Nazareth Hosp. v. Sec'y U.S. Dep't of Health & Human Servs.

• Decision Date: 02 April 2014
• Docket Number: No. 13–2627.,13–2627.
• Citation: 747 F.3d 172
• Parties: NAZARETH HOSPITAL; St. Agnes Medical Center v. SECRETARY UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

747 F.3d 172

NAZARETH HOSPITAL; St. Agnes Medical Center

v.SECRETARY UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Appellant.

No. 13–2627.

United States Court of Appeals,

Third Circuit.

Argued Jan. 16, 2014.

Opinion filed: April 2, 2014.

Negative Treatment Reconsidered

42 C.F.R. § 412.106(b)(4)(ii)Veronica J. Finkelstein, Esquire, Joel M. Sweet, Esquire, Office of United States Attorney, Philadelphia, PA, Stuart F. Delery, Esquire, Assistant Attorney General, Zane David Memeger, Esquire, United States Attorney, Anthony J. Steinmeyer, Esquire, Joshua Waldman, Esquire (argued), Attorneys, Appellate Staff, United States Department of Justice, Washington, DC, for Appellant.

Mark H. Gallant, Esquire (argued), Gregory M. Fliszar, Esquire, Katie Beran, Esquire, Robert A. Chu, Esquire, Cozen O'Connor, Philadelphia, PA, for Appellees.

Before: RENDELL, ROTH and BARRY, Circuit Judges.

OPINION

RENDELL, Circuit Judge:

Kathleen Sebelius, Secretary of the United States Department of Health and Human Services (“HHS”), has appealed from the District Court's judgment holding the Secretary's Medicare regulation to be arbitrary and capricious, as well as a violation of the Equal Protection Clause. The dispute centers around certain Medicare reimbursement adjustments to appellees, two Pennsylvania hospitals. The District Court found there was no rational basis to exclude from such reimbursements patients covered by Pennsylvania's General Assistance (“GA”) plan, while at the same time including patients covered under a federal statutory waiver program. For the reasons that follow, we will reverse the judgment of the District Court.

I. Background

A. Medicare and Medicaid

Medicare, the federal health insurance program for older and disabled individuals, reimburses hospitals for specified inpatient services based upon a “prospective system.” 42 U.S.C. § 1395ww. Under this system, payments are predicated upon prevailing rates for given services, rather than retrospectively based on a hospital's actual costs. Id. at § 1395ww(d). The statute provides for certain adjustments to prospective reimbursement rates, such as for different wage levels, hospitals with medical education, and sole community hospitals. Id. at §§ 1395ww(d)(3)-(d)(5).

Another adjustment provided for by the statute is for “disproportionate share hospitals” (“DSH”), hospitals that serve high numbers of low-income patients. Whether a hospital is eligible for a Medicare DSH adjustment depends in part on the number of days during which the hospital treats certain low-income patients, also known as “patient days.” The relevant language of the subsection concerning calculation of Medicare DSH adjustments is as follows:

(II) ... the number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under subchapter XIX of this chapter [Medicaid] ...

In determining under subclause (II) the number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under subchapter XIX of this chapter, the Secretary may, to the extent and for the period the Secretary determines appropriate, include patient days of patients not so eligible but who are regarded as such because they receive benefits under a demonstration project approved under subchapter XI of this chapter.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (emphasis added). In plain English, the Medicare DSH formula takes into account the number of patient days for those patients eligible for Medicaid, and may also include patient days for those patients ineligible for Medicaid, but who received benefits under a Medicaid “demonstration project.”

Pursuant to the Medicaid Act, individual states submit a medical assistance plan which provides coverage to certain classes of indigent individuals, which we will call a “State Plan.” 42 U.S.C. § 1396a(a). A State Plan must conform to certain statutory eligibility requirements, but the law also provides states flexibility regarding some of the categories of individuals to be covered, and the medical care and services that they can receive. Id.; see Cooper Univ. Hosp. v. Sebelius, 686 F.Supp.2d 483, 486 (D.N.J.2009)aff'd,636 F.3d 44 (3d Cir.2010). Once a plan is approved by the Secretary, the state can receive certain reimbursements from the federal government based on amounts expended as medical assistance under the State Plan, that is, those amounts expended covering individuals eligible for Medicaid. See Univ. of Wash. Med. Ctr. v. Sebelius, 634 F.3d 1029, 1031 (9th Cir.2011).

