Allina Health Services v. Burwell

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ALLINA HEALTH SERVICES, )
et al., )
Plaintiffs, )
)
v. ) Civil Action No. 14-1415 (GK)
)
SYLVIA M. BURWELL, Secretary )
United States Department of )
Health and Human Services, )
)
Defendant. )
````````````````->
MEMORANDUM OPINION
Plaintiffs Allina Health S-ervices, et al. ("Plaintiffs") are
nine hospitals that bring this action against Sylvia M. Burwell,
in her official capacity as Secretary of the United States
Department of Health and Human Services ("Secretary" or
"Defendant") . They challenge the calculation of certain
disproportionate share hospital payments as procedurally and
substantively invalid.
This matter is before the Court on the Plaintiff's Motion for
Summary Judgment [ Dkt. No. 8] and Defendant's Cross-Motion for
Summary Judgment [Dkt. No. 28]. Upon consideration of the Motions,
Oppositions, Replies, the entire record herein, and for the reasons
set forth below, Plaintiffs' Motion shall be denied and Def-endant' s
Motion shall be granted.
1
I . Background
A. The Medicare DSH Payment System
The Medicare program was established in 1965 and provides
health care coverage for persons age 65 and older, disabled
persons, and persons with end stage renal disease who meet certain
eligibility requirements. See 42 U.S.C. § 426, 426a. The Secretary
administers the program through the Centers for Medicare & Medicaid
Services (CMS), an agency with the United States Department of
Health and Human Services. Def.'s Mot. at 4.
Medicare pays benefits through different plans, three of
which are relevant here. "Plan A covers medical services furnished
by hospitals and other institutional care providers." Ne. Hosp.
Corp. v. Sebelius, 657 F.3d 1, 2 (D.C.Cir.2011); 42 U.S.C. §§ 1395c
to 1395i-5. "Part B is an optional supplemental insurance program
that pays for medical items and services not covered by Part A,
including outpatient physician services, clinical laboratory
tests, and durable medical equipment." Ne. Hosp., 657 F.3d at 2;
42 U.S.C. §§ 1395j to 1395w-4. "Part C governs the 'Medicare +
Choice' (M+C) program, which gives Medicare beneficiaries an
alternative to the traditional Part A fee-for-service system,"
allowing enrollment in a managed care plan. Ne. Hosp., u5 7 F. 3d
at 2; see 42 U.S.C. §§ 1395w-21 to 139Sw-29. The Secretary pays
the health care provider directly under Parts A and B, but pays
2
the managed-care plan under Part C, which in. turn pays the
provider.
Hospitals that serve a significantly disproportionate share
of low-income patients without private health insurance are paid
"additional monies [by Medicare], on top of Medicare's normal fees-
for-service, to help cover the costs associated with the care of
the very poor." Allina Health Servs. v. Sebelius, 904 F. Supp. 2d
7 5' 77 (D.D.C. 2012) ("Allina I,,) ; see also 42 u.s.c.
§ 13 9 5 WW ( d) ( 5 ) ( F) ; 4 2 C . F . R . § 4 12 . 1 0 6 .
The disproportionate share hospital ("DSH") adjustment is
based on a "disproportionate patient percentage" for each
hospital, which is determined by a complicated statutory formula.
See 42 U.S.C. §§ 1395ww(d) (5) (F) (iv) and (vii)-(xiii); 42 C.F.R.
§ 412.106(d). The disproportionate patient percentage is the sum
of two fractions, 42 U.S.C. § 1395ww(d) (5) (F) (vi), which are
commonly known as the "Medicaid fraction" and the "Medicare
fraction" (sometimes also referred to as the "SSI fraction").
The Medicare fraction is defined as:
the fraction (expressed as a percentage), the numerator
of which is the number of such hospital's patient days
for such period which were made up of patients who \for
such days) were entitled to benefits under part A of
[Title XVIII] and were entitled to supplemental security
income benefits (excluding any State supplementation)
3
under [Title] XVI of this chapter, and the denominator
of which is the number of such hospital's patient days
for such fiscal year which were made up of patients who
(for such days) were entitled to benefits under part A
of [Title XVIII] ...
42 U.S.C. § 1395ww(d) (5) (F) (vi) (I) (emphasis added). In layman's
terms, thE top of the Medicare fraction is based on the number of
a hospital's patient days for individuals entitled to both Medicare
Part A and SSI benefits, and the bottom of the fraction is based
on the number of patient days for all patients under Part A. As
discussed later, the phrase "entitled to benefits under part A" is
key to the present dispute.
The Medicaid fracti6n is defined as:
the fraction (expressed as a percentage), the numerator
of which is the number of the hospital's patient days
for such period which consist of patients wh6 (for such
days) were eligible for medical assistance under a State
[Medicaid] plan ... but who were not entitled to benefits
under [Medicare] Part A and the denominator of which
is the total number of the hospital's patient days f·or
such period.
Id. § 1395ww(d) (5) (F) (vi) (II). In layman's terms, the top of
the Medicaid fraction is based on · the number of a hospital's
patient days for individuals who are eligible for Medicaid, but
4
who are not entitled to benefits under Medicare Part A, and the
bottom is the total number of all patient days for the hospital.
For a visual representation of the fractions, see Ne. Hosp., 657
F.3d 1, 3.
