Banner Health v. Sebelius ( 2011 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
BANNER HEALTH f/b/o BANNER
GOOD SAMARITAN MEDICAL
CENTER, et al.,
Plaintiffs,
v. Civil Action No. 10-01638 (CKK)
KATHLEEN SEBELIUS, Secretary of the
U.S. Department of Health and Human
Services,
Defendant.
MEMORANDUM OPINION
(July 15, 2011)
Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the
Medicare program. They have sued the Secretary of the Department of Health and Human
Services (the “Secretary”), challenging an array of actions taken by the Secretary in the course of
administering Medicare’s “outlier” payment system. The Secretary has filed a [17] Motion to
Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim (“Motion to
Dismiss”), seeking the dismissal of this action in its entirety. Upon a searching review of the
parties’ submissions, the relevant authorities, and the record as a whole, the motion will be
granted in part and denied in part.
I. STATUTORY AND REGULATORY FRAMEWORK
Medicare “provides federally funded health insurance for the elderly and disabled,”
Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226-27 (D.C. Cir. 1994), through a
“complex statutory and regulatory regime,” Good Samaritan Hosp. v. Shalala, 508 U.S. 402(1993). The program is administered by the Secretary through the Centers for Medicare and
Medicaid Services. Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011).
From its inception in 1965 until 1983, Medicare reimbursed hospitals based on “the
‘reasonable costs’ of the inpatient services that they furnished.” Cnty. of Los Angeles v. Shalala,
192 F.3d 1005, 1008 (D.C. Cir. 1999) (quoting 42 U.S.C. § 1395f(b)), cert. denied, 530 U.S.
1204 (2000). However, “[e]xperience proved . . . that this system bred ‘little incentive for
hospitals to keep costs down’ because ‘[t]he more they spent, the more they were reimbursed.’”
Id. (quoting Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991)).
In 1983, with the aim of “stem[ming] the program’s escalating costs and perceived
inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology.”
Cnty. of Los Angeles, 192 F.3d at 1008 (citing Social Security Amendments of 1983, Pub. L. No.
98-21, § 601, 97 Stat. 65, 149). Since then, the Prospective Payment System, as the overhauled
regime is known, has reimbursed qualifying hospitals at prospectively fixed rates. Id.By enacting this overhaul, Congress sought to “reform the financial incentives hospitals face,
promoting efficiency in the provision of services by rewarding cost[-]effective hospital
practices.” H.R. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.
A. Calculating Prospective Payment Rates
In calculating prospective payment rates, the Secretary begins with the “standardized
amount,” a figure that approximates the average cost incurred by hospitals nationwide for each
treated patient. See 42 U.S.C. § 1395ww(d)(2). Following Congress’s directive, the Secretary
“does not calculate the standardized amount from scratch each year,” but “[i]nstead . . .
calculated the standardized amount for a base year and . . . carrie[s] that figure forward, updating
2
it annually for inflation.” Cape Cod, 630 F.3d at 205 (citing, inter alia, 42 U.S.C. §
1395ww(b)(3)(B)(I), (d)(2), (d)(3)(A)(iv)(II); 42 C.F.R. § 412.64(c)-(d)).
To account for regional variations in labor costs, the Secretary then “determines the
proportion of the standardized amount attributable to wages and wage-related costs and then
multiples that labor-related proportion by a wage index that reflects the relation between the local
average of hospital wages and the national average of hospital wages.” Cape Cod, 630 F.3d at
205 (internal quotation marks omitted; citing, inter alia, 42 U.S.C. § 1395ww(d)(2)(H),
(d)(3)(E)). “Unlike the standardized amount, wage indexes are calculated anew each year.” Id.
Finally, the standardized amount is weighted to “reflect[] the disparate hospital resources
required to treat major and minor illnesses.” Cnty. of Los Angeles, 192 F.3d at 1008 (citing 42
U.S.C. § 1395ww(d)(4)). Specifically, “Medicare patients are classified into different groups
based on their diagnoses, and each of these ‘diagnosis-related groups’[1] is assigned a particular
‘weight’ representing the relationship between the cost of treating patients within that group and
the average cost of treating all Medicare patients.” Cape Cod, 630 F.3d at 205-06 (citing 42
U.S.C. § 1395ww(d)(4)).
Therefore, to calculate how much a hospital should be paid for treating a particular case,
the Secretary “takes the [standardized amount], adjusts it according to the wage index, and then
multiplies it by the weight assigned to the patient’s [diagnosis-related group].” Cnty. of Los
Angeles, 192 F.3d at 1009.2 The result is commonly referred to as the “DRG prospective
1
There are several hundred recognized diagnosis-related groups (“DRGs”).
2
Formulaically:
[SA @ (non-labor%) + (SA @ (labor%) @ WI)] @ (DRG Weight) =
Payment
3
payment rate.” Id.B. Outlier Payments and the Fixed Loss Threshold
By design, the Prospective Payment System does not reimburse hospitals for the actual
costs of the care that they provide to individual Medicare patients. Depending on how the costs
incurred by a hospital in a particular case align with the DRG prospective payment rate, the
hospital “may be over- or under-compensated for any given procedure.” Dist. Hosp. Partners,
L.P. v. Sebelius, __ F. Supp. 2d __, No. 11 Civ. 116 (ESH), 2011 WL 2621000, at *1 (D.D.C.
July 5, 2011). However, “[d]espite the anticipated virtues of [the Prospective Payment System],
Congress recognized that health-care providers would inevitably care for some patients whose
hospitalization would be extraordinarily costly or lengthy” and devised a means to “insulate
hospitals from bearing a disproportionate share of these atypical costs.” Cnty. of Los Angeles,
192 F.3d at 1009. Specifically, Congress authorized the Secretary to make supplemental
“outlier” payments to eligible providers. Id.Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A), which provides, in
relevant part, as follows:
(ii) . . . [A] hospital [paid under the Prospective Payment System]
may request additional payments in any case where charges,
adjusted to cost, . . . exceed the sum of the applicable DRG
prospective payment rate plus any amounts payable under
subparagraphs (B) and (F)[3] plus a fixed dollar amount
Where SA = standardized amount; labor% = the proportion of the standardized amount
attributable to wages and wage-related costs; non-labor% = the proportion of the standardized
amount not attributable to labor-related costs; WI = wage index; and DRG Weight = the weight
assigned to a particular diagnosis-related group. See Cape Cod, 630 F.3d at 206.
3
The referenced subparagraphs contemplate certain add-on payments to offset the costs
of graduate medical education and care of low-income patients. See 42 U.S.C. §
4determined by the Secretary.
(iii) The amount of such additional payment . . . shall be
determined by the Secretary and shall . . . approximate the
marginal cost of care beyond the cutoff point applicable under
clause . . . (ii).
42 U.S.C. § 1395ww(d)(5)(A); see also 42 C.F.R. §§ 412.80-412.86 (implementing regulations).
Each fiscal year, the Secretary determines a fixed dollar amount that, when added to the
DRG prospective payment, serves as the cutoff point triggering eligibility for outlier payments.
See 42 U.S.C. § 1395ww(d)(5)(A)(ii), (iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar
amount is known as the “fixed loss threshold.” If a hospital’s approximate costs actually
incurred in treating a patient exceed the sum of the DRG prospective payment rate and the fixed
loss threshold, then the hospital is eligible for an outlier payment in that case. See 42 U.S.C. §
1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. § 412.80(a)(2)-(3). In this way, the fixed loss threshold
represents the dollar amount of loss that a hospital must absorb in any case in which the hospital
incurs estimated actual costs in treating a patient above and beyond the DRG prospective
payment rate. An increase in the fixed loss threshold reduces the number of cases that will
qualify for outlier payments as well as the amount of payments for qualifying cases.
In designing the Prospective Payment System, Congress provided that “[t]he total amount
of the additional [outlier] payments . . . for discharges in a 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)(iv).
