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Select Specialty Hospital-Denver, Inc. v. Azar

United States District Court, District of Columbia

August 22, 2019

ALEX M. AZAR II, Secretary, U.S. Department of Health and Human Services, Defendant.



         The plaintiffs in this consolidated case are seventy-five long-term care hospitals (“LTCHs”) located in twenty-six states seeking a total of $20, 325, 174 in reimbursements from the Department of Health and Human Services (“HHS”), in connection with the plaintiffs' provision of inpatient care, over the period of 2005 through 2010, for patients eligible for both Medicare and Medicaid (“dual-eligible patients”), who generally are indigent. Prior to 2007, the Centers for Medicare and Medicaid Services (“CMS”) had reimbursed LTCHs for their dual-eligible patients' unpaid co-insurance and deductible obligations (“bad debt”) without requiring the LTCHs to bill state Medicaid programs for a formal determination of how much of that bad debt would be covered by state Medicaid programs. Billing state Medicaid programs was regarded as unnecessary, because the states were not liable for Medicare bad debts incurred at LTCHs.

         In 2007, however, CMS abruptly began denying LTCHs reimbursement for dual-eligible patients' bad debts unless the LTCHs had both billed their state Medicaid programs and received a specific document from those state Medicaid programs called a State Remittance Advice (“RA”)-to prove that the state Medicaid programs were, in fact, not liable for any portion of the bad debts. This requirement that LTCHs bill the state Medicaid program to confirm that the state will not pay the Medicare cost-sharing amounts on behalf of a dual-eligible patient is known as CMS's “must-bill policy.”

         At the time of CMS's change in the must-bill policy, no means were available to satisfy CMS's new requirements because the LTCHs were not enrolled in their respective state Medicaid programs, and states would neither process bills nor issue RAs to non-participating providers. Moreover, when the LTCHs attempted to enroll in their respective state Medicaid programs, some states rejected the LTCHs as unrecognized provider types under their state Medicaid programs. When the LTCHs were eventually able to enroll successfully in their state Medicaid programs, obtaining the requisite RAs remained impossible because states would not process claims for prior fiscal years.

         The plaintiffs claim, inter alia, that CMS could not change the requirements for Medicare bad debt reimbursement, at least as to non-participating Medicaid providers, without conducting notice-and-comment rulemaking, as required by the Medicare Act, 42 U.S.C. § 1395hh(a)(2). Complaint ¶¶ 120-124 (“S1-Compl.”), Select Specialty Hosp.-Denver, Inc. v. Azar (Select I), Civ. No. 10-1356 (filed Aug. 12, 2010), ECF No. 1; Complaint ¶¶ 129-134 (“S2-Compl.”), Select Specialty Hosp.-Birmingham v. Azar (Select II), Civ. No. 17-235 (filed Feb. 2, 2017), ECF No. 1; Complaint ¶ 66(l) (“H-Compl.”), Select Specialty Hosp.-Tulsa/Midtown, LLC v. Azar (Hillcrest), Civ. No. 18-584 (filed Mar. 15, 2018), ECF No. 1. The D.C. Circuit's holding in Allina Health Servs. v. Price (Allina II), 863 F.3d 937 (D.C. Cir. 2017), aff'd, Azar v. Allina Health Servs., 139 S.Ct. 1804 (2019), confirms that the plaintiffs are correct. Thus, for the reasons set forth below, the plaintiffs' Motion for Summary Judgment (“Pls.' Mot.”), ECF No. 66, is granted, and HHS's Cross-Motion for Summary Judgment (“Def.'s Mot.”), ECF No. 67, is denied.

         I. BACKGROUND

         Summarized below are the relevant statutory and regulatory provisions, including CMS's “must-bill” policy and the changes made to this policy leading to the plaintiffs' claims, followed by the factual and procedural history of this case.

         A. Statutory and Regulatory Background

         1. The Medicare Act and Reimbursement Generally

         “Medicare is a federally funded medical insurance program for the elderly and disabled” that was “[e]stablished as part of the Social Security Act, 42 U.S.C. § 1395 et seq.Fischer v. United States, 529 U.S. 667, 671 (2000). Inpatient hospital care, which is at issue in this lawsuit, is generally covered under Part A of the Medicare Act. 42 U.S.C. §§ 1395c-1395i-5. CMS, “formerly the Health Care Financing Administration (HCFA), administers the Medicare program on behalf of the Secretary” of HHS, St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901 n.1 (D.C. Cir. 2010), and is headed by the CMS Administrator, Forsyth Mem'l Hosp. v. Sebelius, 639 F.3d 534, 535 (D.C. Cir. 2011).

