DISTRICT HOSPITAL PARTNERS, L.P. et al v. SEBELIUS

Filing 32

MEMORANDUM OPINION to the Order granting Plaintiffs' Opening Brief and denying Defendant's Motion for Summary Judgment. Signed by Judge Gladys Kessler on 3/26/13. (CL, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
DISTRICT HOSPITAL PARTNERS,
L.P. d/b/a GEORGE WASHINGTON
UNIVERSITY HOSPITAL, et al.,
Plaintiffs,
Civil Action No. 11-1717 (GK)

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

MEMORANDUM OPINION

Plaintiffs
participate

in

are

a

group

of

the

Medicare

commonly owned hospitals

program.

They

bring

this

that

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.
This
Brief

matter

is

before

the

Court

on

§

551 et seq.

Plaintiffs'

Opening

[Dkt. No. 14], which this Court construes as a Motion for

Summary Judgment, 1 Defendant's Motion for Summary Judgment and
Opening-

Opposition

to

Plaintiffs'

Opposition

and

Defendant's

Reply

to

Plaintiffs'

Defendant's

Motion

for

Summary

Plaintiffs'

consideration of the briefs,
entire

record

Plaintiffs'

herein,

Motion

and

for

Reply

Brief

Brief

[Dkt.

No.

19]

1

[Dkt.

No.

22],

and

Opposition

and

Reply

to

No.

28].

Judgment

[Dkt.

Upon

the administrative record, and the
for

the

Summary

reasons

Judgment

stated

is

below,

granted

and

Defendant's Motion for Summary Judgment is denied.
I .

BACKGROUND

A.

Statutory and Regulatory Framework
1.

Title

The Medicare Program

XVIII

of

Medicare program,
and disabled.

the

Security Act

which provides medical

42 U.S.C.

Hosps. v. Sebelius,

Social

§

F.3d

established

care for

the

the elderly

1395 et seq.; see also Kaiser Found.
, 2013 WL 791272, at *1

1

(D.C. Cir.

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)

administered

(citation

by

the

omitted) .

Secretary

The

through the Center for Medicare and Medicaid Services

( "CMS") .

275

(2006) .

&

Medicare

and

is

Services

Dep't of Health

Health

program

Human

Ark.

of

Medicare

Human Servs. v. Ahlborn,

providers

enter

into

547 U.S.

written

268,

agreements

with the Secretary to provide services to eligible individuals.
42

U.S.C.

that

§

1935cc.

process

payments

u.s.c.

to

Fiscal

payments

on

providers,

intermediaries,

behalf

subject

of

to

then

subsequent

companies

make

interim

adjustments.

42

1395h.

§

To calculate these adjustments,
submit

CMS,

private

an

annual

cost

report

providers are required to

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

requirements set forth in 42 U.S. C.
may

appeal

the

determination

to
-3-

the
§

the

provider

meets

the

1395oo (a),

the provider

Provider

Reimbursement

Review

Board

("PRRB").

42

U.S.C.

1395oo (a) (1) (A) (ii).

§

decision of the PRRB is final unless the Secretary,

A

on her own

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

decision,

reverses,

decision. 42 U.S.C.

§

affirms,

Administrator

of

13 9 5 oo (f) ( 1) ; 4 2 C • F . R.
Following
Administrator,

the

PRRB's

affirm, or reverse PRRB decisions to
CMS

§

42

("Administrator") .

u.s.c.

4 0 5 . 18 7 5 .

final

a

modifies

1395oo(f). The Secretary has delegated her

final authority to modify,
the

or

decision

PRRB

the

of

the

or

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

debts"

"bad

are

such

amounts,

unpaid

as

deductibles or copayments, owed by Medicare patients for covered
Medicare services.
413.89 (b) (1) .
are not
C.F.R.

provided
Medicare

to

413.89(e);

see also 42 C.F.R.

are deductions

However,

the

Medicare

§

from revenue and

included in costs reported by the provider.

413.89(a).

cost-shifting,

§

These bad debts

to be
§

42 C.F.R

statute

42

prohibits

which means that costs associated with services
Medicare

patients,

beneficiaries
and

vice
-4-

cannot
versa.

be

borne
42

by

u.s.c.

non§

1395x(v) (1) (A) (i); Walter 0. Boswell Mem'l Hosp. v. Heckler,
F.2d 788,

791

(D.C.

"cost-shifting"
order

to

Cir.

