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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ALLINA HEALTH SERVICES
d/b/a ABBOTT NORTHWESTERN HOSPITAL,
800 East 28th Street
Minneapolis, Minnesota 55407
ALLINA HEALTH SERVICES
d/b/a UNITED HOSPITAL,
333 North Smith Avenue
Saint Paul, Minnesota 55102
ALLINA HEALTH SERVICES
d/b/a UNITY HOSPITAL,
550 Osborne Road
Fridley, Minnesota 55432
FLORIDA HEALTH SCIENCES CENTER, INC.
d/b/a TAMPA GENERAL HOSPITAL,
1 Tampa General Circle
Tampa, Florida 33606
MONTEFIORE MEDICAL CENTER,
111 East 210th Street
Bronx, New York 10467
MOUNT SINAI MEDICAL CENTER OF
FLORIDA, INC.
d/b/a MOUNT SINAI MEDICAL CENTER,
4300 Alton Road
Miami Beach, Florida 33140
THE NEW YORK HOSPITAL MEDICAL CENTER
OF QUEENS,
56-45 Main Street
Flushing, New York 11355
THE NEW YORK METHODIST HOSPITAL,
506 Sixth Street
Brooklyn, New York 11215
THE NEW YORK AND PRESBYTERIAN HOSPITAL
d/b/a NEW YORK PRESBYTERIAN HOSPITAL/
WEILL CORNELL MEDICAL CENTER,
525 East 68th Street
New York, New York 10021

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Case No.: ______

 Case 1:14-cv-01415-TJK Document 1 Filed 08/19/14 Page 2 of 19

Plaintiffs,

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v.
SYLVIA M. BURWELL, Secretary
United States Department of
Health and Human Services,
200 Independence Avenue, S.W.
Washington, DC 20201,
Defendant.

COMPLAINT FOR JUDICIAL REVIEW AND DECLARATORY
AND INJUNCTIVE RELIEF UNDER THE MEDICARE ACT
NATURE OF ACTION
1.

The nine plaintiff Hospitals in the instant action were plaintiffs in Allina Health

Services v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014). The interpretive issue in that earlier case
was whether Medicare “enrollees in Part C are ‘entitled to benefits’ under Part A, such that they
should be counted in the Medicare [part A/SSI] fraction, or whether, if not regarded as ‘entitled
to benefits under Part A,’ they should instead be included in the Medicaid fraction” of the
Medicare disproportionate share hospital (“DSH”) adjustment. Id. at 1105. In particular, that
case addressed the validity of a 2004 rule changing the agency’s interpretation. Id. The D.C.
Circuit affirmed this Court’s vacatur of that rule, but concluded that the question of how the
agency should proceed on remand was not yet presented. Id. at 1111.
2.

Plaintiff Hospitals have brought this further action to prevent the agency from

ever treating part C days as part A days in the DSH calculations for any periods prior to October
1, 2013. The Hospitals contend that such an interpretation is both procedurally and substantively
invalid.

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JURISDICTION AND VENUE
3.

This action arises under the Medicare Act, Title XVIII of the Social Security Act,

42 U.S.C. § 1395 et seq., and the Administrative Procedure Act (“APA”), 5 U.S.C. § 551 et seq.
4.

Jurisdiction is proper under 42 U.S.C. § 1395oo(f)(l).

5.

Venue is proper in this judicial district under 42 U.S.C. § 1395oo(f)(l).
PARTIES

6.

7.

The plaintiffs in this action are:
a.

Allina Health Services, d/b/a Abbott Northwestern Hospital, Medicare
provider number 24-0057, for the cost reporting period ending December
31, 2012;

b.

Allina Health Services, d/b/a United Hospital, Medicare provider number
24-0038, for the cost reporting period ending December 31, 2012;

c.

Allina Health Services, d/b/a Unity Hospital, Medicare provider number
24-0132, for the cost reporting period ending December 31, 2012;

d.

Florida Health Sciences Center, Inc., d/b/a Tampa General Hospital,
Medicare provider number 10-0128, for the cost reporting period ending
September 30, 2012;

e.

Montefiore Medical Center, Medicare provider number 33-0059, for the
cost reporting period ending December 31, 2012;

f.

