First Amended Complaint - As Filed by okyestao

VIEWS: 0 PAGES: 283

									      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page1 of 172


 1   Dario de Ghetaldi - Bar No. 126782
     deg@coreylaw.com
 2   Jerry E. Nastari - Bar No. 151756
     jen@coreylaw.com
 3   Amanda L. Riddle - Bar No. 215221
     alr@coreylaw.com
 4   COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
     700 El Camino Real
 5   P.O. Box 669
     Millbrae, California 94030-0669
 6   Telephone: (650) 871-5666
     Facsimile: (650) 871-4144
 7
 8   Plaintiffs’ Co-Counsel
     [Other Plaintiffs’ Counsel on Signature Page]
 9
10                                      UNITED STATES DISTRICT COURT
11                                   NORTHERN DISTRICT OF CALIFORNIA
12
13   COUNTY OF SANTA CRUZ, COUNTY OF )                                  Case No. 3:07-cv-02888-JSW
     SONOMA, COUNTY OF SAN DIEGO,    )
14   COUNTY OF MARIN, COUNTY OF SANTA)
     BARBARA, COUNTY OF SAN LUIS     )                                  FIRST AMENDED COMPLAINT FOR
15   OBISPO, COUNTY OF MONTEREY,     )                                  DECLARATORY AND OTHER RELIEF
     THEODORE M. MAZER, M.D., WOLBERS)                                       * * * CLASS ACTION * * *
16   AND POREE MEDICAL CORPORATION,  )
                                     )
     on behalf of themselves and all others similarly                   Hon. Jeffrey S. White
17   situated,                       )                                  Dept. 31
                                     )
18             Plaintiffs,           )
                                     )
19        v.                         )
                                     )
20   KATHLEEN SIBELIUS, SECRETARY OF )
     THE UNITED STATES DEPARTMENT OF )
21   HEALTH AND HUMAN SERVICES,      )
                                     )
22             Defendant.            )
                                     )
23                                   )
24
25
26
27
28



                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
          Case3:07-cv-02888-JSW Document89                                  Filed02/18/11 Page2 of 172


 1                                                      TABLE OF CONTENTS
 2   INDEX OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
 3   I.        INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
 4   II.       SUMMARY OF THE CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
 5             A.         Payment Calculations Under Medicare Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
 6             B.         CMS’ Failure to Reconfigure the Locality Structure . . . . . . . . . . . . . . . . . . . . . . . 4
 7             C.         Widespread Agreement That Underpayments Are Occurring . . . . . . . . . . . . . . . . 5
 8             D.         CMS’ Failure to Meet Its Own “Mission,” “Vision,” and “Strategic Plan
                          Objectives” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
 9
               E.         Plaintiffs’ Claims and Remedies Sought . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10
     III.      PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11
     IV.       JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
12
               A.         Presentment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
13
               B.         Jurisdiction Under 28 U.S.C. § 1331 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
14
               C.         Jurisdiction under 42 U.S.C. § 405(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
15
               D.         Jurisdiction Under 5 U.S.C. § 702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
16
               E.         Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
17
     V.        PROCEDURAL HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
18
     VI.       OVERVIEW OF THE PRESENT PHYSICIAN FEE SCHEDULE SYSTEM . . . . . . . 16
19
               A.         1965 – Establishment of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
20
               B.         1986 to 1992: Implementation of the Present Physician Fee Schedule
21                        System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
22                        1.         Recommendations of the Physician Payment Review Commission . . . . 17
23                        2.         Adoption of the Physician Payment Formula . . . . . . . . . . . . . . . . . . . . . 17
24                        3.         Components of the Physician Payment Formula . . . . . . . . . . . . . . . . . . . 18
25                                   a.         The “Geographic Practice Cost Index” or “GPCI” . . . . . . . . . . . 18
26                                   b.         The “Relative Value Unit” or “RVU” . . . . . . . . . . . . . . . . . . . . . 19
27                                   c.         The “Conversion Factor” or “CF” . . . . . . . . . . . . . . . . . . . . . . . . 20
28                                   d.         The Physician Fee Schedule Payment Formula . . . . . . . . . . . . . . 20

                                                                            i
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                   Filed02/18/11 Page3 of 172


 1
                                  e.         The “Geographic Adjustment Factor” or “GAF” . . . . . . . . . . . . 20
 2
            C.         1989 to 1996 – Revision of the 1966 Payment Locality Designations . . . . . . . . 21
 3
                       1.         1989 – Congress Readopts the 1965 Statutory Definition of “Fee
 4                                Schedule Area” or “Locality” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
 5                     2.         1991 to 1994 – The Secretary Assumes the Authority to Change the
                                  Locality Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
 6
                                  a.         1991 – HCFA Makes the Assumption That the Secretary Was
 7                                           Not Precluded from Making Locality Changes . . . . . . . . . . . . . . 23
 8                                b.         1993 – HCFA Mistakenly Claims the 1965 Act Gave the
                                             Secretary the Authority to Make Locality Changes . . . . . . . . . . . 23
 9
                                  c.         1994 – HCFA Repeats the Mistaken Claim that the 1965 Act
10                                           Gave the Secretary the Authority to Modify Localities . . . . . . . . 24
11                                d.         1996 – HCFA Again Repeats the Mistaken Claim that the 1965
                                             Act Gave the Secretary the Authority to Modify Localities . . . . 24
12
                       3.         1996 – HCFA Undertakes a Major Reconfiguration of the Locality
13                                Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14   VII.   DETAILED HISTORY OF THE LOCALITY STRUCTURE UNDER MEDICARE
            PART B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15
            A.         1990 to 1995 – Creation of Single-State Localities During the “Transition
16                     Period” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17                     1.         1990 – The President Finds a Congressionally Directed Method of
                                  Locality Creation Unconstitutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18
                       2.         1991 – Independent Studies of Possible Methods of Locality
19                                Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
20                     3.         1991 – HCFA Proposes to Allow Conversions to Statewide Localities
                                  Based on “Overwhelming Support from the Physician Community” . . . 29
21
                       4.         1991 – Creation of Three Statewide Localities: Minnesota, Nebraska,
22                                and Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
23                     5.         1993 – HCFA Articulates an Interim Preference for Statewide
                                  Localities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
24
                       6.         1993 – HCFA’s Inconsistent Responses to the Effect of Locality
25                                Conversion on Budget Neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
26                                a.         Creating Statewide Budget Neutrality to Induce Conversion
                                             to Statewide Localities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
27
                                  c.         Consolidating Localities Without Requiring Statewide Budget
28                                           Neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

                                                                        ii
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page4 of 172


 1
                             d.         1993 – Creation of Two New Statewide Localities – North
 2                                      Carolina and Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
 3                 7.        1993 – HCFA’s Identification of an Unresolved Issue . . . . . . . . . . . . . . 40
 4                 8.        1994 – HCFA’s Further Comments on Locality Changes During the
                             Transition Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
 5
                   9.        1994 – Creation of the Iowa Statewide Locality . . . . . . . . . . . . . . . . . . . 42
 6
                   10.       1994 – Commenters’ Requests to Establish Clear Criteria for
 7                           Demonstrating Support for Conversion to Statewide Localities . . . . . . . 43
 8       B.        1991 and 1993 – Restructuring Localities Outside the Rule-Making Process . . 44
 9       C.        1996 – Adoption of the Present Locality Configuration . . . . . . . . . . . . . . . . . . . 45
10                 1.        Goals of the 1996 Locality Reconfiguration . . . . . . . . . . . . . . . . . . . . . . 45
11                 2.        HCFA’s Consideration of Four Options for Locality Reconfiguration . . 46
12                 3.        Implementation of “Option 1i” – Use of the “5% Iterative Method”
                             to Create Localities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13
                   4.        Failure to Use a Consistent Methodology in the 1996 Revision of the
14                           Locality Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
15                           a.         Use of Outdated Localities in 1996 Revision of Fee Schedule
                                        Localities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
16
                             b.         Consolidation of “Subcounty” Localities . . . . . . . . . . . . . . . . . . 50
17
                             c.         Continued Use of Antiquated 1966 Multi-County Locality
18                                      Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
19                           d.         Accurate Tracking of Input Prices Used as Justification for
                                        Inconsistent Treatment of Localities . . . . . . . . . . . . . . . . . . . . . . 52
20
                                        (1)        Special Treatment of Three States in the 1996
21                                                 Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
22                                      (2)        Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
23                                      (3)        Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
24                                      (4)        Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
25                                      (5)        Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
26                 5.        Other Standards of Payment Accuracy Set by HCFA During the 1996
                             Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
27
                   6.        Imposition of Statewide Budget Neutrality in the 1996 Locality
28                           Reconfiguration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

                                                                  iii
              FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                   Filed02/18/11 Page5 of 172


 1
                       7.         Phasing In the Locality Changes Where the Largest Payment
 2                                Reductions Would Occur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
 3                     8.         Increased Level of Average Payment Error Resulting From the 1996
                                  Locality Reconfiguration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
 4
     VIII.   UNSUCCESSFUL ATTEMPTS TO OBTAIN LOCALITY CHANGES BETWEEN
 5           2001 AND 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
 6           A.        HCFA’s 1996 Assurance That It Would Make Future Locality Changes
                       Based on “Newer Data” Indicating “Dramatic Relative Cost Changes” . . . . . . . 62
 7
             B.        Development of Payment Disparities Following the 1996 Locality
 8                     Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
 9           C.        2001 – CMS Holds Initial Meetings with the CMA Regarding Payment
                       Disparities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10
             D.        2003 – CMS Requests Comments on the Locality Issue . . . . . . . . . . . . . . . . . . . 64
11
             E.        Events in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
12
                       1.         2004 – CMS Puts Increasing Focus on the Role of Statewide Medical
13                                Associations in Locality Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
14                     2.         2004 – The CMA Proposes a Modification to California’s Locality
                                  Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
15
                       3.         2004 – CMS Rejects the CMA’s Proposal . . . . . . . . . . . . . . . . . . . . . . . 67
16
                       4.         2004 – CMS Reiterates Its Intent to Be Responsive to Proposals
17                                from State Medical Associations for Locality Changes . . . . . . . . . . . . . 69
18           F.        Events in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
19                     1.         2005 – CMS Rejects the CMA’s Proposed Demonstration Project
                                  for Locality Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
20
                       2.         2005 – CMS Proposes Limited Locality Changes in California for
21                                2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
22                                a.         CMS Acknowledges the Existence of Payment Disparities in
                                             California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
23
                                  b.         CMS “Considers” Changing the Locality Designation for
24                                           Only Two Counties in California . . . . . . . . . . . . . . . . . . . . . . . . . 72
25                     3.         2005 – CMS Withdraws Its Proposal for Limited Locality Changes
                                  in California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
26
             G.        Events in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
27
                       1.         2006 – The CMA Publishes a Comprehensive Study of Alternative
28                                Nationwide Locality Reconfigurations . . . . . . . . . . . . . . . . . . . . . . . . . . 75

                                                                        iv
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page6 of 172


 1
                   2.        2006 – CMS Invites Suggestions for Locality Reconfiguration . . . . . . . 76
 2
         H.        Events in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
 3
                   1.        2007 – The GAO Publishes a Report on the Locality Structure
 4                           Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
 5                           a.         The GAO Finds There Are “Large Payment Differences”
                                        in 447 Counties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
 6
                             b.         The Five Alternative Locality Structures Considered by the
 7                                      GAO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
 8                           c.         The GAO Locality Report’s Conclusions . . . . . . . . . . . . . . . . . . 79
 9                 2.        2007 – CMS’ Response to the Draft GAO Locality Report . . . . . . . . . . 80
10                 3.        2007 – CMS Proposes Alternative Plans for Locality Restructuring
                             in California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
11
                   4.        2007 – MedPAC Proposes Reconfiguration of the Locality Structure . . 82
12
                   5.        2007 – CMS’ Proposals for Locality Reconfiguration in California
13                           Had Serious Flaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
14                           a.         Inaccurate Percentage Change Figures . . . . . . . . . . . . . . . . . . . . 85
15                           b.         Inconsistent Values for County GAFs . . . . . . . . . . . . . . . . . . . . . 86
16                           c.         Conflict Between County GAF Values in the CY 2008
                                        Proposed Rule and the GAO Locality Report . . . . . . . . . . . . . . . 86
17
                             d.         Conflicts Between Table 9 and Option 3 Description . . . . . . . . . 87
18
                   6.        2007 – CMS Decides Not to Implement Any of Its Proposed Changes
19                           to California’s Locality Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
20       I.        Events in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
21                 1.        2008 – RTI and the Urban Institute Publish a Report on Alternative
                             Locality Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
22
                   2.        2008 – CMS Reviews Four Methods of Reconfiguring Localities
23                           on a National Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
24                 3.        2008 – Acumen Publishes a Study on Seven Possible Locality
                             Reconfiguration Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
25
                   4.        2008 – CMS Announces Further Study of Locality Reconfiguration . . . 93
26
         J.        Events in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
27
                   1.        2009 – CMS Corrects Houston and Austin Counties’ Locality
28                           Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

                                                                  v
              FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page7 of 172


 1
                     2.         2009 – CMS Announces Further Study of Locality Reconfiguration . . 96
 2
           K.        Events in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
 3
                     1.         2010 – CMS Invokes Its Three-Part Mantra as Justification for
 4                              Delaying Locality Reconfiguration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
 5                   2.         2010 – CMS Proposes a Major Modification to the Calculation of
                                the Practice Expense GPCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
 6
                     3.         2010 – CMS Withdraws Its Proposed Change to the Calculation of
 7                              the Practice Expense GPCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
 8                   4.         2010 – CMS Promises Further Study of the Locality Issue . . . . . . . . . 101
 9   IX.   CAUSES OF “LARGE PAYMENT DIFFERENCES” UNDER MEDICARE
           PART B AND EFFECTS ON SUPPLIERS AND BENEFICIARIES . . . . . . . . . . . . . 102
10
           A.        Three Major Causes of Supplier Underpayments . . . . . . . . . . . . . . . . . . . . . . . 102
11
                     1.         Failure to Apply Consistent Methodology . . . . . . . . . . . . . . . . . . . . . . . 102
12
                     2.         Failure to Modify Localities to Reflect Significant Changes in
13                              Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
14                   3.         Dependence on Physician-Directed Change to Localities . . . . . . . . . . . 104
15         B.        Effect of CMS’ Failure to Create New Localities After 1996 . . . . . . . . . . . . . . 105
16                   1.         Emergence of Payment “Inaccuracies” or “Large Payment
                                Differences” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
17
                     2.         Underpayments to Counties Whose GAFs Have Passed the
18                              5% Iterative Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
19                   3.         Development of “Inappropriate” or “Severe” Boundary Differences . . 107
20                   4.         Development of “Payment Errors” Exceeding 3.16% . . . . . . . . . . . . . . 108
21                   5.         Corresponding Overpayments and Overcharges . . . . . . . . . . . . . . . . . . 108
22   X.    CMS DOES NOT MAINTAIN THE DATA UNDERLYING THE LOCALITY
           PAYMENT STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
23
           A.        The County Plaintiffs’ FOIA Requests and Lawsuit . . . . . . . . . . . . . . . . . . . . . 109
24
           B.        The Court in the FOIA Action Finds CMS Has Conducted a Reasonable
25                   Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
26         C.        CMS’ Vacillation on Sharing Underlying County-Level Data . . . . . . . . . . . . . 111
27                   1.         2004 to 2006 – CMS Freely Shares Data with the CMA . . . . . . . . . . . 111
28                   2.         2007 – CMS Denies the County-Level Data Exists . . . . . . . . . . . . . . . 111

                                                                      vi
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
       Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page8 of 172


 1
                        3.        2007 – CMS Attempts to Suppress County-Level Data . . . . . . . . . . . . 113
 2
                        4.        2010 – CMS Improves Public Access to County-Level Data . . . . . . . . 113
 3
              D.        Significance to This Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
 4
     XI.      FACTUAL CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
 5
              A.        Contrasting the Two Geographies of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . 114
 6
              B.        Contrasting the Two Priorities of CMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
 7
              C.        The Statutory, Administrative, and Policy Goals of Medicare Are Not
 8                      Being Met With the Continued Use of the Current Locality Configuration . . . 120
 9            D.        CMS’ Failure to Modify the Locality Structure Has No Rational Basis . . . . . . 122
10                      1.        CMS Has Repeatedly Acknowledged that the Current Locality
                                  Structure Results in Inaccurate Payments . . . . . . . . . . . . . . . . . . . . . . . 122
11
                        2.        The Current Locality Structure Does Not Meet the Specific Levels
12                                of Payment Accuracy Defined by the Secretary in 1996 . . . . . . . . . . . . 123
13                      3.        The Current Locality Structure Fails to Account for Changed
                                  Economic Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
14
                        4.        The Current Locality Structure Irrationally Treats Localities with
15                                Non-Contiguous Counties Inconsistently . . . . . . . . . . . . . . . . . . . . . . . 124
16                      5.        None of the Secretary’s Expressed Reasons for Maintaining the
                                  Current Locality Structure Has a Rational Basis . . . . . . . . . . . . . . . . . . 126
17
                                  a.         Irrational Concern Over “Winners and Losers” . . . . . . . . . . . . 126
18
                                  b.         Irrational Concern Over Administrative Burden . . . . . . . . . . . . 127
19
                                  c.         Irrational Concern Over the Need for Further Study . . . . . . . . . 128
20
                                  d.         Irrational Desire to Obtain Support for Changes from State
21                                           Medical Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
22                      6.        There Is No Other Conceivable Rational Basis for Maintaining the
                                  Current Locality Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
23
              E.        Lack of an Adequate Legal Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
24
     XII.     SOURCE MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
25
     XIII.    CLASS ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
26
     XIV. CLAIMS FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
27
              A.        First Claim for Relief – Declaration That CMS Has Denied Plaintiffs and
28                      Members of the Class Equal Protection of the Law, and Other Relief . . . . . . . 136

                                                                      vii
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
       Case3:07-cv-02888-JSW Document89                                   Filed02/18/11 Page9 of 172


 1
               B.        Second Claim for Relief – Declaration That 42 U.S.C. § 1395w-4(j)(2) Is
 2                       Unconstitutional as Applied to Plaintiffs and Members of the Class, and
                         Other Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
 3
               C.        Third Claim for Relief – Declaration That 42 C.F.R. § 414.4 Is
 4                       Unconstitutional as Applied to Plaintiffs and Members of the Class,
                         and Other Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
 5
               D.        Fourth Claim for Relief – Declaration That CMS Has Unlawfully Delegated
 6                       Its Duty to Reconfigure Localities, and Other Relief . . . . . . . . . . . . . . . . . . . . 143
 7   XV.       PRAYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
 8   BIBLIOGRAPHY OF SOURCE MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
 9   INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                                                        viii
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page10 of 172


 1                                                    INDEX OF TABLES
 2   Table 1.         “Inaccurate GAFs” in Rejected Option 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
 3   Table 2.         “Inappropriate” Boundary Differences in Rejected Option 3 . . . . . . . . . . . . . . 57
 4   Table 3.         “Substantially Underpaid” Metropolitan Areas in Rejected Option 4 . . . . . . . . 58
 5   Table 4.         “Substantially Overpaid” Metropolitan Areas in Rejected Option 4 . . . . . . . . . 58
 6   Table 5.         “Severe” Boundary Differences in Rejected Option 4 . . . . . . . . . . . . . . . . . . . . 59
 7   Table 6.         Redistributive Impact of Changes to the peGPCI Described in the
                      CY 2011 Proposed Rule From Localities with peGPCI > 1 to Localities
 8                    with peGPCI < 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
 9   Table 7.         Number of Improperly Classified Counties by Year . . . . . . . . . . . . . . . . . . . . . 106
10   Table 8.         Total Annual Underpayments to Suppliers – 2001 to 2010 . . . . . . . . . . . . . . . . 107
11   Table 9.         Accuracy of County-Level and Locality-Level Data Produced by CMS in
                      Response to Plaintiffs’ FOIA Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
12
     Table 10.        The Two Geographies of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
13
     Table 11.        The Two Priorities of CMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
14
     Table 12.        The Need to Separate Marin County from Locality 03 . . . . . . . . . . . . . . . . . . . 125
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                                                    ix
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page11 of 172


 1   I.     INTRODUCTION
 2          1.        Payments to physicians and other “suppliers” under Medicare Part B and payments
 3   to hospitals and other “providers” under Medicare Part A are intended to reflect the local costs of
 4   providing medical services. Because payments are based on the average of costs within a
 5   geographic locality, the accuracy of those payments is dependent on how the geographic boundaries
 6   of the “locality” are drawn. If the boundaries enclose an area where costs are similar, the resulting
 7   payments will be accurate. If the boundaries enclose an area where costs are divergent, the accuracy
 8   of the resulting payments will be dependent on the degree of divergence of those costs.
 9          2.        The localities used to calculate payments for hospitals under Medicare Part A are
10   Metropolitan Statistical Areas (“MSAs”) which are defined and regularly updated by the
11   Government Accountability Office (“GAO”).
12          3.        In contrast, the localities used to calculate payments for physicians and other
13   “suppliers” under Part B are an assortment of counties, combinations of counties, and states. Some
14   of these localities were defined in 1996 based on the local costs of providing medical care extant at
15   the time, some were defined between 1991 and 1994 during a “transition period” from the
16   “reasonable charge” payment method to the current “fee schedule” method, and some were defined
17   in 1966 based on the geographic coverage areas of the insurance companies who originally
18   administered Medicare. With the exception of the 2009 correction of the mistaken configuration of
19   four Texas counties, none of the localities that define payments to physicians and other suppliers
20   under Part B have been modified since 1996.
21          4.        The Centers for Medicare and Medicaid Services (“CMS” or the “Agency”) makes
22   payments to Plaintiffs and Members of the Class, all of whom are “suppliers” under Medicare Part
23   B, based on the average cost of providing medical services in multi-county payment “localities.”
24          5.        Large cost disparities have arisen between counties in those localities since 1996
25   when the Agency last reconfigured the payment locality structure under Part B. Where comparative
26   costs in those multi-county localities were once within reasonable bounds, changes in demographics
27   and economic conditions have dramatically increased cost differences between the high-cost and
28   low-cost counties in many multi-county localities across the United States.

                                                                     1
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page12 of 172


 1          6.         Because payment rates in multi-county localities are based on the average costs for
 2   the counties within the localities where costs have diverged since 1996, Plaintiffs and Members of
 3   the Class (all of whom provide services in high-cost counties within multi-county localities) have
 4   been and are being paid at rates that do not meet the standards of payment accuracy set by the
 5   Agency in 1996. In the past, the Agency has called similar rates “inaccurate,” “inappropriate,” and
 6   “unacceptable,” and has said that such rates amount to “substantial” underpayments.
 7          7.         As a further result, Plaintiffs and Members of the Class are involuntarily subsidizing
 8   windfall overpayments to physicians and other suppliers in the low-cost counties within the payment
 9   locality they share with Plaintiffs and Members of the Class.
10          8.         Underpayments to Plaintiffs and Members of the Class total approximately $3.2
11   billion since 2001.
12          9.         These payment disparities cause serious and increasing harm in two ways to
13   Medicare beneficiaries, the most vulnerable members of our population and the very persons
14   Medicare was designed to protect.
15          10.        First, because the payment rates in the high-cost counties are so far below the actual
16   cost of providing medical services, more and more physicians and other suppliers in those counties
17   have stopped taking new Medicare patients or have stopped seeing any Medicare patients at all.
18   This has led to a public health crisis for Medicare beneficiaries whose access to medical care within
19   their own counties has been sharply reduced or eliminated.
20          11.        Second, Medicare beneficiaries in the low-cost counties are being overcharged as
21   their 20% out-of-pocket cost share is based on the overpayments approved by CMS.
22          12.        These payment inequities are recognized and acknowledged by CMS, the General
23   Accountability Office, congressional advisory committees, and independent researchers. Yet,
24   because of CMS’s repeatedly expressed and completely misplaced concern for the possible effects
25   of eliminating the windfall overpayments, CMS has done nothing to eliminate or even reduce the
26   underpayments to Plaintiffs and Members of the Class.
27          13.        CMS’ deliberate and unjustifiable failure to cure these payment inequities irrationally
28   denies Plaintiffs and Members of the Class equal protection of the laws.

                                                                      2
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page13 of 172


 1   II.    SUMMARY OF THE CLAIMS
 2          A.         Payment Calculations Under Medicare Part B
 3          14.        CMS makes payments to “suppliers” to reimburse them for the cost of providing
 4   medical services and supplies to Medicare beneficiaries under United States Code, Title 42, Chapter
 5   7, Subchapter XVIII, Part B, “Supplementary Medical Insurance Benefits for the Aged and
 6   Disabled” (“Medicare Part B”).
 7          15.         Under 42 U.S.C. § 1395x(d), “supplier” means a “a physician or other practitioner,
 8   a facility, or other entity (other than a provider of services) that furnishes items or services” under
 9   Medicare Part B. The category of “supplier” also includes such practitioners as physician assistants,
10   nurse practitioners, clinical nurse specialists, nurse midwives, dentists, podiatrists, optometrists,
11   chiropractors, clinical psychologists, clinical social workers, physical therapists, occupational
12   therapists, and entities such as a county or corporation that employ and bill for medical services
13   performed by individuals under Medicare Part B. Unless otherwise indicated, the term “physician”
14   is used herein as a synonym for “supplier.”
15          16.        The Agency’s methodology for calculating payments to suppliers begins with its
16   establishment of geographic “fee schedule areas” (“FSAs”) or “localities.”
17          17.        Those localities were first defined in 1966 by the local insurance carriers who were
18   then responsible for setting the amounts paid to physicians and other suppliers. In 1991, the Health
19   Care Financing Administration assumed responsibility for establishing localities and making
20   changes to localities.1
21          18.        Medicare payments to suppliers are calculated based on the average costs of
22   providing specific services within a certain locality relative to the national average costs of
23   providing those services. Thus, to the extent that costs within a particular locality are relatively
24   homogeneous, Medicare payments to suppliers are relatively accurate reflections of those costs. For
25   similar reasons, to the extent that a particular locality encompasses an area where costs are disparate,
26
            1
27             In 1977, the Health Care Financing Administration (“HCFA” or the “Agency”) was
     established under the Department of Health, Education, and Welfare, and became responsible for
28   the coordination of Medicare and Medicaid. On July 1, 2001, HCFA was renamed the Centers for
     Medicare & Medicaid Services.
                                                                      3
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page14 of 172


 1   Medicare payments to suppliers in such a locality will not accurately reflect those costs, but will be
 2   excessive for some suppliers and inadequate for others.
 3          19.        In 1996, based on “the lack of consistency among localities and the significant
 4   demographic and economic changes that had occurred since localities were originally established,”
 5   HCFA implemented a partial restructuring of its locality configuration and made a commitment that
 6   it would revise those localities if “dramatic relative cost changes among areas” developed.
 7          B.         CMS’ Failure to Reconfigure the Locality Structure
 8          20.        The locality configuration for Medicare Part B has not been changed since 1996
 9   despite subsequent significant changes in demographics and relative costs between and within
10   localities, despite numerous formal and informal requests to restructure localities, and despite CMS’
11   knowledge that serious payment inaccuracies have developed as a result.
12          21.        CMS’ failure to restructure the localities has given rise to significant payment
13   inequities for physicians and other suppliers in areas throughout the United States. Ultimately, these
14   inequities are causing a reduction in access to medical care for many Medicare beneficiaries across
15   the country.
16          22.        As a result of CMS’ failure to restructure the localities, large boundary payment
17   differences have developed between neighboring counties at levels well above those HCFA found
18   to be “inappropriate” or “severe” in 1996. For example, suppliers in certain counties in California,
19   Texas and Georgia are paid 12-24% less than their colleagues in neighboring, demographically
20   similar counties for providing exactly the same services.
21          23.        As a further result of CMS’ failure to restructure the localities, a fundamental
22   inequity in payment rates has evolved to the point where suppliers in approximately 200 counties
23   across the country are being paid at rates HCFA deemed “inaccurate” in 1996.
24          24.        Under the current locality structure for Part B, counties are either defined as single-
25   county localities (primarily urban counties) or are grouped as a part of a multi-county locality
26   (primarily rural counties). Suppliers in most urban single-county localities receive payments based
27   on what Medicare recognizes as the actual costs of providing medical services. In contrast, suppliers
28

                                                                      4
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page15 of 172


 1   in multi-county localities receive payments based on the average of the costs of providing medical
 2   services in each of the counties within the locality.
 3           25.        When the current locality structure was created in the 1990’s, the costs within the
 4   multi-county localities were relatively homogeneous. However, the demographics and actual costs
 5   of approximately 200 urban and suburban counties have changed so much since that time, suppliers
 6   in higher-cost counties which are part of multi-county localities typically receive payments up to
 7   15% to 20% less than what Medicare recognizes as their costs. These payment discrepancies meet
 8   or exceed levels that HCFA deemed “substantially underpaid” in 1996.
 9           26.        Generally the payment discrepancies stem from CMS’ method of combining counties
10   into single localities and determining payments to suppliers in the localities by averaging costs of
11   each county within the locality. Thus, inclusion of high-cost counties within a locality with
12   primarily rural counties tends to diminish the payments to the high-cost counties while increasing
13   the payments to the low-cost counties. This means that every dollar that CMS has underpaid to
14   Plaintiffs and Members of the Class due to its failure to restructure the current locality configuration
15   has been overpaid to other physicians and suppliers in rural low-cost counties, in many cases at
16   levels that HCFA deemed “substantially overpaid” in 1996.
17           27.        Medicare beneficiaries in rural low-cost counties are also being harmed by CMS’
18   failure to reconfigure the locality structure to improve payment accuracy. Because Medicare
19   beneficiaries pay 20% of the total charged for medical services, their out-of-pocket costs are
20   artificially inflated when CMS fails to correct the “substantially overpaid” rates it has been setting
21   for suppliers in those rural low-cost counties.
22           28.        Physicians and other suppliers in approximately 200 adversely affected counties
23   cannot afford to continue treating Medicare patients and cannot take on new Medicare patients when
24   they are not being accurately and equitably compensated for their services.
25           C.         Widespread Agreement That Underpayments Are Occurring
26           29.        The inequities resulting from CMS’ failure to restructure localities are recognized
27   by Congress, MedPAC, the GAO, and by CMS itself:
28   / / /

                                                                       5
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page16 of 172


 1                    (a) In September 2004, the House Committee on Appropriations issued a
 2           report expressing concern that Medicare “has failed to address a substantive inequity
 3           over current doctor reimbursement levels” in four California counties “despite
 4           growing evidence that the geographic practice cost index in those counties exceeds
 5           the regulatory parameters” for the locality to which they were assigned. The
 6           Appropriations Committee asked Medicare to submit a plan to correct the
 7           discrepancy within four months, but Medicare never responded.                                       (House of
 8           Representatives: Committee on Appropriations, Report 108-636, p. 126, September
 9           7, 2004.)
10                    (b) In its June 2005 Report to Congress, the Medicare Payment Advisory
11           Commission (“MedPAC”) stated: “Given that [Medicare] has not reconfigured the
12           localities in at least 8 years (and, in some cases, 40 years), the localities likely do not
13           correspond to market boundaries for the inputs physicians use in furnishing services.
14           As a result, Medicare is probably overpaying in some geographic areas and
15           underpaying in others.” 2
16                    (c) In the August 8, 2005, Federal Register, CMS itself stated that it
17           “recognize[s] the potential impact of wide variations in the practice costs within a
18           single payment locality.” (CY 2006 Proposed Rule, 8/8/2005, 70 FR 45784.)
19                    (d) In a letter dated September 28, 2005, from Congressman Bill Thomas,
20           Chairman of the House Ways and Means Committee, to Mark McClellan, M.D.,
21           Administrator of the Centers for Medicare and Medicaid Services, Rep. Thomas
22           stated: “I agree with your assessment that changing economic and population trends
23           over time may lead to payment disparities. CMS has not addressed payment locality
24           configuration since 1996. It is time for a nationwide re-evaluation of how payment
25           localities are drawn.”
26   / / /
27
             2
28            MedPAC is an independent federal body established by the Balanced Budget Act of 1997
     to advise the U.S. Congress on issues affecting the Medicare program.
                                                                     6
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page17 of 172


 1                     (e) On June 29, 2007, the GAO submitted a report to the Chairman of the
 2          Subcommittee on Health of the House Committee on Ways and Means entitled
 3          “Geographic Areas Used to Adjust Physician Payments for Variation in Practice
 4          Costs Should Be Revised,” GAO-07-466 (the “GAO Locality Report”). The GAO
 5          found that there 447 counties across the country with “large payment differences”
 6          (a difference of 5% or more above or below what the payments that suppliers in a
 7          county would receive if the county was a single-county locality and what suppliers
 8          in the county actually received as part of a multi-county locality), and that there were
 9          four corrective methods that could be employed that would improve payment
10          accuracy without cause undue administrative burdens.
11          30.        During MedPAC’s April 2006 Public Meeting, Glenn M. Hackbarth, Chair, made an
12   eloquent assessment of the general policy of fair payment under Medicare:
13                   “So the basic issue here is if we have a system that adjusts for geographic
            differences, to whom does the right to fair payment belong? Is it a state association?
14          Or is it the right of the individual practitioner being paid under the system?
15                   “I think our general policy in Medicare is it’s the right of the individual
            practitioner to fair payment and so we need to set some threshold. We need to
16          periodically readjust the system to reflect changes in underlying practice costs. And
            I don’t think a state association or anybody else ought to be able to override that and
17          say no, we want a different distributive policy.” (MedPAC Public Meeting
            Transcript, 4/19/2006, p. 223.)
18
19          31.        Earlier in the meeting, Mr. Hackbarth had observed:
20                 “If you have a system based on the principle that we ought to adjust for
            geographic differences and practice costs and the payments ought to be adjusted
21          correspondingly, it seems to me that you buy into periodic adjustments of that
            system. . . .
22
                    “If that’s the basic principle that your system is designed on, to say we’re
23          going to freeze it in perpetuity based on a snapshot that was taken in 19– whatever,
            just doesn’t seem reasonable.” (MedPAC Public Meeting Transcript, 4/19/2006, pp.
24          213-214.)
25          32.        CMS has avoided making any changes to the Part B locality structure for ten years,
26   knowing full well that suppliers are being underpaid and beneficiaries are being overcharged as a
27   result of its inaction. CMS’ avoidance is unreasonable as is CMS’ failure to implement any
28

                                                                      7
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page18 of 172


 1   mechanism to regularly adjust the locality structure to account for changes in local costs of
 2   providing medical services.
 3          D.         CMS’ Failure to Meet Its Own “Mission,” “Vision,” and “Strategic Plan
 4                     Objectives”
 5          33.        On its website (http://www.cms.gov/MissionVisionGoals/), CMS states that its
 6   “Mission” is “[t]o ensure effective, up-to-date health care coverage and to promote quality care for
 7   beneficiaries.” CMS describes its “Vision” as being one to “achieve a transformed and modernized
 8   health care system” and states that it will accomplish its “mission by continuing to transform and
 9   modernize America’s health care system.”                        CMS also identifies one of its “Strategic Plan
10   Objectives” is to make “Accurate and Predictable Payments.”
11          34.        The true facts show that over the last ten years, CMS’ failure to modify the locality
12   structure has not “ensured effective, up-to-date health care coverage” and has reduced the ability of
13   suppliers to provide quality care for Medicare beneficiaries.
14          35.        The true facts also show that CMS has done nothing to “modernize” the locality
15   structure despite its knowledge of the need to do so, and as a result has failed to make “accurate
16   payments” to tens of thousands of affected suppliers.
17          E.         Plaintiffs’ Claims and Remedies Sought
18          36.        Plaintiffs, the California Counties of Santa Cruz, Sonoma, San Diego, Marin, Santa
19   Barbara, San Luis Obispo, Monterey, Theodore M. Mazer, M.D., and Wolbers and Poree Medical
20   Corporation bring this action on behalf of themselves and others similarly situated and seek:
21                     (i) a judicial declaration that Plaintiffs and Members of the Class have been
22          denied equal protection of the law since 2001 by CMS’ failure and refusal to assign
23          them to fee schedule areas that reflect the true economic costs of the services they
24          provide relative to the national average of those costs;
25                     (ii) a judicial declaration that 42 U.S.C. § 1395w-4(j)(2) is unconstitutional
26          as applied to Plaintiffs and Members of the Class;
27                     (iii) a judicial declaration that 42 C.F.R. § 414.4 is unconstitutional as applied
28          to Plaintiffs and Members of the Class;

                                                                      8
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page19 of 172


 1                     (iv) a judicial declaration that the Secretary of the Department of Health and
 2          Human Services has unconstitutionally delegated the duty to reconfigure the current
 3          Medicare Part B payment locality structure to state medical associations;
 4                     (v) an order prohibiting the Secretary of the Department of Health and
 5          Human Services from configuring or maintaining a payment locality structure under
 6          Medicare Part B that does not meet or exceed the standards of payment accuracy the
 7          Secretary adopted in 1996;
 8                     (vi) an order prohibiting the Secretary of the Department of Health and
 9          Human Services from delegating any part of the duty to reconfigure the payment
10          locality structure under Medicare Part B to state medical associations; and
11                     (vii) an order requiring to Secretary of the Department of Health and Human
12          Services to reimburse Plaintiffs and Members of the Class for underpayments dating
13          from March 14, 2001, through the date that the Secretary reorganizes the payment
14          locality structure in a manner that meets or exceeds the standards of payment
15          accuracy identified by the Secretary in 1996.
16   III.   PARTIES
17          37.        Plaintiff County of Santa Cruz is a political subdivision of the State of California.
18   The Board of Supervisors of the County of Santa Cruz is both the legislative and executive authority
19   of the county and has authorized this action.
20          38.        Plaintiff County of Sonoma is a political subdivision of the State of California. The
21   Board of Supervisors of the County of Sonoma is both the legislative and executive authority of the
22   county and has authorized this action.
23          39.        Plaintiff County of San Diego is a political subdivision of the State of California.
24   The Board of Supervisors of the County of San Diego is both the legislative and executive authority
25   of the county and has authorized this action.
26          40.        Plaintiff County of Marin is a political subdivision of the State of California. The
27   Board of Supervisors of the County of Marin is both the legislative and executive authority of the
28   county and has authorized this action.

                                                                      9
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page20 of 172


 1           41.        Plaintiff County of Santa Barbara is a political subdivision of the State of California.
 2   The Board of Supervisors of the County of Santa Barbara is both the legislative and executive
 3   authority of the county and has authorized this action.
 4           42.        Plaintiff County of San Luis Obispo is a political subdivision of the State of
 5   California. The Board of Supervisors of the County of San Luis Obispo is both the legislative and
 6   executive authority of the county and has authorized this action.
 7           43.        Plaintiff County of Monterey is a political subdivision of the State of California. The
 8   Board of Supervisors of the County of Monterey is both the legislative and executive authority of
 9   the county and has authorized this action.
10           44.        Plaintiffs County of Santa Cruz, County of Sonoma, County of San Diego, County
11   of Marin, County of Santa Barbara, County of San Luis Obispo, and County of Monterey are
12   collectively referred to herein as the “County Plaintiffs.”
13           45.        Although the County Plaintiffs are political subdivisions of the State of California,
14   they occupy a dual status under California law, are given “corporate powers,” and are designated
15   as bodies “corporate and politic.” Under California law, the County Plaintiffs: (a) may sue and be
16   sued; (b) are deemed to be “local public entities” in contrast to the State and state agencies; (c) are
17   liable for all judgments against them; (d) are authorized to levy taxes to pay such judgments; (e) may
18   sell, hold, or otherwise deal in property; (f) may contract for the construction and repairs of
19   structures; (g) are authorized to provide a variety of public services such as water service, flood
20   control, rubbish disposal, harbor and airport facilities, and health care; and (h) are empowered to
21   issue general obligation bonds payable from county taxes which create no obligation on the part of
22   the State, except that the State is authorized to intervene and to impose county taxes to protect the
23   bondholders if the county fails to fulfill its obligations voluntarily.
24           46.        Plaintiff Theodore M. Mazer, M.D., is a physician currently practicing in the County
25   of San Diego.
26           47.        Plaintiff Wolbers and Poree Medical Corporation is a California corporation in good
27   standing, currently doing business as Pain Clinic of Monterey Bay with its principle place of
28   business in Santa Cruz County.

                                                                      10
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page21 of 172


 1           48.        Plaintiffs are “suppliers” as that term is defined in 42 U.S.C. § 1395x(d) and furnish
 2   and provide medical and other health services to Medicare beneficiaries under Medicare Part B.
 3           49.        Plaintiffs have accepted assignments from Medicare beneficiaries in order to receive
 4   payment directly from Medicare for all items or services furnished to the beneficiaries that are at
 5   issue in this action.
 6           50.        Plaintiffs’ standing to assert the issues raised in this action arises from their status
 7   as assignees of the beneficiaries from whom they have accepted assignments.
 8           51.        Plaintiffs waive all rights for payment from any beneficiary with respect to all items
 9   or services involved in this action.
10           52.        Defendant is Kathleen Sibelius, Secretary of the United States Department of Health
11   and Human Services (“HHS”), the federal agency responsible for the administration of Medicare.
12           53.        This action is brought on behalf of Plaintiffs and all other suppliers in the United
13   States who are similarly situated and affected.
14   IV.     JURISDICTION AND VENUE
15           A.         Presentment
16           54.        On March 14, 2007, Plaintiffs County of Santa Cruz, County of Sonoma, County of
17   San Diego, and County of Santa Barbara presented their claim to HHS (the “Five County Claim”),
18   through NHIC, Corp. (“NHIC”), the insurance carrier to whom HHS has delegated the authority to
19   handle claims. A true and accurate copy of the Five County Claim was attached as Exhibit 5 to the
20   initial complaint filed in this action and is incorporated herein.
21           55.        On March 14, 2007, along with their claim Plaintiffs also submitted a letter to Dawn
22   Cavanaugh at NHIC which accurately summarized a prior conversation with Ms. Cavanaugh and
23   a prior conversation with Anna Duhay at CMS. A true and accurate copy of the letter was attached
24   as Exhibit 6 to the initial complaint filed in this action and is incorporated herein.
25           56.        On May 8, 2007, Plaintiff County of San Luis Obispo presented its joinder in the Five
26   County Claim to HHS, through its agent, NHIC. A true and accurate copy of the San Luis Obispo
27   County joinder was attached as Exhibit 7 to the initial complaint filed in this action (from which the
28

                                                                      11
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page22 of 172


 1   duplicative copy of the Five County Claim that was attached thereto as Exhibit A was intentionally
 2   omitted) and is incorporated herein.
 3            57.        On May 16, 2007, Plaintiff County of Monterey presented its joinder in the Five
 4   County Claim to HHS, through its agent, NHIC. A true and accurate copy of the Monterey County
 5   joinder was attached as Exhibit 8 to the initial complaint filed in this action (from which the
 6   duplicative copy of the Five County Claim that was attached thereto as Exhibit A was intentionally
 7   omitted) and is incorporated herein.
 8            58.        The Five County Claim also included a claim on behalf of a properly defined class
 9   of similarly situated persons and entities who are suppliers of medical goods and services. Plaintiffs
10   Theodore M. Mazer, M.D., and Wolbers and Poree Medical Corporation are members of the class
11   defined in the Five County Claim, a class that is the same class defined herein. Thus, all Plaintiffs
12   have satisfied the presentment requirement both as to themselves and as to Members of the Class.
13            B.         Jurisdiction Under 28 U.S.C. § 1331
14            59.        Jurisdiction is conferred under 28 U.S.C. § 1331. The action pleaded by Plaintiffs
15   arises under federal law in that Plaintiffs’ action really and substantially involves a dispute or
16   controversy respecting the validity, construction or effect of the federal law, on which the
17   determination of the result depends.
18            60.        On May 11, 2007, NHIC responded to Plaintiffs’ claim stating that “it cannot grant,
19   reject, or take any official action upon the submission, because the submission is not a cognizable
20   request for action by a carrier.” A true and correct copy of the May 11, 2007, letter from NHIC to
21   Plaintiffs’ counsel was attached as Exhibit 9 to the initial complaint filed in this action and is
22   incorporated herein (the “Claim Denial”).
23            61.        Thus, Plaintiffs cannot channel their legal challenge through the agency. As HHS’
24   carrier stated in the Claim Denial, “it cannot grant, reject, or take any official action” on Plaintiffs’
25   claim.
26            62.        This fact was confirmed by counsel for the Secretary during oral argument in the
27   Ninth Circuit Court of Appeals in County of Santa Cruz, et al., v. Sibelius, Case No. 08-16389, on
28   April 13, 2009. There, in response to an inquiry from Judge Stephen Reinhardt, counsel for the

                                                                       12
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                  Filed02/18/11 Page23 of 172


 1   Secretary stated, “If they are challenging the definition of fee schedule areas ... there would have
 2   been no administrative ... review.”
 3             63.        The exercise of jurisdiction under 28 U.S.C. § 1331 is not barred by 42 U.S.C. §
 4   405(h).        Federal question jurisdiction exists because the Plaintiffs’ action challenges the
 5   constitutional validity of an agency rule or policy, and is not a challenge to the accuracy of the
 6   agency’s calculation of benefits or a challenge to a carrier’s misapplication or misinterpretation of
 7   valid rules and regulations. Further, HHS has no process by which Plaintiffs may obtain a final
 8   determination of their claim from Defendant under 42 U.S.C. § 405(h) which could then be reviewed
 9   by a court under 42 U.S.C. § 405(g). Therefore, as no administrative or judicial review of the issues
10   raised by Plaintiffs is possible under 42 U.S.C. § 405, federal question jurisdiction exists under 28
11   U.S.C. § 1331.
12             C.         Jurisdiction under 42 U.S.C. § 405(g)
13             64.        To the extent Plaintiffs’ claim falls within the scope of 42 U.S.C. § 405(h) and cannot
14   be brought under 28 U.S.C. § 1331 and to the extent that the Claim Denial constitutes a final
15   determination by the Secretary that HHS does not have the authority to act on Plaintiffs’ claim,
16   jurisdiction over Plaintiffs’ action can be exercised pursuant to 42 U.S.C. § 405(g) following that
17   final determination on Plaintiffs’ claim.
18             65.         To the extent Plaintiffs’ claim falls within the scope of 42 U.S.C. § 405(h) and
19   cannot be brought under 28 U.S.C. § 1331 and to the extent that the Claim Denial does not constitute
20   a final determination by the Secretary of Plaintiffs’ claim, Plaintiffs have satisfied the presentment
21   requirement of 42 U.S.C. § 405(h).
22             66.        Plaintiffs allege that waiver of the exhaustion requirement is proper in this matter and
23   that jurisdiction over Plaintiffs’ action can therefore be exercised pursuant to 42 U.S.C. § 405(g).
24             67.        Plaintiffs’ action is collateral to a substantive claim to entitlement in that it involves
25   a challenge to the constitutional validity of rules, regulations, and policies of HHS which have
26   systematically denied Plaintiffs and Members of the Class treatment equal to that of suppliers in
27   other localities and equal to that of hospitals in a manner contrary to law. Plaintiffs are challenging
28   a deliberate, systemwide policy which intentionally perpetuates payment inequities by using

                                                                        13
                     FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page24 of 172


 1   underpayments to Plaintiffs and Members of the Class to subsidize windfall overpayments to
 2   suppliers in low-cost counties within the same payment localities.
 3           68.        Irreparable harm has arisen from the failure of HHS to modify the locality definitions
 4   used under Part B of Medicare. This failure has caused wide-spread, adverse public health effects
 5   in the form of a reduction in access to medical care for Medicare beneficiaries in over 200 counties
 6   across the United States. Any further delays in seeking modification of the locality definitions
 7   would only hasten the growth of the existing adverse public health effects.
 8           69.        Exhaustion of administrative remedies would be futile in this instance in that CMS
 9   denies that any type of administrative review whatsoever exists for the types of claims raised by
10   Plaintiffs.
11           70.        In 1996, HCFA adopted a policy by which it undertook to modify the boundaries of
12   payment localities when changing demographics within existing localities caused “dramatic relative
13   cost changes among areas.” In 2001, CMS first publicly admitted that such disparities had arisen
14   but has deliberately failed to employ the methods it had used in the past to cure such disparities. In
15   fact, since 2001, despite the concerted efforts of statewide medical associations, members of
16   Congress, Congressional committees, local elected officials, and other persons and entities, CMA
17   has ignored repeated requests and demands that it remedy the payment disparities caused by its
18   failure to modify the locality definitions used under Part B of Medicare.
19           D.         Jurisdiction Under 5 U.S.C. § 702
20           71.        As more fully set forth herein, Plaintiffs and Members of the Class have suffered
21   legal wrong because of agency action and are entitled to judicial review thereof.
22           72.        Plaintiffs and Members of the Class are seeking relief other than money damages and
23   are stating a claim that CMS failed to act in an official capacity.
24           73.        This Court therefore has jurisdiction over the claims stated herein under 5 U.S.C. §
25   702.
26           E.         Venue
27           74.        Venue is appropriate in the United States District Court, Northern District of
28   California under 28 U.S.C. § 1391(e) because: (a) the Secretary is an officer of the United States

                                                                      14
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page25 of 172


 1   acting in her official capacity or under color of legal authority; (b) a substantial part of the events
 2   or omissions giving rise to the claim occurred in this district; (c) no real property is involved in the
 3   action; and (d) four of the County Plaintiffs reside in this district, as does Plaintiff Wolbers and
 4   Poree Medical Corporation.
 5   V.      PROCEDURAL HISTORY
 6           75.        On June 4, 2007, the County Plaintiffs filed the original class action complaint in this
 7   matter asserting eight causes of action: (1) denial of equal protection; (2) deprivation of due process
 8   rights; (3) for a declaration that 42 U.S.C. § 1395w-4(j)(2) is unconstitutional as applied; (4) for a
 9   declaration that 42 C.F.R. § 414.4 is unconstitutional as applied; (5) unlawful withholding or delay
10   in reconfiguration of the locality structure; (6) arbitrary, capricious or abuse of discretion in failure
11   to reconfigure the locality structure; (7) denial of statutory right to reconfiguration; and (8) unlawful
12   delegation of the duty to reconfigure localities.
13           76.        After hearing the Defendant’s motion to dismiss on January 15, 2008, the Court
14   issued an order granting the motion on March 11, 2008 (Docket 57). The Court dismissed the
15   statutory claims (the Fifth, Sixth, and Seventh Causes of Action) for lack of subject matter
16   jurisdiction under 42 U.S.C. § 1395w-4(i)(1)(D). The Court dismissed the constitutional claims (the
17   First, Second, Third, and Fourth Causes of Action) for failure to state a claim, finding that the named
18   Plaintiffs, all of whom are political subdivisions of the State of California are not “persons” within
19   the meaning of the Fifth Amendment. Finally, the Court dismissed the unlawful delegation claim
20   (the Eighth Cause of Action) with leave to amend.
21           77.        On April 9, 2008 (Docket 64), the Court granted the County Plaintiffs’ request to
22   dismiss the Eighth Cause of Action without prejudice, and entered judgment in favor of Defendant
23   on the first seven causes of action (Docket 65).
24           78.        On June 6, 2008, Plaintiffs filed a timely notice of appeal in the United States Court
25   of Appeals for the Ninth Circuit, case number 08-16389.
26           79.        On September 22, 2008, Plaintiffs filed a motion to expedite the hearing on appeal
27   based on evidence that the failure to reconfigure the locality structure was causing a public health
28

                                                                      15
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page26 of 172


 1   care crisis. Defendant did not proffer contrary evidence, and on October 7, 2008, the Ninth Circuit
 2   granted the motion to expedite the hearing.
 3           80.        Briefing was completed on January 9, 2009. Oral argument was heard and the matter
 4   was submitted on April 13, 2009.
 5           81.        On August 10, 2009, the Ninth Circuit entered an order directing the parties to submit
 6   additional briefing on the following issue: “Assuming counties may assert equal protection rights
 7   under the Fifth Amendment, did the Secretary have a rational basis for his alleged treatment of the
 8   Appellants?” Supplemental briefing on that issue was completed on September 8, 2009.
 9           82.        On September 29, 2009, the Ninth Circuit issued a sharply divided opinion that
10   affirmed the dismissal of Plaintiffs’ due process and statutory claims, reversed the trial court’s
11   determination that Plaintiffs are not “persons” under the Fifth Amendment, and remanded the equal
12   protection claims to this Court for further proceedings.
13   VI.     OVERVIEW OF THE PRESENT PHYSICIAN FEE SCHEDULE SYSTEM
14           A.         1965 – Establishment of Medicare
15           83.        The Medicare program was established in 1965 as a part of President Lyndon
16   Johnson’s Great Society programs with the addition of Subchapter XVIII to the Social Security Act
17   (42 U.S.C. §§ 1395, et seq.)
18           84.        From the commencement of the Medicare program in 1966 until 1992, Medicare
19   payments for physicians’ services were made under the “reasonable charge system.” Under that
20   system, the reasonableness of charges was based on similar charges for physicians’ services within
21   the same “payment areas” or “localities.” The boundaries of the payment localities were set by
22   local insurance carriers based on their knowledge of local physician charging patterns. As a result,
23   payment localities had no consistent geographic basis, but tended to be based on geographic or
24   political subdivisions such as States, counties, or cities, on designations such as urban or rural, or
25   on ZIP codes. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34615.)3
26   / / /
27
             3
28             As is CMS’ practice, the terms “locality,” “payment locality,” “payment area,” “fee
     schedule area,” and “FSA” are used interchangeably herein.
                                                                      16
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page27 of 172


 1          85.        Under the reasonable charge system, there were about 240 such payment localities,
 2   including 16 states with statewide localities, and there was little change in those localities between
 3   1966 and 1992. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34615.)
 4          B.         1986 to 1992: Implementation of the Present Physician Fee Schedule System
 5                     1.        Recommendations of the Physician Payment Review Commission
 6          86.        In 1986, the Physician Payment Review Commission (“PPRC”) was created by
 7   Congress to advise it on issues affecting the Medicare program, specifically including possible
 8   reforms to the methods used to pay physicians and other suppliers for services under Part B.4 In
 9   1988, Congress expanded the PPRC’s mandate to include consideration of policies to moderate the
10   growth rate of expenditures and the use of services.
11          87.        The PPRC recommended that the “customary, prevailing, and reasonable method”
12   of paying physicians be replaced by a fee schedule based primarily on resource costs. The PPRC
13   also recommenced that the fee schedule cover all specialties, including anesthesiology and radiology
14   that were then covered by separate fee schedules.
15                     2.        Adoption of the Physician Payment Formula
16          88.        Effective January 1, 1992, under the Omnibus Budget Reconciliation Act of 1989
17   (Pub.L. 101-239; the “1989 Act”), the reasonable charge system was replaced with the current
18   physician fee schedule system under which the Secretary of the Department of Health and Human
19   Services (the “Secretary”) establishes fee schedules for physicians and other suppliers using the
20   formula set forth in 42 U.S.C. § 1395w-4(b).
21          89.        The physician fee schedule system shifted payments from urban to rural areas. This
22   occurred largely because some urban areas were previously paid substantially more than rural areas
23   for the same service and those variations were corrected by the application of the physician fee
24   schedule system. (See CY 1994 Final Rule, 12/2/1993, 58 FR 63637.) Generally speaking, the
25   physician fee schedule formula set forth in 42 U.S.C. § 1395w-4(b) was designed to reimburse
26
27
28          4
                The PPRC advised Congress on Medicare until MedPAC was established in 1997.
                                                                     17
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page28 of 172


 1   physicians for their services in relation to the actual costs of providing those services relative to the
 2   national average of such costs.5
 3                      3.        Components of the Physician Payment Formula
 4                                a.         The “Geographic Practice Cost Index” or “GPCI”
 5           90.        Under 42 U.S.C. § 1395w-4(e)(1)(A), the Secretary is required to develop three
 6   separate Geographic Practice Cost Indexes (“GPCIs”) for each payment locality to measure the
 7   relative resource cost differences in practice expenses, supplier’s work efforts, and malpractice
 8   expenses between payment localities.
 9           91.        The practice expense GPCI (“peGPCI” or “GPCIpe”) reflects “the relative costs of
10   the mix of goods and services comprising practice expenses (other than malpractice expenses) in the
11   different fee schedule areas compared to the national average of such costs.” (42 U.S.C. § 1395w-
12   4(e)(1)(A)(i).)
13           92.        The malpractice GPCI (“mpGPCI” or “GPCImp”) reflects “the relative costs of
14   malpractice expenses in the different fee schedule areas compared to the national average of such
15   costs.” (42 U.S.C. § 1395w-4(e)(1)(A)(ii).)
16           93.        The work GPCI (“wGPCI” or “GPCIw”) reflects “¼ of the difference between the
17   relative value of physicians’ work effort in each of the different fee schedule areas and the national
18   average of such work effort.” (42 U.S.C. § 1395w-4(e)(1)(A)(iii).)
19           94.        Under 42 U.S.C. § 1395w-4(e)(1)(C), the Secretary must review these GPCIs at least
20   every three years.6
21   / / /
22   / / /
23
             5
24             The statutorily defined components of the physician fee schedule are described in the
     attached Exhibit 1.
25           6
               The first review and revision of the GPCIs was implemented in 1995. The Second GPCI
26   Update was prepared by Health Economics Research, Inc., in December 1996 and was implemented
     in 1998-2000. The Third GPCI Update was prepared by KPMG in March 2000 and was
27   implemented in 2001-2004. The Fourth GPCI Update was prepared by Bearing Point in March 2004
     and was implemented in 2005-2007. The Fifth GPCI Update was prepared by Acumen in November
28   2007 and was implemented in 2008-2010. The Sixth GPCI Update was prepared by Acumen, LLC,
     in July 2010 and will be implemented in 2011-2013. (See Bibliography, § G.)
                                                                      18
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page29 of 172


 1                               b.         The “Relative Value Unit” or “RVU”
 2          95.        Under 42 U.S.C. § 1395w-4(c), specific services performed by physicians and other
 3   suppliers are divided into three components, and a relative value unit (“RVU”) is assigned to each
 4   service and each component of each service:                          a “work component,”                 a “practice expense
 5   component,” and a “malpractice component.”
 6          96.        The work RVU (“wRVU” or “RVUw”) is defined under 42 U.S.C. § 1395w-
 7   4(c)(1)(A) as “the portion of the resources used in furnishing the service that reflects physician time
 8   and intensity in furnishing the service.” It includes physicians’ activities before and after direct
 9   patient contact, and, for surgical procedures, includes pre-operative and post-operative physicians’
10   services.
11          97.        The practice expense RVU (“peRVU” or “RVUpe”) is defined under 42 U.S.C. §
12   1395w-4(c)(1)(B) as “the portion of the resources used in furnishing the service that reflects the
13   general category of expenses (such as office rent and wages of personnel, but excluding malpractice
14   expenses) comprising practice expenses.”
15          98.        The malpractice RVU (“mpRVU” or “RVUmp”) is defined under 42 U.S.C. § 1395w-
16   4(c)(1)(C) as “the portion of the resources used in furnishing the service that reflects malpractice
17   expenses in furnishing the service.”
18          99.        Under 42 U.S.C. § 1395w-4(c)(2)(A)(I), the Secretary is required to develop a
19   methodology for the work, practice, and malpractice RVUs for each service to produce a single
20   RVU for that service.
21          100.       Under 42 U.S.C. § 1395w-4(c)(2)(B), the Secretary is required to review the RVUs
22   not less than every 5 years, and to make adjustments “to take into account changes in medical
23   practice, coding changes, new data on relative value components, or the addition of new
24   procedures.” Under 42 U.S.C. § 1395w-4(c)(2)(B)(ii)(II), such adjustments in a given year may not
25   cause Medicare payments to suppliers “to differ by more than $20,000,000 from the amount of
26   expenditures under [Part B] that would have been made if such adjustments had not been made.”
27          101.       CMS publishes a table of the RVUs for over 10,000 medical services every year in
28   the Federal Register. (See, e.g., CY 2011 Final Rule, 11/29/2010, 75 FR 73630-73815.)

                                                                     19
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page30 of 172


 1                             c.         The “Conversion Factor” or “CF”
 2          102.     The conversion factor (“CF”) is calculated under a complex formula set forth in 42
 3   U.S.C. § 1395w-4(d) and represents the effect on costs of annual variations in the economy,
 4   utilization of physicians’ services in prior years, and estimates for changes in utilization of
 5   physicians’ services in the applicable year involved.
 6          103.     The conversion factor is used in the physician fee schedule payment formula to
 7   convert the local cost of providing a particular service relative to the national average into a dollar
 8   amount. For example, the conversion factor will be $33.9764 in 2011. (CMS Pub. 100-20 One-
 9   Time Notification System, Transmittal 828, “SUBJECT: Emergency Update to the CY 2011
10   Medicare Physician Fee Schedule (MPFS) Database,” December 29, 2010.)
11                             d.         The Physician Fee Schedule Payment Formula
12          104.     The physician fee schedule payment formula is used to calculate payments to
13   suppliers for providing specific services to Medicare beneficiaries in specific geographic locations
14   (“localities” or “fee schedule areas” or “FSAs”). “Fee schedule area” is defined by statute in 42
15   U.S.C. § 1395w-4(j)(2) as “a locality used under section 1395u(b) of this title for purposes of
16   computing payment amounts for physicians’ services.”
17          105.     The GPCIs and RVUs described above are the statutorily created methods for
18   measuring costs of providing medical services in localities relative to the national average of
19   providing those services.
20          106.     CMS has stated the payment formula as follows: Payment = [(RVUw × GPCIw) +
21   (RVUpe × GPCIpe) + (RVUmp × GPCImp)] × CF. (CY 2007 Proposed Rule, 8/22/2006, 71 FR 48985.)
22                             e.         The “Geographic Adjustment Factor” or “GAF”
23          107.     The term “Geographic Adjustment Factor” or “GAF” is defined in two distinct ways.
24   One is defined by statute and is rarely, if ever, actually used – “payment GAF.” The other is not
25   defined by statute, but is commonly used and commonly understood – “locality GAF.”
26          108.     There are three “payment GAFs” defined in 42 U.S.C. § 1395w-4(e): work (“GAFw”),
27   practice expense (“GAFpe”), and malpractice (“GAFmp”). Payment GAFs are components of the
28   formula used to calculate individual reimbursements for specific services in specific localities. The

                                                                   20
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page31 of 172


 1   payment GAFs are formulaically defined as multiples of the three RVUs for a specific service and
 2   the three GPCIs for the particular locality where the service is performed: GAFw = (RVUw × GPCIw);
 3   GAFpe = (RVUpe × GPCIpe); and GAFmp = (RVUmp × GPCImp).
 4          109.      “Locality GAFs” are not statutorily defined, but are values used by CMS to illustrate
 5   the differences in costs between different localities by ranking the overall cost of providing medical
 6   care in a particular locality against a nationwide average of “1.” The Locality GAFs are “a weighted
 7   composite of each area’s work, PE, and malpractice GPCIs using the national GPCI cost share
 8   weights.” (CY 2011 Final Rule, 11/29/2010, 75 FR 73601.) The “national GPCI cost share
 9   weights” are the relative percentage values assigned to each of the three GPCIs, and have been the
10   same for each year from 2001 through 2010: (a) the cost share weight for the wGPCI = 0.52466; the
11   cost share weight for the peGPCI = 0.43669; and (c) the cost share weight for the mpGPCI =
12   0.03865. Thus, the formula for calculating a Locality GAF is: [(0.52466 × GPCIw) + (0.43669 ×
13   GPCIpe) + (0.03865 × GPCImp)]. (See CY 2011 Final Rule, 11/29/2010, 75 FR 73817.)7
14          110.      Locality GAFs are published annually in the Federal Register; payment GAFs are not.
15   (See, e.g., CY 2008 Final Rule, 11/27/2007, 72 FR 66545-66546.)
16          111.      It critical to note that the calculations of GPCIs, RVUs, and GAFs are made first at
17   the county level. They are then aggregated to the locality level. (CY 2004 Proposed Rule,
18   8/15/2003, 68 FR 49042-49044; CY 2005 Proposed Rule, 8/5/2004, 69 FR 47503-47504). Thus,
19   payment GAFs can be calculated for single-county localities or for multi-county localities made up
20   of any combination of counties.
21          C.        1989 to 1996 – Revision of the 1966 Payment Locality Designations
22                    1.        1989 – Congress Readopts the 1965 Statutory Definition of “Fee
23                              Schedule Area” or “Locality”
24          112.      The 1989 Act radically changed the way payments to suppliers under Part B were to
25   be calculated by: (a) establishing a national formula for measuring costs of providing specific
26
            7
27           For example, the 2010 Locality GAF for San Francisco (a single-county locality) is 1.201.
     San Francisco’s GPCIs are: (a) GPCIw = 1.059; (b) GPCIpe = 1.441; and (c) GPCImp = 0.414.
28   Employing the formula for the Locality GAF: [(1.059 × 0.52466) + (1.441 × 0.43669) + (0.414 ×
     0.03865)] = 1.20886 (which rounds to 1.201).
                                                                    21
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page32 of 172


 1   medical services within a particular geographic area relative to the national average of those costs;
 2   and (b) making payments to suppliers based on local adjustments to that uniformly applied formula.
 3           113.     However, the 1989 Act did not address the method by which geographic areas were
 4   to be defined.
 5           114.     Instead, Congress indicated in 1989 that it wished to study the locality structure more
 6   closely and directed the Secretary to do the same:
 7           “For 1990 and 1991, these fee schedule areas would be the current carrier locales,
             because the capacity does not currently exist to use other areas. However, the
 8           Committee believes that it would be more appropriate to use either statewide fee
             schedule areas or to use metropolitan statistical areas along with combined non-MSA
 9           areas. Further analysis on these, and possibly other alternatives, will be undertaken
             by the PPRC and the Secretary, so that a decision can be made at a later date. The
10           bill states that the Secretary will make a decision prior to 1992, but it is the
             Committee’s expectation that the Congress is likely to make such a decision before
11           that date.” (H.R. Conf. Report No. 101-247, 345 (9/20/1989); see also H.R. Conf.
             Report No. 101-386, 743 (11/21/1989).)8
12
13           115.     Ultimately, in 1989, Congress readopted the original 1965 definition of “locality” as
14   the definition of “fee schedule area”: “The term ‘fee schedule area’ means a locality used under
15   section 1395u(b) of this title for purposes of computing payment amounts for physicians’ services.”
16   (42 U.S.C. § 1395w-4(j)(2).)
17           116.     This statutory definition of “fee schedule area” refers to an obsolete artifact of the
18   original “reasonable charge” system when the insurance companies who originally administered
19   Medicare set “locality” boundaries by their coverage areas. “Section 1395u(b) of this title”
20   provides: “In determining the reasonable charge for services for purposes of this paragraph, there
21   shall be taken into consideration the customary charges for similar services generally made by the
22   physician or other person furnishing such services, as well as the prevailing charges in the locality
23   for similar services.” (42 U.S.C. § 1395u(b)(3)(L).)9
24   / / /
25
             8
26            As adopted, the 1989 Act did not contain the provision stating that the Secretary would
     make a decision on the locality configuration prior to 1992. Contrary to the Committee’s
27   expectation, Congress has never made a decision on locality configuration even to this date.
             9
28            This sentence of subdivision (b)(3)(L) of 42 U.S.C. § 1395u was in effect in 1989 and has
     not been modified since.
                                                                    22
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page33 of 172


 1                      2.        1991 to 1994 – The Secretary Assumes the Authority to Change the
 2                                Locality Structure
 3                                a.         1991 – HCFA Makes the Assumption That the Secretary Was
 4                                           Not Precluded from Making Locality Changes
 5           117.       HCFA assumed sole responsibility for creating fee schedule areas in 1991, stating
 6   its belief that it was not precluded from doing so:
 7           “Section 1848(j)(2) of the Act defines a fee schedule area as a locality used to
             compute payment amounts under the present reasonable charge system. We do not
 8           believe, however, that this precludes us from making locality changes under the
             present system, nor that it mandates maintaining all existing payment areas under the
 9           fee schedule.” (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25833.)
10           118.       Based on this belief, HCFA stated: “The establishment of and any changes in
11   localities would no longer be left to the discretion of the carrier, but would be done by us.” (CY
12   1992 Proposed Rule, 6/5/1991, 56 FR 25833.)
13                                b.         1993 – HCFA Mistakenly Claims the 1965 Act Gave the
14                                           Secretary the Authority to Make Locality Changes
15           119.       In 1993, HCFA modified its position with respect to its authority to make locality
16   changes, mistakenly claiming that the 1965 Act impliedly gave the Secretary the authority to set
17   localities:
18           “Section 1848(j)(2) [i.e., 42 U.S.C. § 1395w-4(j)(2)] defines a physician fee schedule
             payment area as the locality existing under the reasonable charge system. Section
19           1848 did not, however, delete section 1842 of the Act [i.e., 42 U.S.C. § 1395u],
             which gives the Secretary the authority to set localities. We believe the Congress
20           enacted section 1848(j)(2) to allow us to retain existing localities to facilitate
             changing to the physician fee schedule, but not to preclude us from making locality
21           changes if we so desired.” (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38001-
             38002; emphases added.)10
22
23           120.       HCFA misstated the provisions of Section 1842 in the CY 1994 Proposed Rule. As
24   noted by HCFA in the CY 1992 Proposed Rule, section 1842 of the 1965 Act gave carriers and not
25   the Secretary the authority to set fee locality boundaries: “The establishment and any changes in
26
27
             10
28                 Section 1848 is codified as 42 U.S.C. § 1395w-4; section 1842 is codified as 42 U.S.C.
     § 1395u.
                                                                      23
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page34 of 172


 1   localities would no longer be left to the discretion of the carrier . . .” (CY 1992 Proposed Rule,
 2   6/5/1991, 56 FR 25833; emphasis added.)
 3          121.      The fact that the 1965 Act gave carriers – and not the Secretary – the authority to set
 4   locality boundaries is also confirmed by the following statement made by HCFA in the CY 1997
 5   Proposed Rule: “Under the reasonable charge system, Medicare payment localities for physicians’
 6   services were set by local Medicare carriers based on their knowledge of local physician charging
 7   patterns.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34615; emphasis added.)
 8          122.      It does not logically follow that if Congress did not preclude HCFA from making
 9   locality changes then Congress meant to give HCFA the authority to make such changes. Further,
10   if Congress intended grant HCFA the authority to adjust payment localities, it would not have stated
11   its intent to make a decision on how localities should be defined before 1992. (See ¶ 114, supra;
12   H.R. Conf. Report No. 101-247, 345 (9/20/1989); see also H.R. Conf. Report No. 101-386, 743
13   (11/21/1989).)
14          123.      Nothing in 42 U.S.C. § 1395w-4(j)(2) or its legislative history, and nothing in section
15   1842 of the 1965 Act supports HCFA’s stated belief that it had the authority to make locality
16   changes. In spite of these facts, HCFA repeated this mistaken claim in 1994 and 1996.
17                             c.         1994 – HCFA Repeats the Mistaken Claim that the 1965 Act
18                                        Gave the Secretary the Authority to Modify Localities
19          124.      In the CY 1995 Proposed Rule, HCFA repeated its mistaken claim that the 1965 Act
20   gave the Secretary the authority to modify localities: “Section 1842 of the Act gives us the authority
21   to set payment localities.” (CY 1995 Proposed Rule, 6/24/1994, 59 FR 32759.)
22                             d.         1996 – HCFA Again Repeats the Mistaken Claim that the 1965
23                                        Act Gave the Secretary the Authority to Modify Localities
24          125.      In the CY 1997 Proposed Rule, HCFA again repeated its mistaken claim that the
25   1965 Act gave the Secretary the authority to modify localities:
26          “Section 1848 did not, however, delete section 1842 of the Act, which gives the
            Secretary the authority to set localities. We believe the Congress enacted section
27          1848(j)(2) to allow us to retain existing localities to facilitate the statutory transition
            to the physician fee schedule, but not to preclude us from making locality changes
28

                                                                   24
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page35 of 172


 1           if warranted. All locality changes are now made by HCFA through the rulemaking
             process.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34615.)
 2
 3           126.    In 1996, the Secretary construed the 1989 Act as allowing the retention of the existing
 4   payment localities to facilitate the statutory transition to the physician fee schedule, and as allowing
 5   Secretary to make locality changes as warranted through the rule making process. (CY 1997
 6   Proposed Rule, 7/2/1996, 61 FR 34615.) However, as noted above, the Secretary did so without any
 7   express or even implied statutory authorization.
 8                   3.        1996 – HCFA Undertakes a Major Reconfiguration of the Locality
 9                             Structure
10           127.    Locality configuration studies were conducted by HCFA, the PPRC, and the Urban
11   Institute (“UI”) between 1989 and 1991. Meanwhile, the statutorily established physician fee
12   schedule became effective in 1992. (CY 1997 Final Rule, 11/22/1996, 61 FR 59490.)
13           128.    In the early 1990’s, the Secretary contracted with Health Economics Research, Inc.
14   (“HER”) to conduct an analysis of various options to modify the existing payment localities (the
15   “HER Locality Report”). (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34616-34617.)
16           129.    Following its review of the alternatives proposed in the HER Locality Report, HCFA
17   adopted a rule in 1996 making significant changes in the existing payment localities without any
18   further Congressional action. Under that rule, the number of existing payment localities was
19   reduced from 210 to 89 and the number of statewide localities increased from 22 to 34. (CY 1997
20   Final Rule, 11/22/1996, 61 FR 59490, et seq.) This locality structure has remained in place since
21   it was implemented in 1997.
22           130.    This major reconfiguration of the locality structure was undertaken by HCFA without
23   an express statutory grant of authority and without an implied grant of authority from which
24   discernable standards could be derived.
25   / / /
26   / / /
27   / / /
28   / / /

                                                                   25
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page36 of 172


 1   VII.   DETAILED HISTORY OF THE LOCALITY STRUCTURE UNDER MEDICARE
 2          PART B
 3          A.        1990 to 1995 – Creation of Single-State Localities During the “Transition
 4                    Period”
 5                    1.        1990 – The President Finds a Congressionally Directed Method of
 6                              Locality Creation Unconstitutional
 7          131.      Congress never fulfilled its 1989 prediction that it would pass a bill containing a
 8   definition of locality for Medicare Part B. (See ¶ 114, fn. 8, supra.)
 9          132.      In the Omnibus Budget Reconciliation Act of 1990 (Pub.L. 101-508; the “1990 Act”),
10   Congress did direct the creation of two statewide localities. Section 4117 of the 1990 Act provided
11   that statewide localities would be established for Oklahoma and Nebraska if, by April 1, 1991,
12   HCFA received written expression of support from each congressional delegation from the state and
13   organizations representing urban and rural physicians in the state.
14          133.      However, in the November 5, 1990, press release announcing the signing of the 1990
15   Act, President George H. W. Bush stated that the provision was unconstitutional and directed HCFA
16   not to enforce it because: (a) it vests significant authority to execute federal law in persons not
17   appointed by the President; and (b) it attempts to confer lawmaking power on individual members
18   of Congress. (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25832-25833.)
19          134.      Specifically, President Bush stated:
20          “I would also note certain constitutional difficulties in other titles of the Omnibus
            Budget Reconciliation Act. In particular, section 4117 of the Act requires the
21          Secretary of Health and Human Services, in certain conditions, to treat the States of
            Nebraska and Oklahoma as single fee schedule areas for purposes of determining the
22          adjusted historical payment basis and the fee schedule amount for physicians’
            services furnished on or after January 1, 1992. Such treatment is made to depend on
23          the Secretary’s receiving written expressions of support for treatment of the State as
            a single fee schedule area from each member of the congressional delegation from
24          the State and from organizations representing urban and rural physicians in the State.
            This provision requires the Secretary to base a substantive decision on the
25          allocation of Federal benefits on the statements of members of congressional
            delegations and other persons who are not appointed by the President. Therefore,
26          it must be understood either (1) as an attempt to vest significant authority to
            execute Federal law in those persons, in which case it violates the Appointments
27          Clause, Article II, section 2; see Buckley v. Valeo, 424 U.S. 1 (1975); or (2) as an
            attempt to confer lawmaking power on individual members of the Congress and
28          others, in which case it violates Article I, section 7; see INS v. Chadha, 462 U.S.

