[00:00:02] Speaker 02:
Case number 14-5061, District Hospital Partners LP, doing business as George Washington University at L Appellants, v. Sylvia Matthews Burwell, Secretary of the United States Department of Health and Human Services.

[00:00:16] Speaker 02:
Mr. Roth for the Appellants.

[00:00:17] Speaker 02:
Mr. Liu for the Appellate.

[00:00:19] Speaker 05:
Mr. Roth, good morning.

[00:00:21] Speaker 00:
Good morning.

[00:00:22] Speaker 00:
May it please the Court, Robert Roth, who for Lundy and Bookman for the Appellant Hospitals.

[00:00:27] Speaker 00:
In County of Los Angeles, this court set aside the Secretary's day outlier thresholds because they were not likely to produce projected payments within the statutory range, stating,

[00:00:40] Speaker 00:
where the agency has failed to provide a reason explanation or where the record belies the agency's conclusion, we must undo its actions.

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Appellants asked this court to undo the secretary's cost outlier thresholds for 2004 to 2006 because the secretary determined them after abandoning the approach she herself found not only to be most appropriate, but mandated by the outlier statute to be adopted on an emergency basis as part of the outlier correction rule.

[00:01:10] Speaker 00:
Instead, the Secretary issued the outlier correction rule using the regular notice and comment process, and then in the rulemaking at issue, calculated the thresholds not only without using the approach that she had set a few months earlier, was a statutory mandate, but without ever revealing the approach she believed to be most appropriate.

[00:01:31] Speaker 00:
Remarkably, this occurred only a few short years after this court in County of Los Angeles invalidated the Secretary's Day outlier threshold for the same behavior, that is, failing to account for a trend that the Secretary knew would cause outlier payments to sink below the statutory threshold.

[00:01:50] Speaker 00:
The 2004 to 2006 thresholds must be set aside because the Secretary has failed to provide a reason as to the explanation for her actions, has failed to address the alternative she herself considered mandatory,

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and calculated the threshold using a methodology that not only was facially irrational in disregard of her own data, but as in county of Los Angeles, was not likely to produce the projected payments within the statutorily mandated range.

[00:02:18] Speaker 05:
All right, let me ask you.

[00:02:19] Speaker 05:
She did reduce in 2004 the outlier threshold by 37 percent.

[00:02:30] Speaker 00:
All right.

[00:02:31] Speaker 05:
And then in 05, she reduced it by 26 percent, 06 by 8 percent.

[00:02:37] Speaker 05:
But it's now, as I understand it, at 23,000 something, or for those three years, and a low point of 23,000.

[00:02:47] Speaker 05:
And you, your group, requested 20,000.

[00:02:52] Speaker 05:
in sort of raw numbers.

[00:02:55] Speaker 05:
Am I correct about that?

[00:02:56] Speaker 00:
Well, I think for the years at issue, in light of the changes that were made by the Outlaw Correction Rule, the hospital's comments went down to about $25,000 for 04, then $23,000 and $22,000 in succeeding years, and saying that if this cost methodology had been used, it would have been closer to $20,000, Your Honor.

[00:03:16] Speaker 05:
That's correct.

[00:03:16] Speaker 05:
Okay, and then let me also see if this is correct.

[00:03:21] Speaker 05:
I calculated from the turbochargers being 2% of the hospitals that treat Medicare patients, that that would be 6,300 hospitals that treat Medicare patients.

[00:03:36] Speaker 05:
When you add together the turbochargers, 123, 126, your client's 186, that's only 5%.

[00:03:47] Speaker 05:
of Medicare providers, and I'm trying to figure out if HHS, and this is speculative, if HHS satisfied 95 percent, well even more than that because I don't know if the turbochargers were satisfied or not, but almost 95 percent of the Medicare providers

[00:04:12] Speaker 05:
And you're only two or three thousand dollars apart on the outlier threshold.

[00:04:20] Speaker 05:
It just seems like it is less than a titanic struggle when you realize how huge this program is.

[00:04:29] Speaker 05:
And it seems inevitable to me that HHS would have to make some people unhappy.

[00:04:38] Speaker 00:
Well, a very valid question, Your Honor, and let me address them in this way, that the way that outliers work is a zero-sum amount of money.

[00:04:49] Speaker 00:
And so what happened is that the amount that was diverted to these 123 turbocharging hospitals deprived the other 98 percent, the other approximately 4,000 hospitals of the payments they were entitled to.

[00:05:01] Speaker 00:
In his testimony before... Completely?

[00:05:04] Speaker 05:
What's that?

[00:05:04] Speaker 00:
Well, some entirely and some mostly.

[00:05:07] Speaker 05:
Including your hospitals?

[00:05:10] Speaker 00:
Oh, absolutely, including our hospitals, because what the Secretary found is that there was a raise in the threshold from about 20,000, 21,000 in 2002 to 33,000 in 2003.

[00:05:27] Speaker 00:
And I think for all these years at issue, the numbers should have been in the low 20s, 22, 23, just what Administrator Scully told Congress.

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And what Administrator Scully told Congress and what the Secretary found in the interim final rule was almost the entirety of that increase from 21,000 to 33,000 was because of these turbocharging hospitals.

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They diverted to themselves so much money

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that one hospital got overpaid, according to Administrator Scully's testimony, $60 million in one year, that a chain refunded refused to accept $57 million a month, $750 million over the course of a year.

[00:06:08] Speaker 00:
And that's money that was detracted from every other hospital in the country because the outlier threshold was set so high that some hospitals didn't hit it.

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And even the hospitals that did hit it, they were deprived of the delta that they would have gotten if the threshold had been set accurately.

[00:06:26] Speaker 05:
Right.

[00:06:26] Speaker 05:
And from what I understand, what makes it

[00:06:32] Speaker 05:
top is the cap, the five to six percent cap.

