Empire Health Foundation v. Alex Azar, II ( 2020 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
EMPIRE HEALTH FOUNDATION, for Nos. 18-35845
Valley Hospital Medical Center, 18-35872
Plaintiff-Appellee/
Cross-Appellant, D.C. No.
2:16-cv-00209-
v. RMP
ALEX M. AZAR II, Secretary of the
United States Department of Health OPINION
and Human Services,
Defendant-Appellant/
Cross-Appellee.
Appeal from the United States District Court
for the Eastern District of Washington
Rosanna Malouf Peterson, District Judge, Presiding
Argued and Submitted February 6, 2020
Seattle, Washington
Filed May 5, 2020
2 EMPIRE HEALTH FOUND. V. AZAR
Before: MILAN D. SMITH, JR. and N. RANDY SMITH,
Circuit Judges, and JOHN R. TUNHEIM, * District Judge.
Opinion by Judge Milan D. Smith, Jr.
SUMMARY **
Medicare / Rulemaking
The panel affirmed, on different grounds, the district
court’s order granting partial summary judgment for Empire
Health Foundation and vacating the 2005 Rule promulgated
by the Secretary of the Health and Human Services (“HHS”),
interpreting a Medicare regulation.
The 2005 Rule removed the word “covered” from 42
C.F.R. § 412.106(b)(2)(i), effectively amending HHS’s
interpretation of “entitled to [Medicare]” in 42 U.S.C.
§ 1395ww(d)(5)(F)(vi), a subsection of the Medicare Act,
42 U.S.C. §1395 et. seq. The Rule concerns HHS’s annual
calculation of the disproportionate share hospital adjustment
(DSH Adjustment), which increases a hospital’s annual
Medicare inpatient services reimbursement based on the
approximate number of low-income patients the hospital
serves.
*
The Honorable John R. Tunheim, United States Chief District
Judge for the District of Minnesota, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
EMPIRE HEALTH FOUND. V. AZAR 3
Empire challenged the 2005 Rule as part of its appeal of
HHS’s calculation of its 2008 reimbursement. The district
court held that the 2005 Rule was substantively valid, but it
should be vacated because the rulemaking process failed to
meet the Administrative Procedure Act (“APA”)’s
procedural requirements.
The panel held that the 2005 Rule’s rulemaking process,
while not perfect, satisfied the APA’s notice-and-comment
requirements. The panel reversed the district court’s
contrary conclusion. The panel also held, however, that the
2005 Rule was substantively invalid, and must be vacated,
because it directly conflicted with the court’s interpretation
of 42 U.S.C. § 1395ww(d)(5)(F)(vi) in Legacy Emanuel
Hospital and Health Center v. Shalala, 97 F.3d 1261, 1265-
66 (9th Cir. 1996). Because Legacy Emmanuel interpreted
the meaning of “entitled to [Medicare]” in 42 U.S.C
§ 1395ww(d)(5)(F)(vi) to be unambiguous, the 2005 Rule’s
conflicting construction cannot stand. Thus, the panel
affirmed, on different grounds, the district court’s summary
judgment in favor of Empire.
The panel affirmed the district court’s order vacating the
2005 Rule. The panel reinstated the prior version of 42
C.F.R. § 412.106(b)(2)(i), which embraced only “covered”
patient days. The panel remanded to the district court with
instructions to further remand to the Provider
Reimbursement Review Board to decide the remaining
issues in the case.
4 EMPIRE HEALTH FOUND. V. AZAR
COUNSEL
Stephanie R. Marcus (argued) and Mark B. Stern, Appellate
Staff; William D. Hyslop, United States Attorney; Joseph H.
Hunt, Assistant Attorney General; Civil Division, United
States Department of Justice, Washington, D.C.; for
Defendant-Appellant/Cross-Appellee.
Daniel John Hettich (argued), King & Spalding LLP,
Washington, D.C.; Teresa A. Sherman, Paukert &
Troppmann PLLC, Spokane, Washington; for Plaintiff-
Appellee/Cross-Appellant.
OPINION
M. SMITH, Circuit Judge:
This appeal, made pursuant to the Medicare Act’s
expedited judicial review provision, 42 U.S.C.
§ 1395oo(f)(1), requires us to determine whether a rule
promulgated by the Secretary of the Department of Health
and Human Services (HHS) (the 2005 Rule 1) is procedurally
and substantively valid pursuant to the Administrative
Procedure Act (APA), 5 U.S.C. § 551 et seq. 2 The 2005
1
At issue in this case is one portion of a final rule that amended a
wide range of Medicare regulations. 69 Fed. Reg. 48916, 49098–99
(Aug. 11, 2004). For the purposes of this opinion, “2005 Rule” refers
only to the portion of the final rule, discussed in greater detail below,
which removed the word “covered” from 42 C.F.R. § 412.106(b)(2)(i).
2
The Medicare Act’s expedited judicial review provision
incorporates the judicial review provisions of the APA. See 42 U.S.C.