                                                                    26
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page37 of 172


 1           919 (1983). Accordingly, this requirement is without legal force, and I am so
             instructing the Secretary of Health and Human Services. I am also instructing the
 2           Attorney General and the Secretary of Health and Human Services to prepare
             remedial legislation to amend this section for submission to the next session of the
 3           Congress, so that the Act can be brought into compliance with the Constitution’s
             requirements.” (President George H. W. Bush, “Statement on Signing the Omnibus
 4           Budget Reconciliation Act of 1990,” November 5, 1990; emphasis added.)11
 5           135.      Whether or not such remedial legislation was ever prepared or submitted to Congress,
 6   nothing of the kind has ever been enacted.
 7                     2.        1991 – Independent Studies of Possible Methods of Locality Conversion
 8           136.      Under 42 U.S.C. § 1395w-4(a)(2), the transition to a full fee schedule system was to
 9   be implemented from 1992 through 1995. The pressing need to reconfigure the locality structure
10   was no secret, having been recognized by HCFA as well as Congress, and having been confirmed
11   by two independent studies.
12           137.      Prior to the start of the transition to a full fee schedule system, HCFA publicly
13   acknowledged both “the lack of consistency among current localities and the fact that significant
14   demographic and economic changes may have occurred since the existing localities were established
15   [in 1966].” (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25832.)
16           138.      A 1989 study by the UI and HER had made the following observation:
17           “[A]ny payment reform will need to recognize that a physician’s cost of providing
             services varies not only from procedure to procedure but also from area to area.
18           Practice inputs – employee time and office space, for example – are bought in local
             markets. Furthermore, a physician’s cost of locating in an area depends on the local
19           cost of living and the area’s amenities. Failure to reflect relative geographic costs
             in reimbursement rates could create serious resource misallocation; namely, a
20           physician oversupply in areas where fees are high relative to costs and an
             undersupply where fees are low relative to costs.” (Zuckerman, S., Welch, W.P., and
21           Pope, G.C.: A Geographic Index of Physician Practice Costs. Journal of Health
             Economics 9 (1990), p. 40.)
22
23   / / /
24   / / /
25   / / /
26
27           11
               It is significant to note that shortly after the President\’s determination that Section 4117
28   of the 1990 Act was unconstitutional, HCFA stated for the first time that it had the power to create
     or change localities. (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25833; see ¶ 117, supra.)
                                                                     27
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page38 of 172


 1           139.      In the 1989 Act, Congress had directed the PPRC to study possible changes to the
 2   existing payment localities.12 The PPRC study was completed in 1991 and recommended a mix of
 3   statewide localities and localities based on MSAs:
 4           “The PPRC included the results of this study in its 1991 annual report. The PPRC
             recommended that current carrier localities be replaced with Statewide fee schedule
 5           payment areas except in States with high intra-State price variation. In each of these
             States – California, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland,
 6           Massachusetts, Michigan, Minnesota, Missouri, New York, Pennsylvania, Texas,
             and Virginia – up to five payment areas would be defined, corresponding to MSA
 7           population categories. Each MSA that crosses State borders would have a uniform
             index value and would be considered as falling entirely within the State that contains
 8           the largest portion of the MSA’s population. Any State that is currently a Statewide
             locality would continue to be defined as a Statewide area. This would reduce the
 9           number of payment areas from 240 to 97. We are interested in receiving comments
             on the PPRC's proposal. Completion of our internal review and the PPRC report
10           may result in recommendations to reconfigure existing localities at a future time.”
             (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25832.)
11
12           140.      In the CY 1992 Proposed Rule, HCFA stated that completion of its internal review
13   and its consideration of the PPRC and UI studies “may result in recommendations to reconfigure
14   existing localities at a future time.” (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25832.)
15           141.      In the CY 1992 Final Rule, HCFA stated that it recognized comprehensive changes
16   to the existing locality configuration were needed and that it would continue to study the issue:
17                    “Section 1848(j)(2) of the [1989] Act [i.e., 42 U.S.C. 1395w-4(j)(2)] defines
             fee schedule areas as Medicare payment localities. However, recognizing the lack
18           of consistency among current localities and the fact that significant demographic and
             economic changes may have occurred since the existing localities were established,
19           we are reviewing recommendations on the possible reconfiguration of existing
             localities. One study has been conducted by the UI. Also, Congress required in
20           section 6102(d)(6) of [the 1989 Act] that the PPRC conduct a study to determine the
             feasibility of using some other configuration, such as States or metropolitan
21           statistical areas (MSAs), for payment areas under the fee schedule. Both the PPRC
             and the UI recommended that current carrier localities be replaced with alternative
22           payment areas.... We are still examining these studies.” (CY 1992 Final Rule,
             11/25/1991, 56 FR 59514.)
23
24   / / /
25   / / /
26
27           12
              Established in 1985, the PPRC was the body that advised Congress on issues affecting the
28   Medicare program until MedPAC was established by the Balanced Budget Act of 1997. (Pub.L.
     105-33.)
                                                                     28
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page39 of 172


 1                    3.        1991 – HCFA Proposes to Allow Conversions to Statewide Localities
 2                              Based on “Overwhelming Support from the Physician Community”
 3          142.      In the CY 1992 Proposed Rule, HCFA indicated that it would consider conversion
 4   of multi-locality states into single localities under certain circumstances:
 5          “We propose to allow conversion to Statewide localities in States if overwhelming
            support from the physician community for the change can be demonstrated.” (CY
 6          1992 Proposed Rule, 6/5/1991, 56 FR 25833.)
 7          143.      It is significant to note that in the CY 1992 Final Rule, HCFA stated that requests for
 8   conversion to types of localities other than statewide would also be considered but were unlikely to
 9   be approved during the transition period:
10          “In addition, some individual entities such as cities, towns, and counties asked to be
            moved out of the current locality into another, usually adjacent locality, with a higher
11          GPCI under the fee schedule. We will consider Statewide locality conversions after
            January 1, 1992. We continue to believe Statewide localities are generally desirable,
12          because they reduce the number of localities, thereby simplifying program
            administration, and they tend to increase payments in rural areas. Although we have
13          not ruled out the possibility, we generally do not expect to approve requests for
            other locality changes during the transition, such as moving individual cities or
14          towns, because these types of changes present significant AHPB and transitional
            payment computation problems. Even without conversion to a Statewide locality,
15          many of the large payment variations that currently exist among localities within a
            State will be substantially reduced by the use of GPCIs.” (CY 1992 Final Rule,
16          11/25/1991, 56 FR 59514; emphasis added.)13
17          144.      One of the commenters to the CY 1992 Proposed Rule requested that HCFA
18   guarantee that future locality changes be made if overwhelming physician support was
19   demonstrated. HCFA demurred to that request, but reiterated that few, if any locality changes would
20   be made before 1996:
21          “Comment: A commenter applauded our position of making locality changes if
            overwhelming support exists among affected physicians for the change. The
22          commenter suggested that our ability to be responsive to physician requests for these
            changes after this final rule is published be guaranteed by including language to this
23          effect in the regulations so that future changes can be made if needed.
24          “Response: We have revised [42 C.F.R.] § 415.4(c) to indicate that we can make
            further locality changes after the fee schedule becomes effective (January 1, 1992).
25          Because of the transition, however, we would be unlikely to consider any locality
26
27
            13
28            “AHPB” is the “adjusted historical payment basis,” a conversion factor that was defined
     under 42 C.F.R. § 414.44 and used during the transition period.
                                                                    29
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page40 of 172


 1          changes before 1996, except changes involving consolidation of Statewide
            localities.” (CY 1992 Final Rule, 11/25/1991, 56 FR 59593.)14
 2
 3                    4.        1991 – Creation of Three Statewide Localities: Minnesota, Nebraska,
 4                              and Oklahoma
 5          145.      In the CY 1992 Proposed Rule, HCFA announced it was considering converting
 6   Nebraska and Oklahoma to statewide localities because it had received “a demonstration of support
 7   from physicians” in those two states. (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25833.)
 8          146.      In the CY 1992 Final Rule, HCFA announced that it had converted three states into
 9   statewide localities:
10                 “The only locality changes we have made at this time are changes to
            Statewide localities in States where overwhelming support existed among both rural
11          and urban physicians for the change. Because we have received demonstrations of
            support from physicians in Nebraska, Oklahoma, and Minnesota, those States will
12          be converted to Statewide localities on January 1, 1992 and a single AHPB will be
            used for the Statewide locality.” (CY 1992 Final Rule, 11/25/1991, 56 FR 59514.)15
13
14          147.      There is no discussion in either the CY 1992 Proposed Rule or Final Rule about what
15   constituted the “overwhelming support” expressed by physicians in Nebraska or Oklahoma. Nor
16   is there any discussion of how or when Minnesota demonstrated support for the conversion to a
17   statewide locality.
18          148.      In the CY 1992 Final Rule, HCFA published the first version of 42 C.F.R. § 414.4,
19   the regulation that defines “fee schedule area.” (CY 1992 Final Rule, 11/25/1991, 56 FR 59625.)
20   That regulation provided that as of January 1, 1992, the fee schedule areas in effect would conform
21   to the localities in existence as of that date, excepting only that HCFA was establishing Nebraska,
22   Oklahoma, and Minnesota as single-locality states. That regulation also provided that HCFA would
23   publish proposed changes to the locality structure in the Federal Register and would provide the
24
25          14
               Exhibit 2 attached hereto traces the changes to 42 C.F.R. § 414.4 (“Fee Schedule Areas”)
26   during the transition period through the current version. As set forth in Exhibit 2 at p. 170, 42
     C.F.R. § 415.4 was renumbered in 1992 to 42 C.F.R. § 414.4.
27          15
                Under the reasonable charge system, there were 16 states with statewide localities prior
28   to 1991. (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002.) Those states are listed in the attached
     Exhibit 3.
                                                                    30
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page41 of 172


 1   opportunity for public comment before publishing final changes in a final rule. (See Exhibit 2, at
 2   p. 171.)16
 3           149.      It is ironic that – in the same edition of the Federal Register in which HCFA created
 4   a regulation that provided all changes to localities would be announced in the Federal Register and
 5   an opportunity for public comment would be provided – HCFA added Minnesota to the list of
 6   statewide localities without notice or an opportunity for public comment. (CY 1992 Final Rule,
 7   11/25/1991, 56 FR 59511.)
 8           150.      In deciding to convert Nebraska, Oklahoma, or Minnesota to single-locality states,
 9   there is no indication that HCFA sought or considered the opinion of any non-physician “supplier”
10   such as physician assistants, nurse practitioners, clinical nurse specialists, nurse midwives, dentists,
11   podiatrists, optometrists, chiropractors, clinical psychologists, clinical social workers, physical
12   therapists, occupational therapists, or entities such as corporations or counties that billed for services
13   performed by their employees under Medicare Part B.
14                     5.        1993 – HCFA Articulates an Interim Preference for Statewide Localities
15           151.      In the 1993 Federal Register, HCFA further refined its interpretation of 42 U.S.C. §
16   1395w-4(j)(2), shifted its position on locality changes during the transition period, and misstated its
17   1991 position on locality changes.
18           152.      In 1991, HCFA had proposed to convert multi-locality states to single-locality states
19   if “overwhelming support” from the medical community in a state could be demonstrated. (CY 1992
20   Proposed Rule, 6/5/1991, 56 FR 25833.) In 1991, HCFA had also indicated that it would consider
21   other types of proposed locality changes during the transition period. (CY 1992 Final Rule,
22   11/25/1991, 56 FR 59514.)
23   / / /
24   / / /
25
26           16
                The present 42 C.F.R. § 414.4(b) was added by the CY 1992 Final Rule. (CY 1992 Final
27   Rule, 11/25/1991, 56 FR 59625.) It provides: “CMS announces proposed changes to fee schedule
     areas in the Federal Register and provides an opportunity for public comment. After considering
28   public comments, CMS publishes the final changes in the Federal Register.” (See Exhibit 2.) This
     regulatory change was not announced in the CY 1992 Proposed Rule.
                                                                     31
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page42 of 172


 1          153.      In contrast, two years later, HCFA incorrectly stated that it had announced in 1991
 2   that the only locality changes it would consider during the transition period would be conversions
 3   to statewide localities. In the CY 1994 Proposed Rule, HCFA stated:
 4                  “From the inception of Medicare in 1965 until 1992, Medicare payments for
            physicians’ services were made under the reasonable charge system. Under the
 5          reasonable charge system, Medicare payment localities for physicians’ services were
            set by local Medicare carriers based on their knowledge of local physician charging
 6          patterns. In general, localities tended to be geographic or political subdivisions such
            as States, counties, or cities, or designations such as urban and rural. Most of the
 7          localities changed little between 1965 and 1992. There were about 240 localities,
            including 16 States with statewide localities, under the reasonable charge system.
 8
                    “Section 1848 of the Act replaced the reasonable charge system with the
 9          physician fee schedule effective January 1, 1992. Section 1848(j)(2) defines a
            physician fee schedule payment area as the locality existing under the reasonable
10          charge system. Section 1848 did not, however, delete section 1842 of the Act,
            which gives the Secretary the authority to set localities. We believe the Congress
11          enacted section 1848(j)(2) to allow us to retain existing localities to facilitate
            changing to the physician fee schedule, but not to preclude us from making
12          locality changes if we so desired.
13                  “In the June 1991 proposed rule for physician fee schedule (56 FR 25832),
            we acknowledged the lack of consistency among localities and the significant
14          demographic and economic changes that had occurred since localities were originally
            established. We also stated that we planned no large-scale locality changes until
15          we evaluated the various studies on localities being done within HCFA and by
            outside groups such as the Physician Payment Review Commission. We stated that
16          until we decide on ultimate large-scale changes, the only locality changes we
            would consider would be requests for converting individual states with multiple
17          localities to a single statewide locality if ‘ . . . overwhelming support from the
            physician community for the changes can be demonstrated.’” (CY 1994 Proposed
18          Rule, 7/14/1993, 58 FR 38001-38002; emphases added.)
19          154.      This altered position on locality changes during the transition period was reiterated
20   later in the CY 1994 Proposed Rule:
21                  “As stated above, section 1842 of the [1989 Act] gives the Secretary the
            authority to set payment localities, and we plan to review the existing payment
22          locality structure for possible future changes in 1996. In the meantime, we will
            continue to consider statewide localities for those States in which physicians express
23          a desire for a change. We believe that statewide localities are generally preferable
            to the present Medicare localities because they simplify administration and
24          encourage physicians to practice in rural areas.” (CY 1994 Proposed Rule,
            7/14/1993, 58 FR 38003.)17
25
26          17
              HHS has since recognized that increasing Medicare payments to physicians in rural
27   communities does not have a significant effect on physician location decisions. Commenting on a
     GAO report in 2005, HHS noted:
28
            “This report makes several important findings.                           One key finding is that the
                                                                    32
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page43 of 172


 1           155.     This altered position on locality changes during the transition period was also
 2   reiterated in the CY 1994 Final Rule:
 3                   “In the June 1991 proposed rule (56 FR 25832) and in the November 1991
             final rule (56 FR 59514) on the physician fee schedule, we stated that, until we
 4           decide on ultimate large-scale changes, the only locality changes we would consider
             would be requests for converting individual States with multiple localities to a
 5           single statewide locality if ... overwhelming support from the physician community
             for the changes can be demonstrated.’” (CY 1994 Final Rule, 12/2/1993, 58 FR
 6           63637; emphases added; compare CY 1992 Final Rule, 11/25/1991, 56 FR 59514.)
 7           156.     However, HCFA’s 1993 statements do not accurately characterize its 1991 position
 8   on locality conversion. There is nothing in the CY 1992 Proposed Rule which states that the only
 9   locality changes HCFA would consider would be conversions to statewide localities. Something
10   quite different is true.
11           157.     What HCFA actually stated in the CY 1992 Proposed Rule was simply, “We propose
12   to allow conversion to Statewide localities in States if overwhelming support from the physician
13   community for the change can be demonstrated.” (CY 1992 Proposed Rule, 6/5/1991, 56 FR
14   25833.) In the CY 1992 Final Rule, HCFA did make it clear that – during the transition period –
15   while it believed conversion of states with multiple localities into a single statewide locality was
16   “generally desirable,” it also expressly stated it had “not ruled out” other possible changes:
17
18
             geographic adjustments to the physician fee schedule, required by the Medicare
19           Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) statute, are
             not important factors in physician location, recruitment, and retention. The report
20           points out that since Medicare revenues constitute only about 25 percent of a
             physician’s income, changes in the geographic practice costs indices (GPCIs)
21           generally have only modest impact on physicians’ incomes. The report indicates that
             GAO’s interviews with physician recruitment experts and review of published
22           studies indicate that income is only one of numerous factors that affect physicians’
             decisions to locate in rural areas. Other factors that do affect physician location
23           decisions include: a spouse’s employment opportunities; the quality of local schools;
             and the availability of other physicians to share night and weekend calls.”
24           (“Medicare Physician Fees: Geographic Adjustment Indices Are Valid in Design, but
             Data and Methods Need Refinement,” United States Government Accountability
25           Office Report to Congressional Committees, March 2005, GAO-05-119, p. 43.)

26           Further, since 1994, Congress has enacted provisions that directly benefit suppliers in rural
     areas without disadvantaging suppliers in urban areas. The MMA established a nationwide floor
27   of 1.0 for the work GPCI which has the effect of raising payment rates to suppliers in rural areas.
     This floor has been extended several times, most recently through December 31, 2011. In addition,
28   the Medicare, Improvements for Patients and Providers Act of 2008 established a permanent 1.5
     work GPCI floor for Alaska.
                                                                    33
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page44 of 172


 1          “We continue to believe Statewide localities are generally desirable, because they
            reduce the number of localities, thereby simplifying program administration, and
 2          they tend to increase payments in rural areas. Although we have not ruled out the
            possibility, we generally do not expect to approve requests for other locality changes
 3          during the transition, such as moving individual cities or towns, because these types
            of changes present significant AHPB and transitional payment computation
 4          problems” (CY 1992 Final Rule, 11/25/1991, 56 FR 59514; emphasis added.)
 5          158.     It is significant to note that CMS’ currently stated preference for creating statewide
 6   localities (whether or not CMS foreclosed consideration of creating other, smaller localities) did not
 7   originate as a systemic policy preference, but was only a stated preference “during the transition”
 8   from carrier-based localities to the localities HCFA anticipated creating in 1996.
 9                   6.        1993 – HCFA’s Inconsistent Responses to the Effect of Locality
10                             Conversion on Budget Neutrality
11                             a.         Creating Statewide Budget Neutrality to Induce Conversion to
12                                        Statewide Localities
13          159.     In 1993, HCFA recognized that the creation of statewide localities would have a
14   monetary ripple effect on the entire system. When consolidating a multi-locality state into a
15   statewide locality, the new locality will have different average cost values than the old localities
16   which will in turn affect the national average. Since GPCIs are calculated based on the relative
17   value of a locality’s costs to the national average, the GPCIs for each locality in the entire system
18   would be affected by any modification to the geographic boundaries of a single locality.
19          160.     HCFA recognized, therefore, that if it treated the new statewide localities in the same
20   manner as it had when originally developing the GPCIs, it was possible that overall payments to the
21   new statewide locality might decrease, thereby creating a disincentive for the state to convert to a
22   single locality. HCFA also recognized that it was possible that overall payments to the new
23   statewide locality might increase, thereby creating a burden on the system that could only be met
24   by decreasing payments to the remaining states.
25          161.     In the CY 1994 Proposed Rule, HCFA responded to this dilemma by proposing a
26   significant modification to its GPCI calculation formula in an effort to make it more attractive for
27   states to obtain support for a conversion to statewide localities. That modification was the guarantee
28   that overall payments to the states converting to statewide localities would not change as a result of

                                                                   34
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page45 of 172


 1   the conversion. Thus, the first time “statewide budget neutrality” was employed by HCFA in the
 2   calculation of fees was as an inducement for states to convert to statewide localities:
 3                 “The GPCIs were originally developed based on Metropolitan Statistical
            Area (MSA)/County data. Indices were created for each MSA and for all of the
 4          remaining non-MSA areas of each State. For the physician fee schedule, if Medicare
            payment areas diverged from MSA boundaries or encompassed several MSAs, the
 5          MSA/county indices were converted to payment area indices by general population
            weights. Likewise, the State GPCIs were created by weighting the MSA/non-MSA
 6          GPCIs by population. The GPCIs for all 1992 physician fee schedule payment areas
            – including the new GPCIs for the 1992 statewide areas of Minnesota, Oklahoma,
 7          and Nebraska – were used in computing the nationally budget-neutral CF for 1992
            of $31.001.
 8
                     “The physician fee schedule is budget-neutral on a national basis. If a
 9          State with multiple payment areas converts to a statewide payment area using
            population-weighted State GPCIs after the physician fee schedule became
10          effective, the change may not be budget neutral within the State. Since area
            population weights rather than area expenditure weights were used in mapping
11          MSAs/counties to payment areas, the change will be budget neutral within the State
            only if the population is apportioned among the existing payment areas in relatively
12          the same proportions as payments under the fully implemented physician fee
            schedule (that is, excluding the effects of the transition). If the population is not so
13          apportioned, the conversion may result either in an increase or decrease in payments
            from what would have been paid had the conversion not been made.
14
                    “Generally, urban areas within a State have higher GPCIs than rural areas.
15          Urban areas also tend to be importers of beneficiaries in that Medicare beneficiaries
            frequently travel to urban areas to receive services, usually higher-cost surgical and
16          procedural services, not readily available in rural areas. Thus, urban areas generally
            furnish a larger proportion of services (expenditures) than their proportion of
17          beneficiaries within the State. Therefore, if a State converts from multiple localities
            to a single payment area under the physician fee schedule and a new State GPCI is
18          computed based on population weights, the new GPCI may not be budget neutral
            within the State. Thus, all of the payments lost by the urban areas within a State may
19          not be redistributed to rural areas within the same State, resulting in unintended
            savings to the program.
20
                    “There is no statutory requirement that the physician fee schedule be
21          budget neutral within a State. However, we believe that neither the program nor the
            physicians within a State should be advantaged or disadvantaged if the physicians
22          within the State decide to petition for a statewide payment area and the change is
            made. Therefore, we calculated the following new State GPCIs for the 31 States that
23          contain multiple payment areas. These GPCIs were calculated using area fee
            schedule RVUs rather than population weights and will be budget neutral within
24          a State if the State converts to a single payment area. We are providing these
            GPCIs so States that might consider requesting a change to a statewide payment area
25          can compare them to the existing multiple payment area GPCIs in the State. These
            GPCIs are informational only and have no effect under existing physician fee
26          schedule payment areas. Any of these new GPCIs would become effective only if
27
28

                                                                   35
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page46 of 172


 1          the State meets our criteria and changes to a statewide payment area.” (CY 1994
            Proposed Rule, 7/14/1993, 58 FR 38002; emphases added.)18
 2
 3          162.       Thus, in 1993, HCFA expressly recognized that GPCI changes resulting from locality
 4   modifications must be budget neutral on a national level, and HCFA also expressly recognized that
 5   there was no statutory requirement that modifications to localities be budget neutral with respect to
 6   the state.    (See Congressional Research Service, “Medicare Physician Payment Localities,”
 7   September 9, 2004.) As a corollary, HCFA also recognized that changes to localities within a state
 8   could legally and mathematically reduce or increase payments within the converting state and
 9   correspondingly increase or reduce payments to the remainder of the Medicare system nationwide
10   as long as the ultimate effect was budget neutral on a national level.
11          163.       Therefore, HCFA made a decision to offer an artificially imposed statewide budget
12   neutral option to states that wished to convert to statewide localities because it “believe[d] that
13   neither the program nor the physicians within a State should be advantaged or disadvantaged if the
14   physicians within the State decide to petition for a statewide payment area and the change is made.”
15   (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002.)
16          164.       Such an offer to guarantee that payments to a state will not change if it agrees to
17   convert to a statewide locality appears to be contrary to one of the basic statutory foundations of the
18   physician fee schedule, which is that payments to physicians be distributed based on actual costs in
19   a locality relative to the nationwide average of locality costs. (See 42 U.S.C. § 1395w-4(e)(1).)
20          165.       Under the statutory scheme, a reconfiguration of a locality may cause change in the
21   amount of payments to some or all of the areas originally within the locality, but there was no statute
22   or regulation in effect in 1993 (nor has there ever been) which required locality changes be made
23   budget neutral on a statewide basis.
24
            18
25               The statement that there is “no statutory requirement that the physician fee schedule be
     budget neutral within a State” is significant in part in that it directly contradicts reasons expressed
26   by CMS in 2004 in denying the California Medical Association’s (“CMA”) proposal to modify
     California’s locality configuration to reduce the significant payment disparities that suppliers in nine
27   California counties were experiencing. (See ¶¶ 289-290, infra.) The statement is also significant
     in that it shows the Agency’s apparent willingness to calculate the fee schedule for some localities
28   differently from others, as in CMS’ 2009 correction of erroneous locality designations in Texas in
     a manner that was not budget neutral within Texas. (See ¶¶ 381-384, infra.)
                                                                     36
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page47 of 172


 1          166.     Although in 1993 HCFA acknowledged that the statutory system is only budget
 2   neutral on a national basis (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002), HCFA
 3   fundamentally altered that system in 1993 for a select group of two states (North Carolina and Ohio)
 4   in an attempt to induce multi-locality states to convert to statewide localities by freezing the amount
 5   of payments to states converting to statewide localities, i.e., by imposing statewide budget neutrality
 6   on the system. (See ¶¶ 174-176, infra.) That change is fundamental because it reduced or increased
 7   the payment amounts that otherwise would have gone to the other 48 states as a result of the
 8   statewide locality reconfigurations.
 9                             b.         HCFA Modifies the Method of Calculating GPCIs in a Way that
10                                        Mathematically Results in Statewide Budget Neutrality in the
11                                        Event of a Locality Reconfiguration
12          167.     In 1993, HCFA modified the way in which GPCIs would be calculated in the future,
13   a method of “weighting” GPCIs by RVUs rather than by population. This revised methodology
14   mathematically ensures that any future locality reconfigurations would be budget neutral on a
15   statewide level.
16          168.     The CY 1994 Proposed Rule contains a helpful exposition on how the use of RVU
17   weighting increased payment accuracy, and on how the RVU weighted GPCIs would yield GPCIs
18   that are budget neutral on a statewide basis:
19                  “These GPCIs were created by weighting the existing area GPCIs by the full
            physician fee schedule RVUs in each payment area. Full physician fee schedule
20          RVUs were used rather than 1992 actual dollar payment amounts because the dollar
            amounts would include transition payment differences, which reflect remnants of the
21          prior reasonable charge system and which will disappear when the physician fee
            schedule is fully effective in 1996.
22
                     “These new budget-neutral RVU-weighted State GPCIs are generally slightly
23          higher than the State GPCIs published in Addendum C of the November 1991 final
            rule (56 FR 59785) because the areas with the higher GPCIs within the State as
24          mentioned earlier, import beneficiaries and, thus, furnish services (RVUs) in a
            greater proportion than their resident population. Thus, compared to the previous
25          population-weighted State GPCIs, the losing (urban) areas would generally
            experience slightly less of a decrease in payments, and the winning (rural) areas
26          would generally experience slightly more of an increase in payments under a change
            to a statewide locality. . . .
27
                   “Future conversions to statewide localities would be made using the new
28          budget-neutral State GPCIs in the above table (subject to any future comprehensive

                                                                   37
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page48 of 172


 1          GPCI revisions as discussed below). We calculated these GPCIs to assure that the
            same amount of payments would be made within a State after the conversion as
 2          would have been paid if the conversion to a statewide payment area were not made.
            If we did not use these new State GPCIs, not only might we be generally
 3          disadvantaging the physicians within the State, we might experience unintended
            budget savings. There is no need to recalculate the GPCIs for States that were
 4          already statewide localities when the physician fee schedule began in 1992, because
            these existing GPCIs were used when we computed the 1992 [nationally] budget-
 5          neutral CF.” (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38003.)19
 6          169.       It is worth noting that in 1991 HCFA did not impose statewide neutrality on the
 7   Minnesota, Nebraska, or Oklahoma conversions and instead allowed total payments to each of those
 8   states to change on a nationwide budget neutral basis when they converted to statewide localities.
 9   (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002; see ¶ 161, supra.)
10          170.       Thus, the 1991 conversions of Minnesota, Oklahoma, and Nebraska into statewide
11   localities were accomplished on a nationally budget-neutral basis, but not on a locally or statewide
12   budget-neutral basis. In other words, it is probable that less money went to those three states in 1992
13   than in 1991, and that the “surplus” was distributed among the rest of the 47 states.
14                               c.         Consolidating Localities Without Requiring Statewide Budget
15                                          Neutrality
16          171.       HCFA has consolidated localities on a less than statewide basis without requiring
17   local or statewide budget neutrality. In the CY 1994 Final Rule, HCFA eliminated a “specialty-
18   specific” locality in Washington (“Locality 4”) that consisted of general practitioners in 11 of 13
19   counties in Eastern Washington Counties (“Locality 3”) which resulted in “specialty payment
20   differentials between general practitioners and other specialists for the same services in the same
21   geographic area.” In eliminating this “specialty-specific” locality, HCFA noted, “Specialty payment
22   differentials are prohibited by [42 U.S.C. 1395w-4(c)(6)].” (CY 1994 Final Rule, 12/2/1993, 58 FR
23   63638.) 20
24
25          19
               Under 42 U.S.C. § 1395w-4(e), fee schedule amounts must be calculated using fee
26   schedule RVU weighting as described in the CY 1994 Proposed Rule. (See CY 1994 Proposed Rule,
     7/14/1993, 58 FR 38002.)
27          20
               42 U.S.C. § 1395w-4(c)(6) provides: “The Secretary may not vary the conversion factor
28   or the number of relative value units for a physician’s service based on whether the physician
     furnishing the service is a specialist or based on the type of specialty of the physician.”
                                                                     38
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page49 of 172


 1           172.      When HCFA added the Washington Locality 4 physicians to Washington Locality
 2   3, it noted that it would result in increased payments to the general practitioners from Locality 4
 3   which in turn would result in lower payments to the remaining localities nationwide. In other words,
 4   HCFA recognized that the consolidation of the two localities would not be budget neutral either
 5   statewide or with respect to the two localities but would be budget neutral nationwide.
 6           173.      Instead of modifying the payments to the new consolidated locality in the same
 7   manner it proposed to use for states converting to statewide localities, HCFA allowed the increase
 8   in payments to the combined Locality 3 and 4 to occur along with a corresponding decrease in
 9   payments to the rest of the system. (CY 1994 Final Rule, 12/2/1993, 58 FR 63638.)21
10                               d.         1993 – Creation of Two New Statewide Localities – North
11                                          Carolina and Ohio
12           174.      In 1992, HCFA did not convert any states into statewide localities. In 1993, six states
13   requested conversion to statewide localities. Of the six, HCFA only viewed North Carolina and
14   Ohio as having demonstrated “sufficient support from losing areas to support the change.” (CY
15   1994 Proposed Rule, 7/14/1993, 58 FR 38003.) In the CY 1994 Proposed Rule, HCFA proposed
16   to convert them into statewide payment areas “using the new RVU-weighted State GPCIs.” (CY
17   1994 Proposed Rule, 7/14/1993, 58 FR 38003.)
18           175.      According to the CY 1994 Final Rule:
19                     (a) both the North Carolina and Ohio state medical associations
20           “overwhelmingly” passed resolutions requesting statewide payment areas, with the
21           North Carolina Medical society membership representing about 60% of all North
22           Carolina physicians, and the Ohio State Medical Association representing about 75%
23           of all Ohio physicians;
24   / / /
25
26           21
                HCFA determined the “overall effect on physicians and the Medicare program will be
27   negligible as the overall GAF (a weighted composite of the three component GPCIs) for area 3 is
     only 0.009 higher than that for area 4, and total area 4 payments are only about 0.5 percent of total
28   area 3 payments.” (CY 1994 Final Rule, 12/2/1993, 58 FR 63638.) Thus, the effect on the entire
     Medicare program, though monetarily small, was real.
                                                                     39
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page50 of 172


 1                    (b) 431 out of 434 comments (99%) received from North Carolina physicians
 2          supported the change to a statewide payment area;
 3                    (c) out of 1,330 comments from Ohio physicians, 82% supported a state
 4          payment area;
 5                    (d) 83% of the opposition from Ohio physicians came from the Cleveland
 6          locality (made up of the two losing counties that the state medical society had
 7          previously informed HCFA were opposed to the change) who represented about one-
 8          third of the losing Ohio State Medical Association members;22 and
 9                    (e) of the letters from physicians in losing counties other than the Cleveland
10          locality counties, about 83% supported the change. (CY 1994 Final Rule, 12/2/1993,
11          58 FR 63637.)
12          176.      Based on the responses it received from North Carolina and Ohio, HCFA made North
13   Carolina and Ohio statewide payment areas effective January 1, 1994, using the statewide budget
14   neutral GPCIs. (CY 1994 Final Rule, 12/2/1993, 58 FR 63638.)
15          177.      Neither the 1994 Proposed Rule nor the 1994 Final Rule contains any analysis of the
16   economic impact of reconfiguration on suppliers in the “losing counties” or any indication that the
17   views of suppliers other than physicians in the affected states were sought or considered. Further,
18   there is no indication that HCFA sought the views of beneficiaries whose out-of-pocket costs would
19   be increased as a result of the conversions.
20                    7.        1993 – HCFA’s Identification of an Unresolved Issue
21          178.      In the process of converting Minnesota, Nebraska, North Carolina, Ohio, and
22   Oklahoma into statewide localities, HCFA sought “support from the physician community” of the
23   affected states. (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002; emphasis added.)
24          179.      In the CY 1994 Proposed Rule, HCFA recognized it needed to decide how it would
25   determine whether “overwhelming support” for a locality change actually existed: “An issue to
26   consider is how we can assure that the views of all physicians in an area are solicited and not just
27
            22
28            Through no stretch of the English language could this overwhelmingly negative vote be
     considered as constituting “sufficient support from losing areas to support the change.”
                                                                    40
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page51 of 172


 1   the views of physicians who are members of the State medical societies.” (CY 1994 Proposed Rule,
 2   7/14/1994, 58 FR 38003.)
 3           180.     HCFA did not express similar concern over soliciting views of suppliers other than
 4   physicians who receive payments under Medicare Part B (such as physician assistants, nurse
 5   practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesia assistants,
 6   nurse-midwives, qualified psychologists, and clinical social workers) when considering changing
 7   locality boundaries even though those other suppliers would be equally affected by the changes.
 8   Similarly, HCFA did not express concern over soliciting views of Medicare beneficiaries whose out-
 9   of-pocket costs would be affected by the changes.
10           181.     HCFA never did propose or express any standards it would use in the future to
11   determine whether there was “overwhelming support” for a locality change.
12                    8.        1994 – HCFA’s Further Comments on Locality Changes During the
13                              Transition Period
14           182.     In the CY 1995 Proposed Rule, HCFA reiterated that it would consider creating
15   statewide localities during the transition period and again, as it had in 1993, misstated its 1991
16   comments on the subject:
17           “There is little consistency among carriers in locality structure. In the June 1991
             proposed rule (56 FR 25832) and the November 1991 final rule (56 FR 59514) on
18           the physician fee schedule, we stated that until we decide on ultimate large-scale
             changes, the only locality changes we would consider would be requests for
19           converting individual States with multiple localities to a single statewide locality if
             ‘ ... overwhelming support from the physician community for the changes can be
20           demonstrated.’ ... Section 1842 of the Act gives us the authority to set payment
             localities. We plan to review the existing payment locality structure for possible
21           comprehensive changes in 1996. In the meantime, we will continue to consider
             statewide localities in those States in which physicians express a desire for a
22           change.” (CY 1995 Proposed Rule, 6/24/1994, 59 FR 32759.)
23           183.     As it had done in 1993 (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38001-38003;
24   CY 1994 Final Rule, 12/2/1993, 58 FR 63637), HCFA’s 1994 statement mischaracterized its 1991
25   comments in which it said it had “not ruled out the possibility” of other types of locality change
26   during the transition period. (See CY 1992 Final Rule, 11/25/1991, 56 FR 59514.)
27           184.     In the CY 1995 Final Rule, HCFA noted that commenters from urban areas in
28   Arkansas and New Mexico, both statewide localities, had stated that “costs were higher in their areas

                                                                    41
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page52 of 172


 1   than in the rural areas of the State and that they should have a different GPCI from the rest of the
 2   State.” (CY 1995 Final Rule, 12/8/1994, 59 FR 63415.) HCFA dismissed the comments about
 3   GPCIs as irrelevant to the issue of locality configuration:
 4            “[42 U.S.C. § 1395w-4(e)(1)(A)(i)] requires that the GPCIs reflect practice cost
              differences among fee schedule areas. These fee schedule areas happen to be
 5            statewide areas and, thus, have statewide GPCIs. This is a locality issue rather
              than a GPCI issue. As stated in the locality section of the proposed rule (59 FR
 6            32759), we are reviewing the existing payment locality configuration for possible
              changes sometime after 1996. In the meantime, the only locality changes we will
 7            consider are changes to a statewide locality in States currently having multiple
              payment areas.” (CY 1995 Final Rule, 12/8/1994, 59 FR 63415; emphasis added.)23
 8
 9                      9.        1994 – Creation of the Iowa Statewide Locality
10            185.      In 1994, Iowa and Pennsylvania petitioned to be converted to statewide payment
11   areas.
12            186.      Only Iowa presented HCFA with what it viewed as “evidence demonstrating
13   sufficient support from ‘losing’ areas to support the change. The Iowa Medical Society presented
14   evidence that about 75 percent of its members, including about 70 percent of members in ‘losing’
15   areas, support a statewide payment area.”
16            187.      The degree of support for the proposed conversion among Iowa physicians was
17   detailed in the CY 1995 Final Rule as follows:
18            “Of the 1,625 comments received from Iowa physicians, 98 percent supported a
              statewide payment area. Support was unanimous among the 1,095 comments from
19            Iowa physicians in winning areas. Of the 530 letters from physicians in losing areas,
              about 94 percent supported the change. We received only 34 comments from
20            physicians opposing the change.” (CY 1995 Final Rule, 12/8/1994, 59 FR 63416.)
21            188.      Some urban physicians in Iowa opposed the conversion and commented that their
22   practice costs were higher than those in rural areas and that their payments should therefore continue
23
24
              23
25              The logic behind HCFA’s desire to disassociate a “locality issue” from a “GPCI issue”
     is unclear. GPCIs measure the costs of providing medical services within a locality. If a locality’s
26   boundaries are drawn around areas that are demographically heterogeneous, the GPCIs will measure
     the average costs in the locality, and the accuracy of those measurements will be inversely
27   proportional to the degree of heterogeneity of the costs within the area – the greater the degree of
     difference between costs within a locality, the less accurate the GPCIs will be. If the locality’s
28   boundaries are drawn around a demographically homogeneous area, the GPCIs will accurately
     measure the costs of providing medical services in that area.
                                                                      42
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page53 of 172


 1   to be higher than those to rural physicians. HCFA responded that the physicians in the urban or
 2   “losing” areas were essentially outvoted:
 3           “We agree that the GPCIs show that practice costs are generally slightly higher in
             urban areas in Iowa. However, as previously mentioned, in responding to comments
 4           on the June 1991 proposed rule and in order to be responsive to the physician
             community, we agreed to consider requests for conversion to a statewide payment
 5           area if overwhelming support exists among the physician community for the change.
             This support was demonstrated in Iowa.” (CY 1995 Final Rule, 12/8/1994, 59 FR
 6           63416.)
 7           189.    There is no indication in the CY 1995 Proposed Rule as to what percentage of
 8   physicians are members of the Iowa Medical Society, either statewide or in “losing areas.” (CY
 9   1995 Proposed Rule, 6/24/1994, 59 FR 32759.)
10           190.    There is also no indication in the CY 1995 Proposed Rule as to comments sought or
11   received from any suppliers in Iowa who were not physicians. Nor is there any indication in the CY
12   1995 Proposed Rule that comments from beneficiaries were sought. From its statements in the CY
13   1995 Final Rule, it appears that HCFA never considered the interests of persons other than
14   physicians as having significance: “Proposing the conversion in the proposed rule provided an
15   opportunity for all physicians in Iowa, both State medical society members and nonmembers, to
16   comment on the change.” (CY 1995 Final Rule, 12/8/1994, 59 FR 63416.)
17           191.    Based on this evidence of “support,” HCFA proposed to convert Iowa to a statewide
18   locality effective January 1, 1995. (CY 1995 Proposed Rule, 6/24/1994, 59 FR 32759.)
19           192.    As with the North Carolina and Ohio conversions to statewide localities in 1993, the
20   Iowa conversion was calculated to be budget neutral on a statewide basis. (CY 1995 Final Rule,
21   12/8/1994, 59 FR 63416.)
22                   10.       1994 – Commenters’ Requests to Establish Clear Criteria for
23                             Demonstrating Support for Conversion to Statewide Localities
24           193.    In the CY 1994 Proposed Rule, HCFA had questioned how it could “assure that the
25   views of all physicians in an area are solicited and not just the views of physicians who are members
26   of the State medical societies” when it was determining whether to create a particular statewide
27   locality. (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38003.)
28   / / /

                                                                   43
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page54 of 172


 1          194.      By 1994, HCFA seems to have resolved the issue to its satisfaction by having
 2   developed a “process” for evaluating such requests. That process, however, was still lacking in any
 3   objective standards and still only took the opinions of physicians into consideration:
 4          “Comment: Some commenters suggested that we establish clear criteria, such as an
            absolute numerical standard of the level of support among physicians in the State,
 5          to be met in order for us to convert localities to a statewide payment area. They
            requested an explanation of the decision process in the States that we converted.
 6
            “Response: To be responsive to the physician community we stated that we would
 7          consider requests for a change to a statewide locality if there was overwhelming
            support for the change among physicians in both winning and losing areas. We did
 8          not set absolute numerical levels of support to be met because of the uniqueness of
            the current locality structure in each State. Some large populous, primarily urban,
 9          States have only two localities. On the other hand, some less populous, primarily
            rural, States have seven localities. We believe that setting an absolute numerical
10          level of support would limit the discretion required for us to properly evaluate the
            request in each unique situation.
11
            “While not setting an absolute numerical standard, we have employed a consistent
12          process in evaluating each request. Upon receiving a preliminary contact from a
            State medical society, we inform the society that at a minimum we require: (1) A
13          formal request for the change from the State medical society, along with a copy of
            a recently adopted resolution requesting the change; (2) the number of licensed
14          actively practicing physicians in the State and the number that are society members;
            (3) the number of society members in each local (county) society; and (4) letters
15          from the local societies representing physicians in the losing areas indicating the
            level of support for the change. After evaluating this material, and, in some cases,
16          contacting the medical society if more information is required, if we believe that the
            material demonstrates overwhelming support among both winning and losing
17          physicians, we announce the proposed change in the Federal Register. If the public
            comments received demonstrate this overwhelming support, we announce the change
18          in a final rule in the Federal Register.” (CY 1995 Final Rule, 12/8/1994, 59 FR
            63416.)
19
20          195.      Once again, HCFA did not express concern over soliciting or considering views of
21   suppliers other than physicians or beneficiaries when considering changing locality boundaries even
22   though they would be equally affected by the changes.
23          B.        1991 and 1993 – Restructuring Localities Outside the Rule-Making Process
24          196.      HCFA implemented the restructuring of a number of localities in 1991 and 1993
25   without going through the rule-making process required by 42 C.F.R. § 414.4.
26          197.      For example, only Nebraska and Oklahoma were mentioned in the CY 1992 Proposed
27   Rule as having demonstrated support for becoming statewide localities, and they were the only two
28   states HCFA proposed to convert to statewide localities. (CY 1992 Proposed Rule, 6/5/1991, 56 FR

                                                                    44
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page55 of 172


 1   25833.) Yet, as alleged above, in the CY 1992 Final Rule, Minnesota was converted to a statewide
 2   locality without the opportunity for public comment. (CY 1992 Final Rule, 11/25/1991, 56 FR
 3   59514.)
 4           198.      In the CY 1992 Proposed Rule, HCFA announced that it had combined the Mayo
 5   Clinic (which had been a separate locality) with Minnesota “Carrier 10240 Locality 1” based on its
 6   geographic location. In another change announced in the CY 1992 Proposed Rule, the Virgin
 7   Islands, which had been considered a part of New York “Carrier 803 Locality 3,” was made its own
 8   locality. (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25833.) Both of these locality conversions
 9   were done without notice or opportunity for comment.
10           199.      In the CY 1992 Final Rule, HCFA eliminated two “provider-specific” localities
11   without notice or comment. The Geisinger Clinic in Pennsylvania and the University of Iowa
12   Physicians, which were treated separately from other physicians in their geographic areas, were
13   moved into the fee schedule areas in which they were physically located. (CY 1992 Final Rule,
14   11/25/1991, 56 FR 59514.)
15           200.      In 1993, as alleged above, HCFA eliminated a “specialty-specific” locality in
16   Washington (“Locality 4”) that consisted of general practitioners in 11 of 13 counties in Eastern
17   Washington Counties (“Locality 3”). In doing so, it restructured Locality 3 by adding the Locality
18   4 physicians to that locality. The elimination of Locality 4 and the restructuring of Locality 3
19   resulted in a systemic realignment of payments, yet HCFA did not give notice in the CY 1994
20   Proposed Rule and merely announced the fait accompli in the CY 1994 Final Rule. (CY 1994 Final
21   Rule, 12/2/1993, 58 FR 63638.)
22           C.        1996 – Adoption of the Present Locality Configuration
23                     1.        Goals of the 1996 Locality Reconfiguration
24           201.      In 1996, having studied the locality issue for a number of years, HCFA proposed to
25   implement a major reconfiguration of the locality structure that had been in place since 1966 and
26   proposed four options on which it sought comment in the CY 1997 Proposed Rule.
27   / / /
28   / / /

                                                                     45
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page56 of 172


 1           202.      HCFA identified a number of goals it had identified in choosing those four options:
 2           “A major goal in selecting these options is to continue to reduce the number of areas,
             leading to greater simplicity, understandability, ease of administration, reduction in
 3           urban/rural payment differences, reduction in payment differences among adjacent
             areas, and stability of payment updates resulting from the periodic GPCI revisions.”
 4           (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34616.)
 5                     2.        HCFA’s Consideration of Four Options for Locality Reconfiguration
 6           203.      The four options proposed for consideration by HCFA in 1996 were the options that
 7   had been studied in the 1995 HER Locality Report.24
 8           204.      Option 1 used the then-current localities as building blocks while Options 2-4 used
 9   “metropolitan areas.” Under all four options, the 22 single-locality states were to remain single
10   localities. (CY 1997 Final Rule, 7/2/1996, 61 FR 34616-17.)
11           205.      Under Option 1, the locality GAFs of then-current localities were compared to the
12   statewide GAF in the 28 multi-locality states.25 If the locality GAF exceeded the statewide GAF by
13   a certain percentage (i.e., 5%), those localities would remain a distinct FSA. The Secretary observed
14   that the localities used in Option 1 “tend to be smaller and more focused on high-cost urban counties
15   and track input price variations better than the larger metropolitan area definitions used in Option
16   2.” (CY 1997 Final Rule, 7/2/1996, 61 FR 34617-18.)
17           206.      Under Option 2, statewide localities would be created for the 28 multi-locality states,
18   except for metropolitan areas whose GAF exceeded the state’s GAF by a specified percentage
19   threshold. The Secretary found that Option 2 was “more promising than Options 3 and 4, but less
20   promising than Option 1.” (CY 1997 Final Rule, 7/2/1996, 61 FR 34618.)
21   / / /
22   / / /
23
             24
24            Pope, G.C., Tarantino, R.L., Dayhoff, D., and Hwang, C.W.: Assessment and Redesign
     of Medicare Fee Schedule Areas (Localities). Final Report to the Health Care Financing
25   Administration under Contract No. 500-92-0020, Health Economics Research, Inc., November,
     1995.
26           25
                Recall that the locality GAFs are the sum of the products of each of the three component
27   GPCIs for the locality and their relative weights (which are expressed as a percentage of 1). Thus,
     from 2001-2010, a locality GAF would be calculated substituting the three GPCIs for the particular
28   locality (or county) in the following formula: GAF = (GPCIw × 0.52466) + (GPCIpe × 0.43669) +
     (GPCImp × 0.03865).
                                                                     46
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page57 of 172


 1          207.      Under Option 3, each of the 28 states that were then made up of multiple localities
 2   would be divided into 2 to 5 localities based on metropolitan area population size. The Secretary
 3   rejected this option for the following reasons:
 4          “This option suffers from inadequate tracking of input price variations and
            inappropriate differences across boundaries.... Grouping these types of metropolitan
 5          areas together can lead to inaccurate GAFs and inappropriate differences at FSA
            boundaries.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617-18.)
 6
 7          208.      Under Option 4, each of the 28 states that were then made up of multiple localities
 8   would be divided into 5 nationwide localities based on metropolitan area population size. The
 9   Secretary rejected this option for the following reasons:
10          “Option 4 ... is unacceptably inaccurate in tracking input price differences and
            creates too many large and inappropriate GAF differences across FSA boundaries.
11          Grouping all metropolitan areas of the same size into a single category, regardless
            of geographic location, would substantially underpay some areas while overpaying
12          others.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.)
13                    3.        Implementation of “Option 1i” – Use of the “5% Iterative Method” to
14                              Create Localities
15          209.      Ultimately, HCFA rejected Option 1 because:
16          “In large States with a wide range of GAFs [such as California and Texas], the mid-
            sized cities and metropolitan areas tend to be combined with the residual rest-of-
17          State area. Their GAFs are sharply reduced, lessening the accuracy of input price
            tracking and creating large boundary differences....” (CY 1997 Proposed Rule,
18          7/2/1996, 61 FR 34618.)
19          210.      Instead, HCFA opted to implement a variation of one of the four options– “Option
20   1i” – which established an entirely new locality configuration based on a “5% iterative method.”
21   Implementation of Option 1i reduced the number of localities from 210 to 89, and increased the
22   number of statewide localities from 22 to 34. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620.)
23          211.      In adopting the CY 1997 Final Rule, HCFA stated:
24          “Effective January 1, 1997, we will proceed with the implementation of Option 1i,
            5-percent threshold, with restructuring of subcounty payment areas to reduce the
25          number of physician fee schedule payment localities from 210 to 89.... This policy
            change does not require a change to the regulations set forth in § 414.4 (‘Fee
26          schedule areas’).” (CY 1997 Final Rule, 11/22/1996, 61 FR 59497.)26
27
            26
28               Exhibit 3 contains a list of all statewide localities and the years in which they were
     created.
                                                                    47
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page58 of 172


 1           212.      The methodology for establishing the payment localities was described in the CY
 2   1997 Final Rule as follows:
 3           “Under this [rule], current localities are used as building blocks. The 22 existing
             statewide localities remain statewide localities. [The rule] sets new localities in the
 4           remaining 28 States by comparing the area cost differences as represented by the
             locality GAFs within a State. An area’s GAF is a weighted composite of the area’s
 5           work, practice expense, and malpractice GPCIs and allows a comparison of overall
             costs among areas. Briefly, a State’s localities are ranked from the highest to the
 6           lowest GAF. The GAF of the highest price locality is compared to the weighted
             average GAF of all lower-price localities. If the percentage difference exceeds 5-
 7           percent, the highest-price locality remains a distinct locality. If not, the State
             becomes a statewide locality. If the highest-price locality remains a distinct locality,
 8           the process is repeated for the second highest-price locality. Its GAF is compared
             to the statewide average excluding the two highest-price localities. If this difference
 9           exceeds 5-percent, the second highest price locality remains a distinct locality. This
             logic is repeated, moving down the ranking of localities by costliness, until the
10           highest-price locality does not exceed the combined GAFs of all less costly localities
             by 5-percent and does not remain a distinct locality. No further comparisons are
11           made, and the remaining localities become a residual rest-of-State locality. The GAF
             of a locality always is compared to the average GAF of all lower-price localities.
12           This ensures that the statewide or residual State locality has relatively homogeneous
             resource costs.” (CY 1997 Final Rule, 11/22/1996, 61 FR 59494.)
13
14           213.      HCFA chose Option 1i for several reasons: (1) it “ensures that the statewide or
15   residual FSA has relatively homogeneous input prices”; (2) it “has all of the advantages of Option
16   1, while addressing the problems inherent in Option 1: unwarranted boundary differences and large
17   higher-price areas not being separate FSAs in small States”; (3) “it more consistently defines
18   homogeneous residual State FSAs”; (4) it “reduces unwarranted boundary differences”; and (5) it
19   “would attain the goal of simplifying the payment areas and reducing payment differences among
20   areas while maintaining accuracy in tracking input prices.” (CY 1997 Proposed Rule, 7/2/1996, 61
21   FR 34619.)27
22   / / /
23   / / /
24   / / /
25   / / /
26   / / /
27
             27
28              As alleged in ¶¶ 263-265, infra, implementation of the 1996 locality reconfiguration
     actually reduced payment accuracy nationwide by over 25%.
                                                                     48
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page59 of 172


 1                   4.        Failure to Use a Consistent Methodology in the 1996 Revision of the
 2                             Locality Structure
 3                             a.         Use of Outdated Localities in 1996 Revision of Fee Schedule
 4                                        Localities
 5           214.    The 5% iterative method employed by HCFA in its 1996 revision of the 1966 fee
 6   schedule localities was not uniformly applied to all states and all counties.
 7           215.    The 1966 fee schedule localities were established by local insurance carriers and by
 8   1996 often had no consistent geographic or economic basis – some were county-based, some were
 9   state-wide, and some were based on “subcounty” units such as city limits or ZIP codes. In fact, as
10   early as 1991, HCFA had “acknowledged the lack of consistency among localities and the
11   significant demographic and economic changes that had occurred since localities were originally
12   established.” (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25832.)
13           216.    Although one of the goals of the 1996 restructuring was to create a “uniform, county-
14   based fee schedule system that can be introduced nationwide” (HER Locality Report, Vol. I, p. 5-1),
15   HCFA did not meet that goal. When HCFA adopted the CY 1997 Final Rule which used the 5%
16   iterative threshold method to create new payment localities, it did not use the current 1996 figures
17   for county-specific GAFs despite the fact those figures were available to it. Instead of using a
18   uniform county-based standard to create the new localities, HCFA applied the 5% iterative method
19   to a number of the multi-county 1966 localities even though it knew and had publicly acknowledged
20   that some of those 1966 localities were out-dated and inconsistent.
21           217.    In California, for example, prior to 1996:
22                   (a) Santa Cruz and Monterey Counties (suburban) were combined in a
23           locality with San Benito County which was demographically rural (HER Locality
24           Report, Vol. II, p. A-40);
25                   (b) Sonoma County (suburban) was combined in a locality with Humboldt,
26           Del Norte, Lake and Mendocino Counties, all of which were rural (HER Locality
27           Report, Vol. II, pp. A-39 to A-41);
28   / / /

                                                                   49
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page60 of 172


 1                   (c) Marin, Napa, and Solano Counties were combined in a single locality
 2          even though Marin is not contiguous with Napa or Solano, both of which were
 3          considerably more rural than Marin (HER Locality Report, Vol. II, p. A-40);
 4                   (d) San Diego County (urban) was combined in a locality with rural Imperial
 5          County (HER Locality Report, Vol. II, p. A-39); and
 6                   (e) Alameda and Contra Costa Counties (both urban) were combined in a
 7          single locality (HER Locality Report, Vol. II, p. A-39).
 8          218.     In the 1996 restructuring, the GAFs for the five California multi-county localities in
 9   the examples given above were used instead of the individual county GAFs. Marin, Napa, and
10   Solano Counties became a multi-county locality (“Marin/Napa/Solano”) as did Alameda and Contra
11   Costa Counties (“Oakland/Berkeley”) because their average GAFs were 5% more than the weighted
12   average of the localities that made up the Rest of California. Marin County did not become a
13   separate locality in the 1996 restructuring even though: (a) it is geographically separated from Napa
14   and Solano counties; (b) its county GAF was 5% more than the Solano and Napa County GAF’s;
15   and (c) its county GAF was 5% more than the average GAF for the Rest of California. The
16   remaining counties in the examples above (Santa Cruz, Monterey, San Benito, Sonoma, Humboldt,
17   Lake, Del Norte, Mendocino, and San Diego) were subsumed in the new“Rest of California” locality
18   made up of 47 counties. (1997 Final Rule, 11/22/1996, 61 FR 59715.)
19          219.     In Oregon, parts of Clackamas, Multnomah, and Washington Counties had been
20   included in the 1966 “Rest of Oregon” locality while other parts of those counties were included in
21   the “Portland” locality. In the 1996 restructuring, all of Clackamas, Multnomah, and Washington
22   Counties were made a part of the “Portland, OR” multi-county locality. (CY 1997 Proposed Rule,
23   7/2/1996, 61 FR 34620.)
24                             b.         Consolidation of “Subcounty” Localities
25          220.     Prior to the 1996 locality reconfiguration, there were a number of “subcounty”
26   localities in a number of states. The “subcounty” localities included those whose boundaries were
27   defined by city or town boundaries, zip codes, and multiple cities/towns in noncontiguous counties.
28   (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34619.)

                                                                   50
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page61 of 172


 1          221.     Option 1i used the county as the basic geographic unit because “county boundaries
 2   are unambiguous and rarely change.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34619.) In
 3   addition, since the input price data for GPCIs and GAFs was not available on the subcounty level,
 4   the subcounty areas did not provide additional accuracy in measuring practice input price variations.
 5   (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620.)
 6          222.     HCFA thus decided to modify all of the existing “subcounty” localities to the county
 7   level. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620.) However, in doing so, HCFA did not use
 8   a uniform methodology nationwide.
 9          223.     HCFA accomplished the aggregation of subcounty areas in Arizona, Connecticut,
10   Kentucky, Mississippi, and Nevada by making those states statewide payment areas. California’s
11   eight subcounty areas, all of which were in Los Angeles County and all of which had the same GAF,
12   were aggregated into a single locality. In New York, existing subcounty areas were included in the
13   residual Rest-of-State area. In Oregon, the town-based “Portland” locality which included parts of
14   three counties was redefined to encompass the entire boundaries of all three counties. (CY 1997
15   Proposed Rule, 7/2/1996, 61 FR 34620.)
16                             c.         Continued Use of Antiquated 1966 Multi-County Locality
17                                        Structure
18          224.     One of the stated goals of the 1996 restructuring was to create a “uniform, county-
19   based fee schedule system that can be introduced nationwide.” (HER Locality Report, Vol. I, p. 5-
20   1.) However, HCFA did not implement a uniform, county-based fee schedule system in 1996.
21          225.     Instead, when HCFA implemented the 1996 locality restructuring, it calculated the
22   5% iterative method primarily using single county units, but also continued to use a significant
23   number of the multi-county localities formed in 1966 as units instead of treating the components of
24   those localities as separate counties.
25          226.     In California, for example:
26                   (a) the 1966 locality of suburban Santa Cruz County and rural Monterey and
27          San Benito Counties was treated as a single locality in 1996 and because the three
28

                                                                   51
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page62 of 172


 1           counties’ combined GAF did not exceed the 5% threshold, they became part of the
 2           “Rest-of-California” Locality 99;
 3                      (b) the 1966 locality of suburban Sonoma County and rural Humboldt, Del
 4           Norte, Lake and Mendocino Counties was treated as a single locality in 1996 and
 5           because the five counties’ combined GAF did not exceed the 5% threshold, they
 6           became part of the “Rest-of-California” Locality 99;
 7                      (c) the 1966 locality of urban San Diego County and rural Imperial County
 8           was treated as a single locality in 1996 and because the two counties’ combined GAF
 9           did not exceed the 5% threshold, they became part of the “Rest-of-California”
10           Locality; and
11                      (d) in contrast, when the 1966 locality of suburban Marin County and rural
12           Solano and Napa Counties was treated as a single locality in 1996, the three
13           counties’ combined GAF exceeded the 5% threshold, and they became part of a
14           multi-county locality. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34632.)28
15                               d.         Accurate Tracking of Input Prices Used as Justification for
16                                          Inconsistent Treatment of Localities
17                                          (1)        Special Treatment of Three States in the 1996
18                                                     Restructuring
19           227.       One of HCFA’s major goals in implementing the 1996 locality restructuring was to
20   reduce payment differences among adjacent areas. A further goal was “to establish a consistent set
21   of criteria for the Medicare FSAs that are applied uniformly nationwide.” (HER Locality Report,
22   Vol. I, p. E-3.)
23           228.       In 1996 HCFA used certain statistical formulas to determine the extent to which the
24   5% iterative threshold methodology met the goal of reducing payment differences within localities
25
             28
26              San Diego County has the second-highest annual underpayment of any county in the
     United States. (See Exhibit 4 attached hereto, a chart detailing the annual underpayments by year,
27   state, and county from 2001 through 2010.) Note that unless otherwise indicated all of the data
     contained in the tables or exhibits in this complaint comes from or is derived from data provided by
28   CMS to the CMA or to the County Plaintiffs, data published by HCFA/CMA or their contractors,
     and data published by other governmental agencies. (See Bibliography, §§ A-D, F-J.)
                                                                     52
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page63 of 172


 1   and between adjacent localities. One such formula measures “payment error” by the “mean absolute
 2   percentage deviation” or “MAPD,” which is calculated by determining the average percentage
 3   difference between the county GAF and the locality GAF, weighted by the county physician
 4   services’ RVUs so that inaccuracies in areas where more services are provided are emphasized.
 5   (HER Locality Report, Vol. I, pp. 3-1 and 5-6.) In other words, “payment error” is a measure of the
 6   degree of the cost homogeneity of a payment locality.
 7           229.      Using the “payment error” formulation, HCFA recognized that significant payment
 8   differences within four states would result from implementation of its favored alternative, “Option
 9   1i.” Under Option 1i, Pennsylvania, Missouri, Kansas, and Massachusetts would have had payment
10   errors in 1996 of 3.9%, 3.86%, 3.85%, and 3.16%, respectively. (HER Locality Report, Vol. I, p.
11   5-7.)
12           230.      Three of those states – Pennsylvania, Massachusetts, and Missouri – received special
13   consideration and the localities in those states were established using a method different from the
14   method used in the rest of the United States. In Kansas, the third most adversely affected state,
15   similar curative methods were not employed, and HCFA gave no explanation for the different
16   treatment.
17           231.      Those payment errors led HCFA to conclude that the redefined FSAs resulting from
18   Option 1i in Pennsylvania, Missouri, and Massachusetts did not “track input prices accurately.”
19   (HER Locality Report, Vol. 1, p. 5-6.) This led HCFA to establish the localities for those three
20   states in a manner different from that proposed in Option 1i – each became a multi-locality state
21   despite the fact that results of the 5% iterative method dictated that Missouri and Massachusetts
22   become single-locality states. (See ¶¶ 233-244, infra.)
23           232.      In contrast and for reasons never publicly expressed, HCFA converted Kansas to a
24   single locality state as proposed in Option 1i and did not attempt to correct the resulting high
25   payment error. (See ¶¶ 245-246, infra.)
26                                          (2)        Pennsylvania
27           233.      Prior to the 1996 restructuring, Pennsylvania had four payment localities: (a) Area
28   01 – Philadelphia/Pittsburgh medical schools/hospitals; (b) Area 02 – Large Pennsylvania cities; (c)

                                                                     53
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page64 of 172


 1   Area 03 – Smaller Pennsylvania cities; and (04) Rest of Pennsylvania. If Option 1i had been
 2   implemented as it was in other states, Localities 03 and 04 would have been combined and
 3   Pennsylvania would have been a three locality state – with a high payment error of 3.9%. (HER
 4   Locality Report, Vol. I, p. 5-11.)
 5          234.     However, that would have left the high cost Philadelphia area split between two
 6   separate localities (parts of Area 01 and Area 02), and partially combined with Pittsburgh which is
 7   located on the opposite western side of the state. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620;
 8   HER Locality Report, Vol. I, p. 5-11.)
 9          235.     To cure the resulting payment error, HCFA turned to the Philadelphia MSA. In
10   contrast, all other localities in all other states created under the 1996 restructuring were
11   formulaically generated using GAFs for the Medicare localities that existed at the time. (CY 1997
12   Proposed Rule, 7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, pp. E-3 and 5-4.)
13          236.     Using the Philadelphia MSA, HCFA decided that the five counties comprising the
14   Pennsylvania portion of the Philadelphia MSA were the most costly in Pennsylvania and “clearly
15   belong together” in a “Philadelphia Metropolitan Area” locality. (CY 1997 Proposed Rule,
16   7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-11.)
17          237.     HCFA then decided to sever Allegheny County (Pittsburgh) from the Philadelphia
18   counties in Area 01 because it was “much less expensive than the Philadelphia area, and does not
19   belong in the same locality, either cost-wise or geographically.” (CY 1997 Proposed Rule, 7/2/1996,
20   61 FR 34620; HER Locality Report, Vol. I, p. 5-11.)
21          238.     Employing this unique methodology, Pennsylvania was divided into two localities:
22   (a) Area 01 – “Philadelphia Metropolitan Area” [Montgomery, Philadelphia, Delaware, Bucks, and
23   Chester counties]; and (b) Area 02 – “Rest of Pennsylvania” [all other Pennsylvania counties]. As
24   a result, Pennsylvania’s payment error was reduced from 3.90% to 1.74%. (CY 1997 Proposed
25   Rule, 7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-11.)
26                                        (3)        Missouri
27          239.     Prior to the 1996 restructuring, Missouri had seven localities: (a) Area 01 – Northern
28   Kansas City; (b) Area 02 – Kansas City; (c) Area 03 – St. Louis/Large East Cities; (d) Area 04 – St.

                                                                   54
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page65 of 172


 1   Joseph; (e) Area 05 – Rural Northwest counties; (f) Area 06 – Small East Cities; and (g) Area 07
 2   – Rest of Missouri. If Option 1i had been implemented as it was in 47 other states, Missouri would
 3   have become a single locality state – with a high payment error of 3.86%. (CY 1997 Proposed Rule,
 4   7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-14.)
 5           240.    HCFA recognized that the high payment error under Option 1i reflected intra-state
 6   variation within the single statewide locality caused by combining St. Louis and Kansas City with
 7   the relatively lower cost counties in the rest of the state. (HER Locality Report, Vol. I, p. 5-14.)
 8           241.    To mitigate the payment error, HCFA created three localities in Missouri: (a) Area
 9   01 – Kansas City [Platte, Clay, and Jackson counties]; (b) Area 02 –St. Louis [St. Louis City, St.
10   Louis, Jefferson, and St. Charles counties]; and (c) Area 03 – Rest of Missouri [all other Missouri
11   counties]. As a result, Missouri’s payment error was reduced from 3.86% to 0.89%. (CY 1997
12   Proposed Rule, 7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-14.)
13                                        (4)        Massachusetts
14           242.    Prior to the 1996 restructuring, Massachusetts had two localities – “Urban” and
15   “Suburban.” If Option 1i had been implemented as it was in 27 other states, Massachusetts would
16   have become a single locality state – with a high payment error of 3.16%. (CY 1997 Proposed Rule,
17   7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-8.)
18           243.    Similar to the situation in Missouri, HCFA recognized that the high payment error
19   under Option 1i reflected intra-state variation within the single statewide locality caused by
20   combining urban Boston with the rest of the state where costs were relatively lower. (CY 1997
21   Proposed Rule, 7/2/1996, 61 FR 34620; HER Locality Report, Vol. I, p. 5-8.)
22           244.    To mitigate the payment error, HCFA created two localities in Massachusetts: (a)
23   Area 01 – Boston Metropolitan Area [Suffolk, Norfolk, and Middlesex counties]; and (b) Area 02
24   – Rest of Massachusetts [all other Massachusetts counties]. As a result, Massachusetts’ payment
25   error was reduced from 3.16% to 1.65%. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620; HER
26   Locality Report, Vol. I, p. 5-8.)
27   / / /
28   / / /

                                                                   55
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page66 of 172


 1                                        (5)        Kansas
 2           245.    HCFA’s treatment of Kansas stands in stark contrast with its treatment of the other
 3   three high payment error states. Prior to the 1996 restructuring, Kansas was made up of three
 4   localities. (Proposed Rule, 7/2/1996, 61 FR 34616.) Like Missouri and Massachusetts, Kansas was
 5   a multi-locality state that was slated to become a single-locality state under the 5% threshold of
 6   Option 1i. (HER Locality Report, Vol. I, p. 3-12.)
 7           246.    Yet even though Kansas had the third-highest payment error under Option 1i
 8   (3.85%), it was converted to a single-locality state and was not afforded the special treatment given
 9   to Pennsylvania, Missouri and Massachusetts in order to mitigate its high payment error. (CY 1997
10   Final Rule, 11/22/1996, 61 FR 59715; see also HER Locality Report, Vol. I, pp. 3-12 and p. 5-7.)
11                   5.        Other Standards of Payment Accuracy Set by HCFA During the 1996
12                             Restructuring
13           247.    In addition to the use of the 5% iterative method to reconfigure the locality structure
14   and the 3.16% “payment error” floor it used to justify the reconfiguration of Pennsylvania, Missouri,
15   and Massachusetts, HCFA identified a number of other standards of payment accuracy in the 1997
16   Proposed Rule to establish what it considered the boundaries between acceptable and non-acceptable
17   payment variations to be.
18           248.    In rejecting Option 3, HCFA stated it “This option suffers from inadequate tracking
19   of input price variations and inappropriate differences across boundaries.” (CY 1997 Proposed Rule,
20   7/2/1996, 61 FR 34617.)
21           249.    The following table shows the examples HCFA gave of what it considered to be
22   “inaccurate GAFs” (i.e., degrees of underpayments) under Option 3:
23   / / /
24   / / /
25   / / /
26   / / /
27   / / /
28   / / /

                                                                   56
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page67 of 172


 1                                                    Table 1.
                                        “Inaccurate GAFs” in Rejected Option 3
 2
                                                      Option 3                 “Actual”                Degree of
 3                                                    Proposed
                                                       GAF*                     GAF*                 “Inaccuracy”
 4
                Ft. Lauderdale, FL                       0.992                    1.100                    -9.82%
 5
                Miami, FL                                1.008                    1.116                    -9.68%
 6
                Galveston, TX                            0.926                    1.001                    -7.49%
 7
               *Source: CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.
 8
 9           250.     The HER Locality Report also identified “boundary difference” as a significant
10   measure of payment accuracy. “Boundary difference” is a “summary measure of payment
11   differences among adjacent geographic areas in a FSA option” which is defined as “the average
12   difference of the GAFs between unique pairs of contiguous counties, weighted by the sum of the
13   RVUs of the two counties.” (HER Locality Report, Vol. 1, p. 3-1.) HCFA also recognized the
14   importance of the use of boundary differences in establishing payment accuracy. (See CY 1997
15   Proposed Rule, 7/2/1996, 61 FR 34617.)
16           251.     The following table shows the examples HCFA gave of what it considered to be
17   “inappropriate” boundary differences under Option 3 compared to what the actual county boundary
18   differences were:
19                                               Table 2.
                          “Inappropriate” Boundary Differences in Rejected Option 3
20
21                                                               Option 3                                    “Actual”
                                             Option 3             Locality               “Actual”             County
22                                           Locality            Boundary                 County             Boundary
                                              GAF*               Difference                GAF*              Difference
23
24           Galveston, TX                      0.926                                       1.001
                                                                      11%                                          3%
25           Houston, TX                        1.030                                       1.030

26           * Sources: HER Locality Report, Vol. I, pp. 3-34 to 3-35; CY 1997 Proposed
             Rule, 7/2/1996, 61 FR 34617.
27
28   / / /

                                                                    57
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page68 of 172


 1            252.     In rejecting Option 4, HCFA stated it was “unacceptably inaccurate in tracking input
 2   price differences and creates too many large and inappropriate GAF differences across FSA
 3   boundaries.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.) HCFA also gave a number of
 4   examples of large metropolitan areas that would be “substantially underpaid” or “substantially
 5   overpaid” as well as the “severe boundary problems” that would result under Option 4. (CY 1997
 6   Proposed Rule, 7/2/1996, 61 FR 34617.)
 7            253.     The following table shows the large metropolitan areas HCFA viewed as being
 8   “substantially underpaid” under Option 4:
 9                                              Table 3.
                     “Substantially Underpaid” Metropolitan Areas in Rejected Option 4
10
11                                                     Option 4                 “Actual”                  Degree of
                                                       Proposed                  GAF*                   “Substantial”
12                                                      GAF*                                            Underpayment

13            Nassau-Suffolk, NY                          1.024                    1.199                     -14.60%

14            San Francisco, CA                           1.024                    1.141                     -10.25%
              Miami, FL                                   1.024                    1.116                      -8.24%
15
              New York City, NY                           1.102                    1.176                      -6.29%
16
17            *Source: CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.

18            254.     The following table shows the large metropolitan areas HCFA viewed as being
19   “substantially overpaid” under Option 4:
20                                               Table 4.
                      “Substantially Overpaid” Metropolitan Areas in Rejected Option 4
21
22                                                Option 4                  “Actual”                  Degree of
                                                  Proposed                   GAF*                   “Substantial”
23                                                 GAF*                                             Overpayment

24               Houston, TX                         1.102                    1.030                       6.99%
                 Chicago, IL                         1.102                    1.061                       3.86%
25
                 Philadelphia, PA                    1.102                    1.066                       3.38%
26
27           *Source: CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.

