Northeast Hospital Corporation v. Johnson

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

NORTHEAST HOSPITAL CORP.,

Plaintiff,
v. Civil Action No. 09-0180 (JDB)
KATHLEEN SEBELIUS,
Secretary, United States Department
of Health and Human Services,

Defendant.

MEMORANDUM OPINION

The Secretary of the Department of Health and Human Services, through the Centers for

Medicare and Medicaid Services ("CMS"), provides Medicare payments to hospitals that serve a

disproportionate share of low income patients. In this action, Northeast Hospital Corporation

appeals the Secretary's final decision concerning the amount of Medicare payments due to

Beverly Hospital ("the Hospital"), a Massachusetts non-profit hospital, for the 1999-2002 fiscal

years. Currently before the Court are the Hospital's motion for summary judgment and the

Secretary's cross-motion for summary judgment, on which the Court heard oral argument on

February 19, 2010. Upon consideration of the relevant legal authorities, the parties' memoranda,

and the entire record herein, and for the reasons discussed below, the Court will grant in part and

deny in part both the Hospital's and the Secretary's motions, will vacate the Secretary's final

decision, and will remand to the Secretary for further proceedings.

BACKGROUND

Through a complex statutory and regulatory regime, the Medicare program reimburses

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qualifying hospitals for services they provide to eligible elderly and disabled patients. See

generally County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). Medicare

reimburses the "operating costs of inpatient hospital services" under a prospective payment

system -- that is, based on prospectively-determined standardized rates -- subject to hospital-

specific adjustments. See 42 U.S.C. § 1395ww(d); In re Medicare Reimbursement Litig., 309 F.

Supp. 2d 89, 92 (D.D.C. 2004), aff'd, 414 F.3d 7, 8-9 (D.C. Cir. 2005). One such adjustment is

the "disproportionate share hospital" ("DSH") adjustment, by which the Secretary provides an

additional payment to hospitals that "serve[] a significantly disproportionate number of

low-income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I).

Whether a hospital qualifies for a Medicare DSH adjustment, and the amount of the

adjustment it receives, depends on the hospital's "disproportionate patient percentage." See id. §

1395ww(d)(5)(F)(v)-(vii). This percentage is a "proxy measure for low income." See H.R. Rep.

No. 99-241, at 16 (1985), reprinted in 1986 U.S.C.C.A.N. 579, 594. It represents the sum of two

fractions, commonly referred to as the "Medicaid fraction" and the "Medicare fraction." See 42

U.S.C. § 1395ww(d)(5)(F)(vi); Jewish Hosp. Inc. v. Sec'y of Health and Human Servs., 19 F.3d

270, 272 (6th Cir. 1994).

The Medicaid fraction, central to this case, is defined as

the fraction (expressed as a percentage), the numerator of which is the number of
the hospital's patient days for such period which consist of patients who (for such
days) were eligible for medical assistance under a [s]tate [Medicaid] plan . . . , but
who were not entitled to benefits under [Medicare] part A . . . , and the
denominator of which is the total number of the hospital's patient days for such
period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Thus, the Medicaid fraction varies based on a hospital's

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patient days attributable to individuals who were eligible for medical assistance under a state

Medicaid plan but not entitled to benefits under Medicare part A.1 "Put simply, the more a

hospital treats patients who are 'eligible for medical assistance under a State plan approved under

[Medicaid],' the more money it receives for each patient covered by Medicare." Adena Reg'l

Med. Ctr. v. Leavitt, 527 F.3d 176, 178 (D.C. Cir. 2008) (quoting 42 U.S.C. §

1395ww(d)(5)(F)(vi)(II)) (alteration in original).

The Medicare fraction, which is less directly relevant here, is

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 [Medicare] part A . . . and were
entitled to supplemental security income benefits . . . , and the denominator 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
[Medicare] part A . . . .

42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). Thus, the Medicare fraction turns on the number of a

hospital's patient days attributable to individuals entitled to benefits under Medicare part A as

well as supplemental security income benefits.

Medicare DSH payments are initially calculated by a "fiscal intermediary" -- typically an

insurance company acting as the Secretary's agent. See 42 C.F.R. §§ 421.1, 421.3, 421.100-.128.

The fiscal intermediary applies the Medicare fraction as computed by CMS. See id. §

412.106(b)(2), (5). But the intermediary (rather than CMS) calculates the Medicaid fraction

based on data submitted by the medical care provider. See id. §§ 412.106(b)(4), 413.20. The

fiscal intermediary then adds the two fractions to determine the Medicare DSH reimbursement

1
The Medicare program is divided into several parts. Medicare part A covers medical
services furnished by hospitals and other institutional providers. See 42 U.S.C. §§ 1395c-1395i-
5.

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due, which it sets forth in a Notice of Program Reimbursement. See id. § 405.1803.

A provider dissatisfied with the fiscal intermediary's determination may request a hearing

before the Provider Reimbursement Review Board ("PRRB"), an administrative body appointed

by the Secretary. See 42 U.S.C. § 1395oo(a), (h). The Board may affirm, modify, or reverse the

fiscal intermediary's award. Once the Board rules, the Secretary may affirm, modify, or reverse

the Board's decision. See id. § 1395oo(d)-(f). The Secretary has authorized the Administrator of

CMS to act on her behalf in reviewing the Board’s decisions, and the Administrator's review of a

Board ruling is considered the final decision of the Secretary. See 42 C.F.R. § 405.1875.

Providers may then challenge the Secretary's final determination in federal district court. See 42

U.S.C. § 1395oo(f).

