United States District Court, D. Columbia.
MOUNTAIN STATES HEALTH ALLIANCE, Plaintiff: Daniel J.
Hettich, LEAD ATTORNEY, KING & SPALDING, LLP, Washington, DC.
SYLVIA M. BURWELL, Secretary, U.S. Department of Health and
Human Services, Defendant: Joshua M. Kolsky, LEAD ATTORNEY,
U.S. ATTORNEY'S OFFICE FOR THE DISTRICT OF COLUMBIA,
Washington, DC; Scott Charles Sasjack, LEAD ATTORNEY, U.S.
DEPARTMENT OF HEALTH AND HUMAN SERVICES, Office of the
General Counsel, CMS Division, Washington, DC.
D. MOSS, United States District Judge.
the governing regulations, a Medicare provider is entitled to
for unpaid deductibles and copayments--referred to as "
Medicare bad debt" --but only if certain requirements
are met. Among other things, the regulations require that the
provider establish that it has engaged in " reasonable
collection efforts" before declaring a debt
uncollectible. 42 C.F.R. § 413.89(e). That requirement
is further explicated in section 310 of the Provider
Reimbursement Manual, which specifies that, in order to
qualify as a " reasonable collection effort, a
provider's effort must be similar to the effort the
provider puts forth to collect comparable amounts from
non-Medicare patients." Center for Medicare and Medicaid
Services Pub. 15-1, § 310 (2003). The Provider
Reimbursement Manual further states that " [w]here a
collection agency is used, Medicare expects the provider to
refer all uncollected patient charges of like amount to the
agency without regard to class of patient," that is,
without regard for whether the charges were incurred by a
Medicare or non-Medicare patient. Id. § 310.A.
case involves a challenge to the application of these rules
in a decision by the Secretary of Health and Human Services
(" Secretary" ) denying Plaintiff reimbursement for
unpaid Medicare bad debt for the cost reporting periods
ending June 30, 2004 and June 30, 2005. See
Mountain States Health Alliance 05 Bad
Debt--Passive Collection CIRP Grp. v. BlueCross BlueShield
Ass'n/Cahaba Gov't Benefits Adm'rs, LLC,
PRRB Dec. No. 2013-D6 (Mar. 4, 2013) (" Board
Decision" ), AR 6-18. Plaintiff, Mountain States Health
Alliance, is the owner of two acute care hospitals ("
Providers" ) in Tennessee. For the reporting periods at
issue, the Providers first engaged in in-house collection
efforts without distinguishing between Medicare and
non-Medicare accounts. To the extent those efforts failed,
they then referred the debts to an outside, "
primary" collection agency--again, without
distinguishing between Medicare and non-Medicare accounts.
But to the extent that second round of efforts also failed,
they adopted different approaches for Medicare and
non-Medicare accounts. For non-Medicare accounts, the
Providers sent all but those where the patient was bankrupt,
deceased with no estate, incarcerated, or a charity to a
" secondary" collection agency. In contrast, they
declared all of the remaining Medicare bad debt "
uncollectible" and, on that basis, sought reimbursement
under the Medicare program.
Secretary denied reimbursement on the ground that the
Providers did not use similar efforts to collect Medicare and
non-Medicare bad debt and, in particular, continued to employ
collection agencies to pursue certain non-Medicare debt, but
not Medicare debt. Dissatisfied with that result, Plaintiff
brought this action, alleging that (1) section 310 of the
Provider Reimbursement Manual constitutes a "
legislative rule," which the Secretary failed to adopt
pursuant to the required notice and comment procedures, (2)
the Secretary failed to " list" section 310 in the
Federal Register, as required by statute, (3) the
Secretary's decision departed from Medicare policy in
place on August 1, 1987, and thus violated the
congressionally-mandated " Bad Debt Moratorium,"
and (4) the Secretary's decision was, in any event,
arbitrary and capricious. See Dkt. 16 at 20, 26.
