Adirondack Medical Center v. Sebelius

Under Medicare, two different types of hospitals were subject to two different reimbursement schemes. The first type was reimbursed under the federal rate. The federal rate was calculated by taking a standardized amount, which was based on national data, and multiplying it by the weight associated with a particular diagnostic-related group (DRG). A DRG was a category of inpatient treatment. A DRG’s weight was based on the hospital resources utilized with respect to discharges in that group. The second type of hospital was reimbursed using a hospital-specific rate, which was based on the actual historical operating costs of the subject hospital. The hospital’s specific rate was then multiplied by the relevant DRG weight. Because hospitals in the second category typically served the underprivileged, those hospitals could choose between the higher of the federal rate or the hospital-specific rate. Congress ultimately directed the secretary (defendant) of Health and Human Services (department) to adjust the DRG classification and weighting factors to address changes in technology, treatment patterns, and other relevant factors. However, the department indicated that it was not sure how to address impacts from such changes. Accordingly, Congress enacted 42 U.S.C. § 1395ww(d)(3)(A)(vi). That provision provided that the secretary could adjust the average standardized amount to compensate for negative or unintended consequences of the directed adjustments, namely overpayments to hospitals. The secretary concluded that the financial burden should be shared by all hospitals. Accordingly, the secretary decided to temper the adjustment by splitting the difference between federal-rate and hospital-specific-rate hospitals. A group of hospital-specific-rate hospitals (hospitals) (plaintiffs), including Adirondack Medical Center, objected. The secretary implemented the adjustments, anyway, relying on the authority granted pursuant to § 1395ww(d)(5)(I)(i). That provision provided that the secretary could make exceptions and adjustments to Inpatient Prospective Payment System (IPPS) payment amounts as the secretary deemed appropriate. The hospitals filed suit, arguing that the secretary’s sole means of addressing overpayments was through adjustment of the standardized rate. The district court granted the secretary’s motion to dismiss. The hospitals appealed to the District of Columbia Circuit.