Banner Health v. Sebelius , 55 F. Supp. 3d 1 ( 2014 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
BANNER HEALTH f/b/o BANNER GOOD
SAMARITAN MEDICAL CENTER, et al.,
Plaintiffs,
v. Civil Action No. 10-01638 (CKK)
SYLVIA M. BURWELL, Secretary,
Department of Health and Human Services,
Defendant.
MEMORANDUM OPINION
(July 7, 2014)
Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the
Medicare program. They have sued the Secretary of the Department of Health and Human
Services (the “Secretary”), challenging certain regulatory actions taken by her in the course of
administering Medicare’s reimbursement scheme. 1 Plaintiffs allege that as a result of the
Secretary’s flawed promulgation and implementation of various payment regulations, they were
deprived of more than $350 million dollars in Medicare “outlier” payments for services provided
during fiscal years ending 1998 through 2006. Presently before the Court is Plaintiffs’ [108]
Motion for Leave to Further Amend and Supplement First Amended Complaint. Plaintiffs seek
to add allegations and claims under 5 U.S.C. § 553 regarding the Secretary’s failure to disclose a
2003 Interim Final Rule. Upon a review of the parties’ submissions 2, the applicable authorities,
1
Pursuant to Fed. R. Civ. P. 25(d), Sylvia Mathews Burwell has been automatically
substituted for Kathleen Sebelius, whom the parties’ pleadings name as Defendant.
2
Pls.’ Mot. for Leave to Further Amend and Supplement First Am. Compl., ECF No.
[108] (“Pls.’ Mot.”); Pls.’ Mem. of P. & A. in Supp. of Pls.’ Mot. for Leave to Further Amend
and Supplement First Am. Compl., ECF No. [108] (“Pls.’ Mem.”); Pls.’ Amendments and
and the record as a whole, the Court shall GRANT IN PART and DENY IN PART Plaintiffs’
motion to amend the complaint. The Court denies Plaintiffs leave to amend their complaint to
include claims that the Secretary’s failure to disclose the Interim Final Rule and its contents
violated 5 U.S.C. § 553. However, the Court grants Plaintiffs leave to amend their complaint to
include factual allegations concerning the Interim Final Rule.
I. BACKGROUND
The relevant statutory and regulatory background underlying Plaintiffs’ claims and the
lengthy procedural history of this litigation are set out in detail in the Court’s prior opinions. See
Banner Health v. Sebelius, 797 F. Supp. 2d 97 (D.D.C. 2011); id., 905 F.Supp.2d 174 (D.D.C.
2012); id., 945 F.Supp.2d 1 (D.D.C. 2013). Accordingly, the Court provides herein only a brief
summary of the facts and history of this case, as relevant to the present motion.
Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the
Medicare program. Am. Compl., ECF No. [16], ¶ 22. On December 23, 2010, Plaintiffs filed
their Amended Complaint, which remains the operative iteration of the Complaint in this action.
See Am. Compl., ECF No. [16]. As this Court has previously observed, Plaintiffs’ Amended
Complaint is “sprawling”; it contains over two hundred paragraphs, spans fifty-nine pages, and
appends two lengthy exhibits. Plaintiffs challenge the validity of a series of regulations
establishing the methodology for calculating outlier payments (the “Outlier Payment
Regulations”), 42 C.F.R. §§ 412.80-412.86, as well as the Secretary’s annual promulgation of the
Supplements to First Am. Compl., ECF No. [108-1] (“Pls.’ Proposed Amendments”); Def.’s
Mem. of P. & A. in Opp’n to Pls.’ Mot. for Leave to Amend. Compl., ECF No. [109] (“Def.’s
Opp’n”); Pls.’ Reply to Def.’s Opp’n Regarding Leave to Amend the Compl., ECF No. [110]
(“Pls.’ Reply”); Pls.’ Notice of Suppl. Auth., ECF No. [112] (“Pls.’ Notice”); Def.’s Resp. to
Pls.’ Notice of Suppl. Auth., ECF No. [113] (“Def.’s Notice Resp.”).
2
regulations through which she set the fixed loss threshold for the upcoming fiscal year, for fiscal
years 1998 through 2006 (the “Fixed Loss Threshold Regulations”). 3
In enacting a system for Medicare reimbursement, “Congress recognized that health-care
providers would inevitably care for some patients whose hospitalization would be extraordinarily
costly or lengthy” and devised a means to “insulate hospitals from bearing a disproportionate
share of these atypical costs.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009 (D.C. Cir.
1999). Specifically, Congress authorized the Secretary to make supplemental “outlier” payments
to eligible providers. Id. Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A). See
also 42 C.F.R. §§ 412.80-412.86 (implementing regulations). Each fiscal year, the Secretary
determines a fixed dollar amount that, when added to the DRG prospective payment – the
standardized calculation for how much a hospital is paid for treating a particular case – serves as
the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii),
(iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar amount is known as the “fixed loss
threshold.” If a hospital’s approximate costs actually incurred in treating a patient exceed the
sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is
3
See MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE
PAYMENT SYSTEMS AND FISCAL YEAR 1998 RATES, 62 Fed. Reg. 45,966 (Aug. 29, 1997);
MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS
AND FISCAL YEAR 1999 RATES, 63 Fed. Reg. 40,954 (July 31, 1998); CHANGES TO THE HOSPITAL
INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2000 RATES, 64 Fed. Reg. 41,490
(July 30, 1999); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND
FISCAL YEAR 2001 RATES, 65 Fed. Reg. 47,054 (Aug. 1, 2000); CHANGES TO THE HOSPITAL
INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND RATES AND COSTS OF GRADUATE MEDICAL
EDUCATION: FISCAL YEAR 2002 RATES, 66 Fed. Reg. 39,828 (Aug. 1, 2001); CHANGES TO THE
HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2003 RATES, 67 Fed.
