Court Opinion

ID: 899702
Source: CourtListenerOpinion
Date Created: 2013-06-11 23:40:32.647118+00
Date Added: 2024-06-11T09:06:15.113323
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 15, 2013                  Decided June 11, 2013

                        No. 12-5092

 CATHOLIC HEALTH INITIATIVES IOWA CORPORATION, DOING
   BUSINESS AS MERCY MEDICAL CENTER - DES MOINES,
                      APPELLEE

                              v.

     KATHLEEN SEBELIUS, SECRETARY, UNITED STATES
     DEPARTMENT OF HEALTH AND HUMAN SERVICES,
                     APPELLANT

        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:10-cv-00411)

    Stephanie R. Marcus, Attorney, U.S. Department of Justice,
argued the cause for appellant. With her on the briefs were
Stuart F. Delery, Acting Assistant Attorney General, Ronald C.
Machen Jr., U.S. Attorney, and Anthony J. Steinmeyer,
Attorney.

    Christopher L. Keough argued the cause for appellee. With
him on the brief were J. Harold Richards and Hyland Hunt.

   John M. Faust was on the brief for amici curiae Southwest
Consulting Associates, LP, et al. in support of appellee.
                                2

   Kenneth R. Marcus was on the brief for amicus curiae
Quality Reimbursement Services, Inc. in support of appellee.

    Before: GARLAND, Chief Judge, ROGERS, Circuit Judge,
and SILBERMAN, Senior Circuit Judge.

    Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.

     SILBERMAN, Senior Circuit Judge: Catholic Health
Initiatives challenged a decision of the Secretary of Health and
Human Services denying certain Medicare reimbursements that
Catholic Health believed it was owed under the Medicare
statute. The district court held that the Secretary’s decision was
unlawful because the agency, in calculating reimbursements
owed for a 1997 cost-reporting period, had retroactively applied
a 2004 rulemaking without congressional authorization. We
reverse. The policy on which the agency relied in this case was
first announced in an adjudication in 2000, not in the 2004
rulemaking.       We further conclude that the agency’s
interpretation of the statute is permissible, and the denial of
reimbursements was not arbitrary and capricious. Catholic
Health has not shown that it relied to its detriment on the
position the agency allegedly held before 2000.

                                I

      The federal Medicare program provides health insurance
for the elderly and disabled and reimburses qualifying hospitals
for services provided to eligible patients. The Medicare statute
has five parts, two of which are relevant in this case. Part A
establishes the requirements that individuals must meet to be
eligible for Medicare benefits and provides such individuals
insurance for hospital and hospital-related services. See 42
U.S.C. § 1395c. These benefits include coverage for “inpatient
                                 3

hospital services,” id. § 1395d, which generally refers to
overnight stays in a hospital. But Part A coverage for inpatient
hospital services is limited to a certain number of days, after
which coverage is exhausted.             Specifically, Medicare
beneficiaries are entitled to coverage for the first 90 days of their
stay, and they may then elect to use up to 60 “lifetime reserve
days” beyond the first 90 days. 42 C.F.R. § 409.61(a); see also
42 U.S.C. § 1395d.

     Part E of Medicare sets out “Miscellaneous Provisions,”
including a prospective payment system for reimbursing
hospitals that provide inpatient hospital services covered under
Part A.      42 U.S.C. § 1395ww(d).           Hospitals receive
reimbursement based on prospectively determined national and
regional rates, not on the actual amount they spend, and they
also receive payment adjustments for some hospital-specific
factors. See id. §§ 1395ww(d)(2) & (d)(5)(F)(i)(I). The
adjustment at issue in this case is the “disproportionate share
hospital” (DSH) adjustment, under which the government pays
more to hospitals that “serve[] a significantly disproportionate
number of low-income patients.” Id. § 1395ww(d)(5)(F)(i)(I).
This provision is based on Congress’s judgment that low-income
patients are often in poorer health, and therefore costlier for
hospitals to treat. See Adena Reg’l Med. Ctr. v. Leavitt, 527
F.3d 176, 177-78 (D.C. Cir. 2008).

