United States District Court, D. Connecticut
MEMORANDUM OF DECISION
MICHAEL P. SHEA, U.S.D.J.
In this
class action, Medicare beneficiaries seek to require the
Secretary of Health and Human Services to afford them a
hearing to challenge a critical decision made by others when
they are hospitalized-whether to admit them as inpatients or
whether to place them on “observation status.”
That decision does not always affect the types of medical
services they receive at the hospital, but it can have an
enormous impact on their pocketbooks. If they are discharged
from the hospital to a skilled nursing facility (SNF),
Medicare will cover their stay only if they spent at least
three consecutive days as a hospital inpatient. The named
Plaintiffs in this class action spent multiple days in the
hospital and were discharged to SNFs, but were designated as
outpatients receiving observation services for some or all of
their hospital stays. As a result, they were forced to pay
for their SNF care out of pocket. The Plaintiffs brought this
action against the Secretary on their own behalf and on
behalf of all beneficiaries placed on observation status,
claiming that his failure to afford any hearing or other
administrative review of the decision to deny them inpatient
status violates the Due Process Clause of the Fifth
Amendment. The history of this case is protracted, and I
summarize some of it below. Now before me are the
Secretary's (1) second motion for summary judgment; (2)
motion for class decertification; and (3) motion to dismiss
for lack of subject matter jurisdiction. For reasons I will
explain, the motions are DENIED. After almost eight years of
litigation, this case will finally proceed to trial.
PROCEDURAL
HISTORY
I
assume familiarity with the allegations in the complaints,
(ECF Nos. 1, 53, 123), my ruling on the parties' earlier
cross motions for summary judgment, Alexander v.
Cochran, 2017 WL 522944 (D. Conn. Feb. 2, 2017), ECF No.
196, my ruling on the Plaintiffs' motion for class
certification, Alexander v. Price, 275 F.Supp.3d 313
(D. Conn. 2017), ECF No. 242, and reconsideration of that
ruling, (ECF No. 250). I summarize some of the procedural
history below to provide context for my analysis of the
present motions.
I.
Dismissal and Appeal
On
November 3, 2011, seven Medicare beneficiaries or their
estates filed a complaint challenging the Secretary's use
of observation status. (ECF Nos. 1, 2.) They alleged
violations of the Medicare Act, Administrative Procedure Act,
and Due Process Clause. The Secretary moved to dismiss the
complaint. (ECF No. 23.) Seven intervenor plaintiffs joined
the case on April 9, 2012. (ECF No. 53.) On September 23,
2013, I granted the Secretary's motion to dismiss the
Plaintiffs' original complaint and first intervenor
complaint for failure to state a claim on which relief could
be granted. With respect to their Due Process claims, I
concluded that the Plaintiffs had not alleged facts
sufficient to show that they had a protected property
interest in being admitted as inpatients rather than placed
on observation status. In particular, I determined that the
Secretary, acting through the Centers for Medicare and
Medicaid Services (“CMS”), left the decision to
admit a Medicare beneficiary as an inpatient to the medical
judgment of treating physicians. Bagnall v.
Sebelius, 2013 WL 5346659, at *1 (D. Conn. Sept. 23,
2013). Concluding that CMS's Medicare Policy Manual did
not mandate that a physician order admission, but instead
left the decision to the doctor's discretion, I held that
the Plaintiffs had failed to allege a property interest in
being admitted as inpatients. Id. at *21-*22. The
Plaintiffs appealed.
The
Second Circuit affirmed in part, vacated in part, and
remanded the case.[1] The Court of Appeals held that,
notwithstanding the discretionary language in the Medicare
Policy Manual, the Plaintiffs had alleged facts suggesting
that the decision to admit a patient to the hospital was
“made through rote application of ‘commercially
available screening tools,' as directed by [CMS], which
substitute[d] for the medical judgment of treating
physicians.” Barrows, 777 F.3d at 114. The court
explained:
If plaintiffs can 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 115.