In this case, the Hospital received a Medicare DSH payment for each of the 1999 through

2002 fiscal years. The Hospital challenged the amount of these payments before the PRRB,

contending that the fiscal intermediary improperly excluded patient days attributable to three

different groups -- patients receiving charity care, patients enrolled in so-called

"Medicare+Choice" plans, and patients receiving labor and delivery room services -- from the

numerator of its Medicaid fraction, and that CMS incorrectly calculated its Medicare fraction.

The PRRB ruled in the Hospital's favor on three of the four issues presented, and in the

Secretary's favor on the fourth. See Administrative Record (“AR”) at 205-18 (PRRB Decision).

The Secretary, through the CMS Administrator, reversed the PRRB's decision as to the three

issues decided in the Hospital's favor, and affirmed on the fourth issue decided in favor of the

Secretary. See AR at 1-40 (CMS Decision). The Hospital now challenges the Secretary's

determinations.

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 STANDARD OF REVIEW

Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate when the

pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and

that the moving party is entitled to judgment as a matter of law." In a case involving review of a

final agency action under the Administrative Procedure Act (“APA”), however, Rule 56(c)'s

standard does not apply because of the limited role of a court in reviewing the administrative

record. See North Carolina Fisheries Ass'n v. Gutierrez, 518 F. Supp. 2d 62, 79 (D.D.C. 2007).

Under the APA, it is the agency's role to resolve factual issues to arrive at a decision that is

supported by the administrative record, whereas "the function of the district court 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. Immigration & Naturalization Serv., 753

F.2d 766, 769-70 (9th Cir. 1985). Summary judgment thus serves as the mechanism for

deciding, as a matter of law, whether the agency action is supported by the administrative record

and is otherwise consistent with the APA standard of review. See Richards v. Immigration &

Naturalization Serv., 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977).

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 42 U.S.C. § 1395oo(f)(1)

(courts reviewing Medicare reimbursement decisions must apply APA standards). The scope of

review, however, 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). A court is to presume that the agency's action is valid.

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See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415 (1971). And a "court is

not to substitute its judgment for that of the agency." State Farm, 463 U.S. at 43. But a court

must be satisfied that the agency has "'examine[d] the relevant data and articulate[d] 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) (quoting State Farm,

463 U.S. at 43).

A court reviews an agency's interpretation of a statute under the familiar two-step analysis

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

The first step is 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; see Nat'l Treasury Employees Union v. Fed. Labor

Relations Auth., 392 F.3d 498, 500 (D.C. Cir. 2004) ("When Congress has spoken, we are bound

by that pronouncement and that ends this Court's inquiry."). If, however, the statute is silent or

ambiguous on the specific issue, "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. The agency's

interpretation of a statute "need not be the best or most natural one by grammatical or other

standards . . . . Rather [it] need be only reasonable to warrant deference." Pauley v. BethEnergy

Mines, Inc., 501 U.S. 680, 702 (1991) (citations omitted).

ANALYSIS

I. Charity Care Patient Days

A. Legal and Factual Background

The Medicaid program, 42 U.S.C. § 1396 et seq., is a cooperative venture between the

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federal and state governments to help states provide medical care to certain low-income and

disabled individuals. Pursuant to Medicaid, the federal and state governments share the cost of

providing medical care to eligible individuals. See id. § 1396b.

Each state, however, administers its own Medicaid program pursuant to a state Medicaid

plan, which must be approved by the Secretary of the Department of Health and Human Services.

See 42 U.S.C. §§ 1396, 1396a. A state Medicaid plan "is a comprehensive written statement

submitted by the [state] describing the nature and scope of its Medicaid program and giving

assurance that it will be administered in conformity with the specific requirements of" federal

law. 42 C.F.R. § 430.10. To obtain the Secretary's approval, a state's Medicaid plan must meet a

number of requirements. "The plan must," for example, "provide coverage for the 'categorically

needy' and, at the State's option, may also cover the 'medically needy.'" Pharm. Research & Mfrs.

of Am. v. Walsh, 538 U.S. 644, 650-51 (2003); see also 42 U.S.C. § 1396a(a)(10)(A)(i)-(ii), (C).

And state Medicaid agencies must "reimburse health care providers for the cost of covered

services delivered to Medicaid beneficiaries." Ariz. Health Care Cost Containment Sys. v.

McClellan, 508 F.3d 1243, 1246 (9th Cir. 2007).

If the Secretary approves the state's Medicaid plan, the state generally becomes eligible to

receive federal matching funds for a statutorily-set percentage of the amount "expended . . . as

medical assistance under the State plan." See id. § 1396b(a)(1). In distributing these federal

matching funds to hospitals, states must consider "the situation of hospitals which serve a

disproportionate number of low-income patients with special needs." Id. § 1396a(a)(13)(A)(iv).

Specifically, states must provide for an "appropriate increase in the rate or amount of payment for

[inpatient hospital] services provided by such hospitals." Id. § 1396r-4(a)(1). Such adjustments

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are known as "Medicaid DSH" payments, and are distinct from the Medicare DSH payments

described above that are at issue here. States generally have flexibility in administering these

Medicaid DSH payments. See, e.g., id. § 1396r-4(b)(4), (c)(1)-(3).

Massachusetts's Medicaid program, which the Secretary has repeatedly approved, is

called MassHealth. See AR at 52-76 (State Medicaid Plan). Generally, MassHealth pays

medical providers an average payment per patient they discharge, adjusted for wage-area and

other hospital-specific differences. See id. at 58. Consistent with its obligations under Medicaid,

MassHealth also makes "a[ Medicaid DSH] payment to hospitals which qualify for such an

adjustment." Id. at 71.

