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Healthalliance Hospitals, Inc. v. Azar

United States District Court, District of Columbia

October 26, 2018

HEALTHALLIANCE HOSPITALS, INC., et al., Plaintiffs,
v.
ALEX M. AZAR, Secretary of Health and Human Services, Defendant.

          MEMORANDUM OPINION

          KETANJI BROWN JACKSON UNITED STATES DISTRICT JUDGE.

         Legal issues that arise under the federal government's Medicare and Medicaid programs tend to be “significantly more difficult to describe than to decide[.]” Cooper Hosp./Univ. Med. Ctr. v. Burwell, 179 F.Supp.3d 31, 36 (D.D.C. 2016) (internal quotation marks and citation omitted). The instant matter is no exception; it involves a claim by twelve Massachusetts hospitals (“the Hospitals” or “Plaintiffs”) that the Secretary of the Department of Health and Human Services (“HHS” or “Defendant”) did not fully compensate the Hospitals in the manner that the Medicare program prescribes for a one-year period, from October 1, 2008, to September 30, 2009. (See Compl., ECF No. 1, ¶ 45.) Invoking the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2), as well as a federal law that prescribes additional payments to hospitals that serve a “disproportionate number of low-income patients” under the Medicare program, 42 U.S.C. § 1395ww(d)(5)(F)(i)(I), the Hospitals allege that they are entitled to $6 million more from the federal government than they received during the relevant timeframe for their service to low-income individuals, because HHS miscalculated the percentage of patients who are eligible for Medicaid and similar services within the meaning of the applicable regulations and thus improperly lowered the amount of money that the federal government owes. (See Compl. ¶¶ 2, 45.)

         Whether these contentions have merit turns on a relatively narrow dispute over the meaning of an HHS regulation that delineates how the agency will determine the proportion of low-income individuals that a hospital serves. See 42 C.F.R. § 412.106(b)(4). This regulation establishes a formula that requires consideration of “the number of the hospital's patient days of service” for two categories of low-income individuals: (1) Medicaid-eligible patients, and (2) patients who are “deemed eligible for Medicaid” for the purpose of the regulation because they are “eligible for inpatient hospital services . . . under a waiver authorized under section 1115(a)(2) of the [Social Security Act.]” Id. § 412.106(b)(4)(i). The Hospitals contend that HHS has incorrectly interpreted this regulation to exclude from the second category those patients who are insured under a Massachusetts-run health insurance program for low-income individuals known as Commonwealth Care, which received a section 1115(a)(2) waiver from HHS and thereby indisputably “expand[s] upon the traditional Medicaid program eligibility criteria[.]” (Compl. ¶¶ 2, 45.)

         Before this Court at present are the parties' cross-motions for summary judgment. (See Pls.' Mem. in Supp. of Mot. for Summ. J. (“Pls.' Mem.”), ECF No. 12; Def.'s Mem. in Supp. of its Cross-Mot. for Summ. J. & Opp'n to Pls.' Mot. for Summ. J. (“Def.'s Mem.”), ECF No. 14-1.)[1] In its papers, HHS argues that, in order to determine whether a patient is “eligible for inpatient hospital services . . . under a waiver authorized under section 1115(a)(2), ” 42 C.F.R. § 412.106(b)(4)(i), and is thus to be deemed eligible for Medicaid for purposes of the regulation's calculation, see id., the court must “look[] to the terms of the [waiver] agreement that describe the project” to see if the Secretary has stated explicitly that covered patients are “eligible for inpatient hospital services” (Def.'s Reply in Supp. of its Cross-Mot. for Summ J. (“Def.'s Reply”), ECF No. 19, at 5 (internal quotation marks and citations omitted)). And because no such explicit statement appears in the waiver agreement that Massachusetts and HHS entered into in regard to Commonwealth Care, HHS contends that the patient days relating to the treatment of Commonwealth Care beneficiaries do not count in the Medicare-reimbursement formula that the regulations prescribe. (See Id. at 5-6.) The Hospitals respond that HHS's explicit-statement requirement is contrary to both the plain language of the regulation and the intent behind section 412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations. (See Pls.' Mem. at 24- 29; Pls.' Reply in Supp. of Mot. for Summ. J. & Opp'n to Def.'s Cross-Mot. for Summ. J. (“Pls.' Reply”), ECF No. 16, at 8-9.) The Hospitals further maintain that HHS's reading departs from the agency's practices in other cases (see Pls.' Reply at 24-25), and is an unfair, post-hoc rationalization that the agency did not provide or promote at the administrative stage of this dispute. (See Id. at 22-24; 25-29.)