28   / / /

                                                                     58
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page69 of 172


 1           255.    The following table shows the “severe” boundary differences HCFA and HER
 2   identified under Option 4:
 3                                                Table 5.
                              “Severe” Boundary Differences in Rejected Option 4
 4
 5                                          Option 4   Option 4                         “Actual”           “Actual”
                City/County                 Locality Locality GAF                        County             County
 6                                           GAF*     Boundary                            GAF*             Boundary
                                                      Difference                                           Difference
 7
              Ventura                          0.975                                      1.079
                                                                    13%                                         2%
 8            Los Angeles                      1.102                                      1.103
 9            Galveston                        0.937                                      1.001
                                                                    18%                                         3%
              Houston                          1.102                                      1.030
10
              Cape Cod                         0.937                                      1.063
                                                                    18%                                         2%
11            Boston                           1.102                                      1.084
12            Santa Cruz                       0.937                                      1.066
                                                                     9%                                         6%
              Santa Clara                      1.024                                      1.133
13
              Marin                            1.154                                      1.222
                                                                     9%                                         3%
14            San Francisco                    1.256                                      1.256
15            Santa Barbara                    0.975                                      1.054
                                                                     5%                                         4%
              Ventura                          1.024                                      1.092
16
              *Source: HER Locality Report, Vol. I, p. 3-37, Vol. II, pp. A-21 to
17            A-30; CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617.
18           256.    To summarize, in addition to the 5% iterative threshold, HCFA recognized several
19   other statistical thresholds that defined “inaccurate” GAFs, “inappropriate” boundary differences,
20   “severe” boundary differences, and “substantial” underpayments and overpayments:
21                   (A) “Inaccurate” GAFs are those that reflect a difference of 7.5% or more
22           between the actual GAF and the proposed GAF;
23                   (B) “Inappropriate” boundary differences are those of 11% or more;
24                   (C) “Severe” boundary differences are those of 5% or more;
25                   (D) “Substantial” underpayments are those of 6.3% or more;
26                   (E) “Substantial” overpayments are those of 3.4% or more; and
27                   (F) Unacceptable “payment errors” are those in excess of 3.6%.
28   / / /

                                                                   59
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page70 of 172


 1                   6.        Imposition of Statewide Budget Neutrality in the 1996 Locality
 2                             Reconfiguration
 3           257.    In 1996, the GPCIs for the newly configured localities were calculated using an
 4   adjustment for statewide budget neutrality:
 5                   “The GPCIs, and, therefore, the GAFs, for the proposed new payment areas
             would be budget neutral within each State. That is, an adjustment would be made
 6           to them later in the year (to incorporate the most recent data into the adjustments) to
             yield the same total physician fee schedule payments within that State that would
 7           have been made had the payment areas not been changed.” (CY 1997 Proposed
             Rule, 7/2/1996, 61 FR 34620; see also CY 1997 Final Rule, 11/22/1996, 61 FR
 8           59494.)
 9           258.    In the CY 1997 Proposed Rule, HCFA noted that it anticipated the statewide budget
10   neutrality adjustments would be “minor.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34620.)
11           259.    However, HCFA noted that the statewide budget neutrality adjustments meant that
12   “some current individual payment areas will experience slight increases in payments and some will
13   experience slight decreases in payments under our proposed FSA changes.” (CY 1997 Proposed
14   Rule, 7/2/1996, 61 FR 34620.)
15                   7.        Phasing In the Locality Changes Where the Largest Payment Reductions
16                             Would Occur
17           260.    To ease the impact of the new locality structure on those areas most adversely
18   affected, HCFA phased in the payment changes over a two-year period on the four localities it
19   determined were the most seriously affected. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34621.)
20   The four localities were: (a) Pennsylvania Area 01, Philadelphia/Pittsburgh Medical Schools; (b)
21   Pennsylvania Area 02, Large Pennsylvania Cities; (c) Missouri Area 01, St Louis/Large Eastern
22   Cities; and (d) Massachusetts Area 01, Urban Massachusetts. (See CY 1997 Proposed Rule,
23   7/2/1996, 61 FR 34630.)
24           261.    Payments to portions of each of those localities were to decrease by between 8.6 and
25   4% under the new locality configuration. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34630.) The
26   phase-in softened that impact by guaranteeing that no locality would lose more than 4 percent per
27   year. (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34621.)
28   / / /

                                                                   60
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page71 of 172


 1           262.    By phasing in the decreased payments to those localities, HCFA also phased in the
 2   corresponding increases to other areas within those three states:
 3           “Since the proposed new payment area changes would be budget-neutral within a
             State, all areas within a State would be subject to the 2-year phase-in if the State
 4           contained an area whose payment level is estimated to decrease by more than 4
             percent. This means that areas estimated to receive increases in these States would
 5           receive only part of the increase in 1997 as transitional 1997 GPCIs would be
             calculated to maintain budget neutrality within the State.” (CY 1997 Proposed Rule,
 6           7/2/1996, 61 FR 34621.)
 7                   8.        Increased Level of Average Payment Error Resulting From the 1996
 8                             Locality Reconfiguration
 9           263.    In 1997 alone (the first year in which the 1996 restructured localities were used to
10   calculate payments to physicians), HCFA’s failure to employ a uniform method in restructuring the
11   locality configuration resulted in an increased Medicare payment error of over 25%. (CY 1997
12   Proposed Rule, 7/2/1996, 61 FR 34619-34620.)
13           264.     In the 1996 Proposed Rule, HCFA touted the effect of Option 1i in curing “average
14   county boundary payment differences” (the payment differences between adjoining counties such
15   as Santa Cruz and Santa Clara) which resulted from reducing the number of localities from 210 to
16   87:
17           “It decreases the number of payment areas by almost 60 percent, while at the same
             time reducing average county boundary payment differences, yet reduces average
18           county input price accuracy by only 0.42 percent.” (Proposed Rule, 7/2/1996, 61 FR
             34620.)
19
20           265.    The phrase “reduces average county input price accuracy by only 0.42 percent” is
21   misleading. In 1995 with 210 localities, the average county/FSA input price difference (i.e.,
22   “payment error”) was 1.67%. (HER Locality Report, Table 3-2.) Implementing Option 1i to create
23   87 localities, raised the payment error from 1.67% to 2.09%. While that is a numerical increase of
24   0.42 percentage points, in terms of a percentage increase, that is an increase in payment error of
25   25.15%.
26   / / /
27   / / /
28   / / /

                                                                   61
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page72 of 172


 1   VIII. UNSUCCESSFUL ATTEMPTS TO OBTAIN LOCALITY CHANGES BETWEEN
 2          2001 AND 2010
 3          A.        HCFA’s 1996 Assurance That It Would Make Future Locality Changes Based
 4                    on “Newer Data” Indicating “Dramatic Relative Cost Changes”
 5          266.      Although HCFA employed a new method for classifying payment localities in the
 6   CY 1997 Final Rule, it established no procedures for future locality changes.
 7          267.      In the CY 1997 Proposed Rule, HCFA had invited commenters who felt their
 8   particular area, which would become a part of a residual “rest-of-state” area under the Secretary’s
 9   proposal, to “submit data to show that their area costs exceed the costs of other areas in the residual
10   payment area by the 5-percent threshold.” (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34621.)
11          268.      However, in the CY 1997 Final Rule HCFA stated in response to commenters who
12   asked if HCFA planned to change localities on a periodic basis to recognize future cost change:
13          “While we do not plan to routinely revise payment areas as we implement new
            GPCIs, we will review the areas in multiple locality States if the newer GPCI data
14          indicates dramatic relative cost changes among areas.” (CY 1997 Final Rule,
            11/22/1996, 61 FR 59497.)
15
16          269.      Despite this assurance, despite the emergence of dramatic relative cost changes
17   among areas that exceeded the thresholds set by HCFA in 1996, and despite ten (10) years of
18   attempts to effectuate a change, the Agency has never modified the locality structure for Part B.
19          B.        Development of Payment Disparities Following the 1996 Locality Restructuring
20          270.      CMS made no changes to the payment locality structure following 1996, but did
21   make the statutorily required updates to the GPCIs in 1998, 2001, 2004-2005, 2008, and 2011.29
22
23          29
               Under 42 U.S.C. § 1395w-4(e)(1)(C), CMS is required to review and, if necessary, adjust
24   the GPCIs at least every 3 years. That section also requires CMS to phase in any adjustment over
     2 years and implement only one-half of any adjustment in the first year if more than 1 year has
25   elapsed since the last GPCI revision. (See CY 1998 Final Rule, 10/31/1997, 62 FR 59052.) The
     GPCIs were first implemented in 1992. The first review and revision was implemented in 1995, the
26   second review was implemented in 1998, and the third review was implemented in 2001. In 2004,
     because special tabulations of U.S. Census data were not yet available, the fourth review was not
27   completed on schedule and only the review and revision of the malpractice GPCI was implemented.
     Review and revision of the work and practice expense GPCIs were implemented in 2005 when the
28   data had become available. (See CY 2004 Proposed Rule, 8/15/2003, 68 FR 49039.) The fifth
     review was implemented in 2008, and the sixth review was just implemented in 2011.
                                                                    62
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page73 of 172


 1             271.     Beginning at least in 2001, data compiled during the process of updating the GPCIs
 2   has shown serious payment disparities and imbalances which have been increasing as the years have
 3   passed.
 4             272.     In addition to the other causes alleged, infra, a major reason for the increasing
 5   disparities stems from the simple fact that GPCIs tend to inflate more quickly in urban areas, thereby
 6   compounding the problem over time for high-cost urbanized counties in multi-county localities.
 7             273.     Nationwide there are over 200 counties that should have been reclassified as single-
 8   county localities since 2001, with resulting underpayments to those counties exceeding $3.19 billion
 9   since 2001. These underpayments are detailed in the table in the attached Exhibit 4 which shows
10   the underpayments by county and state for the period from 2001 to 2010 resulting from CMS’ failure
11   to reconfigure localities since 1996.
12             274.     Examples of payment imbalances that have arisen since the 1996 locality
13   restructuring include:
14                      (a) from 2001-2010, Collin County in Texas (a Dallas suburb) was the fastest
15             growing county in Texas, had the highest costs of any of Texas’ 254 counties but,
16             because it is still grouped in the “Rest of Texas – Locality 99,” its reimbursement
17             rate is less than nine lower-cost Texas counties that were in distinct fee schedule
18             areas;
19                      (b) in Virginia, London, Manassas City, Stafford, Prince William, and
20             Fauquier Counties (suburban Washington, D.C.) – which are in the “Virginia”
21             locality – have some of the highest underpayments by percentage in the country;
22                      (c) in California, San Diego County is grouped with 46 other (mostly rural)
23             counties in the “Rest of California – Locality 99” and has the second-highest total
24             underpayments of any county in the United States;
25                      (d) in Massachusetts, despite the special treatment it was afforded during the
26             1996 reconfiguration, two large suburban counties near Boston, Essex and Plymouth,
27             now have costs that are more than 5% above the average of the other counties in their
28             mostly rural locality;

                                                                     63
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page74 of 172


 1                    (e) in 1996, Marin County’s GAF exceeded the average GAFs of the other
 2          two counties in its locality, Napa and Solano, by the 5% iterative threshold and has
 3          consistently exceeded that threshold ever since; and
 4                    (f) in 2008-2010, Santa Cruz County hospitals were paid at the highest rate
 5          in the country under Medicare Part A, while suppliers in Santa Cruz were paid at the
 6          lowest rate in California under Medicare Part B, up to 20% less than suppliers in
 7          bordering Santa Clara and San Mateo Counties for providing identical services.
 8          C.        2001 – CMS Holds Initial Meetings with the CMA Regarding Payment
 9                    Disparities
10          275.      The 2001 GPCI updates showed that the 1996 locality reconfiguration was no longer
11   meeting the “major goal of . . . reducing payment differences among adjacent geographic areas.”
12   (See CY 1997 Final Rule, 11/22/1996, 61 FR 59393.) The failure to meet that goal was particularly
13   evident in California.
14          276.      As a result, beginning in 2001, CMS staff from both its central and regional offices
15   began meeting with the California Medical Association (“CMA”) to discuss payment disparities that
16   had emerged since the 1996 restructuring and possible ways to eliminate those disparities.
17          277.      Since 2001, the CMA has been actively engaged with CMS in efforts to understand
18   and rectify the locality problem.
19          D.        2003 – CMS Requests Comments on the Locality Issue
20          278.      In August 2003, CMS sought public comments in the Federal Register for the first
21   time since 1996 on the composition of the 89 payment localities. (CY 2004 Proposed Rule,
22   8/15/2003, 68 FR 49044.)
23          279.      In late 2003, CMS received “numerous comments” from practitioners, beneficiaries,
24   and medical associations requesting that their counties be removed from their current locality
25   assignment. In response to those comments, CMS stated that it would “continue to examine
26   alternatives for reconfiguring the current locality structure” and also stated that it expected “to
27   further consider this issue as part of future rulemaking.” (CY 2004 Final Rule, 11/7/2003, 68 FR
28   63214.)

                                                                    64
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page75 of 172


 1          E.        Events in 2004
 2                    1.        2004 – CMS Puts Increasing Focus on the Role of Statewide Medical
 3                              Associations in Locality Changes
 4          280.      In its CY 2005 Proposed Rule, CMS briefly stated that it had “considered
 5   alternatives” to the changes suggested by commenters in 2003 (without disclosing what those
 6   alternatives were), but concluded that it had “not yet been able to come up with a policy and criteria
 7   that would satisfactorily apply to all situations.” (CY 2005 Proposed Rule, 8/5/2004, 69 FR 47504.)
 8   CMS also indicated that it was continuing to look to statewide medical associations to be the
 9   impetus for adjusting payment localities within their respective states:
10                  “Locality changes are budget-neutral with respect to the aggregate amount
            of Medicare money in a State. That is, reconfigurations of localities within a State
11          do not result in any more Medicare money for the State in the aggregate, but only
            redistributions of money within a State. Since there will be both winners and losers
12          in any locality reconfiguration, the State medical associations should be the impetus
            behind these changes. Since 1996, we have moved to Statewide areas in several
13          States after receiving resolutions from State medical societies including support from
            physicians in losing areas, and after going through Notice and Comment rulemaking.
14          The support of State medical associations has been the basis for previous changes to
            Statewide areas, and continues to be equally important in our consideration of other
15          future locality changes.” (CY 2005 Proposed Rule, 8/5/2004, 69 FR 47504.)30
16          281.      This statement marks a new level of CMS’ deference to state medical associations
17   with respect to locality reconfigurations. In the early 1990’s, the Agency either sought the support
18   of physicians in “losing areas” in the creation of statewide localities or the support of state medical
19   associations for the creation of statewide localities. This statement indicates that CMS has delegated
20   the authority to state medical associations to initiate any locality change, not simply to support or
21   approve a proposed change to a statewide locality.
22          282.      In response to “numerous comments from physicians and individuals, including
23   members of Congress, living in and around Santa Cruz County, California,” CMS publicly
24
25
            30
26             A portion of the quoted section is not accurate. After 1995, no states were converted into
     single localities after CMS received resolutions of support from state medical societies. Prior to the
27   1996 restructuring, there were 22 single-locality states. The 1996 restructuring increased that
     number to 34 based on the implementation of the 5% iterative threshold calculation, not on
28   resolutions of support from state medical associations. (See CY 1997 Final Rule, 11/22/1996, 61
     FR 59494, 59715-59716.) There have been no conversions to statewide localities since then.
                                                                    65
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page76 of 172


 1   acknowledged that the 1996 payment locality designations were causing “payment disparities,” yet
 2   made no move to correct them, stating:
 3           “We also recognize the concerns expressed by the residents of Santa Cruz County
             about the impact of the current payment disparities upon physicians in their
 4           community. Our consistent position has been that we will be responsive to requests
             for locality changes when there is a demonstrated consensus within the State medical
 5           association for the change. Due to the redistributive impacts of these types of
             changes, we believe this approach helps ensure the appropriateness of any such
 6           change.” (CY 2005 Final Rule, 11/15/2004, 69 FR 66263.)31
 7           283.      However, despite its public recognition that the problem existed, CMS stated that it
 8   was “unable to establish a policy and criteria that would satisfactorily apply to all situations.” (CY
 9   2005 Final Rule, 11/15/2004, 69 FR 66263.)
10                     2.        2004 – The CMA Proposes a Modification to California’s Locality
11                               Structure
12           284.      In response to the CY 2005 Proposed Rule, the CMA submitted a “placeholder”
13   proposal. CMS incorrectly described the proposal as one that would:
14           “move any county [in California] with a county-specific geographic adjustment
             factor (GAF) that is 5 percent greater than its locality GAF to its own individual
15           county payment locality. Under [the CMA] proposal, any reductions in payments
             to maintain budget neutrality in light of the higher payments to physicians in the new
16           counties that are moved into the new independent county localities would be divided
             equally among all payment localities within the State of California.” (CY 2005 Final
17           Rule, 11/15/2004, 69 FR 66263; emphasis added.)
18           285.      In actuality, the CMA proposed a method in which a county GAF is compared not
19   to its locality GAF, but is compared to the weighted average GAFs of the counties remaining in a
20   locality after the high-cost county was removed, and making that county a single-county locality if
21   the difference is 5% or more.
22           286.      In other words, the CMA proposed that CMS use the 5% iterative threshold that CMS
23   had developed, approved, and used in the 1996 locality restructuring by reapplying that method to
24   the county level using current cost data.
25   / / /
26
27           31
                Once again, a portion of the quoted section is inaccurate. The Agency has had an
28   evolving position and not a “consistent position” on the role of state medical associations in the
     process of locality modification.
                                                                     66
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page77 of 172


 1          287.     Since 1997, California has been made up of nine payment localities. Orange County,
 2   Los Angeles County, Ventura County, Santa Clara County, San Mateo County, and San Francisco
 3   County are each single payment localities. Marin, Napa, and Solano Counties make up a single
 4   payment locality, as do Contra Costa and Alameda Counties. California’s 47 remaining counties
 5   are combined in a single payment locality, “Rest of California” or “Locality 99.”
 6          288.     Under the CMA proposal, ten counties would have been removed from the existing
 7   “Rest of California” payment locality and would have become ten new payment localities. In
 8   addition, payments to all other California localities would have been reduced over a two-year period
 9   in order to keep the “Rest of California” locality at 2004 payment levels. (See CY 2006 Final Rule,
10   11/21/2005, 70 FR 70151.)
11                   3.        2004 – CMS Rejects the CMA’s Proposal
12          289.     Although the CMA proposal was unanimously approved by its Board of Trustees,
13   CMS rejected it because it “determined that CMS does not have the authority under [42 U.S.C. §
14   1395w-4(e)] to reduce the GPCIs of some localities in a State to offset higher payments to other
15   localities.” (CY 2005 Final Rule, 11/15/2004, 69 FR 66263.)
16          290.     CMS’ professed lack of authority to modify GPCIs in conjunction with locality
17   changes is inconsistent with its own practices. In every locality change between 1991 and 2009,
18   CMS temporarily modified the GPCIs of some localities during a transition period. Those
19   modifications occurred:
20                   (a) in the 1991 creation of the Minnesota, Nebraska, and Oklahoma statewide
21          localities which had direct nationwide effect on GPCIs (CY 1992 Final Rule,
22          11/25/1991, 56 FR 59514; see also CY 1994 Proposed Rule, 7/14/1993, 58 FR
23          38002; see ¶¶ 159-166, supra);
24                   (b) in the 1991 merger of three “provider-specific” localities into the
25          geographic localities where they were located and the severance of the Virgin Islands
26          from a New York locality, each of which had direct nationwide effect on GPCIs (CY
27          1992 Proposed Rule, 6/5/1991, 56 FR 25833; CY 1992 Final Rule, 11/25/1991, 56
28          FR 59514; see ¶ 198, supra);

                                                                   67
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page78 of 172


 1                    (c) in the 1993 elimination of the “specialty-specific” locality in Washington
 2          which had direct nationwide effect on GPCIs (CY 1994 Final Rule, 12/2/1993, 58
 3          FR 63638; see ¶ 199, supra);
 4                    (d) in the 1993 creation of the North Carolina and Ohio statewide localities
 5          using statewide budget neutral GPCIs which had direct statewide and indirect
 6          nationwide effect on the GPCIs of all other localities in the country which were not
 7          calculated in the same manner (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002-
 8          38003; see ¶¶ 174-177, supra);
 9                    (e) in the 1995 creation of the Iowa statewide locality using statewide budget
10          neutral GPCIs which had direct statewide and indirect nationwide effect on the
11          GPCIs of all other localities in the country which were not calculated in the same
12          manner (CY 1995 Final Rule, 12/8/1994, 50 FR 63416; see ¶ 192, supra);
13                    (f) in the special treatment afforded Massachusetts, Missouri, and
14          Pennsylvania in 1996 when they were made multi-locality states in order to reduce
15          payment errors (see ¶¶ 233-244, supra);
16                    (g) in the 1996 nationwide locality restructuring using statewide budget
17          neutral GPCIs which had direct statewide and indirect nationwide effect on the
18          GPCIs of all localities in the country (CY 1997 Proposed Rule, 7/2/1996, 61 FR
19          34620; see ¶¶ 257-259, supra);
20                    (h) in the method HCFA used in phasing in payment changes over a two-year
21          period for the four localities it deemed were most seriously affected by the
22          implementation of the 1996 restructuring (see ¶¶ 260-262, supra)32; and
23                    (i) in the correction of the two Texas localities in 2009 where CMS reduced
24          the payments to Texas while splitting up the two-county localities that had been
25          mistakenly combined in the 1996 restructuring (see ¶¶ 381-384, infra).
26
            32
27             (a) Pennsylvania Area 01, Philadelphia/Pittsburgh Medical Schools; (b) Pennsylvania
     Area 02, Large Pennsylvania Cities; (c) Missouri Area 01, St Louis/Large Eastern Cities; and (d)
28   Massachusetts Area 01, Urban Massachusetts. (See CY 1996 Proposed Rule, 7/2/1996, 61 FR
     34630.)
                                                                    68
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page79 of 172


 1                     4.        2004 – CMS Reiterates Its Intent to Be Responsive to Proposals from
 2                               State Medical Associations for Locality Changes
 3           291.      Even while rejecting the CMA’s unanimously supported proposal, CMS reiterated
 4   that it intended to defer to state medical associations that requested locality changes.
 5           292.      CMS responded as follows to comments from Texas requesting that it regard all
 6   counties in a Metropolitan Statistical Area (“MSA”) as being in a single payment locality: “As
 7   noted above, we will be responsive to requests for locality changes when there is a demonstrated
 8   consensus within the State medical association for the change.” (CY 2005 Final Rule, 11/15/2004,
 9   69 FR 66263; emphasis added.)
10           F.        Events in 2005
11                     1.        2005 – CMS Rejects the CMA’s Proposed Demonstration Project for
12                               Locality Changes
13           293.      After the publication of the CY 2005 Final Rule, the CMA submitted a proposal for
14   a “demonstration project” under 42 U.S.C. § 1315 that was the same as its rejected “placeholder”
15   proposal. Like its 2004 “placeholder” proposal, the CMA’s demonstration project proposal used
16   the 5% iterative threshold method that HCFA developed, approved, and used in the 1996 locality
17   restructuring by reapplying that method to the county level using current cost data.
18           294.      In August 2005, CMS decided not to exercise its demonstration authority in part
19   because:
20           “physicians whose payments would decrease under the demonstration could
             challenge the validity of a new locality configuration established without providing
21           them the opportunity to comment through the regulatory process (as is CMS’ normal
             process for making locality changes) [sic]. In particular, physicians who are not
22           members of county medical societies or the CMA did not agree to participate in the
             proposed demonstration, and some of them may have challenged its
23           implementation.” (CY 2006 Proposed Rule, 8/8/2005, 70 FR 45783.)
24           295.      CMS’ stated rationale in refusing to allow the CMA to conduct its proposed
25   demonstration project is inconsistent with its previously stated and applied positions and contradicts
26   statutory and administrative policies that would clearly support such a project.
27   / / /
28   / / /

                                                                     69
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page80 of 172


 1           296.      In the CY 2006 Proposed Rule, CMS stated:
 2                   “We do recognize that changing demographics over time may lead to
             payment disparities in particular circumstances. We rely upon State medical
 3           societies to identify and resolve these disparities because there are redistributive
             impacts within a State where new localities are created (or existing ones
 4           reconfigured). Yet we also recognize that CMS is ultimately responsible for
             establishing fee schedule areas.” (CY 2006 Proposed Rule, 8/8/2005, 70 FR 45784.)
 5
 6           297.      Thus, CMS took two flatly contradictory positions in the same CY 2006 Proposed
 7   Rule. On one page of the Federal Register, CMS refused to implement a demonstration project
 8   because some physicians who are not part of CMA might object.33 Then on the very next page,
 9   CMS stated that it continues to “rely upon State medical societies to identify and resolve these
10   [payment] disparities.”
11           298.      CMS’ expressed concern about the inability of some physician to participate in the
12   notice and comment process simply makes no sense in a decision of whether or not to implement
13   a demonstration project. Under 42 U.S.C. § 1395b-1(1)(A), the Secretary has the authority:
14           “to develop and engage in experiments and demonstration projects ... to determine
             whether, and if so which, changes in methods of payment or reimbursement (other
15           than those dealt with in section 222(a) of the Social Security Amendments of 1972)
             for health care and services under health programs established by this chapter,
16           including a change to methods based on negotiated rates, would have the effect of
             increasing the efficiency and economy of health services under such programs
17           through the creation of additional incentives to these ends without adversely
             affecting the quality of such services ....”
18
19           299.      There are no requirements that a demonstration project be implemented after a period
20   of notice and comment. Demonstration projects are inherently experimental and temporary and are
21   used to determine whether changes might be beneficial and to develop evidence that would support
22   a permanent change that might be proposed after notice and with the opportunity for comment.
23   / / /
24
25           33
                This appears to be a reversal of a policy that CMS has employed since 1994 when it stated
26   that it would only consider locality changes on receipt of a request from a state medical society that
     “demonstrates overwhelming support among both winning and losing physicians.” (CY 1995 Final
27   Rule, 12/8/1994, 59 FR 63416.) However, as noted, CMS then reiterates its policy of reliance on
     state medical societies to initiate locality changes. In any case, CMS makes no mention that it gave
28   any consideration to the concerns of California beneficiaries or California suppliers other than
     physicians.
                                                                     70
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page81 of 172


 1                     2.        2005 – CMS Proposes Limited Locality Changes in California for 2006
 2                               a.         CMS Acknowledges the Existence of Payment Disparities in
 3                                          California
 4           300.      In the CY 2006 Proposed Rule, CMS stated that it does “recognize the potential
 5   impact of wide variations in the practice costs within a single payment locality.” (CY 2006
 6   Proposed Rule, 8/8/2005, 70 FR 45784.) CMS noted that it had received “many comments from
 7   physicians and individuals in Santa Cruz County expressing the opinion that Santa Cruz County
 8   should be removed from the Rest of California payment locality and placed in its own payment
 9   locality.” (CY 2006 Proposed Rule, 8/8/2005, 70 FR 45784.) CMS acknowledged:
10           “The county-specific GAF of Santa Cruz County is 10 percent higher than the Rest
             of California locality GAF. Santa Cruz County is adjacent to Santa Clara County
11           and San Mateo County. Santa Clara and San Mateo Counties have two of the highest
             GAFs in the nation. The published 2006 GAF for the Rest of California payment
12           locality is 24 percent less than the GAFs of Santa Clara and San Mateo.” (CY 2006
             Proposed Rule, 8/8/2005, 70 FR 45784.)
13
14           301.      With Sonoma County lying between Marin and Napa Counties, the
15   Marin/Napa/Solano payment locality is now the only locality in the nation made up of non-
16   contiguous counties.34 In the CY 2006 Proposed Rule, CMS stated:
17                  “Sonoma County is also part of the Rest of California payment locality. The
             county-specific GAF of Sonoma County is 8 percent higher than the Rest of
18           California locality GAF. Sonoma County is bordered by Marin County and Napa
             County. Using published 2006 values, the payment locality that includes Marin and
19           Napa counties has the fourth highest GAF in the nation and is 13 percent higher than
             the GAF of the Rest of California Payment locality.” (CY 2006 Proposed Rule,
20           8/8/2005, 70 FR 45784.)
21           302.      Thus, CMS publicly acknowledged in 2005 that physicians and other suppliers in
22   Santa Cruz County received 24% less in fees for performing the same services as physicians and
23   other suppliers in neighboring Santa Clara and San Mateo Counties. At the time, this was the
24   highest payment difference between adjacent counties in the country.
25   / / /
26
             34
27              Until January 1, 2009, there were two localities in Texas made up of non-contiguous
     counties. As more fully set forth in ¶¶ 381-384, infra, CMS realized in 2008 that the localities had
28   been mistakenly configured in that manner in 1996 and corrected the mistake by realigning the four
     counties involved.
                                                                     71
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page82 of 172


 1          303.     CMS has also publicly acknowledged that physicians and other suppliers in
 2   Sonoma County received 13% less in fees for performing the same services as physicians and
 3   other suppliers in Marin, Napa, and Solano Counties. These boundary differences are at the high
 4   end of levels that HCFA had deemed “severe” and “inappropriate” in the 1996 restructuring.
 5                             b.         CMS “Considers” Changing the Locality Designation for Only
 6                                        Two Counties in California
 7          304.     In the CY 2006 Proposed Rule, CMS also stated that it had considered “a number of
 8   alternative locality configurations” which included:
 9          •        Comparing county-specific GAFs to locality GAFs. If a county’s GAF is 5%
10                   higher than its locality’s GAF it would then be designated as a new locality.
11          •        Sorting counties by descending GAFs and comparing the highest county to
12                   the second highest county. If the difference is 5% or less, they are included
13                   in the same locality. If the difference is more than 5%, the highest county is
14                   designated as a new locality, and the second highest county is compared to
15                   the third highest county. The process is then repeated throughout all of the
16                   counties.
17          •        Comparing the county with the highest GAF to the statewide average,
18                   removing counties whose GAF is 5% more than the statewide average.
19          •        Using MSAs defined by the Office of Management and Budget. (CY 2006
20                   Proposed Rule, 8/8/2005, 70 FR 45784.)
21          305.     Because all four alternatives would have resulted in “significant redistributions across
22   most California counties,” CMS proposed that Santa Cruz and Sonoma Counties, which it identified
23   as “the two counties with the most significant disparity between the assigned Rest of California GAF
24   and the county-specific GAF,” be removed from the Rest of California locality and that each be
25   made its own payment locality. (CY 2006 Proposed Rule, 8/8/2005, 70 FR 45784.)
26          306.     In the CY 2006 Final Rule, CMS stated that it made this proposal because “the
27   approach would have the least impact on other counties.” (CY 2006 Final Rule, 11/21/2005, 70 FR
28   70151.)

                                                                   72
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page83 of 172


 1              307.    CMS concluded the “Payment Locality” section of the CY 2006 Proposed Rule by
 2   stating:
 3                      “The issue of payment locality designation in light of changing economic
                and population trends will be of importance to us for the foreseeable future. We
 4              are interested in other solutions to the problem, and will work with anyone who
                presents an idea or makes a suggestion that will help resolve the problems associated
 5              with the designation and revision of payment localities.” (CY 2006 Proposed Rule,
                8/8/2005, 70 FR 45784; emphasis added.)
 6
 7                                3.         2005 – CMS Withdraws Its Proposal for Limited Locality
 8                                           Changes in California
 9              308.    CMS received “numerous comments” in support of the CY 2006 Proposed Rule from
10   beneficiaries and health care providers in Santa Cruz and Sonoma Counties, including comments
11   from several members of Congress, among them Senator Barbara Boxer:
12              “These comments focused on the high costs of practicing in Santa Cruz and Sonoma
                Counties and were appreciative of the proposal. Most supporters referred to studies
13              that have shown the high costs of working in Santa Cruz and Sonoma Counties have
                resulted in physicians restricting their practices or withdrawing from practice
14              altogether. According to the commenters, this has made it more difficult for
                Medicare beneficiaries to find doctors in those counties. These commenters feel that
15              our proposed change will encourage physicians to continue to treat Medicare patients
                in Santa Cruz and Sonoma County practices.” (CY 2006 Final Rule, 11/21/2005,
16              70 FR 70152.)
17              309.    CMS also received a comment from Congressman Bill Thomas, then Chairman of
18   the House Ways and Means Committee. While Congressman Thomas expressed his opposition to
19   the proposed two-county fix, he also stated: “I agree with your assessment that changing economic
20   and population trends over time may lead to payment disparities. CMS has not addressed payment
21   locality configuration since 1996. It is time for a nationwide re-evaluation of how payment localities
22   are drawn.”
23              310.    Congressman Thomas concluded: “I recommend that CMS undertake an analysis of
24   possibilities for reconfiguring payment localities, similar to the analysis undertaken by Health
25   Economic Research, Inc., in the early 1990s, which formed the basis for the current localities. Based
26   on this new analysis, CMS should propose a method to reconfigure localities in its proposed
27   physician payment rule for 2008, and redraw localities, as appropriate, for payments effective in
28   January 2008. As part of this process, CMS should develop a procedure for periodically examining

                                                                      73
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page84 of 172


 1   the configuration of payment localities.” (Letter, Thomas, B., to McClellan, M., Comments on CY
 2   2006 Proposed Rule, 9/28/2005, p. 2.)
 3          311.      CMS also received comments opposing the proposal from “numerous providers and
 4   medical associations in the current Rest of California payment locality” and from “several members
 5   of Congress.” (CY 2006 Final Rule, 11/21/2005, 70 FR 70152.) Among the comments, “The CMA
 6   pointed to the fact, which is the result of the budget neutrality requirement for administrative actions
 7   to modify GPCIs, that the Rest of California locality would be negatively impacted.” The CMA also
 8   noted that the 2005 Proposed Rule did not address the other localities it identified in its
 9   demonstration proposal. (CY 2006 Final Rule, 11/21/2005, 70 FR 70152.)
10          312.      In response, CMS stated:
11                  “It is indicative of the difficult nature of this issue that many of the same
            commenters who expressed disappointment that our proposal did not address all of
12          the other counties that CMA identified in its demonstration proposal were also
            concerned that the proposal would simultaneously result in a reduction of the GPCIs
13          for the Rest of California payment locality. Under our current statutory authority,
            it is well known that changes to the payment localities must be implemented in a
14          budget neutral manner. Therefore, it is not possible to fully meet both objectives
            without legislation to provide additional funding for physician payments in
15          California.” (CY 2006 Final Rule, 11/21/2005, 70 FR 70152.)35
16          313.      Even though CMS stated that it “[did] not disagree with the view that a
17   comprehensive evaluation of the current payment localities is due,” it observed that “it is apparent
18   that this proposed change is not acceptable to the majority of commenters at this time.”36 (CY 2006
19   Final Rule, 11/21/2005, 70 FR 70152; emphasis added.) CMS concluded:
20          “Because of the nearly complete lack of support for this proposal outside the two
            positively impacted counties, we have decided to withdraw this proposal at this time.
21
22          35
                 There are no express provisions in the Medicare Act that require changes to payment
23   localities be made in a statewide budget neutral manner. (See ¶ 162, supra.) In the early 1990’s,
     the Agency chose to weight GPCIs by RVUs instead of population in creating new statewide
24   localities so that those changes would be budget neutral within the state. (See ¶¶ 167-168, supra.)
     The use of GPCIs weighted by RVUs (instead of by population) in modifying payment localities
25   mathematically results in a statewide budget neutral modification.
            36
26              The proposed change was acceptable to the majority of commenters. A review of the
     comments to the CY 2005 Proposed Rule shows: (a) CMS received 1448 total comments; (b) 1402
27   comments favored the proposal; (c) 41 comments opposed the proposal; and (d) 5 comments did not
     take a clear position. Of the 1402 comments in favor of the proposal, 468 were from Santa Cruz
28   County, 887 were from Sonoma County, and 47 were from unspecified or other counties. The 41
     comments against the proposal were from Monterey, San Diego, and other California counties.
                                                                    74
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page85 of 172


 1          As noted above, we intend to work with MedPAC and other interested parties toward
            a more comprehensive evaluation of potential refinements of the payment localities.”
 2          (CY 2006 Final Rule, 11/21/2005, 70 FR 70153.)
 3          314.      In the CY 2006 Final Rule, CMS once again cited the “redistributive impact” and the
 4   lack of support from a state medical association as justifications for not instituting locality
 5   modification:
 6          “Because the GPCIs for each locality are calculated using the average of the county-
            specific data from all of the counties in the locality, removing high cost counties
 7          from a locality will result in lower GPCIs for the remaining counties. Because of
            this redistributive impact, we have refrained, in the past, from making changes to
 8          payment localities unless the State medical association provides evidence that any
            proposed change has statewide support.” (CY 2006 Final Rule, 11/21/2005, 70 FR
 9          70151.)
10          G.        Events in 2006
11                    1.        2006 – The CMA Publishes a Comprehensive Study of Alternative
12                              Nationwide Locality Reconfigurations
13          315.      In January 2006, the CMA submitted a study of alternative nationwide locality
14   reconfigurations to CMS, MedPAC, and Congress (the “CMA Locality Report”). (Bentley, E., and
15   deGhetaldi, L.: A County-Based Model for Grouping Medicare Physician Payment Localities:
16   Analysis and Redesign of the Methodology Used by HCFA in 1996, California Medical Association,
17   January 2006.)
18          316.      The CMA Locality Report made six general recommendations: (1) increase the
19   number of Medicare physician payment localities to improve payment accuracy; (2) payment
20   accuracy should take precedence over administrative simplicity; (3) a payment locality plan should
21   be implemented prior to future GPCI updates under the current system; (4) payment locality reform
22   should avoid or minimize payment reductions and be transitioned over a period of time; (5) any
23   payment locality overhaul should establish an automatic mechanism for future updates; and (6)
24   create an independent objective physician payment locality review board to make future updates.
25   (CMA Locality Report, p. 5.)
26          317.      The CMA Locality Report examined eight options for future revision: (1) maintain
27   the status quo; (2) reapply the 5% iterative county-based method; (3) apply the iterative county-
28   based method using a 3.5% threshold; (4) use only single localities for each state; (5) have a single

                                                                    75
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page86 of 172


 1   national payment locality; (6) implement MSA-based payment localities; (7) implement MSA-based
 2   payment localities using the 5% iterative method; and (8) implement MSA-based payment localities
 3   using the 3.5% iterative method. (CMA Locality Report, p. 5.)
 4           318.     The CMA Locality Report was critical of the HER Locality Report and HCFA’s
 5   implementation of the 1996 locality reconfiguration, pointing out what it termed “flawed
 6   assumptions and errors”: (1) the reconfiguration was based on extant 30-year old payment localities;
 7   (2) individual county GAFs were not examined and only existing locality GAFs were taken into
 8   account; (3) administrative simplicity took precedence over payment accuracy; (4) the county-based
 9   methodology was not applied on a consistent basis; (5) an iterative MSA-based method was not
10   examined; and (6) no considerations were made for future payment locality revisions. (CMA
11   Locality Report, pp. 7-8.)
12           319.     Perhaps most significantly, the CMA Locality Study identified five key questions to
13   be addressed by CMS: (1) what should the threshold be for locality payment accuracy; (2) what
14   should the threshold be for differences in the county GAFs within payment localities; (3) how should
15   statewide localities be managed; (4) how should changes be implemented; and (5) how should the
16   MSA-derived data be applied to counties. (CMA Locality Report, pp. 17-18.)
17           320.     The CMA Locality Report detailed how “payment inaccuracies within localities have
18   increased over time as input price changes become more heterogeneous within many localities
19   absent changes to the geographic configuration of the 89 fee schedule areas.” It demonstrated that
20   changes in the practice expense GPCI within problematic localities is the most significant cause of
21   payment inaccuracies because it has “the most divergence over time.” (CMA Locality Report, p.
22   23.) It also detailed, state by state and county by county, the effect of each of the locality structures
23   it examined. (CMA Locality Report, pp. 24-80.)
24                    2.        2006 – CMS Invites Suggestions for Locality Reconfiguration
25           321.     In its CY 2007 Proposed Rule, CMS asked for “suggestions on alternative ways that
26   [it] could administratively reconfigure payment localities that could be developed and proposed in
27   future rulemaking.” (CY 2007 Proposed Rule, 8/22/2006, 71 FR 48994.)
28   / / /

                                                                    76
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page87 of 172


 1          322.      In its CY 2007 Final Rule, CMS again cited the “redistributive impact” as its reason
 2   for deferring to state medical associations to initiate proposals for locality reconfiguration:
 3                  “In the CY 2005 PFS proposed rule, we discussed issues relating to changes
            to the GPCI payment localities (69 FR 47504). In that proposed rule, we noted that
 4          we look for the support of a State medical society as the impetus for changes to
            existing payment localities. Because the GPCIs for each locality are calculated using
 5          the average of the county-specific data from all of the counties in the locality,
            removing high cost counties from a locality will result in lower GPCIs for the
 6          remaining counties. Therefore, because of this redistributive impact, we have
            refrained, in the past, from making changes to payment localities unless the State
 7          medical association provides evidence that any proposed change has statewide
            support. 37
 8
                   “We requested suggestions on alternative ways that we could administratively
 9          reconfigure payment localities that could be developed and proposed in future
            rulemaking. In addition, MEDPAC and the General Accounting Office (GAO) have
10          both expressed interest in studying the physician payment localities. We intend to
            work with both groups to study our current methodology and develop alternative
11          options.” (CY 2007 Final Rule, 12/1/2006, 71 FR 69655.)
12          323.      No proposals or timetables for proposals or studies were included in the CY 2007
13   Proposed or Final Rules.
14          H.        Events in 2007
15                    1.        2007 – The GAO Publishes a Report on the Locality Structure Under
16                              Part B
17                              a.         The GAO Finds There Are “Large Payment Differences” in 447
18                                         Counties
19          324.      The June 29, 2007, the GAO submitted a report to the House Committee on Ways
20   and Means on the locality structure under Part B. The GAO Locality Report reviewed the
21   development of the current locality structure, and concluded that “[t]he current 89 physician
22   payment localities are primarily consolidations of the payment localities that Medicare carriers first
23   defined in 1966. CMS has since revised them over two different time periods using three
24   approaches that were not uniformly applied.” (GAO Locality Report, pp. 12-17.)
25
26          37
                Once again, it should be emphasized that since removing high cost counties from a
27   specific locality will only affect the future payments to the counties that were in that specific
     locality, CMS’ deference to state medical associations – which represent physicians in all counties
28   within the state, including counties that will not be financially affected by the locality modification
     – has no rational basis.
                                                                    77
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page88 of 172


 1           325.      The GAO also analyzed payment differences within the physician payment localities,
 2   finding that in 47 of 87 localities there was at least one county with a “large payment difference”
 3   (a payment difference of 5% or more between the county-specific GAF and the locality GAF for
 4   locality of which the county was a part). The GAO found there were a total of 447 counties with
 5   “large payment differences,” a disproportionate number of which were located in five states –
 6   California, Georgia, Minnesota, Ohio, and Virginia.38 (GAO Locality Report, pp. 18-22.)
 7                               b.         The Five Alternative Locality Structures Considered by the GAO
 8           326.      The GAO Locality Report included a study of five alternative locality structures:
 9                     (1) a “county-based iterative” approach using RVU weighted county-based GAFs in
10           a manner identical to the method employed by HCFA in its 1996 locality restructuring;
11                     (2) a “county-based GAF ranges” approach in which localities were constructed with
12           groups of counties whose GAFs were within a range of 5% of each other;
13                     (3) an “MSA-based iterative” approach in which MSAs instead of counties were used
14           as the basic unit in the application of the 5% iterative method;
15                     (4) a “statewide” approach in which all states have one statewide locality; and
16                     (5) a “county-based unique GAF” approach in which each group of counties within
17           a state with a unique GAF is a distinct payment locality. (GAO Locality Report, pp. 23-39.)
18           327.      The GAO Locality Report explained that the “statewide” and “county-based unique
19   GAF” approaches were presented:
20           “because they illustrate the tradeoffs between payment accuracy and administrative
             burden. Under the statewide approach, each state has one statewide payment
21           locality. This approach minimizes administrative burden, but maximizes large
             payment differences. In contrast, under the county-based unique GAF approach,
22           each group of counties within a state is a distinct payment locality. This approach
             minimizes large payment differences, but maximizes administrative burden.” (GAO
23           Locality Report, p. 25.)
24   / / /
25   / / /
26   / / /
27
             38
28             Minnesota and Ohio are statewide localities. With the exception of certain counties and
     independent cities surrounding Washington, D.C., Virginia is also a statewide locality.
                                                                     78
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page89 of 172


 1                             c.         The GAO Locality Report’s Conclusions
 2          328.     The GAO found that compared to the current localities:
 3                   (a) four of the five alternative approaches it studied would improve payment
 4          accuracy, while only the statewide approach decreased payment accuracy;
 5                   (b) four of the five approaches would “substantially reduce or eliminate relative
 6          underpayments to physicians”;
 7                   (c) the three county-based approaches would reduce the percentage of payments to
 8          physicians who were overpaid by 5% or more, while the statewide and MSA-based
 9          approaches would “substantially increase overpayments”;
10                   (d) four of the five approaches “would substantially reduce the number of statewide
11          payment localities”;
12                   (e) four of the five approaches “would generally impose a minimal amount of
13          administrative burden on CMS, Medicare carriers, and physicians”; and
14                   (f) the number of localities generated by the county-based and MSA-based iterative
15          approaches “could be reduced with very little loss in payment accuracy by regrouping
16          single-county and single-MSA payment localities with similar GAFs, respectively, into
17          larger payment localities.” (GAO Locality Report, pp. 25-39.)
18          329.     The GAO’s conclusion that localities could be reconfigured without imposing a
19   substantial amount of additional administrative burden was based on responses from CMS officials,
20   carrier representatives, and physicians in affected counties:
21                   “CMS officials we spoke with stated they would experience onetime upfront
            costs if the current payment localities were modified, regardless of the number of
22          localities generated by the approach chosen. Specifically, CMS creates a distinct
            physician fee schedule for each payment locality and would have to perform data
23          reliability checks on the localities’ physician fee schedules to ensure their accuracy.
            Agency officials stated that they would have to reprogram CMS systems, update its
24          files that assign carriers and physicians to a payment locality, and provide physicians
            with extensive education on the payment locality modifications. However, CMS
25          officials stated that they did not anticipate that significant modifications to payment
            localities would require a substantial amount of additional ongoing administrative
26          burden.
27                 “In addition, CMS officials stated that any change to the payment localities
            would cause Medicare carriers to incur upfront costs. Representatives from the five
28          Medicare carriers that we spoke with each stated that a moderate increase in the

                                                                   79
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page90 of 172


 1          number of payment localities would not require a substantial amount of additional
            resources. They each indicated that modifying the payment localities would cause
 2          onetime transitional costs. Specifically, they would be required to create new data
            files that assigned each physician to a new payment locality. Carrier representatives
 3          also indicated that an increase in the number of payment localities would increase
            their ongoing operational costs. Specifically, the carriers must load each of the
 4          distinct physician fee schedules CMS sends them into their data systems and then
            perform data reliability checks on them to ensure they are accurate.
 5
                    “Physicians would not incur additional administrative burden if their payment
 6          locality changed. In addition, physicians in California we spoke with stated that if
            the current localities were modified, they would not experience an increase in
 7          administrative burden and would complete the same paperwork as they do currently.
            CMS officials we spoke with agreed that physicians’ paperwork requirements would
 8          remain the same. In addition, representatives from the Medicare carriers we spoke
            with stated that they do not anticipate having to provide physicians with significant
 9          additional training about payment locality modifications, since most carriers already
            routinely send each physician a complete fee schedule specific to their payment
10          locality.” (GAO Locality Report, pp. 37-38.)
11          330.     Ultimately, the GAO recommended: “the Administrator of CMS [should] examine
12   and revise the physician payment localities using an approach that is uniformly applied to all states
13   and based on the most current data. Second, the Administrator should examine and, if necessary,
14   update the physician payment localities on a periodic basis with no more than 10 years between
15   updates.” (GAO Locality Report, p. 40.)
16                   2.        2007 – CMS’ Response to the Draft GAO Locality Report
17          331.     The GAO Locality Report contains a lengthy response from CMS which includes the
18   following acknowledgments: (a) that there are variations in practice costs within payment locality
19   boundaries; (b) that CMS has known about these variations for a “number of years”; (c) that CMS
20   continues to delegate authority to state medical associations to initiate any locality reconfiguration;
21   and (d) that CMS has not changed the locality structure since the mid-1990’s:
22                  “Currently there are 89 Medicare physician payment localities to which
            geographic practice cost indices (GPCIs) are applied. The structure of the payment
23          localities has been in place since 1998 [sic]. Over time, changing demographics and
            local economic conditions may have led to variations in practice costs within
24          payment locality boundaries. The Centers for Medicare and Medicaid Services
            (CMS) is concerned about the potential impact of these variations and has been
25          studying this issue and potential alternatives for a number of years. However,
            because changes to the GPCIs must be applied in a budget neutral manner (and under
26          the current locality system, budget neutrality results in aggregate payments within
            each State remaining the same), there are significant redistributive effects to any
27          change. Therefore, because of this redistributive impact, we have looked for support
            from an impacted state, such as from a State medical association, before proposing
28          to make changes to payment localities in a state.” (GAO Locality Report, p. 74.)

                                                                   80
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page91 of 172


 1          332.      The draft GAO report identified 447 counties as having “payment differences”
 2   between their costs and their Medicare payment rates of over 5% as “inaccurate.” In its response
 3   to the draft GAO report, CMS objected to the use of the term “inaccurate.” In its final report, the
 4   GAO noted:
 5          “CMS raised concerns about our use of the word ‘inaccurate’ in the draft report to
            describe counties with a payment difference of 5 percent or more between
 6          physicians’ costs and Medicare’s geographic adjustment. The agency stated that our
            characterization of payments as inaccurate could be construed to mean that there has
 7          been an overpayment for which recoupment of the overpayment, as well as other
            actions, should be pursued. As a result, we have deleted the term and instead define
 8          counties with a payment difference of 5 percent or more as having a ‘large payment
            difference.’” (GAO Locality Report, p. 6; emphasis added.) 39
 9
10          333.      The GAO Locality Report contains the GAO’s evaluation of CMS’ other comments
11   on the draft report. (GAO Locality Report, pp. 41-43.)
12                    3.        2007 – CMS Proposes Alternative Plans for Locality Restructuring in
13                              California
14          334.      In its CY 2008 Proposed Rule, CMS described “three possible locality
15   reconfigurations [for California], each of which strikes a different balance between intralocality
16   variations and redistributive impacts.” CMS stated that “[b]ecause of the importance of striking an
17   appropriate balance with any such locality revisions, we want to proceed cautiously and evaluate
18   the impacts in California before considering applying the policy more broadly in the future.” CMS
19   also sought comments about other potential approaches to locality revisions and about using a
20   transition to phase-in changes in a new locality structure blending new and revised payments.” (CY
21   2008 Proposed Rule, 7/12/2007, 72 FR 38140.)
22          •         “Option 1”: Using the existing locality structure, “apply a rule whereby if a county
23                    GAF is more than 5 percent greater that GAF for the locality in which the county
24                    resides it would be removed from the current locality,” with a separate locality being
25
26          39
               CMS’ sensitivity to the use of the term “inaccurate” is inconsistent with the agency’s past
27   views on what constitutes payment accuracy. Recall that in 1996, HCFA had deemed: (a) a
     payment error of 3.16% to be “unacceptable”; (b) an underpayment of 6.3% to be “substantial”; (c)
28   a GAF that is off by 7.5% to be “inaccurate”; and (d) an overpayment of 3.4% to be “substantial.”
     (See ¶¶ 227-256, supra.)
                                                                    81
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page92 of 172


 1                    established for each county that is removed. Using the new fully phased-in GPCI
 2                    data for CY 2009, application of this approach in California would remove three
 3                    counties (Santa Cruz, Monterey, and Sonoma) from the Rest of California payment
 4                    locality and Marin county from the Marin/Napa/Solano payment locality and create
 5                    separate payment localities for each of these counties. (CY 2008 Proposed Rule,
 6                    7/12/2007, 72 FR 38140.)40
 7          •         “Option 2”: Use a methodology similar to Option 1, but structure the new localities
 8                    differently. Instead of creating four new localities, CMS proposed to combine Santa
 9                    Cruz, Monterey, and Sonoma into a single three-county locality, while Marin County
10                    would still become its own single-county locality. (CY 2008 Proposed Rule,
11                    7/12/2007, 72 FR 38140.)
12          •         “Option 3”: Sort counties by descending GAFs and compare the highest county to
13                    the second highest. If the difference is less than 5 percent, the counties were included
14                    in the same locality. The third highest is then compared to the highest county GAF.
15                    This iterative process continues until a county has a GAF difference that is more than
16                    5 percent. When this occurs, that county becomes the highest county in a new
17                    payment locality and the process is repeated for all counties in the State. (CY 2008
18                    Proposed Rule, 7/12/2007, 72 FR 38140.)41
19                    4.        2007 – MedPAC Proposes Reconfiguration of the Locality Structure
20          335.      In its March 2007 Medicare Payment Policy Report to Congress, MedPAC
21   recommended that “Congress should update payments for physician services in 2008 by the
22
23          40
                As noted in ¶¶ 284-286, supra, CMS had incorrectly identified this variant of the 5%
24   iterative method employed in the 1996 locality restructuring as one that had been recommended by
     the CMA. In fact, the CMA had never recommended this option. CMS’ approach compares a
25   county GAF to a locality GAF. The 5% iterative method used in the CMA Locality Report,
     recommended by the CMA in 2004, and used by HCFA in the 1996 locality restructuring compared
26   a county GAF to the weighted average GAFs of the counties remaining in a locality after the high-
     cost county was removed.
27          41
                It is unclear whether CMS used RVU weighted GAFs in the data it evaluated for these
28   three options. The iterative methodology employed by HCFA in 1996 and in the GAO Locality
     Report used RVU weighted GAFs. (See GAO Locality Report, p. 24, Notes.)
                                                                    82
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page93 of 172


 1   projected change in input prices less the Commission’s expectation for productivity growth.”
 2   (MedPAC, “Report to Congress: Medicare Payment Policy,” March 2007, p. xiii.) The 2007
 3   Medicare Payment Policy Report does not contain any recommendations at all regarding locality
 4   restructuring.
 5          336.      In his testimony on March 6, 2007, before the Subcommittee on Health of the House
 6   Energy and Commerce Committee, Glenn Hackbarth, Chairman of MedPAC, reported at p. 12 that
 7   because of divisions among MedPAC’s 17 members it was unable to reach a consensus
 8   recommendation on how to begin to control physician costs.
 9          337.      When he was asked by Representative Lois Capps (D-Santa Barbara) why MedPAC
10   had not considered the payment disparities that had arisen due to CMS’ failure to address locality
11   restructuring, Mr. Hackbarth said that MedPAC has acknowledged in the past that there is a
12   problem, but opined that on a national level it is “relatively isolated.”42
13          338.      However, on August 30, 2007, MedPAC submitted a response to CMS’ CY 2008
14   Proposed Rule in which MedPAC acknowledged that the problem was not “relatively isolated.” On
15   page 4 of that response, MedPAC reached the following conclusions:
16                  “Some organizations that represent physicians have raised an issue that the
            structure of the payment localities often causes payments under the PFS to
17          inaccurately reflect the local costs of providing care. This can cause physicians in
            some areas to be systematically underpaid while others are overpaid, creating
18          payment equity issues. The underlying factor for the payment inaccuracies is that
            many localities encompass geographic areas with very different costs of providing
19          care. This appears to occur for two reasons: many localities are too large to
            accurately track geographic differences in costs of care and many are based on
20          geographic entities established in 1966 and have not been adjusted to reflect
            changes in economic and demographic conditions. [Emphasis added.]” (Hackbarth,
21          G.M., to Kuhn, H.B., MedPAC Comments on CY 2008 Proposed Rule, 8/30/2007,
            p. 4.)
22
23          339.      MedPAC did not offer extensive comments on the three California-only fixes detailed
24   in the 2008 Proposed Rule. Instead, MedPAC described its own consideration of two national
25   locality reconfigurations and the relative changes each would bring.
26
            42
27               But see, e.g., MedPAC, Report to the Congress: Issues in a Modernized Medicare
     Program, June 2005, p. 204. The GAO Locality Report found that there were 447 counties, or over
28   14% of the counties in the United States, with “large payment differences.” (GAO Locality Report,
     pp. 18-22.)
                                                                    83
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page94 of 172


 1          340.      The first option MedPAC considered was the reapplication of the 5% iterative
 2   county-based method employed by HCFA in the 1996 locality reconfiguration. The second option
 3   MedPAC considered was a 5% iterative method using MSAs instead of counties as the basic
 4   geographic unit. (Hackbarth, G.M., to Kuhn, H.B., MedPAC Comments on CY 2008 Proposed
 5   Rule, 8/30/2007, pp. 6-7.)43
 6          341.      MedPAC noted that CMS’ Option 1 was not the same as the 5% iterative used in
 7   1996 because CMS’ 2007 proposal compared the GAF of the highest-cost county to the GAF of all
 8   counties in the locality. MedPAC expressed a preference for the use of the 1996 iterative method
 9   because of the “strong influence” high-cost counties have on the average GAF. (Hackbarth, G.M.,
10   to Kuhn, H.B., MedPAC Comments on CY 2008 Proposed Rule, 8/30/2007, pp. 6-7.) MedPAC’s
11   position is consistent with the reasons expressed by HCFA in 1996 for rejecting the use of a
12   methodology similar to that laid out in CMS’ 2007 Option 1:
13          “First, some mid-sized metropolitan areas in large States such as California and
            Texas do not remain distinct FSAs despite their considerably higher input prices than
14          in the rural and small city areas of their States with which they would be combined
            into a single residual area. Second, some large metropolitan areas in small States,
15          such as Baltimore, Maryland, do not remain distinct FSAs. This is because the State
            GAF to which all locality GAFs are compared contains the high cost area GAFs.
16          This makes it difficult for the mid-sized areas in large States to exceed the State
            GAF, even though their own GAFs may substantially exceed the GAF of all other
17          localities in the residual area to which they would be assigned under Option 1. In
            large States with a wide range of GAFs, the mid-sized cities and metropolitan areas
18          tend to be combined with the residual rest-of-State area. Their GAFs are sharply
            reduced, lessening the accuracy of input price tracking and creating large boundary
19          differences in GAFs between large and mid-sized cities and at rural State boundaries
            that are not reflective of true input price differences.” (CY 1997 Proposed Rule,
20          7/2/1996, 61 FR 34618.)
21          342.      MedPAC found that although both the county-based and MSA-based 5% iterative
22   method options increased the number of payment areas, both options increased payment accuracy.
23   MedPAC also found: (a) boundary differences increased using the county-based method; (b)
24   boundary differences decreased using the MSA-based method; (c) the average GAF change using
25   the county-based method was 1%; and (d) the average GAF change using the MSA-based method
26
27          43
               The GAO used a similar methodology to develop the “county-based iterative” and “MSA-
28   based iterative” options it described in its recent report. (See GAO Locality Report, p. 24.) It is
     unclear whether MedPAC used RVU weighted GAFs in its methodology.
                                                                    84
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page95 of 172


 1   was 1.6%. (Hackbarth, G.M., to Kuhn, H.B., MedPAC Comments on CY 2008 Proposed Rule,
 2   8/30/2007, pp. 6-7.)
 3           343.     MedPAC concluded that if CMS chose to undertake a national reconfiguration of the
 4   locality structure, “it may be prudent to determine which statewide localities would like to maintain
 5   that status and exclude them from reconfiguration.” (Hackbarth, G.M., to Kuhn, H.B., MedPAC
 6   Comments on CY 2008 Proposed Rule, 8/30/2007, p. 8.)
 7                    5.        2007 – CMS’ Proposals for Locality Reconfiguration in California Had
 8                              Serious Flaws
 9                              a.         Inaccurate Percentage Change Figures
10           344.     One major problem with the locality changes proposed by CMS in the CY 2008
11   Proposed Rule was the inaccuracy of the various figures showing percentage changes resulting from
12   the implementation of the proposed options shown in the various tables published in the Federal
13   Register.
14           345.     Attached hereto as Exhibit 5 is a true and correct copy of the County Plaintiffs’ July
15   17, 2007, comments on the CY 2008 Proposed Rule. As shown in the attached Exhibit 5, there are
16   numerous errors in the percentage change figures shown on Tables 7 through 9 of the CY 2008
17   Proposed Rule. (See CY 2008 Proposed Rule, 7/12/2007, 72 FR 38140-38142.) All but one of the
18   percent change figures on Tables 7 and 8 are off by less than one percent and such differences may
19   admittedly be due to rounding of data in the tables. (Exhibit 5, p. 197.) However, the difference
20   between the percent change shown for Rest of California in Table 8 (-0.049%) and the actual percent
21   change (-0.49%) cannot be so explained. (Exhibit 5, p. 198.) Similarly, the errors in the percent
22   differences in Table 9 of the CY 2008 Proposed Rule range from -11.9% to +10.23%, and
23   differences of such magnitude cannot be explained by rounding. (Exhibit 5, p. 199.) The source of
24   these errors is not apparent and may result from data errors, data entry errors, or formulaic errors.
25           346.     CMS did not respond to the County Plaintiffs’ comment.
26   / / /
27   / / /
28   / / /

                                                                    85
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page96 of 172


 1                             b.         Inconsistent Values for County GAFs
 2          347.     A second major problem with the locality changes proposed by CMS in the CY 2008
 3   Proposed Rule was the inconsistency of the values for county GAFs shown in the various tables
 4   published in the Federal Register.
 5          348.     As shown in the County Plaintiffs’ comments to the CY 2008 Proposed Rule, the
 6   2009 County GAFs for six counties (Santa Cruz, Monterey, Sonoma, Marin, Solano, and Napa) were
 7   not consistently shown on Tables 7 through 8 of the CY 2008 Proposed Rule. (See Exhibit 5, pp.
 8   188 and 200; see also CY 2008 Proposed Rule, 7/12/2007, 72 FR 38140-38141.)
 9          349.     CMS did not respond to the County Plaintiffs’ comment.
10                             c.         Conflict Between County GAF Values in the CY 2008 Proposed
11                                        Rule and the GAO Locality Report
12          350.     A third major problem with the locality changes proposed by CMS in the CY 2008
13   Proposed Rule was the inconsistency in the value of the GAF for San Benito County as shown in
14   the Proposed Rule and in the GAO Locality Report.
15          351.     There is a significant difference between the value for the county GAF for San Benito
16   County shown in Table 9 of the CY 2008 Proposed Rule (GAF = 0.971) and the value shown for
17   San Benito County in the GAO Locality Report (GAF = 1.081). (Compare CY 2008 Proposed Rule,
18   7/12/2007, 72 FR 38142, with the GAO Locality Report, p. 54.)
19          352.     The County Plaintiffs pointed out this issue in their comments on the 2008 Proposed
20   Rule. (See Exhibit 5, p. 190.)
21          353.     CMS responded to the County Plaintiffs’ comment in the CY 2008 Final Rule:
22          “Comment: We received several comments expressing the concern that San Benito
            County in California was placed in the wrong payment locality.
23
            “Response: In 2003, the U.S. Census Bureau moved San Benito County from the
24          Rest of State Census category and placed it in the San Jose MSA. Our data and
            methodology do not accommodate mid-decennial changes in Census data, and
25          therefore, our 2008 update reflects that San Benito County remains in the Rest of
            California payment locality.” (CY 2008 Final Rule, 11/27/2007, 72 FR 66244.)
26
27          354.     Thus, CMS knowingly used 8-year old values to calculate the 2008-2010 payments
28   for San Benito County that were over 10% below what they should have been, and CMS’ only

                                                                   86
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page97 of 172


 1   (rather feeble) rationale was that its “data and methodology do not accommodate mid-decennial
 2   changes in Census data.”
 3          355.     This is a violation of 42 U.S.C. § 1395w-4(e)(1)(D) which provides: “In establishing
 4   indices and index values under this paragraph, the Secretary shall use the most recent data available
 5   relating to practice expenses, malpractice expenses, and physician work effort in different fee
 6   schedule areas.”
 7                             d.         Conflicts Between Table 9 and Option 3 Description
 8          356.     A fourth major problem with the locality changes proposed by CMS in the CY 2008
 9   Proposed Rule is the discrepancy between the textual description of Option 3 and the locality
10   configuration in Table 9 showing the implementation of Option 3. This discrepancy results from
11   the failure to correctly employ the methodology as described.
12          357.     The methodology for Option 3 is described as follows:
13          “[W]e sorted the counties by descending GAFs and compared the highest county to
            the second highest. If the difference is less than 5 percent, the counties were
14          included in the same locality. The third highest is then compared to the highest
            county GAF. This iterative process continues until a county has a GAF difference
15          that is more than 5 percent. When this occurs, that county becomes the highest
            county in a new payment locality and the process is repeated for all counties in the
16          State.” (CY 2008 Proposed Rule, 7/12/2007, 72 FR 38141.)
17          358.     In contrast, the groupings of the six proposed localities shown in Table 9 of the CY
18   2008 Proposed Rule appear to have been defined at times by an absolute differential of 0.05 and at
19   times by a relative 5% differential. (CY 2008 Proposed Rule, 7/12/2007, 72 FR 38141-38142.)
20          359.     If a relative 5% differential is uniformly employed as described in the text of the
21   Proposed Rule, only five localities would result, not six as shown in the table. The County
22   Plaintiffs’ comment on the CY 2008 Proposed Rule shows the five localities that would be created
23   by the use of a relative 5% differential. (Exhibit 5, pp. 190-191 and 201.)
24          360.     CMS did not respond to this comment in the CY 2008 Final Rule.
25                   6.        2007 – CMS Decides Not to Implement Any of Its Proposed Changes to
26                             California’s Locality Structure
27          361.     In the CY 2008 Final Rule, CMS included a number of comments and responses, two
28   of which are particularly relevant:

                                                                   87
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page98 of 172


 1          “Comment: Comments regarding changes in the payment localities in California
            were universally accompanied with a belief that we should implement these changes,
 2          without decreasing payments to any counties.44
 3          “Response: We understand the desire to avoid the negative impact implementing
            any of these options might have on certain areas. However, the statute requires that
 4          geographic adjustments be established based upon an index of costs that is tied to
            national averages. As a result, when the average increases in one locality because of
 5          the addition of a higher cost county, the average in the locality that previously
            contained the higher cost county will necessarily decrease. Any changes in localities
 6          will necessarily produce changes in the underlying GPCIs, and we have no authority
            to assign or retain GPCIs that do not represent the actual values for a locality.
 7
            “Comment: Many commenters suggested that we consider a national solution to
 8          payment locality structure problem, not focus on a single state.
 9          “Response: Our proposals attempted to address locality issues in an area of the
            country where the incongruity of certain GAFs within localities is particularly
10          evident. In addition, these issues have been brought to our attention regularly over
            the past several years, and the California Medical Association has demonstrated its
11          desire and willingness to work with us to develop ideas for resolving them. We
            viewed these proposals relating only to California as a starting point and, as we
12          indicated in the proposed rule, we would consider applying any changes to additional
            States in the future.” (CY 2008 Final Rule, 11/27/2007, 72 FR 66247-66248.)
13
14          362.      In the CY 2008 Final Rule, CMS once again cited “redistributive impacts” as
15   justification for delays in implementing locality reconfiguration:
16          “Over time, changing demographics and local economic conditions may lead to
            increased variations in practice costs within payment locality boundaries. We are
17          concerned about the potential impact of these variations and have been studying this
            issue and potential alternatives for a number of years. However, because changes to
18          the GPCIs must be applied in a budget neutral manner (and under the current locality
            system, budget neutrality results in aggregate payments within each State remaining
19          the same), there are significant redistributive effects to any change. Therefore, we
            are also concerned about the potential impact of locality revisions.” (CY 2008 Final
20          Rule, 11/27/2007, 72 FR 66245-66246.)45
21
            44
22              The assertion that the comments on the CY 2008 Proposed Rule were “universally
     accompanied” by such a “belief” is an inexcusable misstatement. Nothing in Exhibit 5 expresses
23   such a belief.
            45
24              On July 2, 2007, the American Medical Association’s newspaper published an article that
     included portions of an interview with Thomas A. Scully, the administrator of CMS from May 2001
25   to December 2003: “Former CMS Administrator Thomas A. Scully said there’s no easy answer [to
     locality configuration], especially when any change has to be budget neutral. ‘You have a finite pot
26   of money, and if you raise one county, you hurt another.’ said Scully, a partner at the New York
     city-based investment firm, Welsh, Carson, Anderson & Stowe. He acknowledged that some data
27   were old and said CMS has pushed for more current practice cost surveys. ‘A lot of doctors’
     concerns are legitimate. But it’s a formula fight,’ Scully said. ‘Sometimes you have to make
28   arbitrary calls based on the best data you have.’ [Emphasis added.]” (Sorrel, A.L., 7/2/2007,
     “Urbanizing Counties Sue to Win Physicians Better Medicare Pay,” AMNews.)
                                                                    88
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
      Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page99 of 172


 1           363.      In the CY 2008 Final Rule, CMS also reiterated its preference to defer to the desires
 2   of state medical associations in modifying locality boundaries:
 3           “Historically, to help us find the best balance in a particular state, we have looked
             to State medical societies to work with us to provide leadership and support on
 4           preferred approaches to locality reconfiguration in that particular State.” (CY 2008
             Final Rule, 11/27/2007, 72 FR 66248.)
 5
 6           364.      Ultimately, CMS decided not to implement any of the options it had proposed:
 7           “The comments we received from California physicians, including the California
             Medical Association’s indication that it does not support any of the options, and
 8           interested parties from other States have convinced us that this issue requires further
             study and analysis. Therefore, we will not be finalizing any of the three proposed
 9           options in this rule. Commenters have suggested some other methodologies that we
             find worthy of further exploration, including the use of Metropolitan Statistical Areas
10           (MSAs).      We do not necessarily believe that the county is the appropriate
             geographic unit on which we should be focusing for locality revisions. Commenters
11           also made strong arguments for why any locality reconfiguration should be done on
             a nationwide basis and not just one State at a time. Therefore, we intend to conduct
12           a thorough analysis of approaches to reconfiguring localities and will address this
             issue again in future rulemaking.” (CY 2008 Final Rule, 11/27/2007, 72 FR 66248.)
13
14           I.        Events in 2008
15                     1.        2008 – RTI and the Urban Institute Publish a Report on Alternative
16                               Locality Structures
17           365.      In March 2008, RTI International and the UI issued a report entitled “Payment Areas
18   for Medicare Physician Services: Selected Alternatives” (the “RTI/UI Locality Report”). The
19   authors of the report made it clear that the analysis for the report was “initial and exploratory” and
20   that they were not making “recommendations about whether revisions in the current payment
21   localities are desirable, and if revisions were to be made, which revised locality options are
22   preferred.” (RTI/UI Locality Report, p. 1.)
23           366.      Working with CMS staff, the authors “agreed to examine selected locality/GAF
24   options derived from four variants: (1) using MSA-based localities; (2) using CMS hospital wage
25   index data instead of Census wage data in the practice expense GPCI [footnote omitted]; (3)
26   grouping similar-cost counties within [a] state into localities; and (4) modifying the existing payment
27   localities incrementally.” (RTI/UI Locality Report, p. 1.)
28   / / /

                                                                     89
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page100 of 172


 1          367.     For the MSA-based locality option, the RTI/UI Locality Report found: “Large
 2   metropolitan areas gain the most from MSA-based versus current localities, while the GAF declines
 3   in small metropolitan areas with MSA-based localities. Both the “adjacent” and the “not-adjacent”
 4   non-metropolitan areas have MSA-based GAFs that are about 3.8 percent lower than the current
 5   locality-based GAFs. Urban areas, especially large urban areas, gain when current statewide
 6   localities are broken up into higher-cost MSAs and lower-cost state nonmetropolitan areas.
 7   Conversely, nonmetropolitan areas lose in this process.” (RTI/UI Locality Report, p. 2.)
 8          368.     For the option using CMS hospital wage data instead of Census wage data, the
 9   RTI/UI Locality Report found: “Among metropolitan areas, large metropolitan areas lose from the
10   imputed GAF, but medium and small metropolitan areas gain. Both ‘adjacent’ and ‘not-adjacent’
11   non-metropolitan areas gain from the imputed GAF. These results indicate that using relative
12   hospital wages in the practice expense GPCI instead of Census wages would tend to benefit smaller
13   metropolitan areas and rural areas.” (RTI/UI Locality Report, p. 2.)
14          369.     For the option that grouped counties with similar practice costs within a state, the
15   RTI/UI Locality Report found:
16          “Nationally, the use of this method resulted in 134 localities, as compared to the 89
            existing localities. The number of statewide localities is reduced from 36 to 7.
17          California has the most localities with six, followed by five each in New York and
            Virginia. This method can create multiple localities, and hence differences in
18          payment, within MSAs, especially those that cross state lines. The configuration of
            some of this method’s localities might not be desirable for other reasons. For
19          instance, the Washington, DC locality does not include the Maryland and Virginia
            counties that are part of the current localities. The results of the method could be
20          modified to limit changes in current localities or to accommodate other exceptions.”
            (RTI/UI Locality Report, pp. 2-3.)
21
22          370.     For the option in which current localities were incrementally modified, RTI/UI
23   employed two methods. The first was the addition of counties to existing localities with multi-
24   locality states. The use of this method added 49 counties to existing localities in multi-locality
25   states. The second was the creation of sub-state localities in states that are currently statewide
26   localities. Applying this method to the current 36 statewide localities, 17 would remain as statewide
27   localities which the other 19 states would be disaggregated into 54 payment localities. (RTI/UI
28   Locality Report, pp. 3-4.)

                                                                   90
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page101 of 172


 1                   2.        2008 – CMS Reviews Four Methods of Reconfiguring Localities on a
 2                             National Basis
 3           371.    In the CY 2009 Proposed Rule, CMS described four methods of reconfiguring
 4   localities that it was “currently reviewing”:
 5                   (1) using the Office of Management and Budget (“OMB”) MSA designation for
 6           locality configuration, consistent with the inpatient hospital prospective payment system
 7           (“IPPS”) and other payment systems such as ESRD facilities, SNFs, ASCs, and home health
 8           agencies (“HHA”);
 9                   (2) dividing states employing the 5% iterative county-based method using current
10           county GAFs as MedPAC had suggested in its comments on the CY 2008 Proposed Rule
11           (see ¶¶ 338-343, supra);
12                   (3) dividing states into localities using a 5% iterative MSA-based method as
13           MedPAC had also suggested in its comments to the CY 2008 Proposed Rule (see ¶¶ 340 &
14           342, supra); and
15                   (4) grouping counties within a state into locality tiers “based on similar GAFs” with
16           differences less than 5%. (CY 2009 Proposed Rule, 7/7/2008, 73 FR 38514.)
17           372.    The CY 2009 Proposed Rule did not give detailed analyses of any of the options, nor
18   did it propose to make any changes to the locality structure. Instead, CMS sought comments on the
19   four options it presented as well as on the “interim report of our locality study” conducted by
20   Acumen, LLC, that was to be published after publication of the CY 2009 Proposed Rule. CMS also
21   sought comments “on the administrative and operational issues associated with the various options
22   under consideration.” (CY 2009 Proposed Rule, 7/7/2008, 73 FR 38514.)
23           373.    CMS stated, “When we are ready to propose any changes to the locality
24   configuration, we will provide extensive opportunities for public comment (for example, town hall
25   meetings or open door forums) on specific proposals before implementing any change.” (CY 2009
26   Proposed Rule, 7/7/2008, 73 FR 38514-38515.)
27   / / /
28   / / /

                                                                   91
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page102 of 172


 1                    3.       2008 – Acumen Publishes a Study on Seven Possible Locality
 2                             Reconfiguration Methods
 3          374.      The Acumen Locality Report was published shortly after the CY 2009 Proposed
 4   Rule, and reviewed the same four scenarios described by CMS in the CY 2009 Proposed Rule.
 5   Acumen also analyzed three of the four scenarios “with the implementation of a smoothing
 6   methodology suggested by MedPAC, essentially leading to seven alternative locality configurations
 7   in total. Smoothing is designed to limit the maximum difference in GAFs between any two adjacent
 8   counties to ten percent.” (Acumen Locality Report, pp. 2-3.)
 9          375.      The Acumen Locality Report generally found that the “alternatives have different
10   distributional effects on individual counties.” (Acumen Locality Report, p. iii.) Specifically, the
11   Acumen Locality Report found:
12                    (1) “GAF decreases are far more common than GAF increases”;
13                    (2) “All of the scenarios result in disproportionately lower GAFs for non-MSA
14          counties, although the effect is lowest for the Separate Counties and Separate MSAs
15          options”;
16                    (3) “The CMS CBSA and Statewide Tiers options would result in a change of greater
17          than one percent for the vast majority of counties”;
18                    (4) “Options based on defined areas (such as CMS CBSA) are more stable over time
19          than alternatives defined based on GAFs”;
20                    (5) “Options based on MSAs are more likely to have data available to match these
21          areas”;
22                    (6) “The Separate Counties and Separate MSAs variants are the most complicated
23          to calculate”;
24                    (7) “The CMS CBSA option is best aligned to other Medicare Locality definitions”;
25                    (8) “Smoothing does not significantly alter the overall relative effects of the
26          scenarios, although the application of smoothing impacts notably more counties in the MSA-
27          based scenarios than the others”;
28                    (9) “All alternative scenarios increase the number of localities”;

                                                                   92
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page103 of 172


 1                   (10) “The CBSA Option creates the widest range of GAFs; only the Separate MSAs
 2          option creates a narrower range of GAFs than the existing localities”;
 3                   (11) “Under all of the alternative scenarios, a majority of counties will have lower
 4          GAFs, although the changes are smallest under the ‘Separate’ options”; and
 5                   (12) “All of the alternatives disproportionately lower GAFs for non-MSA counties,
 6          although the effect is lowest in the ‘Separate’ Options.” (Acumen Locality Report, pp. iii,
 7          viii, and 81-85.)
 8          376.     Acumen found that at most 92 counties of a total of 3,228 would be affected by
 9   “smoothing” in any scenario, and that in those counties “large cliffs between adjacent counties
10   would be reduced.” (Acumen Locality Report, pp. 86-87.)
11          377.     Neither CMS nor Acumen appears to have realized that “smoothing” is not a realistic
12   option under the current statutory scheme. CMS is required under 42 U.S.C. § 1395w-4(e)(1)(A)
13   to calculate the practice expense, work, and malpractice expense GPCIs of each fee schedule area
14   by determining the costs “in the different fee schedule areas compared to the national average of
15   such costs.” Employment of a “smoothing” methodology is inconsistent with that statutory mandate
16   as it results in an artificially adjusted amalgam of the GPCIs and GAFs within and between
17   neighboring fee schedule areas which no longer reflect the actual costs in either. CMS has simply
18   not been granted the authority to make such permanent adjustments under the current statutory
19   framework.
20                   4.        2008 – CMS Announces Further Study of Locality Reconfiguration
21          378.     In its CY 2009 Final Rule, CMS once again used “redistributive impacts” and the
22   need for support from state medical associations as reasons for delaying locality reconfiguration:
23          “Although there have been no changes to the locality structure since 1997, we have
            proposed changes in recent years, although we did not finalize them. As we have
24          frequently noted, any changes to the locality configuration must be made in a budget
            neutral manner. Therefore, changes in localities can lead to significant
25          redistributions in payments. For many years, we have not considered making
            changes to localities without the support of a State Medical Association, which we
26          believed would demonstrate consensus for the change among the professionals who
            would be affected. However, we recognize that over time changes in demographics
27          or local economic conditions may lead us to conduct a more comprehensive
            examination of existing payment localities, and consideration of potential
28          alternatives.” (CY 2009 Final Rule, 11/19/2008, 73 FR 69741.)