     A hospital’s adjustment is based on its “disproportionate
patient percentage” (DPP), 42 U.S.C. § 1395ww(d)(5)(F)(v) —
a higher DPP means greater reimbursements because the
hospital is serving more low-income patients. This figure,
however, is not the actual percentage of low-income patients
served; rather, it is an indirect, proxy measure for low income.
The DPP is statutorily defined as the sum of two fractions, often
called the “Medicare fraction” and the “Medicaid fraction.” The
Medicare fraction is:
                                 4

         [T]he 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 [Medicare] and were entitled to
         supplementary security income [SSI] benefits . . . , 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 [Medicare] . . . .

Id. § 1395ww(d)(5)(F)(vi)(I). The Medicaid fraction is:

         [T]he 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 [Medicaid plan], but who were
         not entitled to benefits under part A of [Medicare], and
         the denominator of which is the total number of the
         hospital’s patient days for such period.

Id. § 1395ww(d)(5)(F)(vi)(II).

     This language is downright byzantine and its meaning not
easily discernible. The Medicare and Medicaid fractions
represent two distinct and separate measures of low income —
SSI (i.e., welfare) and Medicaid, respectively — that when
summed together, provide a proxy for the total low-income
patient percentage. The Medicare fraction effectively asks, out
of all patient days from Medicare beneficiaries, what percentage
of those days came from Medicare beneficiaries who also
received SSI benefits? The Medicaid fraction in turn asks, out
of all patient days in total, what percentage of those days came
from patients who received benefits under Medicaid, but not
                               5

under Medicare? (The exclusion of Medicare beneficiaries in
the Medicaid numerator is to avoid double counting such
individuals in both fractions). As we provided in Northeast
Hospital Corp. v. Sebelius, 657 F.3d 1, 3 (D.C. Cir. 2011), a
visual representation of the two fractions is given below:

                      Medicare fraction     Medicaid fraction
 Numerator            Patient days for      Patient days for
                      patients “entitled    patients “eligible
                      to benefits under     for [Medicaid]”
                      part A” and           but not “entitled
                      “entitled to SSI      to benefits under
                      benefits”             part A”
 Denominator          Patient days for      Total number of
                      patients “entitled    patient days
                      to benefits under
                      part A”

     Many aspects of the DSH adjustment have been challenged
over the years, but the issue in our case is how to interpret the
phrase “entitled to benefits under part A” in the Medicaid
fraction numerator. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II).
Specifically, does this language include individuals who meet
the statutory criteria for Medicare eligibility, but who have
exhausted their coverage under section 1395d? The answer in
turn affects the treatment of patient days for those eligible for
both Medicaid and Medicare, but who have exhausted their
Medicare benefits (“dual-eligible exhausted days”). If such
patients are deemed “entitled to benefits under part A” (even
though their Part A coverage is exhausted), then they would not
be included in the Medicaid fraction, because the statute
specifically excludes from this numerator those “entitled to
benefits under part A.” Of course, even if dual-eligible
                                   6

exhausted days are excluded from the Medicaid fraction, they
could still be included in the Medicare fraction, assuming the
patients were also entitled to SSI benefits. The parties dispute
whether the general effect of interpreting “entitled to benefits
under part A” in this manner would be to increase or decrease
DSH payments, but in at least some cases, including dual-
eligible exhausted days in the Medicaid fraction will result in a
higher DPP, and therefore in greater payments to hospitals.1

     A hospital’s adjustment is calculated in the first instance by
a fiscal intermediary, which is typically a private insurance
company acting as the agent of the Secretary. See 42 C.F.R.
§§ 421.1, 421.3, 421.100-.128. A hospital may appeal an
intermediary’s decision to the Provider Reimbursement Review
Board, an administrative body appointed by the Secretary, which
may affirm, modify, or reverse the intermediary’s decision. 42
U.S.C. § 1395oo (a), (d) & (h). The Secretary in turn may
affirm, modify, or reverse the decision of the Board. Id.
§ 1395oo (f).