Massachusetts hospitals may qualify for a Medicaid DSH payment from MassHealth in

several ways. One is through the "Uncompensated Care Disproportionate Share Adjustment,"

which applies to facilities that incur so-called "free care costs." Id. at 72; see 114.1 Mass. Code

Regs. § 36.07(5).2 These free care -- or "charity care" -- costs reflect the fact that, in

Massachusetts, individuals whose income is less than twice the federal poverty level are eligible

for free medical care, and individuals whose income is less than four times the federal poverty

level are eligible for partial free care. See 114.6 Mass. Code Regs. § 10.03(1)-(2). Individuals

are only eligible for charity care, however, if they are not enrolled in MassHealth on the day of

treatment. See id. § 10.04.

MassHealth provides the Uncompensated Care Disproportionate Share Adjustment

through the Massachusetts Uncompensated Care Pool ("UCP"). The UCP, which pays hospitals

for treating charity care patients, is funded in part by federal matching funds provided to

2
All citations are to the 2002 edition of the Code of Massachusetts regulations.

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MassHealth. See id. § 11.04. The federal matching funds the Secretary provides to MassHealth,

in turn, are based in part on the UCP’s Medicaid DSH payments. See AR at 210 (PRRB

Decision); February 19, 2010 Summ. J. Hr'g Tr. (“Hr'g Tr.”), 5-6, 41.

Here, the Hospital received Medicaid DSH payments through the UCP for treating charity

care patients for the 1999-2002 fiscal years. The fiscal intermediary concluded, however, that the

Hospital's charity care patients were not "eligible for medical assistance under a state [Medicaid]

plan," and thus excluded such patient days from the numerator of the Hospital's Medicaid

fraction. See 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). The PRRB reversed this determination, see

AR at 210-12, but the CMS Administrator, on behalf of the Secretary, in turn reversed the PRRB

and reinstated the fiscal intermediary's original ruling, see id. at 12-23.

The Hospital contends that the Secretary erred in excluding these charity care patient days

from the numerator of its Medicaid fraction. For two independent reasons, the Court disagrees.

The plain language of the Medicare and Medicaid statutes confirms that Massachusetts's charity

care patients are not "eligible for medical assistance." Moreover, the treatment that such patients

receive is not provided "under a state [Medicaid] plan."

B. Are Massachusetts's charity care patients "eligible for medical assistance"?

Because the Court is reviewing the Secretary's interpretation of the Medicare statute, it

proceeds under the Chevron framework. The inquiry therefore starts with the statutory language.

See, e.g., Carcieri v. Salazar, 129 S. Ct. 1058, 1063-64 (2009). Although the Medicare statute

does not define the phrase "medical assistance," the D.C. Circuit has held that these words

"ha[ve] the same meaning" in the Medicare statute "as they have in the federal Medicaid statute,"

which does define the phrase. Adena Reg'l Med. Ctr. v. Leavitt, 527 F.3d 176, 179 (D.C. Cir.

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2008).

The Medicaid statute defines "medical assistance" as "'payment of part or all of the cost'

of medical 'care and services' for a defined set of individuals." See id. at 180 (quoting 42 U.S.C.

§ 1396d(a)). This defined set of individuals, in turn, consists of patients who fall within one of

thirteen categories of people to whom states may (or must) extend Medicaid benefits. See 42

U.S.C. § 1396d(a); see also id. § 1396a(a)(10)(A). For an individual to receive "medical

assistance," then, he must be eligible for Medicaid under the federal Medicaid statute.

It is undisputed that the charity care patients at issue here do not come within one of those

thirteen categories of people eligible for Medicaid. See Pl.'s Mem. in Supp. of Mot. for Summ. J.

("Pl.'s Mem.") [Docket Entry 12], 19; Hr'g Tr. at 20.3 Therefore, they cannot receive "medical

assistance" as that phrase is defined in the Medicaid statute. See 42 U.S.C. § 1396d(a). Because

"medical assistance" means the same thing in the Medicare statute as it does in the Medicaid

statute, Adena, 527 F.3d at 179, these charity care patients are not, by definition, "eligible for

medical assistance" as that phrase is used in the Medicare DSH statute. Therefore, the Secretary

properly excluded them from the numerator of the Hospital's Medicaid fraction. See Nat'l

Treasury Employees Union, 392 F.3d at 500 ("When Congress has spoken, we are bound by that

pronouncement and that ends this Court's inquiry.").4

3
At the motions hearing, the Hospital suggested that Massachusetts's charity care patients
may sometimes fall within the thirteen categories of individuals who are eligible for Medicaid. It
conceded, however, that "the record here doesn't show that these [charity care] patients fit within
one of those thirteen categories." Hr'g Tr. at 20.
4
Several courts of appeals have also noted, albeit in dicta, that the numerator of the
Medicaid fraction refers to patients who are eligible for Medicaid. See Cabell Huntington Hosp.
Inc. v. Shalala, 101 F.3d 984, 989 (4th Cir. 1996) ("It is apparent that 'eligible for medical
(continued...)

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 The Hospital all but concedes that the Medicaid statute's plain language establishes that

the phrase "eligible for medical assistance" means "eligible for Medicaid." But it suggests

nonetheless that following this definition would create odd results by, for example, rendering

"eligible for medical assistance" a young "dot.com" millionaire who might fall into one of the

thirteen categories of people eligible for Medicaid. See Pl.'s Reply in Supp. of Mot. ("Pl.'s

Reply") [Docket Entry 17], 17. But even if true -- and such an individual's wealth would almost

certainly disqualify him, see 42 U.S.C. § 1396d(a) -- strange results alone do not countermand

Congress's unambiguous language. See Sigmon Coal Co. v. Apfel, 226 F.3d 291, 308 (4th Cir.

