Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-14-05061/USCOURTS-caDC-14-05061-0/pdf.json

Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 12, 2015 Decided May 19, 2015

No. 14-5061

DISTRICT HOSPITAL PARTNERS, L.P., DOING BUSINESS AS 

GEORGE WASHINGTON UNIVERSITY HOSPITAL, ET AL.,

APPELLANTS

v.

SYLVIA MATHEWS BURWELL, SECRETARY OF THE UNITED 

STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:11-cv-00116)

Robert L. Roth argued the cause for the appellants. James

F. Segroves and John R. Hellow were with him on brief.

John L. Oberdorfer, Pierre H. Bergeron, Stephen P. Nash

and Sven C. Collins were on brief for the amici curiae

Non-Profit Hospitals in support of the appellants. 

James C. Luh, Trial Attorney, United States Department 

of Justice, argued the cause for the appellee. Stuart F. Delery, 

Assistant Attorney General, Ronald C. Machen, Jr., U.S. 

Attorney, and H. Thomas Byron III, Attorney, were with him 

on brief.

USCA Case #14-5061 Document #1553129 Filed: 05/19/2015 Page 1 of 31
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Before: HENDERSON, ROGERS and BROWN, Circuit 

Judges.

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: This case 

requires us to slough through the “labyrinthine world” of 

Medicare reimbursements. Adirondack Med. Ctr. v. Sebelius, 

740 F.3d 692, 694 (D.C. Cir. 2014). Under the current 

system, hospitals are reimbursed for treating a Medicare 

patient based on the average treatment cost for that patient’s 

ailment/condition. Some patients, however, require 

protracted care that far outpaces an illness’s average cost of 

treatment. To account for this, hospitals can request 

“additional payments,” known as outlier payments, if the cost 

of treating a particular patient is sufficiently high. 42 U.S.C. 

§ 1395ww(d)(5)(A). Every year, the Secretary of Health and 

Human Services (HHS) sets a monetary threshold above which 

outlier payments may be recovered. 

A group of 186 hospitals that participates in Medicare 

believes that the HHS Secretary set the monetary threshold for 

outlier payments too high in 2004, 2005 and 2006. Led by 

District Hospital Partners (DHP), the hospitals sued the 

Secretary in federal district court, claiming that she violated the 

Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et seq., 

by engaging in arbitrary and capricious decision-making. 

They also moved to supplement the administrative record. 

The district court denied the motion to supplement in part and 

rejected DHP’s APA challenges to each outlier threshold. We 

affirm the district court’s partial denial of the motion to 

supplement and its rejection of the APA challenges to the 2005 

and 2006 outlier thresholds. Its conclusion that the 2004 

threshold is adequately explained, however, is erroneous and 

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we therefore reverse its summary judgment grant to the 

Secretary on this claim and remand to the district court with 

instructions to remand to the Secretary for further proceedings. 

See Miller v. Dep’t of Navy, 476 F.3d 936, 939–40 (D.C. Cir. 

2007).

I. BACKGROUND

A. THE OUTLIER PAYMENT SYSTEM

Medicare was “[e]stablished in 1965 as part of the Social 

Security Act.” Fischer v. United States, 529 U.S. 667, 671 

(2000). It operates as a “federally funded medical insurance 

program for the elderly and disabled,” id., and is managed by 

the HHS Secretary, 42 U.S.C. § 1395kk(a). The program 

originally reimbursed hospitals for the “reasonable costs” of 

services provided to Medicare patients. Cnty. of L.A. v. 

Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). That system 

deteriorated over time, however, because it provided “little 

incentive for hospitals to keep costs down,” as “[t]he more they 

spent, the more they were reimbursed.” Id. In 1983, the 

Congress became particularly concerned “that hospitals 

reimbursed on a reasonable cost basis lacked incentives to 

operate efficiently.” Transitional Hosps. Corp. of La., Inc. v. 

Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000).

To rectify the problem, the Congress shifted to a 

prospective payment system that reimburses hospitals based on 

the average rate of “operating costs [for] inpatient hospital 

services.” Cnty. of L.A., 192 F.3d at 1008. Because different 

illnesses entail varying costs of treatment, the Secretary uses 

diagnosis-related groups (DRGs) to “modif[y]” the average 

rate. Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. 

Cir. 2011). A DRG is a group of related illnesses to which the 

Secretary assigns a weight representing “the relationship 

between the cost of treating patients within that group and the 

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average cost of treating all Medicare patients.” Id. at 205–06. 

To calculate a specific reimbursement, the Secretary “takes the 

[average] rate, adjusts it [to account for regional labor costs], 

and then multiplies it by the weight assigned to the patient’s 

DRG.” Cnty. of L.A., 192 F.3d at 1009.

The major innovation of the prospective payment system 

is that hospitals are “reimbursed at a fixed amount per patient, 

regardless of the actual operating costs they incur in rendering 

[those] services.” Sebelius v. Auburn Reg’l Med. Ctr., 133 

S. Ct. 817, 822 (2013) (emphasis added). The new system 

incentivizes hospitals to keep costs as low as possible. But the 

“Congress recognized that health-care providers would 

inevitably care for some patients whose hospitalization would 

be extraordinarily costly or lengthy.” Cnty. of L.A., 192 F.3d 

at 1009. To account for costly patients, the Congress allows 

hospitals to request outlier payments. See 42 U.S.C. 

§ 1395ww(d)(5)(A)(ii). A hospital is eligible for an outlier 

payment “in any case where charges, adjusted to cost, exceed . 

. . the sum of the applicable DRG prospective payment rate . . . 

plus a fixed dollar amount determined by the Secretary.” Id.

Although calculating outlier payments is an elaborate 

process, three particular numbers are important: (1) the 

cost-to-charge ratio, (2) the fixed loss threshold, and (3) the 

outlier threshold. A hospital’s cost-to-charge ratio is 

calculated from data in its most recent cost report. See 42 

C.F.R. § 412.84(i)(2). The ratio represents a hospital’s 

“average markup.” Appalachian Reg’l Healthcare, Inc. v. 

Shalala, 131 F.3d 1050, 1052 (D.C. Cir. 1997). Markup is 

key because outlier payments are available only “where 

charges, adjusted to cost, exceed” the applicable DRG rate by a 

fixed amount. 42 U.S.C. § 1395ww(d)(5)(A)(ii) (emphasis 

added). The ratio ensures that the Secretary does not simply 

reimburse a hospital for the charges reflected on a patient’s 

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invoice but instead only for charges that are “adjusted to cost.” 

Id. Applying the cost-to-charge ratio in practice is 

straightforward. For example, if a hospital’s cost-to-charge 

ratio is 75% (total costs are approximately 75% of total 

charges), the Secretary multiplies the hospital’s charges by 

75% to calculate the hospital’s cost. See Boca Raton Cmty. 

Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229 

n.3 (11th Cir. 2009).

The second important number is the fixed loss threshold. 

A hospital can request an outlier payment if its charges exceed 

the “DRG prospective payment rate . . . plus a fixed dollar 

amount determined by the Secretary.” 42 U.S.C. 

§ 1395ww(d)(5)(A)(ii) (emphasis added). The italicized 

portion—“a fixed dollar amount”—is known as the fixed loss 

threshold. In effect, this threshold “acts like an insurance 

deductible because the hospital is responsible for that portion 

of the treatment’s excessive cost” above the applicable DRG 

rate. Boca Raton Cmty. Hosp., 582 F.3d at 1229. The 

Secretary calculates a new fixed loss threshold for each fiscal 

year. See 42 U.S.C. § 1395ww(d)(6).

The third number is the outlier threshold. The Secretary 

calculates it by adding the DRG rate for a certain illness or 

condition to the fixed loss threshold.1

 See Cnty. of L.A., 192 

 1 We have simplified the calculation. Although the outlier 

threshold is calculated by adding the applicable DRG rate to the 

fixed loss threshold, there are other variables that must be added to 

that amount as well. These include “any IME and DSH payments, 

and any add-on payments for new technology.” 68 Fed. Reg. 

45,346, 45,477 (Aug. 1, 2003). IME is an acronym for indirect 

costs of medical education, which the Secretary must consider in 

disbursing outlier payments. See 42 U.S.C. § 1395ww(d)(5)(B). 

DSH is an acronym for a disproportionate share hospital, which 

considers whether a hospital serves a disproportionate share of 

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F.3d at 1009. Any cost-adjusted charges imposed above the 

outlier threshold are eligible for reimbursement under the 

outlier payment provision. See 42 U.S.C. 

§ 1395ww(d)(5)(A)(ii). Since 2003, outlier payments have 

been 80% of the difference between a hospital’s adjusted 

charges and the outlier threshold. See 68 Fed. Reg. at 45,476;

42 C.F.R. § 412.84(k).

We can tie this all together with an example. Assume that 

the Secretary sets the fixed loss threshold at $10,000. Assume 

also that a hospital treats a Medicare patient for a broken bone 

and that the DRG rate for the treatment is $3,000. The 

Medicare patient required unusually extensive treatment which 

caused the hospital to impose $23,000 in cost-adjusted charges. 

If no other statutory factor is triggered, see supra n.1, the 

hospital is eligible for an outlier payment of $8,000, which is 

80% of the difference between its cost-adjusted charges 

($23,000) and the outlier threshold ($13,000). See generally 

62 Fed. Reg. 45,966, 45,997 (Aug. 29, 1997) (explaining 

similar example).

Apart from calculating individual reimbursements, the 

Secretary must also ensure that total outlier payments are 

neither “less than 5 percent nor more than 6 percent” of the 

total DRG-related payments in a given year. 42 U.S.C. 

 

low-income patients. See id. § 1395ww(d)(5)(F). And 

technological add-on payments refer to the Secretary’s obligation to 

consider whether the applicable DRG rate takes into account the 

expenses of “a new medical service or technology.” Id. 

§ 1395ww(d)(5)(K)(ii)(I). None of these additional 

variables—IME, DSH and technology add-on payments—is 

relevant here. For convenience, then, we refer to the outlier 

threshold as the sum of the applicable DRG rate and the fixed loss 

threshold.

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§ 1395ww(d)(5)(A)(iv). The Secretary complies with this 

provision by selecting outlier thresholds that, “when tested 

against historical data, will likely produce aggregate outlier 

payments totaling between five and six percent of projected . . . 

DRG-related payments.” Cnty. of L.A., 192 F.3d at 1013. 

Nevertheless, testing against historical data is only a predictive 

exercise. Id. at 1009. Accordingly, the Secretary does not 

take corrective action once the fiscal year ends even if outlier 

payments fall outside the five-to-six per cent range. Id. We 

have upheld this practice. Id. at 1020.

B. THE OUTLIER CORRECTION RULE

The outlier payment system began to break down in the 

late 1990s. Outlier payments were supposed to be made “only 

in situations where the cost of care is extraordinarily high in 

relation to the average cost of treating comparable conditions 

or illnesses.” 68 Fed. Reg. 10,420, 10,423 (Mar. 5, 2003). 

But hospitals could manipulate the outlier regulations if their 

charges were “not sufficiently comparable in magnitude to 

their costs.” Id. The Secretary issued a notice of proposed 

rulemaking (NPRM) to address these concerns. Id. at 10,420.

In the NPRM, the Secretary described how a hospital 

could use “the time lag between the current charges on a 

submitted bill and the cost-to-charge ratio taken from the most 

recent settled cost report.” Id. at 10,423. A hospital knows 

that its cost-to-charge ratio is based on data submitted in past 

cost reports. Id. If it dramatically increased charges between 

past cost reports and the patient costs for which reimbursement 

is sought, its cost-to-charge ratio would “be too high” and 

would “overestimate the hospital’s costs.” Id. Some 

hospitals took advantage of this weakness in the system. The 

Secretary identified “123 hospitals whose percentage of outlier 

payments relative to total DRG payments increased by at least 

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5 percentage points” between fiscal years 1999 and 2001. Id. 

The adjusted charges at those 123 hospitals “increased at a rate 

at or above the 95th percentile rate of charge increase for all 

hospitals . . . over the same period.” Id. And during that 

time, the 123 hospitals had a “mean rate of increase in charges 

[of] 70 percent” alongside a decrease of “only 2 percent” in 

their cost-to-charge ratios. Id. at 10,424. The 123 hospitals 

are referred to as turbo-chargers.

The Secretary published the final rule three months after 

the NPRM. See 68 Fed. Reg. 34,494 (June 9, 2003) (outlier 

correction rule). As relevant here, the Secretary adopted two 

new provisions to close the gaps in the outlier payment system. 

First, a hospital’s cost-to-charge ratio was to be calculated 

using more recent cost reports. Id. at 34,497–99 (codified at 

42 C.F.R. § 412.84(i)(1)–(2)). This change reduced “the time 

lag for updating cost-to-charge ratios by a year or more” and 

ensured that those ratios accurately reflected a hospital’s costs. 

Id. at 34,497. Second, a hospital’s outlier payments were to 

be subject to reconciliation when its “cost report[] coinciding 

with the discharge is settled.” Id. at 34,504 (codified at 42 

C.F.R. § 412.84(i)(4)). Outlier payments were still disbursed 

based on the “best information available at that time.” Id. at 

34,501. They were adjusted after the fact, however, if the 

“actual cost-to-charge ratios [were] found to be plus or minus 

10 percentage points from the cost-to-charge ratio” used to 

calculate the outlier payments. Id. at 34,503.

