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Case number 17-50-06, Billings Clinic at L Appellants versus Eric D. Harkin, Acting Secretary, U.S.

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Department of Health and Human Services.

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Mr. Collins for the appellants, Ms.

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Foster for the appellee.

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May it please the court, I'm Sven Collins.

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I'm representing the appellant hospitals.

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Today I'll refer to the appellee secretary as either the secretary or a CMS.

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And the court has raised a question of jurisdiction, and I would just make two remarks on that and prepare to address any further questions the court may have.

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The first is that only a subset of the hospital's claims here at issue would be subject to the jurisdictional question the court's raised.

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And the remaining claims challenge all of the secretary's rule-makings at issue that are in the appeal.

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and second is that is that true 2011 so.

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I thought there was only one provider who raised a claim as to 2011.

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I understand.

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uh... we'd i'd have to verify this again but my understanding is that for all for the years there are hospitals who did not have a jurisdictional question that's right that's been raised by the court uh... and we're going to raise billions raised it for twenty eleven but i'm just not sure if they were a certification or a dismissal your honor i

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We looked at that issue and my understanding is that all the hospitals were received an authority determination from the board that enough to challenge all of the years.

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But of course, we recognize that if that's not the case, that's an issue that relates to the jurisdiction on that particular year.

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And so that eliminates the jurisdictional question, is that what you're saying?

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Correct.

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uh... the second point is uh... yes i will your honor and that the second uh...

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point is that all of the cases and claims that as which the jurisdictional question been raised, they were presented to the agency presented to the agency board.

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The board dismissed the case.

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They came up properly through through appeal through the statute 1395 00F.

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And during the district court proceedings, the secretary waived any further exhaustion of those claims before the agency.

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And that is at the joint appendix at pages 93 to 94.

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But before you do that, when you say that as long as there's some hospital challenging every year, that eliminates the jurisdictional question, is that right?

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Because each of these hospitals want their own money.

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And so for those that were dismissed and that are now here, don't they still want their own money?

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And so we do need to find jurisdiction as to each individual hospital that wants money or not?

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Yeah, absolutely, Your Honor.

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I mean, the hospital... So it doesn't eliminate the jurisdictional question that there's somebody for each year who got a certification from the board.

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yet and number one are are my belief is that 100% of the threshold rulemaking is being challenged.

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There are plaintiffs who received accounts who received a no authority determination from the board respect to that.

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And obviously you raised the question about 2011.

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No, I think what she's asking is even if there are some hospitals as to which there isn't a jurisdictional state problem, what about the hospitals as to which there is still one because there wasn't certification, wasn't a checkoff, whatever.

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And that's the second point I'm addressing.

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Before you get to the second point, which is an argument about we have jurisdiction anyway,

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Isn't the answer to that, if we find jurisdiction, decide in those hospitals' favor, goes back and those hospitals go back now to the board and the secretary has already waived exhaustion, they will, HHS will be bound by our decision in this case.

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So those hospitals will get whatever benefit everybody else gets.

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uh... yes your honor we believe there's uh... they would get benefit of whatever of that balance of hospitals discourse rulings as to the the thresholds themselves uh... and this raises i believe it's a novel issue and and and it probably ties into this court's a line of health decision which talks spends a bit of time talking about the court's authority determinations but uh... and and we'd be happy to break this further the uh...

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the board's exhaustion requirement we believe can be waived and here the secretary did do that and what would happen as a practical.

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Is that waiver what creates jurisdiction in those cases?

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the ones where they were dismissed.

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Well, what creates jurisdiction is the statute, the statute where the hospitals filed appeals with the board, the board dismissed the case for lack of jurisdiction.

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And then in the district court, the court ordered that there was jurisdiction, of course, but that was with the secretary's waiver of any further exhaustion.

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I get that the waiver happened after the complaints were filed, as to just those hospitals for which the board dismissed and certified their claims.

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Then if they come to district court, the only thing they can bring up for review is that

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dismissal decision, right?

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They can't bring up a merits decision because there is neither a certification nor a merits decision to be reviewed in those cases.

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Well, and that's where Judge Collier-Below determined that sending the case back to the board for entering a ministerial no-authority determination was something that the court could find could be waived and have been waived.

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The problem is that subject matter jurisdiction has to attach at the time the complaint is filed.

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I'm not in the waiver did not happen that time frame it didn't happen in the statutory time frame.

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I think 60 days.

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And for reversing a board decision and the board's regulations their own regulations say

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that if the secretary is overturning a jurisdictional dismissal, the case will then go back to the board for the board to certify or to make a final decision on the merits.

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And the statute seems to require one of those two things before there's district court jurisdiction, certification or final decision on the merits.

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Neither of which they had.

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Well, the original is the district court had absolutely original jurisdiction over the appeal because a dismissal from the board based on jurisdiction supplies the jurisdictional basis for the appeal.

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And then the question- For any issue they want to raise or only for that decision to dismiss for lack of jurisdiction.

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That's what I was trying to ask.

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No, and your very steep question that

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Ordinarily, and we prevailed on the jurisdictional question, no question, ordinarily it would go back to the board to enter a ministerial expedited judicial review order, the no authority review decision that it entered for every one of the other hospitals, even some hospitals in the same expedited judicial review order.

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I get the, I get the sort of, it seems ridiculous to send it back so we know what the board's going to do, but I just want to ask, if you had a case where just one hospital, and all that happened was the board dismissed it for lack of jurisdiction, and then they filed a complaint in district court, could that complaint challenge, certainly could challenge the dismissal for lack of jurisdiction?

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Could it also raise merits issues?

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The complaint would also need to seek relief, which is what the hospital plaintiff sought in our case, which is that it remain in the district court, notwithstanding the ordinary remand, and for the district court to make a finding that the jurisdictional, you know, that the ministerial staff... The jurisdiction had been waived.

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Yes.

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Can I ask a question?

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I think this is more, maybe one for the government council to think about while waiting.

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But the statute doesn't say anything about holding off while HHS decides its jurisdiction.

