The opinion of the court was delivered by: Royce C. Lamberth, Chief Judge
Before the Court is plaintiff's Motion  for Summary Judgment, defendant's Cross-Motion  for Summary Judgment, and defendant's Motion  to Strike Plaintiff's Surreply. Upon consideration of the summary judgment motions, the memoranda in support thereof, the supplemental authority, the entire record, and the applicable law, the Court will DENY plaintiff's Motion for Summary Judgment and GRANT defendant's Cross-Motion for Summary Judgment. Upon consideration of defendant's Motion to Strike, the opposition thereto, and the applicable law, the Court will GRANT defendant's motion. The Court's reasoning is set forth below.
In this consolidated action, plaintiff Baptist Memorial Hospital-Memphis (Baptist-Memphis) seeks additional Medicare payments authorized for disproportionate share hospitals (DSH)-i.e., hospitals that treat a disproportionate share of low-income patients. Specifically, Baptist-Memphis seeks the inclusion of what are known as Section 1115 demonstration or expansion waiver days in the DSH payment calculation in connection with two Medicare cost reporting periods-Fiscal Year Ending (FYE) September 30, 1994, and FYE September 30, 1995. The Medicare Provider Reimbursement Review Board (PRRB) entered decisions in favor of Baptist-Memphis as to its appeals for both reporting periods. The Secretary's Administrator of the Centers for Medicare and Medicaid Services (CMS) reversed both decisions. Baptist-Memphis challenges those reversals here.
A.Statutory and Regulatory Background
The operating costs of inpatient hospital services are primarily paid through the Prospective Payment System (PPS), 42 U.S.C. § 1395ww(d). Generally, a hospital's PPS payment is based on prospectively determined rates, rather than on actual operating costs incurred by the hospital. Id. § 1395ww(d)(1)--(4). But the PPS also contains several provisions that adjust payments on the basis of hospital-specific factors. Id. § 1395ww(d)(5). One such provision is known as the disproportionate share hospital or DSH adjustment, under which hospitals that serve a "significantly disproportionate number of low-income patients" receive increased PPS payments. Id. § 1395ww(d)(5)(F)(i)(I).
A hospital qualifies for a DSH adjustment in a given cost reporting period if its "disproportionate patient percentage" for that period equals or exceeds specified thresholds. Id. § 1395ww(d)(5)(F)(v). The disproportionate patient percentage consists of two components: the Medicare and Medicaid fractions. Id. § 1395ww(d)(5)(F)(vi). Only the Medicaid fraction is relevant here. This fraction equals "the number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistances under a State plan approved under [Title XIX, i.e., the Medicaid statute]," divided by "the total number of the hospital's patient days for such period." Id. § 1395ww(d)(5)(F)(vi)(II).
Title XIX of the Social Security Act, known as the Medicaid statute, establishes a federal-state program to provide medical assistance to low-income patients. See id. §§ 1396-- 1396v. To participate in the Medicaid program, a state must develop a plan that specifies, among other things, the categories of individuals who will receive medical assistance and the kinds of services that will be covered. Id. § 1396a. If the Secretary approves the plan, the state is eligible to be reimbursed by the federal government for a specified percentage of expenditures under the plan. Id. §§ 1396b(a)(1), 1396d(b).
Section 1115 of the Social Security Act also authorizes demonstration projects to allow states to explore innovative healthcare initiatives. See id. § 1315. Costs under a Section 1115 demonstration project "shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures under the State [Medicaid] plan." Id. § 1315(a)(2)(A). Per the Secretary's approval, a demonstration project may provide benefits to individuals who do not otherwise qualify under the Medicaid statute. Id. § 1315(a)(1). Individuals who are not eligible for benefits under a Medicaid state plan approved under Title XIX, but who are eligible for benefits under an approved Section 1115 demonstration project, are known as "expansion waiver populations" or simply "expansion populations."
