ROSEMARY M. COLLYER, United States District Judge.
Plaintiff Hospitals blithely argue that the Secretary of Health and Human Services should ignore a decision of the Sixth Circuit Court of Appeals. The Hospitals challenge the Secretary's decision to comply with Clark Regional Medical Center v. HHS, 314 F.3d 241 (6th Cir.2002), a decision concerning how to calculate hospital bed counts under 42 C.F.R. § 412.105(b). Bed counts substantially affect Medicare payments. The Hospitals insist that the Secretary should ignore Clark because it results in bed counts for (and payments to) hospitals located in the jurisdiction of the Sixth Circuit that are different from similar hospitals located elsewhere. Because the Secretary's decision to follow Clark was not arbitrary and capricious, the Hospitals' motion for summary judgment will be denied and the Secretary's cross motion will be granted.
A. The Medicare Act
In 1965, Congress enacted Title XVIII of the Social Security Act, known as the Medicare Act, 42 U.S.C. § 1395 et seq., which provides for federal reimbursement for health care to the elderly and the disabled, see 42 U.S.C. § 1395c. Under Medicare Part A, the Secretary reimburses participating hospitals for care they provide to Medicare patients for "inpatient hospital services, post-hospital extended care services, home health services, and hospice care." Id. § 1395d(a). Medicare Part B, id. §§ 1395j-1395k, is a voluntary program that supplements Part A; it provides for reimbursement for, among other things, "hospital services ... incident to physicians' services rendered to outpatients," id. §§ 1395k(a)(1), 1395x(s)(2)(b).
1. The Prospective Payment System and Bed Counts
Initially, Medicare reimbursed hospitals for the "reasonable costs" of providing Medicare services. Starting in 1983, Congress directed the Secretary to create an "inpatient prospective payment system" (IPPS), whereby the Secretary pays the hospital a fixed payment for each patient diagnosis at discharge, as described in 42
Generally, Medicare Part A pays for inpatient hospital services. To impose "cost limits" on reimbursement as required by statute, see 42 U.S.C. § 1395x(v)(1)(A), the Secretary classifies providers by bed type and count. Identifying the type of hospital bed and counting such beds is critical to determining a providers' IPPS payment.
A small rural hospital can have "swing beds," which are beds that can change in reimbursement status. When a swing bed is used for acute care, Medicare reimburses the hospital under IPPS. When the patient "swings" from needing acute care to needing "post-acute skilled nursing facility care," the status of the bed changes and Medicare reimburses the hospital under skilled nursing facility policies. 42 U.S.C. § 1395tt; Medicare Program Proposed Changes to the Hospital IPPS & FY 2004 Rates, 68 Fed. Reg. 27154, 27205 (May 19, 2003). Hospitals also can have "observation beds," where patients are not formally admitted to the hospital but they occupy a bed for short-term treatment and/or assessment in order to determine the patient's condition and whether s/he needs to be admitted as an inpatient. 68 Fed. Reg. at 27205. When a hospital assigns a patient to an observation bed, Medicare reimburses the hospital under outpatient rules. IPPS does not recognize observation bed-days as part of the hospital's inpatient operating costs. Id. If the hospital subsequently admits an observation patient as an inpatient, Medicare thereafter reimburses for services under Part A. Medicare Program Changes to the Hospital IPPS for Acute Care Hospitals and FY 2010 Rates, 74 Fed. Reg. 43754, 43905 (Aug. 27, 2009).
Bed counts affect Medicare payments in different ways. Because hospitals that train medical residents incur higher operating costs, the Medicare Act provides an additional payment for teaching hospitals — the "indirect medical education" (IME) adjustment. 42 U.S.C. § 1395ww(d)(5)(B). The IME adjustment is calculated by multiplying a hospital's DRG revenue by a factor that in turn is calculated using the hospital's ratio of medical residents over beds. Id.; 42 C.F.R. § 412.105(a) & (b). Notably, the number of beds is a denominator in this ratio and thus, the per-student IME rises as the bed count falls and vice versa. In other words, a teaching hospital has an incentive to exclude beds from the total count because it would receive a larger IME payment with a smaller number of beds.
