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Alexander v. Cochran

United States District Court, D. Connecticut

February 8, 2017

CHRISTINA ALEXANDER, et al., Plaintiffs,
v.
NORRIS COCHRAN, Acting Secretary of Health and Human Services, Defendant.

          MEMORANDUM OF DECISION

          Michael P. Shea, U.S.D.J.

         I. INTRODUCTION

         This putative class action concerns the rights of Medicare beneficiaries placed on “observation status” rather than being admitted as “inpatients” while receiving treatment in a hospital. For the plaintiffs and other Medicare beneficiaries they seek to represent, the distinction is a significant one. Identical services provided to patients on observation status are covered under Medicare Part B, instead of Part A, and are therefore reimbursed at a lower rate. Allegedly, the plaintiffs lost thousands of dollars in coverage-of both hospital services and subsequent skilled nursing care-as a result of being placed on observation status during their hospital stays.

         According to the plaintiffs, while official Medicare policy leaves the inpatient vs. observation decision to the discretion of individual doctors, in practice, hospitals apply fixed criteria set by Defendant Secretary of the Department of Health and Human Services (the “Secretary”) through the Centers for Medicaid and Medicare Services (“CMS”). The plaintiffs claim that CMS pressures hospitals to place more patients in observation status and to make their patient status determinations using computer algorithms known as “commercial screening tools.” They also claim that once a Medicare beneficiary is placed in observation status, the beneficiary does not receive sufficient notice and does not have an opportunity to seek review of the decision.

         The case is before this Court for a second time. The Court of Appeals reversed in part the Court's earlier dismissal of the multi-count complaint, and remanded the case for further consideration as to the due process claims only. Barrows v. Burwell, 777 F.3d 106 (2d Cir. 2015). A claim under the Due Process Clause of the Fifth Amendment has three elements: “a plaintiff must show that: (1) state action (2) deprived him or her of liberty or property (3) without due process of law.” Id. at 113 (citing Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59 (1999)). As for the second element, the Court of Appeals held that the plaintiffs had sufficiently alleged a property interest in being admitted as inpatients and directed the District Court to oversee a limited period of discovery on that issue and then address summary judgment. Id. at 115-16. On the first and third elements, the Court of Appeals directed the Court to consider whether dismissal would be appropriate based on the allegations in the complaint. Id. Accordingly, the parties conducted limited discovery and the Secretary filed a motion for summary judgment with a renewed motion to dismiss. Plaintiffs filed a cross-motion for summary judgment.

         For the reasons detailed below, the Court DENIES the Secretary's Motion for Summary Judgment (ECF No. 160), DENIES Plaintiffs' Motion for Summary Judgment (ECF No. 166), and GRANTS in part and DENIES in part the Secretary's Motion to Dismiss (ECF No. 160). As a preliminary matter, all plaintiffs have standing and the case is not moot. Significant factual disputes preclude summary judgment on the property interest question, in particular about how the final inpatient status determination is made within hospitals, and to what extent CMS influences hospital decision-making. As for the motion to dismiss, the plaintiffs have sufficiently alleged state action in the form of encouragement by the Secretary, through CMS. They have also plausibly alleged that the existing process is inadequate, because, though their claim for expedited notice is moot, no administrative appeals process exists.

         II. PROCEDURAL HISTORY

         On November 3, 2011, seven plaintiffs filed this class action complaint against the Secretary, claiming violations of the Medicare Act, the Administrative Procedure Act, the Freedom of Information Act, and the Due Process Clause of the U.S. Constitution. (ECF No. 1.) Seven additional intervenor-plaintiffs joined the case on April 9, 2012. (ECF No. 53.) On September 23, 2013, this Court granted the Secretary's motion to dismiss as to all nine causes of action, and denied the motion for class certification as moot. Bagnall v. Sebelius, 2013 WL 5346659 (D. Conn. Sept. 23, 2013).

