Select Specialty Hospital - Denver, Inc. v. Sebelius

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

SELECT SPECIALTY HOSPITAL-
DENVER, INC., et al.,

Plaintiffs, Civil Action No. 10-1356 (BAH)

v. Chief Judge Beryl A. Howell

ALEX M. AZAR II, Secretary, U.S.
Department of Health and Human Services,

Defendant.

MEMORANDUM OPINION

Plaintiffs, seventy-five long-term care hospitals, prevailed in their suit seeking over $20

million in reimbursements from the Centers for Medicare and Medicaid Services (“CMS”) for

unpaid co-insurance and deductible obligations of patients eligible for both Medicare and

Medicaid. See Select Specialty Hosp.-Denver, Inc. v. Azar, 391 F. Supp. 3d 53 (D.D.C.),

reconsideration denied, 2019 WL 5697076 (D.D.C. Nov. 4, 2019). Now, under the Equal

Access to Justice Act (“EAJA”), 28 U.S.C. § 2412, plaintiffs seek $1,323,298.04 in attorney’s

fees and costs incurred during this litigation and the underlying administrative proceedings. See

Pls.’ App. by Mot. for Attys.’ Fees & Costs Under EAJA (“Pls.’ Mot.”) at 1, ECF No. 91; Pls.’

Supp. App. by Mot. for Attys.’ Fees & Costs Under EAJA (“Pls.’ Supp.”) at 2, ECF No. 97.

Plaintiffs argue that they are entitled to these fees and costs because CMS acted in bad faith

before and during the litigation, or, in the alternative, because the position CMS took was not

substantially justified. See Pls.’ Mem. Supp. Pls.’ Mot. (“Pls.’ Mem.”) at 3–4, ECF No. 91.

CMS’s conduct does not meet the stringent standard for a finding of bad faith. Further, CMS’s

position was substantially justified at the time it was formulated: Select Specialty Hospital ruled

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for plaintiffs based on Azar v. Allina Health Services, 139 S. Ct. 1804 (2019), a Supreme Court

decision issued a week after the parties completed briefing on the dispositive motions, see Select

Specialty, 391 F. Supp. 3d at 66. Accordingly, and as explained in detail below, plaintiffs’

requests for attorney’s fees and costs are denied.

I. BACKGROUND

The statutory, regulatory, procedural, and factual background were detailed in Select

Specialty Hospital. 391 F. Supp. 3d at 56–66. Only pertinent background is repeated here.

A. Statutory and Regulatory Background

In the Medicare context, unpaid co-insurance and deductible obligations are known as

“bad debts.” See 42 C.F.R. § 413.89(b)(1) (defining “bad debts” as “amounts considered to be

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

services”). Medicare providers may be reimbursed by CMS only for “allowable” bad debts, id.

§ 413.89(d), and a bad debt cannot be “allowable” unless “[t]he provider [is]. . . able to establish

that reasonable collection efforts were made,” id. § 413.89(e) (outlining four criteria that

determine whether a debt is allowable).

Patients eligible for both Medicare and Medicaid are known as “dual-eligible patients.”

For dual-eligible patients’ bad debts, providers can satisfy this reasonable collection requirement

by showing (1) that the patient has “been determined eligible for Medicaid” and (2) that “no

source other than the patient,” including Medicaid, “would be legally responsible for the

patient’s medical bill.” Provider Reimbursement Manual, Part I (“PRM-I”) § 312. The second

obligation was at issue here.

To fulfill this obligation, CMS currently requires that all providers “bill the patient or

entity legally responsible for the patient’s bill.” H-AR at 584 (Joint Signature Memorandum 370

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(“JSM 370”) (Aug. 10, 2004)).1 “[W]ith respect to ‘dual-eligibles,’” current CMS guidance

further states that “in those instances where the state owes none or only a portion of the dual-

eligible patient’s deductible or co-pay, the unpaid liability for the bad debt is not reimbursable to

the provider by Medicare until the provider bills the State, and the State refuses payment (with a

State Remittance advice).” Id.

Prior to 2007, though, the plaintiffs had been reimbursed for their dual-eligible patients’

bad debts without first billing state Medicaid programs and obtaining a remittance advice, or RA.

See Select Specialty, 391 F. Supp. 3d at 55, 60–62. These steps were viewed as unnecessary

because states were not liable for inpatient care of dual-eligible patients by long-term care

hospitals. Id. at 55. Indeed, none of the plaintiffs were enrolled in their state Medicaid programs

as providers prior to 2007, id. at 60, and some states would not allow these types of hospitals to

enroll, id. at 61.

In 2007, Medicare administrative contractors suddenly began denying plaintiffs’ requests

for reimbursement for dual-eligible bad debts, citing plaintiffs’ failure to present RAs.2 In July

and August 2007, one set of plaintiffs, the Select I plaintiffs, had their reimbursement requests

for dual-eligible patients’ bad debts in fiscal year 2005, totaling $438,693, denied by their

1
Four Administrative Records have been filed in this consolidated case. The AR from the first-filed case,
Select Specialty Hosp.- Denver, Inc. v. Azar (“Select I”), No. 10-cv-1356, is referred to as the Select I Administrative
Record (“S1-AR”). See Joint Appendix (“JA”), Appendix from Select I AR (1 of 2), ECF No. 73-1; JA, Appendix
from Select I AR (2 of 2), ECF No. 73-2. The first-filed case also includes a Supplemental AR (“S1S-AR”) with
documents from after the case was remanded to CMS. See JA, Appendix from Select I AR Supplement, ECF No.
73-3. The AR from the second-filed case, Select Specialty Hosp.-Birmingham v. Azar (“Select II”), No. 17-cv-235,
is referred to as the Select II Administrative Record (“S2-AR”). See JA, Appendix from Select II AR (1 of 3), ECF
No. 73-4; JA, Appendix from Select II AR (2 of 3), ECF No. 73-5; JA from Select II AR (3 of 3), ECF No. 73-6.
Finally, the AR from the third-filed case, Select Specialty Hosp.-Tulsa/Midtown, LLC v. Azar (“Hillcrest”), No. 18-
cv-584, is referred to as the Hillcrest Administrative Record (“H-AR”). See JA, Appendix from Hillcrest AR, ECF
No. 73-7.
2
The Secretary of HHS is required by statute to delegate most of “[t]he administration of [Medicare Part A]
. . . through contracts with [M]edicare administrative contractors.” 42 U.S.C. § 1395h(a). These contractors are
responsible for “[d]etermining . . . the amount of the payments required . . . to be made to providers of services,
suppliers and individuals” and for making those payments. Id. § 1395kk-1(a)(4).

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contractor, Wisconsin Physicians Service Corporation (“WPS”). See Select Specialty, 391 F.