matter is now before the Court on cross-motions for summary
judgment. For the reasons explained below, the Court GRANTS
in part and DENIES in part Plantiff's motion for summary
judgment, Dkt. 16, DENIES the Secretary's cross-motion
for summary judgment, Dkt. 17, VACATES the Board's
decision, and REMANDS for further proceedings consistent with
this Memorandum Opinion. A separate Order accompanies this
Statutory And Regulatory Background
The Medicare Provider Reimbursement System
Medicare program provides healthcare for the elderly and
disabled. See 42 U.S.C. § § 1395 et
seq. Participating health care providers collect
deductibles and coinsurance amounts directly from Medicare
patients and are reimbursed for other costs through the
relevant here, providers are reimbursed for various direct
and indirect " reasonable costs." See
generally 42 C.F.R. Part 413; 42 U.S.C. §
1395x(v)(1)(A). The provider bears the burden of supplying
information establishing that the costs for which it seeks
reimbursement are " reasonable costs" eligible for
reimbursement under the relevant regulations. See,
e.g., 42 C.F.R. § 413.24(a). Providers file annual
cost reports, which are reviewed by private administrative
contractors authorized by the Center for Medicare and
Medicaid Services (" CMS" ). See 42 U.S.C.
§ 1395h; 42 C.F.R. § 413.24(f). During the years at
issue here, these private contractors were called "
fiscal intermediaries." See 42 U.S.C. §
1395h (2000). Intermediaries evaluate the annual cost reports
under the Secretary's regulations and informal guidance,
particularly the Provider Reimbursement Manual, which
includes the Secretary's " guidelines and policies
to implement Medicare regulations which set forth principles
for determining the reasonable cost of provider
services." See CMS Pub. 15-1, Part I, Forward,
(2003) (hereinafter " PRM" ). The intermediary
determines the amount of reimbursement to which the provider
is entitled and issues a " Notice of Program
provider that is dissatisfied with an intermediary's
reimbursement determination may appeal to the Provider
Reimbursement Review Board (" the Board" ).
See 42 U.S.C. § 1395oo(a); 42 C.F.R. §
§ 405.1835, 405.1837. The Board is bound by the
Secretary's regulations and " shall afford great
weight to interpretive rules, general statements of policy,
and rules of agency organization, procedure, or practice
established by CMS," including the PRM. See 42
C.F.R. § 405.1867. The provisions in the PRM, however,
" do not have the force and effect of law and are not
accorded that weight in the adjudicatory process."
Shalala v. Guernsey Mem. Hosp., 514 U.S. 87, 99, 115
S.Ct. 1232, 131 L.Ed.2d 106 (1995).
decision becomes the final decision of the Secretary unless
the CMS Administrator, acting on the Secretary's behalf,
elects to review it. See 42 U.S.C. §
1395oo(f)(1); 42 C.F.R. § 405.1875(a)(1). A provider
that is dissatisfied with the Secretary's final decision
may seek judicial review in federal district court. 42 U.S.C.
Medicare Bad Debt
Medicare deductibles and coinsurance amounts are collectively
referred to as " Medicare bad debt." See,
e.g., Abington Crest Nursing & Rehab. Ctr. v.
Sebelius, 575 F.3d 717, 720, 388 U.S. App.D.C. 19 (D.C.
Cir. 2009); 42 C.F.R. § 413.89(a). Medicare "
reimburses providers for
this 'bad debt'" in order to prevent
cross-subsidization, i.e., " a cost shift from
the Medicare recipient to individuals not covered by
Medicare." Cmty. Hosp. of Monterey Peninsula v.
Thompson, 323 F.3d 782, 786 (9th Cir. 2003); see
also 42 C.F.R. § 413.89(d); Abington, 575
F.3d at 720.
the governing regulations, providers seeking reimbursement
for Medicare bad debt must demonstrate that the debt
satisfies 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
(4) Sound business judgment established that there was no
likelihood of recovery at any time in the future.
42 C.F.R. § 413.89(e); see Principles for
Reimbursable Costs, 31 Fed.Reg. 14808, 14813 (Nov. 22, 1966)
(final rule). This case involves the second requirement,
" reasonable collection efforts." Neither the
regulation nor the Medicare Act defines " reasonable
collection efforts," but the Secretary has provided her
interpretation in section 310 of the PRM. That provision
explains that " [t]o be considered a reasonable
collection effort, a provider's effort to collect
Medicare deductible and coinsurance amounts must be similar
to the effort the provider puts forth to collect comparable
amounts from non-Medicare patients." PRM § 310.
