United States District Court, District of Columbia
B. WALTON UNITED STATES DISTRICT JUDGE
plaintiff, Dana-Farber Cancer Institute, a hospital located
in the Commonwealth of Massachusetts, seeks judicial review
under the Administrative Procedure Act ("APA"), 5
U.S.C. §§ 701-706 (2012), of a decision denying
reimbursement to the plaintiff of the gross amount of a tax
imposed by Massachusetts, which the defendant, Sylvia M.
Burwell, in her capacity as Secretary of the Department of
Health and Human Services ("Secretary"), offset by
the amount of Medicaid reimbursements the plaintiff received
from Massachusetts. Complaint for Review of Agency Action
("Compl.") ¶¶ 69-71. Two motions are
currently pending before the Court: (1) Dana-Farber Cancer
Institute's Motion for Summary Judgment ("PL's
Mot."), and (2) the Defendant's Cross-Motion for
Summary Judgment ("Def.'s Mot."). Upon careful
consideration of the parties' submissions and the
administrative record in this case, the Court concludes that
it must grant in part and deny in part the plaintiffs motion,
deny the Secretary's motion, and vacate the
Secretary's final decision.
Statutory and Regulatory Framework
The Medicare Program
Medicare program[, 42 U.S.C. §§ 1395-1395hhh, ] . .
. provides federally funded health insurance for the elderly
and disabled.” Methodist Hosp. of Sacramento v.
Shalala, 38 F.3d 1225, 1226-27 (D.C. Cir. 1994).
“Under an extremely ‘complex statutory and
regulatory regime, ' health care providers are reimbursed
for certain costs that they incur in treating Medicare
beneficiaries.” Id. at 1227 (quoting Good
Samaritan Hosp. v. Shalala, 508 U.S. 402, 405 (1993)).
The Centers for Medicare and Medicaid Services
(“CMS”) “is the operating component of the
[Department of Health and Human Services
(“Department”)] charged with administering the
Medicare program.” Cove Assocs. Joint Venture v.
Sebelius, 848 F.Supp.2d 13, 16 (D.D.C. 2012). “The
[Department]'s payment and audit functions under the
Medicare program are contracted out to insurance companies,
known as [f]iscal [i]ntermediaries . . . .” Cmty.
Care Found. v. Thompson, 412 F.Supp.2d 18, 20 (D.D.C.
2006). “At the close of the fiscal year, a provider
submits to the fiscal intermediary a report of costs it has
incurred during that year.” Id.; see
also 42 C.F.R. § 413.20. The fiscal intermediary
“reviews the report . . . [, ] determines the total
Medicare reimbursement due to the provider[, ] . . . [and]
publishes the amount in a notice of program reimbursement . .
. .” Thompson, 412 F.Supp.2d at 20; see
also 42 C.F.R. § 405.1803. “If a hospital
disputes the intermediary's calculations, it may then
appeal the determination to the . . . [Department's
Provider Reimbursement Review] Board [(the
“Board”)] . . . .” Allina Health Sys.
v. Sebelius, 982 F.Supp.2d 1, 5 (D.D.C. 2013) (citing 42
U.S.C. § 1395oo(a), (h)). “The final decision of
the [Board] is subject to judicial review and may be set
aside under the terms of the [APA].” Eagle
Healthcare, Inc. v. Sebelius, 969 F.Supp.2d 38, 41
(D.D.C. 2013) (citing Richey Manor, Inc. v.
Schweiker, 684 F.2d 130, 133-34 (D.C. Cir. 1982)).
Medicare Act entitles certain providers to “the lesser
of . . . the reasonable cost of [certain] services, . . . or
. . . the customary charges with respect to such
services[.]” 42 U.S.C. § 1395f(b)(1). The Medicare
Act defines “reasonable cost” 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 shall be determined
in accordance with regulations establishing the method or
methods to be used, and the items to be included, in
determining such costs . . . .” Id. §
1395x(v)(1)(A) (emphasis added).
Secretary has promulgated . . . regulations establishing the
methods for determining reasonable cost reimbursement.”
Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 92
(1995) (citation omitted). And under 42 C.F.R. §
413.98(a), “refunds of previous expense payments are
reductions of the related expense.” The regulations
define “refunds” as “amounts paid back or a
credit allowed on account of an overcollection.”
Id. § 413.98(b)(3). “The Secretary has
[also] issued a Provider Reimbursement Manual.”
Catholic Health Initiatives v. Sebelius, 617 F.3d
490, 491 (D.C. Cir. 2010). “The Manual contains
guidelines and policies to implement Medicare regulations
which set forth principles for determining the reasonable
cost of provider services, but it does not have the effect of
regulations.” Id. (citation and internal
quotation marks omitted). Section 2122.1 of the Manual
provides that “taxes assessed against the provider, in
accordance with the levying enactments of the several States
and lower levels of government and for which the provider is
liable for payment, are allowable costs.” Provider
Reimbursement Manual (“Manual”) § 2122.1.