§ 1395oo(f); see also Los Angeles Haven Hospice, Inc. v. Sebelius,
638 F.3d 644, 652 (9th Cir. 2011) (“In a civil action under
EMPIRE HEALTH FOUND. V. AZAR 5
Rule removed the word “covered” from 42 C.F.R.
§ 412.106(b)(2)(i), effectively amending HHS’s
interpretation of “entitled to [Medicare]” in 42 U.S.C.
§ 1395ww(d)(5)(F)(vi), a subsection of the Medicare Act,
42 U.S.C. § 1395 et seq. 3 At stake is HHS’s annual
calculation of the disproportionate share hospital adjustment
(DSH Adjustment), which increases a hospital’s annual
Medicare inpatient services reimbursement based on the
approximate number of low-income patients the hospital
serves. See Catholic Health Initiatives Iowa Corp. v.
Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013).
Plaintiff Empire Health Foundation (Empire) challenged
the 2005 Rule as part of its appeal of HHS’s calculation of
its 2008 reimbursement. The district court granted partial
summary judgment for Empire, ruling that, while the 2005
Rule was substantively valid, it should be vacated because
the rulemaking process leading to its adoption failed to meet
the APA’s procedural requirements.
We affirm the district court’s summary judgment in
favor of Empire, and its order vacating the 2005 Rule, but on
different grounds. See McSherry v. City of Long Beach,
§ 1395oo(f)(1), the validity of the fiscal intermediary’s action is subject
to judicial review using the familiar standards of the Administrative
Procedure Act (‘APA’)—i.e., whether the action was ‘arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with
law.’” (citing 5 U.S.C. § 706(2)(A))).
3
42 U.S.C. § 1395ww(d)(5)(F)(vi) refers to “benefits under part A”
instead of “Medicare,” “supplementary social security income benefits
(excluding any State supplementation) under subchapter XVI of this
chapter,” instead of “SSI benefits,” and “medical assistance under a State
plan approved under subchapter XIX,” instead of “Medicaid.” Herein,
when quoting the statute, we use “[Medicare],” “[SSI benefits],” and
“[Medicaid]” for simplicity.
6 EMPIRE HEALTH FOUND. V. AZAR
584 F.3d 1129, 1135 (9th Cir.2009) (“We may affirm on the
basis of any ground supported by the record.”). We hold that
the 2005 Rule’s rulemaking process, while not perfect,
satisfied the APA’s notice-and-comment requirements.
However, we also hold that the 2005 Rule is substantively
invalid, and must be vacated, because it directly conflicts
with our interpretation of 42 U.S.C. § 1395ww(d)(5)(F)(vi)
in Legacy Emanuel Hospital and Health Center v. Shalala,
97 F.3d 1261, 1265–66 (9th Cir. 1996). Because Legacy
Emanuel interpreted the meaning of “entitled to [Medicare]”
in 42 U.S.C. § 1395ww(d)(5)(F)(vi) to be unambiguous, the
2005 Rule’s conflicting construction cannot stand. See Nat’l
Cable & Telecomms. Ass’n v. Brand X Internet Servs.
(Brand X), 545 U.S. 967, 982–83 (2005).
FACTUAL AND PROCEDURAL BACKGROUND
I. Relevant Statutory and Regulatory Background
As part of the Medicare program, a hospital that “serves
a significantly disproportionate number of low-income
patients,” 42 U.S.C. § 1395ww(d)(5)(F)(i)(I), receives a
DSH Adjustment, which approximately reimburses it for
higher costs associated with providing that service, Catholic
Health, 718 F.3d at 916. HHS administers DSH
Adjustments through the Centers for Medicare and Medicaid
Services (CMS). 4
Qualification for the DSH Adjustment and the amount of
any DSH Adjustment are determined by a hospital’s
“disproportionate patient percentage” (DPP). 42 U.S.C.
§ 1395ww(d)(5)(F)(v). The DPP is calculated by adding the
4
For simplicity, we include CMS in our references to “HHS” herein.
EMPIRE HEALTH FOUND. V. AZAR 7
two fractions set forth in § 1395ww(d)(5)(F)(vi), 5
commonly referred to as the “Medicare fraction” and the
“Medicaid fraction.” See, e.g., Catholic Health, 718 F.3d
at 916. The two fractions are intended to capture a hospital’s
number of patient days attributable two different groups of
low-income patients. Id. at 916–17. SSI entitlement is used
as the low-income proxy for the Medicare population, and
Medicaid eligibility is used as the low-income proxy for the
5
In pertinent part, 42 U.S.C. § 1395ww(d)(5)(F)(vi) provides:
(vi) In this subparagraph, the term “disproportionate
patient percentage” means, with respect to a cost
reporting period of a hospital, the sum of—
(I) 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 this subchapter
and were entitled to supplementary 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 this subchapter, and
(II) 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 subchapter XIX, but who were not entitled
to benefits under part A of this subchapter, and the
denominator of which is the total number of the
hospital’s patient days for such period.
