The opinion of the court was delivered by: Reggie B. Walton United States District Court Judge
The plaintiff, Banner Health, appeals a final decision of the Secretary of Health and Human Services (the "Secretary") denying certain Medicare Part A payment adjustments to four Arizona hospitals in return for expenses the hospitals incurred providing services to low-income individuals in fiscal years 1991 and 1993-1999. Complaint For Sums Due and For Declaratory and Injunctive Relief Concerning Medicare Payments to Disproportionate Share Hospitals ("Compl.") ¶¶ 1, 8. Currently before the Court are the parties' cross-motions for summary judgment.*fn2 For the reasons set forth below, both parties' motions must be granted in part and denied in part, and the case remanded to the Secretary for further action consistent with this opinion.
A. Statutory and Regulatory Framework
1. Medicare and the DSH Payment Adjustment
Through a "complex statutory and regulatory regime," the Medicare program reimburses qualifying hospitals for the services that they provide to eligible patients. County of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). The Medicare regime is administered by the Centers for Medicare and Medicaid Services (the "CMS"),*fn3 under the supervision of the Secretary, and through a network of fiscal intermediaries, usually private companies serving as the Secretary's agents for the purpose of reimbursing health care providers. See Dialysis Clinic, Inc. v. Leavitt, 518 F. Supp. 2d 197, 199 (D.D.C. 2007). Under the Medicare Act, the "operating costs of inpatient hospital services" are reimbursed under a system of prospectively determined standardized rates, but those rates are subject to hospital specific adjustments. See 42 U.S.C. § 1395ww(d) (2006); In re Medicare Reimbursement Litig. Baystate Health Sys. ("Baystate"), 414 F.3d 7, 9 (D.C. Cir. 2005), cert. denied, 547 U.S. 1054 (2006).
In order to receive the reimbursements, eligible hospitals file cost reports with their fiscal intermediaries at the end of each fiscal year. See 42 C.F.R. § 413.20(b) (1999).*fn4 See generally Baystate, 414 F.3d at 8 (describing reimbursement process). After auditing the reports, the fiscal intermediaries issue Notice of Program Reimbursements in which they determine the amount owed by the Secretary to the hospitals for the fiscal year at issue. 42 C.F.R. § 405.1803(a). Hospitals dissatisfied with the fiscal intermediary's award have 180 days to appeal to the Provider Reimbursement Review Board (the "Reimbursement Board"), which issues a decision that the Secretary may reverse, affirm, or modify within sixty days. 42 U.S.C. § 1395oo(f)(1). Hospitals remaining dissatisfied after either the Reimbursement Board or the Secretary issues a final decision may seek judicial review by filing suit in the appropriate federal district court. Id.
This case involves one of the hospital specific adjustments known as the Medicare disproportionate share hospital ("DSH") adjustment. Id. § 1395ww(d)(5)(F)(i)(I); see Compl. ¶¶ 9-10, 24-32. This adjustment is made to hospitals that serve "a significantly disproportionate number of low-income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). Congress enacted legislation establishing detailed criteria for determining eligibility and the extent of a hospital's payment adjustment. Baystate, 414 F.3d at 9.
Whether a hospital qualifies for the Medicare DSH adjustment, and the amount of the adjustment it receives, depends on its "disproportionate patient percentage," 42 U.S.C. § 1395ww(d)(5)(F)(v), which is determined by the Secretary pursuant to a statutory formula. 42 U.S.C. § 1395ww(d)(5)(F)(v)-(vii); 42 C.F.R. § 412.106(b). According to the formula, the disproportionate patient percentage is the sum of two fractions, 42 U.S.C. § 1395ww(d)(5)(F)(vi), commonly referred to as the Medicaid fraction and the Medicare fraction, see Jewish Hosp., Inc. v. Sec'y of Health & Human Servs., 19 F.3d 270, 272 (6th Cir. 1994). Together, the Medicare and Medicaid fractions serve as a proxy for the number of low-income patients served by the hospital. Id.