     1
        The mathematical cause of this tendency is that the two
fractions use different denominators — one that is affected by how
this issue is resolved, and one that is not. The Medicaid denominator
is simply the total patient days, but the Medicare denominator is only
patient days for those entitled to benefits under Medicare. So if
“entitled to benefits” is construed broadly to include exhausted
benefits, then dual-eligible exhausted days are excluded from the
Medicaid numerator, causing that fraction to go down. But even if
such days are added to the Medicare numerator (for those patients also
receiving SSI benefits), they are added to the Medicare denominator
as well, which dilutes the effect of counting such days in this fraction.
So while the Medicare fraction itself might go up, the magnitude of
this increase will often be less than the corresponding decrease in the
Medicaid fraction (though the exact result will depend on the relative
number of days hospitals spend treating Medicare patients, dual-
eligible patients, Medicare/SSI patients, and other patients).
                                  7

                              * * *

     Catholic Health Initiatives owns and operates Mercy
Medical Center, a hospital in Des Moines. In the 1997 fiscal
period, the Hospital discharged two patients who had been
inpatients since 1992, and whose patient days included many
dual-eligible exhausted days — that is, for much of these
patients’ stays, they were both eligible for Medicaid and
enrolled in Medicare, but they had exhausted their Medicare
coverage for inpatient hospital services. The Hospital filed cost
reports with its fiscal intermediary, and in 1999, the
intermediary issued an adjustment payment determination for
the Hospital’s 1997 cost-reporting period. That determination
initially included dual-eligible exhausted days in the Medicaid
fraction numerator, which meant the intermediary was not
counting exhausted days as days for which the patients were
“entitled to benefits” under Medicare — which, of course, was
beneficial to the Hospital.

      But in 2000, the Department decided Edgewater Medical
Center v. Blue Cross & Blue Shield Ass’n, HCFA Adm’r Dec.,
2000 WL 1146601 (June 19, 2000),2 and stated that dual-eligible
exhausted days should not be included in the Medicaid fraction.
 Id. at *4. Then, in 2002, responding to the Edgewater decision,
Catholic Health’s intermediary revised its calculations and
excluded the dual-eligible exhausted days it had previously
included for the Hospital’s 1997 cost-reporting period. Catholic

     2
       The administrative decisions referred to in this case are those
made by the Centers for Medicare & Medicaid Services (CMS),
formerly the Health Care Financing Administration (HCFA). The
Secretary has authorized the CMS Administrator to act on her behalf
in reviewing the Board’s decisions, and the Administrator’s review of
a Board ruling is considered the final decision of the Secretary. See
42 C.F.R. § 405.1875.
                                 8

Health appealed this decision to the Board, but before the Board
could consider it, the parties reached a settlement, in which the
intermediary agreed to include some, but not all, of the dual-
eligible exhausted days.

     But the issue was reopened in 2005, when the intermediary
announced that it would again revisit the Hospital’s DSH
adjustment for 1997.3 The impetus for this second reopening
was an agency rulemaking in 2004 that “adopt[ed] 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.” Medicare
Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2005 Rates, 69 Fed. Reg.
48,916, 49,099 (Aug. 11, 2004); see also id. (“We are revising
our regulations at [42 C.F.R.] § 412.106(b)(2)(i) to include the
days associated with dual-eligible beneficiaries in the Medicare
fraction of the DSH calculation.”). In this rulemaking, the
Department expressly declined to “include dual-eligible
beneficiaries who have exhausted their Part A hospital coverage
in the Medicaid fraction.” Id. The intermediary therefore
excluded from the Medicaid fraction the patient days it had
previously agreed to include under the settlement, and the
Hospital again appealed to the Board.

