TARZANA PROVIDENCE HEALTH SYSTEM et al v. BECERRA

Filing 24

MEMORANDUM OPINION on Defendant's 17 Motion to Dismiss. See the attached Memorandum Opinion for details. Signed by Judge Trevor N. McFadden on 8/30/2024. (lctnm3).

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
TARZANA PROVIDENCE HEALTH
SYSTEM, et al.,
Plaintiffs,

Case No. 1:22-cv-01509 (TNM)

v.
XAVIER BECERRA,
Defendant.

MEMORANDUM OPINION
“Men must turn square corners when they deal with the Government. If it attaches even
purely formal conditions to its consent to be sued those conditions must be complied with.”
Rock Isl. Ark. & La. R.R. Co. v. United States, 254 U.S. 141, 143 (1920). This case exemplifies
that principle. Plaintiffs, a bevy of hospitals that object to a Medicare regulation, did not comply
with the conditions Congress placed on judicial review. So their case must be dismissed.
I.
Plaintiffs are some 33 hospitals from across the country that participate in Medicare and
Medicaid. Amend. Compl. (Compl.) at 1–6, ECF No. 12. They allege that the Government
underpaid them based on an erroneous reading of the Medicare Act. Id. ¶ 32.
Through Medicare, the Government offers health insurance to the elderly and those with
disabilities. 42 U.S.C. § 426(a)–(b). When hospitals care for such patients, Medicare helps foot
the bill. Id. § 1395d(a). But unlike the Good Samaritan, Medicare does not reimburse a hospital
for all it spends on a patient. Instead, it pays a fixed amount per patient based on the typical cost
of efficient care. Id. § 1395ww(d)(1)–(5); 42 C.F.R. § 412.2. The hospital eats the rest.

This limitation stems runaway costs for the Government. But it also discourages
hospitals from taking on Medicare patients who may be more expensive to treat. These patients
are often low-income. See Becerra v. Empire Health Found., 597 U.S. 424, 429 (2021). Loath
to shutter hospitals in poor areas, the Government ups its Medicare payments when a hospital
“serves a . . . disproportionate number of low-income patients.” 42 U.S.C.
§ 1395ww(d)(5)(F)(i)(I). Simply put, “[t]he Medicare program reimburses hospitals at higherthan-usual rates when they serve a higher-than-usual percentage of low-income patients.”
Empire Health, 597 U.S. at 428.
But which hospitals count? The Government uses a complex formula to decide. That
formula is called the Disproportionate Patient Percentage (DPP). 42 U.S.C.
§ 1395ww(d)(5)(F)(vi).
Think of the DPP as asking hospitals two questions, which are roughly as follows. First,
a question focused on Medicare patients: What percentage of the hospital’s Medicare patients
are low income? See 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). Then, a holistic question: What
percentage of the hospital’s entire patient population is low income but not Medicare-eligible?
See id. § 1395ww(d)(5)(F)(vi)(II). Add those two percentages together and you have, roughly,
the hospital’s DPP.
This is how the Medicare statute phrases the first percentage:
The fraction (expressed as a percentage), the numerator of which is the number of [the]
hospital’s patient days . . . which were made up of patients who . . . were entitled to
benefits under [Medicare] and were entitled to supplementary security income [(SSI)]
benefits . . . , and the denominator of which is the number of [the] hospital’s patient days
which were made up of patients who . . . were entitled to benefits under Medicare.
42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). This percentage is known as the “SSI fraction.” Expressed
as a formula, it looks something like 𝑆𝑆𝑆𝑆𝑆𝑆 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 = 100 x
2

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐴𝐴𝐴𝐴𝐴𝐴 𝑆𝑆𝑆𝑆𝑆𝑆 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸

.

And this is how the statute phrases the second percentage:
The fraction (expressed as a percentage), the numerator of which is the number of [the]
hospital’s patient days . . . which consist of patients who . . . were eligible for medical
assistance under [Medicaid], but who were not entitled to benefits under [Medicare], and
the denominator of which is the total number of the hospital’s patient days.
42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). This percentage is known as the “Medicaid fraction.” As
a formula, it looks like 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 = 100 x

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐵𝐵𝐵𝐵𝐵𝐵 𝑁𝑁𝑁𝑁𝑁𝑁 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

.

