[00:00:02] Speaker 00:
Case number 16-5307, Clearon Health West LLC doing business as Clearon West Medical Center versus Thomas E. Price, Secretary, U.S.

[00:00:14] Speaker 00:
Department of Health and Human Services Appellant.

[00:00:16] Speaker 00:
Ms.

[00:00:17] Speaker 00:
Allen for the appellant, Mr. Chen for the appellee.

[00:00:30] Speaker 05:
The Medicare statute did not require notice and comment here.

[00:00:35] Speaker 05:
It requires notice and comment for certain agency actions that establish or change a substantive legal standard governing the payment for services.

[00:00:44] Speaker 01:
Before we get to that, can we start with the jurisdiction question?

[00:00:46] Speaker 05:
Yes, Your Honor.

[00:00:47] Speaker 01:
Does the government agree now that there is jurisdiction?

[00:00:50] Speaker 05:
No, Your Honor, we agree that the Atlanta decision eliminated some of our jurisdictional arguments, but we think that we still have the limited argument we mentioned in our 28-J letter.

[00:01:00] Speaker 01:
Yeah, I'm confused by that argument.

[00:01:01] Speaker 01:
Your argument is that the Provider Board only decided the regulatory question, not the instructions question?

[00:01:11] Speaker 01:
Is that right?

[00:01:12] Speaker 05:
Your Honor, our view is that the board only granted expedited judicial review over what it viewed as a challenge to the regulations.

[00:01:21] Speaker 01:
And not the instructions.

[00:01:22] Speaker 05:
Exactly.

[00:01:23] Speaker 01:
And what did it say about the instructions?

[00:01:25] Speaker 05:
It didn't say anything about the instructions.

[00:01:27] Speaker 01:
It didn't decide that question at all.

[00:01:29] Speaker 05:
Well, Your Honor, we think it was all included in one question that was written rather confusingly.

[00:01:33] Speaker 05:
So we think that the best reading of the board's decision is that it viewed the entire question as a challenge to the validity of the regulations.

[00:01:40] Speaker 01:
So what happened to the challenge to the instructions?

[00:01:43] Speaker 05:
Well, Your Honor, we think that if Clarion thought that the board had misunderstood its question, it could have sought reconsideration with the board and asked for clarification.

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But if this board disagrees about the best reading of the board's opinion, we're prepared to move on to the parents' issue.

[00:01:57] Speaker 01:
No, I think you may have the best reading of the board's opinion, but you have another problem with the alignment case, which is that it points out that if the board does not decide an issue within a certain amount of time,

[00:02:12] Speaker 01:
than to get an expedited appeal.

[00:02:15] Speaker 01:
So that resolves the question.

[00:02:19] Speaker 05:
Well, you're right.

[00:02:20] Speaker 05:
I think that the board viewed the question that Clarion wrote.

[00:02:23] Speaker 05:
And if you look at

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It has the text of the question, and it starts out asking whether the reconciliation process established under the regulation is procedurally and substantively invalid for two reasons.

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And so we think the best reading is that the board thought that that was one question that was a challenge to the validity of the regulation.

[00:02:41] Speaker 01:
Well, what about the words and related program instructions?

[00:02:45] Speaker 05:
Your honor, I think that that portion of the question is one of the reason that the board could have viewed that as one of the reasons Clarion was saying that the regulation was invalid.

[00:02:54] Speaker 05:
It's just a confusingly written question.

[00:02:56] Speaker 05:
And if your honor disagrees with our reading of what we think the board was doing, then we're prepared to move on.

[00:03:02] Speaker 05:
to the merits issue here, but we don't think that Alina forecloses the argument that we're making here, which is just that argument they're pressing now and in district court is different than what we think the board granted, thought it was granted expeditional review on.

[00:03:15] Speaker 05:
And if you look at, you know, what the board said it was doing, I mean, at JA 32, the board said, in this case, the provider is challenging the validity of 42 CFR

[00:03:24] Speaker 05:
412.848 through questions 1, 2, and 4.

[00:03:28] Speaker 01:
So is your argument actually that they failed to exhaust, they failed to raise the issue they're raising before us at all, before the board?

[00:03:39] Speaker 05:
Your Honor, we think that they, that the board didn't grant expeditions.

[00:03:43] Speaker 01:
That's a different question.

[00:03:44] Speaker 01:
Do you think that they didn't raise before the board at all the question that they're raising before us now?

[00:03:52] Speaker 05:
Your honor, I think that the question was written in a confusing way.

[00:03:55] Speaker 05:
In this court, as this court said in Alaina, the courts can't second guess what the board's EJR decision is.

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And our point is merely that when you read the board's decision, the board seemed to think it was granting expedited judicial review of only a challenge to the validity of a regulation.

[00:04:11] Speaker 05:
And we think that this is a different challenge.

[00:04:13] Speaker 01:
Are you saying that they didn't raise a challenge to the instructions before the board?

[00:04:18] Speaker 05:
We're saying that we don't think the board thought they were raising the challenge.

[00:04:21] Speaker 01:
That's a different question.

[00:04:22] Speaker 01:
I'm asking you from the papers that were filed before the board, do you think they failed to raise the entire issue that they're raising before us, before the board?

[00:04:33] Speaker 05:
I think that they phrased the question in a confusing way.

[00:04:35] Speaker 05:
I mean, they do, in some of their papers, definitely make similar arguments to what they're making here.

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Our point is just that, you know, after Alina, this court can't review the propriety of the board's decision.