C. THE CHALLENGED RULES

Once the Secretary promulgated the outlier correction 

rule, she initiated rulemakings to set the outlier thresholds for 

2004, 2005 and 2006, respectively. See 68 Fed. Reg. 45,346; 

69 Fed. Reg. 48,916 (Aug. 11, 2004); 70 Fed. Reg. 47,278 

(Aug. 12, 2005). DHP challenges all three rules. Each one is 

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quite long and has its own context. We therefore summarize 

them individually. 

In the 2004 rule, the Secretary established the outlier 

threshold at “the prospective payment rate for the DRG . . . plus 

$31,000.” 68 Fed. Reg. at 45,477. To arrive at the $31,000 

threshold, the Secretary had to “simulate[] payments” for 2004. 

Id. at 45,476. In order to simulate 2004 payments, the 

Secretary used cost and charge data from 2002 and “inflate[d]” 

it by two years to predict charges for 2004. Id. The 

Secretary inflated the 2002 data using the “2-year average 

annual rate of change in charges per case” between 2000 and 

2002. Id. The average annual rate of change is sometimes 

referred to as the “charge inflation factor.” Id. at 45,477. 

The charge data used to calculate the charge inflation factor 

came from all hospitals’ “cost-to-charge ratios.” Id. at 

45,476.

The Secretary also made adjustments in the 2004 

rulemaking to account for the outlier correction rule. One 

change was to use “more recent cost-to-charge ratios” in order 

to best “approximate” the “latest tentative settled cost reports.” 

Id. Another change took account of the possibility that 

hospitals’ outlier payments were subject to the reconciliation 

process set forth in the outlier correction rule. 2 Id. 

 2 As discussed, supra p. 8, the reconciliation process corrects for 

hospitals that take advantage of the time lag in updating 

cost-to-charge ratios. See 68 Fed. Reg. at 34,500–01. The outlier 

correction rule reduced “the opportunity for hospitals to manipulate 

the system to maximize outlier payments.” Id. at 34,501. But the 

Secretary recognized that the outlier correction rule did not eliminate 

“all such opportunity.” Id. A hospital could still skew the system 

by increasing charges for current invoices because the Secretary 

used past cost-to-charge ratios that did not capture the most recent 

charge increases. See id. To account for this asymmetry, the 

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Specifically, the Secretary made preliminary calculations and 

found “approximately 50 hospitals [she] believe[d] will be 

reconciled.” Id. To avoid understating the rate of charge 

inflation for these hospitals, the Secretary “attempted to project 

each hospital’s cost-to-charge ratio” using “its rate of increase 

in charges per case based on [fiscal year] 2002 charges, 

compared to costs.” Id. at 45,477. 

One commenter asked the Secretary to “factor in the 

calculation of the [outlier] threshold the fact that certain 

hospitals have distorted their charges significantly.” Id. at 

45,477. In other words, the commenter wanted the 2004 

outlier threshold to account for the turbo-chargers. The 

Secretary answered this concern by noting that the 2004 

threshold “reflect[s] the changes made to outliers from the 

[outlier correction] rule.” Id. Had the Secretary not 

accounted for the changes, the 2004 fixed loss threshold would 

have been “approximately $50,200.” Id. The difference 

between this amount and the one selected—$31,000—allowed 

hospitals “to qualify for higher outlier payments due to the 

lower threshold.” Id. The Secretary therefore saw no harm 

to hospitals because “the [2004] threshold ha[d] fallen 

significantly from the proposed threshold.” Id.

 

Secretary created the reconciliation process. Outlier payments are 

still disbursed based on the most recently available “cost-to-charge 

ratios.” Id. at 34,504. But once the cost report “coinciding with 

the discharge is settled”—which occurs after the outlier payment for 

that discharge is disbursed—the Secretary will reconcile (i.e., adjust) 

outlier payments after the fact. Id. at 34,504. Reconciliation 

occurs if the hospital’s actual cost-to-charge ratio is “plus or minus 

10 percentage points from the cost-to-charge ratio used during that 

time period to make outlier payments.” Id. at 34,503. 

Consequently, any interim gains from turbo-charging are erased 

through post-disbursement reconciliation.

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In the 2005 rule, the Secretary established that the outlier 

threshold was to be “equal to the prospective payment rate for 

the DRG . . . plus $25,800.” 69 Fed. Reg. at 49,278. But she 

arrived at that threshold only after a number of commenters 

urged her to adopt a methodology different from the one set 

forth in the proposed rule. The proposed rule provided that 

the 2005 outlier threshold was to be the applicable DRG rate 

“plus $35,085.” Id. at 49,276. Some commenters worried 

that raising the fixed loss threshold from $31,000 to $35,085 

“would make it more difficult for hospitals to qualify for 

outlier payments and put them at greater risk when treating 

high cost cases.” Id. The Secretary considered these 

concerns and revised the methodology “in order to calculate 

the [fiscal year] 2005 outlier thresholds.” Id. at 49,277. Her 

revision accounted for the changes in the outlier correction rule 

and the “exceptionally high rate of hospital charge inflation 

[i.e., turbo-charging] that is reflected in the data” for 2001, 

2002 and 2003. Id. The Secretary was unable to anticipate 

these changes in 2004 because she had “insufficient data” due 

to the “limited time from the publication of [the outlier 

correction rule] to the publication” of the 2004 outlier 

threshold. Id.

As she did one year earlier, the Secretary had to 

“simulate[] payments” for 2005 using past data based on 

“hospital cost-to-charge ratios.” Id. But “[i]nstead of using 

the 2-year average annual rate of change in charges per case” 

between 2001 and 2003, the Secretary took the “unprecedented 

step” of using data from the most recent fiscal year. Id. This 

innovation required her to calculate “the 1-year average annual 

rate of change in charges per case from the first half of [fiscal 

year] 2003 to the first half of [fiscal year] 2004.” Id. She 

believed that these changes would lead to a “more accurate 

determination of the rate of change in charges per case” 

between 2003 and 2005. Id. The Secretary also decided 

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there was no need to account for the effect of reconciliation; 

given the outlier correction rule, she declared, “the majority of 

hospitals’ cost-to-charge ratios will not fluctuate significantly 

enough . . . to meet the criteria to trigger reconciliation of their 

outlier payments.” Id. at 49,278. 