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The statute that gives us jurisdiction says, if the provider files a request for determination by the board of its authority to decide the question of law,

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The board shall render such determination writing within 30 days.

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If the board fails to render such determination, the provider may bring a civil action.

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That's exactly what happened here, right?

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There's no determination on your merits claim and on your claim about the regulations within 30 days.

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Is that right?

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That's correct, Your Honor.

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Okay, so as far as the statute is within 60 days.

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So as far as the statute is concerned, we have jurisdiction.

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The only thing that gives us any pause is that the agency itself thought it was without jurisdiction because of the lack of the certification of the amounts, right?

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Yeah, the board did, correct.

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The board.

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And that comes not from the statute, but from a regulation of the secretary.

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Yes.

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Correct?

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Correct.

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And whether or not, and although the secretary cannot waive our jurisdiction,

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Secretary can certainly waive the secretary's own regulations, at least as long as the secretary doesn't complain about it, which the secretary isn't doing.

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And you're not complaining about it, right?

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That's absolutely right, Your Honor.

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OK, that's a question really for the consul, for the government.

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But that still doesn't answer it.

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Even if that establishes that we have jurisdiction, it doesn't answer jurisdiction as to what.

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It doesn't necessarily answer it, right?

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because it doesn't necessarily tell us that we have jurisdiction as to the entire merits.

[00:11:18] Speaker 02:
Well, I think in the process Chief Garland laid out that the Secretary's failure – the board's failure to issue a no-authority determination within the 30-30-day window would trigger the right to expedite a judicial review under 139500F.

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So you think it bakes in the expedited judicial review, which then brings the entire kit and caboodle before us?

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Well, I think that's another avenue.

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I also think that the government's waiver in the district court, that there's no need for further exhaustion, because once that happens, these claims purely come within the purview of the expedited judicial review provisions of the Medicare Act, which is the provisions through which these cases are appealed.

[00:12:05] Speaker 02:
This case picks up where the Vanner Health case left off, and it challenges the Secretary's process for setting the outlier payment thresholds for 2008 through 2011.

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Banner Health recognized that a critical flaw in the agency's process to set the thresholds in 2004 through 2006 had been its failure to adjust for the uninterrupted decrease in the hospital charge ratios.

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And that failure had caused the secretary to set excessive thresholds that were not likely to pay out at the agency's 5.1% target amount.

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In other words, to bake in underpayments.

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Although the Banner Health Court decision lets stand the agency's first attempt in 2007 to account for this decrease in the hospital charge ratios, the subsequent record facts here demonstrate that CMS's method arbitrarily continued to bake in underpayments.

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CMS has argued for deference, and I'll get to the reasons why shortly why deference is not due, but I will just put to you

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for the big picture facts here.

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And I don't know if we have more time for our argument given the jurisdictional question, but I'm just going to focus now on the four things I want you to think about.

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Number one, the agency

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recognized that it had to adjust for the decrease in the charge ratios.

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It did that in 2007 because it had underpaid hundreds of millions of dollars when it had failed to do so in the prior three years.

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And that was central to this court's reasoning in the Banner Health decision with respect to those three years.

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Now, in 2008, after the Secretary had applied its complicated method that didn't track this... So they used a new adjustment methodology in 2007, is that right?

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Correct.

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The first time they... So nothing that comes before 2007 is really... before 2008 is really relevant, right?

[00:14:04] Speaker 02:
what what there's several things are relevant your honor one is how effective was the method because the agency adopted a method that didn't track historical record trend and in fact this court inferred that the agency might have thought that the record trend if they were if they were below for several years before then they had got the new method which we blessed

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and then they're below the next year.

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You can't look back and say, well, they've been below for many years without adjusting, because they did adjust.

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Now the question is whether this new adjustment is good enough.

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Exactly.

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OK.

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Precisely.

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So in 2008, we don't really have a history to rely on.

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That is, a history of bad adjustments in the past.

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Isn't that right?

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Except for what happened in 2007.

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Well, exactly.

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What happened in 2007, the first year they attempted to apply an adjustment.

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And it actually resulted in more underpayments than it had resulted in 2006.

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So, pause on that fact.

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The next fact is, in 2008, when they applied their method a second time, to account for the uninterrupted decrease in the charge ratios, the Secretary increased them.

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And that irrational result was not addressed by the secretary at all in the rule-makings.

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And the 2007 estimate the secretary had made that there would be, essentially, that the cost-to-charge ratio rate of decrease would slow to almost a trickle did not come to fruition because the 2008 record demonstrated that, in fact, it had continued its uninterrupted decrease at a much higher rate.

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And against this, in the 2008 record and after that, the secretary did not provide any explanation of the record facts compared to its assertion, which unsupported assertion that its method was more accurate than adjusting using the record trend.

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And it's easy to understand why the secretary's method went haywire in 2008.

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And that's specifically because the agency was modeling a change in cost-to-charge ratios.

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Cost-to-charge ratios depend on, and they're computed from, contemporaneous data.

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costs divided by charges from the same fiscal period.

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But the secretary's model used charge data from the most recent period and paired that up with cost data from four earlier fiscal periods.

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And the problem with that is, um, costs and charges, charges were increasing fast, faster than costs consistently, but they were both increasing at different rates.

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And so using the non-contemporary in this data made the secretary's modeled adjustment factor, uh, insured regularly and predictably that it'd be divorced from the record facts.

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And as the record shows in each of the rule-makings here at issue.

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Now,

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Let me say with their off target, I just want to be clear.

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You're saying they didn't hit the five to six percent target.

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They didn't hit the five percent target on projected rates or actual rates?

[00:17:36] Speaker 02:
with the actual payment and and and the secretary and the secretary defined that as five point one percent because that's the amount they offset from the hospital yes projected rate so so now that the secretary each year would look back and estimate how much how close did come to the target so in two thousand seven

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when it did its look back in 2008, it saw that it had paid less with an adjustment factor than without.

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And then in 2009, when it looked back at 2007 and 2008, it saw again its re-estimate of 2007.

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Yes, indeed, we paid less.

