Columbia Saint Mary's Hospital Milwaukee, Inc. v. Sebelius

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
COLUMBIA SAINT MARY’S )
HOSPITAL MILWAUKEE, INC., )
)
Plaintiff, )
)
v. ) Civil Action No. 09-2031 (ABJ)
)
KATHLEEN SEBELIUS, Secretary, )
U.S. Department of Health & Human )
Services, )
)
Defendant. )
____________________________________)

MEMORANDUM OPINION

Plaintiff, Columbia St. Mary’s Hospital Milwaukee, Inc., has brought this action against

defendant Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services,

for improperly calculating the hospital’s Medicare disproportionate share hospital (“DSH”)

adjustment for fiscal year 1999. The DSH adjustment is the means by which hospitals that serve

a disproportionately large number of low income patients can receive additional federal financial

assistance. This lawsuit concerns the statutory provision that sets forth how the DSH adjustment

is to be calculated, and it centers on the meaning of the term “entitled” to Medicare in that

provision. In 2004, the Secretary issued a formal rulemaking explaining her current

interpretation of the term, which she began implementing in 2000. But as of 1999, the Secretary

applied a different interpretation of the statute.

This case presents two issues: whether the Secretary’s current interpretation of the

statute is supported by the statute’s plain terms or is otherwise permissible, and whether the

application of that interpretation to Columbia St. Mary’s FY 1999 DSH adjustment is proper.
The D.C. Circuit has already ruled that the Secretary’s interpretation is not inconsistent with the

statute, leaving open the question of whether it is reasonable. Northeast Hosp. v. Sebelius, 657

F.3d 1 (D.C. Cir. 2011). But this Court need not rule on that issue either because it holds that

even if it assumes the Secretary’s interpretation is permissible, applying that interpretation to

Columbia St. Mary’s 1999 DSH adjustment would be an improper retroactive application of the

agency’s current rule. The Court, therefore, grants the hospital’s the motion for summary

judgment and denies the Secretary’s cross-motion for summary judgment.

I. BACKGROUND

A. The DSH Adjustment

The federal Medicare program provides healthcare coverage to individuals who are at

least 65 years old and eligible for Social Security benefits, among others. 42 U.S.C. § 402.

Medicaid programs are state-run programs that provide healthcare coverage to certain low

income individuals. 42 U.S.C. § 1396. Under both programs, the federal government

reimburses healthcare providers for the services they provide to Medicare and Medicaid

enrollees. See 42 U.S.C. § 1395ww(d). The Department of Health and Human Services

(“HHS”) administers both programs, and the Center for Medicare and Medicaid Services

(“CMS”), which is part of HHS, is responsible for reimbursing providers. See 42 U.S. C. §§

1395h, 1395u.

Hospitals that serve a large number of low income patients can receive additional

reimbursement from the federal government based on the Medicare DSH adjustment. 42 U.S.C.

§1395ww(d)(5)(F)(i)(I). This adjustment does not calculate the actual number of low income

individuals a hospital serves, but rather is an indirect, or “proxy” measurement. Catholic Health

Initiatives v. Sebelius, 841 F.Supp.2d 270, 272 (D.D.C. 2012), citing H.R. Report No. 99–241, at

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16 (1985), reprinted in 1986 U.S.C.C.A.N. at 594. This proxy is calculated by adding two

fractions: the Medicare fraction, sometimes called the SSI fraction, and the Medicaid fraction.

The statute defines the Medicare fraction as follows:

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
this subchapter and were entitled to supplementary security income
benefits (excluding any State supplementation) under subchapter 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 this
subchapter,

42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). It defines the Medicaid fraction this way:

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 who (for such days) were eligible for medical assistance under a
State plan approved under subchapter XIX of this chapter [i.e., Medicaid],
but who were not entitled to benefits under part A of this subchapter [i.e.,
Medicare] and the denominator of which is the total number of the
hospital’s patient days for such period.

42 U.S.C. §1395ww(d)(5)(F)(vi)(II) (emphasis added). The equation below summarizes this

calculation:

Medicare Fraction + Medicaid Fraction = DSH Adjustment

number of patient days for number of patient days for
patients entitled to Medicare patients eligible for Medicaid, but
Part A and to SSI not “entitled” to Medicare Part A
number of patient days for total number of
patients who were entitled patient days
to Medicare Part A

CMS delegates the task of calculating the DSH adjustment to “fiscal intermediaries,”

which are typically private insurance companies acting as the Secretary’s agent. Northeast

Hosp. v. Sebelius, 657 F.3d 1, 3 (D.C. Cir. 2011). To obtain additional reimbursement under the

DSH adjustment, hospitals submit data to these fiscal intermediaries, which calculate the

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adjustment for the relevant time period and issue a notice of program reimbursement to the

hospital. 42 C.F.R. § 405.1803. If a hospital disagrees with the intermediary’s calculation, the

hospital can appeal to an administrative body appointed by the Secretary: the Provider

Reimbursement Review Board (“PRRB”). 42 U.S.C. § 1395oo(a); see also Northeast Hosp.,

657 F.3d at 3–4. The Secretary can then affirm, modify, or reverse the PRRB. 42 U.S.C. §§

1395oo(d)–(f).

