Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-18-35845/USCOURTS-ca9-18-35845-0/pdf.json

Parties Involved:
Alex M. Azar II
Appellant
Empire Health Foundation
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

EMPIRE HEALTH FOUNDATION, for 

Valley Hospital Medical Center,

Plaintiff-Appellee/

Cross-Appellant,

v.

ALEX M. AZAR II, Secretary of the 

United States Department of Health 

and Human Services,

Defendant-Appellant/

Cross-Appellee.

Nos. 18-35845

18-35872

D.C. No.

2:16-cv-00209-

RMP

OPINION

Appeal from the United States District Court

for the Eastern District of Washington

Rosanna Malouf Peterson, District Judge, Presiding

Argued and Submitted February 6, 2020

Seattle, Washington

Filed May 5, 2020

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2 EMPIRE HEALTH FOUND. V. AZAR

Before: MILAN D. SMITH, JR. and N. RANDY SMITH, 

Circuit Judges, and JOHN R. TUNHEIM,

* District Judge.

Opinion by Judge Milan D. Smith, Jr.

SUMMARY**

Medicare / Rulemaking

The panel affirmed, on different grounds, the district 

court’s order granting partial summary judgment for Empire 

Health Foundation and vacating the 2005 Rule promulgated 

by the Secretary of the Health and Human Services (“HHS”), 

interpreting a Medicare regulation.

The 2005 Rule removed the word “covered” from 42 

C.F.R. § 412.106(b)(2)(i), effectively amending HHS’s 

interpretation of “entitled to [Medicare]” in 42 U.S.C. 

§ 1395ww(d)(5)(F)(vi), a subsection of the Medicare Act, 

42 U.S.C. §1395 et. seq. The Rule concerns HHS’s annual 

calculation of the disproportionate share hospital adjustment 

(DSH Adjustment), which increases a hospital’s annual 

Medicare inpatient services reimbursement based on the 

approximate number of low-income patients the hospital 

serves.

* The Honorable John R. Tunheim, United States Chief District 

Judge for the District of Minnesota, sitting by designation.

** This summary constitutes no part of the opinion of the court. It 

has been prepared by court staff for the convenience of the reader.

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EMPIRE HEALTH FOUND. V. AZAR 3

Empire challenged the 2005 Rule as part of its appeal of 

HHS’s calculation of its 2008 reimbursement. The district 

court held that the 2005 Rule was substantively valid, but it 

should be vacated because the rulemaking process failed to 

meet the Administrative Procedure Act (“APA”)’s 

procedural requirements.

The panel held that the 2005 Rule’s rulemaking process, 

while not perfect, satisfied the APA’s notice-and-comment 

requirements. The panel reversed the district court’s 

contrary conclusion. The panel also held, however, that the 

2005 Rule was substantively invalid, and must be vacated, 

because it directly conflicted with the court’s interpretation 

of 42 U.S.C. § 1395ww(d)(5)(F)(vi) in Legacy Emanuel 

Hospital and Health Center v. Shalala, 97 F.3d 1261, 1265-

66 (9th Cir. 1996). Because Legacy Emanuel interpreted the 

meaning of “entitled to [Medicare]” in 42 U.S.C 

§ 1395ww(d)(5)(F)(vi) to be unambiguous, the 2005 Rule’s 

conflicting construction cannot stand. Thus, the panel 

affirmed, on different grounds, the district court’s summary 

judgment in favor of Empire.

The panel affirmed the district court’s order vacating the 

2005 Rule. The panel reinstated the prior version of 42 

C.F.R. § 412.106(b)(2)(i), which embraced only “covered” 

patient days. The panel remanded to the district court with 

instructions to further remand to the Provider 

Reimbursement Review Board to decide the remaining 

issues in the case.

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4 EMPIRE HEALTH FOUND. V. AZAR

COUNSEL

Stephanie R. Marcus (argued) and Mark B. Stern, Appellate 

Staff; William D. Hyslop, United States Attorney; Joseph H. 

Hunt, Assistant Attorney General; Civil Division, United 

States Department of Justice, Washington, D.C.; for 

Defendant-Appellant/Cross-Appellee.

Daniel John Hettich (argued), King & Spalding LLP,

Washington, D.C.; Teresa A. Sherman, Paukert & 

Troppmann PLLC, Spokane, Washington; for PlaintiffAppellee/Cross-Appellant.

OPINION

M. SMITH, Circuit Judge:

This appeal, made pursuant to the Medicare Act’s 

expedited judicial review provision, 42 U.S.C. 

§ 1395oo(f)(1), requires us to determine whether a rule 

promulgated by the Secretary of the Department of Health 

and Human Services (HHS) (the 2005 Rule1) is procedurally 

and substantively valid pursuant to the Administrative 

Procedure Act (APA), 5 U.S.C. § 551 et seq.

2 The 2005 

1 At issue in this case is one portion of a final rule that amended a 

wide range of Medicare regulations. 69 Fed. Reg. 48916, 49098–99 

(Aug. 11, 2004). For the purposes of this opinion, “2005 Rule” refers

only to the portion of the final rule, discussed in greater detail below, 

which removed the word “covered” from 42 C.F.R. § 412.106(b)(2)(i).

