Select Specialty Hospital - Denver, Inc. v. Sebelius

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IN THE UNITED STATES DISTRICT COURT
8 FOR THE DISTRICT OF COLUMBIA

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COVE ASSOCIATES JOINT VENTURE
11 D/B/A/ LIFE CARE CENTER OF No. 1:10-cv-01316 (BJR)
SCOTTSDALE, No. 1:10-cv-01356 (BJR)
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Plaintiff ORDER AND MEMORANDUM OF
13 LAW ON MOTIONS FOR SUMMARY
v. JUDGMENT
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15 KATHLEEN SEBELIUS, Secretary United States
Department of Health and Human Services.
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Defendant.
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__________________________________________
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19 SELECT SPECIALITY HOSPITAL-DENVER,
INC., et. al.,
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Plaintiffs
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22 v.

23 KATHLEEN SEBELIUS, Secretary United States
Department of Health and Human Services.
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Defendant.
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ORDER-1
 I. INTRODUCTION
1
This matter is before the court on the parties’ motions and cross-motions for summary
2
judgment filed pursuant to Federal Rule of Civil Procedure 56. The motions were filed in Select
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4 Specialty Hospital-Denver, Inc. v. Sebelius, 1:10-cv-01356 (BJR) and Cove Associates Joint

5 Venture d/b/a/ Life Care Center of Scottsdale v. Sebelius, 1:10-cv-01316 (BJR). The cases
6 involve substantially similar factual allegations and procedural history, and implicate identical
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statutes, regulations and interpretive guidance. Accordingly, the court will address all of the
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outstanding motions in this order.
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The cases comprise challenges to two final decisions of Defendant Kathleen Sebelius, the
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11 Secretary of Health and Human Services (“Defendant” or the “Secretary”), in which she denied

12 Medicare reimbursement for certain “bad debts” Select Specialty Hospital-Denver, Inc. (“Select

13 Specialty”) and Cove Associates Joint Venture d/b/a/ Life Care Center of Scottsdale
14 (“Scottsdale”) (collectively referred to as “Plaintiffs” or the facilities) incurred as a result of
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treating patients eligible for both Medicare and Medicaid (known as dual-eligible beneficiaries or
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“dual-eligibles”). The Secretary denied reimbursement to Plaintiffs on the grounds that the
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facilities failed to comply with the agency’s “must-bill” policy—a policy that requires a provider
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19 to bill its state’s Medicaid program for costs associated with dual-eligibles before claiming

20 payment for such costs as Medicare bad debt.

21 Plaintiffs move this court for relief from the Secretary’s final decisions, alleging that they
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are arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with the law.
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Defendant opposes the motions and moves with its own motions, requesting that the court
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uphold the Secretary’s decisions. Having reviewed the brief and having entertained oral
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argument, the court finds as follows.

ORDER-2
 II. STATUTORY AND REGULATORY BACKGROUND
1
A. The Medicare Program
2

3 The Medicare program, established by Title XVIII of the Social Security Act, commonly

4 known as the Medicare statute, pays for covered medical care provided primarily to eligible aged
5 and disabled persons. See 42 U.S.C. § 1395, et seq. The Centers for Medicare & Medicaid
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Services (“CMS”) is the operating component of the Department of Health and Human Services
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(“HHS”) charged with administering the Medicare program. The program consists of four main
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parts; Part A, at issue here, provides coverage for the costs of hospital services, related post-
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10 hospital services, home health, and hospice care. See 42 U.S.C. §§ 1395c - 1395i-5. This

11 includes skilled nursing services. See 42 U.S.C. § 1395f(a)(2)(B).

12 Skilled nursing facilities (“SNF”) and Long Term Care Hospitals (“LTCH”) may
13 participate in the Medicare program as a “provider” of services by entering into a “provider
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agreement” with the Secretary. 42 U.S.C. §§ 1395cc, 1395x(u). During the period at issue here,
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CMS contracted with private insurance companies to act as “fiscal intermediaries” (“FIs”) and
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assist in the day-to-day operations of the Medicare program. See 42 U.S.C. § 1395h (2004). The
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18 FI determines the payment to be made to a provider based on audits of annual cost reports

19 submitted by the provider. 42 C.F.R. § 413.20. To receive payment from Medicare for services

20 rendered, the provider is required to file a Medicare cost report with its FI at the end of a cost
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reporting year. 42 C.F.R. § 413.20. The FI is responsible for reviewing the cost report and
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issuing a Notice of Program Reimbursement (“NPR”) which sets forth the amount of allowable
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Medicare payments. 42 C.F.R. § 405.1803.
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A provider that is dissatisfied with a NPR decision may appeal to the Provider
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Reimbursement Review Board (“PRRB” or the “Board”), an administrative tribunal within HHS

ORDER-3
 established to hear Medicare reimbursement disputes. 42 U.S.C. § 1395oo(a). A decision of the
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PRRB is final unless the Secretary, on her own motion, reverses, affirms or modifies the Board’s
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3 decision. See 42 U.S.C. § 1395oo(f).

4 The Secretary has delegated her authority to review PRRB decisions to the Administrator
5 of CMS. 2 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875(a)(1). A provider dissatisfied with a
6
decision of the PRRB or the Secretary, if the Secretary reviews the Board’s decision, may seek
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judicial review of that decision by filing a civil action within 60 days of the date that notice of
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the final decision is received. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877(b).
9

10 B. The Medicaid Program

11 Title XIX of the Social Security Act, commonly known as the Medicaid statute,

12 establishes a cooperative federal-state program that finances medical care for the poor, regardless
13 of age. See 42 U.S.C. §§ 1396-1396v. To participate in Medicaid, a state must submit a plan to
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the Secretary that sets forth, among other things, financial eligibility criteria, covered medical
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services, and reimbursement methods and standards. 42 U.S.C. §§ 1396a(a), 1396a(b), 1396b. If
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the Secretary approves the state’s Medicaid plan, the state’s payments are considered to be
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18 expenditures made “under” the state plan. 42 U.S.C. § 1396b(a)(1). Expenditures made under the

19 state plan, in turn, are matched by federal funds according to a percentage formula tied to the

20 per-capita income in the state, with the percentage ranging from fifty percent to eighty-three
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percent of the cost of medical services provided under the plan. 42 U.S.C. §§ 1396b; 1396d(b).
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“Although participation in the Medicaid program is entirely optional, once a state elects to
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participate, it must comply with the requirements of Title XIX.” Harris v. McRae, 448 U.S. 297,
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301 (1980).
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Unique problems are presented by the existence of persons who qualify for both

ORDER-4
 Medicare and Medicaid (so-called “dual eligibles”), a group composed chiefly of elderly poor
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individuals. In many cases, they cannot afford Medicare Part A deductibles and coinsurances.
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3 For this reason, Medicaid allows states to use Medicaid dollars to pay the cost-sharing