II.
Proceedings on Remand
On
remand, as directed by the Court of Appeals, I ordered a
period of discovery “focused on . . . whether [the
P]laintiffs possessed a property interest in being admitted
to their hospitals as ‘inpatients' . . . .”
Id. at 116; (ECF No. 120 at 1). Shortly after
discovery began, Dorothy Goodman filed a motion to intervene.
(ECF No. 121.) Her motion stated that she had been placed on
observation status in 2014 under policies the Secretary had
adopted after the case had been dismissed and while the
appeal was pending. (Id. at 2-3.) The Secretary did
not object, and I granted the motion on May 8, 2015 (ECF No.
122). Ms. Goodman filed the Second Intervenor Complaint three
days later. (Second Intervenor Compl., ECF No. 123.) The
Second Intervenor Complaint alleged that the Secretary had
promulgated new regulations governing inpatient admissions in
October 2013. (Id. ¶¶ 37-42.) The
regulations established the Two Midnight Rule, which
allegedly created a new standard by which the Secretary would
evaluate the propriety of inpatient admission orders for
reimbursement under Medicare Part A. (Id. ¶
37.) The Second Intervenor Complaint also alleged that the
Secretary's evaluation under the Two Midnight Rule was,
in practice, guided by commercial screening tools.
(Id. ¶¶ 44, 72.)
After
the initial period of discovery closed, the parties filed
cross motions for summary judgment addressing whether the
Plaintiffs had a protected property interest in being
admitted as inpatients. (ECF Nos. 160, 164.) The Secretary
also moved to dismiss the Plaintiffs' complaints, arguing
that the Plaintiffs had failed to allege facts sufficient to
support an inference of state action or to show that they
were entitled to additional procedural protections. (See ECF
No. 160-1 at 27- 33.) I held oral argument on the motions, at
which I raised concerns about standing and mootness in light
of the fact that several Plaintiffs had passed away or had
been reimbursed for their hospitalizations under Medicare
Part A after pursuing administrative appeals. I directed the
parties to file supplemental briefs addressing those
concerns. (See ECF Nos. 189, 190.)
On
February 8, 2017, I denied both parties' motions for
summary judgment and granted in part and denied in part the
Secretary's motion to dismiss. First, I found that all
named Plaintiffs had standing, and their claims were not
moot. See Alexander v. Cochran, 2017 WL 522944, at
*4- *6 (D. Conn. Feb. 8, 2017) Second, I found that neither
party was entitled to summary Judgment because there were
material disputes of fact about (1) the extent to which
inpatient admission decisions were dictated by the
application of commercial screening tools and (2) the extent
to which the Secretary directed hospitals to use those
screening tools in making admission decisions. See
Id. at *10-*14. Third, I held that the
Plaintiffs' complaints “plausibly alleged that the
inpatient admission decision is the result of
‘significant encouragement' from the Secretary,
through CMS, ” and denied the Secretary's motion to
dismiss on state action grounds. Id. at *15-*16.
Fourth, I found that the NOTICE Act, which required hospitals
to provide written and oral notice to patients receiving
observation services for more than 24 hours, 42 U.S.C. §
1395cc(a)(1)(Y), had rendered moot the Plaintiffs' claim
seeking expedited notice about their observation status.
Id. at *17-*18. Finally, I held that the Plaintiffs
had adequately alleged a deprivation of Due Process by
pleading that “there are no administrative review
procedures for Medicare beneficiaries who seek to challenge
their placement on observation status.” Id. at
*18.
On
February 28, 2017, I held a telephonic status conference to
discuss scheduling for the remainder of the case. On the
call, both parties agreed that they were not seeking
additional discovery in connection with class certification,
and the record was sufficient to allow me to decide whether a
class should be certified. (Transcript of Conf., ECF No. 251
at 12:23-13:10.) Three days later, the Plaintiffs filed a
motion for class certification and appointment of class
counsel. (ECF No. 203.) The Secretary opposed the motion.
