UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

BANNER HEALTH f/b/o BANNER GOOD 

SAMARITAN MEDICAL CENTER, et al.,

Plaintiffs,

v.

SYLVIA M. BURWELL, Secretary, 

Department of Health and Human Services,

Defendant.

 Civil Action No. 10-01638 (CKK)

MEMORANDUM OPINION

(July 7, 2014)

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the 

Medicare program. They have sued the Secretary of the Department of Health and Human 

Services (the “Secretary”), challenging certain regulatory actions taken by her in the course of 

administering Medicare’s reimbursement scheme.1

 Plaintiffs allege that as a result of the 

Secretary’s flawed promulgation and implementation of various payment regulations, they were 

deprived of more than $350 million dollars in Medicare “outlier” payments for services provided 

during fiscal years ending 1998 through 2006. Presently before the Court is Plaintiffs’ [108] 

Motion for Leave to Further Amend and Supplement First Amended Complaint. Plaintiffs seek 

to add allegations and claims under 5 U.S.C. § 553 regarding the Secretary’s failure to disclose a 

2003 Interim Final Rule. Upon a review of the parties’ submissions2

, the applicable authorities,

 1 Pursuant to Fed. R. Civ. P. 25(d), Sylvia Mathews Burwell has been automatically 

substituted for Kathleen Sebelius, whom the parties’ pleadings name as Defendant.

2 Pls.’ Mot. for Leave to Further Amend and Supplement First Am. Compl., ECF No. 

[108] (“Pls.’ Mot.”); Pls.’ Mem. of P. & A. in Supp. of Pls.’ Mot. for Leave to Further Amend 

and Supplement First Am. Compl., ECF No. [108] (“Pls.’ Mem.”); Pls.’ Amendments and 
2

and the record as a whole, the Court shall GRANT IN PART and DENY IN PART Plaintiffs’

motion to amend the complaint. The Court denies Plaintiffs leave to amend their complaint to 

include claims that the Secretary’s failure to disclose the Interim Final Rule and its contents 

violated 5 U.S.C. § 553. However, the Court grants Plaintiffs leave to amend their complaint to 

include factual allegations concerning the Interim Final Rule. 

I. BACKGROUND

The relevant statutory and regulatory background underlying Plaintiffs’ claims and the 

lengthy procedural history of this litigation are set out in detail in the Court’s prior opinions. See 

Banner Health v. Sebelius, 797 F. Supp. 2d 97 (D.D.C. 2011); id., 905 F.Supp.2d 174 (D.D.C. 

2012); id., 945 F.Supp.2d 1 (D.D.C. 2013). Accordingly, the Court provides herein only a brief 

summary of the facts and history of this case, as relevant to the present motion.

Plaintiffs are twenty-nine organizations that own or operate hospitals participating in the 

Medicare program. Am. Compl., ECF No. [16], ¶ 22. On December 23, 2010, Plaintiffs filed 

their Amended Complaint, which remains the operative iteration of the Complaint in this action. 

See Am. Compl., ECF No. [16]. As this Court has previously observed, Plaintiffs’ Amended 

Complaint is “sprawling”; it contains over two hundred paragraphs, spans fifty-nine pages, and 

appends two lengthy exhibits. Plaintiffs challenge the validity of a series of regulations 

establishing the methodology for calculating outlier payments (the “Outlier Payment 

Regulations”), 42 C.F.R. §§ 412.80-412.86, as well as the Secretary’s annual promulgation of the 

 

Supplements to First Am. Compl., ECF No. [108-1] (“Pls.’ Proposed Amendments”); Def.’s 

Mem. of P. & A. in Opp’n to Pls.’ Mot. for Leave to Amend. Compl., ECF No. [109] (“Def.’s 

Opp’n”); Pls.’ Reply to Def.’s Opp’n Regarding Leave to Amend the Compl., ECF No. [110] 

(“Pls.’ Reply”); Pls.’ Notice of Suppl. Auth., ECF No. [112] (“Pls.’ Notice”); Def.’s Resp. to 

Pls.’ Notice of Suppl. Auth., ECF No. [113] (“Def.’s Notice Resp.”). 
3

regulations through which she set the fixed loss threshold for the upcoming fiscal year, for fiscal 

years 1998 through 2006 (the “Fixed Loss Threshold Regulations”).3

In enacting a system for Medicare reimbursement, “Congress recognized that health-care 

providers would inevitably care for some patients whose hospitalization would be extraordinarily 

costly or lengthy” and devised a means to “insulate hospitals from bearing a disproportionate 

share of these atypical costs.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1009 (D.C. Cir. 

1999). Specifically, Congress authorized the Secretary to make supplemental “outlier” payments 

to eligible providers. Id. Outlier payments are governed by 42 U.S.C. § 1395ww(d)(5)(A). See 

also 42 C.F.R. §§ 412.80-412.86 (implementing regulations). Each fiscal year, the Secretary 

determines a fixed dollar amount that, when added to the DRG prospective payment – the 

standardized calculation for how much a hospital is paid for treating a particular case – serves as 

the cutoff point triggering eligibility for outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii), 

(iv); 42 C.F.R. § 412.80(a)(2)-(3). This fixed dollar amount is known as the “fixed loss 

threshold.” If a hospital’s approximate costs actually incurred in treating a patient exceed the 

sum of the DRG prospective payment rate and the fixed loss threshold, then the hospital is 

 3 See MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE 

PAYMENT SYSTEMS AND FISCAL YEAR 1998 RATES, 62 Fed. Reg. 45,966 (Aug. 29, 1997); 

MEDICARE PROGRAM; CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS 

AND FISCAL YEAR 1999 RATES, 63 Fed. Reg. 40,954 (July 31, 1998); CHANGES TO THE HOSPITAL 

INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2000 RATES, 64 Fed. Reg. 41,490 

(July 30, 1999); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND 

FISCAL YEAR 2001 RATES, 65 Fed. Reg. 47,054 (Aug. 1, 2000); CHANGES TO THE HOSPITAL 

INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND RATES AND COSTS OF GRADUATE MEDICAL 

EDUCATION: FISCAL YEAR 2002 RATES, 66 Fed. Reg. 39,828 (Aug. 1, 2001); CHANGES TO THE 

HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2003 RATES, 67 Fed. 