Mount Sinai Medical Center of Florida, Inc., d/b/a Mount Sinai Medical
Center; Medicare provider number 10-0034, for the cost reporting period
ending December 31, 2012;

g.

The New York Hospital Medical Center of Queens, Medicare provider
number 33-0055, for the cost reporting period ending December 31, 2012;

h.

The New York Methodist Hospital, Medicare provider number, 33-0236,
for the cost reporting period ending December 31, 2012; and

i.

The New York and Presbyterian Hospital, d/b/a New York Presbyterian
Hospital / Weill Cornell Medical Center, Medicare provider number 330101, for the cost reporting period ending December 31, 2012.

The defendant is Sylvia M. Burwell, in her official capacity as Secretary of the

United States Department of Health and Human Services (“HHS”), the federal agency that

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administers the Medicare program. References to the Secretary herein are meant to refer to her,
to her subordinates, and to her official predecessors or successors as the context requires.
8.

The Centers for Medicare and Medicaid Services (“CMS”) is a component of

HHS with responsibility for day-to-day operation and administration of the Medicare program.
CMS was formerly known as the Health Care Financing Administration. References to CMS
herein are meant to refer to the agency and its predecessors.
LEGAL AND REGULATORY BACKGROUND
Medicare DSH Payment
9.

Part A of the Medicare Act covers “inpatient hospital services.” 42 U.S.C.

§ 1395d(a)(l). Since 1983, the Medicare program has paid most hospitals for the operating costs
of inpatient hospital services under the prospective payment system (“PPS”).
§§ 1395ww(d)(l)-(5); 42 C.F.R. Part 412.

42 U.S.C.

Under PPS, Medicare pays predetermined,

standardized amounts per discharge, subject to certain payment adjustments. Id. One of the PPS
payment adjustments is the DSH payment.

See 42 U.S.C. § 1395ww(d)(5)(F); 42 C.F.R.

§ 412.106.
10.

Under the statutory provisions in effect during the period at issue here, a hospital

that serves a disproportionate share of low-income patients is entitled to an upward percentage
adjustment to the standard PPS rates. See 42 U.S.C. § 1395ww(d)(5)(F); see also 42 C.F.R.
§ 412.106. A hospital may qualify for a DSH adjustment based on its “disproportionate patient
percentage.”

See 42 U.S.C. §§ 1395ww(d)(5)(F)(i)(I) and (d)(5)(F)(v); 42 C.F.R.

§ 412.106(c)(1). As a proxy for utilization by low-income patients, the disproportionate patient
percentage determines a hospital’s qualification as a DSH, and it also determines the amount of
the DSH adjustment.

See 42 U.S.C. §§ 1395ww(d)(5)(F)(iv) and (vii)-(xiii); 42 C.F.R.

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§ 412.106(d). The disproportionate patient percentage is defined as the sum of two fractions
expressed as percentages. 42 U.S.C. § 1395ww(d)(5)(F)(vi).
11.

The first fraction that is used to compute the DSH payment is commonly known

as the “Medicaid fraction.” The statute defines the Medicaid fraction 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 who (for such
days) were eligible for medical assistance under a State plan approved under
[Title XIX], but who were not entitled to benefits under part A of [Title XVIII],
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) (emphasis added). As reflected in the italicized language
above, the numerator of the Medicaid fraction consists of days for patients who were both
eligible for medical assistance under Title XIX, or Medicaid, and “not entitled to benefits under
part A” of Title XVIII, or Medicare.1
12.

The other fraction that is used to compute the DSH payment is the “Medicare part

A/SSI fraction” or “SSI fraction.” The statute defines this fraction 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
supplementation) under subchapter 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). As the italicized language indicates, the
Medicare part A/SSI fraction consists solely of days for patients who were “entitled to benefits
under part A” of Medicare. The denominator includes all part A days, whereas the numerator
includes only those part A days for patients who are also entitled to social security income

1

The statute refers to “this subchapter,” that is, subchapter XVIII of Chapter 7 of Title 42 of the U.S.C.,
which is Title XVIII of the Social Security Act.

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(“SSI”) benefits under Title XVI. The Medicare part A/SSI fraction is computed for each federal
fiscal year by CMS, and must be used to compute a hospital’s DSH payment adjustment for the
cost reporting period beginning in the federal fiscal year. 42 C.F.R. §§ 412.106(b)(2)-(3).
Medicare Part C
13.