(ECF No. 213.) After oral argument and supplemental briefing,
I granted the motion. See Alexander v. Price, 275
F.Supp.3d 313 (D. Conn. 2017). After making two technical
adjustments at the Plaintiffs' request, I certified the
following class under Fed.R.Civ.P. 23(b)(2):
All Medicare beneficiaries who, on or after January 1, 2009:
(1) have received or will have received “observation
services” as an outpatient during a hospitalization;
and (2) have received or will have received an initial
determination or Medicare Outpatient Observation Notice
(MOON) indicating that the observation services are covered
(or subject to coverage) under Medicare Part B. Medicare
beneficiaries who meet the requirements of the foregoing
sentence but who pursued an administrative appeal and
received a final decision of the Secretary before September
4, 2011, are excluded from this definition.
(ECF No. 250.) Discovery then proceeded, as required by the
Second Circuit, “on the other two prongs of the due
process analysis-i.e., ‘state action' and
‘due process.'” Barrows, 777 F.3d at
III.
Pending Motions
Discovery
closed on June 15, 2018. The Secretary filed a letter
notifying the Court of his intention to file a second motion
for summary judgment addressing (1) whether the Plaintiffs
could establish the existence of a property interest for
individuals hospitalized after 2015; and (2) whether the
Plaintiffs could adduce evidence of a risk of erroneous
deprivation under Mathews v. Eldridge, 424 U.S. 319
(1976). (ECF No. 305 at 1-3.) The Secretary also provided
notice of his intent to file a motion to decertify the class.
(Id. at 3-6.)
I held
a telephonic status conference to discuss the potential
filings. On the call and in a subsequent order, I declined to
allow the Secretary to file a motion for summary judgment on
the existence of a property interest. I explained that the
issue had been decided in my previous ruling and that the
Secretary had not moved for reconsideration of that decision.
(ECF No. 311.) I also discouraged the Secretary from filing a
motion to decertify the class as I did not think that such a
motion would further the interest of judicial economy.
(Id.) Finally, I encouraged the Secretary to confine
any motion for summary judgment “to the second Mathews
factor, ‘the risk of an erroneous deprivation of [the
private interest] through the procedures used, and the
probable value, if any, of additional or substitute
procedural safeguards.'” (ECF No. 311 (quoting
Mathews, 424 U.S. at 335).)
The
Secretary filed a second motion for summary judgment on July
30, 2018, and a motion for class decertification on August
24, 2018. (ECF Nos. 319, 323.) I held oral argument on the
motions on November 26, 2018. At the argument, it became
clear that the Plaintiffs intended to rely primarily on the
Two Midnight Rule, rather than the use of commercial
screening tools, as the basis of a property interest in
inpatient admission for Medicare beneficiaries hospitalized
after October 2013. (See Oral Arg. Transcr., ECF No. 363 at
67:11-14 (Plaintiffs' counsel: “I see the classes
divided into 2009 up to the point where the Two Midnight Rule
was introduced in 2013. So Two Midnight Rule [as the basis of
a property interest] for 2013 forward, and commercial
screening tools for the period before that.”).) Because
neither this Court nor the Second Circuit had addressed
whether the Two Midnight Rule provided the type of fixed or
objective criteria that could create a property interest, I
permitted the parties to file supplemental briefs addressing
the Plaintiffs' theory based on the Two Midnight Rule.
(ECF No. 361.) The Secretary also filed a motion to dismiss
the complaints for lack of subject matter jurisdiction. (ECF
No. 370.)
To
summarize, pending before me are (1) the Secretary's
second motion for summary judgment, with supplemental
briefing (ECF Nos. 319, 368); (2) the Secretary's motion
for class decertification (ECF No. 323); and (3) the
Secretary's motion to dismiss for lack of subject matter
jurisdiction (ECF No. 370).[2]
MOTION
FOR SUMMARY JUDGMENT
I.
