Trust Under The Will of James Wills, City of Philadelphia, Acting by The Board of Directors of City Trusts, Trustee v. Burwell

MOTION for Summary Judgment

E.D. Pa.March 20, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA TRUST UNDER THE WILL OF JAMES WILLS, CITY OF PHILADELPHIA, ACTING BY THE BOARD OF DIRECTORS OF CITY TRUSTS, TRUSTEE, d/b/a WILLS EYE HOSPITAL, Plaintiff, v. THOMAS PRICE, M.D. Secretary, United States Department of Health & Human Services, Defendant. : : : : : : : : : : : : : : : : : CIVIL ACTION NO. 16-6615 PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT Pursuant to Federal Rule of Civil Procedure 56, Plaintiffs respectfully move for the entry of an order granting summary judgment in their favor, together with an award of costs and interest. In support of this motion, Plaintiff relies on the previously filed Certified Administrative Record and the accompanying Memorandum of Law. Respectfully submitted, /s/ Mark H. Gallant Mark H. Gallant (PA 51767) Gregory M. Fliszar (PA 87816) Robert A. Chu (PA 307386) COZEN O’CONNOR One Liberty Place 1650 Market Street, Suite 2800 Philadelphia, PA 19103 (215) 665-2000 Dated: March 20, 2017 Facsimile: (215) 665-2013 mgallant@cozen.com rchu@cozen.com Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 1 of 56 2 Attorneys for Plaintiff, Trust Under the Will of James Wills, City of Philadelphia, Acting by the Board of Directors of City Trusts, Trustee, d/b/a Wills Eye Hospital Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 2 of 56 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA TRUST UNDER THE WILL OF JAMES WILLS, CITY OF PHILADELPHIA, ACTING BY THE BOARD OF DIRECTORS OF CITY TRUSTS, TRUSTEE, d/b/a WILLS EYE HOSPITAL, Plaintiff, v. THOMAS PRICE, M.D. Secretary, United States Department of Health & Human Services, Defendant. : : : : : : : : : : : : : : : : : CIVIL ACTION NO. 16-6615 PLAINTIFF’S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Mark H. Gallant (PA 51767) Robert A. Chu (PA 307386) Gregory M. Fliszar (PA 87816) COZEN O’CONNOR One Liberty Place 1650 Market Street, Suite 2800 Philadelphia, PA 19103 Phone: (215) 665-2000 Facsimile: (215) 665-2013 mgallant@cozen.com gfliszar@cozen.com rchu@cozen.com Attorneys for Plaintiff, Trust Under the Will of James Wills, City of Philadelphia, Acting by the Board of Directors of City Trusts, Trustee, d/b/a Wills Eye Hospital Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 3 of 56 i Table of Contents Page INTRODUCTION ......................................................................................................................... iii STATUTORY AND REGULATORY BACKGROUND ...............................................................4 STATEMENT OF THE FACTS OF RECORD ..............................................................................6 A. Background Culminating in Medicare Enrollment Application .................. 6 B. CMS’ Enrollment Determinations .............................................................. 10 C. Agency Appellate Decisions ...................................................................... 12 1. ALJ Decision ...................................................................................... 12 2. DAB Decision ..................................................................................... 14 D. Reopening Request ..................................................................................... 17 E. Impact of Decision on Wills Eye ............................................................... 18 STANDARD OF REVIEW ...........................................................................................................18 ARGUMENT .................................................................................................................................20 I. THE STATUTE IS AT LEAST AMBIGUOUS AND THE DAB’S CRABBED INTERPRETATION OF “PRIMARILY ENGAGED” IS NOT ENTITLED TO DEFERENCE .......................................................................................................... 20 A. The Chevron Test ......................................................................................... 20 B. The Plain Language and Legislative History of § 1861(e)(1) ..................... 21 C. The DAB’s Interpretation of the Act is Not Entitled to Step Two Chevron Deference.................................................................................................... 23 II. THE SECRETARY WAS NOT ENTITLED TO APPLY A COMPARATIVE VOLUME TEST WITHOUT AMENDING THE REGULATIONS OR ISSUING CLEAR ADVANCE NOTICE OF THE INTENT TO APPLY THAT TEST ........ 28 A. The APA and the Medicare Act Independently Require Notice and Comment Rulemaking for Changes in Medicare Enrollment Policies ...... 28 B. The Enrollment Test Applied to Wills Eye Plainly Represented a Change in the Prevailing Policies ................................................................................ 32 C. The Ratio Test Was Not Clearly Ascertainable From the Existing Regulations ................................................................................................. 34 D. The Application of a Volumetric Test to Wills Eye Was Not Saved By the Use of Adjudication.................................................................................... 37 III. THE SECRETARY’S INTERPRETATION IS ARBITRARY AND CAPRICIOUS AND UNCONSTITUTIONAL BECAUSE IT TREATS SIMILARLY SITUATED REGULATED PARTIES IN A DISPARATE MANNER WITHOUT JUSTIFYING THE DISCRIMINATORY TREATMENT ............................................................. 39 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 4 of 56 ii A. The Secretary’s Disparate Treatment of Wills Eye Compared With Other Hospital Was Arbitrary and Capricious and Void Under the APA ............ 39 B. CMS Violated Wills Eye’s Right to Equal Protection ............................... 41 CONCLUSION ..............................................................................................................................42 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 5 of 56 iii TABLE OF AUTHORITIES Cases Page(s) Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077 (D.C. Cir. 2001) ...............................................................................................20 Arizona v. Thompson, 281 F.3d 248 (D.C. Cir. 2002) .................................................................................................24 AT&T v. FCC, 454 F.3d 329 (D.C. Cir. 2006) ...........................................................................................38, 39 Aucielo Iron Works v. NLRB, 517 U.S. 781 (1996) .................................................................................................................24 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1998) ...........................................................................................................34, 39 Britthaven of Chapel Hill, DAB No. 2284 (2009) .........................................................................23 Bush-’92 Primary Comm. Inc. v. FEC, 104 F.3d 448 (D.C. Cir. 1997) .................................................................................................40 Caring Hearts Pers. Home Servs., Inc. v. Burwell, 824 F.3d 968, 971 (10th Cir. 2016) ...................................................................................35, 39 Cath. Health Initiatives v. Sebelius, 617 F.3d 490 (D.C. Cir. 2010) .................................................................................................29 CBS Corp. v. FCC, 663 F.3d 122 (3d Cir. 2011).....................................................................................................19 Chao v. Rothermal, 327 F.3d 223 (3d Cir. 2003).....................................................................................................30 Chevron, U.S.A., Inc. v. National Resources Def. Council, Inc., 467 U.S. 837 (1984) ......................................................................................................... passim Chiropractic Am. v. Lavecchia, 180 F.3d 99 (3d Cir. 1999).......................................................................................................41 Christ The King Manor, Inc. v. HHS, 730 F3d 291, 304-305 (3d Cir. 2003) .....................................................................................40 Christensen v. Harris Cty., 529 U.S. 576 (2000) .................................................................................................................24 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 6 of 56 iv Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971) ................................................................................................................19 Clarian Health W., LLC v. Burwell, No. 14-CV-0339 (KBJ), 2016 WL 4506969 (D.D.C. Aug. 26, 2016) ................................... 29 Danti v. Lewis, 312 F.2d 345 (D.C. Cir. 1962) .............................................................................35 Dialysis Patient Citizens v. Burwell, 2017 U.S. Dist. LEXIS 10145 (E.D. Tex. Jan. 25, 2017) ........................................................41 Diamond Roofing Co. v. OSHRC, 528 F.2d 645 (5th Cir. 1976) ...................................................................................................35 Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016) .............................................................................................................29 FCC v. Beach Commc’n, 508 U.S. 307 (1993) .................................................................................................................42 F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 515, 129 S. Ct. 1800, 1811, 173 L. Ed. 2d 738 (2009) .........................40, 41, 42 FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) .................................................................................................................24 FEC v. Dem. Senatorial Campaign Comm., 454 U.S. 27 (1981) ...................................................................................................................26 Freedom Pain Hosp., DAB No. CR4530 (2016) ....................................................................27, 30 Gen. Elec. Co. v. EPA, 53 F.3d 1324 (D.C. Cir. 1995) .................................................................................................35 GenOn REM, LLC v. EPA, 722 F.3d 513 (3d Cir. 2013).....................................................................................................21 Hagans v. Comm’r of Soc. Sec., 694 F.3d 287 (3d Cir. 2012)...............................................................................................21, 28 Hoctor v. U.S. Dept. of Agric., 82 F.3d 165 (7th Cir. 1996) .....................................................................................................29 Holder v. City of Allentown, 987 F.2d 188 (3d Cir. 1993).....................................................................................................42 Horizons Int’l, Inc. v. Baldrige, 811 F.2d 154 (3d Cir. 1987).....................................................................................................19 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 7 of 56 v Hosp. of the Univ. of Pa. v. Sebelius, 847 F. Supp. 2d 125 (D.D.C. 2012) ...................................................................................35, 36 Int’l Rehab Servs. v. Sebelius, 688 F.3d 994 (9th Cir. 2012) ........................................................38 Jewish Home of E. Pa. v. CMS, 693 F.3d 359 (3d Cir. 2012).....................................................................................................42 King v. Burwell, 135 S. Ct. 2480 (2015) .............................................................................................................26 Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004).....................................................................................................20 Mercy Catholic Med. Ctr. v. Thompson, 380 F.3d 142 (3d Cir. 2004) .........................................19 Mizra, MD v. Ins. Admin. of America, 800 F.3d 129 (3d Cir. 2015).....................................................................................................22 Morton v. Ruiz, 415 U.S. 199 (1974) .................................................................................................................38 Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ...................................................................................................................18 Nordlinger v. Hahn, 505 U.S. 1 (1992) .....................................................................................................................42 NVE Inc. v. Dep’t of Health & Human Servs., 436 F.3d 182 (3d Cir. 2006).....................................................................................................19 O’Connor v. Oakhurst Dairy, No. 16-1901, 2017 WL 957195 (1st Cir. Mar. 13, 2017) ........................................................22 Pa. Dep’t of Pub. Welfare v. Sebelius, 674 F.3d 139 (3d Cir. 2012).....................................................................................................18 PG Publ’g Co. v. Aichele, 705 F.3d 91 (3d Cir. 2013) ..................................................................42 Pub. Serv. Co. v. FERC, 91 F.3d 1478 (D.C.Cir. 1996) ..................................................................................................39 Public Citizen v. DOJ, 491 U.S. 440 (1989) .................................................................................................................26 Qwest Servs. Corp. v. FCC, 509 F.3d 531 (D.C. Cir. 2007) .................................................................................................39 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 8 of 56 vi Republic of Iraq v. Beaty, 556 U.S. 848, 861 (2009) ........................................................................................................26 Restrepo v. U.S. Attorney General, 617 F.3d 787 (3d Cir. 2010)...............................................................................................20, 23 Rite Aid of Pa., Inc. v. Houstoun, 171 F.3d 842 (3d Cir. 1999).....................................................................................................19 Satellite Broadcasting Co., Inc. v. FCC, 824 F.2d 1 (D.C. Cir. 1987) .....................................................................................................35 SEC v. Chenery Corp., 332 U.S. 194 (1947) .................................................................................................................38 Select Specialty Hosp.