District Hospital Partners, L.P. v. Sebelius

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

DISTRICT HOSPITAL PARTNERS,
L.P. d/b/a GEORGE WASHINGTON
UNIVERSITY HOSPITAL, et al.,

Plaintiffs,

v. Civil Action No. 11-1717 (GK)

KATHLEEN G. SEBELIUS,
Secretary of the United
States Department of Health
and Human Services,

Defendant.

MEMORANDUM OPINION

Plaintiffs are a group of commonly owned hospitals that

participate in the Medicare program. They bring this action

against Kathleen Sebelius in her official capacity as Secretary

of the Department of Health and Human Services ("Defendant" or

"Secretary") after the Secretary disallowed various Medicare bad

debts claimed by Plaintiffs in the fiscal years ending in 2003,

2004, and 2005. Plaintiffs challenge that decision pursuant to

the Medicare Act, 42 U.S.C. § 1395 et seq. ("the Act"), and the

Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq.

This matter is before the Court on Plaintiffs' Opening

Brief [Dkt. No. 14], which this Court construes as a Motion for
Summary Judgment, 1 Defendant's Motion for Summary Judgment and

Opposition to Plaintiffs' Opening- Brief [Dkt. No. 19] 1

Plaintiffs' Opposition and Reply Brief [Dkt. No. 22], and

Defendant's Reply to Plaintiffs' Opposition and Reply to

Defendant's Motion for Summary Judgment [Dkt. No. 28]. Upon

consideration of the briefs, the administrative record, and the

entire record herein, and for the reasons stated below,

Plaintiffs' Motion for Summary Judgment is granted and

Defendant's Motion for Summary Judgment is denied.

I . BACKGROUND

A. Statutory and Regulatory Framework

1. The Medicare Program

Title XVIII of the Social Security Act established the

Medicare program, which provides medical care for the elderly

and disabled. 42 U.S.C. § 1395 et seq.; see also Kaiser Found.

Hosps. v. Sebelius, F.3d , 2013 WL 791272, at *1 (D.C. Cir.
1
The parties debate whether the Plaintiffs' Opening Brief should
be construed as a motion for summary judgment. Compare Pls.'
Opp'n & Reply Br. 2 n.2 [Dkt. No. 22], with Def. 's Reply to
Pls.' Opp'n & Reply to Def.'s Mot. for Summ. J. 3 n.2 [Dkt. No.
28] . Plaintiffs acknowledge that judicial review of this case is
under the APA. Pls:' Opp'n & Reply Br. 2 n.2. They also
acknowledge that the entire case will be resolved based on the
briefs and the administrative record. See Joint Mot. to Set a
Briefing Schedule 2 [Dkt. No. 12] . Thus, this case is being
decided as a matter of law, and summary judgment is the
"appropriate procedure for resolving a challenge to a federal
agency's administrative decision when review is based on the
administrative record." Richards v. I.N.S., 554 F.2d 1173, 1177
(D.C. Cir. 1977).
-2-
Mar. 5, 2013) (citation omitted) . The Medicare program is

administered by the Secretary of Health and Human Services

through the Center for Medicare and Medicaid Services ( "CMS") .

Ark. Dep't of Health & Human Servs. v. Ahlborn, 547 U.S. 268,

275 (2006) . Medicare providers enter into written agreements

with the Secretary to provide services to eligible individuals.

42 U.S.C. § 1935cc. Fiscal intermediaries, private companies

that process payments on behalf of CMS, then make interim

payments to providers, subject to subsequent adjustments. 42

u.s.c. § 1395h.

To calculate these adjustments, providers are required to

submit an annual cost report to their fiscal intermediary

identifying total costs incurred during the course of the fiscal

year. 42 C.F.R. §§ 413.20, 413.24. Fiscal intermediaries then

analyze and audit the cost report and inform the provider of a

determination of the amount of total Medicare reimbursement to

which they are entitled, referred to as the notice of amount of

program reimbursement ("NPR"). 42 C.F.R. § 405.1803; see also

Regions Hosp. v. Shalala, 522 U.S. 448, 452 (1998).

If a provider is dissatisfied with the intermediary's final

determination of its NPR, and if the provider meets the

requirements set forth in 42 U.S. C. § 1395oo (a), the provider

may appeal the determination to the Provider Reimbursement

-3-
Review Board ("PRRB"). 42 U.S.C. § 1395oo (a) (1) (A) (ii). A

decision of the PRRB is final unless the Secretary, on her own

motion, and within 60 days after the provider is notified of the

PRRB decision, reverses, affirms, or modifies the PRRB's

decision. 42 U.S.C. § 1395oo(f). The Secretary has delegated her

final authority to modify, affirm, or reverse PRRB decisions to

the Administrator of CMS ("Administrator") . 42 u.s.c.
13 9 5 oo (f) ( 1) ; 4 2 C • F . R. § 4 0 5 . 18 7 5 .

Following a final decision of the PRRB or the

Administrator, a provider is entitled to file a civil action in

the United States District Court for the District of Columbia to

seek judicial review of the final agency action. 42 U.S.C. §

1395 oo(f).

