Healthalliance Hospitals, Inc. v. Sebelius , 130 F. Supp. 3d 277 ( 2015 )


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  •                             UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF COLUMBIA
    HEALTH ALLIANCE HOSPITALS, INC.,
    Plaintiff
    v.
    Civil Action No. 13-1775 (CKK)
    SYLVIA M. BURWELL, Secretary of the                       Civil Action No. 14-159 (CKK)
    U.S. Department of Health and Human
    Services,
    Defendant
    MEMORANDUM OPINION
    (September 16, 2015)
    Plaintiff Health Alliance Hospitals, Inc. (“Plaintiff” or “the Hospital”) filed two lawsuits
    pursuant to the Administrative Procedures Act (“APA”) challenging the Secretary of the
    Department of Health and Human Services’ reduction of the Medicare payments to the Hospital
    under the Disproportionate Share Hospital (“DSH”) program in cost years 2003 (Case No. 14-cv-
    159), and 2004 and 2006 (Case No. 13-cv-1775). The amount of payments available to urban
    hospitals under the DSH program depends, in part, on the number of beds the hospital has
    available for inpatient care. Plaintiff alleges that the Secretary’s deduction of beds licensed for
    inpatient care, but used for observation services, from Plaintiff’s bed count in each of the three
    cost years was arbitrary, capricious, and otherwise contrary to law. Presently before the Court are
    Plaintiff’s Motion for Summary Judgment and Defendant’s Cross-Motion for Summary
    Judgment. Upon consideration of the pleadings, 1 the relevant legal authorities, and the record as
    1
    The Court considered the following pleadings in 13-cv-1775 and 14-cv-159 in
    evaluating the parties’ motions: Plaintiff’s Motion for Summary Judgment (“Pl.’s Mot.”), ECF
    No. 19; Defendant’s Opposition to Plaintiff’s Motion for Summary Judgment and Defendant’s
    Cross-Motion for Summary Judgment (“Def.’s Cross-Mot.”), ECF No. 21; Plaintiff’s Opposition
    to Defendant’s Cross-Motion for Summary Judgment and Reply in Support of Plaintiff’s Motion
    for Summary Judgment (“Pl.’s Reply), ECF No. 22; and Defendant’s Reply to Plaintiff’s
    Opposition to Defendant’s Cross-Motion for Summary Judgment (“Def.’s Reply”), ECF No. 25.
    In both cases, Plaintiff filed a Motion for Leave to File Sur-Reply, ECF No. 26, which the Court
    a whole, the Court finds that the Secretary’s deduction of observation bed days from the
    available bed days listed to determine the amount of DSH payments for which Plaintiff was
    eligible for cost year 2003 was arbitrary and capricious. However, the Court finds that the same
    deduction from Plaintiff’s 2004 and 2006 cost years based on the Secretary’s amended regulation
    explicitly requiring the deduction of these bed days was neither arbitrary nor capricious.
    Accordingly, as to cost year 2003, Plaintiff’s Motion for Summary Judgment is GRANTED and
    Defendant’s Cross-Motion for Summary Judgment is DENIED (Case No. 14-cv-159). However,
    as to cost years 2004 and 2006, Plaintiff’s Motion for Summary Judgment is DENIED and
    Defendant’s Cross-Motion for Summary Judgment is GRANTED (Case No. 13-cv-1775).
    I.      BACKGROUND
    A. Statutory and Regulatory Background
    Medicare “provides federally funded health insurance for the elderly and disabled,”
    Methodist Hosp. of Sacramento v. Shalala, 
    38 F.3d 1225
    , 1226-27 (D.C. Cir. 1994), through a
    “complex statutory and regulatory regime,” Good Samaritan Hosp. v. Shalala, 
    508 U.S. 402
    , 404
    (1993). The program is administered by the Secretary of the Department of Health and Human
    Services through the Centers for Medicare and Medicaid Services (“CMS”). Cape Cod Hosp. v.
    Sebelius, 
    630 F.3d 203
    , 205 (D.C. Cir. 2011). “Part A of the Medicare program provides
    insurance coverage for inpatient hospital care, home health care, and hospice services.” Amgen,
    shall grant since Defendant raised new arguments in her Reply to which Plaintiff should be
    granted the opportunity to respond. The Court shall also grant Defendant’s Motion for Leave to
    File Response to Sur-Reply. See ECF No. 29. Accordingly, in preparing this Memorandum
    Opinion, the Court also considered Plaintiff’s Sur-Reply in Opposition to Defendant’s Cross-
    Motion for Summary Judgment (“Pl.’s Sur-Reply”), ECF No. 26-1, and Defendant’s Response to
    Plaintiff’s Sur-Reply (“Def.’s Resp.”), ECF No. 29-1. Finally, the Court considered the 2003 and
    2004-2006 Administrative Records. See 2003 Administrative Record, Case No. 14-cv-159, ECF
    No. 15; 2004-2006 Administrative Record, Case No. 13-cv-1775, ECF No. 17.
    2
    Inc. v. Smith, 
    357 F.3d 103
    , 105 (D.C. Cir. 2004) (citing 42 U.S.C. § 1395c). “Part B of Medicare
    is a voluntary program that provides supplemental coverage for other types of care, including
    outpatient hospital care.” Id. (citing 42 U.S.C. §§ 1395j, 1395k). Observation services are
    classified as outpatient services and are generally reimbursed under Part B. 
    59 Fed. Reg. 27,708
    ,
    27,930 (May 27, 1994). Observation services involve monitoring, assessment, and treatment of a
    patient to determine whether the patient should be admitted as an inpatient or discharged from
    the hospital. Medicare Benefits Policy Manual, Ch. 6, § 20.6 (2003 AR at 396-97). For the cost
    years at issue in this case, observation services were only compensable under Part A—rather than
    Part B—for patients subsequently admitted to the hospital in cases where “the outpatient
    observation care that [the patient] receives is related to the admission such that there is an exact
    match between the principal diagnosis for both the hospital outpatient claim and the inpatient
    stay.” 
    74 Fed. Reg. 43,754
    , 43,905 (August 27, 2009). Otherwise, observational services were
    only compensable under Part B. See 
    id.
    In 1983, with the aim of “stem[ming] the program’s escalating costs and perceived
    inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology.”
    Cnty. of Los Angeles v. Shalala, 
    192 F.3d 1005
    , 1008 (D.C. Cir. 1999) (citing Social Security
    Amendments of 1983, Pub. L. No. 98-21, § 601, 
    97 Stat. 65
    , 149). In the overhaul of Part A,
    Congress established “a prospective payment system under which hospitals would receive a
    fixed payment for inpatient services.” Cape Cod Hosp., 
    630 F.3d at 205
    . Since then, the
    Prospective Payment System (“PPS”), as the overhauled regime is known, has reimbursed
    qualifying hospitals for inpatient hospital operating costs at prospectively fixed rates rather than
    reasonable operating costs or the hospital’s actual costs. Cnty. of Los Angeles, 
    192 F.3d at 1008
    ;
    42 U.S.C. § 1395ww(d). Congress recognized that the standard payment under the PPS would
    3
    not account for the additional costs of treating a disproportionate number of low-income patients
    that some hospitals incur. Cnty. of Los Angeles, 
    192 F.3d at 141
    . Accordingly, Congress
    authorized an additional payment to “disproportionate share hospitals” (“DSH”) located in urban
    areas that “serv[e] a significantly disproportionate number of low-income patients.” 42 U.S.C.
    § 1395ww(d)(5)(F)(i)(I). Congress linked a hospital’s eligibility for a DSH adjustment to three
    factors: (1) the hospital’s location, (2) the number of its beds, and (3) its low-income patient
    percentage. Id. at § 1395ww(d)(5)(F)(v). For the cost years at issue in this action, hospitals in
    urban areas were only eligible for a DSH adjustment if they had at least 15% low-income
    patients. 2 Id. at § 1395ww(d)(5)(F)(v)(I). The DSH payment received by an urban hospital is
    capped at a set percentage of the standard prospective payment rate if the hospital has fewer than
    100 beds. 3 Id. at §§ 1395ww(d)(5)(F)(iv), (xiii), (xiv). If the hospital has 100 beds or more, there
    is no cap on the DSH payment. Id. The amount of DSH payment is calculated based on the
    “disproportionate patient percentage” (“DPP”). Id. at § 1395ww(d)(5)(F)(vii), (xiii). The
    disproportionate patient percentage “is determined by adding together two fractions.” Allina
    Health Servs. v. Sebelius, 
    746 F.3d 1102
    , 1105 (D.C. Cir. 2014); see 42 U.S.C.
    § 1395ww(d)(5)(F)(vi). “The first fraction, referred to as the Medicare fraction, measures the
    percentage of all Medicare patients (regardless of means) who are low income, i.e., entitled to
    2
    For discharges prior to April 1, 2001, urban hospitals with fewer than 100 beds were
    only eligible for DSH payments if they had at least 40% low-income patients. Id. at
    § 1395ww(d)(5)(F)(v)(III).
    3
    The level of the cap to the disproportionate adjustment percentage differed among the
    cost years at issue in the cases before the Court. See 2004-2006 AR at 17; 42 U.S.C.
    § 1395ww(d)(5)(F)(xiii)-(xiv) (increasing the disproportionate adjustment percentage cap for
    discharges after on or April 1, 2004, from 5.25 percent to 12 percent, subject to exceptions not
    relevant here). However, the levels of those caps are immaterial to the legal issues before the
    Court.
    4
    supplemental security income benefits.” Allina Health Servs., 746 F.3d at 1105. “The second
    fraction accounts for the number of Medicaid patients—who, by definition, are low income—not
    entitled to Medicare.” Id. These calculations are performed using several categories of “patient
    days.” The Medicare fraction is the number of “patient days” for patients who were “entitled to
    benefits under Part A and were entitled to supplemental security income benefits” divided by the
    number of “patient days for such fiscal year which were made up of patients who (for such days)
    were entitled to benefits under Part A.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). The Medicaid
    fraction is the number of “the number of patient days attributable to patients who (for such days)
    were eligible for Medicaid, but ‘not entitled to benefits under [Medicare] Part A’” divided by
    “the total number of patient days, regardless of whether the patients were enrolled in a federal
    medical benefits program.” Allina Health Servs., 746 F.3d at 1105 (quoting 42 U.S.C.
    § 1395ww(d)(5)(F)(vi)(II)).
    The statute authorizing additional payments for DSH did not define “beds,” so the
    Secretary had the responsibility of filling this gap. See 42 U.S.C. § 1395ww(d)(5)(F). In 1986,
    the Secretary adopted the definition of beds from the regulation governing the bed count for the
    PPS adjustment for teaching hospitals that incur indirect medical education costs (the “IME
    adjustment”). See 
    51 Fed. Reg. 16,772
    , 16,788 (May 6, 1986) (codified at 
    42 C.F.R. § 412.106
    (a)(3) (1986)) (DSH regulation) (“The number of beds in a hospital is determined as
    specified in § 412.118(b)). 4 Specifically, the DSH regulation promulgated in 1986 provided that
    the number of beds in a hospital is determined by counting the number of
    available bed days during the cost reporting period, not including beds assigned to
    newborns, custodial care, and excluded distinct part hospital units, and dividing
    that number by the number of days in the cost reporting period.
    4
    The bed counting regulation for indirect medical education (“IME”) expenses, 
    42 C.F.R. § 412.118
    (b), was later re-designated as 
    42 C.F.R. § 412.105
    (b).
    5
    