-Bloomington, Inc. v. Burwell, 757 F.3d 308 (D.C. Cir. 2014) .................................................................................................23 Shalom Pentecostal Church v. Acting Sec’y US Dept. of Homeland Security, 783 F.3d 156 (3d Cir. 2015).....................................................................................................20 Si Min Cen v. Attorney General, 825 F.3d 177 (3d Cir. 2016)............................................................................................. passim Sierra Club v. Mainella, 459 F. Supp. 2d 76 (D.D.C. 2006) ...........................................................................................19 Skidmore v. Swift & Co., 323 U.S. 134 (1944) ...........................................................................................................21, 28 Stuttering Found. of Am. v. Springer, 498 F. Supp. 2d 203 (D.D.C. 2007) .........................................................................................19 Tourus Records, Inc. v. Drug Enf't Admin., 259 F.3d 731 (D.C. Cir. 2001) .................................................................................................19 Transactive Corp. v. United States, 91 F.3d 232 (D.C. Cir. 1996) ...................................................................................................19 Transit. Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019 (D.C. Cir. 2000) ...............................................................................................24 United States v. X-Citement Video, Inc., 513 U.S 64 (1994) ....................................................................................................................26 Velasquez-Garcia v. Holder, 760 F.3d 571 (7th Cir. 2014) ...................................................................................................39 Village of Willowbrook v. Olech, 528 U.S. 562 (2000) ...............................................................42 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 9 of 56 vii Yale-New Haven Hosp. v. Leavitt, 470 F.3d 71 (2d Cir. 2006).......................................................................................................31 Zheng v. Gonzales, 422 F.3d 98 (3d Cir. 2005).................................................................................................21, 25 Statutes 5 U.S.C. § 553 ................................................................................................................................28 5 U.S.C. § 554 ................................................................................................................................24 5 U.S.C. § 555 ................................................................................................................................24 5 U.S.C. § 706 ........................................................................................................18, 19, 27, 40, 41 28 U.S.C. § 2201 ............................................................................................................................43 28 U.S.C. § 2202 ............................................................................................................................43 42 U.S.C. § 1395 ............................................................................................................4, 24, 25, 30 42 U.S.C. § 1395cc ..............................................................................................................5, 30, 32 42 U.S.C. § 1395f ..........................................................................................................................24 42 U.S.C. § 1395hh (SSA §1871) ................................................................1, 12, 13, 30, 32, 35, 36 42 U.S.C. § 1395x ..........................................................................................................................22 42 U.S.C. § 1395x(ccc)(1) .............................................................................................................24 42 U.S.C. § 1395x(e)(1) (SSA § 1861(e)(1))......................................................................... passim 42 U.S.C. § 1395x(g) .....................................................................................................................25 42 U.S.C. § 1395x(ff) ........................................................................................................21, 25, 33 Administrative Procedure Act................................................................................................ passim Deficit Reduction Act of 2005 .......................................................................................................31 Equal Access to Justice Act .............................................................................................................4 Equal Protection Clause ...................................................................................................................3 Other Authorities 42 C.F.R. § 412.3 ...........................................................................................................................26 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 10 of 56 viii 42 C.F.R. § 416.2 .....................................................................................................................18, 27 42 C.F.R. § 424.535 .......................................................................................................................26 42 C.F.R. § 482.1 .....................................................................................................................21, 33 42 C.F.R. § 483.3 .....................................................................................................................21, 33 42 C.F.R. §§ 482.11 through 482.58................................................................................................5 42 C.F.R. § 488.3 .................................................................................................................5, 15, 35 42 C.F.R. § 488.11 et seq. ..............................................................................................................33 42 C.F.R. § 489.24 .........................................................................................................................11 42 C.F.R. § 489.53 ...........................................................................................................................5 42 C.F.R. § 498.5 .........................................................................................................10, 11, 12, 14 42 C.F.R. § 498.22 .........................................................................................................................10 42 C.F.R. § 498.24 .........................................................................................................................12 42 C.F.R. § 498.40(b) ....................................................................................................................12 42 C.F.R. § 498.56 .........................................................................................................................13 42 C.F.R. § 498.79 .........................................................................................................................13 42 C.F.R. § 498.82 .........................................................................................................................14 42 C.F.R. § 498.95 .........................................................................................................................17 42 C.F.R. § 498.100 ................................................................................................................17, 18 79 Fed. Reg. 21552, 21554 (Apr. 16, 2014) ....................................................................................8 Fed. R. Civ. Pro. Rule 56(c)...........................................................................................................19 H.R. Rep. No. 89-213(1965) ....................................................................................................23, 25 H.R. Rep. Np. 100-391 (1987) .................................................................................................31, 32 S. Rep. No. 89-404 (1965) .................................................................................................22, 23, 25 U.S. Department of Health and Human Services, Final Report to the Congress and Strategic and Implementing Plan Required under Section 5006 of the Deficit Reduction Act of 2005, (2006) .............................................................................31, 32, 33, 34 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 11 of 56 ix National Fire Protection Life Safety Code...................................................................................7, 8 Survey and Certification Memorandum to Survey Agency Directors ...........................................36 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 12 of 56 INTRODUCTION This case is about the Secretary’s refusal to enroll Wills Eye Hospital – the nation’s oldest and perhaps most respected specialized eye hospital – as a “hospital” in the Medicare program. Region 3 of the Centers for Medicare & Medicaid Services (Region 3 or CMS) based this refusal on defining “hospitals” for Medicare purposes as including only those providing a greater volume of “inpatient” than “outpatient” care, and concluding that Wills Eye did not meet this test because its ratio of inpatient days to outpatient surgeries was, at best, 17%. The HHS Department Appeals Board (DAB) affirmed CMS on appeal, concluding Wills Eye did not have a “substantial” enough focus on inpatient care to be considered a hospital under the Medicare Act’s definition. As we demonstrate below, the DAB incorrectly concluded that the plain terms of the statute at issue unambiguously required this result. In fact, the focus of the statutory wording, consistent with the legislative history, is not whether a hospital primarily treats inpatients as opposed to outpatients, but whether it primarily furnishes medical, surgical or rehabilitation care to those who are admitted as inpatients. Even if, however, CMS could reasonably construe the statute as requiring a greater volume of inpatient than outpatient care, it erred in applying a comparative volume test to Wills Eye on an ad hoc basis – described euphemistically as a “case- by-case” approach by the HHS Departmental Appeals Board (DAB) – without notice and comment rulemaking. The statute requires that any substantive changes to provider participation “rules, requirements or policies” may not take effect “unless . . . promulgated by . . . regulation” (42 U.S.C. § 1395hh(a)). The Secretary had considered modifying the operative definition of a hospital by amending the rules in a procedurally proper manner to incorporate a comparative volume standard in 2006, but declined to do so upon recognizing that this approach ran counter to medical advances, and would unacceptably limit Medicare access to hospital services and Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 13 of 56 2 endanger participation of specialty hospitals and small rural hospitals. Region 3 threw the Secretary’s prior cautions to the wind by adopting in a procedurally improper manner (i.e., without requisite rulemaking) the very approach the Secretary previously had assiduously avoided. The DAB excused the absence of rulemaking by claiming that the comparative volume test Region 3 applied to Wills Eye did not represent a “change” in the prevailing enrollment policies, and was merely a logical extension of the statute and pre-existing generalized definition of a hospital. The record, however, makes it crystal clear that CMS’ treatment of Wills Eye deviated from the pre-existing rules and policies. None of the existing regulations – including the Secretary’s definitional rules and tens of pages of rules prescribing “conditions of participation” for hospitals – hints that providing a greater volume of inpatient than outpatient care is required for a hospital to participate in Medicare. The unrebutted evidence of the Secretary’s actual practices showed that anywhere from 37 to 84 percent of hospitals that currently participate in Medicare would not have been permitted to do so under the threshold test applied to Wills Eye. The Secretary, moreover, had specifically considered “changing” the enrollment requirements in 2006 to adopt the kind of threshold inpatient-to-outpatient standard that CMS has now applied, but declined to do because of the negative policy implications of so defining “primarily engaged.” What Region 3 has done represents a reversal of the Secretary’s own position before Congress. The DAB alternatively concluded that a relative volume test was sustainable because it could be inferred from the existing general regulations. That reasoning does not save the DAB’s decision. The case law does not permit existing rules to be detrimentally applied in a new manner unless the agency has first provided “clearly ascertainable notice” of its intentions to put a new spin on the existing rules. Because CMS applied this dispositive new twist to the more Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 14 of 56 3 general rules to Wills Eye retroactively, and without any clear advance notice, CMS’s denial of Wills Eye’s Medicare enrollment would fail even if something short of a formal regulatory amendment could suffice. The DAB also failed to justify Region 3’s adoption of this new test as a statutory interpretation that could be lawfully be applied to Wills Eye on a “case-specific basis” through adjudication. Whether or not the DAB describes this new threshold test as a mere “interpretation” of the act (which it is not), CMS is statutorily precluded from using adjudication to alter prevailing provider enrollment policies without rulemaking. Beyond that, standard- setting by adjudication is not permitted where, as here, adjudication is being used to “substitute new law for old law that was reasonably clear” or upset settled expectation. The Secretary’s action also fails as a matter of law because it amounted to the discriminatory treatment of Wills Eye without the requisite acknowledgment and justification for changing course. The Pennsylvania Department of Health, which conducts provider enrollment surveys for the Secretary, underscored that CMS had routinely enrolled small hospitals that were substantially equivalent to Wills Eye, and that Region 3’s treatment of Wills Eye was irreconcilable with the preexisting enrollment standards. And if the standard to which Wills Eye was subjected were applied even-handedly and in a non-discriminatory fashion, as the ALJ’s decision suggests it must be to avoid charges of discrimination, as many as 84% of the hospitals currently participating in Medicare would be barred from doing so. CMS’ unannounced retroactive application of the relative volume standard to Wills Eye, as a “class of one,” was invalid as disparate treatment under the Administrative Procedure Act (APA) and a violation of the Equal Protection Clause of the Constitution. This violation was compounded by CMS’ failure to admit, let alone to explain why, it was departing from its then prevailing regulatory practices. That omission in itself renders CMS’ treatment of Wills Eye both arbitrary and capricious under the APA and irrational discrimination under the Equal Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 15 of 56 4 Protection Clause. The DAB brushed aside the implications of what it had wrought by noting that CMS would not “necessarily” apply this test except to Wills Eye, while simultaneously claiming a lack of authority to redress discriminatory treatment by CMS. This Court, however, is not so powerless. Finally, the DAB’s decision is deeply concerning as a matter of regulatory and medical policy. The DAB recognized that the “vast majority” of hospital services today are outpatient services while claiming, incorrectly, that the dilemma faced by Wills Eye (and other hospitals) can only be rectified by Congress, leaving most of the nation’s hospitals – and particularly small rural hospitals – at risk of Medicare termination for not satisfying the “primarily inpatient services” test. This Court should reverse the DAB’s decision on multiple grounds, as summarized above. As relief, the Secretary should be ordered on remand to appropriately enroll Wills Eye Hospital in Medicare as a hospital, effective as of the date the hospital enrollment survey in which Wills Eye was found to have fully satisfied all federal conditions of participation other than CMS’ unlawful numerical standard. The court also should order a further remand to the government’s intermediary to pay Wills Eye the difference between the fees it has been paid since 2013 as “an ambulatory surgery center,” (ASC) and the Medicare rates Wills Eye should have been paid as a hospital, subject to back interest (and attorney’s fees under the Equal Access to Justice Act). STATUTORY AND REGULATORY BACKGROUND Enacted in 1965 as Title XVIII of the Social Security Act (SSA), Medicare is a public health insurance program for individuals aged 65 or older, qualifying disabled persons, and individuals suffering from end-stage renal disease. 