The bed count has the opposite effect on the "disproportionate share" (DSH) payment. Hospitals that serve a significantly disproportionate number of low income patients receive a supplemental payment, i.e., the DSH adjustment, see 42 U.S.C. § 1395ww(d)(5)(F), because low income patients tend to be in poorer health and treatment costs are thus higher, see Rye
2. Medicare Administration and the Notice of Program Reimbursement
The Centers for Medicare and Medicaid Services (CMS), an agency within the Department of Health and Human Services, administers Medicare. CMS contracts with private entities to process hospital claims. Such entities were known as "fiscal intermediaries," but starting in 2004, became known as "Medicare Administrative Contractors" (MACs). See 42 U.S.C. § 1395h. At the end of every fiscal year, each healthcare provider submits a cost report to its assigned MAC showing the hospital's costs and the portion allocated to Medicare. See 42 C.F.R. §§ 405.1801, 413/24(f), 424.13. The MAC reviews the report, determines hospital-specific adjustments, decides the total amount of Medicare reimbursement owed, and issues a Notice of Program Reimbursement specifying how much Medicare will reimburse for that year. 42 C.F.R. § 405.1803.
Within 180 days, a provider may appeal the determination of total reimbursement set forth in the Notice by filing an appeal with the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo(a)(3); 42 C.F.R. § 405.1835. PRRB decisions are final unless the Secretary reverses, affirms, or modifies the Board's decision within 60 days. 42 U.S.C. § 1395oo(f)(1). A hospital may seek judicial review of PRRB decisions in the federal district court where the hospital is located or in the federal district court in the District of Columbia. Id.
Clark and Bed Counting in the Sixth Circuit
In 2001, two Kentucky hospitals that provided Medicare services to low-income patients filed suit challenging the Secretary's interpretation of the bed counting provision, 42 C.F.R. § 412.105(b). See Clark Regional Medical Center v. HHS, 314 F.3d 241, 242 (6th Cir.2002). Because the Secretary excluded both swing bed and observation bed-days from the count of inpatient bed days, the total count of inpatient beds for each of the Kentucky hospitals was fewer than 100. Id. at 244. With such a low bed count, the hospitals were not eligible for a DSH adjustment despite their 15% disproportionate share. Further, they could not meet the much higher 40% disproportionate share applicable to hospitals with fewer than 100 beds. Id. The hospitals argued that swing and observation beds should have been included in the count of inpatient bed days. If those beds had been included, the hospitals would have had more than 100 beds and would
The hospitals objected to the Secretary's bed counting methodology, arguing that the regulation unambiguously required the Secretary to include swing and observation beds in the bed count for inpatient days. Id. at 246. The district court ruled in favor of the hospitals and the Sixth Circuit affirmed, finding that § 412.105(b) listed beds to be excluded from the court as only "beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in excluded distinct part hospital units."
While the Secretary disagrees with Clark, she recognizes that Clark is binding in the Sixth Circuit. Accordingly, shortly after the Clark ruling, the Secretary published a notice of proposed rulemaking. 68 Fed. Reg. at 27202-05. The proposed new regulation excluded swing and observation beds from the count of inpatient beds. A few months later, the Secretary published the Final Rule amending § 412.105(b), effective October 1, 2003. See Medicare Program Changes to the Hospital IPPS and FY 2004 Rates, 68 Fed. Reg. 45346 (Aug. 1, 2003). The new version of § 412.105(b) superseded the regulation at issue in Clark.
In addition to the amended regulation, the Secretary issued a Joint Signature Memorandum (JSM) 109. JSM-109 provides that the Secretary will follow Clark only as to hospitals located in the jurisdiction of the Sixth Circuit and only for hospital discharges prior to the effective date of the new regulation, October 1, 2003. Administrative Record (AR) 232-34 (JSM-109). That is, under JSM-109, the bed counts for Sixth Circuit hospitals include swing and observation beds for cost years beginning prior to October 2003, and exclude swing and observation beds for bed counting thereafter.
The ten hospitals who are Plaintiffs here (collectively, Hospitals)
AR 15-16 (footnote omitted). CMS, on behalf of the Secretary, declined to review the Board's decision.
The Hospitals filed suit in this Court alleging: Count I, the Secretary violated the Administrative Procedure Act (APA), 5 U.S.C. § 706; and Count II, the Secretary violated the Hospitals' rights to equal protection under the Fifth Amendment. More specifically with regard to the APA claim, the Hospitals contend:
Compl. [Dkt. 1] ¶ 45.
The Hospitals filed a motion for summary judgment and the Secretary filed an opposition and cross motion. The matter is fully briefed. See Pl. Mot. for Summ. J. (MSJ) [Dkt. 22]; Def. Cross Mot. for Summ. J. Combined with Opp'n (XMSJ) [Dkts. 23, 24]; Pl. Opp'n Combined with Reply (Pl. Opp'n) [Dkts. 25, 26]; Def. Reply [Dkt. 29].