4 obligations of dual-eligible individuals. See 42 U.S.C. § 1396a(a)(10)(E)(i). Because the federal
5 government heavily subsidizes Medicaid, this enables states to shift a large portion, though not
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all, of the cost of caring for the elderly poor to the federal treasury. Plaintiffs “[do] not admit
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residents whose primary pay source is Medicaid,” but they do admit dual-eligible beneficiaries.
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(Cove Associates Joint Venture d/b/a/ Life Care Center of Scottsdale v. Sebelius, 1:10-cv-01316
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10 (BJR) Administrative Record (“C-AR”), C-Dkt. No. 10 at 186, 277; Specialty Hospital-Denver,

11 Inc. v. Sebelius, 1:10-cv-01356 (BJR) Administrative Record (“S-AR”), S-Dkt. No. 15 at 639.).

12 C. Medicare “Bad Debts”
13 Prior to July 1, 1998, the Medicare program paid SNFs and LTCHs for furnishing care to
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Medicare beneficiaries based on a retrospective determination of the facilities’ “reasonable cost”
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as defined in the Secretary’s regulations and identified in a provider’s annual cost report. See 42
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U.S.C. §§ 1395f(b), 1395x(v)(1)(A); 42 C.F.R. § 413.1 et seq. Beginning on July 1, 1998,
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18 Congress established a prospective payment system under which facilities are reimbursed

19 through prospectively-fixed rates. See 42 U.S.C. § 1395yy(e); 42 C.F.R. § 413.300 et seq.

20 However, certain other Medicare payments continued to be retrospectively determined and
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reimbursed on a reasonable cost basis, including the unpaid deductible and coinsurance
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obligations of Medicare beneficiaries – or “bad debts” – at issue here. 42 C.F.R. § 413.89(a),
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(h).
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The Secretary has issued regulations regarding the financial documentation that providers
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ORDER-5
 must maintain for reimbursement purposes. 42 C.F.R. §§ 413.20, 413.24. The regulations require
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providers to “maintain sufficient financial records and statistical data for proper determination of
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3 costs payable under the program.” 42 C.F.R. § 413.20(a). The Secretary’s regulations also define

4 “bad debts” as:
5 amounts considered to be uncollectible from accounts and notes receivable that
were created or acquired in providing services. “Accounts receivable” and “notes
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receivable” are designations for claims arising from the furnishing of services,
7 and are collectible in money in the relatively near future.

8 42 C.F.R. § 413.89(b)(1); see Provider Reimbursement Manual (“PRM”) § 302.1 (ex. 1 at 3-3).
9 Unpaid patient obligations in general are treated as reductions in revenue rather than
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reimbursable “costs” of furnishing care. 42 C.F.R. § 413.89(a), (c). However, because the
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Medicare statute provides that the Secretary’s regulations may not result in the costs of
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Medicare-covered services being shifted to non-Medicare patients (or their payers), see 42
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14 U.S.C. § 1395x(v)(1)(A)(i), the regulations provide for reimbursement of Medicare bad debts so

15 that the costs of Medicare services covered by such amounts are not borne by other patients. 42

16 C.F.R. § 413.89(d). This policy is known as the prohibition against cost-shifting or cross-
17 subsidization.
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Medicare is the primary insurer for dual-eligibles and covers medically necessary
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services. Medicaid acts as the secondary payer. To prevent windfalls for providers that might
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otherwise have strong incentives to simply “write off” unpaid Medicare obligations as bad debts
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22 rather than pursue collection of the amounts, the Secretary’s regulations establish several criteria

23 that an unpaid Medicare obligation must meet to be allowed as a “bad debt.” The criteria are:

24 (1) The debt must be related to covered services and derived from deductible and
coinsurance amounts.
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(2) The provider must be able to establish that reasonable collection efforts were
made.
(3) The debt was actually uncollectible when claimed as worthless.
ORDER-6
 (4) Sound business judgment established that there was no likelihood of recovery
1 at any time in the future.
2
42 C.F.R. § 413.89(e); PRM § 308 attached to Dkt. No. 14 as Ex. 1 at 3-5.
3
The PRM, issued together with similar guidelines and letters under the Secretary’s
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interpretive rulemaking authority, explain and clarify the application of the reimbursement
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regulations. See Shalala v. Guernsey Mem. Hosp., 514 U.S. 87, 99 (1995). PRM § 310 instructs
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7 that a provider’s effort to collect Medicare deductible and coinsurance amounts will only be

8 considered “reasonable” if the effort is “similar to the effort the provider puts forth to collect”
9 comparable non-Medicare debts. (Dkt. No. 14, Ex. 1 at 3-5.). PRM § 310 describes the types of
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collection action with respect “to the party responsible for the patient’s personal financial
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obligations” that must be taken to satisfy the “reasonable collection efforts” requirement. (Id.).
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One such requirement is that the collection efforts “must involve the issuance of a bill.” (Id.).
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14 With respect to a patient’s personal financial obligations, whenever a provider is able to

15 establish that a patient is indigent, a presumption of uncollectibility applies, and the provider

16 may claim the related debt without first pursuing the collection efforts described in PRM § 310.
17 (See PRM § 312 attached to Dkt. No. 14 as Ex. 1, 3-6 to 3-7.). While PRM § 312 sets forth
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guidelines for determining a patient’s indigence, it also contains a categorical rule that
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“[p]roviders can deem Medicare beneficiaries indigent or medically indigent when such
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individuals have also been determined eligible for Medicaid as either categorically needy or
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22 medically needy individuals, respectively.” Id. However, these provisions do not speak to the

23 financial obligations of the state Medicaid program under these circumstances.

24 Another provision of the PRM does speak to states’ obligations in this regard. Section
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322 of the PRM provides guidance on reimbursement for bad debts that arise due to nonpayment

ORDER-7
 of Medicare co-payments and deductible amounts owed to providers relating to services
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provided to dual-eligibles. PRM § 322 provides that any portion of deductible or coinsurance
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3 amounts that a state is not obligated to pay under its Medicaid program can be claimed as a

4 Medicare bad debt, provided that the requirements of PRM § 312, or, if applicable, PRM § 310
5 are met. (See PRM § 322 attached to Dkt. No. 14 as Ex.1, 3-8 to 3-9.). However, where “a State
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is obligated by statute or under the terms of its [Medicaid] plan to pay all, or any part, of the
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Medicare deductible or coinsurance amounts, these amounts are not allowable as bad debts under
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Medicare.” Id.
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10 On August 10, 2004, CMS issued Joint Signature Memorandum 370 (“JSM-370”), which

11 provides:

12 In order to fulfill the requirement that a provider make a “reasonable” collection
effort with respect to the deductibles and co-insurance amounts owed by dual-
13 eligible patients, our bad debt policy requires the provider to bill the patient or
14 entity legally responsible for the patient’s [. . .] medical bill; e.g., title XIX, local
welfare agency . . . . prior to claiming the bad debt from Medicare.
15
* * *
16 [I]n those instances where the state owes none or only a portion of the dual-
eligible patient’s deductible or co-pay, the unpaid liability for the bad debt is not
17 reimbursable to the provider by Medicare until the provider bills the State, and the
18 State refuses payment (with a State Remittance advice).

