St. Mary Medical Center v. Alex M. Azar

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ST. MARY MEDICAL CENTER, et al.,
Plaintiffs,
v. Civil Action No. 17-1073 (FYP)
XAVIER BECERRA,
Defendant.
MEMORANDUM OPINION
Plaintiffs are California hospitals that receive payments from the federal government to
treat patients who are on Medicare. The hospitals bring this suit to challenge the Secretary of
Health and Human Services’ interpretation of Section 4410 of the Balanced Budget Act of 1997
— an interpretation that lowered Plaintiffs’ Medicare payments in fiscal years 2009 and 2010.
Section 4410 requires the Secretary to apply an adjustment that increased the Plaintiff hospitals’
Medicare payments — the so-called “rural-floor adjustment;” but the Secretary then decreased
the payments by applying a corresponding “budget-neutrality” provision. Plaintiffs contend that
their Medicare payments should not have been decreased under the budget-neutrality provision.
They assert that the Secretary’s interpretation of that provision violates the plain language of the
statute and is unreasonable; and that the regulations adopted by the Secretary to determine the
hospitals’ payments in 2009 and 2010 violate the Administrative Procedure Act, see 5 U.S.C.
§ 500 et seq. Before the Court are the parties’ dueling motions for summary judgment. For the
reasons set forth below, the Court will deny Plaintiffs’ Motion for Summary Judgment and will
grant Defendant’s Cross Motion for Summary Judgment.1
BACKGROUND
I. Statutory Framework
A. Medicare and the Wage Index
Medicare is a federal health insurance program for the elderly and disabled. See 42
U.S.C. § 1395 et seq. It is administered by the Centers for Medicare & Medicaid Services
(“CMS”) within the Department of Health and Human Services (“HHS”). Medicare Part A
“covers medical services furnished by hospitals and other institutional care providers.” Ne.
Hosp. Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011). Under Part A, Medicare pays
predetermined rates to most hospitals for treating patients admitted to their care, rather than
paying the actual costs of the medical services provided. See 42 U.S.C. § 1395ww(d). This
system of predetermined rates, which was established in 1983, is known as the Medicare hospital
inpatient prospective payment system (“IPPS”). See Social Security Amendments of 1983, Pub.
L. No. 98-21, § 601, 97 Stat. 65, 149; see also Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914–
15 (D.C. Cir. 2009) (describing IPPS); Transitional Hosps. Corp. of La. v. Shalala, 222 F.3d
1019, 1021–22 (D.C. Cir. 2000) (same).2
1
Two other motions are also before the Court: Defendant’s Motion for Summary Judgment against the
Plaintiff hospitals in Bakersfield Memorial Hospital v. Azar, No. 18-cv-1609, see ECF No. 33; and the Bakersfield
Plaintiffs’ Second Motion for Summary Judgement, see ECF No. 34. The Court consolidated the Bakersfield case
with the instant case on August 14, 2018. See Minute Order (August 14, 2018). The Plaintiffs in the Bakersfield
case have joined the instant Plaintiffs’ Motion for Summary Judgment in full. See Bakersfield Pl. Mot. at 5 (“[T]he
[Bakersfield] Plaintiffs hereby adopt the Original Plaintiffs’ prior briefs at ECF No. 17, 23, and 24.”). Defendant
has similarly “set forth in his memoranda in support of his cross-motion for summary judgment in St. Mary Medical
Center, ECF Nos. 20 & 26” his arguments for summary judgment against the Bakersfield Plaintiffs. See Bakersfield
Def. Mot. at 1. Accordingly, this Court’s resolution of the instant motions also will resolve the outstanding motions
for summary judgment in the Bakersfield case.
2
“Hospitals that participate in the [IPPS] are called ‘subsection (d) hospitals,’ named after the statutory
subsection that identifies them.” Anna Jaques Hosp. v. Sebelius, 583 F.3d 1, 2 (D.C. Cir. 2009) (citing 42 U.S.C.
§ 1395ww(d)(1)(B)). “These facilities are best described as ‘short-term acute care general hospitals.’” Id. (quoting
Transitional Hosps., 222 F.3d at 1021). Not all hospitals participate in the IPPS.
2
To calculate payments to hospitals under the IPPS, CMS follows three steps. The agency
(1) constructs a standard nationwide cost rate, which roughly reflects the average cost incurred
by hospitals nationwide for each patient they treat;3 (2) determines the proportion of that
standardized amount attributable to wages and wage-related costs; and (3) multiplies that labor-
related proportion by a wage index that adjusts for local hospital wages as compared to their
federal benchmark. See Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205–06 (D.C. Cir. 2011); 42
C.F.R. § 412.64(g).
The second and third steps of this process reflect the requirement that the Secretary
“adjust the ‘proportion’ of the payment attributable to ‘wages and wage-related costs’ for ‘area
differences in hospital wage levels.’” Anna Jacques Hosp. v. Burwell, 797 F.3d 1155, 1158
(D.C. Cir. 2015) (quoting 42 U.S.C. § 1395ww(d)(3)(E)(i)). “To ensure uniformity in the
adjustment process, the [Medicare] statute requires the Secretary to compute a ‘factor’ that
‘reflect[s] the relative hospital wage level in the geographic area of the hospital compared to the
national average;’” this factor is commonly referred to as the “wage index.” Id. (quoting 42
U.S.C. § 1395ww(d)(3)(E)(i)). In calculating each region’s wage index, the Secretary divides
the regional average hourly wage rate for hospitals in the defined geographic area by the national
average hourly wage rate. Anna Jacques Hosp., 797 F.3d at 1159; 42 C.F.R. § 412.64(h). “A
wage index of 1.0 means a given area is average; an index above 1.0 indicates higher than
average wage costs . . . [;] and an index below 1.0 means a lower than average cost area.”
Dignity Health v. Price, 243 F. Supp. 3d 43, 46 (D.D.C. 2017). The wage index is applied as an
3
“Medicare authorities . . . construct a standard nationwide cost rate — the ‘federal rate’ — based on the
average operating costs of inpatient hospital services.” Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225,
1227 (D.C. Cir. 1994). “They then assign a weight to each category of inpatient treatment, or ‘diagnosis-related
group.’” Id. The diagnosis-related group to which a patient is assigned upon discharge determines how much the
hospital is paid for treating her. See County of Los Angeles v. Shalala, 192 F.3d 1005, 1008–09 (D.C. Cir. 1999);
Methodist Hosp., 38 F.3d at 1227.
3
adjustment to wage-related costs, altering the payments received by a hospital in a fiscal year.
This method ensures that, for example, hospitals in Los Angeles, California, receive higher
payments than hospitals in rural Kansas, to account for the comparatively more expensive labor
market in urban California.
B. The Rural-Floor and the Budget-Neutrality Adjustment
Congress has made an exception to the general rule that each hospital’s wage index is
based on the prevailing wages in its own geographic area. In Section 4410(a) of the Balanced
Budget Act of 1997, Congress included a provision that raises the wage index of urban hospitals
with low wages to the same level as the wage index in rural areas of the same state:
[T]he area wage index applicable . . . to any hospital which is not located
in a rural area . . . may not be less than the area wage index applicable
under such section to hospitals located in rural areas in the State in
which the hospital is located.
See Balanced Budget Act of 1997 (“BBA 1997”), Pub. L. No. 105-33, § 4410(a), 111 Stat. 251,
402. Known as the “rural floor,” this provision guarantees that all hospitals in a state receive at
least the wage index applicable to the rural hospitals in that state. See Cape Cod Hosp., 630 F.3d
at 206; FFY 2009 Final Rule, 73 Fed. Reg. 48,434, 48,570 (Aug. 19, 2008) (“Section 4410 . . .
established the rural floor by requiring that the wage index for a hospital in an urban area of a
State cannot be less than the area wage index received by rural hospitals in that State.”).
Concerned about the increased costs associated with applying the rural floor to raise
Medicare payments to certain urban hospitals, Congress also enacted a budget-neutrality
adjustment to offset the increased payments. See Cape Cod Hosp., 630 F.3d at 206.
Specifically, the budget-neutrality provision in Section 4410(b) of the 1997 Act states:
The Secretary of Health and Human Services shall adjust the area wage
index referred to in subsection (a) for hospitals not described in such
subsection in a manner which assures that the aggregate payments made
4
. . . in a fiscal year for the operating costs of inpatient hospital services
are not greater or less than those which would have been made in the
year if this section did not apply.
See BBA 1997 § 4410(b). Thus, taken as a whole, subsection (a) of Section 4410 increases
Medicare payments to certain urban hospitals through application of the rural-floor adjustment;
and subsection (b) of the statute decreases Medicare payments to other hospitals so that the rural-
floor provision remains budget neutral.
To effectuate the requirements of Section 4410, the Secretary must calculate the wage
indices for three categories of hospitals: (1) rural hospitals; (2) urban hospitals that do not
receive the rural floor, i.e., high-wage urban hospitals; and (3) urban hospitals that do receive the
rural floor, i.e., low-wage urban hospitals. The budget-neutrality provision requires a downward
adjustment of payments to hospitals “not described” in subsection (a) to offset the rural-floor
adjustments paid to low-wage urban hospitals. In applying that provision, the Secretary has
defined hospitals “not described” in subsection (a) as rural hospitals and high-wage urban
hospitals. See FFY 2008 Final Rule, 72 Fed. Reg. 47,130, 47,325 (Aug. 22, 2007). He has
considered two ways to apply the cost of budget neutrality to those hospitals.
