Cookeville Regional Medical Center v. Leavitt

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 12, 2008 Decided June 27, 2008

No. 07-5252

COOKEVILLE REGIONAL MEDICAL CENTER, ET AL.,

APPELLANTS

v.

MICHAEL O. LEAVITT, SECRETARY OF THE UNITED STATES

DEPARTMENT

OF HEALTH AND HUMAN SERVICES,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 04cv01053)

No. 07-5269

BAPTIST MEMORIAL HOSPITAL, INC., ET AL.,

APPELLANTS

v.

MICHAEL O. LEAVITT, SECRETARY, UNITED STATES

DEPARTMENT

OF HEALTH AND HUMAN SERVICES,

APPELLEE

2

Appeal from the United States District Court

for the District of Columbia

(No. 06cv00437)

Murray J. Klein argued the cause and filed the briefs for

appellants Cookeville Regional Medical Center, et al..

Sanford E. Pitler argued the cause for appellants Baptist

Memorial Hospital, Inc., et al. With him on the briefs were

Carol Sue Janes, Julie Quagliano Westemeier, and Michael C.

Zisa.

August E. Flentje, Attorney, U.S. Department of Justice,

argued the cause for appellee. With him on the brief were

Jeffrey S. Bucholtz, Acting Assistant Attorney General, Jeffrey

A. Taylor, U.S. Attorney, and Anthony J. Steinmeyer, Assistant

Director.

Before: HENDERSON, RANDOLPH and ROGERS, Circuit

Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge: These appeals from judgments

of the district court raise common issues regarding application

of the Deficit Reduction Act of 2005, Pub. L. 109-171 (2006).

The cases were brought by two groups of Tennessee hospitals

serving patients who participate in the state’s Medicaid plan,

TennCare. A Medicaid plan provides medical assistance to

qualifying low-income individuals. 42 C.F.R. § 430.0; 42

U.S.C. § 1396 et seq. The federal government shares the cost of

providing assistance if the state Medicaid plan meets the

3

regulations set out in subchapter XIX of the Social Security Act.

See 42 U.S.C. § 1396a.

TennCare is a non-standard Medicaid plan known as a

demonstration project. A demonstration project is a plan for

which some of the regulations imposed on Medicaid plans under

subchapter XIX are waived in order to “enable the states to try

new or different approaches to the efficient and cost-effective

delivery of health care services, or to adapt their programs to the

special needs of particular areas or groups of recipients.” 42

C.F.R. § 430.25; see also 42 U.S.C. § 1315. Despite not

meeting the requirements of subchapter XIX, the costs of

providing care under a demonstration project are treated as

federally reimbursable expenditures made under subchapter XIX

“to the extent and for the period prescribed by the Secretary [of

Health and Human Services].”1 42 U.S.C. § 1315(a)(2)(A).

TennCare provides medical assistance to Medicaid-eligible low-

income individuals and select uninsured or uninsurable

1

“In the case of any experimental, pilot, or demonstration

project which, in the judgment of the Secretary, is likely to assist in

promoting the objectives of subchapter I, X, XVI, or XIX of this

chapter, or part A or D of subchapter IV of this chapter, in a State or

States –

costs of such project which would not otherwise be

included as expenditures under section 303, 655, 1203,

1353, 1383, or 1396b of this title, as the case may be, and

which are not included as part of the costs of projects under

section 1310 of this title, shall, to the extent and for the

period prescribed by the Secretary, be regarded as

expenditures under the State plan or plans approved under

such subchapter, or for administration of such State plan or

plans, as may be appropriate.” 42 U.S.C. § 1315(a)(2)(A).

4

individuals who would not otherwise qualify for Medicaid.2

This latter group of individuals who receive federally

reimbursable care under TennCare despite not meeting the

normal Medicaid requirements is known as the “expansion

waiver population.”3

The central issue in these cases is whether the expansion

waiver population should be counted in determining a hospital’s

Medicaid reimbursement. At the end of each year, hospitals

prepare cost reports seeking reimbursement for the treatment of

Medicaid patients. 42 C.F.R. § 413.24(f). The cost reports are

submitted to financial intermediaries, who report in a “notice of

amount of program reimbursement” how much each hospital is

owed from a state’s Medicaid plan. 42 C.F.R. § 405.1803. The

bulk of the reimbursement stems from the prospective payment

system, under which a flat fee is paid for each day spent treating

a Medicaid patient, based on the diagnosis or category of service

provided. 42 U.S.C. § 1395ww; see also Fed. Trade Comm’n,

Improving Health Care: A Dose of Competition, 31 J. HEALTH

POL. POL’Y & L. 437, 447 (2006). A hospital can supplement its

reimbursement if it is eligible for one of several adjustments.

One available adjustment is the disproportionate share hospital

adjustment, which is given to hospitals serving a high

percentage of low-income patients.

2

See Bureau of TennCare, Overview, available at

http://www.state.tn.us/tenncare/news-about.html (visited May 13,

2008).

3

See also Medicare Inpatient Disproportionate Share

Hospital Adjustment Calculation: Change in the Treatment of Certain

Medicaid Days in States with 1115 Expansion Waivers, 65 Fed. Reg.