M+C (also referred to as Part C) was established by Congress
in 1997 as part of the Balanced Budget Act of 1997 (BBA), Pub. L.
No. 105-33 (1997). In order to enroll in M+C, an individual must
be "entitled to benefits under part A and enrolled under part
B." 42 U.S.C. § 1395w-21 (a) (3) (A). After M+C was implemented, "the
Secretary routinely excluded M+C [inpatient hospital] days from
the Medicare fraction" from 1999 to 2004. Ne. Hosp., 657 F.3d at
15. That is, M+C patients were not counted in the numerator of the
Medicare fraction as part of the patients "entitled to benefits
under Part A . and entitled to [SSI] benefits." 42 U.S.C.
§ 1395ww(d) (5) (F) (vi) (I). It was not until 2007 that the Secretary
began to collect the data needed to include M+C days in the
Medicare/SS I fraction. Id.; see Change Request 564 7, CMS Pub. 100-
04, Transmittal No. 1331 (July 20, 2007).
Central to this case is whether, once enrolled in Part C,
enrollees continue to be entitled to benefits under Part A. If the
agency considers enrollees to be entitled to benefits under Part A,
then they should be included in the Medicare fraction. If they are
no longer entitled to benefits under Part A, because they are
receiving benefits under Part C, then they should be excluded from
5
the Medicare fraction. The financial impact on the hospitals of
this seemingly minor detail is in the hundreds of millions of
dollars. See Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105
(D.C. Cir. 2014) ("Allina I Appeal").
B. Factual Background
In Allina I, a group of hospitals, including the Plaintiffs
in the present case, challenged a 2004 rulemaking by the Sedietary
("2004 Final Rule"). See 904 F. Supp. 2d at 77. The 2004 rulemaking
adopted a policy whereby Part C patients were to be considered as
"entitled to benefits under part A," and therefore counted in the
numerator of the Medicare fraction. In November 2012, the Court
(Collyer, J.) granted summary judgment for the plaintiffs, finding
that the 2004 Final Rule was not a logical outgrowth of the
proposed rule and therefore violated the procedural requirements
of the Administrative Procedure Act ("APA"). See Allina I, 904 F.
Supp. 2d at 89-90.
On appeal, our Court of Appeals affirmed the part of the
Allina I Court's decision vacating the 2004 Final Rule. But, the
Court of Appeals held that the Allina I Court erred when it
directed the Secretary to calculate the DSH payments in a
particular manner, rather than simply remanding. See Allina I
Appeal, 746 F.3d 1102, 1111 (D.C. Cir. 2014). On remand, the
Secretary addressed the issue of the appropriate DSH calculation
methodology through an adjudication. The Administrator determined
6
that, prior to 2004, the regulation did not specify where the Part
C enrollees should be counted in the DSH percentage. Allina I,
Adm'r Dec. at 26 (Dec. 2, 2015) [Dkt. 28-2]. The Administrator
further concluded that the better statutory interpretation is that
Part C enrollees are "entitled to benefits under Part A" within
the meaning of the DSH provisions, and therefore should be included
in the Medicare fraction. Id. at 35-45.
C. Procedural Background
Shortly after our Court of Appeals' decision in Allina I, the
Secretary published calculations for federal fiscal year 2012 DSH
payments ("2012 DSH Calculations") . 1 See 2012 Part A/SSI Fraction
Data File, available at http://www.cms.gov/Medicare/Medicare-Fee-
for-Service-Payment/AcuteinpatientPPS/Downloads/FY-2012-SSI-
Ratios-for-web-posting. zip. Plaintiffs allege that the 2012 DSH
Calculations are based on the 2004 Final Rule that was vacated.
They al~o allege that the 2012 DSH Calculations are procedurally
invalid and arbitrary and capricious. Compl. 'J['J[ 46-52. Plaintiffs
timely appealed the 2012 DSH Calculations to the Provider
1The present act~on is not considered part of the Allina I re~and,
because it concerns a later year. In 2013, the HHS adopted a
legislative rule that interprets the statute to require Part C
days in the Medicare fraction. 78 Fed. Reg. 50,496, 50,614 (Aug.
-1--9, - 2-Q-1~-)- -("-2-G±-2----Rtoi-1--emaking-~)-. --T--fle--l-eg-i-s-1-a~i-v-e --r:-ttl-.e --0R-l-Y---l:i.-O-&>
prospective application, and therefore does not apply to this case
or the Allina I remand. Id. at 50,620.
7
Reimbursement Review Board ("PRRB"), see Compl. '.lI'.lI 36-39, and
requested that the PRRB grant expedited judicial review. Id. '.lI 41.
The PRRB is an independent administrative tribunal that
resolves disputes regarding hospital reimbursement determinations
by Medicare contractors or the Centers for Medicare & Medicaid
Services ("CMS"). See 42 U.S.C. § 1395oo(a). The PRRB may resolve
certain payment disputes without following low-level policy
guidance, see 42 C.F.R. § 405.1867; however, it is bound by agency
regulation and rulings, id., and cannot decide "question[s] of law
or regulations." 42 U.S. C. § 13 9500 ( f) ( 1) . Section 13 9500 ( f) gives
providers "the right to obtain judicial review of any action
which involves a question of law or regulations . whenever the
[PRRB] determines . . . that it is without the authority to decide
the question." Id.