Under the Secretary’s interpretation of the statute, which has been upheld by the United States
1395ww(d)(5)(B), (F). These and other intricacies of the outlier payment system are not at issue
in this action, and are not addressed in this opinion.
5
Court of Appeals for the District of Columbia Circuit, “she must establish the fixed [loss]
thresholds beyond which hospitals will qualify for outlier payments” at the start of each fiscal
year. Cnty. of Los Angeles, 192 F.3d at 1009. To do so, the Secretary first makes a predictive
judgment about the total amount of payments that can be expected to be paid based on DRG
prospective payment rates. Cnty. of Los Angeles, 192 F.3d at 1009. She then examines historical
data to determine the threshold that “would probably yield total outlier payments falling within
the five-to-six-percent range.” Id. For obvious reasons, “[w]hether the Secretary’s projections
prove to be correct will depend, in large part, on the predictive value of the historical data on
which she bases her calculations.” Id. In each of the fiscal years at issue in this action, the
Secretary set fixed loss thresholds at a level so that the anticipated total of outlier payments
would equal 5.1% of the anticipated total of payments based on DRG prospective payment rates.
As aforementioned, if a hospital’s approximate costs actually incurred in treating a patient
exceed the sum of the DRG prospective payment rate and the fixed loss threshold, then the
hospital is eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii);
42 C.F.R. § 412.80(a)(2)-(3). The amount of the outlier payment is “determined by the
Secretary” and must “approximate the marginal cost of care” beyond the fixed loss threshold. 42
U.S.C. § 1395ww(d)(5)(A)(iii). During the time period relevant to this action, the implementing
regulations generally provided for outlier payments equal to eighty percent of the difference
between the hospital’s estimated operating and capital costs and the fixed loss threshold. See 42
C.F.R. § 412.84(k). In this way, “[t]he amount of the outlier payment is proportional to the
amount by which the hospital’s loss exceeds the [fixed loss] threshold.” Dist. Hosp. Partners,
2011 WL 2621000, at *2 (citing 42 C.F.R. § 412.84(k)).
6
An example may be helpful. Imagine that it is fiscal year 1998 and a hospital has
incurred an estimated $72,000 in actual costs in providing a patient covered by Medicare with a
pituitary procedure.4 In fiscal year 1998, the DRG prospective payment for pituitary procedures
was $8,002.49 and the established fixed loss threshold was $11,050. Because the hospital’s
estimated actual costs ($72,000) exceed the sum of those two figures ($19,052.49), the case
would be eligible for an outlier payment. To determine the amount of the outlier payment, the
difference between the hospital’s estimated actual costs ($72,000) and the sum of the DRG
prospective payment and the fixed loss threshold ($19,052.49) is considered, which results in an
amount of $52,947.51. That figure, in turn, is multiplied by the percentage established by
regulation intended to approximate the hospital’s marginal cost of care beyond the fixed loss
threshold (80%), resulting in an outlier payment in the amount of $42,358.01.
What does this mean from the hospital’s perspective? The hospital is paid the DRG
prospective payment of $8.002.49 and the outlier payment specific to the patient’s case in the
amount of $42,358.01, a total of $50,360.50. Meanwhile, the hospital must cover the fixed loss
threshold of $11,050 and the unreimbursed twenty percent of the hospital’s cost of care beyond
the fixed loss threshold of $10,589.50, a total of $21,639.50.
In the absence of the outlier payment system, the hospital would have $63,997.51 in
unreimbursed estimated costs—far more than the $21,639.50 contemplated by this hypothetical.
Which is just to say that outlier payments play an important role in the way healthcare providers
are compensated, and explains why they are so often the subject of litigation.
4
The example is drawn from a notice published in the Federal Register. See MEDICARE
PROGRAM ; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL
YEAR 1998 RATES, 62 Fed. Reg. 45,966, 45,997 (Aug. 29, 1997).
7
II. PROCEDURAL BACKGROUND
Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the
Medicare program. Am. Compl., ECF No. [16], ¶ 22. Plaintiffs contend that during fiscal years
1998 through 2006, they were deprived of more than $350 million in outlier payments. Id. ¶ 17.
Plaintiffs filed appeals with the Provider Reimbursement Review Board (“PRRB”), each
challenging the Secretary’s final outlier payment determinations for the fiscal years in question.
Id. ¶¶ 191-92. Because Plaintiffs’ administrative appeals called into question the underlying
validity of regulations promulgated by the Secretary, the PRRB determined that it was without
authority to resolve the matters raised and, upon Plaintiffs’ petition, authorized expedited judicial
review pursuant to 42 U.S.C. § 1395oo(f)(1). Id. ¶¶ 193-95 & Exs. A-B.
Plaintiffs commenced this action on September 27, 2010, claiming that this Court has
jurisdiction under the Medicare Act, 42 U.S.C. § 1395oo(f)(1), and the Mandamus Act, 28
U.S.C. § 1361. See Compl., ECF No. [1]. On December 23, 2010, they filed an Amended
Complaint as a matter of right, which remains the operative iteration of the Complaint in this
action. See Am. Compl., ECF No. [16]. On January 28, 2011, the Secretary filed the pending
Motion to Dismiss. See Def.’s Mem. of P. & A. in Supp. of Mot. to Dismiss for Lack of Subject
Matter Jurisdiction and Failure to State a Claim (“Def.’s Mem.”), ECF No. [17-1]. On March
16, 2011, Plaintiffs filed their opposition. See Pls.’ Mem. of P. & A. in Opp’n to Def.’s Mot. to
Dismiss (“Pls.’ Opp’n”), ECF No. [19]. On April 4, 2011, the Secretary filed a reply. See Def.’s
Reply Mem. in Supp. of Mot. to Dismiss for Lack of Subject Matter Jurisdiction and Failure to
State a Claim (“Def.’s Reply”), ECF No. [21]. The motion is therefore fully briefed and ripe for
adjudication.
8
III. THE AMENDED COMPLAINT
By any reasonable measure, the Amended Complaint is sprawling; it consists of over two
hundred paragraphs (several with discrete sub-parts), spans fifty-nine pages, and is accompanied
by two lengthy exhibits. In the opening paragraph, Plaintiffs claim to seek “judicial review of the
final administrative decisions of the Secretary . . . as to the amount of Medicare ‘outlier’
payments due Plaintiffs for services provided under the Medicare program for fiscal years 1998 -
2006,” Am. Compl. ¶ 1, but this rather discrete description is misleading, as the allegations in the
Amended Complaint sweep much more broadly. Indeed, as described by Plaintiffs themselves,
at the “heart” of their case is a wide-ranging challenge to the way the Secretary “implemented”
the outlier payment system. Pls.’ Opp’n at 6 (citing Am. Compl. ¶¶ 3-5, 17).5 In this regard,
Plaintiffs’ challenges fall into five basic categories, the first four arising under the Medicare Act
and the fifth arising under the Mandamus Act.
A. Challenges to the Secretary’s Outlier Payment Regulations
First, Plaintiffs contend that the Secretary’s regulations establishing the methodology for
calculating outlier payments (the “Outlier Payment Regulations”), 42 C.F.R. §§ 412.80-412.86,
contained “vulnerabilities” that made them “uniquely susceptible to manipulation” by
unscrupulous hospitals. Pls.’ Opp’n at 6 (citing Am. Compl. ¶¶ 52-98, 138). The Outlier
Payment Regulations were first enacted in 1985 and have been revisited periodically over the
years, most notably in 1988 and 2003. See MEDICARE PROGRAM ; CHANGES TO IMPLEMENT THE
INPATIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM AND FISCAL YEAR 1989 RATES, 53 Fed.
5Given the sheer breadth of Plaintiffs’ allegations, and the wide range of discrete
administrative actions covered, Plaintiffs’ passing suggestion in a footnote that they are pursuing
a single, indivisible claim is untenable. See Pls.’ Opp’n at 39 n.20.
9
Reg. 38,476 (Sept. 30, 1988); MEDICARE PROGRAM ; CHANGE IN METHODOLOGY FOR
DETERMINING PAYMENT FOR EXTRAORDINARILY HIGH -COST CASES (COST OUTLIERS), 68 Fed.