Reg. 49,982 (Aug. 1, 2002); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT
SYSTEMS AND FISCAL YEAR 2004 RATES, 68 Fed. Reg. 45,346 (Aug. 1, 2003); CHANGES TO THE
HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2005 RATES, 69 Fed.
Reg. 48,916 (Aug. 11, 2004); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT
SYSTEMS AND FISCAL YEAR 2006 RATES, 70 Fed. Reg. 47,278 (Aug. 12, 2005).
3
eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R.
§ 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that
a hospital must absorb in any case in which the hospital incurs estimated actual costs in treating a
patient above and beyond the DRG prospective payment rate. An increase in the fixed loss
threshold reduces the number of cases that will qualify for outlier payments as well as the
amount of payments for qualifying cases.
As noted, the Secretary “establish[es] the fixed [loss] thresholds beyond which hospitals
will qualify for outlier payments” at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d
at 1009. In each of the fiscal years at issue in this action, the Secretary set fixed loss thresholds
at a level so that the anticipated total of outlier payments would equal 5.1% of the anticipated
total of payments based on DRG prospective payment rates. Similarly, the amount of the outlier
payment is “determined by the Secretary” and must “approximate the marginal cost of care”
beyond the fixed loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). During the time period
relevant to this action, the implementing regulations generally provided for outlier payments
equal to eighty percent of the difference between the hospital’s estimated operating and capital
costs and the fixed loss threshold. See 42 C.F.R. § 412.84(k).
In this litigation, Plaintiffs claim that the Outlier Payment Regulations, in the form they
existed prior to 2003, 4 contained “vulnerabilities” that made them “uniquely susceptible to
manipulation” by unscrupulous hospitals. Am. Compl. ¶¶ 52-98, 138. According to Plaintiffs,
4
The Outlier Payment Regulations were first enacted in 1985 and have been revisited
periodically over the years, most notably in 1988 and 2003. See MEDICARE PROGRAM; CHANGES
TO IMPLEMENT THE INPATIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM AND FISCAL YEAR
1989 RATES, 53 Fed. Reg. 38,476 (Sept. 30, 1988); MEDICARE PROGRAM; CHANGE IN
METHODOLOGY FOR DETERMINING PAYMENT FOR EXTRAORDINARILY HIGH-COST CASES (COST
OUTLIERS), 68 Fed. Reg. 34,494 (June 9, 2003). Plaintiffs’ allegations are directed principally
towards the regulations in the form in which they were enacted in 1988. See, e.g., Am. Compl.
¶¶ 75-85, 98, 107-10.
4
these “vulnerabilities” in the Outlier Payment Regulations allowed unscrupulous hospitals to
submit excessive reimbursement claims, “led to massive overpayments” to the wrong hospitals,
prompted the Secretary to raise the fixed loss threshold at the beginning of each fiscal year as a
misguided countermeasure, and ended with Plaintiffs being denied the outlier payments “to
which they were entitled.” Id. ¶ 55.
Regarding the Fixed Loss Threshold Regulations, Plaintiffs contend that the Secretary,
faced with an “aberrantly high” level of projected outlier payments caused by a flood of
excessive reimbursement claims, made no attempt to diagnose the actual source of the problem
but instead, as a misguided countermeasure, made “enormous, unprecedented and irrational
increases” in the fixed loss threshold for the fiscal years at issue in this action, and did so without
providing an adequate, reasoned explanation for the increases. See id. ¶¶ 14, 69, 112, 114, 119,
121, 125-26, 129-38, 147-48, 155-61. Plaintiffs contend that the Secretary’s failure to account
for flaws in the Fixed Loss Threshold Regulations led to an irrational increase in the fixed loss
thresholds for fiscal years 1998 through 2006, which allegedly had the ultimate effect of
reducing the number of Plaintiffs’ cases that qualified for outlier payments and the amount of
payments for those cases that did qualify. Id. ¶ 50.
Accordingly, Plaintiffs challenge the promulgation and implementation of the following
agency actions: three sets of Outlier Payment Regulations promulgated in 1988, 1994, and 2003;
and eleven sets of Fixed Loss Threshold Regulations for federal fiscal years 1997 through 2007.
In addition, Plaintiffs challenge outlier payment determinations specific to each of the hospital
Plaintiffs.