Supp. 3d at 61 (citing S1-AR at 674). A second set of plaintiffs, the Select II plaintiffs, had

various such requests for fiscal years 2006–2010, totaling $19,317,678, denied by contractors

WPS and Novitas Solutions, Inc., beginning in June 2007. Id. (citing S2-AR at 457 (Stipulations

¶ 9)). The third plaintiff, the Hillcrest plaintiff, had dual-eligible bad debts reimbursement

requests denied for the first time by WPS in December 2008; this plaintiff was ultimately denied

$568,803 in reimbursements for dual-eligible bad debts for fiscal years 2007 and 2008. Id.

(citing H-AR at 555–57, 565–67; H-Answer ¶¶ 6).

The three sets of plaintiffs appealed the contractors’ denials to the Provider

Reimbursement Review Board (“PRRB”), which reversed those denials in part. See id. at 64–65

(citing Select Specialty ’05 Medicare Dual Eligible Bad Debts Grp. v. Wisc. Physicians Serv.,

PRRB 2010-D25 (Apr. 13, 2010); Select Specialty Medicare Dual Eligible Bad Debts CIRP

Grps. v. Novitas Solutions, Inc., PRRB 2016-D22 (Sept. 27, 2016); Hillcrest Specialty Hosp. v.

Novitas Solutions, Inc., PRRB 2018-D3 (Nov. 6, 2017)). The CMS Administrator, whom the

Secretary of Health and Human Services (“HHS”) has given authority to hear appeals from the

PRRB, reinstated the contractors’ decisions to deny the plaintiffs’ dual-eligible bad debt

reimbursements for failure to submit RAs. Id. at 65 (citing S1-AR at 2–19; S2-AR at 1–22; H-

AR at 2–29).

B. The Instant Litigation

The first set of plaintiffs, the Select I plaintiffs, appealed the Administrator’s decision

about their reimbursements to this Court, see Complaint, Select I, No. 10-cv-1356, ECF No. 1,

which granted partial summary judgment to the plaintiffs and remanded the case to the

Administrator “for reconsideration of the limited issue of whether Plaintiffs were justified in

relying on CMS’ prior failure to enforce the must-bill policy with respect to dual-eligible
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reimbursement claims from non-participating Medicaid providers,” Cove Assocs. Joint Venture

v. Sebelius, 848 F. Supp. 2d 13, 30 (D.D.C. 2012). The Administrator affirmed the previous

denial of reimbursements to the Select I plaintiffs, see Select Specialty, 391 F. Supp. 3d at 65–66

(citing S1S-AR at 3–9), and the Select I plaintiffs’ case in this Court was then reopened and

eventually consolidated with the Select II and Hillcrest plaintiffs’ cases, see Minute Order (Jan.

10, 2019).

In granting the plaintiffs’ motion for summary judgment and denying CMS’s cross-

motion, Select Specialty Hospital held that CMS was required by the Medicare Act, 42 U.S.C.

§ 1395hh(a)(2), to conduct notice-and-comment rulemaking before subjecting the non-Medicaid

participating plaintiffs to the must-bill and RA requirements. 391 F. Supp. 3d at 67. Section

1395hh(a)(2) requires CMS to give notice and an opportunity to comment when “establish[ing]

or chang[ing] a substantive legal standard governing the scope of benefits.” 42 U.S.C.

§ 1395hh(a)(2). A Supreme Court decision issued just after the parties finished briefing the

motions for summary judgment, see Select Specialty, 391 F. Supp. 3d at 66, clarified that this

provision “distinguish[es] a substantive from a procedural legal standard,” and requires that

CMS conduct notice and comment rulemaking for changes to the former but not to the latter type

of standard, Allina Health Servs., 139 S. Ct. at 1811 (emphasis in original). Allina affirmed the

D.C. Circuit’s judgment in Allina Health Services v. Price, 863 F.3d 937 (D.C. Cir. 2017),

without endorsing “in every particular,” the D.C. Circuit’s definition of “substantive,” preferring

to leave “questions about the statute’s meaning” not essential to resolving that case for “other

cases,” Allina Health Servs., 139 S. Ct. at 1814. The D.C. Circuit has further defined

“substantive legal standard,” as, “at a minimum includ[ing] a standard that ‘creates, defines, and

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regulates the rights, duties, and powers of parties.’” Price, 863 F.3d at 943 (quoting BLACK’S

LAW DICTIONARY (10th ed. 2014)).

The record evidence in this case demonstrated that “CMS’s application of the must-bill

and RA requirements to the plaintiffs beginning in 2007 was a change in policy.” Select

Specialty, 391 F. Supp. 3d at 62. That change was substantive rather than procedural because

“CMS changed not just the steps that existing LTCHs must take, vis-à-vis CMS, to be

reimbursed, but also changed whether such entities must form contracts with third parties, the

state Medicaid programs.” Id. at 69. Given that the change was substantive, “without satisfying

the notice-and-comment obligation of § 1395hh(a)(2), CMS could not, and indeed cannot,

impose the must-bill policy and RA requirement on the plaintiffs for the period when they were

non-Medicaid-participating providers.” Id. Thus, summary judgment was granted to the

plaintiffs, the Administrator’s decisions were set aside, and the case was remanded to HHS for

proceedings consistent with the ruling. See Order (Aug. 22, 2019), ECF No. 74.

After CMS’s motion for reconsideration was denied because it relied on “recycled”

arguments rejected in the initial decision, Select Specialty, 2019 WL 5697076, at *6., CMS

appealed, Notice of Appeal, ECF No. 88, and eventually withdrew the appeal, see Appellant’s

Mot. to Voluntarily Dismiss Appeal, Select Specialty Hospital – Denver, Inc. v. Azar, No. 20-

5004 (D.C. Cir. Jan. 13, 2020); Order, Select Specialty Hospital – Denver, Inc., No. 20-5004

(D.C. Cir. Jan. 28, 2020). Plaintiffs then timely filed the instant motion for attorney’s fees, and a

supplemental motion.3 With the filing, on May 8, 2020, of CMS’s opposition to plaintiffs’

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Any application for an award of fees and expenses under the EAJA must be filed “within thirty days of
final judgment in the action.” 28 U.S.C. § 2412(d)(1)(B). A “[f]inal judgment” is one “that is final and not
appealable, and includes an order of settlement.” Id. § 2412(d)(2)(G). Interpreting these provisions, courts have
held that an EAJA fee application is timely if filed within 30 days of a appellate order granting the government’s
motion to voluntarily dismiss an appeal. See McDonald v. Schweiker, 726 F.2d 311, 313–15 (7th Cir. 1983) (holding
this); Am. Acad. of Pediatrics v. Heckler, 580 F. Supp. 436, 438 (D.D.C. 1984) (same); cf. Mass. Union of Pub.
Hous. Tenants v. Pierce, 755 F.2d 177, 180 (D.C. Cir. 1985) (holding that a judgment is final “only when a

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supplemental motion, the plaintiffs’ motions for attorney’s fees and costs are ripe for resolution.