For 2006, the Secretary established that the outlier 

threshold was to be “equal to the prospective payment rate for 

the DRG . . . plus $23,600.” 70 Fed. Reg. at 47,494. As with 

the earlier rules, the Secretary had to “simulate payments” for 

2006 using past data. Id. But she worried that data from 

2002 and 2003 was skewed by “the atypically high rate of 

hospital charge inflation” during that time. Id. To ensure the 

data was not tainted by charge inflation, she opted to calculate 

the “charge inflation factor based on the first six months of 

[fiscal year] 2005 relative to [the] same period for [fiscal year] 

2004.” Id. The data for 2004 and 2005 was “taken from the 

most recent tentatively settled cost reports of hospitals.” Id. 

Her choice was significant because the outlier correction rule 

was in effect for the entire period, meaning that the past data 

“fully incorporate[d] implementation of the new outlier 

policy.” Id.

D. PROCEDURAL HISTORY

DHP asserts that, had the Secretary “established more 

accurate outlier thresholds for federal fiscal years 2004, 2005 

and 2006, [it] would have received substantially more in outlier 

payments.” Compl. ¶ 20. After pursuing administrative 

remedies for some claims, see 42 U.S.C. § 1395oo(a), it filed 

suit in federal district court. The Secretary moved to dismiss 

the complaint on the grounds of failure to exhaust 

administrative remedies and failure to state a claim for relief. 

See Dist. Hosp. Partners, LP v. Sebelius, 794 F. Supp. 2d 162, 

164 (D.D.C. 2011). The district court dismissed the 

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unexhausted claims but concluded that the APA challenges to 

the outlier thresholds should be resolved on summary 

judgment. Id. at 173.

The parties subsequently proceeded to discovery but could 

not agree on the contents of the administrative record. DHP 

eventually filed a motion to compel the Secretary to 

supplement the record. See Dist. Hosp. Partners, LP v. 

Sebelius, 971 F. Supp. 2d 15, 18–19 (D.D.C. 2013). The 

district court supplemented the 2004 rulemaking record with 

two documents: (1) a public comment on the 2004 outlier 

threshold; and (2) a version of the outlier correction rule the 

Secretary had sent to the Office of Management and Budget 

(OMB) for review but eventually abandoned. Id. at 28, 31. 

See generally Exec. Order No. 12,866 § 6(a)(3)(B)(i), 58 Fed. 

Reg. 51,735 (Sept. 30, 1993) (requiring agencies taking 

“significant regulatory action” to send OMB “[t]he text of the

draft regulatory action” before publication in the Federal 

Register). After discovery concluded, the parties 

cross-moved for summary judgment. See Dist. Hosp. 

Partners, LP v. Sebelius, 973 F. Supp. 2d 1, 5 (D.D.C. 2014). 

The district court granted summary judgment to the Secretary 

because she “made reasonable methodological choices in 

determining the fixed loss thresholds” for 2004, 2005 and 

2006. Id. DHP timely appealed.

II. ANALYSIS

We review a grant of summary judgment de novo. 

Deppenbrook v. PBGC, 778 F.3d 166, 171 (D.C. Cir. 2015). 

Summary judgment may be granted “if the movant shows that 

there is no genuine dispute as to any material fact and the 

movant is entitled to judgment as a matter of law.” FED. R.

CIV. P. 56(a). “Our inquiry is more nuanced, however, if the 

dispute involves the review of agency action.” Deppenbrook, 

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778 F.3d at 171. If so, “we review the administrative record” 

directly and “accord no particular deference to the judgment of 

the District Court.” Id. (quotation mark omitted). We will 

affirm summary judgment for the agency unless it “violated the 

Administrative Procedure Act by taking action that is 

‘arbitrary, capricious, an abuse of discretion, or otherwise not 

in accordance with law.’ ” Id. (quoting 5 U.S.C. § 706(2)). 

We review the district court’s “refusal to supplement the 

administrative record for abuse of discretion.” Am. Wildlands 

v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008). 

DHP makes three arguments on appeal. First, it claims 

that the district court should have ordered the Secretary to 

supplement the administrative record with additional 

documents. Second, it contends that the Secretary violated 

the APA by failing to use the best available data. And third, it 

argues that the outlier thresholds for 2004, 2005 and 2006 were 

set too high and are therefore arbitrary and capricious. We 

address each argument in turn. 

A. SUPPLEMENTING THE ADMINISTRATIVE RECORD

DHP claims that the district court abused its discretion by 

not including additional materials in all three rulemaking 

records. We disagree.3

In evaluating agency action under the APA, our review 

must “be based on the full administrative record that was 

before the Secretary” when she made her decision. 

Kempthorne, 530 F.3d at 1002. To ensure that we review only 

 3 The Secretary also asks us to reverse the district court’s decision 

to supplement the 2004 rulemaking record with the OMB draft 

outlier correction rule. We decline to do so because the district 

court did not abuse its discretion in partially supplementing the 2004 

rulemaking record.

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those documents that were before the agency, we “do not allow 

parties to supplement the record unless they can demonstrate 

unusual circumstances justifying a departure from this general 

rule.” Id. (quotation mark omitted). We have identified 

three “unusual circumstances”:

(1) the agency deliberately or negligently excluded 

documents that may have been adverse to its decision; 

(2) the district court needed to supplement the record 

with background information in order to determine 

whether the agency considered all of the relevant 

factors; or (3) the agency failed to explain 

administrative action so as to frustrate judicial review.

Id. (quotation marks, citations and alteration omitted); see also 

City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 

2010) (denying motion to supplement administrative record 

because “[n]one of these [three] conditions is met”).

DHP complains that the district court should have 

supplemented the administrative record with source data used 

to approximate cost-to-charge ratios for 2004. But it does not 

explain—or even try to explain—how its request falls into one 

of the three unusual circumstances elucidated in Kempthorne. 

The Secretary did not frustrate judicial review by saying too 

little; the 2004 rulemaking explained at length how she 

calculated cost-to-charge ratios in light of the outlier correction 

rule. See 68 Fed. Reg. at 45,476 (explaining “three steps” 

used to calculate “updated cost-to-charge ratios”). Nor does 

the source data constitute critical background information. 

See James Madison Ltd. ex rel. Hecht v. Ludwig, 82 F.3d 1085, 

1095–96 (D.C. Cir. 1996) (unnecessary to supplement 

administrative record with underlying source documents 

because record contained “detailed memoranda describing the 

[agency’s] findings and recommendations”). DHP has also 

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failed to establish that this source data was deliberately or 

negligently excluded by the Secretary. Meeting this 

exception requires a “strong showing of [agency] bad faith” 

and the “conclusory statements” in DHP’s brief “fall far short” 

of that high threshold. Id. at 1095 (quotation mark omitted).

DHP next argues that the district court should have 

supplemented the administrative record with the “trimmed” 

version of hospital charge data. Appellants’ Br. 55. It says

that the trimmed data is different from the “complete data sets” 

the Secretary provided to the public, which allegedly left it in 

the dark as to how the Secretary in fact calculated 

cost-to-charge ratios. Id. DHP is wrong: “[T]he process of 

‘trimming’ involved neither the modification of the [data] files 

currently in the administrative record, nor the creation of new 

[data] files not in the record.” Dist. Hosp. Partners, 971 F. 