3136, 3136 (Jan. 20, 2000) (noting that demonstration projects can

expand coverage to otherwise Medicaid ineligible individuals).

5

A statutory formula determines whether the percentage of

low-income patients a hospital treats qualifies it for a

disproportionate share hospital adjustment and how much that

adjustment should be. See 42 U.S.C. § 1395ww(d)(5)(F)(v).

The disproportionate share percentage consists of the sum of

two fractions. Id. § 1395ww(d)(5)(F)(vi). The second fraction

– known as the Medicaid fraction – is the most pertinent to this

case. The Medicaid fraction is derived by dividing “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 plan approved under subchapter XIX [of the Social

Security Act]” by the “total number of a hospital’s patient days

for such period.” Id.

Before January 2000, the Secretary’s policy was not to

include expansion waiver patients in the Medicaid fraction.

Dep’t of Health & Human Servs., Program Memorandum

Intermediaries, Trans. No. A-99-62 (Dec. 1999). Despite this

policy, some financial intermediaries included the expansion

waiver population in the disproportionate share hospital

adjustment. Id. The Secretary recognized this as a violation of

the stated policy but did not attempt to recover the payments.

Id. In January 2000, the Secretary revised the policy and

permitted hospitals to include the expansion waiver population

in the Medicaid fraction. 65 Fed. Reg. 3136, 3139. Three years

later the Secretary issued another revision, excluding the

expansion waiver populations associated with certain

demonstration projects likely to deal with higher income

individuals. Proposed Changes to the Hospital Inpatient

Prospective Payment Systems and Fiscal Year 2004 Rates, 68

Fed. Reg. 27,154, 27,702 (May 19, 2003).

The plaintiff hospitals based their claims on cost reports

submitted before the Secretary’s policy change in January 2000.

The hospitals filed their cost reports with financial

6

intermediaries and received notices of program reimbursement

that did not take TennCare’s expansion waiver population into

account in calculating the disproportionate share hospital

adjustment. Each hospital appealed to the Provider

Reimbursement Review Board, and lost. See 42 U.S.C.

§ 1395oo(a). The hospitals then filed these suits, claiming that

the Secretary had unlawfully refused to count TennCare’s

expansion waiver population in the disproportionate share

hospital adjustment.

The district court granted the hospitals’ motion for

summary judgment, finding that the demonstration project

provision and the disproportionate share hospital adjustment

provision unambiguously required the Secretary to include the

expansion waiver population in the Medicaid fraction.

Cookeville Reg. Med. Ctr. v. Thompson, 2005 WL 3276219

(D.D.C. Oct. 28, 2005) (Cookeville I). While this case was

pending appeal, Congress passed the Deficit Reduction Act of

2005.4 The Act included a provision explicitly giving the

Secretary discretion to determine whether to include a

demonstration project’s expansion waiver population in the

disproportionate share calculation. Deficit Reduction Act

§ 5002(a). The Act also purported to ratify the Secretary’s prior

policies regarding the inclusion or exclusion of the expansion

waiver population. Id. § 5002(b)(3)(A), (B).

In light of these provisions, the Secretary moved to alter the

judgment. We remanded the case and the district court granted

the Secretary’s motion. Cookeville Reg. Med. Ctr. v. Leavitt,

2006 WL 2787831 (D.D.C. Sept. 26, 2006) (Cookeville II). The

district court held that despite its view of the law before the

Deficit Reduction Act, the Act constituted a valid retroactive

4

Baptist Memorial’s case was stayed pending the resolution

of the Cookeville action.

7

change in the law. Id. at *6-8. On that basis the court granted

summary judgment in favor of the Secretary. Our review is de

novo. Taylor v. Rice, 451 F.3d 898, 904 (D.C. Cir. 2006).

The hospitals make three points. The first is that the pre-Act

law unambiguously required the inclusion of the expansion

waiver patients in the disproportionate share hospital

adjustment, leaving the Secretary with no discretion. The

second is that the Act, which acknowledges the Secretary’s

discretion and ratifies the Secretary’s earlier policies, was

therefore a substantive change in the law. The third is that the

Act cannot be applied retroactively consistent with Landgraf v.

USI Film Products, 511 U.S. 255, 265 (1994), because Congress

did not clearly indicate its intention to this effect.

Even if we agreed with the first two propositions, which we

do not, we doubt the last. What is and what is not a retroactive

application of the law is not always easy to discern. The Court’s

opinion in Landgraf indicates that a law has a retroactive effect

if it “impairs [a] right[] a party possessed when he acted.” Id. at

280. While that formulation seems simple enough, the Court

discusses a host of exceptions that weaken the anti-retroactivity

principle. See, e.g., id. at 273 (anti-retroactivity weakened in

prospective relief cases), 275 (anti-retroactivity weakened in

regard to procedural rules), 277 (anti-retroactivity does not

apply when the ultimate outcome is foreseeable, explaining

Bradley v. Sch. Bd. of the City of Richmond, 416 U.S. 696

(1974)). These exceptions, especially Bradley, tend to show that

the presumption against retroactivity exists to protect settled

expectations. See also id. at 265 (“Elementary considerations of

fairness dictate that individuals should have an opportunity to

know what the law is and to conform their conduct accordingly;

settled expectations should not be lightly disrupted.”).