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In other words, if you had unlimited funds, then you could reimburse everybody, but it can only be five to six percent of the DRG reimbursement.

[00:06:46] Speaker 00:
Well, the concern is not that the outliers, that the cap limits the payments, is that the cap has to be set realistically.

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And the Secretary here set a cap that she knew, she absolutely knew, would not hit the minimum 5 percent or the 5.1.

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And it came short by one and a half billion dollars just in 2004 alone.

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And then $3 billion total, Your Honor.

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But the point is that for the hospitals that are involved and the hospitals that protected their appeal rights, this is an enormous big deal because it provides payment for the most sick, for the sickest of the patients.

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Those are the patients who are in the hospital longest, who incur the highest amount of cost.

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And the problem here is, again,

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In the county of LA, this court kind of looked away from the results-oriented approach that the hospitals had requested at that time, not focusing simply on the shortfall, but really focused on the process.

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And the process here was flawed.

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It was fatally flawed because the secretary knew that she couldn't use this inflation factor that she had been using historically without mitigating it by cost-to-charge ratios.

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And in the final rule, what she had said is, you know what?

[00:08:01] Speaker 00:
But we need to exclude the charging factor, the information from the turbocharging hospitals, from those 123 hospitals.

[00:08:11] Speaker 05:
Let me ask you about those hospitals.

[00:08:13] Speaker 05:
Am I right about this?

[00:08:14] Speaker 05:
We don't know who they are.

[00:08:17] Speaker 00:
I think they were disclosed in the information.

[00:08:23] Speaker 05:
Are they all in urban areas?

[00:08:25] Speaker 05:
Are they all trauma hospitals?

[00:08:29] Speaker 05:
Oh, they wouldn't be trauma necessarily, but for Medicare.

[00:08:35] Speaker 05:
big dialysis units.

[00:08:37] Speaker 05:
I know Medicare takes care of dialysis regardless of your age.

[00:08:41] Speaker 05:
Do we have a description of these turbochargers?

[00:08:43] Speaker 00:
We have a description, and what was so amazing about these turbocharging hospitals is that, for example, what Administrator Scully said in his testimony and what was reflected in the record of this case, even what was published in the Federal Register, is that small community hospitals

[00:09:00] Speaker 00:
that historically had had outlier payments in the 3 or 4 percent range were getting payments at 100 percent of their DRG amounts.

[00:09:07] Speaker 00:
So they were getting where they should have had nothing more than 3 or 4 percent.

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And the turbocharging hospitals as a group, as a group, historically if you look before the turbocharger began in 2000,

[00:09:18] Speaker 00:
were getting about 8.9% of their DRG amount in outlier payments.

[00:09:23] Speaker 00:
And once turbocharging went into effect, they got 28% of their DRG amounts and amounted to 24 of all outlier payments across the country.

[00:09:35] Speaker 00:
So 24% of the outlier payments were being diverted to these hospitals, and they weren't necessarily trauma centers.

[00:09:42] Speaker 00:
They were your everyday community hospital who in no way were entitled to pad

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would be expected to have the kind of cases that would lead to outlier payments at that level.

[00:09:53] Speaker 04:
You have relied heavily on the County of Los Angeles as the case, I guess, most analogous to this case.

[00:10:06] Speaker 04:
At the very least, you have several different operations here.

[00:10:11] Speaker 04:
You have 04, you have 05, you have 06.

[00:10:13] Speaker 04:
And things are changing across that time.

[00:10:16] Speaker 04:
I mean, the Secretary is making adjustments.

[00:10:20] Speaker 04:
So are you saying that in each of those years, you consider the explanation to have been inadequate?

[00:10:30] Speaker 04:
Or are you looking at some particular

[00:10:35] Speaker 00:
We're looking at it the way the secretary does, which is all of these years are intertwined.

[00:10:42] Speaker 00:
The outlier payments in particular look back two, three, four years, draw on data from previous times, draw on experience from previous time.

[00:10:50] Speaker 00:
But the problem that was endemic in 2004 that was solved by the secretary in interim final rule was also endemic in 2005 and 2006.

[00:10:59] Speaker 00:
And it's simply this.

[00:11:01] Speaker 04:
So even though there's a change there because she

[00:11:03] Speaker 04:
beginning to use the actual data, in other words, the corrective reports, it seems to me this was kind of a moving target.

[00:11:11] Speaker 04:
I mean, it's different in 2004 than it is in 2006.

[00:11:14] Speaker 04:
And it seems to show that because, in fact, the gap is closing.

[00:11:19] Speaker 00:
Oh, there's no question that the Secretary, on the one side with the inflation factor,

[00:11:25] Speaker 00:
improved her projections by using a more realistic inflation factor.

[00:11:30] Speaker 00:
But the problem here, I have to get technical just for 30 seconds, is that in order for the outlier projection to be realistic, as the Secretary acknowledged in the interim final rule, is that the inflation factor, whatever it is, has to be mitigated by updated cost to charge ratios so that the projections are realistic.

[00:11:48] Speaker 00:
And what happened here is that in 05 and 06, the Secretary did a little better

[00:11:53] Speaker 00:
on the projections of the inflation factor, but entirely ignored any change to the cost to charge ratios.

[00:12:02] Speaker 00:
And what's interesting, Your Honor, and totally inconsistent, is in 2004, in the final rule for 2004, the Secretary recognized this problem, recognized this very problem, and said that there are 50 hospitals that are subject to this thing she called reconciliation.

[00:12:18] Speaker 00:
And so she said, I've got to project different cost to charge ratios for them, because we don't really think it's realistic to use those 50.

[00:12:26] Speaker 00:
We think those 50 are the same as the 123.

[00:12:29] Speaker 00:
She doesn't explain how the 123 in the proposed rule and in the final rule became 50.