8 EMPIRE HEALTH FOUND. V. AZAR
non-Medicare population. Id.; Legacy Emanuel, 97 F.3d
at 1265–66.
The following chart illustrates the two fractions:
Medicare fraction Medicaid fraction
Numerator Patient days for Patient days for
patients entitled to patients eligible for
Medicare and entitled Medicaid but not
to SSI Benefits entitled to Medicare
Denominator Patient days for Total number of
patients entitled to patient days
Medicare
See Catholic Health, 718 F.3d at 917 (providing the chart as
a visual representation of the two fractions).
Empire’s challenge concerns the 2005 Rule’s
interpretation of the statutory phrase “entitled to [Medicare]”
in its implementing regulation, 42 C.F.R.
§ 412.106(b)(2)(i), 6 and that interpretation’s effect on the
6
In pertinent part, 42 C.F.R. § 412.106(b), as amended by the 2005
Rule, provides:
(b) Determination of a hospital’s disproportionate
patient percentage—
(1) General rule. A hospital’s disproportionate
patient percentage is determined by adding the
EMPIRE HEALTH FOUND. V. AZAR 9
treatment of “dual eligible exhausted coverage patient
days.” 7 These are patient days attributable to patients
eligible for both Medicare and Medicaid and whose hospital
stays have exceeded the 90-day limit applicable to Medicare
coverage (after which Medicare ceases to cover the patient’s
results of two computations and expressing that
sum as a percentage.
(2) First computation: Federal fiscal year. For
each month of the Federal fiscal year in which the
hospital’s cost reporting period begins, CMS—
(i) Determines the number of patient days that—
(A) Are associated with discharges occurring
during each month; and
(B) Are furnished to patients who during that
month were entitled to both Medicare Part A
(including Medicare Advantage (Part C)) and
SSI, excluding those patients who received
only State supplementation; . . . .
7
As part of its argument that the 2005 Rule’s rulemaking process
failed to meet the APA’s procedural requirements, Empire’s briefing
alludes to the impact of the 2005 Rule on “Medicare Secondary Payer”
days, which are patient days for which Medicare is not the primary payer
pursuant to 42 U.S.C. § 1395y(b)(2)(A). Empire offered little
explanation as to what the 2005 Rule’s impact on Medicare Secondary
Payer days was, and did not refer to Medicare Secondary Payer days in
its reply brief. Because Empire insufficiently explained this argument in
its briefing, we rule that it was waived. See Ghahremani v. Gonzales,
498 F.3d 993, 997–98 (9th Cir. 2007); Acosta-Huerta v. Estelle, 7 F.3d
139, 144 (9th Cir. 1992). In any case, it is immaterial to our holding
today, which invalidates the 2005 Rule on substantive grounds.
10 EMPIRE HEALTH FOUND. V. AZAR
inpatient hospital services costs). 8 42 U.S.C. § 1395d;
42 C.F.R. § 409.61(a)(1).
Pursuant to the version of 42 C.F.R. § 412.106(b)(2)(i)
in place before the 2005 Rule was promulgated, HHS
included only “covered” patient days in the Medicare
fraction when calculating a hospital’s DSH Adjustment.
42 C.F.R. § 412.106(b)(2)(i) (2003); 69 Fed. Reg. at 49098.
This had the effect of excluding dual eligible exhausted
coverage patient days from the numerator and denominator
of the Medicare fraction. Meanwhile, HHS also excluded
dual eligible exhausted coverage patient days from the
Medicaid fraction. Edgewater Med. Ctr. v. Blue Cross &
Blue Shield Ass’n, HCFA Adm’r Dec., 2000 WL 1146601,
at *4–5 (June 19, 2000). 9 Because HHS did not include dual
eligible exhausted coverage patient days in either the
Medicare fraction or the Medicaid fraction before the 2005
Rule, HHS did not count those days at all for the purpose of
calculating a given hospital’s DSH Adjustment. See
Catholic Health, 718 F.3d at 921, 921 n.5.
In contrast, in the 2005 Rule, HHS removed the word
“covered” from 42 C.F.R. § 412.106(b)(2)(i). As a result,
HHS now includes dual eligible exhausted coverage patient
days in the numerator and denominator of the Medicare
8
Medicare will pay for a limited number of days for each
hospitalization. If a patient’s stay exceeds that number, coverage is
exhausted, and Medicare will not pay for the additional days. 42 U.S.C.
§ 1395d.
9
The Health Care Financing Administration is the predecessor of
CMS. See Catholic Health, 718 F.3d at 918 n.2.
