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Dana-Farber Cancer Institute v. Burwell

United States District Court, District of Columbia

October 24, 2016

DANA-FARBER CANCER INSTITUTE, Plaintiff,
v.
SYLVIA M. BURWELL, Secretary, United States Department of Health and Human Services, Defendant.

          MEMORANDUM OPINION

          REGGIE B. WALTON UNITED STATES DISTRICT JUDGE

         The 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.[1]

         I. BACKGROUND

         A. Statutory and Regulatory Framework

         1. The Medicare Program

         “The 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)).

         The 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).

         “The 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.

         But in 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 hospitals.

Id.

         CMS 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.

         2. The Medicaid Program

         “Medicaid, 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. § 1396a(b).”).

         “In 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 at 845).

         “In 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)).

         B. The Massachusetts Uncompensated Care Trust Fund/Health ...


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