Court Opinion

ID: 2660885
Source: CourtListenerOpinion
Date Created: 2014-04-03 05:19:23.436697+00
Date Added: 2024-06-11T09:17:32.064809
License: Public Domain

UNITED STATES DISTRICT COURT
                          FOR THE DISTRICT OF COLUMBIA

DISTRICT HOSPITAL PARTNERS,
L.P. d/b/a GEORGE WASHINGTON
UNIVERSITY HOSPITAL, et al.,

               Plaintiffs,

        v.                                           Civil Action No. 11-1717 (GK)

KATHLEEN G. SEBELIUS,
Secretary of the United
States Department of Health
and Human Services,

               Defendant.

                                   MEMORANDUM OPINION

        Plaintiffs      are   a    group       of    commonly owned hospitals           that

participate      in   the     Medicare          program.     They    bring    this    action

against Kathleen Sebelius in her official capacity as Secretary

of the Department of Health and Human Services                             ("Defendant" or

"Secretary") after the Secretary disallowed various Medicare bad

debts claimed by Plaintiffs in the fiscal years ending in 2003,

2004,    and 2005.      Plaintiffs challenge that decision pursuant to

the Medicare Act, 42 U.S.C.                §    1395 et seq.        ("the Act"), and the

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

        This   matter    is       before       the   Court   on     Plaintiffs'      Opening

Brief    [Dkt. No. 14], which this Court construes as a Motion for
Summary Judgment, 1 Defendant's Motion for Summary Judgment and

Opposition         to     Plaintiffs'            Opening-       Brief    [Dkt.      No.      19]   1

Plaintiffs'        Opposition          and       Reply     Brief    [Dkt.    No.     22],     and

Defendant's        Reply        to     Plaintiffs'          Opposition       and     Reply     to

Defendant's        Motion       for    Summary          Judgment   [Dkt.     No.    28].     Upon

consideration of the briefs,                     the administrative record, and the

entire     record        herein,           and    for     the    reasons     stated        below,

Plaintiffs'        Motion        for         Summary       Judgment     is     granted        and

Defendant's Motion for Summary Judgment is denied.

I .   BACKGROUND

      A.      Statutory and Regulatory Framework

              1.        The Medicare Program

      Title    XVIII       of    the        Social      Security Act        established       the

Medicare program,           which provides medical                 care for        the elderly

and disabled.       42 U.S.C.          §    1395 et seq.; see also Kaiser Found.

Hosps. v. Sebelius,                  F.3d        , 2013 WL 791272, at *1            (D.C. Cir.
1
  The parties debate whether the Plaintiffs' Opening Brief should
be construed as a motion for summary judgment. Compare Pls.'
Opp'n & Reply Br. 2 n.2 [Dkt. No. 22], with Def. 's Reply to
Pls.' Opp'n & Reply to Def.'s Mot. for Summ. J. 3 n.2 [Dkt. No.
28] . Plaintiffs acknowledge that judicial review of this case is
under the APA. Pls:' Opp'n & Reply Br. 2 n.2. They also
acknowledge that the entire case will be resolved based on the
briefs and the administrative record. See Joint Mot. to Set a
Briefing Schedule 2 [Dkt. No. 12] . Thus, this case is being
decided as a matter of law, and summary judgment is the
"appropriate procedure for resolving a challenge to a federal
agency's administrative decision when review is based on the
administrative record." Richards v. I.N.S., 554 F.2d 1173, 1177
(D.C. Cir. 1977).
                                                 -2-
Mar.     5,        2013)        (citation          omitted) .         The        Medicare      program      is

administered             by     the    Secretary           of        Health         and   Human     Services

through the Center for Medicare and Medicaid Services                                                ( "CMS") .

Ark.    Dep't of Health                &    Human Servs. v. Ahlborn,                         547 U.S.     268,

275     (2006) .        Medicare        providers           enter          into      written     agreements

with the Secretary to provide services to eligible individuals.

42     U.S.C.       §    1935cc.        Fiscal        intermediaries,                 private       companies

that     process           payments         on     behalf        of       CMS,       then    make     interim

payments        to      providers,           subject        to       subsequent           adjustments.      42

u.s.c.    §    1395h.

        To calculate these adjustments,                               providers are required to

submit        an     annual          cost     report        to       their          fiscal     intermediary

identifying total costs incurred during the course of the fiscal

year.    42        C.F.R.       §§    413.20,       413.24.          Fiscal         intermediaries then

analyze and audit the cost report and inform the provider of a

determination of the amount of total Medicare reimbursement to

which they are entitled, referred to as the notice of amount of

program reimbursement                   ("NPR").        42       C.F.R.         §    405.1803;      see also

Regions Hosp. v. Shalala, 522 U.S. 448, 452 (1998).

        If a provider is dissatisfied with the intermediary's final

determination              of    its        NPR,     and        if        the       provider     meets     the

requirements set forth in 42 U.S. C.                                  §    1395oo (a),        the provider

may     appeal          the     determination           to        the       Provider         Reimbursement

                                                      -3-
Review      Board       ("PRRB").            42        U.S.C.     §        1395oo (a) (1) (A) (ii).     A

decision of the PRRB is final unless the Secretary,                                          on her own

motion, and within 60 days after the provider is notified of the

PRRB     decision,            reverses,            affirms,       or        modifies      the     PRRB's

decision. 42 U.S.C.             §   1395oo(f). The Secretary has delegated her

final authority to modify,                      affirm, or reverse PRRB decisions to

the      Administrator              of        CMS         ("Administrator") .             42     u.s.c.
13 9 5 oo (f) ( 1) ; 4 2 C • F . R.      §   4 0 5 . 18 7 5 .

       Following          a      final            decision            of      the     PRRB      or     the

Administrator,         a provider is entitled to file a civil action in

the United States District Court for the District of Columbia to

seek judicial          review of             the       final    agency action.            42 U.S.C.      §

1395 oo(f).