         On appeal, plaintiffs challenged only the dismissal of their claims (Counts Six and Seven) that the Secretary had failed to provide expedited notice and administrative review for patients placed on observation status, in violation of the Medicare Act and the Due Process Clause. The Court of Appeals, while affirming the dismissal of the Medicare Act claims, reversed as to the due process claims on January 22, 2015. Barrows, 777 F.3d 106. The Court of Appeals held that at the motion to dismiss stage, plaintiffs had alleged a property interest sufficient to state a due process claim, explaining:

[T]he complaint alleges that the decision to admit a patient to a hospital is-in practice- made through rote application of “commercially available screening tools, ” as directed by the centers for Medicare and Medicaid Services (“CMS”), which substitutes for the medical judgment of treating physicians. Plaintiffs also allege that CMS exerts pressure on hospitals through its billing policies and through its retroactive “Recovery Audit Contractor” reviews, which give hospitals the incentive-as a cost-saving or compliance measure-to place more Medicare beneficiaries into “observation status” for longer periods of time. Therefore, drawing all reasonable inferences in favor of plaintiffs, these allegations show that the Secretary-acting through CMS-has effectively established fixed and objective criteria for when to admit Medicare beneficiaries as “inpatients, ” and that, notwithstanding the Medicare Policy Manual's guidance, hospitals apply these criteria when making admissions decisions, rather than relying on the judgment of their treating physicians.
If plaintiffs are able to prove their allegation that CMS “meaningfully channels” the discretion of doctors by providing fixed or objective criteria for when patients should be admitted, then they could arguably show that qualifying Medicare beneficiaries have a protected property interest in being treated as “inpatients.” However, if the Secretary is correct and, in fact, admission decisions are vested in the medical judgment of treating physicians, then Medicare beneficiaries would lack any such property interest.

Id. at 114-15 (footnotes omitted). The Court of Appeals took “no position regarding whether plaintiffs have pleaded facts sufficient to establish the other two prongs of the due process analysis… i.e., that the ‘inpatient' decision constituted state action, and that the process provided to challenge the ‘inpatient' decision was inadequate.” Id. at 115.

         The Court of Appeals directed this Court to supervise limited discovery and then consider the remaining issues:

This discovery period will be focused on the sole issue of whether plaintiffs possessed a property interest in being admitted to their hospitals as “inpatients” …. If, after this period of discovery, the District Court grants summary judgment to the Secretary on the ground that the evidence fails to establish a property interest, an appeal will then be authorized in the normal course. However, if the District Court concludes that the evidence establishes that plaintiffs do have a property interest, or that there are material issues of fact that preclude summary judgment as to that issue, it is directed to analyze whether the complaint is properly dismissed on the other two prongs of the due process analysis-i.e., “state action” and “due process.”

Id. at 115-16 (footnote omitted, emphasis in original).

         After remand, on May 11, 2015, a final intervenor plaintiff, Dorothy Goodman, joined the case. (ECF No. 123.) There are now fourteen plaintiffs, [1] all Medicare beneficiaries or representatives of their estates:[2] Christina Alexander (executrix of Bernice Morse's estate), Lee Barrows (executrix of Lawrence Barrows' estate), Irma Becker, [3] Shirley Burton (executrix of Nettie Jean Sapp's estate), Louis Dziadzia, [4] Dorothy Goodman, [5] Charles Holt, Loretta Jackson, Sarah Mulcahy, Ann Pelow (executor of Richard Bagnall's estate), George Renshaw (executor of Charles Renshaw's estate), Denise Rugman (executrix of Florence Coffey's estate), Michael Savage (executor of Mildred Savage's estate), and Mary Smith (personal representative of Martha Leyanna's estate). (ECF Nos. 1 ¶¶ 11-17; 53 ¶¶ 12-18; 86; 105; 123 ¶ 12; 152.) Plaintiffs have not yet filed a renewed motion for class certification.

