCR and outlier payments might be
reconciled once the final cost reports are settled. 5
C. Procedural History
In this action, Plaintiffs have challenged both the 2003 Payment Regulations and the
Threshold Regulations for the 2007, 2008, 2011, and 2012 fiscal years. See Fourth Am. Compl.
¶¶ 4–5, ECF No. 416; see also Pls.’ Mem. Supp. Mot. to Compel Produc. at 15, ECF No. 29
[hereinafter “Pls.’ Mem. Supp.”]. Plaintiffs claim that the Threshold Regulations violate Section
1886(d) of the Social Security Act because they fail to comply with the statutory mandate that
outlier payments fall between five and six percent of all DRG-related payments, and that the
5
See, e.g., FY 2007 Final Rule, 71 Fed. Reg. at 48,149; FY 2008 Final Rule, 72 Fed.
Reg. at 47,419; FY 2011 Final Rule, 75 Fed. Reg. at 50,428–29; FY 2012 Final Rule, 76 Fed.
Reg. at 51,793.
6
On June 16, 2015, and in the midst of briefing with respect to this motion to compel,
Plaintiffs were granted leave to file a Fourth Amended Complaint. The amended complaint
added additional claims by certain hospitals, which were already Plaintiffs in this case, based on
recent activity of the Provider Reimbursement Review Board. Because the amended complaint
did not “implicate any new rulemaking records,” the Plaintiffs represented that the “existing
briefs associated with Plaintiffs’ Motion to Compel with respect to the completeness of the
administrative record will not be impacted by [the] proposed Fourth Amended complaint.” Pls.’
Unopposed Mot. for Leave to File Fourth Am. Compl. ¶ 12, ECF No. 40. Throughout this
memorandum opinion the Court will cite to the Fourth Amended Complaint, as the governing
complaint.
9
regulations are arbitrary and capricious in violation of the Administrative Procedure Act
(“APA”). See Fourth Am. Compl. ¶¶ 72–73, 75. Plaintiffs also contend that the 2003 Payment
Regulations are procedurally invalid and that, because the later fiscal year regulations are
implemented using the 2003 methodology, those regulations are also invalid. See id. ¶ 77.
Plaintiffs seek an order vacating the Payment Regulations, remanding these appeals to the
Secretary so that she can “recalibrate and reset” the fixed loss threshold for each fiscal year at
issue, and allowing the Plaintiffs to submit amended claims for outlier payments under the
recalibrated threshold levels. See Fourth Am. Compl. at 38.
HHS initially produced to the Plaintiffs what HHS purported to be the administrative
record for the 2003 Payment Regulations and the Threshold Regulations for fiscal years 2007,
2008, 2011, and 2012. See Certified List of Contents of the Rulemaking Record, ECF No. 25.
With respect to the Threshold Regulations, the initial record included: the Impact Files and
MedPAR data files for each fiscal year rulemaking, public comments related to those fiscal
years’ proposed rules, the proposed and final rulemaking notices, and, for some fiscal years,
certain documents specifically referenced in each rulemaking. Id. For the 2003 Payment
Regulations, the administrative record included the MedPAR data file, the public comments
related to the proposed rule, and the proposed and final rulemaking notices. Id.
Plaintiffs claim that these documents do not reflect the complete administrative record
that was before the agency when it considered these regulations. Specifically, Plaintiffs have
moved to compel the production of nine documents or categories of documents including: (1) an
Interim Final Rule considered at the time HHS promulgated the 2003 Payment Regulations; (2)
the Impact File for the 2003 Payment Regulations; (3) the formulas used to calculate the fixed
loss threshold for each fiscal year at issue in this case; (4) the formulas and data used to calculate
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estimated outlier payments, made during the previous FYs; (5) the actuarial analysis and data
upon which HHS relied to calculate the CCR adjustment factors; (6) purportedly missing data
HHS used to calculate the inflation factors; (7) purportedly missing and incomplete Impact Files
and related data; (8) materials supporting HHS’s regulatory impact analysis considered when
promulgating each Threshold Regulation; and (9) materials supporting HHS’s conclusion that it
need not consider reconciliation of outlier payments when setting the fixed loss thresholds. See
generally Pls.’ Mem. Supp. at 21–44. 7
III. LEGAL STANDARD
When a court reviews an agency’s action under the APA, it must “review the whole
record or those parts of it cited by a party.” 5 U.S.C. § 706; see also Citizens to Preserve
Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971) (“[R]eview is to be based on the full
administrative record that was before the Secretary at the time he made his decision.”). A
reviewing court “should have before it neither more nor less information than did the agency
when it made its decision.” IMS, P.C. v. Alvarez, 129 F.3d 618, 623 (D.C. Cir. 1997).
Reviewing “less than the full administrative record,” might “allow a party to withhold evidence
unfavorable to its case,” while reviewing “more than the information before the agency at the
time of its decision,” risks “requiring administrators to be prescient or allowing them to take
7
For ease of reference, the Court refers to the specific documents discussed in the
argument section of Plaintiffs’ memorandum. Although Plaintiffs provide a bullet point list in
their memorandum listing the documents they seek, see Pls.’ Mem. Supp. at 17–18, that list
differs in some respects from the description in the subsequent analysis section. For example,
the Court understands Plaintiffs’ general reference to “supporting data which HHS actually used
to determine certain key assumptions for projected outlier payment calculations as set forth in
HHS’s Impact Files for each FY at issue,” Pls.’ Mem. Supp. at 17, to encompass both Plaintiffs’
request for missing data used to calculate inflation factors and their request for the data missing
from the purportedly incomplete impact files, see id. at 34, 36.
11
advantage of post hoc rationalizations.” Walter O. Boswell Mem’l Hosp. v. Heckler, 749 F.2d
788, 792 (D.C. Cir. 1984). Agencies bear the responsibility of compiling the administrative
record, which must include all of the information that the agency considered “either directly or
indirectly.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010). The record that an
agency produces “is entitled to a strong presumption of regularity.” Id.
A party may seek to supplement the record produced by the agency, however, in “one of
two ways.” WildEarth Guardians v. Salazar, 670 F. Supp. 2d 1, 5 n.4 (D.D.C. 2009). First, a
party may seek to include “evidence that should have been properly a part of the administrative
record but was excluded by the agency.” Id. Where a plaintiff follows this first route, as
Plaintiffs do here, supplementation is appropriate if the agency “did not include materials that
were part of its record, whether by design or accident.” Marcum, 751 F. Supp. 2d at 78. But to
overcome the presumption of regularity, “a plaintiff must put forth concrete evidence that the
documents it seeks to ‘add’ to the record were actually before the decisionmakers.” Id. To make
that showing, a plaintiff must do more than simply assert “that materials were relevant or were
before an agency when it made its decision.” Id. “Instead, the plaintiff ‘must identify
reasonable, non-speculative grounds for its belief that the documents were considered by the
agency and not included in the record.’” Id. (emphasis in original) (quoting Pac. Shores
Subdivision Cal. Water Dist. v. U.S. Army Corps of Eng’rs, 448 F. Supp. 2d 1, 6 (D.D.C. 2006)).
