Baptist Healthcare System v. Leavitt

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

BAPTIST HEALTHCARE SYSTEM *
d/b/a BAPTIST REGIONAL *
MEDICAL CENTER, *
*
Plaintiff, *
*
v. * Civil Action No.: AW-08-0677
*
KATHLEEN SEBELIUS, *
SECRETARY OF HEALTH AND *
HUMAN SERVICES1 *
*
****************************************************************

MEMORANDUM OPINION

Baptist Regional Medical Center (“Plaintiff” or “BRMC”) brought

this action seeking judicial review of a decision of the Secretary of

the United States Department of Health and Human Services (“Defendant”

or “Secretary”). Currently pending is BMRC’s Motion for Summary

Judgment (Paper No. 13) and the Secretary’s Cross Motion for Summary

Judgment (Paper No. 18). The Court held a hearing on the pending

Motions on August 7, 2009. The Court has reviewed the entire record,

as well as the Pleadings and Exhibits, with respect to the instant

motions. The issues having been fully briefed by the parties and

argued by the parties, this matter is now ripe for review. For the

reasons set forth below, the Court will grant BRMC’s Motion for

Summary Judgment.

1 On April 28, 2009, Kathleen Sebelius became the Secretary of the United

States Department of Health and Human Services, and therefore is substituted
for the former Secretary, Michael O. Leavitt, as the Defendant in this
action. Fed. R. Civ. P. 25(d).

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Factual and Procedural Background

Plaintiff, Baptist Healthcare System (“BHS”) is a not-for-profit

organization that operates an acute care hospital, Baptist Regional

Medical Center,(“BRMC”)in Louisville, KY. BRMC is a provider under

Title XVIII of the Social Security Act, 42 U.S.C. § 1395, et seq., and

the services rendered by BRMC are certified under the Medicare

Program.2 For the cost reporting years at issue, September 1, 1998

through August 31, 2001, as a part of the BRMC’s collection and write-

off policy to determine indigence, BRMC required that patients with

“debts greater than $800 . . . complete a financial disclosure3 form

that included inquiries for both income and assets,” i.e. an “asset

test,” while patients with debts less than $800 did not. (Compl. ¶ 15

and A.R. at 60.) Patients with a balance under $800 were asked only

about their income. (A.R. at 60.) In addition, BRMC determined that

some of its patients were “indigent” through an upfront screening

process. (A.R. at 61.) Patients completed an “assistance qualification

sheet” or a “financial aid worksheet” prior to admission for services,

“to determine if [they were] going to meet some qualification.” (Id.)

BRMC also considered whether a patient resided in a certain “catchment

area,” as a factor to determine indigence. (Id.) For example, when

dealing with patients who lived in “Whitley County,” a high poverty

2
BRMC primarily offers inpatient/outpatient, psychiatric and rehabilitation
services.
3
This form serves as a so-called “asset test” as described in paragraph B of
the Provider Reimbursement Manual 15-I § 312. Although the term “asset test”
does not appear in the HHS regulations or manual, this terminology is used by
both Plaintiff and Defendant, and thus the Court will adhere to its use as
well.

2
county, BRMC credit counselors did not ask many questions about the

patient’s assets. (Id.) This policy “applied equally to Medicare and

non-Medicare patients.” (Compl. ¶ 14.)

Annually, hospitals must file “cost reports” to their designated
4
fiscal intermediary, that detail the costs attributed to the care of

Medicare patients. 42 C.F.R. § 413.20(b). The fiscal intermediary

reviews and audits the cost reports, and will disallow any costs it

deems inappropriate. The intermediary issues a Notice of Amount of

Program Reimbursement (“NPR”) that indicates the providers expected

reimbursement, and the basis for the calculation. For the cost

reporting years, 1999, 2000 and 2001 the intermediary disallowed all

of BRMC’s “bad debt” claims, when the records did not demonstrate that

BRMC conducted an asset test as a part of their indigence

determination. (A.R. at 3.) The intermediary concluded that “Section

312 of the PRM requires that, in making a determination of indigence,

the Provider should take into account the patients total resources,

including assets, liabilities and income.” (Id.)