42 U.S.C. §§ 1395 et seq. The Secretary has delegated day-to-day responsibility for administering Medicare to CMS. To participate in Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 16 of 56 5 Medicare, a facility must prospectively apply to enroll in the program by filing an enrollment form (i.e., form 855A). To qualify for Medicare participation, a hospital must obtain a license from the state in which it is located, and request the approval of a Medicare Administrative Contractor (formerly known as a Medicare Fiscal Intermediary), which makes a recommendation regarding participation to CMS. In addition, the State licensing agency, acting in its capacity as a Medicare “State Survey Agency,” conducts a survey of all prospective enrollees to determine on behalf of CMS if the applicant satisfies the multitude of Medicare Conditions of Participation (CoPs) for hospitals found at 42 C.F.R. §§ 482.11 through 482.58. A “prospective provider” that is a hospital must “[m]eet the … definition” of § 1861 of the Act (42 U.S.C. § 1395x(a)). 42 C.F.R. § 488.3(a)(1). Section 1861(e) of the SSA, 42 U.S.C. § 1395x(e), defines a hospital as an institution that satisfies a wide host of comprehensive statutory requirements. See 42 U.S.C. § 1395x(e)(1) – (9). One of these many provisions, § 1861(e)(1), states that a hospital “is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services for the rehabilitation of injured, disabled, or sick persons . . . .” 42 U.S.C. § 1395x(e)(l). These statutory terms are not defined elsewhere in the statute or by regulation. A hospital already enrolled in Medicare is subject to regular “surveys,” and a hospital found not to satisfy the regulatory requirements for participation on survey is subject to being “terminated” from further participation. See 42 U.S.C. § 1395cc(b)(2) and 42 C.F.R. § 489.53(a)(3). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 17 of 56 6 STATEMENT OF THE FACTS OF RECORD A. Background Culminating in Medicare Enrollment Application Established in 1832, Wills Eye is a national leader in the treatment of eye diseases and ophthalmic injuries and disorders. (AR 975-982.) Named one of the top two “ophthalmic hospitals” in the United States by U.S. News and World Report (AR 982.) Wills Eye provides tertiary and quaternary level care. Whether on an inpatient or outpatient basis, Wills Eye frequently treats highly complex and intractable cases – often where unsuccessful surgeries have previously been performed elsewhere – on a 24/7 basis. (AR 975-79.) Wills Eye sees patients from across the United States and beyond. Ibid. It also is the only freestanding, high-acuity ophthalmic care hospital facility located between New York and Baltimore. (AR 972-980.)1 Until 2002, Wills Eye had maintained a facility with 120 inpatient beds at 900 Walnut Street, Philadelphia, PA, along with several community-based ambulatory surgery centers (ASCs). (AR 977.) Medical advances, however, have enabled many ophthalmic procedures that formerly required overnight stays to be safety performed on an outpatient basis. Id. These include cataract surgery, repairs of retinal detachments, and certain ocular oncology surgery, which formerly had necessitated 3 to 5 days of inpatient recovery and immobilization. In keeping with these practice developments Wills Eye created a new comprehensive clinical facility at 840 Walnut Street, Philadelphia in 2002 under newly formed, tax-exempt entities which was operated as an ambulatory surgery center (ASC). The ASC was separately organized as Wills Community Surgical Services of Center City, Inc. (WCSSCC), a wholly owned subsidiary of the Board of City Trusts. (AR 1005; AR 977; Dkt. 11-2, M. Allen Decl. ¶8.) The Board simultaneously leased all but 40 of the inpatient beds at the main 900 Walnut Street campus to Thomas Jefferson University Hospital (Jefferson). See AR 977-79; Dkt. 11-2, 1 Wills Eye also is leading trainer of a national and international clinical and research fellows in ophthalmology and its sole focus is hospital level care. (AR 975-77.) Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 18 of 56 7 M. Allen Decl., ¶¶ 8, 9. By 2006, it became financially unfeasible to operate two separate facilities. Accordingly, the Board of City Trusts resolved to transfer the inpatient program at 900 Walnut Street to Jefferson. (AR 977.) Beginning at that time, Wills Eye exclusively operated the outpatient ambulatory care facility at 840 Walnut Street, while Wills Eye physicians treated inpatients at “Jefferson,” at 900 Walnut Street. (AR 977-78; 987.) Over time, the Thomas Jefferson Hospital for the Neurosciences at 900 Walnut Street became a nationally-recognized center of excellence in neurology and neurosurgery, increasing Jefferson’s need for inpatient beds and dedicated operating room time at that location. See AR 15, 977; Dkt. 11-2, M. Allen Decl., ¶ 9. Cases that still may necessitate inpatient treatment include, among others, corneal ulcer treatment, complex retina procedures, ocular trauma, intravenous steroids for neuro-ophthalmology conditions such as giant cell arteritis, and ocular oncologic procedures involving the insertion and removal of radioactive plaques for eye tumors. (AR 978.) In 2011, the Board determined it would best serve the needs of neuroscience and ophthalmic patients for 900 Walnut Street to operate exclusively as a center of excellence in neurosciences, while relocating inpatient ophthalmology services to 840 Walnut Street in order to offer an appropriate continuum of care to ophthalmic patients. AR 978; Dkt. 11-2, M. Allen Decl., ¶¶ 10-11. To “bring back” inpatient capacity, the Board of Trusts initiated extensive renovations of the 840 Walnut Street facility, beginning in 2011. (AR 978; 984; 987.) This included expending approximately $6.5 million to reconfigure the physical plant to add a suite of four inpatient beds and satisfy the National Fire Protection Association’s (NFPA) Life Safety Code (LSC). (AR 976, 982, 984-5; 987.) The renovation also included adding state-of-art equipment and features, and locating the nursing station near the surgical suite. (Dkt. 11-2, M. Allen Decl., ¶¶ 11, 12.) Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 19 of 56 8 Wills Eye incurred this expense largely to comply with CMS policies. Although, the NFPA itself exempted from the LSC hospitals with a daily census of 4 inpatients or less, CMS decided to require full compliance as a Medicare participation condition even by, hospitals of 4 beds or less. See 79 Fed. Reg. 21552, 21554 (Apr. 16, 2014).2 Wills Eye relied on the existing rules and regulations and on CMS instructions and on the manner in which they were being applied in undertaking these extensive renovations to develop a highly specialized, state-of-the- art four-bed inpatient hospital. Plans and program changes for the renovations were reviewed and approved in advance by the Pennsylvania Department of Health (DOH), the State licensing agency which also serves as the State Survey Agency for CMS. Upon completion of the reconstruction, the corporate operations of WCSSCC, Inc. were suspended, and its assets were transferred back to the parent entity, which then separately sought hospital licensure under the auspices of Wills Eye Hospital. (See AR 1005-06.) On February 26, 2013, Wills Eye Hospital submitted a CMS-855A Medicare Enrollment Application for Institutional Providers (AR 990-1001; 1010-15) to the Medicare intermediary, Novitas Solutions, Inc. Novitas recommended enrollment of Wills Eye in Medicare as a hospital to CMS under the prevailing standards. (AR 14, 1007-08.) DOH completed its Medicare hospital survey on August 26, 2013, and, on September 9, 2013, formally certified that Wills Eye had satisfied all Medicare CoPs and recommended its participation in Medicare as a hospital to CMS based on prevailing standards and policies. (AR 14; 990.) DOH simultaneously licensed Wills Eye as an inpatient hospital under State law. As the DAB recognized, CMS has never taken issue with DOH’s determination that Wills Eye was in full compliance with all of the hospital CoPs. See AR 14. However, on October 17-18, 2013, Mr. Dale Van Wieren, then Principal State Representative, Certification 2 In rejecting the 4-bed LSC exception, CMS stated that hospitals with even “one or more [in]patients” must comply. 79 Fed. Reg. at 21554. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 20 of 56 9 and Enforcement Branch, CMS Northeast Division of Survey & Certification, exchanged a series of e-mails with DOH regarding Wills Eye. See AR 1053-55. In his opening e-mail, Van Wieren stated that after “discuss[ing] this with our central office,”3 I intend to “deny their application to become a hospital [because] . . . it would appear that the primary purpose of the facility is out- patient surgery.” (AR 1055.) Van Wieren noted that Wills Eye’s website didn’t “even mention inpatient.” (AR 1054.) In another e-mail, Van Wieren indicated that a comparison of Wills Eye’s projected, annualized inpatient admissions to outpatient procedures showed that inpatient care was only “4% of their business.” Id. DOH responded that Van Wieren’s calculation mistakenly attributed outpatient procedures performed at Wills Eye’s affiliated and remote non-hospital-based ASCs to Wills Eye Hospital, and observed that the website did not describe inpatient services because it had not yet been updated since the 840 Walnut Street had been reconstructed as an inpatient facility. (AR 1053.) DOH underscored that it had found Wills Eye “to be in compliance with all hospital [participation] requirements,” and that “other hospitals in Pa that are currently licensed and CMS certified [as hospitals] . . . have a smaller amount of inpatient beds and conduct a robust outpatient surgery program.” (AR 1054.) DOH also reminded Van Wieren that CMS had routinely enrolled “10 or 12 bed hospital[s],” that a 4 bed hospital qualifies if it “meet[s] the CoPs,” and that DOH did not “see the difference between Wills [Eye] and the other small capacity hospitals that have been previously approved by CMS.” (AR 1053-54.) Undaunted, Van Wieren responded: “I think I’ve found enough to deny them,” noting that Wills Eye reports “an enormous outpatient business.” (AR 1054.) Van Wieren also agreed that CMS previously had recognized (and continues to recognize) what he called another 3 The Secretary never provided Region 3’s communications with the Central Office as part of the official hearing record, even though these obviously were part of the decision-making process. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 21 of 56 10 “glorified ASC [name redacted by CMS] as a hospital,” but asserted that this would not happen again today. (AR 1053.) B. CMS’ Enrollment Determinations Van Wieren issued CMS Region 3’s Initial Determination on October 24, 2013. (AR 988-89). It denied Wills Eye’s application to enroll in Medicare as a hospital on the sole stated basis that Wills Eye was not a “hospital” because it “provides a greater volume of outpatient services than inpatient services” and “is not primarily engaged in providing inpatient services” within the meaning of SSA § 1861(e)(1). (AR 988.) This conclusion was in turn, based explicitly on the assumption that no more than “17% of the cases treated” at Wills Eye were inpatient (based on the projected maximum annual inpatient days (1,460) divided by the “estimate[d]” number of “outpatient surgeries per year” (8,400)). (AR 989.) An applicant dissatisfied with an initial determination that it does not qualify as a Medicare provider is entitled to seek Reconsideration before CMS. See 42 C.F.R. §§ 498.5(a), (l)(1), 498.22(a)(c) authorizing a decision on Reconsideration “affirming or modifying the initial determination and the findings on which it was based.” In support of its request for Reconsideration (AR 975-985), Wills Eye observed that it had been licensed by the Department of Health (DOH) as a hospital, and had been found on survey to satisfy all of the published CoPs and Life Safety Code standards. Relying in part on hospital survey data obtained from the American Hospital Association (AHA) and DOH data (backed by CMS enrollment records) (AR 737-932, 940-959), Wills Eye contended on Reconsideration that CMS was subjecting it to a new enrollment standard without having first adopted that standard through rulemaking, and discriminating against Wills Eye in the process. The AHA data (AR 737-942, at 942) demonstrated that 84% of hospitals enrolled in Medicare do not have a “greater inpatient than outpatient volume,” and that 37% of hospitals Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 22 of 56 11 participating in Medicare, and virtually all small, highly specialized hospitals had inpatient care ratios less favorable than 17% under the same standard being applied to Wills Eye. (AR 979-80.) The AHA data also illustrated that other specialty Eye and Ear Hospitals that CMS has enrolled as “hospitals” in Medicare have lower inpatient to outpatient ratios than Plaintiff’s.4 The DOH data (AR 940) indicated that, under the same methodology applied under Van Wieren, Wills Eye had a more favorable ratio of inpatient days to outpatient procedures than several other specialty hospitals that Region 3 had approved for Medicare enrollment – including Physicians Care Surgical Hospital (7.93%) and Edgewood Surgical Hospital (13.13%). With limited exception, every hospital listed in the DOH data also had significantly less than a 51% inpatient to outpatient ratio and thus would not qualify as “hospitals” for Medicare enrollment purposes under a simple “majority” test.5 Without the evidence, the Manager, Certification and Enforcement Branch, summarily “affirm[ed] the decision to deny [Wills Eye’s] request for participation in Medicare as a hospital” on reconsideration by letter dated January 23, 2014. (AR 973-74.) Hock’s “affirmance” of the 4 These include: Bascom Palmer (0.4%); Phillips Eye Institute (1.6%); N.Y. Eye & Ear Infirmary (0.9%); Mass. Eye & Ear Infirmary (1.8%). The AHA data also confirmed that even hospitals that are not specialty hospitals – such as other “low bed” hospitals, “critical access” hospitals, and even academic medical centers – tend to have low inpatient to outpatient ratios and could not be Medicare “hospitals” under the DAB’s approach. 