19
(C-AR at 552 (quotation omitted).). A “remittance advice” is the particular device used by state
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Medicaid programs to notify providers of the state’s Medicaid liability for costs. JSM-370 also
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22 referenced a recent Ninth Circuit decision, Cmty. Hosp. of the Monterey Peninsula v. Thompson,

23 323 F.3d 782, 799 (9th Cir. 2003):

24 In November of 1995, language was added in PRM-II Section 1102.3L (the cost
report questionnaire) that allowed providers to show other documentation in lieu
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of billing the states. Unfortunately, that language conflicted with the billing
requirements in Chapter 3 of the PRM-I, and the Ninth Circuit panel found
Section 1102.3L to be inconsistent with the Secretary’s must-bill policy. The
ORDER-8
 panel also noted that, effective in August of 1987, Congress had imposed a
1 moratorium on changes in bad-debt-reimbursement policies, and therefore the
Secretary lacked authority in November of 1995 to effect a change in policy. As a
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result of the Ninth Circuit decision, we changed the language in PRM-II Section
3 1102.3l to revert back to pre-1995 language, which requires providers to bill the
individual states for dual-eligibles’ co-pays and deductibles before claiming
4 Medicare bad debt.
5 Id. at 552-53 (internal citations omitted).
6 The Cmty. Hosp. of the Monterey Peninsula decision and the JSM reference the so-called
7 bad debt “moratorium” enacted by Congress in 1987. The bad debt moratorium required as
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follows:
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In making payments to hospitals under [the Medicare program], the Secretary of
10 Health and Human Services shall not make any change in the policy in effect on
August 1, 1987, with respect to payment under [the Medicare program] to
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providers of service for reasonable costs relating to unrecovered costs associated
12 with unpaid deductible and coinsurance amounts incurred under [the Medicare
program] (including the criteria for what constitutes a reasonable collection effort
13 . . . and for determining whether to refer a claim to an external collection agency).
The Secretary may not require a hospital to change its bad debt collection policy
14 if a fiscal intermediary, in accordance with the rules in effect as of August 1,
1987, with respect to criteria for . . . determining whether to refer a claim to an
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external collection agency, has accepted such policy before that date.
16
Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, sec. 4008(c), 101 Stat. 1330-
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55, as amended by the Technical Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, sec.
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8402, 102 Stat. 3798, and as further amended by the Omnibus Budget Reconciliation Act of
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20 1989, Pub. L. No. 101-239, sec. 6023, 103 Stat. 2176 (codified as a note to 42 U.S.C. § 1395f

21 (1992)).
22 III. STATEMENT OF MATERIAL FACTS ON THE ADMINISTRATIVE RECORDS
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Scottsdale operates Life Care Center of Scottsdale, a freestanding skilled nursing facility
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located in Scottsdale, Arizona. (C-AR at 116-17.). The Scottsdale facility participates in
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Medicare and provides covered health care services to Medicare beneficiaries. (Id. at 219, 516.).

ORDER-9
 Select Specialty operates long term care hospitals in Wilmington, Delaware; Jefferson Parish,
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Louisiana; Fort Smith, Arkansas; Denver, Colorado; and Orlando, Florida. (S-AR at 674.). These
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3 facilities also participate in Medicare and provide covered health care services to Medicare

4 beneficiaries. (Id. at 674.). Therefore, Plaintiffs’ patients include Medicare beneficiaries who are
5 obligated to pay coinsurance.
6
During the relevant time period, none of the facilities participated in their respective
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state’s Medicaid programs. (C-AR at 158; S-AR at 640.). As such, Plaintiffs did not admit
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residents who were only Medicaid eligible. However, the facilities did provide health services to
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10 Medicare beneficiaries who may have also been eligible for their states’ Medicaid programs, in

11 other words, dual-eligibles. (C-AR at 120; S-AR at 639.).

12 In fiscal years 2004 and 2005, Plaintiffs incurred bad debts related to Medicare-covered
13 services—specifically related to the Medicare cost-sharing amounts owed in connection with
14
such services. 1 (C-AR at 158; S-AR at 639.). Stated otherwise, Plaintiffs were not paid for some
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Medicare deductible and coinsurance amounts owed by dual-eligibles. Id.
16
Scottsdale’s fiscal intermediary, Riverbend Government Benefits Administrator
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18 (“Riverbend” or “FI”), finalized adjustments to Scottsdale’s 2004 cost report in an Notice of

19 Program Reimbursement (“NPR”) dated June 2, 2006. It denied $46,694 of the facility’s total

20 Medicare reimbursement. (C-AR at 219, 515.). The FI finalized adjustments to Scottsdale’s 2005
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cost report in an NPR dated April 20, 2007, denying $88,961 of the facility’s total Medicare
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reimbursement. (C-AR at 157.). The FI cited the CMS must-bill policy as its reason for denying
23
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24 The applicable periods at issue are the Plaintiffs’ respective cost reporting periods. For Scottsdale, the cost
reporting periods at issue had fiscal year end (“FYE”) of December 31, 2004 and December 31, 2005. Select
25 Specialty’s are as follows: Select Specialty—Delaware, cost reporting period with a FYE of 7/31/05; Select
Specialty—Jefferson Parish and Select Specialty—Fort Smith, cost reporting periods with FYEs of 8/31/05; Select
Specialty—Denver, cost reporting period with a FYE of 9/30/05; and Select Specialty—Orlando, cost reporting
period with a FYE of 12/31/05
ORDER-10
 these amounts. The total amount in controversy for the Scottsdale facility is $135,655. (C-AR at
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157.).
2

3 In July 2007, Select Specialty’s fiscal intermediary, Wisconsin Physicians Service

4 Insurance Corporation (“Wisconsin” or “FI”) finalized adjustments to Select Specialty’s cost
5 reports in a NPR, denying a total of $438,693 of dual eligible bad debt reimbursement for the
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2005 fiscal year. (S-AR 674.). The FI again cited the CMS must-bill policy as its reason for
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denying these amounts. (S-AR at 686.).
8
During a dialog between Select Specialty’s Reimbursement Director, Wade Snyder, and
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10 its FI, the FI informed Select Specialty as follows:

11 Since collection effort is still continuing against the state, the write off date would
not occur until the day you receive the support from the state showing that they
12 did not pay any amount. At that time it can be determined to be
uncollectible….As far as reimbursement for these bad debts goes, once you get
13 the support from the state, you can submit a listing of your current year bad
14 debts….