2000), aff'd sub nom. Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002) ("[E]ven if . . . the

literal text of the statute produces a result that is, arguably, somewhat anomalous -- we are not

simply free to ignore unambiguous language because we can imagine a preferable version.").

The Hospital also urges the Court to evaluate Medicaid's definition of "medical

assistance" in context. It observes that this definition dates to 1965, more than twenty years

before Congress adopted the provisions governing Medicaid DSH payments, and suggests that

Congress intended Medicaid DSH payments to be "medical assistance." See Hr'g Tr. at 18. But

nothing in the Medicaid DSH statute indicates that Congress intended to narrow Medicaid's

definition of "medical assistance." Indeed, the statutory context is to the contrary. The Medicaid

4
(...continued)
assistance under a State plan' refers to patients who meet the income, resource, and status
qualifications specified by a particular state's Medicaid plan . . . ."); Legacy Emanuel Hosp. &
Health Ctr. v. Shalala, 97 F.3d 1261, 1265 (9th Cir. 1996) ("We believe the language of the
Medicare [DSH] provision is clear: the Medicaid [fraction] includes all patient days for which a
person was eligible for Medicaid benefits, whether or not Medicaid actually paid for those days
of service."); Jewish Hosp., 19 F.3d at 274 ("Facially, [the numerator of the Medicaid fraction]
speaks to the aggregate number of days for which a hospital provides Medicaid eligible
services.").

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DSH statute offers two ways in which a hospital may be deemed a disproportionate share

hospital eligible for a Medicaid DSH adjustment. One is based on the percentage of the

hospital's patient days attributable to patients who are "eligible for medical assistance under a

State [Medicaid] plan." See 42 U.S.C. § 1396r-4(b)(1)(A), (2). The other is based on the

hospital's charges "attributable to charity care." See id. § 1396r-(b)(1)(B), (3). That Congress

explicitly drew a distinction between patients who are "eligible for medical assistance" and those

who receive "charity care" suggests that Congress was, at the very least, not narrowing the

Medicaid statute's definition of who is eligible for "medical assistance" to encompass charity care

patients.

Perhaps recognizing the weakness of these arguments, the Hospital focuses on a different

contention. It observes that the UCP's Medicaid DSH payments to it included federal matching

funds, and insists that these Medicaid DSH payments were specifically to compensate the

Hospital for the cost of treating charity care patients. See Pl.'s Mem. at 18-20. According to the

Hospital, "the Federal Medicaid statute does not authorize the Secretary to pay Federal Medicaid

matching funds for anything other than expenditures by the State Medicaid program to provide

'medical assistance under the State plan.'" Pl.'s Mem. at 18 (citing 42 U.S.C. § 1396b).

Therefore, in the Hospital's view, because federal matching funds paid for the treatment of the

Hospital's charity care patients, the charity care patients must have received "medical assistance."

Having received such "medical assistance," they were of course "eligible" for "medical

assistance," and the Secretary therefore erred in excluding them from the numerator of the

Hospital's Medicaid fraction.

Not so. Congress made itself clear: only patients who fall within the thirteen categories

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of individuals eligible for Medicaid benefits are "eligible for medical assistance." Hence, even

assuming that the federal matching funds provided through the UCP specifically pay for the

treatment of the Hospital's charity care patients -- and the Secretary vehemently disputes this5 --

those charity care patients are not rendered "eligible for medical assistance." It is Congress's

unambiguous definition of "medical assistance," and not any purported inconsistent behavior by

the Secretary or the Commonwealth, that controls. See Am. Fed'n of Gov't Employees,

AFL-CIO v. Gates, 486 F.3d 1316, 1321-22 (D.C. Cir. 2007).

Because "medical assistance" is limited to patients who are eligible for Medicaid under

the federal Medicaid statute, the Court need not proceed further. As the charity care patients at

issue in this case do not fall within one of the thirteen categories of individuals eligible for

Medicaid, the Secretary properly excluded their patient days from the numerator of the Hospital's

Medicaid fraction.6

C. Is the treatment that Massachusetts's charity care patients receive provided "under
a state [Medicaid] plan"?

Even were the Court to conclude that Massachusetts's charity care patients were "eligible

5
The Secretary argues that "[t]he reimbursement to [the Hospital] pursuant to the
Medicaid DSH . . . is for the medical services [it] provide[s] to, and only to, Medicaid-eligible
patients, not [charity care] patients." Def.'s Mot. for Summ. J. [Docket Entry 15], 15. The
Hospital contends that this would be an "absurd result." Hr'g Tr. at 22.
6
This conclusion comports with those of the other district courts to have addressed
whether charity care patients are "eligible for medical assistance." See Cooper Univ. Hosp. v.
Sebelius, --- F. Supp. 2d ----, 2009 WL 3234625, at *7 (D.N.J. 2009) (New Jersey's charity care
program "does not provide 'medical assistance' as defined in [the Medicaid statute]"); Univ. of
Wash. Med. Ctr. v. Sebelius, --- F. Supp. 2d. ----, 2009 WL 3185592, at *4 (W.D. Wash. 2009)
("Based on an analysis of the meaning of 'medical assistance' as used in the Numerator formula,
the court agrees . . . that the Numerator formula is unambiguous in that it only counts patients
who are eligible for Medicaid under federal statute.").