                                                                   93
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page104 of 172


 1          379.      In the CY 2009 Final Rule, CMS did not summarize the comments it had received
 2   on the options outlined in the CY 2009 Proposed Rule or on the Acumen Locality Report. Instead,
 3   CMS stated that it would “summarize all comments received in future rulemaking.” (CY 2009 Final
 4   Rule, 11/19/2008, 73 FR 69741.)
 5          380.      CMS noted that it was “currently reviewing several alternative approaches for
 6   reconfiguring payment localities on a nationwide basis” and that its “study of possible alternative
 7   payment locality configurations is in the early stages of development.” (CY 2009 Final Rule,
 8   11/19/2008, 73 FR 69741.)
 9          J.        Events in 2009
10                    1.        2009 – CMS Corrects Houston and Austin Counties’ Locality
11                              Assignments
12          381.      In the 1997 locality reconfiguration, CMS mistakenly combined Houston County and
13   Harris County (where the city of Houston is located) into the “Houston Metro” locality, and also
14   mistakenly combined Austin County and Travis County (where the city of Austin is located) into
15   the “Austin Metro” locality. Based on their relative costs, both Houston County and Austin County
16   should have been included in the rural “Rest of Texas” locality.
17          382.      This mistake was brought to the attention of CMS in early 2006 in a report by the
18   California Medical Association. (See CMA Locality Report, p. 21.) However, it was not until
19   January 1, 2009, that CMS “discovered” the mistake and issued a ruling correcting it:
20                   “In the CY 1997 PFS proposed rule, as part of the revised payment locality
            structure that reduced the number of localities from 210 to 89, we proposed to move
21          Austin County, Texas from the South East Rural Texas locality (locality 03) to the
            Rest of Texas locality (locality 99). In that same rule, we proposed to move Houston
22          County, Texas from the North East Rural Texas locality (locality 02) to the Rest of
            Texas locality (locality 99). These proposed locality configuration changes were
23          adopted as final in the CY 1997 PFS final rule with comment period. In the CY 1998
            final rule with comment period, we included a listing of the counties included in each
24          of the PFS localities in Addendum G. Per Addendum G, the Austin Metro locality
            (locality 31) includes only Travis County; Austin County is not included in the
25          Austin Metro locality. Likewise, the Houston Metro locality includes only Harris
            County; Houston County is not included in the Houston Metro locality. Since neither
26          Austin County nor Houston County is included in the Austin Metro or Houston
            Metro locality (or in any other specific locality description in Addendum G), both
27          Austin County and Houston County fall within the “all other counties” that are
            included in the Rest of Texas locality. However, we recently discovered that since
28          1997, Austin County and Houston County in Texas have been grouped with the

                                                                    94
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page105 of 172


 1          Austin Metro and Houston Metro localities, respectively, instead of the Rest of Texas
            locality as we specified in our final rules. (We note that neither Austin County nor
 2          Houston County is contiguous to the Austin Metro or Houston Metro locality).
            Consequently, physicians, practitioners, and other suppliers furnishing services paid
 3          under the PFS in Austin County and Houston County have been paid for those
            services using the geographic practice cost indexes (GPCIs) for the Austin Metro and
 4          Houston Metro localities, respectively, instead of those for the Rest of Texas
            locality.” (“Phase-In of Correction to Payment Locality Assignment for Austin
 5          County and Houston County, Texas,” CMS-1423-R (January 1, 2009) at pp. 2-4, a
            true and correct copy of which is attached as Exhibit 6.)46
 6
 7          383.      While correcting the mistaken configuration of the localities for the four Texas
 8   counties, CMS:
 9                    (A) decreased the payments to Houston County and Austin County by phasing-in the
10          reductions over three quarters in 2009;
11                    (B) did not seek the return of overpayments it had made to those counties over the
12          previous twelve years;
13                    (C) did not propose to compensate the suppliers in Harris County or Travis County
14          for the underpayments of the previous twelve years;
15                    (D) did not propose to adjust the 2009 or the 2010 payment levels for Harris County
16          or Travis County to reflect the fact that their costs would no longer be averaged with those
17          of Houston County or Austin County; and
18                    (E) did not propose to compensate the Medicare beneficiaries in Houston County or
19          Austin County for their overpayments of the previous twelve years. (See Ex. 6.)
20          384.      In short, the locality changes CMS made in Texas in 2009 were not budget neutral
21   within the state because they reflected a net decrease of payments within the state. In making the
22   changes, CMS did not follow the rule making process, and did not first seek approval from the state
23   medical association with consent of “winners and losers.”
24
25          46
                The error in combining the four Texas counties was also alleged in the County Plaintiffs’
26   original complaint in this matter at ¶¶ 234-244. On January 28, 2009, the County Plaintiffs
     submitted a FOIA request to CMS to produce copies of documents that CMS had reviewed that let
27   to the “recent discovery” of the error. On November 18, 2010, CMS responded to the request with
     a letter inquiring whether the County Plaintiffs were still interested in receiving a response. On
28   November 23, 2010, the County Plaintiffs responded indicating their continued interest in getting
     a response. To date, none has been forthcoming.
                                                                    95
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page106 of 172


 1                   2.        2009 – CMS Announces Further Study of Locality Reconfiguration
 2          385.     In the CY 2010 Proposed Rule, CMS once again used “redistributive impacts” and
 3   the need for support from state medical associations as reasons for delaying locality reconfiguration.
 4   (CY 2010 Proposed Rule, 7/13/2009, 74 FR 33533.) In addition, CMS once again summarized the
 5   four options first studied in the RTI/UI Locality Report and first discussed by CMS in the CY 2008
 6   Proposed Rule. (CY 2010 Proposed Rule, 7/13/2009, 74 FR 33533-33534.)
 7          386.     CMS also summarized the comments it had received to date regarding future locality
 8   reconfiguration, observing that the comments showed “general support for change.” Some
 9   commenters recommended a “cautious approach” to reconfiguration. Others suggested a set of
10   “guiding principles” for reconfiguration which would include: (1) improving payment accuracy; (2)
11   move toward MSA-based localities; (3) minimize reductions to rural areas; and (4) promote
12   administrative simplification by aligning physician and hospital localities. CMS received comments
13   on the four options it had proposed in 2008, as well as other alternative options such as a “market-
14   based” approach instead of the current “cost-based” methodology. The comments summarized by
15   CMS on the “smoothing” adjustment were negative. CMS also summarized comments on
16   redistribution of payment, methodology, suggested additional topics for review, administrative and
17   operational issues, and underlying data. (CY 2010 Proposed Rule, 7/13/2009, 74 FR 33534-33537.)
18          387.     CMS again indicated that it was not proposing any locality changes “at this time,”
19   stating: “We intend to review the suggestions made by the commenters and consider the impact of
20   each of the potential alternative locality configurations. We will also explore whether alternative
21   underlying data sources are available nationwide. A final report will be posted to the CMS Web site
22   after further review of the studied alternative locality approaches.” (CY 2010 Proposed Rule,
23   7/13/2009, 74 FR 33537.)
24          388.     In the CY 2010 Final Rule, CMS again cited the possibility that locality
25   reconfiguration “can lead to significant redistributions in payments” and the need for “support” from
26   state medical associations as justifications for further delay:
27          “As we have frequently noted, any changes to the locality configuration must be
            made in a budget neutral manner within a State and can lead to significant
28          redistributions in payments. For many years, we have not considered making

                                                                   96
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page107 of 172


 1          changes to localities without the support of a State medical association in order to
            demonstrate consensus for the change among the professionals whose payments
 2          would be affected (with some increasing and some decreasing). However, we have
            recognized that, over time, changes in demographics or local economic conditions
 3          may lead us to conduct a more comprehensive examination of existing payment
            localities.” (CY 2010 Final Rule, 11/25/2009, 74 FR 61756.)
 4
 5          389.      The CY 2010 Final Rule once again summarized the comments CMS had received
 6   on the three California-only options for reconfiguration first proposed in 2007 and the four national
 7   options for reconfiguration first proposed in 2008. (CY 2010 Final Rule, 11/25/2009, 74 FR 61756-
 8   61758.)
 9          390.      In the CY 2010 Final Rule, CMS concluded that it agreed “a nationwide locality
10   reconfiguration requires a cautious approach” and repeated that it was not proposing any locality
11   changes “at this time.” (CY 2010 Final Rule, 11/25/2009, 74 FR 61758.)
12          K.        Events in 2010
13                    1.        2010 – CMS Invokes Its Three-Part Mantra as Justification for Delaying
14                              Locality Reconfiguration
15          391.      In 2010, CMS again invoked the same three-part mantra it had used since 2004 to
16   justify the delay in implementing locality reconfiguration: (1) the need for “support of a State
17   medical association”; (2) the fact that “winners and losers” or a “significant redistribution” would
18   result; and (3) the need for further study.
19          392.      In the CY 2011 Proposed Rule and the CY 2011 Final Rule, CMS again cited the
20   possibility that locality reconfiguration “can lead to significant redistributions in payments,” the
21   need for “support” from state medical associations, and the need for a “more comprehensive
22   examination” as justifications for further delay:
23          “As we have previously noted in the CYs 2008 and 2009 proposed rules (72 FR
            38139 and 73 FR 38513), any changes to the locality configuration must be made in
24          a budget neutral manner within a State and can lead to significant redistributions in
            payments. For many years, we have not considered making changes to localities
25          without the support of a State medical association in order to demonstrate consensus
            for the change among the professionals whose payments would be affected (with
26          some increasing and some decreasing). However, we have recognized that, over
            time, changes in demographics or local economic conditions may lead us to conduct
27          a more comprehensive examination of existing payment localities.” (CY 2011
            Proposed Rule, 7/13/2010, 75 FR 40086-40087; CY 2011 Final Rule, 11/29/2010,
28          75 FR 73261.)

                                                                    97
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page108 of 172


 1                       2.        2010 – CMS Proposes a Major Modification to the Calculation of the
 2                                 Practice Expense GPCI
 3             393.      In the Affordable Care Act of 2010 (“ACA”), the Secretary was required to “analyze
 4   current methods of establishing practice expense adjustment ... and evaluate data that fairly and
 5   reliably establishes distinctions in the cost of operating a medical practice in different fee schedule
 6   areas.”       The Secretary was also required to make any appropriate adjustments to the practice
 7   expense GPCI no later than January 1, 2012. (CY 2011 Proposed Rule, 7/13/2010, 75 FR 40084.)
 8             394.      Four months after the Affordable Care Act was signed, CMS issued the CY 2011
 9   Proposed Rule, which sets out an extensive revision to the data and method used to calculate the
10   practice expense GPCI. The revision was proposed with a commendable goal in mind – increasing
11   the level of precision – but suffered from very serious deficiencies.
12             395.      In the CY 2011 Proposed Rule, CMS proposed to:
13             •         revise “the weight for the office rent component ... from 12.209 percent to 8.410
14                       percent to reflect our more detailed breakout of the types of office expenses that are
15                       determined in local markets instead of national markets” including categories it
16                       called “All Other Services” and “All Other Professional Expenses”;
17             •         modify the office expenses category so that only the rent component would be
18                       adjusted for local area cost differences beginning in CY 2011; and
19             •         “disaggregate the broader office expenses component into 9 new cost categories as
20                       part of the proposed CY 2011 ME rebasing,” namely, “utilities, chemicals, paper,
21                       rubber and plastics, telephone, postage, moveable capital, and other miscellaneous
22                       expenses cost component of the PE GPCIs.” (CY 2011 Proposed Rule, 7/13/2010,
23                       75 FR 40084.)
24             396.      CMS stated: “We are proposing to introduce these new, more detailed weights for
25   the 2006-based index based on our intent to derive an increase level of precision which maintaining
26   appropriate levels of aggregation in the market basket.” (CY 2011 Proposed Rule, 7/13/2010, 75
27   FR 40090.)
28   / / /

                                                                       98
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page109 of 172


 1          397.      The proposed expense categories in the index, along with their respective weights,
 2   were “primarily derived from data collected in the 2006 AMA Physician Practice Information
 3   Survey (PPIS) for self-employed physicians and selected self-employed non-Medical Doctor (non-
 4   MD) specialties” including optometrists, oral surgeons, podiatrists, and chiropractors.47 (CY 2011
 5   Proposed Rule, 7/13/2010, 75 FR 40088.)
 6          398.      In the proposed CY 2011 MEI rebasing, the portion of the physician fee schedule that
 7   is not adjusted for local area cost differences was to increase by over 55% from 12.807% to
 8   19.876%. Attached hereto as Exhibit 7 is a copy of the County Plaintiffs’ comments on the CY 2011
 9   Proposed Rule which also includes a series of tables detailing issues with various aspects of the CY
10   2011 Proposed Rule. (See Exhibit 7, pp. 213-235.)
11          399.      CMS’ conclusion that the “All Other Services” and the “All Other Professional
12   Expenses” categories have a national market was clearly erroneous. (See CY 2011 Proposed Rule,
13   7/13/2010, 75 FR 40084 and 40091.) As shown in Exhibit 7, OMB labor data allegedly relied upon
14   by CMS in reaching that conclusion actually showed that each and every one of the wage groups
15   that CMS included in the “All Other Services” and “All Other Professional Expenses” had massive
16   differences between local markets ranging from 114% to 745%. (See Exhibit 7, pp. 231-235.)
17          400.      The modification to the Practice Expense GPCI detailed in the CY 2011 Proposed
18   Rule would have resulted in an annual redistribution of payments totaling approximately $5.3 billion
19   from localities with peGPCI’s greater than 1 to localities with peGPCI’s less than 1. In other words,
20   it would have meant a massive redistribution of payments from more urban localities to more rural
21   localities.48 This is in stark contrast to the much smaller $320 million annual redistributive effect
22   of modifying the locality structure by reapplying the 5% iterative method. The following table
23   shows the proposed increase in the portion of the physician fee schedule that is not adjusted for local
24
25          47
                CMS pointed out that these “non-MD” specialties were included because they are
26   “consistent with the definition of ‘physician’ in [42 U.S.C. § 1395x(r)].” (CY 2011 Proposed Rule,
     7/13/2010, 75 FR 40088.)
27          48
               The CY 2011 Proposed Rule did not quantify the redistributive effect this shift would have
28   had on payments to suppliers, and did not discuss the adverse effect this shift would have had on
     beneficiaries in those rural counties where payment rates would rise.
                                                                    99
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page110 of 172


 1   cost differences, and the resulting redistributive effect of the changes to the MEI weights proposed
 2   in the CY 2011 Proposed Rule:
 3                                              Table 6.
                             Redistributive Impact of Changes to the peGPCI
 4                              Described in the CY 2011 Proposed Rule
                       From Localities with peGPCI > 1 to Localities with peGPCI < 1
 5
 6                                                           2010 (Est.)*            2011 (Est.)*          Effect (Est.)*

 7           Part B Total Physician Fee                      $65.5 Billion          $67.0 Billion              4.275%
             Schedule Payments
 8
             % of peGPCI Tied to National                       12.807%                19.876%                 7.069%
 9           Market

10           Part B peGPCI Payments Tied                      $8.4 Billion          $13.7 Billion           $5.3 Billion
             to National Market
11
            *In 2009, Part B Total Physician Fee Schedule Payments were $62.5 Billion. The 2010-2011 estimated
            payments are based on the average annual payment increase of 4.87% from 2002-2009. Accounting for the
12
            elimination of the 1.00 wGPCI floor that was set to expire on 12/31/2010, the net redistributive effect from
            urban to rural areas that would have resulted from the implementation of the changes described in the CY 2011
13
            Proposed Rule would have been approximately $3 Billion.49
14
15          401.      Despite the huge difference in redistributive effect, in proposing the modification
16   CMS expressed no estimate of the redistributive effect, expressed no concern for any resulting
17   “winners and losers,” and certainly did not proceed “with caution” in making the proposal, having
18   only undertaken four months of study at most, and having undertaken no consultation with suppliers,
19   supplier groups, independent contractors, advisory boards, or other governmental agencies.50
20                    3.        2010 – CMS Withdraws Its Proposed Change to the Calculation of the
21                              Practice Expense GPCI
22          402.      As more fully set forth in ¶ 399, supra, the proposed changes to the calculation of the
23   practice expense GPCI contained in the CY 2011 Proposed Rule were based on the mistaken
24
            49
25             On December 15, 2010, President Obama signed into law the Medicare and Medicaid
     Extenders Act of 2010 (“MMEA”). Section 103 of the MMEA extended the 1.0 wGPCI floor
26   through December 31, 2011.
            50
27             Recall that the Affordable Care Act required the Secretary to analyze the methods and
     data used to establish the practice expense GPCI, and gave the Secretary until January 1, 2012 to
28   “make appropriate adjustments.” (See ¶ 393, supra; CY 2011 Proposed Rule, 7/13/2010, 75 FR
     40084.)
                                                                   100
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page111 of 172


 1   assumption that certain wage-related components of the practice expense GPCI had a national
 2   market and did not vary by location.
 3             403.    In the CY 2011 Final Rule, CMS acknowledged comments it had received to that
 4   effect:
 5             “Several commenters suggested that portions of the ‘all other services’ component
               of the office expenses cost category, (which includes maintenance services, storage,
 6             security and janitorial services, office equipment, information technology systems,
               and medical record systems) and the stand-alone ‘other professional services’ cost
 7             category (which includes accounting services, legal services, office management
               services, continuing education, professional association memberships, journals, and
 8             professional care expenses) are wage-related and, therefore, should be adjusted for
               locality cost differences.” (CY 2011 Final Rule, 11/29/2010, 75 FR 73258.)
 9
10             404.    In response to those comments, CMS withdrew the proposed change to the
11   calculation of the practice expense GPCI and promised further study:
12             “Although we typically update the GPCI cost share weights concurrently with the
               most recent MEI revision and rebasing, the commenters raised many points
13             regarding the reallocation of labor-related costs from the medical equipment and
               supplies and miscellaneous component to the employee compensation component of
14             the PE GPCI. After consideration of the public comments we received on this issue,
               we will continue to use the current GPCI cost share weights for CY 2011.” (CY
15             2011 Final Rule, 11/29/2010, 75 FR 73258.)
16                     4.        2010 – CMS Promises Further Study of the Locality Issue
17             405.    The CY 2011 Proposed Rule and the CY 2011 Final Rule contain a brief summary
18   of the four national options for locality reconfiguration it had first proposed in 2008. (CY 2011
19   Proposed Rule, 7/13/2010, 75 FR 40087; CY 2011 Final Rule, 11/29/2010, 75 FR 73261-73262.)
20   Most significantly, CMS noted that a number of public commenters had:
21             “expressed support for Option 3 (separate MSAs from Statewide localities) because
               the commenters believed this alternative would improve payment accuracy over the
22             current locality configuration and could mitigate possible payment reductions to rural
               areas as compared to Option 1 (CMS CBSAs). Therefore, Acumen is conducting a
23             more in-depth analysis of the dollar impacts that would result from the application
               of Option 3.” (CY 2011 Proposed Rule, 7/13/2010, 75 FR 40087; CY 2011 Final
24             Rule, 11/29/2010, 75 FR 73262.)
25             406.    In the 2011 Final Rule, CMS noted that it had received a number of comments on the
26   locality issue, but would not consider them:
27             “We note that the discussion of PFS payment localities and our preliminary study of
               alternative payment locality configurations in the CY 2011 PFS proposed rule was
28             intended for informational purposes only. We did not make any proposals regarding

                                                                    101
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page112 of 172


 1          the PFS locality configurations for CY 2011 and, therefore, public comments on the
            PFS locality configurations are not within scope of the CY 2011 PFS proposed rule.
 2          We thank the commenters for sharing their views and suggestions; however, we are
            not summarizing or responding to ‘out of scope’ comments in this final rule with
 3          comment period.” (CY 2011 Final Rule, 11/29/2010, 75 FR 73262.)
 4          407.      As it had been promising for several years, CMS again promised to conduct further
 5   study of the locality issue:
 6          “For the past several years, we have been involved in discussions with physician
            groups and their representatives about recent shifts in relative demographics and
 7          economic conditions, most notably within the current California payment locality
            structure. We explained in the CY 2008 PFS final rule with comment period that we
 8          intended to conduct a thorough analysis of potential approaches to reconfiguring
            localities and would address this issue again in future rulemaking.” (CY 2011
 9          Proposed Rule, 7/13/2010, 75 FR 40087; CY 2011 Final Rule, 11/29/2010, 75 FR
            73261.)51
10
11   IX.    CAUSES OF “LARGE PAYMENT DIFFERENCES” UNDER MEDICARE PART B
12          AND EFFECTS ON SUPPLIERS AND BENEFICIARIES
13          A.        Three Major Causes of Supplier Underpayments
14                    1.        Failure to Apply Consistent Methodology
15          408.      One of the three major causes underlying the massive underpayments of over $3
16   billion to suppliers in the affected counties is that HCFA failed to apply a consistent methodology
17   in revising the localities in 1996.
18          409.      After replacing the “reasonable cost” payment system with the GPCI/GAF physician
19   fee schedule, HCFA undertook to revise the locality structure that had been in use since 1966. A
20   major goal of the revision was “to establish a consistent set of criteria for the Medicare FSAs that
21   are applied uniformly nationwide.” (HER Locality Report, Vol. I, p. E-3.) Another goal of the 1996
22   revision was to create a “uniform, county-based fee schedule system that can be introduced
23   nationwide.” (HER Locality Report, Vol. I, p. 5-1.)
24
            51
                As noted in the CY 2011 Final Rule, the Institute of Medicine is conducting two studies
25   that will “evaluate the accuracy of the geographic adjustment factors used for Medicare physician
     payment.” The first study, which is scheduled for completion in the spring of 2011, “will include
26   an evaluation of the accuracy of geographic adjustment factors, and the methodology and data used
     to calculate them.” The second study, which is scheduled for completion in the spring of 2012, “will
27   evaluate the effects of the adjustment factors on the distribution of the health care workforce, quality
     of care, population health, and the ability to provide efficient, high-value care.” (CY 2011 Final
28   Rule, 11/29/2010, 75 FR 73258.)

                                                                   102
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page113 of 172


 1          410.     HCFA’s 1996 restructuring failed to meet the goals of uniformity and consistency
 2   in several ways, each of which has contributed to the current payment disparities:
 3                   (a) in some states, outdated 1966 multi-county localities were used in computations
 4          that defined the new localities;
 5                   (b) in some states, only individual counties were used in defining the new localities;
 6                   (c) in some states, combinations of outdated multi-county localities and individual
 7          counties were used in defining the new localities;
 8                   (d) in six states prior to 1996, HCFA had allowed state medical societies to dictate
 9          the conversion of their multi-locality states to single-locality states – without consulting
10          physicians who were not members of those societies or other suppliers in those states or
11          beneficiaries in those states – but did not reevaluate those states in 1996;
12                   (e) in four states, statistical error computations justified the use of a modified method
13          of restructuring, yet that method was only applied in three of those states; and
14                   (f) in one state, a clear and obvious error led to the creation of two localities, each
15          made up of geographically separated and demographically dissimilar counties, and that error
16          was not corrected until 2009, three years after it was first brought to the Agency’s attention.
17                   2.        Failure to Modify Localities to Reflect Significant Changes in
18                             Demographics
19          411.     The second major cause underlying the massive underpayments is that demographics
20   have changed considerably in a number of localities since 1996, but CMS has not made any changes
21   in the locality structure to reflect those changes.
22          412.     Under 42 U.S.C. § 1395w-4(e)(1)(D), CMS is required to “use the most recent data
23   available relating to practice expenses, malpractice expenses, and physician work effort in different
24   fee schedule areas” in establishing the GPCIs. Since at least 2001, that data has shown those
25   changing demographics and dramatically changing comparative costs across the county.
26          413.     Because CMS has failed to modify the payment localities to reflect those changes in
27   costs, CMS has created payment disparities that are far more serious than the 5% iterative threshold
28   or the 3% payment error threshold that HCFA deemed significant in 1996.

                                                                  103
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page114 of 172


 1           414.     CMS has repeatedly acknowledged the existence of those disparities since 2001, but,
 2   with the sole exception of the 2009 modification to the two localities in Texas, has not adopted any
 3   modification of the locality structure to cure those disparities. This is in spite of the fact that since
 4   2006 CMS has received, undertaken, or commissioned six (6) studies on over twenty (20) ways the
 5   locality structure might be modified to achieve greater uniformity of treatment and greater payment
 6   accuracy. (See ¶¶ 315-320 (CMA), 324-333 (GAO), 335-343 (MedPAC), 365-370 (RTI/UI), 371-
 7   373 (CMS), and 374-379 (Acumen), infra, and Exhibit 11.)
 8                    3.        Dependence on Physician-Directed Change to Localities
 9           415.     As of 1996, there were twenty-two existing statewide localities. Six of those twenty-
10   two statewide localities (Iowa, Minnesota, Nebraska, North Carolina, Ohio, and Oklahoma) had
11   been allowed to convert from multi-locality states to single localities for no other reason than that
12   each state’s medical society “overwhelmingly supported the change.” (See ¶¶ 145-195, supra.)
13   Twelve more statewide localities were added during the 1996 locality restructuring. (See Exhibit
14   3.)
15           416.     Since that time, CMS has recognized and acknowledged that county and state
16   physician associations cannot speak for physicians who are not members of their associations or
17   other practitioners (such as podiatrists, optometrists, physical therapists, and nurse practitioners)
18   who are also defined as “suppliers” under Part B and whose payments are also affected by locality
19   designations. CMS has further acknowledged that such other practitioners would have valid
20   complaints if physician associations were allowed to determine locality designations. (CY 2006
21   Proposed Rule, 8/8/2005, 70 FR 45783-45784.)
22           417.     Despite these acknowledgments, CMS continues to express a policy to defer to state
23   medical associations in the initiation and adoption of locality changes. In each rule published from
24   2004 through 2010, CMS has indicated that it has been its policy not to consider making changes
25   to localities without the support of a state medical association. (See CY 2005 Final Rule,
26   11/15/2004, 69 FR 66203; CY 2006 Final Rule, 11/21/2005, 70 FR 70151; CY 2007 Final Rule,
27   12/1/2006, 71 FR 69655; CY 2008 Final Rule, 11/27/2007, 72 Final Rule 66248; CY 2009 Final
28   Rule, 11/19/2008, 73 FR 69741; 2010 Final Rule, 11/25/2009, 74 FR 61756; and 2011 Final Rule

                                                                   104
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page115 of 172


 1   11/29/2010, 75 FR 73261; see also ¶¶ 280-281, 313-314, 322, 331, 361, 369, 378, 385, 388, and
 2   392, supra.)52
 3             418.      As a result of this policy, there have been no changes to the locality structure since
 4   1996.53
 5             B.        Effect of CMS’ Failure to Create New Localities After 1996
 6                       1.        Emergence of Payment “Inaccuracies” or “Large Payment Differences”
 7             419.      When it implemented the CY 1997 Final Rule that restructured the physician fee
 8   schedule areas, HCFA stated that it would review them “if the newer GPCI data indicates dramatic
 9   relative cost changes among areas.” (CY 1997 Final Rule, 11/22/1996, 61 FR 59497.)
10             420.      Since 1996, there have been dramatic changes in relative costs of providing medical
11   care as well as dramatic changes in demographics across the United States. However, CMS has not
12   modified any of the localities created in the 1996 restructuring as a result of those relative cost
13   changes. As a result, numerous state-wide and multi-county localities do not have “relatively
14   homogeneous resource costs” – something the locality reconfiguration adopted in the CY 1997 Final
15   Rule was meant to ensure. (See CY 1997 Final Rule, 11/22/1996, 61 FR 59494.)
16             421.      Despite these demographic changes, CMS has held over 200 counties at payment
17   levels – whether one denominates those payment levels as “inaccurate” or as “large payment
18   differences” – that CMS once found unacceptable. Since 2001, CMS has been in possession of data
19   that shows:
20   / / /
21   / / /
22
23             52
               Beginning in 2008, CMS has acknowledged that “over time changes in demographics or
     local economic conditions may lead us to conduct a more comprehensive examination of existing
24   payment localities, and consideration of potential alternatives.” (See CY 2009 Final Rule,
     11/19/2008, 73 FR 69741; CY 2010 Final Rule, 11/25/2009; CY 2011 Proposed Rule, 7/13/2010,
25   75 FR 40086.)
26             53
                The only locality structure change actually proposed by a state medical association after
     1996 was the 2004 plan proposed by the CMA. However, CMS justified its decision not to
27   implement that plan by claiming it could not modify the payments to other California counties
     during a transition period – a rationale that is completely fallacious given the number of instances
28   in which CMS has done just that. (See ¶¶ 289-290, supra.)

                                                                      105
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page116 of 172


 1                    (a) a significant number of counties have GAFs that exceed the GAFs for
 2          their localities by 5% or more (Table 1, supra; Exhibit 4; and ¶ 325, detailing the
 3          GAO Locality Report at pp. 18-22);
 4                    (b) a significant number of counties are “substantially” underpaid or overpaid
 5          (see Tables 3 & 4; Exhibit 4);
 6                    (c) a significant number of counties have “inappropriate” or “severe”
 7          boundary differences (see Tables 2 & 5, supra; and ¶¶ 425-428, infra); and
 8                    (d) a significant number of multi-county localities have payment errors equal
 9          to or greater than 3.16% (see ¶¶ 429-431, infra).
10                    2.        Underpayments to Counties Whose GAFs Have Passed the 5% Iterative
11                              Threshold
12          422.      During the period from 2001 to 2010, the total number of affected counties whose
13   GAF has exceeded the 5% threshold established by HCFA in 1996 is 220.54 During that period,
14   counties have had GAFs move above and/or below the 5% threshold as a result of changes
15   implemented by one of the tri-annual GPCI Updates and/or the imposition of the various GPCI
16   “floors” by Congress. The following table derived from Exhibit 4 shows the number of counties in
17   the United States which should have been reclassified as separate payment localities in each year
18   from 2001 through 2010:
19                                                 Table 7.
                                Number of Improperly Classified Counties by Year
20
21        2001     2002      2003      2004       2005       2006      2007       2008      2009       2010           TOTAL
          172      172        169       163        167        167       167        137       133        101               218
22
        Source: Exhibit 4.
23
24          423.      As a result of CMS’ failure to use the 5% iterative threshold established by the CY
25   1997 Final Rule – or any other method – to create new localities, suppliers in the improperly
26   classified counties have been dramatically under-compensated for medical services and supplies they
27
            54
               The GAO found that there were 447 counties with “large payment differences” including
28   counties that were underpaid as well as those that were overpaid. (GAO Locality Report, pp. 18-22.)

                                                                   106
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page117 of 172


 1   have provided to Medicare beneficiaries under Part B when compared to suppliers in properly
 2   classified localities.
 3           424.     Exhibit 4 shows underpayments by county and state for each year from 2001 through
 4   2010 resulting from CMS’ failure to reconfigure localities since 1996. The following table shows
 5   the approximate total underpayment to suppliers in all of the improperly classified counties in the
 6   United States in each year from 2001 through 2010:
 7                                               Table 8.
                            Total Annual Underpayments to Suppliers – 2001 to 2010
 8
                                                 Year                  Annual
 9                                                                  Underpayment
10                                             2001                  $325,235,781
                                               2002                  $324,835,199
11
                                               2003                  $343,585,897
12                                             2004                  $286,094,403
13                                             2005                  $311,188,239
14                                             2006                  $325,259,744
                                               2007                  $349,921,648
15
                                               2008                  $345,120,953
16                                             2009                  $315,438,108
17                                             2010                  $259,666,427
                                              TOTAL                 $3,186,346,410
18
                                          Source: Exhibit 4.
19
20                    3.        Development of “Inappropriate” or “Severe” Boundary Differences
21           425.     In 1996, HCFA described differences in the GAFs of adjoining counties (“boundary
22   differences”) of 5% to 18% as “inappropriate” and “severe.” (See Tables 2 & 5, supra.)
23           426.     The attached Exhibit 8 shows the “severe” and “inappropriate” boundary differences
24   that have developed in a number of counties in California since 1996.
25           427.     For example, in 2010: (a) the boundary difference between Santa Cruz County and
26   adjoining San Mateo County is 18.87%; (b) the boundary difference between Santa Cruz County
27   and adjoining Santa Clara County is 13.44%; (c) the boundary difference between Monterey County
28   and adjoining Santa Clara County is 13.44%; (d) the boundary difference between San Diego

                                                                   107
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page118 of 172


 1   County and adjoining Orange County is 11.46%; and (e) the boundary difference between Marin
 2   County and adjoining San Francisco County is 8.00%. (See Exhibit 8.)
 3           428.       Exhibit 8 shows how these “severe” and “inappropriate” boundary differences can
 4   be significantly improved by using the 5% iterative method to create single-county localities.
 5                      4.        Development of “Payment Errors” Exceeding 3.16%
 6           429.       As a result of CMS’ failure to reconfigure localities since 1996, a growing number
 7   of multi-county localities and states currently have “payment errors” in excess of 3.16%, the
 8   threshold deemed statistically significant by HCFA in 1996. As more fully described in ¶ 228,
 9   supra, “payment error” is a measure of the degree of resulting cost homogeneity of a payment
10   locality.
11           430.       The attached Exhibit 9 shows how fee schedule area payment error rates have
12   changed from 1996 to 2010:
13           (A)        As of 2000, sixteen localities had payment error rates greater than or equal to
14                      HCFA’s 3.16% threshold, eight of which are single-locality states;
15           (B)        As of 2004, eighteen localities had payment error rates greater than or equal to
16                      HCFA’s 3.16% threshold, eight of which are single-locality states; and
17           (C)        As of 2009, fourteen localities had payment error rates greater than or equal to
18                      HCFA’s 3.16% threshold, five of which are single-locality states.
19           431.       The table contained in the attached Exhibit 10 shows examples of how the use of the
20   5% iterative method would have sharply reduced the “large payment differences” or “payment
21   errors” in 2009.
22                      5.        Corresponding Overpayments and Overcharges
23           432.       Because of the way that payments are based on average costs within a locality, every
24   dollar that is underpaid to Plaintiffs and Members of the Class is overpaid to other suppliers low-cost
25   counties in their multi-county or single-state localities as a windfall.
26           433.       Take a simplified example. In 1996 in a state with three counties, Counties A, B, and
27   C had county GAFs of 1.000, and they were combined into a single-state locality with a GAF of
28   1.000. By 2011, the demographics of the counties have changed so that Counties A and B have

                                                                     108
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page119 of 172


 1   GAFs of 0.980 and County C has a GAF of 1.040. However, payments will still be based on the
 2   1996 statewide locality GAF of 1.000, meaning that for every Medicare payment of $1.00, County
 3   C is underpaid by $4.00 and Counties A and B receive windfall overpayments of $2.00 each. If the
 4   5% iterative method is applied, County C will become a single-county locality with a locality GAF
 5   of 1.040, Counties A and B will be combined into a two-county locality with a GAF of 0.980, and
 6   all three counties will be accurately paid.
 7   X.     CMS DOES NOT MAINTAIN THE DATA UNDERLYING THE LOCALITY
 8          PAYMENT STRUCTURE
 9          A.        The County Plaintiffs’ FOIA Requests and Lawsuit
10          434.      The County Plaintiffs made three requests to CMS under the Freedom of Information
11   Act (“FOIA”) 12/11/2006, 1/30/2007, and 7/17/2007, seeking documents sufficient to show the
12   GAFs, GPCIs, RVUs, and conversion factors for each county and locality in the United States used
13   in calculating payments to physicians under Medicare Part B for the years 1999-2009. The County
14   Plaintiffs also made a fourth FOIA request on July 2, 2008, seeking background data used in the
15   preparation of the Fifth GPCI Update, and made a fifth FOIA request on January 28, 2009, seeking
16   information relating to the January 1, 2009, locality change in Texas.
17          435.      On June 4, 2007, based on CMS’ failure to respond to the County Plaintiffs’ first two
18   FOIA requests in a timely and substantive manner, the County Plaintiffs filed an action under FOIA
19   seeking an order compelling CMS to respond and produce responsive documents – County of Santa
20   Cruz, et al., v. Centers for Medicare and Medicaid Services, Northern District of California Case
21   No. C 07-02889 MMC (the “FOIA Action”).
22          436.      During the course of the FOIA Action, CMS initially claimed that no such responsive
23   documents containing county-level data ever existed. Upon being shown by the County Plaintiffs
24   that such document must of necessity exist, CMS then responded that it was unable to locate all
25   responsive documents. Between April 2008 and November 2009 CMS produced approximately 40
26   spreadsheets containing some of the requested information. (See Bibliography, § D.)
27          437.      Due to the nature of FOIA litigation, the County Plaintiffs were not allowed to
28   conduct any discovery during the pendency of the FOIA Action.

                                                                   109
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page120 of 172


 1          438.      As summarized in the following table, the bulk of the information contained in the
 2   spreadsheets was not the final data used in calculating the payments under Part B:
 3                                                Table 9.
                              Accuracy of County-Level and Locality-Level Data
 4                        Produced by CMS in Response to Plaintiffs’ FOIA Requests
 5                                        ACCURACY COUNTY-LEVEL DATA
 6                           Year           GAF          GPCIw         GPCIpe GPCImp                  RVU
 7                           1999            No             No            No             No
                             2000
 8                           2001
                             2002            No             No            No             No            Yes
 9                           2003
                             2004
10                           2005            No             No            No             No            Yes
                             2006            No             No            No             No
11                           2007                           No            No             No
                             2008                                                                      ***
12                           2009

13                                    ACCURACY OF LOCALITY-LEVEL DATA
14                           Year           GAF          GPCIw         GPCIpe GPCImp                  RVU
                             1999
15                           2000
                             2001
16                           2002                                                                      Yes
                             2003                          Yes            Yes          Yes
17                           2004                          No             No          Yes/No
                             2005           No             No             No           No              Yes
18                           2006           Yes            Yes            Yes          Yes
                             2007                          Yes            Yes          Yes
19                           2008                          No             No           No              ***
20                           2009            No            No             No           No
                             Key:
21                                        No data produced
                              Yes        Accurate data produced (i.e., same as data in Fed.Reg.)
22                            No         Inaccurate data produced (i.e., inconsistent with Fed.Reg.)
                              ***        Accurate Data Published on CMS Website in 7/ 2010
23
24
25          B.        The Court in the FOIA Action Finds CMS Has Conducted a Reasonable Search

26          439.      CMS filed three motions for summary judgment on the reasonableness of its search.

27   The first two were denied without prejudice. On December 16, 2009, the Court granted CMS’ third

28   motion, finding as follows:

                                                                   110
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page121 of 172


 1           The Court finds defendants [sic] have satisfied their burden of demonstrating they
             “conducted a search reasonably calculated to uncover all relevant documents.” See
 2           Zemansky v. U.S. Envtl. Prot. Agency, 767 F.2d 569, 571 (9th Cir. 1985) (noting
             issue “is not whether there might exist any other documents possibly responsive to
 3           the request, but rather whether the search for those documents was adequate”)
             (emphasis in original; internal quotation and citation omitted); see also Citizens
 4           Comm’n on Human Rights v. Food & Drug Admin., 45 F.3d 1325, 1328 (9th Cir.
             1995) (noting “[t]he adequacy of the agency’s search is judged by a standard of
 5           reasonableness, construing the facts in the light most favorable to the requestor”).
 6           C.         CMS’ Vacillation on Sharing Underlying County-Level Data
 7                      1.        2004 to 2006 – CMS Freely Shares Data with the CMA
 8           440.       The need for CMS to use accurate data to calculate RVUs, GPCIs, and GAFs should
 9   be self explanatory.
10           441.       Locality-level GAFs, GPCIs, and RVUs are aggregated from county-level GAFs,
11   GPCIs, and RVUs. (See CY 2004 Proposed Rule, 8/15/2003, 68 FR 49039-49044; CY 2005
12   Proposed Rule, 8/5/2004, 69 FR 47502-47504 [ “All three of the [GPCIs] for a specific fee schedule
13   locality are based on the [GPCIs] for the individual counties within the respective fee schedule
14   localities.”].)
15           442.       From 2004 through 2006, CMS was forthcoming in sharing county-level GPCI and
16   RVU data with the CMA which was then in the process of modeling alternative locality
17   configurations. (See Bibliography, § B.)
18           443.       In the fall of 2004, using county-level data supplied by CMS, the CMA found errors
19   in the CY 2005 Proposed Rule in the GPCIs and GAFs for three localities in Southern California,
20   and was able to point out the errors to CMS in time for CMS to correct the errors in the CY 2005
21   Final Rule.
22                      2.        2007 – CMS Denies the County-Level Data Exists
23           444.       After 2006, CMS apparently changed its “open door” policy on sharing data with the
24   public. As a result, the County Plaintiffs needed to resort to making requests under FOIA to obtain
25   the data.
26           445.       In its responses to the County Plaintiffs’ first and second FOIA requests seeking
27   county-level data for 1999 through 2009, CMS denied that such data existed. When the County
28

                                                                     111
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page122 of 172


 1   Plaintiffs demonstrated that they knew that assertion was false and could prove it, CMS undertook
 2   a search for the requested data.
 3           446.    The CY 2008 Proposed Rule – which proposed several possible methods of
 4   modifying the locality structure in California – contained a number of inconsistencies and apparent
 5   errors which called all of the data shown in the tables into question. On July 17, 2007, the County
 6   Plaintiffs submitted a third FOIA request for, inter alia, data underlying each of the GAFs and
 7   GPCIs shown on the tables. The County Plaintiffs’ third FOIA request included a request to
 8   expedite the response so that they would be able “to submit a timely and complete response to the
 9   Proposed Rule published by CMS in 72 FR 38122.” The County Plaintiffs did not receive a
10   response to that request and were therefore unable to submit a complete response to the Proposed
11   Rule.
12           447.    The attached Exhibit 5 is a true and correct copy of the County Plaintiffs’ July 17,
13   2007, comments on the CY 2008 Proposed Rule. Note the specific references on pages 189-190 and
14   200-201 regarding inconsistencies between the proposed county for GAFs San Diego, San
15   Francisco, San Mateo, and Santa Clara Counties for 2006-2009 that do not appear to be supported
16   by changes in the most volatile component of the GAF formula – fair market rental (“FMR”) data
17   supplied by HUD. In particular, the County Plaintiffs’ comment noted: “Between 2007 and 2009,
18   the county GAF for Santa Clara County is set to decline by 9.25%. In contrast, the FMR for 2-
19   bedroom units is set to increase by 0.70%.” (See Exhibit 5, pp. 192 and 203.)
20           448.    Rather than supplying the data that the County Plaintiffs requested so that they could
21   make an informed comment, CMS merely stated in the CY 2008 Final Rule that the HUD data
22   showed a decrease which resulted in the decline in Santa Clara’s GAF – an assertion that is clearly
23   not supportable as noted in the County Plaintiffs’ comment:
24           “Comment: We received several comments about the PE GPCI for Santa Clara
             County, California. In the proposed rule, the PE GPCI was lower for Santa Clara
25           than it has been in previous years and commenters were concerned about why this
             happened.
26
             “Response: We recognize that there was a decrease in the proposed Santa Clara
27           County PE GPCI. We have studied this issue including examining both the source
             data and the methodology for obtaining the PE GPCI in case there was a mistake in
28           the proposed values. However, a close examination of the data showed that the GPCI

                                                                  112
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page123 of 172


 1          is accurate and reflects a decrease in the value of HUD rentals in Santa Clara
            County.” (CY 2008 Final Rule, 11/27/2007, 72 FR 66245.)
 2
 3                    3.        2007 – CMS Attempts to Suppress County-Level Data
 4          449.      From an email obtained during the FOIA litigation, it appears that once the County
 5   Plaintiffs made their FOIA requests in 2007, CMS adopted a deliberate policy of obstructing the
 6   public’s access to the data used in setting payment amounts under the Physician Fee Schedule.
 7          450.      In late 2007, Acumen LLC finalized the GAFs and GPCIs that would be used in the
 8   Fifth GPCI Update during calendar years 2008-2010. In their fourth FOIA request dated July 2,
 9   2008, the County Plaintiffs requested the underlying county-level data that Acumen used in arriving
10   at those numbers.
11          451.      During the pendency of the FOIA litigation, CMS produced several emails between
12   CMS and Acumen relating to the Fifth GPCI Update.
13          452.      The emails produced by CMS included an email exchange between Peggy O’Brien-
14   Strain at Acumen and to Rick Ensor at CMS dated December 14, 2007.
15          453.      In that exchange, Mr. Ensor asked Ms. O’Brien-Strain, “How can you produce a valid
16   locality file without a valid county file?”55
17          454.      Ms. O’Brien-Strain responded, “we were asked [by CMS] not to provide a county
18   file in the final round because of FOIA issues that you’d have to release the file for other people
19   [i.e., the County Plaintiffs] who wanted to do exactly the activity you are doing.”
20                    4.        2010 – CMS Improves Public Access to County-Level Data
21          455.      In the CY 2010 Final Rule, CMS acknowledged that some commenters had
22   “requested that CMS release underlying data sources, including county level GPCI values and
23   budget neutrality estimates, which would allow interested parties to replicate GPCI calculations.”
24   CMS responded as follow:
25
26
            55
               This is the same question that the County Plaintiffs had asked CMS when they were told
27   that county-level files did not exist. The County Plaintiffs found that difficult to believe since CMS
     had provided several county-level files to the CMA between 2004 and 2006. (See Bibliography, §
28   B.)

                                                                   113
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page124 of 172


 1          “We strive to be as transparent as possible in all of our proposals. To that end, we
            have made numerous files available on the CMS Web site under the downloads for
 2          the CY 2011 PFS proposed rule to assist in the public’s review of the CY 2011
            proposal. These files include: The preliminary contractor’s report on data for the
 3          6th GPCI update; the CY 2010 through CY 2012 GPCIs, both as proposed (including
            the ACA provisions) and without the ACA provisions to permit isolation of the
 4          impacts of the updated data; and web links to the publicly available source data and
            copies of data files that are not otherwise publicly available, for example county and
 5          locality-specific RVUs from Medicare claims data and malpractice insurance
            premium data. In combination, this information allows the public to apply our
 6          methodology to replicate our calculations for the proposed GPCIs.” (CY 2011 Final
            Rule, 11/29/2010, 75 FR 73257-73258.)
 7
 8          456.      Although the scope of data CMS made available to the public in 2010 was far greater
 9   than it had been since 2004-2006, the statement that “this information allows the public to apply our
10   methodology to replicate our calculations for the proposed GPCIs” is simply inaccurate.
11          457.      The data that CMS made available in 2010 does not include the county-level data
12   used to calculate the county-level GPCIs, or the county-level GPCIs themselves. (See Bibliography,
13   § D.) This is key data that is needed to calculate the locality-level GPCIs and has not been made
14   publicly available by CMS since 2006.
15          D.        Significance to This Litigation
16          458.      CMS’ failure to maintain records and data that justify the payment levels assigned
17   to each locality is something that would not be expected, let alone tolerated in the private sector,
18   especially in an enterprise that has annual expenditures of $60 billion.
19          459.      To date, Plaintiffs have employed the data provided to them by CMS, data provided
20   to the CMA by CMS, and estimates of the value of missing and/or erroneous data to calculate
21   underpayment amounts, boundary differences, and payment error levels.
22          460.      In this litigation, CMS’ failure to maintain records and data will require
23   determinations of the amounts of the underpayments to Plaintiffs and Members of the Class to be
24   based on estimates.
25   XI.    FACTUAL CONCLUSIONS
26          A.        Contrasting the Two Geographies of Medicare
27          461.      There are two vastly different geographies for Medicare Part A (hospitals) and
28   Medicare Part B (suppliers), the use of which results in vastly different levels of payment accuracy.

                                                                   114
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page125 of 172


 1           462.      Pursuant to 42 C.F.R. § 412.64, the geographic localities used to determine payments
 2   to hospitals under Part A are 324 MSAs and 49 “statewide” nonmetropolitan areas. The MSAs are
 3   uniformly defined, demographically homogeneous, and are revised annually by OMB.56 CMS
 4   includes all non-MSA counties in a state in a single, non-metropolitan area in which all hospitals
 5   are paid at the same rate.
 6           463.      In contrast, the geographic localities used under Part B are not uniformly defined.
 7   Most have not been readjusted since 1996, and some have not been readjusted since 1966.
 8           464.      For hospitals, CMS has adopted a comprehensive regulatory scheme allowing single
 9   hospitals or groups of hospitals to have their geographic classification modified to improve payment
10   accuracy. (See 42 C.F.R. Ch. IV, Subch. B, Pt. 412, Subpt. L, 42 C.F.R. §§ 412.230, et seq.,
11   “Medicare Geographic Classification Review Board.”)
12           465.      In contrast, there is no mechanism that would allow suppliers or groups of suppliers
13   to have their geographic classifications changed.
14           466.      The following table illustrates the stark contrasts between the two geographies of
15   Medicare:
16   / / /
17   / / /
18   / / /
19   / / /
20   / / /
21   / / /
22   / / /
23
             56
                 Pursuant to 44 U.S.C. § 3504(d)(3) and 31 U.S.C. § 1104(d) and E.O. No. 10253 (June
24   11, 1951), the OMB defines Metropolitan Areas (“MAs”) for use in Federal statistical activities.
     OMB updates these definitions each June, adding new areas that qualify as MAs and cities that
25   qualify as central cities for MAs. Metropolitan Areas comprise metropolitan statistical areas
     (“MSAs”), consolidated metropolitan statistical areas (“CMSAs”), and primary metropolitan
26   statistical areas (“PMSAs”). These areas are defined in terms of entire counties or groups of
     counties, except in the six New England States where they are defined in terms of cities and towns.
27   New England county metropolitan areas (“NECMAs”) are an alternative set of county-based areas
     defined for New England states.
28

                                                                    115
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page126 of 172


 1                                                    Table 10.
                                           The Two Geographies of Medicare
 2
 3                           HOSPITALS                                                 SUPPLIERS
                           (Under “Part A”)                                          (Under “Part B”)
 4           Annual Payments in 2009 of Appr.                         Annual Payments in 2009 of Appr.
             $160 Billion                                             $62.5 Billion
 5
             Payment Schedule Updated Every                           Payment Schedule Updated Every 3
 6           Year                                                     Years

 7           Geographic Localities Updated                            Geographic Localities Established in
             Annually Since 2003 by OMB                               1966 by Insurance Companies and
 8                                                                    Revised Only Once by HCFA in 1996
             CMS Adopts OMB Definitions and                           In 1991, HCFA Assumed the
 9           Does Not Otherwise Administer                            Responsibility to Define Boundaries
             Boundaries of Geographic Localities                      of Geographic Localities But Has Not
10                                                                    Made Revisions Since 1996
11           373 Geographic Localities as of 2009                     89 Geographic Localities Since 1996
             Based on Demographically                                 Based Primarily on Counties and
12           Homogeneous MSAs                                         Combinations of Counties Which Are
                                                                      Often Demographically Diverse
13
             Geographic Localities Understandable                     Geographic Localities Poorly
14           and Fair                                                 Understood and Inequitable

15           Comprehensive Regulatory Provisions                      No Regulatory Provisions Allow
             Allow Reclassification of Hospitals                      Reclassification of Suppliers into
16           into Different Geographic Localities                     Different Geographic Localities to
             to Improve Reimbursement Accuracy                        Improve Reimbursement Accuracy
17           Payment System Accurately Reflects                       Payment System Does Not Accurately
             Costs Within Small, Well-Defined,                        Reflect Costs Within
18           Demographically Homogeneous                              Demographically Diverse Multi-
             Geographic Localities                                    County Geographic Localities
19
20          467.     Although there are differences in the specific formulas used to compute payments
21   under Part A and Part B, both use the same underlying principle of making payments based on local
22   costs of providing medical services.
23          468.     Where “local” defines areas that are demographically homogeneous – as under Part
24   A – payments will be accurate and fair. Where “local” defines areas that are demographically
25   diverse – as under Part B – payments will be inaccurate and unfair.
26          469.     Where there is a process for modifying a provider’s locality designation – as under
27   Part A – payment accuracy can be adjusted and improved. Where there is no process for modifying
28

                                                                  116
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page127 of 172


 1   a supplier’s locality designation – as under Part B – payment rates remain stagnant when
 2   demographics change and payment accuracy declines.
 3           470.    Santa Cruz County provides the best example of the comparative payment accuracy
 4   resulting from CMS’ disparate treatment of the geographic locality structures for hospitals under
 5   Part A and suppliers under Part B.
 6           471.    In 2007, the three hospitals in Santa Cruz County – Sutter, Dominican, and
 7   Watsonville – were allowed by CMS to “move” from the Santa Cruz MSA to the Santa Clara MSA
 8   pursuant to 42 C.F.R. §§ 412.230, et seq., thus increasing the payment rate to all of the hospitals in
 9   Santa Cruz County.
10           472.    By 2008-2010, hospital costs in the Santa Cruz MSA became the highest in the
11   nation. As a result, the three hospitals in Santa Cruz County opted to be paid based on costs in the
12   Santa Cruz MSA rather than the lower costs in the Santa Clara MSA.
13           473.    Thus, due to the use of MSAs as the basic geographic unit and the regulatory
14   provisions allowing for locality reclassification under Part A, hospitals in Santa Cruz County are
15   accurately paid at the highest rate in the nation.
16           474.    In contrast, due the use of the outdated locality structure under Part B and the lack
17   of regulatory provisions for locality reconfiguration, physicians and other suppliers in Santa Cruz
18   County are underpaid at the lowest rate in California.
19           475.    Attached hereto as Exhibits 12-18 are maps of California, Florida, Ohio, Minnesota,
20   Texas, North Carolina, and Virginia, the seven states with the highest underpayments under
21   Medicare Part B from 2001-2010. Each exhibit contains a map showing: (A) the geographic areas
22   used to pay hospitals under Part A; (B) the geographic areas used to pay suppliers under Part B; and
23   (C) the counties in each state receiving underpayments and overpayments as a result of CMS’ failure
24   to modify the locality structure under Part B. These maps graphically illustrate the disparate
25   geographies used by CMS to pay hospitals under Part A and suppliers under Part B, as well as the
26   underpayments and overpayments caused by that disparate treatment.
27   / / /
28   / / /

                                                                  117
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page128 of 172


 1          B.        Contrasting the Two Priorities of CMS
 2          476.      A change to the calculation of the practice expense GPCI proposed by CMS in 2010
 3   illustrates the irrationality of CMS’ failure to modify the locality structure under Part B.
 4          477.      Over the past ten years, there have been six studies by CMA, CMS, the GAO,
 5   MedPAC, RTI, the UI, and Acumen in which twenty-one different options for locality
 6   reconfiguration under Part B were given in-depth consideration. (See ¶ 414, supra.) The attached
 7   Exhibit 11 details each of those studies and the options considered in each.
 8          478.      In the CY 2011 Proposed Rule, CMS proposed a major revision of the data sources
 9   and methodology used to calculate the practice expense GPCI, after a four month period of study
10   in which no independent contractors, no other governmental agencies, no advisory boards, and no
11   medical associations were given an opportunity for comment.
12          479.      A uniform reapplication of the 5% iterative method would affect payments to
13   approximately 450 counties, while the proposed revision to the practice expense GPCI would have
14   affected payments to all 3,141 counties (including “county-equivalents”) in the United States.
15          480.      In 2010, CMS proposed to calculate the cost share weights of various components
16   of the practice expense GPCI down to levels of 0.679% (Chemicals), 0.616% (Paper), 0.563%
17   (Rubber & Plastics), 1.415% (Telephone), and 0.661% (Postage) in the interest of achieving
18   “increased levels of precision.” (CY 2011 Proposed Rule, 7/13/2010, 75 FR 40089.)
19          481.      While such microscopic attention to payment accuracy cannot be criticized, the
20   contrast to CMS’ lack of plans to modify a locality structure that generates total payment errors of
21   up to 20% could not be more stark.
22          482.      The total annual redistributive effect of uniformly reapplying the 5% iterative method
23   is approximately $320 million while the total redistributive effect of the proposed changes to the
24   GPCIs in the CY 2011 Proposed Rule would have been approximately $5.3 billion. (See ¶ 400, and
25   Table 6, supra.)
26          483.      CMS has not implemented any changes to the locality structure since 2001 when it
27   was first made aware of the payment inaccuracies that had arisen, repeatedly citing the redistributive
28

                                                                   118
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page129 of 172


 1   effects of any change, the need to proceed “with caution,” and its concern for the resulting “winners
 2   and losers.”
 3          484.     The following table illustrates the two priorities of CMS when it comes to
 4   reconfiguring the locality structure as compared to the proposed modification of the practice expense
 5   GPCI detailed in the CY 2011 Proposed Rule:
 6                                                      Table 11.
                                                 The Two Priorities of CMS
 7
 8                                                         Reconfiguring the                    Revising the
                                                           Locality Structure                 Practice Expense
 9                                                                                                 GPCI
                Annual Amount of                               $320 Million                       $5.3 Billion
10              Redistribution
11              Number of Counties                            447 (per GAO)                     All (i.e., 3,143)
                Affected
12
                Years Studied                                     10 Years                          4 Months
13              Reports and Studies                                     6                                0?
                Considered by CMS
14
                Government Agencies                                   Yes                                No
15              Consulted by CMS
16              Independent Contractors                               Yes                                No
                Consulted by CMS
17
                Advisory Boards                                       Yes                                No
18              Consulted by CMS
                Professional Associations                             Yes                                No
19              Consulted by CMS
20              Concern Over Need to
                Proceed with Caution                                  Yes                                No
21              Expressed by CMS
22              Concern Over Effect on
                “Winners and Losers”                                  Yes                                No
23              Expressed by CMS

24
25          485.     As noted in ¶¶ 402-404, supra, CMS did not implement the proposed changes to the
26   calculation of the practice expense GPCI contained in the CY 2011 Proposed Rule but only because
27   the proposed changes were based on the mistaken assumption that certain wage-related components
28

                                                                  119
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page130 of 172


 1   of the practice expense GPCI had a national market and did not vary by location. (See CY 2011
 2   Final Rule, 11/29/2010, 75 FR 73258.)
 3          486.      The fact remains that the contrasts between CMS’ eager willingness to modify the
 4   practice expense GPCI formula and its impassive resistance to locality reconfiguration could not be
 5   more stark nor could the underlying rationale for the disparate treatment be more opaque.
 6          C.        The Statutory, Administrative, and Policy Goals of Medicare Are Not Being
 7                    Met With the Continued Use of the Current Locality Configuration
 8          487.      The two most important goals of the Medicare program – insuring the provision of
 9   adequate medical care to the elderly and infirm and the accuracy of payments to “suppliers” – are
10   not being met due to the Secretary’s failure to correct the locality structure.
11          488.      Various courts have identified the “fundamental purpose of the Medicare system” as
12   the “provision of adequate medical treatment to the elderly and disabled.” In re University Medical
13   Center, 973 F.2d 1065, 1083-84 (3rd Cir. 1992); see also Furlong v. Shalala, 156 F.3d 384, 392 (2nd
14   Cir. 1998) [“The underlying purpose of the Medicare statute is to provide affordable medical
15   insurance for the aged and disabled.”]; Hultzman v. Weinberger, 495 F.2d 1276, 1281 (3rd Cir.1974)
16   [“the broad remedial purpose” is “to insure that adequate medical care is available to the aged
17   throughout this country”].
18          489.      The Supreme Court has held that “the Legislature’s overriding purpose in the
19   Medicare scheme [is] reasonable (not excessive or unwarranted) cost reimbursement.” Regions
20   Hosp. v. Shalala, 522 U.S. 448, 459, 118 S.Ct. 909, 139 L.Ed.2d 895 (1998). A necessary corollary
21   of that overriding purpose is the avoidance of inadequate cost reimbursement. Indeed, 42 U.S.C.
22   § 1395w-4(e)(1)(A) requires the Secretary to establish indexes that reflect the costs of providing
23   medical services “in the different fee schedule areas compared to the national average of such costs.”
24          490.      The same policy goals apply with respect to payments to “suppliers” such as
25   Plaintiffs and Members of the Class under Medicare Part B – reasonableness, fairness, and accuracy.
26   In a September 2004 study conducted for MedPAC, the Stephen Zuckerman, a senior fellow in the
27   Health Policy Center of the Urban Institute and a leading expert in the field of the Medicare payment
28   system, observed:

                                                                   120
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page131 of 172


 1          “The goal of the Medicare fee schedule was to create a payment system for physician
            services in which fees varied with resource costs.... The fundamental reason that
 2          policymakers vary physician fees across geographic areas is to adjust for differences
            in input prices faced by physicians that are beyond their control.... Adjustments for
 3          input price differences can be seen as promoting fairness by acknowledging cost
            differences across areas.” (Zuckerman, “Reconsidering Geographic Adjustments to
 4          Medicare Physician Fees” (The Urban Institute, September 2004), p. 3.)
 5          491.     In 1996, HCFA made a similar observation when it described the proposal to
 6   restructure the 1966 localities:
 7          “Our proposal is not intended as a payment reduction policy. Rather, it is intended
            as a restructuring of localities based on area costs wherein existing localities with
 8          costs that are significantly higher than other localities with their State remain
            distinct localities while localities with similar costs within the State are collapsed
 9          into a residual State locality.... Our proposal to aggregate current localities is based
            on the application of statistical criteria comparing area costs. [Emphases added.]”
10          (CY 1997 Final Rule, 11/22/1996, 61 FR 59494-59495.)
11          492.     HCFA cited a number of specific reasons in choosing to implement the 5% iterative
12   method of Option 1i in 1996: (1) it “ensures that the statewide or residual FSA has relatively
13   homogeneous input prices”; (2) it addresses “the problems [of] unwarranted boundary differences
14   and large higher-price areas not being separate FSAs in small States”; (3) it “more consistently
15   defines homogeneous residual State FSAs”; (4) it “reduces unwarranted boundary differences”; and
16   (5) it “would attain the goal of simplifying the payment areas and reducing payment differences
17   among areas while maintaining accuracy in tracking input prices.” (CY 1997 Proposed Rule,
18   7/2/1996, 61 FR 34619.)
19          493.     None of the goals expressed by Congress, the courts, the Urban Institute, or the
20   agency are being met today.
21          494.     Physicians and other suppliers in the over 200 affected counties cannot afford to
22   continue treating Medicare patients and cannot take on new Medicare patients when they are not
23   being equitably compensated for their services. This results in a reduction in access to medical care
24   for Medicare beneficiaries in many areas of the United States.
25          495.     The GAO Locality Report warned of a similar result:
26          “Relative underpayments to physicians may have important consequences for
            beneficiary access. Officials from several state medical associations told us that
27          geographic areas that are relatively underpaid have difficulty attracting and retaining
            physicians, which may lead to beneficiary access problems.” (GAO Locality
28          Report, p. 20.)

                                                                  121
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page132 of 172


 1           496.      Beneficiary access problems are real and result from the Secretary’s failure to
 2   maintain payment accuracy to Plaintiffs and Members of the Class.
 3           497.      The statutory, administrative, and policy goals of payment accuracy are simply not
 4   being met by the current locality classifications.
 5           D.        CMS’ Failure to Modify the Locality Structure Has No Rational Basis
 6                     1.        CMS Has Repeatedly Acknowledged that the Current Locality Structure
 7                               Results in Inaccurate Payments
 8           498.      In 1991, the Agency “acknowledged the lack of consistency among localities and the
 9   significant demographic and economic changes that had occurred since localities were originally
10   established.” (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38002; see CY 1992 Proposed Rule,
11   6/5/1991, 56 FR 25832.) In 1996, the Agency partially addressed those issues in the 1996 locality
12   restructuring.
13           499.      Even though the “lack of consistency among localities” remains a problem, and even
14   though there have been “significant demographic and economic changes” since 1996, CMS has not
15   modified the payment locality structure used to compensate physicians and other suppliers since
16   1996.
17           500.      Since 2001, CMS has been aware that accuracy standards set in 1996 were not being
18   met, but has done nothing to improve payment accuracy.
19           501.      Since 2001, CMS’ continued use of that payment locality structure has resulted in
20   underpayments to Plaintiffs and Members of the Class totaling $3.2 billion, which have funded
21   windfall overpayments of $3.2 billion to other physicians and suppliers.
22           502.      Since 2001, CMS has been aware that these underpayments and overpayments exist,
23   but has done nothing to cure the disparities.
24           503.      Since 2004, CMS has repeatedly and publicly acknowledged the need to reconfigure
25   the Medicare Part B locality structure but has done nothing to meet that need. Instead, since 2004,
26   CMS has repeatedly invoked the same three-part mantra it had used since 2004 to justify the delay
27   in implementing locality reconfiguration: (1) the need for “support of a State medical association”;
28

                                                                    122
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page133 of 172


 1   (2) the fact that “winners and losers” or a “significant redistribution” would result; and (3) the need
 2   for further study.
 3                   2.        The Current Locality Structure Does Not Meet the Specific Levels of
 4                             Payment Accuracy Defined by the Secretary in 1996
 5          504.     In response to commenters from urban areas “whose costs were not significantly
 6   higher than rural areas and, thus, were collapsed into statewide or State residual areas” who opposed
 7   the proposal, the HCFA stated in 1996:
 8          “[U]rban areas whose costs do not meet our statistical criteria, that is, are not more
            than 5 percent higher than the combined costs of all lower-price localities in their
 9          State, are combined with these lower-price localities into a new locality. We believe
            that, for all of the reasons stated in the introduction, our proposed locality structure
10          has many advantages over the current structure while maintaining an acceptable
            degree of accuracy in tracking area cost differences. [Emphasis added.]” (CY 1997
11          Final Rule, 11/22/1996, 61 FR 59495.)
12          505.     That degree of accuracy has not been maintained since 2001. In fact, payment
13   inaccuracies have developed since 2001: (1) that are as severe or more severe than those the
14   Secretary found in 1996 would be “unacceptably inaccurate in tracking input price differences” and
15   would lead to “inaccurate GAFs”; (2) that are as severe or more severe than those the Secretary
16   found in 1996 would lead to “too many large and inappropriate GAF differences across FSA
17   boundaries,” “undesirable payment differences at boundaries,” “severe boundary problems,” and
18   “inappropriate differences across boundaries”; and (3) that are as severe or more severe than those
19   the Secretary found in 1996 “would substantially underpay some areas while overpaying others.”
20   (CY 1997 Proposed Rule, 7/2/1996, 61 FR 34617-34618.)
21                   3.        The Current Locality Structure Fails to Account for Changed Economic
22                             Circumstances
23          506.     The failure to reconfigure the current locality structure “cements” a system that
24   results in what the Secretary has classified as “inadequate tracking of price variations,” payment
25   inaccuracies at levels the Secretary has previously found unacceptable, and what the Secretary had
26   called “substantial underpayments” totaling not merely millions, but billions of dollars.
27          507.     A federal agency endowed with regulatory authority is obligated to reevaluate its
28   policies when circumstances affecting its rulemaking proceedings change, and where a regulation’s

                                                                  123
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page134 of 172


 1   rationality is dependent on current socioeconomic conditions periodic review is essential to preserve
 2   that rationality.
 3           508.      As discussed above in ¶ 462, the localities used by CMS to calculate payments to
 4   hospitals under Part A are updated annually. In contrast, CMS has not updated any of the localities
 5   used under Part B to calculate payments to suppliers under Part B since 1996, and has not updated
 6   some of those localities since 1966.
 7           509.      It is primarily the failure to update the locality structure that has made some suppliers
 8   “more equal than others.” All other aspects of the physician fee schedule are regularly reviewed to
 9   adjust for changing economic conditions. (See 42 U.S.C. § 1395w-4, subds. (c)(2)(B) [RVUs
10   adjusted every 5 years], (d)(4)(A) [conversion factors adjusted every 3 years], and (e)(1)(C) [GPCIs
11   adjusted every 3 years].)
12           510.      The failure to make similar adjustments to a locality structure that has generated
13   “substantial underpayments” to Plaintiffs and Members of the Class for the last ten years has no
14   rational basis.
15                     4.       The Current Locality Structure Irrationally Treats Localities with Non-
16                              Contiguous Counties Inconsistently
17           511.      The locality changes CMS made in Texas in 2009 were not budget neutral within the
18   state because they reflected a net decrease of payments within the state. Further, CMS did NOT
19   implement these changes following the direction of the Texas Medical Association and did not
20   demonstrate that physicians in all four counties, including ‘winners and loser’ supported the
21   revision. (See ¶¶ 381-384, supra; Ex. 6.)
22           512.      In the ruling separating the Texas counties, CMS noted that Houston and Austin
23   Counties are neither within the Austin or Houston Metropolitan areas nor are they contiguous with
24   the principle metropolitan counties of Harris and Travis respectively. (Ex. 6.)
25           513.      Following this revision, there remains only one other noncontiguous physician fee
26   schedule area in the nation, California’s Locality 03 which consists of Marin, Napa, and Solano
27   counties in the San Francisco Bay Area. Napa and Solano reside in their own one-county MSAs and
28   Marin (which is not contiguous with either of the other two counties in Locality 03) resides in the

                                                                   124
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page135 of 172


 1   MSA that includes San Francisco and San Mateo Counties. Costs of providing medical care in the
 2   Napa and Solano MSAs are far less than those in the Marin/San Francisco/San Mateo MSA.
 3          514.       The following Table 12 shows the county and locality GAFs for California’s Locality
 4   03 in the fully-implemented years 1999, 2002, 2006, and 2009.57 It also shows how for each of those
 5   years the implementation of the 5% iterative method would require that Marin County be separated
 6   out as a distinct locality given that the GAF for Marin County exceeds the average of the GAFs for
 7   Napa and Solano Counties by more than 5%.
 8                                                   Table 12.
                                The Need to Separate Marin County from Locality 03
 9
                                                     1999 GAF           2002 GAF           2006 GAF           2009 GAF
10
11               Marin                                   1.111              1.186              1.223              1.174

12               Napa                                    1.035              1.055              1.011              1.081
                 Solano                                  1.034              1.056              1.088              1.055
13
                 Locality 03                             1.067              1.104              1.153              1.112
14
15               Marin                                   1.111              1.186              1.223              1.174
                 Napa/Solano                             1.035              1.056              1.050              1.068
16
17               Iterative Differential                  7.4%              12.4%              16.5%               9.9%

18
19          515.       The County of Marin and its suppliers have long been disadvantaged by the

20   inappropriate inclusion of Marin in Locality 03. It is both troubling and unrealistic that CMS

21   continues to require that the CMA and presumably the “winners and losers” within Locality 03

22   initiate the request to unbundle this locality. A fair and consistent approach in a manner that would

23   augment payment accuracy for the suppliers and beneficiaries of Locality 03 should have been

24   applied in 2001, the first year of the Second GPCI Update when CMS first had the data that showed

25   that Marin County had passed the 5% iterative threshold.

26          516.       There is no rational basis for maintaining Locality 03 in its current configuration.

27
            57
             The first year of a GPCI Update (2001, 2005, 2008, and 2011) are “transition years” in
28   which CMS implements only one-half of any adjustment called for by the Update.

                                                                    125
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page136 of 172


 1                    5.        None of the Secretary’s Expressed Reasons for Maintaining the Current
 2                              Locality Structure Has a Rational Basis
 3                              a.         Irrational Concern Over “Winners and Losers”
 4           517.     CMS has repeatedly cited the concern for the “redistributive effect” between
 5   “winners and losers” as a justification for its continued failure to modify the locality structure, but
 6   this “justification” for inaction has no rational basis.
 7           518.     The proper focus of CMS’ concern should be on those who are “losers” now –
 8   Plaintiffs and Members of the Class – and not on those who will be “losers” in the future – those
 9   low-cost counties who are “winners” now because they receive windfall overpayments at the
10   expense of Plaintiffs and Members of the Class.
11           519.     CMS is correct in observing that a modification of the locality structure under Part
12   B will result in a redistribution of payments.
13           520.     However, CMS cannot in good faith claim that a concern for “redistributive effects”
14   is a justification for its inaction with respect to the locality structure.
15           521.     Under Medicare Part B, nationwide “redistributive effects” are a regular result of the
16   tri-annual GPCI updates and the annual RVU updates, and there would have been a nationwide $5
17   billion result of CMS’ 2010 plan to modify the calculation of the peGPCI. CMS has never
18   expressed a concern for “redistributive effects” in those situations.
19           522.     Under Medicare Part A, nationwide “redistributive effects” are also common results
20   that occur: (A) when hospitals “move” from one MSA to another; (B) when hospital payments are
21   updated annually; (C) when hospital payments are modified every four years based on changes in
22   wage levels; (D) when hospital payments are modified every three years based on changes to the
23   occupational mix; (E) whenever the GAO modifies the boundaries of an MSA or creates a new
24   MSA. CMS has never expressed a concern for “redistributive effects” in those situations.
25           523.     However, implicit in CMS’ concern is an acceptance by CMS of the fact that the
26   current locality system should result in underpayments to Plaintiffs and Members of the Class that
27   are funding unearned and undeserved windfall overpayments to other suppliers. Also implicit in this
28   rationale is a greater concern for placating those suppliers whose windfall payments would be

                                                                   126
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page137 of 172


 1   terminated than there is for payment accuracy. Making “Accurate and Predictable Payments” is one
 2   of CMS’ “Strategic Plan Objectives.” Forcing these involuntary subsidies is not.
 3          524.     Congress may and has enacted legislation that creates artificial redistributions under
 4   Part B through the 1.0 work GPCI floor and the special 1.5 work GPCI floor for Alaska, and under
 5   Part A through the 1.0 wage index floor for hospitals in “frontier states” and the increased payments
 6   to “1109 Qualifying Hospitals.” CMS has no such mandate that would allow it to artificially
 7   maintain inaccurate payment levels that involuntarily redistribute payments from those who have
 8   earned them to those who have not.
 9          525.     The only rational response to the current situation would be for CMS to cure the
10   underpayments rather than express concern over the elimination of unearned overpayments.
11          526.     In the past, the Secretary has mitigated the effects of payment reductions resulting
12   from locality changes by phasing in the reductions over one or two years when implementing the
13   1996 locality changes (see ¶¶ 260-262, supra) and again in 2009 when CMS corrected two locality
14   configurations in Texas (“Houston” and “Austin”) where two low-cost counties had mistakenly been
15   combined with two high-cost counties (see ¶¶ 381-384; and Exhibit 6).
16          527.     There is no rational impediment to employing a similar mitigation method in
17   resolving the current payment imbalances which only worsen over time.
18                             b.         Irrational Concern Over Administrative Burden
19          528.     The Secretary has expressed concern about additional administrative costs that may
20   result from a reconfiguration of the locality structure, but has never articulated any quantitative
21   estimate of the magnitude of such additional costs. (See CY 2008 Final Rule, 11/27/2007, 72 FR
22   66246.) Regardless, the Secretary’s “concern” is misplaced for two reasons.
23          529.     First, CMS’ decade of massive underpayments to suppliers has led to shortage of
24   available medical care for beneficiaries in over 200 counties across the country. Insuring the
25   availability of adequate health care is one of the fundamental purposes of the Medicare Act, and that
26   purpose is paramount to concerns over administrative burdens:
27          “The legislation which created health insurance for the aged is remedial and
            therefore to be construed liberally to effectuate the congressional purpose.
28          [Citation.] The purpose of the Act was to insure that adequate medical care was

                                                                  127
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page138 of 172


 1           available to the aged throughout this country. [Citation.] Neither the courts nor the
             Secretary should, in the interest of minimizing costs so interpret the provisions of the
 2           Act as to frustrate its purpose.” (Sowell v. Richardson, 319 F.Supp. 689, 691 (D.S.C.
             1970).)
 3
 4           530.      Second, the GAO found – after consulting with CMS officials – that CMS would
 5   experience “onetime upfront costs if the current payment localities were modified, regardless of the
 6   number of localities generated by the approach chosen.” (GAO Locality Report, p. 37.) The GAO
 7   also found that even though reapplication of the 5% iterative method to all states (including single-
 8   locality states) would increase the number of localities nationwide from 87 to 219, it would reduce
 9   the national average payment difference by 52% while imposing only “a minimal amount of
10   additional administrative burden on CMS, Medicare carriers, and physicians.” (GAO Locality
11   Report, p. 35.)
12           531.      Third, even though the number of localities may increase if a new locality structure
13   is implemented, the GAO also found that the number of localities generated by the county-based and
14   MSA-based iterative approaches “could be reduced with very little loss in payment accuracy by
15   regrouping single-county and single-MSA payment localities with similar GAFs, respectively, into
16   larger payment localities.” (GAO Locality Report, pp. 25-39.) Combining localities across state
17   lines in this manner would greatly reduce any increased administrative burden.
18           532.      Contrasting the “minimal amount” of additional administrative burden with the fact
19   that the reapplication of the 5% iterative method would result in a reduction of the national average
20   payment difference by 52% leads to the inescapable conclusion that the Secretary may not rely on
21   a justification whose relationship to an asserted goal is so attenuated as to render the justification
22   arbitrary or irrational. (See City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 446, 105 S.Ct.
23   3249, 87 L.Ed.2d 313 (1986).)
24                             c.         Irrational Concern Over the Need for Further Study
25           533.      In 2001, the CMA first called CMS’ attention to the need to reconfigure the locality
26   structure to cure payment disparities, and began meeting with CMS to discuss possible ways to
27   eliminate those disparities. (See ¶¶ 275-277, supra.)
28   / / /

                                                                  128
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page139 of 172


 1             534.      In 2003, CMS first sought comments on the locality issue, and received “numerous
 2   comments” from practitioners, beneficiaries, and medical associations requesting that certain
 3   counties be removed from their current locality assignment. In response, CMS stated that it would
 4   “continue to examine alternatives.” (See ¶¶ 278-279, supra.)
 5             535.      In 2005, CMS stated that it “[does] not disagree with the view that a comprehensive
 6   evaluation of the current payment localities is due.” (CY 2006 Final Rule, 11/21/2005, 70 FR
 7   70152; see ¶ 313, supra.) CMS repeated similar statements in 2008, 2009, and 2010. (See ¶¶ 378,
 8   388, and 392, supra.)
 9             536.      Six such comprehensive studies have been completed since 2001, in which a total of
10   twenty-one (21) alternatives locality configurations were analyzed. (See ¶¶ 414 and 417, supra;
11   Exhibit 11.)58 Each of the studies reaches the same conclusion – payment accuracy can be improved
12   through the reapplication of the 5% iterative method and through the application of other locality
13   structures, including the use of MSAs (as CMS uses for hospitals under Part A). Yet despite these
14   efforts, the Secretary still plans to “study” the issue.
15             537.      By this time, there is no dispute that: (a) reconfiguration is needed because, as the
16   GAO found, there are “large payment differences” in 447 counties in the United States; (b)
17   physicians and other suppliers in over 200 counties have been underpaid over a ten year period by
18   large margins, some upwards of 15-20%; (c) physicians and other suppliers have been overpaid over
19   that same ten year period at the expense of Plaintiffs and Members of the Class; and (d) Medicare
20   beneficiaries, among the most vulnerable and underprivileged of our population, are being
21   overcharged, some upwards of 15-20%.
22             538.      Still, CMS has no current plan to implement any sort of reconfiguration. Instead,
23   CMS has repeatedly fallen back on a need for further study as a justification for failing to modify
24   the locality structure, most recently in the CY 2011 Proposed Rule and Final Rule. (See ¶ 407,
25   supra.)
26
27             58
               It is interesting to note that none of the locality studies conducted since 1996 – including
     CMS’ – has considered the current locality structure as a viable alternative. The CMA’s 2006 study
28   included the current structure as a baseline for comparative purposes only. (See Exhibit 11.)