See Def.’s Opp’n to Pls.’ Supp. Mot., ECF No. 98.4

II. LEGAL STANDARD

Under the common law “American Rule,” “parties are ordinarily required to bear their

own attorney’s fees,” so federal courts “follow ‘a general practice of not awarding fees to a

prevailing party absent explicit statutory authority.’” Buckhannon Bd. & Care Home, Inc. v. W.

Va. Dep’t of Health & Human Res., 532 U.S. 598, 602 (2001) (internal citation omitted) (quoting

Key Tronic Corp. v. United States, 511 U.S. 809, 819 (1994)). The EAJA authorizes fee awards

to parties prevailing against the United States, as described in the following Part, see infra Part

III.A, “and thus amounts to a partial waiver of sovereign immunity,” Ardestani v. INS, 502 U.S.

129, 137 (1991).

Based on the recognition that district courts are “better positioned . . . to decide the

issue[s] in question,” Pierce v. Underwood, 487 U.S. 552, 560 (1988) (internal quotation marks

omitted), appellate courts engage in “deferential review of a district court’s decision regarding

attorney’s fees under the EAJA,” id. at 563. First, the appellate court “ask[s] whether the district

court relied on the proper legal standards.” F.J. Vollmer Co. v. Magaw, 102 F.3d 591, 596 (D.C.

Cir. 1996). “Errors in these and other purely legal determinations necessarily constitute abuses

of discretion.” Id. (citing Koon v. United States, 518 U.S. 81, 100 (1996); Cooter & Gell v.

Hartmarx Corp., 496 U.S. 384, 402 (1990)). Second, in “examining the district court’s

judgment is ‘no longer contestable through the appellate process’” (quoting McDonald, 726 F.2d at 313)).
Plaintiffs’ initial application was filed on February 11, 2020, see Pls.’ Mot., which is just 14 days after the D.C.
Circuit’s January 28, 2020 dismissal order, see Order, Select Specialty Hospital – Denver, Inc., No. 20-5004. The
application is therefore also timely under the more general requirement, found in Federal Rule of Civil Procedure
54(d)(2)(B), that a fee petition must be filed within 14 days “[u]nless otherwise provided by statute or order of the
court.” FED. R. CIV. P. 54(d)(2)(B).
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The supplemental application requested that “attorneys’ fees and expenses that Plaintiffs incurred from the
preparation of the original fee application (Dkt. No. 91), the reply brief in response to Defendant’s opposition (Dkt.
No. 96), and this supplemental motion (Dkt. No. 97)” be included in any award. Pls.’ Supp. Mot. at 2.

7
application of those standards to the facts before it,” the appellate court “will reverse the district

court if its decision rests on clearly erroneous factual findings or if it leaves . . . ‘a definite and

firm conviction that the court below committed a clear error of judgment in the conclusion it

reached upon a weighing of the relevant factors.’” Id. (quoting De Allende v. Baker, 891 F.2d 7,

11 n.7 (1st Cir. 1989)).

III. DISCUSSION

Plaintiffs argue that they are entitled to attorney’s fees and costs under § 2412(b) “based

upon Defendant’s bad faith conduct prior to and during this litigation.” Pls.’ Mot. at 1. In the

alternative, they seek an award under § 2412(d) “because Defendant’s position was not

substantially justified.” Id. An overview of the relevant legal rules under § 2412(b) and (d)

precedes analysis of plaintiffs’ arguments.

A. Relevant Rules for Awarding Attorney’s Fees and Costs Under the EAJA

At issue here are two means by which a successful litigant may recover attorney’s fees

and expenses from the government under the EAJA. First, § 2412(b) provides that “[t]he United

States shall be liable for such fees and expenses to the same extent that any other party would be

liable under the common law or under the terms of any statute which specifically provides for

such an award.” 28 U.S.C. § 2412(b). “A narrow exception” to the American Rule “has

developed where the losing party has acted in ‘bad faith’” during the litigation or as part of the

conduct giving rise to the lawsuit. Am. Hosp. Ass’n v. Sullivan, 938 F.2d 216, 219 (D.C. Cir.

1991); see also, e.g., F.D. Rich Co. v. United States, 417 U.S. 116, 129 (1974) (noting an

exception where the losing party “has acted in bad faith, vexatiously, wantonly, or for oppressive

reasons”). “Examples of” bad faith litigation conduct “include the filing of a frivolous complaint

or meritless motion, or discovery-related misconduct.” Am. Hosp. Ass’n, 938 F.2d at 220

(internal citations omitted). “Bad faith in conduct giving rise to the lawsuit may be found where

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‘a party, confronted with a clear statutory or judicially-imposed duty towards another, is so

recalcitrant in performing that duty that the injured party is forced to undertake otherwise

unnecessary litigation to vindicate plain legal rights.’” Id. (quoting Fitzgerald v. Hampton, 545

F. Supp. 53, 57 (D.D.C. 1982)); see also Am. Employers Ins. Co. v. Am. Sec. Bank, 747 F.2d

1493, 1502 (D.C. Cir. 1984) (stating that the common law “allows an award of attorneys’ fees

when the party has been the victim of unwarranted, oppressive, or vexatious conduct on the part

of his opponent and has been forced to sue to enforce a plain legal right”). “[T]he substantive

standard for a finding of bad faith is ‘stringent’ and ‘attorneys’ fees will be awarded only when

extraordinary circumstances or dominating reasons of fairness so demand.’” Ass’n of Am.

Physicians & Surgeons, Inc. v. Clinton, 187 F.3d 655, 660 (D.C. Cir. 1999) (per curiam)

(quoting Nepera Chem., Inc. v. Sea–Land Serv., Inc., 794 F.2d 688, 702 (D.C. Cir. 1986)).

Finally, a “finding of bad faith must be supported by ‘clear and convincing evidence,’ which

‘generally requires the trier of fact, in viewing each party’s pile of evidence, to reach a firm

conviction of the truth on the evidence about which he or she is certain.’” Id. (first quoting

Shepherd v. Am. Broadcasting Cos., Inc., 62 F.3d 1469, 1476–78 (D.C. Cir. 1995), and then

quoting United States v. Montague, 40 F.3d 1251, 1255 (D.C. Cir. 1994)). No statutory cap is

applied to the hourly rate used to calculate attorney’s fees under § 2412(b). See 28 U.S.C.

§ 2412(b); see also Am. Hosp. Ass’n, 938 F.2d at 219 (contrasting § 2412(b) and (d)).