    Id.
     While the parties disagree as to the proper interpretation of “bed days,” the parties agree that
    the language of the above definition was not changed, in relevant part, until the Secretary
    promulgated a revised rule that became effective on October 1, 2003. See Pl.’s Mot., at 5 n.1;
    Def.’s Mot. at 9-15.
    In 2003, the Secretary amended the definition of available bed days to expressly exclude
    the time that hospitals use inpatient beds for observation patients. 
    68 Fed. Reg. 45,346
    , 45,418-
    19 (Aug. 1, 2003). The final regulation provided:
    For purposes of this section, the number of beds in a hospital is determined by
    counting the number of available bed days during the cost reporting period and
    dividing that number by the number of days in the cost reporting period. This
    count of available bed days excludes bed days associated with … [b]eds
    otherwise countable under this section used for outpatient observation services,
    skilled nursing swing-bed services, or ancillary labor/delivery services.
    
    Id. at 45,470
     (emphasis added) (codified at 42 C.F.R. 412.105(b)). The Secretary characterized
    the amendment to the bed count regulation as a clarification of longstanding policy. See 
    id. at 45,416
    .
    The Secretary amended the bed count regulation again in 2004. See 
    69 Fed. Reg. 48,916
    ,
    49,096-98 (Aug. 11, 2004). The amended rule, effective October 1, 2004, included observation
    patient time in the available bed days count when the observation patient was subsequently
    admitted to inpatient care. 
    Id.
     Other observation patient time remained excluded from the count
    of available bed days. See 
    id.
     Specifically, the final regulation provided:
    For purposes of this section, the number of beds in a hospital is determined by
    counting the number of available bed days during the cost reporting period and
    dividing that number by the number of days in the cost reporting period. This count
    of available bed days excludes bed days associated with … [b]eds otherwise
    countable under this section used for outpatient observation services, skilled
    nursing swing-bed services, or ancillary labor/delivery services. This exclusion
    would not apply if a patient treated in an observation bed is ultimately admitted for
    acute inpatient care, in which case the beds and days would be included in those
    counts.
    6
    
    Id. at 49,245
     (codified at 
    42 C.F.R. § 412.105
    (b)) (emphasis added).
    B. Factual Background
    Plaintiff, a non-profit disproportionate share hospital in Leominster, Massachusetts,
    challenges the deduction of days that inpatient beds were used to treat observation patients from
    the Hospital’s total count of inpatient beds for purposes of the DSH adjustment in cost years
    2003, 2004, and 2006. 2003 AR at 13; 2004-2006 AR at 20-21. Importantly, cost year 2003
    ended on September 30, 2003, the day before the Secretary’s 2003 revised rule came into effect.
    For each of the cost years at issue, it is undisputed that Plaintiff operated in an urban area and
    had 103 licensed inpatient beds. 2003 AR at 13-14, 40. In Plaintiff’s cost reports, Plaintiff
    calculated and listed the available bed days for purposes of the DSH adjustment by multiplying
    the 103 licensed inpatient beds by the number of days in the year. 
    Id.
     During the cost years at
    issue, patients requiring observation care at the Hospital were placed in licensed inpatient care
    beds to receive observation services. 
    Id. at 40
    . The observation bed days provided in these beds
    were listed separately in Plaintiff’s cost report for cost reporting purposes, but were not deducted
    from the available bed days on Plaintiff’s cost reports. 
    Id.
    Plaintiff submitted its 2003 cost report to the CMS’s fiscal intermediary, which subtracted
    the number of observation bed days from the available bed days listed to determine the level of
    DSH payments for which Plaintiff was eligible. 
    Id. at 13-14
    . The intermediary’s calculation
    reduced Plaintiff’s qualifying available bed days below 100, thereby reducing Plaintiff’s DSH
    payment. 
    Id.
     The intermediary also subtracted observation bed days from the available bed days
    for cost years 2004 and 2006 and reduced Plaintiff’s DSH payment for these years as well. 2004-
    2006 AR at 19. On March 8, 2006, Plaintiff appealed the intermediary’s 2003 decision to the
    agency’s Provider Reimbursement Review Board (the “Board” or “PRRB”), as provided by 42
    7
    U.S.C. § 1395oo. 2003 AR at 28, 30. Plaintiff appealed its provider reimbursement for cost year
    2004 on March 19, 2007, 2004-2006 AR at 1,546, and the reimbursement for cost year 2006 on
    September 16, 2008, id. at 772. The Board conducted a consolidated hearing on the appeals from
    all three cost years. 2003 AR at 55. For cost year 2003, the Board held that the intermediary
    erred by excluding the observation bed days from the available bed days because “the exclusion
    of observation beds is not supported by the clear language of the regulation and [the Provider
    Reimbursement Manual].” Id. at 35. As to cost years 2004 and 2006, the Board determined that it
    lacked the power to decide the validity of the 2003 and 2004 rulemakings and, thus, issued an
    order granting expedited judicial review of the 2004 and 2006 appeals. 2004-2006 AR at 15-21.
    The Administrator of CMS, reversed the Board’s decision as to the 2003 cost year,
    finding that “the CMS’ guidance on bed counting demonstrate[s] that the long-standing policy
    had been to exclude bed days from the count of available bed days when the beds are used to
    provide outpatient observation services.” 2003 AR at 7; see id. at 16. The Administrator added
    that, in any event, “there are no facts contained within the record that support the Provider’s
    claim that such beds could have been made available for inpatient use” and, accordingly, found
    that excluding them from the count of available bed days was appropriate. Id. at 15. Finally, the
    Administrator affirmed the Board’s grant of expedited judicial review for cost years 2004 and
    2006. 2004-2006 AR at 2-3.
    C. Procedural Background
    On November 11, 2013, Plaintiff filed suit in this Court challenging the intermediary’s
    decisions for cost years 2004 and 2006. See Health Alliance Hospitals, Inc. v. Burwell, No. 13-
    cv-1775. Subsequently, on February 3, 2014, after receiving the Secretary’s decision reversing
    the Board as to cost year 2003, Plaintiff filed suit in this Court challenging the Secretary’s
    8
    exclusion of observation bed days from inpatient beds for cost year 2003. See Health Alliance
    Hospitals, Inc. v. Burwell, No. 14-cv-0159. Plaintiff filed its Motion for Summary Judgment in
    each case on October 1, 2014. Plaintiff contends that the Secretary’s DSH adjustment
    determinations for all three cost years are arbitrary, capricious, and otherwise contrary to law.
    Specifically, Plaintiff argues that the Secretary’s determination for the 2003 cost year violates the
    plain language of the bed count regulation that was in place in 2003 and the Secretary’s “long-
    established interpretation of that regulation,” thereby effecting a substantive change from the
    prior rule. Pl.’s Mot., at 1. As to the 2004 and 2006 cost years, Plaintiff argues that the
    Secretary’s policy to exclude observation days pursuant to the 2003 and 2004 amendments to the
    bed count regulation “defies all logic and reason” and is “inconsistent with the controlling
    statute.” Id. at 2. Plaintiff further argues that the 2003 and 2004 rules are invalid because the
    Secretary never “acknowledged or explained any good reasons for the agency’s departure from
    the bed count regulation and the agency’s original policy under that regulation in effect before
    the 2003 rule change.” Id.
    The Secretary filed its Cross-Motion for Summary Judgment in each case on December
    1, 2014. The Secretary argues that her policy of determining DSH bed-size by subtracting
    observation days “has been firmly in place since 1986.” Def.’s Mot., at 1. As for the 2003 and
    2004 rules, the Secretary contends that the rules are entirely lawful because the Secretary
    “engaged in notice-and-comment, considered alternatives, and fully explained her reasoning”
    and because the Secretary’s policy is “reasonable.” Id. at 1-2.
    Plaintiff subsequently filed its Opposition to Defendant’s Cross-Motion for Summary
    Judgment and Reply to Defendant’s Opposition to Plaintiff’s Motion in each case and Defendant
    submitted its Reply to Plaintiff’s Opposition in each case. Accordingly, Plaintiff’s Motions for
    9
    Summary Judgment and Defendant’s Cross-Motions for Summary Judgment are fully briefed
    and ripe for the Court’s determination. As the parties’ summary judgment briefing in both cases
    is identical and covers the issues raised in both cases, the Court will address both sets of
    summary judgment motions in one memorandum opinion.
    II.     LEGAL STANDARD
    “As a general matter, an agency’s interpretation of the statute which that agency
    administers is entitled to Chevron deference.” Fox v. Clinton, 
    684 F.3d 67
    , 75 (D.C. Cir. 2012)
    (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 
    467 U.S. 837
     (1984)). In the first step
    of the Chevron analysis, the Court reviews the statute de novo to determine whether Congress
    has spoken to the precise question at issue or whether the statute is ambiguous. Chevron, 
    467 U.S. at
    842–43. If the statute is ambiguous, the Court then must defer to the agency’s
    interpretation of the statute unless it is “manifestly contrary to the statute.” 
    Id. at 844
    . Thus, the
    inquiry for the Court under the second step of Chevron is whether the agency’s interpretation of
    Congress’ instructions is reasonable. The Court’s inquiry under the second step of Chevron
    “overlaps with [the Court’s] inquiry under the arbitrary and capricious standard.” Am. Fed’n of
    Gov't Employees, AFL–CIO, Local 446 v. Nicholson, 
    475 F.3d 341
    , 345–46 (D.C. Cir. 2007).
    “Whether a statute is unreasonably interpreted is close analytically to the issue whether an
    agency’s actions under a statute are unreasonable.” Gen. Instrument Corp. v. Fed. Commc’ns
    Comm’n, 
    213 F.3d 724
    , 732 (D.C. Cir. 2000).
    In reviewing agency decisions, the court “must give substantial deference to an agency’s
    interpretation of its own regulations.” Thomas Jefferson Univ., 512 U.S. at 512. The court’s “task
    is not to decide which among several competing interpretations best serves the regulatory
    purpose.” Id. Rather, the agency’s interpretation is controlling “unless it is plainly erroneous or
    10
    inconsistent with the regulation.” Id. (citations omitted). This deference is particularly
    appropriate in contexts that involve a complex and highly technical regulatory program, such as
    Medicare, which requires significant expertise and entails the exercise of judgment grounded in
    policy concerns. Id.; Methodist Hosp. of Sacramento v. Shalala, 
    38 F.3d 1225
    , 1229 (D.C. Cir.
    1994) (“[I]n framing the scope of review, the court takes special note of the tremendous
    complexity of the Medicare statute. That complexity adds to the deference which is due to the
    Secretary’s decision.”).
    Judicial review of Medicare provider reimbursement disputes is governed by the
    Administrative Procedure Act (“APA”). 42 U.S.C. § 1395oo(f)(1). Under Rule 56(a) of the
    Federal Rules of Civil Procedure, “[t]he court shall grant summary judgment if the movant
    shows that there is no genuine dispute as to any material fact and the movant is entitled to
    judgment as a matter of law.” However, “when a party seeks review of agency action under the
    APA [before a district court], the district judge sits as an appellate tribunal. The ‘entire case’ on
    review is a question of law.” Am. Bioscience, Inc. v. Thompson, 
    269 F.3d 1077
    , 1083 (D.C. Cir.
    2001). Accordingly, “the standard set forth in Rule 56[ ] does not apply because of the limited
    role of a court in reviewing the administrative record … . Summary judgment is [ ] the
    mechanism for deciding whether as a matter of law the agency action is supported by the
    administrative record and is otherwise consistent with the APA standard of review.” Southeast
    Conference v. Vilsack, 
    684 F. Supp. 2d 135
    , 142 (D.D.C. 2010).
    The APA “sets forth the full extent of judicial authority to review executive agency action
    for procedural correctness.” FCC v. Fox Television Stations, Inc., 
    556 U.S. 502
    , 513 (2009). It
    requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are
    “(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,”
    11
    “(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;” or
    “(D) without observance of procedure required by law … .” 
    5 U.S.C. § 706
    (2)(A). The arbitrary
    and capricious standard “is a ‘narrow’ standard of review as courts defer to the agency’s
    expertise.” Ctr. for Food Safety v. Salazar, 
    898 F. Supp. 2d 130
    , 138 (D.D.C. 2012) (quoting
    Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 
    463 U.S. 29
    , 43
    (1983)). An agency is required to “examine the relevant data and articulate a satisfactory
    explanation for its action including a rational connection between the facts found and the choice
    made.” Motor Vehicle Mfrs. Ass’n, 
    463 U.S. at 43
     (internal quotation omitted). The reviewing
    court “is not to substitute its judgment for that of the agency.” 
    Id.
     Nevertheless, a decision that is
    not fully explained may be upheld “if the agency’s path may reasonably be discerned.” Bowman
    Transp., Inc. v. Arkansas–Best Freight Sys., Inc., 
    419 U.S. 281
    , 286 (1974).
    III.    DISCUSSION
    A. 2003 Cost Year
    Congress has not explicitly addressed the question of whether observation beds should be
    included in the count of beds for purposes of determining a hospital’s DSH adjustment. In the
    statute, Congress specified only that, for urban hospitals, “the disproportionate share adjustment
    percentage” is calculated according to different formulas for hospitals that have “less than 100
    beds” and hospitals that have “100 or more beds.” 42 U.S.C. § 1395ww(d)(5)(F)(iv). The 100-
    bed threshold is not defined further in the statute. Accordingly, the Court must proceed to the
    second step of the Chevron analysis. The parties do not dispute that the regulations governing the
    2003 cost year—
    42 C.F.R. §§ 412.106
    (a)(1)(i), 412.105(b)—that the Secretary promulgated for
    determining the number of beds at a hospital for purposes of the DSH adjustment constitute a
    permissible construction of the statute. See Chevron, 
    467 U.S. at 844
    . Under 42 C.F.R.
    12
    § 412.106(a)(1)(i), the number of beds for purposes of the DSH adjustment is to be calculated in
    accordance with § 412.105(b), which also governs additional payments to hospitals for the IME
    programs. Pursuant to section 412.105(b), the number of beds in a hospital is determined as
    follows for cost year 2003:
    For purposes of this section, the number of beds in a hospital is determined by
    counting the number of available bed days during the cost reporting period, not
    including beds or bassinets in the healthy newborn nursery, custodial care beds, or
    beds in excluded distinct part hospital units, and dividing that number by the
    number of days in the cost reporting period.
    