According to the Secretary, “[o]ne possible interpretation of section 4410(b) of the BBA
is that the budget neutrality adjustment would be applied only to [the wage indices of] those
hospitals that do not receive the rural floor,” i.e., rural hospitals and high-wage urban hospitals.
Id. “In other words, the wage index of an urban hospital subject to the rural floor would be
increased to the level of the rural wage index in the same State, but would not be adjusted for
budget neutrality.” Id. The Secretary expressed concern, however, that under this approach,
“urban hospitals receiving the rural floor would receive a higher wage index than the rural
hospitals within the same State (because rural floor hospitals would not be subject to budget
5
neutrality, whereas rural hospitals would be).” Id. The Secretary concluded that “such a reading
would not be in accordance with Congressional intent, which was to set a floor for urban
hospitals, not to pay urban hospitals a wage index higher than the wage index applicable to rural
hospitals.” Id.To better vindicate Congress’s intent, the Secretary considered and adopted a second way
to apply the statute, which “allow[s] an iterative calculation of budget neutrality and wage
indices.” Id. Under the iterative method, the Secretary first raises the wage indices of low-wage
urban hospitals to match the rural hospitals for their geographic area, thereby applying the rural
floor. Id. This results in an overall Medicare budget increase, which is prohibited by Section
4410(b); to maintain budget neutrality, the Secretary then applies an overall budget-neutrality
downward adjustment to the wage indices of rural and high-wage urban hospitals. Id. At this
point, the wage indices of low-wage urban hospitals are higher than the wage indices of rural
hospitals, requiring the Secretary to reset the rural floor, and allowing the Secretary to then
decrease the wage indices of low-wage urban hospitals to match the lower rate now applied to
rural hospitals. Id. “At this point, payments would be less in the aggregate,” again violating the
budget-neutrality requirements of Section 4410(b). Id. Accordingly, the Secretary then applies
an upward budget-neutrality adjustment to the wage indices of rural and high-wage urban
hospitals, and then resets the rural floor to this new amount. Id. The low-wage urban hospitals’
rate is then adjusted to the new rural floor. This iterative process continues until the calculation
stabilizes at the point where the system is budget neutral, and the wage indices of low-wage
urban hospitals are equal to those of rural hospitals. Id.; see also id. at 47,326–29 (calculating
nine iterations with a simplified model).
6
Because this iterative process is resource intensive, the Secretary has further “determined
that the iterative method is substantively equivalent to simply adjusting all area wage indices by
a uniform percentage.” Id. at 47,325. He has adopted that simplified methodology since federal
fiscal year (“FFY”) 2008.4 Before 2009, the uniform adjustment rate that approximates the
iterative method was applied nationwide, thereby spreading the cost of budget neutrality across
hospitals throughout the country. See 72 Fed. Reg. at 47,325 (describing nationwide method in
FFY 2008); FFY 2009 Proposed Rule, 73 Fed. Reg. 23,528, 23,620 (Apr. 30, 2008) (noting that
prior to FFY 2009, “a nationwide budget neutrality adjustment” was applied). Because the
adjustment was spread so broadly, the adjustment to each hospital’s payments was relatively
small. See ECF No. 17 (Plaintiffs’ Motion for Summary Judgment) at 7.
C. The In-State Budget-Neutrality Adjustment
For FFY 2009, the Secretary decided to modify the budget-neutrality adjustment. He
proposed an in-state budget-neutrality adjustment, so that each state’s hospitals would become
responsible for the costs of the rural floor in that state, rather than spreading the cost of the rural
floor across hospitals nationwide. See 73 Fed. Reg. at 23,622–23. Under this system, the
iterative method would be performed within each state with low-wage urban hospitals that
benefitted from the rural floor, rather than across all hospitals nationally.5
The Secretary gave two reasons for this change. First, he noted that “at a State-by-State
level, the rural floor is creating a benefit for a minority of States that is . . . funded by a majority
4
Following passage of the Balanced Budget Act of 1997, the Secretary implemented the requirements of
Section 4410 by applying the rural floor budget-neutrality adjustment to the standardized amount rather than the
wage index. See 72 Fed. Reg. at 47,325. Starting in FFY 2008, the Secretary applied the rural floor budget-
neutrality adjustment to all hospitals’ wage indices rather than to the standardized amount. Id. at 47,329.
5
Under the Secretary’s proposal, “States that have no hospitals receiving a rural floor wage index would no
longer have a negative budget neutrality adjustment applied to their wage indices.” See 73 Fed. Reg. at 23,622.
“Conversely, hospitals in States with hospitals receiving a rural floor would have their wage indices downwardly
adjusted to achieve budget neutrality within the State.” Id. at 23,622–23. “All hospitals within each State would, in
effect, be responsible for funding the rural floor adjustment applicable within that specific State.” Id. at 23,623.
7
of States, including States that are overwhelmingly rural in character.” Id. at 23,622. Although
“[t]he intent behind the rural floor seems to have been to address anomalous occurrences where
certain urban areas in a State have unusually depressed wages when compared to the State’s rural
areas,” in practice it was serving as a mechanism by which hospitals in the majority of states
subsidized hospitals in a minority of states. Id. Because, under Section 4410(a), the
comparisons between the wage index of each urban hospital and the index applicable to rural
hospitals “occur at the State level” (e.g., each urban hospital in California compares its wage
index to the index for California’s rural hospitals), the Secretary explained that “it also would be
sound policy to make the budget neutrality adjustment specific to the State, redistributing
payments among hospitals within the State . . . , rather than adjusting payments to hospitals in
other States.” Id. Second, the Secretary suggested that the in-state budget-neutrality adjustment
would help to resolve an anomaly in which some rural hospitals were artificially increasing their
state’s rural floor. Id. According to the Secretary, this gaming of the system “would increase
[payments to hospitals in the state] in excess of $220 million in a single year,” something the in-
state policy prevented. Id.
In the FFY 2009 Proposed Rule, the only modification to the Secretary’s interpretation of
Section 4410 was the change from a nationwide budget-neutrality adjustment to a state-by-state
budget-neutrality adjustment. See 73 Fed. Reg. at 23,620–23,623; see also id. at 48,570–48,574
(final rule adopting no changes other than the in-state adjustment). As a result, the Secretary’s
interpretation from the FFY 2008 rulemaking, describing the iterative method and implementing
it through application of a uniform percentage, remained unchanged and continued to apply in
FFY 2009. See 72 Fed. Reg. 47,325–47,330; see also FCC v. Fox Television Stations, Inc., 556
U.S. 502, 515 (2009) (“An agency may not . . . depart from a prior policy sub silentio or simply
8
disregard rules that are still on the books.”); Mendoza v. Perez, 754 F.3d 1002, 1020 (D.C. Cir.
2014) (“An agency is generally required by the APA to publish notice of proposed rulemaking in
the Federal Register and to accept and consider public comments on its proposal.” (citing 5
U.S.C. § 553)). But under the FFY 2009 Proposed Rule, the simplified version of the iterative
method was to be applied on a state-by-state basis, and not on a nationwide basis.
The Secretary’s proposal of an in-state adjustment garnered significant public comment,
with “the majority of commenters, including most national and State hospital associations,
[opposing] the proposal.” See 73 Fed. Reg. at 48,573. In response to concerns that the change
would result in “potentially drastic payment cuts,” the Secretary “decided to phase in, over a 3-
year period, the transition from the national budget neutrality adjustment to the State level
budget neutrality adjustment.” Id. at 48,574. In FFY 2009, hospitals would “receive a blended
wage index that is 20 percent of a wage index with the State level rural . . . floor budget
neutrality adjustment and 80 percent of a wage index with the national budget neutrality
adjustment.” Id. In FFY 2010, the wage index would be blended evenly between State-level and
national, and in FFY 2011 the adjustment would “be completely transitioned to the State level
methodology.” Id. The Secretary codified this policy at 42 C.F.R. § 412.64(e)(4).6 Due to
6
That regulation reads:
(4) CMS makes an adjustment to the wage index to ensure that aggregate payments
after implementation of the rural floor under section 4410 of the Balanced Budget Act
of 1997 (Pub. L. 105-33) and, for discharges on or after October 1, 2004, and before
October 1, 2018, the imputed floor under paragraph (h)(4) of this section are equal to
the aggregate prospective payments that would have been made in the absence of such
provisions as follows:
(i) Beginning October 1, 2008, such adjustment is transitioned from a nationwide
to a statewide adjustment as follows:
(A) From October 1, 2008 through September 30, 2009, the wage index is a
blend of 20 percent of a wage index with a statewide adjustment and 80
percent of a wage index with a nationwide adjustment.