Once the Government knows a hospital’s DPP, it plugs it into a statutory payment

schedule to determine the reimbursement rate. 42 U.S.C. § 1395ww(d)(5)(F)(vii)-(xiv). As is
clear, the DPP is vital to determining the extent of a hospital’s reimbursement. The larger the
DPP, the larger the payments. Empire Health, 597 U.S. at 431.
Again, the DPP is based on how many patients are “entitled to” certain benefits. So the
Government has issued regulations to clarify what “entitled to” means. Empire Health, 597 U.S.
at 428. Since 2004, the Government has claimed that a patient is “entitled to” Medicare benefits
if he meets all the Medicare eligibility requirements, even if Medicare would not actually pay for
his hospital stay. Id. at 432. That might happen, for instance, if he has already spent more than
90 days in a hospital during that year. Id.
Defining “entitled to” this broadly—by not requiring actual receipt of benefits—drives
down both the SSI fraction and the Medicaid fraction. Because it adds patient days to both the
numerator and denominator of the SSI fraction, it “generally (though not always)” pushes the
SSI fraction down. Empire Health, 597 U.S. at 433. And because it subtracts patient days from
the numerator of the Medicaid fraction, it always drives that fraction down. The result is a
definition that generally minimizes hospitals’ DPPs.
But the Government takes the opposite approach for SSI benefits. To be “entitled to
supplementary security benefits,” a patient must have actually received an SSI payment for the
3

month of his hospital stay. 75 Fed. Reg. 50,042, 50,280–281 (Aug. 16, 2010). This contrasts
with the Government’s treatment of Medicare. By cabining the number of patients who are
entitled to SSI benefits, the Government drives down the numerator of the SSI fraction, again
minimizing hospitals’ total DDPs.
Every year, hospitals “submit cost reports to contractors . . . known as fiscal
intermediaries.” Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 150 (2013). “[T]he
intermediary issues a Notice of Program Reimbursement (NPR) informing the [hospital] how
much [Medicare] will pa[y] for the year.” Id. A hospital that is dissatisfied with its
reimbursement may “request [] a hearing before the [Provider Reimbursement Review Board
(PRRB)] within 180 days of receiving the NPR.” Id. (citing 42 U.S.C. § 1395oo(a)(3)).
Plaintiffs got such an NPR. But they were dissatisfied. They objected to the combination
of the Government’s broad reading of Medicare eligibility and its narrow reading of SSI
eligibility. Compl. ¶ 32. They appealed their NPR to the PRRB and sought Expedited Judicial
Review (EJR). Id. ¶ 3. Without waiting for the PRRB to render a decision, they came here and
sued, raising the same objections. See generally Compl.
II.
The Government moves to dismiss Plaintiffs’ Complaint under Federal Rules of Civil
Procedure 12(b)(1) and (b)(6).
Under either rule, the Court assumes the truth of the allegations in the Complaint. Am.
Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011); Warren v. District of Columbia,
353 F.3d 36, 39 (D.C. Cir. 2004). The Court then asks whether the facts, as alleged, give rise to
a plausible inference that the Court has jurisdiction over the case (for Rule 12(b)(1)), see Spokeo,

4

Inc. v. Robins, 578 U.S. 330, 338 (2016), or a “reasonable inference that the defendant is liable
for the misconduct alleged” (for Rule 12(b)(6)), Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Because jurisdictional challenges implicate the Court’s ability to hear the case, the
burden for Rule 12(b)(1) motions is on Plaintiffs, but the Court is not limited to allegations
contained in the Complaint. Johnson v. Becerra, 668 F. Supp. 3d 14, 19 (D.D.C. 2023), aff’d,
2024 WL 3732956 (D.C. Cir. Aug. 9, 2024). But “jurisdiction” is a “word of many, too many,
meanings,” Steel Co. v Citizens for a Better Environ., 523 U.S. 83, 90 (1998), so the Court must
carefully parse defects that deny the Court power to hear a case from defects that simply doom
Plaintiffs’ Complaint. The later category are matters for Rule 12(b)(6), not (12)(b)(1).
III.
This case begins, and can end, with exhaustion.
The Government claims that Plaintiffs’ failure to exhaust statutorily prescribed
administrative procedures strips the Court of jurisdiction, meaning dismissal is appropriate under
Federal Rule of Civil Procedure 12(b)(1). Def.’s Mot. Dismiss at 8–11.
But Rule 12(b)(1) is not Plaintiffs’ Waterloo. Jurisdiction exists over Plaintiffs’ claims,
so the Court reviews them for failure to state a claim under Rule 12(b)(6). See why: Plaintiffs’
Complaint arises under the Medicare Act, and thus is governed by that act’s judicial review
provisions, 42 U.S.C. § 405(g) and (h). See 42 U.S.C. § 1395ii (adopting the Social Security
Act’s judicial review provisions for the Medicare Act).
Section 405(h) is a cruel mistress. It strips courts of all jurisdiction to review Department
of Health and Human Services Medicare orders “except as [t]herein provided.” 42 U.S.C.
§ 405(h). Thus, for a claim to be reviewable, a plaintiff must precisely follow the Act’s judicial
review requirements, found in § 405(g). Most critical is that courts may review only “final

