1 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLUMBIA 

BAPTIST HEALTHCARE SYSTEM * 

d/b/a BAPTIST REGIONAL * 

MEDICAL CENTER, * 

 * 

 Plaintiff, * 

 * 

 v. * Civil Action No.: AW-08-0677 

 * 

KATHLEEN SEBELIUS, * 

SECRETARY OF HEALTH AND * 

HUMAN SERVICES1 * 

 * 

****************************************************************

MEMORANDUM OPINION

Baptist Regional Medical Center (“Plaintiff” or “BRMC”) brought 

this action seeking judicial review of a decision of the Secretary of 

the United States Department of Health and Human Services (“Defendant” 

or “Secretary”). Currently pending is BMRC’s Motion for Summary 

Judgment (Paper No. 13) and the Secretary’s Cross Motion for Summary 

Judgment (Paper No. 18). The Court held a hearing on the pending 

Motions on August 7, 2009. The Court has reviewed the entire record, 

as well as the Pleadings and Exhibits, with respect to the instant 

motions. The issues having been fully briefed by the parties and 

argued by the parties, this matter is now ripe for review. For the 

reasons set forth below, the Court will grant BRMC’s Motion for 

Summary Judgment. 

 

1 On April 28, 2009, Kathleen Sebelius became the Secretary of the United 

States Department of Health and Human Services, and therefore is substituted 

for the former Secretary, Michael O. Leavitt, as the Defendant in this 

action. Fed. R. Civ. P. 25(d). 
2 

Factual and Procedural Background

Plaintiff, Baptist Healthcare System (“BHS”) is a not-for-profit 

organization that operates an acute care hospital, Baptist Regional 

Medical Center,(“BRMC”)in Louisville, KY. BRMC is a provider under 

Title XVIII of the Social Security Act, 42 U.S.C. § 1395, et seq., and 

the services rendered by BRMC are certified under the Medicare 

Program.2

 For the cost reporting years at issue, September 1, 1998 

through August 31, 2001, as a part of the BRMC’s collection and writeoff policy to determine indigence, BRMC required that patients with 

“debts greater than $800 . . . complete a financial disclosure3

 form 

that included inquiries for both income and assets,” i.e. an “asset 

test,” while patients with debts less than $800 did not. (Compl. ¶ 15 

and A.R. at 60.) Patients with a balance under $800 were asked only 

about their income. (A.R. at 60.) In addition, BRMC determined that 

some of its patients were “indigent” through an upfront screening 

process. (A.R. at 61.) Patients completed an “assistance qualification 

sheet” or a “financial aid worksheet” prior to admission for services, 

“to determine if [they were] going to meet some qualification.” (Id.)

BRMC also considered whether a patient resided in a certain “catchment 

area,” as a factor to determine indigence. (Id.) For example, when 

dealing with patients who lived in “Whitley County,” a high poverty 

 

2

 BRMC primarily offers inpatient/outpatient, psychiatric and rehabilitation 

services.

3

 This form serves as a so-called “asset test” as described in paragraph B of 

the Provider Reimbursement Manual 15-I § 312. Although the term “asset test” 

does not appear in the HHS regulations or manual, this terminology is used by 

both Plaintiff and Defendant, and thus the Court will adhere to its use as 

well.
3 

county, BRMC credit counselors did not ask many questions about the 

patient’s assets. (Id.) This policy “applied equally to Medicare and 

non-Medicare patients.” (Compl. ¶ 14.) 

 Annually, hospitals must file “cost reports” to their designated 

fiscal intermediary, 4 that detail the costs attributed to the care of 

Medicare patients. 42 C.F.R. § 413.20(b). The fiscal intermediary 

reviews and audits the cost reports, and will disallow any costs it 

deems inappropriate. The intermediary issues a Notice of Amount of 

Program Reimbursement (“NPR”) that indicates the providers expected 

reimbursement, and the basis for the calculation. For the cost 

reporting years, 1999, 2000 and 2001 the intermediary disallowed all 

of BRMC’s “bad debt” claims, when the records did not demonstrate that 

BRMC conducted an asset test as a part of their indigence 

determination. (A.R. at 3.) The intermediary concluded that “Section 

312 of the PRM requires that, in making a determination of indigence, 

the Provider should take into account the patients total resources, 

including assets, liabilities and income.” (Id.)

