[00:00:02] Speaker 03:
Case number 16-5129, Banner Health and All Others, Appellants v. Thomas E. Price, Secretary, U.S.

[00:00:11] Speaker 03:
Department of Health and Human Services.

[00:00:13] Speaker 03:
Mr. Collins for the appellants, Mr. Schultz for the appellate.

[00:00:18] Speaker 03:
Good morning.

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

[00:00:22] Speaker 00:
My name is Ben Collins, I'm Spire Pat Boggs, and with me today is my partner, Stephen Nash, on behalf of the Appellant Hospitals.

[00:00:29] Speaker 00:
Congress created the outlier program to provide hospitals both the means and the incentive to treat extremely high-cost cases.

[00:00:39] Speaker 00:
And it created a bit of a bargain, where hospitals would take what amounts to a 5-6% haircut on all of their regular case payments

[00:00:47] Speaker 00:
to be fund what amounts to a pool for outlier payments.

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And the secretary sets a threshold governing access to that fund.

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And that threshold has been established in prior decisions of this court.

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It's supposed to be set at a level likely to pay out total case payments in the amount offset by the secretary.

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Compliant hospitals have lived up to their end of that bargain, each year paying into the fund.

[00:01:14] Speaker 00:
The secretary, unfortunately, has not.

[00:01:16] Speaker 00:
Instead, has set thresholds that have underpaid compliant hospitals in the billions of dollars in the years at issue in this case.

[00:01:26] Speaker 00:
Despite warnings, the secretary unreasonably set thresholds

[00:01:31] Speaker 04:
Now, you say warnings unreasonably.

[00:01:33] Speaker 04:
No one knew about turbocharging until 2003, and it was a Wall Street analyst who came up with it.

[00:01:42] Speaker 04:
Now, I think unless you have some claim that HHS was sitting on information that the public didn't have, how can you say they were unreasonable in detecting that which no one else detected except a Wall Street analyst?

[00:01:58] Speaker 00:
Well, Your Honor, when I say they're early warnings, I'm talking about the comments on the initial regulations which are addressed in the briefs.

[00:02:05] Speaker 00:
And the agency discounted those comments, addressed them, but discounted them and said, we do not believe charges and costs.

[00:02:13] Speaker 00:
There will be excessive charge inflations.

[00:02:15] Speaker 04:
And they were wrong about that.

[00:02:16] Speaker 04:
But the issue is, should they have known about turbocharging, right?

[00:02:21] Speaker 00:
Correct.

[00:02:22] Speaker 04:
Well, we believe- Well, what's your basis for arguing that they should have known about turbocharging before 2003?

[00:02:27] Speaker 00:
Our argument is not premised that they had to know about turbocharging, but our argument is that they should have inquired as to why the thresholds were repeatedly being set at higher and higher levels, hyperinflated, and failing to contain what were mushrooming overpayments.

[00:02:46] Speaker 00:
So it's their modeling assumptions

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We're not playing out in the real results.

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And our argument based on the authority we've cited is that they should have inquired and had they inquired, they may have uncovered the turbocharging problem much sooner.

[00:03:02] Speaker 00:
But the problem is the agency did not do any kind of inquiry and just plowed forward.

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And these projections of the unlawful claims, as I've said, led the secretary to escalate the threshold by extreme amounts.

[00:03:17] Speaker 04:
By the way, do you make any allegation that they were sitting on knowledge, that they had access to knowledge that the public didn't?

[00:03:23] Speaker 00:
Well, one bit of knowledge they did have access to was which hospitals had defaulted to the statewide average.

[00:03:30] Speaker 00:
That's one bit.

[00:03:31] Speaker 00:
But we're not alleging, and the record doesn't show, that the agency had specific knowledge of turbocharging prior to 2003.

[00:03:41] Speaker 00:
These thresholds, of course, did very little to block the payments to the turbochargers, but critically, they blocked claims for the truly high-cost cases.

[00:03:51] Speaker 00:
And the Secretary's failure was especially stark starting in 2003,

[00:03:57] Speaker 00:
when the agency, after it acknowledged the problem, but did nothing to address the underpayments, respectively, for the hospitals, and kept the threshold artificially high that year.

[00:04:09] Speaker 02:
So what's your response to the government's argument that even if there would have been adjustments made in light of turbocharging, that that would have been inured to the non-offending hospital's detriment rather than to their benefit?

[00:04:25] Speaker 00:
Well, their standing argument is we believe that in the early years, if the secretary made an inquiry and made adjustments, the adjustments would have been to exclude payments to turbochargers in some fashion.

[00:04:42] Speaker 00:
And we're not arguing that the secretary to amend the regulations any sooner.

[00:04:45] Speaker 00:
There are other means that the secretary could accomplish that same goal and still calibrate a threshold that's based on non-turbocharged payments.

[00:04:54] Speaker 00:
But then, starting in mid-2003, if the secretary had properly adjusted the turbocharged data and going forward had made the adjustments that we believe were necessary, then

[00:05:06] Speaker 00:
the benefit would have been heard to the hospitals in the form of lower thresholds.

[00:05:10] Speaker 02:
In other words, your response basically is that, look, it might be true that it would have been heard to our detriment if you presuppose that payments to turbocharging hospitals still continue at the same pace, but there's no reason to assume that, because once you find out that turbocharging is happening, then presumably you'd do something to the turbocharging hospitals.

[00:05:30] Speaker 00:
That's correct, Your Honor.

[00:05:36] Speaker 00:
In essence here, the bargain that Congress intended became a system where the compliant hospitals paid for the turbocharger's actions even after turbocharging stopped.

[00:05:45] Speaker 00:
I'll focus for a moment on two clauses of the statute.

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of 1395-WWD5A, the subsection of the Inpatient Prospective Payment Statute of Governance, clause three directs that an outlier payment shall approximate the marginal cost of care beyond the threshold.

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And clause four states that total payments made under the subparagraph shall be five to six percent of total projected regular case payments, also known as DRG payments.

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In County of Los Angeles, this court provided guidance as to both of those clauses, that the third clause employs mandatory language rather than a discretionary guideline, and that the fourth clause means the agency must set a threshold, as enunciated by Judge Wald, at a level that is likely to produce total outlier payments in the 5% to 6% statutory range.

[00:06:41] Speaker 06:
And with the statute in mind- Speaking for the court.

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judge wall speaking for the court.

[00:06:48] Speaker 06:
Well, not just a concurring opinion.

[00:06:51] Speaker 00:
No, thank you, your honor.

[00:06:53] Speaker 00:
Speaking for the court.

[00:06:57] Speaker 06:
So as I understand your statutory argument, it's that, um, even these are my words, not yours, even

[00:07:08] Speaker 06:
deferring to the agency's expertise in light of the complexity of the statute, statutory scheme, necessarily the agency was under a duty to, at least once it was aware of the turbocharging, to eliminate

[00:07:37] Speaker 06:
that corrupted information from the base on which it was going to make these other predictions and then ultimately payments.

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In other words, the agency had no, the secretary had no choice.

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Congress clearly didn't intend for the agency to make its projections, much less its payments, on the basis of corrupted data.

[00:08:04] Speaker 04:
And that's our argument, Your Honor, and it's not merely that it was corrupted, but the data was... Is that your argument globally for all the years or just for 2004?

[00:08:15] Speaker 00:
That is our argument primarily for 2003, but it carries forward a little bit into the later years as well.

[00:08:22] Speaker 00:
It does not... That's not our argument we're pressing with respect to the years prior to mid-2003, the rule-makings prior to mid-2003.

[00:08:32] Speaker 06:
Why do you resist the phrase corrupted data?

[00:08:36] Speaker 00:
I don't, that's a good phrase for it, polluted or corrupted data.

[00:08:42] Speaker 00:
And what fundamentally are the reason why the agency should not have counted that corrupted data going forward is because it didn't meet the basic definition of an outlier payment under the statute, which was under clause three, where the payment approximates the marginal cost of care above the threshold.

[00:09:03] Speaker 00:
turbocharge claim is wildly in excess of the marginal cost of care.

[00:09:07] Speaker 02:
So you could, so turbocharge is one example of a claim that is going to result in a discrepancy between the 5.1% projection and the actual total of outlier payments that come out.

[00:09:17] Speaker 02:
But there's all kinds of other things that could result in discrepancy too, right?

[00:09:20] Speaker 02:
And so there were, after all, it's based on projections.

[00:09:24] Speaker 02:
They're forward-looking projections.

[00:09:25] Speaker 02:
And we already know from county of Los Angeles that it's not real-time.

[00:09:30] Speaker 02:
you know, a cruel accounting, I'm sorry, cash accounting, where you have to kind of update on an hourly basis every time you get a new data that tells you that some projection you made might have been off.

[00:09:39] Speaker 02:
So if that's true with respect to all the other things that could become apparent, that let the agency know and the industry know that the initial projections might have been off,

[00:09:52] Speaker 02:
what's different about turbocharging that required the agency to make adjustments midstream in a way that it wouldn't have had to under County of Los Angeles with respect to all kinds of other things that might come up.

[00:10:03] Speaker 00:
Well, certainly, Your Honor, and we agree with you, the approximate in that clause of the statute suggests the agency did not happen to be exactly the same as cost.

[00:10:14] Speaker 00:
It did not require clairvoyance or absolute perfection, but the Court doesn't have to draw the line here between what is improper and what's proper because the agency had already concluded that the turbocharged payments crossed the line.

[00:10:27] Speaker 06:
No, but I think Judge Srinivasan is focusing on the fact that many things may not be perfect.

[00:10:39] Speaker 06:
And why was the agency required in 2003 to make this mid-year adjustment?

[00:10:49] Speaker 06:
And I'll just add, particularly when the agency offered an explanation that in its

[00:10:54] Speaker 06:
opinion making that mid-year adjustment as your client suggests would have created its own problems and the agency was convinced that the result in terms of its threshold would be much the same.

[00:11:17] Speaker 00:
Well, the agency said it would be a problem to adjust it upwards slightly.

[00:11:21] Speaker 00:
And given the balance of the year, it didn't think it was worth settling upsetting expectations of hospitals.

[00:11:28] Speaker 00:
But the key difference here is, number one, the secretary has not construed the statute that it was proper to project the turbocharged payments.

[00:11:37] Speaker 00:
There is not a construction in the record by the agency.

[00:11:42] Speaker 00:
There is this construction in council's briefs, but that's not something that the court has to report.

[00:11:46] Speaker 04:
But doesn't the County of Los Angeles actually forbid HHS from making mid-year corrections?

[00:11:51] Speaker 04:
I thought that was the whole gist of it, was to say we have this complex statutory scheme, and the basis of it is perspective.

[00:12:00] Speaker 04:
payments and obviously it didn't deal with the facts of this case, but the language is pretty strong that it's not going to allow for mid-year course corrections.