Second, § 2412(d) provides for a mandatory award to the prevailing party “unless the

court finds that the position of the United States was substantially justified or that special

circumstances make an award unjust.” 28 U.S.C. § 2412(d)(1)(A). To prevail on a claim for

fees and costs under § 2412(d), a party must meet five requirements: (1) the party must be a

“prevailing party,” see Astrue v. Ratliff, 560 U.S. 586, 591 (2010) (“[T]he term ‘prevailing party’

9
in subsection (d)(1)(A) carries its usual and settled meaning — prevailing litigant.”); (2) the

government’s position cannot be substantially justified; (3) no special circumstances exist that

would make an award unjust; (4) the litigant must meet certain net worth and size requirements;

and (5) the fees and costs sought must be reasonable. See 28 U.S.C. § 2412(d)(1)(A) & (B).

“Substantially justified” “mean[s] ‘justified to a degree that could satisfy a reasonable

person’ or otherwise having ‘a reasonable basis both in law and fact.’” Taucher v. Brown-

Hruska, 396 F.3d 1168, 1173 (D.C. Cir. 2005) (quoting Pierce, 487 U.S. at 565)). In this

context, “substantially justified” does not mean “justified to a high degree,” Pierce, 487 U.S. at

565, or even “more than mere reasonableness,” id. at 568. At the same time, to be “substantially

justified,” the government’s position must be “more than merely undeserving of sanctions for

frivolousness,” as “that is assuredly not the standard for Government litigation of which a

reasonable person would approve.” Id. at 566.

“The Government has the burden of proving that its position, including both the

underlying agency action and the arguments defending that action in court, was ‘substantially

justified’ within the meaning of the Act.” Halverson v. Slater, 206 F.3d 1205, 1208 (D.C. Cir.

2000). Although the statutory phrase “position of the United States,” 28 U.S.C. § 2412(d)(1)(A),

“may encompass both the agency’s prelitigation conduct and the Department of Justice’s

subsequent litigation positions, . . . only one threshold determination for the entire civil action is

to be made.” INS v. Jean, 496 U.S. 154, 159 (1990).

“The mere fact that the government lost in the underlying litigation does not create a

presumption that its position was not substantially justified.” Taucher, 396 F.3d at 1173

(quoting De Allende, 891 F.2d at 12). In other words, the EAJA calls for an evaluation distinct

from evaluation of the merits. See id. (“Although the strength of the government’s position in

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the litigation obviously plays an important role in a substantial justification evaluation, the

reasonableness inquiry ‘may not be collapsed into [an] antecedent evaluation of the merits, for

EAJA sets out a distinct legal standard.’” (quoting Cooper v. U.S. R.R. Ret. Bd., 24 F.3d 1414,

1416 (D.C. Cir. 1994)). Methodologically, then, and critical here: district courts evaluating

substantial justification must “do more than explain, repeat, characterize, and describe the merits

. . . decision.” Halverson, 206 F.3d at 1209. Instead, district courts “must . . . analyze why the

government’s position failed in court: if, for example, the government lost because it vainly

pressed a position ‘flatly at odds with the controlling case law,’ that is one thing; quite another if

the government lost because an unsettled question was resolved unfavorably.” Taucher, 396

F.3d at 1174 (emphasis in original) (quoting Am. Wrecking Corp. v. Sec. of Labor, 364 F.3d 321,

326–27 (D.C. Cir. 2004), and then citing United States v. Hallmark Constr. Co., 200 F.3d 1076,

1080 (7th Cir. 2000)); see also, e.g., Trahan v. Brady, 907 F.2d 1215, 1219 (D.C. Cir. 1990)

(instructing courts to “analyze[] the government’s position looking prospectively from the time

the government took this position, without the advantage of this Court’s subsequent

pronouncement on the actual meaning of the law.”).

B. Plaintiffs Have Not Shown That CMS Acted in Bad Faith

Plaintiffs argue that CMS acted in bad faith both before and during the litigation. Before

the litigation, plaintiffs claim, CMS “engaged in conduct that required plaintiffs to undertake

otherwise unnecessary litigation to vindicate plain legal rights,” Pls.’ Mem. at 10 (quoting Gray

Panthers Project Fund v. Thompson, 304 F. Supp. 2d 36, 39 (D.D.C. 2004)), and was otherwise

“obstinate, obdurate, and dilatory” in “creating a ‘bureaucratic nightmare’ for Plaintiffs over a

twelve-year period,” before the litigation, id. at 15 (quoting Select Specialty, 391 F. Supp. 3d at

70). During the litigation, plaintiffs claim, CMS (1) manufactured delays; (2) made

misrepresentations to the Court; (3) filed a meritless motion for reconsideration; and
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(4) attempted improperly to relitigate settled issues. Id. at 17. Plaintiffs’ assertions of bad faith

lack support in the case law and the record.

1. CMS’s Conduct Prior to the Litigation

Plaintiffs offer two theories in support of their contention that CMS acted in bad faith

before the litigation: that CMS “engaged in conduct that required plaintiffs to undertake

otherwise unnecessary litigation to vindicate plain legal rights,” id. at 10 (quoting Gray

Panthers, 304 F. Supp. 2d at 39), and was otherwise “obstinate, obdurate, and dilatory” in the

decade before the litigation, id. at 15. Both theories construe the bad faith exception too broadly.

Starting with the first, in Gray Panthers, the Secretary of HHS, “ignored,” id. at 10, two

“unambiguous statutory mandates” — a deadline and a requirement to mail Medicare plan

information to eligible beneficiaries, Gray Panthers, 304 F. Supp. 2d at 39. “[B]y clear and

convincing evidence,” Gray Panthers found that “the Secretary’s actions were in bad faith,”

explaining: “while aware of the unambiguous statutory mandates . . ., the Secretary nevertheless

engaged in conduct that required plaintiffs to undertake otherwise unnecessary litigation to

vindicate plain legal rights.” Id. (citing Am. Hosp. Ass’n, 938 F.2d at 220). Thus, Gray Panthers

holds that a “court can find pre-litigation bad faith ‘where a party, confronted with a clear

statutory . . . duty . . ., is so recalcitrant in performing that duty that the injured party is forced to

undertake otherwise unnecessary litigation to vindicate plain legal rights.’” Id. (quoting Am.

Hosp. Ass’n, 938 F.2d at 220). That rule has no application here. The directive CMS violated —

to engage in notice-and-comment rulemaking before “establish[ing] or chang[ing] a substantive

legal standard,” 42 U.S.C. § 1395hh(a)(2) — is not ministerial like the mandates violated in

Gray Panthers. Indeed, at least until 2019, the scope of § 1395hh(a)(2)’s mandate was unsettled.

In 2007, when CMS began subjecting plaintiffs to the must-bill policy and the RA requirement,

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some courts had interpreted “substantive legal standard” to “incorporate[] the [Administrative

Procedure Act, 5 U.S.C. § 551, et seq., (APA)] exemption for interpretive rules,” Warder v.