Supp. 2d at 25. Moreover, the trimmed files are similar to 

source data and therefore are neither background information 

nor material that is needed because the agency failed to explain 

itself. See James Madison, 82 F.3d at 1095–96. Again, DHP 

makes no showing that the exclusion of the trimmed files was 

done in bad faith.

DHP’s final claim is that the administrative record should 

have been supplemented with the congressional testimony of a 

former HHS official.4 This material also fails to fall within 

one of Kempthorne’s three exceptions. We are not reviewing 

 4 Although DHP also asserts that the district court should have 

supplemented the 2005 and 2006 rulemaking records with the OMB 

draft, its argument on this point consists of only one sentence in its 

opening brief and is therefore forfeited. See Bryant v. Gates, 532 

F.3d 888, 898 (D.C. Cir. 2008) (appellant forfeited argument 

supported by “only [a] single, conclusory statement” in opening 

brief).

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agency rules that say so little they “frustrate judicial review” 

and the congressional testimony is not “background 

information” that illustrates the Secretary’s decision-making. 

Kempthorne, 530 F.3d at 1002. Nor was this document 

excluded in bad faith because it was not withheld: As the 

Secretary points out, the testimony is a “matter of public 

record.” Appellee’s Br. 55. 

Accordingly, the district court did not abuse its discretion 

in limiting supplementation to the 2004 rulemaking record 

with only the draft rule sent to OMB and a 2004 public 

comment. 

B. USING THE BEST AVAILABLE DATA

DHP asserts that the Secretary was obligated to use the 

best available data in formulating the outlier thresholds for 

2004, 2005 and 2006. While some statutes require an agency 

to use the best available data when taking certain action,5 DHP 

has not identified a similar statute constraining the Secretary’s 

discretion in setting outlier thresholds. DHP also claims that 

the Secretary herself required the agency to always use the best 

available data. See 65 Fed. Reg. 47,026, 47,038 (Aug. 1, 

2000). But she simply noted that she “use[s] the best 

available cost reporting data” for a specific calculation, id., but 

did not impose as a freestanding regulatory obligation the use

of the best available data in every rulemaking.

 5 See, e.g., 16 U.S.C. § 1533(b)(1)(A) (Interior Secretary must use 

“the best scientific and commercial data available to him” in 

determining “whether any species is an endangered species or a 

threatened species”); 42 U.S.C. § 13256(b) (Energy Secretary must 

prepare “technical and policy analysis” on alternative fuels “based 

on the best available data and information obtainable by the 

Secretary”).

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DHP attempts to resuscitate its claim by arguing that, in 

Gas Appliance Manufacturers Ass’n, Inc. v. DOE (GAMA), 

998 F.2d 1041 (D.C. Cir. 1993), we imposed a generic 

obligation on agencies to always use the best available data. 

DHP is in error. Nowhere in GAMA did we require agencies 

to collect and use only the best available data. Instead, we 

reversed the Energy Department’s decision because it was not 

adequately explained. Id. at 1046–48, 1049–51. We also

rejected a specific calculation Energy had made because it did 

not explain why it used two different data sets for the same 

inquiry. Id. at 1048. But far from imposing a 

best-available-data obligation on all agencies, GAMA was 

simply a routine APA case in which we found the challenged 

agency action arbitrary and capricious. See NRDC v. Daley, 

209 F.3d 747, 752 (D.C. Cir. 2000).

To be clear, agencies do not have free rein to use 

inaccurate data. An agency is required to “examine the 

relevant data and articulate a satisfactory explanation for its 

action including a rational connection between the facts found 

and the choice made.” Motor Vehicle Mfrs. Ass’n v. State 

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (emphasis 

added; quotation mark omitted). If an agency fails to examine 

the relevant data—which examination could reveal, inter alia, 

that the figures being used are erroneous—it has failed to 

comply with the APA. Moreover, an agency cannot “fail[] to 

consider an important aspect of the problem” or “offer[] an 

explanation for its decision that runs counter to the evidence” 

before it. Id. These requirements underscore that an agency 

cannot ignore new and better data. See Catawba Cnty., NC v. 

EPA, 571 F.3d 20, 46 (D.C. Cir. 2009) (agencies “have an 

obligation to deal with newly acquired evidence in some

reasonable fashion”); see also New Orleans v. SEC, 969 F.2d 

1163, 1167 (D.C. Cir. 1992) (“an agency’s reliance on a report 

or study without ascertaining the accuracy of the data

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contained in the study or the methodology used to collect the

data is arbitrary” (quotation mark omitted)).

Whether an agency has arbitrarily used deficient data 

depends on the specific facts of a particular case, as “the 

parameters of the arbitrary and capricious standard of review 

will vary with the context of the case.” WWHT, Inc. v. FCC, 

656 F.2d 807, 817 (D.C. Cir. 1981) (quotation marks omitted); 

see also Maggard v. O’Connell, 671 F.2d 568, 571 (D.C. Cir. 

1982) (“the concept of arbitrary and capricious review defies 

generalized application and must be contextually tailored” 

(quotation marks omitted)). It is to that inquiry we now turn. 

C. SETTING THE OUTLIER THRESHOLDS

DHP contends that the Secretary acted arbitrarily and 

capriciously by setting the outlier thresholds too high in 2004, 

2005 and 2006. Because the Secretary dealt with different 

considerations in each rulemaking, we discuss them separately.

1. The 2004 Rule

The Secretary established that the 2004 outlier threshold 

was the applicable DRG rate “plus $31,000.” 68 Fed. Reg. at 

45,477. As discussed above, the Secretary selected this 

number by first simulating 2004 outlier payments using data 

from 2002. Id. at 45,476. She inflated the 2002 data using 

“the 2-year average annual rate of change in charges per case”

between 2000 and 2002, which calculation was made from all 

hospitals’ “cost-to-charge ratios.” Id. And she accounted for 

the effects of reconciliation by identifying “approximately 50 

[turbo-charging] hospitals” that were likely to be reconciled. 

Id. For each of the 50 hospitals, the Secretary sought to 

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project its “cost-to-charge ratio based on its rate of increase in 

charges per case” in 2002.6

 Id. at 45,477.

DHP argues that the Secretary, in calculating the charge 

inflation factor, should have excluded the data from the 123 

turbo-charging hospitals identified in the NPRM. The 

Secretary excluded them in the OMB draft rule and DHP faults 

the Secretary for not explaining why she changed course in the 

2004 rulemaking and opted to include turbo-chargers’ data. 