On March 23, 2012, Plaintiffs filed a motion to compel, requesting that the Court order
the Secretary to file the “complete administrative record,” by supplementing the records she had
5
previously filed with various documents, including certain data files, identified by Plaintiffs and
all other documents that were before the agency in connection with its rulemakings, and further
order the Secretary to certify to the Court and Plaintiffs the completeness of the administrative
record. See Pls.’ Renewed Mot. to Compel Def. to File the Complete Admin. Record and to
Certify Same, ECF No. [60]. On May 16, 2013, the Court granted-in-part and denied-in-part
Plaintiffs’ motion to compel, and ordered the Secretary to supplement the administrative record
in this matter with several categories of materials. See Banner Health, 945 F. Supp. 2d 1; Order
(May 16, 2013), ECF No. [82]. Among the materials the Court ordered added to the
administrative record was a February 2003 draft interim final rule (“Interim Final Rule”). As
discussed at length in the Court’s prior Memorandum Opinion, the Interim Final Rule was
“exchanged between HHS and [the Office of Management and Budget (“OMB”)][5] pursuant to
Executive Order 12866, which requires HHS to submit major rulemakings to OMB for review”
and which “also requires that, after the regulation becomes final, OMB must make available to
the public all documents exchanged between it and the agency during the interagency review.”
Banner Health, 945 F. Supp. 2d at 24 (citing 58 Fed. Reg. 51735, Exec. Order No. 12866 §
6(b)(4)(D)). Plaintiffs learned of the Interim Final Rule in February 2012 in response to a
Freedom of Information Act request to OMB. Pls.’ Mem. at 1. The document itself is a “sixty-
page Interim Final Rule sent, over the signature of then HHS Secretary, Tommy G. Thompson,
to OMB for review and approval in early 2003.” Banner Health, 945 F. Supp. 2d at 24.
The Court explained the significance of the Interim Final Rule as follows:
5
OMB is tasked with carrying out coordinated review of agency rulemaking to ensure
that regulations are consistent with applicable law, the priorities of the President, and the
principles set forth in Executive Order 12866. See 58 Fed. Reg. 51735, Exec. Order No. 12866 §
2(b).
6
[O]f the many agency actions challenged in this case is the Secretary’s
promulgation and application, in 2003, of invalid amended Outlier Payment
Regulations and Fixed Loss Threshold Regulations. Plaintiffs argue that, in the
Federal Register sections related to the rulemakings challenged in this case, the
Secretary has variously stated that (a) there were no critical flaws in its Outlier
Payment Regulations – and then, in 2003, that there were three fatal flaws, (b)
that the agency had always used the best available data – and then, in 2003, that
other data, which had previously been available and was better, should be used,
and (c) that it would not make retroactive corrections to outlier payments – and
then, in 2003, that retroactive corrections would be made. Plaintiffs further
contend that in mid-2003, while the agency was in the process of reversing its
position on each of these points, the Secretary should have taken the opportunity
to lower the fixed loss threshold to correct for what the agency openly
acknowledged had been the improper distribution of outlier funds to “turbo
charging” hospitals, but instead, in June of 2003, promulgated amended
regulations which left the threshold at its previous level, $33,560. As
explanation, [the Centers for Medicare and Medicaid Services (“CMS”)][6]
stated that “in light of the relatively small difference between the current
threshold and our revised estimate, and the limited amount of time remaining in
the fiscal year, we have concluded it is more appropriate to maintain the
threshold at $ 33,560.” A.R. at 4408 (68 Fed. Reg. at 34506).
Plaintiffs contend that the Interim Rule, which was approved by Secretary
Thompson on February 6, 2003 and submitted for OMB’s review on February
12, 2003, tells a different story. Specifically, Plaintiffs explain that the Interim
Final Rule contains HHS’s conclusion, with supporting facts and analysis, that
the public interest required it, mid-year, to lower its FY 2003 fixed loss
threshold from $33,560 to $20,760 – in other words, that the threshold was
approximately 62% higher than it should have been. Upon the Court’s own
review of the document, HHS does appear to have proposed to OMB a
reduction of the outlier threshold to $20,760, to be effective as of the date of
publication of the interim rule. Further, HHS acknowledged that the prior
increase in the threshold was due to relatively few hospitals with extraordinary
rates of increase in their charges, causing many truly high-cost cases not to
qualify for outlier payments; HHS therefore proposed that the Interim Final
Rule reducing the threshold be implemented without prior notice and comment
procedures, so as not to extend the duration of these payment inequities.
Plaintiffs observe, however, that the Secretary’s proposed rule, issued on
February 28, 2003 – just over two weeks after HHS submitted the Interim Final
Rule to OMB – makes no mention of the data and analysis stated in the Interim
Final Rule. … [See] [ ] A.R. at 4386-4395 (68 Fed. Reg. at 10420-10429).[7]
Therefore, Plaintiffs argue, inclusion of the Interim Final Rule in the
administrative record is necessary to show significant alternatives, facts, other
6
The Medicare program is administered by the Secretary through CMS.
7
The proposed rule was issued by HHS for publication on February 28, 2003, and
subsequently published on March 5, 2003. See A.R. at 4395 (68 Fed. Reg. at 10429).
7
data and analyses that HHS considered in the rulemaking process, but that were
directly contrary to its published regulations which maintained the threshold at
$33,650. Plaintiffs also argue that this document goes to the heart of
establishing the Secretary’s promulgation of and continued application of
invalid Fixed Loss Threshold Regulations as arbitrary and capricious, because it
demonstrates that the agency knew that lowering the threshold would correct the
problems engendered by its earlier regulations and believed it was obligated to
do so immediately, but did not.
Id. at 25-26 (internal citations to the parties’ pleadings omitted).