5

decision[s]” of the Secretary.” 42 U.S.C. § 405(g) (emphasis added); see Am. Hosp. Ass’n v.
Azar, 895 F.3d 822, 825 (D.C. Cir. 2018).
That finality requirement comprises two essential principles: presentment and exhaustion.
The presentment requirement means that parties seeking judicial review must first present their
claims to the Secretary. Matthews v. Eldridge, 424 U.S. 319, 328 (1976). The exhaustion
requirement, by contrast, means that those parties must also complete “the full set of internalreview procedures provided by the Secretary” before resorting to federal court. Id. at 330.
Presentment, in essence, requires a plaintiff to start in the agency; exhaustion requires a plaintiff
to let it run its course.
For jurisdictional purposes, the two requirements differ in a key way. Presentment is a
“nonwaivable jurisdictional element.” Id. at 330. So the failure for a plaintiff to present his case
to the agency means a court lacks subject matter jurisdiction over that case.
But exhaustion is “waivable.” Id. So exhaustion is better understood as a prudential
threshold issue subject to a couple of judicially created waivers. See id. at 330-331; Ryan v.
Bentsen, 12 F.3d 245, 247 (D.C. Cir. 1993) (describing the narrow circumstances where waiver
of the § 405(g) exhaustion requirement is appropriate). In short: a party’s failure to present
under § 405(g) strips a court of subject matter jurisdiction and must be challenged under
12(b)(1), but a party’s failure to exhaust is not strictly jurisdictional and must be challenged
under 12(b)(6). Azar, 895 F.3d at 828.
The parties do not dispute that Plaintiffs appeared before the PRRB. 1 Mot. Dismiss at 9;
Compl. ¶ 33. The central clash between the parties is whether Plaintiffs’ failure to exhaust

1

The Government suggests that the presentment element is unsatisfied as to the interpretation of
“entitled to supplementary security income benefits,” because Plaintiffs’ challenge to this
definition “was not squarely presented to the Board.” Mot. Dismiss at 10, n.4. But the
6

precludes judicial review, and, if not, whether their claims pack any punches. Mot. Dismiss at 8,
11–12; see generally Compl. So the Court reviews the disagreement under the rubric of
12(b)(6).
Moving to that review: Plaintiffs fail to state a claim on which relief can be granted
because they fail the exhaustion requirement. They openly admit that they have not exhausted
their administrative remedies. Compl. ¶ 3 (“To the best of Plaintiffs’ knowledge, no requests for
EJR have thus far been granted, nor has the PRRB rendered its decision(s) on any such
request.”). Because the PRRB has not decided their administrative appeal, their remedies are not
exhausted. Accord Nat’l Ass’n for Home Care & Hospice v. Becerra, --- F. Supp. 3d ---, 2024
WL 1833881, at *8–9 (D.D.C. 2024). And no waiver can rescue the Plaintiffs. The Government
has not excused the requirement of exhaustion in this case. Compare Weinberger v. Salfi, 422
U.S. 749, 766–67 (1975). Nor is this the rare situation in which Plaintiffs are raising
“constitutional challenge[s] [that are] collateral to [their] claim[s] of entitlement” where they
“stand[] to suffer irreparable harm if forced to exhaust [their] administrative remedies.” Ryan,
12 F.3d at 248. Because their remedies are not exhausted, Plaintiffs are not entitled to judicial
review. Eldridge, 424 U.S. at 328.
Resisting this conclusion, Plaintiffs argue that “awaiting the Board’s determination on the
straightforward EJR request” would be “a waste of time.” Pls.’ Mem. Opp’n Mot. Dismiss at 10.
Maybe so, maybe not. That is not for the Court to decide. Congress set the terms for judicial
review of orders like this one. And absent some argument that those terms are
unconstitutional—an argument Plaintiffs have not made—the Court is bound to follow them.

presentment element does not require the Court to split claims in this manner; it is enough that
Plaintiffs appeared before the Board and expressed their dissatisfaction with their ultimate
reimbursement. Eldridge, 424 U.S. at 329–30.
7

