Catholic Health Initiatives Iowa Corp. v. Sebelius

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.