RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b) File Name: 17a0194p.06 

### UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

B RECKINRIDGE H EALTH , I NC ., et al. Plaintiffs-Appellants ,

v

.

T HOMAS E. P RICE , in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant-Appellee

. ┐ │ │ │ │ │ │ │ │ │ ┘ No. 16-6269

Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 3:15-cv-00251—Joseph H. McKinl ey Jr., Chief District Judge. Argued: April 27, 2017
Decided and Filed: August 23, 2017
Before: GUY, SILER, and DONALD, Circuit Judges.

_________________ COUNSEL

ARGUED: David M. Dirr, DRESSMAN BENZ INGER LAVELLE PS, Crestview Hills, Kentucky, for Appellants. Carleen M. Zubr zycki, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: David M. Dirr, Mathew R. Klein, Richard G. Meyer, DRESSMAN BENZINGER L AVELLE PS, Crestview Hills, Kentucky, for Appellants. Carleen M. Zubrzycki, Michae l S. Raab, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. 

### >No. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 2

______________________

AMENDED OPINION

______________________ BERNICE BOUIE DONAL D, Circuit Judge. Various Kentucky hospita ls (collectively, “Appellants”) sought Medicare reim bursement for certain state taxe s they paid on their gross revenue. The United States Department of H ealth and Human Services (“HHS”) offset the amount of Appellants’ Medica re reimbursement by the Medi caid Disproportionate Share Hospital (“DSH”) payments Appellants receive d, reasoning that those payments effectively refunded the taxes paid. The distri ct court affirmed this decision. Because the net effect of the Medicaid DSH payment was to reimburse Ap pellants for the tax, HHS’s decision was not arbitrary, capricious, or manife stly contrary to the Medicare statute. Accordingly, we AFFIRM the district court’s judgment.

I.
Appellants are Critical Access Hospitals and are reimbursed by Medicare for the reasonable and necessary costs of providing servi ces to Medicare patients . The federal Medicaid program requires states to create a plan to provide additional payments to hospitals, like Appellants, that serve a disp roportionate share of low-income patients. 42 U.S.C. § 1396a(a)(13)(A)(iv). In Kentucky, these DSH payments are matched at 70% by the federal government. Kentucky’s contribution to DSH programs comes from two sources: Kentucky Provider Tax Revenue (“KP-Tax”) and payments fr om state university hospitals. The KP-Tax is a 2.5% tax on the gross revenue of various ho spitals, including Appellants. Ky. Rev. Stat. § 142.303(1). The KP-Tax revenue is deposited into the Medi cal Assistance Revolving Trust (“MART”), Ky. Rev. Stat. § 205.640(2), which in tu rn is used to fund the DSH payments, Ky. Rev. Stat. § 205.640(3)(a). The amount of DSH payments a hospital receives is unrelated to the amount of KP-Tax it paid. Also, during the years at issue, DSH payments covered only approximately 45% of the costs Appellants incurred providing car e to indigent patients.
Appellants filed cost reports in 2009 and 2010 claiming their entire KP-Tax payment as a
reasonable cost for reimbursement under the Medi care Act. Up until that point, they hadNo. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 3

received full reimbursement unde r the reasonable cost statute. However, for 2009 and 2010, the
Medicare Administrative Contract or denied full reimbursement, offsetting the KP-Tax cost by the amount of Medicaid DSH payments Appella nts received. The Pr ovider Reimbursement Review Board (“PRRB”) upheld the offsets, c oncluding that when Appellants received a Kentucky Medicaid DSH payment, they were actua lly receiving a refund of some or all of the KP-Tax they paid. So it concluded that the re imbursable Medicare cost “actually incurred” was the gross amount Appellants paid for the KP-Tax, minus the Medicaid DSH payments it
received.
Appellants appealed this deci sion, but the Administrator of the Centers for Medicare and
Medicaid Services issued a final decision declin ing to modify the PRRB’s decision. Appellants then filed the instant action, a sserting violations of the Administrative Procedure Act. The parties filed cross-motions for summary judgment.
The district court upheld the offset decision. Relying heavily on Abraham Lincoln Memorial Hospital v. Sebelius , 698 F.3d 536 (7th Cir. 2012), the di strict court agreed with the PRRB that the net economic impact of Appellants’ receipt of the DSH payment in relation to the
cost associated with th e KP-Tax assessment indicated that the DSH payments served to reduce Appellants’ expenses such that they constituted a refund. So, th e district court c oncluded that the KP-Tax payment was properly offset by the DSH pa yment. Next, the district court rejected Appellants’ argument that the PRRB’s decision wa s inconsistent with the Final Rule of August 16, 2010, which, according to Appellants, requires a payment to be made specifically for the purpose of reimbursing a tax in order for the claime d reimbursement to be offset by the payment.
The district court concluded that the Rule merely requires evidence that the DSH payment and the KP-Tax are related prior to offsetting the KP -Tax by the DSH payment. Finally, the district court rejected Appellants’ argument that the offs et decision deviated from longstanding practice, reasoning that an agency does not establish policy simply by not taking administrative action. 1