[00:12:10] Speaker 04:
How do you get around that?

[00:12:11] Speaker 00:
That language in the County of L.A.

[00:12:13] Speaker 00:
addresses the circumstance of a retrospective correction after the end of the year or alternatively making

[00:12:21] Speaker 00:
as Judge Srinivasan suggested, some kind of real-time course corrections throughout the year if you had the accounting system and it had to be precise.

[00:12:30] Speaker 00:
That, as County of Los Angeles said, the agency doesn't have to accept the agency's arguments that didn't need to make that kind of a change.

[00:12:37] Speaker 00:
But here in mid-2003, it's perspective determination.

[00:12:40] Speaker 04:
I think you're reading County of Los Angeles a little too narrowly.

[00:12:43] Speaker 04:
As I read it, it turns on the idea that it's supposed to be perspective and that the HHS duty is prior to the year to set the mark and no mid-course corrections.

[00:12:58] Speaker 00:
And Your Honor, here the Secretary stated it had the authority to make a mid-year correction.

[00:13:06] Speaker 00:
So I don't think any party disputes that the agency had that authority to make the mid-year correction.

[00:13:12] Speaker 04:
The question is whether... The nature of the correction.

[00:13:15] Speaker 00:
Pardon me?

[00:13:16] Speaker 04:
You're just quarreling with the type of correction that they made.

[00:13:19] Speaker 00:
a mid-year, yes, a mid-year correction as opposed to the County of Los Angeles scenario paints a little bit of a different burden for the secretary if after they had a true up total outlier payments.

[00:13:31] Speaker 00:
Arguments and claims don't depend on a true up.

[00:13:33] Speaker 00:
What they depend on is when the agency knows that its threshold is, and when the record shows that the agency's threshold, respectively, is not going to pay out what are valid outlier payments under the statute,

[00:13:47] Speaker 02:
it has the authority to, and it needs to make an adjustment in order to avoid... So the way you just phrase it, it makes it sound like the reason why the secretary, the reason that the secretary was required to make a mid-course adjustment in 03 and it wouldn't be required to do it in other situations is because the statute was being violated.

[00:14:08] Speaker 02:
So because under your reading of the statute,

[00:14:12] Speaker 02:
making outlier payments in a time of known turbocharging results in a statutory violation.

[00:14:22] Speaker 02:
In other words, the statutory argument completely disposes of the Secretary's discretion.

[00:14:31] Speaker 02:
Because if you don't think there's a statutory violation, then the secretary's discretion not to make a mid-course correction looks the same as any time in which the secretary in the middle of the year realizes that projections are off.

[00:14:45] Speaker 02:
Maybe they're not off in a way that violates the statute, but the projections are off, but I know I don't need to make a correction.

[00:14:51] Speaker 00:
You see what I'm saying?

[00:14:52] Speaker 00:
I do see what you're saying, Your Honor, and we definitely argue and

[00:14:56] Speaker 00:
and contend that there is a statutory violation occurred in mid-2003.

[00:15:01] Speaker 02:
We'd also... But I'm just wondering, is there something, suppose, I know you have that argument, I'm not telling you that I disagree with it, but suppose I do, just by, just assume that I do, for arguments purposes, is there something independent then, left to your argument that there needed to be a mid-course correction that would distinguish the turbocharger situation from any situation in which the Secretary realizes

[00:15:23] Speaker 02:
there's a problem and the projections are off and we're going to come in either over or under.

[00:15:28] Speaker 00:
What really distinguishes the turbochar situation, the agencies had record data demonstrated that there was a manifest problem with the projection.

[00:15:39] Speaker 02:
But that could happen for any reason, so I assume in the middle of the year they could always look at the data and think, oh boy,

[00:15:47] Speaker 02:
we're off, it could be some unforeseen industry trend, it could be something that should have been foreseen but wasn't.

[00:15:52] Speaker 02:
So that could happen any time, right?

[00:15:56] Speaker 00:
Yes, Your Honor.

[00:15:57] Speaker 00:
And the fundamental difference here was the agency did engage in a rulemaking.

[00:16:01] Speaker 00:
So we're not reviewing, we're not challenging a non-rulemaking scenario, which is what County of Los Angeles implicates.

[00:16:10] Speaker 00:
This is actually where they did engage in a rulemaking, and that rulemaking must satisfy the APA.

[00:16:16] Speaker 00:
in all respects, consistent with the statute, as well as not the arbitrary and capricious.

[00:16:21] Speaker 00:
So once they engaged in that rulemaking, they needed to comply with all of those obligations.

[00:16:29] Speaker 00:
And they didn't.

[00:16:30] Speaker 00:
Because the statute doesn't authorize these unlawful turbocharged claims, wildly in excess of the cost of care.

[00:16:38] Speaker 00:
The agencies consistently acknowledge that.

[00:16:40] Speaker 02:
both in the ruling in the rulemaking you're talking about is the final rulemaking for not the interim one the one that was withdrawn you're talking about the final yes your honor and so with respect to that one I'm still not following because with that final rulemaking for 03 suppose that you had a situation in which there wasn't turbocharging but in the course of the rulemaking in another year it becomes apparent that the projections are just off that there was some unforeseen

[00:17:10] Speaker 02:
occurrence that caused the projections just to be off.

[00:17:13] Speaker 02:
And everybody knows that and everybody agrees with it.

[00:17:16] Speaker 02:
It seems like the agency would still have the discretion to say, all right, it turns out they were off.

[00:17:22] Speaker 02:
We're just not going to do anything about it.

[00:17:24] Speaker 02:
For 03, we're going to, looking forward, we're going to try to come up with better projections to take into account whatever contingency led to this problem.

[00:17:31] Speaker 02:
But for purposes of 03, we're not going to do anything about it.

[00:17:34] Speaker 02:
That seems like it would be fine, unless there's something distinct about turbocharging, and the only distinction about turbocharging that I've seen, which is not to say it's a minimal one, but is your allegation that that resulted in a statutory violation?

[00:17:50] Speaker 00:
Yes, Your Honor.

[00:17:52] Speaker 00:
this was a rulemaking where the agency changed its regulations, it identified a specific problem, it quantified that problem, and then it effectively did very little to nothing to address the underpayments that were caused by that problem.

[00:18:08] Speaker 00:
And so the difference, I think, between that and another scenario where the threshold might be slightly off is

[00:18:15] Speaker 00:
It depends on whether the Secretary is engaged in the midst of a rulemaking and what the implications are of that.

[00:18:22] Speaker 00:
And here, when the Secretary was projecting what its threshold would be for the balance of 2003, it included what were unlawful turbocharged claims, claims that were not reasonable to count under the statute.

[00:18:36] Speaker 00:
And the Secretary also failed to tie the decision not to lower the threshold to the record facts.

[00:18:42] Speaker 00:
I mean, fundamentally, with respect to the turbochargers and that data, as in the 2004 rulemaking, they're nowhere to be found in the final rule.

[00:18:52] Speaker 00:
But also...

[00:18:53] Speaker 04:
the authority for excluding unlawful payments?

[00:18:55] Speaker 04:
I mean, the language of the statute talks about total payments.

[00:18:58] Speaker 04:
It doesn't make this distinction between lawful and unlawful payments.

[00:19:02] Speaker 04:
I recognize the argument has a certain common sense quality to it, but is there something in the statute that requires that distinction?

[00:19:11] Speaker 00:
Well, the statute should be read in context with the other paragraphs, which the provision that talks about total payment says under this subparagraph.

[00:19:21] Speaker 00:
So that's D5A.

[00:19:22] Speaker 00:
What payments are made under that subparagraph, and how are they defined?

[00:19:26] Speaker 00:
And subparagraph three defines it shall pay approximate marginal cost of care beyond the threshold.

[00:19:33] Speaker 00:
That does not satisfy the basic test of the statute as to what an outlier payment is.

[00:19:40] Speaker 00:
And the secretary, in the rulemaking, acknowledged they don't.

[00:19:44] Speaker 00:
In its briefs in this case, acknowledged they don't.

[00:19:47] Speaker 00:
And in the briefs that submitted in the Boca Raton case, acknowledged they don't.

[00:19:50] Speaker 00:
So the agency has never taken a position that these turbocharged claims somehow met the definition of an outlier payment, yet it still paid them, apparently.

[00:20:00] Speaker 00:
The record also,

[00:20:02] Speaker 00:
The record reflects savings of up to $500 million related to the largest hospital chain that had caused the turbocharging problem to be exposed in the first place.

[00:20:14] Speaker 00:
The secretary testified about that in March, and that was certainly a fact the secretary was aware of.

[00:20:19] Speaker 00:
I'm sorry, the CMS administrator testified about that in March and should have been aware of that fact.

[00:20:26] Speaker 00:
when they're deliberating in June.

[00:20:28] Speaker 06:
So let me ask you.

[00:20:30] Speaker 06:
I mean, the Secretary has other means of, and I gather has, made collections from those turbochargers.

[00:20:42] Speaker 06:
But when you have a system that has a two-year lag, why wouldn't it be reasonable for the Secretary to say,

[00:20:55] Speaker 06:
in mid 2003 exactly what the secretary said and then look to 2004 or even 2005 and 2006 in the sense that

[00:21:12] Speaker 06:
what I'm describing as the corrupted data would arguably work its way out of the system because it would no longer be.

[00:21:21] Speaker 06:
Now your argument is yes, but it's there originally and it has these reverberating effects.

[00:21:31] Speaker 06:
So to the extent Congress talks about approximate and there is some discretion here,

[00:21:39] Speaker 06:
what would this court be telling the secretary to adopt your position?

[00:21:45] Speaker 00:
It would be telling the secretary that when it has identified payments that are neither reasonable nor consistent with the statute engaged in rulemaking or to identify those payments, it needs to address them in some reasonable fashion in the rulemaking itself and can't merely count them as if they're proper, which is what happened in this case.

[00:22:07] Speaker 06:
So it has to

[00:22:09] Speaker 06:
go back to square one as it were in terms of determining the threshold for 2003 and then adjust the payments in the latter half of the year.

[00:22:25] Speaker 00:
The secretary had a duty to address them in a reasonable fashion, consistently with the statute, which could have included as of when the secretary had quantified and knew about these payments, from that point forward, they should all be excluded.

[00:22:41] Speaker 06:
So let me just understand something about this scheme from the hospital's perspective.

[00:22:49] Speaker 06:
If one of your clients should have received an outlier payment

[00:22:54] Speaker 06:
You give me a number.

[00:22:56] Speaker 06:
And it didn't.

[00:22:58] Speaker 06:
While the secretary can recover from the turbochargers, what's the mechanism by which your client can recover the amount of the underpayment?

[00:23:11] Speaker 00:
It's through the provider appeal rights statute, which allows hospitals to challenge their total program reimbursement for any given year.