         The Secretary is required by statute to delegate most of “[t]he administration of [Part A] . . . through contracts with [M]edicare administrative contractors.” 42 U.S.C. § 1395h(a). These contractors, known as “Intermediaries, ” are responsible for, inter alia, “[d]etermining . . . the amount of the payments required . . . to be made to providers of services, suppliers and individuals;” for making those payments; and for providing communication, education, and technical assistance to health care providers treating Medicare patients. Id. § 1395kk-1(a)(4). In order to receive payment from the Medicare program, through the Intermediaries, health care providers such as the plaintiffs must submit “cost reports . . . on an annual basis.” 42 C.F.R. § 413.20(b). After receiving and reviewing these cost reports, Intermediaries “must within a reasonable period of time . . . furnish the provider . . . a written notice reflecting the contractor's final determination of the total amount of reimbursement due the provider.” Id. § 405.1803(a). These notices, which “[e]xplain the [Intermediary's] determination of total program reimbursement due the provider, ” id. § 405.1803(a)(1)(i), are known as notices of program reimbursements (“NPRs”).

         When dissatisfied with an NPR, a provider may seek review of, and a hearing regarding, the Intermediary's decision before the Provider Reimbursement Review Board (“PRRB”), so long as certain jurisdictional requirements, which are not at issue here, are met. 42 U.S.C. § 1395oo(a). “A decision of the Board shall be final unless the Secretary, on his own motion, . . . reverses, affirms, or modifies the Board's decision.” Id. § 1395oo(f)(1). The Secretary has delegated responsibility for hearing appeals from PRRB decisions to the CMS Administrator. See 42 C.F.R. § 405.1875; Mercy Home Health v. Leavitt, 436 F.3d 370, 374 (3d Cir. 2006). A dissatisfied provider may file a civil action challenging the PRRB or the Administrator's final decision in the “District Court of the United States for the judicial district in which the greatest number of providers participating in both the group appeal and the civil action are located or in” this District. 42 C.F.R. § 405.1877(e)(2).[1]

         2. The Cost-Shifting Prohibition and Bad Debt Reimbursement

         The Medicare Act requires that the Secretary, in promulgating rules concerning provider reimbursement for reasonable costs, must (1) “take into account both direct and indirect costs of providers of services, ” and (2) employ “methods of determining costs” for “efficiently delivering covered services to [covered] individuals” that ensure such costs are “not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs.” 42 U.S.C. § 1395x(v)(1)(A).[2] The purpose of this cost-shifting prohibition is to ensure that neither providers nor non-Medicare-covered patients end up paying the costs for services rendered to Medicare beneficiaries. Although the costs incurred for most of the care provided to Medicare patients are borne by the federal government, individual Medicare patients are “often responsible for both deductible and coinsurance payments for hospital care.” Hennepin Cnty. Med. Ctr. v. Shalala (Hennepin Cnty.), 81 F.3d 743, 745 (8th Cir. 1996). If Medicare patients fail to pay the deductible or coinsurance amounts they owe for hospital care, Medicare allows for reimbursement to the provider of these “bad debts” so long as certain criteria are met. 42 C.F.R. § 413.89(e).

         “Bad debts” in the Medicare context are defined as “amounts considered to be uncollectible from accounts and notes receivable that were created or acquired in providing services.” 42 C.F.R. § 413.89(b)(1). Such debts are “attributable to the deductibles and coinsurance amounts” billed to Medicare patients. Id. § 413.89(a). Pursuant to the cost-shifting prohibition, Medicare reimburses providers for these bad debts, ensuring that the costs are not “borne by individuals not so covered.” 42 U.S.C. § 1395x(v)(1)(A). Ordinarily, Medicare will reimburse providers for bad debts they can prove are “allowable.” 42 C.F.R. § 413.89(d). Under long-standing regulations, four criteria in effect since 1966, determine whether a bad debt is “allowable” and thus eligible for reimbursement:

(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; and
(4) Sound business judgment established that there was no likelihood of recovery at any time in the future.

Id. § 413.89(e); see 31 Fed. Reg. 14808, 14813 (Nov. 22, 1966); see also 20 C.F.R. § 405.420 (1967); 42 C.F.R. § 413.80 (1986).