B. This Case and Procedural History

Columbia St. Mary’s is an acute care hospital in Milwaukee, Wisconsin that participates

in the federal Medicare program. Compl. ¶ 6. For the period covered by the hospital’s fiscal

year ending June 1999, the hospital had a patient eligible for both Medicare and Medicaid – a

dual-eligible patient – who spent 365 patient days in the hospital that Medicare did not pay for

because the patient had exhausted his Medicare hospital coverage. 1 Pl.’s Statement of Material

Facts (“Pl.’s SMF”) [Dkt. # 14] ¶¶ 2, 7. The fiscal intermediary that calculated Columbia St.

Mary’s DSH adjustment excluded the patient’s 365 unpaid hospital days from the Medicaid

numerator, because it interpreted the phrase “entitled” to Medicare benefits in the numerator to

mean simply whether the patient was enrolled in Medicare or not, not whether the patient’s

hospital days were actually covered by the program. See PRRB Decision 2009-D27 (“PRRB

Decision”) at 4 (attached to Pl.’s SMF, Ex. A). In other words, because the patient with 365

unpaid Medicare days was both a Medicaid enrollee and a Medicare enrollee – and therefore,

“entitled” to Medicare benefits, under the intermediary’s interpretation, the patient’s days were

excluded from the hospital’s calculation.

1 Medicare covers the first 90 days of a beneficiary’s inpatient hospital care and provides
an additional 60 “lifetime reserve days” of inpatient hospital coverage. Catholic Health n.3,
citing 42 C.F.R. § 409.61(a).

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 Columbia St. Mary’s appealed the fiscal intermediary’s calculation to the PRRB, which

decided the appeal in favor of the hospital. PRRB Decision at 5. It held that “entitled” to a

benefit means “the absolute right to receive an independent and readily defined payment.” Id.,

citing Jewish Hosp., Inc. v. Sec’y of Health and Human Services, 19 F.3d 270, 275 (6th Cir.

1994). Under that interpretation, the patient with 365 hospital days unpaid by Medicare should

have been included in the fraction because he had dual-eligibility and he was “not entitled” to

Medicare benefits because his days had been unpaid. In making this ruling, the PRRB relied on

Jewish Hospital, which interpreted “entitled” to Medicare in the Medicare proxy of the

calculation. “The issue is not new and the Board has consistently applied the holdings of the

Court in Jewish Hospital,” which held that “entitled” to Medicare benefits means that benefits

were actually paid. Id., citing Jewish Hospital, 19 F.3d at 275.

The Secretary, through the CMS, overturned the PRRB’s decision. See Ctrs. for

Medicare and Medicaid Serv’s Decision of the Adm’r, Rev. of PRRB 2009-D27 at 6 (attached to

Pl.’s SMF, Ex. A). CMS held that:

[T]he statutory phrase in the Medicaid proxy “but who were not entitled to
benefits under Medicare Part A of this title” forecloses the inclusion of the
days at issue in this case in the numerator . . . . [I]t is the status of the
patients, as opposed to the payment for the day, which determines whether
a patient day is included in the numerator of the Medicaid proxy.

Id. at 5.

Columbia St. Mary’s filed this suit challenging the Secretary’s decision, and the parties

have filed cross motions for summary judgment. See Pl.’s Mot. for Summ. J. (“Pl.’s Mot.”)

[Dkt. # 12]; Def.’s Cross-Mot. for Summ. J. (“Def.’s Mot.”) [Dkt. # 15]. After the parties

briefed their motions for summary judgment, the D.C. Circuit issued Northeast Hosp. Corp. v.

Sebelius, 657 F.3d 1 (D.C. Cir. 2012). The parties briefed their views of the decision’s effect on

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this case. See Pl.’s Status Report (“Pl.’s SR”) [Dkt. # 26]; Def.’s Statement Re: Order dated

Dec. 16, 2011 (“Def.’s SR”) [Dkt. # 27]. Columbia St. Mary’s and the Secretary requested, and

the Court granted, a stay pending a determination of whether the parties in Northeast Hospital

Corp. would seek review of that case by the U.S. Supreme Court. Min. Order Dec. 14, 2011.

When the parties in Northeast Hospital Corp. did not file a petition for writ of certiorari,

Columbia St. Mary’s and the Secretary advised the Court of this and notified the Court of two

other new relevant decisions, Catholic Health Initiatives v. Sebelius, 841 F.Supp.2d 270 (D.D.C.

