Grant Medical Center v. Eric D. Hargan

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 28, 2017 Decided November 17, 2017

No. 16-5314

GRANT MEDICAL CENTER, ET AL.,
APPELLANTS

v.

ERIC D. HARGAN, ACTING SECRETARY, UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE

Appeal from the United States District Court
for the District of Columbia
(No. 1:15-cv-00480)

Daniel C. Gibson argued the cause for appellants. With
him on the briefs was James F. Flynn.

Weili J. Shaw, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
Michael S. Raab, Attorney.

Before: GARLAND, Chief Judge, TATEL, Circuit Judge, and
GINSBURG, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.
 2
TATEL, Circuit Judge: One of our sister circuits, the Sixth,
ruled that the Centers for Medicare and Medicaid Services’
(CMS) method for counting hospital beds conflicted with the
plain language of the applicable regulation. CMS amended the
regulation to permit its preferred counting method but—central
to this case—applied the Sixth Circuit’s interpretation to
hospitals located within that circuit until the revised regulation
took effect. Appellants, hospitals in the Sixth Circuit, challenge
CMS’ decision to acquiesce to the Sixth Circuit’s ruling. Given
that obeying judicial decisions is usually what courts expect
agencies to do, the hospitals face an uphill battle. The district
court found that the agency acted reasonably, and we agree.

I.
Medicare reimburses hospitals for providing inpatient care
through the Inpatient Prospective Payment System. 42 U.S.C.
§ 1395ww(a), (d). Under that system, Medicare pays hospitals
a fixed amount for each patient regardless of the actual costs
incurred. 42 C.F.R. § 412.2(a). In order to account for certain
differences among hospitals, the reimbursement formula
includes several supplemental adjustments. See 42 U.S.C.
§ 1395ww(d). Two such adjustments are at issue here: the
Indirect Medical Education (IME) adjustment, which
supplements payments to hospitals that train medical residents,
id. § 1395ww(d)(5)(B), and the Disproportionate Share
Hospital (DSH) adjustment, which supplements payments to
hospitals that serve a disproportionate share of low-income
patients, id. § 1395ww(d)(5)(F). Both adjustments turn, in part,
on the number of inpatient beds at the hospital. Also, due to the
particularities of the formulas, hospitals claiming the IME
adjustment generally benefit when the bed count is lower, see
42 C.F.R. § 412.105, while hospitals claiming the DSH
adjustment benefit when the bed count is higher, see id.
§ 412.106.
 3
Under this “complex and highly technical regulatory
program,” Thomas Jefferson University v. Shalala, 512 U.S.
504, 512 (1994) (quoting Pauley v. BethEnergy Mines, Inc.,
501 U.S. 680, 697 (1991)), counting beds is no simple matter.
A hospital’s bed count is calculated according to an intricate
formula set forth at 42 C.F.R. § 412.105(b). Prior to October 1,
2003, that regulation provided:

[T]he number of beds available in a hospital is
determined by counting the number of available bed
days during the cost reporting period, not including
beds or bassinets in the healthy newborn nursery,
custodial care beds, or beds in excluded distinct part
hospital units, and dividing that number by the
number of days in the cost reporting period.

42 C.F.R. § 412.105(b) (2002).

At issue in this case are two types of beds occasionally
used for inpatient care but unmentioned in section 412.105(b)’s
express exclusions: “swing beds” and “observation beds.”
Swing beds, found primarily in small rural hospitals, change in
reimbursement status depending on whether the facility is
using the bed for acute care or skilled nursing care. See
Medicare Program; Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates, 68
Fed. Reg. 45,346, 45,418–19 (2003). Observation beds are
short-term beds used for outpatient care when a patient has not
been formally admitted to the hospital. See id. Even though
section 412.105(b) did not expressly exclude swing or
observation beds, the “longstanding policy” of CMS, which
administers Medicare on behalf of the United States
Department of Health and Human Services (HHS), was to
 4
exclude these beds when calculating bed counts. See id.; Joint
Stipulations ¶ 2.

In 2001, two Kentucky hospitals that fell short of the bed
count needed to qualify for the DSH adjustment challenged
CMS’ interpretation of section 412.105(b). See Clark Regional
Medical Center v. HHS, 314 F.3d 241, 242 (6th Cir. 2002). The
hospitals argued that excluding swing and observation beds
conflicted with section 412.105(b)’s plain text. In Clark
Regional Medical Center v. HHS, the Sixth Circuit agreed,
explaining that “[b]ecause the regulation specifically lists
certain types of beds that are excluded from the bed count, but
does not list swing or observation beds, the plain meaning of
the regulation suggests that it is permissible to count swing and
observation beds.” Id. at 247.

