*

The Honorable Richard E. Dorr, United States District Judge for the Western

District of Missouri, sitting by designation.

1

Hon. Donovan W. Frank, United States District Judge for the District of

Minnesota.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3012

___________

United Hospital, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the 

* District of Minnesota.

Tommy G. Thompson, in his official *

capacity as Secretary of the Department *

of Health and Human Services, *

*

Appellee. *

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Submitted: May 12, 2004

Filed: September 7, 2004

___________

Before LOKEN, Chief Judge, BRIGHT, Circuit Judge, and DORR,*

 District Judge.

___________

BRIGHT, Circuit Judge.

United Hospital (“United”), a private healthcare provider in St. Paul,

Minnesota, appeals from the district court’s1

 summary judgment in favor of the

Secretary of Health & Human Services (“the Secretary”). United seeks certain
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payments under the Secretary’s Medicare reimbursement program for hospital

expenses related to the treatment of poor and disabled patients. The district court

approved the Secretary’s decision not to reimburse United for the claimed expenses

as not arbitrary, capricious, or contrary to law. We agree with the district court’s

decision against United and affirm.

I. Background

Pursuant to the Medicare (for the elderly) and Medicaid (for the poor and

disabled) programs established by Congress, the Secretary reimburses hospitals for

costs incurred in treating patients who qualify for insurance under these programs.

Hospitals receive reimbursement for some costs on the basis of the treatment

provided; for example, the hospital would receive a predetermined amount of money

for every treatment it provides for a covered patient’s broken arm. Hospitals also

receive payment based on characteristics of the hospital, rather than the particular

treatment provided. For example, since 1986, those hospitals which serve an

unusually high number of Medicaid patients are entitled to a “disproportionate share

hospital” (“DSH”) adjustment. See 42 U.S.C. § 1395ww(d)(5)(F)(i)(I) (authorizing

supplemental payments to a hospital that “serves a significantly disproportionate

number of low-income patients”). The Secretary applies a statutory formula to

determine how much the DSH adjustment for a particular hospital should be, based

on the number of days that Medicaid patients spent in the hospital (known as

“Medicaid days”).

Some states, including Minnesota, provide health insurance to indigent

residents who are not eligible for federally-funded Medicaid. Patients’ time spent in

hospitals under this type of program is known as “state-only” days, indicating that the

state foots the bill by itself, apart from Medicaid. Even when a patient does receive

benefits under Medicaid, the reimbursement comes to the hospital via the states,

which administer the Medicaid program on behalf of the Secretary. Poor patients
2

See 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (defining the Medicaid component

of the DSH payment as “the fraction . . . the numerator of which is the number of the

hospital’s patient days . . . which consist of patients who . . . were eligible for medical

assistance under a State plan approved under [the Medicaid program] . . . .”).

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may have their treatment costs covered either by the state’s own independent program

or under Medicaid, but in either case the hospital receives payment from the state.

However, only Medicaid days count toward establishing a particular hospital’s DSH

rate. The state’s provision of benefits under its own program does not work to

increase the federal government’s reimbursement rate under Medicaid.

This accounting issue caused confusion for some hospitals, which were

submitting all low-income-patient days for the Secretary’s calculation of DSH rates,

regardless of whether the reimbursement came under the state’s own program or

under the federally funded Medicaid program. To make clear that only Medicaid

days could be counted toward the DSH rate, the Secretary, acting through the agency

now known as the Centers for Medicare and Medicaid Services (“the Centers”),

issued a letter to Congressional oversight officials on October 15, 1999. The letter

explained that the Centers would not seek to recoup payments to hospitals already

made (erroneously) for state-only days, but that in the future hospitals would have to

abide by the statutory requirement that only Medicaid days count toward DSH

payments.2

 Later, the Centers formalized this position in Program Memorandum A99-62 (“Program Memo”), issued December 1, 1999. The Program Memo established

that hospitals that had been reimbursed for state-only days prior to October 15, 1999,

or that had appealed a denial of reimbursement for state-only days as of October 15,

1999, would not face recoupment action from the Secretary and further would have

any money already recouped returned to the hospitals. Furthermore, the Program

Memo provided that the Secretary would pay out to hospitals “that did not receive

payments reflecting the erroneous inclusion of otherwise ineligible days[, if those

hospitals] filed a jurisdictionally proper appeal to the [administrative appeal board]
3

Apparently, United’s appeals filed in both 1996 and 1997 were still pending

before the Board, four years later. Perhaps a speedier resolution of the original

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on the issue of the exclusion of these types of days from the Medicare DSH formula

before October 15, 1999.” 