2 The Medicare Act’s expedited judicial review provision 

incorporates the judicial review provisions of the APA. See 42 U.S.C. 

§ 1395oo(f); see also Los Angeles Haven Hospice, Inc. v. Sebelius, 

638 F.3d 644, 652 (9th Cir. 2011) (“In a civil action under

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EMPIRE HEALTH FOUND. V. AZAR 5

Rule removed the word “covered” from 42 C.F.R. 

§ 412.106(b)(2)(i), effectively amending HHS’s 

interpretation of “entitled to [Medicare]” in 42 U.S.C. 

§ 1395ww(d)(5)(F)(vi), a subsection of the Medicare Act, 

42 U.S.C. § 1395 et seq.

3 At stake is HHS’s annual 

calculation of the disproportionate share hospital adjustment 

(DSH Adjustment), which increases a hospital’s annual 

Medicare inpatient services reimbursement based on the 

approximate number of low-income patients the hospital 

serves. See Catholic Health Initiatives Iowa Corp. v. 

Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013).

Plaintiff Empire Health Foundation (Empire) challenged 

the 2005 Rule as part of its appeal of HHS’s calculation of 

its 2008 reimbursement. The district court granted partial 

summary judgment for Empire, ruling that, while the 2005 

Rule was substantively valid, it should be vacated because 

the rulemaking process leading to its adoption failed to meet 

the APA’s procedural requirements.

We affirm the district court’s summary judgment in 

favor of Empire, and its order vacating the 2005 Rule, but on 

different grounds. See McSherry v. City of Long Beach,

§ 1395oo(f)(1), the validity of the fiscal intermediary’s action is subject 

to judicial review using the familiar standards of the Administrative 

Procedure Act (‘APA’)—i.e., whether the action was ‘arbitrary, 

capricious, an abuse of discretion, or otherwise not in accordance with 

law.’” (citing 5 U.S.C. § 706(2)(A))).

3 42 U.S.C. § 1395ww(d)(5)(F)(vi) refers to “benefits under part A” 

instead of “Medicare,” “supplementary social security income benefits 

(excluding any State supplementation) under subchapter XVI of this 

chapter,” instead of “SSI benefits,” and “medical assistance under a State 

plan approved under subchapter XIX,” instead of “Medicaid.” Herein, 

when quoting the statute, we use “[Medicare],” “[SSI benefits],” and 

“[Medicaid]” for simplicity.

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6 EMPIRE HEALTH FOUND. V. AZAR

584 F.3d 1129, 1135 (9th Cir.2009) (“We may affirm on the 

basis of any ground supported by the record.”). We hold that 

the 2005 Rule’s rulemaking process, while not perfect, 

satisfied the APA’s notice-and-comment requirements. 

However, we also hold that the 2005 Rule is substantively 

invalid, and must be vacated, because it directly conflicts 

with our interpretation of 42 U.S.C. § 1395ww(d)(5)(F)(vi) 

in Legacy Emanuel Hospital and Health Center v. Shalala, 

97 F.3d 1261, 1265–66 (9th Cir. 1996). Because Legacy 

Emanuel interpreted the meaning of “entitled to [Medicare]” 

in 42 U.S.C. § 1395ww(d)(5)(F)(vi) to be unambiguous, the 

2005 Rule’s conflicting construction cannot stand. See Nat’l 

Cable & Telecomms. Ass’n v. Brand X Internet Servs.

(Brand X), 545 U.S. 967, 982–83 (2005).

FACTUAL AND PROCEDURAL BACKGROUND

I. Relevant Statutory and Regulatory Background

As part of the Medicare program, a hospital that “serves 

a significantly disproportionate number of low-income 

patients,” 42 U.S.C. § 1395ww(d)(5)(F)(i)(I), receives a 

DSH Adjustment, which approximately reimburses it for 

higher costs associated with providing that service, Catholic 

Health, 718 F.3d at 916. HHS administers DSH 

Adjustments through the Centers for Medicare and Medicaid 

Services (CMS).4

Qualification for the DSH Adjustment and the amount of 

any DSH Adjustment are determined by a hospital’s 

“disproportionate patient percentage” (DPP). 42 U.S.C. 

§ 1395ww(d)(5)(F)(v). The DPP is calculated by adding the 

4 For simplicity, we include CMS in our references to “HHS” herein.

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EMPIRE HEALTH FOUND. V. AZAR 7

two fractions set forth in § 1395ww(d)(5)(F)(vi),5

commonly referred to as the “Medicare fraction” and the 

“Medicaid fraction.” See, e.g., Catholic Health, 718 F.3d 

at 916. The two fractions are intended to capture a hospital’s 

number of patient days attributable two different groups of 

low-income patients. Id. at 916–17. SSI entitlement is used 

as the low-income proxy for the Medicare population, and 

Medicaid eligibility is used as the low-income proxy for the 

5 In pertinent part, 42 U.S.C. § 1395ww(d)(5)(F)(vi) provides:

(vi) In this subparagraph, the term “disproportionate 

patient percentage” means, with respect to a cost 

reporting period of a hospital, the sum of—

(I) the fraction (expressed as a percentage), the 

numerator of which is the number of such 

hospital’s patient days for such period which were 

made up of patients who (for such days) were 

entitled to benefits under part A of this subchapter 

and were entitled to supplementary security 

income benefits (excluding any State 

supplementation) under subchapter XVI of this 

chapter, and the denominator of which is the 

number of such hospital’s patient days for such 

fiscal year which were made up of patients who 

(for such days) were entitled to benefits under part 

A of this subchapter, and

(II) 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, 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.