In response to the Sixth Circuit’s decision in Clark, CMS
amended section 412.105(b) through notice-and-comment
rulemaking to expressly exclude swing and observation beds.
See Medicare Program; Proposed Changes to the Hospital
Inpatient Prospective Payment Systems and Fiscal Year 2004
Rates, 68 Fed. Reg. 27,154, 27,205–06, 27,229 (May 19, 2003)
(notice of proposed rulemaking); 68 Fed. Reg. at 45,470 (final
rule). CMS explained that, despite its longstanding policy of
excluding swing and observation beds, “courts have applied
our current rules in a manner that is inconsistent with our
current policy and that would result in inconsistent treatment.”
68 Fed. Reg. at 45,416 (discussing Clark). The effective date
of the revised regulation was October 1, 2003. Id. at 45,346.

CMS has taken two additional actions relevant to the issue
before us. First, to address reimbursement claims for patients
discharged prior to the effective date of the revised regulation,
the agency issued Joint Signature Memorandum 109 (JSM-
 5
109). For hospitals located within the Sixth Circuit, CMS stated
that it would comply with Clark and include swing and
observation beds in the total bed count. But for hospitals
located outside the Sixth Circuit, CMS maintained its policy of
excluding swing and observation beds from the total bed count.

Second, in St. Vincent Mercy Medical Center v. Blue Cross
Blue Shield Association, CMS Adm’r Dec., 2008 WL 6468508
(Nov. 17, 2008), CMS affirmed its commitment to follow
Clark and JSM-109 for pre-October 2003 reimbursement
claims at hospitals within the Sixth Circuit. In that case, an
Ohio hospital challenged CMS’ decision to comply with Clark
and include observation beds when calculating total beds for
purposes of the DSH adjustment. The Administrator rejected
the claim, reasoning that “[g]enerally, when a court determines
that an agency’s interpretation is inconsistent with the language
of the regulation, an agency may recognize that court’s
interpretation and apply the court’s interpretation uniformly,
thereafter, within the jurisdictional bounds of the interpreting
court.” Id. at *9. This approach, the Administrator explained,
ensured that “all similarly situated providers are treated the
same for the applicable cost reporting periods” and facilitated
“the orderly administration of a complex and time sensitive
program.” Id. at *10. In the years following St. Vincent, CMS
has continued to apply Clark to reimbursement claims for pre-
October 2003 discharges filed by hospitals within the Sixth
Circuit. See, e.g., Clinton Memorial Hospital v. Blue Cross
Blue Shield Association, CMS Adm’r Dec., 2010 WL 5570983,
at *9 (July 26, 2010).

Appellants in this case are ten Ohio hospitals (“Hospitals”)
operating within the Sixth Circuit. For reasons we need not
probe, the Hospitals would like swing and observation beds
excluded from their total bed count when calculating
 6
reimbursements for discharges prior to October 1, 2003. The
Provider Reimbursement Review Board (PRRB)—the body
responsible for initially hearing Medicare reimbursement
disputes—rejected the Hospitals’ claim. See OhioHealth 2004
Clark Bed Days Group v. BlueCross BlueShield Association,
PRRB Dec. No. 2015-D1, 2015 WL 10739301, at *9 (Jan. 29,
2015). The PRRB explained that the “inclusion of observation
bed days and swing bed days” for discharges prior to October
2003 “was correct . . . as all the providers are located within the
Sixth Circuit and the Clark decision is controlling legal
precedent.” Id. The PRRB also noted that it “concurs with the
Administrator in St. Vincent that the ‘separation of powers
doctrine requires administrative agencies to follow the law of
the circuit whose courts have jurisdiction over the cause of
action.[’]” Id. at *8 (quoting St. Vincent, 2008 WL 6468508, at
*9).

The Administrator declined to review the PRRB’s
decision, and it became final. See 42 U.S.C. § 1395oo(f)(1).
Exercising their prerogative under a venue-choice provision,
the Hospitals challenged the decision in the United States
District Court for the District of Columbia. Id. (providing that
an appeal “shall be brought in the district court of the United
States for the judicial district in which the provider is located
. . . or in the District Court for the District of Columbia”). The
district court granted summary judgment in favor of the
Secretary, see Grant Medical Center v. Burwell, 204 F. Supp.
3d 68, 71 (D.D.C. 2016), and this appeal followed.