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And then 2008, we barely moved the needle from where we had been before there was an adjustment factor.

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And in 2010, it looked back and found that it was actually above for 2009.

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that's correct your honor.

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So they missed two years, they undershot two years and overshot one year.

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They undershot and in fact.

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the record data, which was presented to the secretary in the 2011 rule, showed that 2009 was in fact an underpayment.

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The commenters noted, if you don't model past payments, if you actually look at the actual claims today... Well, we have to decide each year at a time.

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You can't look into the future when you don't know what you know.

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So, but I take it your argument is in 2008,

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They knew that they had undershot in 2007.

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In 2009, they knew they had undershot in 2008 and 2007.

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But in 2010, they knew that they had overshot in 2009, right?

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Not only did they think that, but so did you.

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Correct.

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In 2000, you're absolutely right.

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You're in 2010.

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So just as a big picture,

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Why is it unreasonable for an agency to say, okay, I mean, we're only making estimates here.

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We undershot two years when we overshot the third year.

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Well, first of all, your honor, that is not there's not a word of argument or or explanation like down the record.

[00:19:48] Speaker 03:
But that seems blindingly obvious that the argument did the whole point of your argument is that they're underpaying.

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And if the facts is they underpaid you in first two, they they by estimation and the third year they overpaid seems

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I don't know what the right race, it's a locator maybe.

[00:20:08] Speaker 03:
It seems obvious that that's their rationale for continuing along.

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And they did say in the 2010 record, they said, aha.

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The fact that we slightly overpaid means that our method is sound.

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But in the prior to you rules, they'd said nothing about the fact that they had underpaid and concluded our method may not be sound.

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And in fact, the record showed it wasn't sound.

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And your honor, it would be a bit like if an archer aiming for a target fires five arrows, four go into the woods, one barely hits the target.

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would this court defer to the archer's judgment if the archer can claim to be a marksman?

[00:20:47] Speaker 03:
No, but this is more like a statistical problem than an archer problem.

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mathematical formula which creates a set of plots on a line or on a curve and you're trying to hit certain spots but you can't be sure you're going to hit the exact spot that you want and sometimes just by statistical variance you end up not hitting it and you don't have to really explain other than as long as you know you have a model that you think is going to get to the right spot no model is expected to hit the exactly on target every time.

[00:21:27] Speaker 02:
you're not going to be likely to hit that spy if you're using a method that the record has proved two times in a row to not work.

[00:21:36] Speaker 02:
And that is what we're focusing on here, is not that they had to hit the ultimate 5.1% target.

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Of course, underpaying it or hitting it may reflect on the efficacy of their method.

[00:21:47] Speaker 02:
But the more focused- Well, you said two times in a row.

[00:21:51] Speaker 03:
So in 2008, we don't know two times in a row.

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In 2009 we know two times in a row, and in 2010 we know two times in a row and then one time over.

[00:22:01] Speaker 03:
So what do you do with that?

[00:22:02] Speaker 03:
Does that mean you win only in 2009?

[00:22:06] Speaker 02:
No, your honor.

[00:22:07] Speaker 03:
You just told me two times in a row is what requires.

[00:22:09] Speaker 02:
No, I said that there were four.

[00:22:14] Speaker 02:
The archer fired four arrows.

[00:22:17] Speaker 02:
I may have said five.

[00:22:18] Speaker 03:
But we don't know those four arrows until you start looking at 2011.

[00:22:22] Speaker 03:
In 2008, the archers only fired one arrow.

[00:22:27] Speaker 02:
Your honor, in 2008, the agency knew these facts.

[00:22:33] Speaker 02:
they knew that their prediction for 2007 for the adjustment factor was way off.

[00:22:40] Speaker 02:
Both of the two things they're modeling, one, the rate of cost inflation that they're going to pair up with the rate of charge inflation, way off.

[00:22:47] Speaker 02:
They predicted an increase, not an increase.

[00:22:50] Speaker 02:
Two, the rate was going to decline to a trickle.

[00:22:54] Speaker 02:
Which begs the question, why would you have an adjustment factor in the first place?

[00:22:59] Speaker 02:
If this was such a big problem that the agency was going to acknowledge it in 2007 that we needed to do it, why would you have one that goes to trickle?

[00:23:07] Speaker 02:
But the most glaring thing that happened in 2008 is that the fact that its method predicted something that was counter to all the data.

[00:23:16] Speaker 02:
there is no data that would support.

[00:23:17] Speaker 01:
So if the method were adjusted in 2000, and in response to this, if the methods were adjusted so that there would have been less of an underpayment, then there would have been more of an overpayment later.

[00:23:31] Speaker 02:
Could you repeat that, Your Honor?

[00:23:32] Speaker 01:
Yeah, so if the reaction in 2008 is that something's deeply flawed, we're still getting underpayments, so we need to compensate for that.

[00:23:43] Speaker 01:
And the model is say you just bake in a new factor that says we need to adjust it downwards by an additional 0.2 or something because we're predictably coming in under that.

[00:23:53] Speaker 01:
Then it would have turned out there would have been more of an overpayment in a subsequent year in which there was an overpayment, right?

[00:23:58] Speaker 02:
Well, not at all because of that method.

[00:24:00] Speaker 02:
And in fact, I mean, that's a great question.

[00:24:05] Speaker 02:
What the agency knew is that its model was not effectively addressing the issue, but in 2009, CMS both said, without any analysis, that our method must be sound because we have a slight overpayment, we need to raise the threshold, but also there were many other adjustments

[00:24:21] Speaker 02:
for assumptions in the basic payment rates, not the outlier analysis, that changed how much the threshold had been set in 2009.

[00:24:30] Speaker 02:
The threshold in 2009 was lowered, but it wasn't because the agency applied a proper adjustment factor that year.

[00:24:37] Speaker 02:
So the agency could conceivably have paid out more in 2009 with a proper adjustment factor, but that would have not have meant the adjustment factor was improper.

[00:24:47] Speaker 02:
They were attempting to model a specific component of the variables, which was the steady decrease in the charge ratios.