Factual and Regulatory Background
The
following facts are taken from the parties' Local Rule
56(a) statements and are undisputed unless otherwise
noted.[3] Additional disputed facts are discussed as
relevant in Section III.
A.
Observation Services and Inpatient Hospitalizations
Inpatient
hospitalizations are covered under Medicare Part A, while
outpatient services, including observation services provided
in a hospital setting, are covered under Medicare Part B.
Alexander v. Cochran, 2017 WL 522944, at *6;
(Defendant's Local Rule 56(a)(1) Statement
(“56(a)(1) Stmt.”), ECF No. 319-6 ¶ 4;
Plaintiffs' Local Rule 56(a)(2) Statement
(“56(a)(2) Stmt.”), ECF No. 331-1 at 4.) Patients
have different out-of-pocket obligations depending on whether
their care is covered under Part A or Part B.
Under
Medicare Part A, a beneficiary is required to pay for
hospital services up to a onetime deductible for each
“spell of illness” or “benefit
period.” (See 56(a)1 Stmt. ¶ 5; 56(a)2 Stmt. at
4-5.) The deductible covers the beneficiary's share of
the cost for the first 60 days of the hospitalization.
Id. If an inpatient is discharged from the hospital
and re-admitted within 60 days of discharge, he is not
responsible for paying any deductible for the
re-hospitalization. (56(a)1 Stmt. ¶ 7; 56(a)2 Stmt. at
5-6.) The Plaintiffs assert that the 60-day period begins
upon discharge from the hospital or from SNF care, whichever
is later. (56(a)(2) Stmt. at 6 (citing 42 U.S.C. §
1395x(a)).) In 2018, the Part A inpatient deductible was $1,
340. (56(a)1 Stmt. ¶ 6, 56(a)2 Stmt. at 5.)
Before
2016, a beneficiary placed on “observation
status” was required to pay a co-pay equal to 20% of
the cost of each service he or she received in the hospital.
(56(a)(1) Stmt. ¶ 8; 56(a)2 Stmt. at 6.) The Plaintiffs
assert that beneficiaries also had to pay the cost of any
self-administered drugs. (56(a)2 Stmt. at 6 (citing 42 U.S.C.
§ 1395y(c)).) On January 1, 2016, CMS established a new,
pre-set bundled rate for all covered observation services
provided during a hospitalization lasting at least 8 hours.
(56(a)1 Stmt. ¶ 11; 56(a)2 Stmt. at 7.) Thus,
beneficiaries placed on observation status are now required
to pay a co-pay equal to 20% of the bundled rate. (56(a)1
Stmt. ¶ 12; 56(a)2 Stmt. at 7-8.) In 2018, the 20%
co-payment for observation services under Part B ($469.93)
was less than the deductible for inpatient hospitalizations
under Part A ($1, 340.00). (56(a)1 Stmt. ¶ 11; 56(a)2
Stmt. at 7-8; Baugh Decl., ECF No. 319-18 ¶ 36.)
The
Plaintiffs assert that beneficiaries placed on observation
status may incur other expenses beyond the co-pay for the
bundled observation services. For example, beneficiaries may
be responsible for the cost of self-administered drugs and
any services that are not included in the pre-determined
bundle of observation services. (56(a)2 Stmt. at 7-8 (citing
Medicare Claims Processing Manual Ch. 4 §§ 290.2.2,
290.5.3, ECF No. 334-12 at 3-4, 5-7).)
When a
patient is discharged from the hospital, he or she may
require additional care at a skilled nursing facility
(“SNF”). Medicare Part A covers SNF care upon
discharge from the hospital for individuals who spent at
least three consecutive days in the hospital as inpatients.
(56(a)(1) Stmt. ¶ 14; 56(a)(2) Stmt. at 9.)
Beneficiaries placed on observation status under Part B,
including those who were subsequently admitted as inpatients
but remained hospitalized for fewer than three days after the
inpatient order, are not eligible for SNF coverage under
Medicare. (56(a)(2) Stmt. at 15.)