1984)

(noting

that

statute prohibits

between Medicare and non-Medicare patients) .

prevent

cost-shifting,

a

provider

unable

to

and be

reimbursed under Medicare

if

In

collect

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

749

"bad

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:

"related

from

to

covered

services

and

derived

the

provider

coinsurance

amounts";

"reasonable

collection

efforts

were

made";

uncollectible

when

claimed

as

"actually
"sound

business

likelihood
§

judgment"
recovery

at

establishes
any

time

the debt

deductible

establishes

and
that

the

debt

was

worthless";

and

(4)

that

is

"no

future."

Id.

in

(3)

is

the

there

413.89(e).
Chapter

Part I

490,

3

("PRM"),

Regulations.

2

of

( 2)

(1)

491

of

the

Medicare

Provider Reimbursement

contains the Secretary's interpretation of these

Catholic Health Initiatives v.

(D.C.

Manual, 2

Cir.

2010)

Sebelius,

617

F. 3d

(noting that PRM contains "guidelines

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 nonMedicare

patients."

Administrative

specifically provides that a

Record

("AR")

It

254.

"provider's collection effort may

include the use of a collection agency." Id.
Second,

PRM

section

310.2

sets

forth

a

noncollectibility," which establishes that if,
and

customary

attempts

to

collect

the

"presumption

of

after reasonable

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.

In 1987,

The Medicare Bad Debt Moratorium

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)
Hennepin Cty. Med.

Ctr. v.

Shalala,
-6-

("Foothill")

81 F.3d 743,

747

(citing

(8th Cir.

1996))
to

the

(noting that Congress enacted the Moratorium in response
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.

4008, 101 Stat. 1330 (reprinted in 42 U.S.C.

§

L. No.

100-203

1935f note).

In 1988, Congress amended the Moratorium to further define
"reasonable
"criteria
keeping,

collection

for
and

effort,"

indigency
for

defining

determination

the

term

procedures,

determining whether to

refer

a

to

include

for

record

claim to an

external collection agency." Technical and Miscellaneous Revenue
Act

of

1988,

Pub.

L.

(reprinted in 42 U.S.C.
In 1989,
the

following

No.
§

100-647

§

802,

102

Stat.

1935f note).

Congress amended the Moratorium again.
sentence:

3798

"The

Secretary

may

not

It added
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,
August

1,

in

accordance

1987,

determination

with

with

the

respect

procedures,

to

rules

in

for

criteria
keeping,

record

effect

as

of

indigency
determining

and

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

Reconciliation Act

of

collection

1989,

Pub.

Stat. 2106 (reprinted in 42 U.S.C.

L.
§

policy."
No.

Omnibus

101-239,

§

Budget

6023,

103

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
2004,

and 2005. AR 60.

deductibles

intermediaries in fiscal year 2003,

These alleged bad debts included unpaid

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

issued NPRs disallowing these claimed bad debts,
uan ongoing collection effort at

[an]

intermediary

declaring that

outside collection agency

indicated that the bad debts were not yet deemed worthless." AR
60.
Plaintiffs

timely

appealed

the

NPRs

PRRB,

the

to

challenging the disallowance of the bad debts. AR 60. On May 27,
2011,

the

PRRB

issued

a

unanimous

decision

Plaintiffs properly claimed the uncollectible
debts

even

collection

though
agency.

BlueShield Ass'n,

the

accounts

Univ.

Case No.

Health

were

07-0084GC,

accounts

still

Servs.,

holding

Inc.

at

an
v.

2011 WL 2574339

as

that
bad

outside
BlueCross
(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

Administrator.

51-52.

The

submitted

On July 26,

AR 19-50.

parties

2011,

comments
the

to

the

Administrator

issued a decision reversing the PRRB and upholding the fiscal
intermediary's
debts.

Univ.

Ass'n,

2011

adjustments
Health

WL

disallowing

Servs.,

4499597

Inc.

Plaintiffs'
Blue

v.

(H.C.F.A.

claimed bad
Blue

Admin.

Cross

Dec.

July

26,

PRRB

erred

Shield
2011)

("Administrator Decision").
The

Administrator

ruled

that

the

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

agency,

provider
the

sends

provider

uncollected

cannot

amounts

establish

to

a

collection

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

collection

efforts

were

reasonable

and,

therefore,

there

its
has

been no change in CMS policy." Id. at *9.
As permitted by 42
filed a

U.S.C.

§

Complaint on September 23,

1395oo(f),
2011

review of the Administrator's decision.
4

For ease
position,
collection
claimed as

Plaintiffs timely

[Dkt.

No.