         On September 28, 2018, this Court issued an Order that GRANTED Plaintiffs' motion for summary judgment, and DENIED Defendant's cross-motion for summary judgment. (See Order, ECF No. 25.) As a result, the Court also VACATED the challenged agency decision, and REMANDED this matter to HHS for further proceedings. (See id.) This Memorandum Opinion provides the Court's reasons for that Order.

         In short, after reviewing the parties' briefs, examining the record, and considering the oral arguments presented in this case, this Court concluded that HHS's interpretation of the unambiguous text of section 412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations to disallow the inclusion of the patient days of service that were associated with patients who were covered by Commonwealth Care is an arbitrary and capricious determination, and thus violates the APA. It is clear from the plain language of the regulation's text that patients who are eligible to receive comprehensive medical care through an insurance program authorized under a section 1115 waiver (as evidenced by their eligibility for inpatient hospital services) are to be included in the Medicare reimbursement formula, and whether or not the waiver agreement through which the Secretary authorized the program says anything about their eligibility for inpatient hospital services is irrelevant to the calculation of a hospital's disproportionate share hospital adjustment. Furthermore, given that every individual enrolled in Massachusetts's Commonwealth Care program during the relevant time period obtained a subsidized insurance plan that actually provided coverage for inpatient hospital services, the Secretary's authorization of the Commonwealth Care program under the pertinent section 1115 waiver made every individual insured via Commonwealth Care “eligible for inpatient hospital services” within the meaning of section 412.106(b)(4)(i). Therefore, per the plain text of the applicable regulation, HHS should have counted the patient days pertaining to Commonwealth Care beneficiaries when calculating the Hospitals' disproportionate share hospital adjustments under the Medicare program.

         I. BACKGROUND

         Congress authorized and established the federal Medicare and Medicaid programs in two different subchapters of the Social Security Act, Pub L. No. 89-97 (1965), and the statutory provisions that pertain to each of these programs cross-reference one another in various ways. See Cooper Hosp., 179 F.Supp.3d at 36 (“Although the two programs share similarities, each functions in partial independence of the other, albeit with many cross-references between the subchapters.”). For present purposes, it is important to understand that “[t]he Medicare program provides federally-funded health insurance to qualifying elderly and disabled individuals[, ]” Saint Francis Med. Ctr. v. Azar, 894 F.3d 290, 291 (D.C. Cir. 2018) (citation omitted); see also 42 U.S.C. §§ 1395-1395111, and that, since 1983, the federal government has pursued this goal by reimbursing hospitals for the services they provide to elderly and disabled patients “based on the average rate of operating costs for inpatient hospital services . . . at a fixed amount per patient, regardless of the actual operating costs” that those hospitals incur while treating those patients. Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018) (internal quotation marks and citation omitted); see also Abington Mem. Hosp. v. Burwell, 216 F.Supp.3d 110, 116-17 (D.D.C. 2016). Consequently, as far as Medicare reimbursements are concerned, patient counts matter. Moreover, as explained below, Medicare's reimbursement formulas take into account a variety of factors, including whether a particular hospital's actual costs are significantly higher than average due to its treatment of low-income individuals. Thus, the Medicare payment system's base per-patient rates are subject to a variety of adjustments that increase or decrease the total sum that the government pays each hospital. See Billings Clinic, 901 F.3d at 304; 42 U.S.C. § 1395ww(d)(1).