1 Appellants have not raised this argument on appeal, so we decline to consider it. See Shirvell v. Gordon , 602 F. App’x 601, 606 (6th Cir. 2015).No. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 4

II.
Where, as here, Congress left it up to HHS to determine what constitutes a reasonable cost meriting reimbursement, we give its judgment controlling weight unless it is “arbitrary, capricious, or manifestly c ontrary to the statute.” Chevron U.S.A., Inc. v. Nat. Res. Def. Council,
Inc. , 467 U.S. 837, 843–44 (1984). Our inquiry is not whether the HHS’s interpretation is the best one; instead, we give substantial deference to its interpretation unless an “alternative reading is compelled by the regulation’s plain language or by other indications of the Secretary’s intent.” Thomas Jefferson Univ. v. Shalala , 512 U.S. 504, 512 (1994) (quoting Gardebring v. Jenkins , 485 U.S. 415, 430 (1988)). In the Medicare context, “broad deference is all the more warranted when, as here, the regulation concerns a comp lex and highly technical regulatory program, in
which the identification and classification of re levant criteria necessa rily require significant expertise and entail the exercise of j udgment grounded in policy concerns.” Atrium Med. Ctr. v.
HHS , 766 F.3d 560, 568 (6th Cir. 2014) (quoting Thomas Jefferson Univ. , 512 U.S. at 512) (internal quotation marks omitted).

III.

a.

Under the Medi caid program, a state plan must provide that payments made to hospitals include an upward rate adjustme nt for hospitals that serve a disproportionate number of lowincome patients that have special n eeds. 42 U.S.C. § 1396a(a)(13)(A)(iv); Owensboro Health,
Inc. v. HHS , 832 F.3d 615, 618 (6th Cir. 2016). The purpose of this adjustment is to give relief to those hospitals that have few privately insure d patients to counteract th e losses incurred from a large volume of uninsured patients. Owensboro Health , 832 F.3d at 618–19 (quoting H.R. Rep. No. 103-111, at 211 (1993)). In Kentucky, this upward adjustment, or DSH payment, is determined by regulation. 907 KAR 10:820 § 4.
Under Kentucky law, providers are also required to pay a 2.5% tax on gross revenues. Ky. Rev. Stat. § 142.303(1). The provider taxes, or KP-Tax assessment payments, are deposited into the MART fund. Ky. Rev. Stat. § 205.640(2). These “provider tax revenues and state andNo. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 5

federal matching funds shall be used to fund the disproportionate share pr ogram.” Ky. Rev. Stat. § 205.640(3)(a).

b.
A hospital may also enter into an agreement with the Secretary to render services to
Medi care patients, in most circumstances without charge, in return fo r payments made by Medicare. 42 U.S.C. § 1395cc(a). To be reim bursed by Medicare, hospitals must provide adequate data, based on financial and statistical records, of the costs they incurred. 42 C.F.R. § 413.24(a). Medicare will then reimburse the hospital based on a method of apportioning the costs it will bear. 42 C.F.R. § 413.50(a). Hospit als providing services to Medicare patients are reimbursed for the reasonable costs of providi ng care to those benefi ciaries. 42 U.S.C. § 1395x(v); 42 C.F.R. § 413.9(a). Which of the r easonable costs are “actually incurred” by a provider is determined by regul ation, 42 U.S.C. § 1395x(v)(1)(A), and the Secretary has broad
discretion to determine the reasona ble costs that may be reimbursed, Battle Creek Health Sys. v.
Leavitt , 498 F.3d 401, 410 (6th Cir. 2007). The regula tions define reasonable costs to include
direct and indirect costs of providing services. 42 C.F.R. § 4 13.9(b)(1). In short, the goal of this reimbursement scheme is to prevent covered indivi duals from bearing the costs of services, while ensuring that the Secretary do es not bear the costs for non- covered patients. 42 C.F.R. § 413.9(b)(1).
Retroactive adjustments to the Medicare re imbursement amount are appropriate where the amount is deemed either inadequate or exces sive. 42 U.S.C. § 1395x(v)(1)(A). To this end, the regulations provide that refunds—“amounts paid back or a cr edit allowed on account of an
overcollection”—reduce the reimbursement amount . 42 C.F.R. § 413.98(b)(3). Refunds are “clearly reductions in costs,” so must be take n into account in determining the “true cost” of services, or the “net amount actually pa id for them.” 42 C.F.R. § 413.98(d).

c.