On the other hand, from January 1, 2000 forward, no state-only days accrued

would count toward DSH reimbursement and hospitals raising the reimbursement

issue for state-only days for the first time after the October 15 cut-off date would not

prevail on that issue on appeal. In effect, the Program Memo exempts certain

hospitals that misconstrued the DSH statutes and rules from the otherwise-harsh costs

of their errors.

The basic structure of the Program Memo distinguished between hospitals that

wrongly believed themselves eligible for reimbursement for state-only days, and

hospitals that correctly realized they were not eligible but then pursued benefits once

it became clear that the mistaken hospitals would not have to pay for their error. The

primary issues on appeal in this case, then, are whether United falls into the latter

category or not, and if it does, whether the Secretary’s refusal to pay that category on

the same basis as the first category is arbitrary and capricious.

II. Procedural Posture

United brought appeals to the appropriate administrative body, the Provider

Reimbursement Review Board (“the Board”), in 1996 and 1997, raising issues related

to its cost reports for 1992 and 1993, but not seeking the addition of state-only days

to its DSH calculation. United had not sought the inclusion of state-only days since

the start of the DSH concept in the mid-1980s. After the Centers issued the Program

Memo, United argued for the first time, in March 2000, that it deserved to have the

state-only days retroactively incorporated into its DSH reimbursements.3

 The Board
appeals might have avoided the present controversy.

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provided a hearing and considered United’s position, but concluded that the statutory

restrictions on reimbursement precluded relief for United, and that United did not fall

in any of the exceptions to the statutory restrictions outlined in the Program Memo.

In August 2002, United then appealed the Board’s decision to the district court,

pursuant to 42 U.S.C. § 1395oo(f)(1) (granting jurisdiction to the district court over

this type of appeal). The district court considered four issues raised by United: first,

whether United fell under the protections of the Program Memo; second, if not,

whether the Program Memo denied United its procedural rights; third, whether the

Program Memo’s authorization of reimbursement for some hospitals but not others

was arbitrary; and fourth, whether the reimbursement for some hospitals but not

others denied United equal protection of the laws as construed under the Fifth

Amendment of the federal Constitution.

The district court concluded that because United’s appeals before the Board did

not raise the specific issue of DSH rates until March 2000, United could not claim

protection under the Program Memo, which the district court held to limit relief by

its plain terms to hospitals raising the DSH issue prior to October 15, 1999. The

district court rejected United’s second procedural argument by observing that the

Board gave a hearing and full consideration to United’s claims on the DSH issue. A

right to have claims heard before the Board does not equate to a right to the

substantive relief claimed. Finally, the district court rejected United’s arguments

under the “arbitrary and capricious” standard and the Fifth Amendment standard that

the Program Memo’s terms irrationally discriminate against hospitals like United.

The district court noted that the Program Memo rationally advanced the Secretary’s

goal of solving the DSH confusion by “separat[ing] those hospitals who were

legitimately confused from those hospitals who sought to benefit from the confusion

of others.”
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United now timely appeals from the district court’s grant of summary judgment

to the Secretary. On appeal, United strongly asserts the same four arguments raised

before the trial court concerning the applicability and validity of the Program Memo.

III. Discussion

We review the district court’s grant of summary judgment de novo. See Henry

v. United States Dep’t of the Navy, 77 F.3d 271, 272 (8th Cir. 1996). We examine

agency action with great deference, setting aside the Secretary’s action only if it is

“arbitrary, capricious, an abuse of discretion, unsupported by substantial evidence,

or otherwise not in accordance with the law.” Creighton Omaha Regional Health

Care Corp. v. Bowen, 822 F.2d 785, 789 (8th Cir. 1987).

First, we consider whether the Secretary’s interpretation of the Program Memo

to exclude United constituted arbitrary and capricious agency action. United adopts

a three-step argument to advance its point. First, United states the undisputed fact

that its jurisdictionally proper cost appeals on unrelated issues were pending before

the Board prior to October 15, 1999. Second, United states the undisputed legal

conclusion that the agency review process allows new issues to be raised before the

Board at any time, even after the appeals were first filed. Finally, United argues that

therefore, its March 2000 introduction of the DSH issues to its pending appeals

should be treated under the Program Memo as if the DSH issues had been raised

when the appeals were first filed (i.e., prior to the October 15 cut-off). 