[00:12:35] Speaker 00:
But what she said was, we've got to try to calculate something different.

[00:12:39] Speaker 00:
In 2005 and 2006, she abandoned that entirely, made no effort to account for the changes in cost to charge ratios.

[00:12:48] Speaker 04:
But didn't she, in fact, the agency abandoned what you keep referring to as the interim final rule, right?

[00:12:57] Speaker 04:
So, as I understand it, that was something that was proposed that went

[00:13:05] Speaker 00:
Well, it depends on what you mean by abandon.

[00:13:08] Speaker 00:
They certainly abandoned the methodology.

[00:13:11] Speaker 00:
Almost all of the interim final rule showed up in the proposed outlier correction rule, but not the methodology.

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And to the extent that this Court is looking to defer to anything,

[00:13:22] Speaker 00:
under rural Celia, you know, your Honor's decision, or any of the precedent that was mentioned in those of the other cases, what it's supposed to be deferring to is to the agency expertise that was exercised in accordance with the delegation from Congress here in an area of uncertainty in prediction and projections.

[00:13:41] Speaker 00:
The deference that this court owes is most owed to the interim final rule, because that is the unalloyed, the unvarnished position of the agency of agency expertise.

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It was not until it went to OMB and as Administrator Scully testified before Congress that there were some budget analysts who

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question the secretary, budget analyst.

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The difference from the Congress, the delegation from Congress, was not to budget analyst at OMB.

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And so it goes back to HHS.

[00:14:13] Speaker 00:
And when it went back to the secretary, the secretary was free to change her approach.

[00:14:17] Speaker 00:
But at that point, she needed to explain why.

[00:14:20] Speaker 00:
She needed to explain why in what she presented to OMB that went through entire approval of the entire agency.

[00:14:27] Speaker 04:
Well, excuse me for interrupting.

[00:14:29] Speaker 04:
Sure.

[00:14:30] Speaker 04:
The problem here, it seems to me, is that if this rule had been something that they had put out there, and it was a rule, and they'd been changing that, they would have to explain that.

[00:14:44] Speaker 04:
But what you're saying is they have to explain a process

[00:14:49] Speaker 04:
that was going on when they were deliberating about what to do.

[00:14:53] Speaker 04:
And that seems different to me.

[00:14:56] Speaker 00:
Yeah, well, Your Honor, the deliberations were over.

[00:15:00] Speaker 00:
This was signed by the secretary, signed by the administrator of CMS and went to OMB.

[00:15:05] Speaker 00:
It was the final product.

[00:15:06] Speaker 00:
Now clearing through HHS is a monumental task by itself.

[00:15:10] Speaker 00:
It has to clear all of the agencies within HHS.

[00:15:14] Speaker 00:
So this was, until OMB got involved, the Secretary believed this was going to be published as in in the Federal Register.

[00:15:21] Speaker 00:
Now the point is that we're not saying it was binding policy.

[00:15:23] Speaker 00:
We're not saying the Secretary couldn't change her mind.

[00:15:26] Speaker 00:
But what she never explained, even though she hinted at these 123 in the proposed outlier correction rule and in these hospitals in need for reconciliation, is fundamentally why in addressing the comments that came from the industry, how come she didn't account for the turbocharging data, the data from these turbocharging hospitals?

[00:15:46] Speaker 00:
In the interim final rule, she said, we need to exclude it.

[00:15:50] Speaker 00:
We need to exclude it both from the inflation side, and we need to exclude it both from the cost to charge ratio side, because we don't know where the hospital's going to be on the cost to charge ratio side.

[00:16:00] Speaker 00:
And in the 2004, they said, well, we need to do something about it.

[00:16:04] Speaker 00:
But, Your Honor, ultimately they never disclosed this exclusion possibility, number one.

[00:16:11] Speaker 00:
Number two, they never responded to comments that specifically asked what the Secretary was going to do about the turbocharging hospitals.

[00:16:17] Speaker 00:
And number three, they specifically never responded to the very specific proposal

[00:16:22] Speaker 00:
that was presented by the Federation of American Hospitals that said that you need, Secretary, if you're going to include this inflation factor, you're going to need to do something with those cost to charge ratios.

[00:16:35] Speaker 00:
And what we want you to do is project them using a cost inflation factor.

[00:16:41] Speaker 00:
that the secretary herself had incorporated into each of her final rules under the prospective payment system process.

[00:16:51] Speaker 00:
So Your Honor, the problem isn't that it was like a final or binding policy.

[00:16:55] Speaker 00:
The problem is that under the decisions of this case, the decision below turns its back on decades of authority from all three branches of government.

[00:17:11] Speaker 00:
Congress made clear in the APA, in the notice and comment provisions, and in the judicial review provisions that the Secretary has to explain what she's thinking, explain the facts behind it, and explain the conclusions.

[00:17:26] Speaker 00:
For more than two decades, the executive order said, when a document goes, when a proposed rule or final rule goes to OMB for review, once it's finalized, it needs to be disclosed to the public, not concealed as it was here.

[00:17:41] Speaker 00:
And this court has said that there's a presumption in favor of release of information, of disclosure of information.

[00:17:48] Speaker 00:
This document, the IFR, is not privileged.

[00:17:51] Speaker 00:
There's no claim of privilege associated, no attorney-client, not even a deliberative process privilege.

[00:17:58] Speaker 00:
Because by definition, it's not deliberative process because it is the final agency determination.

[00:18:03] Speaker 00:
That's why Executive Order 12866 mandates that it be a public document.

[00:18:08] Speaker 00:
There is nothing deliberative about it.

[00:18:11] Speaker 00:
And Judge Huvel, in her decision, acknowledging that it needed to be a part of the record here, said that it had none of the hallmarks of deliberation.

[00:18:21] Speaker 00:
There was no one asking a question.