B. The
Two Midnight Rule[4]
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).) As originally promulgated, the Rule
provided, in part
Surgical procedures, diagnostic tests, and other treatment
are generally appropriate for inpatient admission and
inpatient hospital payment under Medicare Part A when the
physician expects the patient to require a stay that crosses
at least 2 midnights. The expectation of the physician should
be based on such complex medical factors as patient history
and comorbidities, the severity of signs and symptoms,
current medical needs, and the risk of an adverse event. The
factors that lead to a particular clinical expectation must
be documented in the medical record in order to be granted
consideration.
42 C.F.R. § 412.3(e)(1) (Oct. 1, 2013). The Rule
required that a formal, written inpatient order be
“present in the medical record” and
“supported by the physician admission and progress
notes.” Id. § 412.3(a). The written
inpatient order had to be “furnished at or before the
time of the inpatient admission.” Id. §
412.3(d).
The
Rule contained two exceptions. First, if a patient's
hospitalization was not expected to cross two midnights, it
would still be appropriate to admit the patient (and to
submit a claim for reimbursement under Medicare Part A) if
the patient underwent a test, procedure, or other treatment
designated as “inpatient only under [42 C.F.R.] §
419.22(n).” Id. Second, if the patient's
hospitalization did not span two midnights due to
“unforeseen circumstances” such as “a
beneficiary's death or transfer, ” it would still
be appropriate for inpatient hospital payment under Part A
provided that a physician reasonably expected the admission
to span two midnights when entering the admission order.
Id. § 412.3(e)(2). CMS also acknowledged that
in “rare and unusual circumstance[s]” it might
recognize further exceptions to the Rule. Medicare Program
Fiscal Year 2014 Payment Policies Related to Patient Status,
78 FR 50496, 50946 (Aug. 19, 2013). In January 2014, CMS
adopted the first and only such exception to date,
recognizing that a patient receiving “newly initiated
mechanical ventilation” would be appropriate for
inpatient admission, and therefore payment under Part A, even
if her hospitalization did not span two midnights. Medicare
Program Short Inpatient Hospital Stays, Provider
Administrative Appeals and Judicial Review, 80 Fed.Reg.
70298, 70540 (Nov. 13, 2015).
It was
this version of the Two Midnight Rule that was in effect when
Plaintiff Dorothy Goodman was hospitalized from January 31,
2014 through February 4, 2014. (Defendant's Supplemental
56(a)(1) Stmt. (“Supp. 56(a)(1)”), ECF No. 369
¶ 2; Plaintiffs' Supplemental 56(a)(2) Stmt.
(“Supp. 56(a)(2)”), ECF No. 372-1 at 3.)
In
December 2015, the Secretary promulgated regulations amending
the Two Midnight Rule. As a result of these amendments, the
amended Rule now provided
[A]n 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.
(i) The expectation of the physician should be based on such
complex medical factors as patient history and comorbidities,
the severity of signs and symptoms, current medical needs,
and the risk of an adverse event. The factors that lead to a
particular clinical expectation must be documented in the
medical record in order to be granted consideration.
42 C.F.R. § 412.3(d)(1) (2016). The amended rule
maintained the “inpatient only” and
“unforeseen circumstances” exceptions noted
above. It also included an additional exception:
Where the admitting physician expects a patient to require
hospital care for only a limited period of time that does not
cross 2 midnights, an inpatient admission may be appropriate
for payment under Medicare Part A based on the clinical
judgment of the admitting physician and medical record
support for that determination. The physician's decision
should be based on such complex medical factors as patient
history and comorbidities, the severity of signs and
symptoms, current medical needs, and the risk of an adverse
event. In these cases, the factors that lead to the decision
to admit the patient as an inpatient must be supported by the
medical record in order to be granted consideration.