9
superseding legislation by Congress that restored the nationwide approach in 2011, however, the
state-by-state budget-neutrality adjustment was applied only in FFY 2009 and 2010.7
II. Facts and Procedural History
Plaintiffs are seventeen hospitals that have benefited from the rural-floor adjustment. As
a result of the FFY 2009 state-wide application of the budget-neutrality adjustment, sixteen of
the Plaintiffs allege that their total Medicare reimbursement was reduced “by approximately
$2,999,151.” See ECF No. 1 (Complaint), ¶ 49. Eight of the Plaintiffs allege that in FFY 2010,
they saw a total reduction of “approximately $1,168,158.” Id., ¶ 51. On June 5, 2017, Plaintiffs
filed their Complaint in the instant case alleging five claims, one of which has since been
resolved8 and another that has been abandoned.9 In their remaining claims, Plaintiffs allege that
the Secretary:
(B) From October 1, 2009 through September 30, 2010, the wage index is a
blend of 50 percent of a wage index with a statewide adjustment and 50
percent of a wage index with a nationwide adjustment.
(ii) Beginning October 1, 2010, such adjustment is a full nationwide adjustment.
See 42 C.F.R. § 412.64(e)(4).
7
In the Patient Protection and Affordable Care Act (“ACA”), Congress overrode the Secretary’s in-state
rural floor budget-neutrality adjustment and required the Secretary to apply a uniform, nationwide rural floor
budget-neutrality adjustment beginning October 1, 2010. See ACA, Pub. L. No. 111-148, § 3141, 124 Stat. 119, 441
(2010) (“[F]or purposes of applying section 4410 . . . , the Secretary of Health and Human Services shall administer
subsection (b) of such section 4410 . . . in the same manner as the Secretary administered such subsection (b) . . . for
discharges occurring during fiscal year 2008 (through a uniform, national adjustment to the area wage index).”).
8
The claim that has been resolved sought to challenge the Provider Reimbursement Review Board’s finding
that it did not have jurisdiction over three of the hospitals’ claims and therefore could not grant those hospitals an
expedited judicial review (“EJR”). See Compl., ¶¶ 64–67. During the pendency of this case, the parties agreed to
remand this issue to the Board, which found that it did have jurisdiction and granted the hospitals an EJR. See ECF
No. 22 (Joint Motion to Remand to U.S. Department of Health and Human Services); ECF No. 35 (Joint Appendix
(Supplemental)), at 3463. The three hospitals then filed a separate Complaint, and their case was ultimately
consolidated with the instant case. See Minute Order (August 14, 2018).
9
In Count III of their Complaint, Plaintiffs allege that the Secretary violated the Tax Relief and Health Care
Act of 2006 by applying the budget-neutrality adjustment statewide despite Congress’s intent to “[m]inimiz[e]
variations in wage index adjustments between and within Metropolitan Statistical Areas and Statewide rural areas.”
See Compl., ¶¶ 71–72. Plaintiffs now state, however, that they “do not contend that the Secretary violated the [Tax
Relief and Health Care Act] or that [the] statute was an absolute command to minimize variations.” See ECF No. 23
(Plaintiffs’ Opposition and Reply) at 16. Instead, Plaintiffs argue only that the Act “is evidence that the Secretary
unreasonably interpreted” Section 4410 because it “shows that Congress was concerned about excessive variations
in wage [indices] among states.” Id.
10(1) Violated Section 4410(b) of the Balanced Budget Act by applying the budget-
neutrality adjustment to low-wage urban hospitals and rural hospitals in FFYs 2009 and 2010,
despite the explicit exclusion of such hospitals by the language of Section 4410(b), id., ¶ 69;
(2) Violated section 553(b)(3)10 of the APA by failing to provide sufficient notice of how
the Secretary calculated his proposed statewide adjustment, the range of alternatives he
considered, and a comparison of wage index values under the existing rule and proposed rule,
id., ¶¶ 74–76 (citing 5 U.S.C. § 553(b)(3)); and
(3) Violated sections 553 and 706(2)(A) of the APA11 by ignoring the concerns raised by
commenters on the 2009 and 2010 proposed rules, id., ¶¶ 78–80 (citing 5 U.S.C. §§ 553,
706(2)(A)).
Plaintiffs seek a declaration that “forbids the Secretary” from applying the budget-
neutrality adjustment to Plaintiffs. Id. at 26. Plaintiffs further seek an order requiring the
Secretary to recalculate the FFY 2009 and 2010 wage indices and Medicare payments applicable
to the Plaintiff hospitals, and an order awarding Plaintiffs fees and costs. Id. at 26–27.
LEGAL STANDARD
Summary judgment is the appropriate means for determining, as a matter of law, if
“agency action is supported by the administrative record and is otherwise consistent with the
APA standard of review.” Hill Dermaceuticals, Inc. v. FDA, No. 11-cv-1950, 2012 WL
10Section 553(b) requires agencies to publish “[g]eneral notice of proposed rulemaking” in the Federal
Register. See 5 U.S.C. § 553(b). The notice must include: “(1) a statement of the time, place, and nature of public
rulemaking proceedings; (2) reference to the legal authority under which the rule is proposed; and (3) either the
terms or substance of the proposed rule or a description of the subjects and issues involved.” Id.11
After an agency provides notice of a proposed rulemaking, the agency must “give interested persons an
opportunity to participate in the rulemaking through submission of written data, views, or arguments.” 5 U.S.C. §
553(c). Failure to adequately respond to submissions constitutes unlawful action under section 706(2)(A). See 5
U.S.C. § 706(2)(A); Sherley v. Sebelius, 689 F.3d 776, 784 (D.C. Cir. 2012) (“[T]he opportunity to comment is
meaningless unless the agency responds to significant points raised by the public.” (quoting Home Box Office, Inc. v.
FCC, 567 F.2d 9, 35–36 (D.C. Cir. 1977), cert. denied, 485 U.S. 959 (1988))).
11
5914516, at *7 (D.D.C. May 18, 2012) (citing Richards v. INS, 554 F.2d 1173, 1177 & n.28
(D.C. Cir. 1977)). While the ordinary summary judgment standard is laid out in Federal Rule of
Civil Procedure 56, “it is well established that, in cases involving review of a final agency
action . . . the standard set forth in Rule 56 does not apply because of the limited role of the court
in reviewing the administrative record.” Otsuka Pharm. Co. v. Burwell, 302 F. Supp. 3d 375,
389 (D.D.C. 2016), aff’d sub nom., Otsuka Pharm. Co. v. Price, 869 F.3d 987 (D.C. Cir. 2017)
(cleaned up). In this context, the function of the agency is “to resolve factual issues to arrive at a
decision that is supported by the administrative record, whereas ‘the function of the district court
is to determine whether or not as a matter of law the evidence in the administrative record
permitted the agency to make the decision it did.’” Stuttering Found. of Am. v. Springer, 498 F.
Supp. 2d 203, 207 (D.D.C. 2007) (quoting Occidental Eng’g Co. v. INS, 753 F.2d 766, 769–70
(9th Cir. 1985)). In other words, “the district judge sits as an appellate tribunal,” Am. Bioscience,
Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001), and “[t]he entire case on review is a
question of law, and only a question of law,” Marshall Cty. Health Care Auth. v. Shalala, 988
F.2d 1221, 1226 (D.C. Cir. 1993).
Notably, “[w]hile the court’s review [on summary judgment] must be ‘searching and
careful, the ultimate standard of review is a narrow one’ and the court ‘is not empowered to
substitute its judgment for that of the agency.’” Cape Hatteras Access Pres. All. v. Dep’t of
Interior, 731 F. Supp. 2d 15, 21 (D.D.C. 2010) (quoting Citizens to Preserve Overton Park v.
Volpe, 401 U.S. 402, 416 (1971)). This deferential standard, however, cannot permit courts
“merely to rubber stamp agency actions, nor be used to shield the agency’s decision from
undergoing a thorough, probing, in-depth review.” Guindon v. Pritzker, 31 F. Supp. 3d 169, 186
(D.D.C. 2014) (internal quotation marks and citation omitted); see also Otay Mesa Prop., L.P. v.
12
Dep’t of Interior, 646 F.3d 914, 916 (D.C. Cir. 2011) (“Substantial evidence is a deferential
standard. But deference is not abdication.”); Huff v. Vilsack, 195 F. Supp. 3d 343, 352 (D.D.C.
2016) (noting that, even under the deferential standard of review, “courts retain a role, and an
important one, in ensuring that agencies have engaged in reasoned decision-making, which
means the court must ensure that the decision was based on a consideration of the relevant
factors and determine whether there has been a clear error of judgment” (cleaned up)).
