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Nature of Suit Code: 151
Nature of Suit: Overpayments under the Medicare Act
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 19, 2015 Decided August 7, 2015

No. 12-5411

GROSSMONT HOSPITAL CORPORATION, DOING BUSINESS AS

SHARP GROSSMONT HOSPITAL, ET AL.,

APPELLANTS

v.

SYLVIA MATHEWS BURWELL, SECRETARY, UNITED STATES

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:10-cv-01201)

Robert L. Roth argued the cause for appellants. With him

on the briefs was John R. Hellow.

Sydney Foster, Attorney, U.S. Department of Justice,

argued the cause for appellee. With her on the brief were

Ronald C. Machen, Jr., U.S. Attorney at the time the brief was

filed, and Michael S. Raab, Attorney. R. Craig Lawrence,

Assistant U.S. Attorney, entered an appearance.

Before: MILLETT, Circuit Judge, and EDWARDS and

SENTELLE, Senior Circuit Judges.

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Opinion for the Court filed by Senior Circuit Judge

SENTELLE.

SENTELLE, Senior Circuit Judge: Appellants, California

hospitals, sought reimbursement under the Medicare program

for so-called “bad claims.” Payment was denied because the

claims were submitted to Medicare without first being submitted

to the State of California for a determination of any payment

responsibility it may have for the claims. The appellants were

denied relief in administrative proceedings. The district court

affirmed. We affirm the district court.

BACKGROUND

The Medicare program pays for certain medical care

provided primarily to eligible elderly and disabled persons. 

Under the program, when a hospital participating in the program

incurs costs in providing services to a Medicare patient, those

costs are borne in part by the patient through the payment of

deductibles and co-insurance. See 42 U.S.C. § 1395e; 42 C.F.R.

§ 409.80 et seq. Generally, the remaining costs are reimbursed

by the Medicare program to the hospital through fiscal

intermediaries, which are typically private insurance companies. 

See 42 U.S.C. § 1395h (2000). The Medicaid program is a

cooperative federal-state program to provide medical care for

eligible low-income individuals. The program is jointly funded

by federal and state governments. In order for a state to qualify

for federal funding, the Secretary of Health and Human Services

(hereinafter “Secretary”) must approve the state’s Medicaid

plan, which sets out, inter alia, covered medical services. See

42 U.S.C. §§ 1396a, 1396b.

Some patients are eligible for both Medicare and Medicaid

(known as “dual eligibles”). When this occurs Medicare is the

primary payor. State Medicaid plans often mandate that the

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state Medicaid agency pay for part or all of the Medicare

deductibles and coinsurance amounts incurred in connection

with treating these dual eligibles. But if under its Medicaid plan

a state is not obligated to pay such deductibles or coinsurance

amounts, then these amounts can be included as “bad debt”

under Medicare, and thus qualify as reimbursable to the hospital

by the federal government. Pursuant to agency regulations, for

a bad debt to be reimbursable the hospital must, inter alia, be

able to establish that reasonable collection efforts were made.

Prior to 1994, California’s Medicaid plan, known as MediCal, provided for payment of dual eligibles’ Medicare

deductibles and co-insurance. On May 1, 1994, however, MediCal unilaterally decided to stop making these payments. In

1996, the Secretary and Medi-Cal reached an agreement under

which Medi-Cal’s payments for Medicare deductibles and coinsurance would continue, subject to a payment ceiling and

retroactive to May 1, 1994. However, for a period of years after

this agreement was reached Medi-Cal continued to

automatically set its payment responsibility for dual eligibles to

zero. Consequently, in 1998 the Secretary and California

reached another agreement under which Medi-Cal would

reprocess all claims made between May 1994 and March 1999.

