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Grossmont Hosp. Corp. v. Sebelius

United States District Court, District of Columbia

November 9, 2012

GROSSMONT HOSPITAL CORP., et al., Plaintiffs,
Kathleen SEBELIUS, Secretary, U.S. Department of Health and Human Services, Defendant.

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Robert L. Roth, Hooper, Lundy & Bookman, P.C., Washington, DC, for Plaintiffs.

Jeremy S. Vogel, U.S. Department of Health and Human Services, Office of the General Counsel, Peter C. Pfaffenroth, U.S. Attorney's Office, Washington, DC, for Defendant.


ROBERT L. WILKINS, District Judge.

Plaintiffs Grossmont Hospital Corporation, Sharp Healthcare, Sharp Chula Vista Medical Center, Sharp Memorial Hospital, and Tri-City Healthcare District (collectively, the " Providers" ), five hospitals located in San Diego County, California, bring this action against Kathleen Sebelius in her official capacity as the Secretary of Health and Human Services. The Providers seek judicial review under the Administrative Procedure Act (" APA" ), 5 U.S.C. § 701 et seq., of the Secretary's final decision denying their requests for Medicare reimbursements on certain " bad debts" arising from inpatient services provided from May 1, 1994 through June 30, 1998 for patients dually eligible for both Medicare and Medicaid.

This matter is before the Court on cross-motions for summary judgment. The Providers moved for summary judgment, arguing that the Secretary's decision was not based on substantial evidence and was arbitrary and capricious. ( See generally Dkt. No. 16 (" Pls.' Mem." )). The Secretary opposed the Providers' motion and cross-moved for summary judgment, arguing that the Court should affirm the Secretary's decision because it was based on a reasoned and rational interpretation of the Secretary's own regulations and is supported by the administrative record. ( See generally Dkt. No. 18 (" Def.'s Mem." )). The Court heard oral argument on the motion and the cross-motion on November 5, 2012.

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Upon a complete review of the administrative record in this case, and for the following reasons, the Court concludes that the Secretary's decision is the product of reasoned decisionmaking and that the administrative record amply supports the Secretary's decision. Accordingly, the Court will DENY the Providers' Motion for Summary Judgment and GRANT the Secretary's Motion for Summary Judgment.


A. Medicare and Medicaid Statutory and Regulatory Framework

The Medicare program, established by Title XVIII of the Social Security Act, pays for covered medical care provided primarily to eligible elderly and disabled persons. 42 U.S.C. § 1395 et seq. The Secretary of Health and Human Services is responsible for the program, but she has delegated its administration to the Center for Medicare and Medicaid Services (" CMS" ). [1] See 42 U.S.C. §§ 1395h, 1395u. The Medicare statute consists of four major components— Parts A through D— but the parties agree that only Part A is relevant to this litigation. Medicare Part A covers the costs of inpatient hospital care, post-hospital home health services and care in skilled nursing facilities, and hospice care. See id. §§ 1395c, 1395d, 1395x(u); 42 C.F.R. § 409.5. Hospitals may participate in the Medicare program as providers of services by entering into provider agreements with the Secretary, 42 U.S.C. §§ 1395x(u), 1395cc, and participating hospitals are generally reimbursed under the Medicare statute for their " reasonable costs" of services provided to Medicare beneficiaries. § 1395x(v)(1)(A). Under the statute, " reasonable cost" is defined as " the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services," and Congress expressly authorized the Secretary to promulgate regulations " establishing the method or methods to be used, and the items to be included, in determining" reasonable costs. Id.

When a participating provider treats a Medicare beneficiary, it generally collects coinsurance and/or deductible payments from the patient and then seeks reimbursement for the remainder of its costs through the Medicare program. The provider obtains reimbursement by filing an annual cost report with its fiscal intermediary, generally a private insurance company that processes payments on behalf of Medicare. After reviewing and auditing those reports, the intermediary issues a Notice of Program Reimbursement (" NPR" ) to the provider setting forth the amount of allowable Medicare payments. 42 C.F.R. § 405.1803. A provider that is dissatisfied with an NPR decision may appeal to the Provider Reimbursement Review Board (" PRRB" or the " Board" ), an administrative tribunal within the Department of Health and Human Services. 42 U.S.C. § 1395 oo (a). From there, the Secretary is authorized to review a PRRB determination on her own motion, but she has delegated that authority to the CMS Administrator. Id. § 1395 oo (f); 42 C.F.R. § 405.1875(a)(1). A provider that is dissatisfied with the final decision of the Secretary, vis-à-vis the CMS Administrator, may seek judicial review by initiating a civil action. 42 U.S.C. § 1395 oo (f); 42 C.F.R. § 405.1877(b).

Along with Medicare, Title XIX of the Social Security Act, commonly known as the Medicaid statute, establishes a cooperative federal-state program that finances

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medical care for the poor, regardless of age. See 42 U.S.C. §§ 1396-1396v. States that choose to participate in the Medicaid program must submit plans to CMS for approval that detail financial eligibility criteria, covered medical services, and reimbursement methods and standards. Id. §§ 1396a(a), 1396b. Once a State's plan is approved, the State will receive financial assistance from the federal government to administer its Medicaid program according to a percentage formula tied to the State's per-capita income. Id. §§ 1396b, 1396d(b). In some cases, individuals qualify for both Medicare and Medicaid. These individuals, commonly known as " dual-eligibles," may be unable to afford the costs of Medicare deductible or coinsurance payments. As a result, the Medicaid statute allows States to use Medicaid funds to pay the cost-sharing obligations of dual-eligibles, enabling States to shift a large portion, though not all, of the cost of providing health insurance for their elderly poor to the federal treasury. See id. § 1396a(a)(10)(E)(i).