EMPIRE HEALTH FOUND. V. AZAR 11
fraction when calculating a given hospital’s DSH
Adjustment. 10
A. The 2005 Rule’s Rulemaking Process
To arrive at the interpretation reflected in the 2005 Rule,
HHS took a circuitous route. Initially, HHS proposed in
2003 to include dual eligible exhausted coverage patient
days in the Medicaid fraction commencing with Fiscal Year
(FY) 2004 (the 2003 Notice). 68 Fed. Reg. 27154, 27207–
208 (May 19, 2003). In the 2003 Notice, HHS misstated its
then-applicable rule with respect to dual eligible exhausted
coverage patient days, asserting that HHS counted them in
the Medicare fraction. Several comments responding to the
2003 Notice noted the misstatement and pointed out that the
then-applicable regulation did not include dual eligible
exhausted coverage patient days in the Medicare fraction. In
its FY 2004 final rule, HHS deferred deciding whether to
promulgate the proposed change, noting that it was still
reviewing comments on dual eligible exhausted coverage
patient days and would respond in a different document.
68 Fed. Reg. 45346, 45421 (Aug. 1, 2003).
In 2004, as part of its rulemaking proposal for the 2005
Rule, the agency explained that it would make sure to
address any comments received in response to the 2003
Notice. 69 Fed. Reg. 28196, 28286 (May 18, 2004). The
new comment period ran until July 12, 2004. Days before
10
Empire contends that the 2005 Rule “serves to systematically
reduce payments hospitals receive for treating” low-income patients.
Empire’s Brief at 5. The record, however, is unclear as to whether the
2005 Rule’s interpretation has increased or decreased hospital
reimbursements in general. It appears that its effect on hospitals is highly
fact-specific, depending on a given hospital’s patient demographics. See
69 Fed. Reg. at 49098–99.
12 EMPIRE HEALTH FOUND. V. AZAR
the comment period for the 2005 Rule closed, HHS posted a
webpage acknowledging the 2003 Notice’s misstatement of
the then-applicable rule. 11 HHS stated that “[o]ur policy has
been that only covered patient days are included in the
Medicare fraction.” A few commenters acknowledged
HHS’s correction. Without acknowledging HHS’s initial
mistake, however, many other commenters voiced support
for the erroneously stated status quo.
In the August 11, 2004 Federal Register entry describing
the final version of the 2005 Rule, HHS noted that:
We received numerous comments that
commenters were disturbed and confused by
our recent Web site posting regarding our
policy on dual-eligible patient days. The
commenters believe that this posting was a
modification or change in our current policy
to include patient days of dual-eligible
Medicare beneficiaries whose Medicare Part
A coverage has expired in the Medicaid
fraction of the DSH calculation. In addition,
the commenters believed that the information
in this notice appeared with no formal
notification by CMS and without the
opportunity for providers to comment.
69 Fed. Reg. at 49098. In response, HHS explained that the
webpage posting “was not a change in our current policy,”
11
We note that there appears to be some dispute in the record over
whether the webpage was published three or five days before the close
of the comment period. For the purposes of our analysis, this difference
of two days is immaterial.
EMPIRE HEALTH FOUND. V. AZAR 13
but a “correction of an inadvertent misstatement” made in
the 2003 Notice. Id.
The 2005 Rule included dual eligible exhausted
coverage patient days in the Medicare fraction. 69 Fed. Reg.
at 49098–99. In effect, the new rule enacted what HHS had
mistakenly stated was the status quo in the 2003 Notice.
Pursuant to the 2005 Rule, HHS now counts dual eligible
exhausted coverage patient days as Medicare days even if
Medicare did not pay for them. 69 Fed. Reg. at 49099
(“[W]e are adopting a policy to include the days associated
with dual-eligible beneficiaries in the Medicare fraction,
whether or not the beneficiary has exhausted Medicare Part
A hospital coverage.” (emphasis added)).
II. The Proceedings in this Case
Empire acquired the outstanding Medicare
reimbursement owed to Valley Hospital Medical Center for
periods prior to October 1, 2008, including the 2008 fiscal
year at issue here. 12 Dissatisfied with its total
reimbursement amount for FY 2008, Empire timely
appealed HHS’s calculation of Empire’s FY 2008
reimbursement and requested a hearing before the Provider
Reimbursement Review Board (PRRB). The PRRB granted
Empire’s request for expedited judicial review pursuant to
42 U.S.C. § 1395oo(f)(1), allowing Empire to challenge the
12
Due to HHS’s delay in amending the language of its regulations
after the promulgation of the 2005 Rule, FY 2008 was the first year in
which the 2005 Rule was implemented, removing the word “covered”
from 42 C.F.R. § 412.106(b)(2)(i). See Allina Health Services v.
Sebelius, 746 F.3d 1102, 1106 n.3 (D.C. Cir. 2014); 72 Fed. Reg. 47130,
47384 (Aug. 22, 2007) (describing “technical correction” implementing
changes to 42 C.F.R. § 412.106(b)(2)(i)).
