Palm Valley Health Care, Inc. v. Azar, 947 F.3d 321 (5th Cir. Jan. 15, 2020) (Owen, Haynes, Costa)
An audit of home health care provider Palm Valley Health Care, Inc. revealed that a significant percentage of sampled claims didn't meet Medicare coverage requirements. Extrapolating that overpayment rate to all claims paid over the relevant time period resulted in a repayment demand of more than $12 million. Palm Valley brought constitutional, statutory, and evidentiary challenges to that decision. The Fifth Circuit affirmed.
Palm Valley argued that HHS had violated due process by failing to meet statutory deadlines at each stage of the reticulated administrative process applicable to Palm Valley's challenge to the repayment demand. The problem was that Palm Valley received a hearing before it was ordered to give any money back to Medicare, so it was left arguing that the delay at each stage of the multi-phased administrative appeal process violated due process. As the Court explained, however, Palm Valley failed to (1) cite Supreme Court or circuit level authority finding a due process violation for delays occurring during an administrative appeals process," (2) take advantage of the statutory escalation procedure that would have allowed it to expedite the process, or (3) seek a federal court injunction to try and prevent
recoupment. As a result, the Court "ha[d] difficulty seeing how Palm Valley was denied due process."
Those same considerations also undermined Palm Valley's ability to show the substantial prejudice necessary for a due process claim to succeed. The delay that Palm Valley complained of, the Court explained, "did not affect HHS's ability to evaluate Palm Valley’s claims, as the evidence that the agency drew on at each stage existed when Palm Valley first requested redetermination. Nor did the delay cause financial harm to Palm Valley." As a result, the Court concluded, Palm Valley's due process claim faltered.
Palm Valley argued that the ALJ and Medicare Appeals Council applied the wrong definition of "homebound" when determining its repayment demand thus violating 42 U.S.C. 1395f(a). The problem here was that "Palm Valley raised this argument for the first time in the district court," and HHS limits the Medicare Appeals Council's review to objections a represented party asserts challenging the ALJ's ruling. 42 C.F.R. 405.1112(c). Having failed to present the issue to the Appeals Council, Palm Valley wasn't allowed to litigate it in federal court. Otherwise, parties could "bypass the agency's internal requirement." (quoting Sims v. Apfel, 530 U.S. 103, 108 (2000).
This, of course, is "issue exhaustion," the administrative-law doctrine that generally requires issues to be raised with an agency before they're raised on judicial review. It is not to be confused with exhaustion of administrative remedies, which generally requires litigants to go through all the stages of an administrative adjudication before going to court. The way I like to think of it is that remedies exhaustion focuses on the agency action at issue and helps to ensure that it is final and therefore fit for judicial review by permitting the administrative process to run its course before the agency's work product is subject to judicial scrutiny. Issue exhaustion, by contrast, has nothing to do with whether the agency action is final. Even when a litigant has checked each and every justiciability box--the agency action is final, the litigant has standing, the lawsuit is timely, etc.--issue exhaustion, when it applies, prevents him from raising an issue in federal court that he didn't raise before the agency.
One difference between issues exhaustion and remedies exhaustion is how you tell whether each applies in the absence of a statutory or regulatory provision saying so. In Darby v. Cisneros, 509 U.S. 137, 147 (1993), the Supreme Court held that §704 of the APA bars federal courts from imposing exhaustion requirements not “clearly mandate[d] . . . by the statute or agency rules.” See also Young v. Reno, 114 F.3d 879, 882 (9th Cir. 1997) (explaining that Darby “limits the discretion of courts to impose exhaustion requirements” above and beyond the statute or agency rules). N.B., however, that where the claim doesn't arise under the APA, Darby doesn't control. In those instances, you presumably fall back on the common law norms of remedies exhaustion.
Issue exhaustion is different. Of course, where it is expressly required by statute or a valid agency rule, it applies. But what happens when no express statutory/regulatory mandate requires it? The Supreme Court answered that question in Sims, 530 U.S. at 108, holding that “the desirability of a court imposing ... issue exhaustion depends on the degree to which the analogy to normal adversarial litigation applies in a particular administrative proceeding.”
Because HHS regulations required issue exhaustion, the Sims rule didn't come into play in Palm Valley Health Care. And because Palm Valley involved issue exhaustion and not remedies exhaustion, my tangent on the distinctions between the two doctrines was unnecessary. I decided to go through all this anyway because it's important, and people often get it all confused. You're welcome :)
Palm Valley also argued that HHS lacked substantial evidence for its finding that 25 beneficiaries at issue weren't homebound. The gist of Palm Valley’s argument was that the Medicare Appeals Council and ALJ relied too heavily on interviews of individuals (including the beneficiaries themselves), who said the beneficiaries were not homebound. According to Palm Valley, that testimony was unreliable, because years had passed between the claims and the interviews. The Fifth Circuit rejected this argument, too, explaining that
[T]he fact that passage of time may be grounds for impeaching testimony does not render that testimony irrelevant. This is the difference evidence law recognizes between relevancy and probative value. Compare FED. R. EVID. 401 (evidence is relevant if it makes a fact any more or less probable), with FED. R. EVID. 403 (excluding evidence if its tendency to make a fact more or less likely is too small relative to the costs of presenting it to the jury). Passage of time goes to the latter, not the former.
Because the Appeals Council's decision reflected that it had weighed the credibility of the evidence at issue. As a result, "Palm Valley's critique ... [wa]s unavailing," and the Court concluded that substantial evidence supported HHS's determination.
Finally, Palm Valley challenged the statistical methodology underlying the agency's analysis of its repayment obligation, contending that it didn't pass muster under Daubert. Unfortunately for Palm Valley, Daubert "does not apply in agency proceedings." After a useful explanation of why that's so (if you're interested, it's worth a read), the Court concluded that Palm Valley had demonstrated no error in the agency's analysis.