In view of the foregoing, the Court found that Plaintiffs had “made a sufficient showing
that ‘unusual circumstances’ warrant supplementation of the administrative record – namely, that
‘the agency deliberately or negligently excluded documents that may have been adverse to its
decision.’” Id. at 26 (citing City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010)).
On July 30, 2013, the Court denied the Secretary’s motion for reconsideration of the decision to
require inclusion of the Interim Final Rule in the administrative record. See Order (July 30,
2013), ECF No. [96]. The Secretary filed the administrative record in this action on July 31,
2013.
After the Court resolved issues relating to the completeness of the administrative record,
this case moved to the scheduling of summary judgment briefing. Subsequently, however, the
Secretary sought leave to file an additional motion to dismiss for lack of subject matter
jurisdiction. See Def.’s Mot. for Leave to File Mot. to Dismiss for Lack of Subject Matter
Jurisdiction, ECF No. [99]. The Court granted the Secretary’s request, but ordered that the
Secretary file this motion “simultaneously with, and in the alternative to, Defendant’s cross-
motion for summary judgment.” Order (Aug. 13, 2013), ECF No. [102] at 1. The Court set a
deadline of October 25, 2013 for the parties’ initial summary judgment briefs and directed the
parties to file a joint status report by October 4, 2013 “(a) outlining in bullet-point format the
arguments the parties intend to raise in support of or in opposition to summary judgment; and (b)
8
indicating the extent to which there is a need to expand the page limits placed on memoranda of
points and authorities by the Local Rules of this Court.” Id. at 4. In this subsequently filed Joint
Status Report 8, Plaintiffs indicated, for the first time, their intention to file a Motion for Leave to
Further Amend and Supplement the First Amended Complaint in light of the addition of the
Interim Final Rule to the administrative record. See Joint Status Report and Mot. to Reset
Briefing Schedule, ECF No. [107]. In light of this request, the Court delayed the scheduled
summary judgment briefing pending resolution of Plaintiffs’ motion to amend. See Minute
Order (Oct. 22, 2013). Plaintiffs subsequently filed their Motion for Leave to Further Amend
and Supplement First Amended Complaint. Defendant filed an Opposition, and Plaintiffs filed a
Reply. Accordingly, the motion is now ripe for review.
II. LEGAL STANDARD
Under the Federal Rules of Civil Procedure, a party may amend its pleadings once as a
matter of course within a prescribed time period. See Fed. R. Civ. P. 15(a)(1). Where, as here, a
party seeks to amend its pleadings outside that time period, it may do so only with the opposing
party’s written consent or the district court’s leave. See Fed. R. Civ. P. 15(a)(2). The decision
whether to grant leave to amend a complaint is entrusted to the sound discretion of the district
court, but leave “should be freely given unless there is a good reason, such as futility, to the
contrary.” Willoughby v. Potomac Elec. Power Co., 100 F.3d 999, 1003 (D.C. Cir. 1996), cert.
denied, 520 U.S. 1197 (1997). As the Supreme Court has observed:
If the underlying facts or circumstances relied upon by a plaintiff may be a proper
subject of relief, he ought to be afforded an opportunity to test his claim on the
merits. In the absence of any apparent or declared reason—such as undue delay,
bad faith or dilatory motive on the part of the movant, repeated failure to cure
8
In light of the lapse of appropriations for the Department of Justice from October 1,
2013 through October 16, 2013, the deadline for this joint status report was subsequently
extended to October 21, 2013. See Minute Order (Oct. 18, 2013).
9
deficiencies by amendments previously allowed, undue prejudice to the opposing
party by virtue of allowance of the amendment, futility of amendment, etc. – the
leave sought should, as the rules require, be “freely given.”
Foman v. Davis, 371 U.S. 178, 182 (1962). “[A] district court has discretion to deny a motion to
amend on grounds of futility where the proposed pleading would not survive a motion to
dismiss.” Nat’l Wrestling Coaches Ass’n v. Dep’t of Educ., 366 F.3d 930, 945 (D.C. Cir. 2004),
cert. denied, 545 U.S. 1104 (2005). Review for futility is practically “identical to review of a
Rule 12(b)(6) dismissal based on the allegations in the amended complaint.” In re Interbank
Funding Corp. Secs. Litig., 629 F.3d 213, 215-16 (D.C. Cir. 2010) (quotation marks omitted).
Because leave to amend should be liberally granted, the party opposing amendment bears the
burden of coming forward with a colorable basis for denying leave to amend. Abdullah v.
Washington, 530 F. Supp. 2d 112, 115 (D.D.C. 2008). 9
III. DISCUSSION
Plaintiffs’ proposed motion to amend consists of two components. First, Plaintiffs seek
to add claims under 5 U.S.C. § 553 that “the Secretary did not allow for meaningful public
comment when she failed to disclose data, analysis and conclusions which had been set forth in
the Interim Final Rule, and were adverse to the determinations the Secretary later proposed and
9
Plaintiffs argue that the Court should also apply Rule 15(d), under which “the court
may, on just terms, permit a party to serve a supplemental pleading setting out any transaction,
occurrence, or event that happened after the date of the pleading to be supplemented.” Fed. R.
Civ. P. 15(d). Plaintiffs argue Rule 15(d) is applicable here because they are seeking to add
allegations concerning when they became aware of the Interim Final Rule, an event that occurred
in February 2012, after the filing of the First Amended Complaint. Pls.’ Mem. at 2-3.