ANALYSIS
Plaintiffs assert that the Secretary’s FFY 2009 and 2010 regulations related to the rural-
floor adjustment are illegal for a number of reasons. First, Plaintiffs contend that the Secretary
unlawfully applied the budget-neutrality adjustment to low-wage urban and rural hospitals, in
contravention of Section 4410. See Pl. Mot. at 18–25. The statute forbids the Secretary from
applying the budget-neutrality adjustments to hospitals “described” in the rural-floor provision,
see BBA 1997 § 4410, and in Plaintiffs’ view, both low-wage urban hospitals and rural hospitals
are unambiguously “described” in that subsection. See Pl. Mot. at 19. Moreover, Plaintiffs
contend that even if the statute is ambiguous, the Secretary’s interpretation is unreasonable
because it “undermines Congress’s objective of assisting urban hospitals with ‘unusually
depressed’ wages by forcing the very same hospitals to bear a share of the budget neutrality
adjustment.” See Pl. Mot. at 22. Finally, Plaintiffs argue that, in adopting the FFY 2009 and
2010 regulations, the Secretary failed to comply with the APA’s requirements to inform the
public of the impact of the regulations and to adequately account for comments opposing the
policy changes. See Pl. Mot. at 25–32. The Secretary responds that Section 4410 is ambiguous;
that his reasonable interpretation is entitled to deference under Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984); and that he complied with all
13
requirements of the APA. See generally ECF No. 20 (Defendant’s Cross-Motion for Summary
Judgment and Opposition). The Court considers each argument in turn.
I. Application of the Budget-Neutrality Adjustment
According to Plaintiffs, the Secretary’s application of the in-state budget-neutrality
adjustment in FFYs 2009 and 2010 is incompatible with the text of Section 4410. See Pl. Mot. at
18–25. Where, as here, a plaintiff challenges a federal agency’s actions as exceeding its
“statutory jurisdiction, authority, or limitations,” see 5 U.S.C. § 706(2)(C), the Court must apply
the two-step framework of Chevron, 467 U.S. 837. See Ass’n of Private Sector Colls. & Univs.
v. Duncan, 681 F.3d 427, 441 (D.C. Cir. 2012).
Chevron directs that if “Congress has directly spoken to the precise question at issue,” the
Court must give effect to that “unambiguously expressed intent.” Nat’l Treasury Emps. Union v.
FLRA, 414 F.3d 50, 57 (D.C. Cir. 2005) (quoting Chevron, 467 U.S. at 842–43) (internal
quotation marks omitted). To determine whether “the intent of Congress is clear” under this first
step of Chevron, the Court must exhaust the “traditional tools of statutory construction,”
including textual analysis, structural analysis, and legislative history. Chevron, 467 U.S. at 843
& n.9; see also Bell Atl. Tel. Cos. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997) (“The
traditional tools include examination of the statute’s text, legislative history, and structure; as
well as its purpose.” (citations omitted)). In conducting the requisite analysis, the pertinent
question is not whether the statutory terms at issue are “‘in some abstract sense, ambiguous, but
rather whether, read in context and using the traditional tools of statutory construction,’ the terms
unambiguously mean what the party claiming victory at Step One says they mean.” Otsuka, 302
F. Supp. 3d at 389 (quoting Cal. Indep. Sys. Operator Corp. v. FERC, 372 F.3d 395, 400 (D.C.
Cir. 2004)). “If the intent of Congress is clear, that is the end of the matter; for the court, as well
14
as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron,
467 U.S. at 842–43.
When the statute at issue “can be read more than one way” and is thus properly deemed
ambiguous, AFL–CIO v. FEC, 333 F.3d 168, 173 (D.C. Cir. 2003) (citation omitted), the Court
must proceed to the second step of Chevron, wherein such ambiguity or silence is generally
considered to be “an implicit delegation from Congress to the agency to fill in the statutory
gaps,” Van Hollen, Jr. v. FEC, 811 F.3d 486, 495 (D.C. Cir. 2016) (quoting FDA v. Brown &
Williamson Tobacco Corp., 529 U.S. 120, 159 (2000)) (emphasis omitted). Accordingly, the
nature of judicial review at Step Two is “highly deferential,” Vill. of Barrington, Ill. v. Surface
Transp. Bd., 636 F.3d 650, 667 (D.C. Cir. 2011), meaning that the court must “accept the
agency’s [reasonable] construction of the statute, even if the agency’s reading differs from what
the court believes is the best statutory interpretation,” Nat’l Cable & Telecomms. Ass’n v. Brand
X Internet Servs., 545 U.S. 967, 980 (2005) (citation omitted); see also Peter Pan Bus Lines, Inc.
v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350, 1353 (D.C. Cir. 2006) (noting that, at
Chevron Step Two, the court must defer to the agency’s interpretation of a statute if it is “based
on a permissible construction of the statute” (citation omitted)). In sum, “the whole point of
Chevron is to leave the discretion provided by the ambiguities of a statute with the implementing
agency.” Ass’n of Private Sector Colls. & Univs., 681 F.3d at 441 (citations omitted).
A. Section 4410 is Ambiguous.
As in all matters of statutory construction, we begin with the plain language of the
statute. Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 566 U.S. 399, 412 (2012).12 The plain
12
Under Chevron, courts may also consider legislative history when analyzing statutory language at Step
One. See Sierra Club v. EPA, 551 F.3d 1019, 1027 (D.C. Cir. 2008). The parties agree, however, that the
“[l]egislative history is no help” in this case. See Def. Mot. at 14; Pl. Mot. 19–21 (making no reference to legislative
history). The relevant conference report simply states that, under the provision ultimately enacted, “[t]he Secretary
15
language of Section 4410(b) requires the Secretary to impose the rural floor budget-neutrality
adjustment only on “hospitals not described” in Section 4410(a). See BBA 1997 § 4410(b)
(stating that the Secretary “shall adjust the area wage index referred to in subsection (a) for
hospitals not described in such subsection”). The parties dispute which hospitals are described in
subsection (a). That subsection provides:
For purposes of [the wage index statute] . . . , the area wage index
applicable under such section to any hospital which is not located in a
rural area . . . may not be less than the area wage index applicable under
such section to hospitals located in rural areas in the State in which the
hospital is located.
See BBA 1997 § 4410(a). Plaintiffs insist that this language unambiguously describes “all rural
hospitals and all urban hospitals with a wage index below the rural floor,” and the Secretary
therefore is forbidden from applying the budget-neutrality adjustment to such hospitals. See Pl.
Mot. at 19. Defendant disagrees, arguing that the statute is ambiguous as to whether it describes
rural hospitals. See ECF No. 26 (Defendant’s Reply) at 6.
As an initial matter, the parties agree that the statute describes low-wage urban
hospitals.13 Section 4410(a) applies the rural-floor adjustment to “any hospital which is not
located in a rural area,” the wage index of which is “less than the area wage index applicable . . .
to hospitals located in rural areas in the State in which the hospital is located.” See BBA 1997
§ 4410(a). This is an unambiguous description of the hospitals that receive the rural-floor
would be required to make any adjustments in the wage index in a budget neutral manner.” See H.R. Conf. Rep. No.
105-217, 105th Cong., 1st Sess. at 712. In other words, the conference report makes clear that Section 4410(b) was
intended to achieve budget neutrality, but it does not dictate how. As a result, this Court’s analysis at Step One
begins and ends with the statutory text.
13
The Secretary conceded in his Reply brief that subsection (a) at least describes low-wage urban hospitals
that receive the rural-floor adjustment. See Def. Reply at 6 (“The parties agree that low-wage urban hospitals are
‘described in’ Section 4410(a).”). This was a retreat from the position that the Secretary took in his opening brief,
where he argued that “[r]ead literally, Section 4410(a) describes two types of hospitals: those ‘located in rural areas
and those ‘not located in a rural area.’” See Def. Mot. at 14. Under that reading, Section 4410(b)’s carveout would
apply to all hospitals, which the Secretary explained “cannot ultimately be correct” because “Congress clearly
intended to establish a budget neutrality adjustment that applied to at least some hospitals.” Id. The Secretary thus
initially argued that the statute is ambiguous as to all hospitals.
16
adjustment — i.e., low-wage urban hospitals — making it clear that the budget-neutrality
adjustment required by Section 4410(b) may not be applied to such hospitals. See id. § 4410(b)
(“The Secretary . . . shall adjust the area wage index referred to in subsection (a) for hospitals not
described in such subsection.” (emphasis added)).
The parties sharply dispute, however, whether the statutory language also “describes”
rural hospitals. See Pl. Mot. at 19 (arguing that Section 4410(a) “exempts from the budget-
neutrality adjustment all rural hospitals”); Def. Reply at 5 (“Rural . . . hospitals are ‘not
described in such subsection’ and are therefore subject to the budget neutrality adjustment
required by Section 4410(b).”). At the very least, rural hospitals are referenced in Section
4410(a), which identifies the hospitals that receive the rural-floor adjustment as those with wage
indices “less than the area wage index applicable . . . to hospitals located in rural areas in the
State in which the hospital is located.” See BBA 1997 § 4410(a) (emphasis added). In
describing low-wage urban hospitals, Section 4410(a) draws a comparison between the wage
index of “any hospital which is not located in a rural area” and those of “hospitals located in
rural areas.” Id. The question is whether this language qualifies as a “description” of rural
hospitals.
“When a statute does not define a term, [courts] typically ‘give the phrase its ordinary
meaning.’” FCC v. AT&T Inc., 562 U.S. 397, 403 (2011) (quoting Johnson v. United States, 559
U.S. 133, 138 (2010)); see also Perrin v. United States, 444 U.S. 37, 42 (1979) (“A fundamental
canon of statutory construction is that, unless otherwise defined, words will be interpreted as
taking their ordinary, contemporary, common meaning.” (citation omitted)). To determine a
word’s ordinary meaning, courts start with the word’s definition. See Taniguchi v. Kan Pac.