The district court relied on Abraham Lincoln in reaching its conclusion that the offset applied here was appropriate. Though there are factual differences between Abraham Lincoln and this case, the Seventh Circuit’s sound reasoning and the similarities to the core structure ofNo. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 6

the scheme at issue here naturally lead us to conclude that HHS’s decision to uphold the offset was not arbitrary, capricious, or manifestly contrary to the le gislative scheme.

In Abraham Lincoln , the agency found that the amount of the tax (“Tax Assessment”) paid by the hospitals to the State of Illinoi s was a reasonable cost eligible for Medicare reimbursement, but was subject to an offset by payments the hospitals received from the state
Medicaid fund. Abraham Lincoln , 698 F.3d at 540. The Tax Asse ssment was required to be deposited into a fund that also included other monies, such as federal matching funds and “any other money received for the Fund from any other source.” Id. at 545. Under the Illinois legislative scheme, certain hospitals were entitled to receive Medicaid “Access Payments”
derived from that fund. Id. A hospital’s Tax Assessment was contingent upon its receipt of Access Payments and approval from the Center fo r Medicare and Medicaid Services (“CMS”) of the Access Payments and the Tax Assessment. Id. at 545–46.
In affirming the agency’s judgment, the Seve nth Circuit first reje cted the hospitals’ argument that the offset decision was a misappli cation of the regulatory definition of “refund.”
Id. at 548. Under a plain reading of the state le gislation—including provisi ons that (1) the Tax Assessment was not due until the hospitals received access payments, and (2) the Access Payments were not due until the Tax Assessmen t took effect—the cour t concluded that the Access Payments clearly served to reduce expenses like the Tax Assessment. Id. at 549. This conclusion found further support in the facts that hospitals may only be reimbursed for their net costs, and that the Access Payments were made from the fund in which the Tax Assessment was deposited. Id.
Next, the Seventh Circuit rejected the argumen t that the agency incorrectly decided that the hospitals did not “actually incur” the cost of the Tax Assessment. Id. at 551. It reasoned that, under the regulations’ net cost approach, it was appropriate to look to the link between the Tax Assessment and the Access Payments to de termine the economic impact of receiving the payment on the tax costs. Id. at 551–52. Because, in determin ing reasonable costs, we must look to the totality of the circumstances, the cour t rejected the hospitals’ argument that the costs
of the Tax Assessment were actuall y incurred because they were billed for those costs and paid
them. Id. at 552. This argument ignored the regulations ’ requirement that reimbursable costs beNo. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 7

reduced by amounts that defray costs and ignored the real net economic impact of the Access Payments. Id. ; see also 42 C.F.R. § 413.98(d) (noting that refunds ar e “clearly reductions in costs,” so must be taken into account in determining the “true cost” of services, or the “net amount actually paid for them.”)
The fundamental elements of the Illinois and Kentucky schemes are the same: under both systems, a tax is paid into a fund, that tax is commingled with other sources, and Medicaid payments derived from that fund are made to hos pitals. Appellants are correct that there are
differences between the instant case and Abraham Lincoln . But these distinctions do not compel a contrary result. For instance, Appellants point to the fact that, unlike in Kentucky, in Illinois hospitals do not pay the Tax A ssessment until after they rece ived the Access Payments and
receive a refund if the Access Payment is not made. Accord ing to the Seventh Circuit, this indicated a legislative intent that Access Paym ents would reduce the Tax Assessment expenses.
Abraham Lincoln , 698 F.3d at 549. Nonetheless, there is a si milar indication of congressional intent here: Kentucky law states that “provider tax revenues and state and federal matching funds
shall be used to fund the disproportionate share prog ram.” Ky. Rev. Stat. § 205.640(3)(a) (emphasis added). It seems plausible then, that when a pr ovider receives a payment from that fund, the payment serves at least as a partial refund of the tax. As Appellants repeatedly insist, we should look to totality of th e circumstances, so we are not limited by the lack of precise similarity between the two systems. Therefore, that the congressional intent in Kentucky was expressed differently than that in Il linois does not undermine our reliance on Abraham Lincoln

. Appellants highlight other distinctions, like th e fact that under the Illinois scheme, the tax and payments are subject to agency approval and hospitals do not have to incur additional costs by treating non-Medicaid patients . However, these differences do not make the net economic effect of the Appellants’ DSH payments out of a fund consisting of th eir KP-tax payment any
less of a refund. 2 Importantly, our goal is not to find the best way to interpret the statute, but

