United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 13, 2009 Decided August 4, 2009
No. 08-5120
ABINGTON CREST NURSING AND REHABILITATION CENTER, ET
AL.,
APPELLANTS
v.
KATHLEEN SEBELIUS, SECRETARY, UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:06-cv-01932-RJL)
Daniel F. Miller argued the cause for appellants. With him
on the briefs were Barbara J. Janaszek and John R. Jacob.
Christopher Fonzone, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Gregory G. Katsas, Assistant Attorney General, Jeffrey A.
Taylor, U.S. Attorney, and Barbara C. Biddle and Jeffrica
Jenkins Lee, Attorneys. R. Craig Lawrence, Assistant U.S.
Attorney, entered an appearance.
Before: GARLAND and GRIFFITH, Circuit Judges, and
EDWARDS, Senior Circuit Judge.
2
Opinion for the Court filed by Circuit Judge GARLAND.
GARLAND, Circuit Judge: The appellants in this case are
skilled nursing facilities that challenge a decision by the
Secretary of the Department of Health and Human Services to
deny them reimbursement for certain bad debt costs. The
facilities contend that the Secretary’s denial violates both the
Medicare statute and agency regulations. The district court
granted the Secretary’s motion for summary judgment, and we
affirm.
I
Appellants are Medicare-certified skilled nursing facilities
(SNFs) that provide therapy services to, among others, SNF
residents who are eligible for both Medicare and Medicaid
benefits (“dual eligible” beneficiaries). The Medicare program
is made up of two principal parts: Part A, which provides
reimbursement for inpatient hospital stays and related services,
42 U.S.C. §§ 1395c–1395i-5; and Part B, which covers hospital
outpatient services, physician services, and other services not
covered by Part A, id. §§ 1395j–1395w-4. The therapy services
that SNFs provide are covered under Part B of the Medicare
program.
Prior to 1997, Medicare reimbursed SNFs based on their
“reasonable costs.” See generally 42 U.S.C. §§ 1395f(b)(1),
1395x(v)(1)(A); 42 C.F.R. § 410.152(b)(1). That methodology
permitted the facilities to claim uncollectible Medicare
deductibles and coinsurance payments -- amounts owed to the
SNFs but uncollectible from either the patient or the patient’s
state Medicaid program -- as bad debts on their Medicare cost
reports. Medicare then reimbursed the providers for the
3
uncollectible amounts pursuant to a Medicare regulation, 42
C.F.R. § 413.80.1
In the Balanced Budget Act of 1997, Congress changed the
payment scheme for SNF services in two respects. Pub. L. No.
105-33, § 4432(a)-(b)(3), 111 Stat. 251, 414-21 (1997).2 It
changed the reimbursement methodology for SNF services
covered under Part A from a reasonable cost system to a
prospective payment system (PPS) based on a per diem rate. 42
U.S.C. § 1395yy(e). And it changed the methodology for the
SNFs’ therapy services -- the services at issue in this case --
from reimbursement based on reasonable costs to
reimbursement based on a preexisting Medicare Part B fee
schedule applicable to physicians. Id. § 1395yy(e)(9); see id.
§§ 1395l(a)(8)(A)(i), 1395m(k), 1395w-4.
Consistent with their practice prior to enactment of the
Balanced Budget Act, appellants listed their uncollectible
deductibles and coinsurance payments as bad debts on the fiscal
year 1999 cost reports they submitted to their “fiscal
intermediary” -- a private insurance company that processes
reimbursements to providers while acting as an agent of the
Secretary of the Department of Health and Human Services
(HHS). 42 U.S.C. § 1395h (2000); 42 C.F.R. § 413.24(f). The
appellants’ fiscal intermediary reviewed the 1999 cost reports
1
This regulation is now found at 42 C.F.R. § 413.89. See
Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916,
49,254 (Aug. 11, 2004). For consistency with the filings of the
parties, we refer to it throughout as 42 C.F.R. § 413.80. See also infra
note 5.
2
The changes applied to cost reporting periods beginning on or
after July 1, 1998. Pub. L. No. 105-33, § 4432(d), 111 Stat. at 422.