2012) and Hall v. Sebelius, 667 F.3d 1293 (D.C. Cir. 2012). See Joint Status Report (“Joint SR”)

[Dkt. # 28]. The parties then briefed the effect of the two new decisions on this lawsuit. See

Def.’s Notice of Supplemental Authority (“Def.’s Notice”) [Dkt. # 30]; Pl.’s Resp. Re: Notice of

Supplemental Authority [Dkt. # 32]; Def.’s Reply [Dkt. # 33].

II. STANDARD OF REVIEW

Summary judgment is appropriate when the pleadings and evidence show that “there is

no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a

matter of law.” Fed.R.Civ.P. 56(a). However, in cases involving review of agency action under

the Administrative Procedure Act (“APA”), Rule 56 does not apply due to the limited role of a

court in reviewing the administrative record. Select Specialty Hosp.-Akron, LLC v. Sebelius, 820

F.Supp.2d 13, 21 (D.D.C. 2011). Under the APA, the agency’s role is to resolve factual issues

and arrive at a decision that is supported by the administrative record, and the court’s role is to

“determine whether or not as a matter of law the evidence in the administrative record permitted

the agency to make the decision it did.” Occidental Eng’g Co. v. INS, 753 F.2d 766, 769–70 (9th

Cir. 1985), citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971); see also

Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977).

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 Under the APA, a court must “hold unlawful and set aside agency action, findings, and

conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law,” 5.U.S.C. § 706(2)(A), in excess of statutory authority, id. § 706(2)(C), or

“without observance of procedures required by law,” id. § 706(2)(D); see also 42 U.S.C. §

1395oo(f)(1). However, the scope of review is narrow. See Motor Vehicle Mfrs. Ass’n of U.S.,

Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The agency’s decision is

presumed to be valid. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. at 415.

Also, a court must not “substitute its judgment for that of the agency.” State Farm, 463 U.S. at

43. A court must be satisfied, however, that the agency has examined the relevant data and

articulated a satisfactory explanation for its action, “including a rational connection between the

facts found and the choice made.” Alpharma, Inc. v. Leavitt, 460 F.3d 1, 6 (D.C. Cir. 2006)

(citations omitted) (internal quotation marks omitted).

In reviewing an agency’s interpretation of a statute, courts use the two-step analysis

outlined in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Step

one involves determining whether Congress has spoken directly to the “precise question at

issue,” for if it has, then “the court, as well as the agency, must give effect to the unambiguously

expressed intent of Congress.” Id. at 842–43. If it has, then that is the end of the matter. Id.;

Nat’l Treasure Employees Union v. Fed. Labor Relations Auth., 392 F.3d 498, 500 (D.C. Cir.

2004). However, if the statute is silent or ambiguous on the question (Chevron “step two”), “the

question for the court is whether the agency’s answer is based on a permissible construction of

the statute.” Chevron, 467 U.S. at 843, 104 S.Ct. 2778. The agency’s interpretation only needs

to be reasonable to warrant deference. Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702

(1991).

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III. ANALYSIS

The parties’ briefs on summary judgment set forth arguments about whether the statute

supports the Secretary’s current interpretation of the DSH adjustment provision, and their

supplemental briefs address how the subsequent decisions from the D.C. Circuit Court of

Appeals and the district court affect this case, including the issue of retroactive application of the

rule.

A. Statutory Interpretation

The dispute at the heart of this case concerns the meaning of the phrase “entitled to

benefits under part A of this subchapter,” i.e., Medicare, in the statute. 42 U.S.C.

§1395ww(d)(5)(F)(vi). Columbia St. Mary’s takes the position that being entitled to Medicare

benefits means that Medicare paid for the specific services in question. The Secretary takes the

position that it means a patient was a Medicare beneficiary, whether or not Medicare actually

paid for the specific services.

Columbia St. Mary’s argues that the Secretary’s interpretation of the statute is

inconsistent with the plain meaning of the statute and is unreasonable, arbitrary and capricious.

Pl.’s Mot.at 1. In arguing that “entitled” to Medicare part A in the Medicaid proxy means that

that Medicare paid for a patient’s services, the hospital relies, among other things, on Jewish

Hospital and other circuit court cases that interpret the term “entitled” to Medicare part A in

other parts of the DSH calculation that way. See Mem. in Supp. of Pl.’s Mot. for Summ. J.

(“Pl.’s Mem.”) at 10 (attached to Pl.’s Mot.). If Columbia St. Mary’s is correct, the 365 unpaid

hospitals days for the patient at issue would be included in the numerator. In the hospital’s view,

that patient was not “entitled” to Medicare part A benefits because Medicare did not actually pay

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for his hospital days, so he met both criteria for his days to be included in numerator: dual-

eligibility and hospital days unpaid by Medicare. See id. at 18–19.

