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Sutter Health Sacramento Sierra Region v. Leavitt


February 13, 2009


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


Through the present litigation, Plaintiff Sutter Health Sacramento Sierra Region, dba Sutter Medical Center Sacramento (hereinafter "Sutter") alleges that Medicare's proposed termination of its approval for Sutter's heart transplant program improperly runs counter to Medicare's own provisions for administering such programs.

Defendant Michael A. Leavitt, as Secretary of Health and Human Services and the government official in charge of Medicare, now moves to dismiss Sutter's Complaint, for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1),*fn1 on grounds that Sutter has not satisfied a necessary prerequisite to suit; namely, the exhaustion of available administrative remedies. Alternatively, Defendant moves to dismiss Plaintiff's Complaint for failure to state a viable cause of action under Rule 12(b)(6).

As set forth below, the Court finds that because Sutter failed to exhaust its administrative remedies before filing the present lawsuit, this Court cannot entertain Sutter's claims at the present time. Dismissal on that ground will therefore be ordered.


This case challenges the proposed termination of Medicare funding for Sutter's heart transplant center, as relayed to Sutter by Defendant's designated agency for administering the Medicare program, the Centers for Medicare and Medicaid Services ("CMS") on December 12, 2008. The stated reason for termination was Sutter's continuing low volume of heart transplants, despite Sutter's implementation of a corrective action plan ("CAP") in 2006 to remedy that shortcoming.

According to the December 12 notice, the termination was to become effective on January 15, 2009. In order to facilitate full briefing on Sutter's request for injunctive relief to prevent termination of its program, that effective date was changed by stipulation of the parties to February 20, 2009.

Sutter's heart transplant program was initially approved by CMS in 1997, under rules established in Medicare's 1987 National Coverage Determination, or NCD. See 52 Fed. Reg. 10935 (April 6, 1987). The 1987 NCD established a minimum volume requirement for heart transplant centers at twelve transplants on an annual basis. Id. at 10947.

Despite CMS' initial approval, Sutter never met Medicare's annual threshold requirements. It never exceeded seven transplants a year, and sometimes performed as few as three. Sutter nonetheless claims to have a good outcome rate, allegedly because of its highly trained staff (Sutter is not a teaching hospital and consequently all care is performed by seasoned professionals on the regular staff) and their considerable experience with open heart procedures in addition to full transplants.

In 2006, CMS requested data from Sutter and other transplant centers that did not satisfy Medicare's volume standards. On January 30, 2007, based on Sutter's response, Sutter was notified that Medicare payment approval would be terminated unless an approved CAP was submitted within 30 days. The January 30, 2007 notice cited both the fact that Sutter had performed only three heart transplants in 2005 and four in 2006, as well as the fact that this small number made it difficult to gauge meaningful statistical outcomes.

After granting an extension for submission of the CAP, Sutter eventually submitted its proposed correctional action plan on March 22, 2007, along with its response to CMS' letter expressing its intent to terminate the Sutter program. Essentially, Sutter pointed to mitigating facts like good clinical results and various explanations for its low volume, including the fact that it had not obtained the means to utilize ventricular assist devices (VADs) for very sick patients to alleviate failing heart function. Because such patients consequently had to seek treatment at heart transplant facilities with VAD capability (there were a total of eleven Medicare-approved heart transplants within California), those facilities obtained priority for receiving organ donations destined for the sickest individuals.

In the meantime, in March of 2007, CMS issued new "conditions of participation" ("CoPs") for organ transplant centers, as set forth in 42 C.F.R. Part 482, subpart E. 72 Fed Reg 15198 (March 30, 2007). Under those requirements, a transplant center had to perform ten or more transplants per year "to demonstrate commitment to its transplant program and gain adequate clinical experience." Id. at 15217. This volume directive was later codified at 42 C.F.R. § 482.80. Heart transplant previously approved under the 1985 NCD had to comply with the new CoPs by June 28, 2007, and to apply for "initial approval" thereunder by December 26, 2007. 42 C.F.R. § 488.61(b)(1).

After working with Sutter to revise the proposed CAP plan issued with respect to the 1987 NCD over a period of three months, CMS approved it on July 2, 2007. Between September 2007 and July 2008, Sutter submitted four quarterly updates on implementation of that CAP. Even though Sutter took steps to obtain VAD capability, those updates showed that Sutter still had performed only three heart transplants in 2007 and three in 2008, only a quarter of the minimum number established by the 1987 NCD. Accordingly, on or about July 29, 2008, Sutter was once again advised that its program would be terminated for continued failure to meet Medicare's volume requirements.