                2.     Medicare Bad Debt Reimbursements

       Medicare         "bad        debts"             are      unpaid         amounts,        such     as

deductibles or copayments, owed by Medicare patients for covered

Medicare services.              42 C.F.R           §    413.89(e);          see also 42 C.F.R.           §

413.89 (b) (1) .       These bad debts                  are deductions              from revenue and

are not        to be    included in costs reported by the provider.                                     42

C.F.R.     §    413.89(a).          However,            the     Medicare         statute       prohibits

cost-shifting,         which means that costs associated with services

provided       to    Medicare         beneficiaries              cannot         be    borne     by    non-

Medicare         patients,               and           vice      versa.              42      u.s.c.      §

                                                       -4-
1395x(v) (1) (A) (i); Walter 0. Boswell Mem'l Hosp. v. Heckler,                                                  749

F.2d 788,       791      (D.C.    Cir.      1984)         (noting      that           statute prohibits

"cost-shifting"          between Medicare and non-Medicare patients) .                                            In

order    to    prevent        cost-shifting,               a    provider          unable            to    collect

from a Medicare beneficiary can claim the amounts owed as                                                       "bad

debts"    and be         reimbursed under Medicare                         if    the provider meets

certain criteria specified in 42 U.S.C. § 413.89(e).

       According to 42 C.F.R.                   §    413.89(e),            bad debts attributable

to unpaid Medicare costs are reimbursable                                       if:     (1)    the debt           is

"related       to    covered      services           and       derived          from        deductible           and

coinsurance          amounts";           ( 2)       the        provider               establishes               that

"reasonable         collection        efforts          were       made";              (3)     the        debt    was

"actually       uncollectible            when        claimed          as    worthless";                  and     (4)

"sound        business        judgment"             establishes             that            there         is     "no

likelihood          of   recovery         at        any        time        in     the         future."           Id.

§   413.89(e).

       Chapter       3   of     the   Medicare         Provider Reimbursement                             Manual, 2

Part I    ("PRM"),       contains the Secretary's interpretation of these

Regulations.         Catholic Health Initiatives v.                               Sebelius,              617    F. 3d

490,    491    (D.C.     Cir.    2010)      (noting that PRM contains "guidelines
2
  The Secretary also issues a manual for fiscal intermediaries,
known as the Medicare Intermediary Manual ( "MIM") . See Albert
Einstein Med. Ctr. v. Sebelius, 566 F.3d 368 (3d Cir. 2009)
(noting that Secretary issues manuals such as the PRM and MIM
"to assist healthcare providers and fiscal intermediaries in
administering the [reimbursement] system").
                               -5-
and policies"      but    "does not have         the effect of regulations") .

Three sections of the PRM are relevant.

      First,     PRM    section    310    defines      a     "reasonable      collection

effort" of Medicare debts as one that is "similar to the effort

the provider puts forth to collect comparable amounts from non-

Medicare       patients."     Administrative           Record        ("AR")    254.     It

specifically provides that a              "provider's collection effort may

include the use of a collection agency." Id.

      Second,     PRM    section    310.2       sets    forth    a    "presumption      of

noncollectibility," which establishes that if,                       after reasonable

and   customary        attempts    to    collect       the    unpaid     amounts      have

failed, the debt remains unpaid more than 120 days from the date

the first bill was mailed to the Medicare beneficiary,                         the debt

"may be deemed uncollectible." AR 255.

      Third,    PRM section 316 establishes a system to ensure that

any debts deemed uncollectible that are later recovered by the

provider are subtracted from benefits due to the provider in the

reporting period in which those payments are recovered. AR 279.

           3.      The Medicare Bad Debt Moratorium

      In 1987,     Congress       enacted what         became    known as      the    "Bad

Debt Moratorium." See Foothill Hosp.-Morris L. Johnston Mem'l v.

Leavitt, 558 F. Supp. 2d 1, 3 (D.D.C. 2008)                     ("Foothill")     (citing

Hennepin Cty. Med.        Ctr. v.       Shalala,   81 F.3d 743,         747    (8th Cir.

                                          -6-
1996))      (noting that Congress enacted the Moratorium in response

to    the   policy     changes         proposed    by   the    Inspector         General    of

Health and Human Services) . 3 The Moratorium reads:

         (c) CONTINUATION OF BAD DEBT RECOGNITION FOR HOSPITAL
        SERVICES.      In making payments to hospitals under
        title XVIII of the Social Security Act, the Secretary
        of Health and Human Services shall not make any change
        in the policy in effect on August 1, 1987, with
        respect to payment under title XVIII of the Social
        Security Act to providers of service for reasonable
        costs relating to unrecovered costs associated with
        unpaid deductible and coinsurance amounts incurred
        under   such    title  (including  criteria   for what
        constitutes a reasonable collection effort) .

Omnibus Budget Reconciliation Act of 1987,                      Pub.      L. No.       100-203

§    4008, 101 Stat. 1330 (reprinted in 42 U.S.C.                    §   1935f note).

        In 1988, Congress amended the Moratorium to further define

"reasonable        collection      effort,"        defining    the       term    to    include

"criteria      for    indigency         determination        procedures,         for     record

keeping,     and     for   determining whether to              refer      a     claim to an

external collection agency." Technical and Miscellaneous Revenue

Act    of    1988,    Pub.    L.       No.   100-647     §    802,       102     Stat.     3798

(reprinted in 42 U.S.C.            §   1935f note).

       In 1989,      Congress amended the Moratorium again.                           It added

the     following      sentence:         "The     Secretary     may       not    require      a

hospital to change its bad debt collection policy if a fiscal

3
  Foothill contains a detailed review of the legislative history
of the Moratorium and its subsequent amendments. 558 F. Supp. 2d
at 2-3.
                                             -7-
intermediary,           in   accordance      with          the     rules    in     effect    as     of

August       1,    1987,      with     respect             to     criteria       for      indigency

determination           procedures,         record              keeping,     and        determining

whether to refer a claim to an external collection agency,                                        has

accepted such policy before that date, and the Secretary may not

collect from the hospital on the basis of an expectation of a

change    in      the    hospital's         collection            policy."       Omnibus     Budget

Reconciliation Act            of   1989,     Pub.      L.        No.   101-239,     §    6023,    103

Stat. 2106 (reprinted in 42 U.S.C.                     §    1935f note).