The plaintiff must also “identify the materials allegedly omitted from the record with sufficient
specificity, as opposed to merely proffering broad categories of documents and data that are
‘likely’ to exist as a result of other documents that are included in the administrative record.”
Banner Health, 945 F. Supp. 2d at 17.
12
Alternatively, a party may seek to supplement the record with “extra-judicial evidence
that was not initially before the agency but [which] the party believes should nonetheless be
included in the administrative record.” WildEarth Guardians, 670 F. Supp. 2d at 5 n.4. In these
circumstances, a more stringent standard applies. To “justify[] a departure from [the] general
rule” that review “is to be based on the full administrative record that was before the Secretary at
the time he made his decision,” a party must demonstrate one of three “unusual circumstances.”
Am. Wildlands v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008) (internal quotation marks
omitted). Those circumstances include: (1) when “the agency ‘deliberately or negligently
excluded documents that may have been adverse to its decision,’” (2) when “background
information [is] needed ‘to determine whether the agency considered all the relevant factors,’”
and (3) when “the ‘agency failed to explain administrative action so as to frustrate judicial
review.’” City of Dania Beach v. F.A.A., 628 F.3d 581, 590 (D.C. Cir. 2010) (quoting Am.
Wildlands, 530 F.3d at 1002).
The Court agrees with another judge in this district in noting that the dual use of the term
“supplement” has caused “some confusion” about the proper test to apply when a party seeks to
supplement the administrative record. See The Cape Hatteras Access Pres. Alliance v. U.S.
Dep’t of Interior, 667 F. Supp. 2d 111, 113 (D.D.C. 2009). “Supplement” has been used
synonymously to refer to both a circumstance in which a party argues that the administrative
record does not actually reflect the materials that the agency had before it when it made its
decision, and a circumstance in which a party seeks to add extra-record or extra-judicial
information to the record that was concededly not before the agency. Id. Perhaps because of
that dual use, courts in this district have regularly invoked the language from Dania Beach and
American Wildlands—and have asked whether a party has shown the existence of one of the
13
“unusual circumstances”—even when considering claims that an agency had not produced
materials that it actually had before it. Both parties similarly invoke the Dania Beach and
American Wildlands language in this case. But this Court reads those cases to set forth the test
for supplementation only with respect to extra-record information. Accord Cape Hatteras, 667
F. Supp. 2d at 114–15. For one thing, both cases—and the D.C. Circuit precedent they rely on—
involved a party’s effort to introduce information that had not been before the agency when it
considered the challenged rule. See, e.g., Dania Beach, 628 F.3d at 590 (seeking to introduce
documents from prior environmental impact statement processes); Am. Wildlands, 530 F.3d at
1002 (seeking to introduce letters that “were written after the [Fish and Wildlife] Service issued
its Reconsidered Finding” and thus were “not part of the administrative record”); James Madison
Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (seeking to introduce bank files
that the party conceded “were not part of the administrative record compiled by the agency when
the Senior Deputy Comptroller declared the banks insolvent”). For another, the Court presumes
that, for judicial review to be effective, materials that were before the agency should be included
in the administrative record irrespective of whether those materials are “adverse to [the agency’s]
decision” or otherwise satisfy any of the three unusual circumstances identified in American
Wildlands and Dania Beach. Similarly, the test’s references to “background information” or an
agency’s failure to adequately explain its action both imply that the information a court is
considering adding to the administrative record in those circumstances is information that was
not before the agency in the first instance. If a party provides concrete, non-speculative evidence
that material an agency did actually consider “either directly or indirectly” is absent from the
record, Marcum, 751 F. Supp. 2d at 78, however, that should be the end of the matter. In those
14
circumstances a court need not go on to ask whether one of the three “unusual circumstances”
has been shown.
The Court acknowledges that in District Hospital Partners the D.C. Circuit recently
applied the American Wildlands test when considering a party’s effort to supplement the
administrative record with materials similar to those the Plaintiffs seek to add to the record in
this case. See 786 F.3d at 55–56. Yet, in that case the Circuit does not seem to have been
confronted with materials that the parties claimed had been before the agency in the first
instance. The Circuit’s recitation of the test suggests as much. After reiterating that APA review
must “be based on the full administrative record that was before the Secretary,” the court
explained that, to “ensure that [courts] review only those documents that were before the
agency,” a party may supplement the record only if “they can demonstrate unusual circumstances
justifying a departure from this general rule.” Id. at 55 (emphasis added). Thus, the Circuit
appears to have been dealing with a situation in which the parties sought to add extra-record
information to the administrative record. 8 As a result, the Court does not read the opinion to
8
This was undoubtedly the case with two of the three types of material at issue in District
Hospital Partners. First, the plaintiffs there sought to supplement the record with the
“congressional testimony of a former HHS official,” Dist. Hosp. Partners, 786 F.3d at 56, which,
quite obviously, was not part of the agency’s rulemaking record. Second, plaintiffs also argued
that the “‘trimmed’ version of hospital charge data” should have been added to the record. Id. at
55. But the Circuit noted that there is no stand-alone version of the trimmed data that differs
from the data files already in the record. Id. at 55; see also infra note 17 (explaining that the
Federal Register identifies the trims applied to the existing MedPAR files). As for the third
category of material, the Circuit generally explained that plaintiffs had sought to supplement the
record with “source data used to approximate cost-to-charge ratios for 2004.” Id. It is not
immediately clear from the Circuit’s description, however, whether the Circuit was referring to
data that it understood the agency to have considered directly. As this Court explains below,
although an agency must include in the administrative record all materials it directly or indirectly
considered, an “agency is not normally obligated to make available the raw data upon which
[reports or documents] considered by the agency were based if the agency itself did not rely on
the raw data when it reached its decision.” Common Sense Salmon Recovery v. Evans, 217 F.
Supp. 2d 17, 22 (D.D.C. 2002) (emphasis added). And with respect to these rulemaking records,
15
hold that, had the plaintiffs requested to supplement the record with materials that had been
before the agency, the Circuit would nevertheless have required the plaintiffs to show an
“unusual circumstance” warranting supplementation.
Plaintiffs here seek to supplement the administrative record with materials that they claim
were in fact before the agency. See Pls.’ Mem. Supp. at 17 (claiming, before listing documents
Plaintiffs seek, that “HHS has not produced significant additional documents which were before
the agency during the rulemakings here at issue”). Consequently, the Court need only consider
whether the Plaintiffs have provided concrete, non-speculative information that the agency
directly or indirectly considered the materials Plaintiffs seek in order to resolve this motion. 9
IV. ANALYSIS
Plaintiffs have moved to supplement the administrative record with materials they claim
are relevant to both the 2003 Payment Regulations and the annual Threshold Regulations.
