Owensboro Health, Inc. v. United States Department of Health & Human Services et al

Filing 30

MEMORANDUM OPINION AND ORDER: The motion for summary judgment by Plaintiff, Owensboro Health, Inc., DN 13 is DENIED and the motion for summary judgment by Defendant, Sylvia M. Burwell, Secretary of Health and Human Services, DN 16 is GRANTED. A Judgment shall be entered consistent with this Opinion. Signed by Chief Judge Joseph H. McKinley, Jr on 9/15/2015. cc: Counsel(JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
OWENSBORO DIVISION
CIVIL ACTION NO. 4:14CV-00023-JHM
OWENSBORO HEALTH, INC.

PLAINTIFF

V.
SYLVIA M. BURWELL,
SECRERTARY OF HEALTH AND HUMAN SERVICES

DEFENDANT

MEMORANDUM OPINION AND ORDER
This matter is before the Court on cross-motions for summary judgment by the parties
[DN 13, DN 16]. This action concerns the amount of Medicare reimbursement the Plaintiff,
Owensboro Health, Inc., should receive for serving a disproportionate share of low-income
patients. Owensboro Health brings this action pursuant to Title XVIII of the Social Security
Act, 42 U.S.C. § 1395 et seq., seeking judicial review of a final Medicare reimbursement
decision by the Secretary of the Department of Health and Human Services (“HHS” or “the
Secretary”). The Secretary determined that Owensboro Health was not permitted to include in
the calculation of its Medicare Disproportionate Share Hospital (“DSH”) adjustment patient days
for patients covered by the Kentucky Hospital Care Program (“KHCP”) for the years 2003 to
2005. Fully briefed, this matter is ripe for decision.
I. BACKGROUND
Medicare, Title XVIII of the Social Security Act, is a federally funded health insurance
program for the elderly and disabled. 42 U.S.C. §§ 1395—1395cc. Medicaid, Title XIX of the
Social Security Act, “is a federal grant program—unavailable to Medicare recipients—that
requires each state to create federal-state partnerships to provide certain medical services to
individuals ‘whose income and resources are insufficient to meet the costs of necessary medical

services.’” Jackson Purchase Medical Center v. United States Dept. of Health and Human
Services, 2015 WL 4875112, *1 (E.D. Ky. Aug. 12, 2015)(quoting 42 U.S.C. § 13961).
A. Medicare and Medicare DSH
Part A of the Medicare statute provides health insurance for inpatient hospital medical
services. 42 U.S.C. §§ 1395c, 1395d. “Under Part A, a participating hospital enters into an
agreement with the Secretary whereby the hospital promises to render services to Medicare
beneficiaries. § 1395cc. The hospital does not charge the Medicare beneficiaries for the services
(except for certain deductible and coinsurance amounts), but instead, the federal government
directly reimburses the hospital for the services rendered. § 1395cc(a)(1).” University of Kansas
Hospital Authority v. Sebelius, 953 F. Supp. 2d 180, 182 (D.D.C. 2013).
“[A] hospital is not reimbursed at the time of service, but rather, the hospital must file an
annual report showing the costs it incurred during the fiscal year and the portion of those costs
allocated to Medicare. 42 C.F.R. §§ 413.24, 413.50.” University of Kansas Hospital Authority,
953 F. Supp. 2d at 182. “The report is filed with a fiscal intermediary (‘FI’), which is typically a
private insurance company acting under contract with the Secretary. 42 U.S.C. § 1395ww(d)(5),
42 C.F.R. § 413.20(b). After auditing the hospital’s report, the FI determines the amount of
reimbursement owed to the hospital by Medicare through the issuance of a Notice of Program
Reimbursement (‘NPR’). 42 C.F.R. § 405.1803(a).” Id. “If the hospital is dissatisfied with the
FI’s award, it has 180 days to appeal to the Provider Reimbursement Review Board (the
“PRRB”), which issues a decision that the Secretary may reverse, affirm, or modify within sixty
days. 42 U.S.C. § 1395oo(f)(1). If the hospital remains dissatisfied after either the PRRB or the
Secretary issues a final decision, it may seek judicial review by filing suit in the appropriate
federal district court.” Id.