BRMC timely appealed the intermediary’s determination to the 

Provider Reimbursement Review Board (“Board”). 42 U.S.C. § 1395oo(a); 

A.R. at 3.) The Board’s review focused on “whether the asset test 

guideline at CMS Pub.15-1, Section 312(B) of the [PRM] must be applied 

to determine a Medicare beneficiary’s indigence. After an in-depth 

examination of Section 312, the Board concluded that Section 312 “does 

 

4 A fiscal intermediary is a contractor, hired by the federal government to 

process hospital claims. 42 U.S.C. § 1395(h). During the time in question, 

BMRC’s intermediary was AdminaStar Federal, Inc. See Compl. at 4. 
4 

not create a mandatory asset test and found that [BRMC’s} bad debts 

should be reimbursed . . . .” (A.R. at 3.)

 Review authority of decisions issued by the Board is invested in 

the Secretary of the Department of Health and Human Services. The 

Secretary may, on her own motion, reverse, affirm or modify the 

Board’s decision. 42 U.S.C. § 1395oo(f)(1). The Secretary has 

delegated her review authority to the Administrator of the Centers for 

Medicare & Medicaid Services (“CMS”). 42 C.F.R. 405.1875. The 

Administrator undertook a review of the Board’s decision. The 

Administrator concluded that,

contrary to the Board’s finding, Section 312 of 

the PRM does create a mandatory asset test. It 

is critical that the provider meet the indigency 

criteria set forth in § 312 of the PRM in order 

to take into account all necessary information 

needed to properly deem any patient indigent and, 

thus, meet the regulatory requirements that a 

reasonable collection effort was made and that 

the debt was uncollectible when claimed as 

worthless.

(A.R. at 8.) 

 Moreover, the Administrator noted that the “introduction and 

paragraphs B and D of [S]ection 312 of the PRM uses ‘should’ whereas 

paragraphs A and C use ‘must,’” yet found that “within the context of 

the regulation and the PRM, “should” is synonymous with “must.” (Id.

at 9 n.3.) 

 BRMC now appeals the Administrator’s decision. 42 C.F.R. § 

405.1875.
5 

Standard of Review

 The parties have filed cross-motions for summary judgment. 

Summary judgment is only appropriate “if the pleadings, the discovery 

and disclosure materials on file, and any affidavits show that there 

is no genuine issue as to any material fact and that the movant is 

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see

Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). The court must 

“draw all justifiable inferences in favor of the nonmoving party, 

including questions of credibility and of the weight to be accorded to 

particular evidence.” Masson v. New Yorker Magazine, Inc., 501 U.S. 

496, 520 (1991) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 

255 (1986)). When parties file cross motions for summary judgment, 

the court must view each motion in the light most favorable to the 

non-movant. Quigley v. Giblin, 569 F.3d 449, 453 (D.C. Cir. 2009); 

Mellen v. Bunting, 327 F.3d 355, 363 (4th Cir. 2003). 

Under the Federal Administrative Procedures Act, a reviewing 

court “shall hold unlawful and set aside agency action, findings and 

conclusions found to be, arbitrary, capricious, an abuse of discretion 

or otherwise not in accordance with law . . . .” 5 U.S.C. § 706(2)(A). 

This standard of review is highly deferential and presumes agency 

action to be valid. Am. Wildlands v. Kempthorne, 530 F.3d 991, 997 

(D.C.Cir.2008). Under the arbitrary and capricious standard, the 

scope of review is narrow, and a court should not substitute its 

judgment for that of the agency. Motor Vehicle Mfrs. Ass’n of U.S., 

Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). An 
6 

agency determination is arbitrary and capricious “if the agency has 

relied on factors which Congress has not intended it to consider, 

entirely failed to consider an important aspect of the problem, 

offered an explanation for its decision that runs counter to the 

evidence before the agency, or is so implausible that it could not be 

ascribed to a difference in view or the product of agency expertise.” 

Id. An agency decision is an abuse of discretion if it is “based on an 

erroneous interpretation of the law, on factual findings that are not 

supported by the substantial evidence or represents and represents an 

unreasonable judgment in weighing relevant factors.” Star Fruits 

S.N.C. v. U.S., 393 F.3d 1277, 1281 (Fed.Cir.2005). Although the 

decision of the Department of Health and Human Services (“HHS”) is 

entitled to a presumption of validity, that presumption does not 

shield the decision from a substantial, “thorough, probing, in-depth 

review” by the reviewing court as opposed to a rubber stamp. Citizens 

to Preserve Overton Park, Inc. v. Volpe, 41 U.S. 402, 415 (1971).

