Grossmont Hospital Corporation v. Sylvia Mathews Burwell , 797 F.3d 1079 ( 2015 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 19, 2015 Decided August 7, 2015
No. 12-5411
GROSSMONT HOSPITAL CORPORATION, DOING BUSINESS AS
SHARP GROSSMONT HOSPITAL, ET AL.,
APPELLANTS
v.
SYLVIA MATHEWS BURWELL, SECRETARY, UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:10-cv-01201)
Robert L. Roth argued the cause for appellants. With him
on the briefs was John R. Hellow.
Sydney Foster, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief were
Ronald C. Machen, Jr., U.S. Attorney at the time the brief was
filed, and Michael S. Raab, Attorney. R. Craig Lawrence,
Assistant U.S. Attorney, entered an appearance.
Before: MILLETT, Circuit Judge, and EDWARDS and
SENTELLE, Senior Circuit Judges.
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Opinion for the Court filed by Senior Circuit Judge
SENTELLE.
SENTELLE, Senior Circuit Judge: Appellants, California
hospitals, sought reimbursement under the Medicare program
for so-called “bad claims.” Payment was denied because the
claims were submitted to Medicare without first being submitted
to the State of California for a determination of any payment
responsibility it may have for the claims. The appellants were
denied relief in administrative proceedings. The district court
affirmed. We affirm the district court.
BACKGROUND
The Medicare program pays for certain medical care
provided primarily to eligible elderly and disabled persons.
Under the program, when a hospital participating in the program
incurs costs in providing services to a Medicare patient, those
costs are borne in part by the patient through the payment of
deductibles and co-insurance. See 42 U.S.C. § 1395e; 42 C.F.R.
§ 409.80 et seq. Generally, the remaining costs are reimbursed
by the Medicare program to the hospital through fiscal
intermediaries, which are typically private insurance companies.
See 42 U.S.C. § 1395h (2000). The Medicaid program is a
cooperative federal-state program to provide medical care for
eligible low-income individuals. The program is jointly funded
by federal and state governments. In order for a state to qualify
for federal funding, the Secretary of Health and Human Services
(hereinafter “Secretary”) must approve the state’s Medicaid
plan, which sets out, inter alia, covered medical services. See
42 U.S.C. §§ 1396a, 1396b.
Some patients are eligible for both Medicare and Medicaid
(known as “dual eligibles”). When this occurs Medicare is the
primary payor. State Medicaid plans often mandate that the
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state Medicaid agency pay for part or all of the Medicare
deductibles and coinsurance amounts incurred in connection
with treating these dual eligibles. But if under its Medicaid plan
a state is not obligated to pay such deductibles or coinsurance
amounts, then these amounts can be included as “bad debt”
under Medicare, and thus qualify as reimbursable to the hospital
by the federal government. Pursuant to agency regulations, for
a bad debt to be reimbursable the hospital must, inter alia, be
able to establish that reasonable collection efforts were made.
Prior to 1994, California’s Medicaid plan, known as Medi-
Cal, provided for payment of dual eligibles’ Medicare
deductibles and co-insurance. On May 1, 1994, however, Medi-
Cal unilaterally decided to stop making these payments. In
1996, the Secretary and Medi-Cal reached an agreement under
which Medi-Cal’s payments for Medicare deductibles and co-
insurance would continue, subject to a payment ceiling and
retroactive to May 1, 1994. However, for a period of years after
this agreement was reached Medi-Cal continued to
automatically set its payment responsibility for dual eligibles to
zero. Consequently, in 1998 the Secretary and California
reached another agreement under which Medi-Cal would
reprocess all claims made between May 1994 and March 1999.