14 EMPIRE HEALTH FOUND. V. AZAR
2005 Rule in the district court. 13 Empire timely filed this
action in the district court, challenging the 2005 Rule’s
interpretation of “entitled to [Medicare]” as both
procedurally and substantively invalid pursuant to the
APA. 14
The parties cross-moved for summary judgment. The
district court granted Empire’s summary judgment motion in
part, denied HHS’s summary judgment motion, and vacated
the 2005 Rule, ruling that the 2005 Rule’s rulemaking
process violated the APA because HHS did not give more
time for comment after correcting its misstatement in the
2003 Notice. However, the district court sided with HHS on
the substantive propriety of HHS’s interpretation of
“entitled.” First, it held that our ruling in Legacy Emanuel,
97 F.3d at 1265, did not foreclose HHS’s interpretation of
the statute pursuant to Brand X. It next held at Chevron step
one, see Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837, 842 (1984), that Congress’s intent was unclear
from the plain language and statutory purpose of 42 U.S.C.
§1395ww(d)(5)(F)(vi). Finally, it held at Chevron step two,
see 467 U.S. at 843, that HHS’s interpretation of the statute
was a permissible construction of the statute. Empire and
HHS each timely appealed.
13
Expedited judicial review is triggered when the PRRB, on its own
or at the request of a provider, determines it does not have the authority
to resolve a provider’s challenge. 42 U.S.C. § 1395oo(f)(1).
14
Empire also argued that, if HHS’s 2005 Rule were upheld, HHS
should broaden its interpretation of “entitled to [SSI benefits]” in the
Medicare fraction to include patient days that reflect SSI eligibility, not
just payment. Because we vacate the 2005 Rule, we do not address this
argument.
EMPIRE HEALTH FOUND. V. AZAR 15
JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction over this appeal
pursuant to 42 U.S.C. § 1395oo(f)(1), the Medicare Act’s
expedited judicial review provision, and 28 U.S.C. § 1331,
as a dispute arising under federal law. We have jurisdiction
over these cross-appeals pursuant to 28 U.S.C. § 1291. We
review de novo a district court’s decision on cross motions
for summary judgment. Guatay Christian Fellowship v.
County of San Diego, 670 F.3d 957, 970 (9th Cir. 2011).
ANALYSIS
I. The Procedural Validity of the 2005 Rule
Empire asserts that the 2005 Rule violated the APA’s
procedural requirements because HHS did not provide the
public with an additional comment period after admitting
that it misrepresented the status quo in the 2003 Notice. We
disagree.
The APA requires an agency to comply with notice-and-
comment procedures when the agency amends its
regulations. 5 U.S.C. § 553. 15 The agency must publish a
notice of proposed rulemaking, which shall include, in
relevant part, “either the terms or substance of the proposed
rule or a description of the subjects and issues involved.” Id.
§ 553(b)(3). After notice, interested parties must have the
15
The Medicare Act has its own notice-and-comment procedure.
42 U.S.C. § 1395hh(b). Because of the similarity of the two procedures,
we will use the more robust APA caselaw in order to analyze this claim
of procedural error. See Monmouth Med. Center v. Thompson, 257 F.3d
807, 814 (D.C. Cir. 2001). Moreover, the parties briefed this issue
pursuant to the APA. See also Stringfellow Mem. Hosp. v. Azar, 317 F.
Supp. 3d 168, 184 n.6 (D.D.C. 2018).
16 EMPIRE HEALTH FOUND. V. AZAR
opportunity to comment on the proposal, “participat[ing] in
the rule making through submission of written data, views,
or arguments.” Id. § 553(c).
We will set aside an agency action that we find to be
“without observance of procedure required by law.”
5 U.S.C. § 706(2)(D). We have also concluded that “[a]
decision made without adequate notice and comment is
arbitrary or an abuse of discretion.” Nat. Res. Def. Council
v. EPA (NRDC II), 279 F.3d 1180, 1186 (9th Cir. 2002)
(citing 5 U.S.C. § 706(2)(A)). Pursuant to the APA, whether
notice is adequate is “whether interested parties reasonably
could have anticipated the final rulemaking” from the
proposed rule. Id. at 1187 (quoting Nat. Res. Def. Council
v. EPA (NRDC I), 863 F.2d 1420, 1429 (9th Cir. 1988)). The
key inquiry is whether the changes in the final rule are a
“logical outgrowth of the notice and comments received.”
Rybachek v. United States EPA, 904 F.2d 1276, 1288 (9th
Cir. 1990). The Medicare statute echoes this standard,
providing that if a final regulation “is not a logical outgrowth
of a previously published notice of proposed rulemaking,”
the final regulation “shall be treated as a proposed
regulation” requiring further public comment. 42 U.S.C.
§ 1395hh(a)(4).
Other considerations to determine the adequacy of notice
include “whether a new round of notice and comment would
provide the first opportunity for interested parties to offer
comments that could persuade the agency to modify its rule,”
NRDC II, 279 F.3d at 1186 (quoting Am. Water Works Ass’n
v. EPA, 40 F.3d 1266, 1274 (D.C. Cir. 1994), and whether
“the notice ‘fairly apprise[s] interested persons of the
subjects and issues before the [a]gency,’” Louis v. U.S. Dep’t
of Labor, 419 F.3d 970, 975 (9th Cir. 2005) (quoting NRDC
II, 279 F.2d at 1186.