[00:23:20] Speaker 06:
So as I understand it, the

[00:23:25] Speaker 06:
That process has a limited amount of discretion at that level.

[00:23:32] Speaker 06:
In other words, if the Secretary has said, whoever makes these decisions, I'm not going to make an adjustment in 2003 for the latter half for the following four reasons.

[00:23:46] Speaker 06:
the people in the appeals process don't have the authority to overrule that decision, do they?

[00:23:52] Speaker 00:
No, they don't.

[00:23:53] Speaker 00:
That's absolutely correct.

[00:23:54] Speaker 00:
I mean, the threshold itself dictates how the payments will be made throughout that governing period.

[00:24:01] Speaker 06:
So what I want to be clear about, in effect, and I may be wrong about this, and I hope the department corrects me on this if I am, there is no way for the hospital

[00:24:16] Speaker 06:
that receives less than it should have in an outlier payment to recover that difference other than through a rulemaking or the secretary actually making a decision to adjust the threshold?

[00:24:37] Speaker 00:
That's correct, Your Honor.

[00:24:38] Speaker 00:
The threshold would need to be lowered in order to rectify the underpayment for the hospitals that didn't turbocharge.

[00:24:45] Speaker 06:
So part of what I read the secretary telling me is that complicated scheme projections, Congress has talked about, approximate, you have to defer to our discretion here, given this two-year lag.

[00:25:04] Speaker 06:
And it may be that hospitals have an injury, but there's no remedy.

[00:25:11] Speaker 06:
In other words, your client can never recover that

[00:25:16] Speaker 06:
under payment amount.

[00:25:18] Speaker 00:
And the secretary's position is they don't have to change the threshold at all.

[00:25:22] Speaker 00:
We believe that they do.

[00:25:24] Speaker 00:
And of course, if it is changed, if they are required to recalibrate the threshold without the turbocharged payments, our clients would receive some relief.

[00:25:33] Speaker 00:
But under the secretary's reading of the statute and the arguments made in the case, the compliant hospitals will be left with no remedy if the secretary's position is affirmed.

[00:25:45] Speaker 00:
and and

[00:25:55] Speaker 00:
Let me just address the 2004 threshold now that this court remanded in the district hospital partners case.

[00:26:04] Speaker 00:
The secretary on its remand was tasked with explaining what appeared to be a manifest discrepancy in its reasoning, which was there were 123 turbochargers.

[00:26:13] Speaker 00:
At one point in time, the secretary made adjustments for only 50.

[00:26:17] Speaker 00:
And so the secretary had the opportunity to explain either that the 123 had disappeared somehow, the rest of the turbochargers were gone, or that somehow it had applied some kind of appropriate adjustment to all of the turbochargers so that that wasn't going to be a problem for it setting the threshold.

[00:26:34] Speaker 00:
And before I go into some detail there, I just

[00:26:39] Speaker 00:
I think here this is a case where the proof is in the eating of the pudding, because the Secretary raised this threshold by nearly 60% from 2002 to 2003 due almost entirely to turbocharging, an 11, almost $12,000 increase, and then only dropped it by 7% after turbocharging had been stopped.

[00:27:02] Speaker 00:
So now let's look at the Secretary's explanation.

[00:27:09] Speaker 00:
The secretary's explanation glosses over the fact that the record data contained data from many more turbochargers.

[00:27:15] Speaker 00:
And in essence, what the Secretary did was ask far too – it redefined who would be a turbocharger.

[00:27:23] Speaker 00:
It now states, with additional information that it didn't provide in the original rulemaking, that it determined them based on these two reconciliation criteria.

[00:27:34] Speaker 00:
Well, the Secretary knew that those criteria would not address all of the turbocharged data.

[00:27:40] Speaker 00:
And the threshold that resulted clearly reflects that.

[00:27:45] Speaker 00:
And the secretary's explanation that it had calculated more recent cost-to-charge ratios for all hospitals from the year 2000 should have mollified the situation.

[00:28:00] Speaker 00:
Well, it didn't for the turbochargers.

[00:28:01] Speaker 00:
It was adequate, perhaps, for the average compliant hospital, but for the turbochargers,

[00:28:08] Speaker 00:
That 2000-era charge ratio was going to be multiplied against charges that had been turbocharged by another two years in its data.

[00:28:17] Speaker 00:
So on its face, it was inactive.

[00:28:20] Speaker 02:
So I'm a little confused, because it seems like there's two different arguments going on here, both of which maybe lead to the same conclusion.

[00:28:26] Speaker 02:
But one of them has to do with why not apply the same methodology with respect to the other 73 of the 123 as the Secretary applied to the first 50.

[00:28:35] Speaker 02:
So there's that argument, which I understand, and that was part of the district hospital remand, and you have an argument that, well, the same reasons that you adjust the CCR for the 50 should have applied to the other 73 also.

[00:28:48] Speaker 02:
But there's another argument I think which is broader, which is that

[00:28:51] Speaker 02:
Why include turbocharged inflation in the projections at all?

[00:28:59] Speaker 02:
Period.

[00:29:00] Speaker 02:
Not anything having to do with the 50 versus the 123, but just period.

[00:29:04] Speaker 02:
Why include turbocharged inflation in the projections at all, given that a new rule was coming into force that was supposed to deal with turbocharged?

[00:29:13] Speaker 02:
Am I right that there's two different?

[00:29:14] Speaker 00:
You're absolutely right, Your Honor.

[00:29:15] Speaker 00:
And I was addressing the first argument, which is you cannot, it was irrational to apply 2000-era charge ratios to the rest of the turbochargers because it would result in projections of continued turbocharging when there's no expectation that that's going to happen.

[00:29:32] Speaker 00:
On the second point, the charge inflation factor, it's much of the same.

[00:29:37] Speaker 00:
that the turbocharged data was going to distort everyone's average charge inflation.

[00:29:43] Speaker 00:
And the Secretary of State, it had no strong reason.

[00:29:46] Speaker 00:
I don't know if maybe it had a medium reason or a mild reason to adjust it, but it said it has no strong reason without any analysis.

[00:29:52] Speaker 00:
But of course it did, because turbocharging, the turbocharged data was irrelevant at this point.

[00:29:59] Speaker 00:
It was unlawful, and it had stopped.

[00:30:02] Speaker 00:
And to the extent that there were any residual turbocharging in the data that the secretary knew, that would be addressed through reconciliation process.

[00:30:11] Speaker 02:
So let me ask this question about reconciliation.

[00:30:13] Speaker 02:
So it seems to me that you make an argument about the irrationality of presupposing turbocharging going forward when turbocharging should have ended, or at least the consequences of it should have been addressed.

[00:30:25] Speaker 02:
But then you also make an argument that it doesn't make any sense not to take into account reconciliation in future years.

[00:30:33] Speaker 02:
And those seem to be in tension because if you're right that turbocharging should have ended and therefore you shouldn't factor in turbocharging in future years, it seems equally right to say, well then there's not going to be any need for reconciliation in future years either.

[00:30:47] Speaker 00:
Well, there would be some ongoing potential for turbocharging, which we believe that the Secretary should have modeled that impact.

[00:30:54] Speaker 00:
And the Secretary did model that impact to some extent with respect to the 50 in 2004.

[00:31:00] Speaker 00:
And we fully acknowledge that, but in later years did not.

[00:31:05] Speaker 00:
So we would see it as not in tension because in 2004,

[00:31:10] Speaker 00:
Most of the turbocharging, the vast majority is out of system, but the secretary is still setting a threshold that's premised effectively on turbocharging.

[00:31:19] Speaker 00:
And the data set the secretary used for charge inflation calculation was even more impacted by turbocharging because it went up.

[00:31:27] Speaker 00:
in 2003 from 17% to almost 28%.

[00:31:33] Speaker 00:
So the record reflects it was worse data to use if you didn't address the turbocharging impact.

[00:31:44] Speaker 00:
and for the reasons uh... and furthermore the secretary uh... has made an argument that it could have distorted projections to address the turbo charge and the charge inflation factor took about uh... out of the equation which we still need to project a payment stamp.

[00:32:03] Speaker 00:
Well the secretary

[00:32:04] Speaker 00:
have that ability to do that.

[00:32:05] Speaker 00:
It has not disputed.

[00:32:06] Speaker 00:
It could have simply taken them out of the charge inflation calculation and projected what their outlier payments would still be.

[00:32:13] Speaker 02:
On a non-term of charge basis?

[00:32:15] Speaker 00:
Yes.

[00:32:15] Speaker 00:
I see I have two minutes left.

[00:32:21] Speaker 06:
All right, we'll give you some time.

[00:32:22] Speaker 00:
And I'm not sure if this is my 20 or my 30.

[00:32:27] Speaker 06:
We'll give you – that's what I said.

[00:32:28] Speaker 06:
Let us hear from the Secretary, and we'll give you some time on the bottle.

[00:32:32] Speaker 00:
Thank you, Your Honors.

[00:32:52] Speaker 06:
Good morning.

[00:32:53] Speaker 01:
Good morning, Your Honor.

[00:32:54] Speaker 01:
May it please the Court.

[00:32:55] Speaker 01:
Benjamin Schultz on behalf of the Secretary.

[00:32:58] Speaker 01:
The Secretary's task in setting the threshold in each of the relevant years was to make a prediction about what amount of payment would be made for outliers in the relevant years as a percentage of the total overall payments made in the Medicare scheme.

[00:33:13] Speaker 01:
The Secretary, each year relevant to this case, reasonably concluded that in making those predictions, the Secretary also ought to account for the rules that were in effect, namely the existing regulations.

[00:33:25] Speaker 01:
So from 1997 through 2003, the Secretary made a calculation based on the understanding that the 1988 regulations would be in effect.

[00:33:34] Speaker 01:
when the secretary did a calculation in mid 2003, she accounted for the fact, or he accounted at the time, I guess, for the fact that those calculations, that those payments would be made for part of the year under the old rules and for part of the year under the new rules.

[00:33:49] Speaker 01:
And then for 2004 and going forward, the secretary's calculations accounted for the fact that there would be new rules in place.

[00:33:55] Speaker 01:
And in each of those years, the secretary acted reasonably.

[00:33:59] Speaker 01:
If there are questions about any specific year, I'd be happy to address them.

[00:34:03] Speaker 06:
Well, you've heard our questions, so you know what we're concerned about.

[00:34:06] Speaker 01:
Sure.

[00:34:07] Speaker 01:
Well, maybe I think the best place to start then is it sounds like the argument that the opposing council is focusing on is the idea that somehow the secretary was obligated, particularly in the mid-year of 2003 correction, to exclude the turbocharging payment.