Appellants Grossmont Hospital Corporation and four other
California hospitals (hereinafter “Grossmont” or “the hospitals”)
provided certain health services to dual eligibles for the relevant
time period, May 1, 1994, through June 30, 1998. During this
time, Grossmont’s fiscal intermediary and Medi-Cal
implemented a system that was intended to automatically
transmit from the intermediary to Medi-Cal all of Grossmont’s
claims for payment of dual eligibles’ deductibles and co-
insurance. However, the system did not always work properly,
and consequently some of Grossmont’s claims were not
transmitted to Medi-Cal. After Medi-Cal reprocessed the claims
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in its system for May 1994 through March 1999, it issued lump-
sum payments in 1999, including to Grossmont. Grossmont
subsequently realized that some of its claims were not included
in its lump-sum payments. One of the hospitals sent the state a
letter concerning the missing claims and a few telephone calls
were made to the state, but there is no evidence in the
administrative record that the hospitals took any other steps to
obtain state determinations of payment responsibility for the
missing claims. Grossmont eventually produced its own
estimates of the missing claims. Grossmont submitted these
estimates to its intermediary, seeking payment, but the
intermediary determined that such documentation was not
appropriate. In 2006, Grossmont sent a letter to the state with a
request to process an attached sample of the missing claims, but
the state denied the request because the claims were not
submitted in a timely manner.
Grossmont appealed the intermediary’s determination to the
Provider Reimbursement Review Board (hereinafter “Board”).
The Board reversed the intermediary’s determination,
concluding that the intermediary had sufficient information to
determine the amounts that Medi-Cal was not obligated to pay.
Joint Appendix (“JA”) 58-70.
The Secretary, through the Administrator for the Centers for
Medicare and Medicaid Services, then reviewed the Board’s
decision. The Secretary reversed the Board’s decision,
observing that under a longstanding policy Medicare would not
reimburse a hospital for dual eligibles’ unpaid deductible and
co-insurance amounts unless the hospital first billed the state
Medicaid agency (“must bill policy”) and obtained a
determination from the state of its payment responsibility
(“mandatory state determination”). Here, the Secretary
concluded, there had been no state determination made on the
missing claims and therefore the claims were not reimbursable.
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JA 35-56.
Grossmont then appealed the Administrator’s decision to
the district court. The parties cross-moved for summary
judgment. In a thorough Memorandum Opinion, Grossmont
Hosp. Corp. v. Sebelius, 903 F. Supp. 2d 39 (D.D.C. 2012)
(“Grossmont I”), the district court granted the Secretary’s
motion for summary judgment, affirming the Secretary’s
decision that the claims were not reimbursable.
Grossmont now appeals the district court’s decision.
STANDARD OF REVIEW
We review the district court’s grant of summary judgment
de novo and review the Secretary’s decision under the standard
of the Administrative Procedure Act. See, e.g., St. Luke’s Hosp.
v. Thompson, 355 F.3d 690, 693-94 (D.C. Cir. 2004). We may
set aside the Secretary’s decision only if it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law,” or “unsupported by substantial evidence
in the administrative record.” 5 U.S.C. § 706(2)(A), (E);
Marymount Hosp., Inc. v. Shalala, 19 F.3d 658, 661 (D.C. Cir.
1994). The Secretary’s interpretation of her own regulations is
entitled to “substantial deference” and “must be given
controlling weight unless it is plainly erroneous or inconsistent
with the regulation.” Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 512 (1994) (internal quotation marks omitted).
DISCUSSION
Grossmont argues that the mandatory state determination
policy violates the bad debt moratorium; that the Secretary’s
refusal to pay Grossmont’s claims based on the mandatory state
determination policy is arbitrary and capricious; and that
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Grossmont’s claims must be paid under Joint Signature
Memorandum 370.
A. The bad debt moratorium
Grossmont questions the validity of the mandatory state
determination policy. According to Grossmont, the long-
standing policy of the Secretary was an “alternative
documentation” policy, under which hospitals had the burden to
show that they were entitled to the Medicare bad debts claimed,
but were not required to submit bills to the state Medicaid
program. Grossmont contends that the alternative
documentation policy was confirmed in 1995 when the
Secretary issued instructions in the Provider Reimbursement
Manual, Part II § 1102.3L, which stated that hospitals can
document a state’s obligation for bad debts by supplying either
a Medicaid remittance advice form or alternative documentation
of the state’s lack of responsibility for payment.
