Healthalliance Hosps., Inc. v. Azar, 1:17-cv-917 (KBJ)

• Decision Date: 26 October 2018
• Docket Number: No. 1:17-cv-917 (KBJ),1:17-cv-917 (KBJ)
• Parties: HEALTHALLIANCE HOSPITALS, INC., et al., Plaintiffs, v. Alex M. AZAR, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

346 F.Supp.3d 43

HEALTHALLIANCE HOSPITALS, INC., et al., Plaintiffs,

v.Alex M. AZAR, Secretary of Health and Human Services, Defendant.

No. 1:17-cv-917 (KBJ)

United States District Court, District of Columbia.

Signed October 26, 2018

Christopher L. Keough, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, for Plaintiffs.

MEMORANDUM OPINION

KETANJI BROWN JACKSON, United States District Judge

Legal issues that arise under the federal government's Medicare and Medicaid programs tend to be "significantly more difficult to describe than to decide[.]" Cooper Hosp./Univ. Med. Ctr. v. Burwell , 179 F.Supp.3d 31, 36 (D.D.C. 2016) (internal quotation marks and citation omitted). The instant matter is no exception; it involves a claim by twelve Massachusetts hospitals ("the Hospitals" or "Plaintiffs") that the Secretary of the Department of Health and Human Services ("HHS" or "Defendant") did not fully compensate the Hospitals in the manner that the Medicare program prescribes for a one-year period, from October 1, 2008, to September 30, 2009. (See Compl., ECF No. 1, ¶ 45.) Invoking the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2), as well as a federal law that prescribes additional payments to hospitals that serve a "disproportionate number of low-income patients" under the Medicare program, 42 U.S.C. § 1395ww(d)(5)(F)(i)(I), the Hospitals allege that they are entitled to $6 million more from the federal government than they received during the relevant timeframe for their service to low-income individuals, because HHS miscalculated the percentage of patients who are eligible for Medicaid and similar services within the meaning of the applicable regulations and thus improperly lowered the amount of money that the federal government owes. (See Compl. ¶¶ 2, 45.)

Whether these contentions have merit turns on a relatively narrow dispute over the meaning of an HHS regulation that delineates how the agency will determine the proportion of low-income individuals that a hospital serves. See 42 C.F.R. § 412.106(b)(4). This regulation establishes a formula that requires consideration of "the number of the hospital's patient days of service" for two categories of low-income individuals: (1) Medicaid-eligible patients, and (2) patients who are "deemed eligible for Medicaid" for the purpose of the regulation because they are "eligible for inpatient hospital services ... under a waiver authorized under section 1115(a)(2) of the [Social Security Act.]" Id. § 412.106(b)(4)(i). The Hospitals contend that HHS has incorrectly interpreted this regulation to exclude from the second category those patients who are insured under a Massachusetts-run health insurance program for low-income individuals known as Commonwealth Care, which received a section 1115(a)(2) waiver from HHS and thereby indisputably "expand[s] upon the traditional Medicaid program eligibility criteria[.]" (Compl. ¶¶ 2, 45.)

Before this Court at present are the parties' cross-motions for summary judgment. (See Pls.' Mem. in Supp. of Mot. for Summ. J. ("Pls.' Mem."), ECF No. 12; Def.'s Mem. in Supp. of its Cross-Mot. for Summ. J. & Opp'n to Pls.' Mot. for Summ. J. ("Def.'s Mem."), ECF No. 14-1.)¹ In its papers, HHS argues that, in order to determine whether a patient is "eligible for inpatient hospital services ... under a waiver authorized under section 1115(a)(2)," 42 C.F.R. § 412.106(b)(4)(i), and is thus to be deemed eligible for Medicaid for purposes of the regulation's calculation, see id. , the court must "look[ ] to the terms of the [waiver] agreement that describe the project" to see if the Secretary has stated explicitly that covered patients are "eligible for inpatient hospital services" (Def.'s Reply in Supp. of its Cross-Mot. for Summ J. ("Def.'s Reply"), ECF No. 19, at 5 (internal quotation marks and citations omitted) ). And because no such explicit statement appears in the waiver agreement that Massachusetts and HHS entered into in regard to Commonwealth Care, HHS contends that the patient days relating to the treatment of Commonwealth Care beneficiaries do not count in the Medicare-reimbursement formula that the regulations prescribe. (See id. at 5–6.) The Hospitals respond that HHS's explicit-statement requirement is contrary to both the plain language of the regulation and the intent behind section 412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations. (See Pls.' Mem. at 24–29; Pls.' Reply in Supp. of Mot. for Summ. J. & Opp'n to Def.'s Cross-Mot. for Summ. J. ("Pls.' Reply"), ECF No. 16, at 8–9.) The Hospitals further maintain that HHS's reading departs from the agency's practices in other cases (see Pls.' Reply at 24–25), and is an unfair, post-hoc rationalization that the agency did not provide or promote at the administrative stage of this dispute. (See id. at 22–24; 25–29.)