         A. Medicare's Disproportionate Share Hospital (DSH) Adjustment

         The instant dispute homes in on one of these hospital-specific adjustments to Medicare's base payment rates: “the disproportionate share hospital (DSH) adjustment.” Billings Clinic, 901 F.3d at 304 (internal quotation marks and citation omitted); see also 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). In essence, this adjustment constitutes a “supplemental payment[]” to hospitals that treat a “significant number” of “very low-income patients[.]” Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105 (D.C. Cir. 2014). The DSH adjustment reflects Congress's recognition that “[h]ospitals that serve a disproportionate numbers of low-income patients have higher [M]edicare costs per case[, ]” H.R. Rep. No. 99-241, pt. 1, at 16 (1985), and that absent this additional payment, the standardized rates that Congress has authorized for certain medical expenses would not cover the full operating costs for these hospitals, see Cooper Hosp., 179 F.Supp.3d at 37. Thus, under the Medicare statute, if a hospital treats a significant number of low-income individuals-i.e., if its “disproportionate patient percentage” is sufficiently high-it is entitled to receive additional payments from the federal government. See 42 U.S.C. § 1395ww(d)(5)(F)(v).

         To calculate a hospital's “disproportionate patient percentage[, ]” HHS “add[s] together two fractions”: the “Medicare fraction” and the “Medicaid fraction[.]” Allina, 746 F.3d at 1105; see also 42 C.F.R. § 412.106 (laying out how both fractions are calculated). The instant case concerns only the Medicaid fraction, which “account[s] for the number of Medicaid patients . . . not entitled to Medicare” that a hospital serves. Allina, 746 F.3d at 1105 (emphasis omitted). Section 1395ww(d)(5)(F)(vi)(II) of Title 42 of the United States Code defines that figure as:

the fraction (expressed as a percentage), the numerator of which is the number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under [the Medicaid program], but who were not entitled to benefits under Plan A of [Medicare], and the denominator of which is the total number of the hospital's patient days for such period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Put simply, “the numerator” of the Medicaid fraction “is the number of patient days attributable to patients who (for such days) were eligible for Medicaid, but not entitled to benefits under Medicare Part A[, ]” and “[t]he denominator is the total number of patient days[.]” Allina, 746 F.3d at 1105 (internal quotation marks, citation, and alteration omitted).[2]

         B. Medicaid's Demonstration Project Expansion Waivers

         As the above definition makes clear, determining whether an individual is eligible for health insurance under the Medicaid program is critical to calculating “the Medicaid fraction” for the purpose of establishing the Medicare program's DSH adjustment. Unlike the Medicare program, which is a purely federal endeavor that insures the elderly and disabled, “Medicaid is a cooperative federal-state program that provides medical assistance to certain limited categories of low-income persons and other individuals who face serious financial burdens in paying for needed medical care.” Cooper Hosp., 179 F.Supp.3d at 38 (internal quotation marks and citation omitted). States that wish to participate in this program draw up a medical assistance plan that conforms to the requirements laid out in the federal Medicaid statute, see 42 U.S.C. § 1396a(a), and once HHS approves a state's plan, the state receives payments from the federal government in support of that program, see Id. § 1396b.

         Significantly for present purposes, some states also “try new or different approaches to the efficient and cost-effective delivery of health care services” for low-income residents, or seek “to adapt their [healthcare] programs to the special needs of particular areas or groups of recipients.” Cookeville Reg'l Med. Ctr. v. Leavitt, 531 F.3d 844, 845 (D.C. Cir. 2008) (internal quotation marks and citation omitted); accord 42 C.F.R. § 430.25. To that end, the Medicaid statute gives the Secretary of HHS the discretion to waive some of the requirements laid out in the Medicaid statute and yet still designate the state as eligible for federal financial support under the Medicaid program. See 42 U.S.C. § 1315. When the Secretary executes such a waiver, the state plan for which the Secretary has waived the Medicaid statute's requirements is termed a “demonstration project[, ]” 42 U.S.C. § 1315, and the “costs of such project”-including the costs of patient treatment-“shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures under the State plan or plans approved under [the Medicaid program], or for administration of such State plan or plans, as may be appropriate, ” id. § 1315(a)(2)(A); see also Cookeville Reg'l, 531 F.3d at 845.

