The opinion of the court was delivered by: John D. Bates United States District Judge
The Secretary of the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services ("CMS"), provides Medicare payments to hospitals that serve a disproportionate share of low income patients. In this action, Northeast Hospital Corporation appeals the Secretary's final decision concerning the amount of Medicare payments due to Beverly Hospital ("the Hospital"), a Massachusetts non-profit hospital, for the 1999-2002 fiscal years. Currently before the Court are the Hospital's motion for summary judgment and the Secretary's cross-motion for summary judgment, on which the Court heard oral argument on February 19, 2010. Upon consideration of the relevant legal authorities, the parties' memoranda, and the entire record herein, and for the reasons discussed below, the Court will grant in part and deny in part both the Hospital's and the Secretary's motions, will vacate the Secretary's final decision, and will remand to the Secretary for further proceedings.
Through a complex statutory and regulatory regime, the Medicare program reimburses qualifying hospitals for services they provide to eligible elderly and disabled patients. See generally County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). Medicare reimburses the "operating costs of inpatient hospital services" under a prospective payment system -- that is, based on prospectively-determined standardized rates -- subject to hospital-specific adjustments. See 42 U.S.C. § 1395ww(d); In re Medicare Reimbursement Litig., 309 F. Supp. 2d 89, 92 (D.D.C. 2004), aff'd, 414 F.3d 7, 8-9 (D.C. Cir. 2005). One such adjustment is the "disproportionate share hospital" ("DSH") adjustment, by which the Secretary provides an additional payment to hospitals that "serve a significantly disproportionate number of low-income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I).
Whether a hospital qualifies for a Medicare DSH adjustment, and the amount of the adjustment it receives, depends on the hospital's "disproportionate patient percentage." See id. § 1395ww(d)(5)(F)(v)-(vii). This percentage is a "proxy measure for low income." See H.R. Rep. No. 99-241, at 16 (1985), reprinted in 1986 U.S.C.C.A.N. 579, 594. It represents the sum of two fractions, commonly referred to as the "Medicaid fraction" and the "Medicare fraction." See 42 U.S.C. § 1395ww(d)(5)(F)(vi); Jewish Hosp. Inc. v. Sec'y of Health and Human Servs., 19 F.3d 270, 272 (6th Cir. 1994).
The Medicaid fraction, central to this case, is defined as the fraction (expressed as a percentage), the numerator of which 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 [s]tate [Medicaid] plan..., but who were not entitled to benefits under [Medicare] part A..., and the denominator of which is the total number of the hospital's patient days for such period. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Thus, the Medicaid fraction varies based on a hospital's patient days attributable to individuals who were eligible for medical assistance under a state Medicaid plan but not entitled to benefits under Medicare part A.*fn1 "Put simply, the more a hospital treats patients who are 'eligible for medical assistance under a State plan approved under [Medicaid],' the more money it receives for each patient covered by Medicare." Adena Reg'l Med. Ctr. v. Leavitt, 527 F.3d 176, 178 (D.C. Cir. 2008) (quoting 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II)) (alteration in original).
The Medicare fraction, which is less directly relevant here, is the fraction (expressed as a percentage), the numerator of which is the number of such hospital's patient days for such period which were made up of patients who (for such days) were entitled to benefits under [Medicare] part A... and were entitled to supplemental security income benefits..., and the denominator of which is the number of such hospital's patient days for such period which were made up of patients who (for such days) were entitled to benefits under [Medicare] part A....
42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). Thus, the Medicare fraction turns on the number of a hospital's patient days attributable to individuals entitled to benefits under Medicare part A as well as supplemental security income benefits.
Medicare DSH payments are initially calculated by a "fiscal intermediary" -- typically an insurance company acting as the Secretary's agent. See 42 C.F.R. §§ 421.1, 421.3, 421.100-.128. The fiscal intermediary applies the Medicare fraction as computed by CMS. See id. § 412.106(b)(2), (5). But the intermediary (rather than CMS) calculates the Medicaid fraction based on data submitted by the medical care provider. See id. §§ 412.106(b)(4), 413.20. The fiscal intermediary then adds the two fractions to determine the Medicare DSH reimbursement due, which it sets forth in a Notice of Program Reimbursement. See id. § 405.1803.