Generally, Plaintiffs contend that “the administrative records that HHS has produced contain
only some of the data inputs and none of the formulas that the agency actually used to set the
thresholds” and that “HHS had omitted a critical document from the rulemaking record for its
some underlying source data was considered, analyzed, and manipulated by the agency, itself,
while other data was not. See infra at 28–30 (explaining that cost report data was analyzed and
manipulated by the agency), 32–33 (explaining that, with respect to provider CCRs, the agency
relied on the Impact Files provided by Enterprise Data Center Group and did not review the
underlying source data itself). Accordingly, given the Circuit’s explanation in District Hospital
Partners that it was considering the plaintiffs’ efforts to “justify[] a departure from th[e] general
rule” that the record should include “only those documents that were before the agency,” this
Court assumes that the underlying source data at issue there had not been considered by the
agency. 786 F.3d at 55.
9
Nonetheless, as explained below, the Court notes that in each instance in which it will
order the record supplemented in this case, one of the three unusual circumstances is satisfied.
See infra notes 14–16, 20.
16
2003 amendments to the outlier payment regulations.” Pls.’ Mem. Supp. at 2. Without these
materials, Plaintiffs claim that “any explanation by HHS of the path taken in arriving at the
challenged agency actions will necessarily be incomplete and will thus hinder the Court’s
review.” Id. For its part, HHS responds that Plaintiffs are seeking materials “that are not
properly included in the administrative records.” Def.’s Mem. Opp. at 2, ECF No. 32. The
Court considers each identified document or category of documents in turn. 10
A. Documents Relevant to the 2003 Payment Regulations
1. The 2003 Interim Final Rule
Plaintiffs first seek to supplement the record with the draft of a 2003 “Interim Final Rule”
that HHS developed at the same time that it proposed the Payment Regulations. The draft
Interim Final Rule was signed by then-Secretary of Health and Human Services Tommy G.
Thompson on February 6, 2003, the same day that the Secretary signed the proposed final rule,
and submitted to the Office of Management and Budget (“OMB”) on February 13, 2003 pursuant
10
To the extent that Plaintiffs’ at times vague references to missing “data” or
“documents” are intended to reference any materials not explicitly discussed in this
memorandum opinion, Plaintiffs have failed to describe those materials with the necessary
specificity to overcome the presumption of regularity. Similarly, Plaintiffs make passing
reference to CMS’s Record Schedule which defines an official rulemaking record to include:
the published proposed rule, all public comments received in response to the
proposed rule or notice that the agency considered in developing the final policy,
the public comment log prepared by the recordkeeping office, any computer runs,
internal/external studies, final actuarial determinations, and all data that supported
the policy, data that refuted the policy and data that would support alternative
options.
See Pls.’ Mem. Supp. Ex. B (reproducing the records schedule). Despite Plaintiffs’ assertion that
this policy makes clear “that there are many other types (or categories) of documents that have
not yet been filed with the Court,” Pls.’ Mem. Supp. at 26, the Court interprets this policy to
merely detail what records must be retained and submitted to the National Archives and Records
Administration. The policy does not indicate that every rulemaking will necessarily lead to the
production or creation of each of the listed types of documents nor that every record that falls
into one of these categories must necessarily become part of the administrative record under the
APA.
17
to Executive Order 12,866. 11 See generally Pls.’ Mem. Supp. Ex. A (reproducing the Interim
Final Rule). In light of certain hospitals’ turbo-charging practices, which had artificially inflated
outlier payments, the Interim Final Rule would have immediately lowered the fixed loss
threshold for the 2003 fiscal year from $33,560 to $20,760. See id. at 34–38. The Interim Final
Rule also set forth a detailed analysis of why HHS believed that an immediate reduction in the
fixed loss threshold was warranted. When HHS published its notice of proposed rulemaking for
the new outlier payment methodology on March 5, 2003, however, the agency did not mention
the Interim Final Rule and did not address any of the data or analysis that had been laid out in
that interim rule. Instead, the agency proposed to make no change to the 2003 fixed loss
threshold. See Medicare Program; Proposed Change in Methodology for Determining Payment
for Extraordinarily High-Cost Cases (Cost Outliers) Under the Acute Care Hospital Inpatient
Prospective Payment System, 68 Fed. Reg. 10,420, 10,427 (Mar. 5, 2003). In its subsequent
final rule, and contrary to the analysis contained in the Interim Final Rule, the agency explained
that, “in light of the relatively small difference between the current threshold and our revised
estimate, and the limited amount of time remaining in the fiscal year, we have concluded it is
more appropriate to maintain the threshold at $33,560.” 2003 Payment Regulations, 68 Fed.
Reg. at 34,506.
The Court agrees with three other courts in this district that this course of events provides
concrete and non-speculative evidence that the substance of the Interim Final Rule—and its
differing conclusion and analysis about the need to lower the fixed loss threshold—was
11
Executive Order 12,866 requires agencies to submit “significant regulatory action[s]”
to the OMB for review. See generally Exec. Order No. 12,866 § 6, 58 Fed. Reg. 51,735 (Sept.
30, 1993). Plaintiffs represent that they obtained the draft of the Final Interim Rule through a
Freedom of Information Act Request submitted to the OMB. Pls.’ Mem. Supp. at 22.
18
considered by the agency when settling on the final 2003 Payment Regulations. 12 See Lee Mem’l
Hosp., 2015 WL 3631811, at *4; Dist. Hosp. Partners, 971 F. Supp. 2d at 30; Banner Health,
945 F. Supp. 2d at 26. The Interim Final Rule, itself, makes clear that the agency at least
considered lowering the 2003 fixed loss threshold. Marcum, 751 F. Supp. 2d at 78. Moreover,
contemporaneous testimony before Congress by then-Administrator of the Center for Medicare
and Medicaid Services, Thomas Scully, confirms that the agency contemplated lowering the
fixed loss threshold but ultimately receded from that position. See Medicare Outlier Payments to
Hospitals: Hearing Before a Subcomm. of the Comm. on Appropriations, 108th Cong. 108-268,
at 12–13 (2003) (statement of Thomas Scully) (“I feel strongly that, and I have argued strongly
within the administration that we should lower the threshold back to $22,000 or $23,000, but you
can understand from OMB’s point of view . . . so I agreed with them in the draft rule to leave it
where it was.”). As the court pointed out in Banner Health, both the Interim Final Rule and the
rule the agency ultimately proposed “bear the same Regulatory Identification Number” and “the
content of the documents are, in large part, identical (except that the proposed rule omits the
recommended reduction of the fixed loss threshold and supporting analysis contained within the
Interim Final Rule).” 945 F. Supp. 2d at 26. Therefore, “there can be little doubt that the Interim
Final Rule reflects views adverse to those finally adopted by the Secretary and that the Secretary
considered—and indeed proposed to OMB—the Interim Final Rule as an alternative in its path to
promulgation of the 2003 amended Outlier Payment Regulations now challenged by Plaintiffs.”
Id. at 27.
12
The D.C. Circuit recently held that one of those courts did not abuse its discretion in so
deciding. See Dist. Hosp. Partners, 786 F.3d at 55 n.3.