The Secretary contends that “entitled” to Medicare part A benefits refers to an

individual’s status as a Medicare enrollee, not whether Medicare paid for specific services.

Mem. of Points and Authorities in Supp. of Def.’s Cross-Mot. for Summ. J. (“Def.’s Mem.”) at

18–19 (attached to Def.’s Mot.). She argues, among other things, that the disputed term is

defined by the Medicare statute, that the plain language of the statute and its legislative history

support the agency’s interpretation, and that the interpretation is reasonable. Id. at 17–38.

According to the Secretary, Columbia St. Mary’s patient was “entitled” to Medicare part A

benefits because of his status as a Medicare enrollee, regardless of whether Medicare paid for his

hospital days. See id. at 34. Thus, his 365 days should be excluded from the numerator in the

calculation because he was both a Medicare and a Medicaid enrollee, but the statute includes in

the numerator only patient days for someone who is a Medicaid enrollee and not a Medicare

enrollee. See id. at 3.

After the parties briefed the summary judgment motions, the Court of Appeals for the

D.C. Circuit issued two rulings that address what being “entitled” to Medicare means, Northeast

Hosp. Corp. v. Sebelius, 657 F.3d 1 (D.C. Cir. 2011) and Hall v. Sebelius, 667 F.3d 1293 (D.C.

Cir. 2012). Northeast Hospital Corp. ruled, in part, on the meaning of “entitled” to Medicare in

another part of the DSH calculation, and Hall discussed what being entitled to Medicare means

in the context of whether Medicare beneficiaries can disavow their Medicare benefits.

Northeast Hospital Corp. involved the question of whether the hospital days of Medicare

part C enrollees should be included in the Medicare fraction of the DSH calculation. The lower

court analyzed the Secretary’s current interpretation of the term “entitled” to Medicare part A as

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referring to a patient’s status and held that this interpretation is not supported by the statutory

language. Northeast Hosp. Corp. v. Sebelius, 699 F.Supp.2d 81 (D.D.C. 2010). The D.C.

Circuit overturned that decision, ruling under the first prong of Chevron that “the Medicare

statute does not unambiguously foreclose the Secretary’s interpretation” that entitlement to part

A benefits refers to a patient’s status and not right to payment. See Northeast Hosp. Corp., 657

F.3d at 5–18, applying Chevron, 467 U.S. 837. The Circuit did not reach the second prong of the

Chevron analysis, however, because it concluded that in that case, the Secretary improperly

applied her interpretation as it affected the Medicare part C enrollees retroactively to 1999–2002

calculations. Northeast Hosp. Corp., 657 F.3d at 13.

Hall analyzed what it means to be “entitled” to Medicare benefits given that the

plaintiffs, who were 65 years old and entitled to Social Security benefits, could decline to request

Medicare payments and can relinquish their Medicare benefits. 667 F.3d at 1294. Because

private insurers limit coverage to Medicare part A beneficiaries, plaintiffs in that case sought a

legal declaration stating not only that they could choose to decline Medicare benefits but that the

government cannot pay them on their behalf. Id. at 1295. The D.C. Circuit held that plaintiffs

remain “entitled” to Medicare part A benefits under the law regardless of whether they accept the

benefits that comes with that entitlement. Id. at 1296.

Both of these decisions support the Secretary’s interpretation of the statute, but neither

entirely decides the question before this Court. Northeast Hosp. Corp. ruled under the first

prong of the Chevron analysis that the Secretary’s interpretation is not foreclosed by the statute’s

language, but the decision did not go on to consider whether the interpretation was reasonable

under the second prong of the Chevron analysis. And although Hall discussed what being

“entitled” to Medicare means in the context of that case, it did not address the question in the

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context of the DSH statutory provision. This Court need not rule on whether the Secretary’s

interpretation is proper under Chevron, however, because as in Northeast Hosp. Corp. and in

Catholic Health, it rules that even if the interpretation is proper, applying the interpretation

retroactively to Columbia St. Mary’s 1999 DSH calculation is improper.

B. Retroactivity

Catholic Health addressed the same legal issues presented here, and the parties have

briefed that decision’s relevance to this case. Because the Court finds Catholic Health

persuasive, it discusses that ruling’s analysis and the parties’ arguments about its effect on this

case.

i. Catholic Health Initiatives v. Sebelius

Catholic Health ruled that the Secretary’s current application of the Medicaid numerator

statute to a hospital’s 1997 DSH adjustment an improper retroactive application of the statute. 2

841 F.Supp.2d at 278. An agency may not promulgate a retroactive rule absent express

congressional authorization. Northeast Hosp., 657 F.3d at 13, citing Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 208 (1988). To determine whether a rule is impermissibly retroactive, the

Court must “first look to see whether it effects a substantive change from the agency’s prior

regulation or practice.” National Mining Ass’n v. Dep’t of Labor, 292 F.3d 849, 860 (D.C. Cir.

