Arkansas Dep't of Human Serv. v. Sebelius, Civil Action No. 10–1251 (JEB).

• Decision Date: 12 October 2011
• Docket Number: Civil Action No. 10–1251 (JEB).
• Citation: 818 F.Supp.2d 107
• Court: U.S. District Court — District of Columbia
• Parties: ARKANSAS DEPARTMENT OF HUMAN SERVICES, Plaintiff, v. Kathleen SEBELIUS, Secretary of the United States Department of Health and Human Services, and Donald Berwick, Administrator of the Centers for Medicare & Medicaid Services, Defendants.

818 F.Supp.2d 107

ARKANSAS DEPARTMENT OF HUMAN SERVICES, Plaintiff,

v.Kathleen SEBELIUS, Secretary of the United States Department of Health and Human Services, and Donald Berwick, Administrator of the Centers for Medicare & Medicaid Services, Defendants.

Civil Action No. 10–1251 (JEB).

United States District Court, District of Columbia.

Oct. 12, 2011.

Ryan Morland Malone, Ropes & Gray, LLP, Washington, DC, for Plaintiff.

Peter Bryce, U.S. Department of Justice, Civil Division, Washington, DC, for Defendants.

MEMORANDUM OPINION

JAMES E. BOASBERG, District Judge.

In April 2006, the Centers for Medicare & Medicaid Services (CMS) issued a notice of disallowance for $4,449,682 in federal matching funds it had paid to Plaintiff Arkansas Department of Human Services for outpatient hospital services. The Department Appeals Board (DAB) of the United States Department of Health and Human Services largely upheld the disallowance, finding that it was consistent with CMS's reasonable interpretation of the regulation governing Medicaid payment limits for those services. In bringing this case, Arkansas seeks to overturn the DAB's decision on the grounds that it was arbitrary and capricious and not in accordance with law, in violation of the Administrative Procedure Act. Arkansas first argues that CMS's interpretation of the regulation is inconsistent with the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). Second, it maintains that even if CMS's interpretation is permissible, CMS was precluded from applying it to Arkansas's detriment because Arkansas lacked fair notice of this interpretation. Both parties have now moved for summary judgment. Because CMS's interpretation of the regulation is consistent with its reasonable construction of BIPA and because the disallowance does not rise to the level of the sanctions contemplated by the “fair notice” doctrine, the Court will grant Defendants' motion.

I. BackgroundA. The Medicaid Statutory and Regulatory Framework

The Medicaid program was established in 1965 by Title XIX of the Social Security Act as a cooperative federal-state initiative intended to assist states in providing medical assistance to low-income individuals and families. See 42 U.S.C. § 1396 et seq. ; Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980). Each state administers its own Medicaid program in accordance with federal statutory and regulatory requirements and pursuant to the terms of its state Medicaid plan. See 42 U.S.C. § 1396, 1396a. Once a state's Medicaid plan is approved by the Secretary of the U.S. Department of Health and Human Services, the state becomes eligible to receive federal matching funds, or “federal financial participation” (FFP), for a percentage of the amounts “expended ... as medical assistance under the State plan.” §§ 1396b(a)(1), 1396d(b). Federal funding levels are set by a statutory formula that calculates reimbursement rates for each state based on that state's Medicaid plan. See § 1396b.

The Social Security Act requires state Medicaid plans to ensure that payments to service providers are “consistent with efficiency, economy, and quality of care.” § 1396a(a)(30)(A). Pursuant to this statutory authority, CMS has established regulations imposing limits on state Medicaid payments to providers of certain medical services, including outpatient hospital and clinic services. See, e.g., 42 C.F.R. § 447.321. As of October 2000, the outpatient hospital and clinic services regulation, 42 C.F.R. § 447.321, provided that “FFP [would] not [be] available for any payment that exceed[ed] the amount that would be payable to providers under comparable circumstances under Medicare.” Id. (2000). This amount, which functions as a ceiling for FFP, is referred to as the “upper payment limit” (UPL).

In October 2000, HHS proposed a new regulation intended to close a loophole that allowed states “to reduce their share of Medicaid costs and cause [d] the Federal government to pay significantly more than it should for the same volume and level of Medicaid services.” Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services, 65 Fed.Reg. 60151, 60152 (proposed Oct. 10, 2000) (“Proposed Rule”). In the Proposed Rule, HHS proposed, inter alia, to alter the regulation concerning outpatient hospital and clinic services, 42 C.F.R. § 447.321, in the following manner: instead of a single aggregate UPL for outpatient hospital and clinic services provided by all facilities in a state, the Proposed Rule set distinct UPLs for different kinds of facilities. See Proposed Rule, 65 Fed.Reg. at 60151. “[T]o ensure continued access to care and the ability to adjust to proposed changes,” the Proposed Rule also provided for two transition periods to allow certain states to come into compliance with the new UPLs. Id. A state would qualify for a transition period if it had in place an approved State Plan Amendment (SPA) that would result in payments in excess of one or more of the new UPLs. See id. at 60154. Such an SPA is referred to as “noncompliant” because its payments exceeded the new UPLs.