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So we don't think it's actually relevant, you know, what they were trying to raise.

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The question is just, what did the board grant expedited judicial review on?

[00:04:54] Speaker 07:
Well, it's relevant with respect to the 30 days after 30 days.

[00:05:00] Speaker 07:
It's eligible to expedite a review.

[00:05:02] Speaker 07:
There wasn't a tentative.

[00:05:04] Speaker 07:
They raised it with the board, and the board didn't attend to it.

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After 30 days, they can get expedited review.

[00:05:10] Speaker 05:
Well, Your Honor, again, we think that the fact that the board didn't separate it out as a separate question just indicates that the board thought it was only a challenge to the validity of the regulation.

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And we're not here to say whether that was right or wrong, just that we think that Alaina doesn't foreclose our argument that what they're pressing now is different than what the board thought it was graining expedited judicial review on.

[00:05:32] Speaker 05:
But as I said, we're prepared to turn to the merits of the case, and I think

[00:05:38] Speaker 05:
that it's clear if you look at the text of the Medicare statute, which requires notice and comment only for actions that establish or change a substantive legal standard, that the manual instructions at issue here don't do that.

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What the manual instructions at issue here do is they set forth

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the agency's instructions to contractors as to when the agency will likely exercise its discretionary power to conduct reconciliation in the face of the limited resources that Medicare contractors have to do so.

[00:06:06] Speaker 05:
And it's similar to, for example, if the speed limit is 25 miles an hour.

[00:06:11] Speaker 05:
The police might not give tickets when someone is going 26 miles an hour, and that might be the police department's policy, but that doesn't mean that that policy is actually changing the legal standard.

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you know, someone who's driving 26 miles an hour is still violating the law.

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And the fact that they don't get a ticket doesn't change that.

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And we think that that analogy is apt here because all the instructions are doing is telling contractors when to come to the agency and request permission to conduct reconciliation.

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And the instructions don't change the actual legal standard, which is set forth in the statute and the regulations.

[00:06:48] Speaker 04:
What's the legal standard?

[00:06:50] Speaker 05:
Well, Your Honor, the statute and the regulations explain when a hospital is entitled to an alibi.

[00:06:55] Speaker 04:
It's the ratio, right?

[00:06:58] Speaker 04:
Is that what you're saying the legal standard is under the reg?

[00:07:01] Speaker 04:
Because the manual is the document that sets forth the criteria.

[00:07:09] Speaker 04:
So where do you find the legal standard if it's not in the criteria?

[00:07:14] Speaker 05:
Those criteria don't have any actual legal effect.

[00:07:17] Speaker 05:
All they do is instruct contractors, which are acting on behalf of the agency, to send notification to CMS.

[00:07:23] Speaker 04:
Let's say I disagree with you.

[00:07:25] Speaker 04:
Where do you think the legal standards are in the regulation itself?

[00:07:29] Speaker 05:
We think that the 2003 regulations subjected all outlier payments to reconciliation.

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We think that that's clear in two respects from the regulation itself as well as from the preamble to the regulation.

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In the regulation itself, the 2003 regulation deleted the prior provision

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which made outlier payments final upon payment, because outlier payments are made on a rolling basis.

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And so prior to 2003, they were final when they were made.

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After 2003, they weren't.

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Instead, they're just tentative payments that, like other additional payments that hospitals receive, are subject to adjustment during the cost report settlement process.

[00:08:07] Speaker 05:
And then when you combine that, the fact that now all of those payments are not final with section 42 CFR 412.84 I-4, that provision explains how reconciliation will be conducted and doesn't have any limit on when the agency can conduct reconciliation.

[00:08:25] Speaker 05:
So we think that the combination of those two regulatory actions

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subjected all outlier payments to reconciliation, and this is also clear in the preamble to the rule where the agency repeatedly stated that they were adopting the rule to subject outlier payments to reconciliation.

[00:08:43] Speaker 04:
All right, during the seven-year period between the regulation and the manual, it looks like from the record it was an absolute mess.

[00:08:52] Speaker 04:
Either CMS didn't have the staff or didn't have the mechanics or for some reason, and then

[00:09:00] Speaker 04:
The manual was finally created and that set the criteria for the fiscal intermediaries and so forth.

[00:09:11] Speaker 04:
I just, I mean to use your speed limit it would be as if the regulation said we are going to impose a speed limit and then seven years later said the speed limit is 25 miles an hour.

[00:09:23] Speaker 05:
Well, Your Honor, I have two responses to that.

[00:09:25] Speaker 05:
All right.

[00:09:25] Speaker 05:
First is just to explain what happened between the 2003 rule and the 2010 manual.

[00:09:32] Speaker 05:
Right after the 2003 rule was issued, the agency issued a memorandum to contractors, and this is explained in our brief, that set forth the very same criteria that are contained in the 2010 manual.

[00:09:43] Speaker 05:
So those criteria were in place throughout the entire period that we're talking about, that you mentioned, from 2003 up until 2010.

[00:09:50] Speaker 05:
And how was that done?

[00:09:52] Speaker 04:
Excuse me?

[00:09:53] Speaker 04:
How was that done?

[00:09:54] Speaker 04:
How were the criteria done before they were put in the manual?

[00:09:58] Speaker 05:
Oh, well, they were in the just prior versions of the manual.

[00:10:01] Speaker 05:
And this is detailed in the fact section of the brief.

[00:10:03] Speaker 05:
Oh, all right.