II. LEGAL STANDARD
A. Summary Judgment
Whether agency action is contrary to law under the APA is a legal question that courts resolve based on the entire administrative record. See Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083-84 (D.C.Cir.2001). Under the APA, an agency's role is to resolve factual issues to reach a decision supported by the administrative record, while "the function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did." Sierra Club v. Mainella, 459 F.Supp.2d 76, 90 (D.D.C.2006) (citation omitted). Summary judgment is the mechanism for deciding whether an agency action was supported by the administrative record and was consistent with the APA standard of review. Id. (citing Richards v. INS, 554 F.2d 1173, 1177 & n. 28 (D.C.Cir.1977)). Summary judgment shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
B. APA Review
The Hospitals allege that the JSM-109 must be set aside because it is arbitrary, capricious and not in accordance with the law in violation of the APA. When reviewing an agency's interpretation of its enabling statute and the laws it administers, courts are guided by "the principles of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)." Mount Royal Joint Venture v. Kempthorne, 477 F.3d 745, 754 (D.C.Cir. 2007). Chevron sets forth a two-step inquiry. The initial question is whether "Congress has directly spoken to the precise question at issue" and, if so, the court must "give effect to the unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. When the statute is clear, the text controls and no deference is extended to an agency's interpretation in conflict with the text. Chase Bank USA, N.A. v. McCoy, 562 U.S. 195, 210, 131 S.Ct. 871, 178 L.Ed.2d 716 (2011).
On the other hand, if a statute is ambiguous or silent on an issue, the court proceeds to the second step of the Chevron analysis and determines whether the agency's interpretation is based on a reasonable construction of the statute. Chevron, 467 U.S. at 843, 104 S.Ct. 2778; Sherley v. Sebelius, 644 F.3d 388, 393-94 (D.C.Cir. 2011). As relevant here, Congress has not explicitly addressed the question of whether observation and swing bed should be counted to determine the total inpatient bed count. See Health Alliance Hosp., Inc. v. Burwell, 130 F.Supp.3d 277, 289 (D.D.C. 2015). Accordingly, the Court must proceed to Chevron step two.
Under step two, a court determines the level of deference due to the agency's interpretation of the law it administers. See Kempthorne, 477 F.3d at 754. When the agency's interpretation is permissible and reasonable, it receives controlling weight, id. "even if the agency's reading differs from what the court believes is the best statutory interpretation." Nat'l Cable & Telecomm. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 980, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005). "[T]he tremendous complexity of the Medicare program enhances the deference due the Secretary's decision." Cmty. Care Found. v. Thompson, 318 F.3d 219, 225 (D.C.Cir.2003) (internal quotation marks omitted).
An agency's interpretation of the law it administers is permissible and reasonable if it is not arbitrary, capricious, or manifestly contrary to the statute. Kempthorne, 477 F.3d at 754. In determining whether an action was arbitrary and capricious, a reviewing court "must consider whether the [agency's] decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Marsh v. Oregon Natural Res. Council, 490 U.S. 360, 378, 109 S.Ct. 1851, 104 L.Ed.2d 377 (1989) (internal quotation marks omitted). The scope of review under the arbitrary and capricious standard is narrow, and a court should not "substitute its judgment for that of the agency." Motor Vehicle Mfrs. Ass'n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). An agency is "not required to choose the best solution, only a reasonable one." Petal Gas Storage, LLC v. FERC, 496 F.3d 695, 703 (D.C.Cir.2007). See also Odessa Reg'l Hosp. v. Leavitt, 386 F.Supp.2d 885, 891 (W.D.Tex.2005) (42 C.F.R. § 412.105 is a permissible construction of the Medicare Act and passes the Chevron test; the question on APA review is whether the Secretary arbitrarily applied the regulation).
The Hospitals make much of the fact that the Secretary does not agree with Clark and that the Secretary's long-standing
A. Agency Nonacquiescence
The Hospitals argue that the Secretary should have engaged in "intracircuit nonacquiescence." They argue that because the Secretary is responsible for implementing Medicare uniformly and nationwide and because she disagrees with Clark, she should have refused to apply Clark to any other case.