Shalala, 149 F.3d 73, 79 (1st Cir. 1998), while others had left § 1395hh(a)(2)’s precise “scope”

open, see Monmouth Med. Ctr. v. Thompson, 257 F.3d 807, 814 (D.C. Cir. 2001) (declining to

“decide whether the Medicare Act . . . creates a more stringent” notice-and-comment

“obligation” or adopts a different meaning of “substantive” than the APA). Even after the

Supreme Court defined “substantive legal standard” in Allina, the key question in this case —

whether the must-bill policy and RA requirement were such standards — remained contested.

In short, this case is not like Gray Panthers because CMS’s duty to go through notice-

and-comment rulemaking was not sufficiently “clear,” “unambiguous,” or “plain.” 304 F. Supp.

2d at 39; see Am. Employers Ins. Co., 747 F.2d at 1502 (spotting no “plain legal right” for

purposes of a bad faith finding where deciding the claim “required . . . interpretation” of

contracts and “the law on the issue . . . was not settled”); cf. GasPlus, L.L.C. v. Dep’t of Interior,

593 F. Supp. 2d 80, 88 (D.D.C. 2009) (“The fact that [the contested statutory provision] had only

recently been adopted; that no precedent existed to guide [the agencies]; . . . sap the record of

clear and convincing evidence that the government acted in bad faith.”).5 Gray Panthers’ rule

must be so limited. Otherwise, as CMS puts it, “every time the Government advances a statutory

interpretation that a Court ultimately rejects, it is acting in bad faith.” Def.’s Opp’n to Pls.’ App.

by Mot. for Attys.’ Fees & Costs Under EAJA (“Def.’s Opp’n”) at 8, ECF No. 95.6

5
Each item on plaintiffs’ laundry list of “additional statutory mandates” allegedly violated by defendants
suffers from the same flaw. Pls.’ Mem. at 14–15 (arguing that defendants acted in bad faith because they violated,
inter alia, “the statutory prohibition on cost-shifting,” “the bad debt moratorium,” and the APA’s “arbitrary and
capricious standard”).
6
The circumstances in Gray Panthers that plaintiffs emphasize in their reply, see Pls.’ Reply Supp. App. by
Mot. for Attys.’ Fees & Costs Under EAJA (“Pls.’ Reply”) at 3, ECF No. 96, were not determinative there, so any
parallel circumstances here do not compel a finding of bad faith, see Gray Panthers, 304 F. Supp. 2d at 40 (stating
that this “other evidence lends support” to the finding of bad faith). Similarly, plaintiffs’ exhaustive discussion of

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 Turning to plaintiffs’ second theory, plaintiffs argue that CMS acted in bad faith in

subjecting them to the must-bill policy and the RA requirement. See Pls.’ Mem. at 15–16

(observing that CMS “began ‘requiring a certain type of paperwork that the plaintiffs simply

could not provide without sufficient advanced notice’” and “obstinately continu[ed] to deny

reimbursement claims rather than working to find a reasonable solution in conjunction with the

state Medicaid programs” (alteration and emphasis in original) (quoting Select Specialty, 391 F.

Supp. 3d at 70)). This is the conduct on which plaintiffs based their “substantive claim,”

Shimman v. Int’l Union of Operating Engineers, 744 F.2d 1226, 1231 (6th Cir. 1984), but “the

bad faith exception to the American Rule does not allow an award of attorney fees based only on

bad faith in the conduct giving rise to the underlying claim,” id. at 1233; see also Centex Corp. v.

United States, 486 F.3d 1369, 1372 (Fed. Cir. 2007) (“[W]e align ourselves with eight other

circuits that have taken the position that fee awards cannot be assessed based on claims of bad

faith primary conduct.”); Ass’n of Flight Attendants v. Horizon Air Indus., Inc., 976 F.2d 541,

550 (9th Cir. 1992) (“[N]o federal appellate authority in or out of the Ninth Circuit has clearly

approved an order shifting attorney’s fees based solely upon a finding of bad faith as an element

of the cause of action presented in the underlying suit.”); Centex Corp., 486 F.3d at 1372–73

(showing that the D.C. Circuit has not explicitly barred such awards but explaining that neither

American Hospital nor Nepera takes the position that fees may be awarded based on the conduct

underlying the substantive claim). That is because “[f]ees awarded under the bad faith exception

. . . are designed to punish the abuse of the judicial process rather than the original wrong.”

Shimman, 744 F.2d at 1232 n.9; see also Shepherd, 62 F.3d at 1477 (“[A]wards of attorneys’

fees for bad faith conduct serve the same punitive and compensatory purposes as fines imposed

their attempts “to find a solution that would avoid litigation” is beside the point, where the point is that CMS did not
violate a clear legal duty. See Pls.’ Mem. at 11–13.

14
for civil contempt.”). Consistent with this design, the cases plaintiffs cite stating that awards can

be based on bad faith in “an aspect of the conduct giving rise to the lawsuit,” Pls.’ Mem. at 4

(quoting Am. Hosp. Ass’n, 938 F.2d at 219); see also id. at 15 (“The bad faith exception to the

American Rule ‘encompasses obstinacy, obduracy and dilatoriness and which extends to conduct

in initiating . . . the litigation.’” (quoting In re Nat’l Student Mktg. Litig., 78 F.R.D. 726, 728

(D.D.C. 1978)), are all about conduct implicating the judicial process. For example, American

Hospital, like Gray Panthers, involved agency action that “forced . . . su[it] to enforce . . . plain

legal rights.” Am. Hosp. Ass’n, 938 F.2d at 220; see also In re National Student Marketing

Litigation, 78 F.R.D. at 728 (lacking any consideration of pre-litigation conduct). The Court

appreciates that CMS’s pre-litigation conduct “created a bureaucratic nightmare” for plaintiffs.

Select Specialty, 391 F. Supp. 3d at 70. Nonetheless, an award of attorneys’ fees is not an

appropriate means of compensation for pre-litigation injury because “[a] person who harms

another in bad faith is nonetheless entitled to defend a lawsuit in good faith.” Shimman, 744

F.2d at 1232 (noting that the “rationale behind the American Rule remains intact when there is

bad faith in the event underlying the substantive claim.”).

2. CMS’s Litigation Conduct

Plaintiffs claim that during the litigation CMS (1) caused years-long delays; (2) made

misrepresentations to the Court; (3) filed a meritless motion for reconsideration; and

(4) attempted improperly to relitigate settled issues. Pls.’ Mem. at 17. The record in this case,

however, does not present the sort of “extraordinary circumstances or dominating reasons of

fairness” that would compel a finding of bad faith during the litigation. Ass’n of Am. Physicians

& Surgeons, 187 F.3d at 660 (quoting Nepera Chem., 794 F.2d at 702).