15 (S-AR at 547.). This was restated in another communication from the FI to Mr. Snyder later that

16 same day:
17 Although billing of the state agency may seem futile, this is the requirement CMS
18 has put forth, and is in line with their “must-bill” policy. This policy reflects the
requirement in CMS Pub. 15-I Section 312, which states that “the provider must
19 determine that no source other than the patient would be legally responsible for
the patient’s medical bill; e.g. title XIX, local welfare agency and guardian.” As
20 stated before, the only support CMS is allowing as proof of such is the RA from
the state, with no exceptions.
21

22 (Id. at 553.).

23 Select Specialty alleges that it attempted to satisfy the must-bill policy but was

24 unsuccessful. It claims that when it attempted to bill Arkansas’, Louisiana’s, Colorado’s, and
25
Delaware’s Medicaid programs without a Medicaid provider number, each state refused to

ORDER-11
 process the claims. 2 (Id. at 640.). Mr. Snyder forwarded an email that he received from the
1
Michigan Medicaid program, which refused to provide RAs for non-participating providers. (Id.
2

3 at 516.). In response, the FI advised Select Specialty that:

4 [i]t is the responsibility of the state Medicaid plans to process these RAs,
regardless of whether they state that they “cannot.” If they truly feel that they are
5 unable to fulfill this requirement, they should contact CMS themselves to dispute
it.
6

7 (Id. at 515.).

8 Select Specialty claims that in response to the rejected claims, four of the LTCHs at issue
9 here applied for Medicaid enrollment. (Id. at 641.). Select Specialty Hospital—Orlando became
10
enrolled in Medicaid effective May 1, 2004. Enrollment was denied to one of the three remaining
11
hospitals allegedly because its state does not recognize LTCHs as Medicaid providers, and
12
Medicaid enrollment is pending for the other two hospitals. In September 2007, Select Specialty
13

14 contacted the FI to determine “whether a State’s refusal to permit [an LTCH] to participate in its

15 Medicaid program satisfies Medicare’s ‘must-bill policy’ for dual eligible patients.” (Id. at 312.).

16 The FI responded that it does not. (Id. at 330.).
17 CMS has not consistently enforced the must-bill requirement against Plaintiffs. Prior to
18
2004, Scottsdale’s FI reimbursed its facility for dual-eligible bad debts without requiring
19
Medicaid RAs. (See C-AR at 118, 398.). Scottsdale claims that it was not until May 2006 that the
20
FI notified Scottsdale such costs would be held to the must-bill requirement. (C-AR at 117.).
21

22 Likewise, for all of Select Specialty’s cost reporting periods prior to fiscal year 2005, its

23 FI reimbursed the facilities for dual-eligible bad debt without Medicaid RAs. (S-AR at 256-57.).

24 Prior to April 2007, the FI allowed proof of the beneficiary’s indigence (here, dual-eligible
25
2
This billing did not occur during the fiscal years in question, but rather, was done in response to the FI’s
rejection of the claims in 2007. (See S-AR at 259.). In addition, the bills were “sample” bills that were not claim-
specific and may have contained fabricated Medicaid numbers. (Id. at 137, 139.).
ORDER-12
 status) as a sufficient basis for Medicare bad debt reimbursement. (S-AR at 127-28, 237, 239.).
1
Indeed, the FI reimbursed some of Select Specialty’s other subsidiary hospitals for dual-eligible
2

3 bad debt without Medicaid RA in fiscal year 2005. Select Specialty claims that it was not until it

4 received an email dated April 5, 2007 from its FI, that it was notified that such costs would be
5 held to the must-bill standard. In the email, the FI stated:
6
“[F]rom this point forward, all providers, Medicaid certified or not, MUST bill
7 the State and obtain a valid RA showing denied or partial payment before we
allow the bad debt on the cost report.”
8
(S-AR at 546-49.) (emphasis in original).
9

10 IV. PROCEDURAL HISTORY

11 Pursuant to 42 C.F.R. § 405.1837, Plaintiffs appealed the fiscal year 2004 and fiscal year

12 2005 NPRs to the PRRB. (C-AR at 37; S-AR at 457.). The issue before the PRRB was whether
13 the “must-bill” policy applies to Plaintiffs’ dual-eligible bad debts when Plaintiffs did not
14
participate in Medicaid. (C-AR at 35; S-AR at 48.). Select Specialty’s hearing was held on
15
December 3, 2008 and the PRRB issued a decision on April 13, 2010. Scottsdale’s hearing was
16
held on June 2, 2009 and the PRRB issued a decision on April 9, 2010. Both decisions reversed
17

18 the FIs’ adjustments. The Board concluded that CMS’ “must-bill” policy “has no foundation in

19 law and is beyond the requirements of the regulations and [PRM]. Application of the must-bill

20 policy to dual-eligible bad debts when the Provider did not participate in the Medicaid program
21
is improper.” (C-Dkt. No. 1, Ex. A at 10.).
22
The CMS Administrator reviewed the PRRB’s decisions pursuant to § 1878(f)(1) of the
23
Act. The parties were notified of the Administrator’s intention to review the Board’s decisions,
24
and CMS and the FIs submitted comments requesting that the decisions be reversed, while the
25
Plaintiffs submitted comments requesting that the decisions be affirmed. In decisions dated June

ORDER-13
 1 and June 9, 2010 (the “Administrator’s Decisions” or the “Decisions”), the Administrator
1
reversed the PRRB’s ruling. The Administrator held that the bad debts claimed by Plaintiffs were
2

3 properly disallowed by the FIs because Plaintiffs had failed to determine that the “debt was

4 actually uncollectable when claimed as worthless as required under 42 C.F.R. 413.89(e)(3) and
5 [the PRM].” (C-AR at 12.). “[B]ecause the Provider has not billed the State and the State had not
6
issued RAs for these services contemporaneous with the cost reporting periods, the bad debts
7
cannot be demonstrated as” meeting the Medicare Bad Debt Criteria. (Id. at 15.). In sum, the
8
Administrator reasoned that:
9

10 [T]he remittance advices are critical as they document the proper payments that
should be made from the respective programs. Moreover, a fundamental principle
11 of the [Medicare] program is that payment be fair to the providers, the
“contributors to the Medicare trust fund[,]” and to other patients. In this instance
12 the Medicare program is reasonably balancing the accuracy of the bad debt
payment and the need to ensure the fiscal integrity of the Medicare funding, with
13 the providers[’] claims for payment which can be made under two different
14 programs for which Medicare is the payer of last resort.

15 (Id. at 16.).

16 Following the Administrator’s Decisions, Plaintiffs timely appealed by filing a
17 complaints with this Court on August 5 and August 12, 2010. Scottsdale moved for summary
18
judgment on February 12, 2011 (c-dkt. no. 13), Select Specialty moved for summary judgment
19
on March 25, 2011 (s-dkt. no. 20), and Defendant filed cross-motions for summary judgment on
20
April 1 and June 23, 2011 (c-dkt. no. 14; s-dkt. no. 23). The motions are now ripe for review.
21

22 V. DISCUSSION

23 A. Standard of Review
24 Pursuant to the Medicare statute, this court reviews Administrator Decisions in
25
accordance with standard of review set forth in the Administrative Procedures Act (the “APA”).