19
HHS’s only response is its contention that the Interim Final Rule is a “predecisional
document” and that “drafts of agency decisions considered within the agency are typically not
considered part of the administrative record even if they are publicly available and therefore not
covered by the deliberative process privilege.” 13 Def.’s Mem. Opp. at 10, 12. But the cases that
the agency cites are not truly comparable. In each of those cases, a court declined to supplement
the administrative record with materials that reproduced the internal deliberation among or
reflected the thought process of administrative decisionmakers. See, e.g., PLMRS Narrowband
Corp. v. F.C.C., 182 F.3d 995, 1001 (D.C. Cir. 1999) (refusing to supplement the record with a
videotape of a meeting among the FCC Commissioners because agency opinions “speak for
themselves” and “[w]here an agency has issued a formal opinion or a written statement of its
reasons for acting, transcripts of agency deliberations . . . should not routinely be used to
impeach that written opinion” (internal quotation marks and citations omitted)); Checkosky v.
S.E.C., 23 F.3d 452, 489 (D.C. Cir. 1994) (noting that agency opinions “speak for themselves”
and that requiring an agency to produce “transcripts of closed agency meetings or intra-agency
memoranda and documents recording the deliberative process leading to the agency’s decision”
is “warranted only in the rarest of cases”); San Luis Obispo Mothers for Peace v. U.S. Nuclear
Regulatory Comm’n, 789 F.2d 26, 44 (D.C. Cir. 1986) (en banc) (refusing to supplement the
record with transcripts of a closed meeting that “record[ed] the frank deliberations of
Commission members engaged in the collective mental processes of the agency”); cf. Citizens to
Preserve Overton Park, 401 U.S. at 420 (stating that “inquiry into the mental processes of
administrative decisionmakers is usually to be avoided”).
13
HHS concedes that “the draft is publically available and not covered by the deliberative
process privilege.” Def.’s Mem. Opp. at 13; see also Dist. Hosp. Partners, 971 F. Supp. 2d at 30
(explaining why the Interim Final Rule is not protected by the deliberative process privilege).
20
In this case, Plaintiffs do not seek to supplement the record with an informal discussion
among regulators, an intra-agency memorandum, or the mental processes of administrative
decisionmakers. Instead, although the interim rule was in draft form when submitted to the
OMB for review, it constitutes a “formal opinion or written statement of [the agency’s] reasons.”
See PLMRS Narrowband Corp., 182 F.3d at 1001, Moreover, that draft rule came to a differing
conclusion about the wisdom of decreasing the fixed loss threshold—although it was ostensibly
based on the same information as the final outlier correction rule. The Interim Final Rule is
therefore highly probative in determining the rationality of the agency’s chosen path. Cf.
Hermes Consol., LLC v. E.P.A., 787 F.3d 568, 576 (D.C. Cir. 2015) (explaining that, while
“[j]udicial review of a change in agency policy is no stricter than our review of an initial agency
action,” an agency “must provide reasoned explanation for its action, which normally requires
that it display awareness that it is changing position” (internal quotation marks and citations
omitted)). HHS has also not cited any authority to support its blanket assertion that “unlike the
views of parties outside the agency” the views “developed by HHS but ultimately not adopted”
are categorically shielded from inclusion in the administrative record. Def.’s Mem. Opp. at 14–
15. To the extent HHS claims that the draft was properly excluded because it “never became
final,” id. at 13, the Court agrees with other courts in this district that such a “bright-line
approach—in addition to lacking legal support—is untenable because it may permit the agency
to hide from judicial review information regarding alternatives that the agency considered on the
path to reaching its decision.” Banner Health, 945 F. Supp. 2d at 23 (citing cases). Accordingly,
21
the Court grants Plaintiffs’ motion to supplement the administrative record with the Interim Final
Rule. 14
2. The 2003 Impact File
The Court similarly grants Plaintiffs’ motion with respect to the 2003 Impact File. As
explained above, and as described by the government, the Impact Files contain “all of the
provider-specific sourced data, including CCRs, used to determine the FLT [the fixed loss
threshold] for a given fiscal year,” and are derived from data in the Provider Specific Files.
Cheng Decl. ¶ 12. Elsewhere in its memorandum, HHS contends that Impact Files supply one of
“the bases for HHS’s determination of the fixed loss thresholds.” Def.’s Mem. Opp. at 16.
Although HHS has included in the administrative record the Impact Files for the fiscal year
2007, 2008, 2011, and 2012 rulemaking, the agency has not supplied the 2003 Impact File.
HHS’s statements demonstrate that the Impact File is important to the rulemaking process
and by themselves provide more than speculative evidence that Impact Files were considered in
the 2003 rulemaking. HHS’s sole response is that the passage of time has left the agency unable
to definitively say whether or not Impact Files were considered during the 2003 rulemaking.
Def.’s Mem. Opp. at 15; Cheng Decl. ¶ 15. But both the proposed Interim Final Rule and the
promulgated Payment Regulations state that the agency reestimated the 2003 threshold when
considering whether to alter it. See Fourth Am. Compl. Ex. A at 34–35 (stating that the agency
calculated the revised outlier threshold by simulating payments using “the same data” as the
existing 2003 threshold, which “included the March 2002 update of the Provider-Specific File”);
14
And to the extent Plaintiffs must show an “usual circumstance” to justify
supplementation of the record, the agency’s about-face certainly suggests that the agency has
“deliberately or negligently excluded documents that may have been adverse to its decision.”
Am. Wildlands, 530 F.3d at 1002.
22
2003 Payment Regulations, 68 Fed. Reg. at 34,505 (stating that the agency “reestimated the
fixed-loss threshold reflecting the changes implemented in this final rule”). And the data
necessary to make that estimation—including the data from the Provider Specific File—is
contained in the relevant Impact File. See Cheng Decl. ¶ 12. The agency has not explained how
it could have simulated these payments without the crucial data contained in the Impact File.
Accordingly, the record should be supplemented to include the 2003 Impact file. 15 Accord Lee
Mem’l Hosp., 2015 WL 3631811, at *5; Banner Health, 945 F. Supp. 2d at 32–33.
B. Documents Relevant to the Annual Fiscal Year Threshold Regulations
1. Formulas Used to Calculate the Fixed Loss Thresholds and Actual Outlier Payments
With respect to the annual Threshold Regulations, Plaintiffs have moved for
supplementation of the record on various grounds. First, Plaintiffs seek formulas that they claim
were necessarily used each fiscal year to calculate the fixed loss threshold. A critical part of
HHS’s efforts to set outlier payment rates and policies each fiscal year is the estimation of
anticipated total IPPS payments that hospitals will incur during the upcoming fiscal year. Only
by projecting payments is HHS able to determine a threshold level which, it predicts, will result
15
The Court also takes judicial notice of the fact that HHS recently confirmed, following
the district court’s decision in a similar case, that it had supplemented the record with the Impact
File for the 2003 Rulemaking. See Def.’s Mot. for Clarification at 1, Lee Mem’l Hosp. v.