Saipan, Ltd., 566 U.S. 560, 566 (2012) (using several dictionary definitions to establish the
17
ordinary meaning of a statutory term). The Merriam-Webster Dictionary defines “describe” as
“to represent or give an account of in words.” See Describe, Merriam-Webster Dictionary
(2022); see also Describe, Oxford English Dictionary (2022) (“To portray in words.”); Describe,
American Heritage Dictionary (2022) (“To give any account of in speech or writing”).
“Describe” may be distinguished from “mention” or “refer.” Compare id., with Mention,
Merriam-Webster Dictionary (2022) (“[T]he act or an instance of citing or calling attention to
someone or something especially in a casual or incidental manner.”), and Mention, Oxford
English Dictionary (2022) (“[T]o refer to briefly and without entering into detail; to remark upon
incidentally.”), and Refer, Merriam-Webster Dictionary (2022) (“[T]o think of, regard, or
classify within a general category or group.”), and Refer, Oxford English Dictionary (2022) (“To
submit or direct a person or thing to another.”).
One way to read the reference to “hospitals located in rural areas” is as a “description” of
rural hospitals: The words arguably “represent” such hospitals. See BBA 1997 § 4410(a). That
plausible construction of the statute is strongly advocated by Plaintiffs. See Pl. Mot. at 19–21;
ECF No. 23 (Plaintiffs’ Opposition and Reply) at 3–5. Importantly, this interpretation leads to
the conclusion that the Secretary may not apply the budget-neutrality adjustment to either low-
wage urban hospitals nor rural hospitals; and that would render the “iterative method” employed
by the Secretary (which applies budget-neutrality adjustments to rural hospitals) unlawful.
But the Secretary proposes an alternative construction of the statute that is also plausible.
See Def. Mot. at 14–17; Def. Reply at 5–7. According to this alternative construction, the
statute’s reference to rural hospitals does not serve to describe those hospitals, but instead is used
to describe the wage index applicable to those hospitals. Id. The statute uses the wage index of
rural hospitals to define the rural floor — rural hospitals themselves are not the subject of the
18
statutory provision and are not described. Instead, the provision describes only low-wage urban
hospitals, but does so by comparing the wage indices of those hospitals with the wage indices of
rural hospitals. Under this reading of the statutory language, rural hospitals are merely
“mentioned” or “referred to” in the description of low-wage urban hospitals; in other words, the
statute does not “portray” or “give an account” of rural hospitals, but instead “cites” or “calls
attention” to such hospitals in an “incidental manner.”
Because the language of Section 4410(a) “can support [multiple] plausible
interpretations,” the statute is “ambiguous for purposes of Chevron analysis.” See AFL–CIO,
333 F.3d at 174 (citation omitted). The statute can be read either as describing rural hospitals
and low-wage urban hospitals or as describing only low-wage urban hospitals. Section 4410(a)
does not unambiguously describe rural hospitals, as Plaintiffs claim, and the statute therefore
does not unambiguously forbid the Secretary from applying budget-neutrality adjustments to
rural hospitals. See id.B. The Secretary’s Interpretation is Reasonable.
Having determined that Section 4410(a) is ambiguous as to which hospitals are
“described,” the Court must now determine whether the Secretary’s interpretation of Section
4410 is permissible. See id. at 173 (citing Chevron, 467 U.S. at 842–43). As previously noted,
the Secretary applied the budget-neutrality adjustment to rural and high-wage urban hospitals
using a simplified form of the iterative model; and in FFY 2009 and 2010, the Secretary
achieved budget neutrality within individual states instead of applying budget-neutrality
adjustments nationwide. See supra, Part I.B & C. The Court examines each of these
components of the Secretary’s interpretation of Section 4410.
19
1. The Secretary’s Application of Budget-Neutrality Adjustments to Rural
Hospitals is Permissible.
The Court defers to the Secretary’s decision to apply the budget-neutrality adjustment to
rural hospitals. As discussed, supra, there is more than one plausible way to read the statute’s
requirement that the Secretary asses the budget-neutrality adjustment against hospitals “not
described” in subsection (a). When a statute is ambiguous, Chevron provides that Congress “has
implicitly delegated the authority” to interpret the ambiguous term to the Secretary, and the
Court must give deference to that interpretation. See Animal Legal Def. Fund, Inc. v. Perdue,
872 F.3d 602, 617 (D.C. Cir. 2017). Here, the Secretary concluded that “rural hospitals are ‘not
described in’ Section 4410(a) because their wage indices are not affected by [the] provision.”
See Def. Reply at 7. The Secretary reads Section 4410(a) to describe only the hospitals that
receive the rural-floor adjustment, i.e., low-wage urban hospitals; he has determined that the
reference to rural hospitals is made only to identify the disparity in wage indices that the statute
intends to correct. This is a permissible construction of the statute that is entitled to deference.
See Brand X, 545 U.S. at 980 (“If a statute is ambiguous, and if the implementing agency’s
construction is reasonable, Chevron requires a federal court to accept the agency’s construction
of the statute.” (citation omitted)).
Further, the Secretary “has reasonably explained how the permissible interpretation [he]
chose is ‘rationally related to the goals of’ the statute.” See Vill. of Barrington, 636 F.3d at 665(quoting AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 388 (1999)). He has identified
Congress’s intent “to address anomalous occurrences where certain urban areas in a State have
unusually depressed wages when compared to the State’s rural areas,” see 73 Fed. Reg. at
48,572; and he has detailed how the application of the budget-neutrality adjustment to rural and
high-wage urban hospitals ensures that the wage indices of low-wage urban hospitals are raised
20
to the rural floor in a budget-neutral way, see 72 Fed. Reg, at 47,325–29 (describing the iterative
method); Def. Mot. 14–17; Def. Reply 5–7. On this Court’s deferential review, the Secretary has
permissibly interpreted Section 4410 to allow the application of the budget-neutrality adjustment
to rural hospitals.
2. The Iterative Method is a Permissible “Manner” of Achieving Budget
Neutrality.
Section 4410(b) specifically requires the Secretary to “adjust the area wage index” of
certain hospitals “in a manner which assures that the aggregate payments made [for the rural-
floor adjustment] in a fiscal year . . . are not greater or less than those which would have been
made . . . if this section did not apply.” See BBA 1997 § 4410(b) (emphasis added). As
discussed, supra, the “manner” that the Secretary adopted to implement the budget-neutrality
provision was the “iterative method.” Under the iterative method, the Secretary first raises the
wage index for low-wage urban hospitals to the rural floor (thus raising aggregate payments),
then lowers the wage indices for rural and high-wage urban hospitals to achieve budget neutrality
(thus reducing the wage index for rural hospitals below the former rural floor). Then, the
Secretary lowers the wage index for low-wage urban hospitals to the newly defined rural floor.
This reduces payments overall, so the Secretary raises the wage indices of non-rural floor
hospitals to achieve budget neutrality. Then he raises the wage index for low-wage urban
hospitals to the newly defined rural floor, thus raising payments overall and beginning the
iterative cycle again, continuing until the wage indices equilibrate to produce budget-neutral
payments. See 72 Fed. Reg. at 47,325–29. The Secretary reads the statute “to allow an iterative
calculation of budget neutrality and wage indices” because that “avoid[s] the apparent
contradiction” of paying low-wage urban hospitals more than (and not just the same amount as)
their rural counterparts. Id. at 47,325.
21
The iterative method complies with Section 4410(b), which requires (1) the rural-floor
adjustment to be budget-neutral; and (2) the assessment of any budget-neutrality adjustments to
be made only on hospitals “not described” in the rural-floor provision — i.e., on rural and high-
wage urban hospitals. The statute provides no further instruction on the “manner” of making
these adjustments, leaving the Secretary to “gap-fill[] . . . ‘[any] difficult policy choices’” within
the bounds of Section 4410. See Animal Legal Def. Fund, 872 F.3d at 617 (quoting Brand X,
545 U.S. at 980); Adirondack Med. Ctr. v. Sebelius, 29 F. Supp. 3d 25, 41 (D.D.C. 2014), aff’d
sub nom. Adirondack Med. Ctr. v. Burwell, 782 F.3d 707 (D.C. Cir. 2015) (interpreting statute
directing Secretary to adjust calculation “in a manner” that is budget neutral as “a deferral to the
Secretary’s expertise in administering Medicare”); Milk Train, Inc. v. Veneman, 310 F.3d 747,
751 (D.C. Cir. 2002) (interpreting statute directing Secretary to “provide assistance . . . in a
manner determined appropriate by the Secretary” as leaving “to the Secretary’s sole judgment
the determination of the manner for providing assistance”). The iterative method chosen by the
Secretary unquestionably achieves budget neutrality; and it does so without requiring low-wage
urban hospitals that receive the rural-floor adjustment to share in the costs of budget neutrality.
Under the iterative method, low-wage urban hospitals see changes in their payments only when
the rural floor moves and their payments are adjusted to match the rural floor; the Secretary
never reduces payments to low-wage urban hospitals to achieve budget neutrality. Thus, it was
well within the Secretary’s discretion to select the iterative method to fulfill his statutory
obligations under Section 4410.