[00:18:23] Speaker 00:
There was no exchange.

[00:18:24] Speaker 03:
It was simply the agency saying... Well, it's hard for me to think that there was no exchange because they withdrew it.

[00:18:30] Speaker 03:
So something was happening.

[00:18:32] Speaker 00:
Oh, absolutely, Your Honor.

[00:18:34] Speaker 00:
As Administrator Scully said, they withdrew it after OMB said, you've been wrong.

[00:18:39] Speaker 00:
You, the expert agency, have been wrong in the past, so we think you're wrong now.

[00:18:44] Speaker 00:
This was not where the Secretary voluntarily changed her mind.

[00:18:48] Speaker 00:
Like we have the example of one of the cases where it gets to the Federal Register and the agency pulls it back.

[00:18:53] Speaker 00:
This is not

[00:18:53] Speaker 00:
The agency didn't change its mind.

[00:18:55] Speaker 00:
The agency yielded to budget analysts at OMB.

[00:18:59] Speaker 00:
Those budget analysts do not have the delegated authority from Congress to adopt Medicare policy.

[00:19:06] Speaker 00:
The court should not be deferring

[00:19:09] Speaker 00:
to a tainted policy.

[00:19:12] Speaker 00:
The court should be deferring to what's in the IFR because that is where the agency, unalloyed, said, here's what should be done.

[00:19:19] Speaker 00:
And what should be done is that the turbocharging data needs to be excluded, entirely excluded, because although we can quantify what has happened charge-wise, we do not know where they're going to be cost to charge ratio-wise.

[00:19:33] Speaker 00:
And it will so skew the data

[00:19:35] Speaker 00:
that the Secretary said she would violate the statutory requirement to pay at least 5 percent.

[00:19:40] Speaker 00:
That's what it said.

[00:19:41] Speaker 00:
They abandoned the methodology in the sense that they were forced to react to what they were required by OMB, but this was not the agency's considered opinion.

[00:19:59] Speaker 05:
We'll give you some time and reply.

[00:20:01] Speaker 00:
Okay, thank you.

[00:20:01] Speaker 00:
I'll save four minutes for a bottle.

[00:20:06] Speaker 05:
Mr. Liu.

[00:20:11] Speaker 01:
Good morning, Your Honors, and may it please the Court.

[00:20:13] Speaker 01:
James Liu for Secretary Burwell.

[00:20:17] Speaker 01:
Your Honors, the district court correctly upheld the agency's actions under the arbitrary and capricious standard.

[00:20:23] Speaker 01:
Plaintiffs here are seeking higher Medicare outlier payments for federal fiscal years 2004, 2005, and 2006.

[00:20:30] Speaker 01:
Now, before the beginning of each federal fiscal year, CMS, the Centers for Medicare and Medicaid Services,

[00:20:40] Speaker 01:
prospectively sets a cutoff point called the fixed loss threshold.

[00:20:45] Speaker 01:
And that cutoff point is used during the fiscal year to calculate the amounts of outlier payments.

[00:20:53] Speaker 01:
The fixed loss threshold is set based on projections that CMS makes of Medicare payments for the coming year, which it produces by running historical charge data through the payment rules that will be in place in the coming year.

[00:21:07] Speaker 01:
And the plaintiffs are alleging that the methodology that the Secretary employed in making those projections for these three years were arbitrary and capricious, and that led to the cutoff point being set too high and their payments being too low.

[00:21:20] Speaker 01:
Now, I think it's important to mention that there's been a lot of discussion of the fiscal year 2003 fixed loss threshold and also the June 2003 rule that addressed turbocharging and that I think the plaintiffs would agree did so with a great degree of success.

[00:21:40] Speaker 01:
Neither the fiscal year 2003 threshold nor the June 2003 rule addressing turbocharging is directly at issue in this case.

[00:21:51] Speaker 01:
The plaintiffs are challenging the fixed-loss threshold determinations for fiscal year 2004, 2005, and 2006.

[00:21:57] Speaker 05:
Does HHS have the authority to deny all outlier payment to a specific hospital?

[00:22:08] Speaker 01:
Your Honor, it doesn't appear so.

[00:22:11] Speaker 01:
In the County of Los Angeles, the Court of Appeals, at least the Secretary has interpreted the statute as requiring her to make outlier payments.

[00:22:25] Speaker 01:
Certainly the language of the statute potentially could support a different interpretation, but under the Secretary's current interpretation, she's required to make outlier payments.

[00:22:36] Speaker 01:
If I understand your question correctly, it's whether the Secretary could simply not make any outlier payments at all.

[00:22:42] Speaker 05:
Well, to one of these turbochargers.

[00:22:45] Speaker 05:
I mean, did anything happen to these hospitals that were gouging the...?

[00:22:50] Speaker 01:
Your Honor, I'm not sure what's in the record about the turbochargers, but there have been numerous actions against turbochargers asking hospitals to return money, also civil proceedings, and I believe there's even been criminal proceedings.

[00:23:07] Speaker 01:
So certainly the

[00:23:09] Speaker 01:
agency has taken action against turbocharging, not just in changing, revising the rules in June 2003 to prevent turbocharging, but also going after these violators after the fact.

[00:23:24] Speaker 06:
But there wouldn't be any retroactive adjustment, is that correct?

[00:23:30] Speaker 01:
I believe that there's been some efforts, and I believe some of those efforts have been successful.

[00:23:38] Speaker 01:
Again, I don't think the details are in the record, but some funds have been, I believe, recovered from turbocharging hospitals.

[00:23:51] Speaker 01:
You know, I can't tell you the precise details of those proceedings, though.

[00:23:55] Speaker 05:
Can you describe this?

[00:23:58] Speaker 05:
MedPAR data in the supplementation of the administrative record, what the MedPAR

[00:24:11] Speaker 01:
Yes, Your Honor.

