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Arkansas Department of Human Services v. Kathleen Sebelius

October 12, 2011

ARKANSAS DEPARTMENT OF HUMAN SERVICES,
PLAINTIFF,
v.
KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, AND DONALD BERWICK, ADMINISTRATOR OF THE CENTERS FOR MEDICARE & MEDICAID SERVICES,
DEFENDANTS.



The opinion of the court was delivered by: James E. Boasberg United States District Judge

MEMORANDUM OPINION

In April 2006, the Centers for Medicare & Medicaid Services (CMS) issued a notice of disallowance for $4,449,682 in federal matching funds it had paid to Plaintiff Arkansas Department of Human Services for outpatient hospital services. The Department Appeals Board (DAB) of the United States Department of Health and Human Services largely upheld the disallowance, finding that it was consistent with CMS's reasonable interpretation of the regulation governing Medicaid payment limits for those services. In bringing this case, Arkansas seeks to overturn the DAB's decision on the grounds that it was arbitrary and capricious and not in accordance with law, in violation of the Administrative Procedure Act. Arkansas first argues that CMS's interpretation of the regulation is inconsistent with the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). Second, it maintains that even if CMS's interpretation is permissible, CMS was precluded from applying it to Arkansas's detriment because Arkansas lacked fair notice of this interpretation. Both parties have now moved for summary judgment. Because CMS's interpretation of the regulation is consistent with its reasonable construction of BIPA and because the disallowance does not rise to the level of the sanctions contemplated by the "fair notice" doctrine, the Court will grant Defendants' motion.

I.Background

A. The Medicaid Statutory and Regulatory Framework

The Medicaid program was established in 1965 by Title XIX of the Social Security Act as a cooperative federal-state initiative intended to assist states in providing medical assistance to low-income individuals and families. See 42 U.S.C. § 1396 et seq.; Harris v. McRae, 448 U.S. 297, 301 (1980). Each state administers its own Medicaid program in accordance with federal statutory and regulatory requirements and pursuant to the terms of its state Medicaid plan. See 42 U.S.C. § 1396, 1396a. Once a state's Medicaid plan is approved by the Secretary of the U.S. Department of Health and Human Services, the state becomes eligible to receive federal matching funds, or "federal financial participation" (FFP), for a percentage of the amounts "expended . . . as medical assistance under the State plan." §§ 1396b(a)(1), 1396d(b). Federal funding levels are set by a statutory formula that calculates reimbursement rates for each state based on that state's Medicaid plan. See § 1396b.

The Social Security Act requires state Medicaid plans to ensure that payments to service providers are "consistent with efficiency, economy, and quality of care." § 1396a(a)(30)(A). Pursuant to this statutory authority, CMS has established regulations imposing limits on state Medicaid payments to providers of certain medical services, including outpatient hospital and clinic services. See, e.g., 42 C.F.R. § 447.321. As of October 2000, the outpatient hospital and clinic services regulation, 42 C.F. R. § 447.321, provided that "FFP [would] not [be] available for any payment that exceed[ed] the amount that would be payable to providers under comparable circumstances under Medicare." Id. (2000). This amount, which functions as a ceiling for FFP, is referred to as the "upper payment limit" (UPL).

In October 2000, HHS proposed a new regulation intended to close a loophole that allowed states "to reduce their share of Medicaid costs and cause[d] the Federal government to pay significantly more than it should for the same volume and level of Medicaid services." Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services, 65 Fed. Reg. 60151, 60152 (proposed Oct. 10, 2000) ("Proposed Rule"). In the Proposed Rule, HHS proposed, inter alia, to alter the regulation concerning outpatient hospital and clinic services, 42 C.F. R. § 447.321, in the following manner: instead of a single aggregate UPL for outpatient hospital and clinic services provided by all facilities in a state, the Proposed Rule set distinct UPLs for different kinds of facilities. See Proposed Rule, 65 Fed. Reg. at 60151. "[T]o ensure continued access to care and the ability to adjust to proposed changes," the Proposed Rule also provided for two transition periods to allow certain states to come into compliance with the new UPLs. Id. A state would qualify for a transition period if it had in place an approved State Plan Amendment (SPA) that would result in payments in excess of one or more of the new UPLs. See id. at 60154. Such an SPA is referred to as "noncompliant" because its payments exceeded the new UPLs.