1]

seeking

Plaintiffs filed their

of analysis, this Court shall refer to the Secretary's
that an account that is outstanding at an outside
agency is per se not uncollectible and thus cannot be
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

Plaintiffs'

11,

2012,

Opposition

and

and

Defendant

Reply

to

filed

her

Defendant's

Reply

Motion

to
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
decision

made

1395oo(f) (1).
provisions

of

by
It

the

PRRB

instructs

the

APA.

or
the

Id.

the

Secretary.

reviewing
Because

42

court

this

U.S.C.

to

case

final

apply
involves

§

the
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.

( 1973) ) ;

Cir.

2003)

Richards,

(citing Camp v.

554

appropriate procedure
agency's

F. 2d at
for

administrative

Pitts,

1177

resolving

411 U.S.

("Summary
a

decision when

judgment

challenge
review

138,

is

to

a

142

is an
federal

based on the

administrative record.").
Under the APA,

an agency decision is set aside only if it

is "arbitrary, capricious,

an abuse of discretion,
-11-

or otherwise

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);

F.3d 231, 235

see also Murray Energy Corp.

(D.C. Cir. 2011)

v.

F.E.R.C.,

§

629

(quotation and citation omitted).

It is well established in our Circuit that this court's review
of agency action is "highly deferential." Bloch v.
F.3d

1060,

quotation

1070

marks

(D.C.

Cir.

omitted) .

If

(citations

2003)
the

"agency

forth the grounds on which it acted,

Powell,

and

has

348

internal

rationally

set

this court may not

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

Transp.

Bd.,

604

F.3d

602,

(D.C.

611

(internal quotation and citation omitted).

However,

Cir.

2010)

this Court

must ensure that the agency has "considered the factors relevant
to
the

its decision and articulated a
facts

found

and

the

rational

choice

made."

Endangered Species Act Listing & 4(d)
2013 WL 765059, at *6

connection between
In

re

Polar
F.3d.

Rule Litig.,

(D.C. Cir. Mar. 1, 2013)

Bear

(quoting Keating

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

determining
factual

if

finding,

substantial
"weighing

evidence

the

evidence

supports
is

not

an
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.

there

is

accept

Jan.
such

as

11,

2013).

relevant

adequate

to

Instead,

evidence

as

support

the

the
a

question

is

reasonable
agency's

(quoting Consolo v. Fed. Mar. Comm'n, 383 U.S.

"whether

mind

might

finding."
607,

620

Id.

(1966))

(internal quotation marks omitted) .
III. ANALYSIS

Plaintiffs make three arguments in support of vacating the
Administrator's
dispositive,

decision.

Their

primary

argument,

which

is

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
Prong of the Bad Debt Moratorium

the

First

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,

2d at

the Administrator concluded that

5

5-9.

As already noted,

558 F.

Supp.

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

effective

date

of

collectability was
the

Moratorium

in place

and

prior

intermediary's denial of the Plaintiffs'

the

upheld

accordingly

to

the

claims on this basis.

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

reasons

set

evidence.

below,

finding

Administrator's

forth

was

See 5 U.S.C.

overturned

only

where

§

the
not

are

concludes

supported

706(2) (E)

they

Court

that

the

substantial

by

(factual conclusions may be
"unsupported

by

substantial

evidence") . 6
1.

The

Secretary

provisions,
1990,

a

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

argues

that

the

Regulations,

a particular 1989 MIM provision,

2008

CMS

Joint

Signature

various

PRM

two memoranda from

Memorandum,

and

various

decisions of the Administrator provide substantial evidence that
the presumption of collectability existed prior to the enactment
of the Moratorium.
Mot.

6

for Summ. J.

De£.' s Mem.

of P.

&

A.

in Supp.

& Opp'n to Pls.' Opening Br.

21-22

of De£.' s
[Dkt. No.

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.

42 C.F.R.

a.

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.
collection efforts,"

It does not define

"reasonable

"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

collectability
wording

of

7

Regulation

in

is

that

the

the

presumption

Regulation.
to

fails

But

support

the
such

of
very
an

Rather than being "inherent" in the Regulation,

presumption

Secretary's

"inherent"

the

interpretation.
the

is

response

of

current

simply

collectability
interpretation

of

the

represents

the

Regulation. 8

See

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.

confusing

Supp.

the

2d at 10

Regulation

(noting that the Secretary was

with

interpretation

his

of

the

Regulation) .
b.

PRM Provisions

The Secretary also argues that the PRM provisions, on their
face,

establish the presumption of collectability. However,

language of
and,

the

in fact,

PRM does not

set

the

forth any such presumption,

tacitly contradicts it. PRM section 310 specifies

that the use of collection agencies by providers can be part of
a "reasonable collection effort."
if
not

PRM section 310.2 states that

"reasonable and customary attempts"
been

successful

presumption
exclude
together,

of

debts

12 0 days,

the

two

remain
PRM

at

debt

This

noncollectibility.
that

the

in

to collect a debt have
is

provision

collection

sections

entitled

to

does

not
Taken

agencies.

obviously

a

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.

