United States District Court, District of Columbia
B. WALTON UNITED STATES DISTRICT JUDGE
plaintiffs, eighty-one acute care hospitals located in
California, seek judicial review of the final decision of the
defendant, the Secretary of the United States Department of
Health and Human Services (“HHS”), denying their
claims for reimbursement of deductible and coinsurance
payments that were not paid to the hospitals by Medicare
beneficiaries. See Complaint (“Compl.”)
¶¶ 1-2. The parties filed cross-motions for summary
judgment, see Plaintiffs' Motion for Summary
Judgment; Defendant's Cross-Motion for Summary Judgment
and Opposition to Plaintiffs' Motion for Summary
Judgment, and United States Magistrate Judge Deborah A.
Robinson issued a Report and Recommendation (the
“Report” or “R&R”) recommending
that the Court affirm the Secretary's decision, deny the
plaintiffs' motion, and grant the Secretary's
cross-motion, see R&R at 30. Currently before
the Court are the plaintiffs' Objections to the
Magistrate Judge's Report and Recommendation
(“Pls.' Objs.”). Upon consideration of the
parties' submissions, the parties' arguments
presented at the motions hearing on February 2, 2018, and the
administrative record in this case,  the Court concludes that it
must grant in part and deny in part the plaintiffs'
motion for summary judgment, deny the Secretary's
cross-motion for summary judgment, and remand this case to
the Secretary for further proceedings consistent with this
Statutory and Regulatory Framework
The Medicare Program
Medicare program, established in 1965 as Title XVIII of the
Social Security Act, 42 U.S.C. §§ 1395-1395lll
(2012) (the “Medicare Act”), “is a
federally funded medical insurance program for the elderly
and disabled, ” Fischer v. United States, 529
U.S. 667, 671 (2000) (internal citation omitted). Relevant
here, Part A of the Medicare Act provides insurance coverage
to eligible beneficiaries for the cost of inpatient hospital
care, home health care, and hospice services, see 42
U.S.C. § 1395c, and Part B provides supplemental
coverage for outpatient hospital care and other types of care
not covered by Part A, see id. § 1395k.
“Although the costs incurred for most of the care
provided to Medicare patients are borne by the government,
individual Medicare patients are ‘often responsible for
both deductible and coinsurance payments for hospital
care.'” Cmty. Health Sys., Inc. v.
Burwell, 113 F.Supp.3d 197, 203-04 (D.D.C. 2015)
(quoting Hennepin Cty. Med. Ctr. v. Shalala, 81 F.3d
743, 745 (8th Cir. 1996)).
Centers for Medicare and Medicaid Services
(“CMS”) administers the Medicare program on
behalf of the Secretary, see Ark. Dep't of Health
& Human Servs. v. Ahlborn, 547 U.S. 268, 275 (2006),
“through contracts with [M]edicare administrative
contractors, ” 42 U.S.C. §§ 1395h(a),
1395u(a), which were known as “fiscal
intermediaries” (the “intermediaries”)
during the cost years at issue in this case, id.
§ 1395h (2000). To receive reimbursement from Medicare,
providers must submit to their intermediaries “cost
reports . . . on an annual basis.” 42 C.F.R. §
413.20(b) (2017). The intermediaries then review these
reports to determine the amount of reimbursement due to the
providers. See 42 U.S.C. § 1395kk-1(a)(4).
Following their review, the intermediaries “must . . .
furnish the provider . . . a written notice reflecting . . .
[their] final determination of the total amount of
reimbursement due [to] the provider.” 42 C.F.R. §
provider who “is dissatisfied with a final
determination of . . . its [ ] intermediary, ” 42
U.S.C. § 1395oo(a)(1)(A)(i), “may obtain a hearing
. . . by a Provider Reimbursement Review Board” (the
“Board”), id. § 1395oo(a). “A
decision by the Board [must] be based upon the record made at
such hearing, . . . and shall be supported by substantial
evidence when the record is viewed as a whole.”
Id. §1395oo(d). The Board's decision is
“final unless the Secretary, [via the CMS Administrator
(the “Administrator”), ] . . . reverses, affirms,
or modifies the Board's decision.” Id.
§ 1395oo(f)(1); 42 C.F.R. § 405.1875 (recognizing
that the Secretary has delegated to the Administrator his
authority to review the Board's decisions). Finally, a
provider may “obtain judicial review of any final
decision of the Board or . . . the [Administrator].”