EMPIRE HEALTH FOUND. V. AZAR 17
Here, HHS undoubtedly misstated the then-applicable
rule in the 2003 Notice. Nevertheless, the 2003 Notice did
describe the content of the 2005 Rule, even if it incorrectly
characterized it as the then-applicable rule. 68 Fed. Reg.
27154, 27207. HHS corrected its misstatement of the then-
applicable rule before the end of the second comment period.
Moreover, many sophisticated commenters, including
several large hospital associations, supported placing dual
eligible exhausted coverage patient days in the Medicare
fraction, as the 2005 Rule finally did. The rulemaking
process was certainly not perfect, and some commenters
expressed confusion with HHS’s correction notice. 69 Fed.
Reg. 48916, 49098. However, the 2005 Rule was a logical
outgrowth of the proposed rule change, and HHS’s 2003
Notice provided adequate notice to commenters of what the
agency was considering. As another district court observed
in upholding the 2005 Rule’s notice-and-comment process:
“Numerous commenters during both the initial and the
second comment periods wrote in support of the misstated
status quo—that is, the policy that was ultimately adopted—
to ‘urge that CMS not change the rules for counting dual-
eligible days.’” Stringfellow, 317 F. Supp. 3d at 187
(quoting record).
We conclude that the procedural error alleged by Empire
here is similar to the one the Supreme Court addressed in
Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174–
75 (2007). There, the Court rejected a procedural challenge
to a final rule that was the opposite of what was contained in
a rulemaking proposal. Id. The final rule exempted certain
domestic workers from the Fair Labor Standards Act
(FLSA), when the proposal had contemplated including
them within the FLSA’s ambit. Id. Nevertheless, the court
held that the final rule was “reasonably foreseeable” and the
proposal had provided fair notice to commenters. Id. at 175.
18 EMPIRE HEALTH FOUND. V. AZAR
The Court observed that commenters could reasonably
foresee that “after . . . consideration [of the proposal] the
Department might choose to adopt the proposal or to
withdraw it.” Id. Commenters on the 2005 Rule were
similarly apprised of a binary choice—under the new rule,
dual eligible exhausted coverage patient days would be
included in either the Medicare or the Medicaid fraction. In
the end, they were included in the Medicare fraction.
Allina Health Services v. Sebelius, 746 F.3d 1102 (D.C.
Cir. 2014), on which Empire relies, is inapposite. Allina
involved a challenge to a different portion of the final rule
that also contained the 2005 Rule. Id. at 1106–07. In the
applicable notice of proposed rulemaking, the agency
proposed to “clarify” an existing practice and stated that it
did not expect the clarification to have a major financial
impact. Id. at 1106. But the final rule in Allina was an
entirely new policy with enormous financial consequences.
Id. at 1107. The D.C. Circuit held that the rule was not a
“logical outgrowth” of its proposal, because it could not have
been anticipated by the parties based on the purported
clarification described in the notice of proposed rulemaking.
Id. at 1108–09 (asking whether “even a good lawyer” could
“anticipate . . . such a volte-face with enormous financial
implications would follow [HHS’s] proposed rule.”); see
also Stringfellow, 317 F. Supp. 3d at 188–89 (distinguishing
Allina while upholding the 2005 Rule’s notice-and-comment
procedure). Here, however, the 2005 Rule was a “logical
outgrowth” of the 2003 Notice because, as we have
explained, the parties could anticipate that HHS intended to
change the way it treated dual eligible exhausted coverage
patient days in the DSH Adjustment. The rulemaking
procedure at issue here did not involve the unexpected
“volte-face” that the D.C. Circuit confronted in Allina.
746 F.3d at 1109.
EMPIRE HEALTH FOUND. V. AZAR 19
Because we conclude that the 2005 Rule was a logical
outgrowth of the notice and the comments received, we
reverse the district court’s contrary conclusion.
Nevertheless, we ultimately affirm the district court’s
summary judgment in favor of Empire and order vacating
the 2005 Rule, because we hold that the 2005 Rule is
substantively invalid.
II. The Substantive Validity of the 2005 Rule
Having determined that the 2005 Rule met the APA’s
procedural requirements, we next consider its substantive
validity pursuant to the APA. Empire argues that our
decision in Legacy Emanuel forecloses HHS’s interpretation
of “entitled to [Medicare]” in the 2005 Rule. HHS, citing
Sixth and D.C. Circuit decisions, maintains that we are not
bound by Legacy Emanuel’s analysis of “entitled to,”
because there, according to HHS’s argument, we decided
only the meaning of the phrase “eligible for medical
assistance under . . . [Medicaid].” According to HHS, our
analysis of the phrase “entitled to [Medicare]” is nothing
more than “non-binding dicta.” Government’s Reply Brief
at 28. We agree with Empire that Legacy Emanuel is directly
at odds with the 2005 Rule, and thus conclude that the rule
is substantively invalid.
