ALLINA HEALTH SERVICES et al v. BURWELL

Filing 39

MEMORANDUM OPINION to the Order denying Plaintiffs' Motion for Summary Judgment and granting Defendant's Motion for Summary Judgment. Signed by Judge Gladys Kessler on 8/17/16. (CL)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ALLINA HEALTH SERVICES,
et al.,
Plaintiffs,

)
)
)
)

v.

Civil Action No. 14-1415 (GK)

)
)

SYLVIA M. BURWELL, Secretary
United States Department of
Health and Human Services,

)
)
)
)

Defendant.

)

~~~~~~~~~~~~~~~~->

MEMORANDUM OPINION

Plaintiffs Allina Health S-ervices, et al.

("Plaintiffs") are

nine hospitals that bring this action against Sylvia M. Burwell,
in

her

official

Department

of

"Defendant") .

capacity
Health

They

disproportionate

as

and

Secretary
Human

challenge

share

the

hospital

of

Services

the

as

States

("Secretary"

calculation

payments

United

of

or

certain

procedurally

and

substantively invalid.
This matter is before the Court on the Plaintiff's Motion for
Summary Judgment

[ Dkt.

No.

8]

and Defendant's Cross-Motion for

Summary Judgment [Dkt. No. 28]. Upon consideration of the Motions,
Oppositions, Replies, the entire record herein, and for the reasons
set forth below, Plaintiffs' Motion shall be denied and Def-endant' s
Motion shall be granted.

1

I .

Background
A.

The Medicare DSH Payment System

The Medicare program was established in 1965 and provides
health

care

coverage

for

persons

age

65

and

older,

disabled

persons, and persons with end stage renal disease who meet certain
eligibility requirements. See 42 U.S.C.

§

426, 426a. The Secretary

administers the program through the Centers for Medicare & Medicaid
Services

(CMS),

an agency with the United States Department of

Health and Human Services. Def.'s Mot. at 4.
Medicare

pays

benefits

through

different

plans,

three

of

which are relevant here. "Plan A covers medical services furnished
by hospitals and other institutional care providers." Ne.

Hosp.

Corp. v. Sebelius, 657 F.3d 1, 2 (D.C.Cir.2011); 42 U.S.C.

1395c

§§

to 1395i-5. "Part B is an optional supplemental insurance program
that pays for medical items and services not covered by Part A,
including

outpatient

physician

services,

clinical

laboratory

tests, and durable medical equipment." Ne. Hosp., 657 F.3d at 2;
42 U.S.C.
Choice'

§§

(M+C)

1395j to 1395w-4.
program,

alternative to the

which

"Part C governs the
gives

traditional

Medicare

'Medicare +

beneficiaries

Part A fee-for-service system,"

allowing enrollment in a managed care plan. Ne. Hosp.,
at 2; see 42 U.S.C.

§§

an

u5 7 F. 3d

1395w-21 to 139Sw-29. The Secretary pays

the health care provider directly under Parts A and B, but pays

2

the

managed-care

plan

under

Part

C,

which

in. turn

pays

the

provider.
Hospitals that serve a significantly disproportionate share
of low-income patients without private health insurance are paid
"additional monies [by Medicare], on top of Medicare's normal feesfor-service,

to help cover the costs associated with the care of

the very poor." Allina Health Servs. v. Sebelius, 904 F. Supp. 2d

§

(D.D.C.

77

7 5'

13 9 5 WW ( d) ( 5 ) ( F) ; 4 2 C . F . R .
The

based

disproportionate

on

a

I,,) ;

("Allina

2012)

§

see

also

42

u.s.c.

4 12 . 1 0 6 .

share

hospital

"disproportionate

patient

("DSH")

adjustment

percentage"

for

is

each

hospital, which is determined by a complicated statutory formula.
See 42 U.S.C.
§

of

§§

412.106(d).
two

1395ww(d) (5) (F) (iv)

The disproportionate patient percentage is the sum

fractions,

commonly
fraction"

known

and (vii)-(xiii); 42 C.F.R.

42

as

U.S.C.

the

1395ww(d) (5) (F) (vi),

§

"Medicaid

fraction"

and

the

which

"Medicare

(sometimes also referred to as the "SSI fraction").

The Medicare fraction is defined as:
the 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

[Title XVIII] and were entitled to supplemental security
income benefits

(excluding any State
3

are

supplementation)

under [Title] XVI of this chapter, 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 [Title XVIII] ...
42 U.S.C.

§

1395ww(d) (5) (F) (vi) (I)

(emphasis added).

In layman's

terms, thE top of the Medicare fraction is based on the number of
a hospital's patient days for individuals entitled to both Medicare
Part A and SSI benefits, and the bottom of the fraction is based
on the number of patient days for all patients under Part A. As
discussed later, the phrase "entitled to benefits under part A" is
key to the present dispute.
The Medicaid fracti6n is defined as:
the 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 wh6 (for such
days) were eligible for medical assistance under a State
[Medicaid] plan ... but who were not entitled to benefits
under [Medicare] Part A

and the denominator of which

is the total number of the hospital's patient days f·or
such period.
Id.

§

1395ww(d) (5) (F) (vi) (II). In layman's terms, the top of

the Medicaid

fraction

is

based on · the number

of

a

hospital's

patient days for individuals who are eligible for Medicaid,
4

but

who are not entitled to benefits under Medicare Part A,

and the

bottom is the total number of all patient days for the hospital.
For a visual representation of the fractions,

see Ne. Hosp.,

657

F.3d 1, 3.
M+C (also referred to as Part C) was established by Congress
in 1997 as part of the Balanced Budget Act of 1997 (BBA), Pub. L.