2. Medicare Bad Debt Reimbursements

Medicare "bad debts" are unpaid amounts, such as

deductibles or copayments, owed by Medicare patients for covered

Medicare services. 42 C.F.R § 413.89(e); see also 42 C.F.R. §

413.89 (b) (1) . These bad debts are deductions from revenue and

are not to be included in costs reported by the provider. 42

C.F.R. § 413.89(a). However, the Medicare statute prohibits

cost-shifting, which means that costs associated with services

provided to Medicare beneficiaries cannot be borne by non-

Medicare patients, and vice versa. 42 u.s.c. §

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1395x(v) (1) (A) (i); Walter 0. Boswell Mem'l Hosp. v. Heckler, 749

F.2d 788, 791 (D.C. Cir. 1984) (noting that statute prohibits

"cost-shifting" between Medicare and non-Medicare patients) . In

order to prevent cost-shifting, a provider unable to collect

from a Medicare beneficiary can claim the amounts owed as "bad

debts" and be reimbursed under Medicare if the provider meets

certain criteria specified in 42 U.S.C. § 413.89(e).

According to 42 C.F.R. § 413.89(e), bad debts attributable

to unpaid Medicare costs are reimbursable if: (1) the debt is

"related to covered services and derived from deductible and

coinsurance amounts"; ( 2) the provider establishes that

"reasonable collection efforts were made"; (3) the debt was

"actually uncollectible when claimed as worthless"; and (4)

"sound business judgment" establishes that there is "no

likelihood of recovery at any time in the future." Id.

§ 413.89(e).

Chapter 3 of the Medicare Provider Reimbursement Manual, 2

Part I ("PRM"), contains the Secretary's interpretation of these

Regulations. Catholic Health Initiatives v. Sebelius, 617 F. 3d

490, 491 (D.C. Cir. 2010) (noting that PRM contains "guidelines
2
The Secretary also issues a manual for fiscal intermediaries,
known as the Medicare Intermediary Manual ( "MIM") . See Albert
Einstein Med. Ctr. v. Sebelius, 566 F.3d 368 (3d Cir. 2009)
(noting that Secretary issues manuals such as the PRM and MIM
"to assist healthcare providers and fiscal intermediaries in
administering the [reimbursement] system").
-5-
and policies" but "does not have the effect of regulations") .

Three sections of the PRM are relevant.

First, PRM section 310 defines a "reasonable collection

effort" of Medicare debts as one that is "similar to the effort

the provider puts forth to collect comparable amounts from non-

Medicare patients." Administrative Record ("AR") 254. It

specifically provides that a "provider's collection effort may

include the use of a collection agency." Id.

Second, PRM section 310.2 sets forth a "presumption of

noncollectibility," which establishes that if, after reasonable

and customary attempts to collect the unpaid amounts have

failed, the debt remains unpaid more than 120 days from the date

the first bill was mailed to the Medicare beneficiary, the debt

"may be deemed uncollectible." AR 255.

Third, PRM section 316 establishes a system to ensure that

any debts deemed uncollectible that are later recovered by the

provider are subtracted from benefits due to the provider in the

reporting period in which those payments are recovered. AR 279.

3. The Medicare Bad Debt Moratorium

In 1987, Congress enacted what became known as the "Bad

Debt Moratorium." See Foothill Hosp.-Morris L. Johnston Mem'l v.

Leavitt, 558 F. Supp. 2d 1, 3 (D.D.C. 2008) ("Foothill") (citing

Hennepin Cty. Med. Ctr. v. Shalala, 81 F.3d 743, 747 (8th Cir.

-6-
1996)) (noting that Congress enacted the Moratorium in response

to the policy changes proposed by the Inspector General of

Health and Human Services) . 3 The Moratorium reads:

(c) CONTINUATION OF BAD DEBT RECOGNITION FOR HOSPITAL
SERVICES. In making payments to hospitals under
title XVIII of the Social Security Act, the Secretary
of Health and Human Services shall not make any change
in the policy in effect on August 1, 1987, with
respect to payment under title XVIII of the Social
Security Act to providers of service for reasonable
costs relating to unrecovered costs associated with
unpaid deductible and coinsurance amounts incurred
under such title (including criteria for what
constitutes a reasonable collection effort) .

Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203

§ 4008, 101 Stat. 1330 (reprinted in 42 U.S.C. § 1935f note).

In 1988, Congress amended the Moratorium to further define

"reasonable collection effort," defining the term to include

"criteria for indigency determination procedures, for record

keeping, and for determining whether to refer a claim to an

external collection agency." Technical and Miscellaneous Revenue

Act of 1988, Pub. L. No. 100-647 § 802, 102 Stat. 3798

(reprinted in 42 U.S.C. § 1935f note).

In 1989, Congress amended the Moratorium again. It added

the following sentence: "The Secretary may not require a

hospital to change its bad debt collection policy if a fiscal

3
Foothill contains a detailed review of the legislative history
of the Moratorium and its subsequent amendments. 558 F. Supp. 2d
at 2-3.
-7-
intermediary, in accordance with the rules in effect as of

August 1, 1987, with respect to criteria for indigency

determination procedures, record keeping, and determining

whether to refer a claim to an external collection agency, has

accepted such policy before that date, and the Secretary may not

collect from the hospital on the basis of an expectation of a

change in the hospital's collection policy." Omnibus Budget

Reconciliation Act of 1989, Pub. L. No. 101-239, § 6023, 103

Stat. 2106 (reprinted in 42 U.S.C. § 1935f note).