BRMC timely appealed the intermediary’s determination to the

Provider Reimbursement Review Board (“Board”). 42 U.S.C. § 1395oo(a);

A.R. at 3.) The Board’s review focused on “whether the asset test

guideline at CMS Pub.15-1, Section 312(B) of the [PRM] must be applied

to determine a Medicare beneficiary’s indigence. After an in-depth

examination of Section 312, the Board concluded that Section 312 “does

4 A fiscal intermediary is a contractor, hired by the federal government to

process hospital claims. 42 U.S.C. § 1395(h). During the time in question,
BMRC’s intermediary was AdminaStar Federal, Inc. See Compl. at 4.

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not create a mandatory asset test and found that [BRMC’s} bad debts

should be reimbursed . . . .” (A.R. at 3.)

Review authority of decisions issued by the Board is invested in

the Secretary of the Department of Health and Human Services. The

Secretary may, on her own motion, reverse, affirm or modify the

Board’s decision. 42 U.S.C. § 1395oo(f)(1). The Secretary has

delegated her review authority to the Administrator of the Centers for

Medicare & Medicaid Services (“CMS”). 42 C.F.R. 405.1875. The

Administrator undertook a review of the Board’s decision. The

Administrator concluded that,

contrary to the Board’s finding, Section 312 of
the PRM does create a mandatory asset test. It
is critical that the provider meet the indigency
criteria set forth in § 312 of the PRM in order
to take into account all necessary information
needed to properly deem any patient indigent and,
thus, meet the regulatory requirements that a
reasonable collection effort was made and that
the debt was uncollectible when claimed as
worthless.

(A.R. at 8.)

Moreover, the Administrator noted that the “introduction and

paragraphs B and D of [S]ection 312 of the PRM uses ‘should’ whereas

paragraphs A and C use ‘must,’” yet found that “within the context of

the regulation and the PRM, “should” is synonymous with “must.” (Id.

at 9 n.3.)

BRMC now appeals the Administrator’s decision. 42 C.F.R. §

405.1875.

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Standard of Review

The parties have filed cross-motions for summary judgment.

Summary judgment is only appropriate “if the pleadings, the discovery

and disclosure materials on file, and any affidavits show that there

is no genuine issue as to any material fact and that the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see

Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). The court must

“draw all justifiable inferences in favor of the nonmoving party,

including questions of credibility and of the weight to be accorded to

particular evidence.” Masson v. New Yorker Magazine, Inc., 501 U.S.

496, 520 (1991) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

255 (1986)). When parties file cross motions for summary judgment,

the court must view each motion in the light most favorable to the

non-movant. Quigley v. Giblin, 569 F.3d 449, 453 (D.C. Cir. 2009);

Mellen v. Bunting, 327 F.3d 355, 363 (4th Cir. 2003).

Under the Federal Administrative Procedures Act, a reviewing

court “shall hold unlawful and set aside agency action, findings and

conclusions found to be, arbitrary, capricious, an abuse of discretion

or otherwise not in accordance with law . . . .” 5 U.S.C. § 706(2)(A).

This standard of review is highly deferential and presumes agency

action to be valid. Am. Wildlands v. Kempthorne, 530 F.3d 991, 997

(D.C.Cir.2008). Under the arbitrary and capricious standard, the

scope of review is narrow, and a court should not substitute its

judgment for that of the agency. Motor Vehicle Mfrs. Ass’n of U.S.,

Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). An

5
agency determination is arbitrary and capricious “if the agency has

relied on factors which Congress has not intended it to consider,

entirely failed to consider an important aspect of the problem,

offered an explanation for its decision that runs counter to the

evidence before the agency, or is so implausible that it could not be

ascribed to a difference in view or the product of agency expertise.”

Id. An agency decision is an abuse of discretion if it is “based on an

erroneous interpretation of the law, on factual findings that are not

supported by the substantial evidence or represents and represents an

unreasonable judgment in weighing relevant factors.” Star Fruits

S.N.C. v. U.S., 393 F.3d 1277, 1281 (Fed.Cir.2005). Although the

decision of the Department of Health and Human Services (“HHS”) is

entitled to a presumption of validity, that presumption does not

shield the decision from a substantial, “thorough, probing, in-depth

review” by the reviewing court as opposed to a rubber stamp. Citizens

to Preserve Overton Park, Inc. v. Volpe, 41 U.S. 402, 415 (1971).

