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Mercy General Hospital v. Azar

United States District Court, District of Columbia

September 29, 2018

MERCY GENERAL HOSPITAL, et al., Plaintiffs,
v.
ALEX M. AZAR II, in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant.

          MEMORANDUM OPINION

          REGGIE B. WALTON UNITED STATES DISTRICT JUDGE

         The 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, [1] 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 opinion.

         I. BACKGROUND

         A. Statutory and Regulatory Framework

         1. The Medicare Program

         The 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)).

         The 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. § 405.1803(a).

         A 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 Administrator.”).

         2. The Medicaid Program and “Dual Eligibles”

         The 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)).

         “Some 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.[2] 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.

         During 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, 1422.

         3. Medicare “Bad Debts”

         If 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).[3] To obtain reimbursement for these bad debts, providers 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 worthless.
(4) Sound business judgment established that there was no likelihood of recovery at any time in the future.

Id.

         Chapter 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 guardian[.]” Id.

         Finally, § 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.

         4. The “Bad Debt Moratorium”

         “In 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).

         Following 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.[4] 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).

         5. PRM § 1102.3L and JSM-370

         In 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 of:
- 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 were furnished.

AR 1248-49.

         However, 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] dual[]eligible 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.

         B. Factual Background

         As 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 2-3.[5] 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 cross[]over 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 program'”).

         The 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.

         On November 12, 2015, the Administrator issued a decision affirming the Board's decision. AR 19. The Administrator concluded:

[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 ...

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