[00:34:25] Speaker 06:
In other words, Congress sets up a scheme to provide an incentive

[00:34:33] Speaker 06:
And once the Secretary knows that people are gaming the system and throwing projections out of sync, the Secretary says, well, this is so complicated and administratively burdensome that we're just going to move forward.

[00:34:56] Speaker 06:
And you heard my concern about, well, maybe the explanation in part is this two-year lag

[00:35:02] Speaker 06:
upsetting the system, but sort of the argument is at some point isn't there some obligation, consistent with Congress's purpose, to make certain that either the model and or the data

[00:35:21] Speaker 06:
are as accurate as the secretary can reasonably determine.

[00:35:26] Speaker 01:
So there's a couple things going on there, and I hope you'll let me unpack it.

[00:35:29] Speaker 01:
Right.

[00:35:29] Speaker 01:
So first of all, it's important to understand that in the county of Los Angeles, this court recognized that Congress, at the very least, in enacting the statute, it was reasonable for HHS to understand the statute as making these predictive models on a year-by-year basis.

[00:35:45] Speaker 01:
And they're important.

[00:35:46] Speaker 06:
Yeah, we're all clear on that.

[00:35:47] Speaker 06:
Sure, so I don't know if your honor is talking about specifically mid-2003 or... What I'm talking about, counsel, is not complicated.

[00:35:53] Speaker 01:
Sure.

[00:35:54] Speaker 06:
Okay?

[00:35:55] Speaker 06:
I just want to understand the secretary's obligation because the way I read what's happening is basically it's a complicated scheme.

[00:36:03] Speaker 06:
The secretary has a lot of discretion.

[00:36:04] Speaker 06:
Oh, we know our model isn't perfect.

[00:36:07] Speaker 06:
We'll address that.

[00:36:08] Speaker 06:
Oh, we know our data is corrupted.

[00:36:11] Speaker 06:
We'll address that at some point.

[00:36:14] Speaker 06:
But in the meantime,

[00:36:17] Speaker 06:
the hospitals, arguably, are not receiving the outlier payments to which HHS would agree they are entitled.

[00:36:32] Speaker 01:
We don't agree with that.

[00:36:33] Speaker 06:
No, no, no.

[00:36:35] Speaker 06:
I understand the Secretary is saying I'm exercising all this discretion.

[00:36:40] Speaker 06:
But if the model was accurately coming up with the numbers,

[00:36:48] Speaker 06:
and the data being fed into the model was not corrupted.

[00:36:53] Speaker 06:
The Secretary, I don't see denying that there would be a change of some kind.

[00:36:58] Speaker 01:
Your Honor, I think it's helpful to focus on individual years because the analysis is very different depending on the year that we're talking about.

[00:37:04] Speaker 01:
I totally agree with that.

[00:37:04] Speaker 06:
But I don't want to, you know, we can get mired in the weeds.

[00:37:10] Speaker 06:
And I'm trying to understand the system, given that we are very clear that there's a lot of discretion here.

[00:37:17] Speaker 01:
Sure, if you want to think about it from the macro level, and again I want to urge the court that it's important not just to look at this at the macro level, but also to look at the analysis as to individual years, because the analysis is distinct in different years.

[00:37:28] Speaker 01:
But from a macro level, what's going on here is Congress has set up a system in which at the beginning of the year, HHS sets the threshold, and it does it based on a projection.

[00:37:38] Speaker 01:
And that projection may be wrong.

[00:37:39] Speaker 01:
Projections often are.

[00:37:40] Speaker 01:
But it's important for hospitals in a prospective payment system to know at the outset what the rules are going to be and to operate within that.

[00:37:48] Speaker 01:
And that was something that this court recognized in County of Los Angeles.

[00:37:51] Speaker 01:
And so given that, if it later comes to pass that for one reason or another, the projections were wrong and somebody with the benefit of hindsight could come back and say, hey, you set the threshold at this level, but maybe it should have been at another level.

[00:38:03] Speaker 01:
The secretary reasonably interprets the statute to say that that's not the way it works, and it's important that everybody knows the rules going in for planning purposes.

[00:38:11] Speaker 06:
So a hospital may have suffered a harm, but there's no remedy.

[00:38:17] Speaker 01:
I quibble with the question of whether or not it's a harm in the way that would be cognizable under this Court's presidency.

[00:38:25] Speaker 01:
We do have a standing argument for it.

[00:38:26] Speaker 06:
So you think Congress intended the secretary to make projections on the basis of

[00:38:32] Speaker 06:
unlawful charges and payments?

[00:38:37] Speaker 01:
Well, Your Honor, I think one thing to keep in mind is that at least when we're talking about 1997 through 2003, the secretary's projections were off.

[00:38:46] Speaker 01:
That's absolutely true.

[00:38:47] Speaker 01:
But they were off in a way that very substantially harmed the Medicare trust fund.

[00:38:51] Speaker 01:
And the reason why is because at the beginning of the year, when the secretary sets a target percentage, that's 5.1%, it reduces the standardized amounts by that same percentage, that 5.1%.

[00:39:02] Speaker 01:
So for all those years, 1997 through 2003, where the secretary ended up paying much more than 5.1%, that means that the standardized amounts had not been reduced by enough at the outset of the year, and the Medicare trust fund was out many, many billions of dollars.

[00:39:16] Speaker 06:
So that's my point about no remedy, because no right.

[00:39:22] Speaker 06:
Because if the trust fund's going down, we're going to reduce the outlier payments.

[00:39:27] Speaker 06:
We're going to increase the threshold.

[00:39:29] Speaker 06:
I understand.

[00:39:30] Speaker 06:
I just want to understand.

[00:39:33] Speaker 06:
what this scheme is because as you know the court asked the secretary to look at this as the 2004

[00:39:41] Speaker 06:
And the answers we got are pretty much the answers we had initially.

[00:39:46] Speaker 01:
Sure.

[00:39:46] Speaker 01:
And I'd be happy to address the specifics of that if the court wants.

[00:39:49] Speaker 01:
But understanding Your Honor's question to be at the more macro level, I think the best way to think about it is a hospital is entitled to outlier payments if after accounting for the threshold, as that threshold is set, you get, if you're above that threshold, then you get outlier payments.

[00:40:05] Speaker 01:
And if you're not above that threshold, then you don't.

[00:40:08] Speaker 01:
And then the only question is,

[00:40:09] Speaker 01:
as a matter of administrative law and accounting for Medicare law, did you set the threshold the right way at the beginning of the year when you sat down and did this?

[00:40:17] Speaker 01:
And I'd be happy to address, as to any individual year, why HHS's calculations were reasonable.

[00:40:22] Speaker 01:
But the fact that somebody can come back with hindsight and say, gee, your projections didn't work now that we know all this that we didn't know back then, that isn't sufficient.

[00:40:31] Speaker 04:
But let me ask you, why didn't HHS know it?

[00:40:34] Speaker 04:
The facts here seem a little odd to me, that it's a Wall Street analyst.

[00:40:37] Speaker 04:
that discovers this.

[00:40:39] Speaker 04:
Why didn't HHS discover this?

[00:40:42] Speaker 01:
If you think about it, it's not so obvious that this is going on because what was so surprising about this was that hospitals were intentionally manipulating their charge practices in a very distinctive way and in a way that exploited regulations that had been in effect since 1988, that for many years this problem didn't appear to be surfacing at all.

[00:41:01] Speaker 01:
And that when it did start to surface in the late 90s, there were other explanations that HHS reasonably looked at and said, well, we think it was this.

[00:41:09] Speaker 01:
And then after a number of years where it still proved that that didn't solve the problem, HHS said, well, all right, well, maybe we think it's this.

[00:41:15] Speaker 01:
And then it was only later that this surprising information, which is really about hospital intent, I think, more than anything else, came out that HHS discovered the problem.

[00:41:26] Speaker 01:
I'll also point out that if you think about it from the perspective of the Medicare system, you have many, many thousands of hospitals and a relatively small number of bad actors.

[00:41:35] Speaker 01:
And you've got intermediaries all over the country.

[00:41:38] Speaker 01:
There are different intermediaries processing different bills.

[00:41:40] Speaker 01:
If a small number of bad actors have these things coming in,

[00:41:44] Speaker 01:
to different intermediaries, not even necessarily the same intermediary, then it's very difficult for HHS and administering this massive program to nitpick these small, tiny pieces of data and conclude from that that certain intentionally fraudulent behavior is going on.

[00:41:59] Speaker 02:
Can I ask you this?

[00:42:02] Speaker 02:
Just stepping away from the niceties of, I don't mean to be pejorative about it, about what's cognizable and what gives rise to a valid legal claim.

[00:42:12] Speaker 02:
Just speaking generally in terms of whether the system is working and whether the system is working fairly.

[00:42:18] Speaker 02:
I don't think the agency would dispute the notion that because of turbocharging, certain bad actors were getting a disproportionate share of outlier payments to which they shouldn't have been entitled.

[00:42:30] Speaker 02:
And had the system worked correctly, those bad actors wouldn't have gotten those payments and other hospitals would have gotten more payments.

[00:42:37] Speaker 02:
How does that generally seem right?

[00:42:39] Speaker 01:
I think Your Honor is right in so far as you're saying that if HHS had discovered turbocharging sooner, it probably would have acted much sooner to amend its regulations.

[00:42:48] Speaker 01:
And then you could further hypothesize from that that if the regulations are amended, then in this counterfactual world where HHS goes to set its threshold, it's going to reasonably assume that these other hypothetical regulations are in effect.

[00:43:00] Speaker 01:
And I think your honor is right that if you follow that chain out, then you could eventually get to a counterfactual world in which the threshold would be lower in the relevant years than it would have been.

[00:43:09] Speaker 02:
And that would be better for the hospitals, the good actors, or at least the non-bad actors, and it would be worse for the bad actors.

[00:43:17] Speaker 01:
I think that's right, although I want to point down, because this is a subtlety that may not have come through very clearly in the briefs, the methodology that HHS used up through 2002, the cost inflation methodology, was a methodology where the setting of the threshold didn't actually depend on the turbocharging, because it was a methodology that just looked at the cost, and that wasn't effective at the turbocharging.

[00:43:40] Speaker 01:
2003 that I think you have an argument that as to that particular year because the agency switched to a charge inflation model, that particular argument wouldn't have worked.

[00:43:49] Speaker 02:
And even with respect to 2003, I can understand the reasons the agency says we shouldn't be looking at the interim suggestion.

[00:43:57] Speaker 02:
I get that.

[00:43:58] Speaker 02:
But it's a real fact about the world that that existed.

[00:44:01] Speaker 02:
It is a fact.

[00:44:01] Speaker 02:
If you look at what that did, it would have put into place measures that would have resulted in a lowering of the threshold.

[00:44:08] Speaker 01:
I think if you follow that chain out, at least for the beginning of 2003, you probably could get there that if the regulations had changed and then HHS had calculated a revised threshold based on new regulations, then you could eventually get to a counterfactual.