Section 4001 of the Balanced Budget Act of 1997, Pub. Law No. 105-33, added a

new part C to Title XVIII of the Social Security Act to establish a Medicare program known as
the Medicare+Choice program, now called Medicare Advantage.2 A Medicare beneficiary can
elect to receive Medicare benefits either through the original fee-for-service program under
Medicare parts A and B, or through enrollment in a Medicare Advantage plan under Medicare
part C. 42 U.S.C. § 1395w-21(a)(1); 42 C.F.R. § 422.50; see also 63 Fed. Reg. 34,968 (June 26,
1998) (“Under section 1851(a)(1), every individual entitled to Medicare Part A and enrolled
under Part B ... may elect to receive benefits through either the existing Medicare fee-for-service
program or a Part C M+C plan.”) (emphasis added).
14.

Prior to the 2004 rulemaking, in which the agency attempted to adopt a new

policy to begin counting part C days in the Medicare part A/SSI fractions, “the Secretary treated
Part C patients as not entitled to benefits under Part A.” Allina Health Servs., 746 F.3d at 1106.
From 1986 through 2004, the Secretary interpreted the term “entitled to benefits under part A” to
mean covered, or paid, by Medicare part A. The regulation governing the calculation of the part
A/SSI fraction directed the Secretary to determine “the number of covered patient days that …
[a]re furnished to patients who … were entitled to both Medicare Part A and SSI.” 42 C.F.R.
§ 412.106(b)(2)(i) (2003); see 42 C.F.R. § 409.3; see also 51 Fed. Reg. 16,772, 16,788 (May 6,
1986); 51 Fed. Reg. 31,454, 31,460-61 (Sept. 3, 1986); Allina Health Servs., 746 F.3d at 1108
2

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173), which
was enacted on December 8, 2003, replaced the Medicare+Choice program with the new Medicare Advantage
program under part C of Title XVIII.

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(describing the agency’s “policy … of excluding Part C days from the Medicare fraction and
including them in the Medicaid fraction”); id. at 1106 (“Prior to 2003, the Secretary treated Part
C patients as not entitled to benefits under Part A.”); Catholic Health Initiatives-Iowa Corp. v.
Sebelius, 718 F.3d 914, 921 n.5 (D.C. Cir. 2013) (noting that the pre-2004 regulation
unambiguously limited the part A/SSI fraction to “covered Medicare Part A inpatient days”);
Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 14-17 (D.C. Cir. 2011).
15.

Further, there was written guidance prior to 2004 repeatedly expressing the

Secretary’s interpretation that part C days, as days for which patients were not entitled to part A,
were to be excluded from the part A/SSI fraction. This guidance included instructions to
hospitals and program memoranda transmitting the part A/SSI fractions on an annual basis from
the enactment of part C through the 2004 rulemaking. See, e.g., HCFA Pub. 60A, Transmittal
No. A-98-21 (July 1, 1998) (instructing non-teaching hospitals not to file “no-pay” the bills for
services furnished to part C patients that would have been necessary to count part C days in the
part A/SSI fraction); HCFA Pub. 60A, Transmittal No. A-98-36 (Oct. 1, 1998) (transmitting part
A/SSI fractions that excluded part C days, specifying that the fractions include only “covered
Medicare days,” and referring to the ratio of SSI days and “covered Medicare days” as “the ratio
of Medicare Part A patient days attributable to SSI recipients”); HCFA Pub. 60A, Transmittal No.
A-99-42 (Sept. 1, 1999) (same); HCFA Pub. 60A, Transmittal No. A-00-54 (Aug. 17, 2000)
(same); CMS Pub. 60A, Transmittal No. A-01-109 (Sept. 13, 2001) (same); CMS Pub. 60A,
Transmittal No. A-02-086 (Sept. 11, 2002) (same); CMS Pub. 60A, Transmittal No. A-03-067
(Aug. 8, 2003) (same); CMS Pub. 100-04, Transmittal 275 (Aug. 13, 2004) (same).
16.