“Because we apply the same standard of review as the
district court, we proceed de novo, as if [the plaintiff] had
brought the case here on direct appeal.” Tenet HealthSystems
HealthCorp. v. Thompson, 254 F.3d 238, 244 (D.C. Cir. 2001).
Thus, we review CMS’ decision under the Administrative
 7
Procedure Act to determine whether it is “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with
law.” 5 U.S.C. § 706(2)(A).

II.
The Hospitals believe that we can disregard the
acquiescence issue because CMS erred when it calculated bed
counts under the pre-2003 version of section 412.105(b) rather
than the revised version promulgated after Clark. Because the
parties agree that the revised regulation would require
excluding swing and observation beds—the Hospitals’
preferred outcome—the Hospitals see this as the simplest path
to relief. Unfortunately for the Hospitals, this simple solution
runs into a simple problem: their case concerns reimbursement
claims for discharges made prior to October 1, 2003, while the
revised regulation applies only to “discharges occurring on or
after October 1, 2003.” 68 Fed. Reg. at 45,346 (emphasis
added).

Undaunted, the Hospitals advance two arguments to
circumvent this clear effective-date provision. Neither is
convincing.

First, invoking the general rule that a “court is to apply the
law in effect at the time it renders its decision,” Bradley v.
School Board of City of Richmond, 416 U.S. 696, 711 (1974),
the Hospitals argue that the PRRB should have applied the
revised regulation because it was the law “in effect” when the
Board rendered its 2015 decision. See Appellants’ Br. 29. But
under a contrary presumption, “congressional enactments and
administrative rules will not be construed to have retroactive
effect unless their language requires this result.” Bowen v.
Georgetown University Hospital, 488 U.S. 204, 208 (1988).
Although our court has grappled with this “apparent
 8
inconsistency in presumptions,” Gersman v. Group Health
Association, Inc., 975 F.2d 886, 889 (D.C. Cir. 1992), this
ambiguity exists “only in the absence of statutory terms clearly
directing the choice between retroactive and prospective
application,” id. at 888. Given that we apply a statute
prospectively when “congressional intent is clear,” Kaiser
Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 837
(1990), we see no reason why the principle should be any
different when the agency’s intent is clear in a regulation.

Next, the Hospitals contend that the PRRB should have
applied the revised regulation retroactively because it
“clarified” rather than “changed” the law and because the
clarification inures to their benefit. This misses the mark in two
respects. First, even if the revised regulation merely reiterates
the law outside the Sixth Circuit, it still marks a “change” from
the interpretation of section 412.105(b) that CMS had
acquiesced to after Clark within that circuit until the revised
regulation took effect. Second, the Hospitals have this circuit’s
retroactivity law backwards: while we have prohibited
retroactive application of a rule that disadvantages a party by
“effect[ing] a substantive change from the agency’s prior
regulation,” National Mining Association v. Department of
Labor, 292 F.3d 849, 860 (D.C. Cir. 2002), we never require
agencies to apply rules retroactively even where it would be
permissible for them to do so. See Mountain Solutions, Ltd. v.
F.C.C., 197 F.3d 512, 520 (D.C. Cir. 1999) (“Because
rulemakings are generally prospective, there would appear to
be no basis for the court to fault the Commission for failing to
give [appellants] the benefit of its new rule.” (citations
omitted)). Had CMS decided to apply the revised regulation
retroactively, it might have sought to justify that decision by
presenting arguments similar to those advanced here by the
Hospitals. But CMS chose to apply the revised regulation only
 9
prospectively, and the Hospitals have given no reason to
overturn that determination.

Focusing on the original bed-counting regulation, the
Hospitals argue that even if the old rule applies, the Sixth
Circuit’s Clark decision can have no bearing on our analysis of
whether CMS’ interpretation of the regulation was arbitrary or
capricious. Instead, they argue, having brought their case in this
circuit, they are entitled to a ruling based on this court’s
independent review of the issue.

