The opinion of the court was delivered by: James Robertson United States District Judge
Plaintiff St. Joseph's Hospital sues the Secretary of Health and Human Services (HHS) seeking APA review of his decision to deny its claim for a Medicare disproportionate share payment adjustment. Plaintiff and defendant have cross-moved for summary judgment. Because it was arbitrary or capricious to overrule the unanimous decision of an agency appellate board on the ground that St. Joseph's had failed to include particular words in its appeal, the government's motion [Dkt. #12] will be denied; and the hospital's motion [Dkt. #10] will be granted.
a. The Medicare Fraction and General Assistance Days
St. Joseph's is a 314-bed, not-for-profit, certified Medicare-participating provider in St. Paul, Minnesota. Dkt. #10-3 at 1; Dkt. #12-2 at 1. The government pays for covered services rendered to Medicare-eligible patients, pursuant to the Medicare statute and regulations. Dkt. #12-1 at 3. The program is administered by the Centers for Medicare & Medicaid Services (CMS), Dkt. #10-2 at 3, which in turn contracts with "fiscal intermediaries" (FIs) to administer its payment functions. 42 U.S.C. § 1395h.
A participating hospital submits a cost report to its fiscal intermediary at the close of each fiscal year. 42 C.F.R. §§ 413.20(b), 413.24(f). The fiscal intermediary audits the cost report and issues a Notice of Program Reimbursement (NPR), which identifies and briefly explains any adjustments to the hospital's cost report. Dkt. #10-2 at 4.
Hospitals may receive additional Medicare payments based on hospital-specific factors. Id. One adjustment, the "disproportionate share hospital" (DSH) adjustment, is for hospitals that serve a "significantly disproportionate number of lower income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). A hospital qualifies for the DSH adjustment for a given cost-reporting period if its "disproportionate patient percentage" for that period equals or exceeds thresholds specified by statute. 42 U.S.C. § 1395(d)(5)(F)(v).*fn1 That percentage is a combination of two other measures: the Medicare and Medicaid fractions. 42 U.S.C. § 1395ww(d)(5)(F)(vi). Only the Medicaid fraction is at issue here. It is 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 [Title XIX of the Social Security Act ], but who were not entitled to benefits under [Medicare Part A, divided by] the total number of the hospital's patient days for such period." 42 U.S.C. § 1395ww(d)(5)(F)(vi).
After several of years of litigation over the Secretary's interpretation that Medicaid patient days could not be included in the numerator if services were paid for by Medicare, CMS issued a ruling in 1997, stating that, "on a prospective basis, [CMS] will count in the Medicaid fraction the number of days of inpatient hospital services eligible for Medicaid on that day, whether or not the hospital received payment for those inpatient hospital services." Ruling 97-2; Dkt. #8 at 347-48; quoted at Dkt. #10-2 at 9. In the year after Ruling 97-2 was released, however, there was continuing confusion about which state-run program days qualified as "Medicaid eligible" days. Dkt. #10-2 at 9. Some states, such as Minnesota, ran assistance programs for low-income individuals and were unable to give legally definitive answers about whether such general assistance programs were part of their approved Medicaid plans. Dkt. #10-2 at 9-10. Some fiscal intermediaries allowed hospitals to count patient days that were covered by state general assistance programs for low-income individuals --"general assistance days" -- and some (those in New York and Pennsylvania, especially) did not, demanding that hospitals refund prior DSH payments that were calculated including such general assistance days. Dkt. #10-2 at 10.
On October 15, 1999, the Deputy Administrator of CMS announced that the agency had decided to "hold hospitals harmless" for DSH payments that had been calculated including general assistance program days, for cost periods beginning prior to January 1, 2000. Dkt. #10-2 at 10. In the announcement, which took the form of a letter to the Chairman of the Senate Finance Committee, CMS stated that "guidance on the calculation of Medicare DSH, particularly with regard to the inclusion of general assistance days, was neither sufficiently clear nor well understood... Many hospitals, fiscal intermediaries and state Medicaid agencies have differing understandings about the particulars of the DSH calculation." Dkt. #10-2 at 11.
The October 15 letter was followed, in December 1999, by the formal issuance of CMS Program Memorandum A-99-62 (the "Hold Harmless Rule"). The Hold Harmless Rule had two main provisions. First, hospitals that had received DSH payments based on the inclusion of general assistance days in cost reports settled before October 15, 1999, could keep the funds and continue to be reimbursed for the same types of program days for fiscal years beginning before January 1, 2000. Second, hospitals that did not receive payment calculated with general assistance days, but appealed the issue prior to October 15, 1999, could receive DSH reimbursement reflecting the inclusion of otherwise "ineligible" general assistance program days for fiscal years beginning prior to January 1, 2000. Dkt. #8 at 676; Dkt. #10-2 at 11. It is the second provision that is (finally) at the center of this case. It provided (taking the form of a direction to the fiscal intermediaries):
If, for cost reporting periods beginning before January 1, 2000, a hospital that did not receive payments reflecting the erroneous inclusion of otherwise ineligible days filed a jurisdictionally proper appeal ... on the issue of the exclusion of these types of days from the Medicare DSH formula before October 15, 1999, reopen the cost report at issue and revise the Medicare DSH payment to reflect the inclusion of these types of days as Medicaid days.
Dkt. #8 at 676; Dkt. #10-2 at 11 (emphasis added). "Otherwise ineligible days" included "general assistance or other State-only health program, charity care, Medicaid DSH, and/or other ineligible waiver or demonstration population days for cost reports that were settled before October 15, 1999." Dkt. #8 at 435.
At the time when St. Joseph's filed its fiscal year 1995 cost report, the State of Minnesota was administering several programs for its low-income residents, including a "general assistance" program. When the Minnesota Medicaid agency was unable readily to provide information concerning which of the programs were part of the state Medicaid plan under Title XIX, however, Dkt. #8 at 126-127; Dkt. #10-2 at 12, the Minnesota fiscal intermediary decided ...