Reg. 34,494 (June 9, 2003).
Plaintiffs claim that there were three key “vulnerabilities” in the Outlier Payment
Regulations in the form that they existed in the fifteen year period extending from 1988 to 2003:6
(1) They required calculation of a hospital’s estimated costs based upon “inherently
inaccurate and unaudited data,” including uninterrogated data gleaned from non-
concurrent cost reports, Am. Compl. ¶¶ 56-84;
(2) They contemplated that a hospital’s cost-to-charge ratio would default to a statewide
average whenever that ratio fell more than three standard deviations above or below
the nationwide mean, Am. Compl. ¶¶ 85-92; and
(3) They failed to provide a mechanism that would allow for outlier payments to be
audited and adjusted by fiscal intermediaries as a check against aggressive charge
inflation, Am. Compl. ¶¶ 93-98.
According to Plaintiffs, the confluence of these three “vulnerabilities” in the Outlier
Payment Regulations (a) allowed unscrupulous hospitals to submit excessive reimbursement
claims, (b) “led to massive overpayments” to the wrong hospitals, (c) prompted the Secretary to
raise the fixed loss threshold at the beginning of each fiscal year as a misguided countermeasure,
and (d) ended with Plaintiffs being denied the outlier payments “to which they were entitled.”
Am. Compl. ¶ 55.
B. Challenges to the Secretary’s Fixed Loss Threshold Regulations
Second, Plaintiffs challenge the Secretary’s annual promulgation of the regulations
through which she sets the fixed loss threshold for the upcoming fiscal year (the “Fixed Loss
6
Plaintiffs’ allegations are directed principally towards the regulations in the form in
which they were enacted in 1988. See, e.g., Am. Compl. ¶¶ 75-85, 98, 107-10.
10
Threshold Regulations”), for fiscal years 1998 through 2006.7 See Am. Compl. ¶¶ 123-61. In
particular, Plaintiffs contend that the Secretary, faced with an “aberrantly high” level of projected
outlier payments caused by a flood of excessive reimbursement claims, made no attempt to
diagnose the actual source of the problem but instead, as a misguided countermeasure, made
“enormous, unprecedented and irrational increases” in the fixed loss threshold for the fiscal years
at issue in this action, and did so without providing an adequate, reasoned explanation for the
increases. Pls.’ Opp’n at 7 (citing Am. Compl. ¶¶ 14, 69, 112, 114, 119, 121, 125-26, 129-38,
147-48, 155-61). To illustrate this point, Plaintiffs allege that the fixed loss threshold increased
by 246% from fiscal year 1997 to fiscal year 2003, even though there was only a modest level of
cost inflation during the same period. See id. (citing Am. Compl. ¶¶ 14, 121, 137, 147).
Plaintiffs attribute the “irrational” increase in fixed loss thresholds to three alleged flaws
in the Secretary’s Fixed Loss Threshold Regulations:
(1) They lacked a means for accurately distinguishing between inflation in legitimate
reimbursement claims from inflation in illegitimate reimbursement claims;
7
See MEDICARE PROGRAM ; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE
PAYMENT SYSTEMS AND FISCAL YEAR 1998 RATES, 62 Fed. Reg. 45,966 (Aug. 29, 1997);
MEDICARE PROGRAM ; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS
AND FISCAL YEAR 1999 RATES, 63 Fed. Reg. 40,954 (July 31, 1998); CHANGES TO THE HOSPITAL
INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2000 RATES, 64 Fed. Reg.
41,490 (July 30, 1999); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS
AND FISCAL YEAR 2001 RATES, 65 Fed. Reg. 47,054 (Aug. 1, 2000); CHANGES TO THE HOSPITAL
INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND RATES AND COSTS OF GRADUATE MEDICAL
EDUCATION : FISCAL YEAR 2002 RATES, 66 Fed. Reg. 39,828 (Aug. 1, 2001); CHANGES TO THE
HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2003 RATES, 67 Fed.
Reg. 49,982 (Aug. 1, 2002); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT
SYSTEMS AND FISCAL YEAR 2004 RATES, 68 Fed. Reg. 45,346 (Aug. 1, 2003); CHANGES TO THE
HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2005 RATES, 69 Fed.
Reg. 48,916 (Aug. 11, 2004); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT
SYSTEMS AND FISCAL YEAR 2006 RATES, 70 Fed. Reg. 47,278 (Aug. 12, 2005).
11
(2) They made no meaningful attempt to correlate the increase in the fixed loss threshold
with the rate of cost inflation; and
(3) They made no attempt to compare the rate of increase in the fixed loss threshold with
the rate of inflation in commonly used inflationary indices (e.g., the CPI-Medical
Index).
See Am. Compl. ¶¶ 128-133. Plaintiffs contend that the Secretary’s failure to account for these
flaws led to an irrational increase in the fixed loss thresholds for fiscal years 1998 through 2006,
which allegedly had the ultimate effect of reducing the number of Plaintiffs’ cases that qualified
for outlier payments and the amount of payments for those cases that did qualify. Id. ¶ 50.
C. Challenges to the Amount of Outlier Payments Provided to Plaintiffs for Fiscal
Years 1998 Through 2006
Third, Plaintiffs challenge “the amount of Medicare ‘outlier’ payments due Plaintiffs for
services provided under the Medicare program for fiscal years 1998 - 2006.” Am. Compl. ¶ 1.
However, Plaintiffs do not claim that their fiscal intermediaries or the Secretary miscalculated
their outlier payments or committed some other sort of clerical error in reaching a final
determination as to the amounts owed to Plaintiffs. Rather, Plaintiffs contend that the
“[a]rtificially high” fixed loss thresholds set by the Secretary for fiscal years 1998 through 2006
“meant fewer and lower” outlier payments to Plaintiffs. Pls.’ Opp’n at 8. In this way, Plaintiffs’
challenges to the amount of outlier payments that were provided to them are fundamentally
intertwined with, and dependent upon, their challenges to the Secretary’s Outlier Payment
Regulations and the Fixed Loss Threshold Regulations. As those challenges go, so go Plaintiffs’
challenges to the amount of outlier payments they were provided.
D. Challenges to the Secretary’s “Implementation” and “Enforcement” of the
Outlier Payment System
Fourth, Plaintiffs’ raise a handful of vague and non-specific allegations challenging the
12
Secretary’s overall “implementation” and “enforcement” of the outlier payment system,
allegations that are untethered to any discrete agency action. See Pls.’ Opp’n at 8, 26-27 (citing
Am. Compl. ¶¶ 3, 100). These allegations are consistent with two themes. In the first, Plaintiffs
allege that the Secretary has “thwarted” Congress’s supposed intent that hospitals should receive
outlier payments approximating their marginal costs and has instead “created and implemented”
a system that has resulted in “systematically den[ying] [hospitals] the financial protection that
Congress intended.” Am. Compl. ¶ 3. In the second, Plaintiffs allege that the Secretary has
engaged in “selective” enforcement of the Outlier Payment Regulations by seeking to recover
from hospitals submitting excessive reimbursement claims “while refusing to take the necessary
steps to correct [] years of underpayments to [Plaintiffs].” Id. ¶ 162.8
E. Challenges to the Disposition of Monies Recovered in Proceedings Against
Hospitals Submitting Excessive Reimbursement Claims
Fifth, and finally, Plaintiffs seek to invoke the Court’s jurisdiction under the Mandamus
Act, 28 U.S.C. § 1361, to challenge the Secretary’s disposition of $1.5 billion in proceeds that
have allegedly been recovered under the False Claims Act in proceedings against hospitals that
have submitted excessive reimbursement claims. See Pls.’ Opp’n at 8 (citing Am. Compl. ¶¶ 15,
177). Plaintiffs contend that the Secretary has a non-discretionary duty to pay Plaintiffs an
unspecified share of these proceeds under 42 U.S.C. § 1395i(k)(2)(C), a statutory provision
relating to an expenditure account within the Federal Hospital Insurance Trust Fund known as
the Health Care Fraud and Abuse Control Account. See Am. Compl. ¶¶ 180-87, 199-204.