8

Here the hospitals could not have been certain of being

reimbursed. The Secretary’s policy during the relevant period

was not to include the expansion waiver population in the

disproportionate share hospital adjustment. 65 Fed. Reg. at

3136. Although some financial intermediaries were including

the expansion waiver population, many (including those in

Tennessee) were not. The hospitals were thus on notice that the

expansion population might not be included.

In any event, we disagree with the hospitals’ first

proposition that the pre-Act law clearly required inclusion of the

expansion waiver patients in the disproportionate share hospital

adjustment. For this point, the hospitals draw most of their

support from a Ninth Circuit opinion analyzing the relevant pre-

Act statutes and determining that expansion waiver patients had

to be included. Portland Adventist Med. Ctr. v. Thompson, 399

F.3d 1091 (9th Cir. 2005).5 We believe the pre-Act law was not

as clear as the Ninth Circuit thought it to be.

The Medicaid fraction incorporates patients who “were

eligible for medical assistance . . . under a state plan approved

under subchapter XIX.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II).

The Social Security Act sets out the requirements for a patient

to be eligible for medical assistance. 42 U.S.C. § 1396d(a). The

expansion waiver population does not meet these criteria –

generally because their incomes are too high. Likewise,

demonstration projects are state plans approved under

subchapter XI, not subchapter XIX.

5

The hospitals could hardly claim that their actions were taken

in reliance on Portland Adventist. They were operating outside the

jurisdiction of the Ninth Circuit and the Portland Adventist opinion

was published several years after the last of the fiscal years involved

in this case.

9

The hospitals say that expansion waiver patients must be

treated as eligible for medical assistance because they receive a

Medicaid benefit when the hospitals are reimbursed by Medicaid

for their care. This argument stems from the language providing

that the costs of a demonstration project “shall” be regarded as

expenditures under subchapter XIX. See 42 U.S.C.

§ 1315(a)(2)(A). The statute, however, modifies the “shall” by

indicating that the costs are only treated as Medicaid

expenditures “to the extent and for the period prescribed by the

Secretary.” Id. While this clearly gives the Secretary control

over the duration of the demonstration project, the language may

do more. Plausibly, the “to the extent” language is a grant of

discretion to the Secretary to determine which costs or how

much of the costs are to be treated as expenditures.6 Under this

reading, the Secretary would have discretion to limit a hospital’s

reimbursement for the expansion waiver population, rather than

permitting the hospital to seek the disproportionate share

hospital adjustment. This interpretation finds some support in

the Deficit Reduction Act. No one contests that § 5002(a) of the

Act gives the Secretary discretion (at least prospectively) to

exclude the expansion waiver population. In conferring this

discretion, Congress relied on the “to the extent and for the

period” language used in § 1315 regarding the demonstration

projects, albeit in a different context. Deficit Reduction Act

§ 5002(a). Additionally, the Secretary acted as though the

statute granted discretion to decide how to treat the expansion

waiver population. The Secretary chose to issue policies rather

than regulations and to base them on practical concerns instead

6

The House and Senate reports discussing § 1315 lend support

to this reading. Both stated that the costs of demonstration projects

“could be included, for purposes of such participation, as expenditures

under . . . the State plan approved under any of such titles, but only for

the period and to the extent prescribed by the Secretary.” S. Rep. 87-

1589, at 31 (1962); H.R. Rep. 87-1414, at 35 (1962).

10

of statutory constraints. See, e.g., Program Memorandum

Intermediaries, Trans. No. A-99-62; 65 Fed. Reg. at 3136.

These considerations lead us to conclude that it was unclear,

prior to the Deficit Reduction Act, whether the Secretary had

discretion to exclude the expansion waiver population from the

disproportionate share hospital adjustment. It follows that there

is no problem of retroactivity. The Deficit Reduction Act did

not retroactively alter settled law; it simply clarified an

ambiguity in the existing legislation. See Deficit Reduction Act

§ 5002(a).7 In doing so, Congress ratified the Secretary’s earlier

policies, “including the policy . . . regarding discharges

occurring prior to January 20, 2000,” to emphasize that the

Secretary always had this discretionary authority. Id.

8

§ 5002(b)(3)(A).

Affirmed.

7

See Brown v. Thompson, 374 F.3d 253, 257-60 (4th Cir.

2004); Pimba Cortes v. Am. Airlines, Inc., 177 F.3d 1272, 1283-84

(11th Cir. 1999); Beverly Comm. Hosp. Ass’n v. Belshe, 132 F.3d

1259, 1265 (9th Cir. 1997); Liquilux Gas Corp. v. Martin Gas Sales,

979 F.2d 887, 890 (1st Cir. 1992).

8

Because the Act resolves an ambiguity in the law, there is

nothing to the hospitals’ claim that the Act violates the Due Process

Clause. See Beverly Comm., 132 F.3d at 1267.