    42 C.F.R. § 412.105
    (b) (1995). What the parties do dispute is whether the Secretary’s
    interpretation and application of its regulation for determining Plaintiff’s bed count in cost year
    2003 was arbitrary, capricious, or otherwise contrary to law.
    The Secretary argues that its long-standing policy has been to “exclude both (1) bed days
    on which inpatient beds were used for non-inpatient services, and (2) all bed days of non-
    inpatient beds.” Def.’s Mot., at 12. The Secretary outlines the history of PPS cost reporting
    practices and the IME adjustment, which, the Secretary contends, were focused on inpatient costs
    and excluding bed days when the beds were used for observation services, and argues that the
    DSH bed count regulation incorporated this approach. 
    Id. at 3, 8-10
    . The Secretary further argues
    that the 1985 switch to measuring “available bed days” over a cost reporting period was clearly
    intended to capture fluctuations in day-to-day usage and that the time in which an outpatient is in
    an inpatient bed must be excluded from the count of bed days because the bed is not available for
    inpatient use. 
    Id. at 22
    .
    Plaintiff argues that the Secretary’s interpretation of the regulation violates the plain
    language of the bed count regulation. Pl.’s Mot., at 15. Specifically, Plaintiff argues that under
    the traditional canon of construction ejudsem generis (“of the same kind”), the list of beds to be
    excluded from the calculation of “bed days” restricts the class of excluded beds “to beds that are
    13
    ‘similar in nature’ to the types of excluded beds that are identified in the regulation.” 
    Id.
     Plaintiff
    contends that “[b]eds that are licensed and maintained to provide inpatient services that are paid
    under [the PPS]—the type of beds at issue here—‘are not of the same class or type’ as the beds
    that the regulation’s text excludes”—notably, beds that, by definition, cannot come within the
    PPS. 
    Id. at 16
    . Plaintiff also argues that the Secretary’s attempt to equate beds with actual patient
    usage is contrary to the language of the regulation and the agency’s long-standing interpretation
    of the regulation, which both focus on beds or bed days, not patients or patient days, and
    emphasizes the location of the bed in a PPS unit as opposed to its actual usage. 
    Id.
     In addition,
    Plaintiff argues that the Secretary’s interpretation of beds conflicts with the Secretary’s intent
    when the regulation was first adopted as reflected in the 1988 Provider Reimbursement Manual
    (“1988 PRM”). 5 The 1988 PRM describes qualifying beds as follows:
    A bed is defined for this purpose as an adult or pediatric bed (exclusive of beds
    assigned to newborns which are not in intensive care areas, custodial beds, and
    beds in excluded units) maintained for lodging inpatients, including beds in
    intensive care units, coronary care units, neonatal intensive care units, and other
    special care inpatient hospital units. Beds in the following locations are excluded
    from the definition: hospital-based skilled nursing facilities or in any inpatient
    area(s) of the facility not certified as an acute care hospital, labor rooms, PPS
    excluded units such as psychiatric or rehabilitation units, postanesthesia or
    postoperative recovery rooms, outpatient areas, emergency rooms, ancillary
    departments, nurses’ and other staff residences, and other such areas as are
    regularly maintained and utilized for only a portion of the stay of patients or for
    purposes other than inpatient lodging.
    To be considered an available bed, a bed must be permanently maintained for
    lodging inpatients. It must be available for use and housed in patient rooms or
    wards (i.e., not in corridors or temporary beds). Thus, beds in a completely or
    partially closed wing of the facility are considered available only if the hospital
    put the beds into use when they are needed. The term “available beds” as used for
    5
    Section 2405.3(G) of the PRM was issued in 1988 to “incorporate[] into a single section
    existing policy setting forth the method for counting beds which had previously been expressed
    in several sections.” Sacred Heart Med. Ctr. v. Blue Cross & Blue Shield Ass’n/Blue Cross of
    Washington & Alaska, Adm’r Dec. (Dec. 21, 1988), reprinted in Medicare & Medicaid Guide
    (CCH) ¶¶ 80, 154. The parties do not dispute that terms defined for purposes of the IME
    adjustment also govern the DSH adjustment.
    14
    the purpose of counting beds is not intended to capture the day-to-day fluctuations
    in patient rooms and wards being used. Rather, the count is intended to capture
    changes in the size of a facility as beds are added to or taken out of service.
    In the absence of evidence to the contrary, beds available at any time during the
    cost reporting period are presumed to be available during the entire cost reporting
    period. The hospital bears the burden of proof to exclude beds from the count.
    PRM § 2405.3(G); 2003 AR at 284. Plaintiff argues that the plain language of the PRM does not
    deduct “the times when a hospital uses available inpatient beds for patient observation or
    temporarily uses its beds for other purposes, like office space.” Id. at 18. Plaintiff further notes
    that the bed count “is not intended to capture the day-to-day fluctuations” in the use of beds in
    patient rooms and wards. Id. at 19. Plaintiff agrees with the Secretary that the DSH bed count is
    meant to capture inpatient capacity, but argues that the language of the regulation and the
    Secretary’s contemporaneous statements make clear that inpatient capacity and, in particular, the
    costs associated with maintaining inpatient capacity, are not diminished by temporary use of an
    inpatient bed for non-inpatient services.
    The Court agrees that the Secretary’s interpretation of its own regulation in cost year
    2003 is inconsistent with the plain meaning of the regulation and the Secretary’s definition of
    “available bed.” For the following reasons, the Court finds that the Administrator’s decision as it
    relates to the Hospital’s 2003 cost year was arbitrary and capricious.
    i.      The Regulation’s Plain Language and the 1988 PRM
    The plain language of the regulation states that the number of beds is to be calculated “by
    counting the number of available bed days during the cost reporting period, not including beds or
    bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded distinct part
    hospital units, and dividing that number by the number of days in the cost reporting period. 
    42 C.F.R. § 412.105
    (b) (emphasis added). As the regulation specifically lists certain types of beds
    that are to be excluded from contributing to “available bed days” and observation beds are not
    15
    among them, the plain meaning of the regulation is that observation beds are not excluded from
    the bed count. Moreover, as Plaintiff notes, the beds at issue here—licensed inpatient beds
    maintained to provide inpatient services reimbursed under PPS and used occasionally for
    observation services—are not the same kind of beds as those specifically excluded in the
    regulation. Unlike the inpatient beds at issue here, the excluded beds are located in areas and
    units of the hospital that, by definition, cannot come within PPS. Therefore, even if the Court
    were to accept the Secretary’s argument that the list of excluded beds in the regulation is not
    exhaustive, see Def.’s Mot., at 28, pursuant to the canon of statutory construction ejudsem
    generis, the plain language of the regulation still would not exclude the type of beds at issue here
    because the excluded beds are not of the same kind. As the Sixth Circuit found in Clark Regional
    Medical Center v. U.S. Department of Health and Human Services when confronted with facts
    substantially similar to those before this Court, “[h]ad the Department intended to exclude all
    non-PPS reimbursable beds and services, it could easily have written the regulation to do so.”
    Clark Reg’l Med. Center v. U.S. Dep’t. of Health and Human Services, 
    314 F.3d 241
    , 247-48 (6th
    Cir. 2002) (emphasis added).
    The Court finds that the Secretary’s 1988 PRM confirms this plain reading of the
    regulation. 6 The PRM states that “[t]o be considered an available bed, a bed must be permanently
    maintained for lodging inpatients.” PRM § 2405.3(G). The parties do not dispute that the 103
    beds at issue here were “licensed inpatient beds located in the area of the Hospital in which it
    provides acute inpatient hospital services that are payable under [PPS].” Pl.’s Mot., at 9. The
    1988 PRM also lists beds that are excluded from the bed count. The Secretary points to the
    6
    The PRM is “the prototypical example of an interpretive rule issued by an agency to
    advise the public of the agency’s construction of the statutes and rules which it administers.”
    Shalala v. Guernsey Memorial Hosp., 
    514 U.S. 87
    , 99 (1995).
    16
    PRM’s list of “additional” excluded beds as evidence that the regulation’s exclusions were not
    intended to be exhaustive, see Def.’s Mot., at 28, but the Court finds that this list actually
    supports the conclusion that observation days in inpatient certified beds are not excluded from
    the bed count. The PRM explains that excluded beds are those located in “facilities,” “areas,”
    “rooms,” “units,” or “departments” of a hospital that are “regularly maintained and utilized” for
    only a portion of a patient’s stay or do not provide acute inpatient hospital care that is payable
    under the prospective payment system. 7 PRM § 2405.3(G). Again, the beds at issue here are not
    explicitly excluded by the language of the PRM nor are they of the same kind as those excluded
    in the PRM. Importantly, the PRM’s list of excluded beds makes clear that the location of a bed
    and not individual day-to-day bed use governs whether a bed is included or excluded from the
    bed count. Accordingly, the Court finds that the Secretary’s interpretation of the DSH bed count
    conflicts with the plain meaning of the bed count regulation.
    ii.       Secretary’s Contemporaneous Statements
    The Secretary’s statements made contemporaneously to the promulgation of the IME and
    DSH regulations defining beds and published in the Federal Register 8 further confirm the
    7
    “Beds in the following locations are excluded from the definition: hospital-based skilled
    nursing facilities or in any inpatient area(s) of the facility not certified as an acute care hospital,
    labor rooms, PPS excluded units such as psychiatric or rehabilitation units, post anaesthesia or
    postoperative recovery rooms, outpatient areas, emergency rooms, ancillary departments, nurses'
    and other staff residences, and other such areas as are regularly maintained and utilized for only a
    portion of the stay of patients or for purposes other than inpatient lodging.” PRM § 2405.3(G)
    (emphasis added).
    8
    Throughout their briefing, the parties cite to and rely on several excerpts from the
    Federal Register but fail to indicate in their briefing or in their Joint Appendix of the
    Administrative Record where or whether these excerpts are in the Administrative Record.
    Nevertheless, because these excerpts are published in the Federal Register, this Court can take
    judicial notice of them. See Koretoff v. Vilsack, 
    841 F. Supp. 2d 1
    , 17 n.21 (D.D.C. 2012) aff’d,
    