[00:24:13] Speaker 01:
As I mentioned, each year when making the projections of Medicare payments for the forthcoming year, the Secretary employs historical charge data.

[00:24:25] Speaker 01:
So, for instance, going back two years and looking at what hospitals' charges were for that year two years ago.

[00:24:33] Speaker 01:
Now, that charge data is contained within these MedPAR files, which are Medicare Provider Analysis and Review.

[00:24:41] Speaker 01:
That's what MedPAR stands for.

[00:24:43] Speaker 01:
That contains the charge data that the Secretary or CMS uses in making the projections.

[00:24:51] Speaker 05:
All right.

[00:24:52] Speaker 05:
And are they confidential?

[00:24:54] Speaker 05:
How do you treat them?

[00:24:56] Speaker 05:
How does the agency treat them?

[00:24:57] Speaker 01:
Your Honor, they are confidential given that they contain very detailed data about treating specific patients.

[00:25:05] Speaker 01:
And in this case, they were included in the administrative records for the challenge actions and provided to the plaintiffs under a protective order.

[00:25:14] Speaker 05:
Okay.

[00:25:15] Speaker 05:
All right.

[00:25:15] Speaker 05:
Thank you.

[00:25:17] Speaker 01:
Your Honor, this Court has recognized that projections and forecasts are by nature speculative, inexact, and riddled with uncertainty.

[00:25:26] Speaker 01:
And that's especially true for outlier payments, because outlier payments are intended to address cases that are aberrational.

[00:25:35] Speaker 01:
And the Court in the County of Los Angeles discussed this.

[00:25:40] Speaker 01:
At length, so predicting outlier payments requires that the agency predict the most unusual, the most rare cases.

[00:25:50] Speaker 01:
It's not simply the most expensive cases.

[00:25:51] Speaker 01:
It's the cases that diverge in cost.

[00:25:55] Speaker 01:
very far from the average for that particular kind of case.

[00:25:59] Speaker 01:
So a particularly costly disease to treat wouldn't necessarily receive an outlier payment.

[00:26:05] Speaker 01:
It would only be if a particular case involved costs that far exceeded the average for that case.

[00:26:14] Speaker 06:
Could I ask you, the district court relied in part on the fact that the interim final rule was not a final rule as such and that during the comment period, the secretary was unprompted by any comments, either that she should apply what I call the interim final rule methodology

[00:26:41] Speaker 06:
or the concern about these turbochargers.

[00:26:47] Speaker 06:
Is that your recollection of the record?

[00:26:49] Speaker 01:
Your Honor, I believe, yes, I do understand that the district court explained that there were no comments regarding the particular proposal of excluding 123 hospitals.

[00:27:04] Speaker 06:
And you heard counsel for Appellant state that there were such comments.

[00:27:11] Speaker 01:
Your Honor, I think the divergence here would be, first of all, it's important to make clear that what the plaintiffs refer to as the interim final rule, the February 2003 draft, was not submitted for comment.

[00:27:26] Speaker 01:
The February 2003- No, I understand.

[00:27:29] Speaker 06:
But in setting the 2004, 5, and 6,

[00:27:34] Speaker 01:
Yes, in the fiscal year 2004 determination, the plaintiffs are correct that commenters asked the secretary to take into account the fact that there had been turbocharging when making her projections.

[00:27:53] Speaker 01:
However, there was no

[00:27:56] Speaker 01:
or the plaintiffs haven't pointed to any specific comment, specifically proposing that these 123 hospitals be excluded.

[00:28:04] Speaker 01:
Now, the secretary

[00:28:08] Speaker 01:
I think where the plaintiffs go wrong is when the plaintiffs claim that the secretary didn't address these comments at all.

[00:28:16] Speaker 01:
The secretary actually addressed these comments at length, went through various proposals that commenters had submitted, and explained that the option that she was going to use was to employ newer data in calculating

[00:28:33] Speaker 01:
and making her projections.

[00:28:35] Speaker 01:
Specifically, she was going to calculate new cost-to-charge ratios for hospitals to reflect the use of tentative settled cost reports under the new June 2003 rule.

[00:28:47] Speaker 01:
And the district court explained this on page 17 of its opinion, and the plaintiffs haven't addressed that explanation at all.

[00:29:01] Speaker 01:
So it's certainly not the case that the agency did not address the comments or the issue of turbocharging or the changes that had been contained in the June 2003 rule that addressed turbocharging.

[00:29:24] Speaker 01:
And, Your Honor, with respect to the 2003 draft, again, this is an internal draft that was rejected.

[00:29:30] Speaker 01:
The draft discussed four potential rule changes.

[00:29:38] Speaker 01:
And the agency included three of those rule changes in its proposed rule, issued in March 2003.

[00:29:44] Speaker 01:
But it decided against the proposal to change the fixed loss threshold.

[00:29:49] Speaker 01:
And the agency explained in the proposed rule, the March 2005, I'm sorry, the March 2003 proposed rule, that the reason it was proposing not to change the fixed loss threshold was because of extreme uncertainty about the effects of

[00:30:06] Speaker 01:
aggressive hospital charging practices, that is turbocharging, on fiscal year 2003 outlier payments.

[00:30:13] Speaker 01:
And that's at 68 Federal Register 10,426.

[00:30:19] Speaker 01:
So the agency, to the extent that there was any obligation to explain their change in approach, which we believe there was not, the agency did provide an explanation of the course that it was taking.

[00:30:35] Speaker 01:
But again, we don't believe that the agency had an obligation to explain its departure from an internal draft that was rejected, and the plaintiffs haven't provided any support for setting aside an agency action based on views stated in a preliminary draft.

[00:30:55] Speaker 01:
And we have pointed to a number of cases showing that preliminary reviews and interagency deliberations are not relevant in judicial review and that the agency does not have to explain its departure from preliminary reviews.