Reg. 49,982 (Aug. 1, 2002); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT 

SYSTEMS AND FISCAL YEAR 2004 RATES, 68 Fed. Reg. 45,346 (Aug. 1, 2003); CHANGES TO THE 

HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEMS AND FISCAL YEAR 2005 RATES, 69 Fed. 

Reg. 48,916 (Aug. 11, 2004); CHANGES TO THE HOSPITAL INPATIENT PROSPECTIVE PAYMENT 

SYSTEMS AND FISCAL YEAR 2006 RATES, 70 Fed. Reg. 47,278 (Aug. 12, 2005). 
4

eligible for an outlier payment in that case. See 42 U.S.C. § 1395ww(d)(5)(A)(ii)-(iii); 42 C.F.R. 

§ 412.80(a)(2)-(3). In this way, the fixed loss threshold represents the dollar amount of loss that 

a hospital must absorb in any case in which the hospital incurs estimated actual costs in treating a 

patient above and beyond the DRG prospective payment rate. An increase in the fixed loss 

threshold reduces the number of cases that will qualify for outlier payments as well as the 

amount of payments for qualifying cases.

As noted, the Secretary “establish[es] the fixed [loss] thresholds beyond which hospitals 

will qualify for outlier payments” at the start of each fiscal year. Cnty. of Los Angeles, 192 F.3d 

at 1009. In each of the fiscal years at issue in this action, the Secretary set fixed loss thresholds 

at a level so that the anticipated total of outlier payments would equal 5.1% of the anticipated 

total of payments based on DRG prospective payment rates. Similarly, the amount of the outlier 

payment is “determined by the Secretary” and must “approximate the marginal cost of care” 

beyond the fixed loss threshold. 42 U.S.C. § 1395ww(d)(5)(A)(iii). During the time period 

relevant to this action, the implementing regulations generally provided for outlier payments 

equal to eighty percent of the difference between the hospital’s estimated operating and capital 

costs and the fixed loss threshold. See 42 C.F.R. § 412.84(k). 

In this litigation, Plaintiffs claim that the Outlier Payment Regulations, in the form they 

existed prior to 2003,4 contained “vulnerabilities” that made them “uniquely susceptible to 

manipulation” by unscrupulous hospitals. Am. Compl. ¶¶ 52-98, 138. According to Plaintiffs, 

 4 The Outlier Payment Regulations were first enacted in 1985 and have been revisited 

periodically over the years, most notably in 1988 and 2003. See MEDICARE PROGRAM; CHANGES 

TO IMPLEMENT THE INPATIENT HOSPITAL PROSPECTIVE PAYMENT SYSTEM AND FISCAL YEAR 

1989 RATES, 53 Fed. Reg. 38,476 (Sept. 30, 1988); MEDICARE PROGRAM; CHANGE IN 

METHODOLOGY FOR DETERMINING PAYMENT FOR EXTRAORDINARILY HIGH-COST CASES (COST 

OUTLIERS), 68 Fed. Reg. 34,494 (June 9, 2003). Plaintiffs’ allegations are directed principally 

towards the regulations in the form in which they were enacted in 1988. See, e.g., Am. Compl. 

¶¶ 75-85, 98, 107-10.
5

these “vulnerabilities” in the Outlier Payment Regulations allowed unscrupulous hospitals to 

submit excessive reimbursement claims, “led to massive overpayments” to the wrong hospitals, 

prompted the Secretary to raise the fixed loss threshold at the beginning of each fiscal year as a 

misguided countermeasure, and ended with Plaintiffs being denied the outlier payments “to 

which they were entitled.” Id. ¶ 55.

Regarding the Fixed Loss Threshold Regulations, Plaintiffs contend that the Secretary, 

faced with an “aberrantly high” level of projected outlier payments caused by a flood of 

excessive reimbursement claims, made no attempt to diagnose the actual source of the problem 

but instead, as a misguided countermeasure, made “enormous, unprecedented and irrational 

increases” in the fixed loss threshold for the fiscal years at issue in this action, and did so without 

providing an adequate, reasoned explanation for the increases. See id. ¶¶ 14, 69, 112, 114, 119, 

121, 125-26, 129-38, 147-48, 155-61. Plaintiffs contend that the Secretary’s failure to account 

for flaws in the Fixed Loss Threshold Regulations led to an irrational increase in the fixed loss 

thresholds for fiscal years 1998 through 2006, which allegedly had the ultimate effect of 

reducing the number of Plaintiffs’ cases that qualified for outlier payments and the amount of 

payments for those cases that did qualify. Id. ¶ 50.

Accordingly, Plaintiffs challenge the promulgation and implementation of the following 

agency actions: three sets of Outlier Payment Regulations promulgated in 1988, 1994, and 2003; 

and eleven sets of Fixed Loss Threshold Regulations for federal fiscal years 1997 through 2007. 