No. 105-33 (1997). In order to enroll in M+C, an individual must
and enrolled under part

be "entitled to benefits under part A
B." 42 U.S.C.

§

1395w-21 (a) (3) (A). After M+C was implemented, "the

Secretary routinely excluded M+C

[inpatient hospital]

the Medicare fraction" from 1999 to 2004. Ne. Hosp.,

days from

657 F.3d at

15. That is, M+C patients were not counted in the numerator of the
Medicare fraction as part of the patients "entitled to benefits
under Part A .
§

and entitled to

[SSI]

benefits." 42 U.S.C.

1395ww(d) (5) (F) (vi) (I). It was not until 2007 that the Secretary

began

to

collect

the

Medicare/SS I fraction.

data

needed

to

include

M+C

days

in

the

Id.; see Change Request 564 7, CMS Pub. 100-

04, Transmittal No. 1331 (July 20, 2007).
Central to this case is whether,

once enrolled in Part C,

enrollees continue to be entitled to benefits under Part A. If the
agency considers enrollees to be entitled to benefits under Part A,
then they should be included in the Medicare fraction. If they are
no

longer entitled to benefits under

Part A,

because they are

receiving benefits under Part C, then they should be excluded from
5

the Medicare fraction.
this

The financial impact on the hospitals of

seemingly minor detail

is

in the hundreds

of millions

of

dollars. See Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105
(D.C. Cir. 2014)
B.

("Allina I Appeal").

Factual Background

In Allina I,

a group of hospitals,

including the Plaintiffs

in the present case, challenged a 2004 rulemaking by the Sedietary
("2004 Final Rule"). See 904 F. Supp. 2d at 77. The 2004 rulemaking
adopted a policy whereby Part C patients were to be considered as
"entitled to benefits under part A," and therefore counted in the
numerator of the Medicare fraction.

In November 2012,

the Court

(Collyer, J.) granted summary judgment for the plaintiffs, finding
that

the

2004

Final

Rule

was

not

a

logical

outgrowth

of

the

proposed rule and therefore violated the procedural requirements
of the Administrative Procedure Act ("APA"). See Allina I, 904 F.
Supp. 2d at 89-90.
On appeal,

our Court of Appeals

affirmed the part of the

Allina I Court's decision vacating the 2004 Final Rule. But, the
Court

of

directed

Appeals
the

Secretary

particular manner,
Appeal,

746

held

F.3d

that
to

rather
1102,

the

calculate

than

1111

Allina

simply

(D.C.

I

Court

the

erred

DSH

payments

remanding.

Cir.

2014).

when

On

it

in

a

See Allina

I

remand,

the

Secretary addressed the issue of the appropriate DSH calculation
methodology through an adjudication. The Administrator determined
6

that, prior to 2004, the regulation did not specify where the Part
C enrollees should be counted in the DSH percentage.
Adm'r Dec.

at 26

(Dec.

2,

2015)

[Dkt.

28-2].

Allina I,

The Administrator

further concluded that the better statutory interpretation is that
Part C enrollees are "entitled to benefits under Part A" within
the meaning of the DSH provisions, and therefore should be included
in the Medicare fraction. Id. at 35-45.
C.

Procedural Background

Shortly after our Court of Appeals' decision in Allina I, the
Secretary published calculations for federal fiscal year 2012 DSH
payments ("2012 DSH Calculations") . 1 See 2012 Part A/SSI Fraction
Data File, available at http://www.cms.gov/Medicare/Medicare-Feefor-Service-Payment/AcuteinpatientPPS/Downloads/FY-2012-SSIRatios-for-web-posting. zip.

Plaintiffs allege that the 2012 DSH

Calculations are based on the 2004 Final Rule that was vacated.
They

al~o

allege that the 2012 DSH Calculations are procedurally

invalid and arbitrary and capricious. Compl.
timely

appealed

the

2012

DSH

'J['J[

Calculations

46-52. Plaintiffs
to

the

Provider

The present act~on is not considered part of the Allina I re~and,
because it concerns a later year. In 2013, the HHS adopted a
legislative rule that interprets the statute to require Part C
days in the Medicare fraction. 78 Fed. Reg. 50,496, 50,614 (Aug.
1

-1--9, -

2-Q-1~-)-

-("-2-G±-2----Rtoi-1--emaking-~)-. --T--fle--l-eg-i-s-1-a~i-v-e

--r:-ttl-.e

--0R-l-Y---l:i.-O-&>

prospective application, and therefore does not apply to this case
or the Allina I remand. Id. at 50,620.
7

Reimbursement

Review

Board

("PRRB"),

'.lI'.lI

see Compl.

36-39,

and

requested that the PRRB grant expedited judicial review. Id. '.lI 41.
The

PRRB

is

an

independent

administrative

tribunal

that

resolves disputes regarding hospital reimbursement determinations
by Medicare contractors or the Centers for Medicare
Services ("CMS"). See 42 U.S.C.
certain

payment

disputes

guidance, see 42 C.F.R.

§

&

Medicaid

1395oo(a). The PRRB may resolve

without

following

low-level

policy

405.1867; however, it is bound by agency

§

regulation and rulings, id., and cannot decide "question[s] of law
or regulations." 42 U.S. C.

§

13 9500 ( f) ( 1) . Section 13 9500 ( f) gives

providers "the right to obtain judicial review of any action
whenever the

which involves a question of law or regulations .

[PRRB] determines . . . that it is without the authority to decide
the question." Id.
By letter dated August 13, 2014, the PRRB granted Plaintiffs'
request for expedited judicial review, finding that "it is without
the

authority

regulation
whether
Allina

to

decide

regarding

the

the Secretary's
[I]

are

the

legal."