[00:44:22] Speaker 01:
But I want to highlight something very important about that, which is that part of that chain is that the regulations would have changed before they actually did.

[00:44:29] Speaker 01:
And that means several problems.

[00:44:31] Speaker 01:
Number one, it falls squarely onto the Supreme Court's decision in our work, which held that if you want to complain about an agency's failure to amend their regulations, then you have to petition for rulemaking.

[00:44:41] Speaker 01:
And nobody did here.

[00:44:42] Speaker 01:
And I want to just highlight for the court that there are many thousands of hospitals in the Medicare system.

[00:44:49] Speaker 01:
And if turbocharging was so obvious that HHS should have Sue Espante recognize it, which is essentially what the plaintiff's argument is,

[00:44:56] Speaker 01:
then why is it that not a single hospital in the Medicare system was asking HHS to change its rules before it eventually did?

[00:45:04] Speaker 01:
And I'd be happy to talk about that more, but I think that just really highlights for the court that this was not something that the agency's suesponte should have done.

[00:45:13] Speaker 02:
Yeah, I mean, that kind of depends on whether there's an allegation that there's information uniquely within the agency's arsenal that should have put the agency on notice that something's amiss, even if the industry wouldn't have been on notice.

[00:45:25] Speaker 01:
Well, yeah, I think insofar as your honor is saying, maybe that would explain why nobody petitioned for rulemaking.

[00:45:31] Speaker 01:
I suppose that could be a pragmatic explanation of why that didn't happen.

[00:45:36] Speaker 02:
And it would also explain why Auer wouldn't apply.

[00:45:38] Speaker 01:
Well, I don't think it's an explanation for why Auer wouldn't apply.

[00:45:40] Speaker 01:
Because at the end of the day, Auer's reasoning is based on the idea that if you want to complain about a change in a rule, there's a mechanism for that.

[00:45:47] Speaker 02:
And the mechanism is hard to imagine that that logic applies in a situation in which

[00:45:53] Speaker 02:
that the entity who would ask for the rule to be changed doesn't even have the information with which to make the request.

[00:46:01] Speaker 01:
Your honor, maybe it's a harder case, but first of all, I don't think that's plaintiff's argument here because what they're saying is, hey, you had these comments on the 1988 rule and then there was this stray comment in 1984, all of which were

[00:46:14] Speaker 01:
in the federal register.

[00:46:15] Speaker 01:
So that's obviously something that the hospitals could have known about.

[00:46:18] Speaker 01:
And frankly, I think in this kind of situation, hospitals probably have better information than HHS about the extent to which they control their own charging practices.

[00:46:26] Speaker 01:
And even if an individual hospital may not know that its sister hospitals are doing turbocharging, they probably would have a better sense of that than HHS just from the fact that it is a hospital and knows the constraints that it's operating under.

[00:46:37] Speaker 06:
Well, but counsel, you know in district hospital partners, this court's relied on state farms.

[00:46:43] Speaker 06:
in terms of the continuing duty on the part of the agency.

[00:46:49] Speaker 06:
So it's not enough to say the hospital is where it falls.

[00:46:54] Speaker 01:
Well, Yara, I think all of the cases about a continuing duty to examine assumptions apply to situations in which there's an active proceeding.

[00:47:03] Speaker 01:
So to the extent that you want to say that in an individual threshold setting, aging.

[00:47:09] Speaker 06:
I didn't read district.

[00:47:11] Speaker 01:
The agency action in district hospital partners was an individual threshold setting.

[00:47:19] Speaker 01:
The agency action challenge there wasn't about a failure to amend regulations that were already in place.

[00:47:24] Speaker 01:
And if you look at the cases that the other side is citing about the continuing duty to

[00:47:29] Speaker 01:
to examine assumptions, most of those are cases where a party actually petitions for a rulemaking, and then once the issue is squarely before the agency, at that point the court says, okay, at that point the agency should.

[00:47:40] Speaker 06:
So let's deal with it.

[00:47:42] Speaker 02:
I was going to skip to 04.

[00:47:46] Speaker 06:
That's all right.

[00:47:48] Speaker 02:
We'll probably cover it.

[00:47:48] Speaker 02:
Well, then let's talk about a year in which we're not talking about administrative correction.

[00:47:52] Speaker 02:
We're talking about 04.

[00:47:53] Speaker 02:
So with 04, what's the explanation for why turbocharging is factored into the projections when the entire premise of the new regulatory regime is that turbocharging has been dealt with?

[00:48:06] Speaker 01:
Sure.

[00:48:07] Speaker 01:
And Your Honor, I think it's helpful here to step back and take a really macro level to make sure we all understand the exact mechanics of what's going on.

[00:48:15] Speaker 01:
If you think about what HHS is doing when it sets a threshold, its goal is to make a prediction about what will actually be paid out in the fiscal year.

[00:48:24] Speaker 01:
And so that means for fiscal year 2004, you kind of want to put yourself in the view, in the perspective of an intermediary.

[00:48:30] Speaker 01:
who is getting these payment requests coming in from the hospitals.

[00:48:33] Speaker 01:
And so a payment request comes in, and it comes in in fiscal 2004.

[00:48:37] Speaker 01:
And that fiscal 2004 payment request is based on charges in fiscal 2004.

[00:48:43] Speaker 01:
So that means one of the things that the agency is going to have to project is, what are a hospital's charges going to look like in fiscal 2004?

[00:48:50] Speaker 01:
And we can talk about how AJ just did that, and I'll just bracket that for a second.

[00:48:53] Speaker 06:
Including illegal charges.

[00:48:55] Speaker 01:
Well, actually, Your Honor, I'm glad Your Honor brought that up because that gets to the next point.

[00:49:00] Speaker 06:
So my hypothetical, because you don't want to answer these questions, is suppose you go to your office tonight and you find out that there's another gaming system and a billion dollars is being paid to hospitals that are not entitled to a nickel.

[00:49:27] Speaker 06:
Well, I hear you saying is basically we're still going to factor that into the system absent a regulatory change, even though the quote on non gaming hospitals.

[00:49:41] Speaker 06:
will suffer.

[00:49:42] Speaker 01:
So your honor, I want to be very clear about this because I think your honor may have a misperception about some of the basic facts.

[00:49:48] Speaker 01:
Let me be crystal clear on this.

[00:49:49] Speaker 06:
That was a hypothetical.

[00:49:50] Speaker 01:
Well, I understand, but it's a hypothetical that I think may be based on a misperception.

[00:49:53] Speaker 01:
So let me make this clarification and I'll address that.

[00:49:55] Speaker 06:
No, the hypothetical was what happens when you get back to your office tonight and you find out that a group of hospitals has figured out a new game and

[00:50:10] Speaker 06:
Unless something is done, the payments that are going to go out two years hence will be a billion dollars over what your model and

[00:50:25] Speaker 06:
the charges being made by hospitals that are not gaining the system would predict.

[00:50:32] Speaker 01:
So I do want to get my answer out, but to answer your hypothetical, I think the answer is in 1395, WWD 5, Romanette 4.

[00:50:40] Speaker 01:
the total amount of the additional payments made under this subparagraph, meaning subparagraph five, for discharges in a fiscal year may not be less than 5% or more than 6% of the total payments projected or estimated to be made.

[00:50:53] Speaker 01:
So in other words, when HHS is setting its threshold to hit the target percentage, and here we're talking about 5.1, that means that the relevant question is, what are the additional payments made under this subparagraph?

[00:51:06] Speaker 06:
And if so, what do you do with this information tonight?

[00:51:09] Speaker 01:
Well, we may well, at that point, go after these guys under the False Claims Act.

[00:51:13] Speaker 06:
That's a different issue.

[00:51:14] Speaker 06:
You're collecting from the turbochargers.

[00:51:16] Speaker 06:
I'm asking, what about the hospitals that are not gaining the system?

[00:51:21] Speaker 06:
Do you do anything to protect their entitlement?

[00:51:24] Speaker 06:
And ignore for the moment your trust fund argument, if you will.

[00:51:27] Speaker 06:
That's money, Congress.

[00:51:29] Speaker 06:
And I understand the pressures on the agency from that.

[00:51:32] Speaker 06:
But now we're just talking about the statutory scheme.

[00:51:37] Speaker 01:
Right.

[00:51:37] Speaker 01:
So again, I think in addressing this hypothetical, it's a little bit complicated because we don't know the specific practices and how the specific practices work might bear on the agency's response.

[00:51:47] Speaker 01:
But a couple of points.

[00:51:49] Speaker 01:
Number one, because the projection at the beginning of the year is based on the payments made under this subparagraph, if somebody is duping HHS,

[00:51:57] Speaker 01:
It may be unfortunate.

[00:51:58] Speaker 01:
We may go after them under the False Claims Act.

[00:52:00] Speaker 01:
We may take other administrative things against them to stop them and maybe ultimately even recover.

[00:52:05] Speaker 01:
But for the purpose of the projection, those payments that the fiscal intermediary is making are payments under the sum paragraph.

[00:52:11] Speaker 01:
Frankly, I don't know what else they could be.

[00:52:12] Speaker 06:
So that's my point.

[00:52:13] Speaker 06:
The hospitals that are not gaining the system have no remedy.

[00:52:18] Speaker 06:
I mean, I... Is that correct?

[00:52:19] Speaker 06:
That's why I signaled you when I was questioning counsel.

[00:52:24] Speaker 01:
I think that's a complicated issue.

[00:52:26] Speaker 01:
I know it's complicated.

[00:52:29] Speaker 06:
But what did Congress have in mind?

[00:52:32] Speaker 06:
There are lots of statutory schemes where agencies have to make judgments.

[00:52:39] Speaker 06:
Are these drugs safe?

[00:52:41] Speaker 06:
Is this food safe?

[00:52:43] Speaker 06:
And there's a realm of discretion there.

[00:52:46] Speaker 06:
But if it's contaminated, do you still consider that

[00:52:53] Speaker 06:
data or not and you seem to be urging me to understand that yes you do well if you're no let me explain why i think the hypothetical is mistaken i think i could save us a lot of trouble i'm happy to hear that you cited f4 sure so other than that i'm sorry i said d5 roman net four that's right right

[00:53:12] Speaker 01:
But I think, Your Honor, if you look at 2004, I want to be crystal clear that there are no illegal payments in 2004, or at least none that we know of.

[00:53:20] Speaker 01:
And that's why I was trying to explain from the perspective of the intermediary to look at what's going on.

[00:53:25] Speaker 01:
So the intermediary is taking these 2004 charges, and they come in as... What went into the base data?