8
However, Plaintiffs disclaim any intention to “compel [the Secretary] to bring
enforcement actions against third parties who have violated [the] regulatory scheme,” Pls.’ Opp’n
at 28—namely, hospitals that have submitted excessive reimbursement claims.
13
IV. DISCUSSION
The Court’s discussion here proceeds in three parts. First, the Court will explain why the
Secretary’s Motion to Dismiss as it pertains to Plaintiffs’ claims under the Medicare Act will be
granted-in-part and denied-in-part. Briefly stated, the Court concludes that (a) Plaintiffs have
stated sufficient facts at the pleading stage to support their standing, (b) Plaintiffs fail to state a
plausible claim for relief based upon the Secretary’s alleged failures in “implementing” and
“enforcing” the outlier payment system, (c) Plaintiffs are not challenging the adequacy of the
Secretary’s enforcement efforts to prevent, detect, and control fraud in this action, and (d)
although at first glance compelling, the Court declines to reach the remainder of the Secretary’s
merits-based arguments in the absence of the full administrative record. Second, the Court will
explain why Plaintiffs have fallen woefully short of identifying the sort of clear and indisputable
duty on the Secretary’s part that is required to support a claim under the Mandamus Act. Third,
and finally, the Court will address what steps need to be taken by the parties to proceed in this
action.
A. The Secretary’s Motion to Dismiss Plaintiffs’ Claims Under the Medicare Act
Will Be Granted-in-Part and Denied-in-Part
1. Plaintiffs Have Stated Sufficient Facts to Support Their Standing to
Pursue Their Claims Under the Medicare Act
In her Motion to Dismiss, the Secretary argues at considerable length that Plaintiffs lack
Article III standing to pursue some of the allegations raised in the Amended Complaint. See
Def.’s Mem. at 20-27; Def.’s Reply at 3-8. Specifically, the Secretary contends that Plaintiffs are
without standing to pursue “[c]laims asserting that supposed weaknesses in [the Secretary’s]
policies drove other hospitals to commit acts of fraud, and that [Plaintiffs] were eventually
14
harmed by those acts of fraud.” Def.’s Reply at 4. The Secretary’s standing argument need not
detain this Court long, at least at this stage, as it rests upon a fundamental misunderstanding of
Plaintiffs’ claims in this action, something that is entirely understandable given the extraordinary
breadth of the allegations raised in the Amended Complaint.
As set forth in detail above, Plaintiffs claims under the Medicare Act fall into four basic
categories. See supra Part III.A-D.9 Plaintiffs challenge (1) the validity of the Secretary’s
Outlier Regulations in the form that they existed between 1988 and 2003, (2) the validity of the
Secretary’s Fixed Loss Threshold Regulations for fiscal years 1998 through 2006, (3) the
Secretary’s determinations as to the amount of outlier payments that Plaintiffs were entitled to
receive for fiscal years 1998 through 2006, and (4) the Secretary’s “implementation” and
“enforcement” of the outlier payment system in a way that allegedly failed to correct outlier
“underpayments” and resulted in denying Plaintiffs the financial protection that Congress
intended. There is a common thread between these four categories: they are all directed towards
the Secretary’s actions or inactions and they all contemplate Plaintiffs receiving fewer and lesser
outlier payments than they otherwise allegedly should have.10
The “irreducible constitutional minimum” of standing requires: (i) an injury-in-fact; (ii)
9
A fifth category, premised on Plaintiffs’ contention that the Secretary failed to perform
an alleged non-discretionary duty to pay to Plaintiffs an unidentified portion of funds recovered
against hospitals submitting excessive reimbursement claims, arises under the Mandamus Act
and is addressed elsewhere in this opinion. See infra Part IV.B.
10
For this reason, the Secretary’s heavy reliance on authorities addressing the situation
where a plaintiff has brought suit based upon an indirect injury allegedly flowing from the
government’s regulation of a third party is misplaced. See, e.g., Simon v. E. Kentucky Welfare
Rights Org., 426 U.S. 26, 40-46 (1976); Renal Physicians Ass’n v. U.S. Dep’t of Health &
Human Servs., 489 F.3d 1267, 1273-78 (D.C. Cir. 2007); Nat’l Wrestling Coaches Ass’n v. Dep’t
of Educ., 366 F.3d 930, 937-45 (D.C. Cir. 2004), cert. denied, 545 U.S. 1104 (2005).
15
causation; and (iii) redressability. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).
In many cases, a plaintiff’s “standing to seek review of administrative action is self-evident,”
including where, as here, “the complainant is ‘an object of the action (or forgone action) at
issue’—as is the case usually in review of a rulemaking and nearly always in review of an
adjudication.” Sierra Club v. Envtl. Prot. Agency, 292 F.3d 895, 900 (D.C. Cir. 2002) (quoting
Lujan, 504 U.S. at 561-62); see also Fund for Animals, Inc. v. Norton, 322 F.3d 728, 734 (D.C.
Cir. 2003). Consistent with this observation, the Secretary concedes, as she must, that Plaintiffs
do “have standing to bring the claims . . . that assert that [she] made errors that directly affected
their payments.” Def.’s Reply at 4. That is, the Secretary admits that Plaintiffs can challenge the
determinations as to the amount of outlier payments that Plaintiffs were provided in fiscal years
1998 through 2006—the third of the four categories identified above. Significantly, from this
lone concession, the conclusion that Plaintiffs also have standing to bring the challenges in the
first and second categories—i.e., the challenges to the validity of the Outlier Payment
Regulations and the Fixed Loss Threshold Regulations—ineluctably follows, as the Secretary
necessarily relied upon, and applied, these regulations when her designees determined Plaintiffs’
entitlement to outlier payments for the fiscal years in question. See Russell-Murray Hospice, Inc.
v. Sebelius, 724 F. Supp. 2d 43, 53 (D.D.C. 2010) (“[T]he fact that the challenged regulation was
directly applied to the plaintiff strongly supports the conclusion that it has standing to challenge
that regulation.”).11
11
Even if Plaintiffs’ arguments as to why these regulations are arbitrary or capricious
may depend, in part, upon the effect the regulations had upon the behavior of third parties, the
regulations indisputably were applied directly to determine the compensation to which Plaintiffs
were entitled. However, strictly speaking, Plaintiffs do not actually argue that the regulations are
arbitrary or capricious in light of the effect that they had on third parties. More accurately, their
16
The fourth and final category—Plaintiffs’ challenges to the “implementation” and
“enforcement” of the outlier payment system—merits like treatment, even if the claims in this
category fit awkwardly in the standing framework by virtue of the fact that, as explained below,
they fail to state a plausible entitlement to relief. See infra Part IV.A.2. Plaintiffs tender a
handful of vague and non-specific allegations contending that the Secretary implemented and
enforced the outlier payment system in a way that failed to correct outlier “underpayments” and
resulted in denying Plaintiffs the financial protection that Congress intended. In this regard, the
category is similarly premised upon the contention that the Secretary’s actions or inactions
caused Plaintiffs direct economic harm. These allegations, although insufficient to state a
plausible claim for relief, pass muster to support a finding of standing at the pleading stage. See
Sierra Club, 292 F.3d at 898-99 (“At the pleading stage, ‘general factual allegations of injury
resulting from the defendant’s conduct may suffice.’”) (quoting Lujan, 504 U.S. at 561).
