Abington Crest Nursing and Rehab. v. Sebelius, 08-5120.

Citation575 F.3d 717
Decision Date04 August 2009
Docket NumberNo. 08-5120.,08-5120.
PartiesABINGTON CREST NURSING AND REHABILITATION CENTER, et al., Appellants v. Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (No. 1:06-cv-01932-RJL).

Daniel F. Miller argued the cause for appellants. With him on the briefs were Barbara J. Janaszek and John R. Jacob.

Christopher Fonzone, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Gregory G. Katsas, Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, and Barbara C. Biddle and Jeffrica Jenkins Lee, Attorneys. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: GARLAND and GRIFFITH, Circuit Judges, and EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge:

The appellants in this case are skilled nursing facilities that challenge a decision by the Secretary of the Department of Health and Human Services to deny them reimbursement for certain bad debt costs. The facilities contend that the Secretary's denial violates both the Medicare statute and agency regulations. The district court granted the Secretary's motion for summary judgment, and we affirm.


Appellants are Medicare-certified skilled nursing facilities (SNFs) that provide therapy services to, among others, SNF residents who are eligible for both Medicare and Medicaid benefits ("dual eligible" beneficiaries). The Medicare program is made up of two principal parts: Part A, which provides reimbursement for inpatient hospital stays and related services, 42 U.S.C. §§ 1395c-1395i-5; and Part B, which covers hospital outpatient services, physician services, and other services not covered by Part A, id. §§ 1395j-1395w-4. The therapy services that SNFs provide are covered under Part B of the Medicare program.

Prior to 1997, Medicare reimbursed SNFs based on their "reasonable costs." See generally 42 U.S.C. §§ 1395f(b)(1), 1395x(v)(1)(A); 42 C.F.R. § 410.152(b)(1). That methodology permitted the facilities to claim uncollectible Medicare deductibles and coinsurance payments — amounts owed to the SNFs but uncollectible from either the patient or the patient's state Medicaid program — as bad debts on their Medicare cost reports. Medicare then reimbursed the providers for the uncollectible amounts pursuant to a Medicare regulation, 42 C.F.R. § 413.80.1

In the Balanced Budget Act of 1997, Congress changed the payment scheme for SNF services in two respects. Pub.L. No. 105-33, § 4432(a)-(b)(3), 111 Stat. 251, 414-21 (1997).2 It changed the reimbursement methodology for SNF services covered under Part A from a reasonable cost system to a prospective payment system (PPS) based on a per diem rate. 42 U.S.C. § 1395yy(e). And it changed the methodology for the SNFs' therapy services — the services at issue in this case — from reimbursement based on reasonable costs to reimbursement based on a preexisting Medicare Part B fee schedule applicable to physicians. Id. § 1395yy(e)(9); see id. §§ 1395l(a)(8)(A)(i), 1395m(k), 1395w-4.

Consistent with their practice prior to enactment of the Balanced Budget Act, appellants listed their uncollectible deductibles and coinsurance payments as bad debts on the fiscal year 1999 cost reports they submitted to their "fiscal intermediary" — a private insurance company that processes reimbursements to providers while acting as an agent of the Secretary of the Department of Health and Human Services (HHS). 42 U.S.C. § 1395h (2000); 42 C.F.R. § 413.24(f). The appellants' fiscal intermediary reviewed the 1999 cost reports and disallowed the bad debt claims for uncollectible deductibles and coinsurance payments. The intermediary disallowed the claims on the ground that Medicare's bad debt reimbursement policy "applies only to the reasonable cost payment system" — the system applicable to SNFs prior to the change to a fee schedule system in the Balanced Budget Act. Intermediary's Position Paper at 4.