     To confuse the issue further, the Board reversed the
intermediary’s decision, holding that the dual-eligible exhausted
days should have been included in the Medicaid fraction. As a
matter of statutory interpretation, the Board concluded that the
phrase “entitled to benefits under part A of [Medicare],” 42
U.S.C. § 1395ww(d)(5)(F)(vi)(II), meant the right to have
payment made on the patient’s behalf — so for days where a

    3
      Intermediary determinations may be reopened within three years
of a decision or final settlement. 42 C.F.R. § 405.1885(b).
                                9

patient had exhausted his right to payment, he was not “entitled
to benefits,” and such days should be counted in the Medicaid
fraction. The Board also pointed to previous decisions and
statements by the agency in the Federal Register that it thought
supported this interpretation. The Secretary reversed, however,
and concluded — consistent with the Edgewater decision — that
the intermediary had properly excluded the days at issue. The
Department determined that the word “entitled” in the Medicare
statute “is not in reference to the right of payment of a benefit,
but rather the legal status of the individual as a Medicare
beneficiary under the law.” The Secretary also stated that it was
a “long-standing policy” to exclude dual-eligible exhausted days
from the Medicaid fraction, and that any statements or decisions
to the contrary were not consistent with this policy.

     Catholic Health filed suit under the APA in the District
Court. The Hospital moved for summary judgment on two
different grounds — first, that the Secretary’s interpretation of
the Medicare statute was impermissible; and second, that the
Secretary’s current position, even if entitled to deference, could
not be retroactively applied to the 1997 cost-reporting period.
The district court passed on the statutory-interpretation issue,
holding that regardless of whether the agency’s interpretation
was permissible, its decision was an unauthorized retroactive
application of the 2004 rulemaking. This appeal followed.

                                II

     The two main issues on appeal are the validity of the
agency’s interpretation of the Medicare statute and its
application to the 1997 cost-reporting period. The Secretary
argues that the statute clearly states that an individual is
“entitled to benefits” under Medicare when he meets the basic
statutory criteria (or at least, that such an interpretation is
reasonable), and that there was no impermissible retroactivity in
                               10

the agency’s decision because the agency never had a clear
policy to the contrary. The Hospital argues that the statute
forecloses the agency’s interpretation because “entitled to
benefits” means the right to have payment made on one’s behalf,
and that regardless of whether the agency’s interpretation is
valid, its decision was impermissibly retroactive because the
agency held a contrary position in 1997.

A. “Entitled to benefits”

     The Secretary argues that her interpretation of “entitled to
benefits under part A of [Medicare]” is not only superior, but
necessary. Section 1395ww(d)(5)(F)(vi) does not itself define
the phrase, nor is the meaning of these words obvious on their
face, but the Secretary legitimately points to related provisions
that clarify the question. The statutory provision on which the
agency primarily relies for its interpretive argument is 42 U.S.C.
§ 426(a), which states that “[e]very individual who . . . has
attained age 65, and . . . is entitled to monthly [Social Security
benefits] . . . shall be entitled to hospital insurance benefits
under part A of [Medicare].” This language, the Department
argues, clearly indicates that entitlement to Medicare benefits is
simply a matter of meeting the statutory criteria, not a matter of
receiving payment. See also 42 C.F.R. § 400.202 (“Entitled
means that an individual meets all the requirements for
Medicare benefits.”).

    In response, Catholic Health points to 42 U.S.C. § 426(c),
which provides that “entitlement of an individual to hospital
insurance benefits for a month shall consist of entitlement to
have payment made under, and subject to the limitations in, part
A of [Medicare] on his behalf for inpatient hospital services.”
(emphasis added). See also 42 U.S.C. § 1395d(a) (“The benefits
provided to an individual by the insurance program under [part
A of Medicare] shall consist of entitlement to have payment
                                  11

made on his behalf . . . for . . . inpatient hospital services . . . for
up to 150 days during any spell of illness minus 1 day for each
day of such services in excess of 90 received during any
preceding spell of illness . . . .”) (emphasis added). Therefore,
the Hospital argues, “entitlement” is defined in terms of the right
to have payment made on one’s behalf, so where an individual
has exhausted that right, they are no longer entitled to Medicare
benefits for the purposes of calculating a hospital’s DSH
adjustment. Catholic Health also contends, somewhat weakly,
that even if the statute is ambiguous, the Department’s
interpretation is unreasonable.