4
and disallowed the bad debt claims for uncollectible deductibles
and coinsurance payments. The intermediary disallowed the
claims on the ground that Medicare’s bad debt reimbursement
policy “applies only to the reasonable cost payment system” --
the system applicable to SNFs prior to the change to a fee
schedule system in the Balanced Budget Act. Intermediary’s
Position Paper at 4.
The SNFs appealed the intermediary’s decision to HHS’
Provider Reimbursement Review Board (PRRB). See 42 U.S.C.
§ 1395oo(b). On July 21, 2006, a majority of the PRRB
disagreed with the intermediary’s decision, concluding that,
although Congress had changed the payment system, it had not
altered the bad debt policy contained in 42 C.F.R. § 413.80.
Extendicare 99 Uncollect Co-In Dual Elig Group v. BlueCross
BlueShield Ass’n/United Gov’t Servs., LLC-WI, PRRB Decision
No. 2006-D36, at 4-5 (July 21, 2006). On September 12,
however, the Secretary, acting through the Deputy
Administrator of the Centers for Medicare and Medicaid
Services, reversed the PRRB’s decision and ruled that the SNFs’
bad debts were nonreimbursable under the new fee schedule
system. “Medicare’s longstanding policy has been not to pay
for bad debts for any services paid under a reasonable charge or
fee schedule methodology,” the Secretary said, and “the bad
debt provisions found at 42 C.F.R. 413.80(e) do not apply to
services for which Medicare payment is based on reasonable
charges or a fee schedule methodology.” Decision of the
Administrator, Ctrs. for Medicare & Medicaid Servs.,
Extendicare 99 Uncollect Co-In Dual Elig Group v. Blue
Cross/Blue Shield Ass’n, United Gov’t Servs., LLC-WI, at 11
(Sept. 12, 2006) [hereinafter Secretary’s Decision].
The appellants next filed suit in the United States District
Court for the District of Columbia pursuant to 42 U.S.C.
§ 1395oo(f), which provides for judicial review of final PRRB
5
decisions. On March 28, 2008, the court granted the Secretary’s
motion for summary judgment. Abington Crest Nursing &
Rehab. Ctr. v. Leavitt, 541 F. Supp. 2d 99, 101 (D.D.C. 2008).
The court framed the issue as follows: “Was the Secretary’s
interpretation of the applicable Medicare law and regulations, to
deny the reimbursement of bad debts arising from Part B
services provided by Extendicare Facilities [the owner of the
SNF plaintiffs], a reasonable construction of the regulations?”
Id. at 105. The court concluded that it was. Id.
The SNFs now appeal from the district court’s grant of
summary judgment to the Secretary. Our review is de novo.
Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229
(D.C. Cir. 1994). Pursuant to § 1395oo(f), we proceed under the
judicial review provisions of the Administrative Procedure Act,
which require us to set aside agency action if it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with the law.” 5 U.S.C. § 706(2)(A).
II
The appellants’ first contention is that the Secretary’s
refusal to reimburse them for uncollectible deductibles and
coinsurance “contravenes” the Medicare statute’s “prohibition
against cross-subsidization.” Appellants’ Br. 16. Although their
briefs do not mention it, the two-step framework of Chevron
U.S.A. Inc. v. Natural Resources Defense Counsel, Inc.
structures our review of HHS’ interpretation of the Medicare
statute. 467 U.S. 837 (1984). Under that framework, “[i]f the
intent of Congress is clear, . . . [a court] must give effect to the
unambiguously expressed intent of Congress.” Id. at 842-43.
But “if the statute is silent or ambiguous with respect to the
specific issue,” the court must uphold the agency’s interpretation
as long as it is reasonable. Id. at 843.
6
The appellants allege that HHS’ denial of their bad debt
claims violates the “anti-cross-subsidization” principle of 42
U.S.C. § 1395x(v)(1)(A), which is italicized below:
(v) Reasonable costs
(1)(A) The reasonable cost of any services shall be the
cost actually incurred, excluding therefrom any part of
incurred cost found to be unnecessary in the efficient
delivery of needed health services, and shall be
determined in accordance with regulations establishing
the method or methods to be used, and the items to be
included, in determining such costs . . . . Such
regulations shall . . . take into account both direct and
indirect costs of providers of services . . . in order that,
under the methods of determining costs, the necessary
costs of efficiently delivering covered services to
individuals covered by the insurance programs
established by this subchapter will not be borne by
individuals not so covered, and the costs with respect
to individuals not so covered will not be borne by such
insurance programs . . . .