                                                                      129
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page140 of 172


 1          539.     Uniform reapplication of the 5% iterative method would correct the payment
 2   disparities suffered by Plaintiffs and Members of the Class. There is no rational reason why a
 3   known, previously utilized method should not be employed to immediately implement that cure
 4   while “further studies” are undertaken seeking what may be a better or more comprehensive cure
 5   on a nationwide scale.
 6                             d.         Irrational Desire to Obtain Support for Changes from State
 7                                        Medical Associations
 8          540.     When HCFA expressed a desire to create statewide localities during the transition
 9   period between 1991 and 1996, it either sought the support of physicians in “losing areas” or the
10   support of state medical associations for the creation of those statewide localities. (See ¶¶ 142, 146,
11   153, 174-175, 178-181, 186, and 195, supra.)
12          541.     From 2004 through 2010, CMS expressed the desire to obtain the support of state
13   medical associations for any locality modification. (See ¶¶ 280-281, 313-314, 322, 331, 361, 369,
14   378, 385, 388, 392, and 416-417, supra.)
15          542.     That desire has no rational basis for at least three reasons:
16                   (i) First, the use of RVU weighting instead of population weighting means that
17          modifying a locality will only affect payments to the counties that had been in the locality
18          before the modification, and will not affect payment rates to any other county in a particular
19          state. Thus, there is no reason to seek the opinion of suppliers in counties in the rest of a
20          state that would not be affected at all by a locality modification.
21                   (ii) Second, state medical associations are not representative of all suppliers in a
22          state who provide medical services under Part B, and do not represent beneficiaries at all.
23                   (iii) Third, state medical associations include many members who do not provide
24          medical services under Part B such as medical students, retired physicians, and practice
25          managers. The opinion of such members should carry no weight in the decision making
26          process.
27          543.     In 1993, HCFA stated that it would seek support from “losing areas to support ...
28   change.” (CY 1994 Proposed Rule, 7/14/1993, 58 FR 38003; see ¶ 174, supra.) This makes a

                                                                  130
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page141 of 172


 1   certain degree of sense. What is irrational is CMS’ current practice of seeking support from
 2   “winning areas” who would receive windfall payments at the expense of the losing areas, the
 3   majority of whom should be expected to act in their own financial self interest by “voting” to receive
 4   those windfall payments.
 5             544.     What is also irrational is CMS’ failure to seek the views of all suppliers (in addition
 6   to only the physicians) in the “losing areas,” failure to seek the views of the beneficiaries in the
 7   “winning areas,” and CMS’ failure to continue to test the degree of support or lack of support as the
 8   years passed and demographic and economic conditions changed.
 9                      6.        There Is No Other Conceivable Rational Basis for Maintaining the
10                                Current Locality Structure
11             545.     There is no conceivable rational basis for the locality classification in which the
12   Secretary continues to place Plaintiffs and Members of the Class where the Secretary and CMS
13   know that payments Plaintiffs and Members of the Class should be receiving are being diverted to
14   other suppliers who have not earned them.
15             546.     Indeed, the irrationality of the Secretary’s failure to revise the locality structure is
16   also demonstrated by the effect it has on beneficiaries in rural counties. Because the Secretary has
17   failed to create new localities made up of high-cost counties in multi-county localities whose costs
18   exceed the 5% threshold set by the Secretary in 1996, and because suppliers in the low-cost counties
19   in those multi-county localities are allowed to overcharge Medicare, this means that the out-of-
20   pocket costs borne by beneficiaries in those low-cost counties is wrongfully inflated. (See ¶¶ 11 and
21   27, supra.)
22             547.     The Secretary has never once addressed this issue from the perspective of those
23   beneficiaries, the very persons the Medicare system is supposed to protect. (See ¶¶ 177 and 180,
24   supra.)
25             548.     Clearly, there is no rational reason to continue to disadvantage those beneficiaries,
26   the most vulnerable group of our population.
27             549.     Further, there is no rational basis for a payment system where:
28   / / /

                                                                     131
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page142 of 172


 1          (A)        CMS knowingly and intentionally underpays Plaintiffs and the Members of the
 2                     Class;
 3          (B)        CMS knowingly and intentionally overpays other suppliers, funding those windfall
 4                     overpayments with money that by right should go to Plaintiffs and Members of the
 5                     Class;
 6          (C)        Payment accuracy thresholds set by the Secretary in 1996 – the 5% iterative rule, the
 7                     3.16 % payment error threshold, the 5% boundary difference threshold – are ignored
 8                     when they are exceeded in later years;
 9          (D)        CMS adopts regulations that provide for yearly updates to the locality structure under
10                     Part A, but intentionally fails to adopt any regulation to provide a mechanism to
11                     update localities under Part B;
12          (E)        CMS adopts regulations that provide a mechanism under Part A for hospitals to
13                     “move into” an adjoining locality to achieve greater payment accuracy, but
14                     intentionally fails to adopt any such regulation for suppliers under Part B;
15          (F)        CMS improperly delegates the authority to initiate locality changes under Part B to
16                     state medical associations, even though President George H.W. Bush had found a
17                     similar delegation to be unconstitutional in 1991, and even though CMS has
18                     acknowledged that those medical associations do not represent all suppliers who
19                     receive payments under Part B; and
20          (G)        Medicare beneficiaries in the affected counties are increasingly unable to access
21                     local medical care because physicians and other suppliers in the underpaid counties
22                     are increasingly unable to provide medical services to Medicare beneficiaries while
23                     Medicare payment rates in their counties are so far below the cost of providing those
24                     services.
25          550.       CMS’ self-described “Mission” is “[t]o ensure effective, up-to-date health care
26   coverage and to promote quality care for beneficiaries.” CMS describes its “Vision” as being one
27   to “achieve a transformed and modernized health care system” and states that it will accomplish its
28

                                                                    132
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page143 of 172


 1   “mission by continuing to transform and modernize America’s health care system.” CMS also
 2   identifies one of its “Strategic Plan Objectives” is to make “Accurate and Predictable Payments.”
 3            551.      Maintenance of the current locality structure means that Mission, Vision, and
 4   Objectives will not be met. The disparate treatment of Plaintiffs and Members of the Class caused
 5   by CMS’ deliberate policy of freezing the 1996 Part B locality configuration has no rational basis
 6   because: (a) it does not “ensure effective, up-to-date health care coverage”; (b) it does not “promote
 7   quality care for beneficiaries”; (c) it does not “achieve a transformed and modernized health care
 8   system”; and (d) it does not generate “accurate” payments.
 9            E.        Lack of an Adequate Legal Remedy
10            552.      The Secretary of the Department of Health and Human Services is threatening to
11   continue to use the current locality structure to calculate payments to suppliers under Medicare Part
12   B through at least 2013 in violation of the constitutional rights of Plaintiffs and Members of the
13   Class.
14            553.      The Secretary of the Department of Health and Human services has a clear duty to
15   refrain from violating the constitutional rights of Plaintiffs and Members of the Class.
16            554.      Plaintiffs and Members of the Class have a clear right to have this threatened
17   violation prevented, but have no adequate legal remedy for this threatened violation of their
18   constitutional rights.
19            555.      The threatened action will also cause injury to two extensive groups of Medicare
20   beneficiaries. First, beneficiaries in counties where suppliers are underpaid will have their access
21   to medical care restricted as more and more suppliers either stop taking new Medicare patients or
22   stop taking Medicare patients altogether. Second, beneficiaries in counties where suppliers are
23   overpaid will be charged more for out-of-pocket expenses than they should.
24            556.      Plaintiffs and Members of the Class have no adequate legal remedy to prevent the
25   threatened action.
26   XII.     SOURCE MATERIALS
27            557.      Following the signature page is a “Bibliography of Source Materials” listing matters
28   that were consulted and relied upon in the preparation of this First Amended Complaint.

                                                                     133
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page144 of 172


 1   XIII. CLASS ALLEGATIONS
 2           558.      Plaintiffs bring this action on behalf of themselves and a Class defined as follows:
 3           All physicians, practitioners and other persons or entities in the United States
             (including the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American
 4           Samoa and the Northern Mariana Islands): (a) who are “suppliers” as that term is
             defined in 42 U.S.C. § 1395x(d); (b) who have furnished and provided “medical and
 5           other health services” as that term is defined in 42 U.S.C. § 1395x(s) to Medicare
             beneficiaries under United States Code, Title 42, Chapter 7, Subchapter XVIII, Part
 6           B, “Health Insurance for Aged and Disabled” from March 14, 2001, to the present;
             (c) who have accepted assignments for all items or services furnished to the
 7           beneficiaries that are at issue herein; (d) who have waived all rights for payment
             from any beneficiary with respect to all items or services at issue herein; and (e) who
 8           have provided such medical and other health services in counties located in fee
             schedule areas where the GAF of the county in which the medical and other health
 9           services were provided exceeded the weighted average GAF of the remaining
             counties in the fee schedule area by 5%.
10
11           559.      Plaintiffs believe that the total number of Class Members is over 10,000 and is so
12   large that individual joinder of all Members of the Class is impracticable. Plaintiffs also believe that
13   the identity of the Class members is obtainable from information and records in the possession of
14   CMS.
15           560.      The amount in controversy with respect to each Plaintiff exceeds one thousand
16   dollars ($1,000). Plaintiffs believe that the total amount in controversy for all Members of the Class
17   is approximately three billion one hundred ninety million dollars ($3,190,000,000). 59
18           561.      Plaintiffs’ claims are typical of the claims of the Members of the Class, and fairly
19   encompass the claims of the Members of the Class. Plaintiffs and the Members of the Class have
20   been harmed by the same pattern of Medicare’s conduct in similar or identical ways.
21           562.      Plaintiffs and Members of the Class are asserting claims properly assigned to them
22   by persons who are Medicare beneficiaries. Plaintiffs and Members of the Class therefore have
23   standing to assert such assigned claims.
24   / / /
25
26           59
               According to the “2010 Annual Report of the Boards of Trustees of the Federal Hospital
     Insurance and Federal Supplementary Medical Insurance Trust Funds,” total expenditures in 2009
27   for physician fee schedule services under Part B were approximately $62.5 billion. The average
     annual underpayment to Plaintiffs and Members of the Class between 2001 and 2010 is
28   approximately $320 million, or approximately ½ of 1 percent of those total annual expenditures.

                                                                    134
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page145 of 172


 1          563.     Class action treatment is superior to all other methods for the fair and efficient
 2   adjudication of this controversy in that a class action will equitably apportion the fees and expenses
 3   in bringing this action among all Members of the Class, including those whose underpayments may
 4   be relatively small when compared with the expense and burden of bringing an individual action.
 5   There will be no real difficulty in the management of this action as a class action.
 6          564.     Plaintiffs will fairly and adequately protect and represent the interests of the Members
 7   of the Class, and have retained counsel who are competent and experienced in class actions and
 8   complex litigation.
 9          565.     Common questions of law and fact exist as to all Members of the Class, and
10   predominate over questions which only affect individual Members of the Class. Among the
11   questions of law and fact which are common to the Class are:
12                   (a) whether 42 U.S.C. § 1395w-4(j)(2) is unconstitutional as applied to
13          Plaintiffs and Members of the Class;
14                   (b) whether 42 C.F.R. § 414.4 is unconstitutional as applied to Plaintiffs and
15          Members of the Class;
16                   (c) whether CMS’ failure to reclassify the counties or localities in which
17          Plaintiffs and Members of the Class have provided medical and other health services
18          as separate fee schedule areas lacks a reasonable basis;
19                   (d) whether CMS’ failure to reclassify the counties or localities in which
20          Plaintiffs and Members of the Class have provided medical and other health services
21          as separate fee schedule areas has denied Plaintiffs and Members of the Class their
22          right to equal protection of the laws;
23                   (e) whether CMS improperly delegated its duty to reclassify the counties or
24          localities in which Plaintiffs and Members of the Class have provided medical and
25          other health services as separate fee schedule areas to state medical associations;
26                   (f) whether CMS has unlawfully or unreasonably continued to assign counties
27          in which Plaintiffs and Members of the Class have provided medical and other health
28          services to improper or incorrect localities despite objective evidence that the county

                                                                  135
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page146 of 172


 1           GAFs exceed the locality GAFs by more than the parameters previously adopted and
 2           implemented by CMS;
 3                     (g) whether the Secretary of Health and Human Services has violated the
 4           ongoing duty and legal obligation to ensure that Plaintiffs and Members of the Class
 5           are adequately, accurately, and equitably compensated for the cost of providing
 6           treatment to Medicare beneficiaries; and
 7                     (h) whether Plaintiffs and Members of the Class are entitled to compensation
 8           for underpayments for medical and other health services provided to Medicare
 9           beneficiaries under United States Code, Title 42, Chapter 7, Subchapter XVIII, Part
10           B, “Health Insurance for Aged and Disabled” during the Class period.
11   XIV. CLAIMS FOR RELIEF
12           A.        First Claim for Relief – Declaration That CMS Has Denied Plaintiffs and
13                     Members of the Class Equal Protection of the Law, and Other Relief
14           566.      Plaintiffs and Members of the Class hereby incorporate Paragraphs 1 through 565,
15   inclusive, as though fully set forth herein.
16           567.      CMS has denied Plaintiffs and Members of the Class equal protection of the law, and
17   has violated 5 U.S.C. § 706(2)(B).
18           568.      Pursuant to 42 U.S.C. § 1395w-4(b), CMS has a duty to establish, on an annual basis,
19   fee schedules to determine the amount of payments it will make for all medical services furnished
20   under Medicare Part B in all fee schedule areas or payment localities. In establishing the fee
21   schedules, CMS has a statutory duty to regularly review and update the relative value units, the
22   conversion factor, and the geographic practice cost indexes.
23           569.      The purpose of the statutory requirements for establishing fee schedules and for
24   requiring that CMS update and review the factors used to establish the fee schedules is to ensure that
25   Medicare beneficiaries receive appropriate medical treatment by ensuring that suppliers are
26   appropriately, accurately, and equitably compensated for services they provide to Medicare
27   beneficiaries.
28   / / /

                                                                    136
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page147 of 172


 1          570.     Under that statutory scheme, suppliers’ fees are to be determined based on costs for
 2   specific services in the locality in which they were provided relative to the national average of costs
 3   for such services. The fees are to be based on a methodical measurement of local costs relative to
 4   the nationwide average of costs, and the accuracy of those measurements can only be achieved by
 5   employing a consistent set of criteria that is uniformly applied nationwide.
 6          571.     Defining boundaries of localities to encompass areas with homogeneous costs is
 7   necessary in order to compute payment amounts for suppliers’ services in a manner that reflects the
 8   true economic costs of providing medical services to Medicare beneficiaries relative to the national
 9   average of those costs. If locality boundaries encompass areas with heterogeneous costs, the
10   payments made by Medicare reflect an average of the costs of the services provided by suppliers in
11   the demographically disparate areas of those localities, and those payments will not accurately
12   reflect the costs of providing those services.
13          572.     Thus, in order for the statutory scheme to achieve its goal of ensuring Medicare
14   beneficiaries receive appropriate treatment by ensuring suppliers receive equitable payments, the
15   selection of geographic localities in which costs are measured must also be achieved using a
16   consistent set of criteria that is uniformly applied nationwide.
17          573.     In addition to the express statutory requirements for establishing fee schedules,
18   HCFA determined in 1991 – in the absence of an express directive from Congress – that it had
19   authority to establish and to modify payment localities. By assuming responsibility for creating
20   payment localities and for assigning counties to payment localities, CMS assumed the duty to ensure
21   that counties are assigned to payment localities that have relatively homogeneous input prices.
22          574.     Here, Plaintiffs and Members of the Class provide services in counties that have not
23   been assigned to the correct payment localities. Payments to Plaintiffs and Members of the Class
24   for providing services under Medicare Part B are significantly below the actual costs of providing
25   those services and do not accurately reflect the actual costs of providing those services relative to
26   the national average.
27          575.     Because Plaintiffs and Members of the Class have been assigned the claims at issue
28   herein by Medicare beneficiaries to whom they provided services, because Plaintiffs and Members

                                                                  137
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page148 of 172


 1   of the Class cannot recover additional payment from Medicare beneficiaries for the services
 2   provided to those beneficiaries, and because CMS is solely responsible for determining the amount
 3   of payments that are made to physicians who treat Medicare beneficiaries, CMS has an ongoing duty
 4   to assure that Plaintiffs and Members of the Class are compensated appropriately and equitably.
 5            576.    Since 1999, payments made to Plaintiffs and Members of the Class under the current
 6   locality structure have failed to meet the standards of payment accuracy established by HCFA in
 7   1996, in particular the 5% iterative threshold, the 3.16% payment error threshold, and the 5%
 8   boundary difference threshold.
 9            577.    Since 2001, CMS has received notice from Plaintiffs and Members of the Class, from
10   Congress, from the GAO, from MedPAC, from CMS’ own commissioned studies, and from other
11   persons and entities that its ongoing assignment of Plaintiffs and Members of the Class to their
12   current payment localities results in significant underpayments to Plaintiffs and Members of the
13   Class.
14            578.    Since 2001, CMS has been aware that the underpayments to Plaintiffs and Members
15   of the Class result in and actually fund windfall overpayments to other suppliers in low-cost counties
16   located in the same localities as Plaintiffs and Members of the Class.
17            579.    Since 2004, the existence of the underpayments to Plaintiffs and Members of the
18   Class and overpayments to other suppliers has been repeatedly and publicly acknowledged by CMS.
19            580.    Since 2004, six studies have been conducted by CMS, GAO, MedPAC, CMA,
20   RTI/UI, and Acumen which analyzed twenty-one different possible locality structures, many of
21   which would achieve a far greater degree of payment accuracy than the present system.
22            581.    CMS has not restructured the payment localities used to compute payment amounts
23   for physicians’ services since 1996 despite: (a) CMS’ repeated acknowledgment that significant
24   demographic and economic changes have occurred in certain counties since 1996; (b) CMS’
25   awareness that numerous counties should be classified as separate localities to ensure appropriate,
26   accurate, and equitable compensation is paid; (c) directives from Congress that CMS devise a plan
27   to correct the payment discrepancy; (d) requests from the medical community to correct the payment
28

                                                                   138
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page149 of 172


 1   discrepancy; and (e) studies undertaken since 2004 that show significant improvements in payment
 2   accuracy can be achieved through a reconfiguration of the locality structure.
 3           582.    As a result, Plaintiffs and Members of the Class have been underpaid by
 4   approximately $3.19 billion from March 2001 through the end of 2010. Those underpayments will
 5   continue until the current locality structure is modified to meet or exceed the standards of payment
 6   accuracy established by HCFA in 1996.
 7           583.    The current payment localities used by Medicare are derived from economic statistics
 8   that date from 1965 to 1996 even though more recent statistics are available that can and should be
 9   used to modify the localities. Using updated statistics to create and designate payment localities is
10   necessary to reflect changing economic realities and to achieve the statutory and public policy goals
11   behind Part B of Medicare, goals which cannot be realized so long as CMS continues using outdated
12   economic data to assign counties to payment localities. In addition, a method for modifying the
13   localities is and has been available for keeping the locality configuration current. That method was
14   studied, approved, and used in 1996 to restructure the localities existing at the time and there is no
15   rational reason why it should not have been used again when CMS first became aware of the
16   payment disparities caused by the dated locality configuration.
17           584.    When Plaintiffs and Members of the Class are significantly underpaid because CMS
18   continues to assign them to payment localities that do not reflect the true economic costs of services
19   they provide relative to the national average of those costs, it jeopardizes their ability to continue
20   providing medical services to Medicare beneficiaries and/or to accept new Medicare beneficiaries.
21   This is contrary to CMS’ own policies and objectives, undermines the purpose of the physician fee
22   schedule, and leads to diminished access to medical care for Medicare beneficiaries in over 200
23   counties across the country.
24           585.    CMS’ overpayments to suppliers in low-cost counties located in the same localities
25   as Plaintiffs and Members of the Class harms Medicare beneficiaries in those low-cost counties as
26   well. Based on inflated rates set by CMS, those beneficiaries are over-charged because they must
27   pay 20% of those improperly inflated rates.
28   / / /

                                                                  139
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page150 of 172


 1           586.     CMS has no rational basis for its disparate treatment of Plaintiffs and the Members
 2   of the Class. In fact, CMS’ failure to revise the payment localities and to reclassify certain counties
 3   as separate localities is both arbitrary and capricious.
 4           587.     In contrast to the locality structure it uses under Medicare Part B, CMS employs a
 5   radically different approach to the locality structure under Medicare Part A where: (a) the locality
 6   structure is updated every year; (b) the geographic units are MSAs which are designed to accurately
 7   reflect uniform demographics within their boundaries; and (c) there is a mechanism which allows
 8   hospitals to “move into” a neighboring locality to achieve greater payment accuracy.
 9           588.     None of the repeated justifications for its continued refusal to remedy the payment
10   inaccuracies expressed by CMS in its three-part mantra has any rational basis, and there is no
11   conceivable rational basis which would support CMS’ continued failure to revise the payment
12   locality structure under Medicare Part B. (See ¶¶ 487-551, supra.)
13           589.     CMS has been aware of the disparate treatment Plaintiffs and Members of the Class
14   have been receiving under its administration of Medicare Part B since 2001, yet CMS has
15   intentionally failed and refused to modify and equalize that treatment.
16           590.     As a result of this ongoing violation of the right to equal protection and equal
17   treatment under the law, Plaintiffs and Members of the Class have been underpaid in the
18   approximate amount of $3,190,000 from March 14, 2001, through the end of 2010.
19           591.     Such underpayments are ongoing and will continue to accrue with respect to each
20   new medical treatment, each new medical service, and each new medical supply furnished by
21   Plaintiffs and Members of the Class to beneficiaries until the Secretary of Health and Human
22   Services either: (a) restructures the Part B payment localities through a reapplication of the 5%
23   iterative threshold and other standards of payment accuracy identified by HCFA in 1996 in a
24   uniform, county-by-county manner nationwide; or (b) restructures the Part B payment localities in
25   a uniform manner nationwide that meets or exceeds the payment accuracy standards identified by
26   HCFA in 1996.
27           592.     The Secretary of the Department of Health and Human Services threatens to continue
28   to violate the constitutional rights of Plaintiffs and Members of the Class in violation of a clear legal

                                                                   140
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page151 of 172


 1   duty. Great public harm will also flow from this threatened behavior, but Plaintiffs and Members
 2   of the Class lack an adequate legal remedy to prevent the threatened behavior.
 3          593.      Therefore, Plaintiffs and Members of the Class seek an order: (i) prohibiting the
 4   Secretary of the Department of Health and Human Services from configuring or maintaining a
 5   locality structure under Medicare Part B that does not meet or exceed the standards of payment
 6   accuracy the Secretary adopted in 1996; and (ii) prohibiting the Secretary of the Department of
 7   Health and Human Services from delegating any part of the duty to reconfigure the payment locality
 8   structure under Medicare Part B to state medical associations.
 9          B.        Second Claim for Relief – Declaration That 42 U.S.C. § 1395w-4(j)(2) Is
10                    Unconstitutional as Applied to Plaintiffs and Members of the Class, and Other
11                    Relief
12          594.      Plaintiffs and Members of the Class hereby incorporate Paragraphs 1 through 593,
13   inclusive, as though fully set forth herein.
14          595.      Plaintiffs and Members of the Class seek a declaration or finding that 42 U.S.C. §
15   1395w-4(j)(2) is unconstitutional as applied to them.
16          596.      42 U.S.C. § 1395w-4(j)(2) is unconstitutional as applied to Plaintiffs and Members
17   of the Class because CMS’ establishment and assignment of payment localities from 2001 to the
18   present, for purposes of computing payment amounts for physicians’ services, deprives Plaintiffs
19   and Members of the Class of their right to equal protection of the law.
20          597.      As a result of the unconstitutional application of 42 U.S.C. § 1395w-4(j)(2),
21   Plaintiffs and Members of the Class have been underpaid in the approximate amount of $3,190,000
22   from March 14, 2001, through the end of 2010.
23          598.      Such underpayments are ongoing and will continue to accrue with respect to each
24   new medical treatment, each new medical service, and each new medical supply furnished by
25   Plaintiffs and Members of the Class to beneficiaries until the Secretary of Health and Human
26   Services either: (a) restructures the Part B payment localities through a reapplication of the 5%
27   iterative threshold and other standards of payment accuracy identified by HCFA in 1996 in a
28   uniform, county-by-county manner nationwide; or (b) restructures the Part B payment localities in

                                                                   141
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page152 of 172


 1   a uniform manner nationwide that meets or exceeds the payment accuracy standards identified by
 2   HCFA in 1996.
 3           599.      The Secretary of the Department of Health and Human Services threatens to continue
 4   to violate the constitutional rights of Plaintiffs and Members of the Class in violation of a clear legal
 5   duty. Great public harm will also flow from this threatened behavior, but Plaintiffs and Members
 6   of the Class lack an adequate legal remedy to prevent the threatened behavior.
 7           600.      Therefore, Plaintiffs and Members of the Class seek an order: (i) prohibiting the
 8   Secretary of the Department of Health and Human Services from configuring or maintaining a
 9   locality structure under Medicare Part B that does not meet or exceed the standards of payment
10   accuracy the Secretary adopted in 1996; and (ii) prohibiting the Secretary of the Department of
11   Health and Human Services from delegating any part of the duty to reconfigure the payment locality
12   structure under Medicare Part B to state medical associations.
13           C.        Third Claim for Relief – Declaration That 42 C.F.R. § 414.4 Is Unconstitutional
14                     as Applied to Plaintiffs and Members of the Class, and Other Relief
15           601.      Plaintiffs and Members of the Class hereby incorporate Paragraphs 1 through 600,
16   inclusive, as though fully set forth herein.
17           602.      Plaintiffs and Members of the Class seek a declaration or finding that 42 C.F.R. §
18   414.4 is unconstitutional as applied to them.
19           603.      42 C.F.R. § 414.4 is unconstitutional as applied to Plaintiffs and Members of the
20   Class because CMS’ establishment and assignment of payment localities from 2001 to the present,
21   for purposes of computing payment amounts for physicians’ services, deprives Plaintiffs and
22   Members of the Class of their right to equal protection of the law.
23           604.      As a result of the unconstitutional application of 42 C.F.R. § 414.4, Plaintiffs and
24   Members of the Class have been underpaid in the approximate amount of $3,190,000 from March
25   14, 2001, through the end of 2010.
26           605.      Such underpayments are ongoing and will continue to accrue with respect to each
27   new medical treatment, each new medical service, and each new medical supply furnished by
28   Plaintiffs and Members of the Class to beneficiaries until the Secretary of Health and Human

                                                                    142
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page153 of 172


 1   Services either: (a) restructures the Part B payment localities through a reapplication of the 5%
 2   iterative threshold and other standards of payment accuracy identified by HCFA in 1996 in a
 3   uniform, county-by-county manner nationwide; or (b) restructures the Part B payment localities in
 4   a uniform manner nationwide that meets or exceeds the payment accuracy standards identified by
 5   HCFA in 1996.
 6           606.      The Secretary of the Department of Health and Human Services threatens to continue
 7   to violate the constitutional rights of Plaintiffs and Members of the Class in violation of a clear legal
 8   duty. Great public harm will also flow from this threatened behavior, but Plaintiffs and Members
 9   of the Class lack an adequate legal remedy to prevent the threatened behavior.
10           607.      Therefore, Plaintiffs and Members of the Class seek an order: (i) prohibiting the
11   Secretary of the Department of Health and Human Services from configuring or maintaining a
12   locality structure under Medicare Part B that does not meet or exceed the standards of payment
13   accuracy the Secretary adopted in 1996; and (ii) prohibiting the Secretary of the Department of
14   Health and Human Services from delegating any part of the duty to reconfigure the payment locality
15   structure under Medicare Part B to state medical associations.
16           D.        Fourth Claim for Relief – Declaration That CMS Has Unlawfully Delegated Its
17                     Duty to Reconfigure Localities, and Other Relief
18           608.      Plaintiffs and Members of the Class hereby incorporate Paragraphs 1 through 607,
19   inclusive, as though fully set forth herein.
20           609.      Under 42 C.F.R. § 414.4, the agency has assumed the authority to create and modify
21   localities without having a clear grant of authority from Congress to do so.
22           610.      In exercising that authority, the Agency has consistently employed an adversarial
23   rulemaking process that gives authority to state medical associations to initiate and approve locality
24   reconfigurations. In doing so, the Agency: (a) vested significant authority to execute Federal law
25   in persons not appointed by the President in violation of the Appointments Clause, Article II, section
26   2; (b) conferred lawmaking power in violation of Article I, section 7; and (c) violated U.S.C. §
27   706(2)(B).
28   / / /

                                                                    143
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page154 of 172


 1           611.     Those state medical associations are not required by law or by the Agency to employ
 2   any objective criteria or standards in initiating or approving locality changes. They do not represent
 3   all persons affected by any given locality reconfiguration, and represent some persons who would
 4   not be affected by any locality reconfiguration. Further, the Agency has no process based on
 5   changed circumstances for the reexamination of the locality changes initiated or approved by those
 6   state medical associations.
 7           612.     Between 1992 and 1995, HCFA created six single-state localities having delegated
 8   the authority to initiate and approve such modifications to the medical associations of the respective
 9   states. HCFA created those single-state localities without regard to the effect on payment accuracy
10   and without regard to the desires and opinions of suppliers in those states who were not members
11   of the state medical associations
12           613.     In the 1996 locality reconfiguration, HCFA did not apply the 5% iterative method
13   to those states and gave no consideration at all to the possibility of modifying the locality structure
14   of those five states.
15           614.     Between 1997 and the present, CMS has not definitively proposed or implemented
16   any locality changes.
17           615.     Between 1996 and the present, only one state medical association has proposed a
18   locality change, a proposal that was not implemented based on a specious rationale. In 2004, the
19   California Medical Association expressed its support for a modification of California’s locality
20   structure. The CMA’s proposal was incorrectly described by CMS in the CY 2005 Proposed Rule.
21   CMS rejected the proposal based on the erroneous premise that it could not modify payments to
22   other counties in California while phasing in the locality changes, a practice that CMS has employed
23   many times in other circumstances
24           616.     In 2005, the demonstration project proposed by the CMA was rejected by CMS based
25   on inherently contradictory positions.
26           617.     In 2005, CMS proposed implementing a locality change that would make Santa Cruz
27   and Sonoma Counties single-county localities. CMS did not implement the proposed change based
28   on lack of support from the CMA and also based once again on the erroneous premise that it could

                                                                   144
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page155 of 172


 1   not modify payments to other counties in California while phasing in the locality changes, a practice
 2   that CMS has employed many times in other circumstances.
 3           618.     In 2007, CMS sought comments on several possible locality changes for California
 4   it was considering. The proposals were seriously flawed, based on inaccurate and inconsistent data
 5   and descriptions. CMS did not implement any of the changes based on lack of support from the
 6   CMA.
 7           619.     In delegating authority to state medical associations, CMS has: (i) has given no
 8   objective standards to the state medical associations for when locality changes should be considered,
 9   initiated, or approved; (ii) has set no objective standards for what it considers the necessary degree
10   of “support” or “demonstrated consensus” by a state medical association to be in order to initiate or
11   approve locality changes; (iii) has retained no authority, final or otherwise, over the action or
12   inaction of those state medical associations with respect to the initiation or approval of changes to
13   the locality structure; and (iv) has established no process by which any changes to the locality
14   structure initiated or approved by state medical associations could be administratively challenged
15   or reviewed.
16           620.     By delegating its authority to the state medical associations, CMS cannot ensure that
17   the state medical associations will comply with federal law. The state medical associations are not
18   federal entities and are not required to comply with CMS’ duties under federal law.
19           621.     CMS delegated its authority to initiate and approve locality changes to the state
20   medical associations even though President George H. W. Bush deemed a similar delegation by
21   Congress in 1990 to be unconstitutional. In November 1990, President Bush went so far as to direct
22   HCFA not to enforce a provision of the 1990 Act because it vested significant authority to execute
23   federal law to persons not appointed by the President, and attempted to confer lawmaking power on
24   individual members of Congress. If Congress cannot constitutionally delegate authority to state
25   medical associations to initiate and approve locality changes, then CMS certainly lacks the authority
26   to do so.
27   / / /
28   / / /

                                                                   145
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page156 of 172


 1           622.     As a result of CMS’ unlawful delegation of its authority, Plaintiffs and Members of
 2   the Class have been underpaid in the approximate amount of $3,190,000 from March 14, 2001,
 3   through the end of 2010.
 4           623.     Such underpayments are ongoing and will continue to accrue with respect to each
 5   new medical treatment, each new medical service, and each new medical supply furnished by
 6   Plaintiffs and Members of the Class to beneficiaries until the Secretary of Health and Human
 7   Services either: (a) restructures the Part B payment localities through a reapplication of the 5%
 8   iterative threshold and other standards of payment accuracy identified by HCFA in 1996 in a
 9   uniform, county-by-county manner nationwide; or (b) restructures the Part B payment localities in
10   a uniform manner nationwide that meets or exceeds the payment accuracy standards identified by
11   HCFA in 1996.
12           624.     The Secretary of the Department of Health and Human Services threatens to continue
13   to violate the constitutional rights of Plaintiffs and Members of the Class in violation of a clear legal
14   duty. Great public harm will also flow from this threatened behavior, but Plaintiffs and Members
15   of the Class lack an adequate legal remedy to prevent the threatened behavior.
16           625.     Therefore, Plaintiffs and Members of the Class seek an order: (i) prohibiting the
17   Secretary of the Department of Health and Human Services from configuring or maintaining a
18   locality structure under Medicare Part B that does not meet or exceed the standards of payment
19   accuracy the Secretary adopted in 1996; and (ii) prohibiting the Secretary of the Department of
20   Health and Human Services from delegating any part of the duty to reconfigure the payment locality
21   structure under Medicare Part B to state medical associations.
22   XV.     PRAYER
23           Plaintiffs pray as follows:
24           (A) For an order certifying a class as defined in ¶ 557;
25           (B) For a judicial declaration or finding that Plaintiffs and Members of the Class have been
26   denied equal protection of the law since 2001 by the failure and refusal of the Secretary of the
27   Department of Health and Human Services to assign them to fee schedule areas that reflect the true
28   economic costs of the services they provide relative to the national average of those costs;

                                                                   146
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page157 of 172


 1          (C) For a judicial declaration or finding that 42 U.S.C. § 1395w-4(j)(2) is unconstitutional
 2   as applied to Plaintiffs and Members of the Class;
 3          (D) For a judicial declaration or finding that 42 C.F.R. § 414.4 is unconstitutional as applied
 4   to Plaintiffs and Members of the Class;
 5          (E) For a judicial declaration or finding that the Secretary of Health and Human Services has
 6   unlawfully delegated the duty to reconfigure the current Medicare Part B payment locality structure
 7   to state medical associations;
 8          (F) For an order prohibiting the Secretary of the Department of Health and Human Services
 9   from configuring or maintaining a locality structure under Medicare Part B that does not meet or
10   exceed the standards of payment accuracy the Secretary adopted in 1996;
11          (G) For an order prohibiting the Secretary of the Department of Health and Human Services
12   from delegating any part of the duty to reconfigure the payment locality structure under Medicare
13   Part B to state medical associations;
14          (H) For an order requiring the Secretary of Health and Human Services to reimburse
15   Plaintiffs and Members of the Class for underpayments dating from March 14, 2001, through the
16   date that the Secretary reorganizes the payment locality structure in a manner that meets or exceeds
17   the standards of payment accuracy identified by the Secretary in 1996;
18          (I) For an award of attorneys fees, costs, and interest as authorized by law; and
19          (J) For such other and further relief as the Court deems just and appropriate.
20   Dated: February 18, 2011                        COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
21
22
23                                                   By:
                                                             DARIO DE GHETALDI
24                                                           Attorneys for Plaintiffs County of Santa Cruz,
                                                             County of Sonoma, County of San Diego, County of
25                                                           Marin, County of Santa Barbara, County of San Luis
                                                             Obispo, County of Monterey, Theodore M. Mazer, M.D.,
26                                                           Wolbers and Poree Medical Corporation, and Members
                                                             of the Class
27
28

                                                                  147
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                           Filed02/18/11 Page158 of 172


 1                                  OTHER PLAINTIFFS’ CO-COUNSEL
 2   Colleen Duffy-Smith - Bar No. 161163                           Michael G. Reedy - Bar No. 161002
 3   cduffysmith@mdstlaw.com                                        mreedy@mcmanisfaulkner.com
     Morgan Duffy-Smith & Tidalgo LLP                               McManis Faulkner
 4   1960 The Alameda, Suite 220                                    Fairmont Plaza, 10th Floor
     San Jose, CA 95126                                             50 West San Fernando Street
 5   Telephone: 408-244-4570                                        San Jose, CA 95113
     Facsimile: 408-882-7927                                        Telephone: 408-297-8700
 6                                                                  Facsimile: 408-279-3244

 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                                                148
              FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                            Filed02/18/11 Page159 of 172


 1                              ADDITIONAL COUNSEL FOR PLAINTIFFS
 2   Dana M. McRae - Bar No. 142231                                      Daniel J. Wallace - Bar No. 37287
     dana.mcrae@co.santa-cruz.ca.us                                      Santa Barbara County Counsel
 3   Santa Cruz County Counsel                                           Celeste E. Andersen - Bar No. 141965
     Office of the County Counsel                                        cander@co.santa-barbara.ca.us
 4   Government Center, County of Santa Cruz                             Deputy County Counsel
     701 Ocean Street, Room 505                                          Office of the County Counsel
 5   Santa Cruz, CA 95060                                                105 East Anapamu, Suite 201
     Tel: 831-454-2040                                                   Santa Barbara, CA 93101
 6   Fax: 831-454-2115                                                   Tel: 805-568-2950
     Attorneys for the County of Santa Cruz                              Fax: 805-568-2982
 7                                                                       Attorneys for the County of Santa Barbara
     Bruce Goldstein - Bar No. 135970
 8   bgoldste@sonoma-county.org                                          Warren R. Jensen - Bar No. 71349
     Sonoma County Counsel                                               San Luis Obispo County Counsel
 9   Office of the County Counsel                                        Susan Hoffman - Bar No. 122304
     575 Administration Drive, Suite 105A                                shoffman@co.slo.ca.us
10   Santa Rosa, CA 95403                                                Deputy County Counsel
     Tel: 707-565-2421                                                   Rita L. Neal - Bar No. 151156
11   Fax: 707-565-2624                                                   rneal@co.slo.ca.us
     Attorneys for the County of Sonoma                                  Deputy County Counsel
12                                                                       Office of the County Counsel
     Thomas E. Montgomery - Bar No. 109654                               1055 Monterey Street, Suite D320
13   thomas.montgomery@sdcounty.ca.gov                                   San Luis Obispo, CA 93408
     San Diego County Counsel                                            Tel: 805-781-5400
14   Deborah Anne McCarthy - Bar No. 99062                               Fax: 805-781-4221
     deborah.mccarthy@sdcounty.ca.gov                                    Attorneys for the County of San Luis Obispo
15   Assistant County Counsel
     C. Ellen Pilsecker - Bar No. 154241                                 Charles J. McKee - Bar No. 152458
16   Ellen.Pilsecker@sdcounty.ca.gov                                     Monterey County Counsel
     Chief Deputy County Counsel                                         William M. Litt - Bar No. 166614
17   Office of the County Counsel                                        littwm@co.monterey.ca.us
     County Administration Center                                        Deputy County Counsel
18   1600 Pacific Highway, Room 355                                      Office of the County Counsel
     San Diego, CA 92101                                                 168 West Alisal Street, 3rd Floor
19   Tel:619-531-4860                                                    Salinas, CA 93901
     Fax: 619-531-6005                                                   Tel: 831-755-5045
20   Attorneys for the County of San Diego                               Fax: 831-755-5283
                                                                         Attorneys for the County of Monterey
21   Patrick K. Faulkner - Bar No. 70801
     Marin County Counsel
22   Jack F. Govi - Bar No. 88483
     Assistant County Counsel
23   Mari-Ann Gibbs Rivers - Bar No. 117053
     mrivers@co.marin.ca.us
24   Deputy County Counsel
     Office of the County Counsel
25   3501 Civic Center Drive, Suite 303
     San Rafael, CA 94903
26   Tel: 415-499-6117
     Fax: 415-499-3796
27   Attorneys for the County of Marin
28

                                                                 149
               FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                 Filed02/18/11 Page160 of 172


 1                             BIBLIOGRAPHY OF SOURCE MATERIALS
 2                                        A. Bureau of Labor Statistics Documents
 3                    (Documents Used to Comment on CY 2011 Proposed Rule [See ¶ 399])
 4   oes06ma.zip
 5   oes06bos.zip
 6   oes07ma.zip
 7   oes07bos.zip
 8   oes08ma.zip
 9   oes08bos.zip
10   oes09ma.zip
11   oes09bos.zip
12                                         B. CMS Electronic Production to CMA
13                              (Documents Produced by CMS to CMA in 2004-2006
                             With Data Used to Model Underpayments [See ¶¶ 442, 453.])
14
     1999.xls
15
     2002.xls
16
     2005 GPCI by County_Rick.xls
17
     2005 GPCI by County 091904budgetneutralized10-21-2004.xls
18
     2006 CMS Final File.xls
19
     2006 US.xls
20
     2008 Hospital WE and GAFs.xls
21
     2008 MD WI.xls
22
     allcalif.xls
23
     cal pe gpci calc.xls
24
     cal pe gpci calc-re CMA_1.xls
25
     california demo - final gpci
26
     comparison - CMSrev.xls
27
     Confidential.xls
28

                                                                      150
                    FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page161 of 172


 1   Confidential2.xls
 2   Copy of Stephanie’s Massachusetts.xls
 3   Copy of Stephanie’s Massachusetts-amended.xls
 4   deghetaldi Massachusetts.xls
 5                          C. CMS Electronic Production – Medicare FOIA Case
 6                              (Documents Produced by CMS to County Plaintiffs
                                  in Response to FOIA Requests With Data Used
 7                                    to Model Underpayments [See ¶ 436])
 8   02cogpci.xls
 9   05final_addenda.xls
10   08.2008 GPCIs budget neutral, 12-17-07.xls
11   1999_County_FOIA.xls
12   2002_County_FOIA.xls
13   2005 Work and PE GPCIs revised 1-21-2004, Exempted.xls
14   2005 GPCI by County_Rick _all_local_statewide2.xls
15   2005 GPCI by County_Rick.xls
16   2005_County_FOIA.xls
17   2007 gpci addendum_revised.xls
18   2008 GPCIs budget neutral for CMM 11-08-07.xls
19   2008 GPCIs budget neutral for CMM 11-08-07 (02).xls
20   2008_GPCI_ADDENDUM_E _CNOTICE_12132007.xls
21   2008Acumen_county_file _onlyfieldsweuse.xls
22   2009_GAF_Addendum_D _NPRM.mas.xls
23   2009_GPCI_ADDENDUM_E _NPRM.mas.xls
24   99county.xls
25   all_2005_info_11MAY07 _counties.xls
26   Baseline GPCIs and GAFs.csv
27   cms2_delivery.xls
28   CMS CBSA GPCIs and GAFs.csv

                                                                  151
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                            Filed02/18/11 Page162 of 172


 1   County GPCIs and GAFs Master File (2008.08.19).xls
 2   County-level GAFs, All Scenarios.csv
 3   ctyrvu02.xls
 4   ctyrvu02FOR03.xls
 5   Final_Cnty_Dec2007.xls
 6   Final_correction_from_Acumen _11_1.xls
 7   FOIACO~1.XLS
 8   GPCI Information from OACT, 2005 MP GPCIs.xls
 9   GPCI files.mdb
10   Malpractice_premiums.xls
11   Practice Expense at 50% variation.docx
12   RVU_2005.csv
13   RVU_2005_Contents.csv
14   Separate MSAs GPCIs and GAFs.csv
15   Separate Counties GPCIs and GAFs.csv
16   Statewide Tiers GPCIs and Gaf.csv
17   TMP1.ca_2005_info_11may07_withrvus.pdf
18   TMP2.new_gpci_11ma707_with05rvus.pdf
19                                            D. CMS Website Documents
20                                   (Documents Published on CMS Website
                                  in Conjunction with CY 2011 Rule With Data
21                               Used to Model Underpayments[See ¶¶ 455-457])
22   2006 and 2007 malpractice insurance premiums.xls
23   2008 RVUs by PFS locality.xls
24   2008 RVUs by County.xls
25   508-2008 RVUs by PFS locality.csv
26   508-2008 RVUs by County.csv
27   508-Documentation-2006 and 2007 malpractice insurance premiums.csv
28   508-MP-2006 and 2007 malpractice insurance premiums.csv

                                                                 152
               FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                            Filed02/18/11 Page163 of 172


 1   CMS-1503-FC-2009_ Utilization_ Data_ Crosswalked_ to_ 2010.zip
 2   CMS-1503-FC-CPT_ Codes_ Subject_ to_ 75_ Percent_ Usage_ Rate.zip
 3   CMS-1503-FC-CY_ 2011_ Addendum_ B.zip
 4   CMS-1503-FC-CY_ 2010_ to_ 2011_ Crosswalks.zip
 5   CMS-1503-FC-CY_ 2011_ Addendum_ C.zip
 6   CMS-1503-FC-CY_ 2011_ Direct_ PE-DPEI.zip
 7   CMS-1503-FC-Geographic_Practice_Cost_Indices_Update_Report.zip
 8   CMS-1503-FC-Indirect_ Practice_ Cost_ Indices.zip
 9   CMS-1503-FC-PE_ HR.zip
10   CMS-1503-FC-Physician_ Time.zip
11   CMS-1503-FC-Supplemental_GPCI_Information.zip
12   Physician_Practice_Expense_nonMDDO_Final_ Report.zip
13   Proposed CY 2011 Addendum D - Copy.csv
14   Supplement to Addendum E_2010 GPCI pre ACA.csv
15   Supplement to Addendum E_2012 GPCI NO ACA - Copy.csv
16   Supplement to Addendum E_2011 GPCI NO ACA - Copy.csv
17   Supplement to Addendum D_GAF Impacts - Copy.csv
18   Supplement to Addendum E_2010 GPCI pre ACA - Copy.csv
19   Supplemental GPCI Information for the CY 2011 Proposed Rule - Copy.xlsx
20   Supplemental Information Regarding Data for the 6th GPCI Update for the PFS.pdf
21   Supplemental_Information_Regarding_Data_for_the_6th_GPCI_Update.zip
22                                              E. Congressional Reports
23                                 (Source Materials for Paragraphs as Indicated)
24   Congressional Research Service, “Medicare Physician Payment Localities,” September 9, 2004.
     [See ¶ 162.]
25
     House of Representatives: Conference Report No. 101-247, September 20, 1989. [See ¶ 122.]
26
     House of Representatives: Conference Report No. 101-386, November 21, 1989. [See ¶ 122.]
27
     House of Representatives: Committee on Appropriations, Report 108-636, September 7, 2004. [See
28   ¶ 29.]

                                                                 153
               FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                            Filed02/18/11 Page164 of 172


 1                                                   F. Federal Register
 2                      (Generally Used for Historical Record, Data Used for
              Modeling Underpayments, and Source Materials for Paragraphs as Indicated)
 3
     CY 1992 Proposed Rule, 56 Federal Register 25792, June 5, 1991. [Background for Facts and Data
 4   Used for Modeling Underpayments; see ¶¶ 117-118, 120, 133-134, 137, 139-140, 142, 145, 147,
     157, 197-198, 215, 289, 498.]
 5
     CY 1992 Final Rule, 56 Federal Register 59502, November 25, 1991. [Background for Facts and
 6   Data Used for Modeling Underpayments; see ¶¶ 141, 143-144, 146-148, 155, 157, 183, 197, 199,
     289.]
 7
     CY 1992 Correction Notice, 57 Federal Register 42491, September 15, 1992. [Background for Facts
 8   and Data Used for Modeling Underpayments.]
 9   CY 1993 MEI Final Rule, 57 Federal Register 55896, November 25, 1992. [Background for Facts
     and Data Used for Modeling Underpayments.]
10
     CY 1993 Final Rule, 57 Federal Register 55914, November 25, 1992. [Background for Facts and
11   Data Used for Modeling Underpayments.]
12   CY 1994 Proposed Rule, 58 Federal Register 37994, July 14, 1993. [Background for Facts and Data
     Used for Modeling Underpayments; see ¶¶ 119, 146, 153-154, 161, 163, 166, 168-169, 174, 178-
13   179, 183, 193, 289, 498, 543.]
14   CY 1994 Final Rule, 58 Federal Register 63626, December 2, 1993. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 89, 155, 171, 173, 175-176, 182, 200.]
15
     CY 1995 Proposed Rule, 59 Federal Register 32754, June 24, 1994. [Background for Facts and Data
16   Used for Modeling Underpayments; see ¶¶ 124, 182, 189, 191.]
17   CY 1995 Final Rule, 59 Federal Register 63410, December 8, 1994. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 184, 187-188, 190, 192, 194, 289, 297.]
18
     CY 1996 Proposed Rule, 60 Federal Register 38400, July 26, 1995. [Background for Facts and Data
19   Used for Modeling Underpayments.]
20   CY 1996 Final Rule, 60 Federal Register 63124, December 8, 1995. [Background for Facts and
     Data Used for Modeling Underpayments.]
21
     CY 1997 Proposed Rule, 61 Federal Register 34614, July 2, 1996. [Background for Facts and Data
22   Used for Modeling Underpayments; see ¶¶ 84-85, 121, 125-126, 128, 202, 204-210, 219-223, 226,
     234-245, 248-264, 267, 289, 492, 505.]
23
     CY 1997 Final Rule, 61 Federal Register 59490, November 22. 1996. [Background for Facts and
24   Data Used for Modeling Underpayments; see ¶¶ 127, 129, 211-213, 268, 270, 275, 280, 419-420,
     491, 504.]
25
     CY 1998 Proposed Rule, 62 Federal Register 33158, June 18, 1997. [Background for Facts and Data
26   Used for Modeling Underpayments.]
27   CY 1998 Final Rule, 62 Federal Register 59048, October 31, 1997. [Background for Facts and Data
     Used for Modeling Underpayments.]
28

                                                                 154
               FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page165 of 172


 1   CY 1999 Proposed Rule, 63 Federal Register 30818, June 5, 1998. [Background for Facts and Data
     Used for Modeling Underpayments.]
 2
     CY 1999 Final Rule, 63 Federal Register 58814, November 2, 1998. [Background for facts and
 3   data.]
 4   CY 2000 Proposed Rule, 64 Federal Register 39608, July 22, 1999. [Background for Facts and Data
     Used for Modeling Underpayments.]
 5
     CY 2000 Final Rule, 64 Federal Register 59380, November 2, 1999. [Background for Facts and
 6   Data Used for Modeling Underpayments.]
 7   CY 2001 Proposed Rule, 65 Federal Register 44176, July 17, 2000. [Background for Facts and Data
     Used for Modeling Underpayments.]
 8
     CY 2001 Final Rule, 65 Federal Register 65376, November 1, 2000. [Background for Facts and
 9   Data Used for Modeling Underpayments.]
10   CY 2002 Proposed Rule, 66 Federal Register 40372, August 2, 2001. [Background for Facts and
     Data Used for Modeling Underpayments.]
11
     CY 2002 Final Rule, 66 Federal Register 55246, November 1, 2001. [Background for Facts and
12   Data Used for Modeling Underpayments.]
13   CY 2003 Proposed Rule, 67 Federal Register 43846, June 28, 2002. [Background for Facts and Data
     Used for Modeling Underpayments.]
14
     CY 2003 Final Rule, 67 Federal Register 67318, November 5, 2002. [Background for Facts and
15   Data Used for Modeling Underpayments.]
16   CY 2004 Proposed Rule, 68 Federal Register 49030, August 15, 2003. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 111, 270, 278, 441.]
17
     CY 2004 Final Rule, 68 Federal Register 63196, November 7, 2003. [Background for Facts and
18   Data Used for Modeling Underpayments; see ¶¶ 279.]
19   CY 2005 Proposed Rule, 69 Federal Register 47488, August 5, 2004. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 111, 280, 441.]
20
     CY 2005 Final Rule, 69 Federal Register 66236, November 15, 2004. [Background for Facts and
21   Data Used for Modeling Underpayments; see ¶¶ 282-284, 289, 292, 417.]
22   CY 2006 Proposed Rule, 70 Federal Register 45764, August 8, 2005. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 29, 294, 296, 300-301, 304-305, 416.]
23
     CY 2006 Final Rule, 70 Federal Register 70116, November 21, 2005. [Background for Facts and
24   Data Used for Modeling Underpayments; see ¶¶ 288, 306, 308, 311-314, 417, 535.]
25   CY 2007 Proposed Rule, 71 Federal Register 48982, August 22, 2006. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 106, 321.]
26
     CY 2007 Final Rule, 71 Federal Register 69624, December 1, 2006. [Background for Facts and
27   Data Used for Modeling Underpayments; see ¶¶ 322, 417.]
28   /   /   /

                                                                   155
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                               Filed02/18/11 Page166 of 172


 1   CY 2008 Proposed Rule, 72 Federal Register 38122, July 12, 2007. [Background for Facts and Data
     Used for Modeling Underpayments; see ¶¶ 334, 345, 348, 351, 357-358.]
 2
     CY 2008 Final Rule, 72 Federal Register 66222, November 27, 2007. [Background for Facts and
 3   Data Used for Modeling Underpayments; see ¶¶ 110, 353, 361-364, 417, 448, 528.]
 4   CY 2009 Proposed Rule, 73 Federal Register 38502, July 7, 2008. [Background for Facts and Data
     Used for Modeling Underpayments; see ¶¶ 371-373.]
 5
     CY 2009 Final Rule, 73 Federal Register 69725, November 19, 2008. [Background for Facts and
 6   Data Used for Modeling Underpayments; see ¶¶ 378-380, 417-418.]
 7   CY 2010 Correction Notice, 74 Federal Register 33403, July 13, 2009. [Background Data Used for
     Modeling Underpayments.]
 8
     CY 2010 Proposed Rule, 74 Federal Register 33520, July 13, 2009. [Background for Facts and Data
 9   Used for Modeling Underpayments; see ¶¶ 385-387.]
10   CY 2010 Final Rule, 74 Federal Register 61737, November 25, 2009. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶¶ 388-390, 417-418.]
11
     CY 2010 Correction Notice, 74 Federal Register 65499, December 10, 2009. [Background Data
12   Used for Modeling Underpayments.]
13   CY 2011 Proposed Rule, 75 Federal Register 40040, July 13, 2010. [Background for Facts and Data
     Used for Modeling Underpayments; see ¶¶ 392-393, 395-397, 399, 402, 405, 407.]
14
     CY 2011 Final Rule, 75 Federal Register 73170, November 29, 2010. [Background for Facts and
15   Data Used for Modeling Underpayments; see ¶¶ 101, 109, 392, 403-407, 417-418, 455, 485.]
16                                    G. Geographic Practice Cost Index Updates
17                         (Generally Used for Historical Record, Data Used for
                 Modeling Underpayments, and Source Materials for Paragraphs as Indicated)
18
     Dayhoff, D.A., Schneider, M.S., Pope, G.C.: Updating the Geographic Practice Cost Index: Revised
19   Cost Shares. Final Report to the Health Care Financing Administration under Contract No. 500-89-
     0050, Health Economics Research, Inc., May 1994. [Background for Facts and Data Used for
20   Modeling Underpayments.]
21   Pope, G.C., and Adamache, K.W.: Second Update of the Geographic Practice Cost Index. Final
     Report to the Health Care Financing Administration under Contract No. 500-92-0020-013, Health
22   Economics Research, Inc., December 1996. [Background for Facts and Data Used for Modeling
     Underpayments; see ¶¶ 94.]
23
     Kirby, K.M.: Third Update to the Geographic Practice Cost Index. Final Report to the Health Care
24   Financing Administration under Contract No. 500-97-0441, KPMG, March 2000. [Background for
     Facts and Data Used for Modeling Underpayments; see ¶¶ 94.]
25
     Slawter, S., Moser, J., and Barcheck, S.: Fourth Update to the Geographic Practice Cost Index.
26   Final Report to the Centers for Medicare and Medicaid Services under Contract No. 500-97-0441,
     Bearing Point, March 2004. [Background for Facts and Data Used for Modeling Underpayments;
27   see ¶¶ 94.]
28   /   /   /

                                                                    156
                  FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                              Filed02/18/11 Page167 of 172


 1   Acumen, LLC: Medicare Physician Fee Schedule Geographic Practice Cost Index (GPCI), Fifth
     Update. Final Report to the Centers for Medicare and Medicaid Services under Contract No. CMS-
 2   06-003/VAC, November 2007. [Background for Facts and Data Used for Modeling Underpayments;
     see ¶¶ 94.]
 3
     O’Brien-Strain, M., Addison, W., and Theobald, N.: Preliminary Report on the Sixth Update of the
 4   Geographic Practice Cost Index for the Medicare Physician Fee Schedule. Draft Report to the
     Centers for Medicare and Medicaid Services, Acumen, LLC, June 2010. [Background for Facts and
 5   Data Used for Modeling Underpayments; see ¶¶ 94.]
 6                         H. Housing and Urban Development Website Documents
 7                            (Source Materials for Data and Paragraphs as Indicated)
 8   FMR2004F_County.xls [Background Data Used for Modeling Underpayments.]
 9   FMR2005F_County.xls [Background Data Used for Modeling Underpayments.]
10   FMR2008F_County.xls [Background Data Used for Modeling Underpayments.]
11   FY2001_County_Level_50th.xls [Background Data Used for Modeling Underpayments.]
12   FY2002_County_Level_50th.xls [Background Data Used for Modeling Underpayments.]
13   FY2003_County_Level_50th.xls [Background Data Used for Modeling Underpayments.]
14   FY2004_County_Level_50th.xls [Background Data Used for Modeling Underpayments.]
15   FY2005_County_Level_50th.xls [Background Data Used for Modeling Underpayments.]
16   FY2006_County_Level_50th.xls [Background Data Used for Modeling Underpayments; see ¶¶ 447-
     448.]
17
     FY2007_County_Level_50th.xls [Background Data Used for Modeling Underpayments; see ¶¶ 447-
18   448.]
19   FY2007F_SCHEDULEB_rev2.xls [Background Data Used for Modeling Underpayments; see ¶¶
     447-448.]
20
     FY2008_County_Level_50th.xls [Background Data Used for Modeling Underpayments; see ¶¶ 447-
21   448.]
22   FY2008PF_FMR_SCHEDULEB.xls [Background Data Used for Modeling Underpayments; see ¶¶
     447-448.]
23
     FY2009_4050_Rev_Final.xls [Background Data Used for Modeling Underpayments; see ¶¶ 447-
24   448.]
25   FY2010_4050_Final.xls [Background Data Used for Modeling Underpayments; see ¶¶ 447-448.]
26   /   /   /
27   /   /   /
28   /   /   /

                                                                   157
                 FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page168 of 172


 1                                                      I. Miscellaneous
 2                                  (Source Materials for Paragraphs as Indicated)
 3   Bush, G.H.W., “Statement on Signing the Omnibus Budget Reconciliation Act of 1990,” November
     5, 1990. [See ¶ 134.]
 4
     Centers for Medicare and Medicaid Services, Pub. 100-20 One-Time Notification System,
 5   Transmittal 828, “SUBJECT: Emergency Update to the CY 2011 Medicare Physician Fee Schedule
     (MPFS) Database,” December 29, 2010. [See ¶ 103.]
 6
     Centers for Medicare and Medicaid Services, Ruling No. CMS-1423-R, January 1, 2009. [See ¶¶
 7   382-383.]
 8   Ginsburg, P.B., “National Policy Perspectives, The Physician Payment Review Commission,”
     Academic Medicine, Vol. 66:20-21, January 1991. [Background for Facts and Data Used for
 9   Modeling Underpayments.]
10   Lee, P.R., Ginsburg, P.B., LeRoy, L.B., Hammons, G.T., “The Physician Payment Review
     Commission Report to Congress,” JAMA, Vol. 261:2382-2385, April 28, 1989. [Background for
11   Facts and Data Used for Modeling Underpayments.]
12   Hackbarth, G.M., Letter to Kuhn, H.B., MedPAC Comments on CY 2008 Proposed Rule, August
     30, 2007. [See ¶¶ 338, 343, 414.]
13
     MedPAC Public Meeting Transcript, pp. 193-232, April 19, 2006. [See ¶¶ 30-31.]
14
     Sorrel, A.L.,“Urbanizing Counties Sue to Win Physicians Better Medicare Pay,” AMNews, July 2,
15   2007. [See ¶ 362.]
16   Thomas, Hon. B., Letter to McClellan, M., Comments on CY 2006 Proposed Rule, September 28,
     2005. [See ¶ 29, 310.]
17
     Thompson, Hon. M., Letter to McClellan, M., Sonoma County Medical Association Survey, March
18   29, 2006. [Background for Facts and Data Used for Modeling Underpayments re Sonoma County.]
19                                                           J. Reports
20                       (Generally Used for Historical Record, Data Used for
               Modeling Underpayments, and Source Materials for Paragraphs as Indicated)
21
     Adamache, W., Pope, G., and Zuckerman, S.: Payment Areas for Medicare Physician Services:
22   Selected Alternatives. Report to the Centers for Medicare and Medicaid Services under Contract
     No. 500-00-0024, O #16, RTI International and the Urban Institute, March 2008. [Background for
23   Facts and Data Used for Modeling Underpayments; see ¶¶ 365-370.]
24   Bentley, E., and deGhetaldi, L.: A County-Based Model for Grouping Medicare Physician Payment
     Localities: Analysis and Redesign of the Methodology Used by HCFA in 1996, California Medical
25   Association, January 2006. [Background for Facts and Data Used for Modeling Underpayments;
     see ¶¶ 315-320, 382, 414.]
26
     Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
27   Funds, “2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
     Supplementary Medical Insurance Trust Funds,” August 5, 2010. [Background for Facts and Data
28   Used for Modeling Underpayments; see ¶¶ 400, 560.]

                                                                  158
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page169 of 172


 1   Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
     Funds, “2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
 2   Supplementary Medical Insurance Trust Funds,” May 12, 2009. [Background for Facts and Data
     Used for Modeling Underpayments.]
 3
     Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
 4   Funds, “2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
     Supplementary Medical Insurance Trust Funds,” March 25, 2008. [Background for Facts and Data
 5   Used for Modeling Underpayments.]
 6   Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
     Funds, “2007 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
 7   Supplementary Medical Insurance Trust Funds,” April 23, 2007. [Background for Facts and Data
     Used for Modeling Underpayments.]
 8
     Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
 9   Funds, “2006 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
     Supplementary Medical Insurance Trust Funds,” May 1, 2006. [Background for Facts and Data
10   Used for Modeling Underpayments.]
11   Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
     Funds, “2005 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
12   Supplementary Medical Insurance Trust Funds,” March 23, 2005. [Background for Facts and Data
     Used for Modeling Underpayments.]
13
     Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
14   Funds, “2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
     Supplementary Medical Insurance Trust Funds,” March 23, 2004. [Background for Facts and Data
15   Used for Modeling Underpayments.]
16   Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
     Funds, “2003 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
17   Supplementary Medical Insurance Trust Funds,” March 17, 2003. [Background for Facts and Data
     Used for Modeling Underpayments.]
18
     Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
19   Funds, “2002 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
     Supplementary Medical Insurance Trust Funds,” March 26, 2002. [Background for Facts and Data
20   Used for Modeling Underpayments.]
21   Government Accountability Office: Geographic Areas Used to Adjust Physician Payments for
     Variation in Practice Costs Should be Revised, GAO-07-466, June 2007. [Background for Facts and
22   Data Used for Modeling Underpayments; see ¶¶ 29, 324-333, 337, 414, 422, 495, 530, 531.]
23   Government Accountability Office: Medicare Physician Fees: Geographic Adjustment Indices Are
     Valid in Design, but Data and Methods Need Refinement, GAO-05-119, March 2005. [Background
24   for Facts and Data Used for Modeling Underpayments; see ¶ 154.]
25   Hartstein, M., Report to the Institute of Medicine: Geographic Adjustment Factors Under Medicare:
     Current Law and Policy, September 16, 2010. [Comparison of Part A and Part B Payment Systems;
26   see generally ¶¶ 461-475.]
27   MedPAC, Assessing Alternatives to the Sustainable Growth Rate System, Statement of Glen M.
     Hackbarth, J.D., March 6, 2007. [Background for Facts and Data Used for Modeling
28   Underpayments; see ¶ 336.]

                                                                  159
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                            Filed02/18/11 Page170 of 172


 1   MedPAC, Report to the Congress: Issues in a Modernized Medicare Program, June 2005.
     [Background for Facts and Data Used for Modeling Underpayments; see ¶ 337.]
 2
     MedPAC, Report to the Congress: Medicare Payment Policy, March 2007. [Background for Facts
 3   and Data Used for Modeling Underpayments; see ¶ 335.]
 4   MedPAC, Report to the Congress: Medicare Payment Issues, March 2007. [Background for Facts
     and Data Used for Modeling Underpayments.]
 5
     O’Brien-Strain, M., Addison, W., Coombs, E., Hinnebusch, N., Johansson, M., and McClellan, S.:
 6   Review of Alternative GPCI Payment Locality Structures. Report to the Centers for Medicare and
     Medicaid Services, Acumen, LLC, July 2008. [Background for Facts and Data Used for Modeling
 7   Underpayments; see ¶¶ 29, 374-379, 414.]
 8   Pope, G.C., Tarantino, R.L., Dayhoff, D., and Hwang, C.W.: Assessment and Redesign of Medicare
     Fee Schedule Areas (Localities). Final Report to the Health Care Financing Administration under
 9   Contract No. 500-92-0020, Health Economics Research, Inc., November 1995. [Background for
     Facts and Data Used for Modeling Underpayments; see ¶¶ 128-129, 203, 216-217, 224, 227-229,
10   231, 233-246, 250-251, 255, 265, 409.]
11   Pope, G.C., Olmsted, E., Healy, D., Zuckerman, S., McFeeters, J. : Review of Physician Practice
     Expense Geographic Adjustment Data. Report to the Centers for Medicare and Medicaid Services,
12   RTI International and the Urban Institute, March 2006. [Background for Facts and Data Used for
     Modeling Underpayments; see ¶¶ 365-370, 414.]
13
     Zuckerman, S., Maxwell, S.: Reconsidering Geographic Adjustments to Medicare Physician Fees.
14   Report to MedPAC through Contract RFP-01-03-MedPAC (UI 07567-001-00). September 2004.
     [Background for Facts and Data Used for Modeling Underpayments; see ¶ 490.]
15
     Zuckerman, S., Welch, W.P., and Pope, G.C.: A Geographic Index of Physician Practice Costs.
16   Report to the HCFA through Grant No. 18-C-98326/1-01 to the Brandeis University Health Policy
     Research Consortium and through Grant No. 17-C-98758/1-03 to the Center for Health Economics
17   Research, August 1989. Journal of Health Economics 9 (1990) 39-69. [Background for Facts and
     Data Used for Modeling Underpayments; see ¶ 138.]
18
19
20
21
22
23
24
25
26
27
28

                                                                 160
               FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                                Filed02/18/11 Page171 of 172


 1                                                    INDEX OF EXHIBITS
 2           1.         Components of the Physician Fee Schedule Formula . . . . . . . . . . . . . . . . . . . . 163
 3           2.         History of 42 C.F.R. § 414.4 (“Fee Schedule Areas”) . . . . . . . . . . . . . . . . . . . . 170
 4           3.         Single Locality States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
 5           4.         Medicare Part B Underpayments 2001-2010 Caused by “Large
                        Payment Differences” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
 6
             5.         County Plaintiffs’ Comments on CY 2008 Proposed Rule
 7                      (August 29, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
 8           6.         “Phase-In of Correction to Payment Locality Assignment for Austin County
                        and Houston County, Texas,” CMS-1423-R (January 1, 2009) . . . . . . . . . . . . 204
 9
             7.         County Plaintiffs’ Comments on CY 2011 Proposed Rule
10                      (August 24, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
11           8.         Use of the 5% Iterative Method to Improve “Severe” or “Inappropriate”
                        Boundary Differences in California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
12
             9.         Physician Fee Schedule Area Payment Error Rates . . . . . . . . . . . . . . . . . . . . . 238
13
             10.        Use of the 5% Iterative Method to Reduce Payment Errors . . . . . . . . . . . . . . . 242
14
             11.        Locality Reconfiguration Options Considered 2004-2010 . . . . . . . . . . . . . . . . 244
15
             12.        The Two Geographies of Medicare in California . . . . . . . . . . . . . . . . . . . . . . . 246
16                      A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 247
                        B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 248
17                      C.    Underpayments and Overpayments in California . . . . . . . . . . . . . . . . . 249
18           13.        The Two Geographies of Medicare in Florida . . . . . . . . . . . . . . . . . . . . . . . . . . 250
                        A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 251
19                      B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 252
                        C.    Underpayments and Overpayments in Florida . . . . . . . . . . . . . . . . . . . 253
20
             14.        The Two Geographies of Medicare in Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
21                      A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 255
                        B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 256
22                      C.    Underpayments and Overpayments in Ohio . . . . . . . . . . . . . . . . . . . . . 257
23           15.        The Two Geographies of Medicare in North Carolina . . . . . . . . . . . . . . . . . . . 258
                        A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 259
24                      B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 260
                        C.    Underpayments and Overpayments in North Carolina . . . . . . . . . . . . . 261
25
             16.        The Two Geographies of Medicare in Minnesota . . . . . . . . . . . . . . . . . . . . . . . 262
26                      A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 263
                        B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 264
27                      C.    Underpayments and Overpayments in Minnesota . . . . . . . . . . . . . . . . . 265
28   / / /

                                                                     161
                   FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
     Case3:07-cv-02888-JSW Document89                             Filed02/18/11 Page172 of 172


 1        17.        The Two Geographies of Medicare in Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
                     A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 267
 2                   B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 268
                     C.    Underpayments and Overpayments in Texas . . . . . . . . . . . . . . . . . . . . 269
 3
          18.        The Two Geographies of Medicare in Virginia . . . . . . . . . . . . . . . . . . . . . . . . . 270
 4                   A.    How Hospitals Are Paid Under Part A . . . . . . . . . . . . . . . . . . . . . . . . . 271
                     B.    How Suppliers Are Paid Under Part B . . . . . . . . . . . . . . . . . . . . . . . . . 272
 5                   C.    Underpayments and Overpayments in Virginia . . . . . . . . . . . . . . . . . . . 273
 6
 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                                                  162
                FIRST AMENDED CLASS ACTION COMPLAINT; County of Santa Cruz, et al. v. Sibelius, Case No. 3:07-cv-02888-JSW
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page1 of 83




                Exhibit 1

                                                                 163
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page2 of 83




                                            Exhibit 1

           COMPONENTS OF THE PHYSICIAN FEE SCHEDULE FORMULA

                                        A. Basic Formula

       Under 42 U.S.C. § 1395w-4, subject to exceptions for certain services (radiology,

anesthesia, electrocardiograms, and imaging), physicians are paid for performance of specific

services using the following formula:

                                   (1) the sum of the products of

                  each the three geographic practice cost indexes (“GPCI” )

                                                and

                  each of the three relative value units (“RVU”) of the specific

                                               times

                         (2) the conversion factor (“CF”) for the year.

       CMS has stated the formula (see CY 2007 Proposed Rule, 8/22/2006, 71 FR 48985) as

follows: Payment = [(RVUw × GPCIw) + (RVUpe × GPCIpe) + (RVUmp × GPCImp)] × CF.

                               B. Statutory Definition of GPCIs

       Under § 1395w-4(e)(1)(A)(i), the practice expense GPCI (“practice expense GPCI” or

“GPCIpe”) must reflect “the relative costs of the mix of goods and services comprising practice

expenses (other than malpractice expenses) in the different fee schedule areas compared to the

national average of such costs.”

       Under § 1395w-4(e)(1)(A)(ii) the malpractice GPCI (“malpractice GPCI” or

“GPCImp”) must reflect “the relative costs of malpractice expenses in the different fee schedule

areas compared to the national average of such costs.”


                                                 1



                                                                                                   164
           Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page3 of 83



       Under § 1395w-4(e)(1)(A)(iii) the work GPCI (“work GPCI” or “GPCIw”) must reflect

“¼ of the difference of the between the relative value of physicians’ work effort in each of the

different fee schedule areas and the national average of such work effort.”

                                 C. Statutory Definition of RVUs

       Under § 1395w-4(c), physicians’ services are divided into three components, a “work

component” (“work RVU” or “RVUw”), a “practice expense component” (“practice expense

RVU” or “RVUpe”), and a “malpractice component” (“malpractice RVU” or “RVUmp”).

       The work RVU is defined under § 1395w-4(c)(1)(A) as “the portion of the resources used

in furnishing the service that reflects physician time and intensity in furnishing the service.” It

includes physicians’ activities before and after direct patient contact, and, for surgical

procedures, includes pre-operative and post-operative physicians’ services.

       The practice expense RVU is defined under § 1395w-4(c)(1)(B) as “the portion of the

resources used in furnishing the service that reflects the general category of expenses (such as

office rent and wages of personnel, but excluding malpractice expenses) comprising practice

expenses.”

       The malpractice RVU is defined under § 1395w-4(c)(1)(C) as “the portion of the

resources used in furnishing the service that reflects malpractice expenses in furnishing the

service.”

       Under § 1395w-4(c)(2)(A)(I), the Secretary is required to develop a methodology for the

work, practice expense, and malpractice RVUs for each service to produce a single RVU for that

service.




                                                  2



                                                                                                      165
         Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page4 of 83



        Under § 1395w-4(c)(2)(B), the Secretary is required to review the RVUs not less than

every 5 years, and to make adjustments “to take into account changes in medical practice, coding

changes, new data on relative value components, or the addition of new procedures.” Under §

1395w-4(c)(2)(B)(ii)(II), such adjustments for a year may not cause Medicare payments to

physicians “to differ by more than $20,000,000 from the amount of expenditures under [Part B]

that would have been made if such adjustments had not been made.”

                                D. Statutory Definition of GAFs

        Under § 1395w-4(e)(2), the payment geographic adjustment factor (“GAF”) for all

physicians’ services for each fee schedule area is equal to the sum of the practice expense GAF,

the malpractice GAF, and the work GAF for the service and the area.

        Under § 1395w-4(e)(3), the practice expense GAF for a service in a particular area is the

product of: (A) the practice expense RVU for the service; and (B) the practice expense GPCI

for the area for the service.

        Under § 1395w-4(e)(4), the malpractice GAF for a service in a particular area is the

product of: (A) the malpractice RVU for the service; and (B) the malpractice GPCI for the area.

        Under § 1395w-4(e)(5), the work GAF for a service in a particular area is the product of:

(A) the work RVU for the service; and (B) the work GPCI for the area.

                                 E. Statutory Definition of CFs

        Under § 1395w-4(d)(1)(A), the CF for each year beginning in 2001 is the CF for the

previous year multiplied by the annual “update” for the year involved.

        Under § 1395w-4(d)(4)(A), the annual “update” for years beginning is 2001 is the

product of:


                                                3



                                                                                                    166
            Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page5 of 83



                (i) 1 plus the Secretary’s estimate of the percentage increase in the Medicare

        economic index for the year (divided by 100); and

                (ii) the Secretary’s estimate of the “update adjustment factor” for the year.1

        Under § 1395w-4(d)(4)(B), the “update adjustment factor” is equal to the sum of the

“prior year adjustment component” and the “cumulative adjustment component.”

        Under § 1395w-4(d)(4)(B)(i), the “prior year adjustment component” is determined by:

                (a) computing the difference (positive or negative) between the amount of

        “allowed expenditures” for physicians’ services for the prior year and the amount of

        actual expenditures for such services for that year;

                (b) dividing that difference by the amount of the actual expenditures for such

        services for that year; and

                (c) multiplying that quotient by 0.75.

        Under § 1395w-4(d)(4)(B)(ii), the “cumulative adjustment component” is determined

by:

                (I) computing the difference (positive or negative) between the amount of

        “allowed expenditures” for physicians’ services from April 1, 1996, through the end of

        the prior year and the amount of actual expenditures for such services for that year;



        1
         The “percentage increase in the medicare economic index” is defined in § 1395u(i)(3) as
“the percentage increase in the medicare economic index (referred to in the fourth sentence of
subdivision (b)(3) of this section) applicable to such services furnished on the first day of that year.”
The fourth sentence of subdivision (b)(3) has been deleted and there is no further reference to the
MEI in § 1395u.

       Under § 1395w-4(d)(4)(A), the update adjustment factor is subject to the same $20,000,000
budget neutrality limitation imposed on changes to RVUs under § 1395w-4(c)(2)(B)(ii).

                                                   4



                                                                                                            167
            Case3:07-cv-02888-JSW Document89-1              Filed02/18/11 Page6 of 83



                (II) dividing that difference by actual expenditures for such services for the prior

       year as increased by the “sustainable growth rate” for the year for which the update

       adjustment factor is to be determined; and

                (III) multiplying that quotient by 0.33.

       Under § 1395w-4(d)(4)(C)(iii), the “allowed expenditures” for a year beginning with

2000, is equal to the “allowed expenditures” for physicians’ services for the previous year,

increased by the “sustainable growth rate” for the year involved.

        Under § 1395w-4(f), the “sustainable growth rate” for years beginning with 2000 is

equal to:

       (i) the product of:

                       (A) 1 plus the Secretary's estimate of the weighted average percentage

                increase (divided by 100) in fees for all physicians' services in the applicable

                period involved;

                       (B) 1 plus the Secretary's estimate of the percentage change (divided by

                100) in the average number of individuals enrolled under this part (other than

                Medicare+Choice plan enrollees) from the previous applicable period to the

                applicable period involved;

                       (C) 1 plus the Secretary's estimate of the annual average percentage

                growth in real gross domestic product per capita (divided by 100) during the 10-

                year period ending with the applicable period involved; and

                       (D) 1 plus the Secretary's estimate of the percentage change (divided by

                100) in expenditures for all physicians' services in the applicable period


                                                  5



                                                                                                       168
 Case3:07-cv-02888-JSW Document89-1              Filed02/18/11 Page7 of 83



       (compared with the previous applicable period) which will result from changes in

       law and regulations, determined without taking into account estimated changes in

       expenditures resulting from the update adjustment factor;

(ii) minus 1 and multiplied by 100.




                                       6



                                                                                          169
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page8 of 83




                Exhibit 2

                                                                 170
         Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page9 of 83




                                         EXHIBIT 2

               HISTORY OF 42 C.F.R. § 414.4 (“FEE SCHEDULE AREAS”)

                                       Current Version

       The current version of 42 C.F.R. § 414.4 provides:

              “(a) General. CMS establishes physician fee schedule areas that
       generally conform to the geographic localities in existence before January 1,
       1992.

              “(b) Changes. CMS announces proposed changes to fee schedule areas in
       the Federal Register and provides an opportunity for public comment. After
       considering public comments, CMS publishes the final changes in the Federal
       Register.”

                                              1991

       The first iteration of 42 C.F.R. § 414.4 was added to the Code of Federal Regulations in

1991 as 42 C.F.R. § 415.5 [sic].

       In the June 5, 1991, Proposed Rule, HCFA announced that § 415.5 would provide:

               “(a) General. Except for the localities described in paragraph (b) of this
       section, HCFA establishes fee schedule areas that conform to the localities in
       existence before January 1, 1992.

             (b) Exceptions. HCFA establishes Statewide fee schedule areas for
       Nebraska and Oklahoma.” (CY 1992 Proposed Rule, 6/5/1991, 56 FR 25858.)


       In the CY 1992 Final Rule, HCFA announced that § 415.5 would read somewhat

differently:

               “(a) General. Except for the localities described in paragraph (b) of this
       section, HCFA establishes fee schedule areas that conform to the localities in
       existence before January 1, 1992.

             “(b) Exceptions. HCFA establishes Statewide fee schedule areas for
       Nebraska, Oklahoma, and Minnesota.”



