Health Law Daily Hospital’s attempt to fight variability in HHS’ wage index unsuccessful
Thursday, May 31, 2018

Hospital’s attempt to fight variability in HHS’ wage index unsuccessful

By Victoria Moran, J.D., M.H.A.

The D.C. District Court disagreed with a Louisiana hospital’s arguments that HHS violated the notice requirements of the Administrative Procedure Act (APA) and Medicare Act and that HHS’ actions were arbitrary and capricious. In promulgating a new rule involving hospital labor-cost adjustments and changes to geographic classifications, HHS was not required to provide entitles with individualized implications of a Proposed rule. In addition, HHS’ actions were not arbitrary or capricious, and the hospital failed to raise any objections to the wage index during the rulemaking process as it should have done in order for the court to consider the issue. The hospital’s motion for summary judgment was denied and HHS’ cross motion for summary judgment was granted (Post Acute Medical at Hammond, LLC v. Azar, May 22, 2018, Friedrich, D.).

Labor-cost adjustment and reclassification. At issue in this case is the labor-cost adjustment to the per patient average costs estimated by HHS for purposes of reimbursement and hospital geographic classifications. After the 2010 census, the Office of Management and Budget (OMB) reclassified the country’s geographic areas, with some areas moved between the Metropolitan Statistical Area (urbanized area of 50,000 or more persons plus adjacent territory with high social and economic integration) and rural categories. HHS utilizes OMB’s classifications for purposes of determining a hospital’s labor-cost adjustment. HHS adopted OMB’s reclassifications for fiscal year (FY) 2015. The rule challenged in this case concerns FY 2016, which carried over the classifications from FY 2015.

The hospital, located in Tangipahoa Parish, Louisiana, was reclassified from rural to urban, resulting in a significant rise in its labor-costs adjustment, which dropped from FY 2015 to FY 2016. The hospital filed suit in June 2016 alleging that in promulgating the FY 2016 Rule, HHS violated the notice-and-comment requirements of the APA and Medicare Act, and it acted arbitrarily and capriciously. Both parties filed motions for summary judgment.

Notice. The hospital argued that HHS failed to provide adequate notice of the significance of carrying over geographic classifications from FY 2015 to FY 2016, and that it should have been informed of the potential volatility in the wage index resulting from classification in an area with only two hospitals. The court was not persuaded and concluded that the APA does not require HHS to advise entities of the individualized implications of a proposed rule. The court noted that such a requirement would be extremely burdensome for agencies and that HHS did more than enough to provide notice of the substance of the FY 2016 Rule, including referring readers to earlier rules, and providing notice of methodology and data used for calculations. In addition, HHS alerted the public to potential wage-index volatility even though it was not required. The hospital also made arguments involving the critical-material doctrine and logical-outgrowth doctrine, but the court ruled these did not apply in this case.

Arbitrary and capricious. Citing black letter administrative law, the court again sided against the hospital and concluded that because the hospital failed to raise any objection to the wage index during the rulemaking process despite publication of its lowered wage index, its claims that HHS acted in an arbitrary and capricious manner were rejected. Moreover, the hospital’s claims fail on their merits because the "D.C. Circuit has already ruled that HHS’s delineation of labor-market areas is reasonable" and HHS provided more than enough reasoning for its decision. In addition, HHS has not treated this situation any differently and its decision to "draw a line between Metropolitan Statistical Areas and Micropolitan Statistical Areas was reasonable."

The case is Civil Action No. 16-1257 (DLF).

Attorneys: Jason M. Healy (Law Office of Jason M. Healy, PLLC) for Post Acute Medical at Hammond, LLC d/b/a Post Acute Specialty Hospital of Hammond. Daniel J. Halainen, U.S. Department of Justice, for Alex M. Azar II.

Companies: Post Acute Medical at Hammond, LLC d/b/a Post Acute Specialty Hospital of Hammond

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