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Additionally, hospitals are not reimbursed for the actual cost of treating Medicare
beneficiaries. Instead, Medicare reimburses hospitals through a prospective payment system
(“PPS”) based on pre-set rates based on a patient’s diagnosis at discharge.

42 U.S.C. §

1395ww(d). However, these predetermined rates may be adjusted for specific hospitals under
certain circumstances recognized by Congress. Id. This case involves one such adjustment,
known as the Medicare Disproportionate Share Hospital (“DSH”) adjustment.

42 U.S.C.

§1395ww(d)(5)(F). “Under the Medicare DSH adjustment, the federal government pays more to
hospitals that ‘serve[ ] a significantly disproportionate number of low-income patients.’”
University of Kansas Hosp. Authority, 953 F. Supp. 2d at 183 (quoting Catholic Health
Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013)(quoting 42 U.S.C.
§1395ww(d)(5)(F)(i)(I))). “This provision is based on Congress’s judgment that low-income
Medicare patients have generally poorer health and are costlier to treat than high-income
Medicare patients.” University of Kansas Hosp. Authority, 953 F. Supp. 2d at 183. “To
compensate for this disparity, Congress authorized the Secretary to disburse extra Medicare
funds—the Medicare DSH adjustment—to hospitals that treat a disproportionate share of lowincome patients.” Id.
Whether a hospital qualifies for the Medicare DSH adjustment and the amount of the
adjustment are based on the hospital’s “disproportionate low-income patient percentage,”
calculated “as the sum of two fractions, which are referred to as the Medicare and Medicaid
fractions.” Waterbury Hospital Center v. Sebelius, 2012 WL 4512506, *2 (D. Conn. Sept. 29,
2012)(citing 42 U.S.C §1395ww(d)(5)(F)(v) and (vi)).

At issue in the present case is the

Medicaid fraction. The Medicaid fraction is a proxy for the percentage of a provider’s lowincome, non-Medicare patients. The Medicare statute defines the Medicaid Fraction as:

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[T]he 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 who (for such days) were eligible for
medical assistance under a State plan approved under subchapter
XIX, but who were not entitled to benefits under part A of
[Medicare], and the denominator of which is the total number of
the hospital’s patient days for such period.
42 U.S.C §1395ww(d)(5)(F)(vi)(II). “[I]n general, under this formula, a hospital’s Medicare
DSH adjustment increases as the number of Medicaid-eligible patient days in the numerator of
hospital’s Medicaid Fraction increases.” University of Kansas Hosp. Authority, 953 F. Supp. 2d
at 184 (citing Cabell Huntington Hosp., Inc. v. Shalala, 101 F.3d 984, 985 (4th Cir. 1996)(noting
that the Medicare statute provides a hospital more money for Medicare patients the more
Medicaid patients it treats)). Owensboro Health challenges the Secretary’s interpretation of the
patients that should be credited in the numerator of the Medicaid fraction.
B. Medicaid and Medicaid DSH
“Medicaid is a state-specific program where, pursuant to a federally approved ‘state
Medicaid plan,’ the federal government provides matching payments for medical assistance to
eligible, low-income individuals.” Jackson Purchase Medical Center, 2015 WL 4875112, *2.
The “state Medicaid plan” specifies the qualifications for eligibility and establishes the nature
and scope of the medical care and services covered pursuant to the state plan. 42 C.F.R. §
430.10.

“The Secretary must approve the state plan before federal matching payments

commence, but ‘[c]onsiderable deference is provided to states under the [Medicaid] Act to
decide ‘eligible groups, types and range of services, payment levels for services, and
administrative and operating procedures.’” Jackson Purchase Medical Center, 2015 WL
4875112, *2 (quoting Linton by Arnold v. Commissioner of Health & Env't, State of Tenn., 65
F.3d 508, 516 n. 10 (6th Cir. 1995) (quoting 42 C.F.R. § 430.0)); 42 U.S.C. §§ 1396a, 1396d(b).