Shortly thereafter, in December 2000, Congress passed BIPA. Pub. L. No. 106-554, 114 Stat. 2763. BIPA required HHS to issue a final rule about Medicaid UPLs based on the October 2000 Proposed Rule. See id., 114 Stat. 2763, 2763A-575 to -577. It exempted HHS from complying with "any requirement of the Administrative Procedure Act" with regard to the promulgation of the final rule, and it mandated that HHS provide for a longer transition period for implementing the UPL changes for certain states. See id.

CMS then promulgated its Final Rule on January 12, 2001. See Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services, 66 Fed. Reg. 3148, 3148 (Jan. 12, 2001) ("Final Rule"). The Final Rule amended 42 C.F.R. § 447.321, which had previously provided for a single aggregate UPL for all outpatient service providers, so that separate UPLs applied to 1) state government-owned or -operated facilities, 2) other government facilities, and 3) privately owned and operated facilities. See 66 Fed. Reg. at 3148; 42 C.F.R. § 447.321 (2001). The Final Rule took effect on March 13, 2001, and, consistent with BIPA's requirement that a longer transition period be added to the two mentioned in the Proposed Rule, provided for three transition periods of varying length for states with noncompliant SPAs. See 66 Fed. Reg. at 3148-50, 3171; Administrative Record (A.R.) at 4.

The governing provision for the short-transition-period states, of which Arkansas was one, stated that "payments may exceed [the newly established UPLs] until September 30, 2002." See 42 C.F.R. § 447.321(e)(2)(ii)(A). The provisions governing the two longer transition periods were more nuanced, requiring states to phase down the amount by which their payments exceeded the new UPLs based on specified formulae. See id. §§ 447.321(e)(2)(ii)(B), 447.321(e)(2)(ii)(C). In addition to laying out these three transition periods, the Final Rule also established a "general rule," applicable to states subject to all three transition periods: "The amount that a state's payment exceeded [the newly established UPLs] must not increase." Id. § 447.321(e)(2)(i). As set forth below, this provision is at the heart of the dispute here.

B. Arkansas's Noncompliant SPA and the Disallowance

Arkansas's noncompliant SPA, SPA 00-10, was approved by CMS on November 29, 2000, and was made retroactively effective to May 18, 2000. See A.R. at 5. SPA 00-10 allowed Plaintiff to make enhanced Medicaid payments to the University of Arkansas for Medical Sciences (UAMS), the state's sole state-operated teaching hospital, for outpatient services. Id. at 5-6, 50-52. Pursuant to this SPA, Plaintiff paid providers of outpatient services statewide at a rate of 80% of the UPL, and then paid the difference between this amount and the UPL to UAMS. See id. at 6; Pl.'s Mot. at 4. This resulted in UAMS receiving a supplemental payment beyond the costs of the outpatient services it provided. See A.R. at 6; Pl.'s Mot. at 4; Def.'s Mot. and Opp. at 9.

This payment methodology was consistent with UPL regulations prior to 2001 - the UPL applied to outpatient services in the aggregate, so Arkansas could receive FFP for enhanced payments to UAMS so long as it remained below the UPL with respect to outpatient services as a whole. Because the Final Rule established a distinct UPL for state-owned or -operated facilities, however, these supplemental payments were disallowed once the Final Rule became effective. See Pl.'s Mot. at 4. SPA 00-10, accordingly, was a noncompliant amendment. In addition, because it became effective on or after October 1, 1999, it was subject to the shortest of the three transition periods established by the Final Rule. See 42 C.F.R. § 447.321(e)(2)(ii)(A).

At issue in this case are the supplemental payments made to UAMS pursuant to SPA 00-10 during the transition period. Plaintiff made these payments consistent with the methodology established in SPA 00-10 through September 30, 2002, the end of the applicable transition period and the day the new UPLs promulgated in the Final Rule became effective for Arkansas. See A.R. at 6; Pl.'s Mot. at 4. Since the amount of the supplemental payments was calculated pursuant to a percentage-based formula, the absolute amount of the payments fluctuated over time. See A.R. at 6 n.7. More important, the supplemental payment amount increased - both in absolute terms and, relevantly, in terms of the amount by which the payments to UAMS exceeded the amount to which UAMS would have been entitled under the new UPLs - during the transition period. See id.