[00:10:04] Speaker 08:
Go ahead.

[00:10:04] Speaker 05:
But the program instructions to the contractors.

[00:10:09] Speaker 05:
But during that period, what CMS hadn't yet developed was a way, sort of computer software, a way for the contractors to conduct reconciliation

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without affecting all of the other payment numbers that they were calculating, without recalculating everything.

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And so it wasn't until 2010 that they had the ability, the software ability to do that.

[00:10:28] Speaker 05:
And so that's why there was a delay in terms of when the agency actually started approving reconciliation.

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payments were held open during that entire period so that once the software was eventually developed, they could be reconciled.

[00:10:47] Speaker 05:
And the second point I wanted to make is just about the speeding analogy.

[00:10:50] Speaker 05:
Perhaps another analogy would be stealing or shoplifting.

[00:10:54] Speaker 05:
It's always illegal, but if someone steals a pack of gum, it's very unlikely that they're going to be prosecuted for stealing.

[00:11:00] Speaker 05:
But that doesn't mean that it's any less illegal.

[00:11:04] Speaker 05:
And we think that that's similar to here, where all outlier payments are subject to reconciliation.

[00:11:10] Speaker 05:
But the fact that the agency has said it's likely only going to use contractors' limited resources when the inaccuracy is of such a magnitude that it's worth doing so, that that's really an enforcement policy and it's not a change to the legal standard.

[00:11:28] Speaker 05:
The criteria, they don't require the contractors to conduct reconciliation in any case.

[00:11:35] Speaker 05:
They explicitly in the manual provision preserve the agency's discretion, both to approve reconciliation when the criteria are met,

[00:11:43] Speaker 05:
And they allow for contractors to request reconciliation even when the criteria are not met.

[00:11:49] Speaker 07:
That's the question I want to ask you about.

[00:11:50] Speaker 07:
Did they ever exercise, I mean the heart of your argument seems to be, these are criteria but we enforce pursuant to the regulations and we don't have to follow the criteria.

[00:12:00] Speaker 07:
We're not bound by them if they otherwise violate the regulations.

[00:12:05] Speaker 07:
Did anyone ever exercise that?

[00:12:07] Speaker 07:
discretion that is go outside of the criteria during any of the periods we're talking about and take action against

[00:12:14] Speaker 07:
or pursue reconciliation against someone where they didn't fit the criteria?

[00:12:21] Speaker 05:
Yes, Your Honor.

[00:12:22] Speaker 05:
We have two examples that we've mentioned in our reply brief of when CMS has gone outside the criteria.

[00:12:29] Speaker 05:
And one of the examples is when a hospital was actually hit by a tornado.

[00:12:33] Speaker 05:
And so it was undergoing reconciliation for a particular year.

[00:12:38] Speaker 05:
I believe it was 2014.

[00:12:41] Speaker 05:
it hadn't met the criteria for reconciliation in 2012, but the agency decided to authorize reconciliation for 2012 anyway because the hospital would receive additional payments for that year.

[00:12:51] Speaker 05:
And so the agency thought overall it would make the hospital's outlier payments more accurate.

[00:12:56] Speaker 05:
And so that's an example of where... Are you saying the agency

[00:13:00] Speaker 07:
did not feel that it was bound by the criteria, and no regulated party could come in and say, well, wait, you can't cause me to reconcile because I don't fit the criteria.

[00:13:13] Speaker 05:
In that case, the hospital was actually asking for reconciliation.

[00:13:18] Speaker 07:
I'm asking a different question.

[00:13:19] Speaker 07:
Could someone come in at the agency acted against them for reconciliation or pursue reconciliation?

[00:13:25] Speaker 07:
Would they have a claim to say, you can't reconcile against me because I don't fit the criteria?

[00:13:31] Speaker 05:
I'm not arguing.

[00:13:34] Speaker 07:
I'm trying to confirm my understanding of your position.

[00:13:37] Speaker 05:
Yes, and I'm sorry, I think I'm agreeing with you, that the, if the hospital, sorry, if a contractor sought approval from the criteria, I guess,

[00:13:50] Speaker 05:
If a hospital sought approval from CMS to conduct reconciliation, CMS approved it, and then reconciliation was conducted and the hospital was determined to owe a certain amount to CMS, the hospital could then challenge that before the board.

[00:14:07] Speaker 05:
And they could argue the board wouldn't be bound by the criteria.

[00:14:15] Speaker 07:
But they couldn't challenge it

[00:14:17] Speaker 07:
on a claim that you shouldn't have sought reconciliation in the first place because I was not within the criteria.

[00:14:29] Speaker 05:
Right, the board wouldn't be bound by the criteria.

[00:14:31] Speaker 05:
So the argument they would have to make would be that conducting reconciliation in that case would be inconsistent with the statute or inconsistent with the regulations.

[00:14:41] Speaker 07:
Not with the instructions.

[00:14:44] Speaker 07:
The only claim they'd have is they're inconsistent with the statute or the regulations.

[00:14:48] Speaker 07:
That's your position.

[00:14:50] Speaker 05:
Yes, in the sense that the board wouldn't be bound by the criteria.

[00:14:55] Speaker 07:
I think I'm saying clearly what you're saying.

[00:14:58] Speaker 07:
The instructions neither bind the board, nor do they give any rights to the regulator.

[00:15:06] Speaker 05:
That's correct.

[00:15:06] Speaker 05:
They bind just the contractors, and all they require the contractors to do is to ask for permission to conduct reconciliation.

