Grant Med. Ctr. v. Hargan

• Decision Date: 17 November 2017
• Docket Number: No. 16-5314,16-5314
• Citation: 875 F.3d 701
• Parties: GRANT MEDICAL CENTER, et al., Appellants v. Eric D. HARGAN, Acting Secretary, United States Department of Health And Human Services, Appellee
• Court: U.S. Court of Appeals — District of Columbia Circuit

875 F.3d 701

GRANT MEDICAL CENTER, et al., Appellants

v.Eric D. HARGAN, Acting Secretary, United States Department of Health And Human Services, Appellee

No. 16-5314

United States Court of Appeals, District of Columbia Circuit.

Argued September 28, 2017

Decided November 17, 2017

Rehearing En Banc Denied March 7, 2018

Daniel C. Gibson argued the cause for appellants. With him on the briefs was James F. Flynn.

Weili J. Shaw, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Michael S. Raab, Attorney.

Before: Garland, Chief Judge, Tatel, Circuit Judge, and Ginsburg, Senior Circuit Judge.

Tatel, Circuit Judge

One of our sister circuits, the Sixth, ruled that the Centers for Medicare and Medicaid Services' (CMS) method for counting hospital beds conflicted with the plain language of the applicable regulation. CMS amended the regulation to permit its preferred counting method but—central to this case—applied the Sixth Circuit's interpretation to hospitals located within that circuit until the revised regulation took effect. Appellants, hospitals in the Sixth Circuit, challenge CMS' decision to acquiesce to the Sixth Circuit's ruling. Given that obeying judicial decisions is usually what courts expect agencies to do, the hospitals face an uphill battle. The district court found that the agency acted reasonably, and we agree.

I.

Medicare reimburses hospitals for providing inpatient care through the Inpatient Prospective Payment System. 42 U.S.C. § 1395ww(a), (d). Under that system, Medicare pays hospitals a fixed amount for each patient regardless of the actual costs incurred. 42 C.F.R. § 412.2(a). In order to account for certain differences among hospitals, the reimbursement formula includes several supplemental adjustments. See 42 U.S.C. § 1395ww(d). Two such adjustments are at issue here: the Indirect Medical Education (IME) adjustment, which supplements payments to hospitals that train medical residents, id. § 1395ww(d)(5)(B), and the Disproportionate Share Hospital (DSH) adjustment, which supplements payments to hospitals that serve a disproportionate share of low-income patients, id. § 1395ww(d)(5)(F). Both adjustments turn, in part, on the number of inpatient beds at the hospital. Also, due to the particularities of the formulas, hospitals claiming the IME adjustment generally benefit when the bed count is lower, see 42 C.F.R. § 412.105, while hospitals claiming the DSH adjustment benefit when the bed count is higher, see id. § 412.106.

Under this "complex and highly technical regulatory program," Thomas Jefferson University v. Shalala , 512 (U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed.2d 405 1994) (quoting Pauley v. BethEnergy Mines, Inc. , 501 U.S. 680, 697, 111 S.Ct. 2524, 115 L.Ed.2d 604 (1991) ), counting beds is no simple matter. A hospital's bed count is calculated according to an intricate formula set forth at 42 C.F.R. § 412.105(b). Prior to October 1, 2003, that regulation provided:

[T]he number of beds available in a hospital is determined by counting the number of available bed days during the cost reporting period, not including beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded distinct part hospital units, and dividing that number by the number of days in the cost reporting period.

42 C.F.R. § 412.105(b) (2002).

At issue in this case are two types of beds occasionally used for inpatient care but unmentioned in section 412.105(b)'s express exclusions: "swing beds" and "observation beds." Swing beds, found primarily in small rural hospitals, change in reimbursement status depending on whether the facility is using the bed for acute care or skilled nursing care. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed. Reg. 45,346, 45,418 –19 (2003). Observation beds are short-term beds used for outpatient care when a patient has not been formally admitted to the hospital. See id. Even though section 412.105(b) did not expressly exclude swing or observation beds, the "longstanding policy" of CMS, which administers Medicare on behalf of the United States Department of Health and Human Services (HHS), was to exclude these beds when calculating bed counts. See id. ; Joint Stipulations ¶ 2.

In 2001, two Kentucky hospitals that fell short of the bed count needed to qualify for the DSH adjustment challenged CMS' interpretation of section 412.105(b). See Clark Regional Medical Center v. HHS , 314 F.3d 241, 242 (6th Cir. 2002). The hospitals argued that excluding swing and observation beds conflicted with section 412.105(b)'s plain text. In Clark Regional Medical Center v. HHS , the Sixth Circuit agreed, explaining that "[b]ecause the regulation specifically lists certain types of beds that are excluded from the bed count, but does not list swing or observation beds, the plain meaning of the regulation suggests that it is permissible to count swing and observation beds." Id. at 247.