In addition, Plaintiffs challenge outlier payment determinations specific to each of the hospital 

Plaintiffs.

On March 23, 2012, Plaintiffs filed a motion to compel, requesting that the Court order

the Secretary to file the “complete administrative record,” by supplementing the records she had 
6

previously filed with various documents, including certain data files, identified by Plaintiffs and 

all other documents that were before the agency in connection with its rulemakings, and further 

order the Secretary to certify to the Court and Plaintiffs the completeness of the administrative 

record. See Pls.’ Renewed Mot. to Compel Def. to File the Complete Admin. Record and to 

Certify Same, ECF No. [60]. On May 16, 2013, the Court granted-in-part and denied-in-part 

Plaintiffs’ motion to compel, and ordered the Secretary to supplement the administrative record 

in this matter with several categories of materials. See Banner Health, 945 F.Supp.2d 1; Order 

(May 16, 2013), ECF No. [82]. Among the materials the Court ordered added to the 

administrative record was a February 2003 draft interim final rule (“Interim Final Rule”). As 

discussed at length in the Court’s prior Memorandum Opinion, the Interim Final Rule was 

“exchanged between HHS and [the Office of Management and Budget (“OMB”)][5] pursuant to 

Executive Order 12866, which requires HHS to submit major rulemakings to OMB for review” 

and which “also requires that, after the regulation becomes final, OMB must make available to 

the public all documents exchanged between it and the agency during the interagency review.” 

Banner Health, 945 F.Supp.2d at 24 (citing 58 Fed. Reg. 51735, Exec. Order No. 12866 § 

6(b)(4)(D)). Plaintiffs learned of the Interim Final Rule in February 2012 in response to a 

Freedom of Information Act request to OMB. Pls.’ Mem. at 1. The document itself is a “sixtypage Interim Final Rule sent, over the signature of then HHS Secretary, Tommy G. Thompson, 

to OMB for review and approval in early 2003.” Banner Health, 945 F.Supp.2d at 24.

The Court explained the significance of the Interim Final Rule as follows:

 5 OMB is tasked with carrying out coordinated review of agency rulemaking to ensure 

that regulations are consistent with applicable law, the priorities of the President, and the 

principles set forth in Executive Order 12866. See 58 Fed. Reg. 51735, Exec. Order No. 12866 § 

2(b). 
7

[O]f the many agency actions challenged in this case is the Secretary’s 

promulgation and application, in 2003, of invalid amended Outlier Payment 

Regulations and Fixed Loss Threshold Regulations. Plaintiffs argue that, in the 

Federal Register sections related to the rulemakings challenged in this case, the 

Secretary has variously stated that (a) there were no critical flaws in its Outlier 

Payment Regulations – and then, in 2003, that there were three fatal flaws, (b) 

that the agency had always used the best available data – and then, in 2003, that 

other data, which had previously been available and was better, should be used, 

and (c) that it would not make retroactive corrections to outlier payments – and 

then, in 2003, that retroactive corrections would be made. Plaintiffs further 

contend that in mid-2003, while the agency was in the process of reversing its 

position on each of these points, the Secretary should have taken the opportunity 

to lower the fixed loss threshold to correct for what the agency openly 

acknowledged had been the improper distribution of outlier funds to “turbo 

charging” hospitals, but instead, in June of 2003, promulgated amended 

regulations which left the threshold at its previous level, $33,560. As 

explanation, [the Centers for Medicare and Medicaid Services (“CMS”)][6]

stated that “in light of the relatively small difference between the current 

threshold and our revised estimate, and the limited amount of time remaining in 

the fiscal year, we have concluded it is more appropriate to maintain the 

threshold at $ 33,560.” A.R. at 4408 (68 Fed. Reg. at 34506). 

Plaintiffs contend that the Interim Rule, which was approved by Secretary 

Thompson on February 6, 2003 and submitted for OMB’s review on February 

12, 2003, tells a different story. Specifically, Plaintiffs explain that the Interim 

Final Rule contains HHS’s conclusion, with supporting facts and analysis, that 

the public interest required it, mid-year, to lower its FY 2003 fixed loss 

threshold from $33,560 to $20,760 – in other words, that the threshold was 

approximately 62% higher than it should have been. Upon the Court’s own 

review of the document, HHS does appear to have proposed to OMB a 

reduction of the outlier threshold to $20,760, to be effective as of the date of 

publication of the interim rule. Further, HHS acknowledged that the prior 

increase in the threshold was due to relatively few hospitals with extraordinary 

rates of increase in their charges, causing many truly high-cost cases not to 

qualify for outlier payments; HHS therefore proposed that the Interim Final 

Rule reducing the threshold be implemented without prior notice and comment 

procedures, so as not to extend the duration of these payment inequities.

Plaintiffs observe, however, that the Secretary’s proposed rule, issued on 

February 28, 2003 – just over two weeks after HHS submitted the Interim Final 

Rule to OMB – makes no mention of the data and analysis stated in the Interim 

Final Rule. ... [See] [ ] A.R. at 4386-4395 (68 Fed. Reg. at 10420-10429).[7]

 

Therefore, Plaintiffs argue, inclusion of the Interim Final Rule in the 

administrative record is necessary to show significant alternatives, facts, other 

 6 The Medicare program is administered by the Secretary through CMS. 

7 The proposed rule was issued by HHS for publication on February 28, 2003, and 

subsequently published on March 5, 2003. See A.R. at 4395 (68 Fed. Reg. at 10429). 
8

data and analyses that HHS considered in the rulemaking process, but that were 

directly contrary to its published regulations which maintained the threshold at 

$33,650. Plaintiffs also argue that this document goes to the heart of 

establishing the Secretary’s promulgation of and continued application of 

invalid Fixed Loss Threshold Regulations as arbitrary and capricious, because it 

demonstrates that the agency knew that lowering the threshold would correct the 

problems engendered by its earlier regulations and believed it was obligated to 

do so immediately, but did not. 