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8 EMPIRE HEALTH FOUND. V. AZAR

non-Medicare population. Id.; Legacy Emanuel, 97 F.3d 

at 1265–66.

The following chart illustrates the two fractions:

Medicare fraction Medicaid fraction

Numerator Patient days for 

patients entitled to 

Medicare and entitled 

to SSI Benefits

Patient days for 

patients eligible for 

Medicaid but not 

entitled to Medicare

Denominator Patient days for 

patients entitled to 

Medicare

Total number of 

patient days

See Catholic Health, 718 F.3d at 917 (providing the chart as 

a visual representation of the two fractions).

Empire’s challenge concerns the 2005 Rule’s 

interpretation of the statutory phrase “entitled to [Medicare]” 

in its implementing regulation, 42 C.F.R. 

§ 412.106(b)(2)(i),6 and that interpretation’s effect on the 

6 In pertinent part, 42 C.F.R. § 412.106(b), as amended by the 2005 

Rule, provides:

(b) Determination of a hospital’s disproportionate 

patient percentage—

(1) General rule. A hospital’s disproportionate 

patient percentage is determined by adding the 

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EMPIRE HEALTH FOUND. V. AZAR 9

treatment of “dual eligible exhausted coverage patient 

days.”7 These are patient days attributable to patients 

eligible for both Medicare and Medicaid and whose hospital 

stays have exceeded the 90-day limit applicable to Medicare 

coverage (after which Medicare ceases to cover the patient’s 

results of two computations and expressing that 

sum as a percentage.

(2) First computation: Federal fiscal year. For 

each month of the Federal fiscal year in which the 

hospital’s cost reporting period begins, CMS—

(i) Determines the number of patient days that—

(A) Are associated with discharges occurring 

during each month; and

(B) Are furnished to patients who during that 

month were entitled to both Medicare Part A 

(including Medicare Advantage (Part C)) and 

SSI, excluding those patients who received 

only State supplementation; . . . .

7 As part of its argument that the 2005 Rule’s rulemaking process 

failed to meet the APA’s procedural requirements, Empire’s briefing 

alludes to the impact of the 2005 Rule on “Medicare Secondary Payer” 

days, which are patient days for which Medicare is not the primary payer 

pursuant to 42 U.S.C. § 1395y(b)(2)(A). Empire offered little 

explanation as to what the 2005 Rule’s impact on Medicare Secondary 

Payer days was, and did not refer to Medicare Secondary Payer days in 

its reply brief. Because Empire insufficiently explained this argument in 

its briefing, we rule that it was waived. See Ghahremani v. Gonzales, 

498 F.3d 993, 997–98 (9th Cir. 2007); Acosta-Huerta v. Estelle, 7 F.3d 

139, 144 (9th Cir. 1992). In any case, it is immaterial to our holding 

today, which invalidates the 2005 Rule on substantive grounds.

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10 EMPIRE HEALTH FOUND. V. AZAR

inpatient hospital services costs).8 42 U.S.C. § 1395d; 

42 C.F.R. § 409.61(a)(1).

Pursuant to the version of 42 C.F.R. § 412.106(b)(2)(i) 

in place before the 2005 Rule was promulgated, HHS 

included only “covered” patient days in the Medicare 

fraction when calculating a hospital’s DSH Adjustment. 

42 C.F.R. § 412.106(b)(2)(i) (2003); 69 Fed. Reg. at 49098. 

This had the effect of excluding dual eligible exhausted 

coverage patient days from the numerator and denominator 

of the Medicare fraction. Meanwhile, HHS also excluded 

dual eligible exhausted coverage patient days from the 

Medicaid fraction. Edgewater Med. Ctr. v. Blue Cross & 

Blue Shield Ass’n, HCFA Adm’r Dec., 2000 WL 1146601, 

at *4–5 (June 19, 2000).9 Because HHS did not include dual 

eligible exhausted coverage patient days in either the 

Medicare fraction or the Medicaid fraction before the 2005 

Rule, HHS did not count those days at all for the purpose of 

calculating a given hospital’s DSH Adjustment. See 

Catholic Health, 718 F.3d at 921, 921 n.5.

In contrast, in the 2005 Rule, HHS removed the word 

“covered” from 42 C.F.R. § 412.106(b)(2)(i). As a result, 

HHS now includes dual eligible exhausted coverage patient 

days in the numerator and denominator of the Medicare 

8 Medicare will pay for a limited number of days for each 

hospitalization. If a patient’s stay exceeds that number, coverage is 

exhausted, and Medicare will not pay for the additional days. 42 U.S.C. 

§ 1395d.

9 The Health Care Financing Administration is the predecessor of 

CMS. See Catholic Health, 718 F.3d at 918 n.2.