Appellants Grossmont Hospital Corporation and four other

California hospitals (hereinafter “Grossmont” or “the hospitals”)

provided certain health services to dual eligibles for the relevant

time period, May 1, 1994, through June 30, 1998. During this

time, Grossmont’s fiscal intermediary and Medi-Cal

implemented a system that was intended to automatically

transmit from the intermediary to Medi-Cal all of Grossmont’s

claims for payment of dual eligibles’ deductibles and coinsurance. However, the system did not always work properly,

and consequently some of Grossmont’s claims were not

transmitted to Medi-Cal. After Medi-Cal reprocessed the claims

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in its system for May 1994 through March 1999, it issued lumpsum payments in 1999, including to Grossmont. Grossmont

subsequently realized that some of its claims were not included

in its lump-sum payments. One of the hospitals sent the state a

letter concerning the missing claims and a few telephone calls

were made to the state, but there is no evidence in the

administrative record that the hospitals took any other steps to

obtain state determinations of payment responsibility for the

missing claims. Grossmont eventually produced its own

estimates of the missing claims. Grossmont submitted these

estimates to its intermediary, seeking payment, but the

intermediary determined that such documentation was not

appropriate. In 2006, Grossmont sent a letter to the state with a

request to process an attached sample of the missing claims, but

the state denied the request because the claims were not

submitted in a timely manner.

Grossmont appealed the intermediary’s determination to the

Provider Reimbursement Review Board (hereinafter “Board”). 

The Board reversed the intermediary’s determination,

concluding that the intermediary had sufficient information to

determine the amounts that Medi-Cal was not obligated to pay. 

Joint Appendix (“JA”) 58-70.

The Secretary, through the Administrator for the Centers for

Medicare and Medicaid Services, then reviewed the Board’s

decision. The Secretary reversed the Board’s decision,

observing that under a longstanding policy Medicare would not

reimburse a hospital for dual eligibles’ unpaid deductible and

co-insurance amounts unless the hospital first billed the state

Medicaid agency (“must bill policy”) and obtained a

determination from the state of its payment responsibility

(“mandatory state determination”). Here, the Secretary

concluded, there had been no state determination made on the

missing claims and therefore the claims were not reimbursable. 

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JA 35-56.

Grossmont then appealed the Administrator’s decision to

the district court. The parties cross-moved for summary

judgment. In a thorough Memorandum Opinion, Grossmont

Hosp. Corp. v. Sebelius, 903 F. Supp. 2d 39 (D.D.C. 2012)

(“Grossmont I”), the district court granted the Secretary’s

motion for summary judgment, affirming the Secretary’s

decision that the claims were not reimbursable. 

Grossmont now appeals the district court’s decision.

STANDARD OF REVIEW

We review the district court’s grant of summary judgment

de novo and review the Secretary’s decision under the standard

of the Administrative Procedure Act. See, e.g., St. Luke’s Hosp.

v. Thompson, 355 F.3d 690, 693-94 (D.C. Cir. 2004). We may

set aside the Secretary’s decision only if it is “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law,” or “unsupported by substantial evidence

in the administrative record.” 5 U.S.C. § 706(2)(A), (E);

Marymount Hosp., Inc. v. Shalala, 19 F.3d 658, 661 (D.C. Cir.

1994). The Secretary’s interpretation of her own regulations is

entitled to “substantial deference” and “must be given

controlling weight unless it is plainly erroneous or inconsistent

with the regulation.” Thomas Jefferson Univ. v. Shalala, 512

U.S. 504, 512 (1994) (internal quotation marks omitted).

DISCUSSION

Grossmont argues that the mandatory state determination

policy violates the bad debt moratorium; that the Secretary’s

refusal to pay Grossmont’s claims based on the mandatory state

determination policy is arbitrary and capricious; and that

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Grossmont’s claims must be paid under Joint Signature

Memorandum 370.

A. The bad debt moratorium

Grossmont questions the validity of the mandatory state

determination policy. According to Grossmont, the longstanding policy of the Secretary was an “alternative

documentation” policy, under which hospitals had the burden to

show that they were entitled to the Medicare bad debts claimed,

but were not required to submit bills to the state Medicaid

program. Grossmont contends that the alternative

documentation policy was confirmed in 1995 when the

Secretary issued instructions in the Provider Reimbursement

Manual, Part II § 1102.3L, which stated that hospitals can

document a state’s obligation for bad debts by supplying either

a Medicaid remittance advice form or alternative documentation

of the state’s lack of responsibility for payment. 