The Hospitals fail to appreciate that the broad and clear holding of Clark necessarily applies to all hospitals in the Sixth Circuit. The Sixth Circuit held that the plain meaning of the prior regulation required the Secretary to include swing and observation beds when counting inpatient beds and, conversely, she had no authority to exclude such beds. Clark, 314 F.3d at 247. The opinion is unequivocal and leaves no wiggle room for arguing that it applied only to the particular parties in that case:
Id. at 247-48 (emphasis in original).
After the Sixth Circuit issued its Clark decision in February 2003, the Secretary's choices were limited: (1) she could file a writ of certiorari to the Supreme Court; (2) she could request that Congress pass a statute superseding Clark; or (3) she could amend the regulation and issue an interpretive memo specifying how she would treat Sixth Circuit cases until the amended regulation became effective. In the interest of expediency and facing the onset of a new fiscal year, the Secretary chose option three, amending the prior regulation and specifying through JSM-109 that Clark applied only in the Sixth Circuit and only for fiscal years prior to the effective date of the Final Rule that amended the regulation. The Final Rule was completed in time for it to be effective across the country at the start of the federal fiscal year beginning October 1, 2003.
The separation of powers doctrine requires administrative agencies to follow the law of the circuit with jurisdiction over a cause of action. Yellow Taxi Co. of Minneapolis d/b/a Suburban Yellow Taxi Co. v. NLRB, 721 F.2d 366, 382 (D.C.Cir.1983). "In the absence of a controlling decision by the Supreme Court, the respective courts of appeals express the law of the circuit." Hyatt v. Heckler, 807 F.2d 376, 379 (4th Cir.1986). In Yellow Taxi, the D.C. Circuit rebuked the National Labor Relations Board which had "historically arrogated to themselves the authority to `disagree' with judicial precedent." 721 F.2d at 382. The Circuit explained that agencies must abide by the superior power of the courts:
Yellow Taxi, 721 F.2d at 382-83.
Agencies that have followed a policy of intracircuit nonacquiescence have been roundly "condemned" by every circuit that has addressed the issue. Johnson v. U.S. R.R. Ret. Bd., 969 F.2d 1082, 1097 (D.C.Cir.1992) (citing Hyatt, 807 F.2d at 379; Stieberger v. Bowen, 801 F.2d 29, 36-37 (2d Cir.1986); Polaski v. Heckler, 739 F.2d 1320, 1322 (8th Cir.1984); Lopez v. Heckler, 725 F.2d 1489, 1503 (9th Cir.), vacated on other grounds and remanded, 469 U.S. 1082, 105 S.Ct. 583, 83 L.Ed.2d 694 (1984); Childress v. Secretary of HHS, 679 F.2d 623, 630 (6th Cir.1982)); see also Jones & Laughlin Steel Corp. v. Marshall, 636 F.2d 32, 33 (3d Cir.1980); Mary Thompson Hosp., Inc. v. NLRB, 621 F.2d 858, 864 (7th Cir.1980). "[F]lagrant disregard of judicial precedent must not continue. Not only is the [agency] obligated under the principles of stare decisis to follow this court's decision ..., but it also owes deference to the other courts of appeals which have ruled on the issue." Mary Thompson, 621 F.2d at 864. It "raises grave constitutional and statutory questions" when an agency refuses to petition for Supreme Court review of an adverse circuit ruling and instead elects to continue to apply the rejected interpretation of an agency rule. Johnson, 969 F.2d at 1091; see also id. at 1092 (comparing nonacquiescence to Governor Orval Faubus' defiance of Brown v. Bd. of Education, 347 U.S. 483, 74 S.Ct. 686, 98 S.Ct. 873 (1954), at Little Rock) (citing Lopez, 725 F.2d at 1497). In Johnson, the Circuit noted that the Secretary of Health and Human Services previously exercised a policy of intra-circuit nonacquiescence, but abandoned this policy "after being severely criticized by the Courts and by Congress." Johnson, 969 F.2d at 1093.
In support of its claim that the Secretary should practice nonacquiescence here, the Hospitals cite Atchison Topeka & Santa Fe Ry. v. Pena, 44 F.3d 437 (7th Cir. 1994) and Holland v. Nat'l Mining Ass'n, 309 F.3d 808 (D.C.Cir.2002). Atchison and Holland do not apply. In those cases, the agency in question relied on a single circuit decision to create a new nationwide policy and gave no explanation for its policy change. Atchison, 44 F.3d at 440; Holland, 309 F.3d at 810. Here, the Secretary has followed a circuit decision in only the circuit that rendered it, and the Secretary provided, via JSM-109, a reasonable explanation of why she did so.