Section 310 further explains that if a provider elects to
refer its non-Medicare accounts to a collection agency, the
provider must similarly refer its Medicare accounts of "
like amount" :
Where a collection agency is used, Medicare expects the
provider to refer all uncollected patient charges of like
amount to the agency without regard to class of patient. The
'like amount' requirement may include uncollected
charges above a specified minimum amount. Therefore, if a
provider refers to a collection agency its uncollected
non-Medicare patient charges which in amount are comparable
to the individual Medicare deductible and coinsurance amounts
due the provider from its Medicare patient, Medicare requires
the provider to also refer its uncollected Medicare
deductible and coinsurance amounts to the collection agency.
PRM § 310.A. Section 310 was last revised in 1983.
See Dkt. 26-1 (HCFA Transmittal No. 246, Feb. 1981);
Dkt. 26-2 (HCFA Transmittal No. 278, Jan. 1983).
The " Bad Debt Moratorium"
1987, Congress enacted legislation to " freeze" the
Secretary's Medicare bad debt reimbursement policies.
Hennepin Cnty. Med. Ctr. v. Shalala, 81 F.3d 743,
751 (8th Cir. 1996); see also Foothill Hosp. v.
Leavitt, 558 F.Supp.2d 1, 3-5 (D.D.C. 2008). This
legislation, typically referred to as the " Bad Debt
Moratorium," provides in relevant part that " the
Secretary of Health and Human Services shall not make any
change in the policy in effect on August 1, 1987, with
respect to payment . . . for reasonable costs relating to
unrecovered costs associated with unpaid deductible and
coinsurance amounts incurred under [the Medicare program]
(including criteria for what constitutes a reasonable
collection effort, including criteria for indigency
determination procedures, for record keeping, and for
determining whether to refer a claim to an external
collection agency)." See Omnibus Budget
Reconciliation Act of 1987 (" OBRA" ), Pub. L. No.
100-203, tit. IV, § 4008(c), 101 Stat. 1330-55,, as
amended by Technical and Miscellaneous Revenue Act of
1988, Pub. L. No. 100-647, tit. VIII, § 8402, 102 Stat.
3798,, reprinted as amended at 42 U.S.C. §
note (2012). In 1986, the Inspector General of the Department
of Health and Human Services (" HHS" ) had proposed
substantial changes regarding the Medicare program's
treatment of bad debt. See Hennepin Cnty.,
81 F.3d at 747, 750-51; Foothill Hosp., 558
F.Supp.2d at 3-5, 6-7. Congress responded by enacting the Bad
Debt Moratorium. Foothill Hosp., 558 F.Supp.2d at 3.
The conference report explains that the conferees adopted the
House-proposed provision, which " [p]rohibits the
Secretary from making any change in policy in effect on
August 1, 1987 on payments for Medicare bad debt," H.R.
Rep. 100-495, 543 (1987) (Conf. Rep.), but added language
" to prohibit the Secretary from modifying the criteria
for what constitutes a reasonable collection effort,"
id. at 547.
language " criteria for indigency determination
procedures, for record keeping, and for determining
whether to refer a claim to an external collection
agency " was added in 1988, a year after the
original enactment of the Bad Debt Moratorium. Pub. L. No.
100-647, tit. VIII, § 802 (emphasis added). The 1988
conference report explains that Congress made this amendment
because it was " concerned about [further]
recommendations made by the Inspector General of HHS
subsequent to August 1, 1987, and actions which may be taken
by the Secretary in response to those recommendations,
regarding the bad debt collection policies followed by
certain hospitals." H.R. Rep. No. 100-1104 (1988) (Conf.
Rep.), reprinted in 1988 U.S.C.C.A.N. 5048, 5337.