But, as already noted, HHS abandoned the OMB draft rule and 

never published it in the Federal Register. Relying on the 

OMB draft rule to impugn the 2004 rulemaking, then, presents 

a problem. The Supreme Court recently iterated that “federal 

courts ordinarily are empowered to review only an agency’s

final action.” Nat’l Ass’n of Home Builders v. Defenders of 

Wildlife, 551 U.S. 644, 659 (2007). Deviations from a 

 6 At oral argument, counsel for DHP intimated that the charge 

inflation factor and cost-to-charge ratios come from two different 

datasets. Oral Arg. Tr. at 11–12, 14–15, 38. Because this data is 

separate, DHP asserted, the Secretary could make adjustments to one 

group but not the other. We do not believe the intimation is 

supported by the record. In each rulemaking, the Secretary 

specified that she derived the charge inflation factor from the 

cost-to-charge ratios for individual hospitals. See 70 Fed. Reg. at 

47,494 (Secretary calculated “a charge inflation factor of 14.94 

percent . . . us[ing] updated cost-to-charge ratios from the March 

2005 update” of hospital files); 69 Fed. Reg. at 49,277 (“[t]he 1-year 

average annual rate of change in charges per case . . . was 8.9772 

percent, or 18.76 percent over 2 years. As discussed above, as we 

have done in the past, we used hospital cost-to-charge ratios” from 

hospital files (emphasis added)); 68 Fed. Reg. at 45,476 (charge 

inflation factor is derived from “the 2-year average annual rate of 

change in charges per case” and is based on “cost-to-charge ratios” 

from hospital files). Accordingly, any adjustment to cost-to-charge 

ratios is reflected in the charge inflation factor.

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“preliminary determination” that was subsequently “overruled 

at a higher level . . . does not render the decisionmaking 

process arbitrary and capricious.” Id. It is true, of course, 

that an agency cannot “depart from a prior policy sub silentio

or simply disregard rules that are still on the books.” FCC v. 

Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). But 

this principle is inapplicable here—the OMB draft was never 

“on the books” in the first place. Id.

We held as much in Kennecott Utah Copper Corp. v. DOI, 

88 F.3d 1191 (D.C. Cir. 1996). That case involved, among 

other things, draft regulations that were sent by a Department 

of Interior (Interior) official to the Office of the Federal 

Register (OFR) for publication. Id. at 1200. Before they 

were published, however, Interior switched course and 

withdrew the draft from publication. Id. at 1200–01. Interior 

then proposed and eventually published a new set of 

regulations. Id. at 1201. Certain Kennecott petitioners 

challenged the published regulations because they supposedly 

“repealed and modified” the never-published draft regulations 

without a new round of notice and comment. Id. at 1207. 

We disagreed and held that the published regulations did not 

“repeal or modify” anything because the draft “never became a 

binding rule requiring repeal or modification.” Id. at 1208. 

The APA requires notice and comment only when 

“formulating, amending, or repealing a rule,” 5 U.S.C. 

§ 551(5), and the “agency was in no sense ‘formulating’ a rule” 

by “discarding” the earlier draft, Kennecott, 88 F.3d at 1209.

Nevertheless—and without regard to the OMB draft—we 

believe that the Secretary’s promulgation of the 2004 outlier 

threshold violated the APA. In the NPRM—a formal agency 

document that was published in the Federal Register—the 

Secretary identified 123 turbo-charging hospitals. 68 Fed. 

Reg. at 10,423–24. The 123 hospitals reported adjusted 

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charges that “increased at a rate at or above the 95th percentile 

rate of charge increase for all hospitals” between 1999 and 

2001. Id. at 10,423. The Secretary also noted that the 123 

hospitals were the principal beneficiaries of the outlier 

payment system: Their “mean rate of increase in charges was 

70 percent” for that two-year period while their cost-to-charge 

ratios “declined by only 2 percent.” Id. at 10,424.

The 123 hospitals are nowhere to be found in the 2004 

rulemaking. Granted, the Secretary identified 50 hospitals 

“that have been consistently overpaid recently for outliers.” 

68 Fed. Reg. at 45,476. But she did not explain how the 50 

hospitals differed from the 123 she identified in the NPRM. 

This unexplained inconsistency is significant because factoring 

in the outlier correction rule “resulted in a substantial

reduction in the outlier threshold from the proposed level.” 

Id. at 45,477 (emphasis added). The changes, in fact, caused 

the actual 2004 fixed loss threshold to fall from $50,200 in the 

proposed rule to $31,000 in the final rule. Id. Had the 

Secretary accounted for more turbo-charging hospitals in the 

2004 rule, perhaps the 2004 outlier threshold would have been 

even lower. Or perhaps not. Either way, we have no way to 

know for sure because there was scarcely a word about the 123 

turbo-chargers in the 2004 rule.7

 7 Although the NPRM was not technically part of the 2004 

rulemaking record, it was sufficiently similar to, and 

contemporaneous with, the 2004 rulemaking as to require the 

Secretary to explain inconsistencies in the data. See Portland 

Cement Ass’n v. EPA, 665 F.3d 177, 187 (D.C. Cir. 2011) (agency 

must account for and explain changes that affect “a 

contemporaneous and closely related rulemaking”); Ala. Power Co. 

v. FCC, 773 F.2d 362, 371 (D.C. Cir. 1985) (noting that agency 

adopted “inconsistent” principles in different but related orders and 

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Our conclusion follows naturally from the Supreme 

Court’s holding in State Farm. There, the Court stated that an 

agency “must examine the relevant data and articulate a 

satisfactory explanation for its action including a rational 

connection between the facts found and the choice made.” 

463 U.S. at 43 (emphases added; quotation mark omitted). 

The Secretary failed to do so here. She identified only 50 

turbo-charging hospitals despite that figure being “counter to 

the evidence” before her, id., namely the 123 hospitals in the 

NPRM. The inconsistency went unresolved in the 2004 

rulemaking because the Secretary never discussed it. We 

have often declined to affirm an agency decision if there are 

unexplained inconsistencies in the final rule. See, e.g., Engine 

Mfrs. Ass’n v. EPA, 20 F.3d 1177, 1182 (D.C. Cir. 1994) 

(noting that “unexplained inconsistency” in final rule was “not 

reasonable”); Gulf Power Co. v. FERC, 983 F.2d 1095, 1101 

(D.C. Cir. 1993) (“[W]hen an agency takes inconsistent

positions . . . it must explain its reasoning.”); General Chem. 

Corp. v. United States, 817 F.2d 844, 846 (D.C. Cir. 1987) 

(agency action was arbitrary and capricious because its 

analysis was “internally inconsistent and inadequately 

explained”). Nor do we uphold agency action if it fails to 

consider “significant and viable and obvious alternatives.” 