2 We are sympathetic to the fact that Appellants have incurred costs of providing indigent care that have not fully been reimbursed. However, we cannot accept their argument that because they still bear 55% of the costs of providing indigent care, they must recei ve the full reimbursement for their KP-t ax assessments. This would require us to determine the net economic effect of DSH payment on all of the costs incurred, not simply on the KP-tax cost incurred. Under this logic, hospitals would have to be reimbursed fully for every cost they paid up until the point that they are fully compensated for indi gent care. This would render null the refund provisions in all cases where aNo. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 8

rather simply to determine whether a contrary result is compelled by the law or congressional
intent. See Thomas Jefferson Univ. , 512 U.S. at 512. We do not find so here. Under the guidance provided in Abraham Lincoln , HHS’s offset decision was not arbitrary, capricious, or manifestly contrary to the Medicare statute.
Appellants rely on Loyola University of Chicago v. Bowen , 905 F.2d 1061 (7th Cir. 1990), in support of their claim that HHS cannot shift costs to non- Medicare patients. This reliance is misplaced. First, aside from the existence of an offset issue, Loyola does not involve a factual scenario remotely similar to the one here. There, the University sought Medicare reimbursement under provisions allo wing it to be reimbursed for the reasonable costs of medical services, including the cost of certain medical educational activities. Id. at 1064. The designated intermediary, however, reduced the University’s reimbursement by fifty pe rcent of the costs of residents and interns working in the University’s outpatient clinic. Id. The Seventh Circuit
concluded that this de cision was erroneous. Id. at 1073. Unlike Appellant s suggest, however, in Loyola , HHS did not impermissibly try to shift the costs of training residents and interns onto non-Medicare patients. Rather, HHS contended that the University attempted to do this, but the court disagreed, concluding that the University sought reimbur sement only for patient care activities involving Medi care beneficiaries. Id. To the extent Appella nts argue that allowing Medicaid DSH payments to refund the KP-T ax violates 42 U.S.C. § 1395x(v)(1)(A), by requiring individuals not covered by Medicare to bear costs of services provided by covered individuals, Appellants provide no explanation as to how this scheme requires non-Medicare patients to bear those costs.
In sum, Appellants incurred a reimbursable Medicare cost when they paid taxes on their gross revenue. However, they also received a Medicaid DSH payment to c over some of the costs of providing care to a disproportionate number of low-income patients. Because the DSH payments Appellants received derived from the fund into which Appellants’ KP-tax expenditures were placed, the net effect of the DSH payment is to reduce, at least in part, the costs Appellants incurred in paying the KP-tax. Therefore, it c onstituted a refund notwithstanding the fact that it

hospital is not completely compensated for this care; ther e is no indication that Congress intended this effect. We, therefore, resolve only th e narrow question of whether the net econo mic effect of the DSH payment was to reimburse Appellants for the amount they paid in KP-Taxes, not the amount paid for uncompensated care generally.No. 16-6269 Breckinridge Health, Inc., et al. v. Price Page 9

was not labelled as such. See Kindred Hospitals East, LLC v. Sebelius , 694 F.3d 924, 928 (8th Cir. 2012) (“Because there was a true reduction in [the plaintiff’s] costs incurred because of the pool, the payments it received fr om the pool looked like refunds, acted like refunds, and were appropriately treated as suc h, regardless of the label.”)

d.
Lastly, although Appellants insist that “[t]he Final Rule does not set out a blackletter rule that disbursements to providers must offset taxes associated with the disbursements,” Appellant Br. 13 (emphasis added), the Rule makes clear th at, in determining the net amount of taxes incurred by a provider, the tax reimbursed should be reduced by the amount received associated
with that tax. The Rule provi des, in relevant part:
In situations in which payments that are associated with the assessed tax are made to providers specifically to make the pr ovider whole or partly whole for the tax expenses, Medicare should similarly r ecognize only the net expense incurred by the provider. Thus, while a tax may be an allowable Medicare cost in that it is related to beneficiary care, the provider ma y only treat as a reasonable cost the net tax expense; that is, the tax paid by the provider, reduced by payments the provider received that are asso ciated with the assessed tax.
75 Fed. Reg. 50,363 (August 16, 2010). Appellants clin g to the word “speci fically” in the first sentence, maintaining that payments that are asso ciated with the tax must be made specifically for the purpose of making the provider whole for th e taxes paid in order for an offset to be appropriate. However, the subse quent sentence undermines that c ontention and clarifies that for a tax to be reduced by a separate payment, the payment need only be “associated with the tax.” Appellants set forth no meaningful argument that the DSH payments, derived from a fund consisting of the KP-Tax, is not “associated with” that tax.

IV.

For the aforementioned reasons, we AFFIRM

.