By letter dated August 13, 2014, the PRRB granted Plaintiffs'
request for expedited judicial review, finding that "it is without
the authority to decide the legal question of whether the
regulation regarding the [2012 DSH Calculations] is valid and
whether the Secretary's actions subsequent to the decisipn in
Allina [I] are legal." Letter from the Provider Reimbursement
Review Board to Stephanie Webster 6 (Aug. 13, 2014) [Dkt. No. 14-1]
("PRRB Decision").
On August 19, 2014, Plaintiffs filed their Complaint,
pursuant to the PRRB' s grant of expedited judicial revi-ew [ Dkt.
8
No. l]. Plaintiffs filed a Notice of Related Case on the same day
[Dkt. No. 2]. Judge Collyer granted Defendant's objection to the
related case designation on May 18, 2015, and the case was randomly
reassigned tp this Court. Minute Order dated May 18, 2015; Case
Assignment [Dkt. No. 20].
On October 27, 2014, Defendant filed her Motion to Dismiss
for Lack of Jurisdiction or in the Alternative for Voluntary Remand
[Dkt. No. 15], arguing that the PRRB improvidently granted
expedited judicial review, or in the alternative, for voluntary
remand to allow the PRRB to adjudicate Plaintiffs' claims without
consideration of the 2004 Final Rule. Motion to Dismiss at 2. The
Court denied Defendant's Motion to Dismiss on October 29, 2015
[Dkt. No. 21].
Plaintiffs filed their present Motion for Summary Judgment on
September 29, 2014 [Dkt. No. 8], prior to Defendant's response.to
the Complaint. On October 1 7, 2014, the Court (Collyer, J.) granted
Defendant's Motion to hold in abeyance the Motion for Summary
Judgment until the Motion to Dismiss was filed and decided. See
October 17, 2014 Minute Ord~r. After this Court denied Defendant's
Motion to Dismiss, Defendant filed her Answer on November 12, 2015
[Dkt. No. 24], and her Cross-Motion for Summary Judgment ("Def.'s
Mot.") on December 15, 2015 [Dkt. No. 29]. Plaintiffs filed their
Opposition ("Opp' n") on January 14, 2016 [ Dkt. No. 30 J and
Defendant filed her Reply ("Reply") on February 4, 2016 [Dkt.
9
No. 33]. On February 12, 2016, Plaintiffs filed a Motion for Leave
to File a Sur-Reply [Dkt. No. 34], which Defendant opposed [Dkt.
No. 35], and the Court denied on February 18, 2016 [Dkt. No. 36].
II. Legal Standard
A. Motion for Summary Judgment
Summary judgment will be granted when there is no genuine
issue as to any material fact. See Fed. R. Civ. P. 56(a). Because
this case involves a challenge to a final administrative decision,
the Court's review on summary judgment is limited to the
administrative record. Holy Land Found. for Relief & Dev. v.
Ashcroft, 333 F.3d 156, 160 (D.C. Cir. 2003) (citing Camp v. Pitts,
411 U.S. 138, 142 (1973)); Fund for Animals v. Babbitt, 903
F. Supp. 96, 105 (D.D.C. 1995) ("Summary judgment is an
appropriate procedure for resolving a challenge to a federal
agency's administrative decision when review is based upon the
)
administrative record").
"Summary judgment thus serves as the mechanism for deciding,
as a matter of law, whether the agency action is supported by the
administrative record and otherwise consistent with the APA
standard of review." Sierra Club v. Mainella, 459 F. Supp. 2d 76,
90 (D.D.C. 2006) (citing Richards v. INS, 554 F.2d 1173, 1177 &
n. 28 (D.C. Cir. 1977)). In reviewing agency action, the district
court "sits as an appellate tribunal, not as a court authorized to
determine in a trial-type proceeding whether the Se·cretary' s
10
[action] was factually flawed." Marshall Cnty. Health Care Auth.
v. Shalala, 988 F.2d 1221, 1225 (D.C. Cir. 1993).
B. Requirements of the APA and Medicare Act
Under the APA and the Medicare Act, legislative rules - rules
that have the "force and effect of law," Chrysler Corp. v. Brown,
441 U.S. 281, 302-303, (1979)) - are issued through notice-and-
comment rulemaking, in which the Secretary must provide the public
with adequate notice of a proposed rule and an opportunity to
comment thereon. See 5 U.S.C. § 553(b)-(c) (APA); 42 U.S.C.
§ 1395hh (b) (1) (Medicare) (" [B] efore issuing in final form any
regulation . the Secretary shall provide for notice of the
proposed regulation in the Federal Register and a period of not
less than 60 days for public comment thereon."). "Notice
requirements are designed (1) to ensure that agency regulations
are tested via exposure to diverse public comment, (2) to ensure
fairness to affected parties, and (3) to give affected parties an
opportunity to develop evidence in the record to support their
objections to th-e rule and thereby enhance the quality of judicial
review." Int'l Union, UMWA v. MSHA, 407 F.3d 1250, 1259 (D.C.
Cir. 2005) . The 2012 DSH Calculations were not issued through
notice and comment rulemaking, although Plaintiffs argue that they
should have beBn. Pls.' Mot. at 9; Pls.' Reply at 10.