Plaintiffs argue that the Secretary’s iterative process essentially applies a budget-
neutrality adjustment to low-wage urban hospitals (which Plaintiffs refer to as “rural floor
hospitals”), and that this is impermissible. See Pl. Opp. at 12. According to Plaintiffs, the
22
Secretary’s methodology “inevitably results in the budget neutrality adjustment for rural floor
urban hospitals coming closer and closer to the budget neutrality adjustment for all others.” Id.Plaintiffs contend that the Secretary should simply upwardly adjust the wage indices of low-
wage urban hospitals to the rural floor, and then reduce the wage indices of rural and high-wage
urban hospitals to achieve budget neutrality. Id. Without any iterative adjustments, this
alternative method would leave the low-wage urban hospitals with higher wage indices than
those of the rural hospitals that set the original benchmark but then had their wage indices
lowered to achieve budget neutrality. Id.; Pl. Mot. at 22–23. Plaintiffs contend that such a result
would be consistent with Congress’s intent to increase payments to low-wage urban hospitals;
they further argue that any decrease in payments to low-wage urban hospitals (under the iterative
method or otherwise) would be contrary to Congress’s intent. See Pl. Mot. at 18, 22.
Although Plaintiffs oppose the iterative method and favor an alternative procedure that
would benefit them, nothing in Section 4410 commands the Secretary to adopt their preferred
approach. As the Secretary notes, a “result that elevated low-wage urban hospitals above the
rural floor would be plainly at variance with the policy of Section 4410 as a whole, which was
designed to raise the indices of low-wage urban hospitals to the index actually received by their
state’s rural hospitals, and no higher.” See Def. Reply at 9 (citing 72 Fed. Reg. at 47,325
(explaining that “such a reading would not be in accordance with Congressional intent, which
was to set a floor for urban hospitals, not to pay [low-wage] urban hospitals a wage index higher
than the wage index applicable to rural hospitals”)). Section 4410 requires only that the
Secretary refrain from applying the budget-neutrality adjustments to low-wage urban hospitals
— and, as discussed, supra, the iterative method does not run afoul of this mandate. Properly
23
understood, the iterated adjustments to the wage indices of low-wage urban hospitals are not
budget-neutrality adjustments at all, but instead are rural-floor adjustments.
3. It was Permissible for the Secretary to Employ a Simplified Version of the
Iterative Method.
Plaintiffs correctly point out that the Secretary ultimately did not use the iterative
method: Because the iterative calculations were cumbersome, the Secretary instead applied a
uniform percentage to all hospitals — including low-wage urban hospitals — that approximated
the result of applying the iterative method. See Pl. Mot. at 23; 72 Fed. Reg. at 47,325. Indeed,
the Secretary “determined that the iterative method is substantively equivalent to simply
adjusting all area wage indices by a uniform percentage.” See 72 Fed. Reg. at 47,325. Since
FFY 2008, therefore, the Secretary has applied a simplified methodology whereby he first raises
the wages indices of low-wage urban hospitals to the rural floor and then applies a uniform
percentage to decrease the wage indices of all hospitals to achieve budget neutrality. Id.
Plaintiffs argue with some force that under this simplified method, the Secretary has
impermissibly applied “a uniform nationwide budget neutrality factor” to all hospitals —
including low-wage urban hospitals — which constitutes an “unreasonabl[e] deviat[ion] from the
statutory text.” See Pl. Mot. at 23.
The Court has considered this argument carefully, but ultimately is not persuaded. At
first glance, it does appear that the Secretary is applying a budget-neutrality adjustment to low-
wage urban hospitals, which would directly violate Section 4410. See supra at I.A (noting that
Section 4410(b) prohibits applying the budget-neutrality adjustment to hospitals “described” in
subsection (a), and that low-wage urban hospitals are “described” in subsection (a)). To be sure,
the simplified method employed by the Secretary results in a direct reduction of payments to
low-wage urban hospitals, at a fixed percentage that is also applied to other hospitals. But this
24
reduction of payments to low-wage urban hospitals is not through application of the budget-
neutrality adjustment. Rather, the simplified methodology adopted by the Secretary is just
another way of applying the iterative method, which complies with Section 4410 because it
applies only the rural-floor adjustment to low-wage urban hospitals. See supra, at I.B.2 (under
the iterative method, “low-wage urban hospitals see changes in their payments only when the
rural floor moves and their payments are adjusted to match the rural floor; the Secretary never
reduces payments to low-wage urban hospitals to achieve budget neutrality”). The key here is
that the simplified method is just another way of applying the permissible iterative method — the
percentage applied under the simplified method yields results that are “substantively identical” to
applying the iterative method. See 72 Fed. Reg. at 47,325. With that understanding, it would be
hyper-technical and ineffectual to prohibit the Secretary from using the simplified form of the
iterative method. Indeed, if this Court were to remand this case for the Secretary to apply the
more complicated version of the iterative method, Plaintiffs’ Medicare reimbursements would be
exactly the same. Id. (explaining how the simplified method is derived from the iterative method
and noting that the simplified method “is accomplished more quickly, is less complex, and
arrives at the same final wage index values” (emphasis added)). The Secretary also lists valid
reasons for using the simplified method, namely that the schedule for setting reimbursement “is
relatively condensed” such that “it would not be practical to require such multiple layers of
calculations, when a uniform adjustment would produce substantively identical results.” Id.
Accordingly, the Secretary’s utilization of the simplified version of the iterative method does not
violate Section 4410 and is within his discretion.
25
4. The Achievement of Budget Neutrality on a State-by-State Basis was
Permissible.
Plaintiffs argue that the Secretary’s application of the budget-neutrality adjustment on a
state-by-state basis, rather than nationwide, was an unreasonable interpretation of Section 4410.
See Pl. Mot. at 23–25; Pl. Opp. at 13–17.14 An agency’s interpretation of a statute is permissible
if it “is logically consistent with the language of the regulation and it serves a permissible
regulatory function.” Rollins Envtl. Servs., Inc. v. EPA, 937 F.2d 649, 652 (D.C. Cir. 1991); see
also Mayo Found. Med. Educ. & Research v. United States, 562 U.S. 44, 53 (2011) (holding that
an agency’s construction is permissible “unless it is arbitrary or capricious in substance, or
manifestly contrary to the statute” (cleaned up)). In the FFY 2009 Proposed Rule, the Secretary
explained that he intended to alter the budget-neutrality adjustment to employ a state-by-state
calculation because the rural floor had been “creating a benefit for a minority of States that is
then funded by a majority of States, including States that are overwhelmingly rural in character.”
See 73 Fed. Reg. at 23,622. He further explained that “[t]he intent behind the rural floor seems
to have been to address anomalous occurrences where certain urban areas in a State have
unusually depressed wages when compared to the State’s rural areas;” and because these
discrepancies “occur at the State level, we believe it also would be sound policy to make the
budget neutrality adjustment specific to the State, redistributing payments among hospitals
within the State, rather than adjusting payments to hospitals in other States.” Id. at 23,622. After
14
As Defendant notes in his Reply brief, it is unclear whether Plaintiffs have conceded their argument that the
in-state application of the budget-neutrality adjustment was impermissible. See Def. Reply at 13 (“Although the
plaintiff hospitals challenged the Secretary’s statutory authority to apply the in-state budget neutrality adjustment,
they seem to have backed away from that challenge on reply.” (internal citations omitted)). At oral argument on the
instant motions, however, Plaintiffs’ counsel stated that Plaintiffs are still challenging the state-by-state application
of the budget-neutrality provision, even though that is not their principal argument. See Transcript of Oral
Argument at 68–69, St. Mary Medical Center, et. al. v. Azar, No. 17-cv-1073 (Jan. 30, 2020).
26
notice and comment, the Secretary reiterated this explanation in the final rulemaking. See 73
Fed. Reg. at 48,752.
The Secretary’s reasoning reflects an interpretation of Section 4410 that is consistent with
the language of the statute and serves a permissible regulatory function. He rationally
considered the purpose of the rural-floor and the budget-neutrality adjustments and decided that
the goals of the regulations would be best served by resolving discrepancies between the rural
hospitals and the “depressed wages” at urban hospitals in each individual state, rather than
spreading the costs of the budget-neutrality provision over a nationwide pool of hospitals. That
determination was not arbitrary, nor capricious, nor manifestly contrary to the goals of Medicare
or Section 4410.
Plaintiffs focus their argument on the alleged inadequacy of the Secretary’s reasoning,
noting that the Secretary failed to explain why the creation of a benefit for a minority of states is
a legitimate concern that should be addressed, and that the Secretary failed to provide any
evidence for the “facially absurd” gaming scheme. See Pl. Opp. 15–16.15 Although Plaintiffs do
not agree with the Secretary, they have not demonstrated that his reasons for adopting the in-state
approach were arbitrary or capricious. The Secretary stated his view that “for all providers, the
within-State budget neutrality policy is more equitable than the national adjustment because it
concentrates the budget neutrality at the State level for a statutory provision that applies benefits
15
Plaintiffs also argue that Congress’s direction in the Medicare Improvements and Extension Act of 2006
that the Secretary “consider . . . [m]inimizing variations in wage index adjustments between and within
[geographical areas]” shows that “Congress was concerned about excessive variations in wage [indices] among
states.” See Pl. Opp. at 16 (quoting Medicare Improvements and Extension Act of 2006, Division B of the Tax
Relief and Health Care Act of 2006, Pub. L. No. 109-432, div. B, tit. I, § 106(b)(2)(D), 120 Stat. 2922, 2982.