On April 7, 2006, CMS issued a notice of disallowance for $4,449,682 in FFP it had paid to Arkansas during the five quarters between July 1, 2001 and September 30, 2002. A.R. at 6. "According to the notice of disallowance, the amount disallowed was the federal government's share of supplemental payments to UAMS that exceeded the limit established by 42 C.F.R. § 447.321(e)(2)(i)," id. at 6-7, since the "general rule" provided that "[t]he amount that a state's payment exceeded [the newly established UPLs] must not increase." 42 C.F.R. § 447.321(e)(2)(i).

C. Procedural History

Arkansas appealed the disallowance to the DAB in May 2006. See A.R. at 7. The DAB, however, stayed its consideration of the case pending its resolution of Missouri Dept. of Social Services, DAB No. 2184 (2008), available at http://www.hhs.gov/dab/decisions/dab2184.pdf, which concerned an identical "must not increase" provision in a parallel portion of the Final Rule. See A.R. at 7. On July 11, 2008, the DAB issued its decision in Missouri, finding that the "must not increase" provision was ambiguous, but that CMS had reasonably interpreted it to require that "the amount by which a state's transition-period payments to a group of facilities (e.g., non-State government owned or operated facilities) exceed the UPL for that group could be no greater than the amount by which Medicaid payments to that group exceeded that group's UPL in some comparable period prior to March 13, 2001, had that UPL been applicable to those payments prior to March 13, 2001." A.R. at 7 (interpreting Missouri, DAB No. 2184, at 2, 19-20). Despite finding that Missouri did not have actual notice of CMS's interpretation of the "must not increase" provision, the DAB upheld CMS's disallowance "because Missouri failed to show that it relied to its detriment on a reasonable alternative interpretation." Id. (interpreting Missouri, DAB No. 2184, at 27-35, 37).

After issuing its decision in Missouri, the DAB invited Arkansas and CMS to submit supplemental briefing on the application of that decision to this case and to specifically address whether Arkansas relied to its detriment on a reasonable alternative interpretation of the "must not increase" provision. See id. at 7-8. After considering the parties' additional arguments, the DAB largely upheld the disallowance. See id. at 8. First, it reaffirmed its finding in Missouri that CMS's interpretation of the "must not increase" provision was reasonable. Id. at 8-12. Second, it found that Arkansas did not have "timely and adequate notice" of that interpretation, but that Arkansas "failed to prove that it relied to its detriment on a reasonable alternative interpretation." Id. at 8, 12-16. CMS, therefore, was entitled to enforce its interpretation of the provision against Arkansas. See id. Third, however, the DAB found that CMS's application of the provision to Arkansas was inconsistent with its interpretation. Id. at 17-19. In other words, the DAB could not conclude that "CMS actually applied its interpretation in calculating the disallowance amount." Id. at 20. It accordingly remanded the case to CMS to permit the issuance of a revised disallowance consistent with CMS's interpretation of the "must not increase" provision. Id. The DAB provided that Arkansas could return within 30 days of receiving the revised disallowance if it disagreed with CMS's calculations. Id.

After recalculating, CMS sought a revised disallowance amount of $4,038,093 plus $391,608 in interest. Compl., ¶ 57; Def.'s Mot. and Opp. at 9. Arkansas does not contest that this amount is consistent with the DAB's decision. See Compl., ¶ 57; Pl.'s Mot. at 11. Arkansas then filed its Complaint initiating the instant suit on July 23, 2010. The Complaint sought reversal of CMS's disallowance and the DAB decision upholding it on two grounds. First, Arkansas argues that the DAB's decision and CMS's disallowance were unlawful "arbitrary and capricious" actions under the Administrative Procedure Act. See Compl., ¶¶ 63-69 (citing 5 U.S.C. § 706(2)(A)). Second, it contends that CMS's interpretation of the "must not increase" provision constituted "new, substantive rulemaking" that failed to comply with the APA's rulemaking requirements. See id., ¶¶ 70-72 (citing 5 U.S.C. § 553). Both parties now seek summary judgment.*fn1

II.Legal Standard

Summary judgment may be granted if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Holcomb v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). A fact is "material" if it is capable of affecting the substantive outcome of the litigation. Holcomb, 433 F.3d at 895; Liberty Lobby, Inc., 477 U.S. at 248. A dispute is "genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Scott v. Harris, 550 U.S. 372, 380 (2007); Liberty Lobby, Inc., 477 U.S. at 248; Holcomb, 433 F.3d at 895.