Thus, the Moratorium, as amended, contains two restrictions

on the Secretary. First, the Secretary is prohibited from making

any changes to the agency's bad debt policy in effect on August

1, 1987. See Foothill, 558 F. Supp. 2d at 5-9 (rejecting the

Secretary's argument that she "is free to make changes to [her]

own policies and is restricted only in modifying the individual

policies of individual Medicare providers" in light of the clear

statutory text and the court's view of the historical context in

which the statute was passed) . Second, the Secretary is

prohibited from requiring a provider to change bad debt policies

it had in place on August 1, 1987. Id. at 4 (noting that the Bad

Debt Moratorium "clearly prevents the Secretary from changing a

provider's established bad debt policy") ; see also Uni v. Health

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Servs., Inc. v. Health & Human Servs., 120 F.3d 1145, 1147-48

(11th Cir. 1997).

B. Factual and Procedural History

Plaintiffs submitted cost reports that included claims for

bad debts to their fiscal intermediaries in fiscal year 2003,

2004, and 2005. AR 60. These alleged bad debts included unpaid

deductibles and coinsurance amounts that had been sent to an

outside collection agency after 120 days of internal collection

efforts. AR 60, 230-32, 236. Plaintiffs' fiscal intermediary

issued NPRs disallowing these claimed bad debts, declaring that

uan ongoing collection effort at [an] outside collection agency

indicated that the bad debts were not yet deemed worthless." AR

60.

Plaintiffs timely appealed the NPRs to the PRRB,

challenging the disallowance of the bad debts. AR 60. On May 27,

2011, the PRRB issued a unanimous decision holding that

Plaintiffs properly claimed the uncollectible accounts as bad

debts even though the accounts were still at an outside

collection agency. Univ. Health Servs., Inc. v. BlueCross

BlueShield Ass'n, Case No. 07-0084GC, 2011 WL 2574339 (P.R.R.B.

May 27, 2011).

On June 20, 2011, the Administrator notified the parties

that she intended to review the PRRB's decision under 42 C.F.R.

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§ 405.1875. AR 51-52. The parties submitted comments to the

Administrator. AR 19-50. On July 26, 2011, the Administrator

issued a decision reversing the PRRB and upholding the fiscal

intermediary's adjustments disallowing Plaintiffs' claimed bad

debts. Univ. Health Servs., Inc. v. Blue Cross Blue Shield

Ass'n, 2011 WL 4499597 (H.C.F.A. Admin. Dec. July 26, 2011)

("Administrator Decision").

The Administrator ruled that the PRRB erred when it

concluded that the Bad Debt Moratorium was applicable in this

case. Id. at *9. She observed that CMS policy establishes that

"when a provider sends uncollected amounts to a collection

agency, the provider cannot establish reasonable collection

efforts have been made, the debt was actually uncollectible when

claimed as worthless[,] and that there is no likelihood of

recovery." 4 Id. at *8. The Administrator therefore concluded that

CMS has "always required that a provider demonstrate that its

collection efforts were reasonable and, therefore, there has

been no change in CMS policy." Id. at *9.

As permitted by 42 U.S.C. § 1395oo(f), Plaintiffs timely

filed a Complaint on September 23, 2011 [Dkt. No. 1] seeking

review of the Administrator's decision. Plaintiffs filed their
4
For ease of analysis, this Court shall refer to the Secretary's
position, that an account that is outstanding at an outside
collection agency is per se not uncollectible and thus cannot be
claimed as a bad debt, as the "presumption of collectability."
-10-
Opening Brief on March 9, 2012. Defendant filed her Motion for

Summary Judgment and Opposition to Plaintiffs' Opening Brief on

April 25, 2012. Plaintiffs then filed their Opposition and Reply

Brief on June 11, 2012, and Defendant filed her Reply to

Plaintiffs' Opposition and Reply to Defendant's Motion for

Summary Judgment on August 9, 2012. The joint appendix was filed

on August 23, 2012 [Dkt No. 30], and this matter is now ripe for

review.

II. STANDARD OF REVIEW

The Medicare Act provides for judicial review of a final

decision made by the PRRB or the Secretary. 42 U.S.C. §

1395oo(f) (1). It instructs the reviewing court to apply the

provisions of the APA. Id. 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 and Dev. v. Ashcroft, 333 F.3d 156,

160 (D.C. Cir. 2003) (citing Camp v. Pitts, 411 U.S. 138, 142

( 1973) ) ; Richards, 554 F. 2d at 1177 ("Summary judgment is an

appropriate procedure for resolving a challenge to a federal

agency's administrative decision when review is based on the

administrative record.").

Under the APA, an agency decision is set aside only if it

is "arbitrary, capricious, an abuse of discretion, or otherwise

-11-
not in accordance with law" and its factual findings are only

overturned if "unsupported by substantial evidence." 5 U.S.C. §

706 (2) (A), (E); see also Murray Energy Corp. v. F.E.R.C., 629

F.3d 231, 235 (D.C. Cir. 2011) (quotation and citation omitted).

