GRANT MEDICAL CENTER et al v. BURWELL

Filing 32

MEMORANDUM AND OPINION. Signed by Judge Rosemary M. Collyer on 9/1/2016. (KD)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________
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Plaintiffs,
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v.
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SYLVIA MATHEWS BURWELL,
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Secretary of Health and Human Services, )
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Defendant.
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_________________________________
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GRANT MEDICAL CENTER, et al.,

Civil Action No. 15-480 (RMC)

OPINION
Plaintiff Hospitals blithely argue that the Secretary of Health and Human Services
should ignore a decision of the Sixth Circuit Court of Appeals. The Hospitals challenge the
Secretary’s decision to comply with Clark Regional Medical Center v. HHS, 314 F.3d 241 (6th
Cir. 2002), a decision concerning how to calculate hospital bed counts under 42 C.F.R. §
412.105(b). Bed counts substantially affect Medicare payments. The Hospitals insist that the
Secretary should ignore Clark because it results in bed counts for (and payments to) hospitals
located in the jurisdiction of the Sixth Circuit that are different from similar hospitals located
elsewhere. Because the Secretary’s decision to follow Clark was not arbitrary and capricious,
the Hospitals’ motion for summary judgment will be denied and the Secretary’s cross motion
will be granted.

1

I. FACTS
A. The Medicare Act
In 1965, Congress enacted Title XVIII of the Social Security Act, known as the
Medicare Act, 42 U.S.C. § 1395 et seq., which provides for federal reimbursement for health
care to the elderly and the disabled, see 42 U.S.C. § 1395c. Under Medicare Part A, the
Secretary reimburses participating hospitals for care they provide to Medicare patients for
“inpatient hospital services, post-hospital extended care services, home health services, and
hospice care.” Id. § 1395d(a). Medicare Part B, id. §§ 1395j-1395k, is a voluntary program that
supplements Part A; it provides for reimbursement for, among other things, “hospital services . . .
incident to physicians’ services rendered to outpatients,” id. §§ 1395k(a)(1), 1395x(s)(2)(b).
1. The Prospective Payment System and Bed Counts
Initially, Medicare reimbursed hospitals for the “reasonable costs” of providing
Medicare services. Starting in 1983, Congress directed the Secretary to create an “inpatient
prospective payment system” (IPPS), whereby the Secretary pays the hospital a fixed payment
for each patient diagnosis at discharge, as described in 42 U.S.C. § 1395ww(d). Methodist Hosp.
of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994). IPPS depends on the patient’s
diagnosis. Diagnoses are assigned to a “diagnosis related group” (DRG), see 42 C.F.R. § 412.60,
and each DRG is assigned a weight that is multiplied by a base dollar amount to determine
payment, see id. § 412.64(g).1 The rate is set in advance and is the amount commonly paid, no

1

The majority of hospitals are paid the “federal rate,” which is the product of the DRG times a
base dollar “standardized” amount. 42 C.F.R. ' 412.64(g). The standardized amount is roughly
an average of operating costs per discharge of all patients for all IPPS hospitals in a given time
period. 42 U.S.C. § 1395ww(d)(2)(C).

2

matter how much the hospital actually may spend on that patient. Methodist Hosp., 38 F.3d at
1227. Because hospitals are paid a fixed rate, they are encouraged to minimize the cost of
treatment. Id.
Generally, Medicare Part A pays for inpatient hospital services. To impose “cost
limits” on reimbursement as required by statute, see 42 U.S.C. § 1395x(v)(1)(A), the Secretary
classifies providers by bed type and count. Identifying the type of hospital bed and counting
such beds is critical to determining a providers’ IPPS payment.
A small rural hospital can have “swing beds,” which are beds that can change in
reimbursement status. When a swing bed is used for acute care, Medicare reimburses the
hospital under IPPS. When the patient “swings” from needing acute care to needing “post-acute
skilled nursing facility care,” the status of the bed changes and Medicare reimburses the hospital
under skilled nursing facility policies. 42 U.S.C. § 1395tt; Medicare Program Proposed Changes
to the Hospital IPPS & FY 2004 Rates, 68 Fed. Reg. 27154, 27205 (May 19, 2003). Hospitals
also can have “observation beds,” where patients are not formally admitted to the hospital but
they occupy a bed for short-term treatment and/or assessment in order to determine the patient’s
condition and whether s/he needs to be admitted as an inpatient. 68 Fed. Reg. at 27205. When a
hospital assigns a patient to an observation bed, Medicare reimburses the hospital under
outpatient rules. IPPS does not recognize observation bed-days as part of the hospital’s inpatient
operating costs. Id. If the hospital subsequently admits an observation patient as an inpatient,
Medicare thereafter reimburses for services under Part A. Medicare Program Changes to the
Hospital IPPS for Acute Care Hospitals and FY 2010 Rates, 74 Fed. Reg. 43754, 43905 (Aug.
27, 2009).