Medicare Regulations and Manuals Overview

Medicare is a federally funded health insurance program for

people age 65 or older, or who meet certain other criteria. Medicare

consists of two parts: “Part A [42 U.S.C. § 1395(c)-1395(i)], provides

reimbursement for inpatient hospital and related post-hospital, home

health and hospice care; and Part B [42 U.S.C. § 1395(j)-1395(w)] is a

supplementary voluntary insurance program for hospital outpatient

services, physician services and other services not covered under Part

A.” (A.R. at 5.) “Medicare providers are reimbursed by the Medicare

6
program through fiscal intermediaries for Part A and carriers for Part

B, under contract with the Secretary.” At issue in this case is Part A

of the Medicare program.

Medicare Part A, reimburses providers for the reasonable and

necessary costs incurred to care for Medicare beneficiaries. 42 C.F.R

§ 413.9(b)(1) defines reasonable costs as those costs, direct and

indirect, related to the treatment of Medicare beneficiaries.

Utilizing the methods in the regulations for determining reasonable

costs, the goal is that costs related to individuals covered by the

program not borne by other not covered by the program. Id. To this

end, Medicare recognizes that,

the failure of beneficiaries to pay the
deductible and coinsurance amounts could result
in the related costs of covered services being
borne by other than Medicare beneficiaries, [and
therefore,] to assure that such covered service
costs are not borne by others, the costs
attributable to the deductible and coinsurance
amounts that remain unpaid are added to the
Medicare share of allowable costs.

42 C.F.R. 413.89(d).

Before unpaid deductible and coinsurance balances or “bad debts”

are added to a provider’s allowable costs, the following criteria must

be satisfied,

(1) The debt must be related to covered services
and derived from deductible and coinsurance
amounts.
(2) The provider must be able to establish that
reasonable collection efforts were made.
(3) The debt was actually uncollectible when
claimed as worthless.

7
 (4) Sound business judgment established that there
was no likelihood of recovery at any time in
the future.

42 C.F.R. 413.89(e). (emphasis added)

Due to the complexity of the regulations, however, the Secretary

has issued interpretive manuals, guidelines, letters and other

publications to help intermediaries and providers better understand

the regulations. See American Hosp. Ass’n v. Bowen, 834 F.2d 1037,

1045 (D.C.Cir.1987). One such manual is the CMS Pub. 15-1, also known

as the Provider Reimbursement Manual (“PMR”). (Paper 18 at 5.) The

provisions of the PRM “do not have the effect of substantive law or

regulation, rather they are interpretive rules” that clarify existing

law or regulations, and “set practical processes.” Harris County, 863

F.Supp. at 409 (citing Mother Frances Hosp. of Tyler, Texas v.

Shalala, 15 F.3d 423 (5th Cir. 1994)). Section 310 and 312 of the PRM

set forth guidelines to assist providers in understanding when a bad

debt is an allowable cost. As a general starting point, a provider is

required to make “reasonable collection efforts” before a bad debt can

be considered an allowable cost. Section 310 states:

To be considered a reasonable collection
effort, a provider’s effort to collect Medicare
deductible and coinsurance amounts must be
similar to the effort the provider puts forth to
collect comparable amounts from non-Medicare
patients. It must involve the issuance of a bill
on or shortly after discharge or death of the
beneficiary to the party responsible for the
patient’s personal financial obligations. It also
includes other actions such as subsequent
billings, collection letters and telephone calls
or personal contacts with this party which
constitute a genuine rather than token collection
effort.

8
PRM § 310. (emphasis added)

In the case of an indigent patient, however, Section 312 of the

PRM dispenses with the reasonable collection efforts and gives

providers different guidance. Section 312 states:

In some cases, the provider may have established before
discharge, or within a reasonable time before the current
admission, that the beneficiary is either indigent or
medically indigent. Providers can deem Medicare
beneficiaries indigent or medically indigent when such
individuals have also been determined eligible for
Medicaid as either categorically needy individuals or
medically needy individuals, respectively. Otherwise,
the provider should apply its customary methods for
determining indigence of patients to the case of the
Medicare beneficiary under the following guidelines:

A. The patient’s indigence must be determined by
the provider, not by the patient; i.e. a
patient’s signed declaration of his inability
to pay his medical bills cannot be considered
proof of indigency;
B. The provider should take into account a
patient’s total resources which would include,
but are not limited, to an analysis of assets
(only those convertible to cash, and
unnecessary for the patient’s daily living),
liabilities and income and expenses. In making
this analysis the provider should take into
account any extenuating circumstances that
would affect the determination of the
patient’s indigence;
C. The provider must determine that no source
other than the patient would be legally
responsible for the patient’s medical bill . .
.; and
D. The patient’s file should contain
documentation of the method by which indigence
was determined in addition to all back up
information to substantiate the determination.

