Nazareth Hospital, et al v. Secretary United States Depart

Filing

PRECEDENTIAL OPINION Coram: RENDELL, ROTH and BARRY, Circuit Judges. Total Pages: 29. Judge: RENDELL Authoring.

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Date Filed: 04/02/2014

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-2627
_____________

NAZARETH HOSPITAL; ST. AGNES MEDICAL
CENTER
v.
SECRETARY UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES,
Appellant

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(District Court No.: 2-10-cv-03513)
District Judge: Honorable Edmund V. Ludwig

Argued on January 16, 2014

Before: RENDELL, ROTH and BARRY, Circuit Judges

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(Opinion filed: April 2, 2014)

Veronica J. Finkelstein, Esquire
Joel M. Sweet, Esquire
Office of United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106
Stuart F. Delery, Esquire
Assistant Attorney General
Zane David Memeger, Esquire
United States Attorney
Anthony J. Steinmeyer, Esquire
Joshua Waldman, Esquire (Argued)
Attorneys, Appellate Staff
United States Department of Justice
Civil Division, Room 7232
950 Pennsylvania Ave., N.W.
Washington, D.C. 20530
Counsel for Appellant

Mark H. Gallant, Esquire (Argued)
Gregory M. Fliszar, Esquire
Katie Beran, Esquire
Robert A. Chu, Esquire
Cozen O’Connor
1900 Market Street
Philadelphia, PA 19103

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Counsel for Appellees

OPINION

RENDELL, Circuit Judge:
Kathleen Sebelius, Secretary of the United States
Department of Health and Human Services (“HHS”), has
appealed from the District Court’s judgment holding the
Secretary’s Medicare regulation to be arbitrary and
capricious, as well as a violation of the Equal Protection
Clause.
The dispute centers around certain Medicare
reimbursement adjustments to appellees, two Pennsylvania
hospitals. The District Court found there was no rational
basis to exclude from such reimbursements patients covered
by Pennsylvania’s General Assistance (“GA”) plan, while at
the same time including patients covered under a federal
statutory waiver program. For the reasons that follow, we
will reverse the judgment of the District Court.
I. Background
A. Medicare and Medicaid
Medicare, the federal health insurance program for
older and disabled individuals, reimburses hospitals for
specified inpatient services based upon a “prospective
system.” 42 U.S.C. § 1395ww. Under this system, payments
are predicated upon prevailing rates for given services, rather

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than retrospectively based on a hospital’s actual costs. Id. at
§ 1395ww(d). The statute provides for certain adjustments to
prospective reimbursement rates, such as for different wage
levels, hospitals with medical education, and sole community
hospitals. Id. at §§ 1395ww(d)(3)-(d)(5).
Another adjustment provided for by the statute is for
“disproportionate share hospitals” (“DSH”), hospitals that
serve high numbers of low-income patients. Whether a
hospital is eligible for a Medicare DSH adjustment depends in
part on the number of days during which the hospital treats
certain low-income patients, also known as “patient days.”
The relevant language of the subsection concerning
calculation of Medicare DSH adjustments is as follows:
(II) . . . 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 this chapter
[Medicaid] . . .
In determining under subclause
(II) 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 this chapter, the Secretary may,
to the extent and for the period the

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Secretary determines appropriate,
include patient days of patients
not so eligible but who are
regarded as such because they
receive
benefits
under
a
demonstration project approved
under subchapter XI of this
chapter.
42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (emphasis added). In
plain English, the Medicare DSH formula takes into account
the number of patient days for those patients eligible for
Medicaid, and may also include patient days for those
patients ineligible for Medicaid, but who received benefits
under a Medicaid “demonstration project.”
Pursuant to the Medicaid Act, individual states submit
a medical assistance plan which provides coverage to certain
classes of indigent individuals, which we will call a “State
Plan.” 42 U.S.C. § 1396a(a). A State Plan must conform to
certain statutory eligibility requirements, but the law also
provides states flexibility regarding some of the categories of
individuals to be covered, and the medical care and services
that they can receive. Id.; see Cooper Univ. Hosp. v.
Sebelius, 686 F. Supp. 2d 483, 486 (D.N.J. 2009) aff’d, 636
F.3d 44 (3d Cir. 2010). Once a plan is approved by the
Secretary, the state can receive certain reimbursements from
the federal government based on amounts expended as
medical assistance under the State Plan, that is, those amounts
expended covering individuals eligible for Medicaid. See
Univ. of Wash. Med. Ctr. v. Sebelius, 634 F.3d 1029, 1031
(9th Cir. 2011).