Despite this notification, CMS still permitted Sutter to submit further information bearing on its proposed decision. Consequently, on September 15, 2008, Sutter made another written submission presenting its case for continued inclusion on Medicare's approved list of transplant providers. After considering those mitigating circumstances, CMS ultimately concluded that the mitigating circumstances identified by Sutter were not sufficiently compelling to warrant approval. Therefore, on December 12, 2008, Sutter was notified in writing that Medicare approval would be withdrawn under the 1987 NCD, and that Sutter's request for initial approval under Medicare's new CoPs would be denied, with both decisions based on low volume. The December 12 letter initially specified that Sutter's termination would become effective on January 15, 2009, or 34 days after issuance of the final notice. As stated above, however, to facilitate this Court's review that termination date was extended to February 20, 2009.


While Defendant moves to dismiss Plaintiff's lawsuit under Rule 12(b)(1) for lack of subject matter jurisdiction, a literal reading of Rule 12(b) suggests that the defense asserted here, a failure to exhaust non-judicial remedies, may not be made by pre-answer motion. As the Ninth Circuit pointed out in Ritza v. Int'l Longshoremen's and Warehousemen's Union, 837 F.2d 365, 369 (9th Cir. 1988), none of the defenses actually described in Rules 12(b)(1) through (7) actually encompass a failure to exhaust. Nonetheless, in Bass v. Social Security Administration, 872 F.2d 832, 833 (9th Cir. 1989), the Ninth Circuit found that failure to exhaust administrative remedies mandated by the Social Security Act (and incorporated within the Medicare statute) deprived the district court of jurisdiction. Failure to exhaust has therefore been viewed as a "matter in abatement" related to jurisdiction that consequently can be heard as a "non-enumerated" Rule 12(b) motion. Inlandboatmens Union of the Pacific v. Dutra Group, 279 F.3d 1075, 1078 n.2 (9th Cir. 2001), citing Ritza, 837 F.3d at 369.


A. Federal Question Jurisdiction Is Barred Unless And Regulations Has Been Completed

Until Administrative Review Under Medicare Statutes And 42 U.S.C. § 405(g) of the Social Security Act, as incorporated into the Medicare Act at 42 U.S.C. § 1395cc(h)(1), provides that a Medicare provider dissatisfied with the termination of its approval may seek judicial review of Medicare's decision in that regard only after the Secretary's "final decision". Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1, 20-21 (2000). Section 405(h), as also incorporated into the Medicare Act at § 1395ii, states specifically that federal question jurisdiction over Medicare matters is barred except as provided in the statute.*fn2 As the Ninth Circuit explained in Queen of Angels/Hollywood Presbyterian Med. Ctr. v. Shalala, 65 F.3d 1472, 1481 n. 23 (9th Cir. 1995), Section 405(h) is "a sweeping and direct prohibition against judicial review of benefits decision outside of the procedures established in the Social Security Act."

It is therefore clear that, barring extenuating circumstances, Sutter can seek judicial review in this Court only after Medicare's internal review system has been exhausted and a final administrative decision has been rendered.

Illinois Council, 529 U.S. at 20-21. This "final decision" requirement constitutes a "statutorily specified jurisdictional prerequisite." Weinberger v. Salfi, 422 U.S. 749, 766 (1975). Consequently, a district court cannot waive Medicare's mandated exhaustion requirements for equitable or other policy reasons. See Queen of Angels, 65 F.3d at 1482.

B. Sutter's Claims Do Not Fall Within Any Exception To The Usual Requirement That Administrative Remedies Be Exhausted

Here, Sutter unquestionably failed to exhaust its administrative remedies before filing suit in this Court and requesting a preliminary injunction to bar implementations of Medicare's decision to revoke its provider status as a heart transplant center. Indeed, on January 23, 2009, shortly after commencing the present action, it submitted a concurrent administrative appeal. See Ex. A to Pl.'s Opp. Additionally, in its Complaint, Plaintiff admits that "the Secretary's decision whether a prospective provider qualifies for participation in Medicare is an initial determination subject to ad administrative appeal." Complaint, ¶ 45.

1. Efficacy of Administrative Review

Despite its concession that additional internal recourse is indeed available, Sutter nonetheless argues that administrative exhaustion should be waived under the circumstances of this particular case.

