United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 12, 2008 Decided June 27, 2008
No. 07-5252
COOKEVILLE REGIONAL MEDICAL CENTER, ET AL.,
APPELLANTS
v.
MICHAEL O. LEAVITT, SECRETARY OF THE UNITED STATES
DEPARTMENT
OF HEALTH AND HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 04cv01053)
No. 07-5269
BAPTIST MEMORIAL HOSPITAL, INC., ET AL.,
APPELLANTS
v.
MICHAEL O. LEAVITT, SECRETARY, UNITED STATES
DEPARTMENT
OF HEALTH AND HUMAN SERVICES,
APPELLEE
2
Appeal from the United States District Court
for the District of Columbia
(No. 06cv00437)
Murray J. Klein argued the cause and filed the briefs for
appellants Cookeville Regional Medical Center, et al..
Sanford E. Pitler argued the cause for appellants Baptist
Memorial Hospital, Inc., et al. With him on the briefs were
Carol Sue Janes, Julie Quagliano Westemeier, and Michael C.
Zisa.
August E. Flentje, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Jeffrey S. Bucholtz, Acting Assistant Attorney General, Jeffrey
A. Taylor, U.S. Attorney, and Anthony J. Steinmeyer, Assistant
Director.
Before: HENDERSON, RANDOLPH and ROGERS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge RANDOLPH.
RANDOLPH, Circuit Judge: These appeals from judgments
of the district court raise common issues regarding application
of the Deficit Reduction Act of 2005, Pub. L. 109-171 (2006).
The cases were brought by two groups of Tennessee hospitals
serving patients who participate in the state’s Medicaid plan,
TennCare. A Medicaid plan provides medical assistance to
qualifying low-income individuals. 42 C.F.R. § 430.0; 42
U.S.C. § 1396 et seq. The federal government shares the cost of
providing assistance if the state Medicaid plan meets the
3
regulations set out in subchapter XIX of the Social Security Act.
See 42 U.S.C. § 1396a.
TennCare is a non-standard Medicaid plan known as a
demonstration project. A demonstration project is a plan for
which some of the regulations imposed on Medicaid plans under
subchapter XIX are waived in order to “enable the states to try
new or different approaches to the efficient and cost-effective
delivery of health care services, or to adapt their programs to the
special needs of particular areas or groups of recipients.” 42
C.F.R. § 430.25; see also 42 U.S.C. § 1315. Despite not
meeting the requirements of subchapter XIX, the costs of
providing care under a demonstration project are treated as
federally reimbursable expenditures made under subchapter XIX
“to the extent and for the period prescribed by the Secretary [of
Health and Human Services].”1 42 U.S.C. § 1315(a)(2)(A).
TennCare provides medical assistance to Medicaid-eligible low-
income individuals and select uninsured or uninsurable
1
“In the case of any experimental, pilot, or demonstration
project which, in the judgment of the Secretary, is likely to assist in
promoting the objectives of subchapter I, X, XVI, or XIX of this
chapter, or part A or D of subchapter IV of this chapter, in a State or
States –
costs of such project which would not otherwise be
included as expenditures under section 303, 655, 1203,
1353, 1383, or 1396b of this title, as the case may be, and
which are not included as part of the costs of projects under
section 1310 of this title, shall, to the extent and for the
period prescribed by the Secretary, be regarded as
expenditures under the State plan or plans approved under
such subchapter, or for administration of such State plan or
plans, as may be appropriate.” 42 U.S.C. § 1315(a)(2)(A).
4
individuals who would not otherwise qualify for Medicaid.2
This latter group of individuals who receive federally
reimbursable care under TennCare despite not meeting the
normal Medicaid requirements is known as the “expansion
waiver population.”3
The central issue in these cases is whether the expansion
waiver population should be counted in determining a hospital’s
Medicaid reimbursement. At the end of each year, hospitals
prepare cost reports seeking reimbursement for the treatment of
Medicaid patients. 42 C.F.R. § 413.24(f). The cost reports are
submitted to financial intermediaries, who report in a “notice of
amount of program reimbursement” how much each hospital is
owed from a state’s Medicaid plan. 42 C.F.R. § 405.1803. The
bulk of the reimbursement stems from the prospective payment
system, under which a flat fee is paid for each day spent treating
a Medicaid patient, based on the diagnosis or category of service
provided. 42 U.S.C. § 1395ww; see also Fed. Trade Comm’n,
Improving Health Care: A Dose of Competition, 31 J. HEALTH
POL. POL’Y & L. 437, 447 (2006). A hospital can supplement its
reimbursement if it is eligible for one of several adjustments.
One available adjustment is the disproportionate share hospital
adjustment, which is given to hospitals serving a high
percentage of low-income patients.
2
See Bureau of TennCare, Overview, available at
http://www.state.tn.us/tenncare/news-about.html (visited May 13,
2008).
3
See also Medicare Inpatient Disproportionate Share
Hospital Adjustment Calculation: Change in the Treatment of Certain
Medicaid Days in States with 1115 Expansion Waivers, 65 Fed. Reg.