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EMPIRE HEALTH FOUND. V. AZAR 11

fraction when calculating a given hospital’s DSH 

Adjustment.10

A. The 2005 Rule’s Rulemaking Process

To arrive at the interpretation reflected in the 2005 Rule, 

HHS took a circuitous route. Initially, HHS proposed in 

2003 to include dual eligible exhausted coverage patient 

days in the Medicaid fraction commencing with Fiscal Year 

(FY) 2004 (the 2003 Notice). 68 Fed. Reg. 27154, 27207–

208 (May 19, 2003). In the 2003 Notice, HHS misstated its 

then-applicable rule with respect to dual eligible exhausted 

coverage patient days, asserting that HHS counted them in 

the Medicare fraction. Several comments responding to the 

2003 Notice noted the misstatement and pointed out that the 

then-applicable regulation did not include dual eligible 

exhausted coverage patient days in the Medicare fraction. In 

its FY 2004 final rule, HHS deferred deciding whether to 

promulgate the proposed change, noting that it was still 

reviewing comments on dual eligible exhausted coverage 

patient days and would respond in a different document. 

68 Fed. Reg. 45346, 45421 (Aug. 1, 2003).

In 2004, as part of its rulemaking proposal for the 2005 

Rule, the agency explained that it would make sure to 

address any comments received in response to the 2003 

Notice. 69 Fed. Reg. 28196, 28286 (May 18, 2004). The 

new comment period ran until July 12, 2004. Days before 

10 Empire contends that the 2005 Rule “serves to systematically 

reduce payments hospitals receive for treating” low-income patients. 

Empire’s Brief at 5. The record, however, is unclear as to whether the 

2005 Rule’s interpretation has increased or decreased hospital 

reimbursements in general. It appears that its effect on hospitals is highly 

fact-specific, depending on a given hospital’s patient demographics. See 

69 Fed. Reg. at 49098–99.

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12 EMPIRE HEALTH FOUND. V. AZAR

the comment period for the 2005 Rule closed, HHS posted a 

webpage acknowledging the 2003 Notice’s misstatement of 

the then-applicable rule.11 HHS stated that “[o]ur policy has 

been that only covered patient days are included in the 

Medicare fraction.” A few commenters acknowledged 

HHS’s correction. Without acknowledging HHS’s initial 

mistake, however, many other commenters voiced support 

for the erroneously stated status quo.

In the August 11, 2004 Federal Register entry describing 

the final version of the 2005 Rule, HHS noted that:

We received numerous comments that 

commenters were disturbed and confused by 

our recent Web site posting regarding our 

policy on dual-eligible patient days. The 

commenters believe that this posting was a

modification or change in our current policy 

to include patient days of dual-eligible 

Medicare beneficiaries whose Medicare Part 

A coverage has expired in the Medicaid 

fraction of the DSH calculation. In addition, 

the commenters believed that the information 

in this notice appeared with no formal 

notification by CMS and without the 

opportunity for providers to comment.

69 Fed. Reg. at 49098. In response, HHS explained that the 

webpage posting “was not a change in our current policy,” 

11 We note that there appears to be some dispute in the record over 

whether the webpage was published three or five days before the close 

of the comment period. For the purposes of our analysis, this difference 

of two days is immaterial.

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EMPIRE HEALTH FOUND. V. AZAR 13

but a “correction of an inadvertent misstatement” made in 

the 2003 Notice. Id.

The 2005 Rule included dual eligible exhausted 

coverage patient days in the Medicare fraction. 69 Fed. Reg. 

at 49098–99. In effect, the new rule enacted what HHS had 

mistakenly stated was the status quo in the 2003 Notice. 

Pursuant to the 2005 Rule, HHS now counts dual eligible 

exhausted coverage patient days as Medicare days even if 

Medicare did not pay for them. 69 Fed. Reg. at 49099 

(“[W]e are adopting a policy to include the days associated

with dual-eligible beneficiaries in the Medicare fraction, 

whether or not the beneficiary has exhausted Medicare Part 

A hospital coverage.” (emphasis added)).

II. The Proceedings in this Case

Empire acquired the outstanding Medicare 

reimbursement owed to Valley Hospital Medical Center for 

periods prior to October 1, 2008, including the 2008 fiscal 

year at issue here.12 Dissatisfied with its total 

reimbursement amount for FY 2008, Empire timely 

appealed HHS’s calculation of Empire’s FY 2008 

reimbursement and requested a hearing before the Provider 

Reimbursement Review Board (PRRB). The PRRB granted 

Empire’s request for expedited judicial review pursuant to 

42 U.S.C. § 1395oo(f)(1), allowing Empire to challenge the 

12 Due to HHS’s delay in amending the language of its regulations 

after the promulgation of the 2005 Rule, FY 2008 was the first year in 

which the 2005 Rule was implemented, removing the word “covered” 

from 42 C.F.R. § 412.106(b)(2)(i). See Allina Health Services v. 

Sebelius, 746 F.3d 1102, 1106 n.3 (D.C. Cir. 2014); 72 Fed. Reg. 47130, 

47384 (Aug. 22, 2007) (describing “technical correction” implementing 

changes to 42 C.F.R. § 412.106(b)(2)(i)).