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“Like Medicare, Medicaid also allows DSH adjustments.” Waterbury Hospital Center,
2012 WL 4512506, *2.

The Medicare DSH adjustment is separate and distinct from the

Medicaid DSH adjustment. Medicare DSH “utilizes a rigid formula set by the Medicare statute.”
Jackson Purchase Medical Center, 2015 WL 4875112, *2.

In contrast, Medicaid DSH

adjustments are defined by each state. “A state is given considerable discretion in determining
how to calculate Medicaid DSH adjustments under its plan.” Waterbury Hospital Center, 2012
WL 4512506, *2. The Medicaid statute allows a state to base its DSH adjustment on services to
“patients eligible for medical assistance under [an approved] State plan . . . or to low-income
patients.” 42 U.S.C. § 1396r–4(c)(3)(B)(emphasis added). “Thus, Congress explicitly allowed a
state to define its Medicaid DSH adjustment to include patients not eligible for any assistance
contemplated under the Social Security Act.” Jackson Purchase Medical Center, 2015 WL
4875112, *2.
Despite a state’s broad discretion in defining its Medicaid DSH adjustments, every state
must include this definition in its state Medicaid plan for approval from the Secretary. 42 U.S.C.
§ 1396r–4(a). “Congress requires approval of this definition to guarantee that Medicaid DSH
payments assist medical facilities providing care to high volumes of low-income patients rather
than ‘for unrelated purposes, such as building roads, operating correctional facilities, [or]
balancing State budgets.’” Jackson Purchase Medical Center, 2015 WL 4875112, *3 (quoting
H.R.Rep. No. 103–111, at 212 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 539); University of
Washington Med. Ctr. v. Sebelius, 634 F.3d 1029, 1034–35 (9th Cir. 2011). Accordingly, the
Secretary’s examination of a state’s Medicaid DSH definition “is limited to verifying that these
payments are directed to low-income medical care and service.” Jackson Purchase Medical
Center, 2015 WL 4875112, *3 (citing Nazareth Hosp. v. Secretary United States Dept. of Health

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and Human Services, 747 F.3d 172, 183 (3d Cir. 2014)). Importantly, “[t]he Secretary does not,
however, approve the details of a state’s plan to use Medicaid DSH payments to assist medical
facilities providing care to high volumes of low-income patients.” Id. Once a state’s plan is
approved, the Secretary “is authorized to pay the state matching funds for Medicaid
expenditures,” commonly referred to as Federal Financial Participation (“FFP”). Waterbury
Hospital Center, 2012 WL 4512506, *2. “Accordingly, Medicaid programs vary from state to
state, both with respect to persons and services covered, and to the scope and duration of
benefits.” Verdant Health Commission v. Burwell, 2015 WL 5124031, *1 (W.D. Wash. Sept. 1,
2015).
C. Kentucky’s Medicaid Plan
Kentucky has an approved Medicaid plan. The Kentucky Medicaid Plan established the
requirements for statewide Medicaid eligibility. For example, during the relevant time period, a
family of three could earn no more than thirty-nine percent of the federal poverty level (“FPL”)
to receive Kentucky Medicaid benefits. (DN 13 at 8-9.) “The state plan also described
Kentucky’s Medicaid DSH definition. Kentucky’s Medicaid DSH definition included
‘traditional’ Medicaid patients and Kentucky Hospital Care Program (‘KHCP’) patients.”
Jackson Purchase Medical Center, 2015 WL 4875112, *3 (citing also 42 U.S.C. § 1396r–
4(c)(3)(B) (permitting a state to include “patients eligible for medical assistance under a State
plan approved under this subchapter or [other] low-income patients” in its Medicaid DSH
definition)).
“KHCP is a state program that provides medical assistance to individuals and families
that (1) can demonstrate Kentucky residency; (2) earn less than one hundred percent of the FPL;
and (3) are ineligible for traditional Medicaid.” Jackson Purchase Medical Center, 2015 WL