B. " Bad Debts" Under The Medicare Program

The Medicare statute prohibits cost-shifting, which means that costs associated with services provided to Medicare beneficiaries cannot be borne by non-Medicare patients, and vice versa. 42 U.S.C. § 1395x(v)(1)(A)(i). Hence, when a provider is unable to collect coinsurance or deductible payments from a Medicare beneficiary, it can claim those amounts as " bad debts" and treat them as " reasonable costs" subject to reimbursement under the Medicare program, provided that certain conditions are met. Specifically, to obtain reimbursement for these types of " bad debts," a provider must satisfy four criteria:

(1) The debt must be related to covered services and derived from deductible and coinsurance amounts.
(2) The provider must be able to establish that reasonable collection efforts were made.
(3) The debt was actually uncollectible when claimed as worthless.
(4) Sound business judgment established that there was no likelihood of recovery at any time in the future.

42 C.F.R. § 413.89(d), (e).[2]

In turn, the Provider Reimbursement Manual (" PRM" ), a collection of interpretative rules, provides further guidance as to the applicable circumstances under which " bad debts" can be treated as reimbursable costs. PRM-I section 310 explains that a provider's collection efforts are " reasonable" where they are " similar to the effort the provider puts forth to collect comparable amounts from non-Medicare patients." (Administrative Record (" AR" ) at 11 (citing PRM-I § 310)). The collection efforts must involve the issuance of a bill. ( Id. ). However, where a provider can establish that a beneficiary is indigent— among other ways, by showing that the beneficiary was Medicaid-eligible at the time of services— a presumption of uncollectibility applies. (AR at 11-12 (citing PRM-I § 312)). In those cases, while the provider's obligation to send a bill to the patient is excused, Section 312 nevertheless requires a provider to " determine that no source other than the patient," including Medicaid, is responsible for the patient's bill. ( Id. ). Section 322 expressly deals with bad debt claims for " dual-eligibles" and provides that, where a State is obligated to pay all or part of the Medicare

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deductible or coinsurance amounts, including where a State imposes a payment " ceiling," those amounts are not allowable as bad debts. (AR at 11-12 (citing PRM-I § 322)). By contrast, any amounts that the State is not obligated to pay may be included as a bad debt under Medicare only where the requirements of Section 312, and if applicable, Section 310 are met. ( Id. ).

CMS issued Joint Signature Memorandum 370 (" JSM-370" ) on August 10, 2004, to clarify the Medicare " must bill" policy for reimbursing dual-eligibles' bad debts. (AR at 13-14, 383-384). JSM-370 specifies that " in those instances where the State owes none or only a portion of the dual-eligible patient's deductible or co-pay, the unpaid liability is not reimbursable to the provider by Medicare until the provider bills the state, and the State refuses payment (with a State Remittance advice)." ( Id. (citing JSM-370)). The Secretary issued this memorandum to reiterate the parameters of her " must bill" policy after the language of former PRM-II § 1102.3L was found " unenforceable" by the Ninth Circuit Court of Appeals. See Cmty. Hosp. of the Monterey Peninsula v. Thompson, 323 F.3d 782, 793, 797 (9th Cir.2003). More specifically, JSM-370 reemphasized the need for providers to actually bill the State Medicare program on dual-eligibles' claims and obtain a State determination as to its financial responsibility, if any, on those claims. (AR at 13-14).

C. California's Medicaid Program And The Providers' Reimbursement Claims

California participates in the Medicaid program by operating a State program commonly known as Medi-Cal. (Def.'s Mem. at 11 (citing CAL. WELF. & INST.CODE § 14000.4)). Prior to May 1, 1994, the Medi-Cal program paid 100 percent of dual-eligibles' Medicare deductibles and coinsurance costs, such that there were generally no bad debts associated with claims for such patients. (AR at 16). On May 1, 1994, however, California stopped paying these cost-sharing amounts altogether without consulting the Secretary, in contravention of its Medicaid State plan. ( Id. ). In light of California's new policy to decline payments on dual-eligibles' claims, the Secretary instructed Medicare intermediaries not to reimburse these amounts as Medicare bad debts. (AR at 255, 258). Several hospitals filed suit against the State of California, and, in the midst of that litigation, California submitted an amendment to its State Medicaid plan that the Secretary approved on February 28, 1996, applied retroactively to May 1, 1994. (AR at 255). Under the new plan, California established a payment " ceiling," whereby it would pay for the deductible and coinsurance costs only if the rate that Medicaid would otherwise pay for the service exceeded the amount paid by Medicare. (AR at 16-17, 255). For claims subject to this payment ceiling, California would perform a claim-by-claim comparison of the Medi-Cal and Medicare payment rates to determine its payment responsibility, if any. (AR at 255-56, 274).

The Secretary ultimately reached an agreement with the State of California, through which the State agreed to reprocess the previously unpaid claims covering the cost reporting periods from May 1, 1994 through April 4, 1999. (AR at 18). Once the State completed this reprocessing, it furnished reports to the intermediaries that showed the claim comparison of amounts paid by Medicare and the Medicaid payment rate for the Medicare coinsurance and deductible amounts. ( Id. ). Based on these reports, the unpaid coinsurance and deductible amounts were allowable as " bad debt," and the intermediaries

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were instructed to issue payments to providers for these amounts retroactive to May 1, 1994. ( Id. ).

The Providers in this case received their two lump-sum payments in August 1999, along with copies of the final reports prepared by the State showing a claim-by-claim comparison of the Medicare payment with the Medi-Cal payment. ( Id. ). Upon review of the reports, the Providers believed that they did not encompass all of their inpatient claims during the period covered by the lump sum payments. The Providers contacted Medi-Cal and requested a correction of the claims data, but the State of California never took action on this request. ( Id. ). In response, the Providers opted to calculate on ...

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