3

Bed counts affect Medicare payments in different ways. Because hospitals that
train medical residents incur higher operating costs, the Medicare Act provides an additional
payment for teaching hospitals–– the “indirect medical education” (IME) adjustment. 42 U.S.C.
§ 1395ww(d)(5)(B). The IME adjustment is calculated by multiplying a hospital’s DRG revenue
by a factor that in turn is calculated using the hospital’s ratio of medical residents over beds. Id.;
42 C.F.R. § 412.105(a) & (b). Notably, the number of beds is a denominator in this ratio and
thus, the per-student IME rises as the bed count falls and vice versa. In other words, a teaching
hospital has an incentive to exclude beds from the total count because it would receive a larger
IME payment with a smaller number of beds.
The bed count has the opposite effect on the “disproportionate share” (DSH)
payment. Hospitals that serve a significantly disproportionate number of low income patients
receive a supplemental payment, i.e., the DSH adjustment, see 42 U.S.C. § 1395ww(d)(5)(F),
because low income patients tend to be in poorer health and treatment costs are thus higher, see
Rye Psychiatric Hosp. Ctr., Inc. v. Shalala, 52 F.3d 1163, 1171-72 (2d Cir. 1995). A hospital is
eligible for DSH payments if it has a “disproportionate share percentage” amounting to: (1) 15%
if the hospital has 100 or more beds; or (2) 40% if the hospital has fewer than 100 beds. 42
U.S.C. § 1395ww(d)(5)(F)(v).2 The Secretary counts beds using the formula set forth in 42
C.F.R. § 412.105(b), and the DSH bed totals incorporate the formula for counting swing beds.
See 42 C.F.R. § 412.106(a)(1)(i) (2004) (incorporating § 412.105(b) by reference). In contrast to
the IME adjustment for teaching hospitals, the DSH adjustment is higher if the hospital in
question has a larger bed count, at least to the 100-bed threshold. In other words, a hospital may

2

The “disproportionate share percentage” is the sum of two fractions, described in
§ 1395ww(d)(5)(F)(vi).
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have an incentive to include beds in the DSH calculation because this makes it easier to meet the
low-income patient threshold and receive DSH payments.
2. Medicare Administration and the Notice of Program Reimbursement
The Centers for Medicare and Medicaid Services (CMS), an agency within the
Department of Health and Human Services, administers Medicare. CMS contracts with private
entities to process hospital claims. Such entities were known as “fiscal intermediaries,” but
starting in 2004, became known as “Medicare Administrative Contractors” (MACs). See 42
U.S.C. § 1395h. At the end of every fiscal year, each healthcare provider submits a cost report to
its assigned MAC showing the hospital’s costs and the portion allocated to Medicare. See 42
C.F.R. §§ 405.1801, 413/24(f), 424.13. The MAC reviews the report, determines hospitalspecific adjustments, decides the total amount of Medicare reimbursement owed, and issues a
Notice of Program Reimbursement specifying how much Medicare will reimburse for that year.
42 C.F.R. § 405.1803.
Within 180 days, a provider may appeal the determination of total reimbursement
set forth in the Notice by filing an appeal with the Provider Reimbursement Review Board
(PRRB). 42 U.S.C. § 1395oo(a)(3); 42 C.F.R. § 405.1835. PRRB decisions are final unless the
Secretary reverses, affirms, or modifies the Board’s decision within 60 days. 42 U.S.C.
§ 1395oo(f)(1). A hospital may seek judicial review of PRRB decisions in the federal district
court where the hospital is located or in the federal district court in the District of Columbia. Id.
3. Clark and Bed Counting in the Sixth Circuit
In 2001, two Kentucky hospitals that provided Medicare services to low-income
patients filed suit challenging the Secretary’s interpretation of the bed counting provision, 42
C.F.R. § 412.105(b). See Clark Regional Medical Center v. HHS, 314 F.3d 241, 242 (6th Cir.