Id. at 25-26 (internal citations to the parties’ pleadings omitted).

In view of the foregoing, the Court found that Plaintiffs had “made a sufficient showing 

that ‘unusual circumstances’ warrant supplementation of the administrative record – namely, that 

‘the agency deliberately or negligently excluded documents that may have been adverse to its 

decision.’” Id. at 26 (citing City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010)). 

On July 30, 2013, the Court denied the Secretary’s motion for reconsideration of the decision to 

require inclusion of the Interim Final Rule in the administrative record. See Order (July 30, 

2013), ECF No. [96]. The Secretary filed the administrative record in this action on July 31, 

2013.

After the Court resolved issues relating to the completeness of the administrative record, 

this case moved to the scheduling of summary judgment briefing. Subsequently, however, the 

Secretary sought leave to file an additional motion to dismiss for lack of subject matter 

jurisdiction. See Def.’s Mot. for Leave to File Mot. to Dismiss for Lack of Subject Matter 

Jurisdiction, ECF No. [99]. The Court granted the Secretary’s request, but ordered that the 

Secretary file this motion “simultaneously with, and in the alternative to, Defendant’s crossmotion for summary judgment.” Order (Aug. 13, 2013), ECF No. [102] at 1. The Court set a 

deadline of October 25, 2013 for the parties’ initial summary judgment briefs and directed the 

parties to file a joint status report by October 4, 2013 “(a) outlining in bullet-point format the 

arguments the parties intend to raise in support of or in opposition to summary judgment; and (b) 
9

indicating the extent to which there is a need to expand the page limits placed on memoranda of 

points and authorities by the Local Rules of this Court.” Id. at 4. In this subsequently filed Joint 

Status Report8, Plaintiffs indicated, for the first time, their intention to file a Motion for Leave to 

Further Amend and Supplement the First Amended Complaint in light of the addition of the 

Interim Final Rule to the administrative record. See Joint Status Report and Mot. to Reset 

Briefing Schedule, ECF No. [107]. In light of this request, the Court delayed the scheduled 

summary judgment briefing pending resolution of Plaintiffs’ motion to amend. See Minute 

Order (Oct. 22, 2013). Plaintiffs subsequently filed their Motion for Leave to Further Amend 

and Supplement First Amended Complaint. Defendant filed an Opposition, and Plaintiffs filed a 

Reply. Accordingly, the motion is now ripe for review.

II. LEGAL STANDARD

Under the Federal Rules of Civil Procedure, a party may amend its pleadings once as a 

matter of course within a prescribed time period. See Fed. R. Civ. P. 15(a)(1). Where, as here, a 

party seeks to amend its pleadings outside that time period, it may do so only with the opposing 

party’s written consent or the district court’s leave. See Fed. R. Civ. P. 15(a)(2). The decision 

whether to grant leave to amend a complaint is entrusted to the sound discretion of the district 

court, but leave “should be freely given unless there is a good reason, such as futility, to the 

contrary.” Willoughby v. Potomac Elec. Power Co., 100 F.3d 999, 1003 (D.C. Cir. 1996), cert. 

denied, 520 U.S. 1197 (1997). As the Supreme Court has observed:

If the underlying facts or circumstances relied upon by a plaintiff may be a proper 

subject of relief, he ought to be afforded an opportunity to test his claim on the 

merits. In the absence of any apparent or declared reason—such as undue delay, 

bad faith or dilatory motive on the part of the movant, repeated failure to cure 

 8 In light of the lapse of appropriations for the Department of Justice from October 1, 

2013 through October 16, 2013, the deadline for this joint status report was subsequently 

extended to October 21, 2013. See Minute Order (Oct. 18, 2013).
10

deficiencies by amendments previously allowed, undue prejudice to the opposing 

party by virtue of allowance of the amendment, futility of amendment, etc. – the 

leave sought should, as the rules require, be “freely given.”

Foman v. Davis, 371 U.S. 178, 182 (1962). “[A] district court has discretion to deny a motion to 

amend on grounds of futility where the proposed pleading would not survive a motion to 

dismiss.” Nat’l Wrestling Coaches Ass’n v. Dep’t of Educ., 366 F.3d 930, 945 (D.C. Cir. 2004), 

cert. denied, 545 U.S. 1104 (2005). Review for futility is practically “identical to review of a 

Rule 12(b)(6) dismissal based on the allegations in the amended complaint.” In re Interbank 

Funding Corp. Secs. Litig., 629 F.3d 213, 215-16 (D.C. Cir. 2010) (quotation marks omitted). 

Because leave to amend should be liberally granted, the party opposing amendment bears the 

burden of coming forward with a colorable basis for denying leave to amend. Abdullah v. 

Washington, 530 F.Supp.2d 112, 115 (D.D.C. 2008).9

III. DISCUSSION

Plaintiffs’ proposed motion to amend consists of two components. First, Plaintiffs seek 

to add claims under 5 U.S.C. § 553 that “the Secretary did not allow for meaningful public 

comment when she failed to disclose data, analysis and conclusions which had been set forth in 

the Interim Final Rule, and were adverse to the determinations the Secretary later proposed and 

 9 Plaintiffs argue that the Court should also apply Rule 15(d), under which “the court 

may, on just terms, permit a party to serve a supplemental pleading setting out any transaction, 

occurrence, or event that happened after the date of the pleading to be supplemented.” Fed. R. 