                                                1

                                                                                                  171
        Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page10 of 83



              “(c) Changes. NCFA publishes a proposed notice in the Federal Register
       to announce changes to fee schedule areas and provide an opportunity for public
       comment. After considering public comment, NCFA publishes a final notice in
       the Federal Register to announce changes.” (CY 1992 Final Rule, 11/25/1991, 56
       FR 59625.)

                                              1992

       HCFA published a correction notice to the CY 1992 Final Rule on September 15, 1992 to

redesignate the fee schedule regulations from part 415, subpart A, to part 414, subpart A,

and to reserve part 415, subpart A, for future use. (Correction Notice, 9/15/1992, 57 FR 42491.)

                                              1993

       In 1993, HCFA amended § 414.4(b) to read:

              “(b) Statewide areas. HCFA recognizes fee schedule areas for Minnesota,
       Nebraska, North Carolina, Ohio and Oklahoma.” (CY 1994 Proposed Rule,
       7/14/1993, 58 FR 38011 and 38014; CY 1994 Final Rule, 12/2/1993, 58 FR
       63647 and 63686.)

                                              1994

       In 1994, HCFA first proposed to add Iowa to the list of statewide localities in § 414(b) it

had created since 1991. (CY 1995 Proposed Rule, 6/24/1994, 59 FR 32773 and 32776.)

       In the CY1995 Final Rule, HCFA did not adopt the change to § 414.4(b) contained in the

Proposed Rule. Instead, it entirely removed subd. (b) with its specific references to states

identified since 1991 as statewide fee schedule areas, and renumbered subd. (c) as subd. (b).

Section 414.4 then provided, much as it does currently:

              “(a) General. HCFA establishes physician fee schedule areas that
       generally conform to the geographic localities in existence before January 1,
       1992.

               “(b) Changes. HCFA announces proposed changes to fee schedule areas
       in the Federal Register and provides an opportunity for public comment. After
       considering public comments, HCFA publishes the final changes in the Federal
       Register.” (CY 1995 Final Rule, 12/8/1994, 59 FR 63431 and 63463.)


                                                 2
                                                                                                     172
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page11 of 83




                 Exhibit 3

                                                                  173
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page12 of 83




                                           EXHIBIT 3

                                 SINGLE-STATE LOCALITIES

Single-State Localities Prior to 1992:                Single-Locality States Added in 1997:

       1.      Alaska                                            23.   Alabama
       2.      Arkansas                                          24.   Arizona
       3.      Colorado                                          25.   Connecticut
       4.      Delaware                                          26.   Idaho
       5.      Hawaii/Guam                                       27.   Indiana
       6.      Montana                                           28.   Kansas
       7.      New Hampshire                                     29.   Kentucky
       8.      New Mexico                                        30.   Mississippi
       9.      North Dakota                                      31.   Nevada
       10.     Rhode Island                                      32.   Virginia**
       11.     South Carolina                                    33.   West Virginia
       12.     South Dakota                                      34.   Wisconsin
       13.     Tennessee
       14.     Utah                                   No New Single-Locality States Since 1997
       15.     Vermont
       16.     Wyoming

Single-Locality States Added in 1992:

       17.     Minnesota*
       18.     Nebraska*
       19.     Oklahoma*

Single-Locality States Added in 1994:

       20.     North Carolina*
       21.     Ohio*

Single-Locality States Added in 1995:

       22.     Iowa*



* Indicates states requesting conversion to single localities.

** Virginia is sometimes incorrectly categorized by CMS as a single-locality state. Five
Virginia counties (Arlington, Fairfax, Alexandria City, Fairfax City, and Falls Church City) are
part of the Washington D.C. locality. The remainder are part of the “Rest of Virginia” locality.




                                                                                                   174
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page13 of 83




                 Exhibit 4

                                                                  175
                                                                      Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page14 of 83
                                                                                              EXHIBIT 4
                                                             Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                               Third GPCI Update                                                  Fourth GPCI Update                                                      Fifth GPCI Update
                                                                                                                     Calculated using 2005 RVUs with county specific escalator &       Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                               Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                               peGPCI Floor in 2010                              2001 - 2010
                                      Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs                 Transitional GPCIs          Fullly Implemented GPCIs

 State               County                2001                2002                2003               2004               2005                  2006                  2007                     2008                   2009                   2010                 TOTAL

AR       Crittenden                   $      441,007     $       441,050     $       454,704     $       249,988   $       325,521      $        361,517       $        368,919         $        343,789      $        302,141       $           2,272       $      3,290,906
         Faulkner                     $      605,026     $       633,689     $       677,107     $       235,261   $       164,094      $        246,474       $        258,027         $        268,367      $        263,895       $               -       $      3,351,940
         Lonoke                       $       80,144     $        82,877     $        87,174     $        29,348   $        21,240      $         31,405       $         32,364         $         33,136      $         32,076       $               -       $        429,763
         Pulaski                      $    7,780,083     $     8,032,884     $     8,496,028     $     2,962,059   $     2,144,565      $      3,188,460       $      3,303,980         $      3,401,462      $      3,310,787       $               -       $     42,620,308
         Saline                       $      217,379     $       236,047     $       261,557     $       102,816   $        68,776      $        107,128       $        116,301         $        125,439      $        127,915       $               -       $      1,363,357
         Jefferson                    $            -     $             -     $             -     $             -   $             -      $         98,962       $         92,338         $         53,530      $         45,444       $               -       $        290,274
                           Total AR   $    9,123,639     $     9,426,547     $     9,976,569     $     3,579,470   $     2,724,196      $      4,033,946       $      4,171,928         $      4,225,724      $      4,082,258       $           2,272       $     51,346,550

CA       Santa Cruz                   $    3,191,815     $     3,410,820     $     3,129,003     $    3,376,293    $    5,068,672       $      5,149,317       $     5,508,601         $      4,673,705       $      4,803,308       $     5,205,600         $     43,517,135
         Sonoma                       $    4,014,075     $     4,335,083     $     4,243,362     $    4,596,052    $    7,712,773       $      7,782,962       $     8,353,087         $      5,993,607       $      6,228,388       $     6,702,893         $     59,962,281
         Monterey                     $            -     $             -     $             -     $            -    $    6,043,425       $      5,821,063       $     6,028,461         $      5,936,910       $      5,964,159       $     6,193,086         $     35,987,105
         San Diego                    $   14,306,815     $    15,672,137     $    17,068,545     $   18,891,102    $   28,013,077       $     28,143,556       $    30,784,756         $     22,429,935       $     24,238,761       $    26,581,831         $    226,130,516
         Sacramento                   $            -     $             -     $             -     $            -    $    9,612,308       $      9,307,696       $     9,952,698         $      4,573,662       $      4,831,916       $     5,179,582         $     43,457,863
         Santa Barbara                $    4,952,180     $     5,227,764     $     5,024,694     $    5,328,058    $    4,276,910       $      3,959,293       $     4,157,825         $      7,155,147       $      7,491,844       $     7,885,590         $     55,459,306
         El Dorado                    $            -     $             -     $             -     $            -    $      709,260       $        671,726       $       726,765         $        429,815       $        483,928       $       546,867         $      3,568,361
         Placer                       $            -     $             -     $             -     $            -    $    1,129,757       $      1,026,102       $     1,140,535         $              -       $              -       $             -         $      3,296,393
         San Luis Obispo              $            -     $             -     $             -     $            -    $    1,273,946       $        995,169       $     1,067,058         $              -       $              -       $             -         $      3,336,173
         Marin                        $    3,873,928     $     3,231,012     $     3,207,918     $    3,460,592    $    4,274,605       $      3,306,466       $     3,497,957         $      1,933,899       $      3,072,282       $     3,276,811         $     33,135,469
                           Total CA   $   30,338,813     $    31,876,817     $    32,673,522     $   35,652,096    $   68,114,733       $     66,163,351       $    71,217,743         $     53,126,680       $     57,114,587       $    61,572,259         $    507,850,601

CO       Denver                       $    5,825,984     $     5,617,878     $     6,268,808     $    5,892,448    $    6,479,488       $      6,341,550       $     6,937,344          $      3,894,816      $      4,866,793       $     4,930,845         $     57,055,953
         Arapahoe                     $    2,249,249     $     2,087,604     $     2,262,356     $    2,016,453    $    3,032,935       $      2,883,106       $     1,452,478          $      1,511,263      $      1,949,005       $     1,907,020         $     21,351,468
         Boulder                      $    1,046,094     $       903,362     $       935,621     $      744,400    $    1,731,415       $      1,563,545       $         9,598          $      1,818,241      $      2,039,520       $     2,021,965         $     12,813,761
         Jefferson                    $    1,263,629     $     1,141,763     $     1,235,849     $    1,031,297    $    1,484,810       $      1,362,119       $       181,333          $        359,696      $        650,277       $       563,133         $      9,273,904
         San Miguel                   $       13,326     $        12,816     $        10,560     $        9,803    $       10,402       $          9,338       $       129,870          $              -      $              -       $             -         $        196,115
         Adams                        $      403,747     $       341,532     $       358,955     $      257,034    $      577,813       $        501,519       $     3,123,129          $              -      $              -       $             -         $      5,563,729
         Douglas                      $            -     $             -     $             -     $            -    $      195,088       $        178,417       $     2,019,850          $              -      $              -       $             -         $      2,393,356
         Eagle                        $            -     $             -     $             -     $            -    $            -       $              -       $             -          $        147,283      $        201,426       $       235,323         $        584,032
         Summit                       $            -     $             -     $             -     $            -    $            -       $              -       $             -          $         12,118      $         20,879       $        18,810         $         51,807
         Broomfield                   $       36,294     $        35,944     $        42,971     $       38,251    $            -       $              -       $             -          $              -      $              -       $             -         $        153,459
         Pitkin                       $      109,420     $        99,835     $        64,307     $       54,806    $      152,057       $        117,545       $       491,947          $        409,513      $        456,625       $       452,782         $      2,408,836
                          Total CO    $   10,947,743     $    10,240,733     $    11,179,427     $   10,044,491    $   13,664,008       $     12,957,139       $    14,345,549          $      8,152,930      $     10,184,524       $    10,129,879         $    111,846,421

CT       Fairfield                    $              -   $               -   $               -   $             -   $   11,735,598       $     12,172,369       $    12,619,277          $    15,693,890       $     13,588,419       $    14,613,509         $     80,423,061
                          Total CT    $              -   $               -   $               -   $             -   $   11,735,598       $     12,172,369       $    12,619,277          $    15,693,890       $     13,588,419       $    14,613,509         $     80,423,061

DE       New Castle                   $    4,728,288     $     4,393,090     $     4,637,375     $     4,452,301   $     3,441,914      $      4,793,736       $      5,128,224         $      6,801,606      $      6,370,399       $      7,035,991        $     51,782,923
                          Total DE    $    4,728,288     $     4,393,090     $     4,637,375     $     4,452,301   $     3,441,914      $      4,793,736       $      5,128,224         $      6,801,606      $      6,370,399       $      7,035,991        $     51,782,923

FL       Miami-Dade                   $    4,291,060     $     4,077,551     $     4,043,356     $    6,719,496    $                -   $                  -   $                   -    $    18,598,192       $              -       $     1,144,972         $     38,874,628
         Broward                      $   17,425,728     $    17,431,148     $    20,010,026     $   22,117,986    $                -   $                  -   $                   -    $    34,839,108       $     24,602,270       $    26,157,394         $    162,583,659
         Palm Beach                   $   15,859,474     $    16,576,773     $    16,983,111     $   20,324,903    $                -   $                  -   $                   -    $             -       $              -       $             -         $     69,744,262
                           Total FL   $   37,576,262     $    38,085,472     $    41,036,493     $   49,162,385    $                -   $                  -   $                   -    $    53,437,300       $     24,602,270       $    27,302,366         $    271,202,549



                                                                                                                           -1-                                                                                                                                                  176
                                                                     Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page15 of 83
                                                                                             EXHIBIT 4
                                                            Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                              Third GPCI Update                                                  Fourth GPCI Update                                                  Fifth GPCI Update
                                                                                                                    Calculated using 2005 RVUs with county specific escalator &   Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                              Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                           peGPCI Floor in 2010                              2001 - 2010
                                     Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs             Transitional GPCIs          Fullly Implemented GPCIs

 State              County                2001                2002                2003               2004               2005                  2006                  2007                 2008                   2009                   2010                 TOTAL

GA       Barrow                      $      248,754     $       267,140     $       300,540     $       280,656   $       274,145      $        317,297      $         353,898    $         238,919      $        252,412       $        165,760        $     2,699,521
         Bartow                      $      789,612     $       863,093     $       972,015     $       908,647   $     1,010,190      $      1,170,414      $       1,306,782    $         883,138      $        933,980       $        613,989        $     9,451,858
         Carroll                     $    1,580,365     $     1,672,843     $     1,769,173     $     1,553,076   $     2,075,890      $      2,258,606      $       2,368,122    $       1,502,898      $      1,492,583       $        921,428        $    17,194,984
         Coweta                      $    1,109,369     $     1,175,870     $     1,319,040     $     1,228,185   $     1,418,043      $      1,636,474      $       1,819,936    $       1,225,081      $      1,290,498       $        845,013        $    13,067,509
         Pickens                     $      171,035     $       192,108     $       201,853     $       176,048   $       310,559      $        335,702      $         349,696    $         220,490      $        217,556       $        133,434        $     2,308,481
         Spalding                    $    1,003,779     $     1,067,197     $     1,191,966     $     1,105,072   $     1,204,340      $      1,383,852      $       1,532,348    $       1,027,039      $      1,077,210       $        702,308        $    11,295,111
                         Total GA    $    4,902,915     $     5,238,250     $     5,754,586     $     5,251,684   $     6,293,167      $      7,102,344      $       7,730,781    $       5,097,565      $      5,264,239       $      3,381,933        $    56,017,464

IL       Clinton                     $       62,015     $        73,004     $             -     $             -   $        22,104      $         12,141      $          17,439    $               -      $              -       $                  -    $       186,703
         Jersey                      $       55,518     $        57,194     $             -     $             -   $        20,778      $         10,269      $          13,272    $               -      $              -       $                  -    $       157,031
         Madison                     $      756,981     $       785,125     $       801,020     $       505,096   $       334,817      $        166,464      $         216,445    $         195,260      $        363,799       $                  -    $     4,125,006
         Monroe                      $       52,884     $        59,687     $             -     $             -   $        14,346      $          7,641      $          10,645    $               -      $              -       $                  -    $       145,202
         St. Clair                   $    1,046,295     $     1,022,243     $       984,501     $       587,130   $       417,876      $        196,493      $         241,636    $         206,165      $        363,288       $                  -    $     5,065,627
         McHenry                     $    2,222,010     $     2,349,232     $     2,834,716     $     2,563,520   $     3,411,720      $      3,951,112      $       4,419,506    $       4,548,543      $      4,637,810       $                  -    $    30,938,169
         Kendall                     $       96,353     $       102,272     $        95,132     $        72,957   $       117,044      $        155,731      $         194,194    $         717,516      $        804,478       $                  -    $     2,355,676
         Sangamon                    $    3,687,826     $     4,396,104     $     5,793,799     $     4,276,914   $             -      $              -      $               -    $               -      $              -       $                  -    $    18,154,643
         Grundy                      $      349,644     $       372,813     $       336,251     $       209,435   $       498,528      $        573,721      $         616,033    $               -      $              -       $                  -    $     2,956,425
         DeKalb                      $            -     $             -     $             -     $             -   $       426,233      $        521,797      $         549,371    $               -      $              -       $                  -    $     1,497,401
                          Total IL   $    8,329,526     $     9,217,674     $    10,845,419     $     8,215,051   $     5,263,445      $      5,595,367      $       6,278,540    $       5,667,484      $      6,169,375       $                  -    $    65,581,882

IA       Johnson                     $    1,753,622     $     1,811,827     $     2,202,288     $     1,058,171   $       353,691      $        462,772      $         442,046    $               -      $              -       $                 -     $     8,084,417
         Dallas                      $       45,267     $        49,828     $        57,150     $        28,647   $        61,754      $         73,304      $          81,694    $          67,628      $         81,730       $                 -     $       547,004
         Polk                        $    5,511,085     $     5,628,958     $     5,786,247     $     2,717,952   $     3,077,056      $      3,422,836      $       3,574,664    $       2,773,074      $      3,140,545       $                 -     $    35,632,418
         Warren                      $       55,604     $        58,958     $        62,411     $        30,187   $        40,081      $         45,910      $          49,372    $          39,439      $         45,993       $                 -     $       427,954
         Pottawattamie               $      521,609     $       533,523     $       592,559     $       259,659   $       267,697      $        310,679      $         325,562    $         291,216      $        345,134       $                 -     $     3,447,638
                         Total IA    $    7,887,186     $     8,083,094     $     8,700,655     $     4,094,617   $     3,800,280      $      4,315,501      $       4,473,338    $       3,171,357      $      3,613,402       $                 -     $    48,139,431

KS       Johnson                     $    4,175,730     $     4,144,374     $     4,327,179     $     2,843,269   $     4,239,236      $      4,961,980       $      5,184,011    $       2,797,837      $      3,144,654       $                  -    $    35,818,272
         Leavenworth                 $      290,542     $       298,162     $       323,339     $       218,139   $       326,291      $        392,134       $        420,636    $         233,091      $        268,991       $                  -    $     2,771,324
         Miami                       $       95,442     $        91,479     $        99,266     $        62,914   $       112,998      $        127,578       $        128,565    $          66,929      $         72,561       $                  -    $       857,732
         Wyandotte                   $    1,429,140     $     1,418,600     $     1,574,392     $     1,039,945   $     1,305,550      $      1,536,191       $      1,613,394    $         875,349      $        989,046       $                  -    $    11,781,606
         Butler                      $      166,731     $       154,435     $       158,785     $        47,703   $             -      $              -       $              -    $         116,458      $              -       $                  -    $       644,111
         Harvey                      $      182,633     $       175,376     $       190,633     $        60,177   $             -      $              -       $              -    $         261,228      $              -       $                  -    $       870,047
         Sedgwick                    $    4,539,765     $     4,268,602     $     4,251,585     $     1,305,802   $             -      $              -       $              -    $       2,801,563      $              -       $                  -    $    17,167,318
         Shawnee                     $    1,532,263     $     1,517,861     $     1,638,597     $       320,752   $             -      $              -       $              -    $               -      $              -       $                  -    $     5,009,473
                         Total KS    $   12,412,245     $    12,068,889     $    12,563,777     $     5,898,701   $     5,984,075      $      7,017,883       $      7,346,607    $       7,152,456      $      4,475,251       $                  -    $    74,919,882

KY       Kenton                      $              -   $               -   $               -   $             -   $     1,495,838      $      1,678,763      $       1,742,616    $                  -   $                  -   $                  -    $     4,917,217
                         Total KY    $              -   $               -   $               -   $             -   $     1,495,838      $      1,678,763      $       1,742,616    $                  -   $                  -   $                  -    $     4,917,217




                                                                                                                          -2-                                                                                                                                             177
                                                                   Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page16 of 83
                                                                                           EXHIBIT 4
                                                          Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                            Third GPCI Update                                                  Fourth GPCI Update                                                  Fifth GPCI Update
                                                                                                                  Calculated using 2005 RVUs with county specific escalator &   Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                            Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                           peGPCI Floor in 2010                              2001 - 2010
                                   Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs             Transitional GPCIs          Fullly Implemented GPCIs

 State            County                2001                2002                2003               2004               2005                  2006                  2007                 2008                   2009                   2010                 TOTAL

LA       St. Charles               $       83,339     $        79,624     $        84,396     $        58,966   $       132,426      $         94,630       $        130,375     $        167,898      $        149,988       $         81,749        $      1,063,389
         St. John the Baptist      $      267,252     $       260,041     $       265,755     $       188,816   $       179,419      $        130,376       $        182,659     $        239,205      $        217,300       $        120,438        $      2,051,262
         St. Tammany               $    2,410,707     $     2,626,948     $     2,778,716     $     2,049,794   $     3,046,066      $      2,439,536       $      3,766,929     $      5,237,267      $      5,243,604       $      3,111,111        $     32,710,679
         Ascension                 $            -     $             -     $             -     $             -   $             -      $              -       $              -     $        117,443      $        116,513       $              -        $        233,956
         East Baton Rouge          $            -     $             -     $             -     $             -   $             -      $              -       $              -     $      3,246,052      $      3,179,440       $              -        $      6,425,492
         Livingston                $            -     $             -     $             -     $             -   $             -      $              -       $              -     $         40,071      $         38,796       $              -        $         78,867
         West Baton Rouge          $            -     $             -     $             -     $             -   $             -      $              -       $              -     $          8,240      $          7,048       $              -        $         15,288
                        Total LA   $    2,761,298     $     2,966,612     $     3,128,867     $     2,297,577   $     3,357,911      $      2,664,541       $      4,079,962     $      9,056,177      $      8,952,689       $      3,313,298        $     42,578,932

MD       Calvert                   $      948,621     $     1,090,964     $     1,194,192     $     1,230,330   $     1,677,213      $      1,867,658       $      2,135,009     $     2,072,440       $      2,170,768       $     2,373,099         $     16,760,294
         Charles                   $    1,134,694     $     1,286,664     $     1,342,221     $     1,358,518   $     2,157,008      $      2,361,822       $      2,666,115     $     2,528,750       $      2,598,707       $     2,766,345         $     20,200,845
         Frederick                 $    1,872,546     $     2,088,370     $     2,167,920     $     2,043,202   $     3,998,822      $      4,275,594       $      4,718,916     $     4,328,159       $      4,339,230       $     4,494,445         $     34,327,205
         Cecil                     $      345,973     $       400,015     $       497,843     $       454,016   $       272,000      $        277,377       $        312,957     $       671,504       $        667,982       $       660,896         $      4,560,563
         Queen Anne's              $            -     $             -     $             -     $             -   $        31,096      $         33,812       $         41,336     $             -       $              -       $             -         $        106,244
         St.Mary's                 $            -     $             -     $             -     $             -   $             -      $              -       $              -     $       423,853       $        393,067       $       334,877         $      1,151,798
                        Total MD   $    4,301,835     $     4,866,014     $     5,202,176     $     5,086,067   $     8,136,139      $      8,816,262       $      9,874,333     $    10,024,707       $     10,169,756       $    10,629,661         $     77,106,950

MA       Essex                     $       81,370     $        78,083     $        58,294     $        62,159   $   10,179,122       $     12,591,089       $    14,133,011      $    11,301,336       $     11,520,905       $    12,214,856         $     72,220,226
         Nantucket                 $    6,980,853     $     5,794,347     $     5,957,057     $     5,980,059   $       42,429       $         51,832       $        56,853      $        39,947       $         38,568       $        38,617         $     24,980,562
         Plymouth                  $    2,876,855     $     2,350,912     $     2,496,338     $     2,529,730   $    4,070,479       $      5,203,736       $     5,821,494      $     4,068,269       $      3,990,171       $     4,032,814         $     37,440,799
                        Total MA   $    9,939,078     $     8,223,343     $     8,511,689     $     8,571,948   $   14,292,030       $     17,846,656       $    20,011,358      $    15,409,553       $     15,549,645       $    16,286,287         $    134,641,587

MI       Livingston                $              -   $               -   $               -   $             -   $       659,056      $        773,214       $        862,151     $              -      $              -       $              -        $      2,294,421
         Monroe                    $              -   $               -   $               -   $             -   $     1,271,805      $      1,387,411       $      1,430,380     $      1,227,440      $      1,394,045       $        919,430        $      7,630,511
                        Total MI   $              -   $               -   $               -   $             -   $     1,930,861      $      2,160,625       $      2,292,531     $      1,227,440      $      1,394,045       $        919,430        $      9,924,932

MN       Anoka                     $    1,138,093     $     1,100,062     $     1,112,738     $    1,057,929    $    3,078,335       $      2,860,953       $     3,001,309      $     1,608,994       $      2,081,206       $     1,916,380         $     18,956,000
         Carver                    $      212,028     $       199,930     $       212,647     $      197,439    $      316,446       $        287,214       $       294,251      $       154,054       $        194,601       $       174,994         $      2,243,604
         Chisago                   $       89,662     $        86,237     $       108,150     $      102,293    $      161,459       $        149,283       $       155,798      $        83,092       $        106,923       $        97,947         $      1,140,846
         Dakota                    $      381,974     $       342,173     $       324,997     $      285,352    $      510,987       $        438,574       $       424,894      $       210,360       $        251,282       $       213,681         $      3,384,275
         Hennepin                  $   10,046,921     $     9,477,838     $     9,751,244     $    9,070,542    $   15,610,886       $     14,194,899       $    14,569,423      $     7,641,806       $      9,670,894       $     8,712,507         $    108,746,959
         Isanti                    $      120,042     $       111,682     $       119,069     $      108,893    $       55,342       $         49,475       $        49,926      $        25,746       $         32,034       $        28,373         $        700,583
         Ramsey                    $    3,908,717     $     3,593,609     $     3,613,472     $    3,272,464    $    5,693,550       $      5,040,398       $     5,036,767      $     2,572,068       $      3,169,057       $     2,779,608         $     38,679,711
         Scott                     $            -     $             -     $             -     $            -    $      162,112       $        137,550       $       131,739      $        64,478       $         76,142       $        64,009         $        636,031
         Sherburne                 $       31,843     $        28,226     $        28,915     $       25,098    $       62,062       $         58,736       $        62,746      $        34,254       $         45,118       $        42,306         $        419,303
         Washington                $      495,564     $       487,963     $       506,322     $      490,198    $      809,638       $        826,214       $       951,699      $       560,209       $        795,642       $       804,435         $      6,727,883
         Wright                    $      139,074     $       150,971     $       176,020     $      183,752    $      201,944       $        175,935       $       173,013      $        86,946       $        105,423       $        90,998         $      1,484,075
         Olmsted                   $    4,691,297     $     4,092,228     $     3,850,440     $    3,195,525    $    1,758,659       $        673,927       $       643,377      $       544,345       $      1,832,709       $     1,126,019         $     22,408,525
                        Total MN   $   21,255,216     $    19,670,919     $    19,804,014     $   17,989,484    $   28,421,420       $     24,893,158       $    25,494,942      $    13,586,351       $     18,361,033       $    16,051,258         $    205,527,795




                                                                                                                        -3-                                                                                                                                              178
                                                                     Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page17 of 83
                                                                                             EXHIBIT 4
                                                            Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                              Third GPCI Update                                                  Fourth GPCI Update                                                      Fifth GPCI Update
                                                                                                                    Calculated using 2005 RVUs with county specific escalator &       Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                              Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                               peGPCI Floor in 2010                              2001 - 2010
                                     Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs                 Transitional GPCIs          Fullly Implemented GPCIs

 State               County               2001                2002                2003               2004               2005                  2006                  2007                     2008                   2009                   2010                 TOTAL

MS       DeSoto                      $      772,641     $       832,654     $       911,073     $       637,953   $     1,028,004      $      1,101,190       $      1,190,839        $       1,237,678      $      1,104,833       $                 -     $     8,816,865
         Hinds                       $    5,032,378     $     5,042,225     $     5,253,472     $     2,729,556   $     3,065,628      $      3,041,584       $      3,045,248        $       3,215,043      $      2,482,481       $                 -     $    32,907,614
         Madison                     $      151,419     $       171,797     $       217,300     $       125,703   $       109,040      $        120,450       $        134,267        $         157,824      $        135,678       $                 -     $     1,323,477
         Rankin                      $      597,279     $       687,909     $       791,841     $       462,902   $       457,707      $        510,943       $        575,573        $         683,706      $        593,982       $                 -     $     5,361,840
         Hancock                     $      155,668     $       149,937     $       148,699     $        40,769   $        20,016      $         17,860       $         15,961        $               -      $              -       $                 -     $       548,910
         Harrison                    $    1,473,095     $     1,528,671     $     1,588,058     $       467,169   $       346,523      $        331,762       $        318,116        $               -      $              -       $                 -     $     6,053,394
         Jackson                     $      879,650     $       926,806     $     1,003,199     $       300,854   $       203,402      $        198,523       $        194,058        $               -      $              -       $                 -     $     3,706,492
                         Total MS    $    9,062,129     $     9,339,998     $     9,913,643     $     4,764,907   $     5,230,318      $      5,322,312       $      5,474,060        $       5,294,250      $      4,316,974       $                 -     $    58,718,593

MO       Cass                        $      439,367     $       466,297     $       556,468     $       424,314   $       334,523      $        409,477       $        472,271        $         420,504      $        401,109       $         91,472        $     4,015,803
         Clinton                     $      135,094     $       171,608     $       241,923     $       206,529   $        62,369      $         85,474       $        110,369        $         107,008      $        113,853       $         25,285        $     1,259,511
         Lafayette                   $      165,375     $       171,008     $       208,124     $       155,081   $       114,921      $        137,466       $        154,934        $         131,113      $        121,761       $         23,603        $     1,383,387
         Ray                         $      125,016     $       106,470     $       101,707     $        62,179   $        93,963      $         92,217       $         85,274        $          59,208      $         45,113       $          7,175        $       778,321
         Franklin                    $      985,438     $       939,504     $       980,741     $       643,483   $     1,079,279      $      1,222,662       $      1,294,243        $       1,045,218      $        899,419       $         75,334        $     9,165,321
         Lincoln                     $      192,383     $       188,069     $       197,139     $       131,141   $       165,607      $        185,743       $        194,663        $         167,149      $        142,403       $         11,809        $     1,576,105
         Warren                      $       71,087     $        67,752     $        70,158     $        45,574   $        63,324      $         72,732       $         78,059        $          59,515      $         51,924       $          4,409        $       584,535
         Boone                       $    3,414,934     $     2,600,353     $     2,309,891     $       501,032   $             -      $              -       $              -        $               -      $              -       $              -        $     8,826,210
         Crawford                    $            -     $             -     $             -     $             -   $         3,081      $          4,111       $          3,729        $               -      $              -       $              -        $        10,921
                         Total MO    $    5,528,694     $     4,711,062     $     4,666,151     $     2,169,333   $     1,917,068      $      2,209,882       $      2,393,542        $       1,989,715      $      1,775,581       $        239,086        $    27,600,115

NE       Cass                        $       11,936     $        11,107     $        10,790     $         3,580   $         3,431      $          3,428       $          3,310        $           1,815      $          1,989       $                 -     $        51,386
         Douglas                     $    5,500,722     $     5,561,012     $     5,992,526     $     2,158,694   $     2,134,024      $      2,315,180       $      2,427,331        $       1,445,403      $      1,720,094       $                 -     $    29,254,988
         Sarpy                       $      236,575     $       233,681     $       246,209     $        86,722   $       196,461      $        208,405       $        213,648        $         124,395      $        144,748       $                 -     $     1,690,844
         Washington                  $       88,051     $        79,289     $        72,752     $        23,352   $        28,951      $         27,986       $         26,145        $          13,872      $         14,709       $                 -     $       375,107
         Lancaster                   $    2,123,851     $     2,041,826     $     2,064,697     $             -   $             -      $              -       $              -        $               -      $              -       $                 -     $     6,230,374
         Dakota                      $       17,806     $        15,304     $        14,337     $             -   $             -      $              -       $              -        $               -      $              -       $                 -     $        47,446
                          Total NE   $    7,978,940     $     7,942,219     $     8,401,312     $     2,272,348   $     2,362,868      $      2,554,999       $      2,670,433        $       1,585,486      $      1,881,541       $                 -     $    37,650,146

NH       Hillsborough                $              -   $               -   $               -   $             -   $     1,872,893      $      2,011,552       $      2,078,496        $       1,655,224      $      2,261,076       $      2,320,412        $    12,199,652
         Rockingham                  $              -   $               -   $               -   $             -   $       480,429      $        560,385       $        590,518        $         150,449      $        596,535       $        610,886        $     2,989,202
                         Total NH    $              -   $               -   $               -   $             -   $     2,353,322      $      2,571,937       $      2,669,014        $       1,805,673      $      2,857,611       $      2,931,298        $    15,188,854

NJ       Mercer                      $              -   $               -   $               -   $             -   $                -   $                  -   $                   -    $      8,333,791      $      7,792,527       $      8,451,230        $    24,577,548
                          Total NJ   $              -   $               -   $               -   $             -   $                -   $                  -   $                   -    $      8,333,791      $      7,792,527       $      8,451,230        $    24,577,548

NM       Los Alamos                  $      188,521     $       191,301     $       195,650     $       170,758   $       256,797      $        279,099       $        295,274        $         342,595      $        319,523       $        223,070        $     2,462,586
         Santa Fe                    $    1,481,834     $     1,535,266     $     1,620,715     $     1,448,134   $     1,434,263      $      1,595,880       $      1,728,498        $       1,972,884      $      1,879,046       $      1,312,946        $    16,009,467
         Bernalillo                  $    2,920,432     $     2,902,869     $     3,080,584     $     1,758,932   $     1,114,290      $      1,455,340       $         56,478        $       1,670,099      $      1,125,200       $              -        $    16,084,224
         Sandoval                    $            -     $             -     $             -     $             -   $        40,406      $        101,147       $         69,433        $         426,385      $        550,587       $              -        $     1,187,958
         Valencia                    $       24,488     $        33,219     $        44,019     $        30,818   $        13,523      $         21,656       $      2,341,686        $          37,364      $         30,867       $              -        $     2,577,640
                         Total NM    $    4,615,275     $     4,662,655     $     4,940,969     $     3,408,643   $     2,859,278      $      3,453,121       $      4,491,369        $       4,449,328      $      3,905,223       $      1,536,016        $    38,321,875




                                                                                                                          -4-                                                                                                                                                 179
                                                                    Case3:07-cv-02888-JSW Document89-1                                       Filed02/18/11 Page18 of 83
                                                                                            EXHIBIT 4
                                                           Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                             Third GPCI Update                                                     Fourth GPCI Update                                                      Fifth GPCI Update
                                                                                                                      Calculated using 2005 RVUs with county specific escalator &       Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                             Calculated using 2002 RVUs using county specific escalators                               wGPCI Floor 2005 to 2010                                               peGPCI Floor in 2010                              2001 - 2010
                                    Transitional GPCIs                Fullly Implemented GPCIs                      Transitional GPCIs         Fullly Implemented GPCIs                 Transitional GPCIs          Fullly Implemented GPCIs

 State              County               2001                2002                2003               2004                  2005                  2006                  2007                     2008                   2009                   2010                 TOTAL

NY       Putnam                     $    1,992,614     $     2,054,663     $     1,723,141     $     1,887,400      $     2,058,866      $      2,083,228       $      2,138,362        $       1,185,108      $      1,262,409       $      1,301,860        $     17,687,651
         Dutchess                   $    3,845,670     $     4,126,485     $     3,079,947     $     3,572,427      $     3,935,995      $      4,139,312       $      4,436,811        $       1,826,140      $      2,406,711       $      2,596,163        $     33,965,660
         Orange                     $    1,271,329     $     1,437,073     $     1,884,838     $     2,275,482      $       754,882      $        740,012       $        773,346        $       3,058,766      $      3,817,213       $      4,085,453        $     20,098,393
                         Total NY   $    7,109,614     $     7,618,221     $     6,687,925     $     7,735,308      $     6,749,742      $      6,962,552       $      7,348,519        $       6,070,014      $      7,486,332       $      7,983,477        $     71,751,704

NC       Chatham                    $      212,939     $       201,269     $       201,761     $      137,198       $      203,212       $        174,517       $       142,729         $         97,095       $         74,263       $        33,826         $      1,478,809
         Durham                     $    3,878,484     $     3,762,693     $     4,207,052     $    2,958,587       $    4,531,916       $      5,038,089       $     5,333,788         $      6,431,335       $      4,650,389       $     2,742,014         $     43,534,346
         Franklin                   $      178,513     $       179,344     $       204,057     $      147,303       $      231,612       $        234,624       $       226,344         $        281,822       $        194,148       $       117,659         $      1,995,427
         Johnston                   $      968,894     $     1,014,904     $     1,113,635     $      833,003       $    1,357,192       $      1,518,217       $     1,617,382         $      2,179,218       $      1,646,737       $     1,083,551         $     13,332,733
         Orange                     $    1,485,424     $     1,455,270     $     1,693,497     $    1,200,460       $    1,853,539       $      2,066,090       $     2,193,221         $      2,651,620       $      1,922,484       $     1,136,597         $     17,658,203
         Wake                       $    6,107,722     $     5,973,632     $     6,418,782     $    4,546,218       $    7,013,567       $      7,877,774       $     8,426,632         $     11,400,240       $      8,649,869       $     5,714,870         $     72,129,307
         Cabarrus                   $    1,577,832     $     1,403,410     $     1,492,951     $      894,620       $      480,903       $        640,813       $     1,091,401         $              -       $              -       $             -         $      7,581,931
         Gaston                     $    1,551,636     $     1,571,062     $     1,800,770     $    1,212,496       $      732,367       $        882,888       $        97,859         $              -       $              -       $             -         $      7,849,079
         Lincoln                    $      188,767     $       184,359     $       210,851     $      137,323       $       80,230       $         98,518       $     4,439,461         $              -       $              -       $             -         $      5,339,508
         Mecklenburg                $    7,995,837     $     7,978,908     $     8,810,437     $    5,869,771       $    3,508,094       $      4,283,251       $       371,358         $              -       $              -       $             -         $     38,817,656
         Rowan                      $      822,861     $       777,316     $       822,312     $      521,609       $      296,811       $        352,531       $       235,404         $              -       $              -       $             -         $      3,828,844
         Union                      $      583,956     $       550,703     $       553,542     $      350,266       $      198,825       $        257,838       $       678,758         $              -       $              -       $             -         $      3,173,888
         Madison                    $       38,173     $        33,966     $        34,260     $       20,255       $            -       $              -       $             -         $              -       $              -       $             -         $        126,654
         Macon                      $      353,116     $       321,866     $       328,081     $      200,816       $            -       $              -       $             -         $              -       $              -       $             -         $      1,203,879
         Martin                     $      116,400     $       118,253     $       141,521     $       95,336       $            -       $              -       $             -         $              -       $              -       $             -         $        471,511
                        Total NC    $   26,060,556     $    25,526,955     $    28,033,509     $   19,125,262       $   20,488,270       $     23,425,148       $    24,854,336         $     23,041,329       $     17,137,890       $    10,828,518         $    218,521,774

OH       Cuyahoga                   $   21,490,856     $    21,939,679     $    23,731,021     $   21,712,996       $   20,613,277       $     22,285,710       $    23,198,975          $    28,182,890       $     25,346,537       $    23,111,172         $    231,613,113
                        Total OH    $   21,490,856     $    21,939,679     $    23,731,021     $   21,712,996       $   20,613,277       $     22,285,710       $    23,198,975          $    28,182,890       $     25,346,537       $    23,111,172         $    231,613,113

OR       Columbia                   $        48,530    $         46,487    $        45,523     $           33,655   $                -   $                  -   $                   -    $                 -   $                  -   $                  -    $       174,195
                        Total OR    $        48,530    $         46,487    $        45,523     $           33,655   $                -   $                  -   $                   -    $                 -   $                  -   $                  -    $       174,195

PA       Carbon                     $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $       722,295       $        714,009       $       469,497         $      1,905,802
         Lehigh                     $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $     7,250,271       $      7,372,187       $     4,986,304         $     19,608,762
         Northampton                $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $     4,795,594       $      4,508,525       $     2,819,466         $     12,123,585
         Cumberland                 $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $     3,472,292       $      3,320,684       $     1,702,419         $      8,495,395
         Dauphin                    $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $     2,631,131       $      2,455,358       $     1,228,330         $      6,314,820
                         Total PA   $              -   $               -   $               -   $                -   $                -   $                  -   $                   -    $    18,871,583       $     18,370,764       $    11,206,017         $     48,448,364

SC       York                       $    2,066,993     $     2,044,521     $     1,974,899     $     1,381,439      $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $      7,467,852
                         Total SC   $    2,066,993     $     2,044,521     $     1,974,899     $     1,381,439      $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $      7,467,852

SD       Lincoln                    $      286,388     $       281,289     $       246,398     $                -   $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $        814,075
         Minnehaha                  $    2,313,594     $     2,188,686     $     2,224,148     $                -   $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $      6,726,428
         Pennington                 $      681,805     $       620,681     $       636,751     $                -   $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $      1,939,237
                         Total SD   $    3,281,787     $     3,090,657     $     3,107,297     $                -   $                -   $                  -   $                   -   $                  -   $                  -   $                  -    $      9,479,741




                                                                                                                            -5-                                                                                                                                                  180
                                                                     Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page19 of 83
                                                                                             EXHIBIT 4
                                                            Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                              Third GPCI Update                                                  Fourth GPCI Update                                                      Fifth GPCI Update
                                                                                                                    Calculated using 2005 RVUs with county specific escalator &       Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                              Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                               peGPCI Floor in 2010                              2001 - 2010
                                     Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs                 Transitional GPCIs          Fullly Implemented GPCIs

 State               County               2001                2002                2003               2004               2005                  2006                  2007                     2008                   2009                   2010                 TOTAL

TN       Cheatham                    $       33,042     $        33,340     $        40,997     $       29,767    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $        137,147
         Davidson                    $   10,052,919     $    10,156,417     $    10,831,413     $    7,891,525    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $     38,932,273
         Dickson                     $      119,629     $       110,561     $       112,047     $       74,668    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $        416,905
         Robertson                   $      216,276     $       205,370     $       236,397     $      162,330    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $        820,374
         Rutherford                  $      838,551     $       958,860     $     1,108,281     $      890,814    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $      3,796,508
         Sumner                      $      500,679     $       543,473     $       648,603     $      501,595    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $      2,194,350
         Williamson                  $    1,001,687     $     1,072,387     $     1,077,585     $      823,182    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $      3,974,842
         Wilson                      $      436,310     $       455,531     $       499,256     $      373,841    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $      1,764,938
                          Total TN   $   13,199,092     $    13,535,941     $    14,554,580     $   10,747,722    $                -   $                  -   $                   -   $                  -   $                  -   $                 -     $     52,037,336

TX       Collin                      $    4,438,547     $     5,080,862     $     5,554,692     $    4,859,834    $    7,121,891       $      8,320,431       $     9,461,887          $     6,940,990       $      7,149,955       $      4,374,935        $     63,304,023
         Rockwall                    $            -     $             -     $             -     $            -    $      309,626       $        390,660       $       477,311          $       349,404       $        383,791       $        202,141        $      2,112,932
         Bastrop                     $      153,240     $       163,359     $       164,945     $      116,915    $      370,059       $        407,466       $       433,804          $       228,941       $        216,923       $         64,946        $      2,320,597
         Caldwell                    $       63,345     $        66,140     $        66,527     $       46,335    $      135,238       $        146,318       $       153,066          $        79,376       $         73,900       $         21,741        $        851,985
         Hays                        $    1,031,795     $     1,074,827     $       952,673     $      658,811    $    1,151,998       $      1,237,543       $     1,285,438          $       661,867       $        611,843       $        178,722        $      8,845,516
         Williamson                  $      912,961     $     1,103,077     $     1,169,579     $      915,619    $    2,294,594       $      2,790,502       $     3,281,262          $     1,912,618       $      2,001,546       $        661,869        $     17,043,627
         Chambers                    $       54,186     $        56,466     $        55,384     $       39,914    $       45,881       $         49,914       $        52,151          $        34,712       $         32,432       $         12,221        $        433,260
         Denton                      $    2,063,176     $     2,492,413     $     2,559,231     $    1,815,920    $    3,455,241       $      4,235,424       $     4,958,174          $     2,766,233       $      2,832,739       $        110,193        $     27,288,743
         Fort Bend                   $      887,041     $     1,049,405     $     1,290,473     $    1,074,529    $    1,730,465       $      2,158,655       $     2,568,695          $     2,313,318       $      2,465,774       $      1,154,132        $     16,692,487
         Ellis                       $            -     $             -     $             -     $            -    $      649,434       $        736,265       $       790,792          $             -       $              -       $              -        $      2,176,491
         Hunt                        $      591,094     $       622,065     $       563,912     $      369,936    $      711,161       $        789,786       $       827,550          $             -       $              -       $              -        $      4,475,503
         Montgomery                  $    2,288,138     $     2,561,086     $     2,985,655     $    2,263,444    $    2,509,647       $      3,107,632       $     3,556,575          $     2,596,483       $      2,565,918       $              -        $     24,434,578
         Kaufman                     $            -     $             -     $             -     $            -    $      356,543       $        408,246       $       422,990          $             -       $              -       $              -        $      1,187,779
         Harris                      $    4,583,441     $     3,787,812     $     4,023,033     $    4,886,920    $      882,425       $        727,485       $       720,819          $             -       $              -       $              -        $     19,611,934
         Travis                      $      907,433     $     1,091,981     $     1,128,976     $            -    $    1,373,580       $              -       $             -          $             -       $              -       $              -        $      4,501,969
                          Total TX   $   17,974,397     $    19,149,492     $    20,515,079     $   17,048,177    $   23,097,783       $     25,506,325       $    28,990,511          $    17,883,942       $     18,334,819       $      6,780,900        $    195,281,425

UT       Davis                       $      589,122     $       406,527     $       380,236     $       146,424   $       266,720      $        274,990       $        263,615        $                  -   $                  -   $                  -    $      2,327,635
         Salt Lake                   $    4,445,185     $     3,078,830     $     2,952,796     $     1,136,286   $     1,740,027      $      1,792,711       $      1,717,346        $                  -   $                  -   $                  -    $     16,863,181
         Weber                       $    1,066,157     $       734,758     $       697,729     $       266,885   $       437,577      $        448,118       $        426,702        $                  -   $                  -   $                  -    $      4,077,926
                          Total UT   $    6,100,464     $     4,220,115     $     4,030,761     $     1,549,596   $     2,444,324      $      2,515,819       $      2,407,663        $                  -   $                  -   $                  -    $     23,268,742

VT       Chittenden                  $              -   $               -   $               -   $             -   $       494,629      $         731,086      $        750,096         $        113,410      $      1,101,471       $        892,245        $      4,082,938
         Franklin                    $              -   $               -   $               -   $             -   $             -      $               -      $              -         $            634      $        100,578       $         80,763        $        181,975
         Grand Isle                  $              -   $               -   $               -   $             -   $             -      $               -      $              -         $      1,231,191      $            820       $            961        $      1,232,972
                          Total VT   $              -   $               -   $               -   $             -   $       494,629      $         731,086      $        750,096         $      1,345,235      $      1,202,869       $        973,969        $      5,497,885




                                                                                                                          -6-                                                                                                                                                  181
                                                                     Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page20 of 83
                                                                                             EXHIBIT 4
                                                            Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                              Third GPCI Update                                                  Fourth GPCI Update                                                  Fifth GPCI Update
                                                                                                                    Calculated using 2005 RVUs with county specific escalator &   Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                              Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                           peGPCI Floor in 2010                              2001 - 2010
                                     Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs             Transitional GPCIs          Fullly Implemented GPCIs

 State               County               2001                2002                2003               2004               2005                  2006                  2007                 2008                   2009                   2010                 TOTAL

VA       Manassas City               $      687,105     $       823,336     $     1,088,188     $    1,195,411    $    1,807,372       $      1,852,022      $      1,915,969     $      1,745,166       $      1,680,492       $     1,537,424         $     14,332,483
         Prince William              $      974,979     $     1,108,217     $     1,279,170     $    1,311,959    $    2,189,009       $      2,587,527      $      3,087,888     $      3,394,721       $      3,772,060       $     3,992,468         $     23,697,998
         Loudoun                     $      899,750     $     1,093,760     $     1,284,628     $    1,374,361    $    2,508,161       $      2,772,413      $      3,093,820     $      3,044,615       $      3,161,330       $     3,098,714         $     22,331,551
         Fauquier                    $      181,230     $       216,767     $       264,298     $      258,902    $      590,170       $        688,650      $        811,150     $        807,218       $        882,204       $       868,644         $      5,569,232
         Fredericksburg City         $    1,587,362     $     1,649,544     $     1,708,400     $    1,522,204    $    3,810,505       $      4,102,857      $      4,459,228     $      3,952,339       $      3,981,280       $     3,553,283         $     30,327,003
         Clarke                      $            -     $             -     $             -     $            -    $            -       $              -      $              -     $         36,936       $         35,685       $        29,799         $        102,420
         Stafford                    $            -     $             -     $             -     $            -    $      379,977       $        482,755      $        619,058     $        648,949       $        770,061       $       786,141         $      3,686,941
         Spotsylvania                $      199,879     $       218,706     $       240,746     $      219,780    $      309,597       $        341,736      $        380,621     $        303,140       $        309,446       $       228,240         $      2,751,892
         Charles City                $        5,226     $         4,844     $         4,841     $        3,630    $        3,206       $            776      $            190     $              -       $              -       $             -         $         22,712
         Chesterfield                $    1,086,220     $     1,357,380     $     1,630,665     $    1,581,069    $    1,805,609       $      1,853,665      $      1,918,652     $              -       $              -       $             -         $     11,233,261
         Dinwiddie                   $       15,560     $        15,681     $        15,320     $       12,516    $       12,045       $         11,614      $         11,290     $              -       $              -       $             -         $         94,025
         Goochland                   $       20,541     $        22,193     $        23,586     $       20,499    $       20,984       $         19,926      $         19,077     $              -       $              -       $             -         $        146,805
         Hanover                     $      707,653     $       693,654     $       670,097     $      536,654    $      506,218       $        618,006      $        760,686     $              -       $              -       $             -         $      4,492,968
         Henrico                     $    4,582,810     $     4,864,312     $     5,077,513     $    4,366,680    $    4,423,222       $      4,870,780      $      5,407,739     $              -       $              -       $             -         $     33,593,057
         New Kent                    $       25,896     $        23,348     $        19,966     $       14,522    $       12,441       $         11,501      $         10,719     $              -       $              -       $             -         $        118,393
         Powhatan                    $       26,032     $        27,525     $        30,452     $       25,998    $       26,143       $         25,619      $         25,313     $              -       $              -       $             -         $        187,083
         Prince George               $        3,192     $         5,971     $         9,037     $       10,590    $       14,616       $         12,957      $         11,581     $              -       $              -       $             -         $         67,944
         Colonial Heights City       $      333,108     $       350,851     $       385,729     $      330,822    $      323,886       $        326,828      $        332,508     $              -       $              -       $             -         $      2,383,731
         Hopewell City               $      289,171     $       292,499     $       314,296     $      259,677    $      227,512       $        232,502      $        239,557     $              -       $              -       $             -         $      1,855,214
         Petersburg City             $      626,604     $       568,161     $       556,404     $      410,007    $      343,475       $        313,059      $        287,683     $              -       $              -       $             -         $      3,105,394
         Richmond City               $    3,166,309     $     2,985,907     $     3,069,040     $    2,370,373    $    2,181,200       $      2,083,718      $      2,006,965     $              -       $              -       $             -         $     17,863,512
         Albemarle                   $      484,862     $       483,684     $       522,803     $      404,224    $            -       $              -      $              -     $              -       $              -       $             -         $      1,895,573
         Fluvanna                    $       24,656     $        24,582     $        23,760     $       18,302    $            -       $              -      $              -     $              -       $              -       $             -         $         91,300
         Greene                      $        7,473     $         7,490     $         7,906     $        6,123    $            -       $              -      $              -     $              -       $              -       $             -         $         28,992
         Charlottesville City        $    1,031,613     $     1,203,180     $     1,718,638     $    1,519,677    $            -       $              -      $              -     $              -       $              -       $             -         $      5,473,107
                          Total VA   $   16,967,232     $    18,041,589     $    19,945,483     $   17,773,978    $   21,495,349       $     23,208,913      $     25,399,693     $     13,933,083       $     14,592,558       $    14,094,714         $    185,452,591

WA       Snohomish                   $    3,384,584     $     3,417,030     $     3,382,995     $     2,896,137   $     5,014,818      $      4,920,424       $      5,054,064     $                 -   $                  -   $                  -    $     28,070,051
         Thurston                    $            -     $             -     $             -     $             -   $     2,671,301      $      2,620,241       $      2,714,975     $                 -   $                  -   $                  -    $      8,006,517
                         Total WA    $    3,384,584     $     3,417,030     $     3,382,995     $     2,896,137   $     7,686,118      $      7,540,665       $      7,769,039     $                 -   $                  -   $                  -    $     36,076,568

WV       Jefferson                   $              -   $               -   $               -   $             -   $         73,970     $          86,274      $         64,146     $                 -   $                  -   $                  -    $       224,389
                         Total WV    $              -   $               -   $               -   $             -   $         73,970     $          86,274      $         64,146     $                 -   $                  -   $                  -    $       224,389

WI       Pierce                      $      127,256     $       120,077     $       123,372     $      109,360    $      225,640       $        220,069      $        215,906     $         128,302      $         133,841      $         87,944        $      1,491,766
         St. Croix                   $      207,464     $       203,593     $       218,722     $      202,894    $      387,604       $        395,611      $        406,171     $         252,589      $         275,744      $        189,609        $      2,740,002
         Milwaukee                   $   11,383,605     $    10,886,778     $    11,258,949     $    9,553,645    $    8,206,427       $      8,206,427      $      8,183,909     $               -      $               -      $              -        $     67,679,740
         Waukesha                    $            -     $             -     $             -     $            -    $    2,371,603       $      2,371,603      $      2,363,160     $               -      $               -      $              -        $      7,106,365
         Dane                        $    3,604,925     $     3,447,746     $     3,526,160     $    2,996,681    $    2,430,416       $      2,430,416      $      2,417,925     $               -      $               -      $              -        $     20,854,269
         Kenosha                     $            -     $             -     $             -     $            -    $      724,149       $        724,149      $        719,114     $               -      $               -      $              -        $      2,167,412
         Ozaukee                     $            -     $             -     $             -     $            -    $      307,082       $        307,082      $        303,616     $               -      $               -      $              -        $        917,781
                          Total WI   $   15,323,250     $    14,658,194     $    15,127,203     $   12,862,579    $   14,652,922       $     14,655,357      $     14,609,801     $         380,890      $         409,585      $        277,553        $    102,957,335




                                                                                                                          -7-                                                                                                                                              182
                                                                   Case3:07-cv-02888-JSW Document89-1                                    Filed02/18/11 Page21 of 83
                                                                                           EXHIBIT 4
                                                          Medicare Part B Underpayments 2001-2010 Caused by "Large Payment Differences"
                                                            Third GPCI Update                                                  Fourth GPCI Update                                                      Fifth GPCI Update
                                                                                                                  Calculated using 2005 RVUs with county specific escalator &       Calculated using 2008 RVUs with county specific escalator & Partial   Underpayments
                                            Calculated using 2002 RVUs using county specific escalators                            wGPCI Floor 2005 to 2010                                               peGPCI Floor in 2010                              2001 - 2010
                                   Transitional GPCIs                Fullly Implemented GPCIs                   Transitional GPCIs         Fullly Implemented GPCIs                 Transitional GPCIs          Fullly Implemented GPCIs

 State            County                2001                2002                2003               2004               2005                  2006                  2007                     2008                   2009                   2010                 TOTAL

WY       Teton                     $              -   $               -   $               -   $             -   $                -   $                  -   $                   -    $        114,114      $         124,154      $                  -    $        238,268
                       Total WY    $              -   $               -   $               -   $             -   $                -   $                  -   $                   -    $        114,114      $         124,154      $                  -    $        238,268

PR       Juncos Municipio          $      539,356     $       532,928     $       512,979     $       316,452   $              -     $               -      $              -        $                -     $               -      $               -       $      1,901,716
         Ceiba Municipio           $            -     $             -     $             -     $             -   $         13,383     $          18,001      $         22,723        $            8,409     $          11,253      $          14,335       $         88,104
                        Total PR   $      539,356     $       532,928     $       512,979     $       316,452   $         13,383     $          18,001      $         22,723        $            8,409     $          11,253      $          14,335       $      1,989,819

         TOTAL US                  $ 325,235,791      $ 324,835,199       $ 343,585,897       $ 286,094,403     $ 311,188,239        $ 325,259,744          $ 349,921,648           $ 345,120,953          $ 315,438,108          $ 259,666,427           $   3,186,346,410

         Single Locality States    $ 193,040,246      $ 189,418,725       $ 201,135,472       $ 141,974,985     $ 164,349,239        $ 172,691,172          $ 181,934,790           $ 138,925,001          $ 132,461,481          $ 101,600,483           $   1,617,531,594
         Multi-Locality States     $ 132,195,545      $ 135,416,474       $ 142,450,425       $ 144,119,419     $ 146,838,999        $ 152,568,572          $ 167,986,858           $ 206,195,952          $ 182,976,628          $ 158,065,944           $   1,568,814,816




                                                                                                                        -8-                                                                                                                                                   183
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page22 of 83




                 Exhibit 5

                                                                  184
               Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page23 of 83




                        COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
                                              Attorneys at Law
George R. Corey
Stevan N. Luzaich
Dario de Ghetaldi
                                       700 EL CAMINO REAL, P.O. BOX 669                     Hon. Edward W. Pliska
                                         MILLBRAE, CALIFORNIA 94030                              (1935-2006)
Jerry E. Nastari
                                                                                            Xenophon Tragoutsis (Ret.)
Amanda L. Riddle                     (650) 871-5666 • FAX (650) 871-4144
Edward A. Daniels
Janet M. Li
                                               www.coreylaw.com


                                              August 29, 2007

     Via Electronic Submission

     Centers for Medicare & Medicaid Services
     Department of Health and Human Services
     Attention: CMS–1385–P
     Mail Stop C4–26–05
     7500 Security Boulevard
     Baltimore, MD 21244–1850

     Re:       Comments on CMS-1385-P
               “GEOGRAPHIC PRACTICE COST INDICES (GPCIs)”

     To Whom It May Concern:

     This office represents the following counties in the State of California: County of Santa Cruz,
     County of Sonoma, County of San Diego, County of Marin, County of Santa Barbara, and
     County of San Luis Obispo. Each of our clients is a “supplier” of medical services as that term
     is defined in 42 U.S.C. § 1395x (d). The following responses are submitted on behalf of each of
     those California counties.

     I.        General Comments

             Generally speaking, the proposed rule does too little, too late. There have been no
     updates to the geographic localities used to calculate payments under the physician fee schedule
     since 1997 and this has resulted in significant underpayments being made to our clients as well
     as to numerous other suppliers in over 440 counties nationwide. (See Geographic Areas Used to
     Adjust Physician Payments for Variation in Practice Costs Should Be Revised, GAO-07-466,
     June 2007 [“GAO Report”], p. 5.)

             There is currently a significant need for a uniform revision of the locality structure and
     that revision should be applied to all states, not just to California. Suppliers in more urbanized
     counties across the country are not the only ones being affected by Medicare’s failure to revise
     the locality structure. Beneficiaries in urban counties that are part of large multi-county
     localities have seen their access to health care reduced as suppliers increasingly eliminate
     Medicare patients from their practices. In addition, beneficiaries and/or their supplemental


                                                  Ex. 5 - 1                                                     185
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page24 of 83



Department of Health and Human Services
August 29, 2007
Page 2


insurance carriers in rural counties that are part of large multi-county localities are paying more
than they should because the payment levels in their localities are artificially inflated by the
inclusion of urban counties (and their higher county GAFs) in those localities.

        Perhaps the most significant defect of the Proposed Rule is the failure to provide for
periodic revisions of the locality structure using defined criteria. This was a central
recommendation of the Government Accountability Office in its recent report which was
specifically addressed to the issue of the adjustment of localities:

       “Regarding our second recommendation – that CMS examine and, if necessary,
       update the payment localities on a periodic basis – the agency stated that it
       considers payment locality issues when concerns are raised by interested parties
       and based on its own initiative, an approach that it believes is more flexible and
       efficient than examining the payment localities every 10 years. Reviewing
       payment localities in response to concerns raised by interested parties, however,
       could result in CMS examining only selected physician payment localities, rather
       than examining all payment localities using a uniform approach. Updating the
       payment localities at least every 10 years when new decennial census data
       become available would ensure that Medicare appropriately accounts for chances
       in the geographic distribution of physicians’ costs of operating a private medical
       practice.” (See GAO Report, p. 41.)

        Medicare has not demonstrated any ability to modify payment localities consistently with
significant demographic changes over the last eleven years. In the 1996 Final Rule, Medicare
stated a position similar to its response to the GAO’s recommendation on updating localities:

       “While we do not plan to routinely revise payment areas as we implement new
       GPCIs, we will review the areas in multiple locality States if the newer GPCI data
       indicates dramatic relative cost changes among areas.” (Final Rule, 11/22/1996,
       61 FR 59497.)

Rather than addressing the significant demographic changes that it recognizes have occurred in
the years since 1996, Medicare has repeatedly refused to implement any locality changes at all.
(Proposed Rule, 8/15/2003, 68 FR 49044; Final Rule, 11/7/2003, 68 FR 63214; Proposed Rule,
8/5/2004, 69 FR 47504; Final Rule, 11/15/2004, 69 FR 66263; Proposed Rule, 8/8/2005, 70 FR
45784; Final Rule, 11/21/2005, 70 FR 70152-70153; Proposed Rule, 8/22/2006, 71 FR 48994;
Final Rule, 12/1/2006, 71 FR 69655.)

         Medicare’s demonstrated inability to implement needed locality modifications on its own
initiative underscores the absolute necessity of adopting a rule under which Medicare is required
to update localities based on uniform criteria at specific intervals of time. It is our clients’



                                             Ex. 5 - 2                                                186
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page25 of 83



Department of Health and Human Services
August 29, 2007
Page 3


position that the 10-year period proposed by the GAO is too long and would suggest that a 3-
year period would be more appropriate. That would make the updating of localities under Part B
consistent with the period for updating localities under Part A.

II.    Discussion of Specific Issues

       A.      Errors in the Data Tables Make Them Unreliable

        We find ourselves unable to effectively comment on any of the three options presented in
the Proposed Rule (72 FR 38137-38142) primarily because the data contained in the explanatory
tables in unreliable in the following ways:

              (a) the tables for Options 1-3 contain inaccurate calculations of percent
       change due to locality changes;

               (b) the tables for Options 1-3 show inconsistent values for county GAFs
       for 6 counties;

             (c) the tables for Options 1-2 appear to have been derived from
       methodologies that are inconsistent with prior practice;

               (d) the table for Option 3 appears to have been derived from a
       methodology that is inconsistent with the methodology laid out in the descriptive
       text for Option 3; and

             (e) the table for Option 3 appears to contain incorrect GAFs for San Diego
       County, Santa Clara County, San Benito County, and perhaps other counties.

       These inconsistencies and apparent errors call all of the data shown in the tables into
question. On July 17, 2007, we submitted a FOIA request for, inter alia, data underlying each of
the GAFs and GPCIs shown on the tables. Our FOIA request included a request to expedite the
response so that we would be able “to submit a timely and complete response to the Proposed
Rule published by CMS in 72 FR 38122.” To date, we have not received a response to that
request and are therefore unable to submit a complete response to the Proposed Rule.

        Following are descriptions of the specific statistical deficiencies that are apparent on the
face of the Proposed Rule.

       Given the number and magnitude of the statistical errors, we request that the Proposed
Rule be republished, the comment period reopened, and all requested underlying data be made
available to allow the public to make full and informed comments.



                                             Ex. 5 - 3                                                 187
        Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page26 of 83



Department of Health and Human Services
August 29, 2007
Page 4


               1.     Inaccurate Percentage Change Figures

      As shown on the attached Exhibits A through C, each of the percentage change figures
shown on Tables 7 through 9 are incorrect.

       All but one of the percent change figures on Tables 7 and 8 are off by less than one
percent and such differences may admittedly be due to rounding of data in the tables.

        However, the difference between the percent change shown for Rest of California in
Table 8 (-0.049%) and the actual percent change (-0.49%) cannot be so explained. Similarly, the
errors in the percent differences in Table 9 range from -11.9% to 10.23%, and differences of
such magnitude cannot be explained by rounding. The source of these errors is not apparent and
may result from data errors, data entry errors, or formulaic errors.

       Given the magnitude of the errors, we believe that the Proposed Rule should be
republished with the errors corrected, the data we requested should be provided, and the
comment period reopened.

               2.     Inconsistent Values for County GAFs

      As shown on the attached Exhibit C, the 2009 County GAFs for six counties (Santa Cruz,
Monterey, Sonoma, Marin, Solano, and Napa) are not consistently shown on Tables 7 through 8.

       The reason for the inconsistencies is not apparent. Given the magnitude of those
inconsistencies, we believe that the Proposed Rule should be republished with the
inconsistencies resolved, the data we requested should be provided, and the comment period
reopened.

               3.     Incorrect Use of the 5% Iterative Method in Options 1 & 2

        Although Options 1 and 2 purport to use the 5% iterative method used by Medicare in
redefining the localities in 1996, the method described in the Proposed Rule is considerably
different from that used in 1996 and was expressly rejected by Medicare in 1996.

       In 1996, Medicare described the 5% iterative method it adopted (“Option 1i”) as follows:

       “Under this [rule], current localities are used as building blocks. The 22 existing
       statewide localities remain statewide localities. [The rule] sets new localities in
       the remaining 28 States by comparing the area cost differences as represented by
       the locality GAFs within a State. An area’s GAF is a weighted composite of the
       area’s work, practice expense, and malpractice GPCIs and allows a comparison of



                                            Ex. 5 - 4                                             188
        Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page27 of 83



Department of Health and Human Services
August 29, 2007
Page 5


       overall costs among areas. Briefly, a State’s localities are ranked from the highest
       to the lowest GAF. The GAF of the highest price locality is compared to the
       weighted average GAF of all lower-price localities. If the percentage difference
       exceeds 5-percent, the highest-price locality remains a distinct locality. If not, the
       State becomes a statewide locality. If the highest-price locality remains a distinct
       locality, the process is repeated for the second highest-price locality. Its GAF is
       compared to the statewide average excluding the two highest-price localities. If
       this difference exceeds 5-percent, the second highest price locality remains a
       distinct locality. This logic is repeated, moving down the ranking of localities by
       costliness, until the highest-price locality does not exceed the combined GAFs of
       all less costly localities by 5-percent and does not remain a distinct locality. No
       further comparisons are made, and the remaining localities become a residual
       rest-of-State locality. The GAF of a locality always is compared to the average
       GAF of all lower-price localities. This ensures that the statewide or residual
       State locality has relatively homogeneous resource costs. [Emphases added.]”
       (Final Rule, 11/22/1996, 61 FR 59494.)

     The GAO used a similar methodology to develop the “county-based iterative” and
“MSA-based iterative” options it described in its recent report. (See GAO Report, p. 24.)

        In contrast, Options 1 and 2 of the current Proposed Rule compares a county’s GAF to its
locality’s GAF. This methodology (referred to in 1996 as “Option 1”) was expressly rejected by
Medicare in 1996 for two reasons:

       “First, some mid-sized metropolitan areas in large States such as California and
       Texas do not remain distinct FSAs despite their considerably higher input prices
       than in the rural and small city areas of their States with which they would be
       combined into a single residual area. Second, some large metropolitan areas in
       small States, such as Baltimore, Maryland, do not remain distinct FSAs. This is
       because the State GAF to which all locality GAFs are compared contains the high
       cost area GAFs. This makes it difficult for the mid-sized areas in large States to
       exceed the State GAF, even though their own GAFs may substantially exceed the
       GAF of all other localities in the residual area to which they would be assigned
       under Option 1. In large States with a wide range of GAFs, the mid-sized cities
       and metropolitan areas tend to be combined with the residual rest-of-State area.
       Their GAFs are sharply reduced, lessening the accuracy of input price tracking
       and creating large boundary differences in GAFs between large and mid-sized
       cities and at rural State boundaries that are not reflective of true input price
       differences.” (Proposed Rule, 7/2/1996, 61 FR 34618.)




                                             Ex. 5 - 5                                             189
        Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page28 of 83



Department of Health and Human Services
August 29, 2007
Page 6


         We believe, but cannot state with certainty because Medicare has not provided us with
the underlying data, that using the methodology it had previously rejected accounts for the fact
that certain counties (including San Diego, Santa Barbara, San Luis Obispo, Sacramento, El
Dorado, and Placer Counties, among others) were not – but should have been – included in the
list of new localities in Options 1 and 2.

       Given the unexplained use of a methodology that Medicare had previously rejected, we
believe that the Proposed Rule should be republished with the proper methodology employed in
Options 1 and 2, the data we requested should be provided, and the comment period reopened.

               4.     Conflict Between the Value for the County GAF for San Benito
                      County Shown in Proposed Rule and the Value Shown by GAO

      There is a significant difference between the value for the county GAF for San Benito
County shown in the Table 9 (0.971) and the value shown by the GAO (1.081). (Compare 72
FR 38142 with GAO Report, p. 54.)

       We believe the difference must lie in the census and/or housing data used by Medicare
and the GAO. The magnitude of the difference calls all data in Tables 7 through 9 into question.
Therefore, we believe that the tables in the Proposed Rule should be checked for error, the
Proposed Rule should then be republished, the data we requested should be provided, and the
comment period reopened.

               5.     Conflicts Between Table 9 and Option 3 Description

      There are discrepancies between description of Option 3 and the locality configuration
shown in Table 9 resulting from the failure to correctly employ the methodology as described.

       The methodology for Option 3 is described as follows:

       “[W]e sorted the counties by descending GAFs and compared the highest county
       to the second highest. If the difference is less than 5 percent, the counties were
       included in the same locality. The third highest is then compared to the highest
       county GAF. This iterative process continues until a county has a GAF difference
       that is more than 5 percent. When this occurs, that county becomes the highest
       county in a new payment locality and the process is repeated for all counties in
       the State.” (72 FR 38141.)

        In contrast, the groupings of the five proposed localities shown in Table 9 appear to have
been defined at times by an absolute differential of 0.05 and at times by a relative 5%
differential.



                                            Ex. 5 - 6                                                190
        Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page29 of 83



Department of Health and Human Services
August 29, 2007
Page 7


        If a 5% differential is uniformly employed as described in the text of the Proposed Rule,
six localities would result, not five as shown in the table.

        The attached Exhibit E shows the localities created by the use of a relative 5%
differential. Exhibit E assumes that most of the “Current County GAFs” shown in Table 9 are
correct, a fact which, as discussed above, is open to question. As noted on Exhibit E, the county
GAF for San Benito as calculated by the GAO Report is used, and the county GAFs shown in
Table 8 for Marin, Napa, Solano, Santa Cruz, Sonoma, and Monterey Counties are used as we
tentatively believe those values to be more accurate than those shown in Table 9.

       For these reasons, we believe that the proposed localities shown in Table 9 need to be
corrected, the Proposed Rule needs to be republished, the data we requested needs to be
provided, and the comment period needs to be reopened.

       B.      The Declines in Certain County GAFs Are Not Supported by Changes in
               HUD Rental Data

       The Proposed Rule states: “Rent data produce the most significant changes because they
are based on annual changes in HUD rents and are therefore more volatile than the wage
(Census) data.” (72 FR 38138.)

       In our FOIA Request of July 17, 2007, we asked to be provided with:

       “The source file for Practice Expense GPCIs for the years 1999 to 2009, including
       documents sufficient to show: (a) the rent data, wage data, and other expense data
       used for all counties and localities; (b) the methodology used to modify any HUD
       rent data employed in the calculations, including which percentile and type
       (number of bedrooms) used; and (c) the actual calculation used for all counties
       and localities in order to arrive at the peGPCI for each (this should include all
       components of the peGPCI).”

As previously noted, we requested that the response be expedited so that we could effectively
respond to the Proposed Rule, but no response was forthcoming.

        We made the request after noting that several counties, including San Diego and Santa
Clara, show declines in their county GAFs between 2006 and 2009 that do not appear to be
supported by changes in the most volatile component of the GAF formula – fair market rental
(“FMR”) data supplied by HUD.

       The attached Exhibit F illustrates the issue with respect to San Diego County. Between
2006 and 2009, the GAF for San Diego County will decline by 1.83%. In contrast, the FMR for



                                            Ex. 5 - 7                                               191
        Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page30 of 83



Department of Health and Human Services
August 29, 2007
Page 8


2-bedroom units is set to increase by 21.40%. The fact that the GAF is declining when the FMR
is increasing and the magnitude of the FMR increase when compared to the GAF decrease leads
us to believe that the 2009 county GAF for San Diego County shown in Table 9 is incorrect.
The data we sought in our FOIA request would have confirmed or negated that belief.

        The attached Exhibit G illustrates the issue with respect to Santa Clara County. Santa
Clara County dropped from No. 1 nationally (with highest rate of repayment by Medicare to
physicians) to No. 3 between 2007 and 2008. The significant percentage changes as between
Santa Clara, San Mateo, and San Francisco Counties in their respective repayment rates, or
Geographic Adjustment Factors ("GAF") cannot be explained by the respective changes in the
factors that most affect the formulaic outcome -- namely, FMR data and the Practice Expense
Geographic Practice Cost Index (“peGPCI”).

       Between 2007 and 2009, the county GAF for Santa Clara County is set to decline by
9.25%. In contrast, the FMR for 2-bedroom units is set to increase by 0.70%. The contrasts
between changes in the county GAF and the FMR for Santa Clara County leads us to believe that
the 2009 county GAF for Santa Clara County shown in Table 9 is incorrect.

        Additional information was available for Santa Clara County that we lacked for San
Diego County, and that additional information gives additional support to our belief that the
county GAF for Santa Clara County is incorrect. The attached Exhibit G contrasts the changes
in the county GAF, peGPCI, and FMR data for Santa Clara, San Mateo, and San Francisco
Counties between 2005-2007 and 2007-2009. The changes between San Mateo and San
Francisco Counties are highly correlated – probably because they are part of the same MSA and
share many of the same data that are used to calculate the peGPCI. In contrast, there is a
complete of a direct correlation between the changes in the county GAF, peGPCI, and FMR data
for Santa Clara County between 2005-2007 and 2007-2009 when contrasted with the same
changes for San Mateo and San Francisco Counties. These contrasts lead us to believe that some
or all of the 2009 county GAFs for Santa Clara, San Mateo, and/or San Francisco Counties may
be incorrect.

       For these reasons, we believe that the proposed localities shown in Table 9 need to be
corrected, the Proposed Rule needs to be republished, the data we requested needs to be
provided, and the comment period needs to be reopened.

       C.     Vital Importance of Medicare Providing Underlying Data

        The multitude of errors and inconsistencies contained in the Proposed Rule underscore
the vital importance of Medicare producing the data we requested in our FOIA Request of July
17, 2007. Having this data will allow us to cross-check Medicare’s data and provide support for
modeling of alternative methods of configuring localities now and in the future.



                                           Ex. 5 - 8                                              192
        Case3:07-cv-02888-JSW Document89-1                    Filed02/18/11 Page31 of 83



Department of Health and Human Services
August 29, 2007
Page 9



       D.      The Proposed Rule Makes Use of Unauthorized Adjustments to Impose
               Statewide Budget Neutrality

        Options 1 and 2 contain GAFs that are based on GPCIs that have been modified in an
unspecified manner in order to result in aggregate payments to California remaining the same.
(72 FR 38139.) According to the Proposed Rule, “changes to GPCIs must be applied in a budget
neutral manner (and under the current locality system, BN results in aggregate payments within
each State remaining the same), there are significant redistributive effects to any change.” (72
FR 38139.)

      It is our belief that there is no statutory authority for modifying the payment formula to
impose statewide budget neutrality for the following reasons:

              (1) Such a modification would not allow accurate an accurate comparison
       to be made between costs in the different fee schedule areas and the national
       average of costs as required by 42 U.S.C. § 1395w-4(e).

              (2) Nothing in the statutory scheme allows for modification of the
       physician fee schedule to create statewide budget neutrality following locality
       changes. (Compare 42 U.S.C. § 1395w-4(c)(2)(B)(ii).)

              (3) Medicare’s own statement of the payment formula under Part B does not
       include a statewide budget neutral adjuster: “Payment = [(RVUwork × GPCIwork) +
       (RVUpractice expense × GPCIpractice expense) + (RVUmalpractice × GPCImalpractice) × CF].” (See
       Proposed Rule, 8/22/2006, 71 FR 48985.)

               (4) Medicare has expressly (and correctly) stated in the past that the
       physician fee schedule is budget-neutral on a national basis and not on a statewide
       basis: “The physician fee schedule is budget-neutral on a national basis. If a
       State with multiple payment areas converts to a statewide payment area using
       population-weighted State GPCIs after the physician fee schedule became
       effective, the change may not be budget neutral within the State. . . . There is no
       statutory requirement that the physician fee schedule be budget neutral within a
       State.” (Proposed Rule, 7/14/1993, 58 FR 38002.)

       In addition, under Options 1 and 2, the imposition of a statewide budget neutrality
requirement, one which is not statutorily authorized, will inequitably affect California physicians
and beneficiaries in counties outside the ones which will be made part of the new localities
described in those options. The redistributive effects of the locality changes must, by statute, be
spread across the entire Medicare system and not localized in the State of California.



                                               Ex. 5 - 9                                                193
        Case3:07-cv-02888-JSW Document89-1                  Filed02/18/11 Page32 of 83



Department of Health and Human Services
August 29, 2007
Page 10


         We request the CMS justify its belief that statewide budget neutrality is authorized by
statute, regulation, or rule by identifying the source of its belief. Failing that, we request that the
Proposed Rule be corrected to remove the effects of any statewide budget-neutral adjustments
that have been made to the data, the Proposed Rule be republished, and the comment period
reopened.

       E.      The Proposed Rule Does Not Discuss Promised Efforts to Work With Other
               Agencies to Study and Develop Alternative Options

       In December 2006, CMS stated that it intended to work with MedPAC and the GAO “to
study our current methodology and develop alternative options [for locality changes].” (Final
Rule, 12/1/2006, 71 FR 69655.)

       The Proposed Rule does not contain any discussion of any such efforts. The Proposed
Rule should be modified to identify the nature and extent of any efforts CMS undertook to work
with MedPAC and the GAO, the results (if any) of those efforts, the Proposed Rule should be
republished, and the comment period should be reopened.