42 U.S.C. § 1395oo(f)(1); Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994); Mem'l
ORDER-14
 Hosp./Adair County Health Ctr., Inc. v. Bowen, 829 F.2d 111, 116 (D.C.Cir.1987). The APA
1
requires a reviewing court to set aside an agency action that is “arbitrary, capricious, an abuse of
2

3 discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.” 5

4 U.S.C. § 706(2)(A),(E). The arbitrary-and-capricious standard and the substantial-evidence
5 standard “require equivalent levels of scrutiny.” Adair County, 829 F.2d at 117. Under both
6
standards, the scope of review is narrow and a court must not substitute its judgment for that of
7
the agency. Motor Veh. Mfrs. Ass'n v. State Farm Mutual Ins. Co., 463 U.S. 29, 43 (1983). As
8
long as an agency has “examined the relevant data and articulated a satisfactory explanation for
9

10 its action including a rational connection between the facts found and the choice made,” courts

11 will not disturb the agency's action. MD Pharm., Inc. v. Drug Enforcement Admin., 133 F.3d 8,

12 16 (D.C.Cir.1998). The burden of showing that the agency action violates the APA standards
13 falls on the provider. Diplomat Lakewood Inc. v. Harris, 613 F.2d 1009, 1018 (D.C.Cir.1979).
14
The parties contest the level of deference this court should apply in reviewing the
15
Administrator’s Decisions. Defendant argues that the appropriate level is “substantial deference”
16
as set forth in Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). (See, e.g., C-Dkt.
17

18 No. 20 at 2.). Plaintiffs counter that substantial deference is not warranted in this case. Relying

19 on GCI Health Care Centers, Inc. v. Thompson, 209 F.Supp.2d 63 (D.D.C. 2002), Plaintiffs

20 argue that provisions of the PRM are subject the less-deferential Skidmore standard (C-Dkt. No.
21
18 at 3 citing Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).).
22
The court finds that because what is at issue here is the Secretary’s interpretation, through
23
the PRM, of her own regulation—42 C.F.R. § 413.89(e)—the appropriate standard is
24
“substantial deference” as set for in Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)
25
(noting that the Court “must give substantial deference to an agency's interpretation of its own

ORDER-15
 regulations”). This court’s task is not to decide which among several competing interpretations
1
best serves the regulatory purpose. Rather, this court must defer to the Secretary's interpretation
2

3 unless an “alternative reading is compelled by the regulation's plain language or by other

4 indications of the Secretary's intent at the time of the regulation's promulgation.” Id. (quoting
5 Gardebring v. Jenkins, 485 U.S. 415, 430 (1988)). This broad deference is all the more
6
warranted when, as here, the regulation concerns “a complex and highly technical regulatory
7
program,” in which the identification and classification of relevant “criteria necessarily require
8
significant expertise and entail the exercise of judgment grounded in policy concerns.” Id.
9

10 (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991)).

11 Indeed, the D.C. Circuit has stated that “[a court’s] review in such cases is ‘more

12 deferential . . . than that afforded under Chevron.’” Wyo. Outdoor Council v. U.S. Forest Serv.,
13 165 F.3d 43, 52 (D.C.Cir. 1999) (internal citation omitted); Psychiatric Inst. of Washington,
14
D.C., Inc. v. Schweiker, 669 F.2d 812, 813-814 (D.C.Cir. 1981) (noting that “where the decision
15
under review involves an agency’s interpretation of its own regulations, forming part of a
16
complex statutory scheme which the agency is charged with administering, the arguments for
17

18 deference to administrative expertise are at their strongest”). Moreover, this Court has made

19 clear that “[t]he high degree of deference due to the Secretary’s interpretation of Medicare

20 regulations extends to the PRM provisions, which are themselves interpretation of regulations.”
21
Cmty. Care Found. v. Thompson, 412 F. Supp. 2d 18, 22-23 (D.D.C. 2006) (internal citation
22
omitted) (citing Shalala v. St. Paul-Ramsey Medical Ctr., 50 F.3d 522, 528 (8th Cir.1995). Thus,
23
the PRM instructions are entitled to a high level of deference.
24

25

ORDER-16
 B. Analysis
1
The issue before this court is whether the Administrator’s decision that CMS’ must-bill
2

3 policy applies to a provider’s dual-eligible bad debts when the provider does not participate in

4 the Medicaid program is “arbitrary, capricious, an abuse of discretion, or otherwise not in
5 accordance with law” or “unsupported by substantial evidence in a case.”
6
1. The Must-Bill Policy Is an Appropriate Exercise of the Secretary’s
7 Authority to Interpret Her Own Regulations

8 The Medicare statute gives the Secretary broad discretion to determine what “reasonable
9 cost[s]” of services to Medicare beneficiaries may be reimbursed to “providers of services.”
10
CHMP, 323 F.3d at 789; 42 U.S.C. § 1395x(v)(1)(A) (stating that reasonable costs “shall be
11
determined in accordance with regulations establishing the method or methods to be used, and
12
the items to be included”). It also grants the Secretary broad discretion as to what information to
13

14 require as a condition of payment to providers under the Medicare program. 42 U.S.C. §

15 1395g(a). Since “Congress has explicitly left [this] gap for the agency to fill,” any regulation

16 regarding the issue must be “given controlling weight unless [it is] arbitrary, capricious, or
17 manifestly contrary to the statute.” CHMP, 323 F.3d at 790 (quoting Chevron, 467 U.S. at 843-
18
44).
19
Utilizing this statutory authority, the Secretary has promulgated regulations setting forth
20
what constitutes “bad debt.” CMS defines bad debt as the “amounts considered to be
21

22 uncollectible from accounts and notes receivable that were created or acquired in providing

23 services.” 42 C.F.R. § 413.89(d). This includes any unpaid Medicare deductibles and

24 coinsurance. Id. CMS has established four criteria that must be satisfied in order for the bad debt
25
to be “allowable”—in other words, eligible for reimbursement:

(1) The debt must be related to covered services and derived from deductible and
ORDER-17
 coinsurance amounts.
1 (2) The provider must be able to establish that reasonable collection efforts were
made.
2
(3) The debt was actually uncollectible when claimed as worthless.
3 (4) Sound business judgment established that there was no likelihood of recovery
at any time in the future.
4
Id. at § 413.89(e). CMS provides further interpretative guidance through PRM §§ 310, 312 and
5
322. Section 310 defines a “reasonable collection effort” as an effort similar to what a provider
6

7 would make to collect amounts owned by non-Medicare patients and “must involve the issuance

8 of a bill….” (See C-Dkt. No. 14, Ex. 1 at 3-5 (emphasis added).). It also states that the
9 “provider’s collection effort should be documented” with “copies of the bill(s)….” (Id. at 3-6.).
10
Section 312 excuses providers from billing indigent patients, but this section does not speak to
11
the financial obligations of the state Medicaid program under these circumstances. (Id. at 3-6.).
12
Section 322 addresses this. Section 322 provides that any portion of Medicare co-payments and
13