First, Sutter cites case law for the proposition that the jurisdictional strictures of § 405(h) do not apply where allegations of irreparable harm make mandated administrative review the practical equivalent of no review at all. See, e.g., Pathfinder Healthcare, Inc. v. Thompson, 177 F. Supp. 2d 895, 896-97. Sutter argues that because its facility could conceivably be forced to close altogether and transfer its patients elsewhere, to the potential detriment of those patients, meaningful review would be circumvented. Sutter further maintains that its procedural challenges to the manner in which termination was effectuated may also fall outside the scope of the administrative review process.

The Court finds neither contention persuasive. The argument that potential irreparable harm makes administrative review futile has already been expressed rejected. The Supreme Court, in Illinois Council, found that for the futility exception to apply, judicial review must be completely precluded as opposed to simply delayed. 529 U.S. at 22-23. In the Court's view, requiring Sutter to proceed through its administrative appellate remedies would not amount to "no review at all" as Illinois Council requires in order to justify circumventing the administrative process. Id. at 13-14. Inconvenience in any particular case does not suffice. Id. at 22-23.

Significantly, in Heckler v. Ringer, the Supreme Court explained the careful balance struck by Congress between individual hardship and the exhaustion of administrative remedies. In declining to tamper with that balance, the Court stated:

"In the best of all words, immediate judicial access... might be desirable. But Congress, in § 405(g) and § 405(h), struck a different balance, refusing declaratory relief and requiring that administrative remedies be exhausted before judicial review..... Congress must have felt that cases of individual hardship resulting from the administrative process had to be balanced against the potential for overly casual or premature judicial intervention in an administrative system that process literally millions of claims every year. If the balance is to be struck anew, the decision must come from Congress and not from this Court." 466 U.S. at 627.*fn3

Additionally, while Sutter appears to contend that matters of agency procedure are not subject to administrative determination, that contention also lacks merit. In Bowen v. City of New York, the Supreme Court explained that "[b]ecause of the agency's expertise in administering its own regulations, the agency ordinarily should be given the opportunity to review application of [its] regulations to a particular factual context." 476 U.S. at 484-85. It makes eminent good sense to afford the agency an opportunity, by way of the required administrative appeals, to itself correct any error in applying its own rules and regulations as Sutter alleges here.

Furthermore, even if some of Sutter's purported due process claims are beyond the scope of administrative appeal, as Sutter appears to contend, does not mean that the overall "action" in its totality should not be channeled through the administrative process. As the Supreme Court states:

"The fact that the agency might not provide a hearing for [a] particular contention, or may lack the power to provide one, is beside the point because it is the "action" that must be channeled through the agency. After the action has been so channeled, the court will consider the contention when it later reviews the action. And a court reviewing an agency determination under section 405(g) has adequate authority to resolve any statutory or constitutional contention that the agency does not, or cannot, decide[.]"

Illinois Council, 529 U.S. at 23 (citations omitted).

2. Collateral Claim Exception to Exhaustion Requirement

An exception to the rule that administrative remedies must be exhausted has also been recognized to permit judicial review of "collateral" constitutional claims challenging an interim, or non-final, agency decision. In order to qualify for a waiver of exhaustion, under that theory, however, a "colorable constitutional claim" is required, along with a entirely collateral challenge to the merits of the substantive claim being presented, and a finding that full relief could not be afforded if administrative remedies were to be exhausted. See Mathews v. Eldridge, 424 U.S. 319, 328-332 (1976); Boettcher v. Sect'y of Health and Human Servs., 759 F.2d 719, 721-22 (9th Cir. 1985); Hoye v. Sullivan, 985 F.2d 990, 991 (9th Cir. 1993).

Here, Plaintiff fails to satisfy any of these three criteria. Sutter's sole alleged constitutional claim is procedural due process stemming from the claimed liberty interest in protecting its reputation for delivering quality heart transplant services. Plaintiff alleges it should have been provided a hearing, pre-termination, in order to present mitigating circumstances in favor of its continued Medicare certification. Complaint, ¶ 65. With respect to its argument that a hearing was required, the Ninth Circuit has specifically found that Medicare providers are not entitled to an evidentiary hearing, or to a completed administrative appeal, before termination. Cassim v. Bowen, 824 F.2d 791, 796-98 (9th Cir. 1987).

Significantly, too, any due process that is required can be accomplished informally. Where, as here, post-termination appeals are available, all that due process requires is that the party facing termination receive "oral or written notice" of the reasons for the proposed action and "an opportunity to respond." Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 545-46 (1985) The extensive process outlined above, which spanned a period of nearly two years, more than sufficed in that regard. CMS twice gave plaintiff advance notice of its failure to meet the prescribed volume requirement, in January of 2007 and again in July of 2008. Complaint, ¶ 32. It gave Sutter more than a year to come into compliance after approving its corrective action plan and allowed Plaintiff to present formal written submissions outlining its alleged mitigating circumstances in March of 2007 and again in September of 2008. Id. at ¶¶ 29-30, 35, 37.