Not all rules require notice-and-comment prior to.issuance.
Section 4(b) (A) of the APA provides that, unless another statute
11
states otherwise, the notice-and-comment requirement "does not
apply" to "interpretative rules, general statements of policy, or
rules of agency organization, procedure, or practice." 5 U.S.C.
§ 553(b) (A). "[T]he critical feature of interpretive rules is that
they are 'issued by an agency to advise the public of the agency's
construction of the statutes and rules which it administers.'"
Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199, 1204 (2015)
(quoting Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 99
(1995)).
The D.C. Circuit had long held that, even though notice and
comment was not necessary for new interpretive rules issued by an
agency, notice and comment was nonetheless required when an agency
changed its prior interpretation. Paralyzed Veterans of Am. v.
D.C. Arena L.P., 117 F.3d 579 (1997). Overturning Paralyzed
Veterans and its subsequent line of cases, the Supreme Court
recently held that an agency need not use notice-and-comment
procedures "when it wishes to issue a new interpretation of a
regulation that deviates significantly from one the agency has
previously adopted." Perez, 135 S. Ct. 1199 at 1203.
The APA also allows a reviewing court to set aside an agency
action that is "arbitrary, capricious, an abuse of discrBti0n, or
otherwise not in accordance with law." 5 U.S.C. § 706(2) (A); Tourus
Records, Inc. v. DEA, 259 F.3d 731, 736 (D.C. Cir. 2001) "The
scope of review under the 'arbitrary and capricious' standard is
12
.
narrow and a court is not to substitute its judgment for that of
the agency." Motor Vehicle Mfrs. Ass'n of U.S. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983)~ The court must "consider
whether the decision was based on a consideration of the relevant
factors and whether there has been a clear error of judgment."
S. Co. Servs., Inc. v. FCC, 313 F.3d 574, 579-80 (D.C. Cir. 2002);
see also United States v. Paddack, 825 F,.2d 504, 514 (D.C. Cir.
1987) .
An agency satisfies the arbitrary and capricious standard if
it "examine[s] the relevant data and articulate[s] 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 (quoting Burlington Truck Lines v. United
States, 371 U.S. 156, 168 (1962)); Lichoulas v. FERC, 606
F.3d 769, 775 (D.C. Cir. 2010). However, courts "do not defer to
the agency's conclusory or unsupported suppositions." McDonnell
Douglas Corp. v. U.S. Dep't of the Air Force, 375 F.3d 1182,
1186-87 (D.C. Cir. 2004).
III .. Analysis
A. The Evidence Is Not Convincing that CMS Calculated the
2012 DSH Fractions Based on the Vacated 2004 Final Rule.
Plaintiffs argue that the Secretary improperly relied on the
vacated 2004 Final Rule to formulate the 2012 DSH Calculations,
-P±s~'- --Mot-~ -at --6--7; -whi--le---Be-fendant- counters --that- t-he-:2012-BSH---
13
Calculations were reached by CMS in reliance on the language of
the disproportionate patient percentage statute itself. Def.' s
Mot. at 9.
What is central to this dispute is the parties' disagreement
as to the impact of the vacatur of the 2004 Final Rule. Defendant
argues that "the agency was faced with. an ambiguous direction from
Congress" and that the pre-2004 version of the applicable
regulation did not specify where Part C days should be counted.
Id. at 10. Plaintiffs on the other hand argue that pre-2004, the
agency had a policy of excluding Part C days from the Medicare
fraction. Pls.' Reply at 4. In the alternative, Plaintiffs argue
that even if there was not a policy or regulation excluding Part C
days from the Medicare fraction, the agency had a prior practice
of excl1:J.ding the Part C days, which was reinstated after the
vacatur of the 2004 Final Rule. Id.- (citing Croplife Am. v. EPA,
329 F.3d 876, 880, 884-85 (D.C. Cir. 2003).
Defendant contends that there is no evidence to directly
suggest that the 2012 DSH Calculations were based on the vacated
2004 Final Rule, rather than on CMS's interpretation of the
statute. Def.'s Mot. at 10. Conversely, Plaintiff argues that there
is no evidence to suggest that the Secretary did not rely on the
vacated rule. The Secretary states that CMS "inevitably had to
employ one of two possible interpretations of the statutory
language," and the one it chose for the 2012 DSH Calculations
14
reflected CMS's best understanding of the statutory language
itself. Def.' s Mot. at 10 (citing Declaration of Ing Jye Cheng
("Cheng Deel.") i i 7, 8 [Dkt. No. 29-3]). Acknowledging that the
2004 Final Rule is no longer in effect, the Secretary cites to the
Allina I Administrator decision as evidence that the agency is no
longer relying on the vacated 2004 Final Rule. Id.Our Court of Appeals, in remanding Allina I to allow the
agency to consider the interpretive issue anew, made it clear that
it was possible the agency could and might adopt the same
interpretation contained in the 2004 Final Rule. Allina I Appeal,
746 F.3d at 1111. Consequently, it follows that the fact that the
agency did adopt the same interpretation as the 2004 Final Rule is
not - in and of itself - indicative that the 2004 Final Rule was
relied upon.