legal

[2012

of

DSH Calculations]

actions
Letter

question

subsequent
from the

to

whether
is

the

valid and

the decisipn

Provider

Review Board to Stephanie Webster 6 (Aug. 13, 2014)

in

Reimbursement
[Dkt. No. 14-1]

("PRRB Decision").
On

August

19,

2014,

Plaintiffs

filed

their

Complaint,

pursuant to the PRRB' s grant of expedited judicial revi-ew
8

[ Dkt.

No. l]. Plaintiffs filed a Notice of Related Case on the same day
[Dkt. No. 2]. Judge Collyer granted Defendant's objection to the
related case designation on May 18, 2015, and the case was randomly
reassigned tp this Court. Minute Order dated May 18,

2015; Case

Assignment [Dkt. No. 20].
On October 27,

2014,

Defendant filed her Motion to Dismiss

for Lack of Jurisdiction or in the Alternative for Voluntary Remand
[Dkt.

No.

15],

arguing

that

expedited judicial review,

the

PRRB

improvidently

or in the alternative,

granted

for voluntary

remand to allow the PRRB to adjudicate Plaintiffs' claims without
consideration of the 2004 Final Rule. Motion to Dismiss at 2. The
Court denied Defendant's Motion to Dismiss on October 29,

2015

[Dkt. No. 21].
Plaintiffs filed their present Motion for Summary Judgment on
September 29, 2014 [Dkt. No. 8], prior to Defendant's response.to
the Complaint. On October 1 7, 2014, the Court (Collyer, J.) granted
Defendant's Motion

to

hold

in abeyance

the Motion

for Summary

Judgment until the Motion to Dismiss was filed and decided.
October 17, 2014 Minute

Ord~r.

See

After this Court denied Defendant's

Motion to Dismiss, Defendant filed her Answer on November 12, 2015
[Dkt. No. 24], and her Cross-Motion for Summary Judgment ("Def.'s
Mot.") on December 15, 2015 [Dkt. No. 29]. Plaintiffs filed their
Opposition
Defendant

("Opp' n")
filed

on

her Reply

January

14,

("Reply")
9

2016
on

[ Dkt.

February

No.
4,

30 J

2016

and
[Dkt.

No. 33]. On February 12, 2016, Plaintiffs filed a Motion for Leave
to File a Sur-Reply [Dkt. No.

34], which Defendant opposed [Dkt.

No. 35], and the Court denied on February 18, 2016 [Dkt. No. 36].
II.

Legal Standard
A.

Motion for Summary Judgment

Summary judgment will be granted when there is no genuine
issue as to any material fact. See Fed. R. Civ. P. 56(a). Because
this case involves a challenge to a final administrative decision,
the

Court's

review

administrative

on

record.

summary
Holy

Land

judgment
Found.

for

Ashcroft, 333 F.3d 156, 160 (D.C. Cir. 2003)
411

U.S.

138,

F. Supp. 96,
appropriate

142
105

(1973));
(D.D.C.

procedure

for

Fund

for

1995)

is

Animals

a

Relief

&

to

the

Dev.

v.

(citing Camp v. Pitts,

("Summary

resolving

limited

v.

Babbitt,

903

is

an

judgment

challenge

to

a

federal

agency's administrative decision when review is based upon the
)

administrative record").
"Summary judgment thus serves as the mechanism for deciding,
as a matter of law, whether the agency action is supported by the
administrative

record

and

otherwise

consistent

with

the

APA

standard of review." Sierra Club v. Mainella, 459 F. Supp. 2d 76,
90

(D.D.C. 2006)

(citing Richards v.

INS,

554 F.2d 1173, 1177

&

n. 28 (D.C. Cir. 1977)). In reviewing agency action, the district
court "sits as an appellate tribunal, not as a court authorized to
determine

in

a

trial-type

proceeding
10

whether

the

Se·cretary' s

[action] was factually flawed." Marshall Cnty. Health Care Auth.
v. Shalala, 988 F.2d 1221, 1225 (D.C. Cir. 1993).
B.

Requirements of the APA and Medicare Act

Under the APA and the Medicare Act, legislative rules - rules
that have the "force and effect of law," Chrysler Corp. v. Brown,
441 U.S.

281,

302-303,

(1979))

-

are issued through notice-and-

comment rulemaking, in which the Secretary must provide the public
with adequate notice of a
comment
§

thereon.

1395hh (b) (1)

regulation

.

See

5

(Medicare)

proposed rule and an opportunity to
U.S.C.

553(b)-(c) (APA);

§

(" [B] efore

42

issuing in final

U.S.C.

form any

the Secretary shall provide for notice of the

proposed regulation in the Federal Register and a period of not
less

than

60

days

for

requirements are designed

public
(1)

comment

thereon.").

"Notice

to ensure that agency regulations

are tested via exposure to diverse public comment,

(2)

to ensure

fairness to affected parties, and (3) to give affected parties an
opportunity to develop evidence in the record to support their
objections to th-e rule and thereby enhance the quality of judicial
review."

Int'l Union,

Cir. 2005) .

The

2012

UMWA v.

MSHA,

407

F.3d 1250,

DSH Calculations were

not

1259

(D.C.

issued through

notice and comment rulemaking, although Plaintiffs argue that they
should have beBn. Pls.' Mot. at 9; Pls.' Reply at 10.
Not all rules require notice-and-comment prior to.issuance.
Section 4(b) (A) of the APA provides that, unless another statute
11

states

otherwise,

the

notice-and-comment

requirement

"does

not

apply" to "interpretative rules, general statements of policy, or
rules of agency organization,
§

procedure,

or practice." 5 U.S.C.

553(b) (A). "[T]he critical feature of interpretive rules is that

they are 'issued by an agency to advise the public of the agency's
construction of the statutes and rules which it administers.'"
Perez v.