[00:15:14] Speaker 05:
And when the criteria aren't met, they allow the contractors to still request reconciliation.

[00:15:20] Speaker 01:
Can I see if I'm understanding your position correctly?

[00:15:25] Speaker 01:
If you could just follow along with it at each point.

[00:15:27] Speaker 01:
The statute at 1395-WW-A, a bunch of little things to little to Romanette, sets the formula for when a hospital is entitled to an outlier payment.

[00:15:43] Speaker 01:
Is that right?

[00:15:44] Speaker 01:
That's correct.

[00:15:46] Speaker 01:
Then there is a regulation published by Notice and Comment, which actually establishes the actual ratios and such, and that is 42 CFR 4.12 80 A1 little 2 romenant.

[00:16:03] Speaker 05:
Right?

[00:16:03] Speaker 05:
I apologize.

[00:16:04] Speaker 05:
I don't have that one written down, but I – the regulations do – oh, sorry.

[00:16:08] Speaker 05:
Yeah, it's – actually, I do have it written down.

[00:16:12] Speaker 05:
Sorry, I think it's 412.883.

[00:16:14] Speaker 05:
Yeah, right.

[00:16:15] Speaker 01:
0.80, but there's a whole series there.

[00:16:19] Speaker 01:
Yes.

[00:16:20] Speaker 01:
That decides whether any individual hospital is entitled or not entitled to an outlier payment, correct?

[00:16:25] Speaker 01:
That's correct.

[00:16:26] Speaker 01:
OK.

[00:16:26] Speaker 01:
Now, your understanding of the regulation, 412.84, is that

[00:16:40] Speaker 01:
Starting from that date in 2006, the cost which is to be used is the cost report coinciding with the discharge, not the earlier most recent settled cost report.

[00:16:55] Speaker 01:
Is that right?

[00:16:56] Speaker 01:
If reconciliation is conducted.

[00:17:00] Speaker 01:
That is, whenever it's conducted, that is to be substituted for the earlier one, right?

[00:17:09] Speaker 01:
Is that right?

[00:17:10] Speaker 01:
Yes.

[00:17:11] Speaker 01:
Okay.

[00:17:11] Speaker 01:
And your understanding of the regulation in light of the statements in the notice of the regulation is that everybody is subject to reconciliation.

[00:17:22] Speaker 01:
That's correct.

[00:17:23] Speaker 01:
All hospitals are subject to reconciliation.

[00:17:25] Speaker 05:
That's correct, both in terms of what was said in the preamble and because the other legal effect of the regulation was to delete the prior provision, which was 412.117.

[00:17:36] Speaker 01:
Yes, right.

[00:17:37] Speaker 01:
So, so far we're on the same page, right?

[00:17:39] Speaker 01:
Yes.

[00:17:39] Speaker 01:
Okay.

[00:17:40] Speaker 01:
Now, you have an enforcement policy to determine when

[00:17:45] Speaker 01:
You will look at a hospital's reports to see when the earlier settled report is too much different from the costs at the time of discharge, right?

[00:17:56] Speaker 01:
And that includes a bunch of things like the 10% rule and the $500,000 rule, right?

[00:18:02] Speaker 05:
That's correct.

[00:18:03] Speaker 01:
If using those as a screen for deciding to reconcile

[00:18:09] Speaker 01:
your contractor does reconcile, those things fall away.

[00:18:13] Speaker 01:
The 10% is no longer relevant in deciding whether they're entitled to outlier payments or not.

[00:18:22] Speaker 01:
The only question is back to the regulation using the latest cost date.

[00:18:27] Speaker 01:
Is that right?

[00:18:29] Speaker 05:
That's correct.

[00:18:30] Speaker 05:
And the statute.

[00:18:31] Speaker 01:
Yeah, and the statute, but the statute is promulgated as implemented by regulation, which actually puts numbers to the statutory general phrases.

[00:18:38] Speaker 01:
Is that right?

[00:18:39] Speaker 01:
Yes.

[00:18:39] Speaker 01:
OK.

[00:18:40] Speaker 01:
So what you regard this is, as an enforcement policy, only if there's a large difference, without describing what large is, between the earlier cost reports and what could be described as the final cost report, are we going to bother with this one?

[00:18:56] Speaker 01:
And if we do bother with this one, they're going to have to use the most recent cost report.

[00:19:00] Speaker 01:
That's how you see this, right?

[00:19:02] Speaker 05:
That's correct.

[00:19:03] Speaker 05:
But again, this is directed at the contractors.

[00:19:05] Speaker 05:
It doesn't bind the agency when the agency is reviewing whether to actually conduct reconciliation or if there were a challenge.

[00:19:14] Speaker 01:
Personally, I'm not sure that makes any difference.

[00:19:17] Speaker 01:
But I understand you think there's an additional level of discretion here.

[00:19:22] Speaker 01:
Yes, we do.

[00:19:23] Speaker 04:
It doesn't even bind the contractor, because the contractor can say, even though you don't meet the criteria, if it's significantly inaccurate,

[00:19:31] Speaker 04:
Which exactly your honor.

[00:19:37] Speaker 01:
Further questions.

[00:19:39] Speaker 01:
We'll hear from the response.

[00:19:49] Speaker 03:
May it please the court?

[00:19:51] Speaker 03:
In our view, this case concerns a straightforward application of the Medicare Act's rulemaking provision, and specifically whether or not the 2010 criteria established for change a substantive legal standard.