As noted above in the Medicare DSH provision cited, the Secretary is empowered to waive statutory requirements pertaining to federal entitlement programs such as Medicaid and “regard” patients as eligible for Medicaid if they are treated under an experimental, pilot or demonstration project under 42 U.S.C. § 1315. Thus, Medicare DSH adjustments take into account both the patient days that a hospital has treated patients eligible for Medicaid, and days for those patients ineligible for Medicaid but who receive benefits pursuant to a Medicaid demonstration project.To authorize such a project, known as a Section 1115 waiver project,¹ the Secretary must conclude that the state-submitted proposal “is likely to assist in promoting the objectives of” Medicaid. 42 U.S.C. § 1315(a). In addition, the Secretary has discretion to choose which Medicaid requirements will be waived, how long the waiver lasts, and whether the costs of the project will be considered Medicaid-covered expenditures. Id. at §§ 1315(a)(1)- (a)(2). The Secretary must also conclude that the project will be budget-neutral. Id. at § 1315(e)(6). Waivers are not inherently provided for in State Plans; rather, states must submit specific applications for Section 1115 waiver projects.

B. Evolution of the Medicare DSH Formula

Initially, for purposes of calculating DSH adjustments, the Medicare statute counted simply the “number of the hospital's patient days of service for which patients were eligible for Medicaid but not entitled to Medicare Part A....” 42 C.F.R. § 412.106(b)(4). Patients were considered eligible for Medicaid if they were eligible for inpatient hospital services under an approved State Medicaid Plan. “Although the Secretary administers DSH payments, it is a fiscal intermediary, typically a health insurance company authorized to act on the Secretary's behalf, who reviews the hospital's end-of-year cost reports.” Phoenix Mem'l Hosp. v. Sebelius, 622 F.3d 1219, 1223 (9th Cir.2010). The Medicare DSH formula was regarded by intermediaries, at least in some states, as including days covered under state GA and charity care programs. In brief, GA programs generally provide reimbursement to hospitals for care of individuals who are low-income as defined by a given state, but not eligible for Medicaid. Id. It seems that through the 1990s, intermediaries in Pennsylvania included GA patient days in the Medicare DSH formula. (Appellees' Br. at 7.)

However, “[i]n light of ... discrepancies between the practices of fiscal intermediaries in the various states,” in December 1999 the Centers for Medicare and Medicaid Services (“CMS”) clarified that the Medicare DSH formula only permitted the inclusion of patient days wherein the patients were eligible for Medicaid, excluding state general assistance and charity plan patient days going forward. See Adventist Health Sys./Sunbelt, Inc. v. Sebelius, 715 F.3d 157, 161 (6th Cir.2013); (App.568–73). In January 2000, the Secretary issued a Final Interim Rule, stating that: “hospitals may include all days attributable to populations eligible for Title XIX matching payments through a waiver approved under section 1115 of the Social Security Act.” 42 C.F.R. § 412.106(b)(4)(ii). Thus, while GA patient days remained excluded, hospitals could now count patient days for individuals covered under a Section 1115 waiver project toward their Medicare DSH adjustment.

During the subsequent notice and comment period, several comments were submitted to the Secretary claiming that the inclusion of days under a Section 1115 waiver was unfair to those hospitals that did not operate under such a waiver, but rather treated patients eligible only under state GA plans. The Secretary agreed that while the regulation “does advantage States that have a section 1115 expansion waiver in place, these days are considered to be Title XIX days by Medicaid standards.”Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2001 Rates, 65 FR 47054–01, 47087, Aug. 1, 2000. The Secretary went further:

General assistance days are days for patients covered under a State-only or county-only general assistance program, whether or not any payment is available for health care services under the program. Charity care days are those days that are utilized by patients who cannot afford to pay and whose care is not covered or paid by any health insurance program. While we recognize that these days may be included in the calculation of a State's Medicaid DSH payments, these patients are not Medicaid-eligible under the State plan and are not considered Title XIX beneficiaries. Therefore, Pennsylvania, and other States that have erroneously included these days in the Medicare disproportionate share adjustment calculation in the past, will be precluded from including such days in the future.

(App.65–66.) As such, the Final Rule, issued in August 2000, stated that Section 1115 waiver patient days could be included in Medicare DSH calculations, while GA patient days remained excluded.

Subsequently, Congress passed the Deficit Reduction Act of 2005 (“DRA”). That law amended the statutory Medicare DSH provision to state explicitly that patient days would be counted for those patients eligible for Medicaid, and “the Secretary...