2010, CMS “learned that there [had been] some confusion
relating to the determination of whether a tax is an
allowable cost, ” Medicare Program; Hospital Inpatient
Prospective Payment Systems for Acute Care Hospitals and the
Long-Term Care Hospital Prospective Payment System Changes
and FY2011 Rates; Provider Agreements and Supplier Approvals;
and Hospital Conditions of Participation for Rehabilitation
and Respiratory Care Services; Medicaid Program:
Accreditation for Providers of Inpatient Psychiatric
Services, 75 Fed. Reg. 50042, 50362-63 (Aug. 16, 2010) (to be
codified throughout 42 C.F.R.), and issued a
“clarification” to the Manual, see id.
at 50363 (describing the Department's
“clarification” of the treatment of provider
taxes under Medicare reimbursement principles); id.
at 50364 (“We will modify section 2122 of the [Manual]
to specifically reference our longstanding reasonable cost
principles.”). CMS expressed concern “that, even
if a particular tax may be an allowable cost that is related
to the care of Medicare beneficiaries, providers may not, in
fact, ‘incur' the entire amount of these assessed
taxes.” Id. at 50363. CMS provided the
following example to illustrate its concern:
[I]n accordance with the Medicaid statute and regulations,
some States levy tax assessments on hospitals. The assessed
taxes may be paid by the hospitals into a fund that includes
all taxes paid, all Federal matching monies, and any
penalties for nonpayment. The State is then authorized to
disburse monies from the fund to the hospitals. We believe
that these types of subsequent disbursements to providers are
associated with the assessed taxes and may, in fact, offset
some, if not all, of the taxes originally paid by the
revised section 2122 of the Manual in December 2011. AR
000022; see also Manual § 2122.7. In pertinent
part, section 2122.7 now provides the following:
While a tax may fall under a category that is generally
accepted as an allowable Medicare cost, the provider may only
treat the net tax expense as the reasonable cost actually
incurred for Medicare payment purposes. The net tax expense
is the tax paid by the provider, reduced by payments the
provider received that are associated with the assessed tax.
Manual § 2122.7.
The Medicaid Program
established under Title XIX of the Social Security Act, 42
U.S.C. §§ 1396 et seq., is a
‘cooperative federal-state program that provides
federal funding for state medical services to the
poor.'” NB ex rel. Peacock v. District of
Columbia, 794 F.3d 31, 35 (D.C. Cir. 2015) (quoting
Frew ex rel. Frew v. Hawkins, 540 U.S. 431, 433
(2004)). “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.” Banner Health v. Sebelius, 715
F.Supp.2d 142, 147 (D.D.C. 2010) (citing Atkins v.
Rivera, 477 U.S. 154, 156-57 (1986)). “To qualify
for federal assistance, a State must submit to the Secretary
and have approved a ‘plan for medical assistance, '
[42 U.S.C.] § 1396a(a), that contains a comprehensive
statement describing the nature and scope of the State's
Medicaid program.” Wilder v. Va. Hosp.
Ass'n, 496 U.S. 498, 502 (1990) (citing 42 C.F.R.
§ 430.10 (1989)); see also Christ the King Manor,
Inc. v. Sec'y U.S. Dep't of Health & Human
Servs., 730 F.3d 291, 297 (3d Cir. 2013) (“States
must submit their proposed plans to CMS, and CMS must review
each plan, ‘make a determination as to whether it
conforms to the requirements for approval, ' 42 U.S.C.
§ 1316(a)(1), and ‘approve any plan which fulfills
the conditions specified' in the Medicaid Act, 42 U.S.C.
addition to the Secretary's authority to approve state
Medicaid plans under Title XIX, the Secretary is given
authority under [section] 1115 of Title XI [of] 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.]'” Banner Health, 715 F.Supp.2d
at 148 (citing 42 U.S.C. § 1315(a); 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.'”
Id. (quoting Cookeville Reg'l Med. Ctr. v.
Leavitt, 531 F.3d 844, 845 (D.C. Cir. 2008)).
“Patients who receive federally reimbursable care under
a [section] 1115 waiver who would not otherwise meet the
normal Medicaid requirements are referred to as the
‘expansion waiver population.'” Id.
(quoting Leavitt, 531 F.3d at 845). “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.
(alteration in original) (quoting Leavitt, 531 F.3d
the late 1980s and early 1990s, states began to take
advantage of a ‘loophole' in the Medicaid program
that allowed states to gain extra federal matching funds
without spending more state money.” Protestant
Mem'l Med. Ctr., Inc. v. Maram, 471 F.3d 724, 726
(7th Cir. 2006). “States desiring to avail themselves
of this statutory loophole would make payments to hospitals
and collect the federal matching funds.” Id.
“The state would then recoup a portion of the state
funding from the hospital, often in the form of a
‘tax.'” Id. (citation omitted).
“Congress addressed this problem in the Medicaid
Voluntary Contribution and Provider-Specific Tax Amendments
of 1991, Pub. L. No. 102-234, 105 Stat. 1793 (1991) (codified
at 42 U.S.C. § 1396b(w)).” Id.
“Through this legislation, Congress instructed the
Secretary to reduce federal matching funds to a state by the
amount of any revenue received from a health care related tax
that ‘hold[s] harmless' [, i.e., reimburses, ] the
health care provider upon whom the tax falls.”
Id. (quoting 42 U.S.C. § 1396b(w)(1)(A)(iii)).
“States still may fund their share of Medicaid expenses
by assessing taxes on health care related items, services or
providers, as long as the tax is uniform, i.e.,
‘broad-based, ' and the tax contains no ‘hold
harmless provision.'” Id. (quoting 42
U.S.C. § 1396b(w)(1)(A)(ii)(iii) & (4)).
The Massachusetts Uncompensated Care Trust Fund/Health ...