Tennessee's approved Section 1115 demonstration project, known as TennCare, was instituted on January 1, 1994. A.R. 640--43. TennCare provided coverage for populations eligible for traditional Medicaid, as well as populations eligible for benefits under expanded requirements for the "uninsurable" (i.e., persons unable to meet traditional requirements due to existing or prior existing heath conditions) and "uninsured" (i.e., persons not eligible for an employer-sponsored or government-sponsored health plan). Id. At issue in this case are expansion populations who are not eligible for traditional Medicaid, but who receive benefits through TennCare.
From the inception of the Medicare DSH adjustment in 1986, the Secretary's policy has been to exclude expansion waiver days in calculating DSH payments. Under the Secretary's regulations, the DSH adjustment would apply only when "benefits are payable under [Title XIX,i.e., the Medicaid statute]." 51 Fed. Reg. 16,777 (1986). There was confusion among hospitals, however, as to which state-only program days qualified as "Medicaid eligible" days that could be included in the DSH calculation. See St. Joseph's Hosp. v. Leavitt, 425 F. Supp. 2d 94, 96 (D.D.C. 2006) (Robertson, J.). To address this confusion, CMS sent a letter to the Chairman of the Senate Finance Committee on October 15, 1999. See A.R. 755--56. The letter announced that CMS had adopted a "hold harmless" policy under which it would not seek to recoup certain DSH overpayments to hospitals. Id. at 755. Specifically, for cost reporting periods beginning before January 1, 2000, CMS's fiscal intermediaries would "not disallow the portion of DSH payment claimed . . . where a hospital had previously claimed and received Medicare DSH payments under the incorrect formula." Id. CMS further stated that it would clarify the policy for both its intermediaries and hospitals. Id.; see United Hosp. v. Thompson, 383 F.3d 728, 740 (8th Cir. 2001) ("The letter explained that [CMS] would not seek to recoup payments to hospitals already made (erroneously) for state-only days, but that in the future hospitals would have to abide by the statutory requirement that only Medicaid days count toward DSH payments.").
On December 1, 1999, CMS issued Program Memorandum A-99-62 (PM A-99-62) to clarify the definition of eligible Medicaid days in its DSH policy and to formalize its hold harmless policy. See A.R. 171--76. PM A-99-62 reiterated that only Title XIX Medicaid days- not, among other things, expansion waiver days-were to be included in the Medicaid fraction of the Medicare DSH formula. Id. at 171--72. It acknowledged, however, that some fiscal intermediaries had made DSH payments "attributable to the erroneous inclusion of general assistance of other State-only health program, charity care, Medicare DSH, and/or ineligible waiver or demonstration population days" in the Medicaid fraction. Id. CMS would thus hold harmless hospitals that had already received payments reflecting the erroneous inclusion of ineligible days. Id. at 173. Likewise, CMS would hold harmless hospitals that had not received such payments, but that had already raised a challenge seeking to include ineligible days in the DSH adjustment. Id.
With regard to this second group of hospitals-those that had not received payments reflecting the erroneous inclusion of ineligible days-PM A-99-62 instructs fiscal intermediaries, in relevant part:
If a hospital did not receive any payment based on the erroneous inclusion of . . . [among other things] waiver or demonstration population days [i.e., expansion days] for cost reports that were settled before October 15, 1999, and the hospital never filed a jurisdictionally proper appeal to the [PRRB] on this issue, you are not to pay the hospital based on the inclusion of these types of days for any open cost reports for cost reporting periods beginning before January 1, 2000.
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 to the PRRB 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. . . .
Where, for cost reporting periods beginning before January 1, 2000, a hospital filed a jurisdictionally proper appeal to the PRRB on the issue of the exclusion of these types of days from the Medicare DSH formula on or after October 15, 1999, reopen the settled cost report at issue and revise the Medicare DSH payment to reflect the inclusion of these types of days as Medicaid days, but only if the hospital appealed, before October 15, 1999, the denial of payment for the days in question in previous cost reporting periods. . . .
Do not reopen a cost report and revise the Medicare DSH payment to reflect the inclusion of these types of days as Medicaid days if, on or after October 15, 1999, a hospital added the issue of the exclusion of these types of days to a jurisdictionally proper appeal already pending before PRRB on other Medicare DSH issues or other unrelated issues.
Id. at 173--74 (emphasis added).
B.Factual and Procedural ...