More specifically, the dispute in this case centers on the computation of the numerator of the Medicaid fraction. Compl. ¶ 32.*fn5 According to the statute, the Medicaid fraction is:
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 State plan approved under [Title] XIX of this chapter [i.e., Medicaid], 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.
Id. § 1395ww(d)(5)(F)(vi)(II); see Adena Reg'l Med. Ctr. v. Leavitt, 527 F.3d 176, 178 (D.C. Cir. 2008), cert. denied., 129 S.Ct. 1933 (2009) (discussing Medicaid fraction). "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, 527 F.3d at 178 (emphasis and alteration in original).
The Medicare DSH provision expressly refers to the Medicaid statute. Id. at 180. See generally 42 U.S.C. §§ 1396-1396v. And although this case involves a Medicare reimbursement dispute, several aspects of Medicaid are relevant.
Medicaid is a cooperative venture between the federal and state governments to assist states in providing medical care to eligible individuals. Harris v. McRae, 448 U.S. 297, 301 (1980). The federal government shares the costs of Medicaid with States that elect to participate in the program and, in return, participating States are to comply with the requirements imposed by the Medicaid Act and by the Secretary. Atkins v. Rivera, 477 U.S. 154, 156-57 (1986).
Each state administers its own Medicaid program pursuant to a state Medicaid plan which must be reviewed and approved by the Secretary. See 42 U.S.C. § 1396-1 ("The sums made available under this section shall be used for making payments to States which have submitted, and had approved by the Secretary, State plans for medical assistance"); id. §§ 1396a(a)(1)-(65) (setting forth state plan requirements). A state plan "is a comprehensive written statement submitted by the [state] agency 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 approval, a state Medicaid plan must meet a number of requirements. For example, the plan must provide coverage for the "categorically needy" population. Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 651 (2003). This population consists of individuals who qualify based on their eligibility for assistance under the federal programs know as the Aid to Families with Dependent Children Program or the Supplemental Security Income Program. See id. at 651 n.4 (citing 42 U.S.C. § 1396a(a)(10)(A)(i)). In addition, and "at the option of the State," 42 U.S.C. § 1396a(a)(10)(A)(ii), the state plan may provide coverage to the "medically needy" population. Walsh, 538 U.S. at 651. As compared to the "categorically needy," the medically needy are "individuals who meet the non-financial eligibility requirements for inclusion in one of the groups covered under Medicaid, but whose income or resources exceed the financial eligibility requirements for categorically needy eligibility." Id. at 651 n.5 (citing 42 U.S.C. § 1396a(a)(10)(C)). State Medicaid agencies must "reimburse health care providers for the cost of covered services delivered to Medicaid beneficiaries." Ariz. Health Care Cost Containment Sys. v. McClellan, 508 F.3d 1243, 1246 (9th Cir. 2007).
If the state's Medicaid plan is approved by the Secretary, the state generally becomes eligible to receive federal matching funds for a statutorily set percentage of the amount "expended . . . as medical assistance under the State plan." 42 U.S.C. § 1396b(a)(1); see id. § 1396d(b); see also Va. Dep't of Med. Assistance Servs. v. Johnson, 609 F. Supp. 2d 1, 2 (D.D.C. 2009). These federal matching funds are referred to as "federal financial participation." E.g., Va. Dept's of Med. Assistance Servs., 609 F. Supp. 2d at 2-3.
In distributing these funds, states must consider "the situation of hospitals which serve a disproportionate number of low-income patients with special needs." 42 U.S.C. § 1396a(a)(13)(A)(iv). Specifically, states must provide for an "appropriate increase in the rate or amount of payment for [inpatient hospital] services provided by such hospitals." Id. § 1396r-4(a)(1)(B). In determining the amount of this adjustment, states may choose from three different methods, including one based on "costs, volume, or proportion of services provided to patients eligible for medical assistance under a State plan approved under this subchapter or to low-income patients." 42 U.S.C. § 1396r-4(c)(3)(B). These adjustments are known as "Medicaid DSH" payments, Northeast Hosp. Corp. v. Sebelius, ___ F. Supp. 2d. ___, ___, No. 09-180, 2010 WL 1199311, at *4 (D.D.C. Mar. 29, 2010), and states generally have flexibility in administering the Medicaid DSH adjustments as opposed to the Medicare DSH adjustments. Id. (citing 42 U.S.C. §§ 1396r-4(b)(4), (c)(1)-(3)).