It is well established in our Circuit that this court's review

of agency action is "highly deferential." Bloch v. Powell, 348

F.3d 1060, 1070 (D.C. Cir. 2003) (citations and internal

quotation marks omitted) . If the "agency has rationally set

forth the grounds on which it acted, this court may not

substitute its judgment for that of the agency." BNSF Ry. Co. v.

Surface Transp. Bd., 604 F.3d 602, 611 (D.C. Cir. 2010)

(internal quotation and citation omitted). However, this Court

must ensure that the agency has "considered the factors relevant

to its decision and articulated a rational connection between

the facts found and the choice made." In re Polar Bear

Endangered Species Act Listing & 4(d) Rule Litig., F.3d.

2013 WL 765059, at *6 (D.C. Cir. Mar. 1, 2013) (quoting Keating

v. F.E.R.C., 569 F.3d 427, 433 (D.C. Cir. 2009)).

When determining if substantial evidence supports an

agency's factual finding, "weighing the evidence is not the

court's function." United Steel, Paper & Forestry, Rubber, Mfg.,

Energy, Allied Indus. & Serv. Workers Int 'l Union, v. Pension

Ben. Guar. Corp., No. 12-5116, 2013 U.S. App. LEXIS 731, at *14

-12-
 (D.C. Cir. Jan. 11, 2013). Instead, the question is "whether

there is such relevant evidence as a reasonable mind might

accept as adequate to support the agency's finding." Id.

(quoting Consolo v. Fed. Mar. Comm'n, 383 U.S. 607, 620 (1966))

(internal quotation marks omitted) .

III. ANALYSIS

Plaintiffs make three arguments in support of vacating the

Administrator's decision. Their primary argument, which is

dispositive, is that the presumption of collectability did not

exist prior to 1987. Therefore, application of that policy to

disallow their claimed bad debts violates the first prong of the

Bad Debt Moratorium prohibiting the Secretary from changing the

agency's bad debt policies. 5

A. The Presumption of Collectability Violates the First
Prong of the Bad Debt Moratorium

The first prong of the Bad Debt Moratorium prohibits the

Secretary from making any changes to the Department ' s bad debt

policy in effect on August 1, 1987. See Foothill, 558 F. Supp.

2d at 5-9. As already noted, the Administrator concluded that
5
Because the Court concludes that the Administrator erred when
she determined that there was no change in policy in violation
of the Bad Debt Moratorium, the Court need not address
Plaintiffs' argument that the Administrator's decision failed to
allow the hospital to claim the debts based on the second,
hospital-specific prong of the Bad Debt Moratorium. For the same
reason, it is not necessary to address whether the presumption
of collectability is arbitrary and capricious. See Foothill, 558
F. Supp. 2d at 11 n.17.
-13-
the presumption of collectability was in place prior to the

effective date of the Moratorium and accordingly upheld the

intermediary's denial of the Plaintiffs' claims on this basis.

Administrator Decision, 2011 WL 4499597, at *9-*10. However, for

the reasons set forth below, the Court concludes that the

Administrator's finding was not supported by substantial

evidence. See 5 U.S.C. § 706(2) (E) (factual conclusions may be

overturned only where they are "unsupported by substantial

evidence") . 6

1. The Record Evidence Cited by the Secretary Does
Not Support the Administrator's Finding

The Secretary argues that the Regulations, various PRM

provisions, a particular 1989 MIM provision, two memoranda from

1990, a 2008 CMS Joint Signature Memorandum, and various

decisions of the Administrator provide substantial evidence that

the presumption of collectability existed prior to the enactment

of the Moratorium. De£.' s Mem. of P. & A. in Supp. of De£.' s

Mot. for Summ. J. & Opp'n to Pls.' Opening Br. 21-22 [Dkt. No.

6
The Foothill court addressed the same issue and came to the
same conclusion. Foothill, 558 F. Supp. 2d at 10-11 (finding
that the presumption of collectability was indeed "a change in
policy, for this policy did not exist prior to the effective
date of the Moratorium") . The Secretary filed an appeal of
Foothill in our Court of Appeals, but withdrew it prior to
briefing. Foothill Hosp.-Morris L. Johnson Mem'l v. Leavitt, No.
08-5224, 2008 WL 4562209 (D.C. Cir. Sept. 19, 2008).
-14-
19-1]; Def. 's Reply to Pls.' Opp' n & Reply to Def. 's Mot. for

Summ. J. 17. The Court addresses each in turn.

a. 42 C.F.R. § 413.89

The Regulation at issue, 42 C.F.R. § 413.89, was issued in

1966, and thus predates the Moratorium. 7 However, the Regulation

does not establish the presumption of collectability nor address

the use of collection agencies. It does not define "reasonable

collection efforts," "actually collectible," or "sound business

judgment." See GCI Health Care Ctrs. , Inc. v. Thompson, 2 0 9 F.

Supp. 2d 63, 69 (D.D.C. 2002).