Mortgage Bankers Ass'n,

135 S.

Ct.

1199,

(quoting Shalala v. Guernsey Memorial Hospital,

1204

514 U.S.

(2015)
87,

99

(1995)).
The D.C. Circuit had long held that, even though notice and
comment was not necessary for new interpretive rules issued by an
agency, notice and comment was nonetheless required when an agency
changed its prior interpretation.
D.C.

Arena

L.P.,

Veterans

and

recently

held

its

117

F.3d

subsequent

that

an

579
line

agency

Paralyzed Veterans of Am.
(1997).

Overturning

of cases,

need

not

use

v.

Paralyzed

the Supreme

Court

notice-and-comment

procedures "when it wishes to issue a new interpretation of a
regulation that deviates significantly from one the agency has
previously adopted." Perez, 135 S. Ct. 1199 at 1203.
The APA also allows a reviewing court to set aside an agency
action that is "arbitrary, capricious, an abuse of discrBti0n, or
otherwise not in accordance with law." 5 U.S.C.
Records,

Inc.

v.

DEA,

259 F.3d 731,

736

§

706(2) (A); Tourus

(D.C. Cir.

2001)

"The

scope of review under the 'arbitrary and capricious' standard is
12

.
narrow and a court is not to substitute its judgment for that of
the agency." Motor Vehicle Mfrs. Ass'n of U.S. v. State Farm Mut.
Auto. Ins. Co.,

463 U.S. 29, 43

(1983)~

The court must "consider

whether the decision was based on a consideration of the relevant
factors and whether there has been a clear error of judgment."
S. Co. Servs., Inc. v. FCC, 313 F.3d 574, 579-80 (D.C. Cir. 2002);
see also United States v.

Paddack,

825 F,.2d 504,

514

(D.C. Cir.

1987) .
An agency satisfies the arbitrary and capricious standard if
it "examine[s] the relevant data and articulate[s] a satisfactory
explanation

for

its

action

including

a

'rational

connection

between the facts found and the choice made.'" Motor Vehicle Mfrs.
Ass'n,
States,

463 U.S.
371

F.3d 769, 775

at 43

U.S.

(quoting Burlington Truck Lines v.

156,

168

(1962));

Lichoulas

v.

United

FERC,

606

(D.C. Cir. 2010). However, courts "do not defer to

the agency's conclusory or unsupported suppositions." McDonnell
Douglas

Corp.

v.

U.S.

Dep't of

the Air

Force,

375

F.3d 1182,

1186-87 (D.C. Cir. 2004).
III .. Analysis
A.

The Evidence Is Not Convincing that CMS Calculated the
2012 DSH Fractions Based on the Vacated 2004 Final Rule.

Plaintiffs argue that the Secretary improperly relied on the
vacated 2004 Final Rule to formulate the 2012 DSH Calculations,
-P±s~'- --Mot-~

-at --6--7; -whi--le---Be-fendant- counters --that- t-he-:2012-BSH---

13

Calculations were reached by CMS in reliance on the language of
the

disproportionate patient

percentage

statute

itself.

Def.' s

Mot. at 9.
What is central to this dispute is the parties' disagreement
as to the impact of the vacatur of the 2004 Final Rule. Defendant
argues that "the agency was faced with. an ambiguous direction from
Congress"

and

that

the

pre-2004

version

of

the

applicable

regulation did not specify where Part C days should be counted.
Id. at 10. Plaintiffs on the other hand argue that pre-2004, the
agency had a policy of excluding Part C days from the Medicare
fraction.

Pls.' Reply at 4. In the alternative,

Plaintiffs argue

that even if there was not a policy or regulation excluding Part C
days from the Medicare fraction,
of

excl1:J.ding

the

Part

the agency had a prior practice

C days,

vacatur of the 2004 Final Rule.

which was

reinstated after

the

Id.- (citing Croplife Am. v. EPA,

329 F.3d 876, 880, 884-85 (D.C. Cir. 2003).
Defendant

contends

that

there

is

no evidence

to

directly

suggest that the 2012 DSH Calculations were based on the vacated
2004

Final

Rule,

rather

than

on

CMS's

interpretation

of

the

statute. Def.'s Mot. at 10. Conversely, Plaintiff argues that there
is no evidence to suggest that the Secretary did not rely on the
vacated rule.
employ

one

of

The Secretary states that CMS "inevitably had to
two

possible

interpretations

language," and the one it chose
14

for

the 2012

of

the

statutory

DSH Calculations

reflected
itself.

CMS's

best

Def.' s Mot.

understanding

at 10

("Cheng Deel.") i i 7,

of

the

statutory

language

(citing Declaration of Ing Jye Cheng

8 [Dkt. No. 29-3]). Acknowledging that the

2004 Final Rule is no longer in effect, the Secretary cites to the
Allina I Administrator decision as evidence that the agency is no
longer relying on the vacated 2004 Final Rule. Id.
Our Court of Appeals,

in remanding Allina

I

to allow the

agency to consider the interpretive issue anew, made it clear that
it

was

possible

the

agency

could

and

might

adopt

the

same

interpretation contained in the 2004 Final Rule. Allina I Appeal,
746 F.3d at 1111. Consequently, it follows that the fact that the
agency did adopt the same interpretation as the 2004 Final Rule is
not - in and of itself - indicative that the 2004 Final Rule was
relied upon.
While it may have been far better if the agency had provided
an explanation of its interpretation of the DSH statute along with
the 2012 DSH Calculations, particularly in light of the vacatur of
the 2004 Final Rule, there is no convincing evidence that Defendant
actually relied on the vacated rule in promulgating the 2012 DSH
Calculations. Indeed, as the Court later concludes, the Secretary
appropriately relied on and interpreted the underlying DSH statute
to calculate the 2012 DSH Calculations.

15

B.