This mischaracterizes the question before us. To
understand our task, we need look no further than the statute
that gives us jurisdiction, 42 U.S.C. § 1395oo(f)(1), which
states that “[p]roviders shall have the right to obtain judicial
review of any final decision of the Board.” In this case, then,
we must determine whether the PRRB’s final decision to
follow Clark when calculating reimbursement claims for
discharges prior to the revised regulation’s effective date was
“arbitrary, capricious, an abuse of discretion, unsupported by
substantial evidence, or otherwise not in accordance with the
law.” Sentara-Hampton General Hospital v. Sullivan, 980 F.2d
749, 755 (D.C. Cir. 1992) (citing 5 U.S.C. § 706(2)(A) and
(E)). In doing so, of course, we evaluate the reasons CMS gave
for complying with Clark. But ignoring Clark altogether would
require us to disregard the context and basis of the very
decision we are reviewing. See Independent Petroleum
Association of America v. Babbitt, 92 F.3d 1248, 1258 (D.C.
Cir. 1996) (holding that Department of the Interior’s
interpretation of a rule was unreasonable because it
“constitute[d] an unexplained departure” from the agency’s
prior adoption of a Fifth Circuit decision).
 10
We turn, then, to the issue at the heart of this case: whether
CMS acted arbitrarily or capriciously when it decided to follow
Clark by excluding swing and observation beds when
calculating bed counts at the Hospitals’ facilities.

The Hospitals argue that the PRRB’s decision to acquiesce
in this case was arbitrary and capricious because it relied on the
faulty premise that the agency was required to follow Clark.
According to the Hospitals, the only rationale the PRRB gave
for following Clark was that “‘the separation of powers
doctrine requires administrative agencies to follow the law of
the circuit whose courts have jurisdiction over the cause of
action.[’]” OhioHealth, 2015 WL 10739301, at *8 (quoting St.
Vincent, 2008 WL 6468508, at *9).

Were this characterization of the PRRB’s decision correct,
we would have to reverse because, in this circuit, an agency
need not always acquiesce to an adverse ruling. See Johnson v.
U.S. Railroad Retirement Board, 969 F.2d 1082, 1093 (D.C.
Cir 1992) (“Although the decision of one circuit deserves
respect . . . ‘it need not be taken by the [agency] as the law of
the land.’” (quoting Givens v. United States Railroad
Retirement Board, 720 F.2d 196, 200 (D.C. Cir. 1983))).
Nonacquiescence may be particularly justified where, as here,
it occurs in the context of a “broad venue statute [that] often
forces the agency to act without knowing which circuit court
ultimately will review its actions.” Id. at 1091.

The Hospitals, however, take too narrow a view of the
PRRB decision. Where “an agency merely implements prior
policy,” as CMS did here by following St. Vincent, “an
explanation that allows this court to discern ‘the agency’s path’
will suffice.” WLOS TV, Inc. v. F.C.C., 932 F.2d 993, 995
(D.C. Cir. 1991) (quoting Hall v. McLaughlin, 864 F.2d 868,
 11
872–73 (D.C. Cir. 1989)). And here, the PRRB’s repeated
references to St. Vincent make the agency’s path abundantly
clear. See OhioHealth, 2015 WL 10739301, at *8 (noting the
argument that “Providers here are situated similarly to . . . St.
Vincent Mercy Medical Center and that the Board should rule
consistently with . . . the Administrator’s decisions in St.
Vincent”). Our task, then, is to determine whether CMS’
incorporation of St. Vincent demonstrates that the agency
properly understood it had no obligation to acquiesce to Clark.

Reading the PRRB’s decision alongside the CMS
Administrator’s ruling in St. Vincent, we think it evident that
CMS’ view is not simply that it was required to acquiesce. See
Tourus Records, Inc. v. DEA, 259 F.3d 731, 738 (D.C. Cir.
2001) (holding that, although a court may not accept appellate
counsel’s post hoc rationalizations for agency actions, it may
consider contemporaneous documents outlining the agency’s
reasoning). To be sure, the Administrator did state that “the
separation of powers doctrine requires administrative agencies
to follow the law of the circuit whose courts have jurisdiction
over the cause of action,” but the context reveals that the
Administrator was merely describing the general disapproval
of intracircuit nonacquiescence. See St. Vincent, 2008 WL
6468508, at *9 n.21 (describing Johnson’s discussion of “true
intra-circuit refusal of an agency to recognize adverse
controlling case law” (citing Johnson, 969 F.2d at 1092)).
Immediately after making this observation, the Administrator
recognized that the principle of complying with adverse
judicial rulings “is more problematic when an agency is faced
with venue uncertainty.” Id. at *9. Nonetheless, the
Administrator explained, CMS “decided to apply the JSM to
ensure the orderly administration of a complex and time
sensitive program and despite the venue uncertainty.” Id. at *10
(emphasis added). Considering both the PRRB’s decision here
and the Administrator’s decision in St. Vincent that it relies
 12
upon, we think it clear that CMS recognized its discretion not
to follow Clark but made a reasoned decision to do so.