        Thus, the Moratorium, as amended, contains two restrictions

on the Secretary. First, the Secretary is prohibited from making

any changes to the agency's bad debt policy in effect on August

1,   1987.     See Foothill,          558   F.    Supp.          2d at     5-9   (rejecting the

Secretary's argument that she "is free to make changes to                                        [her]

own policies and is restricted only in modifying the individual

policies of individual Medicare providers" in light of the clear

statutory text and the court's view of the historical context in

which     the     statute       was     passed) .           Second,        the     Secretary        is

prohibited from requiring a provider to change bad debt policies

it had in place on August 1, 1987. Id. at 4 (noting that the Bad

Debt Moratorium "clearly prevents the Secretary from changing a

provider's established bad debt policy") ; see also Uni v. Health

                                                 -8-
Servs.,       Inc.    v.    Health     &   Human Servs.,          120 F.3d 1145,                1147-48

(11th Cir. 1997).

        B.         Factual and Procedural History

        Plaintiffs submitted cost reports that included claims for

bad debts to their fiscal                      intermediaries in fiscal year 2003,

2004,    and 2005. AR 60.             These alleged bad debts included unpaid

deductibles          and coinsurance amounts                   that    had been sent              to an

outside collection agency after 120 days of internal collection

efforts.       AR     60,   230-32,        236.    Plaintiffs'          fiscal        intermediary

issued NPRs disallowing these claimed bad debts,                                 declaring that

uan ongoing collection effort at                        [an]    outside collection agency

indicated that the bad debts were not yet deemed worthless." AR

60.

        Plaintiffs          timely         appealed        the        NPRs      to        the      PRRB,

challenging the disallowance of the bad debts. AR 60. On May 27,

2011,        the     PRRB     issued       a     unanimous        decision           holding          that

Plaintiffs properly claimed the uncollectible                                 accounts           as    bad

debts        even     though    the        accounts       were        still     at        an     outside

collection          agency.     Univ.          Health     Servs.,        Inc.        v.        BlueCross

BlueShield Ass'n,            Case No.          07-0084GC,       2011 WL 2574339                (P.R.R.B.

May 27, 2011).

        On June       20,    2011,     the Administrator notified the parties

that she intended to review the PRRB's decision under 42 C.F.R.

                                                  -9-
§     405.1875.       AR    51-52.     The    parties    submitted          comments         to   the

Administrator.             AR 19-50.     On July 26,           2011,     the     Administrator

issued a decision reversing the PRRB and upholding the fiscal

intermediary's             adjustments       disallowing       Plaintiffs'           claimed bad

debts.        Univ.     Health    Servs.,       Inc.    v.     Blue      Cross       Blue    Shield

Ass'n,        2011    WL    4499597     (H.C.F.A.       Admin.      Dec.       July    26,    2011)

    ("Administrator Decision").

        The     Administrator          ruled     that        the    PRRB       erred       when    it

concluded that the Bad Debt Moratorium was applicable in this

case.     Id. at *9. She observed that CMS policy establishes that

"when     a     provider       sends     uncollected         amounts        to   a     collection

agency,        the     provider       cannot     establish         reasonable          collection

efforts have been made, the debt was actually uncollectible when

claimed        as     worthless[,]      and    that     there       is    no     likelihood        of

recovery." 4 Id. at *8. The Administrator therefore concluded that

CMS has        "always required that a provider demonstrate that                                  its

collection           efforts   were     reasonable       and,       therefore,         there      has

been no change in CMS policy." Id. at *9.

        As permitted by 42              U.S.C.    §    1395oo(f),          Plaintiffs timely

filed a        Complaint on September 23,                2011       [Dkt.      No.    1]     seeking

review of the Administrator's decision.                            Plaintiffs filed their
4
  For ease          of analysis, this Court shall refer to the Secretary's
position,           that an account that is outstanding at an outside
collection           agency is per se not uncollectible and thus cannot be
claimed as          a bad debt, as the "presumption of collectability."
                                        -10-
Opening Brief on March 9,                     2012. Defendant filed her Motion for

Summary Judgment and Opposition to Plaintiffs' Opening Brief on

April 25, 2012. Plaintiffs then filed their Opposition and Reply

Brief     on    June        11,    2012,        and      Defendant         filed      her     Reply      to

Plaintiffs'       Opposition              and       Reply     to       Defendant's          Motion      for

Summary Judgment on August 9, 2012. The joint appendix was filed

on August 23, 2012                [Dkt No. 30], and this matter is now ripe for

review.

II.     STANDARD OF REVIEW

        The Medicare Act provides for judicial review of a                                           final

decision       made     by        the     PRRB      or      the       Secretary.       42     U.S.C.      §

1395oo(f) (1).         It     instructs          the     reviewing         court      to     apply      the

provisions       of     the        APA.       Id.      Because          this   case         involves      a

challenge to a final administrative decision, the Court's review

on    summary    judgment           is    limited        to     the Administrative                Record.

Holy Land Found. for Relief and Dev. v. Ashcroft, 333 F.3d 156,

160    (D.C.    Cir.    2003)       (citing Camp v.                   Pitts,   411 U.S.          138,   142

( 1973) ) ;    Richards,          554    F. 2d at        1177         ("Summary      judgment       is an

appropriate procedure                   for   resolving           a    challenge      to     a    federal

agency's       administrative             decision when               review    is    based on the

administrative record.").