         As directed by the Court of Appeals, the parties engaged in discovery limited to the issue of whether plaintiffs had a property interest in being admitted to the hospital as inpatients. Plaintiffs submitted interrogatories and requests for production to the Secretary. (ECF No. 166-1 at 9.) Plaintiffs also conducted depositions of: (1) four hospitals that treated six of the named Medicare beneficiaries: William W. Backus (“Backus”) Hospital, University of Connecticut John Dempsey (“Dempsey”) Hospital, Christiana Care (“Christiana”) Hospital, and Clearwater Valley (“Clearwater”) Hospital; (2) four Medicare contractors with different roles: Performant Recovery (a Recovery Audit Contractor, or “RAC”), CGI Federal, Inc. (also a RAC), National Government Services, Inc. (a Medicare Administrative Contractor, or “MAC”), and Qualis (a Quality Improvement Organization, or “QIO”); and (3) witnesses from the Department of Health and Human Services (“HHS”). (Id.)

         The parties then filed cross-motions for summary judgment on the property interest question and the Secretary filed a renewed motion to dismiss, arguing that hospitals' decisions to place patients on observation status does not constitute state action, Plaintiffs' claim for expedited notice is moot, and the existing appeal procedures are adequate. (ECF Nos. 160; 166.) The parties presented oral argument on the pending motions at a hearing on December 15, 2016, and submitted supplemental briefing focused on standing and mootness issues on January 17, 2017. (ECF Nos. 193; 194.)

         III. SUBJECT MATTER JURISDICTION

         Before turning to the cross-motions for summary judgment and the motion to dismiss, the Court must address sua sponte issues that go to its subject matter jurisdiction, including standing and mootness under Article III of the U.S. Constitution. See Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., 433 F.3d 181, 198 (2d Cir. 2005). Accordingly, the Court asked the parties to brief standing and mootness issues with regard to Medicare beneficiaries who have died and/or received a full refund for Medicare coverage. Standing and mootness issues specific to the claim of insufficient notice are addressed separately in Section V.C.2.

         A. Relevant Facts

         Since the litigation commenced, five of the fourteen Medicare beneficiaries or their estates in this case have received full refunds for the services that were not initially covered by Medicare: Lawrence Barrows, Dorothy Goodman, Bernice Morse, Charles Renshaw, and Mildred Savage. (ECF Nos. 22-1; 62-1; 65-3; 68-1; 83-2; 166.) Of those five, three-Lawrence Barrows, Charles Renshaw, and Mildred Savage-died before this case was filed, and two-Dorothy Goodman and Bernice Morse-have since passed away. (ECF Nos. 1 ¶¶ 11-17; 105; 195.) Two other beneficiaries, Florence Coffey and Nettie Jean Sapp, died before the case was filed, but their estates have not received refunds. (ECF No. 1 ¶¶ 11-17.) Four beneficiaries, Richard Bagnall, Irma Becker, Louis Dziadzia, and Martha Leyanna, have died since the case began, and again their estates have not received refunds. (ECF Nos. 86; 152; 192.) The three remaining Medicare beneficiaries named in this case, Charles Holt, Loretta Jackson, Sarah Mulcahy, are, to the best of the Court's knowledge, still alive and have not received refunds. (ECF No. 192.)

         B. Legal Standard

         Article III of the U.S. Constitution restricts the power of federal courts to “Cases” and “Controversies.” U.S. Const. Art. III. For a plaintiff to have standing under Article III's case-or-controversy requirement, the plaintiff must have suffered an “injury in fact” that is “fairly traceable to the challenged action of the defendant” and “it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992) (citations, quotation marks, and alterations omitted). Standing is assessed at the time the suit is commenced. Id. at 570, n.5. In addition, it is “not enough that a dispute was very much alive when suit was filed; the parties must continue to have a personal stake in the ultimate disposition of the lawsuit.” Chafin v. Chafin, 133 S.Ct. 1017, 1023 (2013) (citation and quotation marks omitted). A claim generally becomes moot when subsequent events eliminate the controversy between the parties: “when the issues presented are no longer live or the parties lack a legally cognizable interest in the outcome.” Id. (citation and quotation marks omitted).