The Secretary's response is that the presumption of

collectability is "inherent" in the Regulation. But the very

wording of the Regulation fails to support such an

interpretation. Rather than being "inherent" in the Regulation,

the presumption of collectability simply represents the

Secretary's current interpretation of the Regulation. 8 See

7
42 C.F.R. § 413.89 was originally codified in 1966 as 42 C.F.R.
§ 405.420. Principles for Reimburseable Costs, 31 Fed. Reg.
14,808, 14,813 (Nov. 22, 1966). In 1986, it was redesignated as
42 C.F.R. § 413.80. Redesignation of Reasonable Cost
Regulations, 51 Fed. Reg. 34,790, 34,790 (Sept. 30, 1986). In
2004, it was again redesignated and became 42 C.F.R. 413.89.
Changes to the Hospital Inpatient Prospective Payment Systems
and Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916, 49,254 (Aug.
11, 2004).
8
While the parties vigorously dispute the level of deference
that should be accorded the Secretary's current interpretation,
-15-
Foothill, 558 F. Supp. 2d at 10 (noting that the Secretary was

confusing the Regulation with his interpretation of the

Regulation) .

b. PRM Provisions

The Secretary also argues that the PRM provisions, on their

face, establish the presumption of collectability. However, the

language of the PRM does not set forth any such presumption,

and, in fact, tacitly contradicts it. PRM section 310 specifies

that the use of collection agencies by providers can be part of

a "reasonable collection effort." PRM section 310.2 states that

if "reasonable and customary attempts" to collect a debt have

not been successful in 12 0 days, the debt is entitled to a

presumption of noncollectibility. This provision does not

exclude debts that remain at collection agencies. Taken

together, the two PRM sections obviously contemplate the

possibility that debts which remain at a collection agency for

more than 12 0 days may be deemed noncollectible. Thus, section

310 and section 310.2 do not support the Secretary's position.

See Foothill, 558 F. Supp. 2d at 11.

c. 1989 MIM Transmittal No. 28

The Secretary also argues that a MIM transmittal letter

from September 1989 supports her position that the presumption

that question is irrelevant to the threshold issue of when the
interpretation became the Secretary's policy.
-16-
of collectability existed prior to 1987. The document,

identified as Transmittal No. 28, set out "New Policy" to be

used by intermediaries for audits performed after October 12,

1989. AR 289. Exhibit A-ll in the transmittal specified:

If the bad debt is written-off on the provider's books
121 days after the date of the bill and then turned
over to a collection agency, the amount cannot be
claimed as a Medicare bad debt on the day of the
write-off. It can be claimed as a Medicare bad debt
only after the collection agency completes its
collection effort.

AR 315. This is the first time that the presumption of

collectability actually appeared in writing, and this was two

years after the Bad Debt Moratorium went into effect.

Clearly, the fact that this is the first publication of the

presumption of collectability, and that it was issued well after

passage of the Moratorium, weighs against the Secretary's

assertion that the presumption predated the Moratorium.

Plaintiffs emphasize that the transmittal specifically

identified itself as setting forth "New Policy." Thus, the

transmission, by its own terms actually contradicts the

Secretary's argument. See Foothill, 558 F. Supp. 2d at 10

(finding that the transmittal letter was "[t] ellingly" labeled

as a new policy and thus was a "new rule when it was enacted in

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1989, several years after the Bad Debt Moratorium") . 9 In sum, the

language of the 1989 MIM Transmittal does not support the

Administrator's conclusion that it contained an established

policy with regard to the collectability of bad debts.

d. 1990 Health Care Financing Administration
Memoranda

The Secretary argues that two memoranda written by Health

Care Financing Administration ( "HCFA") 10 personnel in 1990

support her argument. First, the Secretary points to a June 11,

1990, Memorandum to regional administrators entitled

9
The Secretary argues that, while the transmittal did set forth
some new policies, it was transmitting established policy with
respect to "pass-through reasonable cost reimbursement issues
such as bad debts." Administrator Decision, 2011 WL 4499597, at
*7 n.10 (finding that exhibit was "transmitting new policy with
respect to some IPPS issues" but also "transmitting established
policy") . The Administrator's conclusion was based on language
on the front page of the transmission stating that the revisions
addressed "significant and/or recurring issues." AR 289.

Medicare reimbursement policy regarding bad debts was and
clearly still is a recurring issue. See Foothill, 558 F. Supp.
2d at 3 (citing Hennepin, 81 F. 3d at 747) (describing how the
"government has been struggling with this issue :Eor decades" and
noting that its "actions have often been inconsistent") . This
language thus provides no additional support for the Secretary.
Moreover, the Administrator conceded that there was at least
some "new policy" embodied in the transmittal. Administrator
Decision, 2011 WL 4499597, at *7 n.10 (stating that "IPPS
Exhibit A shows certain 'new policies'") . However, she did not
explain how she distinguished the "new" policy from the
"established" policy.
1
°
CMS was formerly known as the Health Care Financing
Administration. St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901
n.1 (D.C. Cir. 2010) (citation omitted)
-18-
"Clarification on Bad Debt Policy," which stated that HCFA

"always believed" that "there is a likelihood of recovery for an

account sent to a collection agency." AR 369. However, a close

look at the language of the Memorandum in its entirety squarely

contradicts her assertion that the presumption of collectability

was clearly in place in 1990, much less before the Moratorium

became effective three years earlier in 1987.