       Under the APA,             an agency decision is set aside only if it

is "arbitrary, capricious,                    an abuse of discretion,                  or otherwise

                                                    -11-
not    in accordance with law"               and its factual             findings are only

overturned if "unsupported by substantial evidence." 5 U.S.C.                                          §

706 (2) (A),     (E);    see also Murray Energy Corp.                       v.    F.E.R.C.,          629

F.3d 231, 235       (D.C. Cir. 2011)              (quotation and citation omitted).

It is well established in our Circuit that this court's review

of agency action is "highly deferential." Bloch v.                                     Powell,       348

F.3d    1060,     1070     (D.C.          Cir.     2003)       (citations             and    internal

quotation       marks    omitted) .         If    the    "agency       has       rationally          set

forth the grounds on which it acted,                                    this court may not

substitute its judgment for that of the agency." BNSF Ry. Co. v.

Surface       Transp.     Bd.,       604     F.3d       602,     611     (D.C.          Cir.    2010)

(internal quotation and citation omitted).                             However,         this Court

must ensure that the agency has "considered the factors relevant

to    its decision and articulated a                     rational       connection between

the    facts     found     and       the     choice        made."      In        re     Polar       Bear

Endangered Species Act Listing & 4(d)                          Rule Litig.,                 F.3d.

2013 WL 765059, at *6            (D.C. Cir. Mar. 1, 2013)                    (quoting Keating

v. F.E.R.C., 569 F.3d 427, 433 (D.C. Cir. 2009)).

       When     determining          if     substantial           evidence            supports        an

agency's       factual    finding,          "weighing       the     evidence           is    not     the

court's function." United Steel, Paper & Forestry, Rubber, Mfg.,

Energy,    Allied Indus.         &    Serv.       Workers       Int 'l Union,           v.     Pension

Ben. Guar. Corp., No. 12-5116, 2013 U.S. App. LEXIS 731, at *14

                                                 -12-
    (D.C.        Cir.    Jan.    11,   2013).    Instead,      the    question        is    "whether

there            is     such    relevant    evidence     as    a     reasonable       mind       might

accept            as     adequate      to   support      the       agency's     finding."          Id.

    (quoting Consolo v. Fed. Mar. Comm'n, 383 U.S.                            607,    620     (1966))

    (internal quotation marks omitted) .

III. ANALYSIS

            Plaintiffs make three arguments in support of vacating the

Administrator's                 decision.       Their    primary       argument,           which    is

dispositive,              is that the presumption of collectability did not

exist prior to 1987.                   Therefore,       application of that policy to

disallow their claimed bad debts violates the first prong of the

Bad Debt Moratorium prohibiting the Secretary from changing the

agency's bad debt policies. 5

            A.        The Presumption of Collectability Violates                           the   First
                      Prong of the Bad Debt Moratorium

            The first prong of the Bad Debt Moratorium prohibits the

Secretary from making any changes to the Department ' s bad debt

policy in effect on August 1,                      1987. See Foothill,               558 F.      Supp.

2d at            5-9.    As already noted,         the Administrator concluded that
5
  Because the Court concludes that the Administrator erred when
she determined that there was no change in policy in violation
of the Bad Debt Moratorium,       the Court need not address
Plaintiffs' argument that the Administrator's decision failed to
allow the hospital to claim the debts based on the second,
hospital-specific prong of the Bad Debt Moratorium. For the same
reason, it is not necessary to address whether the presumption
of collectability is arbitrary and capricious. See Foothill, 558
F. Supp. 2d at 11 n.17.
                              -13-
the     presumption of           collectability was                   in place      prior     to   the

effective     date        of    the    Moratorium           and       accordingly      upheld      the

intermediary's denial of the Plaintiffs'                               claims on this basis.

Administrator Decision, 2011 WL 4499597, at *9-*10. However, for

the     reasons     set        forth       below,     the     Court        concludes        that   the

Administrator's            finding          was      not      supported        by      substantial

evidence.     See 5 U.S.C.             §    706(2) (E)        (factual conclusions may be

overturned         only    where       they       are      "unsupported          by    substantial

evidence") . 6

              1.     The Record Evidence Cited by the Secretary Does
                     Not Support the Administrator's Finding

        The   Secretary         argues        that      the    Regulations,           various      PRM

provisions,        a particular 1989 MIM provision,                         two memoranda from

1990,     a   2008        CMS    Joint        Signature         Memorandum,           and    various

decisions of the Administrator provide substantial evidence that

the presumption of collectability existed prior to the enactment

of the Moratorium.              De£.' s Mem.         of P.        &   A.   in Supp.     of De£.' s

Mot.    for Summ. J.           & Opp'n to Pls.' Opening Br.                    21-22        [Dkt. No.

6
  The Foothill court addressed the same issue and came to the
same conclusion. Foothill, 558 F. Supp. 2d at 10-11 (finding
that the presumption of collectability was indeed "a change in
policy, for this policy did not exist prior to the effective
date of the Moratorium") . The Secretary filed an appeal of
Foothill in our Court of Appeals, but withdrew it prior to
briefing. Foothill Hosp.-Morris L. Johnson Mem'l v. Leavitt, No.
08-5224, 2008 WL 4562209 (D.C. Cir. Sept. 19, 2008).
                               -14-
19-1];    Def. 's Reply to Pls.'           Opp' n    &    Reply to Def. 's Mot.             for

Summ. J. 17. The Court addresses each in turn.

                  a.       42 C.F.R.   §    413.89

      The Regulation at issue,             42 C.F.R.          §    413.89, was issued in

1966, and thus predates the Moratorium. 7 However,                           the Regulation

does not establish the presumption of collectability nor address

the use of collection agencies.                 It does not define                "reasonable

collection efforts,"         "actually collectible," or "sound business

judgment." See GCI Health Care Ctrs. ,                    Inc. v.         Thompson,   2 0 9 F.

Supp. 2d 63, 69 (D.D.C. 2002).