[00:24:57] Speaker 02:
And so this is all obviously very complex.

[00:25:01] Speaker 02:
Joint appendix 4927 through 28 reflects the agency's discussion of those other factors I'm talking about, where they say the regular payment rates are going to change.

[00:25:11] Speaker 02:
So therefore, that is going to change the level of the threshold.

[00:25:15] Speaker 02:
But that doesn't have anything to do with predicting what hospital costs are going to be for purposes of outlier payments.

[00:25:21] Speaker 03:
Other questions from the bench?

[00:25:24] Speaker 03:
Thank you.

[00:25:24] Speaker 03:
We're here from the government.

[00:25:37] Speaker 06:
May it please the court, Sydney Foster, for the government to address the jurisdictional question that your honor asked, and first actually just to address the question about 2011.

[00:25:47] Speaker 06:
I think that there is a decision at J 130 to 136 which granted expedited judicial review with respect to Billings Clinic.

[00:25:54] Speaker 06:
I think it might have been on reconsideration, and it was with respect to Fiscal Year 2011.

[00:25:58] Speaker 06:
So just two big sentences.

[00:26:00] Speaker 03:
So you agree with... Every year there's somebody who's... We agree that every year is covered by... And if we heard their cases only, with the same counsel obviously, exactly the same argument, and decided in their favor, you would be bound on remand with respect to the ones who originally found no jurisdiction to make the same payments.

[00:26:23] Speaker 06:
I would think that, as a procedural matter, I would think then that the district court would remand those cases to the court to make a decision on whether to grant expedited judicial review.

[00:26:33] Speaker 06:
And I don't know whether at that point the board would make a decision saying that it's voucher.

[00:26:38] Speaker 06:
I think it would probably go back to district court, and then the district court would apply this ruling.

[00:26:42] Speaker 03:
Would remand to the board, and the board and the secretary has waived the regulation with respect to jurisdiction.

[00:26:48] Speaker 03:
So with respect to the secretary's jurisdiction.

[00:26:52] Speaker 03:
So the board would then have to decide what to do.

[00:26:55] Speaker 03:
Either it would follow what we just said or it would have to go back to the district court because I don't know.

[00:27:02] Speaker 03:
It seems to me that by that point there would be no regulation.

[00:27:09] Speaker 03:
To be a little even more clear, there is no requirement of payment even possible here, right?

[00:27:14] Speaker 03:
The most that can be done is a vacating and then a remand to reconsider payments.

[00:27:20] Speaker 03:
No one's asked for a specific kind of payment.

[00:27:23] Speaker 03:
That's right, Your Honor.

[00:27:24] Speaker 03:
So everything's going to have to go back.

[00:27:25] Speaker 06:
Everything eventually goes back to the board.

[00:27:27] Speaker 06:
I mean, if this court were to rule in paper, the plans were clear.

[00:27:30] Speaker 03:
I know it's contrary, but still hypothetically, if you were.

[00:27:33] Speaker 06:
Right.

[00:27:33] Speaker 04:
No, I think that's exactly right.

[00:27:34] Speaker 04:
There's no procedural or timing or any other kind of errors that would come in for those folks that were dismissed.

[00:27:38] Speaker 04:
I'm sorry.

[00:27:39] Speaker 04:
There's no procedural or timing or any other kind of barriers that we come in for the folks who came here?

[00:27:45] Speaker 06:
We haven't disputed that there are any other barriers that would apply to them.

[00:27:49] Speaker 06:
That's correct.

[00:27:50] Speaker 06:
But to answer the question that you posed, Your Honor, I mean, I guess my first answer would be that we don't think that there's any need to decide whether or not that is a basis for on which this Court could find that there's jurisdiction, because we think that there's clearly jurisdiction under the salty waiver theory that was applied in Queen of Angels, so I think that would be my first point.

[00:28:10] Speaker 06:
My second point is that I didn't have time to look at all of the Board decisions that dismissed for lack of jurisdiction, but at least with respect to some of them and perhaps all of them,

[00:28:19] Speaker 06:
It not only dismissed for lack of jurisdiction, but it stated that it was denying expedited judicial review for that very reason, and I think that's at least at J100, 103, and 105.

[00:28:28] Speaker 06:
I didn't get a chance to make sure that that was accurate for all of them, and it may not be, but to the extent that the board decisions also stated that they denied expedited judicial review, then it feels like that argument would be an uphill one.

[00:28:44] Speaker 03:
But to the extent that their board decisions- That as an argument against jurisdiction would be an uphill one.

[00:28:49] Speaker 06:
The argument in favor of jurisdiction on the theory that you were advancing seems like it would be more difficult, because your theory was that there would be jurisdiction.

[00:28:58] Speaker 03:
But if they actually denied expedited determination, then that goes right away, right?

[00:29:09] Speaker 06:
Well, that's correct, and that's what happened here.

[00:29:12] Speaker 06:
We had a final decision because it was a jurisdictional dismissal.

[00:29:17] Speaker 06:
I don't know if a denial of expedited judicial review gets to be challenged.

[00:29:23] Speaker 06:
If it's on the merits, if it gets to be challenged, I can't take a decision on that.

[00:29:27] Speaker 06:
But I can say that here, because it was a jurisdictional dismissal, this was a final, final decision.

[00:29:30] Speaker 03:
I like your first point best, which we don't have to decide any of that.

[00:29:33] Speaker 06:
What's that?

[00:29:34] Speaker 03:
Which we don't have to decide.

[00:29:36] Speaker 06:
I know.

[00:29:36] Speaker 06:
It's always good.

[00:29:38] Speaker 06:
So that's my response on that.

[00:29:42] Speaker 06:
To address the merits, all of the aspects of HHS's methodology for setting the fixed loss thresholds in fiscal years 2008 through 2011, that plaintiff's challenge in this case, were also used by the secretary in setting the fixed loss threshold for fiscal year 2007.

[00:30:01] Speaker 06:
And that's what was at issue in this court's recent decision in Banner Health.

[00:30:06] Speaker 06:
This court upheld the agency's methodology, concluding that it was not arbitrary and capricious.