Nat’l Shooting Sports Found., Inc. v. Jones, 716 F.3d 200, 215 

(D.C. Cir. 2013) (quotation marks omitted). The analysis of 

the 123 turbo-charging hospitals identified in the NPRM was a 

significant and obvious alternative to the 50 hospitals the 

Secretary ultimately considered in the 2004 final rule.

The Secretary maintains that she had no obligation to 

explain the inconsistency given our holding in Bell Atlantic 

Telephone Cos. v. FCC, 79 F.3d 1195 (D.C. Cir. 1996). But 

 

remanding to agency for further explanation “[i]n light of this 

unexplained inconsistency”). 

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our holding there is off point. In Bell Atlantic, the FCC was 

required by regulations to set a price cap for telephone carriers 

that included an offset based on “productivity growth” in the 

telecommunications industry. Id. at 1198. In a 1990 order, 

the Commission included data from a controversial study and 

arrived at a productivity offset that was relatively low. See id.

at 1200. Then, in 1995, the Commission reversed course and 

excluded the data from that same study, which led to a higher 

productivity offset. Id. at 1200–01. We held that it was 

reasonable for “[o]ne Commission . . . to include a suspicious 

data point because it was relevant, [and] a later Commission 

. . . to exclude a relevant data point because it was suspicious.” 

Id. at 1203 (first alteration in original). Neither decision 

should “be viewed as more rational” than the other. Id. 

The same circumstances do not exist here. In Bell 

Atlantic, the later Commission acknowledged the inclusion of 

suspect data in the past and explained why it decided to 

exclude that information in calculating the 1995 price cap. Id.

at 1200–03. In the 2004 rulemaking, however, the Secretary 

never even acknowledged the possibility of excluding the 123 

turbo-charging hospitals from the dataset. Her muteness 

makes Bell Atlantic inapposite. Indeed, as we explained in 

that case: “Everyone agrees that an agency’s change of mind 

does not itself render the agency’s action arbitrary. What 

matters is the Commission’s explanation for its decision.” Id. 

at 1202 (emphasis added; citations omitted).

The Secretary also claims that our deferential standard of 

review tilts in favor of upholding the 2004 outlier threshold. 

We have stated that “in framing the scope of review, the court 

takes special note of the tremendous complexity of the 

Medicare statute. That complexity adds to the deference 

which is due to the Secretary’s decision.” Methodist Hosp. of 

Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C. Cir. 1994). 

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We do not retreat from that statement. The Secretary’s task of 

collecting and analyzing hospital charge data remains 

challenging. And when agency decisions “involve complex 

judgments about sampling methodology and data analysis that 

are within the agency’s technical expertise,” they receive “an 

extreme degree of deference.” Alaska Airlines, Inc. v. TSA, 

588 F.3d 1116, 1120 (D.C. Cir. 2009). But our deference “is 

not unlimited” and we will remand to the agency if it fails to 

apply its “expertise in a reasoned manner.” Cape Cod Hosp., 

630 F.3d at 206.

Having decided that the Secretary’s explanation is 

insufficient, the question becomes one of remedy. “If the 

record before the agency does not support the agency action

. . . the proper course, except in rare circumstances, is to 

remand to the agency for additional investigation or 

explanation.” Fla. Power & Light Co. v. Lorion, 470 U.S. 

729, 744 (1985). We have likewise held that “bedrock 

principles of administrative law preclude us from declaring 

definitively that [the Secretary’s] decision was arbitrary and 

capricious without first affording her an opportunity to 

articulate, if possible, a better explanation.” Cnty. of L.A., 192 

F.3d at 1023; see also New York v. Reilly, 969 F.2d 1147, 1153 

(D.C. Cir. 1992) (remanding “for more reasoned 

decisionmaking” because agency failed to “adequately 

explain” its final rule). We follow that well-worn path here 

and remand to the Secretary for additional explanation. On 

remand, the Secretary should explain why she corrected for 

only 50 turbo-charging hospitals in the 2004 rulemaking rather 

than for the 123 she had identified in the NPRM. She should 

also explain what additional measures (if any) were taken to 

account for the distorting effect that turbo-charging hospitals 

had on the dataset for the 2004 rulemaking. And if she 

decides that it is appropriate to recalculate the 2004 outlier 

threshold, she should also decide what effect (if any) the 

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recalculation has on the 2005 and 2006 outlier and fixed loss 

thresholds.

2. The 2005 Rule

The Secretary set the 2005 outlier threshold as the 

applicable DRG rate “plus $25,800.” 69 Fed. Reg. at 49,278. 

In arriving at this number, she considered the suggestions of 

numerous commenters and ultimately adopted a methodology 

in the final rule that was different from that in the proposed 

rule. Id. at 49,277. The Secretary said that she had to use 

more recent data to address both the outlier correction rule and 

the “exceptionally high rate of hospital charge inflation that is 

reflected in the data for [fiscal years] 2001, 2002, and 2003.” 

Id. Although the data in the revised methodology was more 

recent, it still had to be inflated to accurately predict charges 

for 2005. Id. Instead of using the “2-year average annual 

rate of change in charges per case,” the Secretary took “the 

unprecedented step of using the first half-year of data from 

[fiscal year] 2003 and comparing this data to the first half year 

of data for [fiscal year] 2004.” Id.

The Secretary’s methodology in the 2005 rulemaking 

obviated any need to eliminate the turbo-charging hospitals 

from her dataset. She opted to use the most recent 

cost-to-charge ratios in calculating the 2005 charge inflation 

factor, half of which were from the “first half year of data for 

[fiscal year] 2004.” Id. This data came after the effective 

date of the outlier correction rule; it was not infected by 

turbo-charging because the outlier correction rule had by then 

corrected the flaw in the outlier payment system that created 

the opportunity—and incentive—to turbo-charge. See id. at 

49,278; see also supra pp. 7–8. The ratios were therefore 

based on “either the most recent settled cost report or the most 

recent tentative settled cost report, whichever is from the latest 

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cost reporting period.” 42 C.F.R. § 412.84(i)(2). This data 

was “more recent” than previous data used by the Secretary. 

69 Fed. Reg. at 49,278. Her revised methodology, she 

believed, would “account for the[] changes” resulting from the 

outlier correction rule. Id. at 49,277. 

It is true that the data from the “first half-year” of 2003

was affected by turbo-charging. Id. But it makes little sense 

to remove turbo-charging hospitals from this half of the dataset 

without making similar adjustments to the other half of the 

dataset (i.e., the first half-year of data from fiscal year 2004). 

As discussed, there was no need to modify the 2004 data 

because that information was collected while the outlier 

correction rule was in effect. With no need to change the 2004 

data, the Secretary reasonably left both halves unaltered. See 

id. (stating that it is “optimal to employ comparable periods in 

determining the rate of change from one year to the next”). 

Indeed, if the Secretary had removed turbo-chargers from the 

2003 dataset, she would have had to project how that decision 

affected the 2004 dataset. If that projection indicated 

significant effects, she would have had to undertake further 

statistical adjustments and perhaps remove hospitals from the 

2004 dataset. The Secretary sensibly opted for a simpler 

approach that did not entail piling projections atop projections. 

See id. (noting her preference “to employ actual data rather 

than projections in estimating the outlier threshold because we 

employ actual data in updating charges[] themselves”); see 

also Ashland Exploration, Inc. v. FERC, 631 F.2d 817, 822 

(D.C. Cir. 1980) (agencies “may rationally turn to simplicity 

. . . and administrative convenience”).

Moreover, even if this dataset was less than perfect, 

imperfection alone does not amount to arbitrary 

decision-making. See, e.g., White Stallion Energy Ctr., LLC 

v. EPA, 748 F.3d 1222, 1248 (D.C. Cir. 2014) (agency’s 

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“data-collection process was reasonable, even if it may not 

have resulted in a perfect dataset”); In re Polar Bear ESA 

Listing, 709 F.3d 1, 13 (D.C. Cir. 2013) (“That a model is 

limited or imperfect is not, in itself, a reason to remand agency 

decisions based upon it.”); Allied Local and Reg’l Mfrs. 

Caucus v. EPA, 215 F.3d 61, 71 (D.C. Cir. 2000) (“[w]e 

generally defer to an agency’s decision to proceed on the basis 

of imperfect scientific information”); North Carolina v. FERC, 

112 F.3d 1175, 1190 (D.C. Cir. 1997) (“The mere fact that the 

Commission relied on necessarily imperfect information . . . 

does not render [its decision] arbitrary.”); Chemical Mfrs. 

Ass’n v. EPA, 28 F.3d 1259, 1265 (D.C. Cir. 1994) (agency 

may nonetheless use model “even when faced with data

indicating that it is not a perfect fit”). This precedent further 

supports the Secretary’s conclusion that removing 

turbo-charging hospitals from both datasets in the 2005 

rulemaking was not a “significant and viable and obvious 

alternative[].” Nat’l Shooting Sports Found., 716 F.3d at 215 

(quotation marks omitted).

DHP claims that our holding in County of Los Angeles

supports its argument. We disagree. In pertinent part, we 

held there that the Secretary’s 1985 and 1986 outlier thresholds 

were arbitrary and capricious. 192 F.3d at 1021–23. To set 

the thresholds, the Secretary used data that was collected when 

hospitals were still reimbursed based on the reasonable cost of 

their services rather than the average cost of treatment. Id. at 

1020. She did so even though she had a wealth of readily 

available data collected under the new 

average-cost-of-treatment regime. Id. at 1021. The more 

recent data, unlike the older numbers, also accounted for a 

downward “trend” in outlier payments that was caused by the 

new reimbursement scheme. Id. The Secretary nevertheless 

concluded that “there [was] no evidence to suggest that total 

outlier payments” decreased under the new system. Id. We 

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held that her failure to account for the contrary evidence in the 

record—as well as her refusal to use more recent data—were 

arbitrary and capricious actions. Id. at 1023.

Here, by contrast, the Secretary did not reject a more 

recent dataset; she stated time and again that the revised 

methodology “use[d] the most recent charge data available.” 

69 Fed. Reg. at 49,277. She also stated that the revised 

methodology for calculating the 2005 outlier threshold 

“address[ed] both the changes to the outlier payment 

methodology and the exceptionally high rate of hospital charge 

inflation” between 2001 and 2003. Id. Thus, unlike in 

County of Los Angeles, the Secretary here used the most recent 

data that accounted for the outlier correction rule’s effects. 

Accordingly, we reject DHP’s APA challenge to the 2005 

outlier threshold.

3. The 2006 Rule

We need not linger with this rulemaking because the 2006 

outlier threshold was plainly reasonable. The Secretary set it 

at the applicable DRG rate “plus $23,600.” 70 Fed. Reg. at 

47,494. She settled on $23,600 by simulating 2006 payments 

using a charge inflation factor. Id. The data used to compute 

this factor was taken—as in the earlier rules—from “updated 

cost-to-charge ratios” included in “the most recent tentatively 

settled cost reports of hospitals.” Id. With this data in hand, 

the Secretary compared charges from the “first six months of 

[fiscal year] 2005 relative to [the] same period for [fiscal year] 

2004.” Id. Importantly, the Secretary noted that the entire 

period (i.e., both six-month sets) occurred while the outlier 

correction rule was in effect. Id. 

Because all of the charge data for the 2006 rule was 

collected with the outlier correction rule in effect, the specter 

of turbo-charging was nil. Indeed, the Secretary noted in the 

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2006 rulemaking that the outlier correction rule worked as 

predicted: “The actual rate of charge inflation subsided 

significantly in [fiscal year] 2004 after we made significant 

changes to our outlier policy.” Id. In other words, “hospitals 

changed their charging practices as a result” of the outlier 

correction rule. Id. The Secretary reasonably weighed the 

evidence and concluded that there was no need to account for 

turbo-chargers because turbo-charging was no longer 

occurring. See El Conejo Americano of Texas, Inc. v. DOT, 

278 F.3d 17, 20 (D.C. Cir. 2002) (courts do not “reweigh the 

evidence” if agency’s “conclusion was reasonable”). And, to 

state the obvious, excluding data from those hospitals was 

neither a significant nor an obvious alternative the Secretary 

had to consider. See Nat’l Shooting Sports Found., 716 F.3d at 

215–16. 

We are perplexed by DHP’s objection to the 2006 outlier 

threshold. DHP cites favorably a comment submitted during 

the 2006 rulemaking that advocated a fixed loss threshold of 

$24,050, using the methodology the Secretary in fact

employed. Moreover, at oral argument, DHP’s counsel 

suggested that the fixed loss threshold for 2006 should have 

been in the “low twenties.” Oral Arg. Tr. at 35–36. That is 

exactly where it ended up: $23,600. 70 Fed. Reg. at 47,494. 

Accordingly, we conclude that the Secretary’s calculation of 

the 2006 fixed loss threshold was neither arbitrary nor 

capricious. 

For the foregoing reasons, we affirm the district court’s 

partial supplementation of the 2004 rulemaking record and its 

rejection of the APA challenges to the 2005 and 2006 outlier 

thresholds. We reverse its ruling upholding the 2004 outlier 

threshold because that threshold is inadequately explained and 

remand to the district court with instructions to remand the 

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2004 rule to the Secretary for further proceedings consistent 

with this opinion.

So ordered.

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