         One category of demonstration projects-known as “expansion waiver” projects-is of particular relevance to the legal issues presented in this case. Expansion waiver projects “provide medical assistance to expanded eligibility populations that could not otherwise be made eligible for Medicaid.” Cooper Hosp., 179 F.Supp.3d at 45 (internal quotation marks and citation omitted). In other words, the patients who receive health insurance coverage through these programs either make too much money to have a traditional state Medicaid program pay their healthcare costs, or are otherwise disqualified from receiving Medicaid. These patients are known as the “expansion waiver population[.]” Cookeville Reg'l, 531 F.3d at 845; see also Banner Health v. Sebelius, 715 F.Supp.2d 142, 148 (D.D.C. 2010). States that seek to cover this population can apply to the Secretary for a waiver, i.e., for approval of their proposed coverage plan as a demonstration project, and if the waiver is granted, the state will receive federal financial assistance as under the Medicaid program. See 42 U.S.C. § 1315(a); Cookeville Reg'l, 531 F.3d at 845; Banner Health, 715 F.Supp.2d at 148.

         C. HHS's Amendment Of The DSH Adjustment Regulation

         Before the year 2000, it was not clear whether the patient days attributable to low-income individuals who had received healthcare coverage through an expansion waiver demonstration project, as opposed to a traditional state Medicaid program, were to be counted within the numerator of the Medicaid fraction for the purpose of determining a hospital's disproportionate share adjustment under section 412.106(b)(4) of Title 42 of the Code of Federal Regulations. Considerable confusion arose because, while expansion waiver patients were technically not “eligible for medical assistance under” a state Medicaid plan, 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II), such patients had nonetheless received medical care through an insurance program expressly authorized under the laws that govern the Medicaid program. HHS has addressed this matter through notice-and-comment rulemaking, although the agency's position regarding the issue has evolved over time.[3]

         HHS initially refused to count any patient days associated with individuals receiving medical care through an expansion waiver project in the Medicaid fraction's numerator unless those individuals would otherwise be covered under a state's Medicaid plan. See Banner Health, 715 F.Supp.2d at 149. Then, in a regulation HHS promulgated on January 20, 2000, the agency changed course and permitted all patient days for expansion waiver populations to be counted in the numerator of the Medicaid fraction. See 65 Fed. Reg. 3, 136, 3, 137 (Jan. 20, 2000) (“[W]e believe allowing hospitals to include the section 1115 expanded waiver populations in the Medicare DSH calculation is fully consistent with the Congressional goals of the Medicare DSH adjustment[.]”); see also 42 C.F.R. § 412.106(b)(4)(ii) (codifying the understanding that the patient days relating to expansion waiver populations may be counted in the numerator of the Medicaid fraction). Notably, three years later, the agency added the caveat that is at the center of the instant dispute: it clarified that a patient shall be “deemed eligible for Medicaid on a given day”-and thus his patient days will count in the numerator of the Medicaid fraction, see 42 C.F.R. § 412.106(b)(4)-“only if the patient is eligible for inpatient hospital services under an approved State Medicaid plan or under a waiver authorized under section 1115(a)(2)” of the Social Security Act, id. § 412.106(b)(4)(i) (emphasis added). The Federal Register provision that accompanied this new language reiterated the agency's position that patient days under an expansion waiver should be included in the numerator of the Medicaid fraction to “the extent that those individuals receive inpatient benefits under the section 1115 demonstration project[, ]” and explained that the goal of this clarification was to prevent inclusion of patient days associated with demonstration project waiver populations that had, in fact, received only “limited, temporary benefit[s.]” 68 Fed. Reg. 45, 346, 45, 421 (Aug. 1, 2003). HHS found this situation untenable, because while it is “fully consistent with the Congressional goals of the Medicare DSH adjustment” to “include[] the section 1115 expansion populations” in the Medicaid numerator, 68 Fed. Reg. 45, 420, that policy decision applied to individuals “who received benefits under the demonstration project that are similar to those available to traditional Medicaid beneficiaries, including inpatient benefits[, ]” id. at 45, 420-21 (emphasis added); see Id. at 45, 421 (focusing on whether “individuals receiv[e] a comprehensive benefits package”). In other words, for the purpose of determining what share of a hospital's patients counted in regard to the Medicaid fraction, the key question was whether an individual had “receiv[ed] a comprehensive benefit package under a section 1115 demonstration project[.]” Id. at 45, 421 (emphasis added).

         D. Massachusetts's Medicaid And ...


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