Empire Health Found. v. Azar

• Decision Date: 05 May 2020
• Docket Number: 18-35872,Nos. 18-35845,s. 18-35845
• Citation: 958 F.3d 873
• Parties: EMPIRE HEALTH FOUNDATION, FOR VALLEY HOSPITAL MEDICAL CENTER, Plaintiff-Appellee/ Cross-Appellant, v. Alex M. AZAR II, Secretary of the United States Department of Health and Human Services, Defendant-Appellant/ Cross-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

958 F.3d 873

EMPIRE HEALTH FOUNDATION, FOR VALLEY HOSPITAL MEDICAL CENTER, Plaintiff-Appellee/ Cross-Appellant,
v.
Alex M. AZAR II, Secretary of the United States Department of Health and Human Services, Defendant-Appellant/ Cross-Appellee.

Nos. 18-35845
18-35872

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 6, 2020 Seattle, Washington
Filed May 5, 2020

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Stephanie R. Marcus (argued) and Mark B. Stern, Appellate Staff; William D. Hyslop, United States Attorney; Joseph H. Hunt, Assistant Attorney General; Civil Division, United States Department of Justice, Washington, D.C.; for Defendant-Appellant/Cross-Appellee.

Daniel John Hettich (argued), King & Spalding LLP, Washington, D.C.; Teresa A. Sherman, Paukert & Troppmann PLLC, Spokane, Washington; for Plaintiff-Appellee/Cross-Appellant.

Before: MILAN D. SMITH, JR. and N. RANDY SMITH, Circuit Judges, and JOHN R. TUNHEIM,^* District Judge.

M. SMITH, Circuit Judge:

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This appeal, made pursuant to the Medicare Act’s expedited judicial review provision, 42 U.S.C. § 1395oo (f)(1), requires us to determine whether a rule promulgated by the Secretary of the Department of Health and Human Services (HHS) (the 2005 Rule¹ ) is procedurally and substantively valid pursuant to the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq .² The 2005 Rule removed the word "covered" from 42 C.F.R. § 412.106(b)(2)(i), effectively amending HHS’s interpretation of "entitled to [Medicare]" in 42 U.S.C. § 1395ww(d)(5)(F)(vi), a subsection of the Medicare Act, 42 U.S.C. § 1395 et seq .³ At stake is HHS’s annual calculation of the disproportionate share hospital adjustment (DSH Adjustment), which increases a hospital’s annual Medicare inpatient services reimbursement based on the approximate number of low-income patients the hospital serves. See Catholic Health Initiatives Iowa Corp. v. Sebelius , 718 F.3d 914, 916 (D.C. Cir. 2013).

Plaintiff Empire Health Foundation (Empire) challenged the 2005 Rule as part of its appeal of HHS’s calculation of its 2008 reimbursement. The district court granted partial summary judgment for Empire, ruling that, while the 2005 Rule was substantively valid, it should be vacated because the rulemaking process leading to its adoption failed to meet the APA’s procedural requirements.

We affirm the district court’s summary judgment in favor of Empire, and its order vacating the 2005 Rule, but on different grounds. See McSherry v. City of Long Beach , 584 F.3d 1129, 1135 (9th Cir.2009) ("We may affirm on the basis of any ground supported by the record."). We hold that the 2005 Rule’s rulemaking process, while not perfect, satisfied the APA’s notice-and-comment requirements. However, we also hold that the 2005 Rule is substantively invalid, and must be vacated, because it directly conflicts with our interpretation of 42 U.S.C. § 1395ww(d)(5)(F)(vi) in Legacy Emanuel Hospital and Health Center v. Shalala , 97 F.3d 1261, 1265–66 (9th Cir. 1996). Because Legacy Emanuel interpreted the

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meaning of "entitled to [Medicare]" in 42 U.S.C. § 1395ww(d)(5)(F)(vi) to be unambiguous, the 2005 Rule’s conflicting construction cannot stand. See Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs. (Brand X ), 545 U.S. 967, 982–83, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005).

FACTUAL AND PROCEDURAL BACKGROUND

I. Relevant Statutory and Regulatory Background

As part of the Medicare program, a hospital that "serves a significantly disproportionate number of low-income patients," 42 U.S.C. § 1395ww(d)(5)(F)(i)(I), receives a DSH Adjustment, which approximately reimburses it for higher costs associated with providing that service, Catholic Health , 718 F.3d at 916. HHS administers DSH Adjustments through the Centers for Medicare and Medicaid Services (CMS).⁴

Qualification for the DSH Adjustment and the amount of any DSH Adjustment are determined by a hospital’s "disproportionate patient percentage" (DPP). 42 U.S.C. § 1395ww(d)(5)(F)(v). The DPP is calculated by adding the two fractions set forth in § 1395ww(d)(5)(F)(vi),⁵ commonly referred to as the "Medicare fraction" and the "Medicaid fraction." See, e.g. , Catholic Health , 718 F.3d at 916. The two fractions are intended to capture a hospital’s number of patient days attributable two different groups of low-income patients. Id. at 916–17. SSI entitlement is used as the low-income proxy for the Medicare population, and Medicaid eligibility is used as the low-income proxy for the non-Medicare population. Id . ; Legacy Emanuel , 97 F.3d at 1265–66.