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2002). Because the Secretary excluded both swing bed and observation bed-days from the count
of inpatient bed days, the total count of inpatient beds for each of the Kentucky hospitals was
fewer than 100. Id. at 244. With such a low bed count, the hospitals were not eligible for a DSH
adjustment despite their 15% disproportionate share. Further, they could not meet the much
higher 40% disproportionate share applicable to hospitals with fewer than 100 beds. Id. The
hospitals argued that swing and observation beds should have been included in the count of
inpatient bed days. If those beds had been included, the hospitals would have had more than 100
beds and would have qualified for the DSH adjustment under the 15% provision.
The hospitals objected to the Secretary’s bed counting methodology, arguing that
the regulation unambiguously required the Secretary to include swing and observation beds in
the bed count for inpatient days. Id. at 246. The district court ruled in favor of the hospitals and
the Sixth Circuit affirmed, finding that § 412.105(b) listed beds to be excluded from the court as
only “beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded
distinct part hospital units.” 3 Id. at 247. “Because the regulation specifically lists certain types
of beds that are excluded from the bed count, but does not list swing or observation beds, the
plain meaning of the regulation suggests that it is permissible to count swing and observation
beds.” Id.

3

The version of § 412.105(b) that was then effective provided:
(b) Determination of number of beds. For purposes of this section,
the number of beds in a hospital is determined by counting the
number of available bed days during the cost reporting period, not
including beds or bassinets in the healthy newborn nursery,
custodial care beds, or beds in excluded distinct part hospital units,
and dividing that number by the number of days in the cost reporting
period.

6

While the Secretary disagrees with Clark, she recognizes that Clark is binding in
the Sixth Circuit. Accordingly, shortly after the Clark ruling, the Secretary published a notice of
proposed rulemaking. 68 Fed. Reg. at 27202-05. The proposed new regulation excluded swing
and observation beds from the count of inpatient beds. A few months later, the Secretary
published the Final Rule amending § 412.105(b), effective October 1, 2003. See Medicare
Program Changes to the Hospital IPPS and FY 2004 Rates, 68 Fed. Reg. 45346 (Aug. 1, 2003).
The new version of § 412.105(b) superseded the regulation at issue in Clark.
In addition to the amended regulation, the Secretary issued a Joint Signature
Memorandum (JSM) 109. JSM-109 provides that the Secretary will follow Clark only as to
hospitals located in the jurisdiction of the Sixth Circuit and only for hospital discharges prior to
the effective date of the new regulation, October 1, 2003. Administrative Record (AR) 232-34
(JSM-109). That is, under JSM-109, the bed counts for Sixth Circuit hospitals include swing and
observation beds for cost years beginning prior to October 2003, and exclude swing and
observation beds for bed counting thereafter.
The ten hospitals who are Plaintiffs here (collectively, Hospitals)4 are acute care
general hospitals located in Ohio, within the jurisdiction of the Sixth Circuit.5 When calculating
Medicare reimbursements for the Hospitals for fiscal years beginning prior to October 1, 2003,
the MACs applied Clark in accordance with JSM-109, thereby counting swing and observation
beds in total bed counts for the purpose of calculating both IME and DSH reimbursements, and
they provided Notices of Program Reimbursement to the Hospitals. The Hospitals appealed their

4

The Hospitals are: Grant Medical Center, Riverside Methodist Hospital, Doctor’s Hospital,
Western Reserve Care System, St. Elizabeth Health Center, St. Joseph Health Center, Kettering
Memorial Hospital, Grandview Medical Center, Summa Health System, and Sycamore Hospital.

5

The Sixth Circuit covers Ohio, Kentucky, Michigan, and Tennessee.
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respective notices to the Provider Reimbursement Review Board (Board), and the Board
consolidated the appeals.
The Hospitals argued that (1) the Clark decision bound only the parties to that
case; and (2) the Secretary should retroactively apply revised § 412.105(b) to Sixth Circuit
hospitals’ cost years prior to October 1, 2003. The Board rejected these claims. AR [Dkt. 30] 617. The Board held that Clark was binding precedent in the Sixth Circuit prior to October 1,
2003, and that:
[T]he separation of powers doctrine requires administrative
agencies to follow the law of the circuit whose courts have
jurisdiction over the cause of action. In the absence of a controlling
decision by the Supreme Court, the respective courts of appeals
express the laws of the circuit. As there is no controlling precedent
by the Supreme Court addressing the issue in this case, the Board
finds that the Intermediary is obligated to follow the relevant
decisions of the Sixth Circuit in which the providers are located.
AR 15-16 (footnote omitted). CMS, on behalf of the Secretary, declined to review the Board’s
decision.
The Hospitals filed suit in this Court alleging: Count I, the Secretary violated the
Administrative Procedure Act (APA), 5 U.S.C. § 706; and Count II, the Secretary violated the
Hospitals’ rights to equal protection under the Fifth Amendment. More specifically with regard
to the APA claim, the Hospitals contend:
[T]he Secretary’s decision to treat the plaintiff Hospitals differently
from similarly situated providers outside the Sixth Circuit is
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with the law; contrary to constitutional right, power,
privilege or immunity; in excess of statutory jurisdiction, authority,
or limitations, or short of statutory right; and/or without observance
of procedure required by law.
Compl. [Dkt. 1] ¶ 45.