Civ. P. 15(d). Plaintiffs argue Rule 15(d) is applicable here because they are seeking to add 

allegations concerning when they became aware of the Interim Final Rule, an event that occurred 

in February 2012, after the filing of the First Amended Complaint. Pls.’ Mem. at 2-3. 

Defendant, by contrast, argues Plaintiffs’ motion only implicates Rule 15(a) and that Rule 15(d) 

does not apply here “because the proposed amendments pertain to events before the filing of the 

action.” Def.’s Opp’n at 3 n.1. The Court need not resolve this dispute because, as both parties 

concede, “[c]ourts resolve Rule 15(d) motions under the same standard as they resolve motions 

to amend under Rule 15(a).” Tereschuk v. Bureau of Prisons, 851 F.Supp.2d 157, 162 n. 6 

(D.D.C. 2012). See also Wildearth Guardians v. Kempthorne, 592 F.Supp.2d 18, 23 (D.D.C. 

2008). Accordingly, whether considered under Rule 15(a) or Rule 15(d), the same standard 

governs Plaintiffs’ requests. 
11

finalized in her subsequent published rulemakings relating to the Outlier Payment Regulations 

and the [Fixed Loss Threshold] Regulations in 2003 through 2007.” Pls.’ Proposed 

Amendments at 1. Second, Plaintiffs seek to add factual allegations relating to when they 

became aware of the Interim Final Rule. Pls.’ Mem. at 2. For the reasons discussed below, the 

Court concludes that the former proposed amendment is improper while the latter is appropriate. 

A. Proposed Additional Claims Under 5 U.S.C. § 553

Defendant argues that Plaintiffs’ motion should be denied because the proposed 

additional claims under 5 U.S.C. § 553 are futile as contrary to D.C. Circuit precedent. Def.’s 

Opp’n at 8. The Court agrees that Plaintiffs’ claims are not appropriate under § 553, and for this 

reason, leave to amend the complaint to add these additional claims is denied. 

In their proposed Amended Complaint, Plaintiffs state that by failing to disclose data, 

analysis, and conclusions which had been set forth in the Interim Final Rule which were adverse 

to the determinations the Secretary later proposed and finalized in her subsequent published 

rulemakings relating to the Outlier Payment Regulations and the [Fixed Loss Threshold]

Regulations in 2003 through 2007, the Secretary violated 5 U.S.C. § 553 by preventing 

meaningful public comment on these rulemakings. Pls.’ Proposed Amendments at 1. The D.C. 

Circuit has long adhered to the principle that “[i]t is not consonant with the purpose of a rulemaking procedure to promulgate rules on the basis of inadequate data, or on data that, [to a] 

critical degree, is known only to the agency.” Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 

375, 393 (D.C. Cir. 1973). Therefore, “an agency’s failure to disclose critical material, on which 

it relies, deprives commenters of a right under § 553 ‘to participate in rulemaking.’” Allina 
12

Health Svcs. v. Sebelius, 746 F.3d 1102, 1110 (D.C. Cir. 2014) (quoting Air Transp. Ass’n of Am. 

v. F.A.A., 169 F.3d 1, 7 (D.C. Cir. 1999)).10 

The D.C. Circuit’s most recent comprehensive discussion of this doctrine came in 

American Radio Relay League, Inc. v. Federal Communication Commission, 524 F.3d 227 (D.C. 

Cir. 2008), where the panel concluded that the FCC “failed to satisfy the notice and comment 

requirements of [§ 553] by redacting studies on which it relied in promulgating the rule . . . .” In 

that case, the FCC placed five technical studies on which it had relied in promulgating the rule at 

issue into the rulemaking record, but only in redacted form. Id. at 237. The court found that 

these redactions violated § 553 and ordered the FCC, on remand, to “make available the 

unredacted ‘technical studies and data that it has employed in reaching [its] decisions.’” Id. at 

240 (quoting Conn. Light & Power Co. v. Nuclear Regulatory Comm’n, 673 F.2d 525, 530 (D.C. 

Cir. 1982)). On this point, the panel found: 

The Commission has chosen to rely on the data in those studies and to place the 

redacted studies in the rulemaking record. Individual pages relied upon by the 

 10 As Defendant notes, there is considerable debate as to whether this doctrine conflicts 

with the Supreme Court’s decision in Vermont Yankee Nuclear Power Corp. v. Natural Res. Def. 

Council, 435 U.S. 519 (1978), which limited a court’s power to order additional procedures in 

rulemaking beyond those imposed by the Administrative Procedures Act. See Am. Radio Relay 

League, Inc. v. FCC, 524 F.3d 227, 245 (Kavanaugh, J., dissenting); Allina Health Svcs., 746 

F.3d at 1110 (noting “the possible tension between Vermont Yankee and our critical material 

doctrine”). See also Jack M. Beermann & Gary Lawson, Reprocessing Vermont Yankee, 75 

GEO. WASH. L. REV. 856, 892 (2007); Richard L. Pierce, Waiting for Vermont Yankee III, IV, 

and V?, 75 GEO. WASH. L. REV. 902, 916 (2007). Yet to the extent Defendant argues that this 

debate renders Plaintiffs’ proposed claims futile, her argument must be rejected. The Portland 

Cement doctrine remains the prevailing law of this Circuit, and this Court is bound to follow it. 