Even though § 1102.3L was deleted by the Secretary in

2003, it is Grossmont’s contention that the alternative

documentation policy was in effect for the relevant time period,

i.e., May 1994 through June 1998. It was not until a case

decision in 2000, Grossmont asserts, that the Secretary sought

for the first time to impose a mandatory state determination

policy to limit the “alternative documentation” policy. See

California Hospitals 91-91 Outpatient Crossover Bad Debts

Group v. Blue Cross and Blue Shield Association/Blue Cross of

California/Blue Cross of Omaha/ Aetna Life Insurance

Company, Adm. Dec. (Oct. 31, 2000), JA 254–265. Grossmont

argues that this attempt in 2000 to limit the application of the

long-standing alternative documentation policy to the hospitals’

claims must be rejected as a violation of the statutory bad debt

moratorium. The moratorium was enacted by Congress in 1987

and prohibits making any change to any policy in effect at the

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time of its enactment with respect to bad debt payments. See

Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-

203, § 4008(c), 101 Stat. 1330. In short, Grossmont claims that

the mandatory state determination policy violates the bad debt

moratorium and therefore the policy is invalid.

The district court refused to consider Grossmont’s Bad Debt

Moratorium argument, finding that Grossmont waived the

argument by failing to raise it in the administrative proceedings

below. See Grossmont I, 903 F. Supp. 2d at 48. Grossmont

argues that the district court erred in its finding because (a) the

Secretary first raised the moratorium in her decision below, thus

opening the door to the issue, (b) the Secretary did not object in

the district court to Grossmont’s moratorium argument, thereby

waiving any objection to Grossmont’s waiving it, and (c) the

Secretary fully briefed the moratorium issue below. We do not

find these arguments persuasive. We agree with the district

court that this issue will not be considered now as Grossmont

was required to “raise [the] issue with [the] agency before

seeking judicial review.” ExxonMobil Oil Corp. v. FERC, 487

F.3d 945, 962 (D.C. Cir. 2007). Grossmont makes no claim to

raising this issue in the administrative proceedings. We

conclude that Grossmont has failed to preserve its challenge that

the mandatory state determination policy violates the bad debt

moratorium.

* * * * * *

Grossmont goes on to argue that in addition to violating the

moratorium, the Secretary’s effort to limit the alternative

documentation policy must be rejected because it is a change in

policy that must be adopted in a notice and comment rule. 

Grossmont further argues that even if the Secretary could

lawfully limit the alternative documentation policy, that

limitation could not be applied to its claims because doing so

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would have an unlawful retroactive effect. We will not consider

these arguments, however, because as with the bad debt

moratorium issue discussed above, Grossmont did not raise

these arguments in the administrative proceedings, and has thus

failed to preserve them.

B. Arbitrary and capricious

Grossmont argues that even if the Secretary could lawfully

apply the mandatory state determination policy, doing so under

the facts of this case would be arbitrary and capricious and not

based on substantial evidence. This is so, according to

Grossmont, because the only purpose for the mandatory state

determination policy is to assure that the Secretary does not pay

for Medicare co-payments that are the responsibility of the state. 

Grossmont argues that that concern does not arise here because,

first, Medi-Cal made the only determination necessary to show

that Medicare owes the amounts the hospitals claim. In support

of this argument, Grossmont contends that in issuing the two

lump-sum retroactive payments, the Secretary showed that she

had already made the determination that the relevant patients

were eligible for Medi-Cal when the services were provided. 

This determination by Medi-Cal, Grossmont argues, was the

only determination necessary to establish Medi-Cal’s obligation

for the claims at issue; the rest was grade school arithmetic. 

Second, Grossmont asserts that the determination by the

hospitals of Medi-Cal’s payment obligation for the claims at

issue was made using the same methodology that the Secretary

used to determine Medi-Cal’s payment obligation for the lumpsum claims.

In response, the Secretary argues that she properly applied

the must bill policy here. The Secretary asserts that she

reasonably refused to accept Grossmont’s estimates of MediCal’s responsibility in lieu of Medi-Cal’s own determinations of

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those amounts. The Secretary states that she never agreed that

Grossmont’s estimates were accurate. The Secretary further

states that she has not taken a position on the accuracy of the

estimates because such a task is administratively impractical. 