15
 a. Delays

First, plaintiffs claim that defendants displayed bad faith in “‘delaying . . . the litigation’

. . . for over five years” through the lengthy remand proceeding and post-remand settlement

negotiations. Pls.’ Mem. at 17 (quoting Hutto v. Finney, 437 U.S. 678, 690 n.14 (1978)). “CMS

did not take any action on remand for nearly four years,” plaintiffs point out. Id. at 18 (citing

S1S-AR at 2–10). Given that the PRRB considers over 10,000 claims a year, see Def.’s Opp’n at

8 (citing High Country Home Health v. Thompson, 359 F.3d 1307, 1310 (10th Cir. 2004)), the

delay on remand more likely reflects an overburdened agency than a stonewalling one. Plaintiffs

have presented no affirmative evidence of bad faith to counter this reasonable inference.7

After the remand, the case returned to this Court but was stayed while the parties

negotiated a potential settlement. These negotiations ultimately failed when the HHS Office of

General Counsel (“OGC”) declined to approve the parties’ agreed-to settlement terms. See Pls.’

Opp’n at 18–22. Before this OGC decision, CMS’s counsel made representations — to

plaintiffs’ counsel and to the Court in joint status reports — about the status of the settlement

approval processes within CMS, HHS, and DOJ. See id. (summarizing a jumble of emails, joint

status reports, and other statements made in 2017 and 2018). Plaintiffs think that these

representations overstated the extent to which approval had been obtained and understated the

difficulty of getting remaining approvals, see, e.g., id. at 20 (interpreting one joint status report to

“falsely convey[] both significant progress on settlement approval and only one remaining

government office (DOJ) to grant approval”), as a way to buy time to “renegotiate the terms of

7
Plaintiffs’ claim that the final agency decision on remand “was not sent to Plaintiffs’ counsel of record,”
Pls.’ Mem. at 18 (citing S1-AR at 2, 9-10), is not clear or persuasive evidence of bad faith. CMS indicates that the
mailing mix-up may have been plaintiffs’ fault. See Def.’s Opp’n at 9 n.3 (stating that plaintiffs’ “counsel of record
was still the law firm of Reed Smith at the time of that decision, which Plaintiffs’ current counsel had recently
departed and of which he apparently failed to notify CMS. The final agency decision was, therefore, appropriately
furnished to Reed Smith.” (citation omitted)).

16
the parties’ settlement,” id. at 22. Yet, after review of these statements, the Court finds that, over

and over again, agency counsel simply represented what both parties agree is the truth: that CMS

had approved the settlement but that additional approvals were needed. Plaintiffs thus present no

affirmative evidence that CMS engaged in settlement discussions in bad faith. See D.C. v.

Straus, 705 F. Supp. 2d 14, 16–17 (D.D.C. 2010) (“That a party in litigation chooses to seek a

decision on the merits as opposed to settle the case does not alone establish bad faith or

necessarily reflect an illegitimate litigation strategy.”).

In the absence of evidence that CMS delayed the litigation in bad faith, plaintiffs’ award

of prejudgment interest is compensation enough for the regrettable length of the litigation. See

Select Specialty, 2019 WL 5697076, at *7 (awarding prejudgment interest under 42 U.S.C.

§ 1395oo(f)(2)).

b. Misrepresentations

Second, plaintiffs argue that CMS made misrepresentations to the Court. Although

misrepresentations can be the basis for a finding of bad faith, see, e.g., Swedish Hosp. Corp. v.

Shalala, 845 F. Supp. 894, 898 (D.D.C. 1993) (citing Lipsig v. Nat’l Student Mktg Corp., 663

F.2d 178, 181 (D.C. Cir. 1980)), the record does not support a finding that CMS made any such

misrepresentations. As already discussed, CMS’s statements about the status of approval of the

parties’ settlement were not falsehoods. At worst, counsel was overly optimistic about getting

the remaining approvals when stating a “belie[f] in good faith” that approvals from OGC and

DOJ “will occur.” Pls.’ Mem. at 20 (quoting Joint Status Report (Aug. 1, 2018) at 2, ECF 60).

Any expressions of excessive optimism are not enough for a finding of bad faith. Cf. Swedish

Hosp. Corp., 845 F. Supp. at 898 (“A finding of recklessness during litigation, standing alone, is

apparently insufficient to trigger the court’s inherent common-law power to award bad faith

attorney’s fees.”).
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 Next, plaintiffs claim that CMS misrepresented a background fact — namely “that

Plaintiffs did not submit actual Medicaid bills to the states to try to obtain RAs.” Pls.’ Mem. at

23 (citing Def.’s Mem. Supp. Cross-Mot. Summ. J. & Opp’n Pls.’ Mot. Summ. J., ECF No. 50-

1; Def.’s Mem. Supp. Cross-Mot. Summ. J. & Opp’n Pls.’ Mot. Summ. J. (“Def.’s SJ Mem.”),

ECF No. 67-1). In fact, as Select Specialty Hospital explained in a footnote, a “misstatement” by

plaintiffs’ prior counsel led “to the erroneous conclusion that ‘the providers submitted “sample”

bills with fabricated claim numbers.’” 391 F. Supp. 3d at 63 n.9 (quoting Cove Assocs., 848 F.

Supp. 2d at 28). Plaintiffs’ counsel “subsequently clarified” the misstatement, but CMS repeated

the erroneous conclusion in briefing the cross-motions for summary judgment. Id. CMS now

admits to “incorrectly . . . stat[ing] that Plaintiffs had submitted sample bills to the States” but

characterizes the statement as an “oversight.” Def.’s Opp’n at 11. Plaintiffs offer zero evidence

rebutting this characterization. See Ass’n of Am. Physicians & Surgeons, 187 F.3d at 662–63

(“[B]ecause there is insufficient evidence that . . . the Declaration’s drafters intended to mislead

the court, it was clearly erroneous for the court to find bad faith.”); Swedish Hosp. Corp., 845 F.

Supp. at 899 (“[P]laintiffs have not proven that the omission was due to other than incompetence

or inadvertence.”).8

8
Finally, plaintiffs attempt to paint as misrepresentations two legal arguments made by CMS. Plaintiffs
complain that (1) “[d]efendant’s summary judgment briefs also misrepresented that Plaintiffs’ only recourse was
with the state Medicaid programs, not CMS,” Pls.’ Mem. at 23, and (2) “[d]efendant also misrepresented to the
Court that state Medicaid programs would have ‘constructively’ enrolled Plaintiffs in Medicaid if only Plaintiffs had
submitted claims to the states,” id. at 24. CMS did indeed argue (1) that plaintiffs were “not without legal recourse”
against the states that had refused to issue RAs, pointing to a successful suit by providers “against the state [of
Florida] for refusing enrollment,” Def.’s SJ Mem. at 27, and (2) that “CMS has unambiguously directed State
Medicaid programs that they are required to permit the provider to enroll for the limited purpose of obtaining” RAs,
pointing to a guidance issued by CMS in 2013, id. (internal quotation marks omitted); see also id. at 24 n.8
(providing a link to the guidance). These arguments by CMS did not win the day, but the arguments were not false,
groundless, or otherwise made in bad faith.