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4875112, *3. Eligibility for KHCP is based solely on income and assets. KRS § 205.640(5).
KHCP patients are not eligible for Medicare or for Kentucky’s Medicaid program. Id. (“Services
provided to individuals who are eligible for medical assistance [Medicaid] or the Kentucky
Children’s Health Insurance Program do not qualify for reimbursement under this section . . . .”
KRS § 205.640(5)). “Thus, a family of three earning forty-three percent of the FPL could not
qualify for Medicaid but could receive medical assistance under KHCP. KHCP is funded
through state and local payments, and Kentucky also authorizes Medicaid DSH payments to
offset the costs providers incur when treating KHCP patients.” Jackson Purchase Medical
Center, 2015 WL 4875112, *3. “Kentucky submitted its state Medicaid Plan, including the state
Medicaid DSH definition, to the Secretary for approval. The Secretary approved the Kentucky
Medicaid Plan.” Id. at *4.
D. Administrative Proceedings
Owensboro Health participates in Medicare and serves KCHP patients. Owensboro
Health filed Medicare cost reports for the years at issue. In calculating the Medicare DSH,
Owensboro Health’s fiscal intermediary (“FI”) issued the Notice of Program Reimbursement
(“NPR”) for the relevant reporting periods without including KHCP patient days in the
numerator of the Medicaid fraction. The Plaintiff appealed individually to the PRRB which
upheld the FI’s findings. Owensboro Health maintains that the loss for the hospital in Medicare
DSH adjustments is over $2.7 million dollars.

Owensboro Health appealed the Provider

Reimbursement Review Board’s (“PRRB”) decision to the Administrator of the Centers for
Medicare & Medicaid Services (“CMS”) who issued her final decision on January 15, 2014.
(AR 2-21.) The CMS Administrator held that the FI properly did not include the KCHP patient
days in the numerator of the Medicaid fraction. Significantly, she concluded that that the

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statutory language in the Medicare DSH statute -- “patients who were eligible for medical
assistance under a State Plan approved under title XIX” -- means patients who were eligible for
Medicaid. Accordingly, because the KHCP program is for individuals not eligible for Medicaid,
the Administrator determined that those patient days could not be counted in the numerator of
the Medicaid fraction of the Medicare DSH calculation. (AR 15-16.) Additionally, the CMS
Administrator found those KHCP days were not transformed into Medicaid patient days under
the Medicare DSH calculation by virtue of the fact that they were counted to determine Medicaid
DSH payments. (AR 17-18.) The Administrator’s decision constituted the final administrative
decision of the Secretary.
As a result of this decision, Owensboro Health filed this action asserting violations of the
Administrative Procedure Act and the Equal Protection Clause of the Fourteenth Amendment.
The parties have filed cross-motions for summary judgment.
II. STANDARD OF REVIEW
The Supreme Court has established a two-step process for reviewing an agency’s
interpretation of a statute that it administers. Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984). “’First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the
matter; for the court, as well as the agency, must give effect to the unambiguously expressed
intent of Congress.’” Clark Regional Medical Ctr. v. United States Dept. of Health and Human
Servs., 314 F.3d 241, 244–45 (6th Cir. 2002)(quoting Jewish Hosp., Inc. v. Secretary of Health
and Human Servs., 19 F.3d 270, 273 (6th Cir. 1994) (emphasis in original)). The Supreme Court
has explained that “[t]he judiciary is the final authority on issues of statutory construction and