         The second requirement, that the provider make “reasonable collection efforts, ” is principally at issue here. CMS has set out the requirements constituting a reasonable collection effort in its Provider Reimbursement Manual, Part I (“PRM-I”) § 310. With respect to dual-eligible patients, CMS allows providers to presume the beneficiary is indigent and the debt uncollectible, and therefore providers need not engage in the collection practices described in PRM-I § 310. See PRM-I § 312 (“Providers 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.”). In order to rely on a patient's status as a Medicaid beneficiary to establish indigence and satisfy the reasonable collection efforts requirement, however, the provider “must determine that no source other than the patient would be legally responsible for the patient's medical bill; e.g., title XIX, local welfare agency and guardian.” Id. Accordingly, the PRM requires providers to determine that Medicaid is not “legally responsible” for a dual-eligible patient's medical bills before seeking reimbursement from Medicare.

         3. The Must-Bill Policy and the Remittance Advice Requirement

         To demonstrate that “no source other than the patient would be legally responsible” for a dual-eligible patient's medical bills, PRM-I § 312, CMS currently requires providers to bill their respective state Medicaid programs and obtain an RA demonstrating that Medicaid is not responsible for any part of the debt. The Secretary refers to this two-pronged policy as simply the “must-bill policy, ” see Def.'s Mem. Supp. Cross-Mot. Summ. J. & Opp'n Pls.' Mot. Summ. J. (“Def.'s Mem.”) at 28-29, ECF No. 67-1, but the policy has two components: (1) the requirement that providers bill state Medicaid programs for dual-eligible bad debts, and (2) the requirement that RAs are the only acceptable form of documentation to demonstrate that the state Medicaid program is not responsible for the bad debt (“the RA requirement”), each of which came into existence at a separate time.

         The first requirement, that providers generally must bill state Medicaid programs, “has been consistently articulated in the final decisions of the Secretary” since at least 1983. Cove Assocs. Joint Venture v. Sebelius, 848 F.Supp.2d 13, 28 (D.D.C. 2012) (citing Hoag Mem. Hosp. Presbyterian Provider v. Blue Cross, Admin. Dec. No. 2002-D28, 2002 WL 31548714 (Aug. 2, 2002); Hosp. de Area de Carolina, Admin. Dec. No. 93-D23 (Apr. 26, 1993); St. Joseph Hosp., PRRB Dec. No. 84-D109 (Apr. 16, 1984); Concourse Nursing Home, PRRB Dec. No. 83-D152 (Sept. 27, 1983)); see also Community Hosp. of Monterey Peninsula v. Thompson (CHMP), 323 F.3d 783, 799 (9th Cir. 2003); GCI Health Ctrs., Inc. v. Thompson (GCI), 209 F.Supp.2d 63, 67-75 (D.D.C. 2002); Cal. Hosp. 90-91 Outpatient Crossover Bad Debts Grp. v. Blue Cross of Cal., PRRB 2000-D80, 2000 WL 1460668 (Sept. 6, 2000).[3] Nevertheless, the must-bill policy for reimbursement to LTCHs of bad debts for dual-eligible patients was not applied to any of the plaintiffs, none of which were state-Medicaid-participating providers, for their claimed reimbursements, “until the Intermediaries issued the first NPRs at issue, ” in 2007, for fiscal year 2005. See Pls.' Mem. at 12 (citing S1-AR[4] at 549, S2-AR at 1297, H-AR at 541- 43).

         Regarding the second requirement, CMS did not impose an “absolute requirement that the Providers obtain a Medicaid remittance advice (RA), ” S1-AR at 56 (Select Specialty '05 Medicare Dual Eligible Bad Debts Grp. v. Wisc. Physicians Serv., PRRB 2010-D25 (Apr. 13, 2010) (“2010 PRRB Decision”) at 10), until 2004 with the issuance by CMS of Joint Signature Memorandum 370 (“JSM-370”). A JSM “is not issued to the general public, ” S1-AR at 55 (2010 PRRB Decision at 9 n.20), and is “not an appropriate vehicle to set policy, ” id. (2010 PRRB Decision at 9); rather, a JSM is “used by CMS to communicate internally with [CMS] contractors, ” id. (2010 PRRB Decision at 9 n.20). JSM-370 instructed Medicare Intermediaries that “in those instances where the state owes none or only a portion of the 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).” S2-AR at 163 (emphasis added). The Secretary cites nothing in the record articulating an absolute RA requirement before the issuance of JSM-370, and none of the cited provisions in reimbursement instruction manuals, or PRMs, for providers make any ...

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