     We think it unnecessary to parse all the other provisions of
the statute the parties cite in support of their respective
positions. We conclude that, although the Department’s
interpretation is the better one, it is not quite inevitable. Either
interpretation seems permissible, a conclusion that is reinforced
by our recent decision in Northeast Hospital Corp. v. Sebelius,
657 F.3d 1 (D.C. Cir. 2011). That case also involved a hospital
challenging the amount of reimbursement it was due, and the
specific statutory dispute was whether individuals enrolled in
Medicare Part C were still considered “entitled to benefits under
part A” for the purposes of computing the Medicaid fraction. Id.
at 5. The basic arguments made by the parties in Northeast
Hospital track those made here, and after a lengthy analysis, in
which we noted “the Medicare statute’s inconsistent and
specialized use of the phrase ‘entitled to benefits under Part A,’”
id. at 13, we found the statute ambiguous on this question.
Therefore, under Chevron U.S.A., Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837, 842-43 (1984), we of course defer
to the Department’s construction. See Metro. Hosp. v. U.S.
Dep’t of Health & Human Servs., 712 F.3d 248, 270 (6th Cir.
2013) (reaching the same conclusion regarding the construction
of the same provision).
                                   12

B. Retroactivity

     The main dispute presented before the district court and
before us is rather puzzling; the arguments have turned on
whether the regulation was impermissibly retroactive.4 We
certainly understand why Catholic Health would embrace that
framing of the issue — as we stated in Northeast Hospital, “[i]t
is well settled that an agency may not promulgate a retroactive
rule absent express congressional authorization.” 657 F.3d at 13
(citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208
(1988)). But while the 2004 rulemaking was phrased as a matter
of revised statutory interpretation, it is clear that the regulation
— at least as it bears on the issue in this case — simply
reiterated the prior rule of decision first announced in the
Edgewater adjudication and reaffirmed two years later in Castle
Medical Center v. Blue Cross & Blue Shield Ass’n, HCFA
Adm’r Dec., 2003 WL 22490097, at *10-11 (Sept. 12, 2003).
And of course, it is black-letter administrative law that
adjudications are inherently retroactive.                NLRB v.
Wyman-Gordon Co., 394 U.S. 759, 763-66 (1969) (plurality
opinion); SEC v. Chenery Corp., 332 U.S. 194, 203 (1947);
Qwest Servs. Corp. v. FCC, 509 F.3d 531, 539 (D.C. Cir. 2007)
see also Bowen, 488 U.S. at 221 (“Chenery involved that form
of administrative action where retroactivity is not only
permissible but standard. Adjudication deals with what the law
was; rulemaking deals with what the law will be.”) (Scalia, J.,
concurring).

     4
       The agency also relies on the alternative — and much more
difficult — claim that even if the regulation was retroactive, the
existence of a prior inconsistent policy is irrelevant because the
Secretary’s present interpretation of the statute is the only permissible
reading. We need not consider that question because, as we have
already concluded, the statute can reasonably be interpreted either
way.
                                  13

     In short, the premise of the primary argument before the
district court was fallacious — but given the government’s
confusing presentation, we certainly do not fault the district
judge. Indeed, not only has the agency’s briefing on appeal
seemed to accept the rulemaking framework (relying only
tangentially on the Edgewater decision), but the Administrator’s
decision in this very case relied on the 2004 rulemaking, rather
than the Edgewater decision, as supplying the dispositive rule.