Medicare Regulations and Manuals Overview

 Medicare is a federally funded health insurance program for 

people age 65 or older, or who meet certain other criteria. Medicare 

consists of two parts: “Part A [42 U.S.C. § 1395(c)-1395(i)], provides 

reimbursement for inpatient hospital and related post-hospital, home 

health and hospice care; and Part B [42 U.S.C. § 1395(j)-1395(w)] is a 

supplementary voluntary insurance program for hospital outpatient 

services, physician services and other services not covered under Part 

A.” (A.R. at 5.) “Medicare providers are reimbursed by the Medicare 
7 

program through fiscal intermediaries for Part A and carriers for Part 

B, under contract with the Secretary.” At issue in this case is Part A 

of the Medicare program.

Medicare Part A, reimburses providers for the reasonable and 

necessary costs incurred to care for Medicare beneficiaries. 42 C.F.R 

§ 413.9(b)(1) defines reasonable costs as those costs, direct and 

indirect, related to the treatment of Medicare beneficiaries. 

Utilizing the methods in the regulations for determining reasonable 

costs, the goal is that costs related to individuals covered by the 

program not borne by other not covered by the program. Id. To this 

end, Medicare recognizes that,

the failure of beneficiaries to pay the 

deductible and coinsurance amounts could result 

in the related costs of covered services being 

borne by other than Medicare beneficiaries, [and 

therefore,] to assure that such covered service 

costs are not borne by others, the costs 

attributable to the deductible and coinsurance 

amounts that remain unpaid are added to the 

Medicare share of allowable costs. 

42 C.F.R. 413.89(d).

 Before unpaid deductible and coinsurance balances or “bad debts” 

are added to a provider’s allowable costs, the following criteria must 

be satisfied, 

(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. 
8 

(4) Sound business judgment established that there 

was no likelihood of recovery at any time in 

the future. 

42 C.F.R. 413.89(e). (emphasis added) 

Due to the complexity of the regulations, however, the Secretary 

has issued interpretive manuals, guidelines, letters and other 

publications to help intermediaries and providers better understand 

the regulations. See American Hosp. Ass’n v. Bowen, 834 F.2d 1037, 

1045 (D.C.Cir.1987). One such manual is the CMS Pub. 15-1, also known 

as the Provider Reimbursement Manual (“PMR”). (Paper 18 at 5.) The 

provisions of the PRM “do not have the effect of substantive law or 

regulation, rather they are interpretive rules” that clarify existing 

law or regulations, and “set practical processes.” Harris County, 863 

F.Supp. at 409 (citing Mother Frances Hosp. of Tyler, Texas v. 

Shalala, 15 F.3d 423 (5th Cir. 1994)). Section 310 and 312 of the PRM 

set forth guidelines to assist providers in understanding when a bad 

debt is an allowable cost. As a general starting point, a provider is 

required to make “reasonable collection efforts” before a bad debt can 

be considered an allowable cost. Section 310 states:

To be considered a reasonable collection 

effort, a provider’s effort to collect Medicare 

deductible and coinsurance amounts must be 

similar to the effort the provider puts forth to 

collect comparable amounts from non-Medicare 

patients. It must involve 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. It also 

includes other actions such as subsequent 

billings, collection letters and telephone calls 

or personal contacts with this party which 

constitute a genuine rather than token collection 

effort.
9 

PRM § 310. (emphasis added) 

 In the case of an indigent patient, however, Section 312 of the 

PRM dispenses with the reasonable collection efforts and gives 

providers different guidance. Section 312 states: 

In some cases, the provider may have established before 

discharge, or within a reasonable time before the current 

admission, that the beneficiary is either indigent or 

medically indigent. Providers can deem Medicare 

beneficiaries indigent or medically indigent when such 

individuals have also been determined eligible for 

Medicaid as either categorically needy individuals or 

medically needy individuals, respectively. Otherwise, 

the provider should apply its customary methods for 

determining indigence of patients to the case of the 

Medicare beneficiary under the following guidelines: 

A. The patient’s indigence must be determined by 

the provider, not by the patient; i.e. a 

patient’s signed declaration of his inability 

to pay his medical bills cannot be considered 

proof of indigency; 

B. The provider should take into account a 

patient’s total resources which would include, 

but are not limited, to an analysis of assets 

(only those convertible to cash, and 

unnecessary for the patient’s daily living), 

liabilities and income and expenses. In making 

this analysis the provider should take into 

account any extenuating circumstances that 

would affect the determination of the 

patient’s indigence; 

C. The provider must determine that no source 

other than the patient would be legally 

responsible for the patient’s medical bill . . 