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The Hospitals filed a motion for summary judgment and the Secretary filed an
opposition and cross motion. The matter is fully briefed. See Pl. Mot. for Summ. J. (MSJ) [Dkt.
22]; Def. Cross Mot. for Summ. J. Combined with Opp’n (XMSJ) [Dkts. 23, 24]; Pl. Opp’n
Combined with Reply (Pl. Opp’n) [Dkts. 25, 26]; Def. Reply [Dkt. 29].
II. LEGAL STANDARD
A. Summary Judgment
Whether agency action is contrary to law under the APA is a legal question that
courts resolve based on the entire administrative record. See Am. Bioscience, Inc. v. Thompson,
269 F.3d 1077, 1083-84 (D.C. Cir. 2001). Under the APA, an agency’s role is to resolve factual
issues to reach a decision supported by the administrative record, while “the function of the
district court is to determine whether or not as a matter of law the evidence in the administrative
record permitted the agency to make the decision it did.” Sierra Club v. Mainella, 459 F. Supp.
2d 76, 90 (D.D.C. 2006) (citation omitted). Summary judgment is the mechanism for deciding
whether an agency action was supported by the administrative record and was consistent with the
APA standard of review. Id. (citing Richards v. INS, 554 F. 2d 1173, 1177 & n.28 (D.C. Cir.
1977)). Summary judgment shall be granted “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
B. APA Review
The Hospitals allege that the JSM-109 must be set aside because it is arbitrary,
capricious and not in accordance with the law in violation of the APA. When reviewing an
agency’s interpretation of its enabling statute and the laws it administers, courts are guided by
“the principles of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984).” Mount Royal Joint Venture v. Kempthorne, 477 F.3d 745, 754 (D.C. Cir. 2007).
9

Chevron sets forth a two-step inquiry. The initial question is whether “Congress has directly
spoken to the precise question at issue” and, if so, the court must “give effect to the
unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842-43. When the statute
is clear, the text controls and no deference is extended to an agency’s interpretation in conflict
with the text. Chase Bank USA, N.A. v. McCoy, 563 U.S. 195, 210 (2011).
On the other hand, if a statute is ambiguous or silent on an issue, the court
proceeds to the second step of the Chevron analysis and determines whether the agency’s
interpretation is based on a reasonable construction of the statute. Chevron, 467 U.S. at 843;
Sherley v. Sebelius, 644 F.3d 388, 393-94 (D.C. Cir. 2011). As relevant here, Congress has not
explicitly addressed the question of whether observation and swing bed should be counted to
determine the total inpatient bed count. See Health Alliance Hosp., Inc. v. Burwell, 130 F. Supp.
3d 277, 289 (D.D.C. 2015). Accordingly, the Court must proceed to Chevron step two.
Under step two, a court determines the level of deference due to the agency’s
interpretation of the law it administers. See Kempthorne, 477 F.3d at 754. When the agency’s
interpretation is permissible and reasonable, it receives controlling weight, id., “even if the
agency’s reading differs from what the court believes is the best statutory interpretation.” Nat’l
Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005). “[T]he
tremendous complexity of the Medicare program enhances the deference due the Secretary=s
decision.” Cmty. Care Found. v. Thompson, 318 F.3d 219, 225 (D.C. Cir. 2003) (internal
quotation marks omitted).
An agency’s interpretation of the law it administers is permissible and reasonable
if it is not arbitrary, capricious, or manifestly contrary to the statute. Kempthorne, 477 F.3d at
754. In determining whether an action was arbitrary and capricious, a reviewing court “must

10

consider whether the [agency’s] decision was based on a consideration of the relevant factors and
whether there has been a clear error of judgment.” Marsh v. Oregon Natural Res. Council, 490
U.S. 360, 378 (1989) (internal quotation marks omitted). The scope of review under the
arbitrary and capricious standard is narrow, and a court should not “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). An agency is “not required to choose the best solution, only a reasonable
one.” Petal Gas Storage, LLC v. FERC, 496 F.3d 695, 703 (D.C. Cir. 2007). See also Odessa
Reg’l Hosp. v. Leavitt, 386 F. Supp. 2d 885, 891 (W.D. Tex. 2005) (42 C.F.R. § 412.105 is a
permissible construction of the Medicare Act and passes the Chevron test; the question on APA
review is whether the Secretary arbitrarily applied the regulation).
The Hospitals make much of the fact that the Secretary does not agree with Clark
and that the Secretary’s long-standing position, as reflected in bed count calculations before
Clark and in the Final Rule amending § 412.105(b), has been to exclude swing and observation
beds from the inpatient bed count. The relevant question presented, however, is not whether the
Secretary agrees with Clark. She avowedly does not. See XMSJ at 8 (“Although the Secretary
disagreed with the decision in Clark, she had no choice but to accept the Sixth Circuit’s
holding.”) The question here is whether interpretive rule JSM-109––the Secretary’s decision to
apply Clark to all Sixth Circuit hospitals for fiscal years prior to October 2003––was an arbitrary
and capricious interpretation of the Medicare Act. The Court finds that it was not.6