Nevertheless, in light of this tension, the Court is reluctant to read the doctrine more broadly than 

the D.C. Circuit has in past cases. Indeed, even while upholding its continued application, the 

D.C. Circuit has emphasized the narrowness of this doctrine, perhaps out of a concern that a 

broader doctrine would more clearly run afoul of Vermont Yankee. See Am. Radio Relay League, 

Inc., 524 F.3d at 239 (“The narrowness of our holding under section 553 of the APA is 

manifest.”); Allina Health Svcs., 746 F.3d at 1110 (“Perhaps because of the possible tension 

between Vermont Yankee and our critical material doctrine, we have more carefully examined 

whether a failure to disclose such material actually harmed a petitioner.”).
13

Commission reveal that the unredacted portions are likely to contain evidence that 

could call into question the Commission’s decision to promulgate the rule. Under 

the circumstances, the Commission can point to no authority allowing it to rely on 

the studies in a rulemaking but hide from the public parts of the studies that may 

contain contrary evidence, inconvenient qualifications, or relevant explanations of 

the methodology employed.

Id. at 239. The focal point of this analysis was the Commission’s reliance on materials that were 

undisclosed, or that were disclosed only in part with redactions. Importantly, American Radio 

Relay League distinguished cases where the agency did not rely on the undisclosed materials, 

such as EchoStar Satellite LLC v. Federal Communications Commission, 457 F.3d 31, 40 (D.C. 

Cir. 2006), in which “the non-disclosed staff analysis represented ‘merely . . . cogitations upon 

the evidence’ that was part of the rulemaking record.” Am. Radio Relay League, Inc., 524 F.3d 

at 238. “By contrast, the challenged orders” in American Radio Relay, “were, according to the 

Commission, a central source of data for its critical determinations.” Id. Moreover, the court 

concluded that its conclusions were “not inconsistent with the view that ‘the Portland Cement 

doctrine should be limited to studies on which the agency actually relies to support its final 

rule.’” Id. at 240 (quoting 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW TREATISE 437 (4th 

ed. 2002)) (emphasis added in original). See also 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE 

LAW TREATISE 584 (5th ed. 2010) (“If an agency does not attempt to support its final rule by 

reference to an undisclosed study, it seems apparent that the agency was not required to make the 

study available to potential commentators. Thus, the Portland Cement doctrine should be 

limited to studies on which the agency actually relies to support its final rule.”)

Here, according to Plaintiffs’ proposed Amended Complaint, the relevant undisclosed 

material at the time of the rulemakings is the “data, analysis and conclusions which had been set 

forth in the Interim Final Rule [which] were adverse to the determinations the Secretary later 

proposed and finalized in her subsequent published rulemakings.” Pls.’ Proposed Amendments 
14

at 1. The parties disagree in their present briefing as to whether the Secretary “relied” on this 

material in the challenged rulemakings, such that her failure to disclose these materials runs 

afoul of § 553 under the Portland Cement doctrine. Compare Pls.’ Reply at 1-2 with Def.’s 

Opp’n at 8. As support for the proposition that the Secretary relied on the Interim Final Rule and 

the supporting materials, Plaintiffs look to this Court’s decision to include the Interim Final Rule

in the administrative record. Pls.’ Mem. at 3; Pls.’ Reply at 2. Plaintiffs cite the Court’s 

statement that “there can be little doubt that the Interim Final Rule reflects views adverse to 

those finally adopted by the Secretary and that the Secretary considered – and indeed proposed to 

OMB – the Interim Final Rule as an alternative in its path to promulgation of the 2003 amended 

Outlier Payment Regulations now challenged by Plaintiffs.” Pls.’ Mem. at 3 (quoting Banner 

Health, 945 F.Supp.2d at 27). Yet such language does not show that the Secretary relied on 

these materials. In fact, it shows the opposite – that the Secretary in all likelihood discounted

these materials in issuing the Proposed Rule. 

Plaintiffs attempt to bring this case within the ambit of American Radio Relay League by 

arguing in their Reply brief that the 2003 Proposed Rule reflects portions of the Interim Final 

Rule favorable to the agency, but excludes unfavorable portions, just as the FCC included 

favorable portions of studies in American Relay while redacting unfavorable portions. Pls.’ 

Reply at 1-2. Yet Plaintiffs’ prior briefing in this case, and the Court’s conclusions based on this 

briefing contradict this newfound argument. As noted in the Court’s prior Memorandum 

Opinion, Plaintiffs themselves have previously pointed out the sharp disconnect between the 

Interim Final Rule and the Proposed Rule. Indeed, the Court’s previous Memorandum Opinion 

includes the following language: “Plaintiffs observe, however, that the Secretary’s proposed rule, 

issued on February 28, 2003 – just over two weeks after HHS submitted the Interim Final Rule to 
15

OMB – makes no mention of the data and analysis stated in the Interim Final Rule.” Banner 

Health, 945 F.Supp.2d at 25 (emphasis added). Plaintiffs’ instant attempt to argue a contrary 

position – that the Secretary cherry-picked data and analysis that was utilized in the Interim Final 

Rule – is unpersuasive.11 Indeed, the position asserted in Plaintiffs’ Reply brief is similarly 

undercut by Plaintiffs’ proposed Amended Complaint. This proposed filing likewise contends 

that the Secretary did not rely on the Interim Final Rule and its supporting materials, and further 

undermines application of the Portland Cement doctrine here. On this point, Plaintiffs state:

In the published Proposed Rule, the Secretary made no mention of the IFR and 

did not include much of the data, methodological changes and analysis that the 

Secretary had included in the IFR relating to the agency’s conclusion that the 

fixed-loss outlier threshold should be recalculated and set immediately at $20,760 

(plus the additional payments referenced above in paragraph 198.5.b). Among 

other things, the Proposed Rule failed to mention the Secretary’s analysis 

quantifying the impact of hospitals identified as having “taken advantage of two 

vulnerabilities” in the Secretary’s regulations, the agency’s obligation to 

recalculate the fixed loss threshold, methodological changes the Secretary used 

for the recalculation, and the agency’s findings regarding the public interest. All 

of these topics were discussed in the IFR.