Shortly thereafter, in December 2000, Congress passed BIPA. Pub.L. No. 106–554, 114 Stat. 2763. BIPA required HHS to issue a final rule about Medicaid UPLs based on the October 2000 Proposed Rule. See id., 114 Stat. 2763, 2763A–575 to –577. It exempted HHS from complying with “any requirement of the Administrative Procedure Act” with regard to the promulgation of the final rule, and it mandated that HHS provide for a longer transition period for implementing the UPL changes for certain states. See id.

CMS then promulgated its Final Rule on January 12, 2001. See Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services, 66 Fed.Reg. 3148, 3148 (Jan. 12, 2001) (“Final Rule”). The Final Rule amended 42 C.F.R. § 447.321, which had previously provided for a single aggregate UPL for all outpatient service providers, so that separate UPLs applied to 1) state government-owned or - operated facilities, 2) other government facilities, and 3) privately owned and operated facilities. See 66 Fed.Reg. at 3148; 42 C.F.R. § 447.321 (2001). The Final Rule took effect on March 13, 2001, and, consistent with BIPA's requirement that a longer transition period be added to the two mentioned in the Proposed Rule, provided for three transition periods of varying length for states with noncompliant SPAs. See 66 Fed.Reg. at 3148–50, 3171; Administrative Record (A.R.) at 4.

The governing provision for the short-transition-period states, of which Arkansas was one, stated that “payments may exceed [the newly established UPLs] until September 30, 2002.” See 42 C.F.R. § 447.321(e)(2)(ii)(A). The provisions governing the two longer transition periods were more nuanced, requiring states to phase down the amount by which their payments exceeded the new UPLs based on specified formulae. See id. §§ 447.321(e)(2)(ii)(B), 447.321(e)(2)(ii)(C). In addition to laying out these three transition periods, the Final Rule also established a “general rule,” applicable to states subject to all three transition periods: “The amount that a state's payment exceeded [the newly established UPLs] must not increase.” Id. § 447.321(e)(2)(i). As set forth below, this provision is at the heart of the dispute here.

B. Arkansas's Noncompliant SPA and the Disallowance

Arkansas's noncompliant SPA, SPA 00–10, was approved by CMS on November 29, 2000, and was made retroactively effective to May 18, 2000. See A.R. at 5. SPA 00–10 allowed Plaintiff to make enhanced Medicaid payments to the University of Arkansas for Medical Sciences (UAMS), the state's sole state-operated teaching hospital, for outpatient services. Id. at 5–6, 50–52. Pursuant to this SPA, Plaintiff paid providers of outpatient services statewide at a rate of 80% of the UPL, and then paid the difference between this amount and the UPL to UAMS. See id. at 6; Pl.'s Mot. at 4. This resulted in UAMS receiving a supplemental payment beyond the costs of the outpatient services it provided. See A.R. at 6; Pl.'s Mot. at 4; Def.'s Mot. and Opp. at 9.

This payment methodology was consistent with UPL regulations prior to 2001—the UPL applied to outpatient services in the aggregate, so Arkansas could receive FFP for enhanced payments to UAMS so long as it remained below the UPL with respect to outpatient services as a whole. Because the Final Rule established a distinct UPL for state-owned or -operated facilities, however, these supplemental payments were disallowed once the Final Rule became effective. See Pl.'s Mot. at 4. SPA 00–10, accordingly, was a noncompliant amendment. In addition, because it became effective on or after October 1, 1999, it was subject to the shortest of the three transition periods established by the Final Rule. See 42 C.F.R. § 447.321(e)(2)(ii)(A).

At issue in this case are the supplemental payments made to UAMS pursuant to SPA 00–10 during the transition period. Plaintiff made these payments consistent with the methodology established in SPA 00–10 through September 30, 2002, the end of the applicable transition period and the day the new UPLs promulgated in the Final Rule became effective for Arkansas. See A.R. at 6; Pl.'s Mot. at 4. Since the amount of the supplemental payments was calculated pursuant to a percentage-based formula, the absolute amount of the payments fluctuated over time. See A.R. at 6 n. 7. More important, the supplemental payment amount increased—both in absolute terms and, relevantly, in terms of the amount by which the payments to UAMS exceeded the amount to which UAMS would have been entitled under the new UPLs—during the...