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14 EMPIRE HEALTH FOUND. V. AZAR

2005 Rule in the district court.13 Empire timely filed this 

action in the district court, challenging the 2005 Rule’s 

interpretation of “entitled to [Medicare]” as both 

procedurally and substantively invalid pursuant to the 

APA.14

The parties cross-moved for summary judgment. The 

district court granted Empire’s summary judgment motion in 

part, denied HHS’s summary judgment motion, and vacated 

the 2005 Rule, ruling that the 2005 Rule’s rulemaking 

process violated the APA because HHS did not give more 

time for comment after correcting its misstatement in the 

2003 Notice. However, the district court sided with HHS on 

the substantive propriety of HHS’s interpretation of 

“entitled.” First, it held that our ruling in Legacy Emanuel, 

97 F.3d at 1265, did not foreclose HHS’s interpretation of 

the statute pursuant to Brand X. It next held at Chevron step 

one, see Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 

467 U.S. 837, 842 (1984), that Congress’s intent was unclear 

from the plain language and statutory purpose of 42 U.S.C. 

§1395ww(d)(5)(F)(vi). Finally, it held at Chevron step two, 

see 467 U.S. at 843, that HHS’s interpretation of the statute 

was a permissible construction of the statute. Empire and 

HHS each timely appealed.

13 Expedited judicial review is triggered when the PRRB, on its own 

or at the request of a provider, determines it does not have the authority 

to resolve a provider’s challenge. 42 U.S.C. § 1395oo(f)(1).

14 Empire also argued that, if HHS’s 2005 Rule were upheld, HHS

should broaden its interpretation of “entitled to [SSI benefits]” in the 

Medicare fraction to include patient days that reflect SSI eligibility, not 

just payment. Because we vacate the 2005 Rule, we do not address this 

argument.

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EMPIRE HEALTH FOUND. V. AZAR 15

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction over this appeal 

pursuant to 42 U.S.C. § 1395oo(f)(1), the Medicare Act’s 

expedited judicial review provision, and 28 U.S.C. § 1331, 

as a dispute arising under federal law. We have jurisdiction 

over these cross-appeals pursuant to 28 U.S.C. § 1291. We 

review de novo a district court’s decision on cross motions 

for summary judgment. Guatay Christian Fellowship v. 

County of San Diego, 670 F.3d 957, 970 (9th Cir. 2011).

ANALYSIS 

I. The Procedural Validity of the 2005 Rule

Empire asserts that the 2005 Rule violated the APA’s 

procedural requirements because HHS did not provide the 

public with an additional comment period after admitting 

that it misrepresented the status quo in the 2003 Notice. We 

disagree.

The APA requires an agency to comply with notice-andcomment procedures when the agency amends its 

regulations. 5 U.S.C. § 553.15 The agency must publish a

notice of proposed rulemaking, which shall include, in 

relevant part, “either the terms or substance of the proposed 

rule or a description of the subjects and issues involved.” Id. 

§ 553(b)(3). After notice, interested parties must have the 

15 The Medicare Act has its own notice-and-comment procedure. 

42 U.S.C. § 1395hh(b). Because of the similarity of the two procedures, 

we will use the more robust APA caselaw in order to analyze this claim 

of procedural error. See Monmouth Med. Center v. Thompson, 257 F.3d 

807, 814 (D.C. Cir. 2001). Moreover, the parties briefed this issue 

pursuant to the APA. See also Stringfellow Mem. Hosp. v. Azar, 317 F. 

Supp. 3d 168, 184 n.6 (D.D.C. 2018).

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16 EMPIRE HEALTH FOUND. V. AZAR

opportunity to comment on the proposal, “participat[ing] in 

the rule making through submission of written data, views, 

or arguments.” Id. § 553(c).

We will set aside an agency action that we find to be 

“without observance of procedure required by law.” 

5 U.S.C. § 706(2)(D). We have also concluded that “[a] 

decision made without adequate notice and comment is 

arbitrary or an abuse of discretion.” Nat. Res. Def. Council 

v. EPA (NRDC II), 279 F.3d 1180, 1186 (9th Cir. 2002) 

(citing 5 U.S.C. § 706(2)(A)). Pursuant to the APA, whether 

notice is adequate is “whether interested parties reasonably 

could have anticipated the final rulemaking” from the 

proposed rule. Id. at 1187 (quoting Nat. Res. Def. Council 

v. EPA (NRDC I), 863 F.2d 1420, 1429 (9th Cir. 1988)). The 

key inquiry is whether the changes in the final rule are a 

“logical outgrowth of the notice and comments received.” 

Rybachek v. United States EPA, 904 F.2d 1276, 1288 (9th 

Cir. 1990). The Medicare statute echoes this standard, 

providing that if a final regulation “is not a logical outgrowth 

of a previously published notice of proposed rulemaking,” 

the final regulation “shall be treated as a proposed 

regulation” requiring further public comment. 42 U.S.C. 

§ 1395hh(a)(4).

Other considerations to determine the adequacy of notice 

include “whether a new round of notice and comment would 

provide the first opportunity for interested parties to offer 

comments that could persuade the agency to modify its rule,” 

NRDC II, 279 F.3d at 1186 (quoting Am. Water Works Ass’n 

v. EPA, 40 F.3d 1266, 1274 (D.C. Cir. 1994), and whether 

“the notice ‘fairly apprise[s] interested persons of the 

subjects and issues before the [a]gency,’” Louis v. U.S. Dep’t 

of Labor, 419 F.3d 970, 975 (9th Cir. 2005) (quoting NRDC 

II, 279 F.2d at 1186.