Even though § 1102.3L was deleted by the Secretary in
2003, it is Grossmont’s contention that the alternative
documentation policy was in effect for the relevant time period,
i.e., May 1994 through June 1998. It was not until a case
decision in 2000, Grossmont asserts, that the Secretary sought
for the first time to impose a mandatory state determination
policy to limit the “alternative documentation” policy. See
California Hospitals 91-91 Outpatient Crossover Bad Debts
Group v. Blue Cross and Blue Shield Association/Blue Cross of
California/Blue Cross of Omaha/ Aetna Life Insurance
Company, Adm. Dec. (Oct. 31, 2000), JA 254–265. Grossmont
argues that this attempt in 2000 to limit the application of the
long-standing alternative documentation policy to the hospitals’
claims must be rejected as a violation of the statutory bad debt
moratorium. The moratorium was enacted by Congress in 1987
and prohibits making any change to any policy in effect at the
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time of its enactment with respect to bad debt payments. See
Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-
203, § 4008(c), 101 Stat. 1330. In short, Grossmont claims that
the mandatory state determination policy violates the bad debt
moratorium and therefore the policy is invalid.
The district court refused to consider Grossmont’s Bad Debt
Moratorium argument, finding that Grossmont waived the
argument by failing to raise it in the administrative proceedings
below. See Grossmont I, 903 F. Supp. 2d at 48. Grossmont
argues that the district court erred in its finding because (a) the
Secretary first raised the moratorium in her decision below, thus
opening the door to the issue, (b) the Secretary did not object in
the district court to Grossmont’s moratorium argument, thereby
waiving any objection to Grossmont’s waiving it, and (c) the
Secretary fully briefed the moratorium issue below. We do not
find these arguments persuasive. We agree with the district
court that this issue will not be considered now as Grossmont
was required to “raise [the] issue with [the] agency before
seeking judicial review.” ExxonMobil Oil Corp. v. FERC, 487
F.3d 945, 962 (D.C. Cir. 2007). Grossmont makes no claim to
raising this issue in the administrative proceedings. We
conclude that Grossmont has failed to preserve its challenge that
the mandatory state determination policy violates the bad debt
moratorium.
* * * * * *
Grossmont goes on to argue that in addition to violating the
moratorium, the Secretary’s effort to limit the alternative
documentation policy must be rejected because it is a change in
policy that must be adopted in a notice and comment rule.
Grossmont further argues that even if the Secretary could
lawfully limit the alternative documentation policy, that
limitation could not be applied to its claims because doing so
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would have an unlawful retroactive effect. We will not consider
these arguments, however, because as with the bad debt
moratorium issue discussed above, Grossmont did not raise
these arguments in the administrative proceedings, and has thus
failed to preserve them.
B. Arbitrary and capricious
Grossmont argues that even if the Secretary could lawfully
apply the mandatory state determination policy, doing so under
the facts of this case would be arbitrary and capricious and not
based on substantial evidence. This is so, according to
Grossmont, because the only purpose for the mandatory state
determination policy is to assure that the Secretary does not pay
for Medicare co-payments that are the responsibility of the state.
Grossmont argues that that concern does not arise here because,
first, Medi-Cal made the only determination necessary to show
that Medicare owes the amounts the hospitals claim. In support
of this argument, Grossmont contends that in issuing the two
lump-sum retroactive payments, the Secretary showed that she
had already made the determination that the relevant patients
were eligible for Medi-Cal when the services were provided.
This determination by Medi-Cal, Grossmont argues, was the
only determination necessary to establish Medi-Cal’s obligation
for the claims at issue; the rest was grade school arithmetic.
Second, Grossmont asserts that the determination by the
hospitals of Medi-Cal’s payment obligation for the claims at
issue was made using the same methodology that the Secretary
used to determine Medi-Cal’s payment obligation for the lump-
sum claims.
In response, the Secretary argues that she properly applied
the must bill policy here. The Secretary asserts that she
reasonably refused to accept Grossmont’s estimates of Medi-
Cal’s responsibility in lieu of Medi-Cal’s own determinations of
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those amounts. The Secretary states that she never agreed that
Grossmont’s estimates were accurate. The Secretary further
states that she has not taken a position on the accuracy of the
estimates because such a task is administratively impractical.