The Memorandum began by stating that HCFA had "reexamined"

its position on the collectability of accounts at collection

agencies in light of the Moratorium and the fact that "a debt

referred to a collection agency can sometimes be considered as

pending indefinitely." AR 369. Its analysis included the

following passage:

We believe that an intermediary could reasonably have
interpreted the title of section 310.2, Presumption of
Noncollectability, to provide that an uncollectible
account could be presumed to be a bad debt if the
provider has made a reasonable and customary attempt
to collect the bill for at least 120 days even though
the claim has been referred to a collection agency.
Such an interpretation is reasonable unless it is
apparent that the debt is not a bad debt, for example,
because the beneficiary is currently making payments
on account, or has currently promised to pay the debt.
As noted above, section 310.2 provides that the debt
may be deemed uncollectible rather than that the debt
"shall" or "must" be deemed uncollectible. On the
contrary, "may" connotes the existence of discretion.
Thus, even after 120 days, a debt should not be deemed
uncGllectible when there is reason to believe that in
fact it is collectible. However, the mere fact that a
debt is referred to a collection agency after the

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 provider's in-house collection effort is completed
does not mean that the debt is collectible.

AR 370 (emphasis in original) .

There are two important points to be drawn from this

passage. First, the Memorandum recognizes that an intermediary

could "reasonably" interpret the PRM differently, which

contradicts the Secretary's position in this litigation that the

PRM clearly establishes the presumption of collectability.

Second, the Memorandum stated that this alternate interpretation

is reasonable except in specific circumstances where there are

reasons beyond an account's referral to a collection agency to

believe that the debt will be collected. AR 370 (setting out

examples of specific circumstances such as where "the

beneficiary is currently making payments on account, or has

currently promised to pay the debt"). It then declared that "the

mere fact that a debt is referred to a collection agency after

the provider's in-house collection effort is completed does not

mean that the debt is collectible." These statements directly

contradict the presumption of collectability, which posits that

the "mere fact" that an account has been referred to a

collection agency makes it per se not uncollectible.

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 Second, the Memorandum explicitly recognized that HCFA had

failed to issue any directives to intermediaries expressing this

policy prior to 1987. It stated:

Therefore, where an intermediary applied section
310.2 to permit an allowable Medicare bad debt for an
account sent to a collection agency, consistent with
the provider's procedures for non-Medicare patients,
the moratorium would prohibit the intermediary from
applying the policy differently despite HCFA
directives to the contrary dated subsequent to August
1, 1987.

AR 370. This passage reflected the Secretary's interpretation of

the Moratorium to only prevent an intermediary -- not the agency

itself -- from changing its policies. See Foothill, 558 F. Supp.

2d at 4 (noting that Secretary argued that he "is free to make

changes to his own polices and is restricted only in modifying

the individual policies of individual Medicare providers") . At

no point in the Memorandum did HCFA identify any pre-1987

evidence that this interpretation existed prior to the

Moratorium. Moreover, this sentence acknowledged that the only

"directives" that might have informed the intermediary on this

issue were released "subsequent to August 1, 198 7." Thus, the

Memorandum taken as a whole does not support the Secretary's

position.

The Secretary attempts in her Motion for Summary Judgment

to "bolster" the weight of the June 1990 Memorandum by

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referencing a March 20, 1990, Memorandum from the CMS Director

of the Office of Quality Control Programs. See Def.'s Mem. of P.

& A. in Supp. of Def. 's Mot. for Summ. J. & Opp' n to Pls.'

Opening Br. 20 n.10. This Memorandum was not included in the

Administrative Record and therefore need not be considered. 11

However, even if the Court were to consider the March 1990

Memorandum, it neither "bolsters" the June Memorandum nor

supports the Secretary's position. The Memorandum stated that

HCFA "has had a long standing policy on when providers could

claim bad debts" but failed to identify any pre-1987 evidence

that supported that conclusion. Thus, even if the Court were to

consider this March Memorandum, it would not "bolster" the

weight of the June Memorandum, nor support the Secretary's

contention that the presumption of collectability was in place

prior to 1987.

11
Despite having already used the appropriate procedure to
supplement the Administrative Record in this case to include the
2008 Joint Statement Memorandum, see Def. 's Mot. for Leave to
Supplement the Admin. Record [Dkt. No. 1 7] , the Secretary did
not follow such procedure with the March 1990 Memorandum.
Instead, it attached it to its initial filing as an exhibit. The
Court notes that its "[r]eview is to be based on the full
administrative record that was before the Secretary at the time
he made his decision." Walter 0. Bosw~ll Mem. Hosp., 749 F.2d at
792 (emphasis in original) (quoting Citizens to Preserve Overton
Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971)).
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 e. 2008 CMS Joint Statement Memorandum

The Secretary also argues that the May 2, 2008, CMS Joint

Statement Memorandum ( "JSM") supports the Administrator's

finding. The JSM's self-stated purpose was to "clarify

longstanding policy concerning reimbursement for a Medicare bad

debt while the account is at a collection agency." Supplemental

AR 1. However, like the earlier memoranda just discussed, the

JSM actually contradicts the Secretary's position.