5 Wills Eye also submitted updated AHA survey data to similar effect, along with CMS data it obtained from the press in support of its Petition to the DAB Appellate Division to Reopen its Decision. See Dkt. 11-3. These documents appear as Attachments “B” and “C” to Exhibit “B” to the Amended Complaint, respectively. See Dkt. 11-3. The 2016 AHA Report was derived from the most recently available (FY 2014) hospital survey data. It showed that hospitals have continued to provide more and more services on an outpatient basis, and that Wills Eye’s inpatient/outpatient ratio continued to compare favorably with competing specialized eye and ear hospitals’. The data supplied as Attachment “C” was public data obtained from HHS through a FOIA request by the Philadelphia Inquirer, which provided a copy to Wills Eye’s legal counsel after the case had been taken under advisement by the DAB. Wills Eye itself had requested these records under FOIA over two years earlier. It lists 102 hospitals enrolled in Medicare with 10 or fewer beds. The Secretary has correlated low bed numbers with high proportions of outpatient to inpatient services. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 23 of 56 12 Initial Determination reiterated that Wills Eye was “primarily engaged in providing services to outpatients,” and did not “modify” Van Wieren’s decision or “the findings on which it was based.” See 42 C.F.R. § 498.24(c). C. Agency Appellate Decisions 1. ALJ Decision A prospective provider dissatisfied with a Reconsidered Determination is entitled to a hearing before an administrative law judge (ALJ) within the Civil Remedies Division of the DAB upon filing a timely request. See 42 C.F.R. §§ 498.5(a)(l) & (2), 498.40.6 On March 21, 2014, Wills Eye filed a timely Request for Hearing with supporting Exhibits. (AR 53-74; 724- 972.) On July 2, 2014 and October 30, 2014, CMS and Wills Eye, respectively, filed cross- motions for summary judgment. (AR 94-122; 316-362.) Wills Eye contended that it qualified for enrollment in Medicare as a hospital because it was licensed as a hospital by the state and had been found by DOH without exception or disagreement to have not all the applicable Medicare conditions of participation. See AR 1003-04. It also met the “definition” of a hospitals because the phrase “primarily engaged” in § 1861(e) describes the types of services that primarily are provided to those who are admitted as inpatients by a general acute care hospital rather than implicitly requiring that a “hospital” must provide some larger volume of inpatient services than outpatient services. Wills Eye alternatively contended that even if the statute could reasonably be interpreted as imposing a comparative volume test, CMS could not deny enrollment to Wills Eye based on such a test unless it is first adopted through notice and comment rulemaking, pursuant to 42 U.S.C. § 1395hh(a). Wills Eye sought summary judgment on that basis, and on the related 6 A dissatisfied applicant must request a hearing in a manner that “[i]dentifie[s] the specific issues, and the findings of fact and conclusions of law with which the affected party disagrees,” along with the specific basis of the disagreement with the “findings and conclusions” of the Reconsideration Determination. 42 C.F.R. § 498.40(b). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 24 of 56 13 grounds that CMS’ application of this highly restrictive enrollment test exclusively to Wills Eye also violated Wills Eye’s right to equal treatment under the APA and the Fifth Amendment, while reserving any remaining issues for hearing. Although CMS is prohibited by regulation from admitting new documents or advancing new arguments before the ALJ in an enrollment appeal that are not contained in the Reconsidered Decision,7 CMS filed a post-decisional declaration of Van Wieren. (AR 1048-51), Van Wieren claimed that he also had relied on certain previously unstated reasons for concluding Wills Eye “did not meet the definition of a hospital primarily engaged in providing inpatient services.” These included statements that Wills Eye had an “excessive number of [nursing] personnel” in relation to the number of its inpatient beds and “was [voluntarily] seeking to terminate its ASC certification and convert to a hospital.” Aside from not being part of the agency decision being appealed to the ALJ, Van Wieren’s supplemental perceptions had never been subject to examination and were inconsistent with the record facts. Where CMS “has denied an enrollment application,” the ALJ “must issue a decision, dismissal or order to remand to CMS, as appropriate, no later than” 180 days “from the date the appeal was filed.” 42 C.F.R. § 498.79. Despite this deadline, the ALJ granted CMS’s cross- motion for summary judgment and denying Wills Eye’s cross motion for summary judgment by decision of February 18, 2016 (AR 1-12) – nearly two years after Wills Eye’s Request for Hearing. The ALJ sustained CMS’ Reconsidered Determination based on the conclusion that “the bulk” of Wills Eye Hospital’s services were outpatient services, which (over Wills Eye’s objection) the ALJ buttressed in part by relying on Van Wieren’s post decisional declaration. In response to the evidence of discriminatory treatment, the ALJ concluded that Region 3’s application of the comparative volumetric standard only to Wills Eye was a permissible exercise 7 See 42 C.F.R. §§ 498.56(a)(2), 498.56(e). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 25 of 56 14 in “selective enforcement,” stating that: “I may not compound CMS’s purported errors [in not applying a relative volume test to others] by compelling CMS to allow yet another unqualified institution to be certified.” (AR 9.) To redress the unequal treatment, the ALJ exhorted CMS to eliminate other “noncompliant” hospitals from Medicare going forward. Id. 2. DAB Decision A prospective provider dissatisfied with an ALJ’s decision may request review by the Appellate Division of the DAB within 60 days of receiving the notice of ALJ’s decision. 42 C.F.R. §§ 498.5(l)(3), 498.82(a). Wills Eye timely filed a Request for Appellate Review. See AR 507-558. After hearing oral argument, the DAB issued a Final Decision on Review of Administrative Law Judge Decision in Docket No. A-16-78 (Decision No. 2743) on October 25, 2016. The DAB affirmed the ALJ’s award of summary judgment in favor of the Secretary’s, although on somewhat different grounds. First, the DAB concluded that the definition of a hospital contained within § 1861(e)(1) of the Act was clear and unambiguous, and that: An institution seeking to participate in Medicare as a “hospital” must show that it is primarily engaged not only in providing services of the nature described [within § 1861(e)(1)] but in providing them primarily to inpatients. (Emphasis added.) AR 29-30; accord AR 32 (inpatient care must be the “primary activity”), 34 (to participate in Medicare, a hospital must “show [that] inpatient services are the focus of the ongoing business concern.”). See also AR 33 & n.11 the (statute refers to “51% or more . . . inpatient care”). The DAB also stated that if the definition were considered ambiguous, it would “defer” to CMS’ interpretation of the definition of a hospital as the more reasonable one. (AR 30, 31.) The DAB recognized that “advancements in medicine have made it possible to provide the vast majority of [hospital level] care on an outpatient basis.” (AR 50.) Nevertheless, the DAB construed the statute as unequivocally mandating a larger volume of inpatient than outpatient Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 26 of 56 15 care, relying in part on its own perception (which the DAB proclaimed, without any record support, was “undisputed”) that most hospitals were focused on inpatient care “more than 50 years ago” when the statute was enacted. (AR 28, 50.) Despite CMS’ clear and explicit determination that Wills Eye was not “primarily engaged” in furnishing inpatient care based on the 17% ratio, the DAB declined to endorse “any single numerical test,” but instead, framed the standard more vaguely – i.e., “hospital” must treat a “significant number of inpatients” – which the DAB found Wills Eye did not do. (AR 15, 33.) The DAB also rejected Wills Eye’s alternative contention that the Secretary had to formally amend the existing regulations to adopt a comparative volume test before applying it to Wills Eye’s detriment, reasoning that such a test could be inferred from the general language of § 1861(e)(1), which also is cross-referenced by 42 C.F.R. § 488.3(a)(1). See AR 34, 35, 48. The DAB further suggested that CMS’ intent to apply a comparative inpatient to outpatient services test could be inferred from dicta in the DAB’s own prior opinions suggesting the need to provide some majority of inpatient care – even though the DAB decisions at issue involved only the status facilities providing “no” inpatient services at all, without discussing a relative volume standard. See AR 32-34. The DAB also concluded that the Secretary was free to interpret the statute and regulations with particularity on a “case-by-case basis,” while acknowledging that its case-by-case approach offered less clarity and predictability than a regulation or published manual. (AR 44.)8 8 While relying on a “primary focus” or “primary business” standard as the irreducible basis for its decision, the DAB also appeared to attribute some indeterminate significance to Van Wieren’s post-decisional declaration, stating that: Wills’ attempt to transform itself back into a hospital by the addition of a small inpatient component is, at least in significant part, driven by the desire for higher payment rates that would make available for the preexisting services it has been providing as an ASC. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 27 of 56 16 The DAB also rejected Plaintiff’s challenges under the equal protection clause and APA to CMS’ application of a relative volume test only to Wills Eye. After a token effort to (incorrectly) distinguish Wills Eye from other hospitals with equivalent or worse inpatient to outpatient ratios based on its putative “long history” as an ASC, the DAB ultimately asserted it “is not empowered” to protect Wills Eye from the discriminatory application of what it termed “a valid statutory or regulatory requirement.” (AR 48.) The DAB acknowledged its decision would have negative “policy” implications that ran contrary to “advancements in medicine.” (AR 50.) Recognizing that most hospitals provide “vastly more” outpatient than inpatient care, the DAB dismissed the disturbing implications of its own decision, stating that its ruling would not “necessarily cause a catastrophic expulsion of hospitals, large and small, around the country” since – in contrast with the ALJ’s assumption – CMS might simply limit its application of this standard to Wills Eye. (AR 48-50, (emphasis added)). The DAB also noted that it had “no reason to question” or “doubt” that Wills Eye “provide[s] ‘hospital-level’ care as its ‘[s]ole focus,’” or that Wills Eye routinely treats the most medically complex cases including patients that “have been operated on before . . . at other facilities and present heightened risks of failure or complications.” (AR 50.) It nevertheless concluded that the fact that actual medical practice “may have outpaced the statute” or that access to highly specialized care would be curtailed is problem that needed to be addressed by “legislative or regulatory measures” rather than by the DAB. (AR 50, 51.) (AR 46.) To support this statement, the DAB remarked inaccurately that Wills Eye had a “long history as an ASC” which it sought to “convert to a hospital,” and that “it is not our role to second-guess” CMS’ exercise of “discretion.” (AR 47.) In actuality, Wills Eye had a “long history” as a hospital, and had briefly and unsatisfactorily enrolled the 840 Walnut Street outpatient clinical facility in Medicare as an ASC through an affiliate before reconstructing 840 Walnut Street as a specialized inpatient hospital under the direct auspices of the Board of City Trusts. See AR 54, 975, 977; Dkt. 11-2, M. Allen Decl., ¶¶ 5-13. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 28 of 56 17 Finally, the DAB apparently accepted at face value CMS’ contention that Wills Eye was simply “converting” an existing ASC into a hospital. See AR 563, 547. This convenient description, however, ignored plain record facts, namely that a different entity applied to enroll 840 Walnut Street in Medicare as a hospital in 2013 than had operated the former ASC at that address, and the that the facility for which the Board of City Trusts applied for Medicare enrollment in 2013 had undergone extensive and costly renovations to add inpatient capacity, and had been licensed by the State in 2013 as a hospital, not as an ambulatory care facility like the predecessor ASC. D. Reopening Request Wills Eye timely petitioned the DAB to Reopen and Revise the decision under 42 C.F.R. § 498.100. See Exhibit “B” to Amended Complaint (Dkt 11-2). Supporting Exhibits included updated AHA statistical data and a newly obtained CMS spreadsheet identifying the routine enrollment of small specialty hospitals.9 Wills Eye also sought reconsideration of the conclusion that CMS could infer the relative volume from existing regulations without providing clear advance notice of an intention to so construe the enrollment rules. The DAB did not rule on the reopening within the requisite 60 days as required by 42 C.F.R. § 498.100(a), or to act on Wills Eye’s timely request for an extension of time to file a judicial appeal under 42 C.F.R. § 498.95. After the Secretary nevertheless moved to stay this action appeal as interlocutory based on the alleged pendency of the (already moribund) request for reopening (Dkt. 6), Wills Eye formally withdrew the reopening request. The DAB entered an order (Dkt. 9-1) formally terminating the Reopening docket, and this Court denied the Secretary’s Motion for a Stay of Proceedings as being moot. 9 See supra at fn. 5. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 29 of 56 18 E. Impact of Decision on Wills Eye In 42 C.F.R. § 416.2, CMS defines an ASC as providing no care lasting more than 24 hours (i.e., no “inpatient care). In refusing to enroll Wills Eye in Medicare as a hospital, CMS nevertheless encouraged Wills Eye to enroll as an ASC, at least pending appeal, knowing it was “licensed” as a hospital. Since enrolling the renovated 840 Walnut Street facility as an ASC in 2013, Wills Eye has suffered staggering operating losses, which exceeded $18 million in 2014- 2016 alone. See Dkt. 11-2, M. Allen Decl., ¶ 27. Shortly before the hospital enrollment appeal was argued before the DAB, CMS threatened to “terminate” Wills Eye’s Medicare participation as an ASC because it provided inpatient services, demanding that Wills Eye cease and desist from providing any inpatient care to any inpatients – not just Medicare patients – despite its State licensure as a hospital. CMS had initially enrolled Wills Eye as an ASC, knowing it was licensed as an inpatient hospital. While turning a blind eye to this provision in 2013, CMS relied on it in 2016 to force Wills Eye to either stop treating inpatients or have its Medicare ASC participation terminated. Faced with this Hobbesian choice, Wills Eye agreed under protest (and subject to this appeal) to not treat any inpatients. This CMS action has, inter alia, required the transfer of patients (such as children being treated for potentially fatal ocular cancers) to another hospital if overnight care is required. STANDARD OF REVIEW Under the Administrative Procedure Act a reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The District Court’s review is de novo. Pa. Dep’t of Pub. Welfare v. Sebelius, 674 F.3d 139, 146 (3d Cir. 2012). And while deferential, APA review requires a careful, searching inquiry. Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42 (1983). “The agency Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 30 of 56 19 must reach its decision by ‘examin[ing] the relevant data’ and must ‘articulate a satisfactory explanation for its action including a “rational connection between the facts found and the choice made.’” CBS Corp. v. FCC, 663 F.3d 122, 137 (3d Cir. 2011). An agency decision is considered arbitrary and capricious if it represents an unexplained departure from earlier agency precedent, or if the agency offers insufficient reasons for treating similar situations differently. See Transactive Corp. v. United States, 91 F.3d 232, 237-38 (D.C. Cir. 1996); Mercy Catholic Med. Ctr. v. Thompson, 380 F.3d 142, 157-158 (3d Cir. 2004). Where an agency’s decision is arbitrary and capricious, the court is affirmatively obligated to hold it unlawful and set it aside under § 706(2)(A) of the APA. See Tourus Records, Inc. v. Drug Enf’t Admin., 259 F.3d 731, 736 (D.C. Cir. 2001). Traditional summary judgment rules do not apply in cases on review from HHS based on the agency record and APA standards. See Sierra Club v. Mainella, 459 F. Supp. 2d 76, 90 (D.D.C. 2006) (same). Instead of typical summary judgment standards set forth in Rule 56(c) “the reviewing court . . . appl[ies] the appropriate APA standard of review, 5 U.S.C. § 706, to the agency decision based on the record the agency presents to the reviewing court. Horizons Int’l, Inc. v. Baldrige, 811 F.2d 154, 163 (3d Cir. 1987) (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971)). “[T]he, focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court.” NVE Inc. v. Dep’t of Health & Human Servs., 436 F.3d 182, 190 (3d Cir. 2006) (quoting Camp, 411 U.S. at 142); Rite Aid of Pa., Inc. v. Houstoun, 171 F.3d 842, 851 (3d Cir. 1999) (“district court properly ruled that it would not create a new record nor base its review on any ‘post-hoc rationalizations.’”). Facts are determined as a matter of law based on the “substantial evidence” standard. See Stuttering Found. of Am. v. Springer, 498 F. Supp. 2d 203, 207 (D.D.C. 2007). In effect, “when a party seeks review of agency action under the APA, the district judge sits as an Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 31 of 56 20 appellate tribunal,” and “the ‘entire case’ on review is a question of law.” Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001). ARGUMENT I. THE STATUTE IS AT LEAST AMBIGUOUS AND THE DAB’S CRABBED INTERPRETATION OF “PRIMARILY ENGAGED” IS NOT ENTITLED TO DEFERENCE A. The Chevron Test Under “Step One” of the seminal test established by Chevron, U.S.A., Inc. v. National Resources Def. Council, Inc., 467 U.S. 837 (1984), a court faced with questions of statutory interpretation looks first to whether Congress has spoken clearly and unmistakably to the precise question at hand. If the answer is clear and unambiguous from the plain words of the statute, the inquiry ends. If, however, the statute is ambiguous or leaves a gap to be filled, the court defers to the interpretation of the agency responsible for administering the law. In this circuit, the courts first consider the plain language. See Restrepo v. U.S. Attorney General, 617 F.3d 787, 792 (3d Cir. 2010); Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). If it is not dispositive, the court directly endeavor[s] to discern congressional intent by utilizing various tools of statutory construction.” Restrepo, id. These include applying traditional rules of statutory construction and review of the legislative history to ascertain the “legislative purpose.” Restrepo, 617 F.3d at 794-95. See also Shalom Pentecostal Church v. Acting Sec’y US Dept. of Homeland Security, 783 F.3d 156, 164-65 (3d Cir. 2015) (describing use of “traditional rules of statutory construction” as part of Step One inquiry). If the statute still is ambiguous, the court progresses to Step Two of Chevron, and generally will defer to the formal interpretation of the statute by the agency charged with its implementation “provided it is reasonable.” Restrepo, 617 F.3d at 792. Deference under Step Two is not, however, absolute. The statutory text still must be considered in “the larger context Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 32 of 56 21 or structure of the statute in which it is found.” Zheng v. Gonzales, 422 F.3d 98, 119 (3d Cir. 2005). An agency’s action may be rejected where it conflicts with the policies of the statute or is not “reasonable” in light of the overall design of the statute. See Si Min Cen v. Attorney General, 825 F.3d 177, 192-97 (3d Cir. 2016). Less deference is due where an agency has not been consistent over the years. See Hagans v. Comm’r of Soc. Sec., 694 F.3d 287, 300 (3d Cir. 2012).10 When an agency interpretation does not qualify for Chevron deference, the court is not required to defer to the agency’s decision under so-called Skidmore-level deference, unless it is “persuaded” the agency interpretation is correct. Skidmore v. Swift, 323 U.S. 134 (1994). B. The Plain Language and Legislative History of § 1861(e)(1) Section 1861(e)(1) describes a “hospital” as an institution that (1) is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services . . . . 42 U.S.C. § 1395x(e)(1) (emphasis added). These terms are not specifically defined elsewhere in the Act and the Secretary’s contemporaneous definitional regulations merely cross-reference § 1861(e)(1) without explication. See 42 C.F.R. §§ 482.1, 483.3(a)(1). The DAB concluded that the phrase “primarily engaged” in § 1861(e)(1) refers clearly and unmistakably to a hospital’s providing a greater quantity of inpatient services than outpatient services. This phrase, however, is at least ambiguous. The better reading – which also is consistent with the agency’s longstanding enrollment practices – is that a hospital may participate as a general acute care hospital under Medicare if it primarily provides the types of services underlined above to those patients who are inpatients.11 This Circuit has underscored 10 Under the final step, the court also takes the step two factors into account. See 617 F.3d at 795 n. 6; Genon Rema, LLC v. United States EPA, 722 F.3d 513, 522 (3d Cir. 2013). 11 This provision distinguishes the types of services provided to patients of a general acute or rehabilitation hospital from a psychiatric hospital, which are described at § 1861(f), 42 U.S.C. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 33 of 56 22 the grammar and syntax used by Congress plays a crucial role in determining the plain meaning of a statute, including the way each “clause fits within the structure of the sentence.” Mizra, MD v. Ins. Admin. of America, 800 F.3d 129, 134-35 (3d Cir. 2015). See also O’Connor v. Oakhurst Dairy, No. 16-1901, 2017 WL 957195 (1st Cir. Mar. 13, 2017) (meaning of statute turns on use of “Oxford comma”). As articulated in the proffered testimony of Wills Eye’s legislative drafting expert, William H. Clark, Jr. (AR 724-36): [CMS] incorrectly interprets the [§ 1861(e)(1)] definition as requiring that a hospital must provide, by volume, inpatient rather than outpatient services. Instead, in my opinion the correct reading of Section 1861(e) is that the term “primarily” modifies the types of services provided to those who are admitted as inpatients. In addition to conforming to the way the statute actually has been applied historically by the Secretary, Clark’s reading of the statute was based on an expert analysis of the grammar and syntax used by Congress.12 To support its view that the statutory focus was on requiring more inpatient than outpatient services, the DAB brushed aside Wills Eye’s expert drafting evidence and relied on its own perception that hospitals were oriented to provide inpatient care “50 years ago” when Medicare was enacted. (AR 28.) While the DAB described this assumption as “undisputed,” there is no basis for that statement, which contrasts markedly with the legislative history Wills Eye had called to the DAB’s attention. The 1965 Senate Report accompanying §1861(e)(1) made no mention whatsoever of providing more inpatient than outpatient services, but rather focused exclusively on the types of services a general hospital furnishes to inpatients. See S. Rep. No. 89-404, at 180 (1965) § 1395x(f) as an institution “primarily engaged in providing . . . psychiatric services for the diagnosis and treatment of . . . mentally ill persons.” 12 The ALJ parsed the grammar on her own – creating a word diagram in the process – while rejecting CMS’ grammatical arguments. (AR 12.) Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 34 of 56 23 (describing general hospital under § 1861(e)(1) as “primarily engaged in providing diagnostic and therapeutic services for medical diagnosis, treatment, and care”). See also S. Rep. No. 404 at 5 (emphasis added) (“hospital services would include all those ordinarily furnished by a hospital to its inpatients”). The Senate’s clear emphasis was on the types of services provided to inpatients, not on a need to provide more inpatient than outpatient care. The House Committee Report similarly described §1861(e)(1) as an “institution” that is “licensed” and which “is primarily engaged in providing diagnostic and therapeutic services for medical diagnoses, treatment, and care, or rehabilitation services for injured, disabled or sick persons.” H.R. Rep. No. 89-213, at 163 (1965). The legislative history is thus consistent with Wills Eye’s reading of § 1861(e)(1) as focusing on the type of care provided to inpatients, not on whether a facility provides more overnight than outpatient services – as the DAB presumed without discussion of the legislative history. C. The DAB’s Interpretation of the Act is Not Entitled to Step Two Chevron Deference The Secretary’s reading of §1861(e)(2), which is not clearly and unambiguously compelled by the statute, also is not entitled deference under Step Two of Chevron (Step Three under Restrepo) for several reasons. First, the DAB itself purported to “defer” to the interpretation by CMS Region 3. See AR 27 (“CMS’s interpretation is reasonable and permissible, and entitled to deference here”); AR 30. DAB review of a CMS reconsideration determination, however, is de novo. (AR 25.) Under this standard, the DAB acts as a “neutral decision maker” and takes a “fresh look” at the case without affording any deference to CMS.13 Further, Region 3’s underlying statutory 13 See e.g., Britthaven of Chapel Hill, DAB No. 2284, at 6 (2009) (internal citations omitted); Select Specialty Hosp.-Bloomington, Inc. v. Burwell, 757 F.3d 308, 311 (D.C. Cir. 2014) (internal quotations omitted) (under a de novo review standard, the reviewing forum “review[s] the administrative action directly, according no particular deference to the [prior decision maker).” Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 35 of 56 24 “interpretation” was not rendered through rulemaking or formal adjudication (which only occurs at the ALJ and DAB appeal levels), and therefore was not entitled to Chevron deference. See Christensen v. Harris Cty., 529 U.S. 576, 587 (2000); Aucielo Iron Works v. NLRB, 517 U.S. 781 (1996).14 Second, Chevron deference is not due where, as here, an agency takes the position that the law is unambiguous and that its interpretation is compelled by the text of the statute. See Arizona v. Thompson, 281 F.3d 248, 254 (D.C. Cir. 2002). Chevron deference must be “exercised through the eyes of one who realizes she possesses it,” and is not due where an agency has “an erroneous view” that a particular interpretation is unambiguously compelled by law. Transit. Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019, 1024, 1028-29 (D.C. Cir. 2000). Third, statutory provisions must be construed in pari materia with other provisions of the same statute, not in a vacuum. See, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-37 (2000) (“words in a statute must be read in context and with a view to their place in the overall regulatory scheme”). Where Congress uses a particular description in one provision of a statute but not another, the provisions are presumed to have different meanings. Si Min Cen v. Attorney General, 825 F.3d at 193 (internal citations omitted). Tellingly, in § 1861(ccc) of the Act, 42 U.S.C. § 1395x(ccc)(1), Congress defined “a long term care hospital” as a hospital “primarily engaged in providing inpatient services . . . to Medicare beneficiaries.” In contrast with §1861(e)(1), Congress employed clear and unambiguous language in § 1861(ccc)(1) to denote that a certain class of hospitals (long term care hospitals) must primarily provide inpatient services. See also 42 U.S.C. §§ 1395f(d) and 1395f(l)(1) (referring unambiguously to the 14 A formal adjudication includes the right to an on-record hearing before an ALJ and to cross- examine witnesses. See 5 U.S.C. § 554. In contrast, an informal adjudication includes only prompt written notice of a denial of an application. See 5 U.S.C. § 555(e). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 36 of 56 25 furnishing of “inpatient hospital services” § 1395x(ff) (referring to a partial hospitalization program services “furnished to its outpatients”) and § 1395x(g) (referring unambiguously to “outpatient occupational therapy services”). If Congress had intended the statute to distinguish between relative volumes of “inpatient services” and “outpatient services” – a term never mentioned in § 1861(e)(1) – it knew how to, and could easily have done so in plain and clear terms.15 Similarly, statutes must be construed if possible so that no provision becomes surplusage. See Zheng v. Gonzales, 422 F.3d 98, 119 (3d Cir. 2005). The DAB’s reading of §1861(e)(1), however, is incompatible with 42 U.S.C. § 1395. Entitled “Prohibition Against Any Federal Interference,” § 1395 states: Nothing in this title shall be construed to authorize any Federal officer or employee to exercise any control over the practice of medicine or the way in which medical services are provided . . . Section 1395 was intended to “encourage participating institutions. . . to make the best of modern medicine more readily to the aged,” not to create a bifurcated system. H.R. Rep. No. 89-213, at 21-22 (1965). Accord S. Rep. No. 89-404, at 24 (1965). The DAB’s interpretation places Medicare squarely in control of “the way in which medical services are provided” by dictating that, to gain access to Medicare patients (i.e., most patients 65 and older) hospitals must regress to primarily delivering care on an “inpatient” basis, which the DAB itself recognized (AR 50) is contrary to prevailing medical norms. The DAB’s interpretation would deny the “best of modern 15 In a similar vein, the DAB’s leap from the use of the vague phrase “primarily engaged” to the conclusion that Congress meant to only recognize hospitals that provide a majority of care on an inpatient basis also conflicts with the doctrine that Congress “does not alter the fundamental details of a regulatory scheme in vague terms [or] . . . hide elephants in mouse holes.” Si Min Cen, 825 F.3d at 194. It is far more reasonable to expect that so fundamental and dispositive a requirement as having to provide more inpatient than outpatient care would be clearly and plainly stated rather than merely be inferred from “vague terms.” Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 37 of 56 26 medicine” to Medicare beneficiaries, while Wills Eye’s reading of § 1861(e)(1) is consistent with actual practices and easily reconciled with § 1395. Under Chevron Step Two, courts also must “avoid interpreting statutes in a way that would render them absurd.” Min Cen, 825 F.3d at 194 (citing Republic of Iraq v. Beaty, 556 U.S. 848, 861 (2009)). An agency interpretation is deemed absurd if it “frustrate[s] the policy Congress sought to implement.” FEC v. Dem. Senatorial Campaign Comm., 454 U.S. 27, 32 (1981). See United States v. X-Citement Video, Inc., 513 U.S. 64, 70 (1994) (despite “most natural grammatic reading,” refusing to read statute in way that produces “absurd” results). Accord Public Citizen v. DOJ, 491 U.S. 440 at 452-55, 465-67. Absurd results must be avoided, even where that requires deviating from a seemingly plain and literal reading of the statute.16 But, construing the Act to allow only for the enrollment and retention17 in Medicare of hospitals whose “primary focus” is furnishing “inpatient care” yields the incongruous result of calling into question the Medicare participation of most of hospitals in the country, since 84 percent of hospitals provide a “majority” of inpatient care and 37 percent provide the same or less care on an inpatient basis as Wills Eye.18 This absurdity is heightened by the Secretary’s recent regulations pronouncing that an “inpatient” stay must cross two midnights.19 This results in an even greater proportion of hospital services being classified as “outpatient” than under the AHA data. 16 For example, in, King v. Burwell, 135 S. Ct. 2480, 2495 (2015), the Supreme Court rejected a literal reading of Affordable Care Act provisions limiting subsidies to persons obtaining marketplace coverage through “exchanges operated by a state” because applying the literal reading would be inimical to the overall intent and purpose of the statute. 17 The same standards that apply to prospective enrollments apply equally to terminations upon survey. See 42 C.F.R. § 424.535(a)(1). 18 The updated AHLA survey data filed in support of Wills Eye’s Reopening Petition (Dkt. No. 11-2) demonstrates that only 931 out of 5,860 hospitals provide more inpatient than outpatient services, and also further demonstrates that Wills Eye’s inpatient service complement compares favorably with those of other specialized eye and ear hospitals. 19 42 C.F.R. § 412.3(d)(3). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 38 of 56 27 Finally, an agency interpretation also may not be sustained under Chevron if it is otherwise arbitrary and capricious or an abuse of discretion. See Min Cen, 825 F.3d at 187; 5 U.S.C. § 706(2). The DAB’s “case-by-case” approach for identifying hospitals is inherently arbitrary and capricious because it lacks any metes or bounds, and posits an amorphous and unworkable standard for defining a “hospital.” See DAB Dec. at 22 (the “definition cannot be satisfied when treatment of a significant number of inpatients is taking place” without defining “a significant number”). The DAB acknowledged that its case-by-case approach “offer[s] less clarity and predictability” than a regulatory standard. (AR 44.)20 This unworkably vague “significant number” standard essentially presumes that CMS will identify a hospital primarily focused on inpatient care “when it sees one.”21 While this approach may be suitable for identifying pornography, it is arbitrary and capricious when applied to what is supposed to be a uniform and orderly regime of Medicare provider enrollments. Additionally, the DAB presumed that hospitals “providing a small amount of inpatient care” (AR 39) would simply participate in Medicare as ASCs, at lower cost to the government. That critical 20 The DAB also apparently attributed some significance to the fact that the Board had operated an ambulatory surgery center (ASC) at the 840 Walnut Street location of Wills Eye Hospital before the space was reconfigured and before Wills Eye applied to enroll the new facility as a hospital. First, this “rationale” is not contained in the CMS reconsideration determination, but was a prohibited post hoc rationale of agency counsel on appeal. Moreover, to so conclude, the DAB inaccurately characterized this case as one where Wills Eye “was previously a long- functioning ASC.” (AR 49.) This description is grossly inaccurate. See Declaration of Michael Allen, Dkt. 11-2 at ¶¶ 5-13. In any event, nothing in the regulations refers to a history by a hospital (let alone a mere affiliate) operating an ASC without inpatient beds at the same address. The DAB’s “case-specific” decision fails to explicate how, why or when the prior operation of an ASC should preclude hospital enrollment, spawning even more confusion about the proper application of § 1861(e)(1) than the vague “inpatient business” standard alone. 21 See e.g.; http://www.news-leader.com/story/news/health/2016/08/04/how-springfield- missouri-lost-hospital/87358354. (CMS’ “know it when you see it” approach prompted the leaders of the Missouri Hospital Association and the National Rural Health Association (NRHA) to condemn CMS’ definition as “too vague,” and “leaving small hospitals in the dark.”) The lack of clarity is even worse because the “primarily inpatient” test has been a moving target, even within the DAB. See e.g., Freedom Pain Hosp., DAB No. CR4530 (2016) (using a different numerical test than was applied to Wills Eye). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 39 of 56 28 presumption was fundamentally flawed. Under 42 C.F.R. 416.2, as applied by CMS, a hospital with any care exceeding 24 hours cannot participate in Medicare as an ASC, while only those “primarily” providing inpatient care can be hospitals – creating a vast gap in Medicare participation. For all of the above reasons, the Secretary’s comparative volumetric “interpretation of § 1861(e)(1) is not entitled to Chevron deference. For the same reasons, the DAB’s decision is not “persuasive,” and therefore is not entitled even to a lesser degree of deference under Skidmore v. Swift & Co., 323 U.S. at 140. See Hagans v. Comm’r of Soc. Sec., 694 F.3d 287, 294-95 (3d Cir. 2012). II. THE SECRETARY WAS NOT ENTITLED TO APPLY A COMPARATIVE VOLUME TEST WITHOUT AMENDING THE REGULATIONS OR ISSUING CLEAR ADVANCE NOTICE OF THE INTENT TO APPLY THAT TEST Even if the Secretary could validly construe “primarily engaged” as used in § 1861(e)(1) as requiring a greater volume of inpatient than outpatient care, CMS still would be required to adopt that standard in the first instance through notice and comment rulemaking, which it failed to do. The DAB’s alternative conclusions that this standard could validly be inferred from the existing general rules, or applied in the first instance via case-by-case adjudication were legal error, as discussed next. A. The APA and the Medicare Act Independently Require Notice and Comment Rulemaking for Changes in Medicare Enrollment Policies (1) In general, the APA requires notice and comment rulemaking as a condition of making substantive changes to regulations. See 5 U.S.C. § 553. The DAB excused the need for rulemaking, in part, by labeling CMS’ adoption of a relative volume test as a mere interpretation of the phrase “primarily engaged” for which rulemaking is excused under Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 40 of 56 29 § 553(b)(A) and § 1871(c)(1)(B). The DAB’s effort to label the application of a new, threshold requirement for Medicare participation at interpretative was incorrect. However they might be labeled, agency policies for implementing statutes or rules are considered substantive, and subject to notice and comment rulemaking, where the agency is “arbitrarily” interpreting a “general statutory term” through a specific approach that represents one of several competing alternatives, and is not dictated by the statute itself. See Cath. Health Initiatives v. Sebelius, 617 F.3d 490, 495-95 (D.C. Cir. 2010) (adoption of 10 percent standard for implementing a more general rule is considered substantive standard, and must be adopted through rulemaking); Hoctor v. U.S. Dept. of Agric., 82 F.3d 165 (7th Cir. 1996) (application of particular height restriction under a regulation imposing more general requirements is substantive and requires formal rulemaking to amend the rule). See also Encino Motorcars, LLC v. Navorro, 136 S. Ct. 2117, 2125 (2016) (Labor Department must utilize rulemaking to prescribe whether a service manager is “primarily engaged in selling or servicing automobiles, trucks, or farming implements”). As used in this sense, “arbitrary” does not mean “arbitrary and capricious,” but refers to choosing a particular standard for implementing a rule or statute among a variety of possible alternatives. See CHI, 617 F.3d at 495; Clarian Health W., LLC v. Burwell, No. 14-CV-0339 (KBJ), 2016 WL 4506969, at *18 (D.D.C. Aug. 26, 2016). In this case, CMS employed an “arbitrary” numerical formulation for specifically defining “primarily engaged” in furnishing inpatient care based on a ratio of inpatient days to outpatient procedures. But there are a variety of ways for assessing whether there is a primary focus on providing inpatient care, as even the DAB’s Decision recognized. For example, a rule specifically implementing a requirement to be primarily engaged in providing inpatient compared with outpatient care might example (and without limitation) be based for on: inpatient admissions to outpatient procedures; inpatient days Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 41 of 56 30 to outpatient procedures; inpatient hours to outpatient hours; capital investment related to inpatient versus outpatient services; billed charges related to inpatient versus outpatient care; square footage used in connection with each category of services; complexity and sophistication of services. Indeed, a different case decided shortly after Wills Eye by a different ALJ used a different formula for this comparison (admissions divided by procedure) that these ALJ below. See Freedom Pain Hosp. n. 21 supra. These all are the kinds of choices properly vetted through notice and comment rulemaking. (2) In this case, the Medicare Act independently imposes notice and comment rulemaking under provisions even more stringent than under the APA’s with respect to Medicare enrollment policies. First, under 42 U.S.C. § 1395cc(b)(2), Congress provided that “[t]he Secretary: “may refuse to enter into [a provider] agreement under this section” or refuse to renew enrollment for failing to comply substantially with reasons “upon notice to the provider and the public as may be specified in regulations.” (Emphasis added). Additionally, Congress provided in 42 U.S.C. § 1395hh(a)(1) that “[t]he Secretary shall prescribe such regulations as may be necessary to carry out the administration of the insurance programs under this subchapter.” Under section (a)(2), Congress expressly mandated that: no rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing . . . the eligibility of . . . organizations to furnish . . . services [under Medicare] shall take effect unless it is promulgated by the Secretary by regulation. § 1871(a)(2), 42 U.S.C. § 1395hh(a)(2) (emphasis added). This provision also reverses the more general rule that “statements of policy” are exempted from formal rulemaking requirements, see Chao v. Rothermal, 327 F.3d 223, 227 (3d Cir. 2003), making § 1871 more stringent than the APA. These provisions of the Medicare statute independently precluded Region 3 from applying a comparative volume test as a precondition to Wills Eye’s Medicare participation on Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 42 of 56 31 an ad hoc basis. The House Report accompanying § 1871 explained that Congress was concerned about the Secretary’s increased issuance of important regulatory requirements through informal means, and specifically mandated formal rulemaking to ensure specifically that Medicare enrollment policy changes are vetted with “widespread discussion and analysis” by “interested parties.” Congress also noted to avoid situations where “affected parties” impacted by “such policies” do not “know [ ] of their existence until they are subject to them.” H.R. Rep. No. 100-391 to accompany the Omnibus Budget Reconciliation Act of 1987, 100th Cong. at 430 (1987). See Yale-New Haven Hosp. v. Leavitt, 470 F.3d 71, 75 (2d Cir. 2006) (discussing legislative intent). What Congress sought to prevent is exactly what happened here. By applying a relative service volume approach to deny its enrollment without having first vetted and adopted