The

1989 MIM Transmittal No. 28

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

identified as Transmittal No.
used by intermediaries

28,

to

1987.

set out

document,

The

"New Policy"

to be

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

collectability actually appeared in writing,

presumption

of

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

assertion

the
that

Plaintiffs
identified

the

emphasize
itself

transmission,
Secretary's

Moratorium,

by

as
its

argument.

weighs

presumption
that

the

setting
own
See

forth
terms

Foothill,

against
predated

the

Secretary's

the

Moratorium.

transmittal
"New

Policy."

actually
558

(finding that the transmittal letter was

F.

specifically
Thus,

the

contradicts

the

Supp.

2d

"[t] ellingly"

at

10

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

Administrator's

1989

MIM

conclusion

Transmittal
that

it

does

not

contained

support

an

the

established

policy with regard to the collectability of bad debts.
d.

1990 Health
Memoranda

Care

Financing

Administration

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

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-

the

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

completed

AR 370 (emphasis in original) .
There
passage.
could

are

two

First,

important

points

to

be

drawn

from

this

the Memorandum recognizes that an intermediary

"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
examples

the debt will be collected.

of

beneficiary

specific
is

circumstances

currently

making

AR 370

such

payments

on

as

(setting out
where

account,

"the
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

collection agency makes it per se not uncollectible.

-20-

to

a

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

evidence

in

the

that

Moratorium.

Memorandum

this

HCFA

interpretation

Moreover,

"directives"

did

identify

existed

any

prior

pre-1987
to

the

this sentence acknowledged that the only

that might have informed the intermediary on this

issue were released

"subsequent to August

Memorandum taken

a

as

whole

does not

1,

198 7."

support

the

Thus,

the

Secretary's

position.
The Secretary attempts in her Motion for Summary Judgment
to

"bolster"

the

weight

of

the

-21-

June

1990

Memorandum

by

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.

Opening Br.

of Def. 's Mot.

20

n.10.

for

Summ.

J.

&

This Memorandum was not

Opp' n to Pls.'
included in the

Administrative Record and therefore need not be considered. 11
However, even if the Court were to consider the March 1990
Memorandum,
supports

it

the

neither

"bolsters"

Secretary's position.

the

June

Memorandum

nor

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
weight

of

this
the

March

Memorandum,

it

June

Memorandum,

nor

would

not

support

"bolster"
the

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,
Statement

Memorandum

finding.

The

JSM's

( "JSM")

purpose

CMS Joint

Administrator's

the

supports

self-stated

2008,

was

"clarify

to

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

prior to the Moratorium.
the

June

1990

Memorandum

Second,
by

the JSM directly contradicted

asserting

that

establishes the presumption of collectability.
June

1990

Memorandum

in place

explicitly

told

the

PRM

clearly

In addition,

intermediaries

who

the
had

permitted providers to claim bad debts outstanding at collection
agencies that they not only could,
such

bad

debts

contradiction,

pursuant

to

but must,

the

declared such actions

continue to allow

Moratorium.
to be

"not

The

JSM,

in

in accordance

with the regulations" and instructed intermediaries to apply the
presumption

of

collectability.

demonstrates that,
effect,

the

AR

2.

The

JSM

twenty years after the Moratorium went into

agency

communicating or

Supplemental

had

still

implementing a

not

succeeded

policy that

-23-

it

in

adequately

claims was

in

place

for

over

forty

years.

The

JSM

does

not

support

the

Secretary's position.
CMS Administration Decisions

f.

Finally,
decisions

the

Secretary

support

her

argues

decision.

that

various

First,

she

Administrator

identifies

six

Administrator decisions 12 between 1992 and 1997 which allegedly
demonstrate
accounts

the

Administrator's

pending

at

collection

worthless." Def. 's Reply to Pls.'

agencies
Opp' n

&

that

"position

consistent

cannot

be

deemed

Reply to Def. 's Mot.

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

several

separate

years.

issue

of

Second,
whether

all

of

both

these

cases

Medicare

deal

and

with

the

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

Administrator decisions

identifies
"apply the

that

three

fairly

recent

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.

9.

J.

In

addition to the fact that all of these cases significantly postdate 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

Admin.

Dec.

affirmed
Sixth

Cross

Nov.

Shield

12,

2004).

423

Court
F.

of

Supp.

Battle Creek Health Sys.
2007).