While it may have been far better if the agency had provided
an explanation of its interpretation of the DSH statute along with
the 2012 DSH Calculations, particularly in light of the vacatur of
the 2004 Final Rule, there is no convincing evidence that Defendant
actually relied on the vacated rule in promulgating the 2012 DSH
Calculations. Indeed, as the Court later concludes, the Secretary
appropriately relied on and interpreted the underlying DSH statute
to calculate the 2012 DSH Calculations.
15
B. Notice and Comment Rulemaking Was Not Required
i. The APA
The parties agree that the Secretary did not undertake notice
and comment rulemaking to implement a rule including Part C days
in the Medicare fraction that is applicable to the 2012 DSH
Calculations. The issue is whether the Secretary should have.
The APA requires notice and comment when agencies implement
new legislative rules. 5 U.S.C. § 553(b). Plaintiffs argue that
the 2012 DSH Calculations were not a one-time decision, but instead
were the beginning of an ongoing patt~rn and therefore should be
considered a legislative rule. Pls.' Reply at 23. Plaintiffs reason
that the 2012 DSH Calculations "'reflect' a universal policy of
treating part C days as part A days for all hospitals," because
the agency has continued to include Part C days in the Medicare
fraction in all future actions. Id. Therefore, Plaintiffs
continue, the 2012 DSH Calculations constitute "an agency
statement of general or particular applicability and future effect
designed to implement, interpret, or prescribe law or policy," and
are therefore a "rule" for purposes of the APA Id. (citing 5 U.S. C.
§ 551(4)).
Defendant takes issue with the characterization of the 2012
DSH Calculations as involving a rule at all. The 2012 DSH
16
Calculations are comprised solely of a spreadsheet of percentages, 2
which Defendant characterizes as "preliminary, provider-specific
determinations calculated on the basis of services that had already
been rendered." In other words, Defendant argues that the 2012 DSH
Calculations are more appropriately viewed as a step in an
adjudication rather than as a rule. Def.'s Mot. at 12.
However, Defendant acknowledges that the fractions "do
reflect an interpretation of the statute that Part C days are
included in the Medicare fraction." Id. (emphasis in original) .
The 2012 DSH Calculations were not merely a step in an
adjudication, but reflect a decision by the agency to include
Part C days in the Medicare fraction. Thus, the 2012 DSH
Calculations are not appropriately viewed as a step in an
adjudication but rather as a rule.
The Court must now, determine whether the agency was announcing
a new legislative rule or simply interpreting the statute and
announcing an interpretive rule. A "legislative rule," is a rule
intended to have and does have the force of law. "A valid
legislative rule is binding upon all persons, and on the courts,
to the same extent as a congressional statute. When Congress
delegates rulemaking authority to an agency, and the agency adopts
2 The 2012 DSH Calculations are available at
http:/!'www-. cms.gov!'Medicare/Med~care=F'ee--Fo-r,-Service­
Payment/AcuteinpatientPPS/Downloads/FY-2012-SSI-Ratios-for-web-
posting.zip.
17
legislative rules, the agency stands in the place of Congress and
makes law. An 'interpretative' rule, by contrast, does not contain
new substance of its own but merely expresses the agency's
understanding of a congressional statute." Nat' 1 Latino Media
Coal. v. F.C.C., 816 F.2d 785, 787-88 (D.C. Cir. 1987).
Factors to consider when determining whether a rule has a
"legal effect" include "asking 1) whether in the absence of the
rule there would not be an adequate legislative basis for
enforcement action or other agency action to confer benefits or
ensure the performance of duties, ( 2) whether the agency has
published the rule in the Code of Federal Regulations, (3) whether
the agency has explicitly invoked its general legislative
authority, or ( 4) whether the rule effectively amends a prior
legislati v.e rule. If the answer to any of these questions is
affirmative, we have a legislative, not an interpretive rule." Am.
Min. Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1112
(D.C. Cir. 1993).
The answer to all of the above questions is "no." As our Court
of Appeals has previously recognized, the DSH statute is ambiguous
and could be interpreted to include or exclude Part C days. Ne.
Hosp., 65 7 F. 3d at 5-6. The fact that the statute could be
interpreted to include Part C days indicates that there is an
adequate legislative basis for the agency's decision. The rule of
including Part C days in the Medicare fraction, as applied to the
18
2012 DSH Calculations, was not published in the Code of Federal
Regulations, nor did the agency explicitly invoke its legislative
authority. Lastly, the rule does not amend a prior legislative
rule. 3
For these reasons, the Court concludes that the agency did
not issue a legislative rule when it issued the 2012 DSH
Calculations, and therefore APA notice and comment were not
necessary. Instead, the 2012 DSH Calculations constitute the
agency's interpretation of the disproportionate patient percentage
statute. The statute itself provides an "adequate legislative
basis" for including Part C days in the Medicare fraction, and
therefore the rule underlying the 2012 DSH Calculations is
interpretive. See Am. Min. Cong., 995 F.2d at 1112.