Finally, the Secretary states that she has reasonably concluded
that the state is the best source of Medicaid eligibility and state
payment information necessary to calculate properly the state’s
payment responsibility. Taking all of these factors into
consideration, the Secretary argues that the application of the
must bill policy here is not arbitrary or capricious. We agree.
In her decision, the Secretary stated that:
The policy requiring a provider to bill the State and
receive a determination on that claim, where the State
is obligated either by statute or under the terms of its
plan to pay all, or any part of the Medicare deductible
or coinsurance amounts, is consistent with the general
statutory and regulatory provisions relating specifically
to the payment of bad debts and generally to the
payment of Medicare reimbursement.
JA 48 (emphasis deleted). In particular the Secretary noted that
pursuant to 42 C.F.R. § 413.89(e), to be allowable a bad debt
must meet the following criteria:
(1) The debt must be related to covered services and
derived from deductible and coinsurance amounts.
(2) The provider must be able to establish that
reasonable collection efforts were made.
(3) The debt was actually uncollectible when claimed
as worthless.
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(4) Sound business judgment established there was no
likelihood of recovery at any time in the future.
The Secretary further noted that under Section 310 of the
Provider Reimbursement Manual, § 413.89(e)’s second criterion
requirement of a “reasonable collection effort” includes “the
issuance of a bill on or shortly after discharge or death of the
beneficiary to the party responsible for the patient’s personal
financial obligations . . . .” JA 43–44 (emphasis added by the
Secretary). And with respect to the third criterion, the Secretary
explained that “[a] fundamental requirement to demonstrate that
an amount is, in fact, unpaid and uncollectible, is to bill the
responsible party.” JA 48. We hold that it is sensible for the
Secretary to require that the state determine in the first instance
the Medicaid eligibility of the claims and the appropriate
amount of state payment owed because state policies vary
widely and the state will have all of the necessary information
under its Medicaid system.
We have previously instructed that when reviewing “the
Secretary’s interpretation of her own regulations, we apply a still
more deferential standard than that afforded under Chevron
[U.S.A. v. NRDC, 467 U.S. 837 (1984)]. Provided an agency’s
interpretation of its own regulation does not violate the
constitution or a federal statute, it must be given controlling
weight unless it is plainly erroneous or inconsistent with the
regulation.” Nat’l Medical Enters. v. Shalala, 43 F.3d 691,
696–97 (D.C. Cir. 1995) (internal quotation marks and citation
omitted). At least three Justices of the Supreme Court have
expressed misgivings concerning enhanced deference. See
Perez v. Mortgage Bankers Assn, 135 S. Ct. 1199, 1210–13
(2015) (Alito, J., concurring in part and concurring in the
judgment); id. at 1213 (Thomas, J., concurring in the judgment);
and id. at 1211 (Scalia, J., concurring in the judgment). We
need not embroil ourselves in that controversy, since there is a
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simpler approach for resolution of the question.
Ultimately, our review is governed by statute. “Judicial
review of an agency’s interpretation of its own regulations is
governed by 5 U.S.C. § 706(2)(A), which requires courts to set
aside agency action that is “‘arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.’” Edwards,
Elliott, & Levy, Federal Standards of Review 199 (2d ed. 2013).
This standard of review relies on Allentown Mack Sales & Serv.,
Inc. v. NLRB, 522 U.S. 359, 377 (1998), and Thomas Jefferson
Univ. v. Shalala, 512 U.S. 504, 512 (1994). Under this standard,
we afford “substantial deference” to an agency’s views.
Allentown Mack, 522 U.S. at 377; Thomas Jefferson Univ., 512
U.S. at 512. We will defer to the agency’s interpretation “unless
an alternative reading is compelled by the regulation’s plain
language or by other indications of the [agency’s] intent at the
time of the regulation’s promulgation.” Thomas Jefferson Univ.,
512 U.S. at 512. There is no indication that the Secretary’s
interpretation is contrary to law or to the agency’s intent at the
time of the adoption, and we uphold it.
Having upheld the Secretary’s interpretation of law under
the Thomas Jefferson University standard, we easily uphold its
application to the claims at issue. Medi-Cal was not timely
billed for the claims at issue, and consequently the Secretary
disallowed the claims because the state determination
requirement of the must bill policy was never fulfilled. We
conclude that as applied in this case, the Secretary’s state
determination requirement was not arbitrary or capricious.