A provider dissatisfied with the fiscal intermediary's determination may request a hearing before the Provider Reimbursement Review Board ("PRRB"), an administrative body appointed by the Secretary. See 42 U.S.C. § 1395oo(a), (h). The Board may affirm, modify, or reverse the fiscal intermediary's award. Once the Board rules, the Secretary may affirm, modify, or reverse the Board's decision. See id. § 1395oo(d)-(f). The Secretary has authorized the Administrator of CMS to act on her behalf in reviewing the Board's decisions, and the Administrator's review of a Board ruling is considered the final decision of the Secretary. See 42 C.F.R. § 405.1875. Providers may then challenge the Secretary's final determination in federal district court. See 42 U.S.C. § 1395oo(f).
In this case, the Hospital received a Medicare DSH payment for each of the 1999 through 2002 fiscal years. The Hospital challenged the amount of these payments before the PRRB, contending that the fiscal intermediary improperly excluded patient days attributable to three different groups -- patients receiving charity care, patients enrolled in so-called "Medicareਚ≱" plans, and patients receiving labor and delivery room services -- from the numerator of its Medicaid fraction, and that CMS incorrectly calculated its Medicare fraction. The PRRB ruled in the Hospital's favor on three of the four issues presented, and in the Secretary's favor on the fourth. See Administrative Record ("AR") at 205-18 (PRRB Decision). The Secretary, through the CMS Administrator, reversed the PRRB's decision as to the three issues decided in the Hospital's favor, and affirmed on the fourth issue decided in favor of the Secretary. See AR at 1-40 (CMS Decision). The Hospital now challenges the Secretary's determinations.
Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In a case involving review of a final agency action under the Administrative Procedure Act ("APA"), however, Rule 56(c)'s standard does not apply because of the limited role of a court in reviewing the administrative record. See North Carolina Fisheries Ass'n v. Gutierrez, 518 F. Supp. 2d 62, 79 (D.D.C. 2007). Under the APA, it is the agency's role to resolve factual issues to arrive at a decision that is supported by the administrative record, whereas "the function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did." Occidental Eng'g Co. v. Immigration & Naturalization Serv., 753 F.2d 766, 769-70 (9th Cir. 1985). Summary judgment thus serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review. See Richards v. Immigration & Naturalization Serv., 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977).
Under the APA, a court must "hold unlawful and set aside agency action, findings, and conclusions" that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A), in excess of statutory authority, id. § 706(2)(C), or "without observance of procedures required by law," id. § 706(2)(D). See 42 U.S.C. § 1395oo(f)(1) (courts reviewing Medicare reimbursement decisions must apply APA standards). The scope of review, however, is narrow. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). A court is to presume that the agency's action is valid.
See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415 (1971). And a "court is not to substitute its judgment for that of the agency." State Farm, 463 U.S. at 43. But a court must be satisfied that the agency has "'examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.'" Alpharma, Inc. v. Leavitt, 460 F.3d 1, 6 (D.C. Cir. 2006) (quoting State Farm, 463 U.S. at 43).
A court reviews an agency's interpretation of a statute under the familiar two-step analysis outlined in Chevron, U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984). The first step is determining whether Congress has spoken directly to the "precise question at issue," for if it has, then "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43; see Nat'l Treasury Employees Union v. Fed. Labor Relations Auth., 392 F.3d 498, 500 (D.C. Cir. 2004) ("When Congress has spoken, we are bound by that pronouncement and that ends this Court's inquiry."). If, however, the statute is silent or ambiguous on the specific issue, "the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843. The agency's interpretation of a statute "need not be the best or most natural one by grammatical or other standards.... Rather [it] need be only reasonable to warrant deference." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991) (citations omitted).
I. Charity Care Patient Days
A. Legal and Factual Background
The Medicaid program, 42 U.S.C. § 1396 et seq., is a cooperative venture between the federal and state governments to help states provide medical care to certain low-income and disabled individuals. Pursuant to Medicaid, the federal and state governments share the cost of providing medical care to eligible individuals. See id. § 1396b.
Each state, however, administers its own Medicaid program pursuant to a state Medicaid plan, which must be approved by the Secretary of the Department of Health and Human Services. See 42 U.S.C. §§ 1396, 1396a. A state Medicaid plan "is a comprehensive written statement submitted by the [state] describing the nature and scope of its Medicaid program and giving assurance that it will be administered in conformity with the specific requirements of" federal law. 42 C.F.R. § 430.10. To obtain the Secretary's approval, a state's Medicaid plan must meet a number of requirements. "The plan must," for example, "provide coverage for the 'categorically needy' and, at the State's option, may also cover the 'medically needy.'" Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 650-51 (2003); see also 42 U.S.C. § 1396a(a)(10)(A)(i)-(ii), (C). And ...