The following chart illustrates the two fractions:

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Medicare fraction	Medicaid fraction
Numerator	Patient days for patients entitled to Medicare and entitled to SSI Benefits	Patient days for patients eligible for Medicaid but not entitled to Medicare
Denominator	Patient days for patients entitled to Medicare	Total number of patient days

See Catholic Health , 718 F.3d at 917 (providing the chart as a visual representation of the two fractions).

Empire’s challenge concerns the 2005 Rule’s interpretation of the statutory phrase "entitled to [Medicare]" in its implementing regulation, 42 C.F.R. § 412.106(b)(2)(i),⁶ and that interpretation’s effect on the treatment of "dual eligible exhausted coverage patient days."⁷ These are patient days attributable to patients eligible for both Medicare and Medicaid and whose hospital stays have exceeded the 90-day limit applicable to Medicare coverage (after which Medicare ceases to cover the patient’s inpatient hospital services costs).⁸ 42 U.S.C. § 1395d ; 42 C.F.R. § 409.61(a)(1).

Pursuant to the version of 42 C.F.R. § 412.106(b)(2)(i) in place before the 2005 Rule was promulgated, HHS included only "covered" patient days in the Medicare

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fraction when calculating a hospital’s DSH Adjustment. 42 C.F.R. § 412.106(b)(2)(i) (2003) ; 69 Fed. Reg. at 49098. This had the effect of excluding dual eligible exhausted coverage patient days from the numerator and denominator of the Medicare fraction. Meanwhile, HHS also excluded dual eligible exhausted coverage patient days from the Medicaid fraction. Edgewater Med. Ctr. v. Blue Cross & Blue Shield Ass’n , HCFA Adm’r Dec., 2000 WL 1146601, at *4–5 (June 19, 2000).⁹ Because HHS did not include dual eligible exhausted coverage patient days in either the Medicare fraction or the Medicaid fraction before the 2005 Rule, HHS did not count those days at all for the purpose of calculating a given hospital’s DSH Adjustment. See Catholic Health , 718 F.3d at 921, 921 n.5.

In contrast, in the 2005 Rule, HHS removed the word "covered" from 42 C.F.R. § 412.106(b)(2)(i). As a result, HHS now includes dual eligible exhausted coverage patient days in the numerator and denominator of the Medicare fraction when calculating a given hospital’s DSH Adjustment.¹⁰

A. The 2005 Rule’s Rulemaking Process

To arrive at the interpretation reflected in the 2005 Rule, HHS took a circuitous route. Initially, HHS proposed in 2003 to include dual eligible exhausted coverage patient days in the Medicaid fraction commencing with Fiscal Year (FY) 2004 (the 2003 Notice). 68 Fed. Reg. 27154, 27207–208 (May 19, 2003). In the 2003 Notice, HHS misstated its then-applicable rule with respect to dual eligible exhausted coverage patient days, asserting that HHS counted them in the Medicare fraction. Several comments responding to the 2003 Notice noted the misstatement and pointed out that the then-applicable regulation did not include dual eligible exhausted coverage patient days in the Medicare fraction. In its FY 2004 final rule, HHS deferred deciding whether to promulgate the proposed change, noting that it was still reviewing comments on dual eligible exhausted coverage patient days and would respond in a different document. 68 Fed. Reg. 45346, 45421 (Aug. 1, 2003).

In 2004, as part of its rulemaking proposal for the 2005 Rule, the agency explained that it would make sure to address any comments received in response to the 2003 Notice. 69 Fed. Reg. 28196, 28286 (May 18, 2004). The new comment period ran until July 12, 2004. Days before the comment period for the 2005 Rule closed, HHS posted a webpage acknowledging the 2003 Notice’s misstatement of the then-applicable rule.¹¹ HHS stated that "[o]ur policy has been that only covered patient days are included in the Medicare fraction." A few commenters acknowledged HHS’s correction. Without acknowledging HHS’s initial mistake, however, many other commenters voiced support for the erroneously stated status quo.

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In the August 11, 2004 Federal Register entry describing the final version of the 2005 Rule, HHS noted that:

We received numerous comments that commenters were disturbed and confused by our recent Web site posting regarding our policy on dual-eligible patient days. The commenters believe that this posting was a modification or change in our current policy to include patient days of dual-eligible Medicare beneficiaries whose Medicare Part A coverage has expired in the Medicaid fraction of the DSH calculation. In addition, the commenters believed that the information in this notice appeared with no formal notification by CMS and without the opportunity for providers to comment.

69 Fed. Reg. at 49098. In...