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 c. Motion for Reconsideration

Plaintiffs’ third argument — that CMS demonstrated bad faith in “filing a meritless

motion” for reconsideration, Pls.’ Mem. at 26 — is easily dispatched. “A party is not to be

penalized for maintaining an aggressive litigation posture, nor are good faith assertions of

colorable claims or defenses to be discouraged,” Lipsig, 663 F.2d at 180, so only motions that are

“frivolous, unreasonable, or without foundation” can support a finding of bad faith, Washington

Hosp. Ctr. v. Serv. Employees Int’l Union Local 722, AFL-CIO, 746 F.2d 1503, 1510 (D.C. Cir.

1984) (quoting Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421 (1978)); see also

Lipsig, 663 F.2d at 180 (“[A]dvocacy simply for the sake of burdening an opponent with

unnecessary expenditures of time and effort clearly warrants recompense for the extra outlays

attributable thereto.”); 10 CHARLES WRIGHT & ARTHUR MILLER, FEDERAL PRACTICE &

PROCEDURE § 2675 (4th ed., 2020 update) (“[C]ourts are careful not to discourage parties from

litigating thoroughly and bad faith will not be found if the party’s actions were deemed

nonfrivolous or only ordinarily negligent.”). CMS’s motion for reconsideration was none of

those things. The motion was denied because it relied on “recycled” arguments rejected in the

initial decision. Select Specialty, 2019 WL 5697076, at *6. These arguments — that Select

Specialty Hospital conflicted with earlier rulings calling the must-bill policy longstanding and

that failure to apply the policies was attributable to the contractors and not to CMS, id. at *4 —

were unpersuasive but not frivolous, as the in-depth treatment of those arguments in the motion

for reconsideration and original decision illustrates, see id. at *4–6 (citing to discussions from

Select Specialty Hospital); see also Centex Corp., 486 F. 3d at 1375 (affirming finding of lack of

bad faith where arguments were not frivolous). In addition, the filing of a motion for

reconsideration that recycles arguments does not in itself show bad faith, as motions for

reconsideration often “rel[y] on the same arguments . . . originally made.” Messina v. Krakower,
19
439 F.3d 755, 759 (D.C. Cir. 2006) (first alteration in original) (internal quotation marks

omitted).

d. Relitigating Settled Issues

Finally, plaintiffs argue that “[d]efendant has engaged in bad faith through its efforts to

force Plaintiffs to relitigate the issue in this case.” Pls.’ Mem. at 27. Even if such conduct could

support a finding of bad faith, no clear and convincing evidence has been presented that CMS

has done what plaintiffs say. Plaintiffs point to CMS’s refusal to settle “Plaintiffs’ and other

Select Medical LTCHs’ appeal for FY 2011,” Pls.’ Mem. at 27 (citing Complaint, Select

Specialty Hosp., Inc. v. Azar, No. 19-cv-2591 (BAH) (filed Aug. 27, 2019), ECF No. 1), but the

recent grant of CMS’s motion to dismiss that case for lack of subject matter jurisdiction shows

that CMS had good reason to litigate rather than settle that case, Select Specialty Hosps., Inc. v.

Azar, No. 19-cv-2591 (BAH), 2020 WL 2735616, at *7 (D.D.C. May 26, 2020). There,

plaintiffs filed suit in federal court to challenge a PRRB decision that the Administrator later

timely vacated and remanded to the PRRB “to ‘further develop[ ] . . . the record’ on . . . issues,

including ‘the enrollment status of LTCHs in States where the Providers claim they were not

allowed to enroll.’” Id. (quoting CMS Decision at 28). As that case demonstrates, claims like

plaintiffs’ can be fact-dependent, so CMS’s choice to litigate rather than settle future claims

appears legitimate, not obstinate, on the current record.

* * *

In sum, plaintiffs have not shown that CMS acted in bad faith before or during this

litigation. Plaintiffs’ request for fees and expenses on the basis of bad faith is therefore denied.

C. CMS’s Position Was Substantially Justified

Plaintiffs contend that they are “still entitled to a mandatory award of attorneys fees

under 28 U.S.C. § 2412(d),” even if no bad faith is found. Pls.’ Mem. at 28. Recall that, to

20
prevail on a claim for fees and costs under § 2412(d), a party must meet five requirements:

(1) the party must be a prevailing party; (2) the government’s position cannot be substantially

justified; (3) no special circumstances exist that would make an award unjust; (4) the litigant

must meet certain net worth and size requirements; and (5) the fees and costs sought must be

reasonable. See 28 U.S.C. § 2412(d)(1)(A) & (B). Plaintiffs indisputably are a “prevailing

party,” see Pls.’ Mem. at 7–9; Def.’s Opp’n at 11 (not contesting this element); cf. Select

Specialty, 2019 WL 5697076, at *7 (deeming plaintiffs a prevailing party under 42 U.S.C.

§ 1395oo(f)(2)), but CMS has shown that its position was substantially justified. As a result,

CMS’s argument that plaintiffs “do not satisfy the statutory size and income limits prescribed by

28 U.S.C. § 2412(d),” Def.’s Opp’n at 11, need not be evaluated, see Taucher, 396 F.3d at 1173

(“Once an applicant’s status as a prevailing party is established, the government has the burden

of showing that its legal position was substantially justified or that special circumstances make

an award unjust.” (citation omitted)).

CMS took the position that application of the must-bill policy and RA requirement to

plaintiffs was lawful. In defense of that position, CMS points to numerous prior cases upholding

the must-bill policy and RA requirement against statutory and arbitrary and capricious

challenges. See Def.’s Opp’n at 4, 6; see also Def.’s SJ Mem. at 22–24. In upholding the

policies, these prior cases characterized the must-bill requirement as “longstanding,” see Def.’s

Opp’n at 4, 6 (citing cases), a characterization CMS embraced throughout this litigation as

evidence that the policies had not actually changed, Def.’s SJ Mem. at 28. The view that the

policy was longstanding, along with “the novelty of the Allina issue that formed the basis of the

Court’s ruling,” justified its position, CMS argues. See Def.’s Opp’n at 4–6.

21
 Plaintiffs argue that application of the must-bill policy and RA requirement was “not

reasonable in law because CMS violated the statute at 42 U.S.C. § 1395hh(a)(2),” Pls.’ Mem. at

30, but that formulation collapses the substantial justification inquiry into the merits. What

matters now is not the legality of CMS’s decision to bypass notice-and-comment rulemaking but

whether that decision was substantially justified at the time. See Trahan, 907 F.2d at 1219

(instructing courts to “analyze[] the government’s position looking prospectively from the time

the government took this position, without the advantage of this Court’s subsequent

pronouncement on the actual meaning of the law.”). That decision was substantially justified.