    707 F.3d 394
     (D.C. Cir. 2013) (citing 
    44 U.S.C. § 1507
     (“The contents of the Federal Register
    shall be judicially noticed”)).
    17
    regulation’s focus on bed location as opposed to individual bed use. In the 1986 preamble to the
    DSH regulation defining beds, the Secretary explained:
    We believe that the method for determining bed size for the disproportionate share
    adjustment should be consistent with the methods used for other Medicare
    purposes. Therefore, we are using the same method of determination that is
    currently used in calculating the indirect medical education adjustment, which is
    based on the standard bed size definition used by the Medicare program in
    connection with the prospective payment system (that is, the bed count excludes
    beds used for newborns, custodial care, and excluded distinct part units). This is
    also essentially consistent with the method of bed size determination that was
    used in the past to classify hospitals into the cost limit categories before the
    implementation of the prospective payment system.
    
    51 Fed. Reg. 31,454
    , 31,458 (Sept. 3, 1986) (emphasis added). The Secretary cites to this
    language as evidence that the DSH definition of beds was meant to exclude observation bed days
    in inpatient beds because, the Secretary alleges, the pre-PPS definition of bed with which the
    DSH definition is “essentially consistent” was driven by whether a bed was used for inpatient or
    outpatient purposes. See Def.’s Mot., at 10 (citing 51 Fed. Reg. at 31,458). The Court disagrees
    that this language can be read to support the exclusion of observation bed days and instead finds
    that it supports the regulation’s focus on location and regular use over individual day-to-day bed
    usage. First, in the preamble, the Secretary again uses exhaustive language in explaining that the
    “standard bed size definition” used by the Medicare program and the basis for the IME
    adjustment excludes three types of enumerated beds—none of which are the beds at issue here or
    even of the same kind as the beds excluded here. These exclusions, again, do not turn on the day-
    to-day use of a bed. Moreover, the preamble states that the DSH bed definition was intended to
    be “essentially consistent” with the pre-PPS method of bed size determination and that method
    focused on the general use of particular units, locations, and areas. See PRM § 2510.5 (Trans.
    No. 129, July 1975).
    18
    Similarly, the Secretary reiterated in a 1994 rulemaking related to neonatal intensive care
    units and the IME adjustment that, in the 1985 IME adjustment rule, the agency
    did not change the definition of available beds. Our current position regarding the
    treatment of these beds is unchanged from the time when the cost limits
    established under section 1861(v)(1)(A) of the Act were in effect and is consistent
    with the way we treat beds in other hospital areas. That is, if the bed days and
    costs are allowable in the calculation of Medicare’s share of inpatient costs, the
    beds within that unit are included as well. Our policy to include the costs, days,
    and beds of neonatal intensive care units has been in place since prior to the
    prospective payment system and has been the subject of considerable attention.
    
    59 Fed. Reg. 45,330
    , 45,373-74 (Sept. 1, 1994) (emphasis added). Like the 1986 preamble
    language, this language again ties the “available beds” definition to the pre-PPS method of bed
    size determination which the Court already determined was not driven, as the Secretary argued,
    by inpatient or outpatient usage, but by the general use of particular locations, areas, or units.
    The Secretary points to this language as evidence that the Secretary’s regulation intended “bed
    size” to be a measure of inpatient-PPS bed use. 9 Def.’s Mot., at 32. But the Court finds instead
    that the language, like the Secretary’s language from 1986, establishes that the association
    between costs and beds is made on a unit-wide basis and that the definition of “available beds”
    9
    As part of this argument, the Secretary also points to the following response to a
    comment published in the Federal Register in 1988:
    [W]e believe that, based on a reading of the language in section 1886(d)(5)(F) of
    the Act, which implements the disproportionate share provision, we are in fact
    required to consider only those inpatient days to which the prospective payment
    system applies in determining a prospective payment hospital’s eligibility for a
    disproportionate share adjustment. … Moreover, this reading of section
    1886(d)(5)(F) of the Act produces the most consistent application of the
    disproportionate share adjustment, since only data from prospective payment
    hospitals or from hospital units subject to the prospective payment system are
    used in determining both the qualifications for and the amount of additional
    payment to hospitals that are eligible for a disproportionate share adjustment.
    
    53 Fed. Reg. 38,476
    , 38,480 (Sept. 30, 1988) (emphasis added). This response, as the Secretary
    acknowledges, see Def.’s Mot., at 12-13, discusses only “inpatient days,” and does not reference
    bed size or bed days or in any way discuss the relationship between patient days and bed days.
    19
    does not turn on the day-to-day usage of the beds within the included units. The Secretary’s
    response to a comment regarding a 1995 rule also relating to newborns confirms this reading:
    Our bed counting policy essentially is determined by our policies for including or
    excluding costs and days from the calculation of Medicare costs on the cost
    report. These policies have consistently followed the general principle that we do
    not attribute costs or days to individual beds, but rather to units or departments.
    