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As noted above in the Medicare DSH provision cited,
the Secretary is empowered to waive statutory requirements
pertaining to federal entitlement programs such as Medicaid
and “regard” patients as eligible for Medicaid if they are
treated under an experimental, pilot or demonstration project
under 42 U.S.C. § 1315. Thus, Medicare DSH adjustments
take into account both the patient days that a hospital has
treated patients eligible for Medicaid, and days for those
patients ineligible for Medicaid but who receive benefits
pursuant to a Medicaid demonstration project. To authorize
such a project, known as a Section 1115 waiver project, 1 the
Secretary must conclude that the state-submitted proposal “is
likely to assist in promoting the objectives of” Medicaid.
42 U.S.C. § 1315(a). In addition, the Secretary has discretion
to choose which Medicaid requirements will be waived, how
long the waiver lasts, and whether the costs of the project will
be considered Medicaid-covered expenditures. Id. at §§
1315(a)(1)-(a)(2). The Secretary must also conclude that the
project will be budget-neutral. Id. at § 1315(e)(6). Waivers
are not inherently provided for in State Plans; rather, states
must submit specific applications for Section 1115 waiver
projects.
B. Evolution of the Medicare DSH Formula
Initially, for purposes of calculating DSH adjustments,
the Medicare statute counted simply the “number of the
hospital’s patient days of service for which patients were
eligible for Medicaid but not entitled to Medicare Part A . . .
.” 42 C.F.R. § 412.106(b)(4). Patients were considered
1

This name originated because such waiver authority was
promulgated in § 1115 in Title XI of the Social Security Act.

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eligible for Medicaid if they were eligible for inpatient
hospital services under an approved State Medicaid Plan.
“Although the Secretary administers DSH payments, it is a
fiscal intermediary, typically a health insurance company
authorized to act on the Secretary’s behalf, who reviews the
hospital’s end-of-year cost reports.” Phoenix Mem’l Hosp. v.
Sebelius, 622 F.3d 1219, 1223 (9th Cir. 2010). The Medicare
DSH formula was regarded by intermediaries, at least in some
states, as including days covered under state GA and charity
care programs. In brief, GA programs generally provide
reimbursement to hospitals for care of individuals who are
low-income as defined by a given state, but not eligible for
Medicaid. Id. It seems that through the 1990s, intermediaries
in Pennsylvania included GA patient days in the Medicare
DSH formula. (Appellees’ Br. at 7.)
However, “[i]n light of . . . discrepancies between the
practices of fiscal intermediaries in the various states,” in
December 1999 the Centers for Medicare and Medicaid
Services (“CMS”) clarified that the Medicare DSH formula
only permitted the inclusion of patient days wherein the
patients were eligible for Medicaid, excluding state general
assistance and charity plan patient days going forward. See
Adventist Health Sys./Sunbelt, Inc. v. Sebelius, 715 F.3d 157,
161 (6th Cir. 2013); (App. 568-73). In January 2000, the
Secretary issued a Final Interim Rule, stating that: “hospitals
may include all days attributable to populations eligible for
Title XIX matching payments through a waiver approved
under section 1115 of the Social Security Act.” 42 C.F.R.
§ 412.106(b)(4)(ii). Thus, while GA patient days remained
excluded, hospitals could now count patient days for
individuals covered under a Section 1115 waiver project
toward their Medicare DSH adjustment.

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During the subsequent notice and comment period,
several comments were submitted to the Secretary claiming
that the inclusion of days under a Section 1115 waiver was
unfair to those hospitals that did not operate under such a
waiver, but rather treated patients eligible only under state
GA plans. The Secretary agreed that while the regulation
“does advantage States that have a section 1115 expansion
waiver in place, these days are considered to be Title XIX
days by Medicaid standards.” Medicare Program; Changes to
the Hospital Inpatient Prospective Payment Systems and
Fiscal Year 2001 Rates, 65 FR 47054-01, 47087, Aug. 1,
2000. The Secretary went further:
General assistance days are days
for patients covered under a Stateonly or county-only general
assistance program, whether or
not any payment is available for
health care services under the
program. Charity care days are
those days that are utilized by
patients who cannot afford to pay
and whose care is not covered or
paid by any health insurance
program. While we recognize that
these days may be included in the
calculation of a State’s Medicaid
DSH payments, these patients are
not Medicaid-eligible under the
State plan and are not considered
Title
XIX
beneficiaries.
Therefore, Pennsylvania, and