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JSM-109 is an interpretive rule. Interpretive rules receive such deference as is warranted by
circumstances surrounding their creation, including “the degree of the agency’s care, its
consistency, formality, and relative expertness” and the “persuasiveness of the agency’s
position.” Oceana, Inc. v. Locke, 831 F. Supp. 2d 95, 116-17 (D.D.C. 2011).
11

III. ANALYSIS
A. Agency Nonacquiescence
The Hospitals argue that the Secretary should have engaged in “intracircuit
nonacquiescence.” They argue that because the Secretary is responsible for implementing
Medicare uniformly and nationwide and because she disagrees with Clark, she should have
refused to apply Clark to any other case.
The Hospitals fail to appreciate that the broad and clear holding of Clark
necessarily applies to all hospitals in the Sixth Circuit. The Sixth Circuit held that the plain
meaning of the prior regulation required the Secretary to include swing and observation beds
when counting inpatient beds and, conversely, she had no authority to exclude such beds. Clark,
314 F.3d at 247. The opinion is unequivocal and leaves no wiggle room for arguing that it
applied only to the particular parties in that case:
We conclude that the Department's application of its own
regulations in this case cannot be squared with either the plain
meaning of the regulations or with the Department's definition of
“available bed” set forth in PRM § 2405.3(G). As such, we conclude
that the [ ] decision was arbitrary and capricious.
The Department’s attempt to distinguish between a “bed” and an
“available bed day” is at odds with the plain meaning of
§ 412.105(b). Section 412.105(b) states that the number of beds is
to be determined “by counting the number of available bed days
during the cost reporting period, not including beds or bassinets in
the healthy newborn nursery, custodial care beds, or beds in
excluded distinct part hospital units, and dividing that number by
the number of days in the cost reporting period.” 42 C.F.R. §
412.105(b) (emphasis added). Because the regulation specifically
lists certain types of beds that are excluded from the bed count, but
does not list swing or observation beds, the plain meaning of the
regulation suggests that it is permissible to count swing and
observation beds. Further, swing and observation beds are not of the
same class or type as “beds or bassinets in the healthy newborn
nursery, custodial care beds, or beds in excluded distinct part
hospital units.” Although these beds listed as excluded are . . . all
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non-PPS reimbursable beds, the swing and observation beds at issue
in this case are actually used for PPS-reimbursable services more
often than not. None of the beds described as excluded may be used
primarily for acute inpatient care as the swing and observation beds
are. This is because these excluded beds are located in areas of the
hospital that, by definition, cannot come within PPS. Had the
Department intended to exclude all non-PPS reimbursable beds and
services, it could easily have written the regulation to do so.
Id. at 247-48 (emphasis in original).
After the Sixth Circuit issued its Clark decision in February 2003, the Secretary’s
choices were limited: (1) she could file a writ of certiorari to the Supreme Court; (2) she could
request that Congress pass a statute superseding Clark; or (3) she could amend the regulation and
issue an interpretive memo specifying how she would treat Sixth Circuit cases until the amended
regulation became effective. In the interest of expediency and facing the onset of a new fiscal
year, the Secretary chose option three, amending the prior regulation and specifying through
JSM-109 that Clark applied only in the Sixth Circuit and only for fiscal years prior to the
effective date of the Final Rule that amended the regulation. The Final Rule was completed in
time for it to be effective across the country at the start of the federal fiscal year beginning
October 1, 2003.7 This was a permissible and reasonable course of action, especially due to
separation of powers principles and the criticism of agency nonacquiescence from the courts
explained below.
The separation of powers doctrine requires administrative agencies to follow the
law of the circuit with jurisdiction over a cause of action. Yellow Taxi Co. of Minneapolis d/b/a