    60 Fed. Reg. 45,778
    , 45,811 (Sept. 1, 1995) (emphasis added). Based on this policy, the
    Secretary issued the rule that “individual beds that are occasionally used to treat less healthy
    infants [normally included in inpatient costs], but that are located within a regular, healthy baby
    nursery [excluded from the IME/DSH bed count], continue to be treated as part of the unit in
    which they are located, that is, as part of the healthy baby nursery.” 
    Id.
    In her briefing, the Secretary relies heavily on the preamble to the 1985 rulemaking
    relating to the IME regulation defining beds where the Secretary clarified for a commenter that
    “available beds” are generally defined as adult or pediatric beds (exclusive of
    newborn bassinets, beds in excluded units, and custodial beds that are clearly
    identifiable) maintained for lodging inpatients. Beds used for purposes other than
    inpatient lodging, beds certified as long-term, and temporary beds are not
    counted.
    
    50 Fed. Reg. 35,646
    , 35,683 (Sept. 3, 1985) (emphasis added). The Secretary emphasizes the
    language, “[b]eds used for purposes other than inpatient lodging,” as evidence that the DSH bed
    regulation was intended to exclude beds maintained for lodging inpatient beds when they are
    used for observation services. Def.’s Mot., at 8. However, the Court agrees with Plaintiff that
    “[i]n context, it makes no sense to read this exclusion as the one outlier that requires counting
    occasional fluctuations in use, rather than as a reference to beds that are ordinarily and regularly
    used for non-inpatient purposes.” Pl.’s Reply at 22. The other exclusions within the Secretary’s
    clarification refer to more permanent non-inpatient uses, notably beds certified as long-term beds
    and temporary beds. The Court also finds it notable that when the commenter requested a more
    20
    precise definition of the term “available bed days” the Secretary responded by defining
    “available beds,” see 50 Fed. Reg. at 35,683 (emphasis added), undercutting the Secretary’s
    present attempt to distinguish “beds” from “bed days” and to argue that “available bed days”
    measures specific bed usage as opposed to general, regular usage.
    The Secretary further argues that the inclusion of the term “available” before “bed”
    necessarily means that the DSH bed regulation was meant to measure daily use in addition to
    location because an inpatient bed occupied by an observation patient would not be available for
    other patients to be admitted. Def.’s Mot., at 35; Def.’s Reply, at 6. However, the Secretary’s own
    explanation of “available” in the 1985 preamble, the 1988 PRM, and two CMS Administrator
    Decisions confirm that the usage of an otherwise countable inpatient bed for a purpose other than
    inpatient services does not render the bed unavailable for purposes of the DSH bed count. As the
    Secretary herself explains, the original IME methodology was to count only available beds on
    the first day of the cost reporting period. Def.’s Mot., at 7-8. The 1985 rulemaking changed the
    methodology to require a hospital to count available bed days during the current cost reporting
    period divided by the number of days in the cost reporting period. See 
    42 C.F.R. §§ 412.106
    (a)(1)(i). The Secretary explained the reason for this change in the 1985 preamble:
    [s]ince a hospital’s bed size may increase or decrease, sometimes substantially,
    over the course of a cost reporting period, we proposed to base the number of
    beds on the number of available bed days (excluding beds assigned to newborns,
    custodial beds, and beds in excluded units) during the current cost reporting
    period divided by the number of days in the cost reporting period.
    50 Fed. Reg. at 35,679 (emphasis added). In her briefing, the Secretary points to this explanation
    as evidence that a hospital’s bed size could fluctuate day-to-day and, thus, “available bed days”
    was intended to measure daily usage. Def.’s Mot., at 8-9. However, the 1988 PRM explicitly
    clarifies that “[t]he term ‘available bed’ as used for the purpose of counting beds is not intended
    21
    to capture the day-to-day fluctuations in patient rooms and wards being used. 10 Rather, the count
    is intended to capture changes in the size of a facility as beds are added to or taken out of
    service.” PRM § 2405.3(G). The Court finds the language and import of the PRM and the
    preamble clear—“day-to-day, or perhaps even hour-to-hour, change in the occupancy of these
    beds does not reflect the overall size of the Plaintiff hospital[], which is what the bed count is
    intended to capture.” Clark, 
    314 F.3d at 248-49
    .
    The fact that day-to-day fluctuations in usage do not derail the counting of a bed is
    further confirmed by the 1988 PRM’s instruction that “beds available at any time during the cost
    reporting period are presumed to be available during the entire cost-reporting period.” PRM
    § 2405.3(G). The Secretary correctly notes that this presumption applies only “[i]n the absence
    of evidence to the contrary.” Def.’s Reply, at 23 (quoting PRM § 2405.3(G)). But non-permanent
    use of an inpatient bed for observation services is not the kind of evidence contemplated by the
    regulation or the PRM. That unavailability contemplates more permanent or long-term structural
    changes is reinforced by the fact that beds “in a completely or partially closed wing of the
    facility” are still considered available if the hospital can “put the beds into use when they are
    needed.” PRM § 2405.3(G); see also 50 Fed. Reg. at 35,683 (“If some of the hospital’s wings or
    rooms on a floor are temporarily unoccupied, the beds in these areas are counted if they can
    10
    The Secretary argues that the plainest meaning of “not intended to capture day to day
    fluctuations” in the 1988 PRM is that it applies to cost reporting periods beginning before
    October 1, 1984. Def.’s Mot., at 29. The Court has closely read the 1988 PRM and fails to find
    any textual support for the Secretary’s argument. Moreover, as Plaintiff astutely notes, the
    Secretary’s argument is illogical “because during those years, the regulation did not even capture
    changes in size of facility during a year.” Pl.’s Reply, at 26. The Court also finds the PRM’s non-
    fluctuation explanation consistent with the language in the 1985 preamble which states that a
    hospital’s bed size “may increase or decrease … over the course of a cost reporting period.” 50
    Fed. Reg. at 35,679. As fluctuations in daily occupancy of an inpatient bed inevitably occur, this
    language strongly suggests that the Secretary was not focused on day-to-day fluctuations, but
    more permanent, structural changes to a facility.
    22
    immediately be opened and occupied.”). Likewise, the CMS Administrator in Pacific Hospital of
    Long Beach v. Aetna Life Insurance Company found the fact that beds were assigned to a unit
    that was in use as office space or to a unit that was under construction was not evidence that
    these beds were not “available” under the bed count regulation because “beds temporarily
    withheld from service are still counted as available beds for the purpose of determining the
    Provider’s IME adjustment if they can be immediately occupied.” Pac. Hosp. of Long Beach v.
    Aetna Life Ins. Co., Adm’r Dec. (Feb. 2, 1993), reprinted in Medicare & Medicaid Guide (CCH)
    ¶ 41,355 (2003 AR at 477, 481). Similarly, in Santa Clara Valley Medical Center v. Blue Cross
    and Blue Shield Association, the CMS Administrator found that evidence that inpatient beds
    were used as physician sleeping beds was not evidence that the beds were unavailable because
    the beds were otherwise “close to being set up” even though it would move the doctors out.
    Santa Clara Valley Med. Ctr. v. BCBSA, Adm’r Dec. (Mar. 28, 1997), reprinted in Medicare &
    Medicaid Guide (CCH) ¶ 45,230 (2003 AR at 489). In short, these examples illustrate that a bed
    is properly counted as an “available” bed under the bed count regulation if the bed can be put to
    use “when needed” even if it takes some time. Observation services typically last less than 24
    hours and only in “rare and exceptional cases do reasonable and necessary outpatient services
    span more than 48 hours.” Medicare Benefits Policy Manual, Chapter 6, § 20.6 (2003 AR at
    396). The beds at issue here in which observation services were provided were otherwise
    certified, staffed, and ready for inpatient use. That such an inpatient bed in an acute care area of
    the hospital is occasionally used for observation services does not mean that it is “taken out of
    service” while it is providing those services as contemplated by the regulation or the PRM. As
    the Sixth Circuit found in Clark “[t]here is nothing in the language of the PRM that indicates that
    23
    a bed is ‘unavailable’ simply because it is not exclusively designated for acute inpatient care.”
    Clark, 
    314 F.3d at 248
    .
    The Secretary makes a final argument that Plaintiff did not have inpatient capacity of 103
    beds because “on average” Plaintiff carried six outpatients in its 103 inpatient beds. Def.’s Reply,
    at 23. The Secretary is in effect arguing that due to the frequent usage of Plaintiff’s inpatient beds
    for observation services throughout the cost report year, six beds should effectively be
    considered as permanently taken “out of service.” Def.’s Reply, at 3. Based on the language of
    the regulation and the Secretary’s contemporaneous statements outlined above, the Court finds
    the Secretary’s argument misguided. All 103 of the Hospital’s beds at issue were located in the
    acute care area of the hospital and certified, staffed, and ready for acute care inpatients. See PRM
    § 2405.3(G) (“To be considered an available bed, a bed must be permanently maintained for
    lodging in patients. It must be available for use and housed in patient rooms or wards (i.e. not in
    corridors or temporary beds).”). There is no evidence to the contrary. That, “on average,” six of
    the beds had outpatients in them receiving short term observation services, which generally last
    less than 24 hours, does not mean the beds were not “available” for use under the governing
    regulation and interpretive rules as discussed above. Accordingly, the Court finds it was arbitrary
    and capricious for the CMS Administrator to conclude that “there are no facts contained within
    the record that support the Provider’s claim that such beds could have been made available for
    inpatient use.” AR at 15 (CMS Administrator Decision).
    In sum, the Court finds that the Secretary’s interpretation and application of the DSH bed
    regulation to Plaintiff’s 2003 cost report conflicts with the plain language of the regulation, the
    Secretary’s contemporaneous statements, and the Secretary’s statements in the years following
    the promulgation of the DSH bed regulation.
    24
    iii.      BCBSA Bulletin and Cost Report Worksheets
    The Secretary also relies on several documents outside of the Code of Federal
    Regulations and the Federal Register as proof of the Secretary’s purported “longstanding” policy
    of excluding bed days on which inpatient beds are used for non-inpatient services. Specifically,
    the Secretary cites to a 1988 Blue Cross Blue Shield Association (“BCBSA”) Administrative
    Bulletin No. 1841, see Def.’s Mot., at 11-12, and several cost report worksheets and instructions
    from 1996 and 1999, see Def.’s Reply, at 11-15. However, neither the PRRB nor the
    Administrator relied on or even referenced these documents in rendering their decisions. See
    NRDC v. EPA, 
    755 F.3d 1010
    , 1021 (D.C. Cir. 2014) (“[A]n administrative order cannot be
    upheld unless the grounds upon which the agency acted in exercising its powers were those upon
    which its action can be sustained.”) (quoting SEC v. Chenery Corp., 
    318 U.S. 80
    , 95 (1943)).
    Moreover, these documents were not part of the Administrative Record that was before the
    agency when rendering its decision and that is now before this Court. The Administrative
    Procedure Act directs the Court to “review the whole record or those parts of it cited by a party.”
    