Defendant, by contrast, argues Plaintiffs’ motion only implicates Rule 15(a) and that Rule 15(d)
does not apply here “because the proposed amendments pertain to events before the filing of the
action.” Def.’s Opp’n at 3 n.1. The Court need not resolve this dispute because, as both parties
concede, “[c]ourts resolve Rule 15(d) motions under the same standard as they resolve motions
to amend under Rule 15(a).” Tereschuk v. Bureau of Prisons, 851 F. Supp. 2d 157, 162 n. 6
(D.D.C. 2012). See also Wildearth Guardians v. Kempthorne, 592 F. Supp. 2d 18, 23 (D.D.C.
2008). Accordingly, whether considered under Rule 15(a) or Rule 15(d), the same standard
governs Plaintiffs’ requests.
10
finalized in her subsequent published rulemakings relating to the Outlier Payment Regulations
and the [Fixed Loss Threshold] Regulations in 2003 through 2007.” Pls.’ Proposed
Amendments at 1. Second, Plaintiffs seek to add factual allegations relating to when they
became aware of the Interim Final Rule. Pls.’ Mem. at 2. For the reasons discussed below, the
Court concludes that the former proposed amendment is improper while the latter is appropriate.
A. Proposed Additional Claims Under 5 U.S.C. § 553
Defendant argues that Plaintiffs’ motion should be denied because the proposed
additional claims under 5 U.S.C. § 553 are futile as contrary to D.C. Circuit precedent. Def.’s
Opp’n at 8. The Court agrees that Plaintiffs’ claims are not appropriate under § 553, and for this
reason, leave to amend the complaint to add these additional claims is denied.
In their proposed Amended Complaint, Plaintiffs state that by failing to disclose data,
analysis, and conclusions which had been set forth in the Interim Final Rule which were adverse
to the determinations the Secretary later proposed and finalized in her subsequent published
rulemakings relating to the Outlier Payment Regulations and the [Fixed Loss Threshold]
Regulations in 2003 through 2007, the Secretary violated 5 U.S.C. § 553 by preventing
meaningful public comment on these rulemakings. Pls.’ Proposed Amendments at 1. The D.C.
Circuit has long adhered to the principle that “[i]t is not consonant with the purpose of a rule-
making procedure to promulgate rules on the basis of inadequate data, or on data that, [to a]
critical degree, is known only to the agency.” Portland Cement Ass’n v. Ruckelshaus, 486 F.2d
375, 393 (D.C. Cir. 1973). Therefore, “an agency’s failure to disclose critical material, on which
it relies, deprives commenters of a right under § 553 ‘to participate in rulemaking.’” Allina
11
Health Svcs. v. Sebelius, 746 F.3d 1102, 1110 (D.C. Cir. 2014) (quoting Air Transp. Ass’n of Am.
v. F.A.A., 169 F.3d 1, 7 (D.C. Cir. 1999)). 10
The D.C. Circuit’s most recent comprehensive discussion of this doctrine came in
American Radio Relay League, Inc. v. Federal Communication Commission, 524 F.3d 227 (D.C.
Cir. 2008), where the panel concluded that the FCC “failed to satisfy the notice and comment
requirements of [§ 553] by redacting studies on which it relied in promulgating the rule . . . .” In
that case, the FCC placed five technical studies on which it had relied in promulgating the rule at
issue into the rulemaking record, but only in redacted form. Id. at 237. The court found that
these redactions violated § 553 and ordered the FCC, on remand, to “make available the
unredacted ‘technical studies and data that it has employed in reaching [its] decisions.’” Id. at
240 (quoting Conn. Light & Power Co. v. Nuclear Regulatory Comm’n, 673 F.2d 525, 530 (D.C.
Cir. 1982)). On this point, the panel found:
The Commission has chosen to rely on the data in those studies and to place the
redacted studies in the rulemaking record. Individual pages relied upon by the
10
As Defendant notes, there is considerable debate as to whether this doctrine conflicts
with the Supreme Court’s decision in Vermont Yankee Nuclear Power Corp. v. Natural Res. Def.
Council, 435 U.S. 519 (1978), which limited a court’s power to order additional procedures in
rulemaking beyond those imposed by the Administrative Procedures Act. See Am. Radio Relay
League, Inc. v. FCC, 524 F.3d 227, 245 (Kavanaugh, J., dissenting); Allina Health Svcs., 746
F.3d at 1110 (noting “the possible tension between Vermont Yankee and our critical material
doctrine”). See also Jack M. Beermann & Gary Lawson, Reprocessing Vermont Yankee, 75
GEO. WASH. L. REV. 856, 892 (2007); Richard L. Pierce, Waiting for Vermont Yankee III, IV,
and V?, 75 GEO. WASH. L. REV. 902, 916 (2007). Yet to the extent Defendant argues that this
debate renders Plaintiffs’ proposed claims futile, her argument must be rejected. The Portland
Cement doctrine remains the prevailing law of this Circuit, and this Court is bound to follow it.