14 deductibles owed and not paid for by dual-eligibles, and for which the state is not responsible,

15 may be claimed as Medicare bad debt. (Id. at 3-8 to 3-8.1.). However, where “a State is obligated

16 by statute or under the terms of its [Medicaid] plan to pay all, or any part, of the Medicare
17 deductible or coinsurance amounts, these amounts are not allowable as bed debts under
18
Medicare.” (Id.). In other words, where a state may be liable for coinsurance and deductible debt
19
not paid by the patient, bad debt can be reimbursed only and to the extent that the state does not
20
pay.
21

22 These propositions, in the Secretary’s view, necessarily imply that a potentially liable

23 state must be billed. See CMHP, 323 F.3d at 794. Otherwise, the Secretary contends, the

24 requirement under PRM § 322 that the state not have satisfied the patient’s debt would be
25
illusory if the regulations did not impose a duty to demand payment from the state. Id. at 794-95.

This court agrees that PRM §§ 310, 312, and 322 are reasonably read to require that the state be
ORDER-18
 billed. At most, these provisions are ambiguous, and this court must defer to the Secretary’s
1
reasonable determination that billing is required. Id. at 796.
2

3 The court also finds that the must-bill policy is consistent with the Medicare statute and

4 regulations, and is not an unreasonable implementation of either. The Secretary asserts that the
5 policy is necessary to ascertain whether “reasonable collection efforts [have been] made” and
6
that “the debt was actually uncollectible when claimed [as worthless],” as required by Section
7
413.89(e). CMHP, 323 F.3d at 792 (quoting California Hosp., 2000 WL 33170706, *8.). The
8
Secretary claims that billing the state is the most straightforward and reliable way of determining
9

10 whether, and, if so, how much the state will pay. A patient’s financial situation and Medicaid

11 eligibility status may change over the course of a very short period of time. As such, the

12 Secretary argues, because the State maintains the most accurate patient information regarding a
13 patient’s Medicaid eligibility status at the time of service, it is in the best position to determine
14
the State’s cost sharing liability for unpaid Medicare deductibles and coinsurance. (C-Dkt. No. 1,
15
Ex B at 9.). Given this assertion, this court is unable to say that the must-bill policy is
16
inconsistent with the statute or regulations or is an unreasonable implementation of them. See
17

18 CMHP, 323 F.3d at 793 (noting that even though the “regulations can be read as not precluding

19 the possibility of a provider’s establishing the criteria of § 413.80(e) by alternative means…[t]his

20 would not, however, justify [the court] refusing to accept the Secretary’s [must-bill policy].”). It
21
is well established that courts “may not set aside the agency's interpretation merely because
22
another interpretation was possible and seems better, so long as the agency's interpretation is
23

24

25

ORDER-19
 within the range of reasonable meanings that the words of the regulation admit.” Psychiatric
1
Institute of D.C. v. Schweiker, 669 F.2d 812, 814 (D.C.Cir.1981). 3
2

3 2. The Must-Bill Policy Is Not New

4 Plaintiffs argue that the Administrator’s Decision is arbitrary and capricious because it is
5 based on a policy that cannot be found in the Medicare Act, the Medicare regulation governing
6
reimbursement for bad debt, or CMS’ interpretive guidance on this issue. The court disagrees. As
7
discussed above, the must-bill policy is set forth in PRM §§ 310, 312 and 322 and further
8
clarified in JSM 370. See California Hospitals Crossover Bad Debts Group Appeal PRRB Dec.
9

10 No. 2000-D80 (2000 WL 33170706,*8). The must-bill policy has been consistently articulated in

11 the final decisions of the Secretary addressing this issue. See, e.g., Hoag Mem. Hosp.

12 Presbyterian Provider v. Blue Cross, 2002 WL 31548714 (2002); Hospital de Area de Carolina,
13 Admin. Dec. No. 93-D23; Concourse Nursing Home, PRRB Dec. No. 83-D152; St. Joseph
14
Hospital, PRRB Dec. No. 84-D109. Similarly, this court has already affirmed the must-bill
15
policy. GCI Health Care Ctrs v. Thompson, 209 F.Supp.2d 63, 74 (D.D.C. 2002) (holding that
16
there is nothing arbitrary or capricious about the requirement); see also, CHMP, 323 F.3d 782,
17

18 793 (9th Cir. 2003) (holding that the must-bill policy is a reasonable implementation of the

19 reimbursement system and consistent with the governing statute and regulations).

20

21

22

23
3
24 The court is also persuaded by the Administrator’s argument that “a fundamental principle of the
[Medicare] program is that payment be fair to the providers, the ‘contributors to the Medicare trust fund’ and to the
25 other patients.” (C-Dkt. No. 1, Ex. 2 at 16.). Therefore, the Secretary argues, the must-bill policy is a logical
extension of the Medicare program’s attempt to “reasonably balance[] the accuracy of the bad debt payment and the
need to ensure the fiscal integrity of the Medicare funding” against a provider’s claims for reimbursement “which
can be made under two different program[s] for which Medicare is the payer of last resort.” (Id.).
ORDER-20
 3. The Must-Bill Requirement Did Not Require Notice-and-Comment
1 Rulemaking
2
Under the APA, an agency’s informal rulemaking must: (1) provide adequate advance
3
notice and publication of the proposed rule in the Federal Register, (2) afford interested persons
4
and opportunity to comment, (3) publish the final rule with a statement of basis and purpose not
5
less than 30 days before its effective date, and (4) grant interested persons the right to petition for
6

7 the issuance, modification or repeal of a rule. 5 U.S.C. § 533. Unless a specific exception

8 applies, these procedures apply to all informal rules, which are defined as “the whole or a part of
9 an agency statement of general or particular applicability and future effect designed to
10
implement, interpret, or prescribe law or policy[.]” 5 U.S.C. § 551.
11
Plaintiffs allege that “with no prior notification or opportunity for comment, CMS
12
adopted a new and unprecedented interpretation of the must-bill policy and applied it
13

14 retroactively to deny Plaintiff[s’] Medicare reimbursement for otherwise allowable bad debts.”