[00:31:15] Speaker 01:
I'd point to National Association of Home Builders.

[00:31:18] Speaker 01:
The PLMRS narrow-band corporation decision.

[00:31:23] Speaker 01:
This court's decision in San Luis Obispo, Mothers for Peace, pointing out that internal agency deliberations are not a proper subject for judicial review.

[00:31:36] Speaker 06:
That's why I asked you about comments.

[00:31:39] Speaker 06:
Because you have said agencies are supposed to respond to substantive, non-frivolous comments.

[00:31:46] Speaker 01:
Yes, and the agency did that in each of the determinations for fiscal years 2004, 2005, and 2006.

[00:31:56] Speaker 01:
And the district court walked through the agency's responses to those comments.

[00:32:02] Speaker 01:
It's simply not true that the agency didn't address the comments.

[00:32:12] Speaker 01:
Your Honor, the point that I just made sort of goes hand in hand with the proposition that we've also set forth, which is that this draft shouldn't have been included in the record at all, given that records of internal agency deliberations typically aren't considered part of a record for judicial review.

[00:32:33] Speaker 06:
Have we had a case like this, though, where the agency has totally signed off and, as Appellant's counsel suggests,

[00:32:42] Speaker 06:
A man or woman with a green eye shade rejects it?

[00:32:45] Speaker 01:
I think the answer to that would be yes.

[00:32:49] Speaker 01:
We have had a case like this, but it's not a case where the agency totally signed off.

[00:32:54] Speaker 01:
This is not a case where the agency totally signed off.

[00:32:57] Speaker 06:
Well, I gather in submitting a proposal to OMB, the agency is saying, this is what we want.

[00:33:02] Speaker 06:
Please approve it.

[00:33:03] Speaker 06:
And OMB says, for its reasons, policy reasons,

[00:33:10] Speaker 06:
We have problems with it, and so we will not approve it.

[00:33:15] Speaker 01:
No, Your Honor, I don't think that's a fair characterization, because I think... Fair characterization of what?

[00:33:19] Speaker 01:
Of the rulemaking process.

[00:33:21] Speaker 01:
The rulemaking process is continuing until it's over, until the under field MRS narrowband.

[00:33:29] Speaker 06:
Right.

[00:33:30] Speaker 06:
But all I'm getting at is, is there no distinction along the lines Appellant's counsel suggested?

[00:33:40] Speaker 01:
No, I don't think that's, I don't think, if you're asking about what the significance of a signature, I think the case that I point you to would be Pinnacott Utah Copper Corporation where the agency had actually signed this document, sent it on for publication.

[00:33:55] Speaker 01:
It wasn't published.

[00:33:56] Speaker 01:
And a few years down the road, plaintiffs challenge a different rule that departs from that unpublished rule.

[00:34:06] Speaker 01:
And the court finds that it was never a rule and therefore doesn't have to be revised or noticed in comment.

[00:34:15] Speaker 01:
Plaintiffs haven't addressed Kennecott Utah Copper Corporation in any meaningful fashion.

[00:34:26] Speaker 01:
Your Honor, at that point, the agency had not finalized the rule.

[00:34:34] Speaker 01:
It was going through interagency review, and the agency was free to return to the rule and change its mind.

[00:34:40] Speaker 01:
And that's what the agency did.

[00:34:41] Speaker 01:
And the agency explained in the March 2003 proposed rule that that was now not proposing any change to the fiscal year 2003 fixed loss threshold.

[00:34:54] Speaker 01:
I believe my time is up.

[00:34:57] Speaker 01:
Does the panel have any further questions?

[00:34:58] Speaker 01:
Let me ask you.

[00:34:59] Speaker 05:
I didn't want to take your time, but can you address, and I will ask Mr. Roth his interpretation.

[00:35:07] Speaker 05:
It's outside this record, but it's a matter of record.

[00:35:11] Speaker 05:
Is this an ongoing, is this still going on?

[00:35:14] Speaker 05:
Are we going to see for fiscal year seven, eight, nine, and so forth?

[00:35:19] Speaker 05:
The same problem with the turbochargers.

[00:35:24] Speaker 05:
What has happened in the interim with the turbocharging?

[00:35:29] Speaker 01:
Your Honor, I believe the fiscal year 2003 rule has effectively, has been very effective in combating the problem of turbocharging.

[00:35:38] Speaker 01:
So I think that, yeah, and I think the plans would agree with that.

[00:35:43] Speaker 05:
So we're really looking at this three-year period.

[00:35:46] Speaker 01:
I'm sorry?

[00:35:46] Speaker 05:
We're really just looking, I mean, we're looking at this three-year period, but we won't look at it.

[00:35:50] Speaker 05:
We don't expect to be looking at this in the future.

[00:35:55] Speaker 05:
Looking at the turbocharger factor in determining the outlier threshold.

[00:36:04] Speaker 01:
Your Honor, I believe there's other litigation pending and I believe that the amici have or plaintiffs in other litigation challenging other

[00:36:15] Speaker 01:
fiscal years.

[00:36:16] Speaker 01:
I'm not certain exactly what their, you know, how far along the years are, but I think parts of their claims involve questions of whether the agency adequately took into account the effects of turbocharging.

[00:36:34] Speaker 05:
Is that since 2003?

[00:36:39] Speaker 05:
are the fiscal years that they're questioning since 2003 or before?

[00:36:43] Speaker 01:
Yes, they're definitely challenging, in that other litigation, some fiscal years after 2003.

[00:36:49] Speaker 01:
I don't know exactly which years.

[00:36:51] Speaker 01:
I certainly know in one case in which I'm actually counseled, they are challenging fiscal years 2004, 2005, and 2006, which are the years challenged here.

[00:37:01] Speaker 01:
And they're also challenging fiscal year 2007, which is the following year.