Plaintiffs argue that, because the agency previously
promulgated the same interpretation through notice and comment
rulemaking in the 2004 Final Rule and the 2013 Rulemaking, it
should continue to do so for the 2012 DSH Calculations. Pls.' Reply
at 28-30. However, there is no requirement that the agency continue
to do so. For example, an agency may choose to invoke its general
3
Plaintiffs argue that the agency had a prior policy, rather than
simply a practice, of excluding Part C days. See Pls.' Opp' n
at 7-8. The facts do not support a fin ding of a policy, rather
than simply a practice. Even if the agency did have a prior
·· p-0-1-±cy, --tt--woul-ct-not--have- -b-een-a--i:eg±-s-i-at±ve -po-licy-re-qu±r±ng ·
notice and comment to change it~
19
legislating authority out of an abundance of caution. Am. Min.
Cong., 995 F.2d at 1110-11. Therefore, the agency's prior
invocation of its general legislating authority (here, the 2004
Final Rule), is not per se evidence that it needed to do so and
does not negate the Court's finding that the agency's action was
interpretive.
ii. The Medicare Statute
The Medicare statute also requires notice and comment prior
to the Secretary issuing final regulations. See 42 U.S.C.
§ 1395hh(b). Plaintiffs argue that the Medicare statute requires
"rulemaking for a more expansive set of agency pronouncements than
the Pi.PA." Pls.' Reply at 11. Plaintiffs cite to no cases in support
of their argument and the Court finds their statutory
interpretation arguments unpersuasive. Pls. Reply at 11-13.
Our Court of Appeals has not decided whether the Medicare
statute "creates a more stringent obligation [than the APA] or
whether it somehow changes the dividing line between legislative
and interpretive rules." Monmouth Med. Ctr. v. Thompson, 257 F.3d
807, 814 (D.C. Cir. 2001). However, the Court of Appeals did note
that, because the Medicare statute was adopted after the APA, it
was fair to infer that "§ 1385hh ( c) 's reference to, 'interpretive
rules' without any further definition adopted an exemption [to
notice and comment requirements] at least similar in scope to that
of the APA." Id. (internal citation omitted). Other circuit courts
20
•.
have similarly concluded, though without thorough analysis, that
the standards imposed by the APA and Medicare are not materially
different. See Baptist Health v. Thompson, 458 F.3d 768, 776 (8th
Cir. 2006) (42 U.S.C. § 1395hh(a) (2) "imposes no standards greater
than those established by the APA."); Erringer v. Thompson, 371
F.3d 625, 633 (9th Cir. 2004) (declining to determine whether the
Medicare Act "draws the line between substantive and interpretive
rules in a different place than the APA"); Warder v. Shalala, 149
F. 3d 73, 79 n.4 (1st Cir. 1998) ("the [Medicare statute's]
language, drafted after the APA's, can fairly be read to duplicate
the APA on this score.").
Even if the Medicare statute was more demanding, the
Secretary's interpretation of the DSH statute is not a "rule,
requirement, or other statement of policy . that establishes
or changes a subs tan ti ve legal standard" such that notice and
comment would be required.· See 42 U.S.C. § 1395hh(a) (2). As
discussed previously, in the absence of any regulation or rule,
there is an "adequate legislative basis" for the Secretary's
interpretation. and application of the statute. American Mining
Congress, 995 F. 2d at 1112. The agency's interpretation of the
statute does not require rulemaking under the Medicare statute.
iii. Rulemaking Through Adjudication
Defendant argues that notice and comment rulemaking is not
necessary because it is "well-established that an agency may employ
21
...
a new interpretation in the course of an individual adjudication."
Def.' s Mot. at 12 (citing Shalala v. Guernsey Mem' 1 Hosp., 514
U.S. 87, 97 (1995) ("The APA does not require that all the specific
applications of a rule evolve by further, more precise rules rather
than by adjudication. The Secretary's mode of determining benefits
by both rulemaking and adjudication is, in our view, a proper
exercise of her statutory mandate" (internal citations omitted)));
see also Clark-Cowlitz Joint Operating Agency v. FERC, 826 F.2d
1074, 1081 (D.C. Cir. 1987) (en bane) ("[W]hen as an incident of
adjudicatory function an agency interprets a statute, it may apply
that new interpretation in the proceeding before it.") . Def.endant
also points out that the decision whether to make new policy
through adjudication or rulemaking is generally within the
agency's discretion. Id. at 13 (citing NLRB v. Bell Aerospa6e Co.
Div. of Textron, 416 U.S. 267, 291-94 (1974)). Given this,
authority, Defendant concludes that it was "well within CMS' s
discretion to employ the interpretation it did in the course of
calculating the 2012 [OHS Calculations]." Id.Whether or not Defendant can issue new interpretations
through adjudication is not relevant to this case, because the
agency did not engage in an adjudication to reach the 2012 DSH
Calculations. Defendant attempts to rely on a 2007 adjudication as
authority for its policy in the 2012 DSH Calculations, but this
reliance is misplaced. Def.'s Mot. at 14 (citing St. Joseph's Hosp.