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for medical assistance," it would still grant summary judgment to the Secretary because the

treatment these charity care patients receive is not provided "under a State [Medicaid] plan." On

this issue, the D.C. Circuit's decision in Adena is controlling. There, a group of Ohio hospitals

argued that the Secretary improperly excluded charity care patient days from the numerator of

their Medicaid fractions. Under Ohio law, hospitals were required to provide free care to

indigent patients in order to be eligible for Medicaid DSH reimbursements from the state. Id. at

179. Because the hospitals treated these charity care patients pursuant to this state law

requirement, the hospitals contended that such patients were "eligible for medical assistance

under the state [Medicaid] plan."

The D.C. Circuit rejected this argument. It concluded, at Chevron step one, that the Ohio

regulation requiring treatment of these charity care patients was "clearly not part of a 'State plan

approved under [Medicaid].'" Id. at 178. It offered two bases for this determination. First, the

Court observed that "an approved state Medicaid plan . . . must pay providers for the care of

eligible patients," and Ohio's hospitals were required to treat charity care patients without

payment. Id. Second, it concluded that Ohio's charity care patients were only eligible for such

charity care "if they are not recipients of the medical assistance program, that is, Medicaid." Id.

(internal quotation marks omitted). "It [wa]s clear," then, "that under Ohio law [charity care]

patients do not receive care pursuant to the Medicaid plan and, consequently, that [charity care]

patients are not eligible for care 'under a State plan approved under . . . [Medicaid]' within the

meaning of the Medicare statute." Id. (citation omitted) (final alteration in original).7

7
The court also held that Ohio's charity care patients were not "eligible for medical
assistance" because Medicaid's definition of "medical assistance" is "'payment of part or all of the
(continued...)

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 The Hospital seeks to distinguish Adena by arguing that, unlike Ohio's plan, MassHealth

pays hospitals specifically for their costs of treating charity care patients. But even assuming that

the UCP Medicaid DSH payments specifically compensate hospitals for their treatment of charity

care patients,8 this alone does not distinguish Adena. The court in Adena supplied two reasons

for its conclusion that Ohio's charity care patients did not receive care "pursuant to the state

[Medicaid] plan," but nowhere suggested that both reasons were necessary to its conclusion.

Thus, the fact that Ohio's charity care patients are not eligible for the state's Medicaid plan by

itself established that those patients "do not receive care pursuant to the [state] Medicaid plan."

As Massachusetts's charity care patients are not eligible for MassHealth, then, they also do not

receive care pursuant to the state Medicaid plan.

The Hospital also observes that MassHealth expressly provides for the UCP to pay

hospitals that treated charity care patients. See Pl.'s Reply at 3. Thus, it contends, the charity

care patients' treatment must have been provided pursuant to MassHealth, the state Medicaid

plan. But Adena rejected a similar argument. There, the Secretary had "approved certain

modifications" to Ohio's charity care regulation "as an amendment to Ohio's Medicaid plan."

7
(...continued)
cost' of medical 'care and services,'" and Ohio's charity care regulation "does not entail any
payment." Id. at 179-80 (quoting 42 U.S.C. § 1396d(a)). This holding is inapplicable to the
Court's earlier discussion of "medical assistance," however, because Massachusetts hospitals
receive payment for treating charity care patients.
8
As indicated above, the Court need not resolve the disputed question of whether these
UCP payments are made solely to compensate hospitals for the treatment of charity care patients,
or whether they are instead payments for the treatment of other Medicaid patients. See Adena,
527 F.3d at 179 n.** ("Hospitals in Ohio receive more DSH funds under the Medicaid plan the
more [charity care] patients they treat not because those patients receive care under the Medicaid
plan, but because Ohio law treats such patients as a proxy for low-income patients, just as the
Medicare provision treats Medicaid patients as a proxy for low-income patients.").

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Adena, 527 F.3d at 178-79. Thus, the hospitals argued, "the regulation must be part of the Ohio

Medicaid plan: Why else would the Secretary have approved the regulation as an amendment to

that plan?" Id. at 179.

The Adena court quickly dismissed this argument. It observed that Ohio was permitted

"to determine DSH adjustments in its Medicaid program by reference to a hospital's compliance

with the requirement . . . that a hospital provide charity care." Id. at 179. Having done so, Ohio

was obligated "to submit the regulation to the Secretary for approval because the mechanism for

providing a DSH adjustment under Medicaid is part of Ohio's Medicaid plan, and the Secretary

must approve that plan." Id. But, the Court concluded, "[t]he Secretary's approval of [Ohio's

charity care program] does not suggest in any way that [the charity care] patients receive care

pursuant to the Ohio Medicaid plan." Id. So too here: the Secretary's approval of

Massachusetts's charity care program does not mean that Massachusetts's charity care patients

receive treatment pursuant to MassHealth.

At the motions hearing, the Hospital offered that the UCP program is incorporated to a far

greater extent in MassHealth than Ohio's charity care program was in Ohio's state Medicaid plan.

See Hr'g Tr. at 11-13. But the Adena court gave no indication that its conclusion -- that the

Secretary's approval of Ohio's plan was irrelevant -- turned on the extent to which Ohio's

Medicaid plan described or incorporated its charity care program. And this Court declines to

adopt a rule whereby the nature of the treatment given to a state's charity care patients depends on

the description of the program offered in the state Medicaid plan.

Even assuming that Massachusetts's charity care patients are "eligible for medical

assistance," then, they still do not receive care "under a state [Medicaid] plan." Hence, the

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Secretary properly excluded charity care patient days from the numerator of the Hospital's

Medicaid fraction for this reason as well.