[00:30:10] Speaker 03:
But that was in light of the evidence to date, right?

[00:30:12] Speaker 06:
Exactly, that's correct.

[00:30:13] Speaker 03:
And I think that's almost word for word what the case said, something like that.

[00:30:16] Speaker 06:
That's correct.

[00:30:18] Speaker 06:
Although I think there are numerous arguments that plaintiffs make here that are materially the same as the arguments that were made there.

[00:30:23] Speaker 06:
I think there are a few arguments that are new, and I think one of them is this notion and this argument that over time, evidence accumulated that the methodology was improper.

[00:30:33] Speaker 06:
We think those arguments are without merit for the reasons that I think Your Honors were discussing.

[00:30:37] Speaker 06:
There just was limited information available to the agency.

[00:30:40] Speaker 06:
in each of, not enough information available to the agency in each of the rule-makings here to conclude that there's something terribly wrong with the methodology.

[00:30:48] Speaker 01:
So part of what we're looking at is if somebody makes the argument that there's new evidence that has come to light and therefore you ought to rethink what you're doing.

[00:30:57] Speaker 01:
Say we're in the middle of 2008 or 2009 and the providers come together and say there's new evidence that's come to light, this formula's just not working, you need to reconsider it.

[00:31:05] Speaker 01:
then part of the inquiry is, what did the agency say in response?

[00:31:11] Speaker 01:
And is what they said in response something that indicates meaningful engagement and not an arbitrary and capricious refusal to even engage?

[00:31:21] Speaker 01:
And your understanding of what the agency said in response when these arguments were made is

[00:31:28] Speaker 01:
What is your understanding of what's your understanding about the agency's responses?

[00:31:32] Speaker 06:
Yeah, I mean, we do think it was, given especially the broader context of these rulemakings, which are very complicated, it's just one small part of a larger set of rulemakings.

[00:31:40] Speaker 06:
We have a ton of comments being submitted, so we can't go into excruciating detail with respect to each one.

[00:31:45] Speaker 06:
We do think that the amount that the agency said in each rulemaking was appropriate.

[00:31:50] Speaker 06:
If you look at fiscal years 2008 and 2009, what the agency said was it described the comments that said,

[00:31:57] Speaker 06:
hey, the past estimates seem to be resulting in payments that are below the 5.1% target.

[00:32:05] Speaker 06:
We think this other methodology should be used as one where you just assume that the future rate of change is going to be based on whatever the past rate of change was in this national case-weighted average cost-to-charge ratios.

[00:32:21] Speaker 06:
Please change.

[00:32:23] Speaker 06:
The agency acknowledges those comments, it describes them in detail, and it says, no, we think that our methodology is more appropriate.

[00:32:32] Speaker 06:
We like our methodology because it takes into account certain critical cost inflation data that the plaintiff's methodology doesn't take into account, as this court's decision in Banner Health noted.

[00:32:45] Speaker 06:
That data is actually contemporaneous with the kind of period in question that we're actually focusing on with respect to updating the cost and charge ratios.

[00:32:53] Speaker 06:
And so the agency said, no, there's no need for us to make a change at this point.

[00:32:58] Speaker 06:
I think it's true.

[00:32:59] Speaker 06:
The agency didn't explicitly say, and by the way, we're not worried about the fact that there's one or possibly two years of data showing that we have come in under

[00:33:09] Speaker 06:
the 5.1% target when you look at the actual data.

[00:33:12] Speaker 06:
But I think it was blindingly obvious that one or two years worth of data showing that they were potentially undershooting the target doesn't compel a need for change.

[00:33:25] Speaker 06:
And I think that's particularly clear when you look at the data that was available in fiscal years 2008 and 2009 to the agency.

[00:33:33] Speaker 06:
If you look at fiscal year 2008, the agency did have some estimates about what had happened in fiscal year 2007.

[00:33:39] Speaker 06:
But those estimates weren't based on actual claims and charges from fiscal year 2007, because that information wasn't yet available to the agency.

[00:33:48] Speaker 06:
Those estimates were based on data from fiscal year 2006.

[00:33:51] Speaker 06:
And the agency tried to estimate what would have happened in fiscal year 2007 based on that data.

[00:33:59] Speaker 06:
So even if we're looking at just fiscal year 2008 alone,

[00:34:02] Speaker 04:
the estimates about what happened in fiscal year 2007 were not even based on fiscal year 2007 data, so that kind of underscores the conclusion that the agency... By 2010, the hospitals had come forward with information that there were cost ratios that could be used that were substantially closer to the mark.

[00:34:25] Speaker 04:
And given that the

[00:34:28] Speaker 04:
misfiring was not getting closer year by year.

[00:34:31] Speaker 04:
I get that you could miss it, but hopefully it would improve over time, but it actually, other than the dispute about what happened with 2009, keeps getting worse, not better, keeps getting more off the mark each year.

[00:34:42] Speaker 04:
And it's continued that again in 2010, and 2011 is worse than 2010.

[00:34:46] Speaker 04:
So when they come forward with a proposal for a methodology that, as they've demonstrated, further demonstration at least, was more accurate,

[00:34:57] Speaker 04:
The secretary obliged at that point to at least explain why they're not adopting a better methodology when this one seems to keep getting further and further off the mark.

[00:35:08] Speaker 04:
If not then, when?

[00:35:10] Speaker 06:
Yes, so I would disagree with the premise that they came forward with evidence that their methodology was superior.

[00:35:16] Speaker 06:
I think, actually, that's not correct at all.

[00:35:18] Speaker 06:
I think that, in fact, there's only one comment that they cite in the record that purports to try to compare their methodology to the methodology that HHS used.

[00:35:26] Speaker 06:
And it happens to have been submitted in the fiscal year 2010 rulemaking.

[00:35:30] Speaker 06:
And it's at J538 and 557.

[00:35:33] Speaker 06:
We cite it in our brief.