Finally, the Secretary states that she has reasonably concluded

that the state is the best source of Medicaid eligibility and state

payment information necessary to calculate properly the state’s

payment responsibility. Taking all of these factors into

consideration, the Secretary argues that the application of the

must bill policy here is not arbitrary or capricious. We agree.

In her decision, the Secretary stated that:

The policy requiring a provider to bill the State and

receive a determination on that claim, where the State

is obligated either by statute or under the terms of its

plan to pay all, or any part of the Medicare deductible

or coinsurance amounts, is consistent with the general

statutory and regulatory provisions relating specifically

to the payment of bad debts and generally to the

payment of Medicare reimbursement.

JA 48 (emphasis deleted). In particular the Secretary noted that

pursuant to 42 C.F.R. § 413.89(e), to be allowable a bad debt

must meet the following criteria:

(1) The debt must be related to covered services and

derived from deductible and coinsurance amounts.

(2) The provider must be able to establish that

reasonable collection efforts were made.

(3) The debt was actually uncollectible when claimed

as worthless.

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(4) Sound business judgment established there was no

likelihood of recovery at any time in the future.

The Secretary further noted that under Section 310 of the

Provider Reimbursement Manual, § 413.89(e)’s second criterion

requirement of a “reasonable collection effort” includes “the

issuance of a bill on or shortly after discharge or death of the

beneficiary to the party responsible for the patient’s personal

financial obligations . . . .” JA 43–44 (emphasis added by the

Secretary). And with respect to the third criterion, the Secretary

explained that “[a] fundamental requirement to demonstrate that

an amount is, in fact, unpaid and uncollectible, is to bill the

responsible party.” JA 48. We hold that it is sensible for the

Secretary to require that the state determine in the first instance

the Medicaid eligibility of the claims and the appropriate

amount of state payment owed because state policies vary

widely and the state will have all of the necessary information

under its Medicaid system.

We have previously instructed that when reviewing “the

Secretary’s interpretation of her own regulations, we apply a still

more deferential standard than that afforded under Chevron

[U.S.A. v. NRDC, 467 U.S. 837 (1984)]. Provided an agency’s

interpretation of its own regulation does not violate the

constitution or a federal statute, it must be given controlling

weight unless it is plainly erroneous or inconsistent with the

regulation.” Nat’l Medical Enters. v. Shalala, 43 F.3d 691,

696–97 (D.C. Cir. 1995) (internal quotation marks and citation

omitted). At least three Justices of the Supreme Court have

expressed misgivings concerning enhanced deference. See

Perez v. Mortgage Bankers Assn, 135 S. Ct. 1199, 1210–13

(2015) (Alito, J., concurring in part and concurring in the

judgment); id. at 1213 (Thomas, J., concurring in the judgment);

and id. at 1211 (Scalia, J., concurring in the judgment). We

need not embroil ourselves in that controversy, since there is a

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simpler approach for resolution of the question. 

Ultimately, our review is governed by statute. “Judicial

review of an agency’s interpretation of its own regulations is

governed by 5 U.S.C. § 706(2)(A), which requires courts to set

aside agency action that is “‘arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law.’” Edwards,

Elliott, & Levy, Federal Standards of Review 199 (2d ed. 2013). 

This standard of review relies on Allentown Mack Sales & Serv.,

Inc. v. NLRB, 522 U.S. 359, 377 (1998), and Thomas Jefferson

Univ. v. Shalala, 512 U.S. 504, 512 (1994). Under this standard,

we afford “substantial deference” to an agency’s views. 

Allentown Mack, 522 U.S. at 377; Thomas Jefferson Univ., 512

U.S. at 512. We will defer to the agency’s interpretation “unless

an alternative reading is compelled by the regulation’s plain

language or by other indications of the [agency’s] intent at the

time of the regulation’s promulgation.” Thomas Jefferson Univ.,

512 U.S. at 512. There is no indication that the Secretary’s

interpretation is contrary to law or to the agency’s intent at the

time of the adoption, and we uphold it.

Having upheld the Secretary’s interpretation of law under

the Thomas Jefferson University standard, we easily uphold its

application to the claims at issue. Medi-Cal was not timely

billed for the claims at issue, and consequently the Secretary

disallowed the claims because the state determination

requirement of the must bill policy was never fulfilled. We

conclude that as applied in this case, the Secretary’s state

determination requirement was not arbitrary or capricious.