Burwell, No. 1:13-cv-0643-RMC (D.D.C. July 2, 2015), ECF No. 68; see also Lewis v. Drug
Enforcement Admin., 777 F. Supp. 2d 151, 159 (D.D.C. 2011) (“The court may take judicial
notice of public records from other court proceedings.”). HHS’s filing provides non-speculative
evidence that a 2003 Impact File does exist. Because the file exists, the Court finds it difficult to
understand how the fixed loss threshold could have been calculated without the use of that file
for the reasons stated above. For the same reasons, the 2003 Impact File plainly constitutes
“background information . . . needed ‘to determine whether the agency considered all the
relevant factors,’” to the extent an “unusual circumstance” is necessary to supplement the record.
City of Dania Beach, 628 F.3d at 590 (quoting Am. Wildlands, 530 F.3d at 1002).
23
in outlier payments between five and six percent of total IPPS payments. But Plaintiffs contend
that HHS has failed to describe the formulas that it used to determine those fixed loss thresholds.
As already noted, the rulemaking notices explain in general terms how HHS models
anticipated IPPS payments for the upcoming fiscal year. For example, in its fiscal year 2008
rulemaking, HHS explains that it “simulated payments by applying FY 2008 rates and policies
using cases from the FY 2006 MedPAR files.” FY 2008 Final Rule, 72 Fed. Reg. at 47,417. To
account for inflation, the charges from those cases were inflated by two years using an inflation
factor. HHS then uses the universe of cases from 2006, as inflated, to serve as a proxy for the
cases it expects to reimburse during the upcoming fiscal year. To adjust those charges for cost,
HHS also uses “the most recent available data at the time of the” proposed or final rule to model
anticipated CCRs. Id. Those CCRs are also adjusted to take into account both cost and charge
inflation. See id. Together, these general descriptions make clear how HHS arrives at the two
crucial variables necessary to its calculation of anticipated IPPS payments: the agency uses
MedPAR files from two years prior, as inflated, to approximate the charges that providers will
incur and the agency then uses adjusted CCRs to convert those charges to anticipated costs.
What is not fully explained, however, is the mechanism by which HHS uses those two
variables to simulate payments and produce a particular fixed loss threshold. Presumably, HHS
uses the cost-adjusted and inflated charges in some type of calculation to model actual payments.
Indeed, HHS seems to describe this step as involving the application of a formula. As HHS
states in its opposition, after inflating the claims data and adjusting CCRs, the Secretary “feeds
the inflation-adjusted approximated charges data into the payment calculation mechanism that
will be in effect in the coming year . . . and tallies the simulated payments that result when the
fixed loss threshold is set at different levels.” Def.’s Mem. Opp. at 5 (emphasis added). But that
24
payment calculation mechanism’s absence from the administrative record—or any detail about
it—presents a patent obstacle to effective judicial review.
HHS responds that Plaintiffs have relied only on an assumption that formulas beyond the
analysis described in the Federal Register exists. Id. at 18. But the Court shares that assumption;
indeed, the rulemaking notices’ vague references to “simulat[ing] payments,” see, e.g., FY 2008
Final Rule, 72 Fed. Reg. at 47,417, and HHS’s own reference before this Court to a “payment
calculation mechanism,” Def.’s Mem. Opp. at 5, all but confirm it. The Court therefore will
grant Plaintiffs’ motion and orders HHS to supplement the record with the formula or algorithm
through which the agency simulates payments.
The Court recognizes that other courts in this district have come to differing conclusions
about the need for supplementing the administrative record with the formula or algorithm HHS
has used. Compare Lee Mem’l Hosp., 2015 WL 3631811, at *6 (ordering supplementation), with
Banner Health, 945 F. Supp. 2d at 29 (concluding that Plaintiffs failed to identify specific
documents “that might reveal the various formulas, algorithms, and other analysis”). Yet, this
Court believes that the information is essential to delineate the path HHS has taken to arrive at
the chosen fixed loss thresholds. 16
The Court also acknowledges that HHS recently represented in a motion for clarification
in Lee Memorial—where the court had ordered supplementation—that “HHS does not possess
materials that are responsive” to that order “that have not already been included in the
administrative record.” See Def.’s Mot. for Clarification of June 11, 2015 Order and Mem. in
Supp. at 2, Lee Mem’l Hosp., No. 1:13-cv-0643 (D.D.C. July 2, 2015), ECF No. 68. This vague
16
And therefore also constitutes “background information . . . needed ‘to determine
whether the agency considered all the relevant factors.’” City of Dania Beach, 628 F.3d at 590
(quoting Am. Wildlands, 530 F.3d at 1002).
25
assertion provides little explanation and the Court finds it unsatisfying. At present, and for the
reasons stated above, the Court fails to understand how that can be so.
It may be that more specificity is provided in the 2003 Payment Regulations, to which
CMS’s Director of the Division of Acute Care, Hospital and Ambulatory Policy Group makes
passing reference in her declaration. See Cheng Decl. ¶ 22. HHS did point to that regulation in
its motion for clarification in Lee Memorial and that regulation does describe an elaborate
formula that “simulates the IPPS outlier payment for a case at a generic hospital.” 2003 Payment
Regulations, 68 Fed. Reg. at 34,495. But HHS’s briefing here does not mention the 2003
regulation in connection with the alleged formulas that Plaintiffs seek. Moreover, although it is
perhaps conceivable that HHS employs this hospital-specific mechanism on a macro level to
simulate anticipated payments across all providers (using the inflated charges and adjusted
CCRs), the agency’s description in the Federal Register does not make any connection
immediately clear. The current briefing fails to sufficiently explain how the existing
administrative record sets forth all of the formulas necessary to fully delineate the agency’s path.
Accordingly, HHS shall supplement the administrative record with the formulas it used to
calculate the fixed loss threshold. 17
2. Formulas and Data Used to Calculate Estimated Outlier Payments for Prior Fiscal
Years
During each of its annual rulemakings, HHS also uses more recent data to update its
estimate of the outlier payments made during the prior two fiscal years. See, e.g., FY 2008 Final
17
Plaintiffs also moved to compel HHS to disclose the data trims that the agency applied
to the MedPAR files before it simulated payments. HHS pointed out in its opposition that all of
those data trims are explicitly identified in the notices of final rulemaking, see Def.’s Mem. Opp.
at 19, and Plaintiffs no longer seek to supplement the administrative record with the data trims,
see Pls.’ Reply at 14 n.7.
26
Rule, 72 Fed. Reg. at 47,420 (detailing the agency’s “current estimate” of 2006 actual outlier
payments using available 2006 bills and the agency’s estimate for actual 2007 payments using
2006 bills applied to 2007 rates and policies). Plaintiffs similarly seek the formula used to
update those estimates. The rulemakings yet again reference “simulations” that HHS used to
compute the estimated outlier payments for previous fiscal years, see, e.g., id., and the Court
assumes that these calculations are similar, if not identical, to those used to simulate payments
prospectively when setting the fixed loss threshold. Therefore, the Court similarly concludes
that the administrative record fails to fully delineate the formula used to conduct those
acknowledged simulations. Accordingly, the Court grants Plaintiffs’ motion with respect to the
formulas used to calculate estimated outlier payments for prior fiscal years.