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must reject administrative constructions which are contrary to clear congressional intent.” Clark
Regional Medical. Ctr., 314 F.3d at 245 (quoting Chevron, 467 U.S. at 843 n. 9).
Second, if the Court determines that Congress has not directly addressed the precise
question at issue, that is, that the statute is silent or ambiguous on the specific issue, the Court
must determine “’whether the agency’s answer is based on a permissible construction of the
statute.’” Clark Regional Medical Ctr., 314 F.3d at 245 (quoting Jewish Hosp., 19 F.3d at 273).
“In assessing whether the agency’s construction is permissible, [the Court] ‘need not conclude
that the agency construction was the only one it permissibly could have adopted to uphold the
construction, or even the reading [the Court] would have reached if the question initially had
arisen in a judicial proceeding.” Id. at 245. “In fact, the agency’s construction is entitled to
deference unless ‘arbitrary, capricious, or manifestly contrary to the statute.’” Id. (quoting
Chevron, 467 U.S. at 844).
“Pursuant to 42 U.S.C. § 1395oo(f)(1), a decision by the [CMS] is subject to review
under the [APA], 5 U.S.C. § 706(2)(A).” Battle Creek Health System v. Leavitt, 498 F.3d 401,
409 (6th Cir. 2007)(quoting Clark Regional Med. Ctr., 314 F.3d at 245). Under the APA, the
Court reviews an agency decision to see whether it is “arbitrary, capricious, an abuse of
discretion, or otherwise not in accord with law.” Id. (quoting Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 512 (1994)). “Under the APA, an agency’s interpretation of a regulation must be
given controlling weight unless it is ‘plainly erroneous or inconsistent with the regulation.’” Id.
III. DISCUSSION
Owensboro Health maintains that the Secretary disregarded the express language of the
Medicare DSH statute which mandates inclusion of patient days for all patients eligible under a
state plan approved under Title XIX, not just those eligible directly for Medicaid. Further,

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Owensboro Health argues that the Administrator’s exclusion of KHCP patients in the present
case violates the Equal Protection Clause because the Secretary includes patients “who could not
be eligible for medical assistance under Title XIX standards but have been provided medical
assistance only because they are part of an expansion population approved under Title XIX as
part of a § 1115 waiver.
A. Review of Secretary’s Interpretation of Medicare DSH Statutory Language
The question before the Court is whether KHCP patients are “eligible for medical
assistance under a State plan approved under subchapter XIX.”
1395ww(d)(5)(F)(vi)(II).

42 U.S.C. §

Thus, it is necessary to determine the meaning of this statutory

language. The majority of Courts, including the Third, Ninth, and District of Columbia Circuits,
that have interpreted this provision have held that the phrase “eligible for medical assistance
under a State plan approved under subchapter XIX” means eligible for Medicaid. University of
Kansas Hosp. Authority, 953 F. Supp. 2d at 190 (citing Adena Regional Medical Center v.
Leavitt, 527 F.3d 176, 180 (D.C. Cir. 2008)(holding under Chevron step one that State-only plan
beneficiaries are not Medicaid-eligible and, thus, the Secretary properly excluded days
associated with those patients from the Medicaid Fraction)); Univ. of Wash. Med. Ctr. v.
Sebelius, 634 F.3d 1029, 1034–36 (9th Cir. 2011)(concluded that “’eligible for medical
assistance under a State plan approved under subchapter XIX’ is unambiguously limited to those
eligible for traditional Medicaid”); Verdant, 2015 WL 5124031, *6; Banner Health v. Sebelius,
715 F.Supp.2d 142, 162 (D.D.C. 2010).1 In the present case, it is undisputed that KHCP patients
1

Plaintiff relies on Jewish Hosp., Inc. v. Secretary of Health and Human Services, 19 F.3d 270 (6th Cir.
1994), in support of its argument that the Third, Ninth, and District of Columbia Circuits are incorrect. However, as
noted by the Sixth Circuit in Metropolitan Hosp. v. U.S. Dept. of Health and Human Services, 712 F.3d 248 (6th
Cir. 2013), the holding of Jewish is limited to its decision that “’all days for which an individual is capable of
receiving Medicaid should be figured into the proxy calculation,’ rather than only the days of care for which
Medicaid actually paid.” Id. at 257 (quoting Jewish Hosp., 19 F.3d at 274). Jewish Hosp. is not inconsistent with the
above cited case law.