We have noted that under SEC v. Chenery Corp., 318 U.S.

80, 87-88 (1943), “with limited exception, the law does not

allow us to affirm an agency decision on a ground other than

that relied upon by the agency.” Manin v. NTSB, 627 F.3d 1239,

1243 (D.C. Cir. 2011). One exception: “when there is not the

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slightest uncertainty as to the outcome of a proceeding on

remand, courts can affirm an agency decision on grounds other

than those provided in the agency decision.” Id. at 1243 n.1

(internal quotation marks and citation omitted). As the

Secretary argued in the district court, the must bill policy

encompasses two requirements, i.e., a requirement to bill the

state Medicaid program for the bad debt claims as well as a

requirement to obtain the state’s determination as to its financial

responsibility on those claims. See Grossmont, 903 F. Supp. 2d

at 49. Although the Secretary relied only on the state

determination requirement for her disposition, she stated that

“the record thus supports a conclusion that these claims were not

in the States’s system, that is, they were not billed . . . .” JA 54. 

We conclude that an independent basis for affirming the

Secretary’s disallowance of Grossmont’s claims is the failure of

Grossmont to timely bill Medi-Cal for those claims.

We note that because Grossmont never timely submitted

claims to Medi-Cal, we need not decide whether the Secretary

acts arbitrarily and capriciously if she refuses to allow claims as

bad debt if a recalcitrant state refuses to issue state

determinations of payment responsibility despite reasonably

diligent efforts to obtain them.

C. Joint Signature Memorandum 370

Finally, Grossmont argues that its claims must be paid

under Joint Signature Memorandum 370 (JSM 370). Grossmont

notes that after repealing Provider Reimbursement Manual, Part

II (PRM-II) § 1102.3L in 2003, the Secretary in 2004 issued

JSM 370, which “held harmless” bad debt claims where the

intermediary “followed the now-obsolete Section § 1102.3L

instructions for cost reporting periods prior to January 1, 2004.” 

See Appellants’ Br. 54. Under the hold harmless provision of

JSM-370, reimbursements were allowed using other

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documentation in lieu of billing the state. In her decision the

Secretary held that the hospitals did not meet the hold harmless

provisions of JSM-370. JA 55. Grossmont argues that it was

arbitrary and capricious for the Secretary to have made the two

lump-sum payments but then refuse to hold the hospitals

harmless for the claims at issue when (1) the hospitals provided

documentation for these claims that followed the same process

followed in making the lump-sum payments, and (2) the

intermediary stipulated that the hospitals supplied sufficient

documentation to support their methodology for determining the

bad debt amounts for each year under appeal. And furthermore,

argues Grossmont, JSM-370 is properly read as a concession by

the Secretary that PRM-II § 1102.3L was valid and legally

enforceable even after it was deleted from the PRM, and that

hospitals could rely on it.

We note that pursuant to JSM-370, reimbursement was not

allowed using other documentation if, for cost reporting periods

prior to January 1, 2004, the provider’s intermediary required

the provider to bill the state. Contrary to Grossmont’s argument,

the Secretary found that the lump-sum payments were consistent

with the must bill policy because they were “based on claims

(bills) submitted to the Medical agency . . . upon which the State

made determinations of its obligation prior to Medicare allowing

the bad debt.” JA 52 n.19. Other evidence in the record

establishes that the intermediary never allowed Grossmont to

rely on documentation of Medi-Cal’s payment responsibility

that was not produced by Medi-Cal itself, and the intermediary

also never instructed Grossmont that it was not required to bill

Medi-Cal or obtain determinations from Medi-Cal of its

payment responsibility. See, e.g., JA 132, at 137:16-138:19; JA

133, at 143:6-13; JA 137, at 158:4-159:24; JA 141, at 175:3-21. 

Accordingly, the Secretary’s conclusion that the hold harmless

provision does not apply is supported by substantial evidence

and is not arbitrary or capricious.

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CONCLUSION

The judgment of the district court is affirmed.

It is so ordered.

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