Alexander v. Azar

          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 ...