Notice and Comment Rulemaking Was Not Required
i.

The APA

The parties agree that the Secretary did not undertake notice
and comment rulemaking to implement a rule including Part C days
in

the

Medicare

fraction

that

is

applicable

to

the

2012

DSH

Calculations. The issue is whether the Secretary should have.
The APA requires notice and comment when agencies implement
new legislative rules.

5 U.S.C.

§

553(b).

Plaintiffs argue that

the 2012 DSH Calculations were not a one-time decision, but instead
were the beginning of an ongoing

and therefore should be

patt~rn

considered a legislative rule. Pls.' Reply at 23. Plaintiffs reason
that the 2012 DSH Calculations "'reflect'

a universal policy of

treating part C days as part A days for all hospitals," because
the agency has continued to include Part C days in the Medicare
fraction
continue,

in
the

all

future

2012

DSH

actions.

Id.

Calculations

Plaintiffs

Therefore,
constitute

"an

agency

statement of general or particular applicability and future effect
designed to implement, interpret, or prescribe law or policy," and
are therefore a "rule" for purposes of the APA Id.
§

(citing 5 U.S. C.

551(4)).
Defendant takes issue with the characterization of the 2012

DSH

Calculations

as

involving

a

16

rule

at

all.

The

2012

DSH

Calculations are comprised solely of a spreadsheet of percentages, 2
which Defendant characterizes as "preliminary, provider-specific
determinations calculated on the basis of services that had already
been rendered." In other words, Defendant argues that the 2012 DSH
Calculations

are

more

appropriately

viewed

as

a

step

in

an

adjudication rather than as a rule. Def.'s Mot. at 12.
However,

Defendant

acknowledges

that

the

fractions

"do

reflect an interpretation of the statute that Part C days are
included in the Medicare fraction." Id.

(emphasis in original) .

The

merely

2012

DSH

Calculations

adjudication,

but

Part C

in

days

Calculations

are

reflect a
the

were

a

step

decision by the agency to

Medicare

not

not

fraction.

appropriately

Thus,

viewed

as

the
a

in

an

include

2012

step

DSH

in

an

adjudication but rather as a rule.
The Court must now, determine whether the agency was announcing
a

new legislative

rule or simply interpreting the

statute and

announcing an interpretive rule. A "legislative rule," is a rule
intended

to

have

and

does

have

the

force

of

law.

"A

valid

legislative rule is binding upon all persons, and on the courts,
to

the

same

extent

as

a

congressional

statute.

When Congress

delegates rulemaking authority to an agency, and the agency adopts

2

The

2012

DSH

Calculations

are

available

http:/!'www-. cms.gov!'Medicare/Med~care=F'ee--Fo-r,-Service­

Payment/AcuteinpatientPPS/Downloads/FY-2012-SSI-Ratios-for-webposting.zip.
17

at

legislative rules, the agency stands in the place of Congress and
makes law. An 'interpretative' rule, by contrast, does not contain
new

substance

understanding

of
of

its
a

own

but

merely

congressional

expresses

statute."

Nat' 1

the

agency's

Latino

Media

Coal. v. F.C.C., 816 F.2d 785, 787-88 (D.C. Cir. 1987).
Factors to consider when determining whether a rule has a
"legal effect" include "asking 1)
rule

there

would

not

be

an

whether in the absence of the

adequate

legislative

basis

for

enforcement action or other agency action to confer benefits or
ensure

the

performance

of

duties,

( 2)

whether

the

agency

has

published the rule in the Code of Federal Regulations,

(3) whether

the

legislative

agency

authority,
legislati v.e

has
or

( 4)

rule.

explicitly

invoked

whether the
If

the

its

general

rule effectively amends

answer

to

any of

a

prior

these questions

is

affirmative, we have a legislative, not an interpretive rule." Am.
Min. Cong.

v.

Mine Safety

&

Health Admin.,

995 F.2d 1106,

1112

(D.C. Cir. 1993).
The answer to all of the above questions is "no." As our Court
of Appeals has previously recognized, the DSH statute is ambiguous
and could be interpreted to include or exclude Part C days. Ne.
Hosp.,

65 7

F. 3d

interpreted to

at

5-6.

The

fact

include Part C days

that

the

statute

could

indicates that there

be

is an

adequate legislative basis for the agency's decision. The rule of
including Part C days in the Medicare fraction, as applied to the
18

2012 DSH Calculations,

was not published in the Code of Federal

Regulations, nor did the agency explicitly invoke its legislative
authority.
rule.

Lastly,

the rule does not amend a prior legislative

3

For these reasons,
not

issue

a

legislative

Calculations,
necessary.

the Court concludes that the agency did

and

rule

therefore

Instead,

the

when

APA

2012

it

issued

notice

DSH

2012

DSH

comment

and

the

were

not

constitute

the

Calculations

agency's interpretation of the disproportionate patient percentage
statute.

The

statute

itself

provides

an

"adequate

legislative

basis" for including Part C days in the Medicare fraction,
therefore

the

rule

underlying

the

2012

DSH

Calculations

and
is

interpretive. See Am. Min. Cong., 995 F.2d at 1112.
Plaintiffs
promulgated the
rulemaking

argue
same

that,

because

interpretation

in the 2004

Final

Rule

the

through
and the

agency
notice
2013

previously
and comment

Rulemaking,

it

should continue to do so for the 2012 DSH Calculations. Pls.' Reply
at 28-30. However, there is no requirement that the agency continue
to do so. For example, an agency may choose to invoke its general

Plaintiffs argue that the agency had a prior policy, rather than
simply a practice, of excluding Part C days. See Pls.' Opp' n
at 7-8. The facts do not support a fin ding of a policy, rather
than simply a practice.