The SNFs appealed the intermediary's decision to HHS' Provider Reimbursement Review Board (PRRB). See 42 U.S.C. § 1395oo(b). On July 21, 2006, a majority of the PRRB disagreed with the intermediary's decision, concluding that, although Congress had changed the payment system, it had not altered the bad debt policy contained in 42 C.F.R. § 413.80. Extendicare 99 Uncollect Co-In Dual Elig Group v. BlueCross BlueShield Ass'n/United Gov't Servs., LLC-WI, PRRB Decision No.2006-D36, at 4-5 (July 21, 2006). On September 12, however, the Secretary, acting through the Deputy Administrator of the Centers for Medicare and Medicaid Services, reversed the PRRB's decision and ruled that the SNFs' bad debts were nonreimbursable under the new fee schedule system. "Medicare's longstanding policy has been not to pay for bad debts for any services paid under a reasonable charge or fee schedule methodology," the Secretary said, and "the bad debt provisions found at 42 C.F.R. 413.80(e) do not apply to services for which Medicare payment is based on reasonable charges or a fee schedule methodology." Decision of the Administrator, Ctrs. for Medicare & Medicaid Servs., Extendicare 99 Uncollect Co-In Dual Elig Group v. Blue Cross/Blue Shield Ass'n, United Gov't Servs., LLC-WI, at 11 (Sept. 12, 2006) [hereinafter Secretary's Decision].

The appellants next filed suit in the United States District Court for the District of Columbia pursuant to 42 U.S.C. § 1395oo(f), which provides for judicial review of final PRRB decisions. On March 28, 2008, the court granted the Secretary's motion for summary judgment. Abington Crest Nursing & Rehab. Ctr. v. Leavitt, 541 F.Supp.2d 99, 101 (D.D.C.2008). The court framed the issue as follows: "Was the Secretary's interpretation of the applicable Medicare law and regulations, to deny the reimbursement of bad debts arising from Part B services provided by Extendicare Facilities [the owner of the SNF plaintiffs], a reasonable construction of the regulations?" Id. at 105. The court concluded that it was. Id.

The SNFs now appeal from the district court's grant of summary judgment to the Secretary. Our review is de novo. Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C.Cir.1994). Pursuant to § 1395oo(f), we proceed under the judicial review provisions of the Administrative Procedure Act, which require us to set aside agency action if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." 5 U.S.C. § 706(2)(A).


The appellants' first contention is that the Secretary's refusal to reimburse them for uncollectible deductibles and coinsurance "contravenes" the Medicare statute's "prohibition against cross-subsidization." Appellants' Br. 16. Although their briefs do not mention it, the two-step framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. structures our review of HHS' interpretation of the Medicare statute. 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under that framework, "[i]f the intent of Congress is clear, ... [a court] must give effect to the unambiguously expressed intent of Congress." Id. at 842-43, 104 S.Ct. 2778. But "if the statute is silent or ambiguous with respect to the specific issue," the court must uphold the agency's interpretation as long as it is reasonable. Id. at 843, 104 S.Ct. 2778.

The appellants allege that HHS' denial of their bad debt claims violates the "anti-cross-subsidization" principle of 42 U.S.C. § 1395x(v)(1)(A), which is italicized below:

(v) Reasonable costs

(1)(A) The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs.... Such regulations shall ... take into account both direct and indirect costs of providers of services ... in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will 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). The appellants argue that if Medicare does not reimburse the bad debts of Medicare beneficiaries, nonbeneficiary recipients of SNF services will end up bearing those costs, thus transgressing the anti-cross-subsidization principle. See Appellants' Br. 16. Indeed, as the Secretary has acknowledged, the Department has long interpreted that principle to permit Medicare to reimburse bad debts when Medicare pays the "reasonable costs" of services. See Secretary's Decision at 5-7. But the Secretary has also concluded that this provision applies only to reimbursements based on reasonable costs, and not to reimbursements based on reasonable charges or on fee schedules. Id. at 7, 11.

The first step of our Chevron analysis is quickly concluded by reading the statutory text set out above. As is evident on its face, § 1395x(v)(1)(A) is silent on the subject of bad debt — a point we previously noted in Kidney Center of Hollywood v. Shalala, 133 F.3d 78, 86 (D.C.Cir.1998) ("[T]he statute does not speak directly to the question of bad debt."). Although bad debt may be one of the "indirect costs" referred to in the subsection — which is apparently the reason the Secretary has applied the subsection's principle to bad debt under reasonable cost systems — the text is ambiguous in that respect. Even more to the point, the statute does not tell us whether bad debt — or any other indirect...

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