42 U.S.C. § 1395oo(f)(1); see 42 C.F.R. §
405.1877 (“[A] provider has a right to obtain judicial
review of a final decision of the Board, or . . . the
The Medicaid Program and “Dual
Medicaid program, established under Title XIX of the Social
Security Act, 42 U.S.C. §§ 1396-1396w-5,
“authorizes federal financial assistance to States that
choose to reimburse certain costs of medical treatment for
needy persons, ” Pharm. Research & Mfrs. of Am.
v. Walsh, 538 U.S. 644, 650 (2003). “In order to
participate in the Medicaid program, a [s]tate must have a
plan for medical assistance approved by the Secretary,
” id. (citing 42 U.S.C. § 1396a(b)),
which must, among other things, “define the
categories of individuals eligible for benefits and the
specific kinds of medical services that are covered, ”
id. (citing 42 U.S.C. § 1396a(a)(10), (17)).
patients are eligible for both Medicare and Medicaid (known
as ‘dual eligibles').” Grossmont Hosp.
Corp. v. Burwell, 797 F.3d 1079, 1081 (D.C. Cir. 2015).
Although “Medicare is the primary payor” in this
situation, “[s]tate Medicaid plans often mandate that
the state Medicaid agency pay for part or all of the Medicare
deductibles and coinsurance amounts incurred in connection
with treating these dual eligibles.” Id.
Claims submitted to a state Medicaid program for these unpaid
amounts are often referred to as “crossover
claims.” Pls.' Summ. J. Mem. at 8. However,
[i]n some instances, the State has an obligation to pay, but
either does not pay anything or pays only a part of the
deductible or coinsurance because of a State payment
“ceiling.” For example, assume that a State pays
a maximum of $42.50 per day for [ ] services and the
provider's cost is $60.00 a day. The coinsurance is
$32.50 a day so that Medicare pays $27.50 ($60.00 less
$32.50). In this case, the State limits its payment towards
the coinsurance to $15.00 ($42.50 less $27.50).
CMS Pub. 15-1, § 322.
the cost years at issue, California participated in Medicaid
through a program known as Medi-Cal. See AR 12.
Effective August 1, 1989, Medi-Cal instituted a payment
ceiling for Medicare deductibles and coinsurance for
outpatient services. See AR 606. Effective May 1,
1994, Medi-Cal instituted a similar ceiling for inpatient
services. See AR 680-83; see also AR 1412,
Medicare “Bad Debts”
Medicare patients fail to pay the deductible and coinsurance
payments that they owe to providers, the providers may seek
reimbursement from CMS for these amounts, known as “bad
debts.” See 42 C.F.R. §
413.89(e). To obtain reimbursement for these bad
debts, providers must demonstrate that the debt satisfies
(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.
3 of CMS's Provider Reimbursement Manual
(“PRM”) provides further instruction regarding
the requirements for bad debt reimbursement. As to the second
bad debt criterion, regarding “reasonable collection
efforts, ” § 310 provides that “a reasonable
collection effort . . . must involve the issuance of a bill
on or shortly after discharge or death of the beneficiary to
the party responsible for the patient's personal
financial obligations.” CMS Pub. 15-1, § 310
(hereinafter “PRM”). However, § 312, which
addresses bad debts associated with “indigent or
medically indigent” patients, provides that
“[o]nce indigence is determined and the provider
concludes that there ha[s] been no improvement in the
beneficiary's financial condition, the debt may be deemed
uncollectible without applying the §[ ]310
procedures.” Id. § 312. To determine
indigency, § 312 instructs that “[p]roviders can
deem Medicare beneficiaries indigent or medically indigent
when such individuals have also been determined eligible for
Medicaid as either categorically needy individuals or
medically needy individuals, respectively.”
Id. “Otherwise, the provider should apply its
customary methods for determining the indigence of patients
to the case of the Medicare beneficiary, under [PRM]
guidelines[, ]” including that “[t]he provider
must determine that no source other than the patient would be
legally responsible for the patient's medical bill; e.g.,
title XIX [(Medicaid)], local welfare agency[, ] and
§ 322 of the PRM provides specific instruction on bad
debts associated with dual eligible patients. Id.
§ 322. It provides that
[w]here the State is obligated either by statute or under the
terms of its [Medicaid] plan to pay all, or any part, of the
Medicare deductible or coinsurance amounts, those amounts are
not allowable as bad debts under Medicare. [However, a]ny
portion of such deductible or coinsurance amounts that the
State is not obligated to pay can be included as a bad debt
under Medicare, provided that the requirements of §[
]312 or, if applicable, §[ ]310 are met.