[00:53:32] Speaker 01:
sure you're setting the threshold in 2004 right so there is some there was some charge inflation and the charge inflation factor does include turbocharging but if your honor permit me to finish this out this explanation i can explain why that's not a problem

[00:53:47] Speaker 01:
If you think about what that intermediary is getting, he's getting 2004 charges.

[00:53:52] Speaker 01:
And then he's adjusting those charges to cost, as the statute says.

[00:53:56] Speaker 01:
And when he does that in 2004, he does that adjustment based on the new rules.

[00:54:01] Speaker 01:
That's hugely important because the whole reason why turbocharging was an improper practice was because the charges were these charge increases that weren't then being properly adjusted to cost.

[00:54:12] Speaker 01:
And indeed, not only that they weren't even just being properly adjusted to cost, but there was an aspect of intentionality about it, that the hospital's charges increases more no relationship to cost.

[00:54:22] Speaker 01:
That is not the case in 2004 for a very important reason, which is that in 2004, because we're applying the new regulations, now if you have a hospital that maybe say in 1999, it charged $200 for something, in 2003 because of turbocharging, it's charging $1,000.

[00:54:38] Speaker 01:
Maybe in 2004 it only raised it a little bit, say $1,010 or $1,020.

[00:54:43] Speaker 01:
The fact that you got all the way up to $1,000 from past turbocharging doesn't matter at all.

[00:54:48] Speaker 01:
Because when we adjust that charge that comes in in 2004, we adjust it using the new regulations.

[00:54:55] Speaker 01:
And that's why, number one, it's not a problem that there had been this past turbocharging.

[00:54:59] Speaker 01:
But it's also why, number two, if you ignored the past turbocharging, then you would make a massive mistake.

[00:55:06] Speaker 06:
You don't ignore it.

[00:55:08] Speaker 06:
That's the whole point I'm trying to get you to acknowledge here, and you won't for some reason.

[00:55:13] Speaker 06:
And I'm just not clear why.

[00:55:15] Speaker 01:
Sure.

[00:55:15] Speaker 01:
Your Honor, if you think about it, imagine a hospital that is turbocharged.

[00:55:19] Speaker 01:
So it started out, say, at $200 in 1990.

[00:55:21] Speaker 06:
I'm not so concerned about that hospital as I am concerned about the hospitals that are not turbocharging.

[00:55:29] Speaker 01:
I understand that, but in 2000.

[00:55:30] Speaker 06:
And you acknowledge that in setting the threshold

[00:55:33] Speaker 06:
for 2004, that thousand dollar figure that you were just discussing is in that base.

[00:55:40] Speaker 01:
Well, it is, but it's properly adjusted, and that's the point.

[00:55:43] Speaker 06:
To what?

[00:55:44] Speaker 01:
To cost, and that's because the new regular.

[00:55:46] Speaker 06:
And the hospital, the turbo charger says,

[00:55:49] Speaker 06:
cost us $1,000.

[00:55:50] Speaker 01:
No, that's not what the hospital says.

[00:55:53] Speaker 01:
The turbocharging hospital says we're charging $1,000.

[00:55:56] Speaker 06:
And HHS, by virtue of- No, what I just told you is the turbocharging hospitals tells HHS is intermediary.

[00:56:07] Speaker 06:
It cost a charge.

[00:56:09] Speaker 01:
That's not what it says.

[00:56:10] Speaker 06:
It cost us $1,000.

[00:56:14] Speaker 06:
And we charge the client $1,200.

[00:56:18] Speaker 01:
Respectfully, Your Honor, that's not what happens.

[00:56:20] Speaker 01:
And that's because the costs for fiscal year 2004 are not known at that point, and they're not on the bills.

[00:56:25] Speaker 01:
When AJS gets a bill for an outlier, it's just a charge.

[00:56:29] Speaker 01:
It says, our charge for this patient was $1,000.

[00:56:33] Speaker 01:
The true cost for 2004 is unknown at that point.

[00:56:36] Speaker 01:
It may never be known.

[00:56:37] Speaker 01:
But what happens at that point is under the new regulations, that charge is then adjusted to cost.

[00:56:43] Speaker 01:
And maybe under the old regulations, because of the lag and because there was no reconciliation.

[00:56:47] Speaker 06:
So when is it adjusted?

[00:56:49] Speaker 01:
It's adjusted by the intermediary.

[00:56:51] Speaker 06:
And the final cost report is filed?

[00:56:54] Speaker 01:
For the most part, it's not then it's at the point that the intermediary makes the payment.

[00:56:58] Speaker 01:
But if the hospital is subject to reconciliation, then after the final cost report is filed, then you can assume that you've gotten over the threshold.

[00:57:08] Speaker 01:
Yes, well, your honor, I think we may be looking at this from the wrong perspective.

[00:57:12] Speaker 01:
The threshold is set at the beginning of 2004.

[00:57:15] Speaker 06:
And it's got that thousand dollars in there.

[00:57:18] Speaker 01:
It's got the thousand dollars in there only insofar as we want to know what this hospital's charges are going to be because we're going to adjust it to cost.

[00:57:25] Speaker 01:
And maybe if we had applied the 2003 regulations, maybe we'd have only cut that by 50%.

[00:57:30] Speaker 01:
But because we're applying the new regulations, we're going to cut it maybe only

[00:57:34] Speaker 01:
But maybe we're going to cut it by 90%.

[00:57:35] Speaker 01:
Maybe we're going to cut it by 95%.

[00:57:37] Speaker 01:
And that's why it's really important to understand that from 2004 going forward, there aren't, as far as anyone can tell, there aren't illegal turbocharging.

[00:57:46] Speaker 01:
There isn't illegal turbocharging going on.

[00:57:47] Speaker 01:
It also means, and I want to make sure the court understands this, that

[00:57:51] Speaker 01:
If you think about what charges you're going to get in 2004, you absolutely want to know that some people have been turbocharging.

[00:58:00] Speaker 01:
Because when that hospital submits its charges in 2004, it's not going to all of a sudden revert back to the $200.

[00:58:08] Speaker 01:
It's probably going to keep it at $1,000.

[00:58:10] Speaker 01:
Maybe even it's going to raise it even higher.

[00:58:12] Speaker 01:
And so that's why you absolutely want to say, OK, fine.

[00:58:15] Speaker 01:
You're going to give us the $1,000 because you've been turbocharging?

[00:58:18] Speaker 01:
$1,000, but this time, unlike last time, we're going to adjust that by a much, much less generous cost of charge ratio.

[00:58:27] Speaker 02:
So I'm trying to unpack where we are, because what seems to me to be

[00:58:33] Speaker 02:
a logical problem is that we're trying to figure out what the threshold is going to be for 04.

[00:58:41] Speaker 02:
Right.

[00:58:41] Speaker 02:
We have to do that ex ante by projecting charges for 04.

[00:58:45] Speaker 02:
Correct.

[00:58:46] Speaker 02:
And the greater the charges we project, the higher the threshold.

[00:58:51] Speaker 02:
So far so good.

[00:58:53] Speaker 01:
Is that correct?

[00:58:54] Speaker 01:
That is correct.

[00:58:55] Speaker 01:
All else equal, but all else is definitely not equal.

[00:58:57] Speaker 02:
All else equal.

[00:58:58] Speaker 02:
But we have to, in order to understand the effect of charges, the effect of charge inflation, let's just keep all else equal just so we can identify the operative force of this variant.

[00:59:08] Speaker 02:
Right.

[00:59:08] Speaker 02:
So if we overestimate charges, we're going to get too high of a threshold.

[00:59:15] Speaker 01:
All else equal, that is correct.

[00:59:17] Speaker 02:
Yes, okay.

[00:59:18] Speaker 02:
So then the question becomes, we want to get charges as right as possible because all else equal, that'll be more likely to get the threshold right and then everybody will get the right amount of outlier payments because we'll get close to the 5.1% target.

[00:59:31] Speaker 02:
Sure.

[00:59:32] Speaker 02:
Okay.

[00:59:32] Speaker 02:
So if we assume all that to be true, I'm still not understanding why it makes sense to bake in turbocharged rates when we're trying to get the charges right so that the threshold can be right, so that the 5.1 percent is reached, so that the outlier payments can be right.

[00:59:49] Speaker 02:
If we're going to be by hypothesis in 04 in an era in which turbocharging doesn't exist, why would we assume

[00:59:56] Speaker 02:
that the charges are going to be increasing at the same rate when there's not going to be turbocharging.

[01:00:01] Speaker 01:
So I think it's important to understand the data that HHS has at the time that has to do this.

[01:00:05] Speaker 01:
So this is being done in August 2003.

[01:00:07] Speaker 01:
As HHS explained in the Federal Register, the most recent charge data it has at this point is charge data from 2002.

[01:00:14] Speaker 01:
So HHS's task is to take this 2002 charge data, and from that, extrapolate what are going to be the charges in 2004.

[01:00:22] Speaker 01:
So now just think about what time period this is covering.

[01:00:26] Speaker 01:
This is covering about two years.

[01:00:29] Speaker 01:
Roughly half of that period is a period in which everyone agrees turbocharging was going on.

[01:00:34] Speaker 02:
And indeed, there may be a- So I don't care about that.

[01:00:36] Speaker 02:
And the reason I don't care about that is because there's a half of the period when it wasn't going on.

[01:00:40] Speaker 02:
That's right.

[01:00:41] Speaker 02:
So there might be an argument that says,

[01:00:44] Speaker 02:
all right well you can't just completely eliminate turbocharging because we're still going on for half the period so i get that but what i don't understand is why assume that turbocharging is still going on at the same pace

[01:00:56] Speaker 02:
I don't understand that.

[01:00:57] Speaker 01:
So Your Honor, the question, there's a couple of answers.

[01:01:01] Speaker 01:
The first is that HHS acknowledged in its remand notice that this might in fact lead to an overestimate of turbocharging.

[01:01:09] Speaker 01:
But the question wasn't did HHS use the best possible data in doing this.

[01:01:13] Speaker 01:
The question was just in making a projection in the highly complex world of Medicare reimbursements in a world where we had never actually seen the new regulations in effect,

[01:01:21] Speaker 01:
did HHS reasonably do what it did?

[01:01:24] Speaker 01:
And what HHS said was, even though we think that this might overestimate turbocharging, the reverse would be even worse.

[01:01:31] Speaker 01:
Because if we excluded these people entirely, which is what the plaintiffs are saying we should have done, then we projected what those hospital's charges were going to be, and also by proxy other hospitals that started turbocharging a little bit later and aren't even

[01:01:45] Speaker 01:
ones that we know about at this point, then when we project out their charges, we're going to be massively, massively under.

[01:01:52] Speaker 01:
And so what we did was a reasonable compromise.

[01:01:55] Speaker 01:
We said, look, is this data perfect?

[01:01:56] Speaker 01:
It's not perfect.