42 U.S.C. § 1395x(v)(1)(A). The appellants argue that if
Medicare does not reimburse the bad debts of Medicare
beneficiaries, nonbeneficiary recipients of SNF services will end
up bearing those costs, thus transgressing the anti-cross-
subsidization principle. See Appellants’ Br. 16. Indeed, as the
Secretary has acknowledged, the Department has long
interpreted that principle to permit Medicare to reimburse bad
debts when Medicare pays the “reasonable costs” of services.
See Secretary’s Decision at 5-7. But the Secretary has also
concluded that this provision applies only to reimbursements
based on reasonable costs, and not to reimbursements based on
reasonable charges or on fee schedules. Id. at 7, 11.
7
The first step of our Chevron analysis is quickly concluded
by reading the statutory text set out above. As is evident on its
face, § 1395x(v)(1)(A) is silent on the subject of bad debt -- a
point we previously noted in Kidney Center of Hollywood v.
Shalala. 133 F.3d 78, 86 (D.C. Cir. 1998) (“[T]he statute does
not speak directly to the question of bad debt.”). Although bad
debt may be one of the “indirect costs” referred to in the
subsection -- which is apparently the reason the Secretary has
applied the subsection’s principle to bad debt under reasonable
cost systems -- the text is ambiguous in that respect. Even more
to the point, the statute does not tell us whether bad debt -- or
any other indirect cost -- must be reimbursed under a fee
schedule system. There is, therefore, no “unambiguously
expressed intent of Congress . . . with respect to the specific
issue” before us, and we must proceed to Chevron’s second step.
467 U.S. at 842-43.
The second-step question is whether the Secretary
permissibly read § 1395x(v)(1)(A) to apply only to
reimbursement systems based on reasonable costs, and thus to
justify bad debt reimbursement only under such systems. We
conclude that this reading was reasonable. Section 1395x is the
“definitions” section of the Medicare statute. See 42 U.S.C.
§ 1395x. As indicated by its title, subsection 1395x(v) is the
subsection that defines “reasonable costs.” Id. § 1395x(v). The
subsection’s anti-cross-subsidization principle is merely an
element of that definition: it ensures that “[t]he reasonable cost
of any services shall be the cost actually incurred,” by requiring
that the “necessary costs of efficiently delivering covered
services to individuals covered by the insurance programs . . .
will not be borne by individuals not so covered, and the costs
with respect to individuals not so covered will not be borne by
such insurance programs.” 42 U.S.C. § 1395x(v)(1)(A)
(emphases added). It was therefore reasonable for the Secretary
to read this principle, like the subsection of which it is a part, to
8
apply only to reimbursement systems based on “reasonable
costs.”
It was also reasonable for the Secretary to conclude that the
fee schedule system, which the Balanced Budget Act applied to
SNFs, is materially different from a cost-based system. As the
Secretary explained:
Unlike a reasonable cost payment, payment under a fee
schedule is not related to a provider’s cost outlay for
the service and does not involve costs or, likewise,
unrecovered “costs.” Under a fee schedule, Medicare
makes payment for a specific service for which there is
a predetermined rate which includes a margin for profit
and which reflects the price of doing business.
Secretary’s Decision at 11. Indeed, the Secretary noted that,
although Medicare does reimburse providers covered by
reasonable cost systems for bad debts, “Medicare’s longstanding
policy has been not to pay for bad debts for any services paid
under a reasonable charge or fee schedule methodology.” Id.
Appellants dispute the consistency of this “longstanding
policy.” They note, for example, that Medicare reimburses
providers for bad debts under the Part A prospective payment
system, notwithstanding that a PPS is not based on actual costs.
A fee schedule, they insist, is just a variation of a PPS.