As for the “data” underlying those estimates, supplementation is unnecessary. The
rulemaking notices explicitly list which MedPAR files were used to run the simulations. See,
e.g., id. The administrative record already contains the relevant MedPAR files for each
rulemaking. See Def.’s Mem. Opp. at 21.
3. Actuarial Analysis and Data Used to Calculate the CCR Adjustment Factor
Since 2007, HHS has applied what it refers to as an “adjustment factor” to hospitals’
most recent CCRs when estimating outlier payments for the upcoming fiscal year. The
adjustment factor is intended “to account for cost and charge inflation.” FY 2007 Final Rule, 71
Fed. Reg. at 48,150. As explained in the rulemaking notices, HHS works with “the Office of
Actuary to derive the methodology . . . to develop the CCR adjustment factor.” FY 2008 Final
Rule, 72 Fed. Reg. at 47,417. Broadly speaking, that methodology involves comparing “two
different measures of cost inflation”—the average increase in hospitals’ costs per discharge and a
“market basket increase” determined by Global Insight, Inc., a government consultant—over a
27
three year period and then dividing that three year average measure of cost inflation by the one
year average change in charges. Id. Plaintiffs’ motion to compel seeks production of the “input
from [HHS’s] ‘actuarial office,’” the memo from that office that HHS used to develop the
adjustment factor formula, and “several years of cost report data” used to calculate the average
increase in cost per discharge. Pls.’ Mem. Supp. at 33; Pls.’ Reply at 21.
As HHS rightly points out, however, the final rulemaking notices already describe the
full methodology that HHS employs. The Declaration of CMS’s Director of the Division of
Acute Care, Hospital and Ambulatory Policy Group explains that the memo from the Office of
the Actuary simply contains the “market basket update factors.” Cheng Decl. ¶ 24. Those
figures are publicly reproduced in the rulemaking notices. See, e.g., FY 2008 Final Rule, 72 Fed.
Reg. at 47,417–18 (noting that the 2006 market basket percentage increase was 1.0420 and
listing the final market basket increases used in prior fiscal years [1.043 for 2005, 1.04 for 2004,
and 1.041 for 2003]). Plaintiffs have not attempted to describe with specificity any other
information either purportedly contained in those memos or in fact considered by the agency. 18
The Court comes to a different conclusion respecting the cost report data. The
rulemaking notices do set forth the annual “percentage increase of operating costs per discharge”
figures that the agency used to calculate a particular adjustment factor for each relevant fiscal
year. See id. at 47,418 (listing a percentage increase of 1.0564 from 2004-2005, 1.0617 from
2003-2004, and 1.0715 for 2002-2003). Yet, to the extent the administrative record does not
18
In their initial motion, Plaintiffs also requested that HHS produce the data that Global
Insight, Inc. used to calculate the market basket rate of increase. See Pls.’ Mem. Supp. at 33.
HHS has clarified that it does not consider any of the underlying data used to generate the market
basket figure, Cheng Decl. ¶ 24, and Plaintiffs no longer seek to have the record supplemented
with that data, see Pls.’ Mem. Supp. at 21 n.12.
28
already include the cost report data used to calculate and arrive at those percentage increases,
that data should be included in the administrative record.
To be sure, “[t]here is no general requirement that the agency include in the record the
data underlying each factor,” and, in some instances, a court “does not need to examine the raw
data in order to determine whether or not the [agency’s] decision was arbitrary and capricious or
otherwise not in accordance with law.” Todd v. Campbell, 446 F. Supp. 149, 152 (D.D.C. 1978).
But a court must be precise. If the raw or underlying source data that the parties seek to add was
not actually reviewed by the agency, then that data need not be included in the administrative
record. Id. (explaining that because the Civil Service Commission’s staff recommendations were
“replete with detail to alert the Commission to the self-evident underlying factual data,” there
“was no need for the Commission to have seen the data itself” nor for the court “to examine the
raw data”). “[A]n agency is not normally obligated to make available the raw data upon which”
the documents, reports, or analyses “considered by the agency were based if the agency itself did
not rely on the raw data when it reached its decision.” 19 Common Sense Salmon Recovery v.
Evans, 217 F. Supp. 2d 17, 22 (D.D.C. 2002) (declining to supplement the record with “the raw
genetic data used in some of the studies” the Department of Commerce relied upon when listing
a particular species as threatened).
Where, however, the raw data itself is at issue and was directly considered, analyzed, or
manipulated by the agency in the course of reaching its decision, that raw or underlying data is
“properly considered part of the administrative record.” Ctr. for Biological Diversity v. U.S.
19
At least so long as there are no “unique circumstances” suggesting that “the agency had
reason to doubt the validity of a study on which it had relied.” Common Sense Salmon Recovery,
217 F. Supp. 2d at 22 (citing Endangered Species Comm. v. Babbitt, 852 F. Supp. 32, 36–37
(D.D.C. 1994)).
29
Bureau of Land Mgmt., 2007 WL 3049869, at *4 (N.D. Cal. Oct. 18, 2007) (distinguishing
Common Sense Salmon Recovery where certain tables of raw data contained in Excel
Spreadsheets and a series of maps had been directly considered by the agency in the course of
designating an off-road vehicle route in the California Desert Conservation Area). This
conclusion aligns with the requirement that all materials an agency considered “either directly or
indirectly” must be included in the administrative record. Marcum, 751 F. Supp. 2d at 78. And,
here, the Federal Register notices themselves make plain that HHS specifically used and
analyzed the cost report data that the Plaintiffs seek in order to calculate the annual “percentage
increase of operating costs per discharge” for prior fiscal years. See, e.g., FY 2008 Final Rule,
72 Fed. Reg. at 47,418. Thus, Plaintiffs have provided concrete and non-speculative evidence
that the underlying cost report data was directly considered by the agency. The Court will grant
the Plaintiffs’ motion with respect to the cost report data used to calculate the pertinent annual
percentage increases of operating costs listed in each of the Threshold Regulations challenged in
this case. 20
4. Data Used to Calculate Inflation Factors
As explained above, when HHS uses prior years’ payments to simulate IPPS payments
for the upcoming fiscal year, the agency accounts for inflation by applying an “inflation factor.”
The inflation factor is derived from a comparison of the charges submitted during the first two
quarters of the fiscal year two years prior (e.g., 2006 for the 2008 rulemaking) with the charges
submitted during the first two quarters fiscal year one year prior (e.g., 2007). See FY 2008 Final
20
In addition, since the cost report data is necessary for one to understand how the
agency calculated those annual percentage increases, this data constitutes “background
information . . . needed ‘to determine whether the agency considered all the relevant factors.’”
City of Dania Beach, 628 F.3d at 590 (quoting Am. Wildlands, 530 F.3d at 1002).