[00:35:34] Speaker 06:
If you look at what that comment said when it was comparing the two methodologies,

[00:35:39] Speaker 06:
And just even assuming that the methodology that the commenter uses is an appropriate one for gauging which approach is better at predicting cost to charge ratios, which it may not be, but assuming that it is, the comment showed that

[00:35:55] Speaker 06:
The plaintiff's preferred methodology worked better for one of the cost-to-charge ratios that HHS predicts each year, or that changes in cost-to-charge ratios, adjustment factors, I should say, that HHS predicts each year.

[00:36:07] Speaker 06:
But then HHS's method worked better for the other one.

[00:36:10] Speaker 06:
So this comment certainly did not compel the conclusion for HHS that it needed to all of a sudden change its methodology to the one that plaintiffs make.

[00:36:19] Speaker 06:
And I think that's the critical point.

[00:36:20] Speaker 04:
Those are going to J573.

[00:36:23] Speaker 04:
What's that?

[00:36:24] Speaker 04:
JA573 was the Federal Register notice 44009 in the third column near the bottom.

[00:36:33] Speaker 04:
The commenters, again, maybe that there's problems with their methodology, that's for you all to comment on.

[00:36:41] Speaker 04:
They found a variance of .6% for their methodology versus the 1.6% for the CMS methodology.

[00:36:48] Speaker 04:
And I guess I didn't see the explanation

[00:36:51] Speaker 06:
I'm sorry, where are you, Your Honor?

[00:36:52] Speaker 04:
So on J573, so the right-most column, very bottom, right before response.

[00:37:01] Speaker 04:
The commenter also finds up before response.

[00:37:07] Speaker 04:
See, the commenters compared its method and CMS method.

[00:37:12] Speaker 04:
They've got a much smaller variance than yours did.

[00:37:16] Speaker 04:
And the explanation to me just sounded like we're going to keep doing what we're doing.

[00:37:22] Speaker 06:
Yeah, I don't think, maybe I'm misunderstanding the question, but I don't think that what they're doing right there is saying, let's take a look at these two methodologies for projecting an adjustment factor for cost to charge ratios, and let's see, like let's look back at what each methodology would have predicted back in fiscal year 2008, and let's see which one actually matched what later turned out to happen.

[00:37:44] Speaker 06:
Right, that's what the comment that I was referring to in 538 and 557, it was purporting to try and do that kind of comparison.

[00:37:52] Speaker 06:
And that's kind of, if the methodology of that commenter was appropriate, that's a reasonable approach to take, and to question and ask.

[00:37:59] Speaker 06:
I don't think that's what's going on here.

[00:38:01] Speaker 06:
If I'm understanding correctly, all that's going on here is that the commenters

[00:38:05] Speaker 06:
are saying, hey, it's kind of the same argument that we were talking about a moment ago.

[00:38:11] Speaker 06:
The estimates of actual payments are coming in below 5.1%.

[00:38:16] Speaker 06:
You should therefore change your methodology.

[00:38:18] Speaker 06:
And then in response, HHS says two things.

[00:38:21] Speaker 06:
It says, number one, no, we actually prefer our methodology because it takes account of this important cost inflation data.

[00:38:28] Speaker 06:
And then it also notes that in addition,

[00:38:32] Speaker 06:
You are right that we, or well, they don't say you are right, but they contradict the kind of assumption that HHS has been predicting payments to come in below 5.1% by noting that the prediction for fiscal year 2010, or the estimate for fiscal year 2009, I'm sorry, was that HHS made payments above 5.1%.

[00:38:57] Speaker 06:
And even the commenter upon which plaintiffs continually rely for their arguments

[00:39:03] Speaker 06:
noted in the fiscal year 2010 rulemaking that also estimated that the fiscal year 2009 payments at that point were 5.3 percent, and that was at day 541 and 567.

[00:39:13] Speaker 06:
I think, too, just to step back for a moment and address your comment about why is HHS so far off in these years and shouldn't that be any better.

[00:39:24] Speaker 06:
Right.

[00:39:25] Speaker 06:
I mean, I think one thing to just keep in mind is the difficulty of the task that was faced, that HHS was faced with.

[00:39:32] Speaker 06:
It's faced with an unenviable task of predicting what all different kinds of Medicare payments are going to be in an upcoming fiscal year.

[00:39:39] Speaker 06:
That task is riddled with an enormous amount of uncertainty, given the lack of information that is available, obviously, about what's going to happen in the future, the enormous number of variables.

[00:39:49] Speaker 06:
in play, including ones that aren't at issue in this case, but that could affect the calculation.

[00:39:55] Speaker 06:
And so I think given that massive amount of uncertainty, it's unreasonable to expect that HHS's predictions are going to map on to the 5.1% or that the actual payments are going to be exactly 5.1% or even very, very close to 5.1%.

[00:40:12] Speaker 06:
This is a calculation that's riddled with uncertainty.

[00:40:16] Speaker 04:
Something very sympathetic in this.

[00:40:19] Speaker 04:
It's math that's way beyond my pay grade.

[00:40:21] Speaker 04:
But there's a statutory obligation here.

[00:40:25] Speaker 04:
That's what makes this much harder.

[00:40:28] Speaker 04:
It's a floor.

[00:40:30] Speaker 04:
Congress has mandated that it won't be less than 5%.

[00:40:33] Speaker 04:
And it has pretty persistently been less than 5%.

[00:40:37] Speaker 04:
They would say 100% of the time, because they dispute 2009.

[00:40:42] Speaker 04:
But persistently, you're missing that.

[00:40:45] Speaker 04:
And it may well be that you all chose

[00:40:48] Speaker 04:
5.1, which gives you very little margin of error here to comply with your statutory obligation.

[00:40:55] Speaker 04:
You chose that for probably very good reasons.

[00:40:58] Speaker 04:
But you chose to give yourselves virtually no margin of error to comply with the statutory mandate.

[00:41:06] Speaker 04:
And then you miss it persistently.

[00:41:09] Speaker 04:
And since Congress has commanded that floor, can we

[00:41:14] Speaker 04:
can we keep going with going well you know we're trying to get it as right as we can and it's really hard and it seems extremely hard but maybe y'all need to shoot for 5.5 and then you'll get it right.

