Phoenix Baptist Hosp. v. Sebelius

• Citation: 622 F.3d 1219
• Decision Date: 21 September 2010
• Docket Number: No. 09-15506.,09-15506.
• Parties: PHOENIX MEMORIAL HOSPITAL; Casa Grande Regional Medical Center; University Medical Center; John C. Lincoln Hospital-North Mountain; St. Joseph's Hospital & Medical Center; Maricopa County Medical Center; Chandler Regional Hospital; Phoenix Baptist Hospital, Plaintiffs-Appellants, v. Kathleen SEBELIUS, in her official capacity as Secretary, U.S. Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

622 F.3d 1219

PHOENIX MEMORIAL HOSPITAL; Casa Grande Regional Medical Center; University Medical Center; John C. Lincoln Hospital-North Mountain; St. Joseph's Hospital & Medical Center; Maricopa County Medical Center; Chandler Regional Hospital; Phoenix Baptist Hospital, Plaintiffs-Appellants,

v.Kathleen SEBELIUS, in her official capacity as Secretary, U.S. Department of Health and Human Services, Defendant-Appellee.

No. 09-15506.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted March 9, 2010.

Filed Sept. 21, 2010.

Roger N. Morris, Melody Ann Emmert, Lisa E. Davis, Quarles & Brady LLP, Phoenix, AZ, for the plaintiffs-appellants.

Tony West, John J. Tuchi, Anthony J. Steinmeyer, August E. Flentje, Department of Justice, Washington, D.C., for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona, H. Russel Holland, Senior District Judge, Presiding. D.C. No. 2:07-cv-01720-HRH.

Before: BETTY B. FLETCHER, RICHARD R. CLIFTON, and CARLOS T. BEA, Circuit Judges.

OPINION

B. FLETCHER, Circuit Judge:

Eight Arizona hospitals that all receive federal reimbursement for treating Medicare patients appeal the district court's grant of summary judgment in favor of the Secretary of Health and Human Services. The hospitals argue that the adjustment they receive for serving disproportionately high numbers of low-income patients should be increased because the reimbursement does not account for all low-income patients included under the Arizona Health Care Cost Containment System. We have jurisdiction under 28 U.S.C. § 1291 and we affirm.

BACKGROUND

A. Statutory Framework

Under Part A of the Medicare program, the federal government reimburses providers for covered medical services for elderly and disabled individuals. 42 U.S.C. § 1395 et seq. Since 1983, hospitals have received Medicare reimbursement for inpatient hospital services through the Prospective Payment System (PPS). 42 U.S.C. § 1395ww(d); Legacy Emanuel Hosp. & Health Ctr. v. Shalala, 97 F.3d 1261, 1262 (9th Cir.1996). Under PPS, individual hospitals receive reimbursement “based on a predetermined amount that an efficiently run hospital should incur for inpatient services depending on the patient's diagnosis at time of discharge.” Legacy Emanuel Hosp. & Health Ctr., 97 F.3d at 1262. The PPS then can be adjusted in several ways to account for hospital-specific factors. 42 U.S.C. § 1395ww(d)(5). The adjustment at issue in this case gives additional reimbursement to hospitals that serve a “significantly disproportionate number of low-income patients.” 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). This adjustment, known as the Medicare disproportionate share hospital (DSH) adjustment, seeks to compensate hospitals for the additional expense per patient associated with serving high numbers of low-income patients. See, e.g., H.R.Rep. No. 99-241 at 16 (1986), reprinted in 1986 U.S.C.C.A.N. 579, 594.

Whether a hospital qualifies for the DSH adjustment, and how much that adjustment will be, depends on the hospital's “disproportionate patient percentage.” See 42 U.S.C. § 1395ww(d)(5)(F)(v). The disproportionate patient percentage is a mathematical calculation that “serves as a ‘proxy’ for all low-income patients.” Legacy Emanuel Hosp. & Health Ctr., 97 F.3d at 1263 (quotation omitted). One part of this calculation, known as the “Medicare Low Income Proxy,” accounts for low-income Medicare patients and relates to the number of Medicare patients who qualify for Supplemental Security Income. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). The second part of this calculation relates to the number of non-Medicare low-income patients served by a hospital, expressed as a percentage of the hospital's entire patient population. It is commonly referred to as the “Medicaid Fraction” or “Medicaid Low Income Proxy.” Congress has defined the formula for calculating the Medicaid Low Income Proxy as:

the fraction (expressed as a percentage), the numerator of which is 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, but who were not entitled to benefits under part A of this subchapter, and the denominator of which is the total number of the hospital's patient days for such period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Thus, the amount of additional reimbursement a hospital receives for each Medicare patient it serves depends in part on the number of patients “eligible for medical assistance under a State plan approved under [Title] XIX.” Id.