7

Seeking a writ of certiorari or a new statute would have taken substantially more time.
“Catching Congress’ ear . . . is more easily said than done; and given the huge volume of
petitions for certiorari that flood the Supreme Court, it is often necessary to establish a split
among the circuits before the Court will examine an issue.” Johnson v. U.S. R.R. Ret. Bd., 969
F.2d 1083, 1097 (D.C. Cir. 1992) (Buckley, J., concurring in part and dissenting in part).
13

Suburban Yellow Taxi Co. v. NLRB, 721 F.2d 366, 382 (D.C. Cir. 1983). “In the absence of a
controlling decision by the Supreme Court, the respective courts of appeals express the law of
the circuit.” Hyatt v. Heckler, 807 F.2d 376, 379 (4th Cir. 1986). In Yellow Taxi, the D.C.
Circuit rebuked the National Labor Relations Board which had “historically arrogated to
themselves the authority to ‘disagree’ with judicial precedent.” 721 F.2d at 382. The Circuit
explained that agencies must abide by the superior power of the courts:
[T]he Board is not a court nor is it equal to this court in matters of
statutory interpretation. Thus, a disagreement by the NLRB with a
decision of this court is simply an academic exercise that possesses
no authoritative effect. It is in the court of appeals and not in an
administrative agency that Congress has vested the power and
authority to enforce orders of the NLRB. [National Labor Relations
Act,] 29 U.S.C. § 160(e). It is in this court that Congress has vested
the power to modify or set aside an order of the NLRB. [Id.] §
160(f). In 1803, Chief Justice John Marshall, speaking for a
unanimous Court, concisely stated the fundamental principle on
which we rely: “It is emphatically the province and duty of the
judicial department to say what the law is. Those who apply the rule
to particular cases, must of necessity expound and interpret that rule.
If two laws conflict with each other, the courts must decide on the
operation of each.” Marbury v. Madison, 5 U.S. (1 Cranch) 137,
177, 2 L. Ed. 60 (1803). Thus, it is in this court by virtue of its
responsibility as the statutory court of review of NLRB orders that
Congress has vested a superior power for the interpretation of the
congressional mandate. Congress has not given to the NLRB the
power or authority to disagree, respectfully or otherwise, with
decisions of this court. See Volkswagenwerk Aktiengesellschaft v.
FMC, 390 U.S. 261, 272, 88 S. Ct. 929, 935, 19 L. Ed.2d 1090
(1968). For the Board to predicate an order on its disagreement with
this court’s interpretation of a statute is for it to operate outside the
law. Such an order will not be enforced.
Yellow Taxi, 721 F.2d at 382–83.
Agencies that have followed a policy of intracircuit nonacquiescence have been
roundly “condemned” by every circuit that has addressed the issue. Johnson v. U.S. R.R. Ret.
Bd., 969 F.2d 1083, 1097 (D.C. Cir. 1992) (citing Hyatt, 807 F.2d at 379; Stieberger v. Bowen,
801 F.2d 29, 36–37 (2d Cir. 1986); Polaski v. Heckler, 739 F.2d 1320, 1322 (8th Cir. 1984);
14

Lopez v. Heckler, 725 F.2d 1489, 1503 (9th Cir.), vacated on other grounds and remanded, 469
U.S. 1082 (1984); Childress v. Secretary of HHS, 679 F.2d 623, 630 (6th Cir. 1982)); see also
Jones & Laughlin Steel Corp. v. Marshall, 636 F.2d 32, 33 (3d Cir. 1980); Mary Thompson
Hosp., Inc. v. NLRB, 621 F.2d 858, 864 (7th Cir. 1980). “[F]lagrant disregard of judicial
precedent must not continue. Not only is the [agency] obligated under the principles of stare
decisis to follow this court’s decision . . . , but it also owes deference to the other courts of
appeals which have ruled on the issue.” Mary Thompson, 621 F.2d at 864. It “raises grave
constitutional and statutory questions” when an agency refuses to petition for Supreme Court
review of an adverse circuit ruling and instead elects to continue to apply the rejected
interpretation of an agency rule. Johnson, 969 F.2d at 1091; see also id. at 1092 (comparing
nonacquiescence to Governor Orval Faubus’ defiance of Brown v. Bd. of Education, 373 U.S.
493 (1954), at Little Rock) (citing Lopez, 725 F.2d. at 1497). In Johnson, the Circuit noted that
the Secretary of Health and Human Services previously exercised a policy of intracircuit
nonacquiescence, but abandoned this policy “after being severely criticized by the Courts and by
Congress.” Johnson, 969 F.2d at 1093.8
In support of its claim that the Secretary should practice nonacquiescence here,
the Hospitals cite Atchison Topeka & Santa Fe Ry. v. Pena, 44 F.3d 437 (7th Cir. 1994) and
Holland v. Nat’l Mining Ass’n, 309 F.3d 808 (D.C. Cir. 2002). Atchison and Holland do not
8