3. Medicaid Title XI Waivers
In addition to the Secretary's authority to approve state Medicaid plans under Title XIX, the Secretary is given authority under § 1115 of Title XI the Social Security Act, 42 U.S.C. § 1315, to "waive compliance with any of the requirements" of 42 U.S.C. § 1396a to enable States to carry out "experimental, pilot, or demonstration project[s.]" 42 U.S.C. § 1315(a); see also Portland Adventist Med. Ctr. v. Thompson, 399 F.3d 1091, 1093 (9th Cir. 2005). The requirements are waived 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." Cookeville Reg'l Med. Ctr. v. Leavitt, 531 F.3d 844, 845 (D.C. Cir. 2008) (quoting 42 C.F.R. § 430.25). Patients who receive federally reimbursable care under a § 1115 waiver who would not otherwise meet the normal Medicaid requirements are referred to as the "expansion waiver population." Id. However, "[d]espite not meeting the requirements of [Title] XIX, the costs of providing care under a demonstration project waiver are treated as federally reimbursable expenditures made under [Title] XIX 'to the extent and for the period prescribed by the Secretary.'" Id. (quoting 42 U.S.C. § 1315(a)(2)(A)).
4. The Secretary's Medicare DSH Payment Policy
From approximately 1986 until 1997, the Secretary construed the phrase "eligible for medical assistance under a State Medicaid plan approved under [Title] XIX," 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II), to include only those days where benefits were actually paid by Medicaid. See Jewish Hosp., 19 F.3d at 272. However, between 1994 and 1996 four federal circuit courts invalidated this approach, see Baystate, 414 F.3d at 9 (citing cases), and in 1997 the Secretary revised the interpretation and included in the numerator of the Medicaid fraction "the number of days of inpatient hospital services for patients eligible for Medicaid on that day, whether or not the hospital received payment for those inpatient hospital services." Administrative Record ("A.R.") at 399;*fn6 see also 42 C.F.R. § 412.106(b)(4) (1998). The Secretary reasoned that "[u]nder the new interpretation," the Medicaid fraction "will be calculated to include all inpatient hospital days of service for patients who were eligible on that day for medical assistance under a State Medicaid plan." A.R. at 398.
With respect to Medicare DSH calculations when a § 1115 waiver program was invoked, the Secretary's policy during the relevant time period was to separate the beneficiaries into two categories: (1) the inclusion of individuals who could have qualified for Medicaid through a traditional State plan and (2) the exclusion of individuals who were covered under the State plan by virtue of the § 1115 waiver. See Medicare Program; Medicare Inpatient Disproportionate Share Hospital (DSH) Adjustment Calculation: Change in the Treatment of Certain Medicaid Patient Days in States with 1115 Expansion Waivers, 65 Fed. Reg. 3,136, 3,136 (Jan. 20, 2000); see also Cookeville, 531 F.3d at 846 ("Before January 2000, the Secretary's policy was not to include expansion waiver patients in the Medicaid fraction.").
In 2005, Congress passed the Deficit Reduction Act, Pub. L. No. 109-171, 120 Stat. 4, which explained that, in determining the number of days in the Medicaid fraction, "the Secretary may, to the extent and for the period the Secretary determines appropriate, include patient days of patients not [eligible for Medicaid] but who are regarded as such because they receive benefits under a demonstration project approved under Title XI." Id. § 5002(a). The Deficit Reduction Act "purported to ratify the ...