In a substantive APA challenge to a notice-and-comment
rule, we apply the Chevron two-step framework. See United
States v. Mead Corp., 533 U.S. 218, 230–31 (2001). At
Chevron step one, we ask whether Congress “has directly
spoken to the precise question at issue” in the statutory text.
Chevron, 467 U.S. at 842. We employ “traditional tools of
statutory construction” to determine whether “Congress had
an intention on the precise question at issue[.]” Id. at 843 n.
9. If the statute is silent or ambiguous, however, we proceed
to Chevron step two and ask “whether the agency’s answer
20 EMPIRE HEALTH FOUND. V. AZAR
is based on a permissible construction of the statute.” Id. at
843.
Judicial precedent affects how we apply the Chevron
framework. “[A] judicial precedent holding that the statute
unambiguously forecloses the agency’s interpretation, and
therefore contains no gap for the agency to fill, displaces a
conflicting agency construction.” Brand X, 545 U.S. at 982–
83. This occurs “if the prior court decision holds that its
construction follows from the unambiguous terms of the
statute and thus leaves no room for agency discretion.” Id.
at 982. In other words, if the prior court decision was
decided at Chevron step one, there is no need to proceed to
Chevron step two.
Our ruling in Legacy Emanuel was clearly a Chevron
step one decision. 97 F.3d at 1265 (“We believe the
language of the Medicare reimbursement provision is
clear[.]”). In Legacy Emanuel, we considered the meaning
of the words “entitled” and “eligible” in tandem. We
interpreted the word “entitled” to mean that a patient has an
“absolute right . . . to payment.” Id. In contrast, we
interpreted the word “eligible” to mean that a patient simply
meets the Medicaid statutory criteria: “if Congress had
wanted to limit the Medicaid proxy to days for which
Medicaid actually paid, Congress could have used ‘entitled’
or expressly specified that it was to include only those days
actually paid for by Medicaid.” Id. We held that Congress
used a “broader word” than entitled in the Medicaid fraction
to fulfill its intent of compensating hospitals for treating low-
income patients. Id. And we noted that the use of “entitled”
in the Medicare fraction did not frustrate that purpose,
because the low-income proxy in the Medicare fraction is
ultimately determined by entitlement to SSI, not Medicare.
Id. at 1265–66. The 2005 Rule’s interpretation of “entitled,”
EMPIRE HEALTH FOUND. V. AZAR 21
in contrast, resembles our understanding of the term
“eligible” in Legacy Emanuel by embracing even those
patient days for which Medicare coverage is exhausted (i.e.,
for which there is no absolute right to payment). 69 Fed.
Reg. at 49099. Thus, the 2005 Rule mistakenly treats as
ambiguous statutory language that we deemed clear, and
rewrites that language in contravention of our interpretation.
Rejecting Empire’s challenge to the 2005 Rule’s
substantive validity, the district court determined that
Legacy Emanuel does not control the meaning of the
statutory text at issue here and thus proceeded to Chevron
step two. HHS adopts that position here and argues that that
Legacy Emanuel did not actually decide the meaning of the
term “entitled” in the Medicare fraction. We reject this
reading of Legacy Emanuel. Legacy Emanuel’s analysis of
“eligible for [Medicaid]” is inextricable from its analysis of
“entitled to [Medicare].” Consequently, we are bound by
Legacy Emanuel’s interpretation of “entitled to [Medicare]”
unless and until change comes from our court sitting en banc
or the Supreme Court. Miller v. Gammie, 335 F.3d 889, 899
(9th Cir. 2003) (en banc). Pursuant to Brand X, Legacy
Emanuel’s unambiguous interpretation of “entitled to
[Medicare]” in 42 U.S.C. § 1395ww(d)(5)(F)(vi) requires us
to invalidate the 2005 Rule, which adopts a conflicting
interpretation of the statute.
We recognize, as HHS argues on appeal, that the Sixth
and D.C. Circuits have affirmed the 2005 Rule’s
interpretation of the phrase “entitled to [Medicare]” in
42 U.S.C. § 1395ww(d)(5)(F)(vi) at Chevron step two. See
Catholic Health, 718 F.3d at 920 (affirming 2005 Rule at
Chevron step two); Metro. Hosp. v. HHS, 712 F.3d 248, 270
(6th Cir. 2013) (same). Those decisions, however, do not
control our analysis here because neither court dealt with
22 EMPIRE HEALTH FOUND. V. AZAR
binding circuit precedent holding that the statutory language
was unambiguous, as Legacy Emanuel did.
For example, in Catholic Health, the D.C. Circuit relied
on circuit precedent determining that the statutory language
in question was ambiguous. 718 F.3d at 920 (citing
Northeast Hosp. v. Sebelius, 657 F.3d 1, at 13 (D.C. Cir.
2011). 16 So Brand X could not have warranted a different
result in Catholic Health.