      The   Secretary's       response          is       that       the    presumption       of

collectability     is   "inherent"         in    the     Regulation.          But   the    very

wording     of    the      Regulation           fails         to        support     such     an

interpretation.     Rather than being "inherent" in the Regulation,

the   presumption       of     collectability                 simply       represents       the

Secretary's      current     interpretation              of       the     Regulation. 8     See

7
   42 C.F.R. § 413.89 was originally codified in 1966 as 42 C.F.R.
§   405.420. Principles for Reimburseable Costs, 31 Fed. Reg.
14,808, 14,813 (Nov. 22, 1966). In 1986, it was redesignated as
42    C.F.R.   §   413.80.  Redesignation   of   Reasonable   Cost
Regulations, 51 Fed. Reg. 34,790, 34,790 (Sept. 30, 1986). In
2004, it was again redesignated and became 42 C.F.R. 413.89.
Changes to the Hospital Inpatient Prospective Payment Systems
and Fiscal Year 2005 Rates, 69 Fed. Reg. 48,916, 49,254 (Aug.
11, 2004).
8
   While the parties vigorously dispute the level of deference
that should be accorded the Secretary's current interpretation,
                                -15-
Foothill,       558 F.       Supp.       2d at 10       (noting that the Secretary was

confusing        the        Regulation        with       his       interpretation       of    the

Regulation) .

                       b.         PRM Provisions

        The Secretary also argues that the PRM provisions, on their

face,    establish the presumption of collectability. However,                                 the

language of        the       PRM does not          set    forth any such presumption,

and,    in fact,       tacitly contradicts it. PRM section 310 specifies

that the use of collection agencies by providers can be part of

a "reasonable collection effort."                        PRM section 310.2 states that

if    "reasonable and customary attempts"                          to collect a debt have

not     been   successful           in    12 0 days,      the      debt   is   entitled      to   a

presumption        of        noncollectibility.             This      provision     does       not

exclude        debts        that     remain        at    collection         agencies.        Taken

together,       the         two    PRM     sections         obviously       contemplate        the

possibility that debts which remain at a collection agency for

more than 12 0 days may be deemed noncollectible.                              Thus,    section

310 and section 310.2 do not support the Secretary's position.

See Foothill, 558 F. Supp. 2d at 11.

                       c.         1989 MIM Transmittal No. 28

        The    Secretary also             argues     that      a   MIM    transmittal     letter

from September 1989 supports her position that the presumption

that question is irrelevant to the threshold issue of when the
interpretation became the Secretary's policy.
                                               -16-
of   collectability                existed     prior     to      1987.     The     document,

identified as Transmittal No.                   28,     set out     "New Policy"         to be

used by intermediaries                for audits performed after October 12,

1989. AR 289. Exhibit A-ll in the transmittal specified:

     If the bad debt is written-off on the provider's books
     121 days after the date of the bill and then turned
     over to a collection agency, the amount cannot be
     claimed as a Medicare bad debt on the day of the
     write-off. It can be claimed as a Medicare bad debt
     only after    the  collection  agency completes    its
     collection effort.

AR   315.    This       is     the     first     time     that     the     presumption         of

collectability actually appeared in writing,                             and this was         two

years after the Bad Debt Moratorium went into effect.

     Clearly, the fact that this is the first publication of the

presumption of collectability, and that it was issued well after

passage     of    the        Moratorium,        weighs     against        the    Secretary's

assertion        that        the     presumption         predated        the     Moratorium.

Plaintiffs        emphasize            that      the      transmittal            specifically

identified       itself       as     setting     forth    "New     Policy."        Thus,      the

transmission,       by        its      own     terms     actually         contradicts         the

Secretary's       argument.          See     Foothill,    558     F.     Supp.     2d    at    10

(finding that the transmittal letter was                         "[t] ellingly"         labeled

as a new policy and thus was a "new rule when it was enacted in

                                               -17-
1989, several years after the Bad Debt Moratorium") . 9 In sum, the

language    of   the    1989     MIM    Transmittal       does    not   support   the

Administrator's        conclusion       that    it    contained    an   established

policy with regard to the collectability of bad debts.

                  d.     1990 Health           Care   Financing     Administration
                         Memoranda

        The Secretary argues that two memoranda written by Health

Care     Financing     Administration          ( "HCFA") 10   personnel    in     1990

support her argument. First, the Secretary points to a June 11,

1990,      Memorandum       to         regional       administrators       entitled

9
  The Secretary argues that, while the transmittal did set forth
some new policies, it was transmitting established policy with
respect to "pass-through reasonable cost reimbursement issues
such as bad debts." Administrator Decision, 2011 WL 4499597, at
*7 n.10 (finding that exhibit was "transmitting new policy with
respect to some IPPS issues" but also "transmitting established
policy") . The Administrator's conclusion was based on language
on the front page of the transmission stating that the revisions
addressed "significant and/or recurring issues." AR 289.

     Medicare reimbursement policy regarding bad debts was and
clearly still is a recurring issue. See Foothill, 558 F. Supp.
2d at 3 (citing Hennepin, 81 F. 3d at 747) (describing how the
"government has been struggling with this issue :Eor decades" and
noting that its "actions have often been inconsistent") . This
language thus provides no additional support for the Secretary.
Moreover, the Administrator conceded that there was at least
some "new policy" embodied in the transmittal. Administrator
Decision, 2011 WL 4499597, at *7 n.10 (stating that "IPPS
Exhibit A shows certain 'new policies'") . However, she did not
explain how she distinguished the       "new"  policy from the
"established" policy.
1
    °
    CMS was   formerly known as     the Health Care Financing
Administration. St. Luke's Hosp. v. Sebelius, 611 F.3d 900, 901
n.1 (D.C. Cir. 2010) (citation omitted)
                               -18-
"Clarification   on     Bad   Debt   Policy,"     which   stated   that   HCFA

"always believed" that "there is a likelihood of recovery for an

account sent to a collection agency." AR 369. However,               a close

look at the language of the Memorandum in its entirety squarely

contradicts her assertion that the presumption of collectability

was clearly in place in 1990,          much less before the Moratorium

became effective three years earlier in 1987.