In response to the Sixth Circuit's decision in Clark , CMS amended section 412.105(b) through notice-and-comment rulemaking to expressly exclude swing and observation beds. See Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed. Reg. 27,154, 27,205 –06, 27,229 (May 19, 2003) (notice of proposed rulemaking); 68 Fed. Reg. at 45,470 (final rule). CMS explained that, despite its longstanding policy of excluding swing and observation beds, "courts have applied our current rules in a manner that is inconsistent with our current policy and that would result in inconsistent treatment." 68 Fed. Reg. at 45,416 (discussing Clark ). The effective date of the revised regulation was October 1, 2003. Id. at 45,346.

CMS has taken two additional actions relevant to the issue before us. First, to address reimbursement claims for patients discharged prior to the effective date of the revised regulation, the agency issued Joint Signature Memorandum 109 (JSM-109). For hospitals located within the Sixth Circuit, CMS stated that it would comply with Clark and include swing and observation beds in the total bed count. But for hospitals located outside the Sixth Circuit, CMS maintained its policy of excluding swing and observation beds from the total bed count.

Second, in St. Vincent Mercy Medical Center v. Blue Cross Blue Shield Association , CMS Adm'r Dec., 2008 WL 6468508 (Nov. 17, 2008), CMS affirmed its commitment to follow Clark and JSM-109 for pre-October 2003 reimbursement claims at hospitals within the Sixth Circuit. In that case, an Ohio hospital challenged CMS' decision to comply with Clark and include observation beds when calculating total beds for purposes of the DSH adjustment. The Administrator rejected the claim, reasoning that "[g]enerally, when a court determines that an agency's interpretation is inconsistent with the language of the regulation, an agency may recognize that court's interpretation and apply the court's interpretation uniformly, thereafter, within the jurisdictional bounds of the interpreting court." Id. at *9. This approach, the Administrator explained, ensured that "all similarly situated providers are treated the same for the applicable cost reporting periods" and facilitated "the orderly administration of a complex and time sensitive program." Id. at *10. In the years following St. Vincent , CMS has continued to apply Clark to reimbursement claims for pre-October 2003 discharges filed by hospitals within the Sixth Circuit. See, e.g. , Clinton Memorial Hospital v. Blue Cross Blue Shield Association , CMS Adm'r Dec., 2010 WL 5570983, at *9 (July 26, 2010 ).

Appellants in this case are ten Ohio hospitals ("Hospitals") operating within the Sixth Circuit. For reasons we need not probe, the Hospitals would like swing and observation beds excluded from their total bed count when calculating reimbursements for discharges prior to October 1, 2003. The Provider Reimbursement Review Board (PRRB)—the body responsible for initially hearing Medicare reimbursement disputes—rejected the Hospitals' claim. See OhioHealth 2004 Clark Bed Days Group v. BlueCross BlueShield Association , PRRB Dec. No. 2015-D1, 2015 WL 10739301, at *9 (Jan. 29, 2015). The PRRB explained that the "inclusion of observation bed days and swing bed days" for discharges prior to October 2003 "was correct ... as all the providers are located within the Sixth Circuit and the Clark decision is controlling legal precedent." Id. The PRRB also noted that it "concurs with the Administrator in St. Vincent that the ‘separation of powers doctrine requires administrative agencies to follow the law of the circuit whose courts have jurisdiction over the cause of action.[’]" Id. at *8 (quoting St. Vincent , 2008 WL 6468508, at *9 ).

The Administrator declined to review the PRRB's decision, and it became final. See 42 U.S.C. § 1395oo (f)(1). Exercising their prerogative under a venue-choice provision, the Hospitals challenged the decision in the United States District Court for the District of Columbia. Id. (providing that an appeal "shall be brought in the district court of the United States for the judicial district in which the provider is located ... or in the District Court for the District of Columbia"). The district court granted summary judgment in favor of the Secretary, see Grant Medical Center v. Burwell , 204 F.Supp.3d 68, 71 (D.D.C. 2016), and this appeal followed.

"Because we apply the same standard of review as the district court, we proceed de novo, as if [the plaintiff] had brought the case here on direct appeal." Tenet HealthSystems HealthCorp. v. Thompson , 254 F.3d 238, 244 (D.C. Cir. 2001). Thus, we review CMS' decision under the Administrative Procedure Act to determine whether it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A).

II.

The Hospitals believe that we can disregard the...