Once indigence is determined and the provider concludes
that there has been no improvement in the beneficiary’s

9
 financial condition, the debt may be deemed uncollectible
without applying the Section 310 procedures.5

CMS regulations and the PRM allow a provider to “waive collection

of charges to any patients, Medicare or non-Medicare, including low-

income, uninsured or medically indigent individuals, if it is done as

part of the [provider’s] indigency policy. By ‘indigency policy’ [the

Secretary] mean[s] a policy developed and utilized by the hospital to

determine patients’ financial ability to pay for services,” (A.R. at

164)(quoting a 2004 news release of former Secretary of HHS, Thommie

Thompson.) as long as the policy applies to Medicare and non-Medicare

patients uniformly. (A.R. 166-67.)

At issue in this case is the application of paragraph B of

Section 312 of the PRM when a provider seeks reimbursement of bad

debts for indigent Medicare beneficiaries.

Analysis

The Administrator determined that “Section 312 of the PRM does

create a mandatory asset test.” (A.R. at 8.) He concluded that, the

“Provider failed to employ an asset test and did not properly evaluate

the indigency status of its patients and thus, the Intermediary

properly disallowed the Provider’s claimed bad debts.” (A.R. at 9.)

Thus, the question before the Court is whether a reasonable

interpretation of PRM 312 requires that BRMC perform an asset test in

5Available at
http://www.cms.hhs.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-
99&sortByDID=1&sortOrder=ascending&itemID=CMS021929 (Chapter 3)

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order to determine whether a Medicare beneficiary is indigent.6 The

Court’s determination in this case boils down to the meaning of two

simple words — must and should, and contrary to the Administrator’s

finding, this Court concludes that the words must and should are not

synonymous neither in the context of government regulations and

manuals nor in everyday usage.

The Administrator acknowledged that the appearance of the

auxiliary verbs, must and should, alternated from paragraph to

paragraph in Section 312, (A.R. at 7-8.) yet she found that pursuant

to Medicare regulations and the PRM, providers are required to follow

certain procedures in making indigency determinations, . . . [and that

a] provider’s strict compliance with these procedures flows from the

plain, mandatory language of [all of] Section 312 . . . .” (A.R. at

9.)(emphasis added) The Administrator rejected the court’s finding in

Harris County that the word “should” is synonymous with must, but

offered no case law or other legal precedent to support his findings.

(A.R. at 9 n.3) The Administrator simply concluded that BRMC’s policy

“constitute[d] insufficient and improper collection efforts.” (A.R. at

10.)

The Administrator’s conclusions stand in stark contrast to the

Agency’s unequivocal statement that, a hospital may determine its own

individual indigency criteria. (Id.) When the Court examines Section

312 in the context of this unequivocal statement, however, it becomes

6 Defendant mischaracterized the issue for the Court as whether Plaintiff performed an asset
test. (Paper 18 at 9)

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clear paragraph B, as well as paragraph D are best construed as

strong, but noncompulsory recommendations.

Starting from the premise that providers may determine their own

individual indigency criteria,7 Section 312 makes sense. The Section

begins by setting forth the primary ways a provider may classify a

beneficiary as indigent. Section 312 then states, “[o]therwise the

provider should apply its customary methods for determining indigence

of patients . . . .” PRM Section 312. The Court presumes that by

“customary methods” the PRM is referring to the individual indigency

criterion that providers are allowed to create. Section 312 then sets

forth guidelines for how those customary methods should be applied to

Medicare beneficiaries.