15 (C-Dkt. No. 13 at 32.). Plaintiffs argue that in so doing, CMS failed to comply with the notice-

16 and-comment requires of the APA.
17 The notice-and- comment requirements of the APA only apply to so-called “legislative”
18
or “substantive” rules; they do not apply to “interpretative rules, general statements of policy, or
19
rules of agency organization, procedure, or practice.” 5 U.S.C. § 553(b); see, e.g., Lincoln v.
20
Vigil, 508 U.S. 182, 196 (1993) (citing McLouth Steel Prod. Corp. v. Thomas, 838 F.2d 1317,
21

22 1320 (D.C. Cir. 1988)); Cmty. Nutrition Inst. v. Young, 818 F.2d 943, 945-946 (D.C. Cir. 1987)

23 (per curium). When an agency issues an interpretative rule, it is only intending to explain

24 ambiguous language, or remind parties of existing duties—not create new law. See Citizens to
25
Save Spencer County v. EPA, 600 F.2d 844, 876 & n. 153 (D.C.Cir.1979). Interpretative rules

may affect the way parties act or “alter the manner in which parties present themselves or their
ORDER-21
 viewpoints to the agency.” Batterton v. Marshall, 648 F.2d 694, 707 (D.C.Cir.1980); Cabais v.
1
Egger, 690 F.2d 234, 238 (D.C. Cir.1982). Such effects are entirely permissible under the
2

3 interpretative rule exception, so long as the rule represents the agency's explanation of a statutory

4 or regulatory provision, and the rule is not intended to substantively change existing rights and
5 duties. Fertilizer Institute v. E.P.A., 935 F.2d 1303, 1308 (D.C. Cir.1991).
6
The D.C. Circuit has held that, generally speaking, an agency’s rule is a “legislative
7
rule,” and thus subject to the APA’s notice-and-comment requirements, if a court can answer
8
affirmatively any of these questions: (1) whether in the absence of the rule there would not be
9

10 adequate legislative basis for enforcement action or other agency action to confer benefits or

11 ensure the performance of duties; (2) whether the agency has published the rule in the Code of

12 Federal Regulations; (3) whether the agency has explicitly invoked its general legislative power;
13 and (4) whether the rule effectively amends a prior legislative rule. Am. Mining Congress v. Mine
14
Safety & Health Admin., 995 F.2d 1106, 1112 (D.C. Cir. 1993). None of these conditions has
15
been met. Instead, the Secretary’s policy is a classic example of an interpretive rule or general
16
statement of policy, not subject to the APA’s notice and comment rulemaking requirement. See
17

18 Guernsey Mem’l Hosp., 514 U.S. at 96 (Secretary need not promulgate a regulation to “address

19 every conceivable question in the process of determining equitable reimbursement”). In fact,

20 Plaintiffs, themselves, repeatedly characterize the policy as “interpretive.”
21
Plaintiffs cite Paralyzed Veterans of Am. v. D.C. Arena L.P., 117 F.3d 579, 586 (D.C.
22
Cir. 1997), for the proposition that an agency can only change its interpretation of a regulation
23
through notice-and-comment rulemaking. (C-Dkt. No. 18 at 22.). The court in Paralyzed
24
Veterans, quoting a Supreme Court decision, opined that
25
[t]o allow an agency to make a fundamental change in its interpretation of a
substantive regulation without notice and comment obviously would undermine
ORDER-22
 . . . APA requirements. That is surely why the Supreme Court has noted (in dicta)
1 that APA rulemaking is required where an interpretation ‘adopt[s] a new position
inconsistent with ... existing regulations.’
2

3 Paralyzed Veterans of Am., 117 F.3d at 586 (quoting Shalala v. Guernsey Mem. Hosp., 514 U.S.

4 87, 100 (1995)). However, the D.C. Circuit court has held that the new interpretation must
5 “significantly revise” the prior interpretation in order to trigger the notice-and-comment process.
6
MetWest Inc. v. Sec’y of Labor, 560 F.3d 506, 510 (D.C.Cir. 2009); Alaska Prof'l Hunters Ass'n
7
v. FAA, 177 F.3d 1030, 1034 (D.C.Cir.1999) (“When an agency has given its regulation a
8
definitive interpretation, and later significantly revises that interpretation, the agency has in
9

10 effect amended its rule, which requires notice and comment.”) This condition is not met if the

11 new interpretation can reasonably be interpreted as consistent with the prior one. Air Transport

12 Ass’n of Am. v. FAA, 169 F.3d 1, 6 (D.C. Cir. 1999). Here, the Secretary’s interpretation of the
13 must-bill policy does not significantly revise her prior interpretation and nothing in her decision
14
is inconsistent with existing regulations.
15
Plaintiffs’ related assertion that the must-bill policy arose only after the decision in
16
CHMP is misguided. In CHMP, the court upheld application of the must-bill policy to the
17

18 plaintiff providers’ cost years 1989 -1995, well before the 2004 year at issue here. See CHMP,

19 323 F.3d at 785. As previously stated, the must-bill policy upheld in CHMP and GCI derives

20 from longstanding Medicare regulations and manual provisions. 42 C.F.R. § 413.80; PRM §§
21
310, 312, 322. The only thing that occurred as a reaction to the CHMP decision was the
22
Secretary’s revision of a separate manual provision—PMR-II § 1102.3L—that the Ninth Circuit
23
identified as potentially in conflict with the must-bill policy. Notably, though, the Ninth Circuit
24
concluded that it conflicted with the must-bill policy and was not enforceable. See CHMP, 323
25

ORDER-23
 F.3d at 798. Although the Secretary thus subsequently revised that provision, the must-bill policy
1
was in effect the whole time, from before the 1989 year at issue in CHMP to the present day.
2

3 4. The Secretary’s Enforcement of the Must-Bill Policy against Plaintiffs

4 The question remains whether it is arbitrary and capricious for the Secretary to apply the
5 must-bill policy to a provider’s dual-eligible bad debts when the provider does not participate in
6
a state’s Medicaid program. Non-participating providers are caught in a classic Catch-22. They
7
provide services to dual-eligible patients (at least some of whom become Medicaid eligible after
8
they were admitted to the facilities) and then attempt to collect payment for the bad debt incurred
9

10 as a result of those services. The FI refuses to reimburse the facilities without a state-issued RA,

11 and the states refuse to issue the RAs. Complicating the issue further is the fact that Plaintiffs

12 indicate that some states are unwilling to certify their facilities. It seems that Plaintiffs are left in
13 the untenable position of either refusing to treat dual-eligible patients or absorbing the bad debt
14
associated with those patients.
15
Counsel for the agency stated at oral argument that it is the Secretary’s position that the
16
states are required to issue RAs (regardless of a provider’s participation status) and to enroll
17

18 Plaintiffs’ facilities in their Medicaid programs. Failure to do so violates the governing statutes

19 and regulations. However, agency’s counsel conceded that it is in a better position than the

20 providers to ensure that the states comply with the applicable regulations of the Medicaid
21
program. On the other hand, Plaintiffs’ counsel conceded at oral argument that, to date, the
22
providers have not submitted proper bills for services provided to actual patients. Rather, the
23
providers submitted “sample” bills with fabricated claim numbers.
24
In light of these circumstances, Plaintiffs are not entitled to summary judgment at this
25
time. They have not made the correct applications to receive reimbursement. Nevertheless, the

ORDER-24
 court is not willing to place a stamp of judicial approval on a policy that puts non-participating
1
providers in the position of not being paid due to the delinquency of federally-funded state
2

3 programs. If, at some point, Plaintiffs can establish that they have submitted the correct forms