         C. Discussion

         First, for the Medicare beneficiaries who had passed away before the litigation began and have not received refunds, their estate representatives have standing to pursue claims for damages and prospective relief. To establish Article III standing for a claim of prospective relief, the “threatened injury must be certainly impending… allegations of possible future injury are not sufficient.” Clapper v. Amnesty Int'l USA, 133 S.Ct. 1138, 1147 (2013) (citation, quotation marks, and alterations omitted). The Secretary argues that these plaintiffs do not have standing because it is too speculative to imagine that they will be hospitalized or placed incorrectly on observation status in the future. However, this argument misunderstands the nature of the case. Plaintiffs are seeking not a change in how hospitals make admission decisions, but rather an administrative process to appeal those decisions. (See, e.g. ECF No. 1 at 28-29 (prayer for relief seeking, among other things, an injunction “ordering defendant… to establish a procedure for administrative review of a decision to place a Medicare beneficiary on observation status, including the right to expedited review”).) The Medicare beneficiaries' estate representatives are injured by the continuing lack of such an appeals process, which, to this day, is preventing them from requesting and receiving monetary refunds for care that was not covered.

         Second, for the Medicare beneficiaries who have passed away since the case began, have been substituted by estate representatives, and have not received refunds, their claims for damages and prospective relief are not moot for much the same reasons. It is generally true that if “the plaintiff dies or ceases to be subject to the condition that caused his deprivation before his request for prospective injunctive relief is resolved, his claims may in some circumstances become moot.” ABN Amro Verzekeringen BV v. Geologistics Americas, Inc., 485 F.3d 85, 94 (2d Cir. 2007). However, here, the estate representatives continue to lack administrative appeal rights, depriving them of their ability to seek a monetary refund.

         Finally, while the Medicare beneficiaries who received full refunds may no longer have individual claims in the case, they can still act as putative class representatives. A putative class action does not necessarily become moot when the named plaintiff's personal stake expires, even though the class has not yet been certified or class certification has been denied. U.S. Parole Comm'n v. Geraghty, 445 U.S. 388 (1980). For example, the “exception to the mootness doctrine for ‘inherently transitory' claims asserted by the named plaintiff(s) in a class action allows such claims to ‘relate back' to the time of the filing of the complaint with class allegations.” Salazar v. King, 822 F.3d 61, 73 (2d Cir. 2016). The inherently transitory exception applies to putative class actions if “(1) it is uncertain that a claim will remain live for any individual who could be named as a plaintiff long enough for a court to certify the class; and (2) there will be a constant class of persons suffering the deprivation complained of in the complaint.” Id. (citation and quotation marks omitted). “Whether claims are inherently transitory is an inquiry that must be made with reference to the claims of the class as a whole as opposed to any one individual claim for relief.” Amador v. Andrews, 655 F.3d 89, 100 (2d Cir. 2011).

         In Salazar, students brought a class action to challenge the Department of Education's refusal to suspend collection of student loans fraudulently incurred on their behalf. Before the class was certified, however, the plaintiffs received loan discharges from the Department of Education. The Second Circuit held that the inherently transitory exception to the mootness doctrine applied because (1) it was uncertain that the court could address the class certification motion before the Department of Education processed the administrative applications, and (2) there were a large number of potential class members who had received the allegedly fraudulent loans. Salazar, 822 F.3d at 74. The Second Circuit specifically noted that mootness doctrine “does not require a plaintiff to forgo [administrative] remedies to which she is entitled in order to seek broader remedies” in federal court and that to hold otherwise would cause the court to “acquiesce” in the Department of Education's refusal to suspend collection activities on loans it knows to be fraudulent. Id. at 75.

         In this case, just as in Salazar, the named plaintiffs pursued monetary relief through an administrative process while at the same time pursing this broader action. Just as in Salazar, it is uncertain with respect to the “claims of the class as a whole, ” Amador, 655 F.3d at 100, whether Medicare beneficiaries who are placed on observation status will receive refunds from the Secretary before a class is certified. And there is a constant class of Medicare beneficiaries across the country being placed on observation status. Therefore, the inherently transitory exception applies and the named plaintiffs' claims are preserved for purposes of the putative class action.