The Sixth Circuit’s binding precedent construing
42 U.S.C. § 1395ww(d)(5)(F)(vi) also did not trigger Brand
X’s “stare decisis effect to a prior judicial construction” of a
statute. Metro. Hosp., 712 F.3d at 256. In Metropolitan
Hospital, the Sixth Circuit held that its precedent construing
“eligible for [Medicaid]” in the Medicaid fraction, Jewish
Hospital, Inc. v. Secretary of Health & Human Services,
19 F.3d 270 (6th Cir. 1994), did not foreclose the 2005
Rule’s interpretation of “entitled to [Medicare]” in the
Medicare fraction. 712 F.3d at 257–58. The Sixth Circuit
held that Brand X did not apply because Jewish Hospital was
not decided at Chevron step one. Metro. Hosp., 712 F.3d
at 256. Nevertheless, the court also noted that, even if
Jewish Hospital were decided at Chevron step one, the
decision did not precisely decide the statutory meaning of
“entitled to [Medicare],” and its discussion of that statutory
phrase was secondary to other arguments supporting its
holding. Id. at 256–57 (describing Jewish Hospital’s
16
We note that then-Judge Kavanaugh’s concurring opinion in
Northeast Hospital agreed with the interpretation of “entitled to
[Medicare]” we announced in Legacy Emanuel. Northeast Hosp. Corp.
v. Sebelius, 657 F.3d 1, 20 (D.C. Cir. 2011).
EMPIRE HEALTH FOUND. V. AZAR 23
contrast of “entitled” and “eligible” as a “‘back-up’
analysis”).
HHS argues that the Sixth Circuit’s reading of Jewish
Hospital, as set forth in Metropolitan Hospital, should
somehow control our analysis here because we cited Jewish
Hospital as part of our statutory interpretation in Legacy
Emanuel. But Legacy Emanuel’s holding, construing the
unambiguous language of 42 U.S.C. § 1395ww(d)(5)(F)(vi),
is fundamentally different than Jewish Hospital’s, which
held that the statute was ambiguous and deferred to the
agency’s permissible interpretation. Moreover, Jewish
Hospital’s analysis of “entitled to [Medicare]” is
comparatively shorter than our analysis in Legacy Emanuel
and was just one of several analyses informing court’s
decision interpreting “eligible for [Medicaid].” Compare
Jewish Hospital, 19 F.3d at 274–76 with Legacy Emanuel,
97 F.3d at 1265–66. Even the Sixth Circuit recognized that
our interpretation of “entitled to [Medicare]” in Legacy
Emanuel played a central role in our analysis. Metro. Hosp.,
712 F.3d at 259 (noting that Legacy Emanuel “bas[ed] its
conclusion” on the distinction between “eligible to
[Medicaid]” and “entitled to [Medicare]”). Because we have
already construed the unambiguous meaning of “entitled to
[Medicare]” in 42 U.S.C. § 1395ww(d)(5)(F)(vi), we hold
that the 2005 Rule’s contrary interpretation of that phrase is
substantively invalid pursuant to the APA. Thus, we affirm,
on different grounds, the district court’s summary judgment
in favor of Empire.
III. Vacatur of 2005 Rule
Having affirmed, on different grounds, the district
court’s summary judgment in favor of Empire, we also
affirm its order vacating the 2005 Rule. See Nat. Res. Def.
Council v. EPA (NRDC III), 526 F.3d 591, 608 (9th Cir.
24 EMPIRE HEALTH FOUND. V. AZAR
2008) (vacating rule held to be unlawful under Chevron
analysis). We have observed that “when a reviewing court
determines that agency regulations are unlawful, the
ordinary result is that the rules are vacated—not that their
application to the individual petitioners is proscribed.” Univ.
of Cal. v. U.S. Dep’t Homeland Sec., 908 F.3d 476, 511 (9th
Cir. 2018) (quoting Nat’l Mining Ass’n v. U.S. Army Corps.
of Eng’rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998)).
Accordingly, we reinstate the prior version of 42 C.F.R.
§ 412.106(b)(2)(i), which embraced only “covered” patient
days, see Paulsen v. Daniels, 413 F.3d 999, 1008 (9th Cir.
2005) (“The effect of invalidating an agency rule is to
reinstate the rule previously in force.”).
CONCLUSION
While HHS’s notice-and-comment procedure for the
2005 Rule was not without flaws, it met the APA’s
requirements. However, the 2005 Rule violated the
unambiguous text of 42 U.S.C. § 1395ww(d)(5)(F)(vi) and
our court’s ruling in Legacy Emanuel by removing the word
“covered” from 42 C.F.R. § 412.106(b)(2)(i). As a result,
we AFFIRM, on different grounds, the district court’s order
granting partial summary judgment for Empire and vacating
the 2005 Rule. We REMAND to the district court with
instructions to further remand to the PRRB to decide the
remaining issue in this case. 17
AFFIRMED AND REMANDED.
17
Both parties agreed to, and the district court ordered, a remand to
the PRRB to decide whether, in light of Allina, 746 F.3d at 1102,
Medicare Part C days should have been included in the Medicare fraction
for the Empire’s 2008 DSH calculation.