Although styled Motions for Summary Judgment, the pleadings in this case more accurately seek the Court's review of an administrative decision. The standard set forth in Rule 56(c), therefore, does not apply because of the limited role of a court in reviewing the administrative record. See Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89-90 (D.D.C. 2006) (citing National Wilderness Inst. v. United States Army Corps of Eng'rs, 2005 WL 691775, at *7 (D.D.C. 2005); Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995), amended on other grounds, 967 F. Supp. 6 (D.D.C. 1997)). "[T]he 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." Id. (internal citations omitted). 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 otherwise consistent with the APA standard of review. SeeRichards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977), cited inBloch v. Powell, 227 F. Supp. 2d 25, 31 (D.D.C. 2002), aff'd, 348 F.3d 1060 (D.C. Cir. 2003).

The Administrative Procedure Act "sets forth the full extent of judicial authority to review executive agency action for procedural correctness." FCC v. Fox Television Stations, Inc., 129 S. Ct. 1800, 1810 (2009). It requires courts to "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). This is a "narrow" standard of review as courts defer to the agency's expertise. Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). An agency is required to "examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made." Id. (internal quotation omitted). The reviewing court "is not to substitute its judgment for that of the agency," id., and thus "may not supply a reasoned basis for the agency's action that the agency itself has not given." Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-86 (1974) (internal quotation omitted). Nevertheless, a decision that is not fully explained may be upheld "if the agency's path may reasonably be discerned." Id. at 286.

III.Analysis

Arkansas challenges CMS's disallowance and the DAB decision upholding it under § 706 of the APA, which provides that a court may "hold unlawful and set aside" agency actions found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). First, Arkansas contends that CMS's interpretation of 42 C.F.R. § 447.321 (the "must not increase" provision) is not in accordance with law and arbitrary and capricious because it is inconsistent with the governing statutory authority in BIPA. Second, even if CMS's interpretation could stand, Arkansas argues that its application of that interpretation to Plaintiff was arbitrary and capricious because Arkansas lacked notice of it. The court will address each argument in turn.

Arkansas's Complaint also included a second count, which contended that CMS violated the APA by engaging in "new, substantive rulemaking . . . without satisfying the notice and comment requirements of 5 U.S.C. § 553" when it interpreted the "must not increase" provision. Compl., ¶ 72. As Defendants' point out, however, Arkansas made no arguments concerning § 553 of the APA in its Motion for Summary Judgment. See Def.'s Mot. and Opp. at 12, 28 n.13. They argue, accordingly, that Arkansas has "abandoned" this claim. Id. at 28 n.13. Arkansas responds that it "has not abandoned Count II," explaining that "the APA notice and comment rulemaking requirements provide an additional wellspring of the fair notice obligation that CMS failed to discharge." Pl.'s Opp. and Reply at 26 n.24. Plaintiff, however, does not adhere to the contention it proffered in its Complaint - that CMS was required to announce its interpretation of the "must not increase" provision in a notice-and-comment rulemaking. As explained in Section III.B, infra, the Court ultimately need not address § 553.

A. CMS's Interpretation of the "Must not Increase" Provision

Arkansas first argues that CMS's interpretation of the "must not increase" provision conflicts with BIPA and, as such, is not lawful. Both the regulatory scheme at issue in this case and Arkansas's argument concerning CMS's interpretation are complex. This controversy will, fortunately, not arise again inasmuch as it relates to the transition period before the Final Rule took effect. In any event, it makes sense to first outline the conflicting interpretations of the regulation and then turn to the statute. Ultimately, CMS's interpretation of the regulation is consistent with a reasonable interpretation of BIPA.

1. The Parties' Interpretations of the Regulation The relevant section of the ...


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