In the May 2003 proposed rule for federal fiscal year 2004, the Secretary

proposed “to clarify” her long held position that “once a beneficiary elects Medicare Part C,

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those patient days attributable to the beneficiary should not be included in the Medicare fraction
of the DSH patient percentage.” 68 Fed. Reg. 27,154, 27,208 (May 19, 2003). Further, “[t]hese
days should be included in the count of total patient days in the Medicaid fraction (the
denominator), and the patient’s days for a [part C] beneficiary who is also eligible for Medicaid
would be included in the numerator of the Medicaid fraction.” Id. The Secretary explained that
“once a beneficiary has elected to join a Medicare Advantage plan, that beneficiary’s benefits are
no longer administered under Part A.” Id.
17.

In 2004, however, in the final rule for the federal fiscal year 2005, the Secretary

reversed course and “abruptly announced a change in policy.” Allina Health Servs. v. Sebelius,
904 F. Supp. 2d 75, 78 (D.D.C. 2012), aff’d, 746 F.3d at 1107-10. That 2004 rule “adopt[ed] a
policy” to include part C days in the Medicare part A/SSI fraction and exclude them from the
Medicaid fraction effective October 1, 2004. 69 Fed. Reg. 48,916, 49,099 (Aug. 11, 2004); see
also Northeast Hosp., 657 F.3d at 16.
The Allina Litigation
18.

In Allina Health Services, a group of hospitals, including the hospitals in this case,

challenged the applicability of the 2004 rulemaking to several cost reporting periods ending after
October 1, 2004, contending, among other things, that the abrupt reversal in policy did not meet
notice and comment requirements and was not the product of reasoned decision making because
the agency failed to acknowledge or explain its departure from past policy.
19.

This Court agreed and held that the policy announced in the 2004 rulemaking

regarding part C days was not the logical outgrowth of a proposed rule. 904 F. Supp. 2d at 8992. This Court also held that the “cursory explanation in the 2004 Final Rule failed to meet the
requirements of the APA” because “the Secretary[] fail[ed] to acknowledge her ‘about-face,’”
and “her reasoning for the change was brief and unconvincing.” Id. at 93 (quoting Northeast
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Hosp., 657 F.3d at 15). Accordingly, this Court concluded that “[t]he portion of the 2004 Final
Rule … that announced the Secretary’s interpretation of the Medicare Disproportionate Share
Hospital Fraction, as codified in 2007 at 42 C.F.R. § 412.106(b)(2) and as further modified in
2010, will be vacated, and the case will be remanded to the Secretary for further action consistent
with this Opinion.” Id. at 95.
20.

Approximately one month after the Court ruled, it issued a post-judgment order

responding to the government’s request that the Court clarify the scope of its judgment. The
Court noted that its ruling “necessarily included a finding that the 2004 Final Rule—on which
the Secretary relied in defending the FY 2007 calculations . . . —was procedurally defective and,
therefore, infirm ab initio.” Post-Judgment Order, ECF No. 47, at 2 (Dec. 18, 2012). In this
Order, the Court also stated that its prior judgment “remanded the case to the Secretary to
recalculate [the] reimbursements [at issue] without using the interpretation set forth in the 2004
Final Rule.” Id. The government appealed.
21.

Meanwhile, on or about June 27, 2013, the agency published 2011 part A/SSI

fractions for all hospitals nationwide that included part C days. Consistent with the Court’s
vacatur of the 2004 rule, the Secretary calculated revised fractions for 2011 for the Hospitals in
the Allina litigation that did not apply the vacated rule, but rather excluded part C days from the
part A/SSI fraction, consistent with the pre-2004 policy. See Technical Direction Letter, TDL130516, Sept. 3, 2013. Earlier in 2013, the agency had also revised 2010 fractions initially
published by the Secretary on or about October 17, 2012 to exclude part C days for the Hospitals
in the Allina litigation. Technical Direction Letter, TDL-13179, Jan. 30, 2013. Even though
those instructions transmitted part A/SSI fractions that did not include part C days for the Allina

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plaintiffs, the agency did not instruct its contractors to include part C days in the Medicaid
fraction for patients who were also eligible for Medicaid.
22.

For hospitals not plaintiffs in the Allina litigation that received final payment

determinations on their cost reports using part A/SSI fractions that included part C days, the
Secretary had instructed the contractors as follows: “In the event of an unfavorable final
nonappealable decision in Allina Health Services v. Sebelius, the cost report will be reopened to
adjust the Disproportionate Share payment calculation.” See id. Nevertheless, it does not appear
that CMS has yet instructed its contractors to issue corrected part A/SSI fractions that exclude
part C days or to include Medicaid eligible part C days in the Medicaid fraction for hospitals that
were not plaintiffs in the Allina case.
23.