The conference report further explains that the amended
provision was not " intend[ed] to preclude the Secretary
from disallowing bad debt payments based on regulations, PRRB
decisions, manuals, and issuances in effect prior to August
1, 1987." Id. Rather,
[t]he conferees wish to clarify that the Congress intended
that the actions of fiscal intermediaries occurring prior to
August 1, 1987 to approve explicitly a hospital's bad
debt collection practices, to the extent such action by the
fiscal intermediary was consistent with the regulations, PRRB
decisions, or program manuals and issuances, are to be
considered an integral part of the policy in effect on that
date, and thus not subject to change.
1989, Congress again amended the Bad Debt Moratorium, this
time to provide that " [t]he Secretary may not require a
hospital to change its bad debt collection policy if a fiscal
intermediary, acting in accordance with the rules in effect
as of August 1, 1987, . . . has accepted such policy before
that date, . . ." Omnibus Budget Reconciliation Act of
1989, Pub. L. No. 101-239, tit. VI, § 6023, 103 Stat.
2167. Because Plaintiff does not contend that its policy was
approved by a fiscal intermediary before 1987, this
particular aspect of the Moratorium is not at issue here. The
Bad Debt Moratorium ended on October 1, 2012. See
Pub. L. No. 112-96, tit. III, § 3201(d), 126 Stat. 192,,
reprinted at 42 U.S.C. § 1395f note.
owns and operates Providers Johnson City Medical Center and
Indian Path Medical Center, two acute care facilities in
Tennessee that provide Medicare services. AR 10. During the
two years at issue in this case, 2004 and 2005,
Plaintiff's hospitals had a policy of treating the
accounts of Medicare and non-Medicare patients similarly for
approximately one year. The accounts were first subjected to
in-house collection efforts for six months. See AR
13, 15. The accounts were then referred to a primary
collection agency. See id. After six months of
unsuccessful collection efforts at the primary collection
agency, however, the Medicare and non-Medicare
accounts were sent in different directions. The non-Medicare
accounts were sent to a secondary collection agency, with the
exception of accounts deemed " uncollectible" due
to bankruptcy, death, incarceration, or charitable status.
See AR 12, 15, 81, 86, 95. In contrast, all the
Medicare accounts were returned to the Providers and written
off as Medicare bad debts, without regard for the amount of
the account, the status of the patient, or other
individualized considerations. AR 12, 13, 15,
the Providers sought reimbursement for the cost reporting
years ending on June 30, 2004 and June 30, 2005, the fiscal
intermediary excluded approximately $700,000 in Medicare bad
debts. AR 19. The intermediary's auditor acknowledged
that one of the Providers " perform[ed] a thorough
collection effort[ ] on all payor types prior to sending the
bad debts to a primary collection agency. The primary agency
also perform[ed] thorough collection efforts on all payor
types." AR 336-39. Nonetheless, the intermediary
disallowed the Medicare bad debts because the Providers had
referred non-Medicare accounts to a secondary collection
agency, but had not referred Medicare accounts of like
amount, and therefore had not satisfied the " reasonable
collection efforts" requirement set forth in the
relevant regulation, 42 C.F.R. § 413.89(e). AR 10-13.
timely appealed to the Board on behalf of each Provider. AR
12. The Board held a hearing on the consolidated appeals, at
which it heard testimony from Plaintiff's corporate
director of reimbursement and a representative from
Plaintiff's collection agency. See AR 64-111,
66. Plaintiff argued that the Providers satisfied all the
requirements imposed by the regulation regarding "
reasonable collection efforts," 42 C.F.R. §
413.89(e), as interpreted by section 310 of the PRM.
Plaintiff contended that the Providers had subjected Medicare
and non-Medicare accounts to identical collection efforts for
at least a year, see AR 10-11, including submitting
all accounts to a first collection agency, id., and
that the Providers exercised good business judgment in
discontinuing their efforts to collect the Medicare accounts
after a year because those accounts are on average smaller
and more difficult to collect, id. Plaintiff argued
that this policy satisfied section 310's requirement that
" similar" collection efforts be expended with
respect to a provider's Medicare and non-Medicare
accounts. See id. Plaintiff also argued that to the
extent the Secretary's policy required more, that policy
violated the Bad Debt Moratorium because, prior to the
Moratorium, the Secretary had reimbursed Medicare bad debt
even where providers referred only non-Medicare
accounts to collection agencies. See AR 11-12.