[00:20:03] Speaker 03:
Now, Alaina tells us as a starting point that at minimum, a substantive legal standard is one that defines the scope of a hospital's legal rights to payment.

[00:20:12] Speaker 03:
And that is precisely what the 2010 criteria do.

[00:20:15] Speaker 01:
Can I just ask you?

[00:20:16] Speaker 01:
Assume everything I just said you agree with.

[00:20:19] Speaker 01:
I'm sure you don't.

[00:20:21] Speaker 01:
But assuming that everything I said before, you do agreement, would you agree under those circumstances that notice and comment wasn't required?

[00:20:29] Speaker 03:
Well, not necessarily, Your Honor, because I think the further step that needs to be done is that you have, let's say in your hypothetical, right, you have an enforcement plan.

[00:20:38] Speaker 03:
But what is the substantive legal standard that is actually in the regulation that the Secretary would actually be applying then?

[00:20:46] Speaker 03:
There is no substantive legal standard.

[00:20:48] Speaker 01:
Why do you say that?

[00:20:49] Speaker 01:
The regulation establishes who's entitled to outlier payments.

[00:20:54] Speaker 01:
The subsequent regulation, under my hypothetical, which I want you to accept for this purpose, says everybody is subject to reconciliation.

[00:21:03] Speaker 01:
And under reconciliation, the most recent cost data is required.

[00:21:10] Speaker 01:
And that was done by notice and comment.

[00:21:12] Speaker 01:
So now the only question is, which hospitals do we decide to look at?

[00:21:17] Speaker 01:
Why is that decision, which hospitals do we decide to look at?

[00:21:22] Speaker 01:
Why does that require notice and comment?

[00:21:25] Speaker 03:
In that hypothetical, where it's very clear that everybody is subject by regulation, then yes, we would agree that that would not be subject to notice and comment.

[00:21:32] Speaker 01:
OK.

[00:21:32] Speaker 01:
So then the only question.

[00:21:34] Speaker 01:
I think everybody's on the same page.

[00:21:36] Speaker 01:
So then the only question is whether this regulation which was issued makes everybody subject.

[00:21:44] Speaker 01:
And your argument has to rest totally on the words any before the word reconciliation, right?

[00:21:52] Speaker 03:
in in the regulation.

[00:21:55] Speaker 01:
But that's the whole game, right?

[00:21:58] Speaker 01:
What does the words any reconciliation mean?

[00:22:00] Speaker 03:
Well, not necessarily.

[00:22:02] Speaker 03:
I do think that we have further arguments beyond this.

[00:22:05] Speaker 03:
But on this issue specifically, I think that if you look at the preamble very specifically, all it does is it adds 412.84 I4, right?

[00:22:13] Speaker 03:
This is on addendum 20.

[00:22:15] Speaker 03:
third paragraph or third column, and then what it says, and I'm quoting from Addendum 28, we are going to provide specific criteria for identifying those hospitals subject to reconciliation.

[00:22:26] Speaker 03:
So I think the premise is wrong, right?

[00:22:28] Speaker 03:
There was never an understanding or even a suggestion that they were going to subject everything to reconciliation.

[00:22:36] Speaker 03:
Maybe, and I think this is the distinction here, perhaps there was authority, and we would even challenge that.

[00:22:41] Speaker 01:
I'm sorry, I'm using a different version of the,

[00:22:46] Speaker 01:
notice that you are.

[00:22:47] Speaker 01:
If you just tell me what page it's on.

[00:22:50] Speaker 03:
Of the Fedrec?

[00:22:52] Speaker 03:
Yeah.

[00:22:52] Speaker 03:
It's 34504.

[00:23:09] Speaker 03:
And it's the last column under C. I don't have columns.

[00:23:13] Speaker 01:
I have the Westlaw printout.

[00:23:14] Speaker 01:
I'm sorry.

[00:23:14] Speaker 01:
I'm very sorry.

[00:23:15] Speaker 01:
It's my fault, not yours.

[00:23:16] Speaker 01:
It's a response to which comment?

[00:23:21] Speaker 03:
It's not a response to a comment.

[00:23:23] Speaker 03:
It's sort of the summation section.

[00:23:25] Speaker 03:
It's C. It's the last series of paragraphs before the Roman numeral 6.

[00:23:31] Speaker 01:
Yes.

[00:23:32] Speaker 03:
And so it says C, right?

[00:23:34] Speaker 03:
We are adding 412.84 I3.

[00:23:36] Speaker 03:
It's actually I4.

[00:23:38] Speaker 01:
It says the subject effective 60 days after the date of the publication of this rule correct outlier payments will become subject to adjustment

[00:23:47] Speaker 03:
Correct.

[00:23:47] Speaker 03:
And then further down though, and this is in line with the comments, right?

[00:23:51] Speaker 03:
It says, we intend to issue program instructions and will provide specific criteria for identifying those hospitals subject to reconciliation.

[00:24:01] Speaker 03:
And so this, I think, is in keeping with the entire rulemaking.

[00:24:05] Speaker 03:
What you had was comments raised after the notice of proposal.

[00:24:10] Speaker 03:
proposed rulemaking that didn't mention any criteria or really talk about the scope of this program.

[00:24:15] Speaker 03:
And these commenters wanted to know the scope and said, well, what's going to be the substantive legal standard?

[00:24:21] Speaker 03:
They were asking for the secretary to set one in the rulemaking, because this was one of the biggest issues in the rulemaking, what is going to be the substantive legal standard.