While the appeal was pending, the agency engaged in a new notice and comment

rulemaking on the treatment of part C days. In that rulemaking, the agency “proposed to readopt
the policy of counting the days of patients enrolled in [part C] plans in the Medicare fraction” “in
an abundance of caution.” 78 Fed. Reg. 50,496, 50,615 (Aug. 19, 2013). Accordingly, effective
as of October 1, 2013 on a prospective basis only, the rule governing the DSH calculation is the
same as the vacated rule had been. See id. at 50,619 (rule “readopt[ion]” applies to “FY 2014
and subsequent years” only).
24.

On April 1, 2014, the D.C. Circuit affirmed this Court’s Allina decision on the

merits, “agree[ing] with the district court that the Secretary’s final rule was not a logical
outgrowth of the proposed rule.” 746 F.3d at 1109. Because this procedural failure was a
sufficient basis to vacate the rule, the D.C. Circuit did not reach the arbitrariness of the
Secretary’s explanation. Id. at 1111.

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25.

With respect to remedy, the D.C. Circuit held that this Court “correctly concluded

that vacatur was warranted.” Id. The court reversed, however, that part of this Court’s remedy
that “ordered the Secretary to recalculate the hospitals’ reimbursements ‘without using the
interpretation set forth in the 2004 Final Rule.’” Id. (quoting the Post-Judgment Order). The
D.C. Circuit held that the “question whether the Secretary could reach the same result” on
remand as would have applied under the vacated rule “was not before the district court” and
therefore this Court should have simply “remand[ed] after identifying the error.” Id. The D.C.
Circuit noted that “only in rare cases. . . does the court direct the agency how to resolve a
problem.” Id. at 1111 n.6.
26.

The D.C. Circuit’s mandate issued on May 28, 2014, and the time for filing a

petition for certiorari expired on June 30, 2014.
Medicare Appeals Process
27.

The Secretary contracts with private organizations (usually insurance companies)

to perform certain audit and payment functions under part A of the Medicare program. These
organizations are commonly referred to as “intermediaries” or “Medicare Administrative
Contractors.”
28.

After the close of each fiscal year, a hospital is required to file a cost report with

its designated intermediary. 42 C.F.R. §§ 413.20, 413.24.
29.

The intermediary analyzes the cost report and issues a determination, called a

Notice of Program Reimbursement or “NPR,” that informs the hospital of the intermediary’s
final determination as to the amount of Medicare reimbursement due the hospital for the fiscal
year covered by the cost report.

See 42 C.F.R. § 405.1803; See also In re Medicare

Reimbursement Litig. (Baystate Health System v. Thompson), 309 F. Supp. 2d 89, 92 (D.D.C.
2004), aff’d, 414 F.3d 7 (D.C. Cir. 2005).
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30.

The Provider Reimbursement Review Board (“Board”) is an administrative

tribunal appointed by the Secretary. See 42 U.S.C. § 1395oo(h). Each of the appointed members
of the Board must be “knowledgeable in the field of payment to providers of service” under the
Medicare program. Id.
31.

Pursuant to 42 U.S.C. § 1395oo(a)(l)(A)(i), a hospital may appeal to the Board if

the hospital is dissatisfied with an intermediary’s determination as to the amount of Medicare
payment due the hospital for a cost reporting period as reflected in an NPR.
32.

Congress recognized that a hospital’s right to challenge a Medicare payment

policy should not be delayed indefinitely because a Medicare contractor fails to issue a NPR
timely. Accordingly, pursuant to 42 U.S.C. §§ 1395oo(a)(1)(B) and (C), a hospital may also
request a hearing from the Board when its intermediary has failed to issue a final determination
for its perfected cost report within 12 months of the date of receipt of a cost report by the
intermediary.
33.

A hospital may obtain expedited judicial review of a “question of law or

regulations relevant to the matters in controversy” in an appeal to the Board when “the Board
determines . . . that it is without authority to decide the question.” 42 U.S.C. § 1395oo(f)(l); see
also 42 C.F.R. § 405.1842(a)(1).
34.