2002). If the rule departs from established practice, the Court must then examine its impact, if

any, on the legal consequences of prior conduct. See id. A rule that “alter[s] the past legal

consequences of past actions” is retroactive; a rule that alters only the “future effect” of past

actions, in contrast, is not. Mobile Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir. 2006),

quoting Bowen, 488 U.S. at 219 (Scalia, J., concurring) (internal quotation marks omitted). In

2 The Secretary has appealed the decision in Catholic Health. Catholic Health Initiatives
v. Sebelius, appeal docketed, No. 12–5092 (D.C. Cir. Apr. 5, 2012).

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other words, “[i]f a new rule is ‘substantively inconsistent’ with a prior agency practice and

attaches new legal consequences to events completed before its enactment, it operates

retroactively.” Arkema Inc. v. EPA, 618 F.3d 1, 7 (D.C. Cir. 2010).

Catholic Health concluded that the record in that case demonstrated “conclusively that

the Secretary was for including dual-eligible exhausted benefit days in the Medicaid fraction

before she was against it.” 841 F.Supp.2d at 278. Specifically, the court ruled that before 2000,

the Secretary had a policy and practice of including dual-eligible unpaid Medicare benefit days

in the Medicaid numerator, and that in 2000, she changed that policy to exclude those days from

the numerator. Id. at 279–281. The court ruled that when the Secretary applied that new policy

to Catholic Health’s 1997 cost reports, she improperly applied the policy retroactively. Id. at

282. The Secretary does the same thing here.

1) The Secretary’s Rulemakings

Catholic Health’s analysis begins by setting forth any agency rules that existed before the

Secretary issued any pronouncements about the disputed statutory provision. Id. at 278. In a

1986 interim final rule, the Secretary interpreted the phrase “entitled to benefits under part A of

[Medicare]” in the Medicare fraction, as well as “eligible” for Medicaid in the Medicaid fraction

as meaning covered or paid for days. Id. That interim final rule did not, however, expressly

address the part of the calculation at issue in Catholic Health and here: “entitled to benefits

under part A of [Medicare]” in the Medicaid numerator. So, although there was a rule stating

that “entitled” to Medicare benefits in the first fraction meant paid for by Medicare, as of 1986,

there was no express rule on the meaning of the exact same phrase in the Medicaid fraction. Id.

(“Left up in the air” is the question of whether, in 1986, the Secretary interpreted the phrase in

the Medicaid numerator the same way it was interpreted in the Medicare fraction.)

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 This changed in 1995, when the Secretary issued a rule that stated:

A hospital’s disproportionate share adjustment is determined by
calculating two patient percentages (Medicare Part A/Supplemental
Security Income (SSI) covered days to total Medicare covered days, and
Medicaid but not Part A covered days to total inpatient hospital days),
adding them together, and comparing that total percentage to the hospital’s
qualifying criteria.

Id. at 279 (emphasis in original), quoting 60 Fed. Reg. 45,778, 45,811 (Sept. 1, 1995). The

emphasized language describes the Medicaid numerator as including inpatient days “covered,” or

paid for, by Medicaid, but not covered or paid for by Medicare. In other words, the Secretary

summarized the phrase “entitled to benefits under part A [of Medicare]” in the Medicaid fraction

as meaning days paid for by Medicare. This language appeared verbatim in three additional

Federal Register notices in 1995 and 1996. Catholic Health, 841 F.Supp.2d at 279, citing 60

Fed. Reg. 29,202, 29,244 (Jun. 2, 1995) (proposed rule); 61 Fed. Reg. 27,444, 27,273 (May 31,

1996) (proposed rule); 61 Fed. Reg. 46,166, 46, 206 (Aug. 30, 1996) (final rule). Given these

multiple administrative pronouncements, the court in Catholic Health reasoned that although the

1986 rulemaking did not expressly interpret “entitled to benefits under part A [of Medicare]” in

the Medicaid fraction, as of 1995, the Secretary interpreted the phrase in both fractions to mean

that Medicare had paid for the relevant patient days. Id.

In addressing Catholic Health’s analysis of these rules, the Secretary contends in the

present case that the single “fleeting” sentence in the rules “was not intended to announce a

substantive interpretation of the Medicaid fraction.” Def.’s Notice at 9. But the Secretary chose

to include the sentence in four Federal Register notices over fourteen months. Whether the

sentence was intended to announce a substantive interpretation of the Medicaid fraction or not,

the rules reflect the Secretary’s interpretation at that time of the DSH adjustment calculation. In

doing so, they repeatedly describe the Medicaid numerator as counting unpaid Medicare hospital

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days. And “fleeting” or not, the sentence is the only reference in the rules of the Secretary’s

interpretation of the phrase.