We have noted that under SEC v. Chenery Corp., 318 U.S.
80, 87-88 (1943), “with limited exception, the law does not
allow us to affirm an agency decision on a ground other than
that relied upon by the agency.” Manin v. NTSB, 627 F.3d 1239,
1243 (D.C. Cir. 2011). One exception: “when there is not the
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slightest uncertainty as to the outcome of a proceeding on
remand, courts can affirm an agency decision on grounds other
than those provided in the agency decision.” Id. at 1243 n.1
(internal quotation marks and citation omitted). As the
Secretary argued in the district court, the must bill policy
encompasses two requirements, i.e., a requirement to bill the
state Medicaid program for the bad debt claims as well as a
requirement to obtain the state’s determination as to its financial
responsibility on those claims. See Grossmont, 903 F. Supp. 2d
at 49. Although the Secretary relied only on the state
determination requirement for her disposition, she stated that
“the record thus supports a conclusion that these claims were not
in the States’s system, that is, they were not billed . . . .” JA 54.
We conclude that an independent basis for affirming the
Secretary’s disallowance of Grossmont’s claims is the failure of
Grossmont to timely bill Medi-Cal for those claims.
We note that because Grossmont never timely submitted
claims to Medi-Cal, we need not decide whether the Secretary
acts arbitrarily and capriciously if she refuses to allow claims as
bad debt if a recalcitrant state refuses to issue state
determinations of payment responsibility despite reasonably
diligent efforts to obtain them.
C. Joint Signature Memorandum 370
Finally, Grossmont argues that its claims must be paid
under Joint Signature Memorandum 370 (JSM 370). Grossmont
notes that after repealing Provider Reimbursement Manual, Part
II (PRM-II) § 1102.3L in 2003, the Secretary in 2004 issued
JSM 370, which “held harmless” bad debt claims where the
intermediary “followed the now-obsolete Section § 1102.3L
instructions for cost reporting periods prior to January 1, 2004.”
See Appellants’ Br. 54. Under the hold harmless provision of
JSM-370, reimbursements were allowed using other
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documentation in lieu of billing the state. In her decision the
Secretary held that the hospitals did not meet the hold harmless
provisions of JSM-370. JA 55. Grossmont argues that it was
arbitrary and capricious for the Secretary to have made the two
lump-sum payments but then refuse to hold the hospitals
harmless for the claims at issue when (1) the hospitals provided
documentation for these claims that followed the same process
followed in making the lump-sum payments, and (2) the
intermediary stipulated that the hospitals supplied sufficient
documentation to support their methodology for determining the
bad debt amounts for each year under appeal. And furthermore,
argues Grossmont, JSM-370 is properly read as a concession by
the Secretary that PRM-II § 1102.3L was valid and legally
enforceable even after it was deleted from the PRM, and that
hospitals could rely on it.
We note that pursuant to JSM-370, reimbursement was not
allowed using other documentation if, for cost reporting periods
prior to January 1, 2004, the provider’s intermediary required
the provider to bill the state. Contrary to Grossmont’s argument,
the Secretary found that the lump-sum payments were consistent
with the must bill policy because they were “based on claims
(bills) submitted to the Medical agency . . . upon which the State
made determinations of its obligation prior to Medicare allowing
the bad debt.” JA 52 n.19. Other evidence in the record
establishes that the intermediary never allowed Grossmont to
rely on documentation of Medi-Cal’s payment responsibility
that was not produced by Medi-Cal itself, and the intermediary
also never instructed Grossmont that it was not required to bill
Medi-Cal or obtain determinations from Medi-Cal of its
payment responsibility. See, e.g., JA 132, at 137:16-138:19; JA
133, at 143:6-13; JA 137, at 158:4-159:24; JA 141, at 175:3-21.
Accordingly, the Secretary’s conclusion that the hold harmless
provision does not apply is supported by substantial evidence
and is not arbitrary or capricious.
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CONCLUSION
The judgment of the district court is affirmed.
It is so ordered.