Id. Additionally, § 322 addresses situations in
which “the State has an obligation to pay, but either
does not pay anything or pays only part of the deductible or
coinsurance because of a State payment
‘ceiling.'” Id. Section 322
instructs that, “[i]n these situations, any portion of
the deductible or coinsurance that the State does not pay
that remains unpaid by the patient can be included as a bad
debt under Medicare, provided that the requirements of
§[ ]312 are met.” Id.
The “Bad Debt Moratorium”
1986, the [I]nspector [G]eneral of [HHS] had proposed either
eliminating bad debt reimbursement entirely or attempting to
recoup the costs by garnishing the Social Security checks of
debtors.” Hennepin Cty. Med. Ctr., 81 F.3d at
747. Although “[n]either proposal was adopted[, ] [t]he
[I]nspector [G]eneral then called for much closer examination
of providers' bad debt requests.” Id.
“On August 1, 1987, in an attempt to shield Medicare
providers from the Inspector General's proposed policy
changes, Congress enacted [legislation that] became known as
the Bad Debt Moratorium.” Foothill Hosp.-Morris L.
Johnston Mem'l v. Leavitt, 558 F.Supp.2d 1, 3
(D.D.C. 2008); see also Hennepin Cty. Med. Ctr., 81
F.3d at 750-51 (“In passing the moratorium, Congress
was motivated to prevent unexpected consequences to providers
from the [I]nspector [G]eneral's proposed changes in the
criteria for bad debt reimbursement.”). The
legislation, which amended the Medicare Act, sought to
“‘freeze' the Secretary's Medicare bad
debt reimbursement policies.” Mountain States
Health All. v. Burwell, 128 F.Supp. 3D 195, 200 (D.D.C.
2015). Specifically, it provided that
[i]n making payments to hospitals under [the Medicare
program], the Secretary . . . shall not make any change in
the policy in effect on August 1, 1987, with respect to
payment under [the Medicare program] to providers of service
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).
Omnibus Budget Reconciliation Act (OBRA) of 1987, Pub. L. No.
100-203, § 4008(c), 101 Stat. 1330, 1330-55 (codified at
42 U.S.C. § 1395f note).
the legislation's enactment, “the [I]nspector
[G]eneral continued to urge closer scrutiny of bad debt
requests.” Hennepin Cty. Med. Ctr., 81 F.3d at
747. Thus, in 1988, Congress amended the Medicare Act a
second time to clarify that criteria for what constitutes a
“reasonable collection effort . . . includ[ed] criteria
for indigency determination procedures, for record keeping,
and for determining whether to refer a claim to an external
collection agency.” Technical and Miscellaneous Revenue
Act of 1988, Pub. L. No. 100-647, § 8402, 102 Stat.
3342, 3798 (codified at 42 U.S.C. § 1395f note). The
amendment's legislative history makes clear that the
amendment was intended to address Congress's
“concern[s] about recommendations made by the Inspector
General . . . subsequent to August 1, 1987, . . . [that]
appear[ed] to create requirements in addition to those in the
Secretary's regulations, the decisions of the . . .
Board, and relevant program manual and issuances.” HR
Conf. Rep. No. 100-1104 (1988), as reprinted in 1988
U.S.C.C.A.N. 5048, 5337. However, the amendment was
“not intend[ed] to preclude the Secretary from
disallowing bad debt payments based on regulations, [Board]
decisions, manuals, and issuance[s] [ ] in effect prior to
August 1, 1987.” Id. The Bad Debt Moratorium
ended on October 1, 2012. See Middle Class Tax
Relief and Job Creation Act of 2012, Pub. L. No. 112-96, tit.
III, § 3201(d), 126 Stat. 156, 192-93 (codified at 42
U.S.C. § 1395f note).
PRM § 1102.3L and JSM-370
November 1995, CMS revised its guidance in the PRM regarding
reimbursement of bad debts associated with dual eligibles.
Specifically, it revised § 1102.3L to read as follows:
Evidence of the bad debt arising from Medicare/Medicaid
crossovers may include a copy of the Medicaid remittance
showing the crossover claim and resulting Medicaid payment or
nonpayment. However, it may not be necessary for a provider
to actually bill the Medicaid program to establish a Medicare
crossover bad debt where the provider can establish that
Medicaid is not responsible for payment. In lieu of billing
the Medicaid program, the provider must furnish documentation
- Medicaid eligibility at the time services were rendered
(via valid Medicaid eligibility number), and
- Non-payment that would have occurred if the crossover claim
had actually been filed with Medicaid.