[00:24:30] Speaker 03:
And what the secretary did was it said, we agree with these commenters.

[00:24:33] Speaker 03:
We are not going to reconcile everything.

[00:24:35] Speaker 03:
We are going to do this on a limited basis.

[00:24:38] Speaker 03:
So I think when you read the rulemaking, it's very clear that they were not going to subject everything to.

[00:24:44] Speaker 03:
And that's the distinction I wanted to draw.

[00:24:46] Speaker 03:
And they're not going to enforce against everyone.

[00:24:49] Speaker 07:
There's nothing in the preamble of the rule that says,

[00:24:54] Speaker 07:
that anything other than all hospitals are subject to reconciliation if the standards are met.

[00:25:03] Speaker 07:
Well, yeah.

[00:25:04] Speaker 07:
An agency is going to make determinations under what circumstances will we pursue.

[00:25:09] Speaker 07:
That's not surprising.

[00:25:10] Speaker 07:
But the substantive standard goes back to the regulation.

[00:25:13] Speaker 07:
And that has never changed.

[00:25:15] Speaker 07:
Well, Your Honor, the- I mean, do you really believe that a hospital could say,

[00:25:23] Speaker 07:
Under the regime, as the agency thinks exists, and as the chief judge has gone through in his scenario, the hospital could say, you can't pursue reconciliation against us because we don't fit the instruction criteria.

[00:25:39] Speaker 03:
Well, Your Honor, there would not be a legal claim here, we think, under the regulation, because it would all be under the criteria itself, right?

[00:25:50] Speaker 03:
Those are the determining factor between whether or not reconciliation.

[00:25:55] Speaker 07:
A high school is now in the midst of reconciliation.

[00:25:59] Speaker 03:
Correct.

[00:26:01] Speaker 07:
Can they advance a claim that you cannot cause reconciliation here, can't cause it to happen?

[00:26:07] Speaker 07:
In other words, they assume it's not going to be favorable.

[00:26:09] Speaker 07:
You can't cause it to happen because we don't fit the instruction criteria.

[00:26:14] Speaker 07:
So you should not be pursuing it.

[00:26:16] Speaker 07:
We're done.

[00:26:18] Speaker 03:
You're talking about before the board.

[00:26:21] Speaker 03:
Yes, your honor.

[00:26:22] Speaker 03:
I do think that.

[00:26:26] Speaker 03:
in the regulation or in the instruction?

[00:26:28] Speaker 03:
Oh, sorry, not as to the criteria themselves.

[00:26:32] Speaker 03:
Yes, it would have to be on some other basis.

[00:26:35] Speaker 03:
And our point is, we don't really know what that other basis would be, right?

[00:26:39] Speaker 07:
Yeah, but we start with the assumption that everyone is subject to reconciliation.

[00:26:42] Speaker 07:
And the regulation and statute tell us how so.

[00:26:46] Speaker 07:
So I don't know what the other basis would be.

[00:26:48] Speaker 07:
That's what I'm not getting.

[00:26:49] Speaker 07:
Unless you assume there is a right not

[00:26:52] Speaker 07:
to be reconciled against.

[00:26:54] Speaker 07:
You understand what I mean?

[00:26:56] Speaker 01:
Is that your argument that you have a right against any kind of reconciliation?

[00:27:00] Speaker 03:
No, no, Your Honor.

[00:27:01] Speaker 01:
Well, I'm not sure why.

[00:27:03] Speaker 01:
So if your view is that the manual instructions are void because they weren't subject to notice and comment, isn't your position that you can never be reconciled?

[00:27:17] Speaker 01:
No hospital can ever be reconciled.

[00:27:20] Speaker 01:
Isn't that your position?

[00:27:22] Speaker 03:
Well, Your Honor, if we assume that there really is no substantive legal standard out there, then... No, what's your position?

[00:27:31] Speaker 01:
Your position?

[00:27:32] Speaker 01:
Is your position that no hospitals, under the current regulations, no hospital is subject to reconciliation?

[00:27:41] Speaker 03:
No, we would concede that there are hospitals that can be subject to reconciliation.

[00:27:44] Speaker 01:
Which ones?

[00:27:45] Speaker 03:
How so?

[00:27:46] Speaker 03:
Well, under the current regime, those we think that meet the criteria.

[00:27:50] Speaker 03:
Those would be subject to reconciliation.

[00:27:52] Speaker 01:
What criteria?

[00:27:54] Speaker 03:
The criteria in the 2010 manual.

[00:27:58] Speaker 01:
But I thought you just said that the manual is void because the instructions about reconciliation are void because they weren't subject to notice and comment.

[00:28:09] Speaker 01:
Is that right or wrong?

[00:28:11] Speaker 03:
Yes, Your Honor.

[00:28:12] Speaker 03:
That's our bottom line.

[00:28:13] Speaker 01:
OK, so if the manual is taken away,

[00:28:17] Speaker 01:
is your position that no hospital subject to reconciliation?

[00:28:23] Speaker 01:
Is that your position here?

[00:28:25] Speaker 06:
I mean, you should hesitate.

[00:28:29] Speaker 06:
It's a fragile position.

[00:28:31] Speaker 06:
We knew if you'd taken a look at it, what is your position?

[00:28:36] Speaker 01:
What subjects a hospital to reconciliation?

[00:28:41] Speaker 01:
Any hospital under any circumstances?