       F.      The Proposed Rule Fails to Give Due Consideration to an Option Based on
               MSAs

        The Proposed Rule fails to give due consideration to a fourth option, one based on
MSAs. The GAO Report concluded that an MSA-based locality structure was one of three
alternatives that would improve payment accuracy (i.e., reduce overpayments and
underpayments to physicians) without a significant increase in administrative expense. (GAO
Report, pp. 23-44.)

        The GAO’s conclusions appear to be supported by statements CMS has made on the
issue. In the past, CMS has recognized the need for a “national classification system built on
clear, objective standards.” (Proposed Rule, 8/8/2005, 70 FR 45794.) In addition, CMS has
concluded that “the MSA system (developed by OMB) is the only one that meets the
requirements for use as a classification system in a national payment program.” (Proposed Rule,
8/8/2005, 70 FR 45794.) As such, CMS uses the MSA system for purposes of, inter alia,
classifying hospital payment areas, and establishing local wage and rental data for purposes of
calculating payments to both hospitals and physicians. Further, CMS admitted to the GAO that
“they did not anticipate that significant modifications to the payment localities would require a
substantial amount of additional ongoing administrative burden.” (GAO Report, p. 37.)

       Currently, CMS uses an MSA-based locality structure to make payments to hospitals
under Part A. The following table shows the effects of the disparate methods employed by
Medicare in defining geographic payment localities as between Part A and Part B:



                                              Ex. 5 - 10                                                  194
       Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page33 of 83



Department of Health and Human Services
August 29, 2007
Page 11


                    HOSPITALS                                SUPPLIERS
                  (Under “Part A”)                         (Under “Part B”)
        Annual Payments Appr. $150 Billion       Annual Payments Appr. $60 Billion
        Payment Schedule Updated Every           Payment Schedule Updated Every 3
        Year                                     Years
        Geographic Localities Based on           Geographic Localities Established in
        Metropolitan Statistical Areas           1966 by Insurance Companies and
        (“MSAs”) Usually Revised Every 3         Revised Only Once by Medicare in
        Years by OMB                             1996
        Medicare Does Not Administer             In 1991, Medicare Assumed the
        Boundaries of Geographic Localities      Responsibility to Administer
                                                 Boundaries of Geographic Localities
                                                 But Has Not Made Revisions Since
                                                 1996
        433 Geographic Localities Based on       89 Geographic Localities Based
        Demographically Homogeneous              Primarily on Counties and
        MSAs                                     Combinations of Counties Which Are
                                                 Often Demographically Diverse
        Geographic localities understandable     Geographic localities poorly
        and fair                                 understood and inequitable
        Comprehensive Regulatory Provisions      No Regulatory Provisions for
        for Reclassification of Hospitals into   Reclassification of Suppliers into
        Different Geographic Localities for      Different Geographic Localities for
        Reimbursement Purposes                   Reimbursement Purposes
        Payment System Accurately Reflects       Payment System Does Not Accurately
        Costs Within Small, Well-Defined,        Reflect Costs Within
        Homogeneous Geographic Localities        Demographically Diverse Multi-
                                                 County Geographic Localities


        Given these facts, it is simply inconceivable that CMS did not include a study of an
MSA-based locality structure in the Proposed Rule. We recommend that CMS republish the
Proposed Rule including a study of an MSA-based locality structure, and reopen the comment
period.




                                          Ex. 5 - 11                                           195
          Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page34 of 83



Departnlent of Health and HUlnan Services
August 29, 2007
Page 12


        G.     CMS Should Identify and Quantify Additional Administrative Burdens
               When Analyzing Modifications to the Locality Structure

        No attempt was made to identify or quantify additional administrative burdens that lnight
result from the implelnentation of any of the three proposed options on a single-state or national
level.

        In the past, CMS has justified the reduction in the nunlber of localities under Part B to 89
based on reduction in administrative burdens. In contrast, as shown in the above table, Medicare
bases its paYlnents to hospitals under PaIi A using an MSA-based locality systeln in which there
are 433 localities. Clearly, the adlninistrativecosts of using the MSA-based locality system
under Part A (with almost five tilnes the number of localities as used for PaIi B) lnust be justified
or else CMS would not have implelnented it.

       If administrative costs are to be considered as a significant factor in choosing one locality
proposal over the other, generalized conclusions that one alternative might sOlnehow prove more
expensive or burdensome are not sufficient. Instead, in order for the public to lnake infonned
COlnments on proposed locality changes under Part B, Medicare needs to identify and quantify
the cOlnparative administrative costs of each alternative.

       We recommend that CMS republish the Proposed Rule including a study of the nature
and extent of additional administrative burdens resulting from any proposed option, and reopen
the COlnment period.

III.   Conclusion

        For all of the foregoing reasons, we are unable to select a proposed alternative for
modification of the locality structure under Part B. We reco1111nend that CMS: (a) republish the
Proposed Rule with the inclusion of the corrections, additional infonnation, and consideration of
the other proposed alternatives we have requested; and (b) reopen the comment period.

                                                      Sincerely,        /J /   J1


                                                  ~~'
                                                      Dario de Ghetaldi

DEG/drj
Enc.




                                              Ex. 5 - 12                                                196
                     Case3:07-cv-02888-JSW Document89-1            Filed02/18/11 Page35 of 83

                                                 EXHIBIT "A"

           OPTION 1 -- ERRORS IN CALCULATION OF PERCENTAGE CHANGE

                         Figures as Shown in Table 7 -- Option 1
                                                                                          Actual
                                             New CY 2009 New CY 2009    Percent           Percent
                                               GAF, No    GAF With Change Due          Change Due     Error
   Locality Name           County Name                                                  to Locality
                                               Locality    Locality   to Locality
                                               Change      Change    Change [sic]         Change


Santa Cruz              Santa Cruz                  1.017          1.100       7.59%        7.545%    -0.59%
Monterey                Monterey                    1.017          1.080       5.83%        5.833%     0.06%
Sonoma                  Sonoma                      1.017          1.076       5.51%        5.483%    -0.49%
Marin                   Marin                       1.112          1.173       5.19%        5.200%     0.20%
Napa/Solano             Solano                      1.112          1.066      -4.33%       -4.315%    -0.34%
Napa/Solano             Napa                        1.112          1.066      -4.33%       -4.315%    -0.34%
Rest of California      Rest of California          1.017          1.012      -0.49%       -0.494%     0.82%




                                                    Ex. 5 - 13                                        197
                   Case3:07-cv-02888-JSW Document89-1                          Filed02/18/11 Page36 of 83
                                                           EXHIBIT "B"

                             OPTION 2 -- ERRORS IN CALCULATION OF PERCENTAGE CHANGE

                                 Figures as Shown in Table 8 -- Option 2

                                                                                                            Actual
                                                                                                            Percent
                                                                  New CY 2009 New CY 2009    Percent     Change Due     Error
                                                    CY 2009         GAF, No    GAF With Change Due
       Locality Name             County Name                                                              to Locality
                                                   County GAF       Locality    Locality   to Locality      Change
                                                                    Change      Change    Change [sic]

Marin                         Marin                       1.173            1.112     1.173       5.19%         5.20%     0.199%
Napa/Solano                   Napa                        1.080            1.112     1.066      -4.33%        -4.32%    -0.343%
Napa/Solano                   Solano                      1.053            1.112     1.066      -4.33%        -4.32%    -0.343%
Santa Cruz/Monterey/Sonoma    Santa Cruz                  1.100            1.017     1.082       6.03%         6.01%    -0.376%
Santa Cruz/Monterey/Sonoma    Sonoma                      1.076            1.017     1.082       6.03%         6.01%    -0.376%
Santa Cruz/Monterey/Sonoma    Monterey                    1.080            1.017     1.082       6.03%         6.01%    -0.376%
Rest of California            Rest of California          1.017            1.017     1.012     -0.049%        -0.49%    90.082%




                                                             Ex. 5 - 14                                                 198
              Case3:07-cv-02888-JSW Document89-1                        Filed02/18/11 Page37 of 83
                                                       EXHIBIT "C"

                         OPTION 3 -- ERRORS IN CALCULATION OF PERCENTAGE CHANGE

                             Figures as Shown in Table 9 -- Option 3
                                                                                                    Calculated
                                          Current   Proposed    Proposed    Current                  Percent     Error
                     Current Medicare                                                   Percent
     County                               County    Medicare     Locality   Locality                Difference
                         Locality                                                      Difference
                                           GAF       Locality     GAF        GAF
San Mateo         San Mateo, CA            1.204        1         1.197      1.204         -0.60%      -0.585%    -2.600%
San Francisco     San Francisco, CA        1.201        1         1.197      1.201         -0.30%      -0.334%    10.225%
Marin             Marin/Napa/Solano, CA    1.170        1         1.197      1.112          7.60%       7.101%    -7.026%
Santa Clara       Santa Clara, CA          1.148        2         1.119      1.148         -2.50%      -2.592%     3.534%
Contra Costa      Oakland/Berkeley, CA     1.134        2         1.119      1.131         -1.00%      -1.072%     6.750%
Alameda           Oakland/Berkeley, CA     1.129        2         1.119      1.131         -1.00%      -1.072%     6.750%
Orange            Anaheim/Santa Ana, CA    1.128        2         1.119      1.128         -0.80%      -0.804%     0.533%
Ventura           Ventura, CA              1.121        2         1.119      1.121         -0.20%      -0.179%   -11.900%
Los Angeles       Los Angeles, CA          1.112        2         1.119      1.112          0.60%       0.626%     4.086%
Santa Cruz        Rest of California       1.098        3         1.061      1.012          4.90%       4.618%    -6.100%
Napa              Marin/Napa/Solano, CA    1.077        3         1.061      1.112         -4.60%      -4.807%     4.302%
Monterey          Rest of California       1.077        3         1.061      1.012          4.90%       4.618%    -6.100%
Sonoma            Rest of California       1.074        3         1.061      1.012          4.90%       4.618%    -6.100%
San Diego         Rest of California       1.053        3         1.061      1.012          4.90%       4.618%    -6.100%
Santa Barbara     Rest of California       1.053        3         1.061      1.012          4.90%       4.618%    -6.100%
Solano            Marin/Napa/Solano, CA    1.051        3         1.061      1.112         -4.60%      -4.807%     4.302%
Sacramento        Rest of California       1.047        4         1.023      1.012          1.20%       1.075%   -11.600%
El Dorado         Rest of California       1.033        4         1.023      1.012          1.20%       1.075%   -11.600%
San Bernardino    Rest of California       1.023        4         1.023      1.012          1.20%       1.075%   -11.600%
Placer.           Rest of California       1.021        4         1.023      1.012          1.20%       1.075%   -11.600%
Riverside         Rest of California       1.017        4         1.023      1.012          1.20%       1.075%   -11.600%
San Luis Obispo   Rest of California       1.015        4         1.023      1.012          1.20%       1.075%   -11.600%
San Joaquin       Rest of California       1.006        4         1.023      1.012          1.20%       1.075%   -11.600%
Yolo               Rest of California      0.995        5         0.962      1.012         -4.90%      -5.198%     5.724%
Stanislaus         Rest of California      0.979        5         0.962      1.012         -4.90%      -5.198%     5.724%
Mono               Rest of California      0.977        5         0.962      1.012         -4.90%      -5.198%     5.724%
Nevada             Rest of California      0.975        5         0.962      1.012         -4.90%      -5.198%     5.724%
Kern              Rest of California       0.973        5         0.962      1.012         -4.90%      -5.198%     5.724%
San Benito        Rest of California       0.971        5         0.962      1.012         -4.90%      -5.198%     5.724%
Sierra            Rest of California       0.967        5         0.962      1.012         -4.90%      -5.198%     5.724%
Amador            Rest of California       0.967        5         0.962      1.012         -4.90%      -5.198%     5.724%
Fresno            Rest of California       0.963        5         0.962      1.012         -4.90%      -5.198%     5.724%
Mendocino         Rest of California       0.960        5         0.962      1.012         -4.90%      -5.198%     5.724%
Madera            Rest of California       0.960        5         0.962      1.012         -4.90%      -5.198%     5.724%
Tuolumne          Rest of California       0.959        5         0.962      1.012         -4.90%      -5.198%     5.724%
Alpine            Rest of California       0.957        5         0.962      1.012         -4.90%      -5.198%     5.724%
Mariposa          Rest of California       0.956        5         0.962      1.012         -4.90%      -5.198%     5.724%
Tulare            Rest of California       0.950        5         0.962      1.012         -4.90%      -5.198%     5.724%
Butte             Rest of California       0.950        5         0.962      1.012         -4.90%      -5.198%     5.724%
Merced            Rest of California       0.949        5         0.962      1.012         -4.90%      -5.198%     5.724%
Calaveras         Rest of California       0.949        5         0.962      1.012         -4.90%      -5.198%     5.724%
Humboldt          Rest of California       0.947        5         0.962      1.012         -4.90%      -5.198%     5.724%
Lake              Rest of California       0.947        5         0.962      1.012         -4.90%      -5.198%     5.724%
Imperial          Rest of California       0.945        5         0.962      1.012         -4.90%      -5.198%     5.724%
Plumas            Rest of California       0.945        6         0.938      1.012         -7.30%      -7.889%     7.468%
Lassen            Rest of California       0.944        6         0.938      1.012         -7.30%      -7.889%     7.468%
Sutter            Rest of California       0.942        6         0.938      1.012         -7.30%      -7.889%     7.468%
Yuba              Rest of California       0.942        6         0.938      1.012         -7.30%      -7.889%     7.468%
Colusa            Rest of California       0.940        6         0.938      1.012         -7.30%      -7.889%     7.468%
Del Norte         Rest of California       0.940        6         0.938      1.012         -7.30%      -7.889%     7.468%
Modoc             Rest of California       0.938        6         0.938      1.012         -7.30%      -7.889%     7.468%
Shasta            Rest of California       0.937        6         0.938      1.012         -7.30%      -7.889%     7.468%
Kings             Rest of California       0.935        6         0.938      1.012         -7.30%      -7.889%     7.468%
Inyo              Rest of California       0.935        6         0.938      1.012         -7.30%      -7.889%     7.468%
Siskiyou          Rest of California       0.934        6         0.938      1.012         -7.30%      -7.889%     7.468%
Trinity           Rest of California       0.933        6         0.938      1.012         -7.30%      -7.889%     7.468%
Tehama            Rest of California       0.932        6         0.938      1.012         -7.30%      -7.889%     7.468%
Glenn             Rest of California       0.930        6         0.938      1.012         -7.30%      -7.889%     7.468%
                                                        Ex. 5 - 15                                                       199
Case3:07-cv-02888-JSW Document89-1       Filed02/18/11 Page38 of 83




                       EXHIBIT "D"

                 INCONSISTENT COUNTY GAFs

                               2009 County GAFs

                       Option 1:
                       "New CY         Option 2:   Option 3:
                       2009 GAF        "CY 2009    "Current
      County Name
                         With           County      County
                        Locality         GAF"        GAF"
                       Change"
    Santa Cruz           1.100          1.100        1.098
    Monterey             1.080          1.080        1.077
    Sonoma               1.076          1.076        1.074
    Marin                1.173          1.173        1.170
    Solano               1.066          1.053        1.051
    Napa                 1.066          1.080        1.077




                          Ex. 5 - 16                                  200
              Case3:07-cv-02888-JSW Document89-1                        Filed02/18/11 Page39 of 83
                                                      EXHIBIT "E"

                   OPTION 3 USING CORRECTED COUNTY GAFS AND UNIFORM 5% DIFFERENCE
                                                     Locality 1 Locality 2 Locality 3 Locality 4 Locality 5       Medicare's
                                           Corrected
                     Current Medicare                "Option 3" "Option 3" "Option 3" "Option 3" "Option 3"       Proposed
     County                                 Current
                         Locality                        5%         5%         5%         5%         5%           "Option 3"
                                          County GAF
                                                     Difference Difference Difference Difference Difference        Locality
San Mateo         San Mateo, CA              1.204     0.00%                                                          1
San Francisco     San Francisco, CA          1.201     0.25%                                                          1
Marin             Marin/Napa/Solano, CA      1.173     2.57%                                                          1
Santa Clara       Santa Clara, CA            1.148     4.65%                                                          2
Contra Costa      Oakland/Berkeley, CA       1.134     5.81%      0.00%                                               2
Alameda           Oakland/Berkeley, CA       1.129                0.44%                                               2
Orange            Anaheim/Santa Ana, CA      1.128                0.53%                                               2
Ventura           Ventura, CA                1.121                1.15%                                               2
Los Angeles       Los Angeles, CA            1.112                1.94%                                               2
Santa Cruz        Rest of California         1.100                3.00%                                               3
San Benito        Rest of California         1.081                4.67%                                               5
Monterey          Rest of California         1.080                4.76%                                               3
Napa              Marin/Napa/Solano, CA      1.080                4.76%                                               3
Sonoma            Rest of California         1.076                5.11%      0.00%                                    3
Solano            Marin/Napa/Solano, CA      1.053                           2.14%                                    3
San Diego         Rest of California         1.053                           2.14%                                    3
Santa Barbara     Rest of California         1.053                           2.14%                                    3
Sacramento        Rest of California         1.047                           2.70%                                    4
El Dorado         Rest of California         1.033                           4.00%                                    4
San Bernardino    Rest of California         1.023                           4.93%                                    4
Placer.           Rest of California         1.021                           5.11%      0.00%                         4
Riverside         Rest of California         1.017                                      0.39%                         4
San Luis Obispo   Rest of California         1.015                                      0.59%                         4
San Joaquin       Rest of California         1.006                                      1.47%                         4
Yolo              Rest of California         0.995                                      2.55%                         5
Stanislaus        Rest of California         0.979                                      4.11%                         5
Mono              Rest of California         0.977                                      4.31%                         5
Nevada            Rest of California         0.975                                      4.51%                         5
Kern              Rest of California         0.973                                      4.70%                         5
Sierra            Rest of California         0.967                                      5.29%      0.00%              5
Amador            Rest of California         0.967                                                 0.00%              5
Fresno            Rest of California         0.963                                                 0.41%              5
Mendocino         Rest of California         0.960                                                 0.72%              5
Madera            Rest of California         0.960                                                 0.72%              5
Tuolumne          Rest of California         0.959                                                 0.83%              5
Alpine            Rest of California         0.957                                                 1.03%              5
Mariposa          Rest of California         0.956                                                 1.14%              5
Tulare            Rest of California         0.950                                                 1.76%              5
Butte             Rest of California         0.950                                                 1.76%              5
Merced            Rest of California         0.949                                                 1.86%              5
Calaveras         Rest of California         0.949                                                 1.86%              5
Humboldt          Rest of California         0.947                                                 2.07%              5
Lake              Rest of California         0.947                                                 2.07%              5
Imperial          Rest of California         0.945                                                 2.28%              5
Plumas            Rest of California         0.945                                                 2.28%              6
Lassen            Rest of California         0.944                                                 2.38%              6
Sutter            Rest of California         0.942                                                 2.59%              6
Yuba              Rest of California         0.942                                                 2.59%              6
Colusa            Rest of California         0.940                                                 2.79%              6
Del Norte         Rest of California         0.940                                                 2.79%              6
Modoc             Rest of California         0.938                                                 3.00%              6
Shasta            Rest of California         0.937                                                 3.10%              6
Kings             Rest of California         0.935                                                 3.31%              6
Inyo              Rest of California         0.935                                                 3.31%              6
Siskiyou          Rest of California         0.934                                                 3.41%              6
Trinity           Rest of California         0.933                                                 3.52%              6
Tehama            Rest of California         0.932                                                 3.62%              6
Glenn             Rest of California         0.930                                                 3.83%              6

                                                     County GAFs Shown for Option 2
                                                     GAF for San Benito as Calculated by GAO ( compare: 0.971 per Medicare)
                                                     Localities Under Option 3 Using Uniform 5% Threshholds
                                                     Localities Shown by CMS Under Option 3

                                                       Ex. 5 - 17                                                              201
Case3:07-cv-02888-JSW Document89-1         Filed02/18/11 Page40 of 83




                         EXHIBIT "F"
              THE SAN DIEGO COUNTY GAF ISSUE


                                          Prior Year
                  GAF       Change                     Change
                                            FMR*

       2005       1.07825                    $1,183
       2006       1.07225     -0.56%         $1,065    -11.08%
       2009       1.05300     -1.83%         $1,355     21.40%

      *HUD FMR data from the prior year is used to calculate
      the current year peGPCI. The rental figures shown are
      for 2-bedroom units.




                             Ex. 5 - 18                                 202
           Case3:07-cv-02888-JSW Document89-1                       Filed02/18/11 Page41 of 83



                                                EXHIBIT "G"

                                 THE SANTA CLARA COUNTY GAF ISSUE

                    Santa Clara                         San Mateo                       San Francisco
                      National    Year-Year              National    Year-Year             National   Year-Year
            GAF                                 GAF                               GAF
                       Rank        Change                 Rank        Change                Rank       Change
  2003      1.184       3                      1.119       2                      1.221       1
  2004      1.184       3          0.00%       1.201       2          7.33%       1.223       1         0.16%
  2005      1.224       3          3.38%       1.230       2          2.41%       1.239       1         1.31%
  2006      1.265       1           3.35%      1.259       2           2.36%      1.256       3          1.37%
  2007      1.265       1           0.00%      1.259       2           0.00%      1.256       3          0.00%
  2008      1.206       3          -4.66%      1.231       1          -2.22%      1.228       2         -2.23%
  2009      1.148                  -4.81%      1.204                  -2.19%      1.201                 -2.20%
            2005- 2007 Delta        3.24%      2005- 2007 Delta        2.30%      2005- 2007 Delta       1.35%
            2007- 2009 Delta       -9.25%      2007- 2009 Delta       -4.37%      2007- 2009 Delta      -4.38%

              Santa Clara              San Mateo            San Francisco


           peGPCI       Delta      peGPCI      Delta      peGPCI       Delta

  2005      1.551                   1.547                  1.554
  2007      1.543      -0.52%       1.539      -0.52%      1.546      -0.51%
  2009      1.292     -16.27%       1.431      -7.02%      1.439      -6.92%


         HUD FMR*       Delta     HUD FMR*     Delta    HUD FMR*       Delta

  2004     $1,821                  $1,775                 $1,775
  2006     $1,284     -29.49%      $1,536     -13.46%     $1,536      -13.46%
  2008     $1,293      0.70%       $1,592      3.65%      $1,592       3.65%

*HUD FMR data from the prior year is used to calculate the current year peGPCI.
The rental figures shown are for 2-bedroom units.




                                                   Ex. 5 - 19                                                     203
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page42 of 83




                 Exhibit 6

                                                                  204
       Case3:07-cv-02888-JSW Document89-1    Filed02/18/11 Page43 of 83




eMS Rulings                                             Department of Health
                                                        and Human Services

                                                        Centers for Medicare &
                                                        Medicaid Services



Ruling No.:   CMS-1423-R                                Date:   January 1, 2009


         CMS Rulings are decisions of the Administrator that serve as

         precedent final opinions or orders or statements of policy or

         interpretation.   They are published under the authority of the

         Administrator of the Centers for Medicare & Medicaid Services

         (CMS) .


         CMS Rulings are binding on all CMS components, on all Health &

         Human Services (HHS) components that adjudicate matters under

         the jurisdiction of CMS, and on the Social Security

         Administration (SSA) to the extent that components of the SSA

         adjudicate matters under the jurisdiction of CMS.



               This Ruling sets forth CMS' decision to phase-in the

         correction of an error in the locality assignments of Austin

         County and Houston County, Texas.    The correction will be

         phased in over the first three quarters of calendar year (CY)

         2009 by making quarterly payments to physicians,

         practitioners, providers and suppliers furnishing services

         paid under the Physician Fee Schedule (PFS) and the Ambulance




                                                                                  205
Case3:07-cv-02888-JSW Document89-1    Filed02/18/11 Page44 of 83




                                                                    2


 Fee schedule in Austin County and Houston County, Texas.          The

 phase-in payments will be made following the first, second,

 and third quarters of CY 2009.      The phase-in payments will

 cease after the third quarter 2009 payment is made.

 MEDICARE PROGRAM

 Medicare Supplemental Medical Insurance (Part B)

 PHASE-IN OF CORRECTION TO PAYMENT LOCALITY ASSIGNMENT FOR

 AUSTIN COUNTY AND HOUSTON COUNTY TEXAS



 CITATIONS:     Section 1848(e) of the Social Security Act (the

 Act).    July 2, 1996 Physician Fee Schedule (PFS) proposed rule

 (61 FR 34654 through 34655) and November 22, 1996 PFS final

 rule with comment period for Calendar Year (CY) 1997

 (61 FR 59497).    October 31, 1997 PFS final rule with comment

 period for CY 1998 (62 FR 59260) .

 BACKGROUND

         In the CY 1997 PFS proposed rule, as part of the revised

 payment locality structure that reduced the number of

 localities from 210 to 89, we proposed to move Austin County,

 Texas from the South East Rural Texas locality (locality 03)

 to the Rest of Texas locality (locality 99).       In that same

 rule, we proposed to move Houston County, Texas from the North

 East Rural Texas locality (locality 02) to the Rest of Texas




                                                                         206
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page45 of 83




                                                                  3


 locality (locality 99).    These proposed locality configuration

 changes were adopted as final in the CY 1997 PFS final rule

 with comment period.   In the CY 1998 final rule with comment

 period, we included a listing of the counties included in each

 of the PFS localities in Addendum G.     Per Addendum G, the

 Austin Metro locality (locality 31) includes only Travis

 County; Austin County is not included in the Austin Metro

 locality.   Likewise, the Houston Metro locality includes only

 Harris County; Houston County is not included in the Houston

 Metro locality.   Since neither Austin County nor Houston

 County is included in the Austin Metro or Houston Metro

 locality (or in any other specific locality description in

 Addendum G), both Austin County and Houston County fall within

 the "all other counties" that are included in the Rest of

 Texas locality.   However, we recently discovered that since

 1997, Austin County and Houston County in Texas have been

 grouped with the Austin Metro and Houston Metro localities,

 respectively, instead of the Rest of Texas locality as we

 specified in our final rules.    (We note that neither Austin

 County nor Houston County is contiguous to the Austin Metro or

 Houston Metro locality).   Consequently, physicians,

 practitioners, and other suppliers furnishing services paid

 under the PFS in Austin County and Houston County have been

 paid for those services using the geographic practice cost




                                                                      207
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page46 of 83




                                                                  4


 indexes   (GPCIs) for the Austin Metro and Houston Metro

 localities, respectively, instead of those for the Rest of

 Texas locality.   Additionally, ambulance fee schedule payments

 to ambulance providers and suppliers furnishing services in

 Austin County and Houston County have been calculated using

 the practice expense (PE) GPCIs for the Austin Metro and

 Houston Metro localities, respectively (since a portion of the

 ambulance fee schedule payment is geographically adjusted

 using the PE GPCIs) .

      The correction of the locality assignments for Austin

 County and Houston County will be phased in over the first

 three quarters of CY 2009 by making quarterly payments to

 physicians, practitioners, providers, and suppliers furnishing

 services paid under the Physician Fee Schedule (PFS) and the

 ambulance fee schedule.

      Effective January 1, 2009, we will correct our payment

 files to include Austin County and Houston County, Texas in

 the Rest of Texas locality instead of the Austin Metro and

 Houston Metro localities, respectively.     As a result of this

 correction, payments to physicians, practitioners, and

 providers and suppliers in these counties under the PFS and

 ambulance fee schedule will be reduced (because the GPCIs for

 the rest of Texas locality are lower than the GPCIs for the

 Austin Metro and Houston Metro).    Although the correction of




                                                                      208
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page47 of 83




                                                                  5


 this error is necessary, we are concerned about the impact of

 the lower payment rates on the physicians, practitioners,

 providers and suppliers who furnish services in Austin County

 and Houston County, as well as the potential impact on

 beneficiary access to physician and ambulance services in

 these counties.   In order to allow for a period of adjustment,

 the Medicare contractor for Texas (TrailBlazer) will make a

 separate phase-in payment to each physician, practitioner,

 provider and supplier that has furnished PFS or ambulance fee

 schedule services in Austin County and Houston County,

 following each of the first three quarters of CY 2009.

      Effective January 1, 2009, for services paid under the

 PFS, the usual claims-based payments will be made for services

 paid under the PFS, based on the appropriate CY 2009 GPCIs for

 the Rest of Texas payment locality.    A separate phase-in

 payment will be made through lump sum quarterly payments which

 will be calculated based upon a percentage add-on to the

 claims-based payments for the quarter.     For services paid

 under the PFS, the percentage add-on reflects one-half of the

 difference between the CY 2009 GAF for the Rest of Texas

 locality and the CY 2009 GAF for the Austin Metro and Houston

 Metro localities, respectively.     This percentage add-on will

 be applied to the amount paid to each physician, practitioner,

 and supplier during the quarter.    We have decided to use the




                                                                      209
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page48 of 83




                                                                  6


 GAFs for each of the respective localities as a proxy to

 calculate the average payment amount difference between the

 Rest of Texas locality and the Austin Metro and Houston Metro

 localities.     Using GAFs, the percentage add-on for services

 paid under the PFS will be 2.2 percent for physicians,

 practitioners, and suppliers in Austin County and 3.5 percent

 for physicians, practitioners, and suppliers in Houston

 County.

      Effective January 1, 2009 for services paid under the

 ambulance fee schedule, the usual claims-based payments will

 be made for services furnished in Austin County and Houston

 County using the CY 2009 PE GPCI for the Rest of Texas

 locality.     Although we use the GAFs as a proxy to calculate

 the average payment amount differences between the Rest of

 Texas locality and the Austin Metro and Houston Metro

 localities under the PFS, no similar identifiable proxy is

 available for services paid under the ambulance fee schedule.

      Therefore, the separate phase-in payment for ambulance

 providers and suppliers will be equal to one-half of the

 difference between the actual payments under the ambulance fee

 schedule during the quarter (calculated based upon the PE GPCI

 for Rest of Texas locality) and the payment amounts calculated

 as if they had been based upon the PE GPCIs for the Austin

 Metro and Houston Metro localities, respectively.




                                                                      210
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page49 of 83




                                                                  7


         The quarterly phase-in payments will apply to PFS and

 ambulance fee schedule services furnished on or after

 January 1, 2009 and be calculated based upon the amount paid

 during the quarter.     PFS and ambulance fee schedule services

 furnished in Austin County and Houston County Texas with dates

 of service prior to January 1, 2009 will be paid based on the

 Austin Metro and Houston metro localities, respectively, and

 will not be included in the quarterly phase-in payment

 calculations.

         The quarterly phase-in payments will be made following

 the first,    second and third quarters of CY 2009.   The phase-in

 payments will cease after the third quarter 2009 payment is

 made.    We will issue a technical direction letter instructing

 TrailBlazer on how to administer the quarterly payments.




                                                                      211
         Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page50 of 83




EFFECTIVE DATE

This Ruling is effective January 1, 2009.



Dated:    December 12, 2008




                                     Kerry Weems

                                     Acting Administrator,

                                     Centers for Medicare & Medicaid

                                     Services.




                                                                           212
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page51 of 83




                 Exhibit 7

                                                                  213
               Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page52 of 83




                         COREY, LUZAICH, PLISKA, DE GHETALDI & NASTARI LLP
                                               Attorneys at Law
George R. Corey
Stevan N. Luzaich
Dario de Ghetaldi
                                       700 EL CAMINO REAL, P.O. BOX 669                     Hon. Edward W. Pliska
                                         MILLBRAE, CALIFORNIA 94030                              (1935-2006)
Jerry E. Nastari
                                                                                            Xenophon Tragoutsis (Ret.)
Amanda L. Riddle                     (650) 871-5666 • FAX (650) 871-4144
Edward A. Daniels
                                               www.coreylaw.com


                                              August 24, 2010

     Via Electronic Submission

     Centers for Medicare & Medicaid Services
     Department of Health and Human Services
     Attention: CMS–1503–P
     Mail Stop C4–26–05
     7500 Security Boulevard
     Baltimore, MD 21244–1850

     Re:       Comments on CMS-1503-P
               Medicare Part B Proposed Rule for CY 2011

     To Whom It May Concern:

              This office represents the following counties in the State of California: County of Santa
     Cruz, County of Sonoma, County of San Diego, County of Marin, County of Santa Barbara, County
     of San Luis Obispo, and County of Monterey. Each of our clients is a “supplier” of medical services
     as that term is defined in 42 U.S.C. § 1395x(d). The following responses are submitted on behalf
     of each of those California counties.

             CMS is to be commended for stated intent of achieving “an increased level of precision” in
     deriving values for the PFS. 75 FR 40090. However, the 2011 Proposed Rule seeks to reach that
     level of precision in an astoundingly inconsistent manner, at once “disaggregating” the office
     expense component of the practice expense GPCI into cost categories that represent small fractions
     of a percent of the costs of providing medical services while at the same time making no attempt to
     cure payment disparities that range from 5% to 20% in over 220 counties across the country.

              CMS is also to be commended for providing data that was formerly never made available
     to the public and which greatly assists in the ability to provide comments to the 2011 Proposed Rule.
     For the first time, CMS has published a file containing RVUs by county, data that underlies and is
     critical to the calculation of the locality GPCIs and GAFs. However, all data underlying those
     calculations should be made available to the public. Although requests have been made by our
     clients and by several state and national medical associations, CMS has inexplicably refused to
     publish county-level data used in the calculation of locality GPCIs and GAFs. That data, along with
     any budget neutral adjusters applied by Acumen and the OACT should be published to allow the


                                                  Ex. 7 - 1                                                     214
        Case3:07-cv-02888-JSW Document89-1                   Filed02/18/11 Page53 of 83



Department of Health and Human Services
August 24, 2010
Page 2


public to make informed comments on the 2011 Proposed Rule. Without such transparency, the
public is not afforded a fair and reasonable opportunity to comment.

        The 2011 Proposed Rule contains landmark changes to the MEI. Once again, CMS is to be
commended for improving the references to the data used to justify those changes. However, once
again, CMS has not made full disclosure of those data sources and, more significantly, CMS has not
made a reasonable attempt to explain the methodology used to derive the MEI weights.

       Each of these topics will be more fully discussed below.

I.     Critical Need for Locality Reconfiguration

        Access to health care is a key to good health. Why would CMS perpetuate a policy that
results in hundreds of thousands of Medicare beneficiaries being denied critical access to health
care?

        Why do physicians in Santa Cruz County receive 25% less from CMS than physicians in
neighboring Santa Clara and San Mateo Counties for providing exactly the same services? Why do
physicians in San Diego County receive 11% less from CMS than physicians in neighboring Orange
County? Why does CMS pay physicians in Santa Cruz County at the lowest rate in California while
paying hospitals in Santa Cruz County at the highest rate in the nation? Why are there no
psychiatrists in San Luis Obispo County who will treat Medicare patients? Why are Medicare
suppliers in these counties and in over 220 counties across the United States not taking Medicare
patients?

        Simply put, the answer to all of these questions is that none of the fee schedule areas from
which payments to physicians are derived under Medicare Part B have been reconfigured since
1996, and some have not been reconfigured since Medicare was first enacted in 1966. This failure
results in the fact that physicians in those counties are reimbursed at rates that are below the
physicians’ cost of providing medical services. Is it any wonder that physicians in more and more
counties can no longer afford to take no new Medicare patients or that some are treating no Medicare
patients at all?

        These payment disparities were first disclosed to CMS in 2001, and CMS has been aware
of the resulting public health crisis in the affected counties since that time. It is simply disgraceful
that CMS has failed to remedy these payment disparities.

        CMS has not reconfigured the payment locality structure since 1996 despite the fact that
shifting demographics across the country have increased costs of providing medical services in over
200 counties to a point where those counties should have become single-county localities. Because
CMS has not reapplied the 5% threshold since 1996 to counties where costs have risen significantly,



                                              Ex. 7 - 2                                                    215
        Case3:07-cv-02888-JSW Document89-1                  Filed02/18/11 Page54 of 83



Department of Health and Human Services
August 24, 2010
Page 3


payments to physicians in many statewide or multi-county localities no longer reflect the actual cost
of providing services in two ways. First, physicians in the high-cost counties are being underpaid.
Second, physicians in the low-cost counties are being overpaid. A related effect of these inequitable
payments is that Medicare beneficiaries in the low-cost counties are being overcharged on their 20%
co-pay while beneficiaries in the high-cost counties are being undercharged. To date,
underpayments to physicians in high-cost counties total almost $3.7 billion and overcharges to
beneficiaries in low-cost counties total over $750 million. These amounts are based on our best
estimated calculations using the recently published 2008 RVU data as well as data provided to our
clients pursuant to their FOIA requests for data underlying the Fourth and Fifth GPCI Updates. See
attached Appendix A. It is worth noting that the GAO’s 2007 report estimated that CMS was
underpaying suppliers by 5% or more in over 440 counties nationwide. See Geographic Areas Used
to Adjust Physician Payments for Variation in Practice Costs Should Be Revised, GAO-07-466, June
2007 [the “GAO Locality Report”], p. 5.

        In addition to the failure of the current locality configuration to meet the 5% threshold CMS
set in 1996, other payment inaccuracies have developed since 2001. Data developed by CMS and
Acumen shows that there are currently payment inaccuracies that are as severe or more severe than
those that the Secretary found in 1996: (1) would be “unacceptably inaccurate in tracking input price
differences” and would lead to “inaccurate GAFs”; (2) would lead to “too many large and
inappropriate GAF differences across FSA boundaries,” “undesirable payment differences at
boundaries,” “severe boundary problems,” and “inappropriate differences across boundaries”; and
(3)“would substantially underpay some areas while overpaying others.” See 61 FR at 34617-18.

        In June 2007, after six years of trying to craft an administrative or legislative remedy to the
payment imbalances, seven California counties – Marin, Monterey, San Diego, San Luis Obispo,
Santa Barbara, Santa Cruz, and Sonoma – filed a class action lawsuit on behalf of themselves and
other suppliers of medical services under Medicare Part B in counties across the country that should
have been converted to single-county localities when their costs exceeded the 5% threshold set by
CMS in 1996. Although CMS was well aware that payment imbalances had developed, no
administrative remedies were forthcoming as a result of CMS’ refusal to modify the payment
localities over “concerns” for the “winners and losers” that would result when suppliers in low-cost
counties would no longer be overpaid.

        Within a few days after the counties filed their lawsuit, the Government Accountability
Office issued the GAO Locality Report that was consistent with the claims of the counties’ lawsuit.
The GAO Locality Report specifically found that “although substantial population growth has
occurred in certain areas, potentially leading to increased costs, CMS has not revised the payment
localities in accordance with these changes.”

       The success of health care reform will be measured less on its success with insurance reform
or coverage expansion than it will be on whether it will sufficiently bend the cost curve for total



                                              Ex. 7 - 3                                                   216
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page55 of 83



Department of Health and Human Services
August 24, 2010
Page 4


health care expenditures. The primary legislative tool in this year’s health care reform aimed at
reducing the growth of health care expenditures, especially in programs funded by the federal
government, is the establishment of Accountable Care Organizations (“ACOs”). ACOs change the
historical “pay for volume” paradigm with physicians and hospitals working in unaligned
competition to consume more resources to one where local ACOs are built around collaborative
hospital-physician relationships designed to promote “value over volume.” If ACOs fail to fulfill
their promise, the likelihood is that health care reform will fail to achieve the goal of decreasing
health care inflation to less than the GDP and will fail to move U.S. per capita health care
expenditures to levels comparable with other industrialized nations.

        ACOs will create county, or sub-county, geographies that will set payment targets for
Medicare beneficiaries at historical expenditure levels. ACOs will implement a concept promoted
by the Dartmouth Atlas of Health Care economists that suggests that because all health care is
locally delivered that local expenditure targets, as opposed to national expenditure targets like the
SGR, will prove effective. The best geographic unit used to define local cost variations are MSAs.
This is how hospitals’ costs are now defined. In fact, this is how the cost input data for physician
payment localities are also calculated. The problem is that while hospital costs and Medicare
payments reflect their local MSA derived cost data, physician costs and payments do not. Instead,
under the anachronistic physician payment geographies established in the early years of the
Medicare program, physicians’ costs are only initially calculated at the level of the MSA but are
then jumbled and reconfigured into the current confusion of single county, multiple-county
localities, and single-state localities.

        ACOs must be established with accurate cost input factors. Physician localities must migrate
to the more accurate MSA-based localities used for hospitals. A failure to do so will establish
expenditure targets that are either overstated (in those counties within large physician payment
localities that are low cost) or are understated (in the contrasting more urban counties within those
localities). A failure to correct the physician payment localities in advance of the establishment of
ACOs, in essence by applying the physician geographies of the 1960s to geographic cost areas of
the 2010s, will undermine the success of the most important cost containment tools of health care
reform.

        Local expenditure targets when accurately established will be effective. Local targets must
be accurately built off of local costs. Local costs are best derived from MSAs. Physician payment
localities must be derived from MSAs and the geographies of hospitals must be congruent with the
geographies of physicians; both must be established using the most accurate geographic unit now
available.

       Reconfiguration of the locality structure is long overdue. Further delays are unjustified and
are made at the expense of the most vulnerable members of the public.




                                             Ex. 7 - 4                                                  217
        Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page56 of 83



Department of Health and Human Services
August 24, 2010
Page 5


II.    Need for Additional Data Relating to the Sixth GPCI Update

       Full disclosure of all underlying data is necessary to the ability to make an informed
comment to the 2011 Proposed Rule and the Sixth GPCI Update. Our clients have made numerous
requests for county-level data in the past and the responses of CMS to those requests have been
inconsistent and inaccurate – first claiming that the requested data does not exist, then finally
acknowledging that the data does exist while asserting that not all of the requested data could be
found or had been destroyed or deleted.

      We once again request that CMS publish all data used in the calculation of locality GPCIs
and GAFs, as well as any adjusters applied by Acumen and/or the OACT to that data.

       We request that the Proposed Rule be republished, the comment period reopened, and all
requested underlying data be made available to allow the public to make full and informed
comments.

III.   Comments on the Proposed 2006 MEI Weights

       A.      General Comments

        A number of state medical associations and the American Medical Association have met with
CMS to discuss the effect of the proposed changes to the MEI, particularly the way in which it
dramatically shifts payments to a number of rural localities and away from a number of urban
localities. This payment shift results from the fact that almost 20% of the proposed 2006 MEI
weights are not adjusted for local cost differences, an increase of almost 8% from the 2000 MEI
weights.

       The methodology used to create the 2006 MEI weights is not fully explained and some of
the underlying data does not support CMS’ assumption that certain practice expense components
have a national market.. The effect of the proposed changes is significant and deserving of a
complete explication. As currently described, it is simply impossible to offer constructive
comments.

       B.      Underlying Data Does Not Support Assumption of National Market

        Two major components of the Physician’s Practice Expense are incorrectly keyed to a
national market and are not adjusted for local costs: (a) “All Other Labor Related” is a new
subcategory of “Office Expenses”; and (b) “Other Professional Expenses” which has been a
component of the Physician’s Practice Expense since the PFS was first implemented in the early
1990’s.




                                            Ex. 7 - 5                                                218
        Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page57 of 83



Department of Health and Human Services
August 24, 2010
Page 6


        CMS is to be commended again for offering more detail into the make-up of these
components and the data underlying them. However, the data contained in the specific labor-related
OES statistics compiled by the BLS conclusively demonstrates that there is no national market for
the services included in these components. The BLS OES statistics show that between 2006 and
2009, there were significant differences between the most expensive and least expensive counties
in the country (excluding Puerto Rico) in the costs of: (a) accounting and billing – ranging between
107% and 148%; (b) janitors and cleaners – ranging between 111% and 160%; (c) lawyers – ranging
between at least 370% and 395%; (d) maintenance and repair workers – ranging between between
143% and 305%; (e) managers – ranging between 150% and 784%; (f) marketing – ranging between
330% and 642%; and (g) security – ranging between 201% and 274%. See Appendix B.

       “All Other Labor Related” and “Other Professional Expenses” make up 9.2% of the MEI
weights and are improperly keyed to national markets. This error should be corrected, a new
proposed rule published, and a new comment period opened.

       C.      Apparent Multiple Inclusion of Utility Costs

        It appears that utility costs have been included twice in the MEI calculation. The HUD data
used by CMS as a source for the rent data includes utilities. However, utilities have been included
a second time as a new component of the “Office Expense” category of “Other Practice Expenses”
and it does not appear that the “Fixed Capital” (rent) component has been scaled down as a result.

      This error should be corrected, a new proposed rule published, and a new comment period
opened.

       D.      Inconsistent Designations of Data Sources

        Although CMS has expanded the designation of the data underlying some of the GPCI and
MEI constructs over the designations of previous years, the descriptions used are sometimes either
inconsistent or contradictory. For example, CMS notes that “for the proposed sixth GPCI update,
we used the 2006 through 2008 Bureau of Labor Statistics (BLS) Occupational Employment
Statistics (OES) data as a replacement for the 2000 Census data.” 75 FR 40083 [emphasis added].
In contrast, CMS used “2006 Occupational Employment Statistics (OES), BLS” for the proposed
2006 MEI expense weights. 75 FR 40089, note (2) [emphasis added].

       It is impossible to discern from the Proposed Rule whether inconsistent data sets were used
or whether there is simply a misprint.




                                             Ex. 7 - 6                                                 219
        Case3:07-cv-02888-JSW Document89-1                 Filed02/18/11 Page58 of 83



Department of Health and Human Services
August 24, 2010
Page 7


       E.      Failure to Use Most Current Data Available

       CMS does not explain why the proposed MEI weights are keyed to 2006, a date that would
make these weights the least current of any readjustment. The first MEI was developed in 1992 and
was keyed to 1989. See 57 FR 55900. The second MEI was developed in 1998 and was keyed to
1996. See 63 FR 58845. The third MEI was developed in 2003 and was keyed to 2000. See 68 FR
63239.

       CMS is to be commended for making a readjustment that has been overdue, however, its
used of 4-year old data is questionable since more current data was surely available.

IV.    Conclusion

        Although Congress gave CMS until January 1, 2012 to “analyze current methods of
establishing practice expense adjustments . . . and evaluate data that fairly and reliably established
distinctions in the cost of operating a medical practice in different fee schedule areas,” CMS appears
to have performed this analysis over a period of three short months and now proposes to modify the
PFS in a manner that shifts payments on a massive scale from urban areas to rural areas with no
apparent concern for “winners and losers.” CMS does not explain the need for such urgency, or why
it is making these proposals in advance of the IOM GPCI Workshop scheduled for mid-September
2010.

        As part of its MEI analysis, CMS focused on minute components of the PFS, components
that represent fractions of a percent in several instances. At the same time, CMS has repeatedly
refused to cure the 5%, 10%, and 20% imbalances that have existed since 2001 as a result of its 10-
year failure to reconfigure the locality structure. Clearly, there is a massive disconnect in CMS’
priorities and administration of the Medicare program.

        CMS has not provided the public sufficient data underlying either the Sixth GPCI Update
or the 2011 Proposed Rule to allow informed comments to be made. Repeated requests to publish
county-level GPCI and GAF data have either been overlooked or ignored.

        The methodology underlying the proposed 2006 MEI weights is not sufficiently explained
to allow informed comments to be made. Data underlying those weights does not support the
assumption that over 9% of those weights (“All Other Labor Related” and “Other Professional
Expenses”) are properly based on national markets. Instead, that data clearly demonstrates that
those costs must – by law – be measured by local costs. Utility costs appear to be included twice
in the 2006 MEI weights, once as a component of “Office Expenses” and once as a component of
“Fixed Capital” (rent). Data sources appear to have been inconsistently employed in the calculation
of the 2006 MEI weights and the Sixth GPCI Update. It also appears that the most currently
available data sources were not used for the 2006 MEI weights.



                                              Ex. 7 - 7                                                  220
       Case3:07-cv-02888-JSW Document89-1              Filed02/18/11 Page59 of 83



Department of Health and Human Services
August 24, 2010
Page 8


       The issue of locality reconfiguration needs to be addressed immediately. The errors and
omissions identified here should be corrected, a new proposed rule published, and a new comment
period opened.

                                                   Sincerely,

                                                         /s/

                                                   Dario de Ghetaldi

DEG/drj
Enc.




                                          Ex. 7 - 8                                               221
Case3:07-cv-02888-JSW Document89-1        Filed02/18/11 Page60 of 83




               Appendix A




         Response of County of Santa Cruz, County of Sonoma,
               County of San Diego, County of Marin,
         County of Santa Barbara, County of San Luis Obispo,
                       and County of Monterey


                     Comments on CMS-1503-P
              Medicare Part B Proposed Rule for CY 2011




                              Ex. 7 - 9                                222
                                                    Case3:07-cv-02888-JSW Document89-1                                            Filed02/18/11 Page61 of 83
                                                                                MEDICARE PART B UNDERPAYMENTS 2001-2010


                                          Calculated using 2002 RVUs using county specific escalators                              Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State               County                2001             2002              2003             2004               2005            2006              2007              2008             2009             2010             TOTAL

AR       Crittenden                   $      435,822    $      441,050   $      459,896   $      490,954    $       362,539   $      372,011    $      381,731   $      399,985   $      378,772    $      388,669   $     4,111,429
         Faulkner                     $      584,039    $      633,689   $      698,293   $      795,915    $       472,436   $      512,313    $      555,555   $      791,919   $      756,597    $      820,459   $     6,621,214
         Lonoke                       $       75,885    $       82,877   $       91,493   $      103,867    $        59,254   $       64,373    $       69,934   $       99,699   $       95,585    $      103,842   $       846,808
         Pulaski                      $    7,376,917    $    8,032,884   $    8,901,764   $   10,243,805    $     6,193,028   $    6,753,637    $    7,364,993   $   10,567,754   $   10,143,928    $   11,062,182   $    86,640,892
         Saline                       $      216,138    $      236,047   $      262,802   $      303,491    $       173,425   $      190,009    $      208,178   $      300,329   $      289,421    $      317,096   $     2,496,935
         Jefferson                    $            -    $            -   $            -   $            -    $       232,667   $      246,112    $      260,333   $      509,539   $      390,641    $      413,215   $     2,052,507
                              Total   $    8,688,800    $    9,426,547   $   10,414,248   $   11,938,032    $     7,493,350   $    8,138,454    $    8,840,724   $   12,669,225   $   12,054,945    $   13,105,462   $   102,769,787

CA       Santa Cruz                   $    3,167,216    $    3,410,820   $    3,695,298   $    3,987,798    $     5,652,600   $    6,026,553    $    6,425,245   $    5,462,853   $    5,945,300    $    6,338,617   $    50,112,300
         Sonoma                       $    3,797,804    $    4,335,083   $    4,902,134   $    5,518,251    $     8,331,214   $    9,270,990    $   10,316,775   $    8,022,276   $    8,989,204    $   10,003,202   $    73,486,933
         Monterey                     $            -    $            -   $            -   $            -    $     6,360,546   $    6,871,707    $    7,423,948   $    7,173,369   $    8,180,235    $    8,837,634   $    44,847,439
         San Diego                    $   14,620,003    $   15,672,137   $   16,919,635   $   18,352,087    $    29,595,371   $   31,442,468    $   33,404,846   $   22,549,888   $   25,168,808    $   26,739,636   $   234,464,878
         Sacramento                   $            -    $            -   $            -   $            -    $    10,105,729   $   10,830,103    $   11,606,400   $    8,076,110   $    9,201,566    $    9,861,130   $    59,681,038
         Santa Barbara                $    4,834,060    $    5,227,764   $    5,641,066   $    6,054,552    $     4,835,430   $    5,134,645    $    5,452,375   $    5,783,069   $    6,420,198    $    6,817,477   $    56,200,638
         El Dorado                    $            -    $            -   $            -   $            -    $       710,304   $      724,595    $      739,173   $      405,953   $      455,911    $      465,083   $     3,501,019
         Placer                       $            -    $            -   $            -   $            -    $     1,288,462   $    1,440,876    $    1,611,319   $            -   $            -    $            -   $     4,340,657
         San Luis Obispo              $            -    $            -   $            -   $            -    $     1,497,624   $    1,591,819    $    1,691,938   $            -   $            -    $            -   $     4,781,382
         Marin                        $    3,815,389    $    3,231,012   $    3,508,188   $    3,824,773    $     4,698,039   $    5,019,852    $    5,363,710   $    2,283,856   $    3,772,690    $    4,031,118   $    39,548,628
                              Total   $   30,234,473    $   31,876,817   $   34,666,320   $   37,737,461    $    73,075,319   $   78,353,609    $   84,035,729   $   59,757,374   $   68,133,912    $   73,093,898   $   570,964,911

CO       Denver                       $    6,206,353    $    5,617,878   $    5,832,077   $    6,110,949    $     7,305,072   $    7,462,866    $    7,445,820   $    3,853,345   $    3,975,885    $    4,061,766   $    57,872,011
         Arapahoe                     $    2,215,241    $    2,087,604   $    2,285,568   $    2,530,092    $     3,587,032   $    3,864,662    $    2,968,782   $    1,950,502   $    2,195,434    $    2,365,356   $    26,050,274
         Boulder                      $      942,069    $      903,362   $    1,037,034   $    1,207,477    $     1,880,203   $    2,124,056    $    1,602,680   $    2,402,744   $    3,288,573    $    3,715,085   $    19,103,284
         Jefferson                    $    1,296,744    $    1,141,763   $    1,217,024   $    1,316,950    $     1,617,879   $    1,697,068    $    1,585,658   $            -   $            -    $            -   $     9,873,085
         San Miguel                   $       11,410    $       12,816   $       15,478   $       18,759    $        15,705   $       18,665    $        9,497   $            -   $            -    $            -   $       102,329
         Adams                        $      385,626    $      341,532   $      384,845   $      442,600    $       781,035   $      866,074    $      960,372   $            -   $            -    $            -   $     4,162,085
         Douglas                      $            -    $            -   $            -   $            -    $       305,932   $      495,239    $      801,687   $            -   $            -    $            -   $     1,602,857
         Eagle                        $            -    $            -   $            -   $            -    $             -   $            -    $            -   $      161,785   $      206,540    $      226,163   $       594,488
         Broomfield                   $       44,876    $       35,944   $       34,952   $       34,489    $             -   $            -    $            -   $            -   $            -    $            -   $       150,261
         Pitkin                       $       35,201    $       99,835   $      170,797   $      294,219    $       202,811   $      341,446    $      574,846   $    1,678,863   $    3,199,382    $    5,386,361   $    11,983,760
                              Total   $   11,137,521    $   10,240,733   $   10,977,776   $   11,955,535    $    15,695,670   $   16,870,075    $   15,949,342   $   10,047,238   $   12,865,814    $   15,754,732   $   131,494,436

CT       Fairfield                    $             -   $            -   $            -   $             -   $    13,301,380   $   13,965,000    $   14,661,729   $   17,223,381   $   17,525,446    $   18,399,810   $    95,076,747
                              Total   $             -   $            -   $            -   $             -   $    13,301,380   $   13,965,000    $   14,661,729   $   17,223,381   $   17,525,446    $   18,399,810   $    95,076,747

DE       New Castle                   $    4,746,380    $    4,393,090   $    4,770,373   $    5,684,091    $     3,575,105   $    3,820,332    $    4,082,379   $    7,272,537   $     7,230,006   $    7,725,933   $    53,300,226
                              Total   $    4,746,380    $    4,393,090   $    4,770,373   $    5,684,091    $     3,575,105   $    3,820,332    $    4,082,379   $    7,272,537   $     7,230,006   $    7,725,933   $    53,300,226

FL       Miami-Dade                   $    3,684,064    $    4,077,551   $    4,650,849   $    8,125,257    $             -   $             -   $            -   $      951,415   $     1,067,906   $    1,198,660   $    23,755,703
         Broward                      $   16,687,437    $   17,431,148   $   18,778,788   $   21,418,596    $             -   $             -   $            -   $            -   $             -   $            -   $    74,315,969
         Palm Beach                   $   15,510,686    $   16,576,773   $   18,111,736   $   21,531,578    $             -   $             -   $            -   $            -   $             -   $            -   $    71,730,773
                              Total   $   35,882,186    $   38,085,472   $   41,541,374   $   51,075,431    $             -   $             -   $            -   $      951,415   $     1,067,906   $    1,198,660   $   169,802,445

GA       Barrow                       $      279,809    $      279,809   $      273,779   $      282,493    $       327,783   $      326,356    $      324,935   $      185,763   $       185,330   $      184,523   $     2,650,581
         Bartow                       $      849,838    $      849,838   $      909,156   $      980,044    $     1,067,309   $    1,110,272    $    1,154,966   $      663,843   $       700,002   $      728,180   $     9,013,448
         Carroll                      $    1,547,434    $    1,547,434   $    1,724,849   $    1,894,995    $     2,277,690   $    2,416,028    $    2,562,769   $    1,523,312   $     1,628,267   $    1,727,161   $    18,849,938
         Coweta                       $    1,175,260    $    1,175,260   $    1,283,823   $    1,398,360    $     1,759,589   $    1,848,753    $    1,942,436   $    1,179,309   $     1,244,247   $    1,307,297   $    14,314,333
         Pickens                      $      148,994    $      148,994   $      202,449   $      242,774    $       355,490   $      411,829    $      477,098   $      313,249   $       365,119   $      422,984   $     3,088,980
         Spalding                     $    1,083,389    $    1,083,389   $    1,130,199   $    1,203,715    $     1,547,585   $    1,590,427    $    1,634,455   $      980,812   $     1,007,968   $    1,035,872   $    12,297,811
                              Total   $    5,084,725    $    5,084,725   $    5,524,255   $    6,002,382    $     7,335,444   $    7,703,665    $    8,096,657   $    4,846,288   $     5,130,933   $    5,406,018   $    60,215,092




                                                                                                                Ex. -7 -- 10
                                                                                                                     1                                                                                                         223
                                                   Case3:07-cv-02888-JSW Document89-1                                            Filed02/18/11 Page62 of 83
                                                                               MEDICARE PART B UNDERPAYMENTS 2001-2010


                                         Calculated using 2002 RVUs using county specific escalators                              Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State            County                  2001             2002              2003             2004               2005            2006              2007              2008             2009             2010             TOTAL

IL       Clinton                     $       68,611    $       73,004   $       80,652   $      104,080    $        31,311   $       34,040   $       37,007   $             -    $           -    $           -    $       428,703
         Jersey                      $       48,648    $       57,194   $       80,652   $      104,080    $        35,934   $       42,181   $       49,513   $             -    $           -    $           -    $       418,202
         Madison                     $      764,160    $      785,125   $      841,424   $      770,051    $       528,534   $      557,415   $      587,875   $         9,061    $      13,827    $      13,827    $     4,871,300
         Monroe                      $       61,427    $       59,687   $       60,676   $       72,081    $        24,458   $       24,467   $       24,476   $             -    $           -    $           -    $       327,271
         St. Clair                   $    1,009,795    $    1,022,243   $    1,080,891   $      973,862    $       663,926   $      690,840   $      718,845   $        11,022    $      17,079    $      17,079    $     6,205,581
         McHenry                     $    2,165,892    $    2,349,232   $    2,701,473   $    3,084,951    $     3,208,403   $    3,630,727   $    4,108,642   $        80,259    $      79,507    $      79,507    $    21,488,595
         Kendall                     $       89,690    $      102,272   $      117,489   $      135,574    $       151,112   $      177,995   $      209,660   $        14,919    $      14,700    $      14,700    $     1,028,111
         Sangamon                    $    3,977,076    $    4,396,104   $    5,261,939   $    6,209,729    $             -   $            -   $            -   $             -    $           -    $           -    $    19,844,847
         Grundy                      $      330,915    $      372,813   $      416,263   $      469,300    $       661,800   $      748,166   $      845,802   $             -    $           -    $           -    $     3,845,059
         DeKalb                      $            -    $            -   $            -   $            -    $       772,307   $      848,588   $      932,403   $             -    $           -    $           -    $     2,553,297
                            Total    $    8,516,214    $    9,217,674   $   10,641,457   $   11,923,707    $     6,077,785   $    6,754,419   $    7,514,224   $       115,260    $     125,113    $     125,113    $    61,010,967

IA       Johnson                     $    1,917,257    $    1,811,827   $    1,772,774   $    1,734,135    $     1,257,040   $    1,257,040   $    1,257,040   $             -    $            -   $            -   $    11,007,114
         Dallas                      $       38,639    $       49,828   $       62,612   $       78,641    $        82,749   $      102,324   $      126,528   $       138,455    $      184,513   $      228,159   $     1,092,448
         Polk                        $    5,972,412    $    5,628,958   $    5,464,736   $    5,303,438    $     4,686,284   $    4,477,131   $    4,277,313   $     3,592,441    $    3,723,125   $    3,556,959   $    46,682,796
         Warren                      $       57,957    $       58,958   $       61,551   $       64,223    $        57,658   $       59,236   $       60,857   $        56,170    $       61,266   $       62,943   $       600,818
         Pottawattamie               $      525,973    $      533,523   $      559,824   $      587,290    $       441,732   $      456,129   $      470,995   $       477,467    $      547,789   $      565,643   $     5,166,365
                            Total    $    8,512,238    $    8,083,094   $    7,921,497   $    7,767,726    $     6,525,464   $    6,351,860   $    6,192,733   $     4,264,533    $    4,516,693   $    4,413,703   $    64,549,541

KS       Johnson                     $    3,766,759    $    4,144,374   $    4,798,628   $    5,600,448    $     5,209,651   $    5,936,039   $    6,763,709   $     4,986,227    $    6,202,909   $    7,067,789   $    54,476,534
         Leavenworth                 $      263,265    $      298,162   $      351,738   $      417,895    $       394,211   $      457,641   $      531,278   $       402,241    $      505,756   $      587,135   $     4,209,323
         Miami                       $       78,624    $       91,479   $      110,024   $      133,242    $       116,505   $      137,893   $      163,207   $       123,403    $      161,502   $      191,150   $     1,307,030
         Wyandotte                   $    1,386,622    $    1,418,600   $    1,556,487   $    1,723,040    $     1,386,436   $    1,496,977   $    1,616,333   $     1,098,044    $    1,331,148   $    1,437,282   $    14,450,969
         Butler                      $      148,685    $      154,435   $      173,019   $      196,567    $        78,652   $       86,713   $       95,601   $        65,984    $      100,868   $      111,206   $     1,211,729
         Harvey                      $      131,089    $      175,376   $      234,137   $      318,035    $       216,400   $      284,307   $      373,523   $       355,962    $      559,466   $      735,027   $     3,383,322
         Sedgwick                    $    4,389,727    $    4,268,602   $    4,547,092   $    4,922,282    $     2,090,739   $    2,191,684   $    2,297,503   $     1,556,448    $    2,191,392   $    2,297,196   $    30,752,666
         Shawnee                     $    1,596,388    $    1,517,861   $    1,595,824   $    1,709,483    $             -   $            -   $            -   $             -    $            -   $            -   $     6,419,555
                            Total    $   11,761,160    $   12,068,889   $   13,366,947   $   15,020,992    $     9,492,593   $   10,591,255   $   11,841,154   $     8,588,311    $   11,053,040   $   12,426,786   $   116,211,128

KY       Kenton                      $             -   $            -   $            -   $             -   $     2,203,284   $    2,398,519   $    2,611,054   $              -   $            -   $            -   $     7,212,857
                            Total    $             -   $            -   $            -   $             -   $     2,203,284   $    2,398,519   $    2,611,054   $              -   $            -   $            -   $     7,212,857

LA       St. Charles                 $       60,751    $       79,624   $       99,497   $      124,650    $        90,567   $      111,369   $      136,950   $       346,008    $      405,318   $      498,416   $     1,953,148
         St. John the Baptist        $      273,847    $      260,041   $      246,686   $      234,591    $       139,832   $      130,539   $      121,863   $       233,742    $      207,849   $      194,035   $     2,043,023
         St. Tammany                 $    2,352,972    $    2,626,948   $    2,882,406   $    3,145,185    $     2,487,917   $    2,686,393   $    2,900,703   $     6,227,310    $    6,391,323   $    6,901,198   $    38,602,356
         Ascension                   $            -    $            -   $            -   $            -    $             -   $            -   $            -   $       150,849    $      128,268   $      127,567   $       406,683
         East Baton Rouge            $            -    $            -   $            -   $            -    $             -   $            -   $            -   $     6,897,863    $    6,457,230   $    7,064,688   $    20,419,780
         Livingston                  $            -    $            -   $            -   $            -    $             -   $            -   $            -   $        99,067    $      101,500   $      122,724   $       323,292
         West Baton Rouge            $            -    $            -   $            -   $            -    $             -   $            -   $            -   $        19,838    $       17,607   $       18,525   $        55,970
                             Total   $    2,687,570    $    2,966,612   $    3,228,588   $    3,504,426    $     2,718,315   $    2,928,301   $    3,159,516   $    13,974,677    $   13,709,095   $   14,927,153   $    63,804,252

ME       Cumberland                  $             - $              - $               - $               - $               - $              - $              - $         11,142 $        976,143 $       1,004,406 $       1,991,691
                            Total    $             - $              - $              - $               - $               - $               - $              - $         11,142 $        976,143 $       1,004,406 $       1,991,691

MD       Calvert                     $    1,054,258    $    1,090,964   $    1,147,234   $    1,206,464    $     1,839,816   $    1,903,908   $    1,970,233   $     1,659,123    $    1,669,005   $    1,727,146   $    15,268,151
         Charles                     $    1,096,675    $    1,286,664   $    1,499,527   $    1,747,538    $     2,700,521   $    3,097,182   $    3,552,106   $     3,246,047    $    3,603,495   $    4,132,788   $    25,962,545
         Frederick                   $    1,882,254    $    2,088,370   $    2,308,241   $    2,552,434    $     4,714,961   $    5,128,400   $    5,578,091   $     4,760,668    $    4,995,800   $    5,433,864   $    39,443,083
         Cecil                       $      365,074    $      400,015   $      433,577   $      470,510    $       338,020   $      360,548   $      384,576   $       547,043    $      540,948   $      576,999   $     4,417,311
         Queen Anne's                $            -    $            -   $            -   $            -    $        52,643   $       57,920   $       63,727   $       555,826    $      546,813   $      601,630   $     1,878,558
                            Total    $    4,398,260    $    4,866,014   $    5,388,579   $    5,976,946    $     9,645,962   $   10,547,958   $   11,548,733   $    10,768,706    $   11,356,061   $   12,472,428   $    86,969,648




                                                                                                               Ex. -7 -- 11
                                                                                                                    2                                                                                                         224
                                                    Case3:07-cv-02888-JSW Document89-1                                            Filed02/18/11 Page63 of 83
                                                                                MEDICARE PART B UNDERPAYMENTS 2001-2010


                                          Calculated using 2002 RVUs using county specific escalators                              Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State               County                2001             2002              2003             2004               2005            2006              2007              2008             2009             2010             TOTAL

MA       Essex                        $       78,173    $       78,083   $       87,143   $       97,607    $    10,102,477   $   11,586,361   $   13,288,201   $    12,493,959   $   13,903,152    $   15,269,245   $    76,984,401
         Nantucket                    $    7,128,536    $    5,794,347   $    5,786,220   $    5,837,907    $        47,520   $       51,687   $       56,219   $        42,148   $       41,826    $       41,102   $    24,827,513
         Plymouth                     $    2,544,005    $    2,350,912   $    2,700,120   $    3,139,478    $     4,174,385   $    4,452,585   $    4,749,324   $     5,787,802   $    6,640,509    $    7,505,473   $    44,044,594
                              Total   $    9,750,714    $    8,223,343   $    8,573,483   $    9,074,992    $    14,324,383   $   16,090,632   $   18,093,744   $    18,323,909   $   20,585,487    $   22,815,821   $   145,856,507

MI       Livingston                   $             -   $            -   $            -   $             -   $       692,686   $      795,582   $      913,762   $             -   $             -   $            -   $     2,402,029
         Monroe                       $             -   $            -   $            -   $             -   $     1,382,662   $    1,526,829   $    1,564,196   $     1,200,617   $     1,694,482   $    1,802,290   $     9,171,076
                              Total   $             -   $            -   $            -   $             -   $     2,075,348   $    2,322,411   $    2,477,958   $     1,200,617   $     1,694,482   $    1,802,290   $    11,573,105

MN       Anoka                        $      873,236    $    1,100,062   $    1,414,585   $    1,840,949    $     3,572,614   $    4,520,932   $    5,720,972   $     2,756,859   $    5,060,344    $    6,403,565   $    33,264,117
         Carver                       $      211,417    $      199,930   $      207,443   $      218,031    $       335,836   $      342,909   $      350,131   $       134,748   $      200,655    $      204,881   $     2,405,981
         Chisago                      $       90,480    $       86,237   $       90,129   $       95,655    $       131,677   $      135,427   $      139,284   $        58,384   $       79,526    $       81,791   $       988,590
         Dakota                       $      360,659    $      342,173   $      354,928   $      371,653    $       595,026   $      607,379   $      619,989   $       249,977   $      356,793    $      364,200   $     4,222,778
         Hennepin                     $    9,772,521    $    9,477,838   $   10,082,601   $   10,869,966    $    17,098,265   $   17,899,687   $   18,738,673   $     7,430,010   $   11,308,480    $   11,838,526   $   124,516,566
         Isanti                       $      157,804    $      111,682   $       78,226   $       55,441    $        57,167   $       39,405   $       27,161   $         7,776   $        7,077    $        4,878   $       546,617
         Ramsey                       $    3,757,635    $    3,593,609   $    3,768,918   $    4,002,228    $     6,579,364   $    6,790,472   $    7,008,353   $     2,722,321   $    4,122,996    $    4,255,288   $    46,601,185
         Scott                        $            -    $            -   $            -   $            -    $       160,639   $      144,201   $      129,445   $        45,250   $       57,088    $       51,246   $       587,870
         Sherburne                    $       33,490    $       28,226   $       25,747   $       23,744    $        71,025   $       80,118   $       90,375   $        41,502   $       63,441    $       71,563   $       529,231
         Washington                   $      460,556    $      487,963   $      559,339   $      649,691    $       923,026   $      978,882   $    1,038,118   $       404,360   $      644,477    $      683,476   $     6,829,888
         Wright                       $      152,787    $      150,971   $      162,698   $      177,188    $       222,056   $      216,183   $      210,466   $        80,232   $      109,842    $      106,937   $     1,589,359
         Olmsted                      $    4,708,853    $    4,092,228   $    4,048,454   $    4,096,440    $     2,657,080   $    2,745,902   $    2,837,693   $             -   $    2,472,821    $    2,555,483   $    30,214,953
                              Total   $   20,579,440    $   19,670,919   $   20,793,067   $   22,400,986    $    32,403,776   $   34,501,497   $   36,910,660   $    13,931,418   $   24,483,538    $   26,621,834   $   252,297,135

MS       DeSoto                       $      646,792    $      832,654   $    1,043,347   $    1,323,168    $     1,337,355   $    1,649,078   $    2,033,459   $     2,688,540   $     2,625,241   $    3,237,155   $    17,416,787
         Hinds                        $    4,986,343    $    5,042,225   $    5,226,509   $    5,517,615    $     4,783,842   $    4,879,737   $    4,977,555   $     5,902,373   $     4,633,475   $    4,726,356   $    50,676,031
         Madison                      $      172,245    $      171,797   $      175,510   $      181,935    $       191,599   $      192,624   $      193,654   $       220,503   $       175,182   $      176,119   $     1,851,168
         Rankin                       $      652,631    $      687,909   $      739,289   $      807,620    $       748,980   $      792,106   $      837,716   $     1,022,274   $       838,350   $      886,623   $     8,013,497
         Hancock                      $      171,816    $      149,937   $      130,218   $      115,928    $        63,755   $       54,489   $       46,569   $             -   $             -   $            -   $       732,712
         Harrison                     $    1,480,236    $    1,528,671   $    1,596,624   $    1,707,846    $     1,214,363   $    1,248,152   $    1,282,881   $             -   $             -   $            -   $    10,058,772
         Jackson                      $      919,725    $      926,806   $      950,675   $    1,001,451    $       680,855   $      687,270   $      693,747   $             -   $             -   $            -   $     5,860,529
                              Total   $    9,029,787    $    9,339,998   $    9,862,172   $   10,655,562    $     9,020,749   $    9,503,456   $   10,065,580   $     9,833,690   $     8,272,248   $    9,026,252   $    94,609,495

MO       Cass                         $      528,259    $      466,297   $      457,866   $      457,255    $       313,999   $      303,413   $      293,184   $       270,957   $       211,727   $      204,589   $     3,507,546
         Clinton                      $      232,189    $      171,608   $      131,948   $      102,975    $        65,679   $       49,696   $       37,602   $        26,194   $        16,174   $       12,238   $       846,303
         Lafayette                    $      199,383    $      171,008   $      161,977   $      155,868    $        92,111   $       85,858   $       80,029   $        69,477   $        52,088   $       48,552   $     1,116,353
         Ray                          $      111,001    $      106,470   $      112,079   $      119,558    $        90,988   $       94,257   $       97,644   $        93,085   $        78,737   $       81,566   $       985,385
         Franklin                     $      878,125    $      939,504   $    1,098,082   $    1,306,885    $     1,281,731   $    1,474,224   $    1,695,625   $     1,843,951   $     1,698,297   $    1,953,349   $    14,169,772
         Lincoln                      $      106,846    $      188,069   $      282,542   $      431,081    $       187,399   $      143,638   $      110,095   $        28,515   $        48,980   $       37,542   $     1,564,705
         Warren                       $       90,955    $       67,752   $       52,771   $       41,732    $        66,562   $       98,406   $      145,485   $       572,060   $       240,364   $      355,357   $     1,731,443
         Boone                        $    2,964,858    $    2,600,353   $    2,741,677   $    3,010,290    $             -   $            -   $            -   $             -   $             -   $            -   $    11,317,178
         Crawford                     $            -    $            -   $            -   $            -    $         3,487   $        3,618   $        3,753   $             -   $             -   $            -   $        10,858
                              Total   $    5,111,615    $    4,711,062   $    5,038,943   $    5,625,643    $     2,101,956   $    2,253,109   $    2,463,418   $     2,904,238   $     2,346,367   $    2,693,193   $    35,249,543

NE       Cass                         $       11,824    $       11,107   $       11,030   $       11,009    $         6,799   $        6,644   $        6,493   $         5,581   $         5,119   $        5,002   $        80,609
         Douglas                      $    5,544,631    $    5,561,012   $    5,894,488   $    6,300,776    $     4,031,697   $    4,205,428   $    4,386,646   $     3,497,102   $     3,938,228   $    4,107,932   $    47,467,942
         Sarpy                        $      156,935    $      233,681   $      321,706   $      445,971    $       417,404   $      565,486   $      766,104   $       803,327   $     1,160,264   $    1,571,891   $     6,442,770
         Washington                   $       79,326    $       79,289   $       83,923   $       89,438    $        45,535   $       47,428   $       49,401   $        40,249   $        44,226   $       46,066   $       604,880
         Lancaster                    $    2,121,680    $    2,041,826   $    2,117,840   $    2,241,073    $     1,301,241   $    1,328,196   $    1,355,710   $       723,655   $       916,203   $      935,182   $    15,082,605
         Dakota                       $       18,778    $       15,304   $       13,683   $       12,726    $             -   $            -   $            -   $             -   $             -   $            -   $        60,490
                              Total   $    7,933,173    $    7,942,219   $    8,442,670   $    9,100,993    $     5,802,675   $    6,153,183   $    6,564,354   $     5,069,914   $     6,064,041   $    6,666,073   $    69,739,295

NH       Hillsborough                 $             -   $            -   $            -   $             -   $     1,740,012   $    1,797,143   $    1,856,149   $     1,043,024   $     2,168,380   $    2,239,575   $    10,844,284
         Rockingham                   $             -   $            -   $            -   $             -   $       786,106   $      830,322   $      877,026   $       225,898   $       954,126   $    1,007,792   $     4,681,270
                              Total   $             -   $            -   $            -   $             -   $     2,526,118   $    2,627,465   $    2,733,175   $     1,268,922   $     3,122,506   $    3,247,368   $    15,525,554


                                                                                                                Ex. -7 -- 12
                                                                                                                     3                                                                                                         225
                                                Case3:07-cv-02888-JSW Document89-1                                           Filed02/18/11 Page64 of 83
                                                                            MEDICARE PART B UNDERPAYMENTS 2001-2010


                                      Calculated using 2002 RVUs using county specific escalators                             Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State           County                2001             2002             2003             2004              2005             2006              2007              2008             2009             2010             TOTAL

NM       Los Alamos               $      164,174   $      191,301   $      227,170   $      269,452   $        310,373   $      362,700    $      423,850   $      586,875    $      519,432   $      607,006   $     3,662,332
         Santa Fe                 $    1,541,396   $    1,535,266   $    1,611,226   $    1,688,983   $      1,799,870   $    1,858,849    $    1,919,760   $    2,272,583    $    1,794,381   $    1,853,179   $    17,875,491
         Bernalillo               $    3,023,924   $    2,902,869   $    2,992,846   $    3,082,034   $      2,208,720   $    2,240,926    $    2,273,603   $    3,178,471    $    2,201,518   $    2,233,619   $    26,338,529
         Sandoval                 $            -   $            -   $            -   $            -   $         74,685   $       92,693    $      115,044   $    1,131,034    $      987,560   $    1,225,685   $     3,626,701
         Valencia                 $       33,295   $       33,219   $       34,715   $       36,235   $         25,798   $       26,530    $       27,283   $       34,963    $       27,166   $       27,937   $       307,140
                          Total   $    4,762,788   $    4,662,655   $    4,865,956   $    5,076,704   $      4,419,445   $    4,581,699    $    4,759,539   $    7,203,927    $    5,530,056   $    5,947,426   $    51,810,194