As already explained, until Allina, in 2019, some courts read the phrase “substantive legal

standard” to contemplate an interpretive rule exception to the Medicare Act’s notice-and-

comment requirement. See, e.g., Warder, 149 F.3d at 79; Monmouth Med. Ctr., 257 F.3d at 814

(assuming this without deciding). Consistent with this reading of § 1395hh(a)(2), CMS bypassed

notice-and-comment because it viewed any change in application of the must-bill policy and RA

requirement as interpretive. See Def.’s SJ Mem. at 36 (citing Cove Assoc., 848 F. Supp. 2d at

27–28). A court in 2012 determined that the must-bill policy and RA requirement were clearly

“interpretive” because they met “[n]one of the[] conditions” of a legislative rule. Cove Assoc.,

848 F. Supp. 2d at 27 (emphasis added). CMS’s position that changes to the policies were

interpretive and that interpretive rules were exempt from notice-and-comment rulemaking thus

“had a reasonable basis” in case law, Pierce, 487 U.S. at 563, and that is sufficient to justify it

“to a degree that could satisfy a reasonable person” id. at 564; see also Hill v. Gould, 555 F.3d

1003, 1007 (D.C. Cir. 2009) (affirming finding of substantial justification because position “was

not flatly at odds with the controlling case law, and the Secretary certainly did not press her

position in the face of an unbroken line of authority, or against a string of losses” (internal

22
quotation marks and citations omitted)); see also, e.g., Ivy Sports Med., LLC v. Burwell, 174 F.

Supp. 3d 130, 146 (D.D.C. 2016) (“Although the government was incorrect is anticipating [the

development of the case law], the Court finds that the government’s position, as applied to the

facts of this case and considering the case law at the time, was substantially justified.”); Ctr. for

Food Safety v. Burwell, 126 F. Supp. 3d 114, 126 (D.D.C. 2015) (“The Defendants’ litigation

position was substantially justified because it cited authority that is ‘justified to a degree that

could satisfy a reasonable person.’” (quoting Pierce, 487 U.S. at 565)).

By the time CMS was defending its position at the summary judgment stage of this case,

the D.C. Circuit had shifted its definition of “substantive legal change” and that redefinition was

on review in the Supreme Court. See Def.’s SJ Mem. at 37 (discussing Price, 863 F.3d at 943–

44 (D.C. Cir. 2017)). Here, CMS, relying on the Solicitor General’s briefing in Allina,

maintained that interpretive rules were not subject to the Medicare Act’s notice-and-comment

requirement. See Def.’s SJ Mem. at 37 (discussing Allina Health Servs. v. Price, 863 F.3d at

943–44). These developments in no way undermine the conclusion that CMS’s position was

substantially justified. If anything, that the Supreme Court granted certiorari to settle a dispute

about the meaning of § 1395hh(a)(2) bolsters the conclusion that CMS’s position, developed as it

was amid legal uncertainty in a complex area of law, was reasonable. See Lundin v. Mecham,

980 F.2d 1450, 1460 (D.C. Cir. 1992) (“Given the unsettled state of the law at that time, the

Director’s initial position cannot be deemed unreasonable.”); Hill, 555 F.3d at 1008 (“[T]he

Secretary took a reasonable approach to that relatively unsettled area of administrative law.”).

To plaintiffs, the government’s voluntary dismissal of its appeal signals “that there was

not a reasonable basis in law for Defendant’s position.” Pls.’ Mem. at 30. “While . . . objective

indicia,” “such as the terms of a settlement agreement” or “the stage in the proceedings at which

23
the merits were decided,” can “be relevant” to the substantial justification inquiry, such indicia

can also be misleading. Pierce, 487 U.S. at 568. For example, “willingness to settle the

litigation on unfavorable terms” could be a sign that the government’s position was groundless or

could reflect, say, “a change in substantive policy instituted by a new administration.” Id.

Factors other than the strength of CMS’s position could easily explain the decision to withdraw

the appeal. Given that Select Specialty Hospital was the first decision to apply Allina, the

government might have seen benefits in allowing further development of the law before putting

this issue before the D.C. Circuit. Or, as a matter of strategy, CMS might have preferred for a

circuit court to decide an issue of this consequence in a case that CMS won in a district court. In

short, the withdraw of the appeal is not in this case a conclusive “sign that the government’s case

is weak.” Pls.’ Mem. at 30.

Finally, plaintiffs contend that applying the must-bill policy to them when they could not

enroll in state Medicaid programs was “not reasonable in fact,” Pls.’ Mem. at 30, but that

argument is premised on a distortion of the standard, which requires CMS to show not that its

actions were, in fact, reasonable but that its position had “a reasonable basis in fact.” See, e.g.,

Taucher, 396 F.3d at 1173 (defining substantially justified as “‘justified to a degree that could

satisfy a reasonable person’ or otherwise having ‘a reasonable basis both in law and fact’”

(quoting Pierce, 487 U.S. at 565)); Hill, 555 F.3d at 1007 (“It is enough that the Secretary’s

interpretation and legal arguments had a reasonable basis in fact and in the text and purpose of

the controlling statute and treaties.”).

One factual aspect of CMS’s position was ultimately unsupported by the record: CMS

insisted throughout the litigation that the policies were longstanding and that any change in how

the plaintiffs were reimbursed should be attributed to the contractors. In defense of its view,

24
CMS cited case law indicating that the policy was longstanding, see Def.’s Opp’n at 4 (citing,

inter alia, Maine Med. Ctr. v. Burwell, 775 F.3d 470, 473 (1st Cir. 2015)), and presented a

plausible, though ultimately rebutted, narrative faulting the contractors for any deviation from

that policy, see Select Specialty, 2019 WL 5697076, at *5–6 (summarizing this evidence). In

addition, CMS’s view of the policy’s history was consistently accompanied by the alternative

argument already discussed: if the policy did change, CMS argued, then that change was

justified. Taken together, those arguments get CMS over the reasonable basis in fact threshold.

* * *

In sum, CMS has shown that its position had a reasonable basis in fact and law. Plaintiffs

are not entitled to a fee award under § 2412(d).

IV. CONCLUSION

Plaintiffs have not shown by clear and convincing evidence that CMS acted in bad faith

before or during this litigation. For that reason, plaintiffs’ request for fees and expenses under

§ 2412(b) is denied. In addition, CMS has shown that its position was substantially justified. As

a result, plaintiffs are not entitled to an award of fees and expenses under § 2412(d). Plaintiffs’

motion and supplemental motion for attorney’s fees and costs are denied.

An appropriate Order accompanies this Memorandum Opinion.

Date: June 25, 2020

__________________________
BERYL A. HOWELL
Chief Judge

25