[00:41:27] Speaker 06:
I guess I'd say two things in response here.

[00:41:30] Speaker 06:
Number one, I actually think the statute points in exactly the opposite direction.

[00:41:33] Speaker 06:
If Congress really wanted HHS to hit 5.1% exactly or some other percentage exactly, it could have required the outlier payments be exactly 5.1%

[00:41:43] Speaker 06:
It says that the projected outlier payments should be between five and six percent of projected total payments.

[00:41:56] Speaker 04:
I thought it was mandatory language.

[00:41:57] Speaker 04:
Am I just misreading it?

[00:41:58] Speaker 06:
It's mandatory language and I think the point I'm making though is that Congress

[00:42:02] Speaker 06:
said that the calculation should be based on projections.

[00:42:05] Speaker 06:
If it was concerned that actual payments should also be 5.1% of actual outlier payments, should also be 5.1% of actual total payments, then it could have either A said so or B said first make these projections and then go back.

[00:42:20] Speaker 04:
But then at some point this becomes evidence that maybe the projections just aren't reasonable in this regard and need to be adjusted.

[00:42:26] Speaker 04:
And it may be complicated.

[00:42:27] Speaker 04:
But however complicated it is, if it keeps persistently producing the wrong number, and you're not going, whoa, OK, 2008, that wasn't quite what we want.

[00:42:38] Speaker 04:
Let's tweak this, and then we'll be a little less off.

[00:42:41] Speaker 04:
Maybe we're off, but we're getting closer to the target.

[00:42:44] Speaker 04:
But you were going 4.7, 4.8.

[00:42:45] Speaker 04:
And then we have to find about 2009.

[00:42:48] Speaker 04:
But then again, it's 4.7, 4.8 going in the other direction.

[00:42:51] Speaker 04:
Do you not have some obligation?

[00:42:54] Speaker 04:
given the statutory mandate to?

[00:42:56] Speaker 06:
Right, well again, the statute just says that the agency must, essentially the statute contemplates, I think Congress must have recognized that it's going to be enormous, there was an enormous uncertainty making these predictions, and by saying- Can I pause over this for a few seconds here?

[00:43:10] Speaker 03:
What's that?

[00:43:10] Speaker 03:
The higher you go above 5.1,

[00:43:16] Speaker 03:
That money gets taken out of prospective payments.

[00:43:18] Speaker 05:
Exactly.

[00:43:18] Speaker 03:
That hurts the hospitals.

[00:43:19] Speaker 05:
Exactly.

[00:43:20] Speaker 03:
So that's the reason that number was chosen, because they're going to get hurt on the other end if you go too high.

[00:43:26] Speaker 05:
That's exactly right.

[00:43:27] Speaker 03:
This isn't a cost-free decision.

[00:43:28] Speaker 05:
Exactly.

[00:43:29] Speaker 03:
Second, have they raised the argument you should have gone higher than 5.1?

[00:43:33] Speaker 03:
No, they have not.

[00:43:34] Speaker 03:
And so they wouldn't have used that target.

[00:43:35] Speaker 03:
Presumably for that reason, because it's not really to their advantage.

[00:43:38] Speaker 06:
That's exactly right.

[00:43:39] Speaker 06:
And if Congress wanted to make sure that the actual payments would be between 5 and 6 percent and realized that there was kind of this uncertainty, maybe Congress should have directed HHS to have a target of 5.5 percent.

[00:43:51] Speaker 06:
But that's not what Congress did.

[00:43:52] Speaker 06:
Congress directed target HHS to make projections that were between 5 and 6 percent.

[00:43:57] Speaker 06:
Thus, Congress was allowing HHS to choose a target that was as low as 5.1 percent.

[00:44:03] Speaker 06:
Congress anticipated surely

[00:44:05] Speaker 06:
that the actual payments would not necessarily fall within the close to that target.

[00:44:09] Speaker 01:
Just to make sure I'm understanding this right, the reason it's effectively a zero-sum game in that if you go above

[00:44:16] Speaker 01:
then it ends up coming back out of the hospitals.

[00:44:18] Speaker 01:
It doesn't have to do with outlier payments.

[00:44:20] Speaker 01:
At that point, you're talking about non-outlier payments that get reduced.

[00:44:23] Speaker 06:
That's exactly right.

[00:44:24] Speaker 06:
Because whatever value HHS chooses for this target, if it's 5.1% or 5.5%, then they have to adjust the standard payment for typical cases.

[00:44:35] Speaker 01:
The in-lier payments.

[00:44:36] Speaker 01:
Right.

[00:44:36] Speaker 01:
Exactly.

[00:44:37] Speaker 06:
And that's actually addressed in the

[00:44:38] Speaker 06:
That's addressed in the fiscal year 2007 rule, and I think we cite to the relevant part in our brief.

[00:44:44] Speaker 06:
I mean, I think the other thing that's important to keep in mind here is that we can't just look at HHS's method and ask, you know, is it perfect?

[00:44:54] Speaker 06:
Are there ways that it could be improved?

[00:44:56] Speaker 06:
The question here is, is HHS's, were their methodological choices reasonable?

[00:45:01] Speaker 04:
And in particular, with- Before you get to that, I'm vying with your answer.

[00:45:08] Speaker 04:
what we actually end up paying doesn't matter, as long as our projections.

[00:45:11] Speaker 04:
So why do we have to have that conversation at all?

[00:45:12] Speaker 04:
That's exactly, no, that is our answer.

[00:45:14] Speaker 04:
It really doesn't matter about the methodologies.

[00:45:16] Speaker 04:
I mean, the answer that we were getting here is we're trying to get it right, and this is our way of doing it.

[00:45:21] Speaker 04:
And if the answer is, we've got it right, consistent with the statute.

[00:45:26] Speaker 04:
To me, like, your point was that we realize that we want to have a closer relationship between projection and actual.

[00:45:32] Speaker 04:
You feel obliged to do that as well.

[00:45:34] Speaker 06:
Right.

[00:45:34] Speaker 06:
I mean, the central question here is, is HHS methodology reasonable?