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Here, HHS undoubtedly misstated the then-applicable 

rule in the 2003 Notice. Nevertheless, the 2003 Notice did 

describe the content of the 2005 Rule, even if it incorrectly 

characterized it as the then-applicable rule. 68 Fed. Reg. 

27154, 27207. HHS corrected its misstatement of the thenapplicable rule before the end of the second comment period. 

Moreover, many sophisticated commenters, including 

several large hospital associations, supported placing dual 

eligible exhausted coverage patient days in the Medicare 

fraction, as the 2005 Rule finally did. The rulemaking 

process was certainly not perfect, and some commenters 

expressed confusion with HHS’s correction notice. 69 Fed. 

Reg. 48916, 49098. However, the 2005 Rule was a logical 

outgrowth of the proposed rule change, and HHS’s 2003 

Notice provided adequate notice to commenters of what the 

agency was considering. As another district court observed 

in upholding the 2005 Rule’s notice-and-comment process: 

“Numerous commenters during both the initial and the 

second comment periods wrote in support of the misstated 

status quo—that is, the policy that was ultimately adopted—

to ‘urge that CMS not change the rules for counting dualeligible days.’” Stringfellow, 317 F. Supp. 3d at 187 

(quoting record).

We conclude that the procedural error alleged by Empire 

here is similar to the one the Supreme Court addressed in 

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174–

75 (2007). There, the Court rejected a procedural challenge 

to a final rule that was the opposite of what was contained in 

a rulemaking proposal. Id. The final rule exempted certain 

domestic workers from the Fair Labor Standards Act 

(FLSA), when the proposal had contemplated including 

them within the FLSA’s ambit. Id. Nevertheless, the court 

held that the final rule was “reasonably foreseeable” and the 

proposal had provided fair notice to commenters. Id. at 175. 

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18 EMPIRE HEALTH FOUND. V. AZAR

The Court observed that commenters could reasonably 

foresee that “after . . . consideration [of the proposal] the 

Department might choose to adopt the proposal or to 

withdraw it.” Id. Commenters on the 2005 Rule were 

similarly apprised of a binary choice—under the new rule, 

dual eligible exhausted coverage patient days would be 

included in either the Medicare or the Medicaid fraction. In 

the end, they were included in the Medicare fraction.

Allina Health Services v. Sebelius, 746 F.3d 1102 (D.C. 

Cir. 2014), on which Empire relies, is inapposite. Allina

involved a challenge to a different portion of the final rule 

that also contained the 2005 Rule. Id. at 1106–07. In the 

applicable notice of proposed rulemaking, the agency 

proposed to “clarify” an existing practice and stated that it 

did not expect the clarification to have a major financial 

impact. Id. at 1106. But the final rule in Allina was an 

entirely new policy with enormous financial consequences. 

Id. at 1107. The D.C. Circuit held that the rule was not a 

“logical outgrowth” of its proposal, because it could not have 

been anticipated by the parties based on the purported 

clarification described in the notice of proposed rulemaking. 

Id. at 1108–09 (asking whether “even a good lawyer” could 

“anticipate . . . such a volte-face with enormous financial 

implications would follow [HHS’s] proposed rule.”); see 

also Stringfellow, 317 F. Supp. 3d at 188–89 (distinguishing 

Allina while upholding the 2005 Rule’s notice-and-comment 

procedure). Here, however, the 2005 Rule was a “logical 

outgrowth” of the 2003 Notice because, as we have 

explained, the parties could anticipate that HHS intended to 

change the way it treated dual eligible exhausted coverage 

patient days in the DSH Adjustment. The rulemaking 

procedure at issue here did not involve the unexpected 

“volte-face” that the D.C. Circuit confronted in Allina. 

746 F.3d at 1109.

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Because we conclude that the 2005 Rule was a logical 

outgrowth of the notice and the comments received, we 

reverse the district court’s contrary conclusion. 

Nevertheless, we ultimately affirm the district court’s 

summary judgment in favor of Empire and order vacating 

the 2005 Rule, because we hold that the 2005 Rule is 

substantively invalid.

II. The Substantive Validity of the 2005 Rule 

Having determined that the 2005 Rule met the APA’s 

procedural requirements, we next consider its substantive 

validity pursuant to the APA. Empire argues that our 

decision in Legacy Emanuel forecloses HHS’s interpretation 

of “entitled to [Medicare]” in the 2005 Rule. HHS, citing 

Sixth and D.C. Circuit decisions, maintains that we are not 

bound by Legacy Emanuel’s analysis of “entitled to,” 

because there, according to HHS’s argument, we decided 

only the meaning of the phrase “eligible for medical 

assistance under . . . [Medicaid].” According to HHS, our 

analysis of the phrase “entitled to [Medicare]” is nothing 

more than “non-binding dicta.” Government’s Reply Brief 

at 28. We agree with Empire that Legacy Emanuel is directly 

at odds with the 2005 Rule, and thus conclude that the rule 

is substantively invalid.