42 C.F.R. § 412.3(d)(3) (2016).
The
Secretary again amended the Two Midnight Rule in August 2018.
See Medicare Program; Hospital Inpatient Prospective Payment
Systems and Physician Certification and Recertification of
Claims, 83 Fed. Reg. 41144, 41507-08 (Aug. 17, 2018). The
amendment removed the requirement of a formal, written
inpatient order. See 42 C.F.R. § 412.3(a) (2019)
(removing the requirement that the inpatient order be
“present in the medical record and be supported by the
physician admission and progress notes”).
C.
Changes to Government Review of Medicare Claims
After a
hospital admits a Medicare beneficiary as an inpatient or
places the beneficiary on observation status, it submits a
claim for reimbursement under the Medicare program.
Alexander v. Cochran, 2017 WL 522944, at *7 (D.
Conn. Feb. 8, 2017). A hospital's claim for Medicare
reimbursement undergoes several layers of review. Before
October 1, 2015, Medicare Administrative Contractors
(“MACs”) made the initial determination about
whether a hospital's claim was appropriate for payment
under Part A. Id. Since that date, medical review of
claims submitted under the Two Midnight Rule has been
delegated to Beneficiary & Family Centered Care Quality
Improvement Organizations (“QIOs”). (See Supp.
56(a)(1) ¶ 10; Supp 56(a)(2) Stmt. at 4); Medicare
Program: Hospital Outpatient Prospective Payment and
Ambulatory Surgical Center Payment Systems, 80 Fed.Reg.
70298, 70545 (Nov. 13, 2015) (“We indicated . . .
[that] no later than October 1, 2015, we would be changing
the medical review strategy and planned to have QIO
contractors, rather than the MACs, conduct these reviews of
short inpatient stays.”). These QIO evaluations are
known as “short stay reviews.” (Supp. 56(a)(1)
¶ 10; Supp. 56(a)(2) at 4.)
Before
the Two Midnight Rule, CMS engaged Recovery Audit Contractors
(“RACs”) to perform targeted post-payment audits
of claims approved by MACs and paid to hospitals.
Alexander v. Cochran, 2017 WL 522944, at *7 (D.
Conn. Feb. 8, 2017). RAC audits were suspended from October
1, 2013 through December 31, 2015. (Supp. 56(a)(1) ¶ 9;
Supp. 56(a)(2) at 4.) RAC audits began again in January 2016,
but are now authorized only upon referral by QIOs for
providers exhibiting persistent noncompliance with Medicare
policies. (Supp. 56(a)(1) ¶ 11; Supp. 56(a)(2) at 5.)
II.
Legal Standard
“Summary
judgment is appropriate only if the movant shows that there
is no genuine issue as to any material fact and the movant is
entitled to judgment as a matter of law.” Tolan v.
Cotton, 134 S.Ct. 1861, 1866 (2014) (internal quotation
marks and citations omitted). “In making that
determination, a court must view the evidence in the light
most favorable to the opposing party.” Id.
(quotation marks omitted). On summary judgment a court
“must resolve all ambiguities and draw all reasonable
inferences against the movant.” Caronia v. Phillip
Morris USA, Inc., 715 F.3d 417, 427 (2d Cir. 2013). The
moving party bears the burden of demonstrating that no
genuine issue exists as to any material fact. Celotex
Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). If
the moving party carries its burden, “the opposing
party must come forward with specific evidence demonstrating
the existence of a genuine dispute of material fact.”
Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d
Cir. 2011).
III.
Discussion
The
Secretary argues that he is entitled to summary judgment
because (1) the Plaintiffs have failed to adduce evidence
demonstrating that they face a risk of erroneous deprivation
of a protected property interest; (2) the Plaintiffs have
failed to demonstrate that additional procedures could remedy
any deprivation; and (3) the Plaintiffs' private interest
is outweighed by the likely burden of implementing additional
procedures.[5] Because the existence of a property
interest is logically antecedent to any risk of deprivation,
I first ...