    5 U.S.C. § 706
    . This requires the Court to review “the full administrative record that was before
    the Secretary at the time he made his decision.” Citizens to Preserve Overton Park v. Volpe, 
    401 U.S. 402
    , 420 (1971), abrogated on other grounds by Califano v. Sanders, 
    430 U.S. 99
     (1977).
    Courts in this Circuit have “interpreted the ‘whole record’ to include all documents and materials
    that the agency directly or indirectly considered … [and nothing] more nor less.” Pac. Shores
    Subdivision, Cal. Water Dist. v. U.S. Army Corps of Eng’rs, 
    448 F. Supp. 2d 1
    , 4 (D.D.C. 2006)
    (alteration in original, emphasis added, and citation omitted). Accordingly, the Court will not
    consider the BCBSA Bulletin nor the cost report worksheets and instructions in evaluating the
    Administrator’s decision regarding the Hospital’s 2003 cost report.
    25
    iv.      1997 Memorandum
    Finally, the Secretary relies on a February 27, 1997, Memorandum from the Acting
    Deputy Director of the Bureau of Policy Development to all CMS regional offices which
    explicitly addresses the exclusion of observation services provided in inpatient beds:
    If a hospital provides observation services in beds that are generally used to
    provide hospital inpatient services, the equivalent days that those beds are used
    for observation services should be excluded from the count of available bed days
    for purposes of the IME and DSH adjustments. If a patient in an observation bed
    is later admitted, then the equivalent days before the admission are also excluded.
    Thus, all observation bed days are excluded from the available bed count.
    Def.’s Mot., at 14 (citing 2003 AR at 402-04 (emphasis added)). The Secretary argues that this
    memorandum “merely restated what had been the Secretary’s policy for over a decade.” 
    Id.
    Plaintiff launches many arguments against the Secretary’s reliance on the 1997 Memorandum,
    but the Court need not address all of them because the Court agrees that the 1997 Memorandum
    represents an interpretive rule to which little to no deference is warranted given “the facts and
    circumstances surrounding [its] creation.” Oceana, Inc. v. Locke, 
    831 F. Supp. 2d 95
    , 116-17
    (D.D.C. 2011). Interpretive rules receive a level of deference “warranted by the facts and
    circumstances surrounding their creation,” 
    id.,
     including “the degree of the agency’s care, its
    consistency, formality, and relative expertness,” and “the persuasiveness of the agency’s
    position,” U.S. v. Mead Corp., 
    533 U.S. 218
    , 228 (2001). Here, the Memorandum was written by
    a subordinate agency official and did not cite to any authority or provide any analysis or
    reasoning for its observation bed days policy. Plaintiff contends that this subordinate agency
    official did not have “delegated rulemaking authority,” see Pl.’s Opp’n, at 22, and Defendant
    does not contest this characterization in her reply briefs. In light of the fact that the policy
    articulated in the Memorandum represented a departure from the plain language of the IME/DSH
    regulation and the Secretary’s contemporaneous statements, as discussed above, the lack of
    26
    supported reasoning for the policy reflects a lower degree of “agency[] care” and “formality.”
    More importantly, the Memorandum was not published or otherwise “issued in a manner
    designed to place the public (e.g., providers) on notice of this change in policy because the
    distribution list for the memorandum was only internal.” 2003 AR at 35 (PRRB Decision); see
    also 
    68 Fed. Reg. 27,154
    , 27,205 (May 19, 2003) (explaining the “memorandum was sent to all
    CMS Regional Offices (for distribution to fiscal intermediaries)”).
    Moreover, the fact that the Memorandum was not published in the Federal Register even
    though the Medicare Act requires publication in the Federal Register of “all manual instructions,
    interpretive rules, statements of policy, and guidelines of general applicability … ” “not less
    frequently than every 3 months” further persuades the Court to give little, if any, weight to the
    Memorandum. 42 U.S.C. § 1395hh(c)(1). The Secretary contends that “even if the Secretary did
    not comply with this requirement” 11 Plaintiff bears the burden of proving that it was prejudiced
    by the failure. Def.’s Mot., at 31 (citing Cent. Iowa Hosp. Corp. v. Sebelius, 
    762 F. Supp. 2d 49
    ,
    56 (D.D.C. 2011) (rejecting § 1395hh(c) noncompliance argument where the plaintiff failed to
    show prejudice), aff’d, 
    466 Fed. Appx. 6
     (D.C. Cir. 2012); St. Luke’s Hosp. v. Sebelius, 
    662 F. Supp. 2d 99
    , 104 (D.D.C. 2009) (same), aff’d, 
    611 F.3d 900
     (D.C. Cir. 2010)). The cases cited by
    Defendant focus on whether the plaintiff had notice of the agency’s policy even though the
    policy was not published in the Federal Register as required. Defendant speculates that Plaintiff
    cannot show such prejudice (1) because there is “no evidence that fiscal intermediaries did not
    11
    The Secretary appears unwilling to concede that it did not publish the 1997
    Memorandum in the Federal Register as required. See Def.’s Mot., at 31 (“even if the Secretary
    did not comply with this requirement … ”); Def.’s Reply, at 11 (“the Secretary’s purported
    failure to list the February 27, 1997 Memorandum in the Federal Register … ”). However, the
    Secretary does not present any argument or point to any evidence to suggest that the Department
    was in compliance with the publishing requirement or did not have to comply with the
    publishing requirement.
    27
    make the memorandum available,” and (2) because the Secretary’s position regarding
    observation bed days was publicly reflected in the 1996 cost reporting worksheet and
    instructions and in the Department’s litigating position in the Sixth Circuit’s 2002 Clark decision.
    Plaintiff responds that “[t]he Hospital is prejudiced by the application of this unlisted, nonpublic
    standard” and points to the fact that the PRRB itself found that the Memorandum “was not issued
    in a manner designed to place the public (e.g. providers) on notice.” Pl.’s Opp’n, at 32 (citing
    2003 AR at 35).
    The Court finds Defendant’s speculation about Plaintiff’s notice of the policy reflected in
    the 1997 Memorandum unavailing. The fact that there may not be any “evidence that the fiscal
    intermediaries did not make [the Memorandum] available” does not establish that Plaintiff was in
    fact on notice, especially when the PRRB has found that the Memorandum was issued in a
    manner that was not designed to place the public on notice. Furthermore, the Court finds it
    unreasonable to impute to Plaintiff notice of the Secretary’s policy based on the Sixth Circuit’s
    2002 explication of the Secretary’s litigation position in Clark—a case involving different parties
    in which the Sixth Circuit ultimately found that the Secretary’s exclusion of observation bed days
    from inpatient beds could not be squared with the DSH regulation or the Department’s published
    interpretive guidance. See Clark, 
    314 F.3d at 247
    . As for the 1996 cost report worksheets and
    instructions, as the Court discussed supra, these documents were not part of the Administrative
    Record and thus will not be considered by the Court. Accordingly, the Court finds that the
    Secretary’s failure to publish the 1997 Memorandum in the Federal Register renders the 1997
    Memorandum an invalid interpretive rule entitled to little to no deference.
    Finally, the Secretary contends that even if the Court were to find the 1997 Memorandum
    to be an invalid interpretative rule, the Memorandum can be considered as evidence of the
    28
    consistency of the Secretary’s policy regarding the exclusion of observation bed days. Def.’s
    Mot., at 32. The Court agrees with Plaintiff that “[a] procedurally invalid document that was
    issued by a subordinate agency official, cites nothing, was never published, and contradicts the
    agency’s primary interpretive guidance on the subject presents no probative evidence of the
    ‘consistency’ of the Secretary’s policy.” Pl.’s Opp’n, at 33. Accordingly, the Court will not give
    any weight to the 1997 Memorandum.
    v.      Conclusion
    The Court finds that the Secretary’s 2003 decision to deduct observation bed days from
    the Hospital’s 103 licensed inpatient beds located in the Hospital’s acute care area cannot be
    reconciled with the plain language of the Secretary’s regulation, the 1988 PRM, and the
    Secretary’s contemporaneous statements. As the regulation stood and was interpreted at the time
    Plaintiff submitted its 2003 cost report, inpatient beds used for observation services but
    otherwise available for inpatient use should have been considered available beds for purposes of
    the DSH adjustment. Accordingly, the Court concludes that the Secretary’s 2003 reimbursement
    determination was arbitrary, capricious, and otherwise contrary to the law. The Court vacates the
    final decision of the Secretary regarding Plaintiff’s 2003 cost year and reinstates the decision of
    the PRRB finding in favor of the Hospital. The Court remands to the agency for further
    proceedings consistent with this Memorandum Opinion.
    B. Cost Years 2004 and 2006
    In deducting the number of observation bed days from the available bed days listed to
    determine the amount of DSH payments for which Plaintiff was eligible for cost years 2004 and
    2006, the Secretary applied the DSH bed count regulation as amended in 2003 and again in 2004.
    The amendments to the regulation promulgated in 2003 indicate clearly the exclusion of bed
    29
    days associated with “beds otherwise countable under this section used for outpatient observation
    services.” 68 Fed. Reg. at 45,470. The following year, in 2004, the agency promulgated a further
    change to the regulation indicating that the exclusion of observation services bed days “would
    not apply if a patient treated in an observation bed is ultimately admitted for acute inpatient care,
    in which case the beds and days would be included in those counts.” 69 Fed. Reg. at 49,245. As
    amended in 2004, the bed regulation states:
    For purposes of this section, the number of beds in a hospital is determined by
    counting the number of available bed days during the cost reporting period and
    dividing that number by the number of days in the cost reporting period. This
    count of available bed days excludes bed days associated with …. [b]eds
    otherwise countable under this section used for outpatient observation services,
    skilled nursing swing-bed services, or ancillary labor/delivery services. This
    exclusion would not apply if a patient treated in an observation bed is ultimately
    admitted for acute inpatient care, in which case the beds and days would be
    included in those counts.
    Id. (emphasis added). Plaintiff contends that it was arbitrary and capricious for the Secretary to
    apply the regulation as amended in 2003 and 2004 to deduct bed days from the Hospital’s 2004
    and 2006 cost reports because the regulation represents a policy change and “the Secretary
    neither acknowledged nor explained any coherent, good reason for the policy change.” Pl.’s
    Mot., at 2. Plaintiff further argues that the new policy “defies all logic and reason, unreasonably
    altering a hospital’s bed size for a cost year with temporary and fluctuating uses of the beds and
    treating similar situations differently with no coherent explanation for the agency’s disparate
    treatment.” Id. In addition, Plaintiff contends that the Secretary’s new policy “generally equating
    bed size with the count of patient days, is inconsistent with the controlling statute because it
    equates two plainly different statutory terms, ‘beds’ and ‘patient days,’ that serve different
    statutory purposes.” Id.
    The Secretary responds that the Department’s actions in promulgating the amended
    regulation and applying it to the Hospital were neither arbitrary nor capricious because “the
    30
    Secretary engaged in notice-and-comment, considered alternatives, and fully explained her
    reasoning” and because “the Secretary’s policy is reasonable.” Def.’s Mot., at 1-2. The Court has
    thoroughly reviewed the Secretary’s explanations for the 2003 and 2004 rulemakings published
    in the Federal Register, see 68 Fed. Reg. at 27,154, 27,202-06, 45,415-19; 
    69 Fed. Reg. 45,415
    -
    20, and finds that the Secretary’s promulgation of the new regulations and application of the
    regulations to the Hospital’s 2004 and 2006 cost years were neither arbitrary nor capricious nor
    otherwise contrary to the law.
    i.      Reasoning for Departure from Prior Policy
    Plaintiff contends that the Secretary’s rule as amended in 2003, and again in 2004,
    “marks an unacknowledged and unexplained departure from the agency’s prior regulation, policy
    and practice.” Pl.’s Mot., at 28. Plaintiff points to several cases holding that when an agency
    changes course on a policy “it must ‘provide reasoned explanation for its action,’ which ‘would
    ordinarily demand that it display awareness that it is changing position.’ ” Nat’l Ass’n of Home
    Builders v. EPA, 
    682 F.3d 1032
    , 1038 (D.C. Cir. 2012) (quoting Fox, 
    556 U.S. at 515
    ); see also
    Dillmon v. Nat’l Transp. Safety Board, 
    588 F.3d 1058
    , 1089-90 (D.C. Cir. 2009) (“Reasoned
    decision making … necessarily requires the agency to acknowledge and provide an adequate
    explanation for its departure from established precedent.”); Northpoint Tech., Ltd. v. FCC, 
    412 F.3d 145
    , 156 (D.C. Cir. 2005) (“A statutory interpretation … that results from an unexplained
    departure from prior [agency] policy and practice is not a reasonable one.”). Plaintiff argues that
    the Secretary’s insistence throughout the rulemaking that the amended regulation was a
    “clarification” of “longstanding policy,” 68 Fed. Reg. at 45,419, by itself renders the rulemaking
    arbitrary and capricious because it fails to meet this “core requirement” that the Secretary
    acknowledge it is changing its position. Pl.’s Mot., at 29.
    31
    The Court disagrees that the 2003 and 2004 rulemakings were arbitrary and capricious
    simply because the Secretary did not concede that the amended rule was a “change” from prior
    policy. Although the Secretary states that the new rule is a “clarification” of its pre-existing
    policy, the Secretary directly acknowledges that “some hospitals have contested our policy
    excluding … observation beds and patient days under existing §§ 412.105(b) and
    412.106(a)(1)(ii)” and “some courts have applied our current rules in a manner that is
    inconsistent with our current policy and that would result in inconsistent treatment of beds,
    patient days, and costs.” 68 Fed. Reg. at 27,202. The Secretary specifically engages with the
    holding in Clark Regional and explains that, while the Sixth Circuit found the “listing of beds to
    be excluded from the count restricts the class of excluded beds only to those specifically listed,”
    the “list of the types of beds excluded from the count under existing § 412.105(b) was never
    intended to be an exhaustive list.” Id. at 27,205. The Secretary concludes that the regulation is
    being amended “[i]n order to avoid any potential future misunderstandings about our policies
    regarding the exclusion of observation … bed days.” Id. at 27,206.