Paragraph A states: “the patient’s indigence must be determined

by the provider, not by the patient;. . . .” PRM Section 312(A). No

one disputes that the word must connotes an obligation, and thus it

follows that the drafters of Section 312 used the word must in

paragraph A because they wanted to ensure that providers, in creating

their own indigency criteria, did not leave the determination up to

the patient, and thus render Section 312 impotent. But it also

follows that the drafters used the word “should” in paragraph B.

Paragraph B states: “the provider should take into account a

patient’s total resources which would include, but are not limited, to

7 The parties agree that a provider is allowed to determine its own indigency policy as long as
the criteria are applied consistently to Medicare and non-Medicare patients. (A.R. 166-67) It is
undisputed that BRMC’s indigency policy applied consistently to Medicare and non-Medicare
patients.

12
an analysis of assets . . . , liabilities and income and expenses. In

making this analysis the provider should take into account any

extenuating circumstances . . . .” PRM Section 312(B)(emphasis added).

The drafters used the word should not once, but twice, and the Court

finds that they used the word should as a suggestion of the ideal

criteria a provider could use. The drafters did not use the word must

because had they done so, they would have effectively dictated to

providers exactly how they had to structure their indigence criteria,

which would contradict the initial premise. Likewise it makes sense

that the drafters chose to use word should in second sentence of

paragraph B to express a strong suggestion that providers take into

account a patients extenuating circumstances. For the same reasons,

the use of the word must in paragraph C and should in paragraph D is

logical as well.

With respect to paragraph C, were the provider able to bill

Medicare for a bad debt that someone else other than the patient was

legally required to pay, it would create a gaping loophole in the

indigence determination. Hence, the use of the unequivocal auxiliary

verb must. The Court finds paragraph D particularly instructive, not

only on the issue of whether must and should are synonymous, but also

on the asset test on the whole. Paragraph D states: “The patient’s

file should contain documentation of the method by which indigence was

determined in addition to all back up information to substantiate the

determination.” PRM Section 312(D)(emphasis added). During the

hearing, the Defendant pointed to the use of should in this paragraph

as proof that the word should carries a mandatory connation because no

13
one can dispute a provider must submit documentation in order to

receive reimbursement from Medicare. The Plaintiff countered that

while documentation is certainly necessary, the real meaning of

paragraph D emanates from the words preceding should. Plaintiff

argues that in the context of the words, “the patient’s file,” the

word should is still precatory and not mandatory, because it explains

the ideal location for the documentation. The Court agrees, but also

notes that the word method indicates that the manual contemplates

others ways that a provider can determine a person’s indigence, aside

from an asset test.

The case law is clear and. Several Courts of Appeals discussing

the word should repudiate the notion that it is synonymous with must.

See Marshall v. Anaconda Co., 586 F.2d 370, 375 (9th Cir.

1979)(stating that the words “should . . . unless” are more advisory

than the words “shall . . . unless”); United States v. Maria, 186 F.3d

65,70 (2d Cir. 1999)(stating that the common meaning of “should”

suggests or recommends a course of action, while the ordinary

understanding of “shall” describes a course of action that is

mandatory.); United States v. Harris, 63 F.3d 555, 559 (2d Cir.

1994)(opining that because the regulation does not say that the court

“must” but rather the court “should,” it suggests an approach and does

not mandate it.) Moreover, the court in Harris County squarely dealt

with this issue in sum and substance, and here, just as in Harris

County, the Secretary “goes to heroic efforts to assert that should

means must,” but offers nothing to refute the plain meaning of the two

words, and thus her argument must fail. Harris County, 863 F.Supp. at

14
410. And while the Secretary beseeches this Court that her

interpretation of the PRM’s language is entitled to substantial

deference, the Court finds this interpretation arbitrary because it

disregards the purposeful word choice undertaken when drafting

regulations and guidelines that have far reaching legal implications.

This is especially the case when drafters of such documents toggle

between words within a particular provision.

Thus for the reasons cited above, the Court believes that words

must and should do not carry the same meaning in the context of

Section 312 of the PRM.

Conclusion

The Secretary has the discretion to change the language of the

PRM so that each paragraph uses the auxiliary verb must, but for some

reason she has chosen not to. In order to preclude courts from

reaching the same conclusion in future decisions, the Secretary should

amend Section 312 of the PRM.

____August 18, 2009_______ ___________/s/_______________
Date Judge Alexander Williams, Jr.
United States District Judge

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