.; and

D. The patient’s file should contain 

documentation of the method by which indigence 

was determined in addition to all back up 

information to substantiate the determination. 

Once indigence is determined and the provider concludes 

that there has been no improvement in the beneficiary’s 
10 

financial condition, the debt may be deemed uncollectible 

without applying the Section 310 procedures.5

CMS regulations and the PRM allow a provider to “waive collection 

of charges to any patients, Medicare or non-Medicare, including lowincome, uninsured or medically indigent individuals, if it is done as 

part of the [provider’s] indigency policy. By ‘indigency policy’ [the 

Secretary] mean[s] a policy developed and utilized by the hospital to 

determine patients’ financial ability to pay for services,” (A.R. at 

164)(quoting a 2004 news release of former Secretary of HHS, Thommie 

Thompson.) as long as the policy applies to Medicare and non-Medicare 

patients uniformly. (A.R. 166-67.)

At issue in this case is the application of paragraph B of 

Section 312 of the PRM when a provider seeks reimbursement of bad 

debts for indigent Medicare beneficiaries. 

Analysis

The Administrator determined that “Section 312 of the PRM does 

create a mandatory asset test.” (A.R. at 8.) He concluded that, the 

“Provider failed to employ an asset test and did not properly evaluate 

the indigency status of its patients and thus, the Intermediary 

properly disallowed the Provider’s claimed bad debts.” (A.R. at 9.) 

Thus, the question before the Court is whether a reasonable 

interpretation of PRM 312 requires that BRMC perform an asset test in 

 

5 Available at 

http://www.cms.hhs.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-

99&sortByDID=1&sortOrder=ascending&itemID=CMS021929 (Chapter 3) 
11 

order to determine whether a Medicare beneficiary is indigent.6 The 

Court’s determination in this case boils down to the meaning of two 

simple words — must and should, and contrary to the Administrator’s 

finding, this Court concludes that the words must and should are not 

synonymous neither in the context of government regulations and 

manuals nor in everyday usage.

The Administrator acknowledged that the appearance of the 

auxiliary verbs, must and should, alternated from paragraph to 

paragraph in Section 312, (A.R. at 7-8.) yet she found that pursuant 

to Medicare regulations and the PRM, providers are required to follow 

certain procedures in making indigency determinations, . . . [and that 

a] provider’s strict compliance with these procedures flows from the 

plain, mandatory language of [all of] Section 312 . . . .” (A.R. at 

9.)(emphasis added) The Administrator rejected the court’s finding in 

Harris County that the word “should” is synonymous with must, but 

offered no case law or other legal precedent to support his findings. 

(A.R. at 9 n.3) The Administrator simply concluded that BRMC’s policy 

“constitute[d] insufficient and improper collection efforts.” (A.R. at 

10.)

The Administrator’s conclusions stand in stark contrast to the 

Agency’s unequivocal statement that, a hospital may determine its own 

individual indigency criteria. (Id.) When the Court examines Section 

312 in the context of this unequivocal statement, however, it becomes 

 

6 Defendant mischaracterized the issue for the Court as whether Plaintiff performed an asset 

test. (Paper 18 at 9) 
12 

clear paragraph B, as well as paragraph D are best construed as 

strong, but noncompulsory recommendations. 

 Starting from the premise that providers may determine their own 

individual indigency criteria,7

 Section 312 makes sense. The Section 

begins by setting forth the primary ways a provider may classify a 

beneficiary as indigent. Section 312 then states, “[o]therwise the 

provider should apply its customary methods for determining indigence 

of patients . . . .” PRM Section 312. The Court presumes that by 

“customary methods” the PRM is referring to the individual indigency 

criterion that providers are allowed to create. Section 312 then sets 

forth guidelines for how those customary methods should be applied to 

Medicare beneficiaries.

Paragraph A states: “the patient’s indigence must be determined 

by the provider, not by the patient;. . . .” PRM Section 312(A). No 

one disputes that the word must connotes an obligation, and thus it 

follows that the drafters of Section 312 used the word must in 

paragraph A because they wanted to ensure that providers, in creating 

their own indigency criteria, did not leave the determination up to 

the patient, and thus render Section 312 impotent. But it also 

follows that the drafters used the word “should” in paragraph B.