In short, Plaintiffs’ claims under the Medicare Act are each directed towards challenging
administrative action or inaction having an immediate impact upon them as regulated entities. At
this early stage in the proceedings, their allegations are sufficient to establish their standing to
challenge (1) the validity of the Secretary’s Outlier Regulations in the form that they existed
between 1988 and 2003, (2) the validity of the Secretary’s Fixed Loss Threshold Regulations for
fiscal years 1998 through 2006, (3) the Secretary’s determinations as to the amount of outlier
payments that Plaintiffs were entitled to in fiscal years 1998 through 2006, and (4) the
argument is that the Secretary failed to fully grapple with the effect her regulations would have
(or were having) on the behavior of third parties and the implications of that third-party behavior
on the outlier payment system as a whole, and that by failing to grapple with this problem, the
Secretary failed to examine all the relevant data and articulate a satisfactory explanation for her
chosen course of action.
17
Secretary’s “implementation” and “enforcement” of the outlier payment system. Therefore, the
Court will deny the Secretary’s Motion to Dismiss insofar as it seeks dismissal of Plaintiffs’
claims under the Medicare Act for lack of standing.
Nonetheless, it may very well prove to be the case that, as the parties proceed along the
path towards summary judgment, the nature and scope of Plaintiffs’ claims will further
crystallize and come into sharper focus. The Court’s opinion today is not intended, nor should be
construed, to foreclose the Secretary from revisiting her arguments as to Plaintiffs’ standing or
lack thereof upon further development of the record.
2. Plaintiffs Fail to State a Plausible Claim for Relief Based Upon the
Secretary’s Alleged Failures in “Implementing” and “Enforcing” the
Outlier Payment System
Judicial review of Plaintiffs’ claims under the Medicare Act rests on 42 U.S.C. §
1395oo(f)(1), which incorporates the Administrative Procedure Act (the “APA”). See 42 U.S.C.
§ 1395oo(f)(1) (“Such action[s] . . . shall be tried pursuant to the applicable provisions under
chapter 7 of Title 5.”); see also Abington Crest Nursing & Rehab. Ctr. v. Sebelius, 575 F.3d 717,
719 (D.C. Cir. 2009). Under the APA, the reviewing court is generally confined to evaluating
“final agency action,” 5 U.S.C. § 704, which may include “the whole or part of an agency rule,
order, license, sanction, relief, or the equivalent or denial thereof, or failure to act,” id. § 551(13).
Each of these enumerated categories implicates “circumscribed, discrete agency actions,” a
limitation designed in large part “to protect agencies from undue judicial interference with their
lawful discretion, and to avoid judicial entanglement in abstract policy disagreements.” Norton
v. S. Utah Wilderness Alliance, 542 U.S. 55, 62 & 66 (2004). As the Secretary correctly
observes, these strictures preclude “a blunderbuss attack on an entire program based on its
18
supposed failure to achieve abstract goals.” Def.’s Mem. at 28.12
Despite the extraordinary breadth of the Amended Complaint, Plaintiffs allegations are,
for the most part, tethered to the sort of “circumscribed, discrete agency actions” that are subject
to judicial review—namely, (a) the Secretary’s promulgation of the Outlier Payment Regulations,
(b) the Secretary’s promulgation of the Fixed Loss Threshold Regulations, and (c) the Secretary’s
determinations as to the amount of outlier payments that Plaintiffs would receive for fiscal years
1998 through 2006. In contrast, Plaintiffs’ vague and non-specific allegations challenging the
Secretary’s overall “implementation” and “enforcement” of the outlier payment system plainly
12
Although it is not altogether clear, the Secretary at times appears to go even farther and
suggest that review under 42 U.S.C. § 1395oo(f)(1) is limited not just to challenging discrete
agency action, but to one specific form of discrete agency action—namely, the agency’s final
determinations as to the amount of outlier payments that a provider will receive for a given fiscal
year, see Def.’s Mem. at 29; Def.’s Reply at 13—a view that would, presumably, foreclose
judicial review of the Secretary’s rules and regulations under § 1395oo(f)(1). To the extent the
Secretary intended to make this argument, it is unsupported by any on-point authority and
appears to run counter to established precedent. Because the Medicare Act “generally forecloses
other avenues of review,” Monmouth Med. Ctr. v. Thompson, 257 F.3d 807, 809 (D.C. Cir. 2001)
(citing 42 U.S.C. §§ 405(h), 1395ii), parties “must channel [their] complaints through the
administrative review procedures set forth in the statute,” Russell-Murray Hospice, 724 F. Supp.
2d at 49 (citing 42 U.S.C. §§ 405(h), 1395ii). This means that “[p]arties challenging Medicare
rules [and regulations] must exhaust the agency review process regardless of whether the matter
involves a direct constitutional, statutory, or regulatory challenge.” Three Lower Counties Cmty.
Health Servs. v. U.S. Dep’t of Health & Human Servs., 317 F. App’x 1, 1 (D.C. Cir. 2009) (per
curiam) (citing Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 5 (2000)). However,
since neither the fiscal intermediary nor the PRRB has the authority to declare regulations
invalid, providers may, as Plaintiffs did in this case, file a request for a determination by the
Board of its authority to decide the question of law or regulations relevant to the matter in
controversy. 42 U.S.C. § 1395oo(f)(1). If the PRRB determines that it lacks the authority to
decide the question, it may certify the question for “expedited judicial review.” Bethesda Hosp.
Ass’n v. Bowen, 485 U.S. 399, 406-07 (1988). Consistent with this scheme, courts routinely
consider challenges to the Secretary’s rules and regulations when exercising jurisdiction under 42
U.S.C. § 1395oo(f)(1). See, e.g., Heartland Reg’l Med. Ctr. v. Leavitt, 415 F.3d 24, 31 (D.C.
Cir. 2005); Marshall Cnty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1222 (D.C. Cir. 1993);
Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 976 (D.C. Cir. 1991).
19
“lack the specificity requisite for agency action.” S. Utah Wilderness Alliance, 542 U.S. at 66.
For example, Plaintiffs free-floating allegations that the Secretary has “thwarted” Congressional
intent by “systematically deny[ing]” hospitals the protection that Congress intended and by
“refusing to take steps to correct [] years of underpayments,” Am. Compl. ¶¶ 3, 162, comprise
the very sort of “broad programmatic attack” directed towards “[g]eneral deficiencies in
compliance” with “broad statutory mandates” that fall beyond the ambit of judicial review under
the APA, S. Utah Wilderness Alliance, 542 U.S. at 64, 66. Therefore, the Court will grant the
Secretary’s Motion to Dismiss insofar as it seeks dismissal of Plaintiffs’ claims premised upon
allegations challenging the Secretary’s overall “implementation” and “enforcement” of the
outlier payment system that are untethered to any discrete agency action.13
3. Plaintiffs Are Not Challenging The Adequacy of the Secretary’s
Enforcement Efforts to Prevent, Detect, and Control Fraud
It is a basic and unobjectionable principle of administrative law that judicial review
cannot extend to “agency action [that] is committed to agency discretion by law.” 5 U.S.C. §
701(a)(2). In order for the district court to exercise its judicial function, there must be “law to
apply,” Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971), and judicial
review will not lie where the governing statute and regulations are “drawn so that a court would
have no meaningful standard against which to judge the agency’s exercise of discretion,” Heckler
v. Chaney, 470 U.S. 821, 830 (1985).
Relying upon these principles, the Secretary argues at some length that Plaintiffs “cannot
13
Which is not to say that Plaintiffs are foreclosed from raising issues of Congressional
intent, and the like, in future submissions, only that such issues must be made in the context of an
argument that some circumscribed and discrete action taken by the Secretary was arbitrary or
capricious.
20
challenge the adequacy of [her] efforts to prevent, detect, and control false inflation of charges in
outlier payments,” because “agencies’ decisions about whether, when, and how to pursue
violations of law are committed to agency discretion since they involve sensitive judgments
about resource allocation and agency priorities that courts are not well-equipped to review.”
Def.’s Mem. at 32-33.