22
-.
v. Blue Cross/Blue Shield Ass'n, 2007 WL 4861952 at *5 (Nov. 13,
2007)) . St. Joseph's was not a forward looking policy and was
limited to fiscal years 1998, 1999, and 2000. St. Joseph's Hosp.,
2007 WL 4861952 at *1. In addition, the PRRB reached its decision,
later affirmed by the Administrator, with reference to the now
vacated 2004 Final Rule, which calls into question any prospective
validity St. Joseph's may have had. See PRRB Decision (Aug. 27,
2004), available at https://www.cms.gov/Regulations-and-
Guidance/Review-Boards/PRRBReview/Downloads/2007d68.pdf
Therefore, an agency's ability to issue· new interpretive
rules through adjudication does not help Defendant's case here.
iv. Prior Definitive Interpretation
As discussed previously, in Perez, the Supreme Court
overruled the Court of Appeals' Paralyzed Veterans doctrine, which
had created a judge-made procedural requirement that an agency use
notice-and-comment rulemaking whenever it changed a rule
interpreting a statute, even though such notice-and-comment would
not have been required when interpreting the statute in the first
instance. See supra, 12. Plaintiffs acknowledge that changes to an
interpretive rule are no longer subject to notice and comment under
the APA, and have withdrawn that argument. See Pls.' Reply
at 16 n. 10.
Even so, Plaintiffs contend that a "policy that 'works
substantive changes' or makes 'major substantive legal additions'
23
to existing regulations requires notice and comment.' Pls.' Reply
at 19 (quoting U.S. Telecom Ass'n v. FCC, 400 F.3d 29, 34-35 (D.C.
Cir. 2005)). Plaintiffs argue that the 2012 DSH Calculations
effected a substantive change and therefore should have undergone
notice and comment procedures. Id. at 19-20. This argument
misunderstands U.S. Telecom, which does not stand for the
proposition that there are certain instances where interpretive
rules require notice and comment. Rather, it held that new rules
that affect substantive changes or amend prior legislative rules
may more appropriately be considered legislative rules rather than
interpretive rules. U.S. Telecom Ass'n, 400 F.3d at 34-35. The
Court has already determined that the policy that was effectively
announced in the 2012 DSH Calculations was an interpretive one,
not legislative.· See supra 19. Because the agency's action was
interpretive, notice and comment was not required.
C. The Decision to Include Part C Days Is Not Arbitrary and
Capricious
Plaintiffs argue that the Secretary's decision to include
Part C days in the Medicare fraction was arbitrary and capricious.
See Pls.' Reply at 32. Plaintiffs' contention has two prongs:
first, that the agency's "no-process determination for all
hospitals" is arbitrary and capricious, and second, that the
agency's decision is impermissibly inconsistent with the
underlying stat:utory scneme. · ra~ at 3Z-=33.
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As to the first, Plaintiffs contend that the Secretary's
policy determination is arbitrary and capricious because the
agency has not "articulated any rationale for its choice." Pls.
Reply at 33 (quoting Republican Nat'l Comm. v. FEC, 76
F.3d 400, 407 (D.C. Cir. 1996). The scope of review under the
arbitrary and capricious standard is a narrow one. The Court is
not to substitute its own judgment, but the "agency must examine
the relevant data and articulate a satisfactory explanation for
its action." Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29, 42-43 (1983). The court may not supply
reasoning that the agency itself has not provided. Id. at· 43.
However, the court will "uphold a decision of less than ideal
clarity if the agency's path may reasonably be discerned." Id.(quoting Bowman Transp. Inc. v. Arkansas-Best Freight Sys., 419
U.S. 281, 286 (1974)).
Defendant blames the absence of a contemporaneous explanation
for its decision to include Part C days in the Medicare fraction
in the 2012 DSH Calculations on the unique posture of the case.
Def.'s Mot. at 25-26. Defendant explains that the agency expected
further administrative proceedings in connection with the
challenge and regarded the decision as non-final. Id. at 26. Even
if the Defendant expected "further administrative development"
before the PRRB and Administrator, id., it is not clear why the
agency would not provide any contemporaneous explanation with the
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issuance of the 2012 DSH Calculations. The agency also contends it
was a one-time interpretive decision and as such, Plaintiffs are
not entitled to expect an explanation of the sort that CMS would
provide for a final prospective rule. Id.Despite the lack of explanation, Defendant argues that the
interpretative choi6e "can be readily sustained on the basis of
the.explanation set forth in the Administrator's decision in the
Allina I remand." Id. at 27. Defendant concedes that the Court's
review is ordinarily limited to the contemporaneous record
developed by the agency, but argues that an exception is warranted.
Id. (citing SEC v. Chenery Corp., 318 U.S. 80 (1943); Glob.
Crossing Telecomms., Inc. v. Metrophones Telecomms., Inc., 550
U.S. 45, 63-64 (2007)).
Chenery stands for the proposition that "an agency's decision
must reflect the reasons for its action, and that subsequent
rationalizations cannot be substituted on appeal for
contemporaneous reasoned decisionmaking." Pub. Serv. Co. of
Indiana v. I.C.C., 749 F.2d 753, 759 (D.C. Cir. 1984) (citing
Chenery, 318 U.S. at 92-95). But Chenery is not absolute. In Global
Crossing, ~he Supreme Court found that the FCC's initial opinion
did not explain its determination, but nevertheless upheld the
determination, finding that the "context and cross-referenced
opinions ma[d]e the FCC's rationale obvious." Glob. Crossing
Telecomms., 550 U.S. at 63 (internal citations omitted).
26
The Secretary argues that the instant case is akin to Global
.