The statute provides that a Board decision finding that it lacks authority to decide

a question of law “shall be considered a final decision and not subject to review by the
Secretary.” 42 U.S.C. § 1395oo(f)(l). A hospital may initiate an action for judicial review of that
question of law in this Court within 60 days of the Board’s determination. Id.
FACTS SPECIFIC TO THIS CASE
35.

All nine plaintiff Hospitals in this case were also plaintiffs in Allina.

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36.

On June 13, 2014, the agency published its calculations of the part A/SSI fractions

for every hospital in the country for cost years beginning in federal fiscal year 2012. Those
fractions included part C days for all hospitals, including the prevailing hospitals in Allina. The
release noted that the fractions included part C days.3 But the agency provided no explanation
for the Secretary’s determination to include part C patient days in the part A/SSI fraction
following the D.C. Circuit’s decision affirming the vacatur of the 2004 rule change.
37.

The plaintiff Hospitals notified the Secretary of their view that these 2012 part

A/SSI fractions were impermissible and sought assurances from the Secretary that new 2012
fractions that exclude part C days would be calculated for the plaintiff Hospitals. The Secretary
did not agree to issue new fractions for the plaintiff Hospitals.
38.

These 2012 part A/SSI fractions are binding on the intermediaries, who must

apply them without alteration when issuing NPRs for the plaintiff Hospitals. Baystate Med. Ctr.
v. Leavitt, 545 F. Supp. 2d 20, 24 (D.D.C. 2008). None of the plaintiff Hospitals has received an
NPR reflecting final Medicare DSH payment determinations for their cost reporting periods
beginning in federal fiscal years 2012.
39.

As a result, the plaintiff Hospitals timely filed appeals to the Board, pursuant to

42 U.S.C. §§ 1395oo(a)(1)(B), to challenge the agency’s treatment of Medicare part C days as
Medicare part A days for purposes of the part A/SSI fraction and the Medicaid fraction of the
Medicare DSH calculation for their 2012 cost years.4

3

2012 Part A/SSI Fraction Data File. Available at http://www.cms.gov/Medicare/Medicare-Fee-forService-Payment/AcuteInpatientPPS/Downloads/FY-2012-SSI-Ratios-for-web-posting.zip.
4
The Hospitals also filed a motion for further relief in Allina seeking to address the narrow question of
whether the Secretary has violated the mandate in that case. The Hospitals contend there that the Secretary cannot
either apply the vacated rule or otherwise treat part C days as part A days in advance of an adjudication that the
agency apparently has planned to adopt the same policy again for periods prior to October 1, 2013. This case
presents the broader question of whether the Secretary is barred from ever treating part C days as part A days for
those periods.

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40.

The Hospitals filed their appeals within 180 days of the 12-month anniversary of

the filing of their 2012 cost reports. The Board assigned case numbers 14-3736G and 143813GC to those appeals.
41.

All of the plaintiff Hospitals requested that the Board grant expedited judicial

review over whether the Secretary can validly treat part C days as part A days in their 2012 DSH
calculations.
42.

By letter dated August 13, 2014, the Board found jurisdiction over the plaintiff

Hospitals’ appeals and granted expedited judicial review.
43.

The plaintiff Hospitals have timely initiated this action for expedited judicial

review pursuant to 42 U.S.C. § 1395oo(f)(l).
ASSIGNMENT OF ERRORS
44.

The Medicare statute provides for expedited judicial review of the question

presented here “pursuant to the applicable provisions under chapter 7 of title 5,” i.e., the
Administrative Procedure Act. 42 U.S.C. § 1395oo(f)(l).
45.

The applicable provisions of the APA provide that the “reviewing court shall . . .

hold unlawful and set aside agency action . . . found to be . . . (A) arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law; . . .(C) in excess of statutory jurisdiction,
authority, or limitations, or short of statutory right; (D) without observance of procedure required
by law; [or] (E) unsupported by substantial evidence[.]” 5 U.S.C. § 706(2).
46.