II. Medicare+Choice Patient Days

The second issue concerns whether patient days attributable to individuals who have

enrolled in "Medicare+Choice" plans should be included in the numerator of the Medicaid

fraction. The Medicare program is divided into several parts, of which two -- parts A and C --

are relevant here. Medicare part A covers medical services furnished to beneficiaries by

hospitals and other institutional care providers. See 42 U.S.C. §§ 1395c to 1395i-5. And

Medicare part C -- sometimes called Medicare+Choice -- allows beneficiaries to obtain medical

services through HMOs, preferred provider organization plans, and other "managed care"

arrangements offered by private health insurers. See 42 U.S.C. §§ 1395w-21 to 1395w-28.

Individuals are eligible for Medicare part C if they are "entitled to benefits under [Medicare] part

A." 42 U.S.C. § 1395w-21(a)(3)(A) ("[T]he term 'Medicare + Choice eligible individual' means

an individual who is entitled to benefits under [Medicare] part A . . . ."). Individuals eligible for

Medicare part C may elect to receive their Medicare benefits either "through the original

medicare fee-for-service program under [Medicare] parts A and B . . . , or . . . through enrollment

in a Medicare+Choice plan under [Medicare part C]." 42 U.S.C. § 1395w-21(a)(1).

Here, the fiscal intermediary calculating the Hospital's Medicare DSH reimbursement

excluded from the numerator of the Medicaid fraction the Hospital's patient days attributable to

individuals who had elected a Medicare+Choice ("M+C") plan under Medicare part C, and who

were eligible for Medicaid, because such patients were still "entitled to benefits under [Medicare]

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part A." See 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II).9 The PRRB affirmed this determination, see

AR at 207-10, and the Secretary in turn affirmed the PRRB, see id. 9-11.

The precise question before the Court is whether patients who elect to receive their

Medicare benefits through a M+C plan under Medicare part C are still "entitled to benefits under

[Medicare] part A." The Secretary contends that because individuals may only enroll in a M+C

plan if they are "entitled to benefits under [Medicare] part A," 42 U.S.C. § 1395w-21(a)(3)(A),

the Hospital's M+C patients were necessarily "entitled to benefits under [Medicare] part A." The

Secretary insists she therefore properly excluded such patient days from the numerator of the

Hospital's Medicaid fraction.

This argument fails, however, because it ignores the statutory definition of "entitled to

benefits under [Medicare] part A." Under the Medicare statute, "entitlement of an individual to

[Medicare part A] benefits for a month shall consist of entitlement to have payment made under,

and subject to the limitations in, [Medicare] part A . . . on his behalf for [certain] services." Id. §

426(c)(1).10 As the Secretary notes, a person may only enroll in a M+C plan if he is entitled to

9
As detailed above, the numerator of the Medicaid fraction "consist[s] of patients who
(for such [patient] days) were eligible for medical assistance under a State [Medicaid] plan . . . ,
but who were not entitled to benefits under [Medicare] part A." Id.
10
The Medicare statute also states that "[t]he benefits provided to an individual by the
insurance program under [Medicare part A] shall consist of entitlement to have payment made on
his behalf" for certain medical services. 42 U.S.C. § 1395d(a). Both § 1395d and § 426 were
adopted with the original Medicare bill. See 42 U.S.C. § 1395d(a) (1965); id. § 426(b)(1) (1965)
(same as present 42 U.S.C. § 426(c)(1)). The linguistic distinctions between the two provisions
are irrelevant here, however: section 1395d(a) details that individuals receiving Medicare part A
benefits are entitled to have payments made on their behalf, and section 426(c)(1) clarifies that
these payments are "made under, and subject to the limitations in, [Medicare] part A."
Moreover, to the extent that both provisions define "entitled to benefits under [Medicare] part
A," the Court must still apply § 426(c)(1)'s more specific language in order to give meaning to all
(continued...)

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benefits under Medicare part A. See id. § 1395w-21(a)(3)(A). Once that individual enrolls in a

M+C plan, however, he is no longer "entitle[d] to have payments made under, and subject to the

limitations in, [Medicare] part A." Rather, "payments under a contract with a Medicare+Choice

organization . . . with respect to an individual electing a Medicare+Choice plan offered by the

organization shall be instead of the amounts which (in the absence of the contract) would

otherwise be payable under [Medicare] parts A and B." Id. § 1395w-21(i)(1) (emphases added);

see also id. § 1395w-21(a)(1) ("Each [M+C] eligible individual . . . is entitled to receive benefits

. . . (A) through the original medicare fee-for-service program under parts A and B . . . , or (B)

through enrollment in a Medicare+Choice plan under [part C]." (emphasis added)). In other

words, once an individual elects a M+C plan, payments on his behalf during that enrollment are

no longer made under Medicare part A, but are instead made under Medicare part C.11

Congress, then, explicitly concluded that M+C patients are not "entitled to benefits under

[Medicare] part A" as that phrase is defined in the Medicaid statute. Hence, the Secretary erred

by excluding patient days attributable to such individuals from the numerator of the Hospital's

10
(...continued)
of Congress's words. See Hawaii v. Office of Hawaiian Affairs, 129 S. Ct. 1436, 1444 (2009)
("We must have regard to all the words used by Congress, and as far as possible give effect to
them.").
11
The Secretary does not address 42 U.S.C. § 1395w-21(i)(1) in her briefs. At the
motions hearing, however, she observed that this section is "[s]ubject to" a number of other
provisions. See Hr'g Tr. 52-54; see also 42 U.S.C. § 1395w-21(i)(1) (listing 42 U.S.C. §§
1395w-22(a)(5), 1395w-23(a)(4), (g), (h), (m), 1395ww(d)(11), (h)(3)(D)). The Court agrees.
Therefore, § 1395w-21(i)(1) does not apply, for example, when there are certain "legislative
change[s] in benefits." See 42 U.S.C. § 1395w-22(a)(5). But the Court need not address how
these exceptions to § 1395w-21(i)(1) affect M+C enrollees' entitlement to benefits under
Medicare part A, as the Secretary has not suggested that these exceptions apply to the Hospital's
M+C patients at issue here.