    The Court finds that the Secretary’s acknowledgement of prior alternative policy
    interpretations meets the “core requirement” of rulemaking, especially in light of the fact that the
    Secretary goes on to fully explain her reasons for the policy that she sought to clarify through the
    rulemaking. When an agency changes its policy “[i]t suffices that the new policy is permissible
    under the statute, that there are good reasons for it, and that the agency believes it to be better
    … .” Fox, 
    556 U.S. at 515
    . Notably, the Secretary explains that “[t]he policies to exclude
    observation bed days and swing-bed days stem from the fact that these bed days are not payable
    under the IPPS” and “are based on the principle of counting beds in the same manner as the
    patient days and costs are treated.” 68 Fed. Reg. at 27,204-05. The Secretary further reasoned
    32
    that “[w]hen the application of IPPS payment policy is dependent on a determination of a
    hospital’s number of beds, it seems reasonable to base that determination on the portion of the
    hospital that generates the costs that relate to those IPPS payments.” 68 Fed. Reg. at 45,419.
    Although the new regulations may not represent the only way to measure bed size, the Court
    finds that the Secretary has provided a reasoned explanation for its action and that the amended
    bed size measurement does not contradict the statute.
    ii.      Purported Internal Inconsistencies
    Plaintiff further argues that the Secretary’s 2003 and 2004 rulemakings were arbitrary and
    capricious because “the Secretary has utterly failed to articulate any coherent explanation for the
    internal inconsistencies in the agency’s position.” Pl.’s Mot., at 30. Specifically, Plaintiff claims
    that the Secretary failed to explain why observation bed days are treated differently than other
    uses of hospital facilities that Plaintiff argues are similarly situated. It is true that, “[a]s a general
    matter, an agency cannot treat similarly situated entities differently unless it ‘support[s] th[e]
    disparate treatment with a reasoned explanation and substantial evidence in the record.’”
    Lilliputian Sys., Inc. v. Pipeline & Hazardous Materials Safety Admin., 
    741 F.3d 1309
    , 1313
    (D.C. Cir. 2014) (quoting Burlington N. & Santa Fe Ry. Co. v. Surface Transp. Bd., 
    403 F.3d 771
    ,
    777 (D.C. Cir. 2005)) (alterations in the original). However, the Court concludes that the
    purported inconsistencies do not pertain to activities that are, in fact, similarly situated and that,
    insofar as Plaintiff identifies disparate treatment among similarly situated activities, the agency
    has adequately explained the reasons for the disparate treatment. The Court addresses, in turn,
    the supposed inconsistencies that Plaintiff identifies.
    First, Plaintiff looks to several categories of activities that are not excluded from
    “available bed beds,” even though those activities are not included in patient days. The Hospital
    33
    contrasts these activities with observational services, which are excluded from bed days pursuant
    to the 2003 rulemaking (and are also excluded pursuant to the 2004 rulemaking, unless the
    patients are subsequently admitted as inpatients). Plaintiff points to the treatment of empty beds,
    spaces used for sleeping doctors and office storage, and experimental procedures as evidence of
    inconsistencies.
    The Court begins with the treatment of empty beds because, notwithstanding Plaintiff’s
    arguments to the contrary, they are self-evidently different than beds occupied for observational
    services. In contrast to beds that are used for observational services, beds that are empty are not
    excluded from “available bed days.” This treatment is wholly reasonable because an unused
    bed—or empty bed—is by its very nature available for use. By contrast, as the Secretary
    emphasizes, a bed used for observational services—which do not qualify for payment under
    Medicare Part A, with limited exceptions—is by its nature not available for use. See Def.’s Mot.,
    at 37. Accordingly, the agency is not applying disparate treatment to similar activities because
    empty beds and beds used for observational services are simply different.
    Next, the Court turns to beds used temporarily for ancillary, non-patient uses, such as
    doctors sleeping or office space, as well as space under renovation. The Court need not delve
    into the question of whether the decisions on which Plaintiff relies are applicable only in the
    context of completely or partially closed wings, see PRM § 2405.3(G); 2003 AR at 284, because
    these uses are also fundamentally different from observational services. Observational services
    are compensable under Medicare Part B and not under Medicare Part A—subject to limited
    exceptions—and therefore it is reasonable not to count facilities used for Part B activities in
    assessing the size of a facilities for the purposes of a DSH adjustment under Part A. By contrast,
    all of the activities identified by Plaintiffs, from the time a doctor spent sleeping to minor
    34
    renovations, are not compensable patient-focused activities; instead, they are activities that are
    ancillary to the patient-focused activities that are compensable under Part A. As such, they are
    fundamentally different from the observational services whose treatment is challenged here. The
    agency adequately explained its treatment of observational services, see 68 Fed. Reg. at 45,415-
    21; 69 Fed. Reg. at 49,096-97, in the context of the broader DSH scheme. The agency had no
    further obligation to sua sponte explain differences between the treatment of these ancillary
    activities and the treatment of observational services because they are not, in fact, similarly
    situated.
    So, too, with experimental procedures. Experimental procedures are procedures that are
    not compensable under Medicare Part A. However, they are the type of procedures that are
    similar to those that are compensable under Part A and, therefore, are appropriate to conduct in
    the acute care facilities used for Part A activities, the type of facilities that are quantified in
    determining the number of available bed days. As the agency explained, “[t]he expectation is that
    a patient [receiving an experimental treatment] located in an acute care unit or ward of the
    hospital is receiving a level of care that is consistent with what would be payable under the
    IPPS.” 68 Fed. Reg. at 45,417. This understanding in stark contrast to observational services,
    which do not need to occur in inpatient beds that accommodate activities compensable under Part
    A. See 69 Fed. Reg. at 49,096 (“Observation services may be provided in a distinct outpatient
    observation bed area, (which is not a routine inpatient acute care unit or ward for which costs are
    included for purposes of the IPPS)”). Because experimental procedures are the type of
    procedures that would be performed in a Part A-qualified bed, but observational services are not,
    the Court concludes that they are not similarly situated. The agency adequately explained its
    treatment of beds used for experimental procedures, see id., and it did not have any further
    35
    obligation to explain any discrepancies between the treatment of those activities and the
    treatment of beds used for observational services.
    While Plaintiffs identify several categories of activities that are not excluded from
    available bed days even though they are excluded from patient days—in contrast to the treatment
    of observational services, which are excluded from both—the agency has adequately explained
    its treatment of these activities. The Court concludes that none of the identified activities are, in
    fact, similarly situated to observational services such that additional explanation of differences in
    treatment among these types of activities is necessary. The Court also concludes that, to the
    extent to which the identified activities are similar to observational services, the agency has
    explained those differences adequately.
    Second, Plaintiff argues that the treatment of nursery beds is inconsistent with the
    treatment of beds used for observational services. Plaintiff’s argument here is different from the
    argument pertaining to the activities discussed immediately above, because the treatment of
    nursery beds is different from the treatment of those activities. Specifically, for the purposes of
    calculating the Medicaid fraction of the disproportionate patient percentage—used to calculate
    the level of the DSH adjustment, as explained above—healthy newborn patient days are included
    in the count of Medicaid patient days and the count of total patient days. 68 Fed. Reg. at 45,417.
    However, these days are not included in the count of bed days because the healthy newborn
    nursery as a whole is excluded from that calculation. See 50 Fed. Reg. at 45,811. Because of this
    discrepancy, Plaintiff argues that the Secretary cannot logically argue that observational services
    should be excluded from bed days in order to facilitate consistency with the calculation of patient
    days. However, the Secretary adequately explained the treatment of the newborn nursery in the
    2003 rulemaking. See 68 Fed. Reg. at 45,417 (“Medicare does not generally cover services for
    36
    infants. However, Medicaid does offer extensive coverage to infants, and nursery costs would be
    directly included in calculating Medicaid hospital inpatient care costs.”). Once again, the Court
    concludes that the differences between the treatment of the healthy newborn nursery and of
    observational services are justified by differences in those activities. Specifically, as explained
    above, the DSH provisions of the Medicare statute explicitly requires the calculation of a
    Medicaid fraction—the proportion of the total patient days attributable to Medicaid and not
    compensable under Medicare Part A—in order to determine the level of the DSH adjustment. See
    Allina Health Servs., 746 F.3d at 1105. In other words, the statute requires the assessment of
    Medicaid funded activities in calculating patient days for the purposes of establishing the DSH
    adjustment for Medicare Part A payments. The Court concludes that, given that the provisions of
    the Medicare act establishing the formula for calculating the DSH adjustment require assessment
    of Medicaid activities, the healthy newborn nursery is not similarly situated to observational
    services. Accordingly, the Court concludes that the agency has adequately explained the
    treatment of both observational services and the healthy newborn nursery, and the Court
    concludes that the agency had no obligation to provide any further explanation of the differences
    between the treatment of the healthy newborn nursery and the treatment of observational services
    for the purposes of calculating the DSH adjustment.
    Third, Plaintiff argues that the Secretary’s exclusion of observation bed days
    “unreasonably conflates” “patient days” and “bed days,” two statutorily-distinct terms and
    therefore is inconsistent with the plain language and intent of the DSH statute. Pl.’s Mot., at 36.
    Plaintiff’s argument is unavailing. The Secretary does not equate—or conflate—“patient days”
    and “bed days.” As explained above, in discussing the parties’ arguments, “bed days” and
    “patients days” do not always encompass the same activities. However, just because the terms
    37
    are used for different aspects of the calculation of the DSH adjustment and just because different
    activities are assessed differently with respect to these two categories does not mean that it is
    unreasonable for the agency to attempt, where possible, to interpret the terms so that they are
    consistent—where it is possible and where it is consistent with the overall statutory scheme. In
    the context of the complex statutory scheme governing Medicare, with numerous data tracking
    and reporting requirements, it is not unreasonable for the agency to implement the scheme such
    that two related, but distinct terms—“patient days” and “bed days”—are interpreted similarly
    where possible. The agency has explained why it has done so with respect to observational
    services. See 68 Fed. Reg. at 45,415-21; 69 Fed. Reg. at 49,096-97. The Court concludes that the
    explanation is adequate and that the decision to treat observational services similarly for the
    purposes of calculating bed days and patient days is reasonable.
    As a final matter, the Court turns to differences between the 2003 rulemaking and the
    2004 rulemaking. As a reminder, in 2003, the agency promulgated a rule that clarified the
    previous policy and made it clear that observational services were excluded from the calculation
    of available bed days. In that rulemaking, the agency considered a change regarding observation
    bed days of patients who are ultimately admitted as inpatients. However, in promulgating the
    final 2003 rule, the agency stated that it was “still in the process of reviewing comments and
    defer[red] action until a later rule with respect to this issue.” 68 Fed. Reg. at 45,419.
    Accordingly, the rule promulgated that year excluded observational services even for patients
    that were ultimately admitted as inpatients. See id. After further consideration of the issue, in the
    final rule promulgated in 2004, the agency ultimately decided that observational services time
    would be included in both bed days and patient days if the patient is ultimately admitted. See 69
    Fed. Reg. at 49,097. Neither of these decisions was arbitrary or capricious. The agency
    38
    reasonably concluded, in 2003, that it was necessary to give further consideration to changes to
    what it understood as the existing policy, particularly because those changes would necessarily
    involve changes in the tracking and reporting of data pertaining to observational services. See id.
    (describing changes to data tracking and reporting). Similarly, the 2004 rulemaking, which
    introduced changes that brought the calculation of bed days and patient days into closer
    alignment with each other and with other portions of the Medicare funding scheme, was a
    reasonable policy change and was adequately explained by the agency. See id. at 49,096-97.
    In sum, the Court has considered all of the parties’ arguments, and the Court concludes
    that the changes made in the 2003 and 2004 rulemakings with respect to observational services
    are adequately explained, reasonable, and not inconsistent with the statute.
    IV.    CONCLUSION
    For the foregoing reasons, the Court GRANTS Plaintiff’s Motion for Summary Judgment
    and DENIES Defendant’s Cross-Motion for Summary Judgment pertaining to cost year 2003
    (Case No. 14-cv-159). The Court VACATES the decision of the Secretary challenged in that
    action, REINSTATES the underlying decision of the Provider Reimbursement Review Board,
    and REMANDS that action to the agency for further proceedings consistent with this
    Memorandum Opinion. The Court DENIES Plaintiff’s Motion for Summary Judgment and
    GRANTS Defendant’s Cross-Motion for Summary Judgment pertaining to cost years 2004 and
    2006 (Case No. 13-cv-1775).
    An appropriate Order accompanies this Memorandum Opinion.
    Dated: September 16, 2015
    /s/
    COLLEEN KOLLAR-KOTELLY
    United States District Judge
    39
    