An interpretation that treats part C days as part A days for purposes of the

Hospitals’ DSH calculations for periods prior to October 1, 2013 is invalid because vacatur of the
2004 rule adopting a policy change restored the previously-governing policy until it is changed
by rulemaking that could validly be applied to these years, which has not occurred. See 5 U.S.C.
§ 553(c); 42 U.S.C. § 1395hh(a)(2); Croplife Am. v. EPA, 329 F.3d 876, 879 (D.C. Cir. 2003)
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(vacating rule and holding that “[a]s a consequence, the agency’s previous practice ... is
reinstated and remains in effect unless and until it is replaced by a lawfully promulgated
regulation”); Action on Smoking & Health v. Civil Aeronautics Bd., 713 F.2d 795, 797-98 (D.C.
Cir. 1983) (“[B]y vacating or rescinding [one rule], the judgment of this court had the effect of
reinstating the rules previously in force,” which “cannot again be revoked without new
rulemaking[.]”); see also Heartland Reg’l Med. Ctr. v. Sebelius, 566 F.3d 193, 198 (D.C. Cir.
2009) (explaining that had an earlier district court decision vacated a rule, it “likely would have
required HHS to make payments to those hospitals [the challenger hospital and “similarly
situated hospitals”] for those [challenged] years and for any subsequent years until the agency
repromulgated the same rule and gave an adequate reason for rejecting the alternatives”). The
Secretary has engaged in a rulemaking applicable on a prospective basis to federal fiscal year
2014 and later (i.e., beginning October 1, 2013), 78 Fed. Reg. at 50,619, but has engaged in no
rulemaking for the period from the vacated 2004 rulemaking through fiscal year 2013.
47.

An interpretation that treats part C days as part A days is also invalid because the

Medicare Act specifies that where, as here, the final rule “is not a logical outgrowth of a
previously published notice of proposed rulemaking …, such provision shall be treated as a
proposed regulation and shall not take effect.” 42 U.S.C. § 1395hh(a)(4). In violation of this
provision, the Secretary has treated the 2004 rule not as a mere “proposed regulation,” but has
applied the policy for 2012 as if it had been finalized in a new rule for these periods.
48.

The Medicare Act provides that “[n]o rule, requirement, or other statement of

policy … that establishes or changes a substantive legal standard governing … the payment for
services … shall take effect unless it is promulgated by the Secretary by regulation.” 42 U.S.C.
§ 1395hh(a)(2). An interpretation to treat part C days as part A days “changes a substantive legal

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 Case 1:14-cv-01415-TJK Document 1 Filed 08/19/14 Page 16 of 19

standard governing … the payment for services” within the meaning of this statute. See Queen
City Home Health Care Co. v. Sullivan, 978 F.2d 236 (6th Cir. 1992) (identifying three features
of a “substantive legal standard” subject to Section 1395hh(a)(2): nationwide applicability,
permanence (i.e., not updated annually), and promulgation by the Secretary rather than by a
contractor). Thus, the Medicare Act requires notice and comment rulemaking to change policy
regarding the treatment of part C days.
49.

Furthermore, because the now-reinstated pre-2004 regulation and the Secretary’s

definitive interpretation of it both provide that part C days must be excluded from the part A/SSI
fraction and included in the Medicaid fraction, the agency is procedurally barred by the APA
from altering that policy without going through notice-and-comment rulemaking. See 5 U.S.C.
§ 551(5) (“‘rule making’ means agency process for … amending … a rule”); Thomas Jefferson
Univ. v. Shalala, 512 U.S. 504, 512 (1994) (regulation’s meaning as reflected in the “regulation’s
plain language or by other indications of the Secretary’s intent at the time of the regulation’s
promulgation” governs absent a valid change through rulemaking); Envtl. Integrity Project v.
EPA, 425 F.3d 992, 995 (D.C. Cir. 2005) (“[A]n interpretation of a legislative rule cannot be
modified without the notice and comment procedure that would be required to change the
underlying regulation—otherwise, an agency could easily evade notice and comment
requirements by amending a rule under the guise of reinterpreting it.”).
50.