Ass'n,

However,

2004

WL

3049346

The Western District

the Administrator's

Circuit

Thompson,

Blue

decision,

Appeals.
2d 755,
v.

and was

Battle
760

Leavitt,

Creek

(W.D.

Health

Sys.

2006),

3d 401

as the Foothill court observed,

Battle Creek did not raise,

of Michigan

upheld by the

Mich.

498 F.

(H.C.F.A.

v.

aff'd,

(6th Cir.

the parties in

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
-25-

1804073

(H.C.F.A.

Admin.

Dec.

Apr.

18,

2007),

which was

similarly upheld without

the Bad Debt Moratorium. Mesquite Cmty.

Hosp. v.

addressing

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

Foothill Presbyterian Hosp. v.
2007

WL

1004394

discussed above,
of

this

collectability

these

Court

Dec.

in

Blue Shield Ass' n,

Feb.

existed

are

prior

that
to

Foothill,

not

she

because

determination

evidence.

opinions

Admin.

&

opinion

14,

2007).

As

that opinion was overturned by another member

District

Administrator's

substantial

(H.C.F.A.

Blue Cross

2007

1987

558

persuasive

F.

the
was
Supp.

evidence

found

the

that

of

presumption
not

supported

2d at
of

11.

by

Thus,

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.

v. Leavitt, 511 F.3d 172, 176
review of

the

record,

Chippewa Dialysis Servs.

(D.C. Cir. 2007). In this case, a

beyond the

evidence relied upon by the

Secretary, further contradicts the Administrator's finding.
For instance,
obviously
agencies.

a set of audit guidelines in place in 1985,

pre-Moratorium,
AR

360-365.

specifically

Section

15.04

addressed
of

the

collection

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,
"both

Medicare

handled in a
patient's

and

"is

collection effort,

11

the

non-Medicare

similar manner 11

file

11

properly

intermediary should ensure
uncollectible

by the provider,
documented

and determine

if

to

amounts

are

ensure that the
substantiate

the amounts

the

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

account

Secretary did

was

Foothill,
provided

outstanding

558 F.
to

not
at

prohibit

a

collection

Supp. 2d at 11. Thus,

intermediaries,

reimbursement

the

agency.

while

an

367;

see

AR

in two major references

Secretary did

not

mention or

allude to any presumption of collectability.
Moreover, a pre-Moratorium Administrator decision·, Scotland
Mem. Hosp. v. Blue Cross
Dec.

Nov.

9,

1984),

collectability.
Administrator

AR
noted

&

Blue Shield Ass' n,

directly

contradicts

463-464.
that

the

In

(H. C. F .A. Admin.

the

Memorial,

Scotland

presumption of

presumption

of
the

noncollectability

established in PRM section 310.2 deserved "more weight than the
subjective
who

felt

and unrealistic
the

bad

debts

opinion of
were

not

the provider's witness,

uncollectible

because

expected the collection agency to collect them." AR 464.
as

of

310.2

1984,
applied

the
to

presumption
accounts

of

that

noncollectability
had

been

sent

to

in

she
Thus,

section

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
Lourdes

agency

Hosp.

that
Blue

v.

had

not

Cross

yet

terminated

& Blue

Shield

its

efforts.
(H.C.F.A.

Ass'n,

Admin. Dec. Oct. 27, 1995). AR 271-275. While Lourdes, like many
of the Administrator decisions cited above,

significantly post-

dates

the presumption of

the Moratorium,

it demonstrates

that

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

understands
function."
However,

deferential,"
that

Bloch,

~weighing

United

Steel,

considering

that

the

2013

348

evidence
U.S.

the

App.

F. 3d
is

not

LEXIS

Secretary

1070,

at

has

the

and

court's

731,

at

pointed

*14.
to

no

persuasive evidence that supports her contention, much less pre1987 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

omitted). Accordingly,
does

not

contain

Administrator's

support"

her

conclusion.

Id.

(citation

the Court must conclude that the record
substantial

determination

evidence
that

to
the

uphold

intermediary

appropriately disallowed the Plaintiffs' bad debt claims.

-29-

the

IV.

REMEDY

Plaintiffs request that the Court "reimburse Plaintiffs for
the bad debt claims on their fiscal year 2003,
cost reports,

including interest." Proposed Order

1]. As noted in Foothill,
remand

to

2004 and 2005

the

Agency.

however,

See

[Dkt. No.

14-

the appropriate remedy is a

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

determined that agency made an error of law,

Court

has

the case must be

remanded to the agency for further proceedings) .
Thus,
factual

because

the

determination

Court
that

finds

the

that

the

presumption

of

Administrator's
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.

/sf@~~

March 26, 2013

Gladys Kessle
United States District Judge
-30-