4 and made the right applications, it may in fact, in those circumstances, be arbitrary and
5 capricious for the Secretary to not accept an alternative form of documentation or to require that
6
the states comply with her regulations.
7
5. The Secretary’s Prior Inconsistent Treatment of Plaintiffs’ Bad Debt
8 Claims
9 Plaintiffs argue that the Administrator’s Decisions are arbitrary and capricious because
10
they constitute an unexplained departure from CMS’ prior treatment of their dual-eligible bad
11
debts. The Secretary’s application of the must-bill policy to Plaintiffs is inconsistent with the
12
Secretary’s prior treatment of Plaintiffs’ reimbursement requests. For all of the Plaintiffs’ cost
13

14 reporting prior to fiscal year 2004-2005, and in fact, for some of Plaintiffs’ subsidiary facilities’

15 the cost reporting periods applicable in fiscal year 2005, the FIs reimbursed Plaintiffs for dual-

16 eligible bad debts without Medicaid RAs. Indeed, Select Specialty’s FI, in an email dated April
17 5, 2007, confirmed the Secretary’s practice of not requiring Medicaid RAs in order to reimburse
18
Medicare bad debt: “If a provider is not Medicaid certified, they shouldn’t be required to bill the
19
state before we allow the bad debt as the state does not have any liability to non-Medicaid-
20
certified providers.” (S-AR 549.). Plaintiffs also note that before PRM-II § 1102.3L was
21

22 rescinded by the Secretary after the CHMP decision in 2003, it provided: “it may not be

23 necessary for a provider to actually bill the Medicaid program to establish a Medicare crossover

24 bad debt where the provider can establish that Medicaid is not responsible for payment.”
25
Therefore, Plaintiffs argue, the Administrator’s Decisions are arbitrary and capricious because

they did not take into account Plaintiffs’ legitimate reliance interests.
ORDER-25
 As the United States Supreme Court has stated: “Sudden and unexplained change or
1
change that does not take account of legitimate reliance on prior interpretation may be ‘arbitrary,
2

3 capricious or an abuse of discretion.’” Smiley v. Citibank, 517 U.S. 735, 742 (1996); see also

4 F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (an administrative determination is
5 arbitrary and capricious if it “depart[s] from a prior policy sub silentio” or if the “prior policy has
6
engendered serious reliance interests” that were not taken into account). The mere fact that an
7
agency interpretation contradicts a prior agency position is not fatal. Smiley, 517 U.S. at 742
8
(stating that “change is not [necessarily] invalidating, since the whole point of Chevron is to
9

10 leave the discretion provided by the ambiguities of a statute with the implementing agency”). But

11 if the change does not take into account a legitimate reliance on prior interpretation, see, e.g.,

12 United States v. Pennsylvania Industrial Chemical Corp., 411 U.S. 655, 670-675 (1973), it may
13 be “arbitrary, capricious [or] an abuse of discretion.” Smiley, 517 U.S. at 742.
14
Here, the Secretary did not change her policy—the must-bill requirement is
15
longstanding—but CMS did change how it enforces the policy. As the Ninth Circuit noted at the
16
time of the CHMP decision, CMS guidance PRM-II § 1102.31 allowed providers to show other
17

18 documentation in lieu of billing the states. CHMP, 323 F.3d at 798. The Ninth Circuit noted that

19 this conflicted with the must-bill policy and, therefore, was unenforceable. Id. Accordingly, on

20 August 10, 2004, the Secretary revised that provision, reiterating that the must-bill policy applies
21
to dual-eligible beneficiaries. 4
22

23
4
24 Plaintiffs also note that prior published instructions for completing form HCFA-339 (Provider Cost Report
Reimbursement Questionnaire) stated that, “it may not be necessary for a provider to actually bill Medicaid to
25 establish [dual-eligible] bad debt where the provider can establish that Medicaid is not responsible for payment. In
lieu of billing Medicaid, the provider must furnish documentation of [Medicaid eligibility and non-payment that
would have resulted from billing Medicaid].” (S-AR at 511-513.). CMS deleted this language from HCFA-339,
effective on October 1, 2003, well before the fiscal years at issue here. (See S-Dkt. No. 20 at 8.).
ORDER-26
 The court finds it significant that the must-bill policy had not been applied to Plaintiffs’
1
dual-eligible bad debt claims before the FIs’ current disallowance at issue here. (See, e.g., S-Dkt.
2

3 No. 20 at 8 (citing an email from Select Specialty’s FI: “CMS…has historically taken the

4 position that the [must-bill] policy does not apply, and the billing is not required, where
5 Medicaid, as a matter of law, cannot be responsible for the claim.” (S-AR at 549).). JSM 370
6
may have placed providers on notice that CMS would no longer accept documentation in lieu of
7
a state’s RA, but it was not issued until August 10, 2004. The Secretary now seeks to
8
retroactively apply JSM 370 to Plaintiffs’ cost reporting for fiscal years 2004-2005. The
9

10 Secretary provides no explanation for her sudden change in enforcement, other than to state that

11 prior inconsistent reimbursements are “unfortunate.” Nor does she explain why some of

12 Plaintiffs’ subsidiaries receive reimbursement for 2005 dual-eligible bad debt claims that were
13 not substantiated with state RAs. Furthermore, Plaintiffs argue that JSM 370 was issued to fiscal
14
intermediaries, not to providers like Plaintiffs. They contend that the first time they became
15
aware of the Secretary’s new enforcement policy was in 2007, when their respective FIs rejected
16
the cost reports for fiscal years 2004 and 2005.
17

18 Based on these allegations, the court finds that CMS’ enforcement of the must-bill policy

19 to Plaintiffs’ claims may “constitute a change that does not take [into] account [] legitimate

20 reliance on prior interpretation” and therefore may be arbitrary, capricious or an abuse of
21
discretion.” Smiley v. Citibank, 517 U.S. 735, 742 (1996). Therefore, the court will remand to the
22
agency for reconsideration of the limited issue of whether Plaintiffs were justified in relying on
23
CMS’ prior failure to enforce the must-bill policy with respect to dual-eligible reimbursement
24
claims from non-participating Medicaid providers. See NTEU v. Fed. Labor Relations Auth., 30
25
F.3d 1510, 1514 (D.C. Cir. 1994).

ORDER-27
 IV. CONCLUSION
1
Based on the foregoing, the court HEREBY rules as follows:
2

3 Defendant’s and Plaintiffs’ motions for summary judgment are GRANTED in part and

4 DENIED in part. Plaintiffs’ cases are REMANDED to the agency for reconsideration on the
5 limited issue of whether, in 2004 and 2005, Plaintiffs’ were justified in relying on the Secretary’s
6
prior failure to enforce the must-bill policy against them.
7
DATED this 26th day of March, 2012.
8

9

10

11
A
Barbara Jacobs Rothstein
12 U.S. District Court Judge

13

14

15

16

17

18

19

20

21

22

23

24

25

ORDER-28