The Secretary also argues that because, at the time, “eligible” for Medicaid in the

Medicaid fraction meant only covered days, “it is likely that any reference to ‘covered’ Medicare

days in the Medicaid fraction was inadvertent – an example of a misplaced modifier.” Id. In

making this argument, the Secretary would have the Court rewrite the words of a sentence that

the Secretary published, and re-published, in the Federal Register. The fact that the Secretary

included the exact same language in four separate notices suggests that the Secretary did not

“misplace a modifier,” but meant what she wrote. See, e.g., Motorola, Inc. v. United States, 30

C.I.T. 1766, 1773 (2006), aff’d, 509 F.3d 1368 (Fed. Cir. 2007) (“Rules of statutory construction

are similarly applicable to the Code of Federal Regulations, interpreting a statute.”); Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975) (“The starting point in every case

involving construction of a statute is the language itself.”).

Finally, the Secretary argues that these rules were not intended to interpret the term

“entitled” to Medicare in the Medicaid fraction, suggesting the Court should simply ignore them.

Def.’s Notice at 9–10. But the Secretary has not identified any other agency rule issued at the

time that interpreted the term differently. These four statements reflect the Secretary’s

contemporaneous understanding of the meaning the phrase at issue in this lawsuit, and this Court

cannot rewrite or ignore them.

2) The Secretary’s Administrative Decisions

The rules cited in Catholic Health are not the only statements the Secretary made about

the meaning of this phrase. The court in that case also analyzed administrative determinations

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issued by the Secretary after the 1995 and 1996 rules that reflected the agency’s practice of

including dual-eligible unpaid Medicare days in the Medicaid numerator.

1. Presbyterian Medical Center

Presbyterian Medical Center of Philadelphia was a 1996 administrative decision that

involved two issues: (1) the meaning of the phrase “eligible” for Medicaid in the first part of the

Medicaid fraction and (2) how to treat “a number of days of care that were billed to Medicaid

because the patients has exhausted their Medicare benefits.” Presbyterian Med. Ctr. of Phila. v.

Aetna Life Ins. Co., CMS Adm’r Dec., available at 1996 WL 887683 at *2 (H.C.F.A. 1996)

(attached to Def.’s Notice, Ex. A). On the second issue, Presbyterian Medical Center instructed

that unpaid Medicare benefit days should be included in the Medicaid fraction, id. at 2 and 4, and

the court in Catholic Health considered that to be significant:

[O]n the exact question for this Court – namely, whether patient days
attributable to patients who were eligible for Medicaid but who had
exhausted their Medicare benefits should be included the Medicaid
fraction – the Administrator affirmed the PRRB’s decision, finding that
such days “may be properly included in the DSH calculation . . . ”

Catholic Health, 841 F.Supp.2d at 280, citing Presbyterian Med. Ctr., 1996 WL 887683 at *4.

The Secretary argues that Catholic Health wrongly relied on Presbyterian Medical

Center because that decision was not “focused” on the second issue of unpaid Medicare days, but

rather on the first issue. Def.’s Notice at 11. Catholic Health, according to the Secretary, reads

too much into the “single sentence” that addressed the second issue, emphasizing that the

agency’s discussion was “relegated to four sentences at the very end of the decision.” Id.

In making this argument, the Secretary acknowledges that Presbyterian specifically

addressed the issue in dispute here. Id. at 10. The fact that this issue took fewer sentences to

address than the first issue in the case makes it no less relevant or instructive. Whether the

Secretary needed four sentences or forty sentences to address the question, the instruction was
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the same: to include unpaid Medicare days in the Medicaid numerator “consistent with 42

C.F.R. 412.106.” Id. at 10. And the fact that the Secretary could easily address the issue in that

case supports the conclusion that the agency had an existing policy. She did not need to provide

a lengthy explanation given her repeated pronouncements starting in 1995 that the Medicaid

numerator included “Medicaid but not Part A covered days.” Id. at 8.

To support her argument about Presbyterian, the Secretary directs the Court to a 1997

administrative memorandum about Health Care Finance Administrative Ruling 97-2. Def.’s

Notice at 12, citing Mem. Re: HCFA Ruling 97-2 Instructions (Jun. 12, 1997) (“HCFA Mem.”)