It is true that under the Part A prospective payment system,
“the amount of payment per discharge is fixed in advance, is not
based on a hospital’s actual costs, and is not subject to
retroactive adjustment.” Washington Hosp. Ctr. v. Bowen, 795
F.2d 139, 142 n.2 (D.C. Cir. 1986). But the Secretary
reasonably explains that there is also a material difference
between the Part A PPS and the physician fee schedule
9
applicable to SNFs. The Part A PPS is based on hospitals’
average costs per discharge in an annual base period, see 42
U.S.C. § 1395ww(d)(2)(A), and “bad debts incurred during the
. . . base period were not included in the calculation of the
prospective rates.” Secretary’s Decision at 13. By contrast, the
Part B physician fee schedule is based on prices health care
providers charge, and “[h]istorically, these prices have reflected
the entities[’] costs of doing business including expenses such
as bad debt.” Id. (quoting Medicare Program; Provider Bad
Debt Payment, 68 Fed. Reg. 6682, 6683 (proposed Feb. 10,
2003)).3
As another counterexample to the Secretary’s claim of a
consistent policy of denying bad debt reimbursement under fee
schedule systems, appellants proffer the case of ambulatory
surgical centers. Medicare pays such centers according to a fee
schedule. See 42 U.S.C. §§ 1395k(a)(2)(F), 1395l(i)(2)(A).
And yet, it nonetheless reimburses their bad debts. See
Medicare Program; Payment for Facility Services Related to
Ambulatory Surgical Procedures Performed in Hospitals on an
Outpatient Basis, 52 Fed. Reg. 36,765, 36,771-72 (Oct. 1, 1987).
The Secretary reasonably distinguishes this counterexample
as well, explaining that appellants’ contention misconstrues the
payment method that the Medicare statute specifically prescribes
3
Appellants’ opening brief also argued that the Secretary
conceded, in a 1998 Program Memorandum, that the Balanced Budget
Act did not alter providers’ entitlement to reimbursement for bad debts
relating to services provided to dual beneficiaries. Appellants’ Br. 39
(citing Program Memorandum A-98-18, Medicare & Medicaid Guide
(CCH) [1998-1 Transfer Binder] ¶ 46,321). The Secretary responded
that this Program Memorandum was only applicable and sent to
contractors that made payments under the Part A prospective payment
system. See Appellee’s Br. 44. Appellants did not dispute that
response in their reply brief.
10
for ambulatory surgical centers. Although the statute does
require the Secretary to establish a “fair fee” for the services
provided by such centers, 42 U.S.C. § 1395l(i)(2)(A), the term
“fee” does not have its usual meaning because the statute
requires the Secretary, in estimating a fair fee, to consider the
“costs incurred by such centers.” Id. § 1395l(i)(2)(A)(i). And
because payment rates for ambulatory surgical centers are thus
based on costs rather than charges, they are closer to the Part A
PPS (under which the Secretary continues to reimburse
providers for bad debts) than to the physician fee schedule
applicable to SNFs.
Finally, appellants maintain that the Secretary’s
interpretation of the Medicare statute is unreasonable because
“the physician fee schedule, which is now used to pay SNFs for
the services that are the subject of this appeal, does not include
any component of bad debt reimbursement.” Appellants’ Br. 24.
The Secretary disagrees, insisting that the schedule is “based on
data reflecting what health care providers charge, which
historically has taken into account the costs of being unable to
collect some co-pays and deductibles.” Appellee’s Br. 33. We
could resolve this dispute on the ground that the appellants bear
the burden of proof here, see City of Olmstead Falls, Ohio v.
FAA, 292 F.3d 261, 271 (D.C. Cir. 2002) (“[T]he party
challenging an agency’s action as arbitrary and capricious bears
the burden of proof.”), and that the record is devoid of evidence
on this issue. But there is another, more fundamental ground for
resolution: Medicare pays the SNFs based on the physician fee
schedule not because of a decision made by the Secretary, but
because of a decision made by Congress.4 It may be, as
appellants contend, that “the physician fee schedule, which is
based on physicians’ historical charges, has nothing to do with
costs that institutions, like SNFs, incur in providing services to
4
See 42 U.S.C. §§ 1395l(a)(8)(A)(i), 1395m(k), 1395w-4.