We observe that United did raise the DSH issue before the Board and obtain

a decision on that issue, albeit an adverse decision. However, logic clearly does not

support the leap United asks this court to make: that any issue raised and resolved

by the Board at any time must be treated as constructively raised at the start of the

administrative appeal. Neither does any statutory or regulatory provision support this

backdating. To the contrary, the plain language of the Program Memo expressly
4

The Program Memo goes on to instruct:

Do not reopen a cost report and revise the Medicare DSH payment to

reflect the inclusion of these types of days as Medicaid days if, on or

after October 15, 1999, a hospital added the issue of the exclusion of

these types of days to a jurisdictionally proper appeal already pending

before [the Board].

App. at E4.

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excludes hospitals in United’s position from gaining its protections, declaring a

hospital’s eligibility for reimbursement only if the hospital filed “a jurisdictionally

proper appeal to the [Board] on the issue of the exclusion of these types of days from

the Medicare DSH formula before October 15, 1999.”4

 United’s position would have

us read the crucial phrase “on the issue of the exclusion of these types of days” out

of the Program Memo, allowing DSH reimbursement if the hospital’s appeals were

filed before the cut-off date on any issue. We decline to alter the plain text of the

Program Memo. United falls outside the protections established by the Secretary.

United further asserts that if it is not entitled to the challenged DSH payments

under the Program Memo, then the Program Memo itself must be illegal. First,

United argues that the Program Memo improperly restricted United’s procedural

rights to raise issues before the Board. As we have discussed above, however, the

Board did have a full hearing and gave careful consideration to United’s claims.

Obviously, United then took full advantage of its statutory right to appeal the Board’s

decision to the district court and to this court. That each of the relevant adjudicators

decided against United does not establish any lack of statutory due process.

United finally argues that its exclusion from the safe havens of the Program

Memo is irrational, thereby failing the arbitrary and capricious test under the

Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (requiring reviewing courts to

invalidate agency action that is “arbitrary, capricious, an abuse of discretion, or
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otherwise not in accordance with law”) and the rational purpose test of our equal

protection jurisprudence under the Fifth Amendment to the United States

Constitution, see, e.g., Arkansas Pharmacists Ass’n v. Harris, 627 F.2d 867, 871 (8th

Cir. 1980) (“[A] court must uphold [economic] regulations if they bear a rational

relation to a legitimate congressional purpose”). 

United fails on both arguments, because the Secretary had an amply rational

basis for distinguishing between hospitals that correctly understood that only

Medicaid days could count toward DSH reimbursement, and other hospitals that

believed state-only days could also count. United asserts that “[t]he high costs

associated with treating a disproportionate share of low income patients are felt no

less acutely by Minnesota urban hospitals than New York and Pennsylvania urban

hospitals.” We have no reason to doubt that assertion. However, the basis for the

Secretary’s distinction between the Minnesota hospitals and the New York and

Pennsylvania hospitals lies not in geography, but in chronology. The New York and

Pennsylvania hospitals argued, before the Secretary’s decision to allow overpayments

to go unrecovered had been announced, that they deserved to have their state-only

days included in the DSH calculations. United did not make that argument until it

already knew the other hospitals would get to keep money received on that basis.

Because the statute makes clear that only Medicaid days can be included in the DSH

calculations, the Secretary had to set a date beyond which the erroneous

overpayments would cease. The date of October 15, 1999 satisfies common sense

(and the rational basis test) because any claims raised for the first time after that date

would come from hospitals that knew full well that the Secretary’s previous payments

were undeserved. Once some hospitals misconstrued their eligibility for DSH

reimbursement, the Secretary had no choice but to seek a solution. The solution

provided, while incomplete, more than satisfies the rational basis test. The perfect

must not become the enemy of the good. See Alcala v. Burns, 545 F.2d 1101, 1105

(8th Cir. 1976) (“[The] Equal Protection Clause does not require that [an agency]
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must choose between attacking every aspect of a problem or not attacking the

problem at all.” (quoting Dandridge v. Williams, 397 U.S. 471, 487 (1970)).

IV. Conclusion

The Secretary erroneously overpaid certain hospitals who believed themselves

eligible for extra reimbursement. Now United, which never operated under the

misapprehension suffered by the other hospitals, seeks the same unearned payments.

The Secretary’s refusal to compound the error was not irrational or discriminatory.

Accordingly, we affirm the judgment of the district court.

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