According to Plaintiffs, this means that the Secretary’s in-state policy, which they claim increases variation, is
unreasonable. The Court is not convinced. First, Congress directed the Secretary to “consider” minimizing
variations, which the Secretary asserts he has. See Def. Mot. at 21–22. Second, in interpreting Section 4410, the
Secretary is guided by the language of the statute and service of a permissible regulatory function. See Rollins
Envtl. Servs. Inc., 937 F.2d at 652. Nothing in Congress’s later directive modifies the language of the statute or
prohibits the regulatory function relied upon by the Secretary.
27
at the State level.” See 73 Fed. Reg. at 48,574. Section 4410 allows the Secretary to make
policy choices such as this one when implementing the statute’s requirements, see Amgen Inc. v.
Hargan, 285 F. Supp. 3d 351, 371 (D.D.C. 2018) (explaining that when interpretation of a statute
“implicates the type of policy-laden judgment that is better left to the politically accountable
executive branch,” courts should defer to agencies because it is “precisely the type of statutory
gap-filling that involves difficult policy choices that agencies are better equipped to make than
courts” (quoting Animal Legal Def. Fund, 872 F.3d at 617)).
Finally, Plaintiffs contend that the Secretary’s in-state application of the budget-neutrality
provision is prohibited by the text of Section 4410: According to Plaintiffs, the statute’s
requirement that the budget-neutrality assessments be made against hospitals “not described” in
subsection (a) means “all hospitals not described,” i.e., all hospitals in the country. See Pl. Mot.
at 21 (emphasis in original). Plaintiffs’ reading of Section 4410 to require a nationwide budget-
neutrality adjustment is far from clear and unambiguous. As previously discussed, the statute
appears to address categories of hospitals without any consideration of their geographic location.
See, supra, Part I.A. Accordingly, under Chevron, the Secretary’s reasonable interpretation of
the statute and his application of the in-state budget-neutrality adjustment are entitled to
deference. See Brand X, 545 U.S. at 980 (citing Chevron, 467 U.S. at 843–44 & n.11).
For all the foregoing reasons, the Secretary lawfully applied the budget-neutrality
adjustment to rural hospitals and high-wage urban hospitals, using a simplified version of the
iterative method, on a state-by-state basis, in FFYs 2009 and 2010.
II. Challenges to the Rulemaking Process
Plaintiffs allege that the Secretary violated the APA in adopting and implementing
regulations to apply the rural-floor and budget-neutrality provisions. Plaintiffs contend that the
28
rule applied in FFYs 2009 and 2010 should fall because the Secretary did not provide adequate
notice of the in-state budget-neutrality adjustment and did not adequately respond to comments
about the proposed rule. See Pl. Mot. at 25–32.
A. Adequacy of Notice
Plaintiffs first contend that the Secretary violated the APA because the FFY 2009
Proposed Rule “did not adequately describe ‘the terms or substance of the proposed rule or a
description of the subjects and issues involved;’” and it therefore “foreclosed criticism or
formulation of possible alternatives.” See Pl. Mot. at 25–26 (quoting 5 U.S.C. § 553(b)(3)).
Specifically, Plaintiffs allege that the proposed rule failed to explain how the Secretary had
calculated the statewide adjustment, failed to describe the range of alternatives the Secretary had
considered, and did not provide a comparison of wage index values under the existing policy and
the proposed policy. Id. at 26–29.
The APA requires an agency to publish “notice” of “either the terms or substance of the
proposed rule or a description of the subjects and issues involved,” in order to “give interested
persons an opportunity to participate in the rulemaking.” See 5 U.S.C. § 553. “Longstanding
precedent instructs that notice is sufficient if it affords interested parties a reasonable opportunity
to participate in the rulemaking process, and if the parties have not been deprived of the
opportunity to present relevant information by lack of notice that the issue was there.” Am.
Radio Relay League, Inc. v. FCC, 524 F.3d 227, 236 (D.C. Cir. 2008) (cleaned up); see Fla.
Power & Light Co. v. Nuclear Regulatory Comm’n, 846 F.2d 765, 771 (D.C. Cir. 1988).
Although Plaintiffs provide a litany of particulars that they would have liked the
Secretary to include in his notice of proposed rulemaking, the APA requires only that the agency
provide sufficient information such that parties have “a reasonable opportunity to participate in
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the rulemaking process.” Am. Radio Relay League, 524 F.3d at 236. In this instance, the
Secretary provided clear and adequate notice of his intent “to apply a State level rural floor
budget neutrality adjustment to the wage index beginning in [FFY] 2009.” See 73 Fed. Reg. at
23,622. In the FFY 2009 Proposed Rule, the Secretary explained that the method of calculation
described in the FFY 2008 Final Rule would apply within each state rather than nationwide. See
72 Fed. Reg. at 47,325–29 (detailing the rural-floor and budget-neutrality calculations); 73 Fed.
Reg. at 23,622–23 (explaining that “States that have no hospitals receiving a rural floor wage
index would no longer have a negative budget neutrality adjustment applied to their wage
indices,” while “hospitals in States with hospitals receiving a rural floor would have their wage
indices downwardly adjusted to achieve budget neutrality within the State”). The Secretary
provided (1) a breakdown of the estimated payments hospitals in each state would receive under
the then-current nationwide policy and the proposed in-state policy, see 73 Fed. Reg. at 23,620–
21; (2) a chart showing the anticipated percentage differential of the two policies in each state,
id. at 23,622; and (3) a clear explanation for the policy change, id. at 23,620 (noting that the
nationwide budget-neutrality adjustment meant that “urban hospitals that qualify for their State’s
rural floor wage index receive enhanced payments at the expense of all rural hospitals
nationwide and all other urban hospitals that do not receive their State’s rural floor”); id. at
26,622 (explaining that the in-state policy would limit the opportunistic activities of some
hospitals opting into the IPPS system to increase a state’s rural floor). The information provided
by the Secretary was sufficient to “afford[] interested parties a reasonable opportunity to
participate in the rulemaking process,” and did not “deprive[] [parties] of the opportunity to
present relevant information by lack of notice that the issue was there.’” Am. Radio Relay
League, Inc., 524 F.3d at 236 (citation omitted).
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Plaintiffs’ claim of inadequate notice is belied by the record. Notably, the Secretary’s
notice of proposed rulemaking elicited public comments directed at the very issues raised by
Plaintiffs — the calculation of the statewide adjustment and the alternative of retaining the
practice of applying a nationwide adjustment. See First Am. Discount Corp. v. CFTC, 222 F.3d
1008, 1015 (D.C. Cir. 2000) (finding record of comments on subjects complained of by plaintiffs
to constitute evidence that sufficient notice-and-comment process was undertaken). Although
Plaintiffs contend that “[t]he Secretary’s proposed rule did not explain how he calculated [the]
proposed within-state budget neutrality adjustment,” see Pl. Mot. at 26, the record contains
numerous, in-depth, public comments about the calculations in the FFY 2009 Proposed Rule.
See ECF Nos. 28 & 29 (Administrative Record), 1214, 1519–20, 6559–60, 6573–74 (public
comments describing and critiquing calculations in proposed rule). Similarly, while Plaintiffs
assert that the Secretary’s proposed rule did not “describe the range of alternatives [he]
considered,” see Pl. Mot. at 26, the record is replete with comments urging the Secretary to retain
the nationwide policy — an obvious alternative to adopting the new rule. See A.R. 5141 (public
comment urging the Secretary to “apply the rural floor budget-neutrality adjustments on a
nationwide basis”) and A.R. 4963, 4969, 5014 (same). As is evident from the public comments,
the proposed rule clearly explained the Secretary’s intent to apply an in-state budget-neutrality
adjustment: Contrary to Plaintiffs’ argument, many hospitals were able to predict and comment
upon the impact of that adjustment, based on the Secretary’s notice, see, e.g., A.R. 1395, 6498,
6510, 6513–14, 6568 (public comments specifically estimating the negative impact of the policy
change on individual hospitals, using the Secretary’s calculations).
Equally unavailing is Plaintiffs’ final contention that “[t]he Secretary revealed the basic
methodology for determining the adjustment but not the data that he used to calculate the
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adjustments,” such that individual hospitals “were deprived of information sufficient to evaluate
the economic impact of the proposed” rule. See Pl. Opp. at 17–18; Pl. Mot. at 27 (“[T]he
Secretary did not include a table of wage [indices] using the nationwide budget neutrality
adjustment.”). Although Plaintiffs would have preferred additional information, the level of
detail that they demand is unwarranted. As Defendant points out, “[a]n administrative agency
has no obligation to individually identify each winner and loser from a given proposal, much less
quantify the winnings or losses.” See Def. Reply at 16. The Court’s inquiry focuses only on
whether “the interested parties could not reasonably have anticipated the final rulemaking from
the draft rule,” and “whether the notice given affords exposure to diverse public comment,
fairness to affected parties, and an opportunity to develop evidence in the record.” Nat’l Mining
Ass’n v. Mine Safety & Health Admin., 116 F.3d 520, 530–31 (D.C. Cir. 1997) (cleaned up). As
previously discussed, the process followed by the agency complied with the enumerated
requirements.