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other States that have erroneously
included these days in the
Medicare disproportionate share
adjustment calculation in the past,
will be precluded from including
such days in the future.
(App. 65-66.) As such, the Final Rule, issued in August
2000, stated that Section 1115 waiver patient days could be
included in Medicare DSH calculations, while GA patient
days remained excluded.
Subsequently, Congress passed the Deficit Reduction
Act of 2005 (“DRA”). That law amended the statutory
Medicare DSH provision to state explicitly that patient days
would be counted for those patients eligible for Medicaid, and
“the Secretary may . . . include patient days of patients not so
eligible but who are regarded as such because they receive
benefits under a demonstration project approved under
subchapter XI of this chapter [Medicaid].” 42 U.S.C. §
1395ww(d)(5)(F)(vi)(II). In addition, the DRA “ratified,
effective as of the date of their respective promulgations,”
certain regulations which “provide for the treatment of
individuals eligible for medical assistance under a
demonstration project . . . .” Pub. L. No. 109-171, § 5002(b).
Specifically listed as one of the ratified regulations was the
January 2000 Interim Final Rule, which stated that Section
1115 waiver patient days were to be included in Medicare
DSH calculations. Id.
C. State General Assistance Plan

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After the promulgation of the Final Rule, but before
the enactment of the DRA, appellees Nazareth Hospital and
St. Agnes Medical Center, both Pennsylvania hospitals,
included GA patient days in their 2002 Medicare cost reports
“under protest.” (Appellees’ Br. at 11); (App. 121.) Notably,
Pennsylvania has not applied for a Section 1115 waiver, and
instead provides reimbursements to certain hospitals as a
component of the state GA program. That GA program
reimburses hospitals and provides cash assistance for patients
who are ineligible for Medicaid, but are nonetheless classified
as low-income or otherwise needy by the state. (App. 121.)
Appellees note that, while ostensibly state-run, the GA
program was described in Pennsylvania’s State Medicaid
Plan, specifically in amendment SPA 94-08, as a part of the
state’s proposal to distribute certain lump-sum payments,
known as Medicaid DSH payments. 42 U.S.C. § 1396r-4.
Such payments, which are distinguished from
Medicare DSH adjustments that are the subject of this appeal,
can be distributed at the state’s discretion, so long as they are
distributed to institutions that provide care to “low-income”
individuals, as defined by the state itself. Univ. of Wash.
Med. Ctr., 634 F.3d at 1035 (describing the different payment
mechanisms). States often describe in their state Medicaid
plan relevant state charity or general assistance plans, so that
hospitals which treat patients under such plans can receive
Medicaid DSH payments. See Adena Reg’l Med. Ctr. v.
Leavitt, 527 F.3d 176, 179 (D.C. Cir. 2008). 2
2

A helpful way of contrasting these DSH provisions is that
both Medicare and Medicaid reimburse hospitals, or adjust
rates of reimbursement, for the treatment of low-income
individuals. Medicare DSH adjustments use Medicaid-

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Accordingly, Pennsylvania amended its state Medicaid
plan via amendment SPA 94-08 to provide:
additional payments to meet the
needs of those facilities which
serve a large number of Medicaid
and medical assistance eligible,
low income patients. . . . These
payments are available to
hospitals on behalf of certain lowincome persons who are described
below and are made in addition
to, and not as a substitute for,
disproportionate share payments
described in other portions of this
state plan.
(App. 595.) Amendment SPA 94-08 further stated that those
“low-income persons” were those who were covered under
the state GA program. (App. 595.) As such, SPA 94-08
eligibility and Section 1115 waiver projects as a proxy for
determining low-income status. By contrast, Medicaid DSH
payments use eligibility either under Medicaid and under the
state’s definition of low income, to determine economic
status. Univ. of Wash. Med. Ctr., 634 F.3d at 1036 (noting
that the “Medicaid DSH proxy considers either those patients
who are [eligible for Medicaid] or who qualify under the
statute’s definition of ‘low income’”); 42 U.S.C. § 1396r4(b)(3) (defining “low-income utilization rate” under
Medicaid DSH in part as including state charity care
patients).

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established that Medicaid DSH payments were to be used by
Pennsylvania, in part, to reimburse hospitals for care of GA
patients.
D. Procedural History
Following appellees’ “protest” inclusion of GA patient
days on their 2002 Medicare cost reports, the Intermediary
excluded those days from the hospitals’ Medicare DSH
calculations. That decision was affirmed by both the
appellate Provider Reimbursement Review Board and the
CMS Administrator. The hospitals appealed the ruling of the
Administrator to the U.S. District Court for the Eastern
District of Pennsylvania, on the grounds that (1) excluding
GA days was an impermissible construction of the Medicare
statute by the Secretary, (2) excluding GA patient days while
including Section 1115 waiver days was arbitrary and
capricious under the Administrative Procedure Act, and (3)
such disparate treatment constituted an Equal Protection
violation.
The case was initially held in suspense pending the
appeal in Cooper University Hospital v. Sebelius, 686 F.Supp.
2d 483 (D.N.J. 2009). That case concerned whether patient
days covered under the New Jersey Charity Care Program
should be included in Medicare DSH calculations. Id. at 484.
The district court held that while the statute was ambiguous,
the Secretary permissibly construed the law to exclude charity
care patient days from the Medicare DSH formula. Id. at 498.
We agreed with this reasoning and affirmed in a precedential
opinion, “substantially for the reasons set forth” by the
district court, noting that “[w]e could not do it better . . . .”