      The Memorandum began by stating that HCFA had "reexamined"

its   position on     the   collectability of      accounts   at   collection

agencies in light of the Moratorium and the fact that "a debt

referred to a collection agency can sometimes be considered as

pending   indefinitely."      AR     369.   Its    analysis   included     the

following passage:

      We believe that an intermediary could reasonably have
      interpreted the title of section 310.2, Presumption of
      Noncollectability, to provide that an uncollectible
      account could be presumed to be a bad debt if the
      provider has made a reasonable and customary attempt
      to collect the bill for at least 120 days even though
      the claim has been referred to a collection agency.
      Such an interpretation is reasonable unless it is
      apparent that the debt is not a bad debt, for example,
      because the beneficiary is currently making payments
      on account, or has currently promised to pay the debt.
      As noted above, section 310.2 provides that the debt
      may be deemed uncollectible rather than that the debt
      "shall" or "must" be deemed uncollectible. On the
      contrary, "may" connotes the existence of discretion.
      Thus, even after 120 days, a debt should not be deemed
      uncGllectible when there is reason to believe that in
      fact it is collectible. However, the mere fact that a
      debt is referred to a collection agency after the

                                     -19-
        provider's in-house collection effort is                                   completed
        does not mean that the debt is collectible.

AR 370 (emphasis in original) .

        There    are       two   important         points     to    be        drawn    from        this

passage.    First,         the Memorandum recognizes that an intermediary

could      "reasonably"           interpret         the      PRM     differently,              which

contradicts the Secretary's position in this litigation that the

PRM     clearly       establishes          the     presumption           of    collectability.

Second, the Memorandum stated that this alternate interpretation

is reasonable except in specific circumstances where there are

reasons beyond an account's referral to a collection agency to

believe that          the debt will be collected.                   AR 370          (setting out

examples        of        specific     circumstances              such        as      where        "the

beneficiary          is    currently    making          payments    on        account,        or    has

currently promised to pay the debt"). It then declared that "the

mere fact that a debt is referred to a collection agency after

the provider's in-house collection effort is completed does not

mean that       the debt         is   collectible."         These    statements directly

contradict the presumption of collectability, which posits that

the     "mere    fact"       that     an    account         has    been        referred        to     a

collection agency makes it per se not uncollectible.

                                                 -20-
      Second,      the Memorandum explicitly recognized that HCFA had

failed to issue any directives to intermediaries expressing this

policy prior to 1987. It stated:

      Therefore, where an intermediary       applied section
      310.2 to permit an allowable Medicare bad debt for an
      account sent to a collection agency, consistent with
      the provider's procedures for non-Medicare patients,
      the moratorium would prohibit the intermediary from
      applying   the   policy   differently   despite   HCFA
      directives to the contrary dated subsequent to August
      1, 1987.

AR 370. This passage reflected the Secretary's interpretation of

the Moratorium to only prevent an intermediary -- not the agency

itself -- from changing its policies. See Foothill, 558 F. Supp.

2d at 4      (noting that Secretary argued that he "is free to make

changes to his own polices and is restricted only in modifying

the individual policies of individual Medicare providers") . At

no   point    in     the    Memorandum         did     HCFA     identify    any     pre-1987

evidence      that     this          interpretation        existed        prior      to    the

Moratorium.     Moreover,            this sentence acknowledged that the only

"directives"       that might have informed the intermediary on this

issue were released             "subsequent to August             1,    198 7."    Thus,   the

Memorandum taken           as    a    whole    does not       support    the      Secretary's

position.

      The Secretary attempts in her Motion for Summary Judgment

to   "bolster"       the        weight    of     the     June     1990     Memorandum       by

                                              -21-
referencing a March 20,              1990, Memorandum from the CMS Director

of the Office of Quality Control Programs. See Def.'s Mem. of P.

&    A.    in Supp.       of Def. 's Mot.   for      Summ.   J.    &    Opp' n to Pls.'

Opening Br.         20    n.10.   This Memorandum was not               included in the

Administrative Record and therefore need not be considered. 11

          However, even if the Court were to consider the March 1990

Memorandum,         it     neither    "bolsters"      the    June       Memorandum    nor

supports      the       Secretary's position.      The Memorandum stated that

HCFA "has had a            long standing policy on when providers could

claim bad debts"            but failed to identify any pre-1987 evidence

that supported that conclusion. Thus, even if the Court were to

consider         this    March    Memorandum,   it     would      not     "bolster"   the

weight      of    the     June    Memorandum,   nor     support         the   Secretary's

contention that the presumption of collectability was in place

prior to 1987.

11
   Despite having already used the appropriate procedure to
supplement the Administrative Record in this case to include the
2008 Joint Statement Memorandum, see Def. 's Mot. for Leave to
Supplement the Admin. Record [Dkt. No. 1 7] , the Secretary did
not follow such procedure with the March 1990 Memorandum.
Instead, it attached it to its initial filing as an exhibit. The
Court notes that its "[r]eview is to be based on the full
administrative record that was before the Secretary at the time
he made his decision." Walter 0. Bosw~ll Mem. Hosp., 749 F.2d at
792 (emphasis in original) (quoting Citizens to Preserve Overton
Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971)).
                              -22-
                         e.     2008 CMS Joint Statement Memorandum

       The Secretary also argues that the May 2,                                2008,   CMS Joint

Statement       Memorandum           ( "JSM")       supports         the        Administrator's

finding.       The        JSM's     self-stated           purpose        was       to       "clarify

longstanding policy concerning reimbursement for a Medicare bad

debt while the account is at a collection agency." Supplemental

AR 1.     However,        like the earlier memoranda                 just discussed,               the

JSM actually contradicts the Secretary's position.