30
Rule, 72 Fed. Reg. at 47,418. The administrative record here already contains the MedPAR data
for each fiscal year between 2006 and 2011. See Def.’s Mem. Opp. at 24. Yet, the government
admits that those MedPAR files differ in certain respects from the MedPAR data that the agency
actually used to calculate the charge inflation factor. See id. The agency explains that the data it
used to calculate the charge inflation factor set forth in the rulemaking notices “is from an early
update of MedPAR that is highly sensitive and not publicly available because it contains HIPPA-
protected personally-identifiable information.” Id.; see also Cheng Decl. ¶ 25. The agency
explains that one can pull the applicable quarters of data from the publicly available MedPAR
files contained in the final rulemaking records in order to “closely approximate the inflation
factor that CMS calculated.” Id. at 24–25; Cheng Decl. ¶ 25.
Although Plaintiffs seek to compel the agency to supplement the record with the actual
MedPAR files used to calculate the inflation factor, the Court agrees with HHS that
supplementation with the early update of the MedPAR files is not warranted. Despite Plaintiffs’
claim that the withheld files will leave the record without “the exact data before the agency,”
Pls.’ Reply at 20, it is not clear to the Court that the withheld files differ from the produced files
in any way other than form. The agency notes that the MedPAR files already produced include
all of the “actual data used by the agency” and that the pertinent quarter’s data can be culled
from those files to approximate the charge inflation factor. Cheng Decl. ¶ 25. Other than the
sensitive HIPPA-protected information, the Court does not understand the actual charge data
contained in the MedPAR files to differ. Thus, the record already contains the data that the
agency actually considered, and Plaintiffs’ motion is denied with respect to the early update of
the MedPAR files.
31
5. Missing or Incomplete Impact Files
Plaintiffs also seek to supplement the administrative record with the source data
underlying the Impact Files for each rulemaking challenged in this action. The administrative
record here already includes the relevant Impact Files. See Certified List of Contents of the
Rulemaking Record, ECF No. 25. But Plaintiffs seek the underlying source data for two reasons.
First, they contend that “the administrative record does not contain HHS’s underlying
assumptions and associated data used to compute the conclusory data contained in the Impact
Files.” Pls.’ Mem. Supp. at 36. Second, they claim that there “are material differences between
the CCRs set forth in the Impact Files and those set forth in the March updates of the Provider
Specific File” (“PSF”). Id. at 37.
As an initial matter, the Court again notes that where an agency “itself did not rely on . . .
raw data when it reached its decision,” that agency is “not normally obligated to make available
the raw data” in the administrative record. Common Sense Salmon Recovery, 217 F. Supp. 2d at
22. Here, Plaintiffs have not even alleged, never mind demonstrated, that when HHS
promulgated each year’s rule the agency considered any of the underlying PSF data other than
the CCRs that were specifically reproduced in the Impact Files.
Indeed, as Plaintiffs correctly point out, the Impact Files contain data that is
“derivative”—that is, the data has been abstracted from other files and merged to form a single
Impact File. See Pls.’ Mem. Supp. at 36. HHS has provided a robust explanation of how the
Impact Files are created. Specifically, hospitals submit a Medicare cost report each fiscal period
(or more frequently) to a government contractor referred to as a Medicare Administrative
Contractor (“MAC”). See Cheng Decl. at ¶ 6. The MAC then manually calculates CCRs using
that hospital’s most recent settled cost report and enters that CCR into the hospital’s PSF which
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lists both the current and past CCRs, identified by effective date. Id. at ¶ 9. As HHS explains,
because “cost report settlement . . . can take several years to finalize, the CCRs in the file may
repeat across several records for any given provider.” Id. Every quarter each MAC combines all
of the data for the providers that the MAC services into a single “PSF Quarterly Update File”
and transmits that file to a second contractor called Enterprise Data Center Group (“EDC”). Id.
at ¶ 10. EDC then sends those Quarterly Update Files to CMS, and CMS compiles them into a
single combined file which lists all of the PSF data for every Medicare provider. Occasionally,
there may be problems with the transmission of the data from EDC to CMS or other errors may
occur. Id. If CMS and EDC are unable to remedy the error in a timely manner, CMS may
simply use that provider’s prior CCR figure in place of the updated figure—a practice CMS
refers to as “backfilling.” Id. For purposes of the annual rulemaking, CMS then creates a
smaller file—the Impact File—which lists only the PSF data, including the CCR, from the most
recent update the agency has received. Id.
This description persuasively rebuts the Plaintiffs’ contention that the underlying source
data should be included in the administrative record. Instead, the record makes clear that the
agency only considered the more recent data that was contained in the Impact File, even if, as the
agency readily admits, some of that data was backfilled or substituted with the statewide average
CCR. See Cheng Decl. ¶ 12; see also Common Sense Salmon Recovery, 217 F. Supp. 2d at 22.
As a result, Plaintiffs have failed to satisfy their burden of providing concrete evidence that HHS
either had the underlying derivative data before it or considered that data when promulgating its
final rules. See Marcum, 751 F. Supp. 2d at 78.
Nor do the discrepancies Plaintiffs allege that they have identified provide grounds for
supplementing the record. Plaintiffs claim that “material discrepancies” exist between the CCRs
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listed in the Impact Files and the CCRs reproduced in the publicly available versions of the
March update to the relevant Provider Specific File. They further claim that the March update to
the files therefore “could not have been the source of all the CCRs set forth in the Impact
Files.” 21 Pls.’ Mem. Supp. at 37. As HHS explains, however, the publicly available version of
the Provider Specific File may differ from the static Impact File if a MAC later received a more
recent cost report and updated the PSF to reflect that information. For that reason, HHS points
out that one must consider the effective date listed in the PSF; only the data with an effective date
in the early months of each year would have been available to HHS as part of the March update
to the PSF and have been included in the Impact File. Cheng Decl. ¶¶ 16–18. HHS represents
that when effective dates are considered, the number of discrepancies falls dramatically. Id. ¶
19. And HHS further argues that the use of statewide averages or backfilling with earlier data in
the place of data that was corrupted during transmission from EDC likely explains the remaining
discrepancies. Id.
These explanations accord with HHS’s description of the general process by which the
Impact Files are compiled and seem to explain why discrepancies may exist between the public
file and the Impact File for each fiscal year. See Lee Mem’l Hosp., 2015 WL 3631811, at *10
(noting that “the Provider Specific File data on the CMS website is updated (and may be
retroactively corrected) by fiscal intermediaries and therefore cannot be relied upon to mirror the
21
Plaintiffs claim that 385 CCRs in the 2008 Impact File do not match the CCRs listed in
the publicly-available Provider Specific File, and they argue that similar discrepancies exist for
each of the fiscal years they have challenged here. See Pls.’ Mem. Supp. at 37 & n.27. Yet,
Plaintiffs have not identified the effective dates of the data that they reviewed, nor do they detail
exactly how their comparative analysis was conducted. Such generalized assertions are
insufficient to overcome the presumption of regularity. In any event, even assuming that
Plaintiffs’ contentions are accurate, as just explained it is clear that the agency only considered
the data memorialized in the relevant Impact File when it promulgated each Threshold
Regulation.
