Detroit Rec. Hosp., Univ. Health Ctr. v. Sebelius, 08-1920.

• Decision Date: 30 July 2009
• Docket Number: No. 08-1920.,08-1920.
• Citation: 575 F.3d 609
• Parties: DETROIT RECEIVING HOSPITAL AND UNIVERSITY HEALTH CENTER; Oakwood Annapolis Hospital; Beyer Hospital; Botsford General Hospital; Oakwood Hospital and Medical Center; Garden City Hospital; Genesys Regional Medical Center; Grace Hospital; Harper Hospital; Oakwood Heritage Hospital; Hurley Medical Center; Huron Valley Hospital; Hutzel Hospital; Metropolitan Hospital; Mount Clemens General Hospital; Port Huron Hospital; Rehabilitation Institute of Michigan; St. Luke's Hospital of Kansas City; Oakwood Southshore Medical Center; Sinai Hospital; Spectrum Health-Butterworth Campus; W.A. Foote Memorial Hospital; University of Michigan Hospitals and Health Centers, Plaintiffs-Appellants, v. Kathleen SEBELIUS, In her official capacity as Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

575 F.3d 609

DETROIT RECEIVING HOSPITAL AND UNIVERSITY HEALTH CENTER; Oakwood Annapolis Hospital; Beyer Hospital; Botsford General Hospital; Oakwood Hospital and Medical Center; Garden City Hospital; Genesys Regional Medical Center; Grace Hospital; Harper Hospital; Oakwood Heritage Hospital; Hurley Medical Center; Huron Valley Hospital; Hutzel Hospital; Metropolitan Hospital; Mount Clemens General Hospital; Port Huron Hospital; Rehabilitation Institute of Michigan; St. Luke's Hospital of Kansas City; Oakwood Southshore Medical Center; Sinai Hospital; Spectrum Health-Butterworth Campus; W.A. Foote Memorial Hospital; University of Michigan Hospitals and Health Centers, Plaintiffs-Appellants, v. Kathleen SEBELIUS, In her official capacity as Secretary of Health and Human Services, Defendant-Appellee.

No. 08-1920.

United States Court of Appeals, Sixth Circuit.

Argued: June 16, 2009.

Decided and Filed: July 30, 2009.

ARGUED: Andrew S. Doctoroff, Honigman Miller Schwartz and Cohn LLP, Detroit, Michigan, for Appellant. Steven P. Croley, Assistant United States Attorney, Detroit, Michigan, for Appellee. ON BRIEF: Andrew S. Doctoroff, Kenneth R. Marcus, Honigman Miller Schwartz and Cohn LLP, Detroit, Michigan, for Appellant. Elizabeth J. Larin, Assistant United States Attorney, Detroit, Michigan, for Appellee.

Before: CLAY and ROGERS, Circuit Judges; JORDAN, District Judge.^*

OPINION

ROGERS, Circuit Judge.

The plaintiffs are hospitals that provide services to patients under both Medicare and Medicaid. Medicare beneficiaries are billed co-payments and deductibles for the services provided to them, and in some cases the Medicare beneficiaries cannot or will not pay. The beneficiaries in this case also have Medicaid as a secondary insurer, and Medicaid may cover these out-of-pocket costs, but in some circumstances Medicaid only partially covers them. The plaintiff-hospitals all do business in states that cap the amount of such Medicaid payments. In these states, Medicaid prevents the hospital from recovering the remaining portion of the fees from the beneficiary. The hospitals are left, therefore, with unrecoverable bad debt.

The Medicare Act states that the Secretary of Health and Human Services will promulgate regulations to ensure that the costs of Medicare will not be borne, or cross-subsidized, by individuals not covered by Medicare. Because of this provision, the Medicare program historically covered all bad debts attributable to Medicare patients. In 1997, Congress in the Balanced Budget Act amended the Medicare Act to provide a percentage reduction of the amount of bad debt that would be reimbursed by Medicare. The provider can make up for the remaining loss by continuing collection efforts against Medicare beneficiaries, except when the beneficiaries are also covered by Medicaid, as the Medicaid Act disallows such efforts. The plaintiffs allege that the provider is effectively forced to recoup the remaining loss attributable to dually-covered Medicare/Medicaid patients from funds paid by non-Medicare patients.

The plaintiffs brought suit against the Secretary, arguing that this scheme violates the Medicare Act's cross-subsidization ban. The plaintiffs argued that the Secretary's regulation, promulgated under the 1997 bad debt reimbursement reduction statute, is invalid and that there should be an exception to the bad debt reimbursement reduction for debt arising from services provided to dually-covered beneficiaries. The district court granted summary judgment in favor of the Secretary. It is questionable to characterize Medicare's effective incorporation of Medicaid cost limits as "cross-subsidization" rather than simply as "rate setting." In any event, the statutory scheme is clear on its face and does not allow for the exception that plaintiffs seek to the statutory reduction in Medicare reimbursement for bad debt. The district court thus properly entered judgment for the Secretary.

I.