Moreover, because the purpose of the DSH adjustment is to provide additional

payment under the part A prospective payment system for hospitals that incur higher costs in
treating low-income patients, an agency interpretation that treats part C days as part A days is
also unreasonably and impermissibly inconsistent with the legislative history and purpose of the
Medicare DSH statute. See H.R. Rep. No. 99-241(I), reprinted in 1986 U.S.C.C.A.N 579; AFL-

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CIO v. Chao, 409 F.3d 377 (D.C. Cir. 2005) (invalidating, under Chevron step two, an agency
rule as inconsistent with congressional policy); Health Ins. Ass’n of Am. Inc. v. Shalala, 23, F.3d
412, 416 (D.C. Cir. 1994) (rule impermissible under Chevron step two because it “conflict[s]
with the policy judgments that undergird the statutory scheme”). Reasonableness is also a
function of an interpretation’s “conformity to statutory purposes.” Goldstein v. SEC, 451 F.3d
873, 881 (D.C. Cir. 2006).5
51.

In addition, the Secretary’s determination in the 2012 part A/SSI fractions to

include part C days in the part A/SSI fraction constitutes the adoption of a new rule for which
notice-and-comment rulemaking is required. The determination to include part C days in the part
A/SSI fraction used “clear and unequivocal language” that created a “‘binding norm’” regarding
part C days which is “‘finally determinative of the issues or rights to which it is addressed,’”
Croplife Am., 329 F.3d at 881 (quoting Chamber of Commerce v. U.S. Dep’t of Labor, 174 F.3d
206, 212 (D.C. Cir. 1999)), because the part A/SSI fractions are binding on the Secretary’s
contractors, 42 C.F.R. § 412.106(b)(2). Accordingly, the determination “constitutes a binding
regulation” that can only be promulgated through notice-and-comment rulemaking. Croplife
Am., 329 F.3d at 881.
52.

The agency’s determination to treat part C days as part A days for 2012 DSH

calculations is also arbitrary and capricious. The agency failed to “display awareness that it is
changing position” when making this policy change, and impermissibly “depart[ed] from a prior
policy sub silentio.” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). Given that
the agency said even less here than in its insufficient 2004 rulemaking, the determination to
5

For the reasons discussed in Judge Kavanaugh’s concurring opinion in Northeast Hospital, 657 F.3d at
18-24, the language of the statute is plain and also forecloses an interpretation to treat part C days as part A days in
the DSH calculation. The plaintiff Hospitals recognize that this Court is bound by the contrary decision of the panel
in Northeast Hospital, 657 F.3d at 2, but make this claim to preserve it to the extent that certiorari to the Supreme
Court is ever granted in this case.

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include part C days in the part A/SSI fractions for federal fiscal year 2012 patently fails the test
of reasoned decision-making. See Allina Health Servs., 904 F. Supp. 2d at 93 (“[T]he Secreatry’s
cursory explanation in the 2004 Final Rule failed to meet the requirements of the APA.”).
Moreover, the agency provided no “explanation of how [its] interpretation serves the statute’s
objectives,” Northpoint Tech., Ltd. v. FCC, 412 F.3d 145, 151 (D.C. Cir. 2005), thus utterly
failing to demonstrate that “the agency considered the matter in a detailed and reasoned fashion,”
ITT Indus., Inc. v. NLRB, 251 F.3d 995, 1004 (D.C. Cir. 2001).
REQUEST FOR RELIEF
53.

The plaintiff Hospitals request an Order:
A.

declaring invalid and enjoining the Secretary from applying any policy of

treating part C days as part A days for purposes of calculating Medicare DSH calculation for
periods prior to October 1, 2013;
B.

directing the Secretary to calculate the plaintiff Hospitals’ DSH payments

consistent with that Order and to make prompt payment of any additional amounts due the
plaintiff Hospitals plus interest calculated in accordance with 42 U.S.C. § 1395oo(f)(2);
C.

requiring the Secretary to pay legal fees and cost of suit incurred by the

plaintiff Hospitals; and
D.

providing such other relief as the Court may consider appropriate.

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 Case Document 1 Filed 08/19/14 Page 19 of 19

Dated: August 19, 2014

Respectfully Submitted,

Stephanie A. Webster
DC Bar No. 479524
Christopher L. Keough
DC Bar No. 436567
Hyland Hunt
DC Bar No. 999276
Alex J. Talley
DC Bar No. 1020488
AKIN GUMP STRAUSS HAUER FELD LLP
1333 New Hampshire Avenue, NW.
Washington, DC. 20036
Phone: (202) 887-4049
Fax: (202) 887?4288
swebster@akingump.com

Counsel for Plaintiffs

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