The payment calculation will be audited based on the
state's Medicaid plan in effect on the date that services
on August 10, 2004, CMS issued a memorandum, known as
JSM-370, which “changed the language in . . . [§]
1102.3L to revert back to pre-1995 language, which requires
providers to bill the individual states for dual
eligibles' co-[insurance] and deductibles before claiming
Medicare bad debt.” AR 1608. According to this
memorandum, CMS changed § 1102.3L's language
“[a]s a result of [a] Ninth Circuit decision, ”
which had “found [§] 1102.3L to be inconsistent
with the Secretary's must[-]bill policy.” AR
1607-08 (citing Cmty. Hosp. of the Monterey Peninsula v.
Thompson, 323 F.3d 782 (9th Cir. 2003)). The memorandum
further explained that the Secretary's
“must[-]bill” policy provides that “where
the state owes none or only a portion of [a] dualeligible
patient's deductible or co-pay, the unpaid liability for
the bad debt is not reimbursable to the provider by Medicare
until the provider bills the State and the State refuses
payment (with a State Remittance Advice).” AR 1607.
Finally, the memorandum includes a “directive to hold
harmless providers that can demonstrate that they followed
the instructions previously laid out at [§] 1102.3L
for open cost reporting periods beginning prior to January 1,
2004.” AR 1608. Specifically, CMS noted that
“[i]ntermediaries who followed the now-obsolete
[§] 1102.3L instructions for cost reporting periods
prior to January 1, 2004[, ] may reimburse providers they
service for dual-eligible bad debts with respect to unsettled
cost reports that were deemed allowable using other
documentation in lieu of billing the state.” AR 1608.
noted earlier, the plaintiffs are acute care hospitals
located in California that participate in both Medicare and
Medi-Cal. See AR 12. At issue in this case are the
plaintiffs' claims for Medicare reimbursement of unpaid
deductible and coinsurance amounts associated with dual
eligible patients, incurred between the fiscal years ending
in October 1995 and December 2004. See AR
During these fiscal years, the plaintiffs “billed
[Medi-Cal] for some of the dual eligible patients but due to
various factors related to the billing process they decided
. . . to stop billing, alleging that it was not cost
effective” for them to bill Medi-Cal. AR 12 n.13. Among
the problems they encountered were that “Medi-Cal [ ]
failed to issue remittance advices in some instances and
also[, ] . . . as a result of [Medi-Cal's] payment
ceiling, the Medi-Cal payments were often zero or only a
dollar or two.” AR 12. According to the plaintiffs,
beginning “in 1992 and [ ] continu[ing] . . . in 1995,
” they “gathered alternative documentation and
submitted bad debt lists for billed and unbilled crossover
claims . . . for audit verification.” Pls.' Objs.
at 19. Additionally, “the [plaintiffs] contracted in
2007 . . . with” EDS Corporation (“EDS”),
which they claim is “the same contractor used by . . .
California” to process crossover claims, “to
produce reports to submit . . . [to the intermediary] as [ ]
alternative documentation to the State remittance
advices” (the “EDS reports”). AR 12-13;
see also AR 34 (explaining that the plaintiffs
retained EDS “in order to . . . generate certain
reports ‘for the purposes of identifying outpatient and
inpatient bad debt payable by the Medicare
plaintiffs' intermediary ultimately “disallowed the
. . . amounts” claimed by the plaintiffs because
“there were no State Medicaid remittance advices,
” AR 12, i.e., a “receipt” for
payment or non-payment, Motions Hrg. Tr. 5:9 (Feb. 2, 2018).
Thereafter, the plaintiffs appealed the intermediary's
determination to the Board, which held a hearing on the
plaintiffs' claims on August 23 and 24, 2012.
See AR 31-32. On September 14, 2015, the Board
issued a decision affirming the intermediary's
disallowance of the plaintiffs' claims, see AR
39, which the plaintiffs then appealed to the Administrator,
see AR 2.
November 12, 2015, the Administrator issued a decision
affirming the Board's decision. AR 19. The Administrator
[R]egardless of any alleged omissions by the State to provide
the Medicaid remittance advices and the payment ceiling, or
the alleged financial inconvenience [to the plaintiffs], the
[plaintiffs] were required to bill for and produce [ ]
remittance advices as a condition of including crossover bad
debt claims on [their] cost report[s]. Accordingly, the[ir]
failure to produce Medicaid remittance advices represent[ed]
a failure on the part of the [p]roviders to meet the
necessary criteria for Medicare payment of bad ...