(attached to Def.’s Notice, Ex. D). Ruling 97-2 was a new rule the Secretary implemented to

interpret the first part of the Medicaid numerator, the meaning of “eligible for [Medicaid]” in the

Medicaid fraction numerator. 3 Health Care Fin. Admin. Ruling 97-2 (Feb. 27, 1997) (attached to

Def.’s Notice, Ex. C). Before that new rule was promulgated, the agency had interpreted

“eligible” for Medicaid to mean patient days paid for by Medicaid. Id. at 2. After it was issued,

the agency interpreted the phrase to refer to the fact of Medicaid enrollment only. Id. at 3. The

agency sent a memorandum to regional administrators explaining the change. In it, the agency

wrote that the statute

precludes the counting of any patient days furnished to patients entitled to
both Medicare Part A and Medicaid. Therefore, once the State has
verified the eligibility of the hospital’s patient data for Medicaid purposes,
the intermediary must determine if any of these days are dual entitlement
days and subtract them from the calculation.

HCFA Mem. at 2.

3
It was issued in response to adverse rulings from four circuit courts about the agency’s
interpretation of the term “eligible” for Medicaid, Cabell Hunting Hosp., Inc. v. Shalala, 101
F.3d 984 (4th Cir. 1996); Legacy Emanuel Hosp. & Health Ctr. v. Shalala, 97 F.3d 1261 (9th
Cir. 1996); Deaconess Health Servs. Corp. v. Shalala, 83 F.3d 1041 (8th Cir. 1996) (per curiam),
affirming 912 F.Supp. 438 (E.D. Mo. 1995); Jewish Hosp., Inc. v. Secretary of Health and
Human Servs., 19 F.3d 270 (6th Cir. 1994).
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 In citing this memorandum, the Secretary argues that if Presbyterian had “ushered” in a

policy in November 1996 of including hospital days unpaid by Medicare in the Medicaid

numerator, this 1997 memorandum would have mentioned the Presbyterian decision or the

policy. Def.’s Notice at 13. The memorandum, the Secretary argues, shows that as of 1997, the

Secretary’s policy was to “exclude[] from the Medicaid fraction numerator hospitals days

belonging to beneficiaries of Medicare Part A and Medicaid.” Id. But Catholic Health did not

hold that Presbyterian ushered in a new rule. It held that Presbyterian reinforced the practice

expressed in the 1995 rule. Catholic Health, 841 F.Supp.2d at 279–80.

Further, the memorandum is not inconsistent with the policy stated in 1995 of including

unpaid Medicare days in the Medicaid numerator. It reiterates the new rule on the meaning of

“eligible” for Medicaid, while remaining silent about what “entitled” to Medicare means in the

second part of the numerator. The memorandum instructs intermediaries first to verify with the

State a patient’s “eligibility” for, i.e., enrollment in, Medicaid, then determine if any of those

days are “dual-entitlement days and subtract them.” HCFA Mem. at 2. But the memorandum

does not specifically answer the only question here – what dual-entitlement means – so there is

no reason to conclude based on this evidence that subtracting “dual-entitlement days” cannot

mean subtracting unpaid Medicare days, as the 1995 rule provided.

2. Jersey Shore Medical Center

Catholic Health next analyzed a 1999 administrative decision in which the Secretary

vacated a PRRB decision to include dual-eligible unpaid Medicare benefit days, Jersey Shore

Medical Center v. Blue Cross & Blue Shield Ass’n, CMS Adm’r Dec., reprinted in Medicare &

Medicaid Guide (CCH) ¶ 80,153 (Jan. 4, 1999) (attached to Def.’s Notice, Ex. E). Catholic

Health did not read this decision to mean the policy to include such days in the Medicaid

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numerator was no longer in effect, because the order to vacate resulted from a different issue.

Catholic Health, 841 F.Supp.2d at 280. The only reason the agency gave for vacating the issue

of exhausted benefit days was to “avoid bifurcation” of the case. Id. at 281.

The Secretary describes Jersey Shore Medical Center as the first time the agency was

presented squarely with the issue of whether exhausted Medicare days should be included in the

Medicaid numerator. Def.’s Notice at 13. The Secretary agrees that the question was dispensed

with on procedural grounds but argues that if a settled policy of including unpaid benefit days in

the numerator existed, the agency would have affirmed that part of the PRRB’s decision.

Id. at 14. The court in Catholic Health concluded the opposite – that if the agency had such a

policy, it would have made that clear and reversed the PRRB on that basis. Catholic Health, 841

F.Supp.2d at 281. In this Court’s view, the procedural disposition of the matter leaves the Court

with insufficient grounds to draw a conclusion either way. In any event, the record in Catholic

Health presented no additional information about Jersey Shore Medical Center after the agency

issued it, id., and the Secretary provides no further information about the case’s subsequent

history to this Court. 4

3. Edgewater Medical Center

Catholic Health found that it was not until almost two years later, in April 2000, that the

Secretary first announced a clear rule excluding unpaid Medicare benefit days from the Medicaid

numerator. Catholic Health at 281. She announced this in Edgewater Med. Ctr. v. Blue Cross