that approach through rulemaking, CMS held Wills Eye to a new enrollment standard that was not evident from the rules and only was crystalized when Wills Eye “was subject to it.” CMS’ modifying the enrollment standards in this ad hoc fashion also circumvented the process Congress mandated for ensuring that alterations of substantive Medicare enrollment requirements and policies are vetted first through public discussion with interested parties before they are adopted. The adoption of the ratio test without rulemaking was particularly egregious. The Secretary had considered amending the rules to include the type of threshold test applied by Region 3 in 2006, but thought the better of it. The Deficit Reduction Act of 2005, required the Secretary to report to Congress about concerns raised by a proliferation of physician-owned specialty hospitals. In the Final Report to Congress, (reproduced at AR 1020-1047) the Secretary explained that he had considered addressing this concern by enacting a new regulation that would have specifically “defined” a hospital for Medicare purposes as one providing a Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 43 of 56 32 greater volume of inpatient than outpatient services. (AR 1039.) But after vetting this potential approach through meetings with stakeholders (AR 965), then Secretary Leavitt advised Congress through both Interim (AR 972) and Final Reports that HHS had decided against adopting a regulation that would define a hospital as “primarily engaged in providing services to inpatients” because CMS was unable to: Identify any quantitative method, such as percentage of services or ratio of inpatient-to-outpatient services that could be used without disqualifying both community hospitals and specialty hospitals. (AR 1039.) In declining to adopt a comparative volume or ratio test, the Secretary credited the fact that, due to “advances and improvements in medical technology, “many” procedures that previously could be performed on an inpatient basis only can now be safely performed on an outpatient basis.” (AR 1039.) The Secretary also observed that small hospitals, community hospitals, specialty hospitals and rural hospitals “might not meet new requirements . . . such as [a] percentage of services or ratio of inpatient-to-outpatient services,” which counseled against adopting this definition. In declining to so define hospitals the Secretary advised Congress that he had decided not to make “changes to the enrollment process.” (AR 1040.) In the present case, Region 3 has adopted the very approach the Secretary abandoned in 2006 after vetting the likely consequences defining “primarily engaged” based on some greater ratio or percentage of inpatient care than outpatient care. Since 42 U.S.C. §§ 1395cc(b)(2) and 1395hh(a)(2) constrain the Secretary to specify any such requirements through regulations, Region 3 acted beyond its authority in applying this standard to Wills Eye on an ad hoc basis. B. The Enrollment Test Applied to Wills Eye Plainly Represented a Change in the Prevailing Policies The DAB contended that § 1871(a) did not apply because the standard Region 3 applied to Wills Eye did not represent a “change” the programmatic requirements. See AR 10, 39. Likewise, CMS had insisted before the DAB that the new ratio test was “not a change in Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 44 of 56 33 standards” or “inconsistent” with prevailing practices. (AR 8, 391, 577.) The record, however, leaves no doubt that CMS’ decision to reject Wills Eye’s application to provide Medicare services based on its inpatient to outpatient service ratio represented exactly such a change. Neither the statute, the “definitional” regulations at 42 C.F.R. §§ 482.1, 488.3(a)(1), nor the 29 published conditions of participation (COPs), 42 C.F.R. § 488.11 et seq., include a comparative volume test for hospital enrollments. The “definitional” regulations (42 C.F.R. §§ 482.1 and 488.3(a)(1)) merely cross-reference § 1861(e) of the act, without more. No mention is made about relative volumes of inpatient and outpatient care. Further, § 482.1 states that hospitals “must meet certain specified requirements.” The regulations also expressly recognize Medicare participation by hospitals of four beds or less, irrespective of census or occupancy,22 which contrasts sharply with CMS’ argument that enrollment should be denied because Wills “only” has four inpatients beds. See AR 1049-50; DAB Arg. Tr., AR 1056 et seq. at pages 32-33. Nor do the regulations anywhere indicate that hospital status is affected by whether the prospective hospital applicant (or any affiliate) previously operated an ASC at the same street address. Clearly, neither the state survey agency nor the Medicare intermediary had any sense that a ratio test applied, since DOH found all conditions of participation had been satisfied without exception, and Novitas endorsed Wills Eye’s enrollment to CMS without question or exception. That a ratio-based test represented a “change” from the prevailing enrollment policies also is obvious from the Secretary’s own 2006 Final Report to Congress, which accompanied the agency’s decision not to amend the rules to add the problematic relative volume test. The Secretary advised Congress, that “because” HHS was declining to incorporate a ratio or a volumetric test to define a hospital for Medicare purposes, it was not adopting any new 22 See supra at 8 & n. 2, and 36 infra. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 45 of 56 34 requirements making any “changes to the enrollment process.” (AR 966, 1040, 1046.) The DAB’s position that a relative volume screen is not a change in the enrollment requirements is undercut by the Secretary’s own Reports to Congress. That CMS has applied the same new requirements and enrollment process “changes” in the absence of a regulation does not alter the fact that the comparative volume test represents a “change” from prevailing enrollment rules and policies. As such, CMS was prohibited from adopting this new screen without prior rulemaking. It also is difficult to fathom how a standard requiring that some majority of services must be provided on an inpatient basis is not a “change” in enrollment standards when 84 percent of hospitals enrolled in Medicare could not satisfy a simple majority of inpatient test, and nearly 40 percent would fail a 17 percent inpatient test (the percentage ascribed to Wills). See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 at 211, 214 (1998) (reviewing the “past administrative practice” to determine whether the agency has changed its regulatory interpretation). Any possible doubt that the standards applied to Wills Eye by CMS and the DAB represented a change of course on hospital enrollments was eviscerated by the consternation of the State Survey Agency about Region 3’s never having previously taken this approach, and by Van Wieren’s own statement to DOH that he would today have treated differently another similar hospital he demeaned as a “glorified ASC.” C. The Ratio Test Was Not Clearly Ascertainable From the Existing Regulations The DAB alternatively concluded that applying a comparative volumes test for Wills Eye was proper because such a test could be inferred from the more general terms of the statute and existing regulations. See AR 40; AR 48 (the fact that this standard is “not spelled out … cannot excuse a facility for failing to satisfy [a statutory definition].”) That, however, is not the law. It is inappropriate to require compliance with a standard “which did not exist when [an application] was filed, [and] when in fact the application was sufficient to establish eligibility Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 46 of 56 35 under standards [on the books] at the time it was received.” See Caring Hearts Pers. Home Servs., Inc. v. Burwell, 824 F.3d 968, 971 (10th Cir. 2016) (Gorsuch, J) (quoting Danti v. Lewis, 312 F.2d 345, 349 (D.C. Cir. 1962)).23 An agency’s particularized interpretation of a statute or regulation may not be applied to the detriment of a regulated party before that position is “clearly ascertainable,” so that a regulated party acting in good faith will have advance notice of that interpretation before being penalized for not satisfying it. See Gen. Elec. Co. v. EPA, 53 F.3d 1324, 1329 (D.C. Cir. 1995); Satellite Broadcasting Co., Inc. v. FCC, 824 F.2d 1, 3-4 (D.C. Cir. 1987); Diamond Roofing Co. v. OSHRC, 528 F.2d 645, 649 (5th Cir. 1976). A controlling standard ordinarily must be “clearly ascertainable” from the face of the regulation itself. See Hosp. of Univ. of Pa. v. Sebelius, 847 F. Supp. 2d 125 (D.D.C. 2012).24 Barring clear notice from the face of a regulation, the Secretary must at least provide notice, in advance of applying a standard, through the issuance of clear and explicit written subregulatory guidance. Hosp. of Univ. of Pa., supra. In this case, the clearly ascertainable notice rule is buttressed by 42 U.S.C. § 1395hh(c). That provision requires that even when notice and comment is not required, the Secretary still “shall publish in the Federal Register, not less frequently than every 3 months, a list of all manual instructions, interpretative rules, statements of policy, and guidelines of general applicability which—(A) are promulgated to carry out this 23 In Caring Hearts, CMS applied a refined definition of whether a person using a wheelchair was considered “homebound” for purposes of qualifying for skilled home care services. The standard had merely been alluded to in earlier litigation positions, but not formally implemented until adopted by regulation after the dates of the services at issue. 24 In Hosp. of the Univ. of Pa., CMS claimed that providers should have been on notice that a duplicate “shadow bill” must be “timely filed” with the hospital’s fiscal intermediary to obtain credit for graduate medical education funding for patients enrolled in Medicare Advantage plans. The district court rejected CMS’ argument that this putative requirement could be inferred from the existing regulations because they did not “actually reference” the agency’s specific expectation. As relief, the court ordered CMS to allow the claims that would have been recognized but for the illegitimate, retroactive application of the timely filing requirement to the claims at issue. See 847 F.Supp.2d at 135-136. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 47 of 56 36 subchapter, but (B) are not published pursuant to subsection (a)(1) of this section and have not been previously published in a list under this subsection.” Wills Eye had no prior notice of the need to satisfy a putative ratio test before being denied enrollment privileges based on its failure to satisfy that test. The generalized definition in § 1861(e) contains no ascertainable means for implementing the undefined “primarily engaged” standard let alone mention a comparison of inpatient to outpatient capacity. As noted the existing “definitional” regulations merely cross-reference the § 1861(e)(1) without any explication, other than to differentiate the types of services provided by general hospitals from those provided by psychiatric hospitals. Indeed, the existing rules explicitly recognized enrollment of hospitals of 4 beds or less. CMS even stressed in existing guidance relating to the LSC that it does “not consider the number of inpatients” in determining whether an entity is a hospital, but focuses instead on the nature of the services (sleeping accommodations, medical treatment or services on a 24-hour basis) and patients. See Survey and Certification Memorandum to SA Directors, S&C-11-05-LSC, at 2-3 (Feb. 18, 2011). Certainly, Wills Eye had no reason to expect that such a threshold test would apply given that no such test had been applied to thousands of prior hospital enrollments (including by many small, outpatient-intensive specialty hospitals), and given that the Secretary advised Congress in 2006 that he was not “changing” the rules to adopt a ratio-based definition because of the detrimental impact it would have on the program. Nor was “ascertainable certainty” provided by obiter dicta in prior DAB decisions which “held” only that hospitals providing “no” inpatient services at all cannot satisfy § 1861(e)(1). The DAB’s very suggestion that the threshold test applied to Wills Eye should somehow have been apparent is undermined by its simultaneous recognition that “this case requires us to venture further than we previously had to go in evaluating whether a particular institute is [primarily] engaged” in inpatient care. (AR 34.) Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 48 of 56 37 Having no clearly ascertainable notice of the obligation to provide some greater volume of or “focus” on inpatient than outpatient care under the existing rules, Wills Eye expended well over $6 million to renovate the physical plant at 840 Walnut Street to meet Life Safety Codes for hospitals in good faith, based on prevailing regulatory standards. As set forth at paragraphs 11- 12 and 14-18 of the Allen Declaration (Dkt. 11-2), Wills Eye spent millions of dollars to construct and enroll a hospital facility in good faith, and in reliance on the existing rules and hospital enrollment standards, including standards that expressly recognize the enrollment of, and required satisfaction of LSC requirements as a condition of Medicare participation for 4 bed hospitals. Had CMS actually promulgated a rule adopting a comparative volume test (or declaring the prior operation at a site of an ASC) as a factor, Wills Eye may have structured the hospital or its operations differently, or reconsidered whether to embark on this costly reconstruction project. Under the law, standards that merely can be inferred from existing regulations cannot be invoked against Wills Eye. Because Wills Eye was duly licensed and satisfied all of the prevailing hospital CoPs, and because no regulation requires hospitals to provide a majority of care to inpatients in order to enroll in Medicare, Wills Eye’s Medicare enrollment as a hospital was improperly denied. D. The Application of a Volumetric Test to Wills Eye Was Not Saved By the Use of Adjudication Citing Int’l Rehab Servs. v. Sebelius, 688 F.3d 994 (9th Cir. 2012) (involving whether particular medical services met the definition of “medically necessary”) the DAB alternatively disavowed the need for the Secretary to proceed by rulemaking based on the assumption that the Secretary was free to interpret the statute as incorporating a relative volume test though “case- by-case adjudication.” (AR 36.) That conclusion was legally erroneous for several reasons. Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 49 of 56 38 An agency generally has discretion to interpret a statute by regulation or individual adjudication. SEC v. Chenery Corp., 332 U.S. 194, 203 (1947).25 Here, however, CMS was statutorily prohibited from denying Wills Eye’s enrollment based on the application of a new provider enrollment policy established via adjudication because rulemaking is explicitly required under the Medicare Act. That the Secretary has attempted to use adjudication to alter existing policy does not negate the fact that CMS is “changing” an enrollment policy, which, under § 1871, requires rulemaking and may not be accomplished through on a case-by-case adjudication. Indeed, the DAB acknowledged that a case-by-case approach would “offer less clarity and predictability” than a regulatory standard. (AR 44.) This is why Congress did not want informal individualized changes to prevailing enrollment policies. Even apart from § 1871, because adjudication ordinarily is given retroactive effect, it is not considered an appropriate means for statutory interpretation where an “agency decision [ ] . . . substitutes[s] . . . new law for old law that was reasonably clear.” Qwest Servs. Corp. v. FCC, 509 F.3d 531, 539 (D.C. Cir. 2007). Agencies have flexibility to interpret law by adjudication only where adjudication is not being used to “announce[ ] a new [rule],” but “merely” embodies “new applications of existing law, clarifications, and additions.” Qwest Servs. Corp., 509 F.3d at 535, 539 (quoting AT&T v. FCC, 454 F.3d 329, 332 (D.C. Cir. 2006).26 A statutory interpretation rendered in an adjudication, even if reasonable, may not be 25 The discretion is not itself untrammeled. Even aside from the requirements to utilize rulemaking in the Medicare Act, when an the agency has the “ability to make new law prospectively through the exercise of rulemaking powers,” there is “less reason to rely on ad hoc adjudication to formulate new standards of conduct,” and a presumption that the setting of new controlling standards will “be performed as much as possible through the promulgation of rules.” SEC v. Chenery Corp., 332 U.S. at 202. See also Morton v. Ruiz, 415 U.S. 199, 232 (1974) (refusing to apply ad hoc statutory definition used for determining eligibility for welfare benefits that altered prior practice where the BIA declined to use formal rulemaking). 26 See also Bowen, 484 U.S. at 211, 214; (“Adjudication deals with what the law was; rulemaking deals with what the law will be”); Pub. Serv. Co. v. FERC, 91 F.3d 1478 at 1488, 1490 (D.C.Cir. 1996); Caring Hearts Pers. Home Servs. Inc., 824 F.3d 972 (rejecting case-by- Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 50 of 56 39 given retroactive effect where doing so would “attach[ ] new legal consequences to events completed before” the interpretation had been rendered by “tak[ing] away or impairing] vested rights under existing laws, or imposes obligations” or “new duties] . . . in respect to transactions or considerations already past.” See Velasquez-Garcia v. Holder, 760 F.3d 571 (7th Cir. 2014) see also AT&T, 454 F.3d at 334 (adjudicatory interpretations cannot be used to upset “Settled expectations”). But that is exactly what happened here. The relative volume test was sprung on Wills Eye after the fact, and after it relied in good faith on the prevailing rules, including regulations explicitly recognizing the enrollment of “four bed hospitals” – in extensively renovating and applying for hospital licensure for the 840 Walnut Street site at great expense. As the colloquy between Van Wieren and DOH makes clear, Wills Eye had no way of seeing this coming. Consequently, even if CMS’ application of a relative service volume test could be applied to future hospital applicants, principles of law limiting the retroactive effect of adjudicative interpretations prevent the application of this new standard to Wills Eye. III. THE SECRETARY’S INTERPRETATION IS ARBITRARY AND CAPRICIOUS AND UNCONSTITUTIONAL BECAUSE IT TREATS SIMILARLY SITUATED REGULATED PARTIES IN A DISPARATE MANNER WITHOUT JUSTIFYING THE DISCRIMINATORY TREATMENT A. The Secretary’s Disparate Treatment of Wills Eye Compared With Other Hospital Was Arbitrary and Capricious and Void Under the APA An agency’s implementation of a statute is deemed “arbitrary and capricious” under 5 U.S.C. § 706(2)(A) when it results in similarly situated regulated parties being treated differently without a valid justification being given. See e.g., Bush-’92 Primary Comm. Inc. v. FEC, 104 F.3d 448, 453 (D.C. Cir. 1997). Discriminatory treatment of regulated parties is invalid under case interpretation of the statute itself to substitute new standard that “is far from obvious” without “the added gloss” of the most recent interpretation). Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 51 of 56 40 the APA, even if the agency’s underlying interpretation of a statute would be considered reasonable under Chevron absent being applied in a discriminatory fashion. Id. See also Christ The King Manor, Inc. v. HHS, 730 F3d 291, 304-305 (3d Cir. 2003) (recognizing that whether application of law is arbitrary and capricious is separate from whether interpretation of statute is reasonable). Further, “[t]he requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. An agency may not, for example, depart from a prior policy sub silentio or simply disregard rules that are still on the books.” FCC v. Fox Telev. Stations, Inc., 556 U.S. 502, 515 (2009). When satisfaction of existing criteria for enrolling in Medicare as a hospital are no longer acceptable because a comparative volume test also must be satisfied, the Secretary must not only give advance notice of that intention, but must explain why it has now decided to apply a narrower standard than it had before. The denial of Wills Eye’s application for Medicare participation must be set aside as arbitrary and capricious because the Final Decision treats Wills Eye differently than other similarly situated facilities, and does so without offering any justification, let alone a reasonable explanation, for the change in course. As noted, rather than providing a valid explanation or justification for implementing the statute differently in Wills Eye’s case than for thousands of other hospitals enrolled in Medicare, the Secretary simply denied treating Wills Eye differently than other hospitals – despite the unrebutted record evidence to the contrary. The denial was demonstrably facially false, as discussed above. Until Wills Eye’s, Region 3 had routinely enrolled 10 or 12 bed facilities with inpatient to outpatient service ratios comparable to, or worse than, Wills Eye’s. Emails from the State Survey Agency to Van Wieren confirmed that there was no “difference” between Wills [Eye] and the other small capacity hospitals that have been previously approved by CMS.” Van Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 52 of 56 41 Wieren essentially admitted CMS Region 3 was applying a new standard to Wills Eye, boasting in an email to the State Survey Agency that “if a [Redacted Medicare Hospital which he considered similar] came along now, we would really scrutinize their business plan.” The routine practice of enrolling substantially equivalent hospitals throughout the Medicare program, despite a “primary outpatient, was irrefutably documented by the AHA and DOH data filed in support of reconsideration. The Secretary’s disparate treatment of Wills Eye is arbitrary and capricious and therefore invalid under 5 U.S.C. § 706. The Secretary’s failure to “display awareness” that the agency was “changing its position” from its longstanding enrollment policies and practices in itself amounted to an arbitrary failure to acknowledge and satisfactorily justify its change of course. See Fox Telev. Stations, 556 U.S. at 516; see also Dialysis Patient Citizens v. Burwell, 2017 U.S. Dist. LEXIS 10145, at *17-18 (E.D. Tex. Jan. 25, 2017) (HHS must provide “reasoned explanation” when it is departing from a “long accepted . . . practice of” allowing charitable premium assistance). B. CMS Violated Wills Eye’s Right to Equal Protection Whether discriminatory agency action is arbitrary and capricious under the APA or violates the equal protection clause because it lacks a rational basis are analytically similar, but “separate question[s].” Chiropractic Am. v. Lavecchia, 180 F.3d 99, 106 (3d Cir. 1999); F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 516, (2009). Equal protection “keeps governmental decision makers from treating differently persons who are in all relevant respects alike.” Nordlinger v. Hahn, 505 U.S. 1, 10 (1992); FCC v. Beach Commc’n, 508 U.S. 307, 313- 14 (1993). Selective discriminatory enforcement of a facially valid law is unconstitutional under the Equal Protection Clause of the Fourteenth Amendment.” See Jewish Home of E. Pa. v. CMS, 693 F.3d 359, 363 (3d Cir. 2012). “As the Supreme Court as held, a public official may Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 53 of 56 42 engage in invidious discrimination among persons or groups either by discriminatory use of a statute providing a system of broad discretionary licensing power or . . . by selective enforcement of an extremely broad prohibitory statute.” Holder v. City of Allentown, 987 F.2d 188, 197-99 (3d Cir. 1993). A plaintiff may pursue claims under the equal protection clause under a “class of one” theory by showing that a state actor treated him differently from similarly situated individuals without a rational basis for the different treatment, without the need to show that he was a member of a “protected class.” See Village of Willowbrook v. Olech, 528 U.S. 562, 564 (2000); PG Publ’g Co. v. Aichele, 705 F.3d 91, 114 (3d Cir. 2013). The Secretary’s refusal to enroll Wills Eye as a hospital in the Medicare program comprises invidious discrimination against Wills Eye. As Region 3 had not previously employed the inpatient days to outpatient procedures test against hospitals other than Wills Eye, Plaintiff validly asserted an unconstitutional discrimination claim under the “class of one” rule. Agency action reviewed under the equal protection clause must be sustained or overturned based solely on the rationale actually provided by the agency. The Secretary has offered no rational basis for discriminating against Wills Eye, and has not even purported to justify treating Wills Eye’s Medicare enrollment different than its forebearers. The Secretary’s unjustful discriminatory treatment of Wills Eye violated Wills Eye’s rights under the Equal Protection Clause of the Fifth Amendment to the United States Constitution. CONCLUSION For the reasons stated, Plaintiff, Wills Eye, respectfully requests that this court enter judgment in its favor as follows, and issue an Order: 1. reversing the Secretary’s decision that Wills Eye did not satisfy the requirements to participate as a hospital in the Medicare program; 2. requiring the Secretary to further remand this matter to the Board with instructions to further remand to CMS to enroll Wills Eye as a Medicare hospital effective August 26, 2013, (the date of the survey on which it was Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 54 of 56 43 found to have satisfied all of the published Medicare conditions of participation); 3. requiring the Secretary or the intermediary to or reimburse Wills Eye as a hospital, with interest, for the Medicare services it provided from the date of the survey, August 26, 2013 through the present without regard to any timely filing rules; 4. awarding relief pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202, that the Decision is contrary to law and that the Secretary must enroll Wills Eye as a Medicare hospital, retroactive to the date of its hospital survey, and reprocess and pay ASC claims from that date forward as hospital claims. 5. awarding Wills Eye its costs and reasonable attorneys’ fees to the extent permitted by law; and 6. awarding such other and further relief the court may deem just and appropriate. Respectfully submitted, s/ Mark H. Gallant Mark H. Gallant (PA 51767) Gregory M. Fliszar (PA 87816) Robert A. Chu (PA 307386) COZEN O’CONNOR One Liberty Place 1650 Market Street, Suite 2800 Philadelphia, PA 19103 Phone: (215) 665-2000 Dated: March 20, 2017 Facsimile: (215) 665-2013 mgallant@cozen.com gfliszar@cozen.com rchu@cozen.com Attorneys for Plaintiff, Trust Under the Will of James Wills, City of Philadelphia, Acting by the Board of Directors of City Trusts, Trustee, d/b/a Wills Eye Hospital LEGAL\29181539\28 13436.0002.000/344208.000 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 55 of 56 CERTIFICATE OF SERVICE I, Mark H. Gallant, hereby certify that I caused a true and correct copy of the foregoing Plaintiff’s Motion for Summary Judgment, Plaintiff’s Memorandum of Points and Authorities in Support of Motion for Summary Judgment, and Proposed Order to be served via electronic filing, available for viewing and downloading from the Court’s ECF system, upon the following: Peter T. Wechsler U.S. Department of Justice Civil Division, Federal Programs Branch 20 Massachusetts Ave NW Room 7111 Washington, D.C. 20530 peter.wechsler@usdoj.gov Paul W. Kaufman U.S. Department of Justice 615 Chestnut Street Suite 1250 Philadelphia, PA 19106 paul.kaufman2@usdoj.gov /s/ Mark H. Gallant Mark H. Gallant, Esquire Date: March 20, 2017 Case 2:16-cv-06615-TON Document 20 Filed 03/20/17 Page 56 of 56 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA TRUST UNDER THE WILL OF JAMES WILLS, CITY OF PHILADELPHIA, ACTING BY THE BOARD OF DIRECTORS OF CITY TRUSTS, TRUSTEE, d/b/a WILLS EYE HOSPITAL, Plaintiff, v. THOMAS PRICE, M.D. Secretary, United States Department of Health & Human Services, Defendant. : : : : : : : : : : : : : : : : : CIVIL ACTION NO. 16-6615 PROPOSED ORDER Upon consideration of the parties’ cross-motions for summary judgment, the memoranda filed by the parties with respect to the motions, the decision below and the undisputed evidence in the administrative record, it is hereby: ORDERED that Plaintiff’s motion for summary judgment is GRANTED; and it is FURTHER ORDERED that Defendant’s motion for summary judgment is DENIED; and it is FURTHER ORDEREED that this matter is remanded to the Health and Human Services (“HHS”) Department Appeals Board, with instructions to further remand the matter to the Centers for Medicare & Medicaid Services (“CMS”) with instructions to enroll Wills Eye Hospital in Medicare as a hospital, effective, August 26, 2013 (the date of the survey on which it was found to have satisfied all of the published Medicare conditions of participations); and to further require CMS to promptly instruct the appropriate Medicare Administrative Contractor to Case 2:16-cv-06615-TON Document 20-1 Filed 03/20/17 Page 1 of 2 2 pay Wills Eye Hospital the difference between the fees it has been paid since August 26, 2013 as ambulatory surgery center, (“ASC”) and the Medicare rates Wills Eye should have been paid as a hospital, with interest, without regard to any timely filing rules; and it is FURTHER ORDERED that Wills Eye Hospital be awarded its costs, and its reasonable attorneys’ fees under the Equal Access to Justice Act, 28 U.S.C. § 2412. Dated:_______________ __________________________ THOMAS N. O’NEILL, JR. United States District Judge Case 2:16-cv-06615-TON Document 20-1 Filed 03/20/17 Page 2 of 2