Crossing in that the Administrator's Allina I decision provides
evidence of the agency's reasoning and therefore the agency's
rationale is adequately explained. Def.'s Reply at 27. However,
the Administrator's Decision, which was issued in December 2015,
was not yet issued at the time of the 2012 DSH Calculations, which
were issued in 2014. Although the 2013 Rulemaking had been issued,
it is prospective only. See 78 Fed. Reg. 50,496, 50,614
(Aug. 19, 2013). In addition, unlike Global Crossing, the 2012 DSH
Calculations do not include any cross-references to opinions or
documents that shed light on the agency's rationale.
Defendant argues that it "'would be a waste of time to review
only' the contemporaneous agency record to the 2012 DSH
Calculations when the agency has subsequently issued in 2015 a
'better considered' decision upon which review may be based."
Def.'s Mot. at 28 (quoting Pub. Serv. Co., 749 F.2d at 760). Public
Service is easily distinguished from the case at hand, as it
involved a clarifying opinion. The Commission had provided a first
opinion, but then at the request of the petitioners to reopen the
decision, reconsidered the record and issued a second clarifying
opinion. The issue there was whether the second opinion could be
considered. Such is not the case here. The Administrator's Allina I
decision is precisely th~ type of post-hoc rationalization that
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Chenery says cannot be .substituted on appeal for contemporaneous,
reasoned decisionmaking. Chenery, 318 U.S. at 92-95.
The dangers of post-hoc rationalizations for agency action
are that the judiciary, rather than the agency, will supply the
reasons underlying the action and that the "real reasons for agency
action will escape judicial scrutiny altogether." Women Involved
in Farm Econ. v. U.S. Dep't of. Agric., 876 F.2d 994, 1000 (D.C.
Cir. 1989). These concerns are not present here. Here, the agency
has supplied its reasons on multiple occasions, including the
Administrator's recent decision and the 2013 Rulemaking. This is
also not a case where the agency's reasoning will escape judicial
review given that the issue has been before the courts on multiple
occasions, as demonstrated in this opinion. See infra, 29-30.
Viewing the situation in its entirety, the Court concludes
that the process underlying the 2012 DSH Calculations was not
arbitrary and capricious. Although the agency gave no explicit
contemporaneous explanation, the concerns for post-hoc
rationalization are not present. The agency had made its
interpretation of the statute clear in the 2004 Final Rule,
although that rule was later vacated, and the 2013 Regulation, and
has also subsequently made it clear in the Administrator's
decision. Although no explanation accompanied the 2012 DSH
Calculations, it is not difficult to understand the agency's
reasoning, there is no concern that subsequent rationalizations
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are substituting contemporaneous reasoned decisionmaking, nor is
there a concern that the judiciary is providing the reasons for
the agency's action, rather than the agency.
Turning to Plaintiffs' second allegation that the Secretary's
interpretation is inconsistent with the statute, our Court of
Appeals has already held that the statutory text does not foreclose
the Secretary's interpretation. Ne. Hosp. Corp., 657 F.3d at 13.
In evaluating the same question of whether Part C enrollees are
entitled to benefits under Part A, the Northeast Hospital court
stated, at step 1 of the Chevron analysis, that "Congress ha[d]
not clearly foreclosed the Secretary's interpretation that [Part
C] enrollees are entitled to benefits under Part A." Id. While
Northeast Hospital found that. the Secretary's interpretation was
not foreclosed by the statute, it did not reach the Chevron step
2 analysis to determine if the Secretary's interpretation was
reasonable. See Ne. Hosp. Corp., 65 7 F. 3d at 13. The Northeast
Hospital court held that it was for the Secretary, not the Court,
to determine the proper interpretation. Id. That is precisely what
the Secretary has done in this instance.
In Catholic Health Initiatives v. Sebelius, the Court
considered the phrase "entitled to benefits under Part A," also
key to the case at hand, though not in the context of Part C days.
718 F.3d 914·, 917 (2013). The Secretary argues that the Court's
decision in Catholic Health is instructive here, Def.'s Mot. at 32,
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as the Court def erred under Chevron step 2 to the Secretary's
interpretation that "entitlement" is "simply a matter of meeting
the statutory criteria, not a matter of receiving payment."
Catholic Health, 718 F. 3d at 919-920.
Plaintiffs offer no meaningful distinction between the case
at hand and Catholic Health. See Pls.' Reply at 30-31, 39. Although
the type of days specifically at issue are different, the core
dispute is the same. Defendant argues that "entitlement" refers
simply to meeting the statutory requirements, Def.'s Mot at 31,
while Plaintiffs argue that "entitlement" requires the ability to
be paid under Part A. Pls.' Reply at 3, 39-40. The Catholic Health
Court deferred to the agency's interpretation, and that deference
is applicabie to this case as well.
In light of our Court of Appeals' decisions in Northeast
Hospital and Catholic Health, as well as the narrow standard of
review, the Court concludes that the Secretary's interpretation
that patients enrolled in Part C continue to be "eligible" for
Part A is well within her authority and not arbitrary and
capricious.
IV. Conclusion
For the foregoing reasons, Plaintiffs' Motion for Summary
Judgment shall be denied and Defendant's Motion for Summary
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Judgment shall be granted. An Order shall accompany this Memorandum
Opinion.
August 17, 2016
Copies to: attorneys on record via ECF
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