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Cooper Univ. Hosp. v. Sebelius, 636 F.3d 44, 45 (3d Cir.
2010).
Following that ruling, the parties in this case filed
cross-motions for summary judgment in the District Court,
with the appellees limiting their arguments to whether the
disparate treatment of GA and Section 1115 patient days
constituted arbitrary and capricious action under the APA, or
a violation of Equal Protection. The District Court initially
remanded the case to the agency to make a more complete
record regarding the distinction between GA patient days and
Section 1115 days. The agency responded at length,
answering inquiries posed by the District Court, such as that
regarding the similarity between hospital patient populations
covered under the GA plan and those in other states covered
under Section 1115 demonstration projects. In one relevant
passage, the Secretary noted:
The eligibility criteria for the
individual State section 1115
populations
are
federally
approved and set forth in the
terms and conditions of the
section 1115 waiver project.
Unlike
the
State
general
assistance program, the section
1115 waiver has been reviewed
and approved by the Federal
government as likely to assist in
promoting the objectives of
Medicaid.
No such Federal
determination has been made with
respect to a State-only program.

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In addition, the expenditures
under the section 1115 waiver
must be budget neutral. The
Medicaid expenditures under the
waiver cannot exceed the
expenditures that would have
otherwise been spent under the
Medicaid state plan. The State
only funded program has no such
restrictions.
(App. 75-76.) The Secretary concluded, in essence, that she
had acted rationally in including patient days for those
patients eligible for traditional Medicaid, as well as those
days, “related to the Federally approved and authorized
section 1115 waiver populations for whom expenditures for
care is considered to be an approved expenditure under Title
XIX.” (App. 83.) As such, the Secretary held, because
Pennsylvania GA patients did not fall under either category, it
was reasonable to exclude them from Medicare DSH
calculations.
The District Court disagreed. It held that there was no
rational distinction between the state GA program and several
Section 1115 waiver projects, in terms of eligibility
requirements and services covered. The Court further
determined that, just as in approving a Section 1115 waiver,
CMS “determined that the objectives of the Medicaid statute
were promoted by authorizing” SPA 94-08. (App. 37.) The
District Court concluded that the Secretary’s disparate
treatment could not stand under both the APA and the Equal
Protection Clause. As a consequence, the Court ordered the

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Secretary to remit certain Medicare DSH adjustments to
plaintiffs, including patient days under the state GA program.

II. Standard of Review
We have jurisdiction over this appeal under 28 U.S.C.
§ 1291. “We apply de novo review to a district court’s grant
of summary judgment in a case brought under the APA, and
in turn apply the applicable standard of review to the
underlying agency decision.” Pennsylvania, Dep’t of Pub.
Welfare v. Sebelius, 674 F.3d 139, 146 (3d Cir. 2012)
(internal quotations omitted). Pursuant to the APA, courts
must set aside agency action which is “arbitrary, capricious,
an abuse of discretion or otherwise not in accordance with
law,” or which is conducted, “without observance of
procedure required by law . . . .” 5 U.S.C. § 706(2)(A) & (D).
“Under what we have called this ‘narrow’ standard of
review, we insist that an agency ‘examine the relevant data
and articulate a satisfactory explanation for its action.’”
F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 513
(2009) (quoting Motor Vehicle Mfrs. Ass’n. of United States,
Inc. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43
(1983)). “Agency action is arbitrary and capricious if the
agency offers insufficient reasons for treating similar
situations differently. If [an] agency makes an exception in
one case, then it must either make an exception in a similar
case or point to a relevant distinction between the two cases.”
Muwekma Ohlone Tribe v. Salazar, 708 F.3d 209, 216 (D.C.
Cir. 2013) (internal quotations and citations omitted).