In the early 1980s, the Secretary took the position that each Circuit ruling applied only to the
parties in that case on the ground that the Social Security benefits program should be
administered uniformly on a national basis. See H.R. Rep. 98-618 (1984), reprinted in 1984
U.S.C.C.A.N. 3038, 1984 WL 37436, at *23-24 (Mar. 14, 1984). Congress debated the issue in
the course of enacting the Social Security Disability Benefits Reform Act of 1984, Pub. l. No.
98-460, 98 Stat 1794. The Conference Committee urged agencies to follow a policy of
nonacquiescense only where “the administration has initiated or has the reasonable expectation
and intention of initiating the steps necessary to receive a review of the issue in the Supreme
Court.” Joint Conf. Comm. Statement, H.R. Conf. Rep. 98-1039, at *37 (1984).
15

apply. In those cases, the agency in question relied on a single circuit decision to create a new
nationwide policy and gave no explanation for its policy change. Atchison, 44 F.3d at 440;
Holland, 309 F.3d at 810. Here, the Secretary has followed a circuit decision in only the circuit
that rendered it, and the Secretary provided, via JSM-109, a reasonable explanation of why she
did so.9
Even if the Secretary might have chosen not to follow Clark, she was not required
to make this choice. An agency is not required to choose the “best” solution, only a reasonable
one. Petal Gas, 496 F.3d at 703. Choosing to issue JSM-109 was reasonable in light of strong
prior criticism of intracircuit nonacquiescence by numerous circuit courts and Congress, see
Johnson 969 F.2d at 1097, and in light of the conflicting policy concerns at issue. Hospitals
around the country disagree about how beds should be counted. In contrast to the Hospitals’
argument that Clark should be disregarded within the Sixth Circuit, other hospitals advocate for
national application of the Clark decision. See, e.g., Health Alliance Hosp., Inc. v. Burwell, 130
F. Supp. 3d 277, 292-99 (D.D.C. 2015) (following Clark in determining the bed count at a
Massachusetts hospital prior to October 2003); Odessa Reg’l Hosp. v. Leavitt, 386 F. Supp. 2d
885, 891-92 (W.D. Tex. 2005) (following Clark in determining the bed count at a Texas hospital
for time periods before 2003). This is variation presumably is caused by the fact that including
swing and observation beds in bed counts increases Medicare payments to some hospitals and
decreases Medicare payments to others. The Secretary is in the best position to weigh the
conflicting interests involved. See Cmty. Care, 318 F.3d at 225 (courts defer to the Secretary’s

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The Hospitals also assert that Holland requires that no deference be given to the Secretary’s
decision here because her acquiescence to Clark is not a “reasoned judgment” where she openly
disagrees. Pl. Opp’n at 4. But an agency that predicates action based on its disagreement with a
court order acts outside the law. Yellow Taxi, 721 F.2d at 383.
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policy choices in Medicare cases due to the tremendous complexity of the Medicare program).
The Secretary’s action in adopting JSM-109, and thereby applying Clark to hospitals located
within the Sixth Circuit only, was not arbitrary and capricious.
The Hospitals further contend that the Secretary’s decision to apply Clark in the
Sixth Circuit was arbitrary and capricious because of the venue choice provision in the statute,
42 U.S.C. § 1395oo(f)(1). That provision allows a hospital to seek judicial review of PRRB
decisions in the federal district court where the hospital is located or in the federal district court
in the District of Columbia. The fact that a litigant has a choice where to file its appeal has no
bearing on the analysis of whether the Secretary acted reasonably. A plaintiff may choose the
venue for its APA challenge, but the Rule under review (here, JSM-109) is the same wherever
the suit is filed.
B. Retroactive Rulemaking
The Hospitals also argue that the Secretary should have applied the Final Rule
retroactively within the Sixth Circuit. “The decision of whether to grant retroactive force to a
newly promulgated agency rule is a question of law for the courts with no overriding obligation
of deference to the agency decision.” Mason Gen. Hosp. v. Sec’y of HHS, 809 F.2d 1220, 1224
(6th Cir. 1987). However, it is well-established that a regulation that changes legal rights
adversely cannot be applied retroactively. See Nat’l Mining Ass’n v. Dep’t of Labor, 292 F.3d
849, 859 (D.C. Cir. 2002) (a rule cannot be applied retroactively where it “changes the legal
landscape” by impairing vested rights, creating a new duty or obligation., or increasing a party’s
liability for past conduct) (citing Landgraf v. USI Film Prods., 511 U.S. 244, 269-71 (1994));
Georgetown Univ. Hosp. v. Bowen, 821 F2d 750, 757 (D.C. Cir. 1987) (the APA does not
authorize the Secretary to engage in retroactive rulemaking), aff’d sub nom. Bowen v.