Even if the agency did have a prior
·· p-0-1-±cy, --tt--woul-ct-not--have- -b-een-a--i:eg±-s-i-at±ve -po-licy-re-qu±r±ng ·
notice and comment to change it~
3

19

legislating authority out of an abundance of caution.
Cong.,

995

F.2d

at

1110-11.

Therefore,

the

invocation of its general legislating authority
Final Rule),

agency's
(here,

Min.

Am.

prior

the 2004

is not per se evidence that it needed to do so and

does not negate the Court's finding that the agency's action was
interpretive.
ii.

The Medicare Statute

The Medicare statute also requires notice and comment prior
to
§

the

Secretary

issuing

final

regulations.

See

42

U.S.C.

1395hh(b). Plaintiffs argue that the Medicare statute requires

"rulemaking for a more expansive set of agency pronouncements than
the Pi.PA." Pls.' Reply at 11. Plaintiffs cite to no cases in support
of

their

argument

and

the

Court

finds

their

statutory

interpretation arguments unpersuasive. Pls. Reply at 11-13.
Our Court of Appeals has not decided whether the Medicare
statute "creates a more stringent obligation

[than the APA]

or

whether it somehow changes the dividing line between legislative
and interpretive rules." Monmouth Med. Ctr. v. Thompson, 257 F.3d
807, 814 (D.C. Cir. 2001). However, the Court of Appeals did note
that, because the Medicare statute was adopted after the APA, it
was fair to infer that
rules'

"§

1385hh ( c) 's reference to, 'interpretive

without any further definition adopted an exemption

[to

notice and comment requirements] at least similar in scope to that
of the APA." Id.

(internal citation omitted). Other circuit courts
20

•.

have similarly concluded, though without thorough analysis, that
the standards imposed by the APA and Medicare are not materially
different. See Baptist Health v. Thompson, 458 F.3d 768, 776 (8th
Cir. 2006)

(42 U.S.C.

1395hh(a) (2) "imposes no standards greater

§

than those established by the APA."); Erringer v. Thompson,
F.3d 625, 633 (9th Cir. 2004)

371

(declining to determine whether the

Medicare Act "draws the line between substantive and interpretive
rules in a different place than the APA"); Warder v. Shalala, 149
F.

3d

73,

79

n.4

(1st

Cir.

1998)

("the

[Medicare

statute's]

language, drafted after the APA's, can fairly be read to duplicate
the APA on this score.").
Even

if

Secretary's

the

Medicare

statute

interpretation of the

was

DSH

more

statute

requirement, or other statement of policy
or changes
comment

a

would

subs tan ti ve
be

required.· See

discussed previously,
there

is

an

legal

standard"
42

U.S.C.

995

is

not

a

the

"rule,

. that establishes
such that notice
§

and

1395hh(a) (2).

As

in the absence of any regulation or rule,

"adequate

legislative

basis"

interpretation. and application of the
Congress,

demanding,

F. 2d at 1112.

for

statute.

the

Secretary's

American Mining

The agency's interpretation of the

statute does not require rulemaking under the Medicare statute.
iii. Rulemaking Through Adjudication

Defendant argues that notice and comment rulemaking is not
necessary because it is "well-established that an agency may employ
21

...

a new interpretation in the course of an individual adjudication."
Def.' s Mot.

at 12

U.S. 87, 97 (1995)

(citing Shalala v.

Guernsey Mem' 1 Hosp.,

514

("The APA does not require that all the specific

applications of a rule evolve by further, more precise rules rather
than by adjudication. The Secretary's mode of determining benefits
by both

rulemaking

and adjudication

is,

in

our view,

a proper

exercise of her statutory mandate" (internal citations omitted)));
see also Clark-Cowlitz Joint Operating Agency v.
1074, 1081 (D.C. Cir. 1987)

(en bane)

FERC,

826 F.2d

("[W]hen as an incident of

adjudicatory function an agency interprets a statute, it may apply
that new interpretation in the proceeding before it.") . Def.endant
also

points

through

out

that

the
or

adjudication

decision whether
rulemaking

is

to make

generally

new policy
within

the

agency's discretion. Id. at 13 (citing NLRB v. Bell Aerospa6e Co.
Div.

of

authority,

Textron,

416

Defendant

U.S.

267,

concludes

that

291-94
it

was

(1974)).

Given

this,

"well within CMS' s

discretion to employ the interpretation it did in the course of
calculating the 2012 [OHS Calculations]." Id.
Whether

or

not

Defendant

can

issue

new

interpretations

through adjudication is not relevant to this case,

because the

agency did not engage in an adjudication to reach the 2012 DSH
Calculations. Defendant attempts to rely on a 2007 adjudication as
authority for its policy in the 2012 DSH Calculations, but this
reliance is misplaced. Def.'s Mot. at 14 (citing St. Joseph's Hosp.
22

-.

v. Blue Cross/Blue Shield Ass'n,

2007 WL 4861952 at *5

2007)) .

forward

St.

Joseph's was not a

(Nov. 13,

looking policy and was

limited to fiscal years 1998, 1999, and 2000. St. Joseph's Hosp.,
2007 WL 4861952 at *1. In addition, the PRRB reached its decision,
later affirmed by the Administrator,

with reference to the now

vacated 2004 Final Rule, which calls into question any prospective
validity St.
2004),

Joseph's may have had.

available

See PRRB Decision

(Aug.

27,

https://www.cms.gov/Regulations-and-

at

Guidance/Review-Boards/PRRBReview/Downloads/2007d68.pdf
Therefore,

an

agency's

ability

to

issue· new

interpretive

rules through adjudication does not help Defendant's case here.
iv.