[01:01:57] Speaker 01:
But we don't have better data, or at least we could reasonably conclude that this data was good enough for our purposes.

[01:02:02] Speaker 02:
So I don't remember that whole explanation being in what HHS did, as opposed to whatever reason.

[01:02:06] Speaker 02:
It's in the remand explanation.

[01:02:07] Speaker 02:
All of what you said is in the remand explanation.

[01:02:09] Speaker 01:
I mean, I think I'm paraphrasing somewhat and maybe giving a little bit more meat on what was going on there.

[01:02:14] Speaker 01:
Yeah, but that matters.

[01:02:15] Speaker 01:
Well, you could definitely find in the remand explanation and acknowledgement that HHS is saying that, look, we understand that turbocharging was expected to end by the beginning of 2004.

[01:02:26] Speaker 01:
We understand that not all of this period is going to be turbocharging, but they are also saying, look, a big

[01:02:33] Speaker 02:
chunk of that period is going to be turbocharging, and because we don't think that ignoring these people entirely is going to be better, we'd rather... Let me just ask the obvious, what seems to me to be the obvious question, which is that it's true that turbocharging existed for part of the baseline period against which you're measuring, because we're talking about 03.

[01:02:55] Speaker 02:
Right.

[01:02:56] Speaker 02:
It's also true that the same hospitals that were turbocharging are still submitting requests for payments.

[01:03:02] Speaker 02:
Correct.

[01:03:03] Speaker 02:
You can't just take them out of the system altogether because they're still in the system.

[01:03:05] Speaker 02:
I get all that.

[01:03:07] Speaker 02:
But it just still seems to me to be odd to project the same pace.

[01:03:12] Speaker 02:
Why not just say, all right, they're not going to be turbocharging anymore.

[01:03:16] Speaker 02:
They're still in the system, so we'll give a discount factor.

[01:03:18] Speaker 02:
It's going to be something in between full turbocharging and no turbocharging.

[01:03:24] Speaker 01:
I see my time is up, but I do want to answer your own question.

[01:03:28] Speaker 06:
Please, go ahead.

[01:03:28] Speaker 01:
Question.

[01:03:29] Speaker 01:
First of all, I think it's very telling that this isn't an argument that the plaintiffs are making.

[01:03:34] Speaker 01:
Their argument was that we should have excluded the turbochargers entirely.

[01:03:38] Speaker 06:
Second of all, if we're going to nonetheless... A fairness to them, that is one alternative.

[01:03:43] Speaker 01:
Correct.

[01:03:44] Speaker 06:
They say there are other obvious alternatives, and one of the obvious alternatives is the one judge.

[01:03:49] Speaker 06:
Srinivasan is now discussing.

[01:03:51] Speaker 01:
Well, respectfully, Your Honor, that's not a supposedly obvious alternative that the plaintiffs have ever articulated in this litigation, as far as I understand.

[01:03:58] Speaker 01:
And it's certainly not an obvious alternative that they've articulated in their briefing in this court.

[01:04:02] Speaker 01:
But to answer.

[01:04:03] Speaker 06:
What they have said, let's just be clear, Counsel.

[01:04:06] Speaker 06:
What they have said is that there were a number of alternatives that were available.

[01:04:12] Speaker 06:
All right?

[01:04:14] Speaker 06:
So you can't just hit them on that point.

[01:04:19] Speaker 06:
With all due respect, counsel, I think what we're trying to understand is how the system works and what the secretary's reasoning is here.

[01:04:28] Speaker 06:
And that's the thrust, as I understand it, of Judge Shreenivasan's question.

[01:04:32] Speaker 01:
So I understand that, and I do want to address that.

[01:04:34] Speaker 01:
I just want to make sure the court understands that this is not something that the plaintiffs have been arguing.

[01:04:38] Speaker 01:
And so number one, we think it's waived.

[01:04:40] Speaker 01:
And number two, the explanation I'm about to give you,

[01:04:42] Speaker 01:
see specifically in the Federal Register precisely because it wasn't an alternative that people were presenting to HHS.

[01:04:49] Speaker 01:
But what I can tell you is if you think about why HHS might not want to have done that, one reason why you can imagine that the agency wouldn't have wanted to do that is because if you think about the amount of turbocharging that is going on in 2003, if you look at the 2003 Federal Register notices, one of the things that the agency was really worried about in 2003 was that because turbocharging had

[01:05:11] Speaker 01:
had become so widely known during 2003 that the agency was afraid that the pace of turbocharging was going to accelerate in 2003, both because lots of other hospitals that hadn't previously been turbochargers now learn about this and say, oh, yeah, me too.

[01:05:26] Speaker 01:
I want to do that also.

[01:05:28] Speaker 01:
And also because the existing hospitals are saying, oh, wow, I have to turbocharge even more because now that HHS is doing this charge inflation.

[01:05:35] Speaker 06:
When did HHS sue these turbo hospitals for?

[01:05:38] Speaker 01:
I believe there were some hospitals, and I want to be clear that it's not all of the 123, but there are some hospitals that HHS pursued under the False Claims Act, and there were settlements.

[01:05:51] Speaker 01:
But to finish answering Judge Srinivasan's question,

[01:05:53] Speaker 01:
The agency was just not sure about what exactly had happened in 2003, and it was very worried that 2003 was the worst year, far worse than any other years.

[01:06:02] Speaker 01:
And you could reasonably understand why at that point the agency wouldn't want to just assume that, hey, we think it's going to be, for 2003, just exactly the same as it was from, say, 2001 to 2002.

[01:06:13] Speaker 06:
That's what Judge Srinivasan is saying.

[01:06:15] Speaker 01:
He is, but I understand.

[01:06:16] Speaker 01:
But I took Judge Srinivasan's question to be about why is it that in projecting this two-year period when only about half of that period was turbocharging, why would you just extrapolate from the prior two-year period?

[01:06:29] Speaker 01:
What I'm trying to explain is that that was an unusual first half of the two-year period.

[01:06:34] Speaker 01:
And it was the first half of a two-year period in which turbocharging probably was much worse than it had been in any prior period.

[01:06:42] Speaker 02:
Yeah, I mean, I guess the upshot it sounds to me like is that, look, it does seem odd to project forward assuming turbocharging in an era in which we've instituted measures that are supposed to deal with turbocharging.

[01:06:57] Speaker 02:
And the agency acknowledged that.

[01:06:58] Speaker 02:
But the oddity is explainable because

[01:07:01] Speaker 02:
Even though you're not going to have turbocharging at the same pace, you're in a period in which you had a rapid increase recently.

[01:07:09] Speaker 02:
You're in a period in which there's still going to be some other hospitals potentially that are going to be turbocharging.

[01:07:14] Speaker 02:
And so all else being equal, we roughly think that the projecting at the same pace is going to account for all of that, even though it's going to be for sort of different reasons.

[01:07:24] Speaker 01:
And I think that is what the agency said on remand.

[01:07:26] Speaker 01:
It said there was a lot of uncertainty.

[01:07:28] Speaker 01:
And it didn't think that the alternative of excluding these 123 was better.

[01:07:35] Speaker 01:
And it recognized that what it was doing could be imprecise.

[01:07:38] Speaker 01:
But it made a reasonable value judgment based on the data available to it at the time that this was a reasonable way to do it.

[01:07:44] Speaker 01:
And this court recognized in district hospital that HHS's obligation is not to use the best available data.

[01:07:51] Speaker 01:
It's just to make a reasonable forecast.

[01:07:52] Speaker 02:
I think all of that is well taken, but it also has to be methodologically sensible.

[01:07:57] Speaker 02:
And in order to make it methodologically sensible and you get a lot of leeway, the agency gets a lot of leeway when it does something methodologically sensible in coming up with a forecast, no doubt about it.

[01:08:07] Speaker 01:
And I just want to make sure also I really emphasize the point that if that is the particular methodological tweak that you think the agency should have made in projecting 2004, number one, I don't believe that was a particular tweak that any commenter said.

[01:08:24] Speaker 01:
But it's also not a tweak that the other side, I believe, has ever said the agency should have done in their brief.

[01:08:29] Speaker 01:
And that matters for a couple of reasons.

[01:08:31] Speaker 01:
It matters

[01:08:32] Speaker 01:
number one in saying, like, you know, gee, this was the kind of obvious thing that the agency should have done su espante.

[01:08:38] Speaker 01:
It also matters in talking about, you know, waiver, just for whether or not they can bring this now, springing it at oral argument.

[01:08:46] Speaker 02:
Yeah, there's one other methodological question I have.

[01:08:49] Speaker 02:
I know we're over time, but if I can just ask.

[01:08:51] Speaker 02:
Please, I'd be happy to address it.

[01:08:53] Speaker 02:
It's somewhat related, but what is the explanation for why if charge inflation is something that's taken into account for purposes of calculating the threshold, charge inflation wouldn't also be taken into account in projecting the CCR?

[01:09:09] Speaker 01:
And I think it's important there to go back to putting yourself in the position of the intermediary.

[01:09:14] Speaker 01:
So the intermediary is getting this 2004 bill, and the 2004 bill is coming in at 2004 charges.

[01:09:22] Speaker 01:
But when that 2004 bill is adjusted to charges, it's going to be multiplied by a cost to charge ratio.

[01:09:28] Speaker 01:
And assuming for the moment that the hospital isn't subject to reconciliation, then when the intermediary says, okay, what are your costs,

[01:09:35] Speaker 01:
It's not multiplying it by a 2004 cost-to-charge ratio.

[01:09:39] Speaker 01:
It's multiplying it by whatever the latest tentatively settled cost report is.

[01:09:44] Speaker 01:
If for some reason there's a delay and that happens to be a couple years old, then so be it.

[01:09:49] Speaker 01:
That's what it is.

[01:09:50] Speaker 01:
But if HHS is trying to project

[01:09:53] Speaker 01:
ex ante, what are those 2004 charges going to be adjusted to?

[01:09:57] Speaker 01:
It knows that it's almost certainly not going to be adjusted to a 2004 cost to charge ratio.

[01:10:02] Speaker 01:
It's going to be adjusted to the most recent tentatively settled cost report, whatever that is.

[01:10:06] Speaker 01:
Now, that I think answers the question of why is it that we're not using just, you know, why is it a problem that we're using somewhat old cost to charge ratios in particular circumstances?

[01:10:17] Speaker 01:
I recognize that that may not be a complete answer to why HHS doesn't account in its 2004 projection.

[01:10:24] Speaker 01:
For at some point during the year, you might think that their hospital's probably gonna settle another cost report, and at that point, there's gonna be a change somewhere in the middle of the year.

[01:10:35] Speaker 02:
But I think- So I'm not so worried about the change in the middle of the year.

[01:10:38] Speaker 02:
I'm talking more about the projection.

[01:10:40] Speaker 02:
Right.