First, the JSM cited no pre-1987 evidence in support of its

statement that the presumption of collectability was in place

prior to the Moratorium. Second, the JSM directly contradicted

the June 1990 Memorandum by asserting that the PRM clearly

establishes the presumption of collectability. In addition, the

June 1990 Memorandum explicitly told intermediaries who had

permitted providers to claim bad debts outstanding at collection

agencies that they not only could, but must, continue to allow

such bad debts pursuant to the Moratorium. The JSM, in

contradiction, declared such actions to be "not in accordance

with the regulations" and instructed intermediaries to apply the

presumption of collectability. Supplemental AR 2. The JSM

demonstrates that, twenty years after the Moratorium went into

effect, the agency had still not succeeded in adequately

communicating or implementing a policy that it claims was in

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place for over forty years. The JSM does not support the

Secretary's position.

f. CMS Administration Decisions

Finally, the Secretary argues that various Administrator

decisions support her decision. First, she identifies six

Administrator decisions 12 between 1992 and 1997 which allegedly

demonstrate the Administrator's consistent "position that

accounts pending at collection agencies cannot be deemed

worthless." Def. 's Reply to Pls.' Opp' n & Reply to Def. 's Mot.

for Summ. J. 7-8. First, all these cases postdate the Moratorium

by several years. Second, all of these cases deal with the

separate issue of whether both Medicare and non-Medicare

accounts must be sent to a collection agency for the provider to

claim the Medicare accounts as bad debts. These decisions do not

address when in the process the provider can claim such accounts

as bad debts, and thus, are not applicable.

12
Baystate Med. Ctr. v. Aetna (H.C.F.A. Admin. Dec. Aug. 4,
1997) [Dkt. No. 28-1 pp. 58-65]; Arlington Hosp. v. Blue Cross
Blue Shield Ass'n, 1997 WL 420393 (H.C.F.A. Admin. Dec. June 13,
1997) [Dkt. No. 28-1 pp. 49-57]; Detroit Receiving Hosp. & Univ.
Health Ctr. v. Blue Cross and Blue Shield Ass'n, 1996 WL 887671
(H.C.F.A. Admin. Dec. Oct. 7, 1996) [Dkt. No. 28-1 pp. 41-48];
Mem' 1 Hosp. of Dodge Cty. v. Blue Cross & Blue Shield Ass' n
(H.C.F.A. Admin. Dec. March 22, 1996) [Dkt. No. 28-1 pp. 31-40];
Univ. Hosp. v. Blue Cross & Blue Shield Ass'n (H.C.F.A. Admin.
Dec . Aug. 21, 19 9 5) [Dkt . No. 2 8 -1 pp. 21-3 0] ; Humana Hosp. v.
Aetna Life Ins. Co. (H. C. F .A. Admin. Dec. Sept. 11, 1992) [Dkt.
No. 28-1 pp. 2-10].
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 Second, the Secretary identifies three fairly recent

Administrator decisions that "apply the Secretary's policy in

the same manner it has been applied in this case." Def. 's Reply

to Pls.' Opp'n & Reply to Def.'s Mot. for Summ. J. 9. In

addition to the fact that all of these cases significantly post-

date the Moratorium, the decisions were either overturned based

on a finding that the presumption of collectability violated the

Bad Debt Moratorium or were upheld without addressing the

Moratorium issue.

The earliest of the decisions cited by the Secretary is a

2004 case, Battlecreek Health Sys. & Mercy Gen. Health Partners

v. Blue Cross Blue Shield Ass'n, 2004 WL 3049346 (H.C.F.A.

Admin. Dec. Nov. 12, 2004). The Western District of Michigan

affirmed the Administrator's decision, and was upheld by the

Sixth Circuit Court of Appeals. Battle Creek Health Sys. v.

Thompson, 423 F. Supp. 2d 755, 760 (W.D. Mich. 2006), aff'd,

Battle Creek Health Sys. v. Leavitt, 498 F. 3d 401 (6th Cir.

2007). However, as the Foothill court observed, the parties in

Battle Creek did not raise, and neither the district court nor

the appellate court addressed, the Moratorium. Foothill, 558 F.

Supp. 2d at 5 n.7.

The second case cited is Mesquite Cmty. Hosp. v. Blue Cross

and Blue Shield Ass'n, 2007 WL 1804073 (H.C.F.A. Admin. Dec.

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Apr. 18, 2007), which was similarly upheld without addressing

the Bad Debt Moratorium. Mesquite Cmty. Hosp. v. Levitt, 3-07-

CV-1093-BD, 2008 WL 4148970, at *3 n.4 (N.D. Tex. Sept. 5, 2008)

(noting that "[u]nlike the provider in Foothill Hospital,

plaintiff makes no argument concerning the Bad Debt Moratorium

in this case").

The third case is the Administrator's 2007 opinion in

Foothill Presbyterian Hosp. v. Blue Cross & Blue Shield Ass' n,

2007 WL 1004394 (H.C.F.A. Admin. Dec. Feb. 14, 2007). As

discussed above, that opinion was overturned by another member

of this District Court because she found that the

Administrator's determination that the presumption of

collectability existed prior to 1987 was not supported by

substantial evidence. Foothill, 558 F. Supp. 2d at 11. Thus,

these opinions are not persuasive evidence of pre-Moratorium

policy.

