Allina Health Servs. v. Sebelius

• Decision Date: 01 April 2014
• Docket Number: 13–5015.,Nos. 13–5011,s. 13–5011
• Citation: 746 F.3d 1102
• Parties: ALLINA HEALTH SERVICES, Doing Business as Abbott Northwestern Hospital, Doing Business as Cambridge Medical Center, Doing Business as Owatonna Hospital, Doing Business as United Hospital, Doing Business as Unity Hospital, et al., Appellees v. Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

746 F.3d 1102

ALLINA HEALTH SERVICES, Doing Business as Abbott Northwestern Hospital, Doing Business as Cambridge Medical Center, Doing Business as Owatonna Hospital, Doing Business as United Hospital, Doing Business as Unity Hospital, et al., Appellees

v.Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Appellant.

Nos. 13–5011, 13–5015.

United States Court of Appeals,District of Columbia Circuit.

Argued Feb. 7, 2014.

Decided April 1, 2014.

Held Invalid

42 C.F.R. § 412.106(b)(2).

Appeals from the United States District Court for the District of Columbia, (No. 1:10–cv–01463) (No. 1:12–cv–00328).

Stephanie R. Marcus, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the briefs were Stuart F. Delery, Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, and Anthony J. Steinmeyer, Attorney.

Stephanie A. Webster argued the cause for appellees. With her on the briefs were Christopher L. Keough, J. Harold Richards, Hyland Hunt, and Dennis M. Barry.

Before GARLAND, Chief Judge, SRINIVASAN, Circuit Judge, and SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge SILBERMAN.

SILBERMAN, Senior Circuit Judge.

Appellees are a group of hospitals that serve a significant number of elderly, very low-income patients. Congress assumes that such patients cost more to treat than the average Medicare patients, so these hospitals are entitled to supplemental payments. These are determined by calculating what is called the “disproportionate share percentage”—a formula which is a proxy for the percentage of low-income patients served.

In 2004, the Secretary issued a rule that addressed one aspect of this calculation. Although ostensibly only a detail, the financial impact is apparently substantial, costing the hospitals hundreds of millions of dollars. Not surprisingly, the hospitals sued in district court challenging the rule. The court, holding that the final rule was not a logical outgrowth of the proposed rule and that the Secretary had insufficiently explained a change in policy, granted judgment to the hospitals and vacated the rule. But the court went further, instructing the Secretary to recalculate reimbursement percentages using the alternate methodology. We affirm in part and reverse in part.

I.

Medicare, as is surely well known, is the federal program providing health insurance for all elderly, as well as the disabled. The Medicare statute has three parts relevant in this case: Part A provides direct “fee for service” hospital payments; Part C is an alternative option providing eligible beneficiaries an opportunity to enroll in private health insurance plans; and Part E includes the formula for calculation of the disproportionate share percentage—the added compensation for the treatment of a disproportionate number of low-income patients.¹

The size of this adjustment is determined by adding together two fractions. The first fraction, referred to as the Medicare fraction, measures the percentage of all Medicare patients (regardless of means) who are low income, i.e., entitled to supplemental security income benefits. Mathematically, the numerator of this fraction is the number of “patient days” for patients who were “entitled to benefits under Part A and were entitled to supplemental security income benefits.” The denominator is the total number of “patient days for such fiscal year which were made up of patients who (for such days) were entitled to benefits under Part A.” 42 U.S.C. § 1395ww(d)(5)(F)(iv) (emphasis added).

The second fraction accounts for the number of Medicaid patients—who, by definition, are low income— not entitled to Medicare. The numerator 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.” The denominator is the total number of patient days, regardless of whether the patients were enrolled in a federal medical benefits program. Id.

The statutory interpretation question that led to this case is whether enrollees in Part C are “entitled to benefits” under Part A, such that they should be counted in the Medicare fraction, or whether, if not regarded as “entitled to benefits under Part A,” they should instead be included in the Medicaid fraction. As it turns out, if Part C beneficiaries are included in the Medicaid fraction rather than the Medicare fraction, the hospitals receive a great deal more compensation.