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Georgetown Univ. Hosp., 488 U.S. 204, 213 (1988) (the Medicare Act does not authorize
retroactive rulemaking). The Final Rule, amending 42 C.F.R. § 412.105(b), cannot be applied
retroactively because it modified settled Sixth Circuit law established in Clark.
The Hospitals insist that the revisions to § 412.105(b) in the Final Rule were
“clarifying amendments” that the Secretary can and should apply retroactively. The Hospitals
argue that Clark did not “settle” the law, that in fact it “unsettled” the law, and the Secretary’s
amendment to § 412.105(b) should be given retroactive effect because it clarified the preexisting regulation. Pl. Opp’n 17-18.
The Hospitals are correct that a clarifying amendment, which does not change the
law, can be applied retroactively. The Secretary takes the position in all but the Sixth Circuit
that the Final Rule amending § 412.105(b) merely clarified the law. See XMSJ at 25. In the
Sixth Circuit, however, the Final Rule represents a substantive change because revised
§ 412.105(b) is inconsistent with Clark. “If a new regulation is substantively inconsistent with a
prior regulation, prior agency practice, or any Court of Appeals decision rejecting a prior
regulation or agency practice, it is retroactive as applied to pending claims.” Nat’l Mining Ass’n
v. Dep’t of Labor, 292 F.3d 849, 860 (D.C. Cir. 2002) (emphasis added).
In their argument that the Secretary should apply the Final Rule retroactively, the
Hospitals ignore the rules of stare decisis. Clark interpreted the “plain meaning” of the prior
regulation, see Clark, 314 F.3d at 247, and thereby established precedent that is binding in the
Sixth Circuit unless and until its ruling is overturned en banc or by the Supreme Court. See
Salmi v. Sec’y of HHS, 774 F.2d 685, 689 (6th Cir. 1985) (the ruling of a circuit panel creates
binding precedent in the circuit). Clark determined what the law was in the Sixth Circuit at the
time, and the Secretary was obligated to follow it. See Yellow Taxi, 721 F.2d at 382 (an agency’s

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disagreement with a court decision “possesses no authoritative effect”). Clark established Sixth
Circuit law, and the subsequent Final Rule amending § 412.105(b) as of October 2003, was in
conflict with Sixth Circuit law prior to its effective date. As a matter of law, the Secretary had
no authority to apply the Final Rule retroactively in the Sixth Circuit.
C. Equal Protection
The Hospitals claim that the Secretary violated their rights to equal protection by
treating them differently from similarly situated hospitals, i.e., by applying Clark and thus
including swing and observation beds in finding their total bed count. To advance an equal
protection claim, a plaintiff must assert facts that support the allegation that the government
intentionally treated it differently from others who were similarly situated and that there is no
rational basis for the difference in treatment. 3883 Connecticut LLC v. District of Columbia, 336
F.3d 1068, 1075 (D.C. Cir. 2003) (citing Village of Willowbrook v. Olech, 529 U.S. 562, 564
(2000)). Equal protection “does not require that all persons everywhere be treated alike. Instead,
it imposes the rather more modest requirement that government not treat similarly situated
individuals differently without a rational basis.” Noble v. U.S. Parole Comm’n, 194 F.3d 152,
154 (D.C. Cir. 1999) (citing Cleburne v. Cleburne Living Ctr., Inc., 473 U.S. 432, 439 (1985)).
In the face of an equal protection challenge, a court must uphold agency action if there was a
rational basis for such action. FCC v. Beach Commc’ns, Inc., 508 U.S. 307, 313 (1993).
The Hospitals assert that the geographical location of the hospitals is an arbitrary
basis for determining whether to apply Clark or the Final Rule. As explained above, however,
the Secretary’s decision to promulgate and apply JSM-109 was reasonable. The geographical
boundaries that govern are those of the Sixth Circuit where Clark provided the relevant rule of
law until the Final Rule became effective. The equal protection claim fails.

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IV. CONCLUSION
For the reasons set forth above, Plaintiffs’ motion for summary judgment [Dkt.
22] will be denied, and the Secretary’s cross motion for summary judgment [Dkt. 23] will be
granted. Judgment will be entered in favor of the Secretary. A memorializing Order
accompanies this Opinion.

Date: September 1, 2016

/s/
ROSEMARY M. COLLYER
United States District Judge

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