Document Info

Docket Number: Civil Action No. 2014-0159

Citation Numbers: 130 F. Supp. 3d 277, 2015 U.S. Dist. LEXIS 123203

Judges: Judge Colleen Kollar-Kotelly

Filed Date: 9/16/2015

Precedential Status: Precedential

Modified Date: 11/7/2024

Authorities (22)

Califano v. Sanders , 97 S. Ct. 980 ( 1977 )

United States v. Mead Corp. , 121 S. Ct. 2164 ( 2001 )

Amer Bioscience Inc v. Thompson, Tommy G. , 269 F.3d 1077 ( 2001 )

northpoint-technology-ltd-and-compass-systems-inc-v-federal , 412 F.3d 145 ( 2005 )

Good Samaritan Hospital v. Shalala , 113 S. Ct. 2151 ( 1993 )

St. Luke's Hospital v. Sebelius , 662 F. Supp. 2d 99 ( 2009 )

Central Iowa Hospital Corp. v. Sebelius , 762 F. Supp. 2d 49 ( 2011 )

Amer Fed Govt Empl v. Nicholson, R. James , 475 F.3d 341 ( 2007 )

Clark Regional Medical Center Pattie A. Clay Hospital v. ... , 314 F.3d 241 ( 2002 )

Motor Vehicle Mfrs. Assn. of United States, Inc. v. State ... , 103 S. Ct. 2856 ( 1983 )

Citizens to Preserve Overton Park, Inc. v. Volpe , 91 S. Ct. 814 ( 1971 )

Federal Communications Commission v. Fox Television ... , 129 S. Ct. 1800 ( 2009 )

Chevron U. S. A. Inc. v. Natural Resources Defense Council, ... , 104 S. Ct. 2778 ( 1984 )

Pacific Shores Subdivision California Water District v. ... , 448 F. Supp. 2d 1 ( 2006 )

Cape Cod Hospital v. Sebelius , 630 F.3d 203 ( 2011 )

St. Luke's Hospital v. Sebelius , 611 F.3d 900 ( 2010 )

Amgen Inc. v. Scully, Thomas , 357 F.3d 103 ( 2004 )

Burlington Northern & Santa Fe Railway Co. v. Surface ... , 403 F.3d 771 ( 2005 )

Methodist Hospital of Sacramento v. Donna E. Shalala, ... , 38 F.3d 1225 ( 1994 )

county-of-los-angeles-a-political-subdivision-of-the-state-of-california , 192 F.3d 1005 ( 1999 )

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