Nevertheless, in light of this tension, the Court is reluctant to read the doctrine more broadly than
the D.C. Circuit has in past cases. Indeed, even while upholding its continued application, the
D.C. Circuit has emphasized the narrowness of this doctrine, perhaps out of a concern that a
broader doctrine would more clearly run afoul of Vermont Yankee. See Am. Radio Relay League,
Inc., 524 F.3d at 239 (“The narrowness of our holding under section 553 of the APA is
manifest.”); Allina Health Svcs., 746 F.3d at 1110 (“Perhaps because of the possible tension
between Vermont Yankee and our critical material doctrine, we have more carefully examined
whether a failure to disclose such material actually harmed a petitioner.”).
12
Commission reveal that the unredacted portions are likely to contain evidence that
could call into question the Commission’s decision to promulgate the rule. Under
the circumstances, the Commission can point to no authority allowing it to rely on
the studies in a rulemaking but hide from the public parts of the studies that may
contain contrary evidence, inconvenient qualifications, or relevant explanations of
the methodology employed.
Id. at 239. The focal point of this analysis was the Commission’s reliance on materials that were
undisclosed, or that were disclosed only in part with redactions. Importantly, American Radio
Relay League distinguished cases where the agency did not rely on the undisclosed materials,
such as EchoStar Satellite LLC v. Federal Communications Commission, 457 F.3d 31, 40 (D.C.
Cir. 2006), in which “the non-disclosed staff analysis represented ‘merely . . . cogitations upon
the evidence’ that was part of the rulemaking record.” Am. Radio Relay League, Inc., 524 F.3d
at 238. “By contrast, the challenged orders” in American Radio Relay, “were, according to the
Commission, a central source of data for its critical determinations.” Id. Moreover, the court
concluded that its conclusions were “not inconsistent with the view that ‘the Portland Cement
doctrine should be limited to studies on which the agency actually relies to support its final
rule.’” Id. at 240 (quoting 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW TREATISE 437 (4th
ed. 2002)) (emphasis added in original). See also 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE
LAW TREATISE 584 (5th ed. 2010) (“If an agency does not attempt to support its final rule by
reference to an undisclosed study, it seems apparent that the agency was not required to make the
study available to potential commentators. Thus, the Portland Cement doctrine should be
limited to studies on which the agency actually relies to support its final rule.”)
Here, according to Plaintiffs’ proposed Amended Complaint, the relevant undisclosed
material at the time of the rulemakings is the “data, analysis and conclusions which had been set
forth in the Interim Final Rule [which] were adverse to the determinations the Secretary later
proposed and finalized in her subsequent published rulemakings.” Pls.’ Proposed Amendments
13
at 1. The parties disagree in their present briefing as to whether the Secretary “relied” on this
material in the challenged rulemakings, such that her failure to disclose these materials runs
afoul of § 553 under the Portland Cement doctrine. Compare Pls.’ Reply at 1-2 with Def.’s
Opp’n at 8. As support for the proposition that the Secretary relied on the Interim Final Rule and
the supporting materials, Plaintiffs look to this Court’s decision to include the Interim Final Rule
in the administrative record. Pls.’ Mem. at 3; Pls.’ Reply at 2. Plaintiffs cite the Court’s
statement that “there can be little doubt that the Interim Final Rule reflects views adverse to
those finally adopted by the Secretary and that the Secretary considered – and indeed proposed to
OMB – the Interim Final Rule as an alternative in its path to promulgation of the 2003 amended
Outlier Payment Regulations now challenged by Plaintiffs.” Pls.’ Mem. at 3 (quoting Banner
Health, 945 F. Supp. 2d at 27). Yet such language does not show that the Secretary relied on
these materials. In fact, it shows the opposite – that the Secretary in all likelihood discounted
these materials in issuing the Proposed Rule.
Plaintiffs attempt to bring this case within the ambit of American Radio Relay League by
arguing in their Reply brief that the 2003 Proposed Rule reflects portions of the Interim Final
Rule favorable to the agency, but excludes unfavorable portions, just as the FCC included
favorable portions of studies in American Relay while redacting unfavorable portions. Pls.’
Reply at 1-2. Yet Plaintiffs’ prior briefing in this case, and the Court’s conclusions based on this
briefing contradict this newfound argument. As noted in the Court’s prior Memorandum
Opinion, Plaintiffs themselves have previously pointed out the sharp disconnect between the
Interim Final Rule and the Proposed Rule. Indeed, the Court’s previous Memorandum Opinion
includes the following language: “Plaintiffs observe, however, that the Secretary’s proposed rule,
issued on February 28, 2003 – just over two weeks after HHS submitted the Interim Final Rule to
14
OMB – makes no mention of the data and analysis stated in the Interim Final Rule.” Banner
Health, 945 F. Supp. 2d at 25 (emphasis added). Plaintiffs’ instant attempt to argue a contrary
position – that the Secretary cherry-picked data and analysis that was utilized in the Interim Final
Rule – is unpersuasive. 11 Indeed, the position asserted in Plaintiffs’ Reply brief is similarly
undercut by Plaintiffs’ proposed Amended Complaint. This proposed filing likewise contends
that the Secretary did not rely on the Interim Final Rule and its supporting materials, and further
undermines application of the Portland Cement doctrine here. On this point, Plaintiffs state:
In the published Proposed Rule, the Secretary made no mention of the IFR and
did not include much of the data, methodological changes and analysis that the
Secretary had included in the IFR relating to the agency’s conclusion that the
fixed-loss outlier threshold should be recalculated and set immediately at $20,760
(plus the additional payments referenced above in paragraph 198.5.b). Among
other things, the Proposed Rule failed to mention the Secretary’s analysis
quantifying the impact of hospitals identified as having “taken advantage of two
vulnerabilities” in the Secretary’s regulations, the agency’s obligation to
recalculate the fixed loss threshold, methodological changes the Secretary used
for the recalculation, and the agency’s findings regarding the public interest. All
of these topics were discussed in the IFR.