[00:45:40] Speaker 06:
And of course, HHS's goal is to try and get as close to 5.1% as possible.

[00:45:45] Speaker 06:
But of course, there's a massive amount of uncertainty.

[00:45:47] Speaker 06:
It's going to be very difficult given all the variables involved in the

[00:45:52] Speaker 06:
limited amount of information available to HHS for HHS to get super duper close to that target.

[00:45:58] Speaker 06:
And so the only question really is were the methodological choices reasonable?

[00:46:02] Speaker 06:
And here I think they plainly were, especially when you think that you have to think about when comparing to the methodology that plaintiffs say is better.

[00:46:10] Speaker 06:
I mean the question is

[00:46:13] Speaker 06:
is not really, you know, was that another methodology that would have been reasonable?

[00:46:18] Speaker 06:
Perhaps it would have been.

[00:46:19] Speaker 06:
It's not even, was that another methodology that was better?

[00:46:24] Speaker 06:
But did the record here compel the conclusion to HHS that their methodology was so much better than the methodology that HHS chose, that HHS should have abandoned its methodology?

[00:46:34] Speaker 06:
And I think there's no showing in this record

[00:46:36] Speaker 06:
based on kind of the past data about actual payments and where they came in were relative to 5.1% and also with respect to specific showings comparing how the methodology actually worked out.

[00:46:47] Speaker 01:
So it's not part of this case but just as a matter of background, has anything changed since?

[00:46:51] Speaker 01:
Has the formula, has the same methodology remained in place?

[00:46:54] Speaker 06:
he just did change on the methodology in the room making for fiscal year two thousand fourteen and have adopted a methodology that's more similar to the one that thank this advocate using of course that's that fact is not relevant to kind of evaluating whether or not was reasonable based on the records uh... before the court uh... here dot to to continue adhering to it and i think just based on these records there just wasn't enough information for it has to conclude that it's methodology was unreasonable and of course this is a very technical

[00:47:23] Speaker 06:
area involving a lot of complexity where this court owes HHS's expert judgments a great deal of deference.

[00:47:31] Speaker 03:
Further questions from the bench?

[00:47:32] Speaker 03:
Thank you.

[00:47:34] Speaker 03:
I'm afraid you have 10 minutes over, but we'll give you one more minute.

[00:47:38] Speaker 03:
If you could stick to one minute, that would be helpful.

[00:47:50] Speaker 02:
the key word is that story language which is for interpreting county of l a los angeles is likely the secretary's process is not likely to set thresholds hitting five point one percent target when there's a key component that that has done has is demonstrably

[00:48:07] Speaker 02:
uh... not working and that showed up in two thousand eight in the very first case here at issue when the agency knew and and the secretary has even addressed it in her briefs its method produced an increase when it was trying to model a decrease we've explained in great detail why that happened but their method was not structured to ever come up with

[00:48:30] Speaker 02:
a rate of change in the decrease in charge ratios that would look anything like what was actually going to happen.

[00:48:35] Speaker 02:
They were trying to model what happened from the march of the rulemaking to the march of the following rulemaking.

[00:48:41] Speaker 02:
Their method could never do it.

[00:48:43] Speaker 02:
And Judge Trinnebazen, you asked, what do the agencies say in the rulemakings?

[00:48:48] Speaker 02:
And that's really key here, because the agency must connect the record facts to its conclusions.

[00:48:53] Speaker 03:
If the agency, if we

[00:48:56] Speaker 03:
Just to be clear about the remedy here, couldn't possibly order them to give payments based on your model, right?

[00:49:03] Speaker 03:
You don't expect us to be able to do that.

[00:49:04] Speaker 02:
No, Your Honor, it would be remanded.

[00:49:06] Speaker 02:
Right.

[00:49:06] Speaker 03:
So if they remanded and the agency said the reason is we didn't have enough years yet under this model, and we had, in the first year we only had one year, in the second year we only had two years, and the third year it actually went over.

[00:49:21] Speaker 03:
If that explanation had been given then, would that have been enough?

[00:49:25] Speaker 02:
no no it wouldn't have been enough because we're looking at the two thousand eight rulemaking what did the agency say how did he connect

[00:49:33] Speaker 02:
the facts on the record before the agency to the conclusion that its method was more accurate than the commenters method, which by the way was the identical method adopted in 2014.

[00:49:41] Speaker 02:
It was not kind of like it, it was identical.

[00:49:46] Speaker 02:
And in 2009, how did they connect their assertion, their conclusion that their method was more accurate when commenters critiqued it to the record facts?

[00:49:55] Speaker 03:
That's not the test though.

[00:49:56] Speaker 03:
It doesn't have to be more accurate, one or the other.

[00:49:59] Speaker 03:
It just has to be reasonable, right?

[00:50:01] Speaker 02:
But here, the agency is asserting its method is more accurate than using the record trend.

[00:50:07] Speaker 02:
It is not asserting our method is reasonable.

[00:50:10] Speaker 02:
We're not going to compare it against.

[00:50:11] Speaker 02:
The agency is actually asserting a comparison.

[00:50:13] Speaker 03:
On review, our only question is whether it's reasonable.

[00:50:16] Speaker 03:
Our question isn't whether there's another one that if we were the policymaker, we would adopt.

[00:50:21] Speaker 02:
that's the opposite of arbitrary and i i think there's two points one is that the secretary's method is is actually not reasonable what it doesn't when it's demonstrably not performing what it's supposed to do which is to to measure what the record trend is going to be

[00:50:37] Speaker 02:
And is there a better method?

[00:50:39] Speaker 02:
Absolutely.

[00:50:40] Speaker 02:
The secretary claimed its method, the agency's method, was better, but it didn't examine on the record any of the facts and still hasn't even examined in its brief how that assertion could be true and how its method could be accurate when it's modeling a decrease by increasing.

[00:50:57] Speaker 02:
Thank you, Your Honor.

[00:50:58] Speaker 02:
Thank you.

[00:50:58] Speaker 02:
We'll take the case to the Senate.