[00:28:44] Speaker 03:
It would be the authority that I suppose would be established by the regulation.

[00:28:48] Speaker 01:
Okay.

[00:28:49] Speaker 01:
And that's the regulation that says any reconciliation should be determined at the time.

[00:28:53] Speaker 01:
Blah, blah, blah.

[00:28:54] Speaker 01:
That one, right?

[00:28:55] Speaker 02:
Correct.

[00:28:55] Speaker 01:
Okay.

[00:28:56] Speaker 01:
So you agree that that regulation of its own force allows Medicare to reconcile?

[00:29:05] Speaker 02:
Correct, Your Honor.

[00:29:06] Speaker 01:
Okay.

[00:29:07] Speaker 01:
Under any circumstances at once.

[00:29:11] Speaker 03:
correct your honor yes okay so then what is it that you're complaining about that you're complaining that so your honor only ones with a greater than ten percent difference are reconciled that's a problem well no your honor well yes we have a problem with the criteria and and if you assume that baseline right of any reconciliation we think that the criteria are a change in that substantive legal standard

[00:29:37] Speaker 01:
a change from the Medicare being able to do whenever it wants under any circumstance and one in which Medicare has constrained itself?

[00:29:46] Speaker 03:
Well, Your Honor, this wouldn't be the first time, I think, in which this Court has held that an enforcement plan of that nature, when you have actual criteria that make a determination.

[00:29:55] Speaker 01:
I'm not asking about whether it's law or anything.

[00:29:58] Speaker 01:
I just want to know what your position is.

[00:30:01] Speaker 01:
Your position is

[00:30:03] Speaker 01:
that there should not be the 10% rule, $500,000 rule.

[00:30:09] Speaker 01:
And instead, Medicare should be able to reconcile whenever it wants.

[00:30:17] Speaker 01:
Is that your position?

[00:30:18] Speaker 01:
5%, 1%, 0%, $100,000, $25,000, regardless.

[00:30:25] Speaker 01:
That's what you would be left with if we did what you wanted.

[00:30:28] Speaker 03:
Well, yes, yes, Your Honor.

[00:30:29] Speaker 03:
That is what we would be left with.

[00:30:31] Speaker 01:
Then how are you harmed?

[00:30:32] Speaker 03:
Well, we're harmed here because that's not the system we feel.

[00:30:35] Speaker 03:
We feel that the criteria are the substantive legal standard because they are binding in theory and in practice.

[00:30:41] Speaker 01:
We think that they... How are you harmed if we abolish those criteria and instead Medicare can just reconcile you because it wants to and they will?

[00:30:54] Speaker 01:
How do you have standing anymore?

[00:30:56] Speaker 01:
How can we remedy the problem that you find here?

[00:31:01] Speaker 01:
What happened in this case is they picked on you because you had a more than 10% difference.

[00:31:07] Speaker 01:
You're saying you would like them to be able to pick on you under any circumstances, at any time, for any reason.

[00:31:13] Speaker 03:
Well, Your Honor, we would still have standing in this case because we believe that the procedure in which they went about doing that was incorrect.

[00:31:20] Speaker 03:
And I think we have a right to a proper procedure under the APA.

[00:31:27] Speaker 03:
And not only the APA, but specifically here the Medicare Act.

[00:31:32] Speaker 03:
And so here, we're suggesting that the process was not done correctly, right?

[00:31:38] Speaker 03:
And so that these criteria were, in fact, binding in theory and in practice.

[00:31:43] Speaker 03:
They served as the substantive legal rule.

[00:31:46] Speaker 03:
And even if you want to go to the exceptions, right?

[00:31:48] Speaker 03:
We don't look at those sort of exceptions when tornadoes happen or whatnot.

[00:31:52] Speaker 03:
We look to the standard case.

[00:31:53] Speaker 03:
That's what the general electric case tells us.

[00:31:55] Speaker 03:
And I think here, the proof is in the pudding.

[00:31:56] Speaker 03:
We don't only have mandatory language, will reconcile, shall be finalized, but we also have a number of data points, Clarion included with its 2005 cost share when it did not meet the criteria, and it was not reconciled an additional $1 million when we have its 2000 cost share.

[00:32:19] Speaker 01:
The United States Attorney issued an order to all the United States Attorneys, Assistant U.S.

[00:32:25] Speaker 01:
Attorneys.

[00:32:25] Speaker 01:
We are not bringing any crack cases unless they're more than 50 grams.

[00:32:30] Speaker 01:
That's it.

[00:32:30] Speaker 01:
You cannot.

[00:32:31] Speaker 01:
You have no discretion.

[00:32:32] Speaker 01:
Do not bring any crack case of more than 50 dollars, 50 grams.

[00:32:37] Speaker 01:
Would a crack dealer who is arrested for 40 grams be able to claim that there was a non-discretionary policy adopted by the U.S.

[00:32:48] Speaker 01:
Attorney that required 50 grams and the AUSA violated it?

[00:32:55] Speaker 03:
Yes, Your Honor.

[00:32:57] Speaker 01:
Yes, yes.

[00:32:58] Speaker 03:
I'm sorry.

[00:33:00] Speaker 01:
You're a crack dealer, sorry.

[00:33:05] Speaker 01:
And you're caught selling 40 grams of crack.

[00:33:10] Speaker 01:
And the AUSA, in violation of a policy of the office, that we're not going to arrest crack dealers unless they actually sell 50 grams.

[00:33:22] Speaker 01:
Would you be able to claim when you're charged under a law, which says it's against the law, to sell any amount of crack?