3136, 3136 (Jan. 20, 2000) (noting that demonstration projects can
expand coverage to otherwise Medicaid ineligible individuals).
5
A statutory formula determines whether the percentage of
low-income patients a hospital treats qualifies it for a
disproportionate share hospital adjustment and how much that
adjustment should be. See 42 U.S.C. § 1395ww(d)(5)(F)(v).
The disproportionate share percentage consists of the sum of
two fractions. Id. § 1395ww(d)(5)(F)(vi). The second fraction
– known as the Medicaid fraction – is the most pertinent to this
case. The Medicaid fraction is derived by dividing “the number
of the hospital’s patient days for such period which consist of
patients who (for such days) were eligible for medical assistance
under a State plan approved under subchapter XIX [of the Social
Security Act]” by the “total number of a hospital’s patient days
for such period.” Id.
Before January 2000, the Secretary’s policy was not to
include expansion waiver patients in the Medicaid fraction.
Dep’t of Health & Human Servs., Program Memorandum
Intermediaries, Trans. No. A-99-62 (Dec. 1999). Despite this
policy, some financial intermediaries included the expansion
waiver population in the disproportionate share hospital
adjustment. Id. The Secretary recognized this as a violation of
the stated policy but did not attempt to recover the payments.
Id. In January 2000, the Secretary revised the policy and
permitted hospitals to include the expansion waiver population
in the Medicaid fraction. 65 Fed. Reg. 3136, 3139. Three years
later the Secretary issued another revision, excluding the
expansion waiver populations associated with certain
demonstration projects likely to deal with higher income
individuals. Proposed Changes to the Hospital Inpatient
Prospective Payment Systems and Fiscal Year 2004 Rates, 68
Fed. Reg. 27,154, 27,702 (May 19, 2003).
The plaintiff hospitals based their claims on cost reports
submitted before the Secretary’s policy change in January 2000.
The hospitals filed their cost reports with financial
6
intermediaries and received notices of program reimbursement
that did not take TennCare’s expansion waiver population into
account in calculating the disproportionate share hospital
adjustment. Each hospital appealed to the Provider
Reimbursement Review Board, and lost. See 42 U.S.C.
§ 1395oo(a). The hospitals then filed these suits, claiming that
the Secretary had unlawfully refused to count TennCare’s
expansion waiver population in the disproportionate share
hospital adjustment.
The district court granted the hospitals’ motion for
summary judgment, finding that the demonstration project
provision and the disproportionate share hospital adjustment
provision unambiguously required the Secretary to include the
expansion waiver population in the Medicaid fraction.
Cookeville Reg. Med. Ctr. v. Thompson, 2005 WL 3276219
(D.D.C. Oct. 28, 2005) (Cookeville I). While this case was
pending appeal, Congress passed the Deficit Reduction Act of
2005.4 The Act included a provision explicitly giving the
Secretary discretion to determine whether to include a
demonstration project’s expansion waiver population in the
disproportionate share calculation. Deficit Reduction Act
§ 5002(a). The Act also purported to ratify the Secretary’s prior
policies regarding the inclusion or exclusion of the expansion
waiver population. Id. § 5002(b)(3)(A), (B).
In light of these provisions, the Secretary moved to alter the
judgment. We remanded the case and the district court granted
the Secretary’s motion. Cookeville Reg. Med. Ctr. v. Leavitt,
2006 WL 2787831 (D.D.C. Sept. 26, 2006) (Cookeville II). The
district court held that despite its view of the law before the
Deficit Reduction Act, the Act constituted a valid retroactive
4
Baptist Memorial’s case was stayed pending the resolution
of the Cookeville action.
7
change in the law. Id. at *6-8. On that basis the court granted
summary judgment in favor of the Secretary. Our review is de
novo. Taylor v. Rice, 451 F.3d 898, 904 (D.C. Cir. 2006).
The hospitals make three points. The first is that the pre-Act
law unambiguously required the inclusion of the expansion
waiver patients in the disproportionate share hospital
adjustment, leaving the Secretary with no discretion. The
second is that the Act, which acknowledges the Secretary’s
discretion and ratifies the Secretary’s earlier policies, was
therefore a substantive change in the law. The third is that the
Act cannot be applied retroactively consistent with Landgraf v.
USI Film Products, 511 U.S. 255, 265 (1994), because Congress
did not clearly indicate its intention to this effect.
Even if we agreed with the first two propositions, which we
do not, we doubt the last. What is and what is not a retroactive
application of the law is not always easy to discern. The Court’s
opinion in Landgraf indicates that a law has a retroactive effect
if it “impairs [a] right[] a party possessed when he acted.” Id. at
280. While that formulation seems simple enough, the Court
discusses a host of exceptions that weaken the anti-retroactivity
principle. See, e.g., id. at 273 (anti-retroactivity weakened in
prospective relief cases), 275 (anti-retroactivity weakened in
regard to procedural rules), 277 (anti-retroactivity does not
apply when the ultimate outcome is foreseeable, explaining
Bradley v. Sch. Bd. of the City of Richmond, 416 U.S. 696
(1974)). These exceptions, especially Bradley, tend to show that
the presumption against retroactivity exists to protect settled
expectations. See also id. at 265 (“Elementary considerations of
fairness dictate that individuals should have an opportunity to
know what the law is and to conform their conduct accordingly;
settled expectations should not be lightly disrupted.”).