     Nevertheless, the Secretary’s reliance on the 2004
rulemaking does not necessarily render “retroactive” the
application of that rule. When a rule is challenged, the first
question is always whether the rule is substantively valid on its
face, and as we have already explained, the Secretary’s
interpretation in this case is permissible under Chevron. The
next question is whether it is retroactive, meaning that the rule
itself effected a clear change in the legal landscape and attached
new legal consequences to past actions. See Arkema Inc. v.
EPA, 618 F.3d 1, 7 (D.C. Cir. 2010). But the policy of
excluding dual-eligible exhausted days from the Medicaid
fraction was announced four years earlier in Edgewater, and the
rulemaking was simply a reiteration of this position.5

     5
       The 2004 rulemaking did effect a change with respect to
whether Medicare-exhausted days could be included in the Medicare
fraction. Prior to 2004, the Secretary interpreted the phrase “entitled
to benefits under part A of [Medicare]” in the Medicare fraction to
include only “covered Medicare Part A inpatient days.” Medicare
Program; Fiscal Year 1986 Changes to the Inpatient Hospital
Prospective Payment System, 51 Fed. Reg. 16,772, 16,777 (May 6,
1986). Only after the rule went into effect did the agency include in
the Medicare fraction all days for which patients were eligible for
Medicare, regardless of whether Medicare actually paid for those days.
But the dispute in this case turns on whether to include dual-eligible
exhausted days in the Medicaid fraction, so Edgewater clearly
established the relevant rule prior to the 2004 rulemaking.
                                14

     To be sure, as Catholic Health argues, the Edgewater
decision contained problems that might have rendered it
arbitrary and capricious if challenged on direct appeal (which
perhaps explains why the Secretary has been reluctant to rely on
it heavily). First, it did not forthrightly discuss prior statements
and administrative decisions that could be thought inconsistent
with the interpretation given in that case, and second, it
erroneously claimed that the agency’s policy at that time was to
include Medicare-exhausted days in the Medicare fraction (in
fact, the agency did not follow this practice until the 2004
rulemaking). 2000 WL 1146601, at *4. But the issue for
retroactivity purposes is not whether a prior adjudication is
substantively sound; it is only whether a prior adjudication does,
in fact, establish the policy at issue. There is no doubt that the
Edgewater adjudication set forth the interpretation that governs
this case prior to the 2004 rulemaking, so the alleged
retroactivity problem is not one of retroactive rulemaking.

     Thus, the only remaining question, which might be thought
to have been raised implicitly, is whether applying the
Edgewater interpretation “retroactively” to Catholic Health is
improper. Even though adjudication is by its nature retroactive,
we have recognized that “deny[ing] retroactive effect to a rule
announced in an agency adjudication” may be proper where the
adjudication “substitut[es] . . . new law for old law that was
reasonably clear” and where doing so is “necessary . . . to
protect the settled expectations of those who had relied on the
preexisting rule.” Williams Natural Gas Co. v. FERC, 3 F.3d
1544, 1554 (D.C. Cir. 1993) (quoting Aliceville Hydro Assocs.
v. FERC, 800 F.2d 1147, 1152 (D.C. Cir. 1986)). By
“retroactive effect,” of course, we typically refer to an order or
penalty with economic consequences, not retroactive application
of the rule itself — after all, under Wyman-Gordon, an
adjudication must have retroactive effect, or else it would be
considered a rulemaking. 394 U.S. at 763-66.
                                  15

     The parties have extensively argued whether the Edgewater
interpretation constituted a legal volte face — that is, whether
pre-Edgewater agency statements and decisions did, in fact,
establish a contrary policy. But it is unnecessary for us to
decide that question in this case because Catholic Health has
presented no explanation as to how it relied to its detriment on
the alleged prior policy — neither in its brief, nor when asked
directly at oral argument.6 So even assuming the Edgewater rule
was “retroactively” applied to the 1997 cost-reporting period, it
would not constitute the sort of unfair retroactivity that may
render an agency decision arbitrary and capricious. The
judgment of the district court is therefore reversed.

                                                          So ordered.

     6
        The parties’ briefing does not touch at all on detrimental
reliance, but this issue — along with the broader rulemaking vs.
adjudication framework discussed above — was explored in some
detail at oral argument. Had Catholic Health argued that the Secretary
waived the right to argue a lack of reliance, then the agency might
well have been foreclosed from prevailing on this point so late in these
proceedings. But counsel never made any such suggestion — in
briefing or at oral argument — so we construe Catholic Health as
having itself waived any waiver argument.