[00:33:31] Speaker 01:
Would you be able to say, well, they violated their policy here?

[00:33:35] Speaker 01:
Their policy wasn't subject to notice and comment, because it's not really a policy, because it was binding on it.

[00:33:40] Speaker 01:
They made it binding on themselves.

[00:33:43] Speaker 01:
no your honor okay so how is this really different if if we if you agree that you can be subject to reconciliation at any point why does it matter that the department restricts itself to only reconciling you

[00:34:00] Speaker 01:
The amount in controversy is more than 500,000, and the difference in the ratios is 10%.

[00:34:07] Speaker 03:
Well, Your Honor, here I would point to the context, and I think this is very important to underscore here.

[00:34:13] Speaker 03:
This is in a situation, I think, where we have a very clear legal standard to begin with, and then it's sort of a limiting of discretion.

[00:34:20] Speaker 03:
This is a situation in which

[00:34:24] Speaker 03:
even though the regulation says any time, it was clear that this was a big deal and that commenters wanted the secretary to discuss this in a rulemaking, right?

[00:34:34] Speaker 03:
And so you have a situation where essentially the agency has retreated from the rulemaking and ducked these hard questions that were supposed to be part of the rulemaking and thus have sort of forecasted even that they would make a future substantive judgment.

[00:34:52] Speaker 03:
And I would say, again, we do think that these are, in practice and in theory, the substantive legal standard that separates outlier payments that are reconciled from those that are not.

[00:35:04] Speaker 01:
Let me ask you something, maybe a more realistic hypothetical or more directly on closer to this circumstance.

[00:35:12] Speaker 01:
Hospitals, I don't know which particular Medicare program it would be, but a hospital can only charge for the actual cost of

[00:35:21] Speaker 01:
of providing oxygen.

[00:35:24] Speaker 01:
Say that's the rule.

[00:35:27] Speaker 01:
And your hospital actually charges double the cost.

[00:35:38] Speaker 01:
So it's clearly in violation of the rule.

[00:35:41] Speaker 01:
And Medicare announces, look, we can't find everybody, but we're going to require our auditors to look for hospitals that charge more than $100 per PSI of oxygen, because that's going to be more than their costs.

[00:36:00] Speaker 01:
but we can't go after everybody.

[00:36:03] Speaker 01:
Would you be able to defend, and so they come after you and they find out, my God, actually they're charging twice the cost.

[00:36:09] Speaker 01:
Would you be able to defend on the ground that the auditors had a rule that bound the auditors to only looking for more than $100?

[00:36:20] Speaker 02:
No, Your Honor.

[00:36:21] Speaker 01:
And why is that different than this?

[00:36:23] Speaker 01:
In this case, if anybody can be reconciled under your theory, and when they're reconciled they have to use the actual most recent costs, why does it matter that they bound themselves to not punishing everybody or not going after everybody and not enforcing against everybody, but only $500,000?

[00:36:46] Speaker 03:
well your honor i think it's the fact of discretion we're not saying we're not disagreeing that there is a caveat here in the 2010 criteria that says subject to the approval and we would dispute the nature of that discretion is being informed or sort of full discretion but even assuming that were the case you still i think we have a situation here where they have

[00:37:08] Speaker 03:
limited that discretion in a way that is substantive.

[00:37:11] Speaker 03:
This is the Pikus case, I think.

[00:37:13] Speaker 03:
This is what this court has called the classic case, where you have the parole board issuing criteria, right, that are expressly subject to broad statutory authority on parole decisions, and yet the court said very clearly that the narrowing of that discretion in a particular way, in a way that looks binding and is binding in fact,

[00:37:33] Speaker 03:
will be substantive in nature.

[00:37:35] Speaker 03:
So it can't just be the fact that there could be sort of exceptions to the rule and sort of a broader background norm here.

[00:37:41] Speaker 03:
What they have done here is they have constrained themselves, we feel, and even if in the end there could be exceptions for tornadoes, for example, there still is a substantive legal standard in issuing those criteria.

[00:37:56] Speaker 07:
So then you would agree that if they really have not bound themselves or the contractors or the board, then you lose?

[00:38:04] Speaker 03:
Yes, but we would, for the reasons I've stated, we think that they are binding, in fact, and in theory they're not in their place.

[00:38:12] Speaker 01:
Okay.

[00:38:12] Speaker 01:
Other questions?

[00:38:14] Speaker 01:
Does the government have any more time?

[00:38:17] Speaker 01:
All right, we've gone over, in both circumstances, we'll give you another two minutes.

[00:38:25] Speaker 05:
Thank you, Your Honor.

[00:38:26] Speaker 05:
the key point here is that the manual criteria issued to contractors do not change the legal standard that's at issue governing hospitals right to payments.

[00:38:38] Speaker 05:
And I think as opposing counsel agreed that if the 2003 regulations subjects all outlier payments to reconciliation, then notice and comment wasn't required.

[00:38:51] Speaker 05:
And I think they also agreed that that is what the 2003 regulation did.

[00:38:55] Speaker 05:
And so we think it's clear that the manual instructions don't change the substantive legal standard and therefore notice and comment isn't required by the Medicare statute.

[00:39:07] Speaker 05:
If there are no further questions, thank you for your time.

[00:39:10] Speaker 01:
No further questions.

[00:39:11] Speaker 01:
Thank you.

[00:39:11] Speaker 01:
We'll take the matter under submission.