Paragraph B states: “the provider should take into account a 

patient’s total resources which would include, but are not limited, to 

 

7 The parties agree that a provider is allowed to determine its own indigency policy as long as 

the criteria are applied consistently to Medicare and non-Medicare patients. (A.R. 166-67) It is 

undisputed that BRMC’s indigency policy applied consistently to Medicare and non-Medicare 

patients. 
13 

an analysis of assets . . . , liabilities and income and expenses. In 

making this analysis the provider should take into account any 

extenuating circumstances . . . .” PRM Section 312(B)(emphasis added). 

The drafters used the word should not once, but twice, and the Court 

finds that they used the word should as a suggestion of the ideal 

criteria a provider could use. The drafters did not use the word must

because had they done so, they would have effectively dictated to 

providers exactly how they had to structure their indigence criteria, 

which would contradict the initial premise. Likewise it makes sense 

that the drafters chose to use word should in second sentence of 

paragraph B to express a strong suggestion that providers take into 

account a patients extenuating circumstances. For the same reasons, 

the use of the word must in paragraph C and should in paragraph D is 

logical as well.

With respect to paragraph C, were the provider able to bill 

Medicare for a bad debt that someone else other than the patient was 

legally required to pay, it would create a gaping loophole in the 

indigence determination. Hence, the use of the unequivocal auxiliary 

verb must. The Court finds paragraph D particularly instructive, not 

only on the issue of whether must and should are synonymous, but also 

on the asset test on the whole. Paragraph D states: “The patient’s 

file should contain documentation of the method by which indigence was 

determined in addition to all back up information to substantiate the 

determination.” PRM Section 312(D)(emphasis added). During the 

hearing, the Defendant pointed to the use of should in this paragraph 

as proof that the word should carries a mandatory connation because no 
14 

one can dispute a provider must submit documentation in order to 

receive reimbursement from Medicare. The Plaintiff countered that 

while documentation is certainly necessary, the real meaning of 

paragraph D emanates from the words preceding should. Plaintiff 

argues that in the context of the words, “the patient’s file,” the 

word should is still precatory and not mandatory, because it explains 

the ideal location for the documentation. The Court agrees, but also 

notes that the word method indicates that the manual contemplates 

others ways that a provider can determine a person’s indigence, aside 

from an asset test. 

The case law is clear and. Several Courts of Appeals discussing 

the word should repudiate the notion that it is synonymous with must. 

See Marshall v. Anaconda Co., 586 F.2d 370, 375 (9th Cir. 

1979)(stating that the words “should . . . unless” are more advisory 

than the words “shall . . . unless”); United States v. Maria, 186 F.3d 

65,70 (2d Cir. 1999)(stating that the common meaning of “should” 

suggests or recommends a course of action, while the ordinary 

understanding of “shall” describes a course of action that is 

mandatory.); United States v. Harris, 63 F.3d 555, 559 (2d Cir. 

1994)(opining that because the regulation does not say that the court 

“must” but rather the court “should,” it suggests an approach and does 

not mandate it.) Moreover, the court in Harris County squarely dealt 

with this issue in sum and substance, and here, just as in Harris 

County, the Secretary “goes to heroic efforts to assert that should 

means must,” but offers nothing to refute the plain meaning of the two 

words, and thus her argument must fail. Harris County, 863 F.Supp. at 
15 

410. And while the Secretary beseeches this Court that her 

interpretation of the PRM’s language is entitled to substantial 

deference, the Court finds this interpretation arbitrary because it 

disregards the purposeful word choice undertaken when drafting 

regulations and guidelines that have far reaching legal implications. 

This is especially the case when drafters of such documents toggle 

between words within a particular provision. 

Thus for the reasons cited above, the Court believes that words 

must and should do not carry the same meaning in the context of 

Section 312 of the PRM. 

Conclusion

The Secretary has the discretion to change the language of the 

PRM so that each paragraph uses the auxiliary verb must, but for some 

reason she has chosen not to. In order to preclude courts from 

reaching the same conclusion in future decisions, the Secretary should 

amend Section 312 of the PRM.

____August 18, 2009_______ ___________/s/_______________

Date Judge Alexander Williams, Jr. 

 United States District Judge