On this record, the Court concludes that no parties have been “deprived of the
opportunity to present relevant information” and that the notice provided by the Secretary was
“sufficient [to] afford[] interested parties a reasonable opportunity to participate in the
rulemaking process.” See Am. Radio Relay League, Inc., 524 F.3d at 236.
B. Adequacy of Response to Comments
Plaintiffs also argue that the Secretary violated the APA because he failed to adequately
address public comments. See Pl. Mot. at 29–32; Pl. Opp. at 19–23. APA Section 553 requires
agencies to provide the public with notice of a proposed rulemaking, an opportunity to comment,
and “[a]fter consideration of the relevant matter presented,” a “concise general statement” of the
rule’s basis and purpose. See 5 U.S.C. § 553. The D.C. Circuit has made clear that “the
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opportunity to comment is meaningless unless the agency responds to significant points raised by
the public.” Home Box Office, Inc. v. FCC, 567 F.2d 9, 35–36 (D.C. Cir. 1977), cert. denied,
485 U.S. 959 (1988); see also Sherley v. Sebelius, 689 F.3d 776, 784 (D.C. Cir. 2012). That
said, the notice-and-comment provision of the APA, see 5 U.S.C. § 553(c), “has never been
interpreted to require [an] agency to respond to every comment, or to [analyze] every issue or
alternative raised by comments, no matter how insubstantial.” Thompson v. Clark, 741 F.2d 401,
408 (D.C. Cir. 1984) (citation omitted). Rather, the agency need respond only to those
“comments which, if true, . . . would require a change in an agency’s proposed rule.” Home Box
Office, Inc., 567 F.2d at 35 n.58.
Plaintiffs raise two main points. First, Plaintiffs generally highlight that “the majority of
commenters, including most national and State hospital associations, did not support the proposal
to apply a State level budget neutrality adjustment for the rural [floor].” See 73 Fed. Reg. at
48,573; see also Pl. Mot. at 30–31; Pl. Opp. at 21. According to Plaintiffs, the Secretary’s
response to this “thoroughgoing assault” was insufficient because he provided “only a few
‘unedifying’ comments.” See Pl. Mot. at 31 (citing City of Brookings Mun. Tel. Co. v. FCC, 822
F.2d 1153, 1167 (D.C. Cir. 1987).16 In the final rule, however, the Secretary acknowledged the
widespread dissatisfaction with the in-state policy and provided a detailed explanation of his
decision to adopt it notwithstanding its unpopularity. See 73 Fed. Reg. at 48,573–74 (explaining
that the nationwide policy “requires hospitals nationwide to fund an adjustment to the Medicare
payment system to address unrelated situations in a minority of States”). The Secretary also
16
Plaintiffs attempt to bolster their case by contextualizing it “against the backdrop of the Secretary’s other
widespread errors in calculating the rural floor budget neutrality adjustment and his refusal to respond generally to
criticisms of his policies during the FFY 2009 rulemaking period.” See Pl. Opp. at 19 (citing Cape Cod Hosp., 630
F.3d 203). Plaintiffs appear to argue that because the D.C. Circuit previously remanded a case concerning Medicare
payments for inpatient services due to the Secretary’s insufficient response to comments, this Court should do the
same. The Court declines Plaintiffs’ invitation to consider the adequacy of the Secretary’s response to comments
about other 2009 policy changes that are not before this Court.
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responded to the expressed concerns by “phas[ing] in, over a 3-year period, the transition from
the national budget neutrality adjustment to the State level budget neutrality adjustment.” Id.Plaintiffs counter that this “purported response” is “inadequate” because the Secretary did not
“address the financial hardship that the within-state rural floor budget neutrality adjustment
would place on hospitals in the affected states whether implemented immediately or through a
three-year transition period.” See Pl. Opp. at 21–22. The Court disagrees. In the final rule, the
Secretary directly “[took] into account the potentially drastic payment cuts that may occur to
hospitals in some States,” and explained that the three-year phasing-in period was meant to ease
the transition to the new system. See 73 Fed. Reg. at 48,574.17 Although Plaintiffs would have
strongly preferred for the Secretary to change his position and abandon the in-state policy, the
Secretary was obligated only to “respond[] to significant points raised by the public,” Home Box
Office, 567 F.2d at 35–36, and to describe “how the agency resolved any significant problems
raised,” Rodway v. Dep’t of Agric., 514 F.2d 809, 817 (D.C. Cir. 1975). The Secretary met that
obligation.
Plaintiffs also argue that the Secretary entirely failed to address four concerns raised by
comments, specifically that the in-state rural floor budget-neutrality adjustment would: (1)
17
In describing the calculations made to implement the phased-in budget-neutrality adjustments, the
Secretary noted that “in order to ensure that national payments overall remain budget neutral after application of the
rural and imputed floor, an additional adjustment factor of 0.999923 must be applied to the blended wage [indices].”
See 73 Fed. Reg. at 48,762. Plaintiffs argue that the Secretary provided no notice whatsoever of this additional
adjustment. See Pl. Mot. at 21; Pl. Opp. at 18. But this additional adjustment was part of the plan to use blended
wage indices during the three-year transition period, which was adopted in response to comments. See 73. Fed. Reg.
at 48,574 (‘[I]n response to the public’s concerns . . . we have decided to phase in, over a 3-year period, the
transition from the national budget neutrality adjustment to the State level budget neutrality adjustment.”). The
Secretary, therefore, could not have provided notice of the additional adjustment because the phase-in was not
contemplated in the originally proposed rule. See 73 Fed. Reg. at 23,620–23; Ass’n of Battery Recyclers, Inc. v.
EPA, 208 F.3d 1047, 1058 (D.C. Cir. 2000) (“[N]otice requirements do not require that the final rule be an exact
replication of the proposed rule. If that rigidity were required, . . . [a]gencies would either refuse to make changes in
response to comments or be forced into perpetual cycles of new notice and comment periods.”).
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“increase[] variations among wage [indices],” see Pl. Mot. at 31–32 (citing A.R. 2257); Pl. Opp.
at 22–23 (citing A.R. 888, 2258, 2261, 6027–28); (2) “result in treatment of rural hospitals
differently based on the state in which they are located,” see Pl. Opp. at 23; (3) place “undue
hardship and burden on hospitals with a greater number of Medicare beneficiaries,” id.; and (4)
cause “drastic swings in hospital reimbursement,” id. Contrary to Plaintiffs’ first concern, the
Secretary directly acknowledged that the rule change would result in “increased variations
among wage [indices],” but explained that those variances simply reflected the underlying wage
variations within states and did not justify a national budget-neutrality adjustment. See 73 Fed.
Reg. at 48,573. As for the other comments raised by Plaintiffs, the Secretary made clear in both
the proposed rule and the final rule that the policy change would benefit some hospitals while
burdening others; indeed, the redistribution of the benefits and burdens of budget neutrality was
the intended purpose of the change. See 73 Fed. Reg. at 48,573 (explaining that the nationwide
policy requires all hospitals “to fund an adjustment to the Medicare payment system to address
unrelated situations in a minority of States”); id. at 48,571–72 (tables and charts demonstrating
the net effect of the policy change on hospitals in different states); 73 Fed. Reg. at 23,620–23
(noting that “urban hospitals that qualify for their State’s rural floor wage index receive
enhanced payments at the expense of all rural hospitals nationwide and all other urban hospitals
that do not receive their State’s rural floor”). Thus, comments that the policy change would
greatly change the payments received by some hospitals, though obviously true, “would [not]
require a change in [the] agency’s proposed rule,” see ACLU, 823 F.2d at 1581, and thus did not
require any additional response.
In any event, “[f]ailure to respond [to comments] is not grounds for APA invalidation
unless the points raised in the comments were sufficiently central that agency silence would
35
demonstrate the rulemaking to be arbitrary and capricious.” National Res. Def. Council, Inc. v.
EPA, 859 F.2d 156, 188 (D.C. Cir. 1988). Plaintiffs have made no showing here that the
Secretary’s alleged silence on the particular points raised constituted arbitrary and capricious
action. The record reflects that the Secretary addressed the differential treatment of hospitals
under the new policy by phasing in the proposed change over time; the Secretary was not
obligated to address every specific comment that touched upon this issue. See Thompson, 741
F.2d at 408 (holding that an agency is not required “to respond to every comment, or to [analyze]
every issue or alternative raised by comments, no matter how insubstantial”). Accordingly, the
Court rejects Plaintiffs’ challenge to the Secretary’s rulemaking process.
CONCLUSION
For the foregoing reasons, the Court will deny Plaintiffs’ Motion for Summary Judgment
and will grant Defendant’s Cross Motion. A separate Order will issue this day.
Florence Y. Pan
United States District Judge
Date: January 20, 2022
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