[00:37:06] Speaker 01:
But, Your Honor, I think it's important to make a distinction here between, one, the problem of turbocharging, which I believe the plaintiffs would agree was thoroughly addressed by the June 2003 rule, and second would be the problem of how to

[00:37:27] Speaker 01:
address the effects of the June 2003 rule in the projection models?

[00:37:34] Speaker 01:
And I think those are two separate questions, and I think pretty much there's agreement on – there's agreement that the June 2003 rule addressed the problem of turbocharging.

[00:37:45] Speaker 01:
The disputes are about whether the agency should have done more than it did to address

[00:37:53] Speaker 01:
to take into account the effects of the June 2003 rule in making its projections.

[00:37:59] Speaker 01:
And as we've explained, the agency has taken into account in each of the years since 2003 the effects of that June 2003 rule.

[00:38:14] Speaker 05:
All right.

[00:38:18] Speaker 05:
Thank you.

[00:38:18] Speaker 05:
Let's see, Mr. Roth.

[00:38:23] Speaker 05:
Okay, let's see, why don't you take a couple minutes and then if you want to

[00:38:28] Speaker 05:
give your version of present day before, that won't count.

[00:38:32] Speaker 05:
Or you might want to wait until you have – find what you have to say in rebuttal and then give your version of where we are today with respect to it.

[00:38:42] Speaker 00:
Thank you.

[00:38:42] Speaker 00:
I'll try to be quite succinct.

[00:38:43] Speaker 00:
Let me start with that.

[00:38:44] Speaker 00:
Okay.

[00:38:45] Speaker 00:
As the Secretary wrote in her brief, they were unable to identify any related cases.

[00:38:51] Speaker 00:
There is not this issue because of the way the data catches up.

[00:38:55] Speaker 00:
We don't believe this is an issue after 2006.

[00:38:57] Speaker 00:
That's not part of our case, because as you see, the thresholds got better and better and better from the hospital's perspective, and I think the payment levels in 2007 and beyond were basically acceptable.

[00:39:09] Speaker 00:
So I don't think there is, and the Secretary has never identified any related case.

[00:39:13] Speaker 00:
He said that we identified the amici as being kind of somewhat

[00:39:19] Speaker 00:
related to outliers generally, but not focused, as this case is, on this particular issue, which led to the Secretaries.

[00:39:26] Speaker 00:
I'm going to try to

[00:39:28] Speaker 00:
Let me just try to be very succinct here.

[00:39:32] Speaker 00:
Judge Rogers, there was in fact these comments, and they weren't addressed thoroughly.

[00:39:37] Speaker 00:
The Federation of American Hospital in 2004 alone gave eight pages, single-spaced, only on the outlier threshold.

[00:39:45] Speaker 00:
And in doing so, they said there's a mismatch.

[00:39:48] Speaker 00:
There's a mismatch between the charge data and the cost-to-charge ratios.

[00:39:52] Speaker 00:
And what Judge Udell said below is that there weren't any concrete suggestions.

[00:39:56] Speaker 00:
Well, that's just not what the record says.

[00:39:58] Speaker 00:
The record says, here's the suggestion, project cost to charge ratios.

[00:40:02] Speaker 00:
And what's amazing, Your Honor, is that that's what the Secretary did in 2004.

[00:40:05] Speaker 00:
It said, well, we're going to try and do that.

[00:40:08] Speaker 00:
It said attempt to 450 hospitals and then abandon it.

[00:40:11] Speaker 00:
And had, in fact, she done that for the 123 and continued to do that,

[00:40:16] Speaker 00:
This case wouldn't exist.

[00:40:18] Speaker 00:
Second point, again, Judge Rogers, there was no retroactive correction until the rule came in in 2004.

[00:40:25] Speaker 00:
And the rule for 2004 said, if we found that you've overpaid, we're going to get the money back with interest.

[00:40:31] Speaker 00:
That's unprecedented.

[00:40:32] Speaker 00:
It doesn't exist anywhere else in the Medicare program.

[00:40:35] Speaker 00:
where the agency can go back and impose interest for what was made years ago under the Debt Collection Improvement Act, there has to be 30 days notice before a debt can accrue interest.

[00:40:46] Speaker 00:
So it ended turbocharging.

[00:40:48] Speaker 00:
We certainly agree with the government on that.

[00:40:50] Speaker 00:
And having ended turbocharging, the Secretary knew in the interim final rule that turbocharging had ended.

[00:40:56] Speaker 00:
And so what the Secretary said there is because turbocharging has ended, we have to take special account for these 123 hospitals.

[00:41:03] Speaker 00:
And she did that in the Irma final rule.

[00:41:05] Speaker 00:
For some reason, after talking to OMB, the secretary decided she didn't – not only did she have to not account for them, she didn't even have to disclose the fact that she thought that the most appropriate and statutorily required approach was to eliminate the data from these turbocharging hospitals.

[00:41:23] Speaker 00:
Now, this is, as far as we were able to tell, a case of first impression on the question of what happens when a rule goes to OMB.

[00:41:33] Speaker 00:
And the reason, because we couldn't find another instance where the agency concealed it, because what Executive Order 12866 says is, it's in the record, that

[00:41:45] Speaker 00:
The executive order requires the agency to, quote, identify for the public in a complete, clear, and simple manner the substantive changes between the draft submitted to OIRA, which is the agency within OMB that reviews these regulations for review, and the action subsequently announced, and is required to identify, quote, changes in the regulatory action that were made at the suggestion or recommendation of OIRA.

[00:42:13] Speaker 00:
There is no question that the executive branch has for decades now – that goes back to 1993, but they were predecessors – recognized that these kinds of actions have to be disclosed to the public.

[00:42:28] Speaker 00:
And so what the government's response is to say is, well, what Judge Huvel meant was that there wasn't a comment that said,

[00:42:35] Speaker 00:
exclude the 123 turbochargers.