Under the Medicare program, 42 U.S.C. §§ 1395 et seq., the federal government pays the cost of eligible health care expenses for the aged and disabled. Medicare Part A authorizes the Secretary to pay for inpatient institutional care, primarily at hospitals. § 1395c. Medicare Part B provides optional supplemental insurance for physician's services, outpatient hospital care, and medical equipment. §§ 1395j, 1395k. As under a private insurance plan, Part B enrollees are responsible for copayments and deductibles. §§ 1395j, 1395l, 1395r, 1395s.

Under both Part A and Part B, Medicare pays for services that are medically reasonable and necessary for the beneficiary. § 1395f(a)(2). Before 1983, the Medicare statute provided that hospitals be paid for the services rendered based on a retrospective determination of the "reasonable cost" for the service. § 1395(x)(v). Since 1983, hospitals are paid based on a fixed-rate system, where the provider is paid a standard rate per treatment at the time of discharge. § 1395ww(d). Some costs, including those at issue in this case, are still reimbursed on a retrospective basis. In creating regulations regarding the payment of reasonable costs, the Secretary must ensure that the Medicare program is self-sustaining: Regulations promulgated by the Secretary

shall (i) take into account both direct and indirect costs of providers of services ... in order that ... 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....

§ 1395x(v)(1)(A) (emphasis added); see also 42 C.F.R. § 413.80(d). This "cross-subsidization" ban was in the original statute and is part of the definition of "reasonable cost." Social Security Amendments of 1965, Pub.L. No. 89-97, § 1861(v)(1), 79 Stat. 322-23.

Bad debts of Medicare enrollees are treated as "reasonable costs," and are reimbursed to hospitals on a retrospective basis. Bad debts arise when the hospital cannot recover co-payments and deductibles from Medicare enrollees despite reasonable collection efforts. 42 C.F.R. § 413.89(e). Historically, the Secretary reimbursed bad debt in full. However, in 1997 Congress decreased the amount of bad debt reimbursement in order to combat rising Medicare costs, Balanced Budget Act of 1997, Pub.L. No. 105-33, § 4451, 111 Stat. 251, and provide the hospitals an impetus to make collection efforts, H.R.Rep. No. 105-149, at 1344 (1997).

[T]he amount of bad debts otherwise treated as allowable costs which are attributable to the deductibles and coinsurance amounts under this subchapter shall be reduced—

(i) for cost reporting periods beginning during fiscal year 1998, by 25 percent of such amount otherwise allowable,

(ii) for cost reporting periods beginning during fiscal year 1999, by 40 percent of such amount otherwise allowable,

(iii) for cost reporting periods beginning during fiscal year 2000, by 45 percent of such amount otherwise allowable, and

(iv) for cost reporting periods beginning during a subsequent fiscal year, by 30 percent of such amount otherwise allowable.

§ 1395x(v)(1)(T). The Secretary promulgated a regulation that mirrors the statute at 42 C.F.R. § 413.89(h)(1). For the remaining bad debt, the hospitals must either accept the loss or continue to pursue debt collection from the Medicare beneficiary.

Some Medicare beneficiaries are also enrolled in Medicaid, and Medicaid pays their copayments and deductibles, which generally prevents bad debt with respect to Medicaid beneficiaries. Medicaid is a federal-state program that pays the cost of necessary medical expenses for low-income individuals. 42 U.S.C. § 1396. Individuals covered by both Medicare and Medicaid, or qualified Medicare beneficiaries ("QMBs"), include those who are enrolled in both programs, by virtue of their age or disability and their low-income, and also those who are enrolled in Medicare and have an income level not low enough to qualify for Medicaid but low enough to make them unable to pay Medicare co-payments and deductibles. §§ 1396d(p)(1), 1396a(a)(10)(E)(i). Medicare pays a QMB's medical expenses, but state Medicaid agencies are responsible for "Medicare cost-sharing," including paying a QMB's co-payments and deductibles. § 1396d(p)(3).

However, as permitted under federal law, Michigan and Missouri have placed caps on the Medicare cost-sharing under their Medicaid programs. The caps can result in reduced payments to hospitals for the services provided to QMBs. In the Balanced Budget Act of 1997, § 4714(a)(2), Congress provided that:

[A] State is not required to provide any payment for any expenses incurred relating to payment for deductibles, coinsurance, or copayments for medicare cost-sharing to the extent that payment under [Medicare] for the service would exceed the payment amount that otherwise would be made under the State [Medicaid] plan ... for such service if provided to an eligible recipient other than a medicare beneficiary.

42 U.S.C. § 1396a(n)(2). Under this provision, if the Medicare payment rate for the QMB's treatment is above the rate that the state Medicaid program pays for the same treatment, the state Medicaid program pays no additional amount for copayments or deductibles. If the Medicare payment rate is below the Medicaid rate, the state Medicaid program pays only the additional amount necessary to provide the hospital with the Medicaid rate amount. For example, if the provider charges $100 for a service to the QMB and Medicare pays $80, a $20 co-payment remains. If the state Medicaid rate for that service is $70, Medicaid pays nothing and the provider is shortchanged $20 if the QMB does not pay his co-payment. If the state Medicaid rate for the service is $90, Medicaid pays the $10 difference between the Medicaid and Medicare rates, and the provider is shortchanged...