Were Plaintiffs in fact challenging the Secretary’s “[r]efusals to take enforcement steps”
against hospitals submitting excessive reimbursement claims, Heckler, 470 U.S. at 831, such as
seeking to recoup payments in administrative enforcement proceedings or commencing
proceedings under the False Claims Act, then the Court would be inclined to agree. However,
the Secretary’s argument, at least as it is framed in her Motion to Dismiss, rests on a fundamental
misconstruction of Plaintiffs’ claims in this action. In this case, Plaintiffs expressly disavow any
challenge to the Secretary’s discretion “to bring enforcement actions against third parties who
have violated [the] regulatory scheme.” Pls.’ Opp’n at 28. That is, they are not challenging the
adequacy of the Secretary’s enforcement efforts to prevent, detect, and control fraud committed
by unscrupulous hospitals per se. Rather, as described in detail above, see supra Part III.A-C,
Plaintiffs are challenging as arbitrary and capricious the Outlier Payment Regulations and the
Fixed Loss Threshold Regulations, as well as the application of those regulations in fixing the
amount of outlier payments to which Plaintiffs would be entitled. As part of these challenges,
Plaintiffs intend to argue that the Secretary failed to fully grapple with the effect her regulations
would have (or were having) on the behavior of third parties and the implications of that third-
party behavior on the outlier payment system as a whole, and that by failing to grapple with this
problem, the Secretary failed to examine all the relevant data and articulate a satisfactory
21
explanation for her chosen course of action. See supra Part III.A-C. While these arguments may,
at a high level of abstraction, be described as challenging the Secretary’s ability to “control
fraud,” they are in actuality targeted towards challenging the Secretary’s administrative
decisionmaking process in the context of discrete, circumscribed agency action. In the end,
these arguments may or may not prove to have merit, but it is premature to ask that question in
the absence of the administrative record. See infra Part IV.A.4.14
4. The Court Declines to Reach the Merits of the Secretary’s Remaining
Arguments for Dismissal of Plaintiffs’ Medicare Claims in the
Absence of the Administrative Record
“[W]hen a party seeks review of agency action under the APA, the district judge sits as an
appellate tribunal.” Am. Bioscience Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001).
“The entire case is a question of law,” and the “complaint, properly read, actually presents no
factual allegations, but rather only arguments about the legal conclusion[s] to be drawn about the
agency action.” Marshall Cnty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir.
1993). Therefore, the question is not whether the plaintiff has “raised genuine issues of material
fact,” but whether, “based on the agency record[,] . . . the agency acted arbitrarily or
capriciously.” Rempfer v. Sharfstein, 583 F.3d 860, 865 (D.C. Cir. 2009) (citing 5 U.S.C. § 706),
cert. denied sub nom. Rempfer v. Hamburg, __ U.S. __, 130 S. Ct. 1707 (2010).
When presented with a motion to dismiss for failure to state a claim, the district court
14
While the Court rejects the Secretary’s argument as it is framed in her Motion to
Dismiss, which speaks to what is essentially a phantom claim, it may be that certain aspects of
the Secretary’s decisionmaking process in connection with the discrete agency actions at issue
are either committed to her discretion by law or are not governed by meaningful standards to
guide the Court’s review. Should that be the case, the Secretary is of course free to raise such
issues when the Court has the benefit of the full administrative record to evaluate how and in
what way the Secretary may have exercised her discretion.
22
may, in appropriate circumstances, reach the merits even in the absence of the administrative
record, as when the parties’ arguments can be resolved with reference to nothing more than the
relevant statute and its legislative history. See Dist. Hosp. Partners, 2011 WL 2621000, at *6-7.
Moreover, a court may generally take judicial notice of materials published in the Federal
Register without converting the motion to one for summary judgment. See 44 U.S.C. § 1507(“The contents of the Federal Register shall be judicially noticed.”).15
Nevertheless, in recognition of the dangers associated with proceeding with judicial
review “on the basis of a partial and truncated record” without the consent of the parties, Natural
Res. Def. Council, Inc. v. Train, 519 F.2d 287, 291-92 (D.C. Cir. 1975), when the arguments
raised go to the question of whether the agency has adhered to the standards of decisionmaking
required by the APA, the United States Court of Appeals for the District of Columbia Circuit has
advised that the “better practice” is to test the parties’ arguments in the context of a motion for
summary judgment and with reference to the full administrative record. Marshall Cnty., 988
F.2d at 1226 n.5. “If a court is to review an agency’s action fairly, it should have before it neither
more nor less information than did the agency when it made its decision.” Walter O. Boswell
Mem’l Hosp. v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984); see also Occidental Petroleum
Corp. v. Secs. & Exch. Comm’n, 873 F.2d 325, 338 (D.C. Cir. 1989) (“[I]n order to allow for
15
Contrary to Plaintiffs’ characterization, this Court’s decision in Lake Pilots Ass’n v.
U.S. Coast Guard, 257 F. Supp. 2d 148 (D.D.C. 2003), does not stand for the proposition that
“considering [materials in the] Federal Register would convert a motion to dismiss to a motion
for summary judgment.” Pls.’ Opp’n at 14. The short footnote relied upon by Plaintiffs for this
characterization simply provides that the Court had construed the motion then before it as one for
summary judgment because it involved consideration of “the administrative record that was
before the agency at the time it made its decision.” Lake Pilots Ass’n., 257 F. Supp. 2d at 150
n.1. True, the Court considered materials in the Federal Register, but its review was not so
limited. See id. at 166.
23
meaningful judicial review, the agency must produce an administrative record that delineates the
path by which it reached its decision.”).
Consistent with this guidance, courts routinely exercise their discretion to decline to reach
the ultimate question of whether the agency’s decisionmaking process was arbitrary or capricious
in the absence of the full administrative record. See, e.g., Ravulapalli v. Napolitano, __ F. Supp.
2d __, No. 10 Civ. 447 (CKK), 2011 WL 1126055, at *10 (D.D.C. Mar. 29, 2011); Int’l
Longshoremen’s Ass’n, AFL-CIO v. Nat’l Mediation Bd., No. 04 Civ. 824 (RBW), 2005 WL
850358, at *4 (D.D.C. Mar. 30, 2005).16 Indeed, this Court has done just that when presented
with motions to dismiss similar challenges to the Secretary’s administration of the Medicare Act.
See Dist. Hosp. Partners, 2011 WL 2621000, at *7; Swedish Am. Hosp. v. Sebelius, 691 F. Supp.
2d 80, 88-89 (D.D.C. 2010).
In this case, the Secretary raises a litany of arguments that are best decided only in the
context of a motion for summary judgment, at which point the parties and the Court will have the
benefit of the administrative record. See Def.’s Mem. at 35-44; Def.’s Reply at 19-24. While the
Secretary’s arguments at first glance appear to be compelling, the claims raised by Plaintiffs
require the Court to ascertain whether the Secretary examined all the relevant data and articulated
16
Plaintiffs contend that in Piersall v. Winter, 435 F.3d 319 (D.C. Cir. 2006), the United
States Court of Appeals for the District of Columbia Circuit held that it “would not reach the
merits of [an] APA challenge without the certified administrative record.” Pls.’ Opp’n at 13. To
put it generously, this is an inaccurate description of the Court of Appeals’ holding. In Piersall,
the district court dismissed the action at the outset for lack of subject matter jurisdiction; the
administrative record was never submitted and the parties did not develop the merits before the
district court. See Piersall, 435 F.3d at 325. After concluding that the district court erred in
dismissing the action for lack of subject matter jurisdiction, the Court of Appeals merely declined
to reach the merits without first remanding based on the principle that an appellate court
generally should refrain from considering an issue that has not been raised before the district
court. See id.24
a satisfactory explanation for her chosen course of action. See Motor Vehicle Mfrs. Ass’n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Without the administrative record, the Court
is unable to perform this function. Therefore, the Court will deny the remainder of the
Secretary’s Motion to Dismiss insofar as it seeks dismissal of Plaintiffs’ claims under the
Medicare Act. The Court will require the Secretary to produce the administrative record before
reaching the merits of these arguments.17 Simply put, the Secretary would have this Court wade
into the details of its decisionmaking process on a motion to dismiss. Such an approach invites
error, and this Court declines the Secretary’s invitation.