Under these circumstances, adequate due process prior to termination was unquestionably afforded.

Even more fundamentally, the Ninth Circuit has also found that a Medicare provider's termination does not affect any property interest protected by due process in any event, and impinges on a liberty interest only when accusations are leveled that are both contested and which impair the provider's reputation for "honesty and morality". Erickson v. United States, 67 F.3d 858, 862-63 (9th Cir. 1995); Guzman v. Shewry, 544 F.3d 1073, 1084-86 (9th Cir. 2008).*fn4 Here, despite Plaintiff's protestations to the contrary, CMS' stated reason for terminating Sutter, its failure to meet volume requirements, has no bearing on Sutter's reputation or morality. Nor is that stated reason for termination even contested: Sutter candidly admits that it failed to meet the volume requirements, only arguing that it nonetheless should not have been terminated from Medicare participation for other, extenuating reasons.

In addition, Sutter's alleged due process claim, stemming from Medicare's purported failure to follow the appropriate procedures in effectuating Sutter's termination, is not completely independent, or collateral from, its substantive claim that mitigating circumstances weigh against termination.

Claims are not necessarily collateral simply because they are procedural in nature. Heckler v. Ringer, 466 U.S. 602, 615 (1984). A claim is collateral only if it "is not 'bound up' with the merits so closely that [the court's] decision would constitute interference with the agency process. Johnson v. Shalala, 2 F.3d 918, 920 (9th Cir. 1993). Here, the Court finds that the substantive issues underlying Sutter's termination as a Medicare approved heart transplant provider are inextricably intertwined with the procedural requirements necessary to effect that termination. Moreover, the Court believes that premature judicial intervention, as advocated by Plaintiff, would impermissibly appear with the agency's own decision making process.

Although Sutter relies on several out-of-circuit district court decisions in advocating a different result, the Court declines to follow those decisions.*fn5 Furthermore, while Sutter also points to potential irreparable harm, allegations of such injury cannot bypass the fundamental requirement of a colorable constitutional claim. See Winter v. California Medical Review, Inc., 900 F.2d 1322, 1326 (9th Cir. 1990) (treating colorable claim requirement as inherent part of irreparable injury element).

Finally, it is illogical for Sutter to argue, as it does, that administrative review would serve no purpose under the circumstances of this case. As the Supreme Court, in Bowen, supra, explains:

"Exhaustion is generally required as a matter of preventing premature interference with agency processes, so that the agency may function efficiently and so that it may have an opportunity to correct its own errors, and to afford the parties and the courts the benefit of its experience and expertise, and to compile a record which is adequate for judicial review."

Bowen v. City of New York, 476 U.S. at 484, quoting Weinberger v. Salfi, supra, 422 U.S. at 765.

These considerations apply squarely to this case and mandate that exhaustion not be waived.

C. Circumstances Of This Case.

There Is No Basis For Mandamus Relief Under The

1. remedies precludes this Court from exercising Sutter's failure to exhaust administrative mandamus jurisdiction.

Although Plaintiff also seeks to predicate federal jurisdiction on the federal mandamus statute, 28 U.S.C. § 1361, that statute confers jurisdiction "only if plaintiff has exhausted all other avenues of relief and only if the defendant owes him a clear non-discretionary duty." Heckler v. Ringer, 466 U.S. 602, 616 (1984) (emphasis added). Sutter cannot satisfy either prerequisite since, as discussed above, it has not exhausted its administrative remedies. Unless such exhaustion has occurred, jurisdiction under the Mandamus Act is unavailable. Hironymous v. Bowen, 800 F.2d 888, 893 (9th Cir. 1986).

2. mandamus relief can be predicated in any event. No clear, non-discretionary is present upon which

Additionally, for mandamus to issue, a clear, non-discretionary duty must be identified. "Mandamus is an extraordinary remedy and is available to compel a federal official to perform a duty only if: (1) the individual's claim is clear and certain; (2) the official's duty is non-discretionary, ministerial, and so plainly prescribed as to be free from doubt, and (3) no other adequate remedy is available." Kildare v. Saenz, 325 F.3d 1078, 1084 (9th Cir. 2003), quoting Patel v. Reno, 134 F.3d 929, 931 (9th Cir. 1998).