On September 28, 2018, this Court issued an Order that GRANTED Plaintiffs' motion for summary judgment, and DENIED Defendant's cross-motion for summary judgment. (See Order, ECF No. 25.) As a result, the Court also VACATED the challenged agency decision, and REMANDED this matter to HHS for further proceedings. (See id. ) This Memorandum Opinion provides the Court's reasons for that Order.

In short, after reviewing the parties' briefs, examining the record, and considering the oral arguments presented in this case, this Court concluded that HHS's interpretation of the unambiguous text of section 412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations to disallow the inclusion of the patient days of service that were associated with patients who were covered by Commonwealth Care is an arbitrary and capricious determination, and thus violates the APA. It is clear from the plain language of the regulation's text that patients who are eligible to receive comprehensive medical care through an insurance program authorized under a section 1115 waiver (as evidenced by their eligibility for inpatient hospital services) are to be included in the Medicare reimbursement formula, and whether or not the waiver agreement through which the Secretary authorized the program says anything about their eligibility for inpatient hospital services is irrelevant to the calculation of a hospital's disproportionate share hospital adjustment. Furthermore, given that every individual enrolled in Massachusetts's Commonwealth Care program during the relevant time period obtained a subsidized insurance plan that actually provided coverage for inpatient hospital services, the Secretary's authorization of the Commonwealth Care program under the pertinent section 1115 waiver made every individual insured via Commonwealth Care "eligible for inpatient hospital services" within the meaning of section 412.106(b)(4)(i). Therefore, per the plain text of the applicable regulation, HHS should have counted the patient days pertaining to Commonwealth Care beneficiaries when calculating the Hospitals' disproportionate share hospital adjustments under the Medicare program.

I. BACKGROUND

Congress authorized and established the federal Medicare and Medicaid programs in two different subchapters of the Social Security Act, Pub L. No. 89-97 (1965), and the statutory provisions that pertain to each of these programs cross-reference one another in various ways. See Cooper Hosp. , 179 F.Supp.3d at 36 ("Although the two programs share similarities, each functions in partial independence of the other, albeit with many cross-references between the subchapters."). For present purposes, it is important to understand that "[t]he Medicare program provides federally-funded health insurance to qualifying elderly and disabled individuals[,]" Saint Francis Med. Ctr. v. Azar , 894 F.3d 290, 291 (D.C. Cir. 2018) (citation omitted); see also 42 U.S.C. §§ 1395 – 1395lll, and that, since 1983, the federal government has pursued this goal by reimbursing hospitals for the services they provide to elderly and disabled patients "based on the average rate of operating costs for inpatient hospital services ... at a fixed amount per patient, regardless of the actual operating costs" that those hospitals incur while treating those patients. Billings Clinic v. Azar , 901 F.3d 301, 303 (D.C. Cir. 2018) (internal quotation marks and citation omitted); see also Abington Mem. Hosp. v. Burwell , 216 F.Supp.3d 110, 116–17 (D.D.C. 2016). Consequently, as far as Medicare reimbursements are concerned, patient counts matter. Moreover, as explained below, Medicare's reimbursement formulas take into account a variety of factors, including whether a particular hospital's actual costs are significantly higher than average due to its treatment of low-income individuals. Thus, the Medicare payment system's base per-patient rates are subject to a variety of adjustments that increase or decrease the total sum that the government pays each hospital. See Billings Clinic , 901 F.3d at 304 ; 42 U.S.C. § 1395ww(d)(1).

A. Medicare's Disproportionate Share Hospital (DSH) Adjustment

The instant dispute homes in on one of these hospital-specific adjustments to Medicare's base payment rates: "the disproportionate share hospital (DSH) adjustment." Billings Clinic , 901 F.3d at 304 (internal quotation marks and citation omitted); see also 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). In essence, this adjustment constitutes a "supplemental payment[ ]" to hospitals that treat a "significant number" of "very low-income patients[.]" Allina Health Servs. v. Sebelius , 746 F.3d 1102, 1105 (D.C. Cir. 2014). The DSH adjustment reflects Congress's recognition that "[h]ospitals that serve a disproportionate numbers of low-income patients have higher [M]edicare costs per case[,]" H.R. Rep. No. 99-241, pt. 1, at 16 (1985), and that absent this additional payment, the standardized rates that Congress has authorized for certain medical expenses would not cover the full operating costs for these hospitals, see Cooper Hosp. , 179 F.Supp.3d at 37. Thus, under the Medicare statute, if a...