B. Plaintiffs’ Claim Under the Mandamus Act Will Be Dismissed for Failure to
State a Plausible Claim for Relief
Plaintiffs assert a claim that is styled as arising under the Mandamus Act, 28 U.S.C. §
1361. See Am. Compl. ¶¶ 180-87, 199-204. Under the Mandamus Act, district courts have
original jurisdiction over “any action in the nature of mandamus to compel an officer or
employee of the United States or any agency thereof to perform a duty owed to the plaintiff.” 28
U.S.C. § 1361. In recognition of the drastic nature of mandamus, jurisdiction under the statute is
exceedingly narrow. In re Cheney, 406 F.3d 723, 729 (D.C. Cir. 2005) (en banc). Mandamus-
type relief may issue if, and only if, (i) the plaintiff has a clear and indisputable right to relief, (ii)
17
The Court does not doubt that there are circumstances in which dismissal under Rule
12(b)(6) will be appropriate even in the absence of the full administrative record. The Secretary
identifies one such circumstance, noting that if a plaintiff were only to allege that an agency
promulgated a rule without providing adequate advance notice, and the agency were to identify a
notice published in the Federal Register providing the required notice, a court could properly
dismiss the claim under Rule 12(b)(6). See Def.’s Reply at 10 n.3. Or, to use an example
relevant to the present action, dismissal may be appropriate where the plaintiff’s pleadings fail to
identify a discrete, circumscribed agency action subject to review under the APA. See supra
Part III.A.2. Dismissal is particularly appropriate in such a case because there will be no
concrete administrative record to anchor judicial review.
25
the defendant has a clear duty to act, and (iii) there is no other adequate remedy available. Power
v. Barnhart, 292 F.3d 781, 784 (D.C. Cir. 2002). In this case, Plaintiffs seek mandamus to
compel the Secretary to exercise what they claim is her non-discretionary duty to pay Plaintiffs
an unspecified share of $1.5 billion in proceeds that have allegedly been recovered under the
False Claims Act in proceedings against hospitals that have submitted excessive reimbursement
claims. See Am. Compl. ¶¶ 180-87, 199-204; Pls.’ Opp’n at 40-42.
1. Plaintiffs Have Failed to Identify a “Clear and Compelling” Basis for
the Alleged Non-Discretionary Duty
To support mandamus jurisdiction, the proffered legal basis for the defendant’s duty must
be “clear and compelling.” In re Cheney, 406 F.3d at 729. That means that the duty “must be so
plainly prescribed as to be free from doubt and equivalent to a positive command.” Consol.
Edison Co. of N.Y. v. Ashcroft, 286 F.3d 600, 605 (D.C. Cir.) (internal quotation marks omitted),
cert. denied, 537 U.S. 1029 (2002). “[I]f there is no clear and compelling duty under the statute
as interpreted, the district court must dismiss the action.” In re Cheney, 406 F.3d at 729.18
In this case, Plaintiffs assert that the Secretary has a non-discretionary duty to pay them
an unspecified share of the proceeds that have allegedly been recovered under the False Claims
Act in proceedings against hospitals that have submitted excessive reimbursement claims. See
Am. Compl. ¶¶ 180-87, 199-204; Pls.’ Opp’n at 40-42. Plaintiffs contend that this duty emanates
18
“To this extent, mandamus jurisdiction under § 1361 merges with the merits.” In re
Cheney, 406 F.3d at 729. That is, the question of whether the statute relied upon imposes a clear
and compelling duty on the defendant is a “merits issue.” Auburn Reg’l Med. Ctr. v. Sebelius,
686 F. Supp. 2d 55, 62 (D.D.C. 2010), rev’d on other grounds, __ F.3d __, No. 10-5115, 2011
WL 2507853 (D.C. Cir. June 24, 2011). Therefore, if dismissal rests on a plaintiff’s failure to
point to a clear and compelling duty, it should be treated as a dismissal for failure to state a
plausible entitlement to relief, not as a dismissal for lack of subject matter jurisdiction. Ahmed v.
Dep’t of Homeland Sec., 328 F.3d 383, 386-87 (7th Cir. 2003).
26
from 42 U.S.C. § 1395i(k)(2)(C), a statutory provision relating to an expenditure account within
the Federal Hospital Insurance Trust Fund (“Trust Fund”) known as the Health Care Fraud and
Abuse Control Account. See 42 U.S.C. § 1395i(a), (k)(1). The contention is without merit.
The inquiry begins and ends with the statutory text. Section 1395i(k)(2)(C) provides, in
relevant part, as follows:
The Managing Trustee shall transfer to the Trust Fund . . . an amount
equal to the sum of the following:
***
(iv) Penalties and damages obtained and otherwise creditable to
miscellaneous receipts of the general fund of the Treasury obtained
under sections 3729 through 3733 of Title 31 (known as the False
Claims Act), in cases involving claims related to the provision of
health care items and services (other than funds awarded to a relator,
for restitution or otherwise authorized by law).
42 U.S.C. § 1395i(k)(2)(C). To put it bluntly, Plaintiffs’ argument as to why this language
requires the Secretary to pay them anything is so devoid of merit that it is difficult to reduce to
writing. So far as the Court can tell, the argument proceeds in four basic steps: Plaintiffs begin
by observing that the requirement that certain penalties and damages obtained under the False
Claims Act be transferred to the Trust Fund does not apply to funds awarded to a relator for
“restitution,” couple that unobjectionable observation with the naked assertion that they are
entitled to restitution, paint the use of the word “shall” as mandatory language that disallows the
exercise of discretion, and conclude by positing that the Secretary is somehow obligated to pay
them some unspecified share of restitution-related proceeds. See Pls.’ Opp’n at 40-41.
Whatever the merits of Plaintiffs’ argument in the abstract, it has virtually no connection
to the actual text of § 1395i(k)(2)(C). True, the provision employs the word “shall,” a term that
27
traditionally denotes a mandatory duty, but by its plain language, the provision requires one
thing, and one thing only: “[t]he Managing Trustee” must “transfer” certain monies obtained
under the False Claims Act “[t]o the Trust Fund.” 42 U.S.C. § 1395i(k)(2)(C).
Undeterred, Plaintiffs attempt to conjure from § 1395i(k)(2)(C) a non-discretionary duty
on the Secretary’s part to pay Plaintiffs an unspecified share of the proceeds that have allegedly
been recovered under the False Claims Act in proceedings against hospitals that have submitted
excessive reimbursement claims. Their argument hinges on the statute’s exclusion from the
“[p]enalties and damages” that the Managing Trustee must transfer to the Trust Fund any “funds
awarded to a relator, for restitution or otherwise authorized by law.” 42 U.S.C. §
1395i(k)(2)(C)(iv). Plaintiffs first claim that they are entitled to “restitution” and, in a wild leap
of logic, contend that the exclusion of restitution-related proceeds from the scope of the statute
somehow requires the Secretary to pay them an unspecified amount of restitution. However, by
its unambiguous terms, the statute concerns only the Managing Trustee’s responsibilities in
transferring monies to the Trust Fund—no more and no less. See id. When read in its context,
all the exclusionary language does is limit the scope of the Managing Trustee’s transfer
responsibilities: whereas the Managing Trustee must transfer the bulk of penalties and damages
to the Trust Fund, he need not transfer “funds awarded to a relator, for restitution or otherwise
authorized by law.” Id. Meanwhile, the provision is completely silent on the proper use and
disposition of monies that are not transferred by the Managing Trustee to the Trust Fund,
including those “funds awarded to a relator, for restitution or otherwise authorized by law.” The
upshot is this: this provision cannot possibly be read as entitling anyone, let alone Plaintiffs, to a
28
payment of restitution.19
In short, far from identifying a clear and indisputable duty owed to them by the Secretary,
Plaintiffs’ claim for mandamus-type relief relies upon a wholly implausible and unsustainable
reading of the relevant statute. Due to the absence of a clear and compelling legal basis for the
duty asserted, the Court will dismiss Plaintiffs’ claim under the Mandamus Act.