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Review of an equal protection claim in the context of
agency action is similar to that under the APA. That is, an
agency’s decision must be upheld if under the Equal
Protection Clause, it can show a “rational basis” for its
decision. F.C.C. v. Beach Commc’ns, Inc., 508 U.S. 307, 313
(1993). As such, “the equal protection argument can be
folded into the APA argument, since no suspect class is
involved and the only question is whether the . . . treatment of
[appellees] was rational (i.e., not arbitrary and capricious).”
Ursack Inc. v. Sierra Interagency Black Bear Grp., 639 F.3d
949, 955 (9th Cir. 2011). Taken together, we need only
consider whether the Secretary set forth a satisfactory,
rational explanation for her actions here. See New Jersey
Hosp. Ass’n v. Waldman, 73 F.3d 509, 517 (3d Cir. 1995)
(finding that arbitrary and capricious review also governed by
whether state can show rational basis).
III. Discussion
Our review of the record establishes that the Secretary
set forth multiple rational bases upon which to distinguish
patient days covered under Pennsylvania’s GA program, from
days covered under a Section 1115 waiver project. We first
explain that the Secretary has the statutory authority to treat
those two categories of patient days differently from each
other. Further, we conclude that, given the different purposes
of the programs, and the extent of federal control over them,
it was neither arbitrary nor capricious to do so.
A. Statutory Distinction

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Appellees did not claim below, and do not now
contend, that the Secretary lacked statutory authority to either
include Section 1115 patient days, or exclude state GA days
from Medicare DSH calculations. While the language of the
relevant statutory provision obviously does not determine
whether the Secretary acted in an arbitrary and capricious
manner, we think it a relevant starting point in our analysis, as
the statute is at the root of the distinction between the two
types of patient days at issue.
The
statutory
subsection,
42
U.S.C.
§
1395ww(d)(5)(F)(vi)(II), mandates that Medicare DSH
adjustments are keyed to the number of Medicaid-eligible
patient days, adding that the Secretary may also choose to
include days for patients eligible under a Section 1115
project. Appellees point out that the latter subsection,
providing discretion to include Section 1115 patient days, was
passed as part of the DRA in 2005, whereas the regulation at
issue was finalized in 2000. Therefore, appellees claim, the
statute must be evaluated as it stood in 2000, lacking any
mention of Section 1115 waiver projects.
We note, however, that the DRA explicitly “ratified,
effective as of the date of” its promulgation, the January 2000
Interim Final Rule, as it pertained to Section 1115 waiver
projects. Pub. L. No. 109-171 §§ 5002(b)(1), (b)(3)(A), (B).
“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.”
Cookeville Reg’l Med. Ctr. v. Leavitt, 531 F.3d 844, 849
(D.C. Cir. 2008). Accordingly, there can be no dispute that,
at the very least, the Secretary had discretion to include

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Section 1115 patient days in the Medicare DSH adjustment,
as of the date of the Interim Final Rule in January 2000.
In addition, circuit courts have held that it is a
permissible, or even necessary, construction of the statute to
exclude state charity or GA plan patient days from Medicare
DSH calculations. In Adena Regional Medical Center v.
Leavitt, 527 F.3d 176 (D.C. Cir. 2008), the D.C. Circuit held
that Ohio’s charity care patient days could not be included in
the Medicare DSH calculation, on the view that the Medicare
statute specifically excluded such patient days. Similarly, in
University of Washington Medical Center, 634 F.3d 1029, the
Ninth Circuit found that the statute required the Secretary to
exclude from Medicare DSH calculations days for those
patients who were not eligible for Medicaid but nonetheless
covered under Washington’s state plan. See also Phoenix
Mem’l Hosp. v. Sebelius, 622 F.3d at 1227 (finding that
exclusion from Medicare DSH formula of patient populations
not covered by Arizona’s Section 1115 waiver was “not
contrary to law, arbitrary or capricious, or unsupported by
substantial evidence”).
In Cooper, we affirmed that it was permissible for the
Secretary to exclude New Jersey charity plan 3 patient days
3

Appellees note that certain of these cases dealt with charity
care patient days, as opposed to those covered under a general
assistance plan such as that in place in Pennsylvania. We find
that this is a distinction without a difference, as the Secretary
made clear both in the December 1999 clarification and in the
Final Rule in August 2000 that both charity care and general
assistance patient days would be excluded from Medicare
DSH calculations. (App. 65-66, 572.)

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from Medicare DSH adjustments. The district court correctly
noted that the DRA “suggest[ed] Congress’ intent to narrowly
apply the Medicaid proxy fraction,” in ratifying the
discretionary inclusion only of Section 1115 waiver patient
days. Cooper, 686 F. Supp. 2d at 494. 4
In sum, the Secretary had discretion to include Section
1115 patient days in Medicare DSH adjustments, pursuant to
congressional ratification, and could exclude state charity or
general assistance days. The Government must now establish
that, in taking both such actions, the Secretary articulated a
rational basis for doing so.
B. Distinction in Purpose
The Government argues that the very purpose of a
Section 1115 waiver project rationally distinguishes it from
Pennsylvania’s GA plan. (Gov. Br. at 49.) That is, a Section
1115 waiver project is an experimental, demonstration or
pilot project which is only approved if the Secretary
concludes that it “is likely to assist in promoting the
objectives of” Medicaid. 42 U.S.C. § 1315(a). As CMS
explained on remand:
The purpose of these [Section
1115] demonstrations, which give
States additional flexibility to
design
and
improve
their
programs, is to demonstrate and
evaluate policy approaches such
4

Cooper, Adena, and Phoenix Memorial, each concerned
reimbursement disputes that pre-dated the enactment of the
DRA in 2005.