8
Here the hospitals could not have been certain of being
reimbursed. The Secretary’s policy during the relevant period
was not to include the expansion waiver population in the
disproportionate share hospital adjustment. 65 Fed. Reg. at
3136. Although some financial intermediaries were including
the expansion waiver population, many (including those in
Tennessee) were not. The hospitals were thus on notice that the
expansion population might not be included.
In any event, we disagree with the hospitals’ first
proposition that the pre-Act law clearly required inclusion of the
expansion waiver patients in the disproportionate share hospital
adjustment. For this point, the hospitals draw most of their
support from a Ninth Circuit opinion analyzing the relevant pre-
Act statutes and determining that expansion waiver patients had
to be included. Portland Adventist Med. Ctr. v. Thompson, 399
F.3d 1091 (9th Cir. 2005).5 We believe the pre-Act law was not
as clear as the Ninth Circuit thought it to be.
The Medicaid fraction incorporates patients who “were
eligible for medical assistance . . . under a state plan approved
under subchapter XIX.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II).
The Social Security Act sets out the requirements for a patient
to be eligible for medical assistance. 42 U.S.C. § 1396d(a). The
expansion waiver population does not meet these criteria –
generally because their incomes are too high. Likewise,
demonstration projects are state plans approved under
subchapter XI, not subchapter XIX.
5
The hospitals could hardly claim that their actions were taken
in reliance on Portland Adventist. They were operating outside the
jurisdiction of the Ninth Circuit and the Portland Adventist opinion
was published several years after the last of the fiscal years involved
in this case.
9
The hospitals say that expansion waiver patients must be
treated as eligible for medical assistance because they receive a
Medicaid benefit when the hospitals are reimbursed by Medicaid
for their care. This argument stems from the language providing
that the costs of a demonstration project “shall” be regarded as
expenditures under subchapter XIX. See 42 U.S.C.
§ 1315(a)(2)(A). The statute, however, modifies the “shall” by
indicating that the costs are only treated as Medicaid
expenditures “to the extent and for the period prescribed by the
Secretary.” Id. While this clearly gives the Secretary control
over the duration of the demonstration project, the language may
do more. Plausibly, the “to the extent” language is a grant of
discretion to the Secretary to determine which costs or how
much of the costs are to be treated as expenditures.6 Under this
reading, the Secretary would have discretion to limit a hospital’s
reimbursement for the expansion waiver population, rather than
permitting the hospital to seek the disproportionate share
hospital adjustment. This interpretation finds some support in
the Deficit Reduction Act. No one contests that § 5002(a) of the
Act gives the Secretary discretion (at least prospectively) to
exclude the expansion waiver population. In conferring this
discretion, Congress relied on the “to the extent and for the
period” language used in § 1315 regarding the demonstration
projects, albeit in a different context. Deficit Reduction Act
§ 5002(a). Additionally, the Secretary acted as though the
statute granted discretion to decide how to treat the expansion
waiver population. The Secretary chose to issue policies rather
than regulations and to base them on practical concerns instead
6
The House and Senate reports discussing § 1315 lend support
to this reading. Both stated that the costs of demonstration projects
“could be included, for purposes of such participation, as expenditures
under . . . the State plan approved under any of such titles, but only for
the period and to the extent prescribed by the Secretary.” S. Rep. 87-
1589, at 31 (1962); H.R. Rep. 87-1414, at 35 (1962).
10
of statutory constraints. See, e.g., Program Memorandum
Intermediaries, Trans. No. A-99-62; 65 Fed. Reg. at 3136.
These considerations lead us to conclude that it was unclear,
prior to the Deficit Reduction Act, whether the Secretary had
discretion to exclude the expansion waiver population from the
disproportionate share hospital adjustment. It follows that there
is no problem of retroactivity. The Deficit Reduction Act did
not retroactively alter settled law; it simply clarified an
ambiguity in the existing legislation. See Deficit Reduction Act
§ 5002(a).7 In doing so, Congress ratified the Secretary’s earlier
policies, “including the policy . . . regarding discharges
occurring prior to January 20, 2000,” to emphasize that the
Secretary always had this discretionary authority. Id.
8
§ 5002(b)(3)(A).
Affirmed.
7
See Brown v. Thompson, 374 F.3d 253, 257-60 (4th Cir.
2004); Pimba Cortes v. Am. Airlines, Inc., 177 F.3d 1272, 1283-84
(11th Cir. 1999); Beverly Comm. Hosp. Ass’n v. Belshe, 132 F.3d
1259, 1265 (9th Cir. 1997); Liquilux Gas Corp. v. Martin Gas Sales,
979 F.2d 887, 890 (1st Cir. 1992).
8
Because the Act resolves an ambiguity in the law, there is
nothing to the hospitals’ claim that the Act violates the Due Process
Clause. See Beverly Comm., 132 F.3d at 1267.