2. Plaintiffs Are Not Entitled to Jurisdictional Discovery
In a last-ditch effort, Plaintiffs attempt to salvage their claim under the Mandamus Act by
arguing that they should be permitted to conduct jurisdictional discovery of (a) the Secretary’s
historical interpretation of the term “restitution” and (b) the disposition of $1.5 billion in
proceeds that have allegedly been recovered under the False Claims Act in proceedings against
hospitals that have submitted excessive reimbursement claims. See Pls.’ Opp’n at 43-44. The
argument is unavailing.
As a threshold matter, Plaintiffs have never actually filed a motion for jurisdictional
discovery; a passing argument made in opposition to a motion to dismiss simply will not suffice.
However, more to the point, a party is not entitled to jurisdictional discovery to establish
mandamus jurisdiction absent a detailed showing that the additional discovery would alter the
district court’s conclusion. See Baptist Mem’l Hosp. v. Johnson, 603 F. Supp. 2d 40, 44-45
(D.D.C. 2009), aff’d sub nom. Baptist Mem’l Hosp. v. Sebelius, 603 F.3d 57 (D.C. Cir. 2010).
None of the evidence that could hypothetically be uncovered by Plaintiffs’ vague discovery
19
As if this were not enough, Plaintiffs’ argument suffers from another fatal defect—the
Secretary, who is the only defendant in this action, is mentioned nowhere in § 1395i(k)(2)(C).
The transfer obligations imposed by the statute run to the Managing Trustee of the Trust
Fund—i.e., the Secretary of the Treasury. See 42 U.S.C. § 1395i(b). Therefore, whatever duties
arise under the statute, they cannot be enforced against the Secretary.
29
requests could possibly transform § 1395i(k)(2)(C) into anything other than a statement as to the
responsibilities of the Secretary of the Treasury in transferring certain monies to the Trust Fund.
In other words, the requested discovery has no bearing on the question of whether the statute
imposes a clear and indisputable duty on the Secretary’s part to pay Plaintiffs an unspecified
share of the proceeds that have allegedly been recovered under the False Claims Act. See Wilbur
v. U.S. ex rel. Kadrie, 281 U.S. 206 (1930) (“[W]here the duty is not [] plainly prescribed, but
depends upon a statute or statutes the construction or application of which is not free from doubt,
it is regarded as involving the character of judgment or discretion which cannot be controlled by
mandamus.”). The Court will not exercise its discretion to authorize Plaintiffs to go on a fishing
expedition, particularly one that can bear no fish.
C. Next Steps and Further Proceedings in this Action
For the reasons described above, see supra Part III.A.4, the Court declines to reach the
merits-based arguments raised by the Secretary as a basis for dismissing Plaintiffs’ remaining
claims without the benefit of the full administrative record. Nevertheless, the Court is not
presently convinced that proceeding immediately to the filing of the administrative record and the
subsequent briefing of motions for summary judgment going to the merits of Plaintiffs’ claims
would be the most expeditious manner of proceeding in this action.
For example, it is evident from the Secretary’s Motion to Dismiss that she has been
laboring under a misapprehension as to the nature and scope of Plaintiffs’ claims, something that
is entirely understandable given the extraordinary breadth of the allegations in the Amended
Complaint. Now that the Court has identified the discrete agency actions that remain at issue in
this action, the Secretary may consider it appropriate to seek dismissal of some or all of
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Plaintiffs’ claims under the Medicare Act based upon a theory that Plaintiffs may have failed to
fully exhaust their administrative remedies or to commence suit within the applicable statute of
limitations, issues which were not raised by the Secretary in her Motion to Dismiss. See Def.’s
Mem. at 15 n.6. The Court emphasizes that it expresses no view on the merits of any such
arguments, as the record before the Court simply does not speak to those questions.20
Nonetheless, it may be that permitting the Secretary to raise such arguments before proceeding in
this action could reduce the scope of the administrative record that would need to be compiled
and narrow the parties’ focus to the key claims at issue.
Alternatively, it may be that the resolution of some of Plaintiffs’ claims may, for all
practical purposes, be dispositive of Plaintiffs’ other claims. For instance, it is clear that
Plaintiffs’ challenges to the outlier payments that they received for fiscal years 1998 through
2006 are intertwined with, and dependent upon, Plaintiffs’ challenges to the Outlier Payment
Regulations and the Fixed Loss Threshold Regulations. As those challenges go, so go Plaintiffs’
challenges to the amount of outlier payments they were provided. For this reason, a staggered
briefing schedule allowing the parties to address the key issues before reaching subsidiary issues
may prove economical.
At this point, the Court considers it appropriate to gain some further clarity as to the
20
Plaintiffs claim that they have exhausted all administrative remedies “by appealing
their underpayment for outlier claims before the Provider Reimbursement Review Board . . . for
each of the [fiscal years] here at issue.” Am. Compl. ¶ 20. While that may mean that Plaintiffs
have exhausted their administrative remedies with respect to the determinations as to the amount
of outlier payments that they would receive for fiscal years 1998 through 2006, that does not ipso
facto mean that they have fully exhausted their administrative remedies to challenge the Outlier
Payment Regulations and the Fixed Loss Threshold Regulations. See, e.g., Cape Cod, 630 F.3d
at 210-11 (“[C]ourts ordinarily refuse to consider objections not submitted in accordance with
agency procedures during the rulemaking process.”).
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precise contours of Plaintiffs’ claims and to permit the parties an opportunity to meet and confer
about how best to proceed in this action. To this end, the Court will require Plaintiffs to file a
“notice of claims” on or before Wednesday, July 27, 2011, identifying, in bullet-point format,
each circumscribed, discrete agency action that Plaintiffs intend to challenge in this action,21
which shall include references to each iteration of the Outlier Payment Regulations and Fixed
Loss Threshold Regulations that Plaintiffs intend to challenge, with citations to the Code of
Federal Regulations or the Federal Register, as appropriate. See, e.g., supra Part III.B n.7.
Thereafter, the parties must promptly meet and confer in a good faith effort to devise an agreed-
upon plan for proceeding in this action in an expeditious yet efficient manner. On or before
Wednesday, August 10, 2011, the parties shall file a joint status report with the Court proposing
a schedule for proceeding in this action. If the parties are unable to agree on a plan for
proceeding in this action, they may set out their positions separately in the joint status report.
Upon reviewing the parties’ submission, the Court will consider whether it requires further
information from the parties in deciding how to proceed.
V. CONCLUSION
For the reasons set forth above, the Secretary’s [17] Motion to Dismiss will be granted-in-
part and denied-in-part. Specifically, (1) the motion will be granted insofar as it seeks dismissal
of (a) Plaintiffs’ claims under the Medicare Act based upon allegations challenging the
Secretary’s “implementation” and “enforcement” of the outlier payment system that are
unconnected to any discrete agency action, and (b) Plaintiffs’ claim under the Mandamus Act;
21
To be clear, Plaintiffs may not expand the scope of their “notice of claims” to identify
agency actions that do not fall within the scope of the Amended Complaint, which the Court has
summarized in this opinion. See supra Part III.
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and (2) the motion will otherwise be denied. On or before Wednesday, July 27, 2011, Plaintiffs
shall file a “notice of claims” with the Court identifying, in bullet-point format, each
circumscribed, discrete agency action that Plaintiffs intend to challenge. Plaintiffs’ submission
shall include references to each iteration of the Outlier Payment Regulations and Fixed Loss
Threshold Regulations that Plaintiffs intend to challenge in this action, with citations to the Code
of Federal Regulations or the Federal Register, as appropriate. On or before Wednesday, August
3, 2011, the Secretary shall serve and file an Answer to the Amended Complaint. On or before
Wednesday, August 10, 2011, the parties shall file a Joint Status Report with the Court proposing
a schedule for proceeding in this action. An appropriate order accompanies this memorandum
opinion.
Date: July 15, 2011
/s/
COLLEEN KOLLAR-KOTELLY
United States District Judge
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