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data that was used to generate the Impact Files” (emphasis omitted) (quoting Memorandum
Order at 19, Banner Health, No. 10-1638, (D.D.C. July 30, 2013), ECF No. 96)). Because the
agency considered only the Impact Files that have already been produced when setting the
threshold level for each fiscal year, any subsequent updates that were made to the CCRs are
immaterial for purposes of assessing the validity of the agency’s rules. 22 At bottom, Plaintiffs’
contention that the agency considered CCRs other than those memorialized in the Impact Files is
speculative. Accordingly, the Court denies the motion to supplement with respect to the Impact
Files.
6. Documents Pertaining to the Regulatory Impact Analyses
Executive Order 12,866 requires federal agencies to prepare a Regulatory Impact
Analysis (“RIA”) for major rules, and HHS prepared an RIA for the annual Threshold
Regulations and the Payment Regulations at issue in this case. The RIAs are set forth in the
rulemaking notices. Plaintiffs have moved to supplement the record with the “data, equations,
assumptions, and analyses foundational to” those analyses. Pls.’ Mem. Supp. at 39.
22
Plaintiffs argue that two declarations of CMS’s director of the Division of Acute Care,
Hospital and Ambulatory Policy Group—one filed in this case and a second in another case in
this district—confirm that the agency actually used more recent data than the March updates to
create the Impact Files. See Pls.’ Mem. Supp. at 37–38 (discussing, for March 2007 Impact file,
June 2007 effective dates); Pls.’ Reply at 18 (referring to effective dates extending until
September 2007, the end of the fiscal year). Plaintiffs appear to take the Director’s references
out of context, however. In both declarations Ms. Cheng consistently maintains that CCRs were
calculated with reference to, and that the Impact File only contained, the data CMS had as of the
March update to the Impact Files. See Cheng Decl. at ¶ 19; Decl. of Ing-Jye Cheng ¶ 15, Lee
Mem’l Hosp. v. Burwell, No. 1:13-cv-0643-RMC (D.D.C. Jan 23, 2015), ECF No. 53–1. As best
the Court can discern, Ms. Cheng’s references to “effective dates prior to” June 2007 and
“effective dates prior to” October 2007 seem to refer to the dates by which CMS would have
received a new quarterly update from EDC that would have displaced the previous March 2007
update. The Court does not read either declaration to suggest that CCRs were sourced from data
received after the March 2007 updates. For this same reason, the Court disagrees with Plaintiffs’
claim that Ms. Cheng’s declaration in this case contradicts her prior declaration in Lee Memorial.
See Pls.’ Reply at 18.
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Specifically, Plaintiffs point to a single paragraph in each rulemaking’s lengthy RIA that
references the agency’s calculation and consideration of the prior year’s actual anticipated
outlier payments when determining the new regulation’s costs and benefits. See id. at 40; see
also, e.g., FY 2008 Final Rule, 72 Fed. Reg. at 48,160.
The Plaintiffs appear to be laboring under the mistaken impression that the RIA, itself, is
missing from the administrative record. HHS points out, however, that the analysis is
reproduced in its entirety as Appendix A to the pertinent year’s final rulemaking notice. See
Def.’s Mem. Opp. at 28; see also, e.g., FY 2008 Final Rule, 72 Fed. Reg. at 48,157–48,173.
The Court does not understand Appendix A to provide merely a summary of the pertinent RIA.
To the extent that Plaintiffs seek the “data, equations, assumptions, and analyses” underlying the
RIAs, Plaintiffs have not detailed with specificity any particular document they believe was
before the agency but has not been produced. The motion to supplement is denied with respect
to the RIAs and data underlying those analyses.
7. Documents Pertaining to Reconciliation of Outlier Payments
Finally, HHS has explained in each Threshold Regulation rulemaking challenged here
that it had chosen not to adjust its projection of anticipated outlier payments during the upcoming
fiscal year for “the possibility that hospitals’ CCRs and outlier payments may be reconciled upon
cost report settlement” because it believed that its 2003 correction rules would prevent CCRs
from fluctuating significantly. See, e.g., FY 2008 Final Rule, 72 Fed. Reg. at 47,419. As a
result, HHS explained that it expects that “few hospitals will actually have these ratios reconciled
upon cost report settlement.” See, e.g., id. Contrary to this assertion, Plaintiffs claim that “HHS
has failed to file any of the documents underlying and substantiating its assertion that few
hospitals will actually have these ratios reconciled upon cost report settlement,” and have moved
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to supplement the record with any such documents that exist. Pls.’ Mem. Supp. at 42 (internal
quotation marks omitted).
In reality, Plaintiffs’ argument is geared toward disputing the adequacy of the agency’s
proffered rationale. True, Plaintiffs do contend that two reports issued by the HHS Office of the
Inspector General (“OIG”) indicate that HHS has consistently failed to reconcile past outlier
payments in contravention of the 2003 Payment Regulations. See Pls.’ Mem. Supp. at 42–43.
They further contend that those OIG reports make “clear that either HHS has failed to produce
documents that are adverse to its assertion that few hospitals will actually have these ratios
reconciled upon cost report settlement,” or that “HHS has failed to provide the true rationale as
to why it refused to account for the impact of reconciliation when setting the fixed loss
thresholds.” Id. at 43. But Plaintiffs merely speculate that such alternative rationales—or
documents memorializing them—exist. Therefore, they have failed to carry their burden of
identifying any such documents with specificity. To the extent that Plaintiffs argue that HHS’s
stated rational does not adequately support its chosen path, that claim is better left for this
Court’s merits consideration of whether the challenged rules are arbitrary and capricious.
Accord Lee Mem’l Hosp., 2015 WL 3631811, at *12 (“Whether HHS’s decision may be deemed
unreasonable in light of the OIG report is a question to be addressed upon the Court’s review of
the merits.”).
V. CONCLUSION
For the foregoing reasons, the Court grants in part and denies in part the Plaintiffs’
motion to compel production of the complete administrative record. To summarize, Defendant
shall supplement the administrative record with the following materials:
(1) The 2003 draft Interim Final Rule;
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(2) The 2003 rulemaking Impact File;
(3) The formula(s) the agency used to calculate the fixed loss threshold for the Threshold
Regulations;
(4) The formula(s) used to calculate estimated outlier payments for prior fiscal years; and
(5) The cost report data used to calculate each of the annual percentage increases of
operating costs per discharge identified in each of the Threshold Regulations.
Defendant shall produce these materials to Plaintiffs and file a certified list of contents with the
Court pursuant to the local civil rules. See Local Civil Rule 7(n)(1). The parties are to meet and
confer and submit on or before November 23, 2015 a proposed timeframe within which to
comply with this directive. An order consistent with this Memorandum Opinion is separately
and contemporaneously issued.
Dated: November 9, 2015 RUDOLPH CONTRERAS
United States District Judge
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