         D. Conclusion

         All named plaintiffs had standing at the time the complaint was filed, and no named plaintiff need be terminated due to mootness. The case may proceed on the merits.

         IV. CROSS-MOTIONS FOR SUMMARY JUDGMENT

         The parties have filed cross-motions for summary judgment on the second prong of the due process analysis: whether Medicare beneficiaries have a protected property interest in inpatient status.

         A. Undisputed Facts

         The following undisputed facts are taken from the parties' Local Rule 56(a) Statements and the documents cited therein, including statutes and CMS's Medicare Benefit Policy Manual (“Policy Manual”). See Defendant's Local Rule 56(a)(1) Statement, ECF No. 160-2; Plaintiffs' Local Rule 56(a)(2) Statement, ECF No. 163-1; Plaintiffs' Local Rule 56(a)(1) Statement, ECF No. 164-1; Defendant's Local Rule 56(a)(2) Statement, ECF No. 176-1. Disputed facts are discussed in Section IV.C where relevant.

         1. Official Policy on Inpatient vs. Observation Status

         When Medicare beneficiaries are admitted to a hospital as “inpatients, ” they are eligible for coverage under Medicare Part A. 42 U.S.C. § 1395d. When they are placed in “observation status, ” however, they are considered to be “outpatients, ” and their care is covered under Medicare Part B. 42 U.S.C. § 1395k; Policy Manual, Ch. 6 § 20.6(B). Medicare beneficiaries placed in observation and covered under Part B pay more out of pocket for equivalent hospital services than those admitted as inpatients and covered under Part A. 42 U.S.C. §§ 1395e, 1395cc(a)(2)(A). Also, Medicare covers the cost of post-hospital care at a skilled nursing facility only if the individual was classified as an inpatient at the hospital for at least three consecutive days. Id. §§ 1395d(a)(2), 1395x(i). In other words, the decision to place on observation status rather than admit as an inpatient has significant financial consequences for the patient. But that decision does not affect what treatment or medical services the hospital can provide. (ECF Nos. 164-1 ¶ 6; 176-1 ¶ 6.)

         According to the Policy Manual, the decision whether to admit a Medicare beneficiary as an inpatient belongs to the “physician or other practitioner responsible for a patient's care at the hospital” and “the decision to admit a patient is a complex medical judgment.” Policy Manual, Ch. 1 § 10.

         By contrast, CMS considers the determination as to whether services are properly billed and paid as inpatient or outpatient to be a regulatory matter, under the authority of the Secretary. (ECF Nos. 164-1 ¶ 12; 176-1 ¶ 12.) The Policy Manual defines inpatient as “a person who has been admitted to hospital for bed occupancy for purposes of receiving inpatient hospital services.” Policy Manual, Ch. 1 § 10. It defines observation services as “a well-defined set of clinically appropriate services which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.” Id., Ch. 6 § 20.6(A). In October 2013, CMS adopted the Two-Midnight Rule to address “high rates of error for hospital services rendered in a medically-unnecessary setting (i.e. inpatient rather than outpatient).” (ECF Nos. 164-1 ¶ 7; 176-1 ¶ 7 (quoting CMS Fact Sheet dated June 7, 2015, ECF No. 164-10 at 2).) The Two-Midnight Rule instructs that “an inpatient admission is generally appropriate for payment under Medicare Part A when the admitting physician expects the patient to require hospital care that crosses two midnights.” 42 C.F.R. § 412.3(d)(1). CMS provides an exception to the Two-Midnight Rule for certain medical procedures listed in an annual “inpatient only list.” (ECF Nos. 164-1 ¶¶ 14-15; 176-1 ¶¶ 14-15.) Those procedures qualify for Medicare Part A coverage regardless of the expected length of stay. (Id. ¶ 15.)

         2. Government ...


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