[01:10:40] Speaker 02:
And why in the projected CCR,

[01:10:43] Speaker 02:
Is there not a projection of a charge increase commensurate with the charge inflation that's informing the setting of the threshold?

[01:10:50] Speaker 01:
Sure.

[01:10:50] Speaker 01:
And I think that's because it's important to remember that HHS's task in setting the threshold is to kind of put themselves in the intermediary role.

[01:10:58] Speaker 01:
See, what is the intermediary going to do in that situation?

[01:11:00] Speaker 02:
So do you think it would have been wrong to factor in a charge increase in the CCR?

[01:11:06] Speaker 01:
Well, in 2007, the agency modeled the midyear increase.

[01:11:10] Speaker 01:
And we're not saying that that was an unreasonable choice.

[01:11:12] Speaker 01:
And we can understand why you would model a midyear choice.

[01:11:14] Speaker 01:
We also think it was reasonable, particularly in 2004 to 2006, not to model that midyear change.

[01:11:20] Speaker 01:
But the one thing that I think would not make sense, or at least would be very difficult to justify, is projecting it all the way out to 2004.

[01:11:27] Speaker 01:
Because unless you thought the hospital was going to be subject to reconciliation, well, the one thing you could be pretty confident of is that when the intermediary is making the 2004 payment, he doesn't even know what the cost of charge ratio is in 2004.

[01:11:39] Speaker 01:
He's not going to know that for many years.

[01:11:40] Speaker 02:
But isn't that true in 2007, too?

[01:11:42] Speaker 01:
So that's why I'm trying to draw a distinction between the mid-year change versus coming up to the current cost year.

[01:11:50] Speaker 01:
So what the mid-year change is, is at the beginning of the year, you're using the latest tentatively settled cost report, which is, for most hospitals, probably going to be the same cost report that AJ just made its professional projection based on, the same cost to target ratio.

[01:12:05] Speaker 01:
At some point during the fiscal year, you're probably going to get a new one.

[01:12:08] Speaker 01:
And at that point, from that point in the fiscal year forward,

[01:12:11] Speaker 01:
it's likely that that cost to charge ratio is going to be lower.

[01:12:14] Speaker 01:
So in 2007, what HHS did is said, OK, let's try and model that particular tweak on the model.

[01:12:20] Speaker 01:
But that's still not the same thing as saying we're trying to turn this forward all the way to the current fiscal year.

[01:12:26] Speaker 01:
That's just saying we're trying to account for the fact that you're probably going to settle one more cost report at some point during that year.

[01:12:33] Speaker 01:
And so I'd be happy to address why it was reasonable for 2004 to 2006 not to make that particular tweak if the court wants.

[01:12:41] Speaker 02:
I'm fine without it.

[01:12:45] Speaker 06:
Thank you, Council.

[01:12:54] Speaker 06:
Council for Opponents.

[01:12:59] Speaker 00:
Thank you, Honors.

[01:13:01] Speaker 00:
I just want to correct a mistake in the government's presentation that we had waved an argument regarding charge inflation.

[01:13:08] Speaker 00:
I'm quoting our summary judgment briefing at page 292 of the Joint Appendix before the District Court.

[01:13:14] Speaker 00:
As in the IFR, the Secretary should have excluded data relating to turbochargers from its inflation calculation.

[01:13:21] Speaker 00:
So we obviously didn't waive that.

[01:13:23] Speaker 02:
I think his point was that there's a difference between saying that you should exclude turbochargers and saying that you can account for including them but have a discount factor that

[01:13:34] Speaker 02:
that discounts the extent to which you're going to take account of charge inflation.

[01:13:38] Speaker 02:
I thought that was the hypothetical that was being addressed.

[01:13:41] Speaker 00:
And, Your Honor, our position is that, and the argument we presented, is their data, turbocharged data from the batch of turbochargers should have been taken out of the charge inflation factor.

[01:13:52] Speaker 00:
And the reason why that wouldn't have distorted anything is because the agency can still project what their regular payments would be.

[01:14:00] Speaker 00:
They just wouldn't be turbocharged payments.

[01:14:02] Speaker 00:
And if the data, if the agency had modeled it and gone into granular detail and said, well, look, this certain batch of hospitals... Your point basically is that, yeah, we talked about excluding the turbochargers, but of course that wasn't to the exclusion of counting those same hospitals in some way.

[01:14:19] Speaker 02:
You would put them back into the mix and you would assume that they would be.

[01:14:22] Speaker 02:
asking for payments, and you would just treat that as a normal course.

[01:14:26] Speaker 00:
Yes, Your Honor, and so I think we've fairly presented that and preserved that argument for purposes of appeal.

[01:14:38] Speaker 00:
The secretary is also addressing the 2004 rulemaking, discusses what is likely to happen in the upcoming year.

[01:14:45] Speaker 00:
And what was not likely to happen was turbocharging would continue.

[01:14:49] Speaker 00:
Council discussed the charge ratios and what should be expected for a charge ratio or what should not have been expected.

[01:14:58] Speaker 00:
And what the secretary knew would not be expected was that the turbochargers

[01:15:02] Speaker 00:
would have charge ratios based on 2000 because their cost reports would all be settled before that fiscal upcoming fiscal year and let's just say for some reason they weren't and they were still relied on 2000 era data for their charge ratios they would have been reconciliation candidates based on their charge inflation statistics and so therefore it wasn't likely

[01:15:27] Speaker 00:
that they were going to receive the payments of the secretary rejected which is the mandate of the statute of perspective setting the threshold

[01:15:35] Speaker 00:
The council also suggested that there was no comment identifying this precise adjustment with respect to the charge inflation factor.

[01:15:46] Speaker 00:
Well, the Federation of American Hospitals comment that the district court disregard in our case, but was at issue in the District Hospital Partners case, actually made those suggestions.

[01:15:58] Speaker 00:
They didn't make the specific suggestion to say,

[01:16:00] Speaker 00:
exclude the turbochargers and the turbocharged charge inflation data, and then make a special adjustment for them.

[01:16:06] Speaker 00:
But they raised the point.

[01:16:09] Speaker 00:
And moreover, the secretary here waved expressly any argument based on lack of comment.

[01:16:18] Speaker 00:
They did that expressly in the briefs.

[01:16:20] Speaker 00:
And why did they do that?

[01:16:21] Speaker 00:
Because they had lost many of the comments.

[01:16:24] Speaker 00:
and they had no common law and so that that's in our briefs we we established that and they waived it.

[01:16:30] Speaker 00:
I could cite to you a page in the Joint Appendix where they did it at some point but if the court needs that specific site and effectively as to the calculation charge inflation the secretary says well we could have over adjusted you know we could have made a mistake by taking out too much charge inflation that might have continued

[01:16:54] Speaker 00:
Well, what the secretary did was guarantee that the secretary would be wrong in the estimate because it knew that there was significant distorting data that was not reasonable to project 40.

[01:17:05] Speaker 00:
And it made no effort to make any kind of fine distinction between what was good, what was bad.

[01:17:11] Speaker 00:
It merely accepted it all as good, which was not likely to project a threshold that would achieve 5.1% payments.

[01:17:22] Speaker 00:
And I also note, Your Honor, that the argument that's been presented regarding some folks might, some turbocharging might catch fire, might become suddenly popular even though the agencies sent out its OIG task force to crack down on it.

[01:17:38] Speaker 00:
That wasn't an argument made in any, I'm not talking about the briefs, but that's not a justification for any of the rule in 2004 or even 2016.

[01:17:49] Speaker 00:
The agency's rulemaking doesn't suggest that there was any kind of modeling for increased turbocharging by copycat turbochargers when the era was drawing to a close.

[01:18:04] Speaker 00:
The agencies argued that this is a predictive exercise, and I would just remind the court that the County of Los Angeles case did remand the secretary's thresholds because they failed to predict consistently with the APA.

[01:18:22] Speaker 00:
So those were remanded.

[01:18:23] Speaker 00:
It was a course of perspective.

[01:18:25] Speaker 00:
It's discussing what your perspective termination is.

[01:18:29] Speaker 00:
And in 2000, mid 2003,

[01:18:33] Speaker 00:
It was no longer reasonable to project and predict continued turbocharging.

[01:18:39] Speaker 00:
The argument made about, well, we're in an era where part of our old regulations apply and part new apply doesn't hold up because the secretary did not permit turbocharging under the old regulations.

[01:18:53] Speaker 00:
I mean, just because a charge came in multiplied by a hospital's charge ratio doesn't mean it was permitted.

[01:18:59] Speaker 00:
And the secretary has argued that in the Booker-Tone case strenuously.

[01:19:05] Speaker 00:
And in its original rulemaking, it said in 1998, we don't think that charges will significantly outpace costs.

[01:19:15] Speaker 00:
That is not the assumption of our basic model.

[01:19:21] Speaker 00:
Now,

[01:19:24] Speaker 00:
I don't know how much.

[01:19:26] Speaker 06:
Let's take a minute or so to wrap up.

[01:19:30] Speaker 00:
I will wrap up with two final points relating to projecting the charge ratios.

[01:19:40] Speaker 00:
The truth of the matter is that the charge ratios, and now I'm talking about five, six, and seven, the charge ratios would be updated all

[01:19:51] Speaker 00:
during the upcoming eighteen month period and most prior to that period some would be updated no later than halfway through the year and so what that meant is if the secretary wasn't accounting for that properly or at all in 2005 and 2006 or properly in 2007 was it was a guarantee that the agency was going to over project costs outlier payments instead of threshold that was too high and that was a fundamental failure to address an important aspect of the problem

[01:20:21] Speaker 00:
I'll last just discuss the early years and the question of the agency, the agency has paid out

[01:20:41] Speaker 00:
the agency had paid out billions out of the trust fund in excess payments, in excess of the thresholds.

[01:20:49] Speaker 00:
Well, those billions paid out in excess were to turbochargers.

[01:20:53] Speaker 00:
And the secretary had evidence that the system had gone way off the track.

[01:21:00] Speaker 00:
And our position

[01:21:04] Speaker 00:
we believe the law supports this, is the agency had some duty to make an inquiry and not simply allow the system to proceed farther and farther off track each and every year.

[01:21:15] Speaker 00:
And had the agency made that inquiry, it could have seen in its very own files.

[01:21:19] Speaker 00:
It doesn't have to, our argument is not that they had to look at every speck and grain of data, but if they had made any inquiry, they would have seen in their own projection files turbocharging right before their eyes.

[01:21:34] Speaker 00:
does the court have any questions about our APA procedural claim before I wrap up?

[01:21:39] Speaker 06:
No, I think that's it.

[01:21:40] Speaker 06:
Thank you.

[01:21:41] Speaker 00:
Thank you, Your Honors.

[01:21:42] Speaker 06:
We'll take the case under advisement.