4 The Secretary did submit a December 4, 1998 memorandum that the Acting Deputy
Director for the agency’s Plan and Provider Purchasing Policy Group submitted for CMS’s
consideration in deciding Jersey Shore Medical Center. Mem. Re: Office Hearings, Hearing
Decision No. 99-D4; Jersey Shore Medical Center (“Jersey Mem.”) (attached to Def.’s Notice,
Ex. G). That memorandum states the Acting Deputy Director disagreed with the PRRB’s
decision to include the unpaid Medicare days in the Medicaid numerator. Jersey Mem. at 2. But
the Secretary did not adopt that position in the Jersey Shore Medical Center decision, again,
dispensing with the issue on procedural grounds.
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Blue Shield Ass’n, CMS Adm’r Dec., available at 2000 WL 1146601 (H.C.F.A.) at * 4 (attached

to Def.’s Notice, Ex. H). The Secretary then formalized this rule change in a 2004 rulemaking.

Catholic Health at 281-82, citing 69 Fed. Reg. 49,916, 49,099 (Aug. 11, 2004).

Although the Secretary agrees that Edgewater was the first case squarely raising and

deciding how to count unpaid hospital days, she disagrees that it marks a substantive departure

from prior practice. Def.’s Notice at 15. To demonstrate this, the Secretary points to the fact

that the Edgewater decision italicized the phrase “entitled to” in the Medicaid fraction provision

as proof the Secretary intended to interpret that provision. Id. at 16. The Secretary also submits

a 2003 decision, Castle Med. Ctr. Provider v. Blue Cross/Blue Shield Ass’n, PRRB Dec. No.

2003-D6 (Sept. 12, 2003) (attached to Def.’s Notice, Ex. J), and Mercy Med. Ctr. v. Wisconsin

Physician Servs., PRRB Dec. No. 2010-D7 (Dec. 4, 2009) (attached to Def.’s Notice, Ex. K), a

2010 decision, for the proposition that the Administrator italicizes the language he intends to

interpret. Def.’s Notice at 16. Whether the Secretary italicized particular text in these decisions

or not, these decisions do not show that the agency interpreted the statute to exclude dual-eligible

unpaid Medicare days from the Medicaid numerator before April 2000. They only show that the

Secretary excluded dual-eligible unpaid Medicare days from the Medicaid numerator after April

2000. More importantly, the Secretary identifies no additional cases to support its argument that

before April 2000 the agency “consistently interpreted the Medicaid fraction to exclude

exhausted inpatient hospital coverage days.” Def.’s Notice at 18 (emphasis in original).

Given the well-reasoned analysis in Catholic Health and the fact that the Secretary has

not presented any new information or argument to warrant a contrary holding, the Court holds

that before April 2000, the Secretary had a policy and practice of including unpaid Medicare

benefit days in the Medicaid numerator of the DSH calculation. It was not until 2000, with

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Edgewater, that the agency implemented a substantive change from that prior policy and

practice, and began excluding unpaid Medicare days from the numerator.

ii. Columbia St. Mary’s DSH Calculation

The Court further holds that applying the agency’s new policy to Columbia St. Mary’s

1999 DSH calculation is an improper application of the rule on a retroactive basis. An agency

may not promulgate a retroactive rule without express congressional authorization. Northeast

Hosp., 657 F.3d at 13, citing Bowen, 488 U.S. at 208(1988). The Secretary has no congressional

authorization to promulgate retroactive rules for DSH calculations. Northeast Hosp., 657 F.3d

at 17.

As explained above, the Secretary’s new rule departs from its established practice in 1999

of including unpaid Medicare days in the Medicaid numerator. That departure applied to

Columbia St. Mary’s 1999 DSH calculation altered the past legal consequences of the hospital’s

past actions. Id at 16–17. Hospitals that serve a disproportionately large number of low income

patients receive a statutorily mandated additional payment from the Secretary. 42 U.S.C.

§1395ww(d)(5)(F)(i). Whether a hospital qualifies for this payment and the payment amount

depend on the hospital’s DSH fractions. Northwest Hosp., 657 F.3d at 17. A rule that alters the

method for calculating those fractions, therefore, changes the legal consequences of treating low

income patients. Id. Here, excluding 365 patient days from Columbia St. Mary’s Medicaid

numerator under the current rule reduces the hospital’s DSH adjustment payment. Thus, the

Secretary’s current interpretation of the statute, first applied in 2000 in the Edgewater decision,

cannot be applied retroactively to Columbia St. Mary’s fiscal year 1999 DSH calculation.

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IV. CONCLUSION

For the reasons set forth above, the Court will grant Columbia St. Mary’s motion for

summary judgment, will deny the Secretary’s cross-motion for summary judgment, will vacate

the Secretary’s final decision, and will remand the matter to the Secretary for further proceedings

in accordance with this decision.

AMY BERMAN JACKSON
United States District Judge

DATE: September 28, 2012

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