Here, Medicare has no such duty to postpone termination until after administrative appeals have been exhausted. To the contrary, the applicable regulation, 42 C.F.R. § 489.53(d)(1), allows Medicare to make termination effective just 15 days following notice.*fn6 Administrative appeals could not possibly be exhausted within that short period. The inescapable inference is that the regulations necessarily contemplate termination to be effective before the appeals process has been completed, a conclusion reinforced by the fact that appeals can be taken up to 60 days post termination. 42 C.F.R. § 498.40. The contention that CMS owed Sutter a non-discretionary duty to provide a pre-termination appeal simply fails under these circumstances.

Nor is Sutter's reliance on statements in the preamble to the 2007 Final Rules any more persuasive. See 72 Fed. Reg. 15248. Plaintiff argues that said preamble requires a "follow up survey" prior to termination of heart transplant centers not meeting the volume requirement (Complaint, ¶¶ 24-25), and further points to a statement in the preamble that "in most cases, Medicare providers and suppliers are permitted to continue to participate in Medicare while an appeal is pending." 72 Fed. Reg. at 15248. As an initial matter, Sutter's termination was effected under the 1987 NCD and not the 2007 conditions of participation. In addition, the preamble to the 2007 Rules does not rise to the level of a legal duty as required for mandamus jurisdiction in any event. Importantly, the actual governing regulation simply gives CMS the discretion to review a provider's compliance (See 42 C.F.R. § 488.61(a)(3); 488.20). Moreover, to the extent that the 2007 preamble appeared to recognize a right to continue to participate in Medicare while an appeal was pending, shortly after it was issued the Secretary recognized that it was inconsistent with Medicare policy over the past 30 years and expressly repudiated it. 73 Fed. Reg. 68502, 68787 (Nov. 18, 2008).*fn7 Significantly, that repudiation occurred before CMS' final termination notice in December of 2008, so Sutter cannot allege that it reasonably believed anything otherwise at the time of that termination.

Significantly, too, at the time the 2007 preamble was published, CMS was already some fifteen months into Sutter's termination process, which makes it hard for Sutter to maintain that it believed all along that it would be permitted to continue in operation after a termination.

As discussed above, Sutter's reliance on 42 C.F.R. § 402.5 for providing the requisite non-discretionary duty is also unavailing, since to the extent that regulation does provide for a pre-termination hearing, it is limited to specific, culpable statutory violations, like knowing and willful improper billing, charging or reporting practices. See 42 C.F.R. § 402.3. Not only is § 402.5 inapplicable, but by specifically authorizing pretermination appeals under the narrow circumstances it encompasses, it suggests that the Medicare Regulations permit such pretermination review only where expressly provided, a situation notably absent here.

Finally, while Sutter also points to provisions of the State Operations Manual that suggest that CMS should have given Sutter 210 days in which to cure any volume deficiency (See Complaint, ¶ 25), the fact that the termination process here extended well beyond those parameters (at almost two years) makes reliance on any such provision misplaced. Furthermore, the State Operations Manual itself qualifies the 210-day period by stating that "[a]ll timeframes are maximum," and that CMS "may terminate more quickly as long as the regulatory requirements for notification of the public and provider are satisfied." State Operations Manual, Exh. F to Plaintiff's Appendix of Authorities, at p. 42.

The applicable notice period before termination, as set forth above, is 15 days pursuant to 42 C.F.R. 489.53(d).

In sum, although mandamus jurisdiction is precluded here at the onset due to Sutter's failure to exhaust its administrative remedies, it is also unavailable in any event because no clear, non-discretionary duty to act on the part of CMS has been identified.


Given the foregoing, the Court finds that Sutter's failure to exhaust its available administrative remedies in this matter makes any resort to judicial intervention premature at the present time. Because that failure to exhaust is jurisdictional in nature, Sutter's Complaint is dismissed, without prejudice, pending completion of the administrative appellate process. Plaintiff's Motion to Dismiss on jurisdictional grounds, which the Court will construe as an unenumerated Rule 12(b) for the reasons set forth above, is accordingly GRANTED.

Because Sutter's lawsuit is therefore terminated for reasons related to the Court's jurisdiction, it is not necessary to address Defendant's alternative contention that the lawsuit also be dismissed for failure to state a cognizable claim under Rule 12(b)(6), and the Court declines to do so.

Additionally, given the dismissal of Plaintiff's complaint on jurisdictional grounds, Sutter's concurrently pending Motion for Preliminary Injunction becomes moot, and is accordingly DENIED on that basis.

The Clerk is directed to close this file. IT IS SO ORDERED.

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