In a substantive APA challenge to a notice-and-comment 

rule, we apply the Chevron two-step framework. See United 

States v. Mead Corp., 533 U.S. 218, 230–31 (2001). At 

Chevron step one, we ask whether Congress “has directly 

spoken to the precise question at issue” in the statutory text. 

Chevron, 467 U.S. at 842. We employ “traditional tools of 

statutory construction” to determine whether “Congress had 

an intention on the precise question at issue[.]” Id. at 843 n. 

9. If the statute is silent or ambiguous, however, we proceed 

to Chevron step two and ask “whether the agency’s answer 

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20 EMPIRE HEALTH FOUND. V. AZAR

is based on a permissible construction of the statute.” Id. at 

843.

Judicial precedent affects how we apply the Chevron 

framework. “[A] judicial precedent holding that the statute 

unambiguously forecloses the agency’s interpretation, and 

therefore contains no gap for the agency to fill, displaces a 

conflicting agency construction.” Brand X, 545 U.S. at 982–

83. This occurs “if the prior court decision holds that its 

construction follows from the unambiguous terms of the 

statute and thus leaves no room for agency discretion.” Id. 

at 982. In other words, if the prior court decision was 

decided at Chevron step one, there is no need to proceed to 

Chevron step two.

Our ruling in Legacy Emanuel was clearly a Chevron 

step one decision. 97 F.3d at 1265 (“We believe the 

language of the Medicare reimbursement provision is 

clear[.]”). In Legacy Emanuel, we considered the meaning 

of the words “entitled” and “eligible” in tandem. We 

interpreted the word “entitled” to mean that a patient has an 

“absolute right . . . to payment.” Id. In contrast, we 

interpreted the word “eligible” to mean that a patient simply 

meets the Medicaid statutory criteria: “if Congress had 

wanted to limit the Medicaid proxy to days for which 

Medicaid actually paid, Congress could have used ‘entitled’ 

or expressly specified that it was to include only those days 

actually paid for by Medicaid.” Id. We held that Congress 

used a “broader word” than entitled in the Medicaid fraction 

to fulfill its intent of compensating hospitals for treating lowincome patients. Id. And we noted that the use of “entitled” 

in the Medicare fraction did not frustrate that purpose, 

because the low-income proxy in the Medicare fraction is 

ultimately determined by entitlement to SSI, not Medicare. 

Id. at 1265–66. The 2005 Rule’s interpretation of “entitled,” 

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EMPIRE HEALTH FOUND. V. AZAR 21

in contrast, resembles our understanding of the term 

“eligible” in Legacy Emanuel by embracing even those 

patient days for which Medicare coverage is exhausted (i.e., 

for which there is no absolute right to payment). 69 Fed. 

Reg. at 49099. Thus, the 2005 Rule mistakenly treats as 

ambiguous statutory language that we deemed clear, and 

rewrites that language in contravention of our interpretation.

Rejecting Empire’s challenge to the 2005 Rule’s 

substantive validity, the district court determined that 

Legacy Emanuel does not control the meaning of the 

statutory text at issue here and thus proceeded to Chevron

step two. HHS adopts that position here and argues that that 

Legacy Emanuel did not actually decide the meaning of the 

term “entitled” in the Medicare fraction. We reject this 

reading of Legacy Emanuel. Legacy Emanuel’s analysis of 

“eligible for [Medicaid]” is inextricable from its analysis of 

“entitled to [Medicare].” Consequently, we are bound by 

Legacy Emanuel’s interpretation of “entitled to [Medicare]” 

unless and until change comes from our court sitting en banc 

or the Supreme Court. Miller v. Gammie, 335 F.3d 889, 899 

(9th Cir. 2003) (en banc). Pursuant to Brand X, Legacy 

Emanuel’s unambiguous interpretation of “entitled to 

[Medicare]” in 42 U.S.C. § 1395ww(d)(5)(F)(vi) requires us 

to invalidate the 2005 Rule, which adopts a conflicting 

interpretation of the statute.

We recognize, as HHS argues on appeal, that the Sixth 

and D.C. Circuits have affirmed the 2005 Rule’s 

interpretation of the phrase “entitled to [Medicare]” in 

42 U.S.C. § 1395ww(d)(5)(F)(vi) at Chevron step two. See 

Catholic Health, 718 F.3d at 920 (affirming 2005 Rule at 

Chevron step two); Metro. Hosp. v. HHS, 712 F.3d 248, 270 

(6th Cir. 2013) (same). Those decisions, however, do not 

control our analysis here because neither court dealt with 

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binding circuit precedent holding that the statutory language 

was unambiguous, as Legacy Emanuel did.

For example, in Catholic Health, the D.C. Circuit relied 

on circuit precedent determining that the statutory language 

in question was ambiguous. 718 F.3d at 920 (citing 

Northeast Hosp. v. Sebelius, 657 F.3d 1, at 13 (D.C. Cir. 

2011).16 So Brand X could not have warranted a different 

result in Catholic Health.