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as: expanding eligibility to
individuals who are not otherwise
Medicaid or CHIP eligible;
providing services not typically
covered by Medicaid; using
innovative
service
delivery
systems that improve care,
increase efficiency, and reduce
costs.
(App. 55.) In fact, a Section 1115 waiver project can be
vacated if a court finds that the Secretary could not have
rationally found the program likely to advance the objectives
of Medicaid. See Newton-Nations v. Betlach, 660 F.3d 370,
381 (9th Cir. 2011) (vacating Medicaid waiver due to
insufficient evidence that the Secretary “‘consider[ed] the
impact of the state’s project on’ the persons the Medicaid Act
‘was enacted to protect’”) (quoting Beno v. Shalala, 30 F.3d
1057, 1070 (9th Cir. 1994)); C.K. v. New Jersey Dep’t of
Health & Human Servs., 92 F.3d 171, 185 (3d Cir. 1996)
(reviewing similar waiver project under Aid to Families with
Dependent Children program). By contrast, rather than a
demonstration project, the Pennsylvania GA plan constitutes
the permanent state medical assistance program, and requires
no federal judgment that it is likely to assist in promoting the
goals of Medicaid.
However, the District Court and appellees reject this
distinction. The District Court found, and appellees urge
here, that the Secretary approves a Section 1115 waiver
project just as she does Pennsylvania’s GA program –
specifically amendment SPA 94-08 – which is included as
part of the state Medicaid plan. This finding was in error.

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While the Secretary must find that a Section 1115
waiver project is likely to assist in promoting the objectives
of Medicaid, she reviewed SPA 94-08 for an entirely different
reason. Under the Medicaid DSH statute, state Medicaid
plans “require[] [DSH] payments to hospitals to take into
account the situation of hospitals which serve a
disproportionate number of low income patients with special
needs.” 42 U.S.C. § 1396r-4(a)(1). That provision requires a
state to submit an amendment to its Medicaid plan that
“specifically defines” eligibility for Medicaid DSH payments,
and “provides . . . for an appropriate increase in the rate or
amount of payment for such services provided by such
hospitals . . . . ” Id. at § 1396r-4(a)(1)(A)-(B). In addition,
states are required to submit a “description of the
methodology used by the State to identify and to make
payments to disproportionate share hospitals . . . on the basis
of the proportion of low-income and [M]edicaid patients . . . .
” Id. at § 1396r-4(a)(2)(D).
Thus, the Secretary did not “determine[] that the
objectives of the Medicaid statute were promoted by
authorizing” SPA 94-08, as the District Court held. (App.
37.) Rather, the Secretary reviewed SPA 94-08 simply to
ascertain how Pennsylvania intended to disburse Medicaid
DSH payments. See Adena, 527 F.3d at 179 (“Federal law
obliged Ohio to submit the [amendment to its State Medicaid
Plan] to the Secretary for approval because the mechanism for
providing a DSH adjustment under Medicaid is part of Ohio’s
Medicaid plan, and the Secretary must approve that plan.”).
A Section 1115 waiver is therefore distinct from SPA 94-08,
in that it serves a different purpose, and provides the
Secretary greater control and oversight.

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Importantly, CMS noted this precise distinction upon
remand, stating that, “[u]nlike the State general assistance
program, the section 1115 waiver has been reviewed and
approved by the Federal government as likely to assist in
promoting the objectives of Medicaid. No such Federal
determination has been made with respect to a State-only
program.” 5 (App. 75-76); see also (App. 82) (noting that
Delaware’s Section 1115 waiver project “was required to . . .
be approved by CMS as consistent with the objectives of
Medicaid in order to be treated as Medicaid expenditures for
the costs of individual care. That process did not occur under
a section 1115 waiver approval for the general assistance state
days involved in this case.”).
We agree with the Government that these distinct
purposes “rationally separate Section 1115 demonstration
projects from Pennsylvania’s GA program.” (Gov. Br. at 44.)
Given this “relevant distinction,” the Secretary was not
treating “similar situations differently,” by including patient
days covered under a demonstration, experimental or pilot
program approved to advance the objectives of Medicaid, but
excluding patient days under a state program that lacked any
such purpose. See Muwekma Ohlone Tribe, 708 F.3d at 216.