Board affirmed the fiscal intermediary's denial of
reimbursement. See AR 13-18. It agreed with the
intermediary that Plaintiff's hospitals had failed to
satisfy the " reasonable collection efforts"
requirement, see AR 14, 17, explaining that "
[t]he key principle . . . for determining whether a
provider's efforts to collect Medicare deductible and
coinsurance amounts is 'reasonable' is that such
efforts are 'similar' to the provider's efforts
to collect 'comparable' amounts from non-Medicare
patients," AR 14. Furthermore, where a provider uses a
collection agency, " CMS requires providers to refer all
uncollected patient charges of 'like amount' to the
collection agency without regard for class of patient."
Board emphasized that the Providers did not decide whether to
refer a given Medicare account " based on the actual
documented collectability of the individual account (
e.g., bankrupt or deceased patient) or on a global
threshold amount by which Medicare and non-Medicare accounts
were referred alike." AR 16. Instead, " [t]he
record reflects that . . . for delinquent Medicare accounts,
the Providers made a single global decision not to refer
[Medicare] accounts to the secondary collection agency based
on attributes believed by the Providers to generally exist
across Medicare accounts as a whole," i.e.,
" that the Medicare population on average is
retired and not gainfully employed, is not necessarily going
to borrow money, is living off retirement and social security
income, presents difficulty with regards to pursuing property
liens and wage garnishments, and has no regard for a lower
credit score." AR 16 (emphasis in original). The Board
concluded that the exclusion of the Medicare accounts "
on a global basis" from referral to the secondary
collection agency " did not comply with the regulatory
requirement that reasonable collection efforts were
made." AR 17.
Board also concluded that the Secretary's policy did not
violate the Bad Debt Moratorium. AR 16-17. Plaintiff argued
that three prior Board decisions construed section 310 to
impose a requirement for like treatment of Medicare and
non-Medicare accounts, but had not imposed the type of
categorical rule applied by the intermediary. According to
Plaintiff, by applying an inflexible rule, the intermediary
had changed the governing bad debt policy in violation of the
Moratorium. In response, the Board explained that the three
administrative decisions cited by Plaintiff applied the bad
debt reimbursement policy in effect for cost years prior to
January 1983. AR 16. Because section 310 was revised in
January 1983, and because it was the revised version of
section 310 that was in effect when the Moratorium was
enacted in August 1987, the Board concluded that the pre-1983
decisions were " not relevant to the Bad Debt Moratorium
issue." Id. The Board also concluded that a
fourth administrative decision, rendered in 1996, was not
illustrative of the Secretary's policy in August 1987,
because it was issued after the effective date of the Bad
Debt Moratorium and, in any event, relied on the three
decisions applying the pre-1983 policy, which the Board had
already concluded were irrelevant. AR 16-17.
the CMS Administrator declined to review the Board's
decision, it became the final decision of the Secretary.
Plaintiff timely appealed to this Court, the parties filed
cross-motions for summary judgment, and, on May 5, 2015, the
Court heard oral argument. The Court then directed the
parties to submit copies of the HHS Inspector General Report
cited in Foothill Hospital v. Leavitt, 558 F.Supp.2d
1, 3 (D.D.C. 2008), and " supplemental materials
relating to the interpretation of the Bad Debt Moratorium,
such as legislative history, administrative decisions, and
HHS guidance documents." See May 6, 2015,
Minute Order; see also Dkts. 25, 26, 27. The parties
filed memoranda addressing the supplemental materials.
See Dkts. 29, 30.
STANDARD OF REVIEW
to the Medicare Act, 42 U.S.C. § 1395oo(f)(1), this
Court reviews the final decision of the Secretary under the
applicable provisions of the Administrative Procedure Act
(" APA" ), 5 U.S.C. § § 701 et
seq. The Court will set aside the Secretary's
decision only if it is " arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law."