       First, the JSM cited no pre-1987 evidence in support of its

statement that            the presumption of collectability was                             in place

prior to the Moratorium.                  Second,      the JSM directly contradicted

the    June    1990       Memorandum       by    asserting        that      the       PRM    clearly

establishes the presumption of collectability.                              In addition,           the

June    1990    Memorandum          explicitly          told    intermediaries              who    had

permitted providers to claim bad debts outstanding at collection

agencies that they not only could,                        but must,        continue to allow

such    bad     debts          pursuant     to      the      Moratorium.          The       JSM,    in

contradiction,           declared such actions               to be    "not        in accordance

with the regulations" and instructed intermediaries to apply the

presumption         of        collectability.          Supplemental         AR     2.       The    JSM

demonstrates that,              twenty years after the Moratorium went into

effect,       the    agency        had     still       not     succeeded         in     adequately

communicating or              implementing a         policy that           it    claims was         in

                                                -23-
place     for    over        forty       years.        The     JSM     does      not    support     the

Secretary's position.

                        f.        CMS Administration Decisions

        Finally,    the           Secretary       argues       that       various      Administrator

decisions       support           her     decision.           First,       she     identifies       six

Administrator decisions 12 between 1992 and 1997 which allegedly

demonstrate        the        Administrator's                 consistent          "position        that

accounts        pending           at     collection          agencies         cannot       be   deemed

worthless." Def. 's Reply to Pls.'                           Opp' n   &   Reply to Def. 's Mot.

for Summ. J. 7-8. First, all these cases postdate the Moratorium

by   several      years.          Second,        all    of     these      cases     deal    with    the

separate        issue        of        whether     both        Medicare          and    non-Medicare

accounts must be sent to a collection agency for the provider to

claim the Medicare accounts as bad debts. These decisions do not

address when in the process the provider can claim such accounts

as bad debts, and thus, are not applicable.

12
   Baystate Med. Ctr. v. Aetna (H.C.F.A. Admin. Dec. Aug. 4,
1997)  [Dkt. No. 28-1 pp. 58-65]; Arlington Hosp. v. Blue Cross
Blue Shield Ass'n, 1997 WL 420393 (H.C.F.A. Admin. Dec. June 13,
1997) [Dkt. No. 28-1 pp. 49-57]; Detroit Receiving Hosp. & Univ.
Health Ctr. v. Blue Cross and Blue Shield Ass'n, 1996 WL 887671
(H.C.F.A. Admin. Dec. Oct. 7, 1996) [Dkt. No. 28-1 pp. 41-48];
Mem' 1 Hosp. of Dodge Cty. v. Blue Cross & Blue Shield Ass' n
(H.C.F.A. Admin. Dec. March 22, 1996) [Dkt. No. 28-1 pp. 31-40];
Univ. Hosp. v. Blue Cross & Blue Shield Ass'n (H.C.F.A. Admin.
Dec . Aug. 21, 19 9 5) [Dkt . No. 2 8 -1 pp. 21-3 0] ; Humana Hosp. v.
Aetna Life Ins. Co. (H. C. F .A. Admin. Dec. Sept. 11, 1992) [Dkt.
No. 28-1 pp. 2-10].
                                                  -24-
        Second,        the        Secretary            identifies          three     fairly       recent

Administrator decisions                       that     "apply the         Secretary's policy in

the same manner it has been applied in this case." Def. 's Reply

to    Pls.'     Opp'n        &    Reply        to     Def.'s      Mot.      for    Summ.    J.     9.     In

addition to the fact that all of these cases significantly post-

date the Moratorium,                   the decisions were either overturned based

on a finding that the presumption of collectability violated the

Bad     Debt    Moratorium               or     were       upheld    without        addressing           the

Moratorium issue.

        The earliest of the decisions cited by the Secretary is a

2004 case, Battlecreek Health Sys. & Mercy Gen. Health Partners

v.    Blue     Cross    Blue           Shield        Ass'n,       2004     WL     3049346    (H.C.F.A.

Admin.    Dec.    Nov.           12,     2004).       The Western District                 of Michigan

affirmed       the Administrator's                    decision,          and was     upheld by the

Sixth    Circuit       Court           of     Appeals.       Battle       Creek     Health       Sys.     v.

Thompson,      423     F.        Supp.      2d 755,         760    (W.D.    Mich.      2006),     aff'd,

Battle Creek Health Sys.                       v.    Leavitt,       498 F.        3d 401     (6th Cir.

2007).    However,          as the Foothill court observed,                          the parties in

Battle Creek did not raise,                          and neither the district court nor

the appellate court addressed,                         the Moratorium.             Foothill,      558 F.

Supp. 2d at 5 n.7.

       The second case cited is Mesquite Cmty. Hosp. v. Blue Cross

and Blue       Shield Ass'n,                  2007    WL    1804073        (H.C.F.A.    Admin.          Dec.

                                                     -25-
Apr.    18,    2007),    which was        similarly upheld without                   addressing

the Bad Debt Moratorium. Mesquite Cmty.                        Hosp. v.         Levitt,     3-07-

CV-1093-BD, 2008 WL 4148970, at *3 n.4 (N.D. Tex. Sept. 5, 2008)

(noting        that    "[u]nlike       the     provider        in       Foothill      Hospital,

plaintiff makes no argument concerning the Bad Debt Moratorium

in this case").

        The    third    case     is    the    Administrator's              2007      opinion    in

Foothill Presbyterian Hosp. v.                 Blue Cross           &   Blue Shield Ass' n,

2007     WL    1004394        (H.C.F.A.      Admin.     Dec.        Feb.       14,   2007).    As

discussed above,         that opinion was overturned by another member

of      this      District        Court       because        she         found       that      the

Administrator's           determination              that      the         presumption          of

collectability          existed       prior    to     1987     was       not      supported     by

substantial       evidence.       Foothill,      558    F.     Supp.       2d at      11.   Thus,

these     opinions      are    not    persuasive       evidence          of     pre-Moratorium

policy.