5

It is of no consequence that this reasoning was mapped out
on remand, rather than during the initial promulgation of the
Final Rule in 2000. See Alpharma, Inc. v. Leavitt, 460 F.3d 1,
6 (D.C. Cir. 2006) (“Needless to say, if it is appropriate for a
court to remand for further explanation, it is incumbent upon
the court to consider that explanation when it arrives.”).

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C. Distinction in Control
The Government also argues that the degree of federal
control over Section 1115 waiver projects distinguishes them
from Pennsylvania’s GA program. That is, if the Secretary
determines that an experimental waiver project is likely to
advance the goals of Medicaid, she has significant authority
to determine the precise scope of the project. The Secretary
may determine which Medicaid requirements will be waived,
how long the waiver will last, 6 and whether the costs of the
project will be considered Medicaid expenses eligible for
matching payments under the statute.
42 U.S.C. §§
1315(a)(1)-(a)(2); see Pharm. Research & Mfrs. of Am. v.
Thompson, 313 F.3d 600, 602 (D.C. Cir. 2002) (“The
Secretary also has authority to ‘regard’ costs for a
demonstration project as an ‘expenditure’ pursuant to that
state’s Medicaid plan.”).
The Secretary has no analogous authority to alter the
scope of a state GA program, even if referenced in the state
Medicaid plan, as in the case of SPA 94-08. As noted above,
the Secretary reviews such amendments for compliance with
requirements pertaining to Medicaid DSH payments. 42
U.S.C. §§ 1396r-4(a)(1)(A)-(B).
On remand, CMS also noted this distinction as grounds
for differentiating Section 1115 waiver programs from
Pennsylvania’s GA plan. It noted that, unlike a state general
assistance program, “[t]he eligibility criteria for the individual
6

“In general,” CMS noted, “§ 1115 demonstrations are
approved for a five-year period and can be renewed, typically
for an additional three years.” (App. 55.)

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State section 1115 populations are federally approved and set
forth in the terms and conditions of the section 1115 waiver
project.” (App. 75-76); see also (App. 77) (finding that any
comparison between GA and Section 1115 waiver
populations “can at best be only speculative,” as Pennsylvania
had not submitted its GA plan for approval as a Section 1115
waiver project.) Again, we find that such a distinction
establishes a rational basis for the Secretary to treat
Pennsylvania’s GA patient days differently from days
covered under a Section 1115 waiver project.
Like the Secretary in promulgating the regulations at
issue, we recognize that such differentiation may
disadvantage hospitals such as appellees, that do not operate
in a state with an ongoing waiver project. However, this
occurred because of permissible, rational choices made by the
Secretary. She reasonably chose to include in Medicare DSH
calculations patient days which were covered under a waiver
program that she had specifically found would advance the
objectives of Medicaid, and over which she had authority to
initially shape the project’s scope. She further determined
that state general assistance days, which shared none of these
characteristics, would not be so included. Such actions were
neither arbitrary or capricious under the APA, nor a violation
of equal protection.
Moreover, nothing prevents
Pennsylvania from filing an application to qualify for a
Section 1115 waiver.
D. Similarity in Population and Plans
The District Court focused on appellees’ claim that
patients and services covered under Section 1115 waiver
projects are the same as those covered by Pennsylvania’s GA

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plan. As the District Court stated, “[n]either the inpatients
nor the hospital services made available under SPA 94-08 in
contrast to Section 1115 waiver programs differ significantly
– except as to the hospital’s statutory path to federal matching
funds.” (App. 35.) It concluded, “[o]n this record, plaintiff
hospitals in all relevant respects are indistinguishable from
other hospitals in Section 1115 waiver states.” (App. 45.)
It is sufficient to state that even if such alleged
similarities are accurate, they are irrelevant. While people
and services may be the same, they can be treated differently
for purposes of reimbursement if the reason for the differing
treatment is rational. The Secretary has described relevant
distinctions between patient days under the state GA plan and
those under a Section 1115 waiver project, such that she
rationally excluded the former from Medicare DSH
calculations and included the latter.
We reach the same conclusion with regard to the
District Court’s holding that the Secretary erroneously found
that Pennsylvania’s GA program was “state-only funded.”
Appellees argue that because Medicaid DSH payments are
used to subsidize GA program care, the state plan is federally
funded, and thus identical to traditional Medicaid payments.
(Appellees’ Br. at 34.) They accordingly take issue with
CMS’s repeated description of the GA program as state-only
funded.
First, we note Nazareth Hospital’s own stipulation:
“General Assistance Days represent patient days of
Pennsylvania Medical Assistance beneficiaries enrolled in the
‘State-Only funded’ General Assistance Program.” (App.