Pls.’ Proposed Amendments at 2. Consequently, despite their present briefing to the contrary, 

Plaintiffs’ proposed amendments and their previous statements in this case show that they are not 

alleging that the Secretary relied on these materials and failed to disclose them. Rather, they 

appear to contend that she improperly considered and then did not rely on these materials, and 

 11 Plaintiffs’ prior briefing includes additional language revealing the disconnect between 

the Interim Final Rule and the Proposed Final Rule. See Pls.’ Mem. of P. & A. in Supp. of 

Renewed Motion to Compel Def. to File the Complete Admin. Record and to Certify Same, ECF 

No. [60] at 16 (“In stark contrast, HHS’s published rulemaking . . . conspicuously lacks the 

foregoing data, other facts, analysis.”); id. at 17 (noting that exclusion of the Interim Final Rule

“would only serve to conceal significant alternatives, facts, other data and analyses that HHS 

considered in the rulemaking process, but that were contrary to its published regulations.”); id. at 

18 (arguing that “the data and other facts used, and analysis undertaken, by HHS in reaching its 

conclusions in the Interim Final Rule” “bear upon options that HHS considered, but did not 

disclose or address in the Federal Register, when the agency was revising the Outlier Payment 

Regulations.”)
16

that the contrary conclusions and information contained in the Interim Final Rule undercut the 

alternative conclusions set forth in the Proposed Rule. This is not the sort of undisclosed basis 

for a rule that triggers the Portland Cement doctrine. See 1 RICHARD J. PIERCE, JR.,

ADMINISTRATIVE LAW TREATISE 583-84 (5th ed. 2010). (“[A]ccess to the data that putatively 

supports a proposed rule is critical to the right to comment on the rule and, hence, is part of the 

notice required by § 553(b).”) (emphasis added). Instead these allegations more properly go to 

the question of whether the Secretary’s actions, taken in apparent disregard of contrary data and 

analysis, were arbitrary and capricious, and thus substantively invalid. Id. at 584-85 (noting that 

it is consistent with Portland Cement for “[a] reviewing court [to] require an agency to add to the 

rulemaking record documents in the agency’s possession that contradict the predicates for a rule . 

. . and then use those documents to support a holding that the rule is arbitrary and capricious.”). 

For this reason, this Court’s decision to include the Interim Final Rule in the administrative 

record – for purposes of assessing the substantive validity of the Secretary’s regulations – does 

not establish that the Secretary relied on these undisclosed materials. Compliance with § 553 is 

an issue distinct from the completeness of the administrative record.

Accordingly, because the Court concludes that Plaintiffs’ have failed to assert proper 

claims under 5 U.S.C. § 553 based on non-disclosure of the Interim Final Rule and the 

underlying data and analysis, Plaintiffs’ proposed amendment to add these claims is denied as 

futile.12

 12 In light of the Court’s conclusion that Plaintiffs’ proposed § 553 claims fall outside of D.C. 

Circuit precedent, the Court does not reach the Secretary’s alternative argument for futility – that 

the Court lacks subject matter jurisdiction over the § 553 claims because they were not properly 

presented in administrative proceedings. See Def.’s Opp’n at 6-8. While the Supreme Court has 

held that a court should address jurisdictional questions such as Article III standing prior to 

addressing any question on the merits, see Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 

101 (1998), that doctrine is inapplicable here, where Defendant’s jurisdictional argument is 
17

B. Proposed Additional Factual Allegations

Although the Court concludes that Plaintiffs’ proposed additional claims are futile, this 

does not doom the entirety of Plaintiffs’ motion. Defendant’s futility arguments go only to the 

additional claims asserted by Plaintiffs and not to the additional factual allegations raised in the 

proposed Amended Complaint. Indeed, in making her futility argument, Defendant nowhere 

contends that these allegations themselves are futile as additional factual background for 

Plaintiffs’ existing claims. Def.’s Opp’n at 6-8. Accordingly, in the absence of a futility 

argument, the Court looks to whether there are other reasons – such as prejudicial delay – to 

deny leave to add these additional allegations. For the reasons discussed below, the Court finds

Plaintiffs’ delay in seeking leave to add these allegations, although lengthy, was not prejudicial 

or in bad faith. Therefore, the Court permits Plaintiffs to add these additional allegations as 

support for their existing claims.

“Only limited circumstances justify a district court’s refusal to grant [ ] leave to amend: 

undue delay, bad faith on the part of the moving party, or undue prejudice to the opposing party.” 