11
Medicare beneficiaries.” Appellants’ Reply Br. 2. But if so, the
appellants’ quarrel is with Congress and not the Secretary.
III
The appellants’ second contention is that the Secretary’s
denial of reimbursement for bad debts “disregards the plain
terms” of the Secretary’s own regulation. Appellants’ Br. 31.
The Supreme Court has described the scope of our review of
such a contention as follows: “We must give substantial
deference to an agency’s interpretation of its own regulations.
Our task is not to decide which among several competing
interpretations best serves the regulatory purpose. Rather, the
agency’s interpretation must be given controlling weight unless
it is plainly erroneous or inconsistent with the regulation.”
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)
(internal quotation marks and citations omitted); see Bowles v.
Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).
In the fiscal year in question, the regulation at issue, 42
C.F.R. § 413.80(d), provided as follows:
Under Medicare, costs of covered services furnished
beneficiaries are not to be borne by individuals not
covered by the Medicare program, and conversely,
costs of services provided for other than beneficiaries
are not to be borne by the Medicare program.
Uncollected revenue related to services furnished to
beneficiaries of the program generally means the
provider has not recovered the cost of services covered
by that revenue. The failure of beneficiaries to pay the
deductible and coinsurance amounts could result in the
related costs of covered services being borne by other
than Medicare beneficiaries. To assure that such
covered service costs are not borne by others, the costs
12
attributable to the deductible and coinsurance amounts
that remain unpaid are added to the Medicare share of
allowable costs. Bad debts arising from other sources
are not allowable costs.
See 42 C.F.R. § 413.80(d) (1997) (emphasis added).5 As is
readily apparent, § 413.80(d) incorporates the anti-cross-
subsidization principle found in the statutory subsection that we
discussed in Part II. See 42 U.S.C. § 1395x(v)(1)(A). There is,
however, a difference. Unlike the statutory provision, the
regulation expressly addresses the bad debt issue and mandates
reimbursement of unpaid deductibles and coinsurance to prevent
cross-subsidization.
But the fact that the regulation expressly covers bad debt
does not answer the question of whether it applies to payment
systems based on fee schedules. Just as the statutory provision
is located in a subsection that defines “Reasonable Costs,” the
regulation is located in the part of the Medicare regulations that
sets forth the “Principles of Reasonable Cost Reimbursement.”
42 C.F.R. Part 413. It was therefore perfectly sensible for the
Secretary to read the regulatory anti-cross-subsidization
principle in the same manner as its statutory counterpart: that is,
to apply only to reasonable cost reimbursement systems. As the
Secretary reasonably explained, the regulation’s “bad debt
5
As noted in footnote 1 above, this regulation is now found in 42
C.F.R. § 413.89. While this case was pending in the district court, the
Secretary published a new subsection, which the Secretary stated was
intended to “clarify that payment of bad debts for covered services
paid for under a reasonable charge-based methodology or fee schedule
is not allowable.” Medicare Program; Revisions to Payment Policies,
71 Fed. Reg. 69,624, 69,712 (Dec. 1, 2006). The new subsection
provides: “Bad debts arising from covered services paid under a
reasonable charge-based methodology or a fee schedule are not
reimbursable under the program.” 42 C.F.R. § 413.89(i).
13
provision arises from the reasonable ‘cost’ anti-cross-
subsidization provision[,] which is not controlling under the
reasonable charge/fee schedule methodology” set forth in the
Balanced Budget Act. Secretary’s Decision at 11.
Although there are quite a number of “reasonabl[es]” in that
last sentence, they should not obscure our bottom line: the
Secretary’s interpretation of the Secretary’s own regulation is
neither “plainly erroneous” nor “inconsistent with the
regulation,” and it therefore commands our deference. Thomas
Jefferson Univ., 512 U.S. at 512.
IV
Because the Secretary’s denial of the appellants’
reimbursement request violates neither the Medicare statute nor
the program’s regulations, the judgment of the district court is
Affirmed.