As

Prior Definitive Interpretation

discussed

previously,

in

the

Perez,

Supreme

Court

overruled the Court of Appeals' Paralyzed Veterans doctrine, which
had created a judge-made procedural requirement that an agency use
notice-and-comment

rulemaking

whenever

it

changed

a

rule

interpreting a statute, even though such notice-and-comment would
not have been required when interpreting the statute in the first
instance. See supra, 12. Plaintiffs acknowledge that changes to an
interpretive rule are no longer subject to notice and comment under
the

APA,

and

have

withdrawn

that

argument.

See

Pls.'

Reply

that

'works

at 16 n. 10.
Even

so,

Plaintiffs

contend

that

a

"policy

substantive changes' or makes 'major substantive legal additions'
23

to existing regulations requires notice and comment.' Pls.' Reply
at 19 (quoting U.S. Telecom Ass'n v. FCC, 400 F.3d 29, 34-35 (D.C.
Cir.

2005)).

Plaintiffs

argue

that

the

2012

DSH

Calculations

effected a substantive change and therefore should have undergone
notice

and

comment

misunderstands

U.S.

procedures.
Telecom,

Id.

at

which

19-20.

does

not

This
stand

argument
for

the

proposition that there are certain instances where interpretive
rules require notice and comment. Rather, it held that new rules
that affect substantive changes or amend prior legislative rules
may more appropriately be considered legislative rules rather than
interpretive rules.

U.S.

Telecom Ass'n,

400 F.3d at 34-35.

The

Court has already determined that the policy that was effectively
announced in the 2012 DSH Calculations was an interpretive one,
not legislative.· See supra 19.

Because the agency's action was

interpretive, notice and comment was not required.
C.

The Decision to Include Part C Days Is Not Arbitrary and
Capricious

Plaintiffs argue that

the Secretary's decision to include

Part C days in the Medicare fraction was arbitrary and capricious.
See

Pls.'

first,

that

hospitals"
agency's

Reply at

is

the

32.

agency's

arbitrary

decision

Plaintiffs'

is

and

contention has

"no-process

underlying stat:utory scneme. ·

determination

capricious,

impermissibly
ra~

at

24

two prongs:

and

second,

inconsistent

3Z-=33.

for

all

that

the

with

the

As

to

policy

the

first,

determination

Plaintiffs
is

contend that

arbitrary

and

the

Secretary's

capricious

because

the

agency has not "articulated any rationale for its choice." Pls.
Reply

at

33

F.3d 400, 407

(quoting
(D.C.

Cir.

76

Nat'l

1996).

scope of review under the

The

Comm.

FEC,

Republican

v.

arbitrary and capricious standard is a narrow one. The Court is
not to substitute its own judgment, but the "agency must examine
the relevant data and articulate a satisfactory explanation for
its action." Motor Vehicle Mfrs. Ass'n v.
Ins.

Co.,

463 U.S.

reasoning that
However,

29,

42-43

(1983).

State Farm Mut. Auto.

The court may not supply

the agency itself has not provided.

Id.

at· 43.

the court will "uphold a decision of less than ideal

clarity if the agency's path may reasonably be discerned." Id.
(quoting Bowman Transp.

Inc. v. Arkansas-Best Freight Sys.,

419

U.S. 281, 286 (1974)).
Defendant blames the absence of a contemporaneous explanation
for its decision to include Part C days in the Medicare fraction
in the 2012 DSH Calculations on the unique posture of the case.
Def.'s Mot. at 25-26. Defendant explains that the agency expected
further

administrative

proceedings

in

connection

with

the

challenge and regarded the decision as non-final. Id. at 26. Even
if the

Defendant expected "further administrative development"

before the PRRB and Administrator,

id.,

it is not clear why the

agency would not provide any contemporaneous explanation with the
25

issuance of the 2012 DSH Calculations. The agency also contends it
was a one-time interpretive decision and as such,

Plaintiffs are

not entitled to expect an explanation of the sort that CMS would
provide for a final prospective rule. Id.
Despite the lack of explanation,

Defendant argues that the

interpretative choi6e "can be readily sustained on the basis of
the.explanation set forth in the Administrator's decision in the
Allina I remand." Id. at 27. Defendant concedes that the Court's
review

is

ordinarily

limited

to

the

contemporaneous

record

developed by the agency, but argues that an exception is warranted.
Id.

(citing

SEC

v.

Crossing Telecomms.,

Chenery Corp.,
Inc.

v.

318

U.S.

80

(1943);

Metrophones Telecomms.,

Glob.

Inc.,

550

U.S. 45, 63-64 (2007)).
Chenery stands for the proposition that "an agency's decision
must

reflect

the

reasons
cannot

rationalizations
contemporaneous
Indiana v.

for
be

reasoned

I.C.C.,

749

its

action,

and

substituted

decisionmaking."

F.2d 753,

759

that

on
Pub.

(D.C.

subsequent

appeal
Serv.

Cir.

1984)

Co.

for
of

(citing

Chenery, 318 U.S. at 92-95). But Chenery is not absolute. In Global
Crossing,

~he

Supreme Court found that the FCC's initial opinion

did not explain its determination,
determination,
opinions

ma[d]e

finding
the

that

FCC's

the

but nevertheless upheld the

"context

rationale

and

obvious."

cross-referenced
Glob.

Telecomms., 550 U.S. at 63 (internal citations omitted).
26

Crossing

The Secretary argues that the instant case is akin to Global

.