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121.) We will not fault the Administrator for adopting the
hospital’s agreed-upon terminology. 7
Second, we reiterate that whether there is similarity in
patient populations or funding provided is immaterial, as
differing treatment between the GA program and Section
1115 waiver projects need only be justified by a rational basis
advanced by the agency. As shown above, (1) the purpose of
Section 1115 waiver projects and (2) their accompanying
conditions under federal control, reasonably distinguish such
projects from Pennsylvania’s GA program, and were set forth
as rational bases for differing treatment by the Secretary. 8

7

The Government also takes pains to point out that
Pennsylvania indeed utilizes Medicaid DSH payments to
subsidize its state GA plan, but that the lump-sum allotment is
capped by statute and is not providing matching payments for
any specific patient or services. We agree that any funding of
GA services with federal dollars is thus purely a choice of
Pennsylvania and cannot alone convert the GA plan, a
creature of state law, into one of federal law. See Univ. of
Wash. Med. Cntr. v. Sebelius, 634 F.3d at 1035 (“[T]he
federal government was not spending its funds for the GAU
and MI populations’ care. . . . Regardless of how the State
chooses to distribute it to DSH hospitals, this money is not
being paid on behalf of any specific individual for any
specific service.”).
8
We accordingly reject appellees’ alternate argument that, in
describing the GA program as state-only funded, the
Secretary’s decision was not supported by substantial
evidence under 5 U.S.C. § 706(2)(E), or was otherwise
contrary to the record.

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E. Rulemaking Comments
Appellees alternatively contend that the Secretary’s
decision should be reversed because she ignored comments
made in the rulemaking process, pursuant to 5 U.S.C.
§
553(c). “The requirement that agency action not be arbitrary
or capricious includes a requirement that the agency
adequately explain its result, and respond to ‘relevant’ and
‘significant’ public comments. However, neither requirement
is particularly demanding.” Pub. Citizen, Inc. v. F.A.A., 988
F.2d 186, 197 (D.C. Cir. 1993) (citations omitted).
While the District Court did not address this issue, we
conclude that the Secretary adequately responded to the
comments posed during the rulemaking process, which
claimed that patient days under a General Assistance plan
should be treated identically to Section 1115 waiver days.
The Secretary noted that “comments from Pennsylvania
hospitals supported the continued inclusion of general
assistance days in the Medicaid portion of the Medicare DSH
adjustment calculation as well as expansion waiver days.”
(App. 65.) The Secretary then responded in part:
[w]hile we initially determined
that States under a Medicaid
expansion waiver could not
include those expansion waiver
days as part of the Medicare DSH
adjustment calculation, we have
since consulted extensively with
Medicaid
staff
and
have
determined that section 1115
expansion waiver days are utilized

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by patients whose care is
considered to be an approved
expenditure under Title XIX.
While this does advantage States
that have a section 1115
expansion waiver in place, these
days are considered to be Title
XIX days by Medicaid standards.
(Id.) Together with the rest of the explanation, “this response
demonstrates that the [agency] considered and rejected” the
arguments of appellees, “this is all that the Administrative
Procedure Act requires.” Covad Commc’ns Co. v. F.C.C., 450
F.3d 528, 550 (D.C. Cir. 2006) (internal quotations and
brackets omitted) (quoting City of Waukesha v. E.P.A., 320
F.3d 228, 258 (D.C. Cir. 2003)).
As an aside, it appears that the general remedy for
failure to adequately respond to rulemaking comments is not
complete vacatur of an agency rule, but rather remand for
additional consideration. See Ass’n of Private Sector Colls. &
Univs. v. Duncan, 681 F.3d 427, 449 (D.C. Cir. 2012)
(remanding to agency to “address . . . concerns” raised by
comments that were “never really answered.”). Here, the
District Court initially remanded the case to the agency,
requesting further explanation of the precise issues raised in
the comments cited by appellees. We have found the
agency’s explanations on remand to be sufficient. Ignoring
the record following remand and remanding for a second time
for failure to address rulemaking comments, some thirteen
years following the promulgation of the rule, would seem
unwarranted at best. See Covad Commc’ns Co., 450 F.3d at
550 (“The failure to respond to comments is significant only

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insofar as it demonstrates that the agency’s decision was not
based on a consideration of the relevant factors.”) (quoting
Thompson v. Clark, 741 F.2d 401, 409 (D.C.Cir.1984)).
IV. Conclusion
The Secretary set forth multiple rational bases
justifying her including Section 1115 patient days in
Medicare DSH calculations, but excluding days covered
under Pennsylvania’s GA plan. It is well-established that “a
court is not to substitute its judgment for that of the agency,”
and should “uphold a decision . . . if the agency’s path may
reasonably be discerned . . . .” F.C.C. v. Fox Television
Stations, Inc., 556 U.S. 502, 513-14 (2009) (quoting Motor
Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Accordingly, the
challenged regulations must stand. We reverse the decision
of the District Court.

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