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are not eligible for traditional Medicaid. (Memorandum in Support of Plaintiff’s Motion for
Summary Judgment at 9.) Consistent with the above case law, because KHCP patients “are not
eligible for Medicaid, the days associated with their treatment cannot be included in a provider’s
Medicaid Fraction.” University of Kansas Hosp. Authority, 953 F. Supp. 2d at 190.2
While recognizing that KHCP patients are not eligible for traditional Medicaid,
Owensboro Health maintains that KHCP is a Kentucky Medicaid approved plan warranting the
inclusion of KHCP patient days in the Medicaid fraction of the Medicare DSH Adjustment.
Owensboro Health asserts that in approving the Kentucky Medicaid Plan, the Secretary also
approved the KHCP program; therefore, the KHCP Program qualifies as “a State plan approved
under subchapter XIX.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). The Court disagrees. Owensboro
Health “conflate[s] approval of a definition with approval of a plan.” Jackson Purchase Medical
Center, 2015 WL 4875112, *6.

As noted above, the Secretary’s examination of a state’s

Medicaid DSH definition “is limited to verifying that these payments are directed to low-income
medical care and service.” Jackson Purchase Medical Center, 2015 WL 4875112, *3 (citing
Nazareth Hosp. v. Secretary United States Dep’t of Health & Human Servs., 747 F.3d 172, 183
(3d Cir. 2014)). Importantly, “[t]he Secretary does not, however, approve the details of a state’s
plan to use Medicaid DSH payments to assist medical facilities providing care to high volumes
of low-income patients.” Id.
In the present case, KHCP is a Kentucky program for low-income individuals distinct
from Medicaid. Jackson Purchase Medical Center, 2015 WL 4875112, *6. Kentucky “included

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The Court in Jackson Purchase Medical Center v. United States Dept. of Health and Human Services,
2015 WL 4875112, *1 (E.D. Ky. Aug. 12, 2015) reached the same conclusion for essentially the same reasons, with
one exception. There, the Court also held that “[b]ecause Medicaid DSH payments are distributed prospectively and
not directed towards specific care or services, Medicaid DSH funds do not constitute ‘medical assistance.’” Id. at
*6. This Court does not share in that view and believes instead that the pivotal question in these cases is whether the
medical assistance in question was provided under a State plan approved under subchapter XIX.

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this program in its definition of the Medicaid DSH adjustment, and the Secretary approved the
definition of Kentucky’s Medicaid DSH adjustment. The Secretary did not approve the
qualifications, nature, or scope of the KHCP program.” Id. (citing H.R.Rep. No. 103111, at 212
(1993), reprinted in 1993 U.S.C.C.A.N. 378, 539). Thus, contrary to the argument of the
Plaintiff, “the Secretary did not approve the KHCP plan under subchapter XIX, and KHCP
patients may not be credited in the numerator of the ‘Medicaid fraction’ of the Medicare DSH
formula.” Jackson Purchase Medical Center, 2015 WL 4875112, * 7; see also Adena Regional
Med. Ctr., 527 F.3d at 178–79 (rejecting the argument that the Secretary’s approval of the
definition of a state’s Medicaid DSH adjustments equated to approval of the plan); Univ. of
Wash. Med. Ctr., 634 F.3d at 1034–35 (same).
Therefore, the Court concludes that the Secretary was correct in finding that KHCP
patients were not eligible for medical assistance under Kentucky’s Medicaid plan, and thus their
patient days were properly excluded from Owensboro Health’s Medicare DSH adjustment.
B. Equal Protection
Owensboro Health argues that the Secretary’s exclusion of KHCP patients in the present
case violates the Equal Protection Clause of the Fourteenth Amendment because the Secretary
includes patients in the Medicare DSH adjustment who are not eligible for medical assistance
under Title XIX standards but have been provided medical assistance only because they are part
of an expansion population approved under Title XIX as part of a § 1115 waiver. Owensboro
Health maintains that KHCP patients are functionally identical to §1115 waiver patients. Review
of an equal protection claim in the context of agency action is similar to that under the APA.
“That is, an agency’s decision must be upheld if under the Equal Protection Clause, it can show a

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‘rational basis’ for its decision.” Nazareth Hosp., 747 F.3d at 180 (citing F.C.C. v. Beach
Communications, Inc., 508 U.S. 307, 313 (1993)).
Section 1115 of the Social Security Act authorizes the Secretary “to waive statutory
requirements pertaining to federal entitlement programs such as Medicaid and ‘regard’ patients
as eligible for Medicaid if they are treated under an experimental, pilot or demonstration project
under 42 U.S.C. § 1315.”