As we have previously recognized, the phrase “entitled to benefits under Part A” is ambiguous. Northeast Hospital Corp. v. Sebelius, 657 F.3d 1, 13 (D.C.Cir.2011). Because a Part C enrollee must, by definition, have been eligible for Part A, it could mean one was legally entitled to Part A benefits whether or not one chose Part C's option, or it could mean only those who did not choose Part C, and, therefore, remained legally entitled to Part A benefits. In other words, someone who chose Part C nevertheless could still be “entitled” to Part A within the meaning of the statute.

Prior to 2003, the Secretary treated Part C patients as not entitled to benefits under Part A. Id. at 16–17. They then should have been included in the Medicaid fraction. But there was, apparently, considerable confusion among the hospitals, and since the disproportionate share percentage was calculated by fiscal intermediaries (insurance companies) using privacy protected patient data, the hospitals were unable to confirm that reimbursement rates were correct.

The Secretary, recognizing the confusion, issued a notice of proposed rulemaking, explaining:

We have received questions whether patients enrolled in an M+C Plan [ ²] should be counted in the Medicare fraction or the Medicaid fraction....The question stems from whether the M+C plan enrollees are entitled to benefits under Medicare Part A since M+C plans are administered through Part C.

We note that, under 422.50, an individual is eligible to elect an M+C plan if he or she is entitled to Medicare Part A....However, once a beneficiary has elected to join an M+C plan, that beneficiary's benefits are no longer administered under Part A.

Therefore, we are proposing to clarify that once a beneficiary elects Medicare Part C, those patient days attributable to the beneficiary should not be included in the Medicare fraction of the DSH patient percentage. These patient days should be included in the count of total patient days in the Medicaid fraction (the denominator), and the patient's days for the M+C beneficiary who is also eligible for Medicaid would be included in the numerator of the Medicaid fraction.

Medicare Program, Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed.Reg. 27154, 27208 (May 19, 2003).

The Secretary further explained, in estimating the financial impact of the proposal, that “there should not be a major impact associated with this proposed change.” 68 Fed.Reg. at 27416. Only a smattering of hospitals even bothered to comment; their commentary totaled just 26 pages, and a number of them did not understand the proposal.

The next year the Secretary announced a final rule adopting the exact opposite interpretation of the statute. Medicare Part C beneficiaries, according to the rule, were to be counted in the Medicare fraction because “they are still, in some sense, entitled to benefits under Medicare Part A.” Medicare Program: Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed.Reg. 48916, 49099 (Aug. 11, 2004) (emphasis added). ³

The rule change had enormous financial consequences for the hospitals. Apparently Part C beneficiaries are rarely entitled to SSI payments or eligible for Medicaid. Thus, by including Part C beneficiaries in the Medicare fraction, the denominator (total patient days for Part A eligible patients) is increased, without having a significant impact on the numerator (total patient days for Medicare patients who are also receiving SSI payments). This has the effect of diluting the fraction and significantly reducing reimbursement rates. By contrast, if the Part C patients are counted in the Medicaid fraction, there is no effect on the denominator (total patient days) and a small effect on the numerator (Medicare Part A eligible patients who are also eligible for Medicaid).

In Northeast Hospital Corp. v. Sebelius, a number of hospitals challenged the Secretary's rule, arguing that it was an impermissible interpretation of the statute and that it could not be retroactively applied to the fiscal years 1999 through 2002. We held that the Medicare statute did not unambiguously foreclose the Secretary's interpretation of the statute. 657 F.3d 1, 13 (D.C.Cir.2011). In other words, the Secretary's interpretation passed Chevron step one.⁴ We did not reach the question whether the Secretary's interpretation was reasonable under step two. We held that, even if the Secretary's interpretation was reasonable, that interpretation could not be applied retroactively to the years at issue in the case because, prior to issuing the rule, the Secretary had a settled practice of not counting the Part C days in the Medicare fraction. Id. at 17. Accordingly, after Northeast Hospital, the validity of the Secretary's rule as applied to future years remained an open question.

When the Secretary, in 2009, published reimbursement calculations for FY 2007 (one of the future years), the petitioners learned that their payments would decrease by tens of millions of dollars per year. The hospitals challenged these calculations before the agency, and ultimately appealed to the district court. The court held that the 2004 rule was invalid on two grounds: It was not a logical outgrowth of the proposed rule, and it did not adequately acknowledge and justify the Secretary's change in policy. The court vacated the rule and ordered the Secretary to...