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Medicaid fraction.

Moreover, the Secretary's conclusion that M+C patients remain "entitled to benefits under

[Medicare] part A" directly conflicts with her interpretation of identical language elsewhere in

the Medicare statute. Thus, even if the Medicare DSH statute were ambiguous, the Court would

still, at Chevron step two, vacate the Secretary's final decision and remand for further

proceedings.

42 U.S.C. § 1395ww(d)(5)(G), located immediately adjacent to the provision governing

the Medicare DSH adjustment at issue in this case -- 42 U.S.C. § 1395ww(d)(5)(F) -- provides

for Medicare DSH adjustments to "medicare-dependent, small rural hospital[s]." Whether a

hospital is a "medicare-dependent, small rural hospital" depends on how many of the hospital's

patient days are attributable to patients "entitled to benefits under [Medicare] part A." Id. §

1395ww(d)(5)(G)(iv)(IV).

In a 1990 final rule, the Secretary interpreted this section such that individuals are

"entitled to benefits under [Medicare] part A" only when they are entitled to have their medical

services paid for under Medicare part A. Specifically, she observed that "[e]ntitlement to

payment under part A ceases after the beneficiary has used 90 days in a benefit period and has

either exhausted the lifetime reserve days or elected not to use available lifetime reserve days."

55 Fed. Reg. 35990, 35996 (Sept. 4, 1990).12 But "[s]ince patients who have exhausted their part

A benefits are no longer entitled to payment under part A," she concluded, "we do not believe

12
As explained by the Secretary, "[t]he scope of benefits to which an individual is entitled
to payment under part A . . . [is] limited to 90 days during each benefit period. An additional
lifetime reserve of 60 days may be drawn upon when an individual exceeds 90 days in a benefit
period." Id.

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such stays should be counted" in this Medicare DSH calculation. Id.

Were the Secretary's prior interpretation applied to the Medicare DSH provision at issue

here, the Hospital's M+C patient days would be included in the numerator of the Medicaid

fraction, as such patients are "no longer entitled to payment under [Medicare] part A." Indeed,

the agency "acknowledges that this reasoning [in the 1990 final rule] is inconsistent with the

Secretary's interpretation of the term 'entitlement' in the Medicare DSH calculation." Def.'s

Reply in Supp. of Mot. for Summ. J. ("Def.'s Reply") [Docket Entry 24], 18. Nevertheless, the

Secretary insists that this inconsistency "does not mean that the Secretary’s interpretation of the

Medicare DSH statute is either incorrect or arbitrary." Id. Indeed, "[i]t may be that the

interpretation of 42 U.S.C. § 1395ww(d)(5)(G)(iv)(IV) should be amended to conform to the

Secretary’s interpretation of the Medicare DSH statute, or that, due to different statutory

purposes, it is reasonable for the Secretary to interpret the same statutory language differently."

Id. at 18-19.

Perhaps. "There is . . . no effectively irrebuttable presumption that the same defined term

in different provisions of the same statute must be interpreted identically." Envtl. Def. v. Duke

Energy Corp., 549 U.S. 561, 576-77 (2007) (internal quotation marks omitted). Rather, "the

'natural presumption that identical words used in different parts of the same act are intended to

have the same meaning . . . is not rigid and readily yields whenever there is such variation in the

connection in which the words are used as reasonably to warrant the conclusion that they were

employed in different parts of the act with different intent.'" Id. (quoting Atl. Cleaners & Dyers,

Inc. v. United States, 286 U.S. 427, 433 (1932)). But the Secretary has, she concedes, offered no

explanation or argument for why Congress might have employed this identical language, in

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adjacent paragraphs, with different intent. See Hr'g Tr. at 61 ("Q: But in either instance, the

Secretary hasn't explained it. A: That is correct. Q: And hasn't really articulated that position.

A: That is correct.").

Therefore, even if the statute were ambiguous, the Secretary's decision would still be

arbitrary and capricious for this reason. "Of course the mere fact that an agency interpretation

contradicts a prior agency position is not fatal." Smiley v. Citibank (S.D.), N.A., 517 U.S. 735,

742 (1996). But agencies "may not . . . depart from a prior policy sub silentio or simply disregard

rules that are still on the books." Fed. Commc'ns Comm. v. Fox TV Stations, Inc., 129 S. Ct.

1800, 1811 (2009); accord Dillmon v. Nat'l Trans. Safety Bd., 588 F.3d 1085, 1089 (D.C. Cir.

2009) ("Reasoned decision making, therefore, necessarily requires the agency to acknowledge

and provide an adequate explanation for its departure from established precedent." (citing Fox

TV, 129 S. Ct. at 1811)). Here, the Secretary has offered no explanation, much less a reasoned

one, for her departure from her earlier interpretation of the phrase "entitled to benefits under

[Medicare] part A." Accordingly, even at Chevron step two, the Court would still vacate the

Secretary's final decision and remand for further proceedings. See Dillmon, 588 F.3d at 1095

("[B]ecause the Board departed from its precedent without reasoned explanation, we grant the

petition for review, vacate the order, and remand for further proceedings.").