NY       Putnam                   $    1,992,614   $    2,054,663   $    2,198,371   $    2,311,068   $      2,305,307   $    2,427,275    $    2,555,697   $    1,380,458    $    1,776,705   $    1,870,707   $    20,872,864
         Dutchess                 $    3,845,670   $    4,126,485   $    4,557,215   $    4,886,260   $      4,075,120   $    4,429,039    $    4,813,696   $    2,859,236    $    3,071,382   $    3,338,128   $    40,002,232
         Orange                   $    1,271,329   $    1,437,073   $    1,587,149   $    1,900,905   $        750,839   $      816,012    $      886,841   $    1,555,552    $    4,616,252   $    5,016,940   $    19,838,892
                          Total   $    7,109,614   $    7,618,221   $    8,342,735   $    9,098,233   $      7,131,266   $    7,672,326    $    8,256,234   $    5,795,245    $    9,464,340   $   10,225,775   $    80,713,988

NC       Chatham                  $      212,939   $      201,269   $      210,238   $      221,497   $       242,324    $      249,093    $      256,052   $      235,648    $      230,476   $      236,914   $     2,296,450
         Durham                   $    3,878,484   $    3,762,693   $    4,064,711   $    4,457,338   $     4,594,912    $    4,884,703    $    5,192,770   $    4,989,280    $    5,062,887   $    5,382,192   $    46,269,970
         Franklin                 $      178,513   $      179,344   $      198,871   $      223,332   $       225,860    $      246,464    $      268,947   $      308,984    $      324,123   $      353,691   $     2,508,131
         Johnston                 $      968,894   $    1,014,904   $    1,166,147   $    1,357,453   $     1,625,158    $    1,837,612    $    2,077,839   $    2,411,932    $    2,616,093   $    2,958,090   $    18,034,122
         Orange                   $    1,485,424   $    1,455,270   $    1,584,642   $    1,751,823   $     1,686,174    $    1,806,841    $    1,936,143   $    1,878,335    $    1,922,390   $    2,059,961   $    17,567,003
         Wake                     $    6,107,722   $    5,973,632   $    6,499,209   $    7,173,194   $     7,798,114    $    8,349,140    $    8,939,103   $    9,822,511    $   10,089,722   $   10,802,677   $    81,555,024
         Cabarrus                 $    1,577,832   $    1,403,410   $    1,409,870   $    1,441,519   $       692,500    $      684,612    $      676,813   $            -    $            -   $            -   $     7,886,557
         Gaston                   $    1,551,636   $    1,571,062   $    1,773,443   $    2,035,844   $     1,179,971    $    1,310,766    $    1,456,058   $            -    $            -   $            -   $    10,878,779
         Lincoln                  $      188,767   $      184,359   $      201,295   $      223,123   $       117,352    $      126,093    $      135,485   $            -    $            -   $            -   $     1,176,473
         Mecklenburg              $    7,995,837   $    7,978,908   $    8,911,866   $   10,127,981   $     5,758,679    $    6,329,628    $    6,957,184   $            -    $            -   $            -   $    54,060,083
         Rowan                    $      822,861   $      777,316   $      826,623   $      893,580   $       469,960    $      491,814    $      514,685   $            -    $            -   $            -   $     4,796,838
         Union                    $      583,956   $      550,703   $      584,207   $      629,401   $       323,222    $      337,427    $      352,256   $            -    $            -   $            -   $     3,361,172
         Madison                  $       38,173   $       33,966   $       33,666   $       33,720   $             -    $            -    $            -   $            -    $            -   $            -   $       139,525
         Macon                    $      353,116   $      321,866   $      330,288   $      344,171   $             -    $            -    $            -   $            -    $            -   $            -   $     1,349,441
         Martin                   $      116,400   $      118,253   $      133,551   $      153,233   $             -    $            -    $            -   $            -    $            -   $            -   $       521,438
                          Total   $   26,060,556   $   25,526,955   $   27,928,628   $   31,067,208   $    24,714,225    $   26,654,192    $   28,763,336   $   19,646,690    $   20,245,691   $   21,793,525   $   252,401,007

ND       Cass                     $    1,708,459   $    1,675,386   $    1,744,612   $    1,871,292   $              -   $             -   $            -   $             -   $            -   $            -   $     6,999,750
         Grand Forks              $      210,782   $      210,890   $      215,560   $      263,039   $              -   $             -   $            -   $             -   $            -   $            -   $       900,270
         Burleigh                 $      546,866   $      503,458   $      215,560   $      539,210   $              -   $             -   $            -   $             -   $            -   $            -   $     1,805,093
         Morton                   $       12,127   $       11,293   $      215,560   $       12,002   $              -   $             -   $            -   $             -   $            -   $            -   $       250,981
                          Total   $    2,478,234   $    2,401,026   $    2,391,291   $    2,685,543   $              -   $             -   $            -   $             -   $            -   $            -   $     9,956,094

OH       Cuyahoga                 $   20,941,415   $   21,939,679   $   23,436,942   $   24,855,534   $     22,196,507   $   23,333,795    $   24,529,355   $   33,625,677    $   28,304,883   $   29,755,148   $   252,918,934
                          Total   $   20,941,415   $   21,939,679   $   23,436,942   $   24,855,534   $     22,196,507   $   23,333,795    $   24,529,355   $   33,625,677    $   28,304,883   $   29,755,148   $   252,918,934

OR       Columbia                 $       30,289   $       46,487   $       64,994   $       90,826   $              -   $             -   $            -   $             -   $            -   $            -   $       232,597
                          Total   $       30,289   $       46,487   $       64,994   $       90,826   $              -   $             -   $            -   $             -   $            -   $            -   $       232,597

SC       York                     $    1,897,499   $    2,044,521   $    2,247,962   $    2,555,292   $              -   $             -   $            -   $             -   $            -   $            -   $     8,745,274
                          Total   $    1,897,499   $    2,044,521   $    2,247,962   $    2,555,292   $              -   $             -   $            -   $             -   $            -   $            -   $     8,745,274

SD       Lincoln                  $      223,072   $      281,289   $      360,497   $      469,555   $        468,633   $      324,228    $      342,853   $      675,943    $    1,018,259   $    1,284,213   $     5,448,541
         Minnehaha                $    2,359,130   $    2,188,686   $    2,216,343   $    2,289,983   $      1,662,589   $    2,333,334    $    2,472,746   $    1,215,207    $    1,407,713   $    1,402,807   $    19,548,538
         Pennington               $      719,649   $      620,681   $      607,206   $      618,516   $              -   $            -    $            -   $      240,983    $      324,563   $      312,461   $     3,444,060
                          Total   $    3,301,851   $    3,090,657   $    3,184,046   $    3,378,054   $      2,131,222   $    2,657,562    $    2,815,598   $    2,132,133    $    2,750,535   $    2,999,481   $    28,441,139




                                                                                                          Ex. -7 -- 13
                                                                                                               4                                                                                                          226
                                                    Case3:07-cv-02888-JSW Document89-1                                             Filed02/18/11 Page65 of 83
                                                                                MEDICARE PART B UNDERPAYMENTS 2001-2010


                                          Calculated using 2002 RVUs using county specific escalators                               Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State               County                2001             2002              2003             2004               2005             2006              2007              2008             2009             2010             TOTAL

TN       Cheatham                     $       37,459    $       38,483   $       40,754   $       30,197    $              -   $             -   $            -   $             -   $            -   $            -   $       146,892
         Davidson                     $    9,862,444    $   10,132,282   $   10,730,081   $    7,950,461    $              -   $             -   $            -   $             -   $            -   $            -   $    38,675,267
         Dickson                      $      111,542    $      114,594   $      121,355   $       89,918    $              -   $             -   $            -   $             -   $            -   $            -   $       437,409
         Robertson                    $      228,383    $      234,631   $      248,474   $      184,107    $              -   $             -   $            -   $             -   $            -   $            -   $       895,595
         Rutherford                   $      914,719    $      939,746   $      995,191   $      737,387    $              -   $             -   $            -   $             -   $            -   $            -   $     3,587,044
         Sumner                       $      556,391    $      571,614   $      605,339   $      448,527    $              -   $             -   $            -   $             -   $            -   $            -   $     2,181,872
         Williamson                   $      935,799    $      961,403   $    1,018,125   $      754,380    $              -   $             -   $            -   $             -   $            -   $            -   $     3,669,707
         Wilson                       $      442,318    $      454,420   $      481,230   $      356,568    $              -   $             -   $            -   $             -   $            -   $            -   $     1,734,537
                              Total   $   13,089,055    $   13,447,174   $   14,240,549   $   10,551,545    $              -   $             -   $            -   $             -   $            -   $            -   $    51,328,323

TX       Collin                       $    4,334,422    $    5,080,862   $    5,902,721   $    7,068,000    $      8,730,038   $    9,980,701    $   11,410,533   $    9,833,611    $    8,361,711   $    9,559,608   $    80,262,208
         Rockwall                     $            -    $            -   $            -   $            -    $        372,828   $      335,353    $      301,645   $      199,067    $      122,196   $      109,913   $     1,441,003
         Bastrop                      $      119,183    $      163,359   $      209,418   $      277,561    $        418,696   $      528,202    $      666,348   $      510,627    $      588,224   $      742,068   $     4,223,685
         Caldwell                     $       51,473    $       66,140   $       81,568   $      118,699    $        125,646   $      152,487    $      185,061   $      131,112    $      147,382   $      178,866   $     1,238,434
         Hays                         $    1,038,857    $       63,423   $       67,439   $      103,665    $      1,429,442   $    1,455,535    $    1,482,104   $      913,095    $      850,196   $      865,716   $     8,269,472
         Williamson                   $      818,667    $    1,103,077   $    1,397,797   $      702,687    $      2,784,360   $    3,472,111    $    4,329,740   $    3,230,872    $    3,698,620   $    4,612,199   $    26,150,129
         Chambers                     $       57,654    $      991,970   $    1,054,788   $    1,838,023    $         54,936   $       53,200    $       51,518   $       39,642    $       23,757   $       23,006   $     4,188,495
         Denton                       $    2,112,245    $    2,610,421   $    2,775,588   $    2,001,636    $      4,105,145   $    4,654,928    $    5,278,341   $    3,572,244    $    3,654,322   $    4,143,729   $    34,908,599
         Fort Bend                    $      800,381    $    1,049,405   $    1,337,004   $    1,634,838    $      2,301,568   $    2,885,648    $    3,617,953   $    4,026,517    $    3,443,258   $    4,317,071   $    25,413,643
         Ellis                        $            -    $            -   $            -   $            -    $        953,307   $    1,056,489    $    1,170,838   $            -    $            -   $            -   $     3,180,634
         Hunt                         $      511,235    $      622,065   $      735,043   $      903,363    $        912,859   $    1,061,478    $    1,234,294   $            -    $            -   $            -   $     5,980,336
         Montgomery                   $    2,127,896    $    2,561,086   $    3,088,607   $    3,546,988    $      3,339,111   $    3,962,775    $    4,702,925   $    4,557,266    $    4,857,072   $    5,764,255   $    38,507,981
         Kaufman                      $            -    $            -   $            -   $            -    $        556,326   $      604,979    $      657,886   $            -    $            -   $            -   $     1,819,192
         Harris                       $    4,506,007    $    3,787,812   $    4,097,623   $    4,884,843    $        821,461   $      874,502    $      930,967   $            -    $            -   $            -   $    19,903,215
         Travis                       $      885,701    $    1,091,981   $    1,211,028   $    1,762,103    $      2,215,761   $    2,418,199    $    2,639,133   $            -    $            -   $            -   $    12,223,905
                              Total   $   17,363,721    $   19,191,600   $   21,958,623   $   24,842,406    $     29,121,485   $   33,496,587    $   38,659,287   $   27,014,053    $   25,746,739   $   30,316,429   $   267,710,930

UT       Davis                        $      500,852    $      406,527   $      457,486   $      520,776    $        449,405   $      497,687    $      551,156   $             -   $            -   $            -   $     3,383,890
         Salt Lake                    $    4,042,214    $    3,078,830   $    3,268,474   $    3,515,460    $      2,899,021   $    3,028,592    $    3,163,954   $             -   $            -   $            -   $    22,996,544
         Weber                        $      944,315    $      734,758   $      794,780   $      870,461    $        748,593   $      796,853    $      848,224   $             -   $            -   $            -   $     5,737,984
                              Total   $    5,487,380    $    4,220,115   $    4,520,740   $    4,906,697    $      4,097,018   $    4,323,132    $    4,563,335   $             -   $            -   $            -   $    32,118,417

VT       Chittenden                   $             -   $            -   $            -   $             -   $      1,005,074   $    1,051,442    $    1,099,949   $      147,756    $    1,687,589   $    1,765,444   $     6,757,253
         Franklin                     $             -   $            -   $            -   $             -   $              -   $            -    $            -   $          411    $      126,174   $      127,997   $       254,581
         Grand Isle                   $             -   $            -   $            -   $             -   $              -   $            -    $            -   $    1,921,060    $          417   $          508   $     1,921,985
                              Total   $             -   $            -   $            -   $             -   $      1,005,074   $    1,051,442    $    1,099,949   $    2,069,227    $    1,814,180   $    1,893,948   $     8,933,819




                                                                                                                Ex. -7 -- 14
                                                                                                                     5                                                                                                          227
                                                    Case3:07-cv-02888-JSW Document89-1                                            Filed02/18/11 Page66 of 83
                                                                                MEDICARE PART B UNDERPAYMENTS 2001-2010


                                          Calculated using 2002 RVUs using county specific escalators                              Calculated using 2005 RVUs with county specific escalator                         Sum 2001 - 2010

 State               County                2001             2002              2003             2004               2005            2006              2007              2008             2009             2010             TOTAL

VA       Manassas City                $       22,710    $      823,336   $      994,130   $    1,212,524    $     1,823,240   $    2,166,407    $    2,574,164   $    2,804,313    $    2,942,448   $    3,496,270   $    18,859,542
         Prince William               $       30,009    $    1,108,217   $    1,270,590   $    1,435,981    $     2,529,489   $    2,853,932    $    3,219,991   $    3,422,820    $    3,504,028   $    3,953,471   $    23,328,528
         Loudoun                      $       29,628    $    1,093,760   $    1,317,279   $    1,565,287    $     2,915,586   $    3,455,509    $    4,095,417   $    4,408,258    $    4,723,884   $    5,598,677   $    29,203,286
         Fauquier                     $        5,789    $      216,767   $      255,511   $      294,033    $       638,578   $      740,732    $      859,228   $      883,779    $      877,163   $    1,017,483   $     5,789,062
         Fredericksburg City          $    1,544,340    $    1,649,544   $    1,855,243   $    2,133,343    $     4,261,334   $    4,716,421    $    5,220,109   $    5,011,768    $    5,290,281   $    5,855,254   $    37,537,636
         Clarke                       $            -    $            -   $            -   $            -    $             -   $            -    $            -   $       50,852    $       50,770   $       52,249   $       153,870
         Stafford                     $            -    $            -   $            -   $            -    $       421,944   $      437,550    $      453,733   $      405,551    $      351,726   $      364,735   $     2,435,238
         Spotsylvania                 $      204,449    $      218,706   $      241,441   $      270,661    $       379,081   $      411,825    $      447,397   $      399,547    $      410,866   $      446,355   $     3,430,329
         Charles City                 $        5,226    $        4,844   $        4,653   $        4,563    $         3,887   $        3,675    $        3,474   $            -    $            -   $            -   $        30,322
         Chesterfield                 $    1,086,220    $    1,357,380   $    1,685,920   $    2,149,127    $     2,359,951   $    2,884,488    $    3,525,612   $            -    $            -   $            -   $    15,048,698
         Dinwiddie                    $       15,560    $       15,681   $       16,411   $       17,478    $        16,306   $       16,794    $       17,297   $            -    $            -   $            -   $       115,526
         Goochland                    $       20,541    $       22,193   $       24,708   $       28,026    $        27,202   $       29,803    $       32,652   $            -    $            -   $            -   $       185,124
         Hanover                      $      707,653    $      693,654   $      711,621   $      749,782    $       635,595   $      641,678    $      647,818   $            -    $            -   $            -   $     4,787,800
         Henrico                      $    4,582,810    $    4,864,312   $    5,358,849   $    6,053,735    $     6,006,184   $    6,511,467    $    7,059,257   $            -    $            -   $            -   $    40,436,615
         New Kent                     $       25,896    $       23,348   $       21,754   $       20,644    $        17,420   $       15,973    $       14,645   $            -    $            -   $            -   $       139,680
         Powhatan                     $       26,032    $       27,525   $       30,103   $       33,611    $        32,719   $       35,213    $       37,897   $            -    $            -   $            -   $       223,101
         Prince George                $        3,192    $        5,971   $        8,963   $       13,712    $        16,588   $       24,502    $       36,194   $            -    $            -   $            -   $       109,122
         Colonial Heights City        $      333,108    $      350,851   $      374,439   $      428,983    $       419,441   $      450,967    $      484,863   $            -    $            -   $            -   $     2,842,652
         Hopewell City                $      296,709    $      298,617   $      383,324   $      271,396    $       271,150   $      274,028    $      276,936   $            -    $            -   $            -   $     2,072,159
         Petersburg City              $      627,339    $      568,161   $      532,610   $      510,747    $       421,654   $      388,977    $      358,833   $            -    $            -   $            -   $     3,408,322
         Richmond City                $    3,123,637    $    3,119,299   $    3,308,264   $    2,834,953    $     2,456,480   $    2,412,580    $    2,369,464   $            -    $            -   $            -   $    19,624,678
         Albemarle                    $      484,862    $      483,684   $      501,753   $      534,700    $             -   $            -    $            -   $            -    $            -   $            -   $     2,004,999
         Fluvanna                     $       24,656    $       24,582   $       25,404   $       26,756    $             -   $            -    $            -   $            -    $            -   $            -   $       101,398
         Greene                       $        7,473    $        7,490   $        7,782   $        8,265    $             -   $            -    $            -   $            -    $            -   $            -   $        31,010
         Charlottesville city         $    1,031,613    $    1,203,180   $    1,427,388   $    1,762,664    $             -   $            -    $            -   $            -    $            -   $            -   $     5,424,845
                              Total   $   14,239,452    $   18,181,098   $   20,358,142   $   22,360,970    $    25,653,830   $   28,472,521    $   31,734,982   $   17,386,888    $   18,151,165   $   20,784,494   $   217,323,543

WA       Snohomish                    $    3,101,222    $    3,417,030   $    3,844,201   $    4,354,400    $     5,336,160   $    5,907,671    $    6,540,391   $    4,192,196    $    4,644,411   $    5,141,834   $    46,479,517
         Thurston                     $            -    $            -   $            -   $            -    $     2,954,170   $    3,237,219    $    3,547,387   $            -    $            -   $            -   $     9,738,775
                              Total   $    3,101,222    $    3,417,030   $    3,844,201   $    4,354,400    $     8,290,330   $    9,144,890    $   10,087,779   $    4,192,196    $    4,644,411   $    5,141,834   $    56,218,292

WV       Jefferson                    $             -   $            -   $            -   $             -   $        73,040   $       75,226    $      77,477    $             -   $            -   $            -   $       225,744
                              Total   $             -   $            -   $            -   $             -   $        73,040   $       75,226    $      77,477    $             -   $            -   $            -   $       225,744

WI       Pierce                       $      113,435    $      120,077   $      132,587   $      150,075    $       217,881   $      236,749    $      257,251   $      168,596    $     192,234    $     208,881    $     1,797,766
         St. Croix                    $      192,426    $      203,593   $      225,846   $      259,221    $       406,574   $      443,833    $      484,507   $      306,927    $     368,862    $     402,665    $     3,294,456
         Milwaukee                    $   11,222,202    $   10,886,778   $   11,219,763   $   12,181,705    $     9,665,157   $    9,802,194    $    9,941,175   $            -    $           -    $           -    $    74,918,974
         Waukesha                     $            -    $            -   $            -   $            -    $     2,970,871   $    3,130,250    $    3,298,179   $            -    $           -    $           -    $     9,399,300
         Dane                         $    3,399,255    $    3,447,746   $    3,703,410   $    4,192,244    $     3,281,840   $    3,469,077    $    3,666,997   $            -    $           -    $           -    $    25,160,569
         Kenosha                      $            -    $            -   $            -   $            -    $       737,534   $      814,180    $      898,791   $            -    $           -    $           -    $     2,450,504
         Ozaukee                      $            -    $            -   $            -   $            -    $       277,815   $      300,006    $      323,970   $            -    $           -    $           -    $       901,791
                              Total   $   14,927,318    $   14,658,194   $   15,281,606   $   16,783,245    $    17,557,670   $   18,196,290    $   18,870,871   $      475,523    $     561,096    $     611,546    $   117,923,360

WY       Teton                        $             -   $            -   $            -   $             -   $             -   $             -   $            -   $      242,869    $     291,591    $     310,736    $       845,195
                              Total   $             -   $            -   $            -   $             -   $             -   $             -   $            -   $      242,869    $     291,591    $     310,736    $       845,195




                                                                                                                Ex. -7 -- 15
                                                                                                                     6                                                                                                         228
                                                 Case3:07-cv-02888-JSW Document89-1                                           Filed02/18/11 Page67 of 83
                                                                             MEDICARE PART B UNDERPAYMENTS 2001-2010


                                       Calculated using 2002 RVUs using county specific escalators                             Calculated using 2005 RVUs with county specific escalator                        Sum 2001 - 2010

 State           County                 2001             2002             2003             2004              2005             2006              2007              2008             2009             2010            TOTAL

PR       Juncos Municipio          $      593,864   $      532,928   $      486,821   $      444,524   $             -   $             -   $            -   $             -   $             -   $           -   $     2,058,136
         Ceiba Municipio           $            -   $            -   $            -   $            -   $        19,597   $        15,842   $       12,807   $         5,524   $         4,740   $       3,832   $        62,342
         Catano Municipio          $            -   $            -   $            -   $            -   $        10,881   $        11,994   $       13,220   $             -   $             -   $           -   $        36,095
         Barceloneta Municipio     $            -   $            -   $            -   $            -   $        30,638   $        30,359   $       30,083   $        29,108   $        31,198   $      30,914   $       182,301
         San Juan Municipio        $            -   $            -   $            -   $            -   $     4,612,823   $     4,481,453   $    4,353,824   $     4,088,553   $     4,406,141   $   4,280,657   $    26,223,451
         Guaynabo Municipio        $            -   $            -   $            -   $            -   $       194,709   $       190,638   $      186,653   $       174,198   $       197,879   $     193,743   $     1,137,820
         Aguas Buenas Municipio    $            -   $            -   $            -   $            -   $        26,899   $        26,465   $       26,038   $             -   $             -   $           -   $        79,401
                           Total   $      593,864   $      532,928   $      486,821   $      444,524   $     4,895,548   $     4,756,751   $    4,622,624   $     4,297,383   $     4,639,958   $   4,509,145   $    29,779,546

                          TOTAL    $ 319,438,513    $ 327,175,550    $ 354,304,984    $ 388,496,088    $ 376,681,339     $   406,291,613   $ 436,683,227    $ 327,104,606     $ 354,458,419     $ 387,216,421   $ 3,677,850,758

         Single Locality States    $ 190,167,910    $ 191,870,494    $ 205,491,433    $ 219,189,233    $ 214,783,744     $   229,023,707   $ 242,289,950    $ 177,249,485     $ 189,477,430     $ 205,993,402   $ 2,065,536,789
         Multi-Locality States     $ 129,270,603    $ 135,305,056    $ 148,813,551    $ 169,306,854    $ 161,897,594     $   177,267,906   $ 194,393,277    $ 149,855,121     $ 164,980,988     $ 181,223,018   $ 1,612,313,969




                                                                                                           Ex. -7 -- 16
                                                                                                                7                                                                                                         229
Case3:07-cv-02888-JSW Document89-1        Filed02/18/11 Page68 of 83




                Appendix B




         Response of County of Santa Cruz, County of Sonoma,
               County of San Diego, County of Marin,
         County of Santa Barbara, County of San Luis Obispo,
                       and County of Monterey


                     Comments on CMS-1503-P
              Medicare Part B Proposed Rule for CY 2011




                             Ex. 7 - 17                                230
                                       Case3:07-cv-02888-JSW Document89-1                          Filed02/18/11 Page69 of 83


                                 2006-2009 REGIONAL VARIATIONS IN SERVICE COSTS -- MEDIAN HOURLY WAGE

   Category                         2006                                     2007                                    2008                            2009
                          Low*      High         Delta          Low*         High        Delta          Low*         High      Delta        Low*      High      Delta

Accountants &
                      $ 13.84      $ 34.30     147.83%      $    15.09   $    34.35    127.63%      $    15.00   $    36.03   140.20%   $ 17.77      $ 37.24   109.57%
Auditors

Billing & Posting
                      $    9.10    $ 19.96     119.34%      $     9.35   $    20.01    114.01%      $     9.90   $    20.54   107.47%   $     9.77   $ 22.19   127.12%
Clerks

Janitors &
                      $    6.53    $ 16.96     159.72%      $     7.18   $    17.20    139.55%      $     7.51   $    17.19   128.89%   $     7.79   $ 16.41   110.65%
Cleaners

Lawyers**             $ 13.99      $ 65.79     370.26%      $    14.52   $    69.93    381.61%      $    15.34   $    75.96   395.18%   $ 16.23      $ 77.10   375.05%

Maintenance
Workers,              $    8.41    $ 29.14     246.49%      $     9.00   $    31.78    253.11%      $     9.32   $    33.43   258.69%   $     9.47   $ 38.34   304.86%
Machinery

Maintenance &
Repair Workers,       $    8.50    $ 22.84     168.71%      $     8.77   $    21.78    148.35%      $     9.33   $    22.71   143.41%   $     9.50   $ 23.50   147.37%
General

Managers, All
                      $ 11.31      $ 59.78     428.56%      $    14.63   $    63.25    332.33%      $     7.50   $    63.34   744.53%   $     7.57   $ 66.89   783.62%
Other

Management
                      $ 22.18      $ 59.00     166.01%      $    23.36   $    60.70    159.85%      $    25.11   $    62.82   150.18%   $ 24.53      $ 65.13   165.51%
Occupations

Market Research       $    7.19    $ 53.35     642.00%      $     7.60   $    48.88    543.16%      $     8.84   $    48.11   444.23%   $     8.26   $ 50.12   506.78%

Marketing
                      $ 11.89      $ 68.12     472.92%      $    15.87   $    68.57    332.07%      $    16.61   $    71.48   330.34%   $ 12.23      $ 71.92   488.06%
Managers

Security Guards       $    6.63    $ 19.96     201.06%      $     6.68   $    24.37    264.82%      $     7.23   $    27.07   274.41%   $     7.61   $ 26.07   242.58%

* Excluding Puerto Rico
** Highest recorded wage shown, but note:
   (a) For 2006-2007, other locations in the category are more than $70.00 per hour or $145,600 per year; and
   (b) For 2008-2009, other locations in the category are more than $80.00 per hour or $166,400 per year.
Source: http://www.bls.gov/oes/oes_dl.htm




                                                                                    Ex. 7 - 18                                                                    231
                       Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page70 of 83


                            2006 REGIONAL VARIATIONS IN SERVICE COSTS
                                                                   Median Hourly Wage
          Category                                Low*                                      High
                                                                                                                   Delta
                                           Area                 Wage                 Area                 Wage
                            Hammond nonmetropolitan                     St. Mary's County, Maryland
Accountants & Auditors                                      $ 13.84                                     $ 34.30   147.83%
                            area, LA                                    nonmetropolitan area
                                                                        San Francisco-San Mateo-
Billing & Posting Clerks    Idaho Falls, ID                 $    9.10   Redwood City, CA Metropolitan $ 19.96     119.34%
                                                                        Division

                                                                        Nantucket Island and Martha's
Janitors & Cleaners         Midland, TX                     $    6.53                                 $ 16.96     159.72%
                                                                        Vineyard nonmetropolitan area

                                                                        San Francisco-San Mateo-
                            West Arkansas
Lawyers                                                     $ 13.99     Redwood City, CA Metropolitan $ 65.79     370.26%
                            nonmetropolitan area
                                                                        Division**
Maintenance Workers,
                            Victoria, TX                    $    8.41   Hattiesburg, MS                 $ 29.14   246.49%
Machinery
Maintenance & Repair                                                    Northeastern Wyoming
                            Brownsville-Harlingen, TX       $    8.50                                   $ 22.84   168.71%
Workers, General                                                        nonmetropolitan area
                            North Idaho nonmetropolitan                 San Jose-Sunnyvale-Santa
Managers, All Other                                         $ 11.31                                     $ 59.78   428.56%
                            area                                        Clara, CA
                            East Idaho nonmetropolitan                  San Jose-Sunnyvale-Santa
Management Occupations                                      $ 22.18                                     $ 59.00   166.01%
                            area                                        Clara, CA
                            Myrtle Beach-Conway-North
Market Research                                             $    7.19   Joplin, MO                      $ 53.35   642.00%
                            Myrtle Beach, SC
                                                                        San Jose-Sunnyvale-Santa
Marketing Managers          Wichita Falls, TX               $ 11.89                                     $ 68.12   472.92%
                                                                        Clara, CA
                            Hammond nonmetropolitan                     Kennewick-Richland-Pasco,
Security Guards                                             $    6.63                                   $ 19.96   201.06%
                            area, LA                                    WA
*Excluding Puerto Rico
** Highest recorded wage; other locations in the category are more than $70.00 per hour or $145,600 per year
Source: http://www.bls.gov/oes/oes_dl.htm
        Metropolitan Area Cross-Industry Estimates (oesm06ma.zip)
        Nonmetropolitan Cross-Industry Estimates (oesm06bos.zip)


                                                          Ex. 7 - 19                                                        232
                           Case3:07-cv-02888-JSW Document89-1            Filed02/18/11 Page71 of 83


                              2007 REGIONAL VARIATIONS IN SERVICE COSTS
                                                                    Median Hourly Wage
          Category                                 Low*                                       High
                                                                                                                    Delta
                                            Area                 Wage                  Area                Wage
                                                                         New York-White Plains-
                              Hammond nonmetropolitan
Accountants & Auditors                                       $ 15.09     Wayne, NY-NJ Metropolitan       $ 34.35   127.63%
                              area, LA
                                                                         Division
Billing & Posting Clerks      Idaho Falls, ID                $    9.35   Danbury, CT                     $ 20.01   114.01%

                                                                         Nantucket Island and Martha's
Janitors & Cleaners           Midland, TX                    $    7.18                                 $ 17.20     139.55%
                                                                         Vineyard nonmetropolitan area

                              West Arkansas
Lawyers                                                      $ 14.52     Santa Rosa-Petaluma, CA         $ 69.93   381.61%
                              nonmetropolitan area
Maintenance Workers,          Southern Texas
                                                             $    9.00   Niles-Benton Harbor, MI         $ 31.78   253.11%
Machinery                     nonmetropolitan area
Maintenance & Repair                                                     West Central North Dakota
                              Brownsville-Harlingen, TX      $    8.77                                   $ 21.78   148.35%
Workers, General                                                         nonmetropolitan area
                              Northwestern Oklahoma                      San Jose-Sunnyvale-Santa
Managers, All Other                                          $ 14.63                                     $ 63.25   332.33%
                              nonmetropolitan area                       Clara, CA
                              Eastern Montana                            San Jose-Sunnyvale-Santa
Management Occupations                                       $ 23.36                                     $ 60.70   159.85%
                              nonmetropolitan area                       Clara, CA
                                                                         Southern Ohio nonmetropolitan
Market Research               Gainesville, FL                $    7.60                                 $ 48.88     543.16%
                                                                         area
                                                                         San Francisco-San Mateo-
                              Eastern Tennessee
Marketing Managers                                           $ 15.87     Redwood City, CA Metropolitan $ 68.57     332.07%
                              nonmetropolitan area
                                                                         Division
                              Southwest Idaho                            San Luis Obispo-Paso Robles,
Security Guards                                              $    6.68                                $ 24.37      264.82%
                              nonmetropolitan area                       CA
*Excluding Puerto Rico
** Highest recorded wage; other locations in the category are more than $70.00 per hour or $145,600 per year
Source: http://www.bls.gov/oes/oes_dl.htm
        Metropolitan Area Cross-Industry Estimates (oesm07ma.zip)
        Nonmetropolitan Cross-Industry Estimates (oesm07bos.zip)


                                                          Ex. 7 - 20                                                         233
                           Case3:07-cv-02888-JSW Document89-1             Filed02/18/11 Page72 of 83


                              2008 REGIONAL VARIATIONS IN SERVICE COSTS
                                                                     Median Hourly Wage
          Category                                  Low*                                      High
                                                                                                                      Delta
                                             Area                 Wage                 Area                 Wage
                              Garrett County, Maryland                    San Jose-Sunnyvale-Santa
Accountants & Auditors                                        $ 15.00                                      $ 36.03   140.20%
                              nonmetropolitan area                        Clara, CA
                                                                          San Francisco-San Mateo-
                              Western South Dakota
Billing & Posting Clerks                                      $    9.90   Redwood City, CA Metropolitan $ 20.54      107.47%
                              nonmetropolitan area
                                                                          Division
                                                                          Nantucket Island and Martha's
Janitors & Cleaners           Shreveport-Bossier City, LA     $    7.51   Vineyard nonmetropolitan         $ 17.19   128.89%
                                                                          area, MA
                              West Arkansas
Lawyers                                                       $ 15.34     Rocky Mount, NC**                $ 75.96   395.18%
                              nonmetropolitan area
Maintenance Workers,                                                      Oakland-Fremont-Hayward,
                              Montgomery, AL                  $    9.32                                    $ 33.43   258.69%
Machinery                                                                 CA Metropolitan Division
Maintenance & Repair
                              Brownsville-Harlingen, TX       $    9.33   Gary, IN Metropolitan Division   $ 22.71   143.41%
Workers, General
                                                                          San Jose-Sunnyvale-Santa
Managers, All Other           Danville, IL                    $    7.50                                    $ 63.34   744.53%
                                                                          Clara, CA
                              Southwest Idaho                             San Jose-Sunnyvale-Santa
Management Occupations                                        $ 25.11                                      $ 62.82   150.18%
                              nonmetropolitan area                        Clara, CA
                              Myrtle Beach-Conway-North                   San Jose-Sunnyvale-Santa
Market Research                                               $    8.84                                    $ 48.11   444.23%
                              Myrtle Beach, SC                            Clara, CA
                              Northwest Mississippi                       San Jose-Sunnyvale-Santa
Marketing Managers                                            $ 16.61                                      $ 71.48   330.34%
                              nonmetropolitan area                        Clara, CA
                                                                          San Luis Obispo-Paso Robles,
Security Guards               Albany, GA                      $    7.23                                $ 27.07       274.41%
                                                                          CA
*Excluding Puerto Rico
** Highest recorded wage; other locations in the category are more than $80.00 per hour or $166,400 per year
Source: http://www.bls.gov/oes/oes_dl.htm
        Metropolitan Area Cross-Industry Estimates (oesm08ma.zip)
        Nonmetropolitan Cross-Industry Estimates (oesm08bos.zip)


                                                            Ex. 7 - 21                                                         234
                       Case3:07-cv-02888-JSW Document89-1               Filed02/18/11 Page73 of 83


                            2009 REGIONAL VARIATIONS IN SERVICE COSTS
                                                                   Median Hourly Wage
          Category                              Low*                                        High
                                                                                                                   Delta
                                         Area                 Wage                   Area                 Wage
                                                                        New York-White Plains-
                            North Missouri
Accountants & Auditors                                       $ 17.77    Wayne, NY-NJ Metropolitan        $ 37.24   109.57%
                            nonmetropolitan area
                                                                        Division
                            Natchitoches nonmetropolitan                San Jose-Sunnyvale-Santa
Billing & Posting Clerks                                     $   9.77                                    $ 22.19   127.12%
                            area, LA                                    Clara, CA
                                                                        Nantucket Island and Martha's
                            Northwest Mississippi
Janitors & Cleaners                                          $   7.79   Vineyard nonmetropolitan         $ 16.41   110.65%
                            nonmetropolitan area
                                                                        area, MA
                            Winnsboro nonmetropolitan
Lawyers                                                      $ 16.23    Madera, CA**                     $ 77.10   375.05%
                            area, LA
Maintenance Workers,
                            Montgomery, AL                   $   9.47   Casper, WY                       $ 38.34   304.86%
Machinery
Maintenance & Repair                                                    Southwestern Wyoming
                            Brownsville-Harlingen, TX        $   9.50   nonmetropolitan area             $ 23.50   147.37%
Workers, General
                            Northeastern Nebraska                       San Jose-Sunnyvale-Santa
Management, All Other       nonmetropolitan area             $   7.57   Clara, CA                        $ 66.89   783.62%

                            West Central Utah                           San Jose-Sunnyvale-Santa
Management Occupations      nonmetropolitan area             $ 24.53    Clara, CA                        $ 65.13   165.51%

                            Myrtle Beach-North Myrtle                   San Jose-Sunnyvale-Santa
Market Research             Beach-Conway, SC                 $   8.26   Clara, CA                        $ 50.12   506.78%

                                                                        San Francisco-San Mateo-
                            Northwest Mississippi                       Redwood City, CA Metropolitan $ 71.92
Marketing Managers                                           $ 12.23                                               488.06%
                            nonmetropolitan area                        Division
                                                                        San Luis Obispo-Paso Robles,
Security Guards             Terre Haute, IN                  $   7.61   CA                               $ 26.07   242.58%

*Excluding Puerto Rico
** Highest recorded wage; other locations in the category are more than $80.00 per hour or $166,400 per year
Source: http://www.bls.gov/oes/oes_dl.htm
        Metropolitan Area Cross-Industry Estimates (oesm09ma.zip)
        Nonmetropolitan Cross-Industry Estimates (oesm09bos.zip)


                                                         Ex. 7 - 22                                                          235
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page74 of 83




                 Exhibit 8

                                                                  236
          Case3:07-cv-02888-JSW Document89-1           Filed02/18/11 Page75 of 83




                                           EXHIBIT 8

   USE OF 5% ITERATIVE METHOD TO IMPROVE "SEVERE" or "INAPPROPRIATE"
                  BOUNDARY DIFFERENCES IN CALIFORNIA

                       2010                      New 2010
                                   Boundary                 Boundary
                      Locality                    County                   Improvement
                            *      Difference               Difference
                       GAF                         GAF**

San Mateo              1.203                      1.203
                                    18.87%                    9.56%            49%
Santa Cruz             1.012                      1.098

Santa Clara            1.148                      1.148
                                    13.44%                    4.55%            66%
Santa Cruz             1.012                      1.098

Santa Clara            1.148                      1.148
                                    13.44%                    6.59%            51%
Monterey               1.012                      1.077

Orange                 1.128                      1.128
                                    11.46%                    7.12%            38%
San Diego              1.012                      1.053

San Francisco          1.201                      1.201
                                     8.00%                    2.65%            67%
Marin                  1.112                      1.170

* Source for 2010 Locality GAFs: CY 2011 Proposed Rule, 7/13/2010, 75 FR 40643.

** After application of the 5% iterative rule.




                                                                                         237
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page76 of 83




                 Exhibit 9

                                                                  238
                                                        Case3:07-cv-02888-JSW Document89-1          Filed02/18/11 Page77 of 83
                                                                                        EXHIBIT 9
                                                                     Physician Fee Schedule Area Payment Error Rates

                                                        Second
                                                      GPCI Update               Third GPCI Update                 Fourth GPCI Update          Fifth GPCI Update        Increase
                                                                                                                                                                      2000 - 2010
State            Locality Name               1996    1999     2000      2001      2002      2003      2004     2005      2006     2007    2008      2009      2010
 AL     Statewide                            2.22%   2.41%   2.41%     2.70%     2.59%     2.59%     2.67%     2.57%    2.58%     2.63%   2.68%     2.26%     2.23%      -7.45%
 AK     Statewide                             N/A    1.25%   1.25%     1.84%     1.31%     3.30%     1.62%     3.35%    1.26%     1.31%   1.46%     1.54%     1.50%      19.64%
 AZ     Statewide                            1.22%   1.61%   1.61%     2.35%     2.18%     2.27%     2.23%     2.93%    2.84%     2.88%   1.95%     1.64%     1.59%      -1.28%
 AR     Statewide                             N/A    2.64%   2.64%     2.97%     2.87%     2.89%     3.03%     2.69%    2.73%     2.75%   2.63%     2.64%     2.62%      -0.70%
        Anaheim/Santa Ana, CA                 N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Los Angeles, CA                       N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Marin/Napa/Solano, CA                 N/A    3.82%   3.82%     6.54%     6.69%     7.09%     6.74%     6.60%    6.60%     6.65%   5.89%     5.55%     5.53%      44.93%
        Oakland/Berkley, CA                   N/A    0.16%   0.16%     1.54%     0.63%     0.94%     0.68%     3.43%    0.29%     0.35%   2.31%     0.36%     0.36%     120.54%
        Rest of California*                   N/A    3.65%   3.65%     3.64%     3.66%     3.66%     3.66%     4.90%    4.97%     5.02%   4.43%     4.36%     4.36%      19.37%
 CA
        San Francisco, CA                     N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        San Mateo, CA                         N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Santa Clara, CA                       N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Ventura, CA                           N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
                                 Total CA    1.20%   1.51%   1.51%     1.62%     1.58%     1.60%     1.58%     2.45%    2.32%     2.34%   2.10%     1.96%     1.96%      29.89%
 CO     Statewide                             N/A    2.17%   2.17%     3.73%     3.57%     3.57%     3.62%     5.38%    5.46%     5.53%   3.42%     3.22%     3.18%      46.53%
 CT     Statewide                            1.92%   2.17%   2.17%     2.53%     2.43%     2.89%     2.52%     2.67%    2.68%     2.77%   2.84%     2.81%     2.75%      26.74%
 DE     Statewide                             N/A    3.64%   3.64%     3.84%     3.55%     3.66%     3.84%     3.18%    3.38%     3.40%   4.52%     4.05%     4.01%      10.04%
 DC     Statewide                             N/A    4.85%   4.85%     4.85%     4.68%     4.63%     4.65%     2.70%    1.41%     1.50%   2.34%     1.82%     1.78%     -63.30%
        Fort Lauderdale, FL                   N/A    3.82%   3.82%     4.25%     4.29%     4.40%     4.34%     2.85%    3.09%     3.15%   5.10%     4.80%     4.82%      26.14%
        Miami, FL                             N/A    0.48%   0.48%     0.83%     0.92%     1.61%     1.30%     0.42%    0.26%     0.31%   2.27%     0.41%     0.40%     -17.17%
 FL
        Rest of Florida                       N/A    1.84%   1.84%     2.39%     2.31%     2.34%     2.32%     2.58%    2.66%     2.72%   2.60%     2.60%     2.59%      40.84%
                                 Total FL    2.07%   2.26%   2.26%     2.76%     2.73%     2.85%     2.79%     2.41%    2.50%     2.56%   3.29%     3.03%     3.03%      33.68%
        Atlanta, GA                           N/A    0.18%   0.18%     1.15%     0.55%     0.44%     0.60%     0.85%    0.08%     0.14%   1.98%     0.17%     0.13%     -26.71%
 GA     Rest of Georgia                       N/A    2.22%   2.22%     2.57%     2.54%     2.57%     2.59%     2.58%    2.56%     2.62%   2.54%     2.38%     2.33%       4.78%
                                 Total GA    1.44%   1.47%   1.47%     2.05%     1.81%     1.81%     1.86%     2.01%    1.74%     1.81%   2.30%     1.43%     1.39%      -5.73%
 HI     Statewide                             N/A    3.42%   3.42%     2.75%     1.64%     1.39%     1.68%     1.55%    1.20%     1.30%   4.32%     3.64%     3.61%       5.33%
 ID     Statewide                            1.76%   1.64%   1.64%     1.80%     1.70%     1.78%     1.76%     1.92%    1.84%     1.88%   1.95%     1.88%     1.84%      12.28%
        Chicago, IL                           N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        East St. Louis, IL                    N/A    1.81%   1.81%     2.62%     2.50%     2.48%     2.44%     1.93%    1.64%     1.73%   1.86%     2.12%     2.18%      20.46%
 IL     Rest of Illinois                      N/A    3.21%   3.21%     3.81%     3.90%     3.84%     3.92%     3.83%    3.83%     3.90%   3.54%     3.52%     3.53%       9.88%
        Suburban Chicago, IL                  N/A    1.11%   1.11%     1.67%     1.33%     1.19%     1.33%     1.88%    1.21%     1.26%   2.06%     1.69%     1.67%      51.13%
                                  Total IL   1.40%   1.34%   1.34%     1.67%     1.64%     1.59%     1.64%     1.80%    1.68%     1.72%   1.54%     1.48%     1.48%      10.49%
 IN     Statewide                            2.35%   2.31%   2.31%     2.58%     2.60%     2.67%     2.56%     2.40%    2.45%     2.46%   2.67%     2.44%     2.41%       4.42%
 IA     Statewide                             N/A    2.85%   2.85%     2.91%     2.85%     2.83%     2.86%     3.12%    3.09%     3.14%   2.92%     2.69%     2.71%      -4.85%
 KS     Statewide                            3.85%   3.58%   3.58%     4.00%     3.81%     3.75%     3.85%     2.11%    2.20%     2.20%   3.11%     2.86%     2.83%     -20.84%
 KY     Statewide                            2.67%   2.79%   2.79%     3.04%     2.95%     2.95%     2.95%     3.06%    3.04%     3.10%   2.81%     2.53%     2.51%     -10.05%
        New Orleans, LA                       N/A    0.15%   0.15%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%    -100.00%
 LA     Rest of Louisiana                     N/A    1.95%   1.95%     2.15%     2.13%     2.11%     2.11%     1.86%    1.83%     1.88%   2.65%     2.54%     2.49%      27.84%
                                 Total LA    1.19%   1.57%   1.57%     1.70%     1.68%     1.66%     1.66%     1.40%    1.38%     1.42%   2.27%     2.18%     2.14%      36.49%


                                                                                           -1-
                                                                                                                                                                                  239
                                                        Case3:07-cv-02888-JSW Document89-1          Filed02/18/11 Page78 of 83
                                                                                        EXHIBIT 9
                                                                     Physician Fee Schedule Area Payment Error Rates

                                                        Second
                                                      GPCI Update               Third GPCI Update                 Fourth GPCI Update          Fifth GPCI Update        Increase
                                                                                                                                                                      2000 - 2010
State            Locality Name               1996    1999     2000      2001      2002      2003      2004     2005      2006     2007    2008      2009      2010
        Rest of Maine                         N/A    0.57%   0.57%     0.70%     0.57%     0.52%     0.61%     0.71%    0.55%     0.59%   0.99%     0.80%     0.77%     34.79%
 ME     Southern Maine                        N/A    1.42%   1.42%     1.19%     1.53%     1.49%     1.56%     1.65%    1.46%     1.48%   1.97%     1.68%     1.65%     16.11%
                                 Total ME    0.86%   0.93%   0.93%     0.91%     0.97%     0.93%     1.01%     1.11%    0.93%     0.97%   1.43%     1.19%     1.16%     24.69%
MD      Baltimore/Surr. Cntys, MD             N/A    0.99%   0.99%     1.12%     1.26%     1.63%     1.22%     1.44%    0.87%     0.93%   1.34%     1.10%     1.13%     14.21%
        Rest of Maryland                      N/A    3.50%   3.50%     3.63%     3.38%     3.52%     3.39%     5.41%    5.35%     5.42%   5.15%     4.99%     4.94%     41.14%
                                 Total MD    1.42%   2.33%   2.33%     1.83%     1.86%     2.16%     1.83%     2.73%    2.32%     2.39%   2.50%     2.28%     2.29%     -1.78%
        Metropolitan Boston                   N/A    1.37%   1.37%     1.88%     1.16%     1.53%     1.22%     2.13%    1.16%     1.21%   1.21%     0.96%     0.91%    -33.11%
MA      Rest of Massachusetts                 N/A    2.48%   2.48%     3.35%     3.17%     3.19%     3.22%     4.05%    3.98%     4.04%   3.45%     3.40%     3.36%     35.71%
                                 Total MA    3.16%   1.94%   1.94%     2.63%     2.19%     2.38%     2.24%     3.21%    2.75%     2.80%   2.38%     2.23%     2.19%     13.16%
 MI     Detroit, MI                           N/A    1.48%   1.48%     1.83%     1.69%     1.83%     1.68%     0.95%    0.75%     0.84%   2.38%     1.37%     1.43%     -3.93%
        Rest of Michigan                      N/A    2.30%   2.30%     3.01%     2.86%     2.86%     2.85%     2.29%    2.33%     2.41%   3.13%     2.87%     2.84%     23.36%
                                  Total MI   1.49%   1.88%   1.88%     2.39%     2.25%     2.32%     2.24%     1.65%    1.58%     1.67%   2.73%     2.06%     2.08%     10.66%
MN      Statewide                             N/A    4.04%   4.04%     4.94%     4.81%     4.80%     4.87%     5.93%    5.69%     5.70%   4.33%     4.30%     4.29%      6.00%
MS      Statewide                            2.61%   2.47%   2.47%     2.62%     2.50%     2.52%     2.58%     3.00%    3.03%     3.10%   2.74%     2.67%     2.62%      6.03%
        Metropolitan Kansas City, MO          N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%      0.00%
        Metropolitan St. Louis, MO            N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%      0.00%
MO
        Rest of Missouri*                     N/A    2.05%   2.05%     2.65%     2.03%     2.07%     2.19%     2.18%    2.08%     2.16%   1.89%     1.86%     1.83%    -10.83%
                                 Total MO    3.86%   0.96%   0.96%     1.25%     0.96%     0.98%     1.03%     1.10%    1.05%     1.09%   0.83%     0.82%     0.81%    -16.27%
MT      Statewide                             N/A    0.88%   0.88%     1.01%     1.01%     1.00%     1.31%     0.96%    1.06%     1.10%   1.30%     0.96%     0.92%      4.52%
NE      Statewide                             N/A    3.18%   3.18%     3.65%     3.62%     3.47%     3.66%     3.39%    3.32%     3.33%   3.30%     2.90%     2.88%     -9.42%
NV      Statewide                             N/A    1.45%   1.45%     1.74%     1.45%     1.49%     1.54%     0.78%    0.68%     0.67%   0.95%     0.62%     0.56%    -61.58%
NH      Statewide                             N/A    2.26%   2.26%     2.61%     2.32%     2.31%     2.51%     2.76%    2.77%     2.81%   3.47%     2.70%     2.67%     18.50%
NM      Statewide                             N/A    3.61%   3.61%     4.09%     3.80%     3.81%     3.80%     3.16%    3.17%     3.22%   3.84%     3.55%     3.49%     -3.38%
        Northern NJ                           N/A    1.16%   1.16%     1.47%     1.32%     1.32%     1.49%     1.61%    1.57%     1.62%   1.76%     1.57%     1.51%     30.64%
 NJ     Rest of New Jersey                    N/A    1.75%   1.75%     2.26%     2.13%     2.27%     2.30%     2.17%    2.21%     2.29%   2.84%     2.66%     2.60%     48.36%
                                  Total NJ   1.44%   1.40%   1.40%     1.79%     1.65%     1.70%     1.82%     1.84%    1.84%     1.90%   2.21%     2.03%     1.97%     40.81%
        Manhattan, NY                         N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%      0.00%
        NYC Suburbs/Long I., NY               N/A    3.38%   3.38%     4.62%     4.47%     4.84%     4.47%     3.93%    3.65%     3.69%   3.06%     2.50%     2.50%    -26.21%
        Poughkpsie/N NYC Suburbs, NY          N/A    5.37%   5.37%     5.34%     5.35%     5.28%     5.31%     4.53%    4.49%     4.52%   4.78%     4.66%     4.65%    -13.35%
 NY
        Queens, NY                            N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%      0.00%
        Rest of New York                      N/A    2.18%   2.18%     2.39%     2.37%     2.39%     2.38%     1.81%    1.91%     1.92%   2.17%     1.83%     1.85%    -14.98%
                                 Total NY    1.84%   2.40%   2.40%     3.01%     2.94%     3.10%     2.94%     2.51%    2.42%     2.44%   2.29%     1.93%     1.93%    -19.47%
 NC     Statewide                             N/A    2.65%   2.65%     3.25%     3.07%     3.06%     3.14%     3.10%    3.11%     3.14%   2.83%     2.84%     2.83%      6.78%
 ND     Statewide                             N/A    1.96%   1.96%     2.40%     2.38%     2.47%     2.46%     1.87%    2.05%     2.06%   0.84%     1.38%     1.36%    -30.79%
 OH     Statewide                             N/A    2.45%   2.45%     3.22%     3.08%     3.04%     3.10%     3.09%    3.08%     3.14%   3.36%     3.48%     3.59%     46.51%
 OK     Statewide                             N/A    2.19%   2.19%     2.56%     2.62%     2.69%     2.71%     2.02%    2.26%     2.24%   2.38%     2.04%     3.04%     39.12%
        Portland, OR                          N/A    0.38%   0.38%     1.45%     0.59%     0.53%     0.60%     0.52%    0.33%     0.32%   1.12%     0.43%     0.40%      5.38%
 OR     Rest of Oregon                        N/A    1.56%   1.56%     1.81%     1.59%     1.69%     1.59%     1.62%    1.65%     1.67%   1.32%     1.29%     1.26%    -19.23%
                                 Total OR    1.19%   1.19%   1.19%     1.70%     1.27%     1.32%     1.28%     1.30%    1.24%     1.24%   1.25%     1.01%     0.98%    -17.65%


                                                                                           -2-
                                                                                                                                                                                 240
                                                       Case3:07-cv-02888-JSW Document89-1          Filed02/18/11 Page79 of 83
                                                                                       EXHIBIT 9
                                                                    Physician Fee Schedule Area Payment Error Rates

                                                       Second
                                                     GPCI Update               Third GPCI Update                 Fourth GPCI Update          Fifth GPCI Update        Increase
                                                                                                                                                                     2000 - 2010
State            Locality Name              1996    1999     2000      2001      2002      2003      2004     2005      2006     2007    2008      2009      2010
        Metropolitan Philadelphia, PA        N/A    1.31%   1.31%     1.50%     1.29%     1.44%     1.31%     0.71%    0.55%     0.64%   1.34%     1.25%     1.26%      -3.88%
 PA     Rest of Pennsylvania                 N/A    2.51%   2.51%     2.79%     2.74%     2.74%     2.78%     2.11%    2.26%     2.29%   3.12%     3.05%     3.05%      21.55%
                                 Total PA   3.90%   2.18%   2.18%     2.44%     2.34%     2.38%     2.37%     1.75%    1.82%     1.86%   2.58%     2.51%     2.51%      15.28%
 RI     Statewide                            N/A    0.29%   0.29%     1.16%     0.62%     1.73%     0.66%     2.49%    0.30%     0.41%   3.21%     0.41%     0.36%      21.28%
 SC     Statewide                            N/A    3.70%   3.70%     4.73%     4.62%     4.21%     4.55%     2.11%    2.20%     2.20%   1.90%     1.78%     1.75%     -52.62%
 SD     Statewide                            N/A    7.75%   7.75%     3.05%     2.98%     2.90%     3.05%     2.92%    2.89%     2.91%   2.59%     2.57%     2.54%     -67.21%
 TN     Statewide                            N/A    2.17%   2.17%     2.83%     2.77%     2.69%     2.84%     2.89%    2.82%     2.87%   2.27%     2.28%     2.25%       3.76%
        Austin, TX                           N/A    0.24%   0.24%     0.68%     0.77%     0.74%     0.97%     1.56%    0.31%     0.29%   0.00%     0.00%     0.00%    -100.00%
        Beaumont, TX                         N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Brazoria, TX                         N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Dallas, TX                           N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
 TX     Fort Worth, TX                       N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Galveston, TX                        N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
        Houston, TX                          N/A    0.24%   0.24%     0.73%     0.60%     0.82%     0.66%     0.32%    0.15%     0.17%   0.00%     0.00%     0.00%    -100.00%
        Rest of Texas                        N/A    2.37%   2.37%     3.05%     3.13%     3.13%     3.26%     3.10%    2.99%     3.06%   3.09%     3.10%     3.08%     29.76%
                                 Total TX   1.14%   1.43%   1.43%     1.92%     1.95%     1.99%     2.05%     2.07%    1.93%     1.98%   1.79%     1.80%     1.78%     24.89%
 UT     Statewide                            N/A    1.31%   1.31%     2.61%     2.34%     2.31%     2.37%     3.09%    3.10%     3.14%   2.92%     2.34%     2.28%      74.06%
 VT     Statewide                            N/A    2.06%   2.06%     2.15%     2.14%     2.14%     2.17%     2.52%    2.47%     2.51%   2.85%     2.86%     2.83%      37.47%
 VA     Statewide                           3.06%   2.69%   2.69%     3.11%     3.06%     3.10%     3.17%     3.87%    3.86%     3.88%   4.15%     4.19%     4.17%      54.94%
 VI     Statewide                            N/A                      1.62%     1.63%     1.55%     1.62%     1.62%    1.61%     1.68%   2.58%     2.09%     2.04%       0.00%
        Rest of Washington                   N/A    2.12%   2.12%     2.70%     2.66%     2.58%     2.71%     3.54%    3.55%     3.61%   2.66%     2.49%     2.48%      16.81%
WA      Seattle (King Cnty), WA              N/A    0.00%   0.00%     0.00%     0.00%     0.00%     0.00%     0.00%    0.00%     0.00%   0.00%     0.00%     0.00%       0.00%
                                Total WA    1.35%   1.49%   1.49%     1.90%     1.87%     1.81%     1.90%     2.62%    2.63%     2.67%   1.88%     1.75%     1.75%      17.49%
WV      Statewide                           1.85%   1.88%   1.88%     2.58%     2.15%     2.22%     2.42%     2.26%    2.13%     2.22%   2.09%     1.90%     1.83%      -3.02%
WI      Statewide                           2.94%   3.02%   3.02%     3.25%     3.11%     3.11%     3.34%     3.11%    3.11%     3.15%   3.16%     2.55%     2.52%     -16.48%
WY      Statewide                            N/A    1.11%   1.11%     1.80%     1.30%     1.85%     1.41%     2.41%    1.89%     1.99%   1.82%     1.67%     1.62%      45.66%
PR      Statewide                            N/A    1.90%   1.90%     2.46%     2.38%     3.01%     2.39%     2.53%    2.46%     2.47%   2.28%     2.33%     2.32%      21.84%
                              TOTAL US      N/A     2.06%   2.06%     2.50%     2.33%     2.39%     2.38%     2.31%    2.25%     2.29%   2.66%     2.43%     2.43%     17.67%




                                                                                          -3-
                                                                                                                                                                                 241
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page80 of 83




               Exhibit 10

                                                                  242
        Case3:07-cv-02888-JSW Document89-1          Filed02/18/11 Page81 of 83


                                     EXHIBIT 10

        Use of the 5% Iterative Method to Reduce Payment Errors

                                                               2009
                                                    2009     Payment
                                                                            Degree of
State               Locality Name                 Payment   Error After
                                                                          Improvement
                                                   Error    Use of 5%
                                                             Method

         Marin/Napa/Solano, CA                     5.55%      0.76%          86%
 CA      Rest of California                        4.36%      2.00%          54%
                                    total state    1.96%      0.88%          55%
 CO      Statewide                                 3.22%      1.18%          63%
 DE      Statewide                                 4.05%      0.23%          94%
         Fort Lauderdale, FL                       4.80%      3.70%          23%
 FL
                                    total state    3.03%      2.67%          12%
 HI      Statewide                                 3.64%      3.64%          0%
         Rest of Illinois                          3.52%      3.23%          8%
 IL
                                    total state    1.48%      1.36%          8%
         Rest of Maryland                          4.99%      1.10%          78%
MD
                                    total state    2.28%      1.10%          52%
         Rest of Massachusetts                     3.40%      1.18%          65%
MA
                                    total state    2.23%      1.07%          52%
MN       Statewide                                 4.30%      0.39%          91%
NH       Statewide                                 2.70%      0.45%          83%
NM       Statewide                                 3.55%      0.40%          89%
         Poughkpsie/N NYC Suburbs, NY              4.66%      0.30%          94%
 NY
                               total state         1.93%      1.67%          13%
 OH      Statewide                                 3.48%      2.56%          26%
         Rest of Pennsylvania                      3.05%      2.05%          33%
 PA
                               total state         2.51%      1.81%          28%
         Rest of Texas                             3.10%      2.24%          28%
 TX
                               total state         1.80%      1.30%          28%
 VA      Statewide                                 4.19%      3.53%          16%

                US Total                           2.43%      2.01%          17%

         Multi-Locality States                     2.19%      1.79%          18%
         Single Locality States                    3.51%      2.98%          15%




                                                                                    243
Case3:07-cv-02888-JSW Document89-1   Filed02/18/11 Page82 of 83




               Exhibit 11

                                                                  244
    Case3:07-cv-02888-JSW Document89-1                Filed02/18/11 Page83 of 83


                                         EXHIBIT 11

      LOCALITY RECONFIGURATION OPTIONS CONSIDERED 2004-2010

       Option Considered              CMS    CMA      GAO    MedPAC   RTI/UI   Acumen
Reapplication of the 5% Iterative
                                             2004
Method -- California Only -- Hold
                                             2005
Harmless by Urban Counties
Santa Cruz & Sonoma Counties
                                      2005
Become Separate Localities
Maintain the Status Quo                      2006
Reapply the 5% Iterative County-
                                      2008   2006     2007    2007              2008
Based Method
Reapply the 5% Iterative County-
Based Method and Use                  2008                                      2008
Smoothing
Apply the Iterative County-Based
                                             2006
Method Using a 3.5% Threshold
Each State Becomes a Single
                                             2006     2007
Locality
Impose a Single National Payment
                                             2006
Locality
Implement MSA-Based Payment
                                      2008   2006                     2008      2008
Localities
Implement MSA-Based Payment
                                      2008                                      2008
Localities and Use Smoothing
Implement MSA-Based Payment
Localities Using the 5% Iterative     2008   2006     2007    2007              2008
Method
Implement MSA-Based Payment
Localities Using the 5% Iterative     2008                                      2008
Method and Use Smoothing
Implement MSA-Based Payment
Localities Using the 3,5% Iterative          2006
Method
Use Variant of County-Based
Iterative Method to Create 4 New      2007
Localities -- California Only
Use Variant of County-Based
Iterative Method to Create 2 New      2007
Localities -- California Only
Create Localities Using County-
Based GAF Ranges -- California        2007
Only
Create Localities Using County-
                                      2008            2007            2008      2008
Based GAF Ranges
Each County Becomes a Single
                                                      2007
Locality
Use CMS Hospital Wage Index in
                                                                      2008
Calculating PE GPCI
Restructure Only Multi-County
                                                                      2008
Localities
Restructure Only Statewide
Localities                                                            2008



                                                                                        245
Case3:07-cv-02888-JSW Document89-2   Filed02/18/11 Page1 of 16




               Exhibit 12

                                                                 246
        Case3:07-cv-02888-JSW Document89-2            Filed02/18/11 Page2 of 16




                                       EXHIBIT 12-A
           The Two Geographies of Medicare in California
                    How Hospitals Are Paid Under Part A


                                                    Hospitals in 27 MSAs paid based
                                                    on local costs.

                                                    Hospitals in Non-Metropolitan
                                                    Area paid at uniform rate.




                                                                Marin hospitals in the same
                                                                MSA as San Francisco and
                                                                San Mateo, and accurately
                                                                paid at the same rate.




     Santa Cruz hospitals
     accurately paid at the
     highest rate in the
     U.S. based on costs
     within the county.




         San Diego hospitals accurately paid at
         rates based on costs within the county.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                                              247
         Case3:07-cv-02888-JSW Document89-2           Filed02/18/11 Page3 of 16




                                          EXHIBIT 12-B
            The Two Geographies of Medicare in California
                     How Suppliers Are Paid Under Part B


                                                      “Locality 99” or “Rest of California” is
                                                      made up of 47 counties where, since
                                                      1997, suppliers have been paid at the
                                                      same rates based on the average
                                                      costs within the 47 counties.


                                                      Marin, Napa, and Solano Counties are
                                                      a single locality, with payments based
                                                      on an average of the disparate costs
                                                      in those three counties.


                                                                 Contra Costa and Alameda
                                                                 Counties are combined into
                                                                 one locality.




   Suppliers in Santa
   Cruz County are
   paid at the lowest
   rate in California
   unlike Santa Cruz
   hospitals that are
   paid at the highest
   rate in the U.S.

   There are 6 single-county localities
   in California where suppliers are
   accurately paid based on costs
   within those counties.




Note: All Locality boundaries unchanged since 1997.

                                                                                                 248
        Case3:07-cv-02888-JSW Document89-2                 Filed02/18/11 Page4 of 16




                                         EXHIBIT 12-C
           The Two Geographies of Medicare in California
          Underpayments and Overpayments Under Part B

                                                           Underpayments of over $500,000,000
                                                           to suppliers in 10 counties.

                                                           Windfall overpayments of more than
                                                           $500,000,000 to suppliers in 40
                                                           counties funded by underpayments
                                                           to suppliers in 10 counties.
                                                           Beneficiaries are overcharged by
                                                           $100,000,000.
                                                           Accurate payments to suppliers in
                                                           only 8 out of 58 counties in California.


                                                                          CALIFORNIA HAS THE
                                                                           HIGHEST TOTAL OF
                                                                          UNDERPAYMENTS IN
                                                                                THE U.S.




    Underpayments to suppliers in San Diego County
    alone total more than $225,000,000. That is the
    second-highest total for a single county in the U.S.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                                      249
Case3:07-cv-02888-JSW Document89-2   Filed02/18/11 Page5 of 16




               Exhibit 13

                                                                 250
       Case3:07-cv-02888-JSW Document89-2           Filed02/18/11 Page6 of 16




                                     EXHIBIT 13-A
            The Two Geographies of Medicare in Florida
                  How Hospitals Are Paid Under Part A




           Hospitals in 20 MSAs paid based
           on local costs.
           Hospitals in Non-Metropolitan
           Area paid at uniform rate.




     Hospitals in Palm Beach, Broward, and Miami-
     Dade in same MSA and paid at uniform rates.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                                251
        Case3:07-cv-02888-JSW Document89-2            Filed02/18/11 Page7 of 16




                                       EXHIBIT 13-B
             The Two Geographies of Medicare in Florida
                   How Suppliers Are Paid Under Part B




            “Locality 99” or “Rest of Florida” is
            made up of 59 counties where
            suppliers are paid at rates based on
            average costs within the 59 counties.

            “Locality 03” or “Fort Lauderdale, FL”
            is made up of 6 counties where
            suppliers are paid at rates based on
            average costs within the 6 counties.

            “Locality 04” or “Miami, FL” is made
            up of 2 counties where suppliers are
            paid at rates based on average costs
            within the 2 counties.




Note: All Locality boundaries unchanged since 1997.

                                                                                  252
        Case3:07-cv-02888-JSW Document89-2                Filed02/18/11 Page8 of 16




                                      EXHIBIT 13-C
             The Two Geographies of Medicare in Florida
          Underpayments and Overpayments Under Part B




                   FLORIDA HAS THE
                SECOND HIGHEST TOTAL
                OF UNDERPAYMENTS IN
                       THE U.S.




             Underpayments of over $270,000,000
             to suppliers in 3 counties.

             Windfall overpayments of more than
             $270,000,000 to suppliers in 5
             counties funded by underpayments
             to suppliers in 3 counties.
             Beneficiaries are overcharged by
             $54,000,000.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                        253
Case3:07-cv-02888-JSW Document89-2   Filed02/18/11 Page9 of 16




               Exhibit 14

                                                                 254
      Case3:07-cv-02888-JSW Document89-2         Filed02/18/11 Page10 of 16




                                   EXHIBIT 14-A
             The Two Geographies of Medicare in Ohio
                How Hospitals Are Paid Under Part A


                 Cuyahoga County (Cleveland)
                 hospitals accurately paid
                 based on local costs.




              Hospitals in 15 MSAs paid based
              on local costs.

              Hospitals in Non-Metropolitan
              Area paid at uniform rate.



Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                              255
        Case3:07-cv-02888-JSW Document89-2                  Filed02/18/11 Page11 of 16




                                       EXHIBIT 14-B
               The Two Geographies of Medicare in Ohio
                   How Suppliers Are Paid Under Part B

      A 1993 vote taken by Cleveland physicians – the only part of Ohio that stood to have rates
      reduced in a conversion to a single-state locality – was 83% against the change. HCFA
      considered this to be “sufficient support from losing areas to support the change.”




                           Ohio has been a single-state locality since 1994.
                           Suppliers in all counties are paid at the same rate.



Note: All Locality boundaries unchanged since 1997.

                                                                                                   256
        Case3:07-cv-02888-JSW Document89-2                Filed02/18/11 Page12 of 16




                                      EXHIBIT 14-C
               The Two Geographies of Medicare in Ohio
             Underpayments and Overpayments in Part B

            OHIO HAS THE THIRD                  Cuyahoga County (Cleveland) has
             HIGHEST TOTAL OF                   the highest single-county total
            UNDERPAYMENTS IN                    underpayment in the U.S. – almost
                 THE U.S.                       $240,000,000.




                                                                          ALL PAYMENT
                                                                         RATES FOR OHIO
                                                                            SUPPLIERS
                                                                          UNDER PART B
                                                                         ARE INACCURATE.

               Underpayments of $240,000,000 to suppliers in Cuyahoga County alone.
               Windfall overpayments of $240,000,000 to suppliers in 87 counties funded by
               underpayments to suppliers in Cuyahoga County. Beneficiaries are
               overcharged by $48,800,000.


Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                             257
Case3:07-cv-02888-JSW Document89-2   Filed02/18/11 Page13 of 16




               Exhibit 15

                                                                  258
                Case3:07-cv-02888-JSW Document89-2         Filed02/18/11 Page14 of 16




                                                 EXHIBIT 15-A
                The Two Geographies of Medicare in North Carolina
                           How Hospitals Are Paid Under Part A




               Hospitals in 13 MSAs paid based
               on local costs.

               Hospitals in Non-Metropolitan
               Area paid at uniform rate.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                                        259
                   Case3:07-cv-02888-JSW Document89-2                 Filed02/18/11 Page15 of 16




                                                 EXHIBIT 15-B
                  The Two Geographies of Medicare in North Carolina
                              How Suppliers Are Paid Under Part B




                                      North Carolina is a single-locality state where
                                      all 100 counties are paid at the same rate
                                      derived from the average costs in all counties.




Note: All Locality boundaries unchanged since 1997.

                                                                                                   260
                   Case3:07-cv-02888-JSW Document89-2                 Filed02/18/11 Page16 of 16




                                                  EXHIBIT 15-C
                   The Two Geographies of Medicare in North Carolina
                        Underpayments and Overpayments in Part B




                            NORTH CAROLINA HAS THE
                            FOURTH HIGHEST TOTAL OF
                           UNDERPAYMENTS IN THE U.S.



              Underpayments of almost $220,000,000 to suppliers in 15 counties.         ALL PAYMENT RATES FOR
              Windfall overpayments of almost $220,000,000 to suppliers in 85              NORTH CAROLINA
              counties funded by underpayments to suppliers in 15 counties.             SUPPLIERS UNDER PART B
              Beneficiaries are overcharged by $44,000,000.                                ARE INACCURATE.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                                             261
Case3:07-cv-02888-JSW Document89-3   Filed02/18/11 Page1 of 12




               Exhibit 16

                                                                 262
       Case3:07-cv-02888-JSW Document89-3        Filed02/18/11 Page2 of 12




                                EXHIBIT 16-A
         The Two Geographies of Medicare in Minnesota
                How Hospitals Are Paid Under Part A




                                                         Hospitals in 7 MSAs paid
                                                         based on local costs.

                                                         Hospitals in Non-
                                                         Metropolitan Area paid at
                                                         uniform rate.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                                     263
        Case3:07-cv-02888-JSW Document89-3                Filed02/18/11 Page3 of 12




                                     EXHIBIT 16-B
          The Two Geographies of Medicare in Minnesota
                   How Suppliers Are Paid Under Part B


                                            Minnesota is a single-locality state where all 87
                                            counties are paid at the same rate derived from
                                            the average costs in all counties.




                                                                    HCFA converted Minnesota
                                                                    to a single-state locality in
                                                                    1992. The prospect of
                                                                    converting Minnesota was
                                                                    not announced in the CY
                                                                    1992 Proposed Rule, and the
                                                                    conversion did not go
                                                                    through the comment and
                                                                    rule-making process.




Note: All Locality boundaries unchanged since 1997.

                                                                                                    264
        Case3:07-cv-02888-JSW Document89-3                Filed02/18/11 Page4 of 12




                                      EXHIBIT 16-C
           The Two Geographies of Medicare in Minnesota
             Underpayments and Overpayments in Part B


                                                               MINNESOTA HAS THE FIFTH
                                                                  HIGHEST TOTAL OF
                                                              UNDERPAYMENTS IN THE U.S.




                                                                               ALL PAYMENT
                                                                                RATES FOR
                                                                                MINNESOTA
                                                                             SUPPLIERS UNDER
                                                                                PART B ARE
                                                                               INACCURATE.

                                                                   Underpayments of over
                                                                   $205,000,000 to suppliers in
                                                                   15 counties.
                                                                   Windfall overpayments of
                                                                   over $205,000,000 to
                                                                   suppliers in 75 counties
                                                                   funded by underpayments to
                                                                   suppliers in 15 counties.
                                                                   Beneficiaries are overcharged
                                                                   by $40,100,000.


                                                                       Home of the Mayo Clinic.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                                   265
Case3:07-cv-02888-JSW Document89-3   Filed02/18/11 Page5 of 12




               Exhibit 17

                                                                 266
       Case3:07-cv-02888-JSW Document89-3        Filed02/18/11 Page6 of 12




                                     EXHIBIT 17-A
            The Two Geographies of Medicare in Texas
                 How Hospitals Are Paid Under Part A




          Hospitals in 25 MSAs paid based
          on local costs.
          Hospitals in Non-Metropolitan
          Area paid at uniform rate.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                             267
        Case3:07-cv-02888-JSW Document89-3              Filed02/18/11 Page7 of 12




                                        EXHIBIT 17-B
              The Two Geographies of Medicare in Texas
                   How Suppliers Are Paid Under Part B

                                                      In 1997, HCFA mistakenly joined Houston
                                                      with Harris, and mistakenly joined Austin
                                                      with Travis. CMS corrected the mistake in
                                                      2009 when Houston and Austin were made
                                                      part of the “Rest of Texas” locality.




                                                                        Since CMS corrected
             “Locality 99” or “Rest of Texas” is                        the mistaken joinder
             made up of 247 counties where                              of 4 counties in 2009,
             suppliers paid at the same rates                           Texas has had 7 single-
             based on the average costs                                 county localities.
             within the 247 counties.




Note: All Locality boundaries unchanged since 1997.

                                                                                                  268
        Case3:07-cv-02888-JSW Document89-3                Filed02/18/11 Page8 of 12




                                      EXHIBIT 17-C
              The Two Geographies of Medicare in Texas
             Underpayments and Overpayments in Part B

                                                          From 2001-2010, Collin County was
                                                          the fastest growing county in Texas
       TEXAS HAS THE                                      and had the highest costs in Texas,
       SIXTH HIGHEST                                      but its suppliers were paid at the
          TOTAL OF                                        lowest rate in the state.
      UNDERPAYMENTS
         IN THE U.S.




         Underpayments of $195,000,000
         to suppliers in 15 counties.
         Windfall overpayments of
                                                                           Accurate payments
         $195,000,000 to suppliers in 234
                                                                           to 5 counties based
         counties funded by
                                                                           on local costs.
         underpayments to suppliers in 10
         counties. Beneficiaries are
         overcharged by $39,000,000.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                                 269
Case3:07-cv-02888-JSW Document89-3   Filed02/18/11 Page9 of 12




               Exhibit 18

                                                                 270
                Case3:07-cv-02888-JSW Document89-3         Filed02/18/11 Page10 of 12




                                             EXHIBIT 18-A
                     The Two Geographies of Medicare in Virginia
                          How Hospitals Are Paid Under Part A




                      Hospitals in 10 MSAs paid based
                      on local costs.
                      Hospitals in Non-Metropolitan
                      Area paid at uniform rate.




Note: All MSA boundaries current as of November 2008.
Source: http://www.census.gov/geo/www/maps/msa_maps2008/us_wall_1108.html

                                                                                        271
                   Case3:07-cv-02888-JSW Document89-3                      Filed02/18/11 Page11 of 12




                                                    EXHIBIT 18-B
                         The Two Geographies of Medicare in Virginia
                               How Suppliers Are Paid Under Part B

    HCFA converted Virginia into a “single-state”
    locality in 1997. Actually, two Virginia
    counties and three independent cities are
    part of the Washington D.C. locality.




                           The “Virginia” locality is made up of 95
                           counties and 35 independent cities where
                           suppliers are paid at the same rates based on
                           the average costs within those cities and
                           counties.




Note: All Locality boundaries unchanged since 1997.

                                                                                                        272
                   Case3:07-cv-02888-JSW Document89-3                 Filed02/18/11 Page12 of 12




                                                  EXHIBIT 18-C
                        The Two Geographies of Medicare in Virginia
                        Underpayments and Overpayments in Part B

                                                                                                 Suppliers in some
                                                                                                 D.C. suburbs
                                                                                                 accurately paid.
              VIRGINIA HAS THE SEVENTH
                  HIGHEST TOTAL OF
             UNDERPAYMENTS IN THE U.S.




             Underpayments of $185,000,000 to suppliers in 17 counties and 6
             independent cities.                                                        Counties and cities in
                                                                                        suburban Washington D.C.
             Windfall overpayments of $185,000,000 to suppliers in 76 counties          have some of the highest
             and 27 independent cities funded by underpayments to suppliers in          percentage underpayments
             17 counties and 6 independent cities. Beneficiaries are                    in the U.S.
             overcharged by $37,000,000.




Note: All figures are for the period from January 1, 2001, through December 31, 2010.

                                                                                                             273