[00:42:38] Speaker 00:
Well, there was a comment that said, and I quote, this is the summary the secretary said, one commenter requested that CMS factor in the calculation of the threshold the fact that certain hospitals have distorted their charges significantly.

[00:42:51] Speaker 00:
Then you have eight single-spaced pages where the Federation of American Hospitals runs item by item identifying and quantifying each aspect of the outlier correction rule, asking the Secretary to take account of each of them, and ends up at $25,000 for 2004, but says, we can't take into account reconciliation.

[00:43:11] Speaker 00:
The Secretary ultimately did try to take into reconciliation and brought it down from 50,000 to 33,000.

[00:43:18] Speaker 00:
But Judge Henderson, the 50,000 that the Secretary proposed, that was in May of 2003.

[00:43:25] Speaker 00:
At the same time, that was just two months after she had submitted her interim final rule, which said that the outlier threshold had to be 20,760.

[00:43:35] Speaker 00:
At the same time that the administrator of CMS said that the threshold had to be around $22,000 or $23,000, and that was corroborated by the actuaries.

[00:43:45] Speaker 00:
So what we think happened here is that the Secretary came up with some kind of make-weight or pretend

[00:43:51] Speaker 00:
outlier threshold, and then congratulates itself in the final rule for coming down so far.

[00:43:56] Speaker 00:
And the government says in thoroughly addressing these comments, those thoroughly addressing amounted to one paragraph that said, give us credit.

[00:44:03] Speaker 00:
Look how much we've taken down the threshold.

[00:44:05] Speaker 00:
Well, the problem isn't how much the threshold went down.

[00:44:08] Speaker 00:
It's the fact that it didn't go down sufficiently.

[00:44:11] Speaker 05:
Well, if it was set artificially high to begin with, then the fact that it went down is

[00:44:16] Speaker 00:
I think that's our point, Your Honor, is that we took county of L.A.

[00:44:20] Speaker 00:
seriously.

[00:44:21] Speaker 00:
We didn't take a quantitative approach here.

[00:44:24] Speaker 00:
What we did is we took a qualitative and methodological approach here.

[00:44:28] Speaker 00:
The Secretary knew that the turbocharging data had to be eliminated.

[00:44:31] Speaker 00:
It skewed the inflation data and it also skewed the cost of charge ratio data.

[00:44:36] Speaker 00:
And so when the interim final rule took it out, put the threshold in the low 20s, the administrator said it should be the low 20s.

[00:44:42] Speaker 00:
It turns out it should have been in the low 20s.

[00:44:44] Speaker 00:
That's where the comments were in the low 20s.

[00:44:47] Speaker 00:
Everything was in line here except the secretary's own rules and in concealing the IFR, it actually did the one thing that this court said decades ago that shouldn't happen

[00:44:58] Speaker 00:
in the notice and comment process, and that is that it shouldn't be turned into some kind of quote-unquote charade, that the Secretary should in good faith simply reveal to the regulated entities what she was thinking.

[00:45:14] Speaker 00:
And having done that, it then gives the opportunity for there to be meaningful comment.

[00:45:19] Speaker 00:
The Keneci case, which the Secretary says we didn't address – well, of course we addressed it – the question came up was that was a comment question, a question about commenting on some previous rule that was taken away.

[00:45:31] Speaker 00:
It did not have anything to do, at least from our perspective, with a situation where the deferential power of the Secretary was invested in a document

[00:45:41] Speaker 00:
that the Secretary later refused to reveal, actively conceal, and then didn't address causing a procedural irregularity in this final rule and the outlier thresholds for all three years.

[00:45:55] Speaker 05:
Can I just ask you briefly, what do you think the purpose of submitting this to OMB is?

[00:46:03] Speaker 05:
Just your idea of it.

[00:46:07] Speaker 05:
What is OMB empowered to do once it gets to IFR?

[00:46:13] Speaker 00:
OMB is empowered to do, I think, precisely what it did.

[00:46:15] Speaker 00:
It's empowered to say, you know, we're going to look at what you did, we're going to be the eyes and ears, we're looking at the government totally, we want to kind of check what you've done.

[00:46:24] Speaker 00:
We're not here questioning the role of OMB.

[00:46:30] Speaker 00:
The fault here with us, from our perspective, is the Secretary.

[00:46:33] Speaker 00:
The Secretary could have adopted the OMB budget analyst position as her own, but simply needed to explain why it was okay to include turbocharging hospital data in the inflation figure

[00:46:46] Speaker 00:
but not make any mitigating change to the cost of charge ratios.

[00:46:49] Speaker 00:
Had the secretary done that?

[00:46:51] Speaker 00:
In other words, the secretary could have done one of two things.

[00:46:54] Speaker 00:
Either eliminated the data altogether, or included the data from the turbocharging hospitals for purposes of inflation,

[00:47:01] Speaker 00:
and also include mitigating cost-to-charge ratios, but the Secretary did the one thing that she couldn't do, which is include the data for purposes of inflation, the charges, inflating the charges, but do nothing on the cost-to-charge ratio side.

[00:47:16] Speaker 00:
And Judge Udell was wrong, was flatly wrong when she said that the hospitals didn't address this, didn't comment on it, and didn't propose an alternative.

[00:47:24] Speaker 00:
It proposed an alternative, but had it been given the secretary's alternative, I think it would endorse the secretary's alternative and saying that one or the other was necessary, but what the secretary done would have led, the secretary knew would have led to an underpayment under the statutory floor.

[00:47:42] Speaker 05:
Okay.

[00:47:43] Speaker 00:
All right.

[00:47:44] Speaker 00:
Thank you.

[00:47:44] Speaker 00:
Okay.

[00:47:44] Speaker 00:
Thank you very much.