Nazareth Hosp., 747 F.3d at 175 (citing 42 U.S.C. §

1395ww(d)(5)(F)(vi)(II)); see also Verdant, 2015 WL 5124031, *2. The “costs of such projects .
. . shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures
under the State [Medicaid] plan.” 42 U.S.C. § 1315(a)(2). To authorize such a demonstration
project, known as a Section 1115 waiver project, “the Secretary must conclude that the statesubmitted proposal ‘is likely to assist in promoting the objectives of’” Medicaid. Nazareth
Hosp., 747 F.3d at 176 (citing 42 U.S.C. § 1315(a)). “In addition, the Secretary has discretion to
choose which Medicaid requirements will be waived, how long the waiver lasts, and whether the
costs of the project will be considered Medicaid-covered expenditures.” Id. at §§ 1315(a)(1)(a)(2). “Waivers are not inherently provided for in State Plans; rather, states must submit specific
applications for Section 1115 waiver projects.” Id.
The Court finds that there is a rational basis upon which to distinguish patient days
covered under KHCP from patient days covered under a Section 1115 waiver project. First,
statutory authority exists to treat KHCP patient days and Section 1115 patient days differently
from each other. As explained by the Third Circuit in Nazareth Hosp. v. Secretary U.S. Dept. of
Health and Human Services, “[t]he statutory subsection, 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II),
mandates that Medicare DSH adjustments are keyed to the number of Medicaid-eligible patient
days, adding that the Secretary may also choose to include days for patients eligible under a

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Section 1115 project.” Nazareth Hosp., 747 F.3d at 180. In contrast, as discussed in detail
above, the statute requires the Secretary to exclude KHCP patient days from Medicare DSH
calculations because those patients are not eligible for Medicaid. See also Adena Regional
Medical Center, 527 F.3d at 179-80; University of Washington Medical Center, 634 F.3d at
1034; Phoenix Memorial Hosp. v. Sebelius, 622 F.3d 1219, 1227 (9th Cir. 2010).
Second, the distinction between section 1115 waiver programs and KHCP is rational
because the programs have different purposes and the federal government has control over only
Section 1115 projects. Nazareth Hosp., 747 F.3d at 181; Verdant, 2015 WL 5124031, *9. As
explained above, “a section 1115 waiver project is an experimental, demonstration or pilot
project which is only approved if the Secretary concludes that it ‘is likely to assist in promoting
the objectives of’ Medicaid.” Id. (quoting 42 U.S.C. § 1315(a)). In contrast, the KHCP plan
requires no federal assessment that it is likely to assist in promoting the goals of Medicaid.
Additionally, while the Secretary has significant control over Section 1115 waivers, see 42
U.S.C. §§ 1315(a)(1)- (a)(2), “the Secretary’s scrutiny of a state’s Medicaid DSH definition is
limited to verifying that these payments are directed to low-income medical care and service.”
Jackson Purchase Medical Center, 2015 WL 4875112, *3 (citing Nazareth Hosp., 747 F.3d at
183). “The Secretary did not approve the qualifications, nature, or scope of the KHCP program.”
Jackson Purchase Medical Center, 2015 WL 4875112, *6.
Accordingly, the Court finds that the Secretary’s interpretation of the Medicare DSH
statute to include § 1115 waiver days in the Medicare DSH calculation, but not to include KHCP
days, is not arbitrary and capricious and does not violate Owensboro Health’s rights under the
Equal Protection Clause of the Fourteenth Amendment.

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IV. CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED that the motion for
summary judgment by Plaintiff, Owensboro Health, Inc., [DN 13] is DENIED and the motion
for summary judgment by Defendant, Sylvia M. Burwell, Secretary of Health and Human
Services, [DN 16] is GRANTED. A Judgment shall be entered consistent with this Opinion.

cc: counsel of record

September 15, 2015

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