Health Law Daily Civil action against HHS over outlier FFY 2005, 2006 threshold calculations moves forward
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Thursday, July 23, 2020

Civil action against HHS over outlier FFY 2005, 2006 threshold calculations moves forward

By Gregory Kane, J.D., M.B.A.

HHS was unsuccessful in its motion to dismiss a civil action challenging FFY 2005, 2006 outlier threshold calculations as precluded by prior litigation.

The Department of Health and Human Services was denied its motion to dismiss a civil action by 168 hospitals challenging its 2005 and 2006 federal fiscal year (FFY) outlier threshold calculations for being barred under either claim preclusion or issue preclusion as prior cases did not resolve the claims or issues in the present action (Galen Hospital Alaska, Inc. v. Azar, July 21, 2020, Walton, R.).

Background. Under the Medicare program, hospitals are paid at a fixed rate scheme known as the Inpatient Prospective Payment System where payment is calculated to reflect the estimated average cost of treating a patient with that diagnosis. In order to protect against large financial losses, when patients require care outside the norm, hospitals may seek outlier payments where the cost-adjusted charges for a case exceed the fixed-loss cost threshold. The hospitals in the present case received final payment for outlier cases for FFY 2005 and 2006 on the basis of thresholds calculated by HHS, but these hospital contend that the calculations were inaccurate resulting in their receiving substantially less in outlier payments than owed.

In 2011, prior to this action, 186 hospitals filed suit challenging the fixed loss threshold calculations for FFY 2004, 2005 and 2006 as arbitrary and capricious—158 of the hospitals in the present case were also parties in that case. Ultimately, the challenges to the FFY 2005 and 2006 outlier thresholds as arbitrary and capricious failed in that case. In another case with an entirely different set of hospitals, certain aspects of the FFY 2005 and 2005 threshold calculations were found foreclosed by prior litigation but the calculations were found to be arbitrary and capricious and HHS was required to explain its calculations in a June 2019 notice by the HHS Secretary.

In the present matter, HHS moved to dismiss the complaint for failure to state a claim and as claim precluded and issue precluded by the prior litigation. The hospitals moved to file a supplemental complaint to account for the June 2019 notice.

Claim preclusion. While HHS argued that the prior litigation of the FFY 2005 and 2006 calculations were barred by prior litigation, the hospitals argued that the plaintiffs in the prior litigation could not have brought the present claims regarding the FFY 2005 and 2006 thresholds since they were statutorily precluded from seeking administrative or judicial relief for these claims. At the time of the prior litigation, the hospitals in the present suit were barred from bringing their FFY 2005 and 2006 claims because they had not yet exhausted their administrative remedies as required under Title XVIII of the Social Security Act. A party may not be precluded from contesting a threshold rule if it previously had no power to do so. As such, the HHS motion to dismiss was denied on the grounds of claim preclusion.

Issue preclusion. HHS argued that issue preclusion barred the present suit because the FFY 2005 and 2006 fixed loss threshold determinations were upheld by the court in the prior litigation. Issue preclusion does not encompass any challenge to the FFY 2005 and 2006 outlier thresholds, but is limited to the specific issues actually and necessarily previously decided. In the prior litigation, the court determined that the inclusion of certain turbo-charging hospital data in the threshold calculation was not arbitrary and capricious. The present matter challenges the calculation of projection cost-to-charge ratios, which is a distinct issue from prior litigation. As such, the HHS motion to dismiss was denied on the grounds of issue preclusion.

Supplemental complaint. The hospitals were granted their motion to file a supplemental complaint to account for the June 2019 notice as it would promote an economic and speedy disposition of the controversy as the notice contained the Secretary’s most recently articulated rationale for the methodology used in calculating the outlier thresholds in FFY 2005 and 2006.

The case is No. 18-728 (RBW).

Attorneys: Robert L. Roth (Hooper Lundy & Bookman, PC) for Galen Hospital Alaska, Inc. d/b/a Alaska Regional Hospital, Riverside Healthcare System, L.P. d/b/a Riverside Community Hospital and San Jose Healthcare System, L.P. d/b/a Regional Medical Center of San Jose. James C. Luh, U.S. Department of Justice, for Alex M. Azar, II.

Companies: Galen Hospital Alaska, Inc. d/b/a Alaska Regional Hospital; Riverside Healthcare System, L.P. d/b/a Riverside Community Hospital; San Jose Healthcare System, L.P. d/b/a Regional Medical Center of San Jose

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