The Hospitals further contend that the Secretary's decision to apply Clark in the Sixth Circuit was arbitrary and capricious because of the venue choice provision in the statute, 42 U.S.C. § 1395oo(f)(1). That provision allows a hospital to seek judicial review of PRRB decisions in the federal district court where the hospital is located or in the federal district court in the District of Columbia. The fact that a litigant has a choice where to file its appeal has no bearing on the analysis of whether the Secretary acted reasonably. A plaintiff may choose the venue for its APA challenge, but the Rule under review (here, JSM-109) is the same wherever the suit is filed.
B. Retroactive Rulemaking
The Hospitals also argue that the Secretary should have applied the Final Rule retroactively within the Sixth Circuit. "The decision of whether to grant retroactive force to a newly promulgated agency rule is a question of law for the courts with no overriding obligation of deference to the agency decision." Mason Gen. Hosp. v. Sec'y of HHS, 809 F.2d 1220, 1224 (6th Cir.1987). However, it is well-established that a regulation that changes legal rights adversely cannot be applied retroactively. See Nat'l Mining Ass'n v. Dep't of Labor, 292 F.3d 849, 859 (D.C.Cir. 2002) (a rule cannot be applied retroactively where it "changes the legal landscape" by impairing vested rights, creating a new duty or obligation., or increasing a party's liability for past conduct) (citing Landgraf v. USI Film Prods., 511 U.S. 244, 269-71, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994)); Georgetown Univ. Hosp. v. Bowen, 821 F.2d 750, 757 (D.C.Cir.1987) (the APA does not authorize the Secretary to engage in retroactive rulemaking), aff'd sub nom. Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 213, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (the Medicare Act does not authorize retroactive rulemaking). The Final Rule, amending 42 C.F.R. § 412.105(b), cannot be applied retroactively because it modified settled Sixth Circuit law established in Clark.
The Hospitals insist that the revisions to § 412.105(b) in the Final Rule were "clarifying
The Hospitals are correct that a clarifying amendment, which does not change the law, can be applied retroactively. The Secretary takes the position in all but the Sixth Circuit that the Final Rule amending § 412.105(b) merely clarified the law. See XMSJ at 25. In the Sixth Circuit, however, the Final Rule represents a substantive change because revised § 412.105(b) is inconsistent with Clark. "If a new regulation is substantively inconsistent with a prior regulation, prior agency practice, or any Court of Appeals decision rejecting a prior regulation or agency practice, it is retroactive as applied to pending claims." Nat'l Mining Ass'n v. Dep't of Labor, 292 F.3d 849, 860 (D.C.Cir. 2002) (emphasis added).
In their argument that the Secretary should apply the Final Rule retroactively, the Hospitals ignore the rules of stare decisis. Clark interpreted the "plain meaning" of the prior regulation, see Clark, 314 F.3d at 247, and thereby established precedent that is binding in the Sixth Circuit unless and until its ruling is overturned en banc or by the Supreme Court. See Salmi v. Sec'y of HHS, 774 F.2d 685, 689 (6th Cir.1985) (the ruling of a circuit panel creates binding precedent in the circuit). Clark determined what the law was in the Sixth Circuit at the time, and the Secretary was obligated to follow it. See Yellow Taxi, 721 F.2d at 382 (an agency's disagreement with a court decision "possesses no authoritative effect"). Clark established Sixth Circuit law, and the subsequent Final Rule amending § 412.105(b) as of October 2003, was in conflict with Sixth Circuit law prior to its effective date. As a matter of law, the Secretary had no authority to apply the Final Rule retroactively in the Sixth Circuit.
C. Equal Protection
The Hospitals claim that the Secretary violated their rights to equal protection by treating them differently from similarly situated hospitals, i.e., by applying Clark and thus including swing and observation beds in finding their total bed count. To advance an equal protection claim, a plaintiff must assert facts that support the allegation that the government intentionally treated it differently from others who were similarly situated and that there is no rational basis for the difference in treatment. 3883 Connecticut LLC v. District of Columbia, 336 F.3d 1068, 1075 (D.C.Cir.2003) (citing Village of Willowbrook v. Olech, 528 U.S. 562, 564, 120 S.Ct. 1073, 145 L.Ed.2d 1060 (2000)). Equal protection "does not require that all persons everywhere be treated alike. Instead, it imposes the rather more modest requirement that government not treat similarly situated individuals differently without a rational basis." Noble v. U.S. