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Bethesda Health, Inc. v. Azar

United States District Court, District of Columbia

July 23, 2019

BETHESDA HEALTH, INC., et al., Plaintiffs,
ALEX M. AZAR II, Secretary of the Department of Health and Human Services, Defendant.



         This case concerns the application of a mathematical intersection between the federal Medicare program and the joint state/federal Medicaid program insofar as inpatient hospital care is reimbursed by Medicare. Hospitals that treat significant numbers of low-income patients receive a higher amount per Medicare patient as a “disproportionate share hospital (DSH) adjustment.” The size of the DSH adjustment to a given hospital is determined in part by the percentage of the hospital's total patient days attributed to Medicaid-eligible patients; the more patients a hospital treats who are “eligible for Medicaid, ” the greater its DSH adjustment and the greater its reimbursement rate under Medicare. The phrase “eligible for Medicaid” thus plays an important role in determining the amount of federal funding a hospital receives, and much ink has been spilled over its meaning in various contexts. This case is one such example.

         Plaintiffs are a group of hospital organizations[1] in the State of Florida which provide uncompensated inpatient hospital services to uninsured and underinsured patients. These patients would not typically be “eligible for Medicaid.” However, in 2006 Florida authorized, and the Secretary of the Department of Health and Human Services (HHS) approved, a Medicaid “demonstration project” which reformed Florida's Medicaid program and established, inter alia, a federally-matched $1 billion Low Income Pool (LIP). Funds from the LIP were used to reimburse hospitals for the uncompensated inpatient hospital services provided to uninsured and underinsured patients.

         The Medicare statute and its regulations allow patients to be “deemed eligible for Medicaid”-even if they are not-and counted towards a hospital's DSH adjustment if those patients are “eligible for inpatient hospital services” under a Medicaid demonstration project. The question here is whether the uninsured and underinsured patients whose uncompensated inpatient hospital services were reimbursed by the LIP, with the Secretary's blessing, so qualify. The Secretary has already answered “no.” Plaintiffs challenge this answer as arbitrary and capricious. Both Parties move for summary judgment.

         The Court concludes that the uninsured and underinsured patients whose uncompensated inpatient hospital services were reimbursed by the LIP as part of a demonstration project were “eligible for Medicaid” within the meaning of the statute and regulation and should have had their patient days included in the relevant DSH calculations. Accordingly, the Court will grant Plaintiffs' motion for summary judgment and deny the government's cross-motion. The matter will be remanded for further proceedings.

         I. BACKGROUND

         A. The Medicaid Statute and Medicaid Demonstration Projects

         Although this is a Medicare case, a brief introduction to Medicaid is necessary for context. Medicaid was adopted in Title XIX of the Social Security Act (the Act), 42 U.S.C. § 1396 et seq. It is a joint federal-state program which “offers federal funding to States to assist pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care.” Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 541 (2012). To receive federal funding under Medicaid, a state must submit a plan for medical assistance for approval to the Centers for Medicare and Medicaid Services (CMS), the agency within HHS which administers both Medicaid and Medicare. This so-called State plan specifies who will receive medical care and what care they will receive, among other details of the State plan's administration. Once a State plan is approved, CMS provides federal funds to the state matching, to varying degrees, the amount the state itself “expended . . . as medical assistance under the State plan.” 42 U.S.C. § 1396b(a)(1). The more “medical assistance” hospitals provide to Medicaid patients under a State plan, the more payments the state makes to those hospitals, and the more CMS reimburses the state.

         Generally, under a traditional State plan, CMS only matches state expenditures for “medical assistance, ” a term limited by statute to certain enumerated services provided to certain enumerated classes of individuals. See 42 U.S.C. § 1396d(a) (defining “medical assistance”). Title XI § 1115(a) of the Social Security Act, 42 U.S.C. § 1315(a), however, authorizes the Secretary to waive some of Medicaid's statutory requirements for experimental state “demonstration projects” which, in the Secretary's judgment, will “assist in promoting the objectives of [Medicaid].” Id. These demonstration projects-also known as § 1115 waivers- “enable the states to try new or different approaches to the efficient and cost-effective delivery of health services, or to adapt their programs to the special needs of particular areas or groups of recipients, ” 42 C.F.R. § 430.25, and a state's costs towards a demonstration project “shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures under the State plan.” 42 U.S.C. § 1315(a)(2)(A). In plain English, the law allows a state to adopt a demonstration project, with prior approval from the Secretary, to “provide benefits to people who wouldn't otherwise be eligible for Medicaid benefits; and the costs of these benefits are treated as if they are matchable Medicaid expenditures.” Forrest Gen. Hosp. v. Azar, No. 18-60227, 2019 WL 2417409, at *2 (5th Cir. June 10, 2019). Patients not normally eligible for Medicaid who nonetheless receive Medicaid benefits under a demonstration project are known as “expansion waiver populations.” See Cookeville Reg'l Med. Ctr. v. Leavitt, 531 F.3d 844, 846 (D.C. Cir. 2008).

         B. The Medicare Statute and the Disproportionate Share Hospital Adjustment

         Medicare, adopted as Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., is a federal program which provides health insurance to those who qualify, mostly senior persons receiving Social Security Income benefits at retirement or those receiving Social Security Disability Income due to a covered disability. It is a huge program, paid for by taxes. See Azar v. Allina, 139 S.Ct. 1804, 1808 (2019). Part A of Medicare reimburses hospitals for the costs of inpatient medical care to such patients. Critically, Medicare no longer reimburses hospitals for their actual operating costs. Described most simply, CMS reimburses hospitals “at a fixed amount per patient” for each day of inpatient hospital services provided, according to a patient's diagnosis. Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018). That fixed amount per patient day differs among hospitals and is adjusted annually upwards or downwards based on various local factors. As relevant here, Congress has determined that “[h]ospitals that serve a disproportionate share of low-income patients have higher [M]edicare costs per case, ” H.R. Rep. No. 99-241, pt. 1, at 16 (1985), and those hospitals receive an upward adjustment to their Medicare reimbursement, which is known as the disproportionate share hospital (DSH) adjustment.[2]

         To determine whether a hospital serves a disproportionate share of low-income patients, CMS looks to its “disproportionate patient percentage, ” which is calculated by adding together two fractions known as the Medicare fraction and the Medicaid fraction. Together these two fractions “provide a proxy for the total low-income patient percentage.”[3] Catholic Health Initiative Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013). This case involves only the Medicaid fraction,

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 subchapter XIX [i.e., Medicaid], but who were not entitled to benefits under part A of this subchapter [i.e., 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, for the purposes of this case, hospitals must count how many in-hospital days were spent treating “patients who . . . were eligible for medical assistance under a State plan approved under [Medicaid].” The effect of this fraction is that “the more a hospital treats patients who are eligible for medical assistance under . . . Medicaid, the more money it receives for each patient covered by Medicare.” Adena Reg'l Med. Ctr. v. Leavitt, 527 F.3d 176, 178 (D.C. Cir. 2008) (internal marks omitted) (emphasis in original).

         That said, the meaning of the phrase “patients who . . . were eligible for medical assistance under a State plan approved under [Medicaid]” is not as obvious as it may sound. This is because there is a second part to the definition of the Medicaid fraction:

In determining under [the Medicaid fraction] 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 [Medicaid], the Secretary may, to the extent and for the period the Secretary deems appropriate, include patient days of patients not so eligible but who are regarded as such because they receive benefits under a demonstration project approved under subchapter XI.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (emphasis added). This means that hospitals may count “both (1) days a hospital treated patients who were Medicaid-eligible, and (2) days a hospital treated patients who are regarded as Medicaid-eligible because they received demonstration project benefits.” Forrest Gen. Hosp., 2019 WL 2417409, at *2 (emphasis added). Interestingly, although the Medicare DSH provisions have existed since 1986, Congress only recently added this second part of the Medicaid fraction statute, as § 5002(a) of the Deficit Reduction Act of 2005, Pub. L. No. 109-71, § 5002(a), 120 Stat. 4, 31 (Feb. 8, 2006). To understand this development, we turn to the regulations implementing the Medicaid fraction.

         C. The Medicare DSH Regulation

         The regulation implementing the Medicaid fraction of the DSH calculation is found at 42 C.F.R. § 412.106(b)(4) and includes in the Medicaid fraction “the number of the hospital's patient days of service for which patients were eligible for Medicaid.” 42 C.F.R. § 412.106(b)(4) (emphasis added). Initially, patient days attributable to expansion waiver populations could not be included in a hospital's DSH calculation because CMS only considered patients “eligible for Medicaid” if they were “eligible for medical assistance under an approved Medicaid state plan.” 42 C.F.R. § 412.106(b)(4)(i) (1999). Demonstration projects, approved under Title XI, are not part of State plans approved under Title XIX. See Cookeville, 531 F.3d at 848. This language was not applied evenly across the states, however, see Id. at 846, so in January 2000 the Secretary promulgated an Interim Final Rule allowing all patient days attributable to expansion waiver populations to be included in the DSH adjustment calculation:

For the purposes of counting days under paragraph (b)(4)(i) of this section, hospitals may include all days attributable to populations eligible for Title XIX matching payments through a waiver approved under section 1115 of the Social Security Act.

65 Fed. Reg. 3, 136, 3, 137 (Jan. 20, 2000) (codified at 42 C.F.R. § 412.106(b)(4)(ii)) (2000 Interim Final Rule); see also Id. at 3, 136 (“[W]e believe allowing hospitals to include the section 1115 expanded waiver population in the Medicare DSH calculation is fully consistent with the Congressional goals of the Medicare DSH adjustment to recognize the higher costs to hospitals of treating low income individuals covered under Medicaid.”).

         But while the 2000 Interim Final Rule resolved one problem, it introduced another: Some Medicaid demonstration projects provided only limited benefits to expansion waiver populations, such as family planning and prescription drugs benefits. While such demonstration projects were permissible and approved, the expansion waiver populations which received such limited benefits tended to have higher incomes than traditional Medicaid beneficiaries and including them in the DSH calculation essentially skewed the low-income proxy. See 68 Fed. Reg. 45, 346, 45, 420-21 (Aug. 1, 2003) (2003 Clarifying Rule). In August 2003, the Secretary thus clarified that his “intention in allowing hospitals to include patient days related to section 1115 expansion waiver populations was to include patient days of demonstration populations who receive benefits under the demonstration project that are similar to traditional Medicaid beneficiaries, including inpatient benefits, ” id. (emphasis added), and amended the implementing regulation to state:

a patient is deemed eligible for Medicaid on a given day 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 Act on that day . . . .

Id. at 45, 470 (emphasis added) (codified at 42 C.F.R. § 412.106(b)(4)(i)).

         Congress approved this understanding of the DSH adjustment statute because in addition to amending the statutory definition of the Medicaid fraction, as discussed above, the Deficit Reduction Act also expressly ratified the 2000 Interim Final Rule and 2003 Clarifying Rule. See Deficit Reduction Act § 5002(b). As a result, hospitals may now include in their DSH calculations patient days attributable to patients “eligible for inpatient hospital services” under a demonstration project. 42 C.F.R. § 412.106(b)(4)(i).

         D. Florida's Demonstration Project

         The Secretary approved a five-year demonstration project for Florida's Medicaid program in 2006, pursuant to certain Special Terms and Conditions (STC).[4] See generally STC at ¶ 398-433. The demonstration project had several components, but as described in the STC, one fundamental element was the creation of a Low Income Pool (LIP), a federally-matched $1 billion dollar capped annual allotment which was established “to ensure continued government support for the provision of health care services to Medicaid, underinsured and uninsured populations.” STC ¶ 91 at ¶ 421.

         Hospitals generally provide health care services to uninsured and underinsured patients in the form of uncompensated care-also known as charity care-which is unreimbursed, generally because a patient has insufficient third-party health insurance, if any at all, and cannot afford to pay the cost themselves. Without government support, the cost of uncompensated care is borne entirely by the hospital, limiting how much care it can afford to provide to the uninsured and underinsured. The LIP “continued government support” because LIP funds could be used “for health care expenditures . . . that would be within the definition of medical assistance in [42 U.S.C. § 1936d(a)], ” that were incurred by hospitals “for uncompensated medical care costs of medical services for the uninsured.” STC ¶ 94 at ¶ 422. The use of LIP funds was implemented according to a Reimbursement and Funding Methodology (RFM) document negotiated between Florida and CMS and approved by the latter. See STC ¶ 101 at ¶ 423-24; see generally RFM at ¶ 449-71.

         As discussed earlier, under traditional Medicaid, the federal government matches a state's reimbursements to its hospitals pursuant to the State plan so that more medical assistance to Medicaid patients costs more to that state and to CMS in reimbursements. The LIP portion of Florida's demonstration project functioned similarly, but with a caveat: The LIP was a capped allotment, which meant that each year Florida could receive no more than $1 billion in matching federal funds to the LIP to reimburse hospitals for providing uncompensated care to uninsured and underinsured patients not otherwise covered by Medicaid. While $1 billion is a large amount of money, Florida is also a large state, and the allotment was consistently “insufficient to fund a statewide benefit for the uninsured.” RFM at ¶ 449. Accordingly, Florida “adopted a basic distribution methodology similar to CMS' methodology of providing a predetermined pool to fund the uninsured, underinsured, and Medicaid shortfalls.” RFM at ¶ 450. In this way, Florida developed a formula by which hospitals could claim a share of the limited LIP funds to reimburse them for specified expenditures for underinsured and uninsured patients under the demonstration project, but no share would reimburse “100% of the cost of services for the uninsured [and] underinsured.” RFM at ¶ 451.

         Participating hospitals entered into agreements with the state to use LIP funds “to increase the provision of health services for the Medicaid, uninsured, and underinsured people of . . . Florida.” See, e.g., Letter of Agreement at ¶ 2550. So that Florida could calculate each hospital's shares of LIP funding, hospitals were required to submit to the state “Milestone Reports” which summarized the “unduplicated count of Medicaid and uninsured/underinsured visits at their respective facilities funded by LIP resources.” RFM at ¶ 468. Hospitals were further required “to document the number of services provided to those individuals, ” distinguishing between inpatient and outpatient hospital services provided. RFM at ¶ 468; see, e.g., Low Income Pool Milestone Reporting Requirements at ¶ 1083; see also Transcript of PRRB Hearing at ¶ 279 (Michele Golden) (“[P]roviders . . . must maintain medical records and track . . . the individuals they're providing services to using the low-income pool funding, and at any time, they may be requested to provide supporting documents or an onsite visit to verify those.”).

         One result of this funding methodology was that although Florida hospitals provided and documented inpatient care to individual patients, and although that inpatient care was factored into their LIP reimbursements, the hospitals received lump sums from the LIP that were not earmarked for any particular individual but, rather, partially reimbursed the hospitals' costs for all qualifying inpatient hospital services provided to all uninsured and underinsured patients.

         In each of the first three years following implementation of the LIP, hospitals reimbursed by the LIP were estimated to have provided approximately 1.5 million days of inpatient hospital services to underinsured and uninsured patients, up from roughly 1 million days in the year prior to implementation. See University of Florida, Evaluation of the Low-Income Pool Program Using Milestone Data: SFY 2008-09 (University of Florida Study) at ¶ 1814, AR1841, AR1856.

         E. Procedural History

         Per standard procedure, Plaintiffs each requested Medicare reimbursements by filing annual cost reports with a fiscal intermediary[5] (essentially, private contractors who process and audit Medicare reimbursements for CMS). See Banner Health v. Sebelius, 715 F.Supp.2d 142, 146 (D.D.C. 2010). Plaintiffs included inpatient days attributable to ...

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