Pls.’ Proposed Amendments at 2. Consequently, despite their present briefing to the contrary,
Plaintiffs’ proposed amendments and their previous statements in this case show that they are not
alleging that the Secretary relied on these materials and failed to disclose them. Rather, they
appear to contend that she improperly considered and then did not rely on these materials, and
11
Plaintiffs’ prior briefing includes additional language revealing the disconnect between
the Interim Final Rule and the Proposed Final Rule. See Pls.’ Mem. of P. & A. in Supp. of
Renewed Motion to Compel Def. to File the Complete Admin. Record and to Certify Same, ECF
No. [60] at 16 (“In stark contrast, HHS’s published rulemaking . . . conspicuously lacks the
foregoing data, other facts, analysis.”); id. at 17 (noting that exclusion of the Interim Final Rule
“would only serve to conceal significant alternatives, facts, other data and analyses that HHS
considered in the rulemaking process, but that were contrary to its published regulations.”); id. at
18 (arguing that “the data and other facts used, and analysis undertaken, by HHS in reaching its
conclusions in the Interim Final Rule” “bear upon options that HHS considered, but did not
disclose or address in the Federal Register, when the agency was revising the Outlier Payment
Regulations.”)
15
that the contrary conclusions and information contained in the Interim Final Rule undercut the
alternative conclusions set forth in the Proposed Rule. This is not the sort of undisclosed basis
for a rule that triggers the Portland Cement doctrine. See 1 RICHARD J. PIERCE, JR.,
ADMINISTRATIVE LAW TREATISE 583-84 (5th ed. 2010). (“[A]ccess to the data that putatively
supports a proposed rule is critical to the right to comment on the rule and, hence, is part of the
notice required by § 553(b).”) (emphasis added). Instead these allegations more properly go to
the question of whether the Secretary’s actions, taken in apparent disregard of contrary data and
analysis, were arbitrary and capricious, and thus substantively invalid. Id. at 584-85 (noting that
it is consistent with Portland Cement for “[a] reviewing court [to] require an agency to add to the
rulemaking record documents in the agency’s possession that contradict the predicates for a rule .
. . and then use those documents to support a holding that the rule is arbitrary and capricious.”).
For this reason, this Court’s decision to include the Interim Final Rule in the administrative
record – for purposes of assessing the substantive validity of the Secretary’s regulations – does
not establish that the Secretary relied on these undisclosed materials. Compliance with § 553 is
an issue distinct from the completeness of the administrative record.
Accordingly, because the Court concludes that Plaintiffs’ have failed to assert proper
claims under 5 U.S.C. § 553 based on non-disclosure of the Interim Final Rule and the
underlying data and analysis, Plaintiffs’ proposed amendment to add these claims is denied as
futile. 12
12
In light of the Court’s conclusion that Plaintiffs’ proposed § 553 claims fall outside of D.C.
Circuit precedent, the Court does not reach the Secretary’s alternative argument for futility – that
the Court lacks subject matter jurisdiction over the § 553 claims because they were not properly
presented in administrative proceedings. See Def.’s Opp’n at 6-8. While the Supreme Court has
held that a court should address jurisdictional questions such as Article III standing prior to
addressing any question on the merits, see Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83,
101 (1998), that doctrine is inapplicable here, where Defendant’s jurisdictional argument is
16
B. Proposed Additional Factual Allegations
Although the Court concludes that Plaintiffs’ proposed additional claims are futile, this
does not doom the entirety of Plaintiffs’ motion. Defendant’s futility arguments go only to the
additional claims asserted by Plaintiffs and not to the additional factual allegations raised in the
proposed Amended Complaint. Indeed, in making her futility argument, Defendant nowhere
contends that these allegations themselves are futile as additional factual background for
Plaintiffs’ existing claims. Def.’s Opp’n at 6-8. Accordingly, in the absence of a futility
argument, the Court looks to whether there are other reasons – such as prejudicial delay – to
deny leave to add these additional allegations. For the reasons discussed below, the Court finds
Plaintiffs’ delay in seeking leave to add these allegations, although lengthy, was not prejudicial
or in bad faith. Therefore, the Court permits Plaintiffs to add these additional allegations as
support for their existing claims.
“Only limited circumstances justify a district court’s refusal to grant [ ] leave to amend:
undue delay, bad faith on the part of the moving party, or undue prejudice to the opposing party.”