        In sum,       the Court has reviewed the evidence cited by the

Secretary and finds that it falls far short of the "substantial

evidence" on which the Administrator based her contention that

the presumption of collectability existed prior to 1987.

                                              -26-
             2.      Evidence   in   the    Record    Contradicts the
                     Administrator's Finding that the Presumption of
                     Collectability Existed Prior to 1987

        The Court must look to "the record as a whole 11 in reviewing

the Administrator's           factual   findings.      Chippewa Dialysis Servs.

v. Leavitt, 511 F.3d 172, 176              (D.C. Cir. 2007). In this case, a

review of     the    record,     beyond the      evidence relied upon by the

Secretary, further contradicts the Administrator's finding.

        For instance,        a set of audit guidelines in place in 1985,

obviously     pre-Moratorium,           specifically         addressed     collection

agencies.     AR     360-365.     Section      15.04    of    the    Hospital      Audit

Program, located in a manual for intermediaries, explained that:

        Where a provider utilizes the services of a collection
        agency, the provider need not refer all uncollected
        patient charges to the agency, but it may refer only
        uncollected charges above a specified minimum amount.
        If reasonable collection effort was applied, fees the
        collection agency charges the provider are recognized
        as an allowable administrative cost of the provider.

AR 362.     It then stated that,          "[t]o determine the acceptability

of collection agency services,            11
                                               the    intermediary should ensure

"both     Medicare     and      non-Medicare         uncollectible       amounts     are

handled in a        similar manner 11     by the provider,           ensure that the

patient's     file     "is     properly    documented        to     substantiate     the

collection effort,      11
                              and determine      if    the amounts       are properly

recorded. AR 362. It is noteworthy that these guidelines set out

step-by-step instructions for intermediaries preparing to audit

                                          -27-
a provider's use of collection agencies, but did not state that

PRM     section              310.2's      presumption            of    noncollectability            did      not

apply to accounts sent to collection agencies.

        In addition, the pre-Moratorium provision of the MIM relied

on by        the        Secretary did             not      prohibit       reimbursement          while        an

account        was           outstanding         at   a    collection          agency.    AR        367;     see

Foothill,          558 F.           Supp. 2d at 11. Thus,                 in two major references

provided           to        intermediaries,            the      Secretary did         not     mention or

allude to any presumption of collectability.

        Moreover, a pre-Moratorium Administrator decision·, Scotland

Mem. Hosp. v. Blue Cross                         &    Blue Shield Ass' n,             (H. C. F .A. Admin.

Dec.        Nov.        9,     1984),      directly           contradicts       the    presumption            of

collectability.                     AR     463-464.             In     Scotland        Memorial,             the

Administrator                 noted      that     the      presumption of          noncollectability

established in PRM section 310.2 deserved "more weight than the

subjective          and unrealistic                   opinion of         the provider's witness,

who     felt        the        bad       debts    were        not      uncollectible          because        she

expected the collection agency to collect them." AR 464.                                                   Thus,

as     of    1984,           the     presumption           of    noncollectability             in    section

310.2        applied           to    accounts         that       had    been    sent     to    collection

agencies.

        Finally,              in a 1995 case,              the Administrator approved a bad

debt claim even though the debt had been given to an outside

                                                          -28-
collection       agency     that     had     not    yet    terminated              its    efforts.

Lourdes     Hosp.    v.     Blue     Cross       & Blue    Shield        Ass'n,           (H.C.F.A.

Admin. Dec. Oct. 27, 1995). AR 271-275. While Lourdes, like many

of the Administrator decisions cited above,                        significantly post-

dates    the Moratorium,           it demonstrates         that     the presumption of

collectability was not firmly established even eight years after

the Moratorium went into effect.

        The Court is mindful that review of a final agency decision

is     ~highly      deferential,"          Bloch,        348     F. 3d        at     1070,           and

understands       that    ~weighing        the      evidence      is     not        the    court's

function."       United     Steel,       2013    U.S.     App.    LEXIS        731,        at        *14.

However,        considering       that     the     Secretary       has        pointed           to     no

persuasive evidence that supports her contention, much less pre-

1987 evidence, and that the only pre-1987 evidence that has been

identified by the parties contradicts the Secretary's position.

there is not "such relevant evidence as a reasonable mind might

accept    as     adequate    to    support"        her    conclusion.          Id.        (citation

omitted). Accordingly,             the Court must conclude that the record

does      not     contain         substantial           evidence         to        uphold             the

Administrator's             determination               that       the              intermediary

appropriately disallowed the Plaintiffs' bad debt claims.

                                             -29-
IV.     REMEDY

        Plaintiffs request that the Court "reimburse Plaintiffs for

the bad debt claims on their fiscal year 2003,                               2004 and 2005

cost reports,          including interest." Proposed Order                    [Dkt. No.    14-

1]. As noted in Foothill,                 however,       the appropriate remedy is a

remand     to    the    Agency.     See     Foothill,       558   F.    Supp.    2d   at    11

(quoting Palisades Gen. Hosp. Inc. v. Leavitt, 426 F.3d 400, 403

(D.C.     Cir.    2005))     (observing           that     once   District       Court     has

determined that agency made an error of law,                           the case must be

remanded to the agency for further proceedings) .

        Thus,    because     the    Court         finds    that   the       Administrator's

factual     determination          that     the     presumption        of    collectability

existed prior to 1987 was not supported by substantial evidence,

the Court vacates the Administrator's decision and remands the

case    to the     Secretary for           further proceedings              consistent with

this ruling.

V.      CONCLUSION

        For the    foregoing reasons,              Plaintiffs'     Motion for Summary

Judgment is granted and Defendant's Motion for Summary Judgment

is denied. An Order shall accompany this Memorandum Opinion.

March 26, 2013
                                                     /sf@~~
                                                    Gladys Kessle
                                                    United States District Judge

                                             -30-