The Sixth Circuit’s binding precedent construing 

42 U.S.C. § 1395ww(d)(5)(F)(vi) also did not trigger Brand 

X’s “stare decisis effect to a prior judicial construction” of a 

statute. Metro. Hosp., 712 F.3d at 256. In Metropolitan 

Hospital, the Sixth Circuit held that its precedent construing 

“eligible for [Medicaid]” in the Medicaid fraction, Jewish 

Hospital, Inc. v. Secretary of Health & Human Services, 

19 F.3d 270 (6th Cir. 1994), did not foreclose the 2005 

Rule’s interpretation of “entitled to [Medicare]” in the 

Medicare fraction. 712 F.3d at 257–58. The Sixth Circuit 

held that Brand X did not apply because Jewish Hospital was 

not decided at Chevron step one. Metro. Hosp., 712 F.3d 

at 256. Nevertheless, the court also noted that, even if 

Jewish Hospital were decided at Chevron step one, the 

decision did not precisely decide the statutory meaning of 

“entitled to [Medicare],” and its discussion of that statutory 

phrase was secondary to other arguments supporting its 

holding. Id. at 256–57 (describing Jewish Hospital’s 

16 We note that then-Judge Kavanaugh’s concurring opinion in 

Northeast Hospital agreed with the interpretation of “entitled to 

[Medicare]” we announced in Legacy Emanuel. Northeast Hosp. Corp. 

v. Sebelius, 657 F.3d 1, 20 (D.C. Cir. 2011).

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EMPIRE HEALTH FOUND. V. AZAR 23

contrast of “entitled” and “eligible” as a “‘back-up’ 

analysis”).

HHS argues that the Sixth Circuit’s reading of Jewish 

Hospital, as set forth in Metropolitan Hospital, should 

somehow control our analysis here because we cited Jewish 

Hospital as part of our statutory interpretation in Legacy 

Emanuel. But Legacy Emanuel’s holding, construing the 

unambiguous language of 42 U.S.C. § 1395ww(d)(5)(F)(vi), 

is fundamentally different than Jewish Hospital’s, which 

held that the statute was ambiguous and deferred to the 

agency’s permissible interpretation. Moreover, Jewish 

Hospital’s analysis of “entitled to [Medicare]” is 

comparatively shorter than our analysis in Legacy Emanuel

and was just one of several analyses informing court’s 

decision interpreting “eligible for [Medicaid].” Compare

Jewish Hospital, 19 F.3d at 274–76 with Legacy Emanuel, 

97 F.3d at 1265–66. Even the Sixth Circuit recognized that 

our interpretation of “entitled to [Medicare]” in Legacy 

Emanuel played a central role in our analysis. Metro. Hosp., 

712 F.3d at 259 (noting that Legacy Emanuel “bas[ed] its 

conclusion” on the distinction between “eligible to 

[Medicaid]” and “entitled to [Medicare]”). Because we have 

already construed the unambiguous meaning of “entitled to 

[Medicare]” in 42 U.S.C. § 1395ww(d)(5)(F)(vi), we hold 

that the 2005 Rule’s contrary interpretation of that phrase is 

substantively invalid pursuant to the APA. Thus, we affirm, 

on different grounds, the district court’s summary judgment 

in favor of Empire.

III. Vacatur of 2005 Rule

Having affirmed, on different grounds, the district 

court’s summary judgment in favor of Empire, we also 

affirm its order vacating the 2005 Rule. See Nat. Res. Def. 

Council v. EPA (NRDC III), 526 F.3d 591, 608 (9th Cir. 

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24 EMPIRE HEALTH FOUND. V. AZAR

2008) (vacating rule held to be unlawful under Chevron

analysis). We have observed that “when a reviewing court 

determines that agency regulations are unlawful, the 

ordinary result is that the rules are vacated—not that their 

application to the individual petitioners is proscribed.” Univ. 

of Cal. v. U.S. Dep’t Homeland Sec., 908 F.3d 476, 511 (9th 

Cir. 2018) (quoting Nat’l Mining Ass’n v. U.S. Army Corps. 

of Eng’rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998)). 

Accordingly, we reinstate the prior version of 42 C.F.R. 

§ 412.106(b)(2)(i), which embraced only “covered” patient 

days, see Paulsen v. Daniels, 413 F.3d 999, 1008 (9th Cir. 

2005) (“The effect of invalidating an agency rule is to 

reinstate the rule previously in force.”).

CONCLUSION

While HHS’s notice-and-comment procedure for the 

2005 Rule was not without flaws, it met the APA’s 

requirements. However, the 2005 Rule violated the 

unambiguous text of 42 U.S.C. § 1395ww(d)(5)(F)(vi) and 

our court’s ruling in Legacy Emanuel by removing the word 

“covered” from 42 C.F.R. § 412.106(b)(2)(i). As a result, 

we AFFIRM, on different grounds, the district court’s order 

granting partial summary judgment for Empire and vacating 

the 2005 Rule. We REMAND to the district court with 

instructions to further remand to the PRRB to decide the 

remaining issue in this case.17

AFFIRMED AND REMANDED.

17 Both parties agreed to, and the district court ordered, a remand to 

the PRRB to decide whether, in light of Allina, 746 F.3d at 1102, 

Medicare Part C days should have been included in the Medicare fraction 

for the Empire’s 2008 DSH calculation.

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