Crossing in that the Administrator's Allina I
evidence

of the

agency's

reasoning

rationale is adequately explained.

decision provides

and therefore

the

agency's

Def.'s Reply at 27.

However,

the Administrator's Decision, which was issued in December 2015,
was not yet issued at the time of the 2012 DSH Calculations, which
were issued in 2014. Although the 2013 Rulemaking had been issued,
it

is

prospective

only.

See

78

Fed.

Reg.

50,496,

50,614

(Aug. 19, 2013). In addition, unlike Global Crossing, the 2012 DSH
Calculations do not include any cross-references to opinions or
documents that shed light on the agency's rationale.
Defendant argues that it "'would be a waste of time to review
only'

the

contemporaneous

agency

record

to

the

2012

DSH

Calculations when the agency has subsequently issued in 2015 a
'better

considered'

decision

upon which

review may be

based."

Def.'s Mot. at 28 (quoting Pub. Serv. Co., 749 F.2d at 760). Public
Service

is

easily distinguished

involved a clarifying opinion.

from the

case

at

hand,

as

it

The Commission had provided a first

opinion, but then at the request of the petitioners to reopen the
decision, reconsidered the record and issued a second clarifying
opinion. The issue there was whether the second opinion could be
considered. Such is not the case here. The Administrator's Allina I
decision is precisely

th~

type of post-hoc rationalization that

27

Chenery says cannot be .substituted on appeal for contemporaneous,
reasoned decisionmaking. Chenery, 318 U.S. at 92-95.
The dangers of post-hoc rationalizations for agency action
are that the judiciary,

rather than the agency,

will supply the

reasons underlying the action and that the "real reasons for agency
action will escape judicial scrutiny altogether." Women Involved
in Farm Econ. v. U.S.

Dep't of. Agric.,

876 F.2d 994, 1000

(D.C.

Cir. 1989). These concerns are not present here. Here, the agency
has

supplied its

reasons

on multiple

occasions,

including the

Administrator's recent decision and the 2013 Rulemaking. This is
also not a case where the agency's reasoning will escape judicial
review given that the issue has been before the courts on multiple
occasions, as demonstrated in this opinion. See infra, 29-30.
Viewing the situation in its entirety,
that

the process underlying the 2012

arbitrary and capricious.
contemporaneous

interpretation

are
of

not

the

DSH Calculations was

not

Although the agency gave no explicit

explanation,

rationalization

the Court concludes

the

present.

statute

concerns
The

clear

for

agency

in

the

had

2004

post-hoc
made

Final

its
Rule,

although that rule was later vacated, and the 2013 Regulation, and
has

also

decision.

subsequently

made

Although

explanation

Calculations,
reasoning,

it

is

no
not

it

clear

difficult

in

the

Administrator's

accompanied
to

understand

the
the

2012

DSH

agency's

there is no concern that subsequent rationalizations
28

are substituting contemporaneous reasoned decisionmaking, nor is
there a concern that the judiciary is providing the reasons for
the agency's action, rather than the agency.
Turning to Plaintiffs' second allegation that the Secretary's
interpretation

is

inconsistent

with

the

statute,

our Court

of

Appeals has already held that the statutory text does not foreclose
the Secretary's interpretation. Ne. Hosp. Corp.,

657 F.3d at 13.

In evaluating the same question of whether Part C enrollees are
entitled to benefits under Part A,

the Northeast Hospital court

stated, at step 1 of the Chevron analysis,

that "Congress ha[d]

not clearly foreclosed the Secretary's interpretation that

[Part

C]

While

enrollees are entitled to benefits under Part A." Id.

Northeast Hospital found that. the Secretary's interpretation was
not foreclosed by the statute, it did not reach the Chevron step
2

analysis

reasonable.

to

determine

See Ne.

Hosp.

if

the

Corp.,

Secretary's

interpretation was

65 7 F. 3d at 13.

The Northeast

Hospital court held that it was for the Secretary, not the Court,
to determine the proper interpretation. Id. That is precisely what
the Secretary has done in this instance.
In

Catholic

Health

Initiatives

v.

Sebelius,

the

Court

considered the phrase "entitled to benefits under Part A," also
key to the case at hand, though not in the context of Part C days.
718 F.3d 914·,

917

(2013).

The Secretary argues that the Court's

decision in Catholic Health is instructive here, Def.'s Mot. at 32,
29

as the Court def erred under Chevron step 2 to the Secretary's
interpretation that "entitlement" is "simply a matter of meeting
the

statutory

criteria,

not

a

matter

of

receiving

payment."

Catholic Health, 718 F. 3d at 919-920.
Plaintiffs offer no meaningful distinction between the case
at hand and Catholic Health. See Pls.' Reply at 30-31, 39. Although
the type of days specifically at issue are different,
dispute is the same.

the core

Defendant argues that "entitlement" refers

simply to meeting the statutory requirements,

Def.'s Mot at 31,

while Plaintiffs argue that "entitlement" requires the ability to
be paid under Part A. Pls.' Reply at 3, 39-40. The Catholic Health
Court deferred to the agency's interpretation, and that deference
is applicabie to this case as well.
In light of our Court of Appeals'
Hospital and Catholic Health,
review,

decisions

in Northeast

as well as the narrow standard of

the Court concludes that the Secretary's interpretation

that patients enrolled in Part C continue to be "eligible" for
Part

A

is

well

within

her

authority

and

not

arbitrary

and

capricious.
IV.

Conclusion

For the
Judgment

foregoing

shall

be

reasons,

denied

and

Plaintiffs'
Defendant's

30

Motion for
Motion

for

Summary
Summary

Judgment shall be granted. An Order shall accompany this Memorandum
Opinion.

August 17, 2016

Copies to: attorneys on record via ECF

31