Although this case concerns reimbursement for Medicare patients, the heart of the dispute centers on which patients are included in the Medicaid Low Income Proxy. The more patients included, the greater the amount of the additional reimbursement. Medicaid, Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., is a cooperative federal-state program that provides health care to indigent individuals who are elderly, blind, or disabled, or members of families with dependent children. Under the Medicaid program, the federal government provides funds to states to offset some of the expense of furnishing medical services to low-income persons. Id.; 42 C.F.R. § 430.0. The program is jointly financed by the federal and state governments, and states administer the program according to federal guidelines. 42 U.S.C. § 1396 et seq. ; 42 C.F.R. § 430.0. To participate in Medicaid, a state must submit a plan that the Secretary approves. 42 U.S.C. § 1396a(a). A plan specifies certain categories of individuals and types of medical services that will be covered. See 42 U.S.C. § 1396a. State plans must cover the “categorically needy,” those individuals who qualify because they are eligible for assistance under either the Aid to Families with Dependent Children program or the Supplemental Security Income program. See Spry v. Thompson, 487 F.3d 1272, 1274 (9th Cir.2007). Participating states also can provide coverage to the “medically needy,” those individuals who have incomes above the poverty line, but who lack the means to pay for medical care. See id. “Within those broad requirements, however, states are given discretion to determine the type and range of services covered, the rules for eligibility, and the payment levels for services.” Legacy Emanuel Hosp. & Health Ctr., 97 F.3d at 1262 (citing 42 C.F.R. § 430.0.). If the Secretary approves a states's plan, the state will be eligible for federal payments. 42 U.S.C. §§ 1315, 1396, 1396c.

Section 1115 of the Social Security Act authorizes the Secretary to approve experimental or demonstration projects with the goal of encouraging states to adopt innovative programs that promote the objectives of Medicaid. Portland Adventist Medical Ctr. v. Thompson, 399 F.3d 1091, 1093 (9th Cir.2005); 42 U.S.C. § 1315(a). “For these experimental projects, the Secretary is authorized to waive compliance with the general federal requirements for Medicaid state plans set out in § 1396a.” Portland Adventist Medical Ctr., 399 F.3d at 1093. Experimental projects may cover medical assistance costs for individuals who could be eligible for Medicaid even without a waiver as well as to individuals who would not be eligible. Id. (citing Interim Final Rule, Medicare Program; Medicare Inpatient Disproportionate Share Hospital (DSH) Adjustment Calculation, 65 Fed.Reg. 3136, 3136-37 (Jan. 20, 2000)). Patients who are eligible for services by way of the Secretary's waiver of particular requirements under section 1115 are known as “expansion populations” or “expanded eligibility populations.” Id. Expansion and expanded eligibility populations are included in the calculation of the Medicaid Low Income Proxy. Id. at 1099.

B. The Arizona Hospitals' Challenge

The dispute here centers on the Secretary's attempt to clarify federal reimbursement policies for certain groups of patients. Arizona participates in Medicaid pursuant to a section 1115 demonstration project waiver. The state program, Arizona Health Care Cost Containment System (“AHCCCS”), provides acute care services to four eligibility categories relevant here: (1) the Title XIX Categorically Needy (Mandatory Medicaid); (2) the Medically Needy/Medically Indigent (MN/MI); (3) Eligible Low Income Children (ELIC); and (4) Eligible Assistance Children (EAC).

Up until 1990, plaintiffs received DSH adjustment payments that were calculated by including MN/MI, ELIC, and EAC (collectively “MN/MI”) patient days in the DSH reimbursement formula. 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. ¹ 42 U.S.C. § 1395g; 42 C.F.R. §§ 405.1801(b)(1), 413.24(f), 413.64(f). In early 1992, the plaintiff hospitals were advised that the intermediary would not include these patient days in the DSH formula for fiscal years after 1990. From 1990 onward, therefore, Arizona's intermediary had a practice of excluding patient days attributable to these categories of recipients.

Intermediaries in other states, however, historically had allowed hospitals to include days for patients who qualified for general assistance and other state-only funded programs in their DSH calculation. In the mid-1990s, several of the intermediaries who previously had included state-only program days in the DSH calculation notified hospitals that they no longer would include these days and would seek to recoup erroneously paid funds. In December 1999, the Secretary issued Program Memorandum 99-62 (“Program Memorandum”), a “clarification of allowable Medicaid days in the Medicare [DSH] adjustment calculation.” This Program Memorandum explained that states with both state-only and federal-state eligibility groups in one program would not be allowed to include state-funded...