In sum, the Court has reviewed the evidence cited by the

Secretary and finds that it falls far short of the "substantial

evidence" on which the Administrator based her contention that

the presumption of collectability existed prior to 1987.

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 2. Evidence in the Record Contradicts the
Administrator's Finding that the Presumption of
Collectability Existed Prior to 1987

The Court must look to "the record as a whole 11 in reviewing

the Administrator's factual findings. Chippewa Dialysis Servs.

v. Leavitt, 511 F.3d 172, 176 (D.C. Cir. 2007). In this case, a

review of the record, beyond the evidence relied upon by the

Secretary, further contradicts the Administrator's finding.

For instance, a set of audit guidelines in place in 1985,

obviously pre-Moratorium, specifically addressed collection

agencies. AR 360-365. Section 15.04 of the Hospital Audit

Program, located in a manual for intermediaries, explained that:

Where a provider utilizes the services of a collection
agency, the provider need not refer all uncollected
patient charges to the agency, but it may refer only
uncollected charges above a specified minimum amount.
If reasonable collection effort was applied, fees the
collection agency charges the provider are recognized
as an allowable administrative cost of the provider.

AR 362. It then stated that, "[t]o determine the acceptability

of collection agency services, 11
the intermediary should ensure

"both Medicare and non-Medicare uncollectible amounts are

handled in a similar manner 11 by the provider, ensure that the

patient's file "is properly documented to substantiate the

collection effort, 11
and determine if the amounts are properly

recorded. AR 362. It is noteworthy that these guidelines set out

step-by-step instructions for intermediaries preparing to audit

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a provider's use of collection agencies, but did not state that

PRM section 310.2's presumption of noncollectability did not

apply to accounts sent to collection agencies.

In addition, the pre-Moratorium provision of the MIM relied

on by the Secretary did not prohibit reimbursement while an

account was outstanding at a collection agency. AR 367; see

Foothill, 558 F. Supp. 2d at 11. Thus, in two major references

provided to intermediaries, the Secretary did not mention or

allude to any presumption of collectability.

Moreover, a pre-Moratorium Administrator decision·, Scotland

Mem. Hosp. v. Blue Cross & Blue Shield Ass' n, (H. C. F .A. Admin.

Dec. Nov. 9, 1984), directly contradicts the presumption of

collectability. AR 463-464. In Scotland Memorial, the

Administrator noted that the presumption of noncollectability

established in PRM section 310.2 deserved "more weight than the

subjective and unrealistic opinion of the provider's witness,

who felt the bad debts were not uncollectible because she

expected the collection agency to collect them." AR 464. Thus,

as of 1984, the presumption of noncollectability in section

310.2 applied to accounts that had been sent to collection

agencies.

Finally, in a 1995 case, the Administrator approved a bad

debt claim even though the debt had been given to an outside

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collection agency that had not yet terminated its efforts.

Lourdes Hosp. v. Blue Cross & Blue Shield Ass'n, (H.C.F.A.

Admin. Dec. Oct. 27, 1995). AR 271-275. While Lourdes, like many

of the Administrator decisions cited above, significantly post-

dates the Moratorium, it demonstrates that the presumption of

collectability was not firmly established even eight years after

the Moratorium went into effect.

The Court is mindful that review of a final agency decision

is ~highly deferential," Bloch, 348 F. 3d at 1070, and

understands that ~weighing the evidence is not the court's

function." United Steel, 2013 U.S. App. LEXIS 731, at *14.

However, considering that the Secretary has pointed to no

persuasive evidence that supports her contention, much less pre-

1987 evidence, and that the only pre-1987 evidence that has been

identified by the parties contradicts the Secretary's position.

there is not "such relevant evidence as a reasonable mind might

accept as adequate to support" her conclusion. Id. (citation

omitted). Accordingly, the Court must conclude that the record

does not contain substantial evidence to uphold the

Administrator's determination that the intermediary

appropriately disallowed the Plaintiffs' bad debt claims.

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IV. REMEDY

Plaintiffs request that the Court "reimburse Plaintiffs for

the bad debt claims on their fiscal year 2003, 2004 and 2005

cost reports, including interest." Proposed Order [Dkt. No. 14-

1]. As noted in Foothill, however, the appropriate remedy is a

remand to the Agency. See Foothill, 558 F. Supp. 2d at 11

(quoting Palisades Gen. Hosp. Inc. v. Leavitt, 426 F.3d 400, 403

(D.C. Cir. 2005)) (observing that once District Court has

determined that agency made an error of law, the case must be

remanded to the agency for further proceedings) .

Thus, because the Court finds that the Administrator's

factual determination that the presumption of collectability

existed prior to 1987 was not supported by substantial evidence,

the Court vacates the Administrator's decision and remands the

case to the Secretary for further proceedings consistent with

this ruling.

V. CONCLUSION

For the foregoing reasons, Plaintiffs' Motion for Summary

Judgment is granted and Defendant's Motion for Summary Judgment

is denied. An Order shall accompany this Memorandum Opinion.

March 26, 2013
/sf@~~
Gladys Kessle
United States District Judge

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