Similarly, Plaintiffs’ denigration of the exhaustion requirement as “a [t]echnicality”
misses the point. Id. at 12. The exhaustion requirement may be a technicality in that it is a small
“detail meaningful only to a specialist.” Technicality, Merriam-Webster’s Collegiate Dictionary
(10th ed. 1996). But federal jurisdiction is a set of technicalities of enormous significance.
These technicalities are the keys that unlock the courthouse door. See Steel Co., 523 U.S. at 94–
95. Plaintiffs therefore cannot evade the terms of the statute by simply arguing that the
procedures Congress specified are just not all that important. Accord Ryan, 12 F.3d at 248.
Plaintiffs’ Complaint is therefore barred. They never exhausted their administrative
remedies, and a waiver is not appropriate here. So the Complaint must be dismissed under Rule
12(b)(6).
IV.
In any event, Plaintiffs’ substantive arguments fare no better. Plaintiffs identified two
main errors in the NPRs. They contend that the agency was wrong to define Medicare
entitlement as not requiring actual receipt of benefits. Compl. ¶ 37. At the same time, they argue
that the agency was wrong to define SSI entitlement as requiring actual receipt of benefits. Id.
¶ 38. For those reasons, they ask the Court to enjoin the Secretary from applying either
definition. Id. ¶ 39(a). Neither argument succeeds.
First, the Supreme Court rejected Plaintiffs’ Medicare-entitlement argument in Empire
Health. In that case, the Court concluded that “HHS’s understanding of the Medicare fraction,”
in which “individuals entitled to Medicare Part A benefits are all those qualifying for the
program, regardless of whether they are receiving Medicare payments” “best implements the

8

[Medicare] statute[].” Empire Health, 597 U.S. at 428, 445 (cleaned up). Under that decision,
Plaintiff’s challenge to the definition of Medicare entitlement founders.
Next, Plaintiffs’ challenge to the SSI-entitlement definition is foreclosed by Advocate
Christ Medical Center v. Becerra, 80 F.4th 346 (D.C. Cir. 2023). In that case, another set of
hospitals objected to the Government’s interpretation of “entitled to supplemental security
income benefits” as requiring actual receipt of SSI payments. Id. at 352. But the D.C. Circuit
declared, flatly, “[t]he hospitals are mistaken.” Id. It therefore “agree[d] that the Secretary
offered the correct interpretation” of the statute, and that entitlement to SSI benefits required
actual receipt of SSI payments. Id. at 352–54. Under this decision, Plaintiffs’ challenge to the
SSI-entitlement regulation also fails.
Plaintiffs do not contest any of this. Opp’n at 14–15. The Government argued in its
dismissal motion that Empire Health and Advocate Christ Medical Center foreclosed Plaintiffs’
challenges. Mot. at 11–12, ECF No. 17. In response, Plaintiffs simply denied challenging the
definition of Medicare entitlement at all. Opp’n at 14; but see Compl. ¶ 37. They did not assert,
much less argue, that Empire Health would not doom such a challenge. The Court takes this
disavowal as an abandonment of Plaintiffs’ Medicare-entitlement claim. But it also takes
Plaintiffs’ failure to respond on this point as a concession that Empire Health forecloses any
claim that the Medicare-entitlement definition was unlawful. These independently sufficient
reasons both require rejection of Plaintiffs’ Medicare-entitlement claim. See Compl. ¶ 37.
Nor can Plaintiffs prevail on their SSI-entitlement claim. Here, they do admit to having
made such a claim. But again, they do not respond to the Government’s argument that Advocate
Christ Medical Center forecloses it. Instead, they insinuate the Court should simply ignore that
decision. Opp’n at 14. Since that decision was “subject to a potential filing by Plaintiffs for a

9

petition for [a] writ of certiorari” (which has since been filed and granted), they say applying it
here “is premature.” Id. But that is not how precedent works.
The Circuit’s opinion in Advocate Christ Medical Center bound courts in this district
from the moment it was issued. See United States v. Torres, 115 F.3d 1033, 1036 (D.C. Cir.
1997). And it will continue to bind district courts until it is either vacated or overruled. Id.
Neither has happened yet. So the Court has no liberty to ignore the Circuit’s command.
Even looking past exhaustion, the meat of Plaintiffs’ argument is flavorless. Their
Medicare-fraction claim is abandoned and, if not, it fails. Their SSI-fraction claim fails and, if
not, it is forfeited. So the Court will dismiss their Complaint on these grounds too.
V.
Plaintiffs contend that they almost exhausted their administrative remedies. Almost may
count in horseshoes and hand grenades, but not federal judicial review. And their claims founder
on controlling precedent in any event. So the Court will grant the Government’s Motion to
Dismiss. 2 A separate Order will issue today.

2024.08.30
10:20:09 -04'00'
Dated: August 30, 2024

TREVOR N. McFADDEN, U.S.D.J.

2

Plaintiffs ask that the Court remand the case to the agency with reinstatement. Opp’n at 12–14.
The Court declines the invitation. Once a court determines that plaintiffs have failed to allege a
viable cause of action—whether under Rule 12(b)(1) or 12(b)(6)—the only appropriate course is
to dismiss the case. See, e.g., Fed. R. Civ. P. 12(h)(3).
10