The Hospitals also argue that the PRRB acted arbitrarily
and capriciously because it failed to give a rational explanation
for treating hospitals in the Sixth Circuit differently from
providers located elsewhere. Even if Clark constrained CMS’
options for counting beds in the Sixth Circuit, the Hospitals
believe that the better approach would have “treat[ed]
[providers] similarly based on their common interests vis a vis
the bed counting regulation (DSH versus IME).” Appellants’
Br. 64. The Hospitals style this argument as both an arbitrary-
and-capricious challenge and an equal-protection challenge.
Appellants’ Br. 15, 17. As they acknowledged at oral
argument, however, these two versions are “fundamentally
indistinguishable.” Oral Arg. Rec. 14:17–:27. Accordingly, we
consider these arguments together, reversing only if “‘the
agency offers insufficient reasons for treating similar situations
differently.’” Muwekma Ohlone Tribe v. Salazar, 708 F.3d
209, 215 (D.C. Cir. 2013) (quoting County of Los Angeles v.
Shalala, 192 F.3d 1005, 1022 (D.C. Cir. 1999)); cf. Ursack,
Inc. v. Sierra Interagency Black Bear Group, 639 F.3d 949,
955 (9th Cir. 2011) (noting that where “no suspect class is
involved” the “equal protection argument can be folded into the
APA argument”).

The mere fact that the Hospitals suggest an alternate
approach hardly means that CMS acted arbitrarily or
capriciously in choosing the approach it did. To the contrary,
the existence of different law in different circuits provides a
perfectly adequate reason for distinguishing between providers
based on location. As this circuit’s nonacquiescence case law
establishes, once a court rejects an agency’s interpretation of a
regulation, the agency is not free to simply ignore the ruling
 13
within that court’s jurisdiction. Heartland Plymouth Court MI,
LLC v. NLRB, 838 F.3d 16, 22 (D.C. Cir. 2016) (noting that
intracircuit nonacquiescence may constitute bad faith if not
“clearly asserted and accompanied by a preservation of
arguments for Supreme Court or en banc review”). Rather, the
agency must choose between compliance or nonacquiescence
and, if opting for the latter, it must “specify[] its arguments
against adverse precedent” and seek further judicial review. Id.
Given that seeking en banc review or certiorari after Clark was
unrealistic—after all, CMS could correct the problem simply
by revising the regulation—it is hardly surprising that the
agency chose the former: acquiescing to the Sixth Circuit and
promptly revising the regulation. In explaining its decision, the
agency stated that complying with Clark would ensure that “all
similarly situated providers are treated the same for the
applicable cost reporting periods” and maintain “the orderly
administration of a complex and time sensitive program . . .
despite the venue uncertainty in PRRB cases.” St. Vincent,
2008 WL 6468508, at *10. Perhaps there were more elegant
solutions to CMS’ predicament, but our task is not to test
whether the agency chose “the best solution, only a reasonable
one.” Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695, 703
(D.C. Cir. 2007).

As a final matter, although the Hospitals never squarely
challenge the Sixth Circuit’s reading of section 412.105(b), we
emphasize that CMS’ acquiescence would have been
unacceptable had it rested on an unreasonable interpretation of
the regulation. See Holland v. National Mining Association,
309 F.3d 808, 812, 819 (D.C. Cir. 2002) (rejecting agency’s
contention that acquiescing nationwide to an interpretation
compelled by court order “cannot violate that ‘not in
accordance with law standard of the APA’”). We would be
unable to sustain an administrative action that conflicted with
the applicable statutory or regulatory text just because a sister
 14
circuit has approved the interpretation or because the agency
acts out of “administrative concerns, such as the desirability of
uniformity.” Id. at 818; see also Atchison, Topeka & Santa Fe
Railway v. Peña, 44 F.3d 437, 446 (7th Cir. 1994) (cautioning
against agency action seeking to ensure that the “applicable
rule of law be settled [rather] than that it be settled right”
(quoting Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406
(1932) (Brandeis, J., dissenting))), aff’d sub nom. Brotherhood
of Locomotive Engineers v. Atchison, Topeka & Santa Fe
Railway, 516 U.S. 152 (1996). That, however, is not the case
here. As CMS explained when it first articulated its
acquiescence decision in JSM-109, “[t]he regulations’ text was
silent” on the issue of counting swing and observation beds at
the time of the Clark decision. Given this ambiguity, CMS
believed that the Sixth Circuit’s interpretation was permissible,
even if not required, and we do as well.

III.
For the foregoing reasons, we affirm the district court’s
grant of summary judgment to CMS.

So ordered.