Sinclair v. Kleindienst, 645 F.2d 1080, 1085 (D.C. Cir. 1981). Moreover, “[t]o warrant denial of
leave to amend, any delay in seeking leave must be accompanied by a showing of bad faith or
prejudice.” Council on American-Islamic Relations Action Network, Inc. v. Gaubatz, 891
premised on a lack of statutory, rather than constitutional, jurisdiction. “Steel Co. requires that
we prioritize the jurisdictional issue only when the existence of Article III jurisdiction is in
doubt; that decision ‘explicitly recognized the propriety of addressing the merits where doing so
made it possible to avoid a doubtful issue of statutory jurisdiction.’” Chalabi v. Hashemite
Kingdom of Jordan, 543 F.3d 725, 728 (D.C. Cir. 2008) (quoting Kramer v. Gates, 481 F.3d 788,
791 (D.C. Cir. 2007)). Here, Defendant does not raise an issue of Article III jurisdiction in
arguing for futility. Rather, the Secretary argues that this Court lacks statutory subject matter
jurisdiction to rule on claims that may not have been properly channeled through the “expedited
judicial review” process of 42 U.S.C. § 1395oo(f)(1), which allows for judicial review in the
absence of prior exhaustion before the Medicare Provider Reimbursement Review Board. Def.’s
Opp’n at 6-7. Accordingly, the Court may rule on alternative bases for futility without
addressing Defendant’s statutory jurisdiction argument.
17
F. Supp. 2d 13, 33 (D.D.C. 2012) (citing Caribbean Broad. Sys., Ltd. v. Cable & Wireless P.L.C.,
148 F.3d 1080, 1084 (D.C. Cir. 1998)). Defendant, as the party opposing amendment, bears the
burden of establishing bad faith or prejudice. City of New York v. Group Health, Inc., 649 F.3d
151, 157 (2d Cir. 2011); Abdullah, 530 F. Supp. 2d at 115.
Here, the Court finds that Defendant has not met her burden of showing that Plaintiffs’
delay in adding these additional allegations is accompanied by bad faith or prejudice. Certainly,
Defendant is correct that Plaintiffs have known about the Interim Final Rule since February 2012
and could have moved to add these additional factual allegations to support her claims far
sooner. Def.’s Opp’n at 4. But Defendant points to no prejudice from the failure to add these
allegations earlier. See Estate of Gaither ex rel. Gaither v. Dist. of Columbia, 272 F.R.D. 248,
252 (D.D.C. 2011) (“the mere passage of time does not preclude amendment – the delay must
result in some prejudice to the judicial system or the opposing party.”). Indeed, the Secretary’s
entire prejudice argument addresses the harm from allowing Plaintiffs to add new claims – rather
than new factual allegations to existing claims – at this stage of the litigation. Def.’s Opp’n at 5-
6. Yet the Court has already rejected the proposed additional claims as futile. In the absence of
a new claim, Defendant does not provide any reason to believe that she would be prejudiced by
allowing the addition of new factual allegations concerning the Interim Final Rule to Plaintiffs’
existing claims. Nor can the Court discern any, as leave to add clarifying factual allegations to
existing claims is typically freely given. See Council on American-Islamic Relations Action
Network, Inc., 793 F. Supp. 2d at 324 (“Plaintiffs’ factual allegations merely fine-tune the basis
for the relief Plaintiffs seek in this action. Factual allegations of this kind, which clarify but do
not reshape the action, are rarely a bad thing.”). See also Harrison v. Rubin, 174 F.3d 249, 253
(D.C. Cir. 1999) (stating that technical corrections and clarifications of legal theories without a
18
showing of prejudice are not sufficient grounds for denying a motion). Here, these allegations
merely explain the discovery and content of the Interim Final Rule, and provide additional basis
for Plaintiffs’ arguments that certain actions taken by the Secretary were substantively invalid.
Pls.’ Proposed Amendments at 1-2.
The Court is also unpersuaded by Defendant’s accusations that Plaintiffs have acted in
bad faith. Def.’s Opp’n at 5. Defendant contends that “[t]he most likely explanation for the
plaintiffs’ motion is that after seeing which of their claims survived the Court’s July 2011 and
November 2012 rulings and which did not, and then seeing which of their multifarious
challenges to the administrative records succeeded and which did not, the plaintiffs decided to
shift their bets in hopes of improving their overall chances in this litigation.” Id. Again, this
accusation goes mainly to Plaintiffs’ proposal to add new claims, rather than new factual
allegations to existing claims. Accordingly, it does not provide a basis to reject these
supplemental allegations.
Therefore, although it denies Plaintiffs leave to add new claims pursuant to 5 U.S.C. §
553, the Court will grant Plaintiffs leave to add factual allegations concerning the Interim Final
Rule. Accordingly, Plaintiffs may amend their complaint to include the allegations contained in
sub-paragraphs 198.5(a)-(e) of their Proposed Amendments. 13 See Pls.’ Proposed Amendments
at 1-2. These allegations, though arguably untimely, are not accompanied by bad faith or
prejudice.
IV. CONCLUSION
For all of the reasons stated herein, the Court GRANTS IN PART and DENIES IN
PART Plaintiffs’ [108] Motion for Leave to Further Amend and Supplement First Amended
13
Plaintiffs may not add the heading paragraph 198.5, which contains the proposed
claims under 5 U.S.C. § 553. Pls.’ Proposed Amendments at 1.
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Complaint. The Court denies Plaintiffs leave to amend their complaint to include claims that the
Secretary’s failure to disclose the Interim Final Rule and its contents violated 5 U.S.C. § 553.
However, the Court grants Plaintiffs leave to amend their complaint to include factual allegations
concerning the Interim Final Rule. An appropriate Order accompanies this Memorandum
Opinion.
Date: July 7, 2014
_______ /s/__________________
COLLEEN KOLLAR-KOTELLY
United States District Judge
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