Sinclair v. Kleindienst, 645 F.2d 1080, 1085 (D.C. Cir. 1981). Moreover, “[t]o warrant denial of 

leave to amend, any delay in seeking leave must be accompanied by a showing of bad faith or 

prejudice.” Council on American-Islamic Relations Action Network, Inc. v. Gaubatz, 891 

 

premised on a lack of statutory, rather than constitutional, jurisdiction. “Steel Co. requires that 

we prioritize the jurisdictional issue only when the existence of Article III jurisdiction is in 

doubt; that decision ‘explicitly recognized the propriety of addressing the merits where doing so 

made it possible to avoid a doubtful issue of statutory jurisdiction.’” Chalabi v. Hashemite 

Kingdom of Jordan, 543 F.3d 725, 728 (D.C. Cir. 2008) (quoting Kramer v. Gates, 481 F.3d 788,

791 (D.C. Cir. 2007)). Here, Defendant does not raise an issue of Article III jurisdiction in 

arguing for futility. Rather, the Secretary argues that this Court lacks statutory subject matter 

jurisdiction to rule on claims that may not have been properly channeled through the “expedited 

judicial review” process of 42 U.S.C. § 1395oo(f)(1), which allows for judicial review in the 

absence of prior exhaustion before the Medicare Provider Reimbursement Review Board. Def.’s 

Opp’n at 6-7. Accordingly, the Court may rule on alternative bases for futility without 

addressing Defendant’s statutory jurisdiction argument.
18

F.Supp.2d 13, 33 (D.D.C. 2012) (citing Caribbean Broad. Sys., Ltd. v. Cable & Wireless P.L.C., 

148 F.3d 1080, 1084 (D.C. Cir. 1998)). Defendant, as the party opposing amendment, bears the 

burden of establishing bad faith or prejudice. City of New York v. Group Health, Inc., 649 F.3d

151, 157 (2d Cir. 2011); Abdullah, 530 F.Supp.2d at 115.

Here, the Court finds that Defendant has not met her burden of showing that Plaintiffs’ 

delay in adding these additional allegations is accompanied by bad faith or prejudice. Certainly, 

Defendant is correct that Plaintiffs have known about the Interim Final Rule since February 2012 

and could have moved to add these additional factual allegations to support her claims far 

sooner. Def.’s Opp’n at 4. But Defendant points to no prejudice from the failure to add these 

allegations earlier. See Estate of Gaither ex rel. Gaither v. Dist. of Columbia, 272 F.R.D. 248, 

252 (D.D.C. 2011) (“the mere passage of time does not preclude amendment – the delay must 

result in some prejudice to the judicial system or the opposing party.”). Indeed, the Secretary’s 

entire prejudice argument addresses the harm from allowing Plaintiffs to add new claims – rather 

than new factual allegations to existing claims – at this stage of the litigation. Def.’s Opp’n at 5-

6. Yet the Court has already rejected the proposed additional claims as futile. In the absence of 

a new claim, Defendant does not provide any reason to believe that she would be prejudiced by 

allowing the addition of new factual allegations concerning the Interim Final Rule to Plaintiffs’ 

existing claims. Nor can the Court discern any, as leave to add clarifying factual allegations to 

existing claims is typically freely given. See Council on American-Islamic Relations Action 

Network, Inc., 793 F.Supp.2d at 324 (“Plaintiffs’ factual allegations merely fine-tune the basis 

for the relief Plaintiffs seek in this action. Factual allegations of this kind, which clarify but do 

not reshape the action, are rarely a bad thing.”). See also Harrison v. Rubin, 174 F.3d 249, 253 

(D.C. Cir. 1999) (stating that technical corrections and clarifications of legal theories without a 
19

showing of prejudice are not sufficient grounds for denying a motion). Here, these allegations 

merely explain the discovery and content of the Interim Final Rule, and provide additional basis

for Plaintiffs’ arguments that certain actions taken by the Secretary were substantively invalid. 

Pls.’ Proposed Amendments at 1-2.

The Court is also unpersuaded by Defendant’s accusations that Plaintiffs have acted in

bad faith. Def.’s Opp’n at 5. Defendant contends that “[t]he most likely explanation for the 

plaintiffs’ motion is that after seeing which of their claims survived the Court’s July 2011 and 

November 2012 rulings and which did not, and then seeing which of their multifarious 

challenges to the administrative records succeeded and which did not, the plaintiffs decided to 

shift their bets in hopes of improving their overall chances in this litigation.” Id. Again, this 

accusation goes mainly to Plaintiffs’ proposal to add new claims, rather than new factual

allegations to existing claims. Accordingly, it does not provide a basis to reject these 

supplemental allegations.

Therefore, although it denies Plaintiffs leave to add new claims pursuant to 5 U.S.C. § 

553, the Court will grant Plaintiffs leave to add factual allegations concerning the Interim Final 

Rule. Accordingly, Plaintiffs may amend their complaint to include the allegations contained in 

sub-paragraphs 198.5(a)-(e) of their Proposed Amendments.

13 See Pls.’ Proposed Amendments

at 1-2. These allegations, though arguably untimely, are not accompanied by bad faith or 

prejudice. 

IV. CONCLUSION

For all of the reasons stated herein, the Court GRANTS IN PART and DENIES IN

PART Plaintiffs’ [108] Motion for Leave to Further Amend and Supplement First Amended 

 13 Plaintiffs may not add the heading paragraph 198.5, which contains the proposed 

claims under 5 U.S.C. § 553. Pls.’ Proposed Amendments at 1.
20

Complaint. The Court denies Plaintiffs leave to amend their complaint to include claims that the 

Secretary’s failure to disclose the Interim Final Rule and its contents violated 5 U.S.C. § 553. 

However, the Court grants Plaintiffs leave to amend their complaint to include factual allegations 

concerning the Interim Final Rule. An appropriate Order accompanies this Memorandum 

Opinion. 

Date: July 7, 2014

_______ /s/__________________ 

COLLEEN KOLLAR-KOTELLY

United States District Judge