III. Labor and Delivery Patient Days

The Hospital also contends that the Secretary erred in excluding from the numerator of its

Medicaid fraction the days associated with labor and delivery services that are attributable to

patients who are eligible for Medicaid and not entitled to Medicare part A benefits. The fiscal

intermediary concluded that these days are not "patient days," as required by the Medicaid

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fraction, and thus excluded them. The PRRB reversed this determination, see AR at 212-16, but

the Secretary then reversed the PRRB, see id. at 24-34.

The Secretary has interpreted "patient days" to refer to "only those days attributable to

areas of the hospital that are subject to the prospective payment system." 42 C.F.R. §

412.106(a)(1)(ii) (2002). The prospective payment system -- which provides hospital

reimbursements based on prospectively-determined standardized rates -- applies to the "operating

costs of inpatient hospital services." 42 U.S.C. § 1395ww(d)(1)(A). "[T]he term 'operating costs

of inpatient hospital services'" is further defined as "includ[ing] all routine operating costs,

ancillary service operating costs, and special care unit operating costs with respect to inpatient

hospital services." Id. § 1395ww(a)(4).

The Secretary now concedes that her decision to exclude these days from the numerator

of the Hospital's Medicaid fraction "was premised on the erroneous belief that costs attributable

to labor and delivery room patients were not treated as inpatient operating expenses." Def.'s

Reply at 19; see also Hr'g Tr. at 64 ("As we freely concede, the administrator's decision in the

labor and delivery room day issue was wrong."). Accordingly, she asks the Court to remand the

issue to the agency for further proceedings. See Def.'s Reply at 19. The Hospital objects, and

instead requests an order "declaring invalid, and setting aside, the Deputy Administrator’s

decision . . . and further directing the Secretary to count labor and delivery room days in both the

numerator and denominator of the Medicaid fraction." Pl.'s Reply at 42.

The Court cannot grant the Hospital's request. The rule in this circuit is clear: "'when a

court reviewing agency action determines that an agency made an error of law, the court's inquiry

is at an end: the case must be remanded to the agency for further action consistent with the

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correct legal standards.'" Palisades Gen. Hosp., Inc. v. Leavitt, 426 F.3d 400, 403 (D.C. Cir.

2005) (quoting County of Los Angeles, 192 F.3d at 1011); see also Baystate Med. Ctr. v. Leavitt,

545 F. Supp. 2d 20, 58 (D.D.C. 2008) ("A district court may not 'retain jurisdiction to devise a

specific remedy for the Secretary to follow.'" (quoting County of Los Angeles, 192 F.3d at

1011)). Accordingly, the Court "ha[s] jurisdiction only to vacate the Secretary's decision . . . and

to remand for further action consistent with its opinion," and it would be error to do anything

more. Palisades, 426 F.3d at 403.

IV. The Medicare Fraction

The Hospital's final contention is that the Secretary's own data cannot support her

calculation of the Hospital's Medicare fraction for fiscal year 1999. The Secretary acknowledges

that this case "presents the same allegations of systematic flaws of the [Medicare] fraction that

this Court decided in Baystate," 545 F. Supp. 2d 20. Def.'s Mot. at 42. Accordingly, she

"concedes that this Court has no reason to enter a different decision in this case." Id. at 42-43.

The Court will thus vacate the Secretary's final decision and remand for further proceedings. See

Palisades, 426 F.3d at 403.13

The Hospital further asks that, beyond a remand, the Court also "enjoin the Secretary and

her subordinates from continuing to disregard the Court's [Baystate decision]." Pl.'s Reply at 43.

Citing the Secretary's final decision in this case, the Hospital complains that "the Secretary

apparently refuses to acquiesce in this Court's [Baystate] ruling," but instead "intends to force the

Plaintiff Hospital . . . to go through the same meaningless, lengthy, and expensive hearing

13
The Hospital urges the Court to issue specific guidance to the Secretary on remand.
For the reasons already explained, the Court cannot do so.

-24-
process only to eventually arrive in this Court, where the Secretary will then concede error and

seek a remand." Id. at 43-44.

As the agency notes, however, "the Deputy Administrator decided this case before the

Secretary withdrew her appeal of the Court's decision in Baystate." Def.'s Reply at 20.14 And the

Secretary's counsel represented at the motions hearing that, to his knowledge, "there have been

no decisions subsequent to the withdrawal of the appeal in Baystate[] where the [CMS]

administrator has addressed whether Baystate should be followed in the administrative context."

Hr'g Tr. at 66. Indeed, even the Hospital acknowledged that it "d[idn't] think the Secretary has

issued a decision on that one way or another since [Baystate]." Id. at 37. Even assuming that this

Court has the authority to "enjoin the Secretary" in the manner requested by the Hospital, then,

nothing in the record suggests that such an aggressive approach is warranted at this time.

CONCLUSION

For the foregoing reasons, the Court will grant in part and deny in part the parties'

cross-motions for summary judgment, will vacate the Secretary's final decision, and will remand

this matter to the Secretary for further proceedings consistent with this opinion. A separate Order

accompanies this Memorandum Opinion.

/s/
JOHN D. BATES
United States District Judge

Date: March 30, 2010

14
The Secretary's final decision in this case is dated November 21, 2008. See AR at 40.
The Secretary withdrew her appeal in Baystate in February 2009. See Clerk's Order, Baystate
Med. Ctr. v. Johnson, No. 09-5039 (D.C. Cir. Feb. 26, 2009).

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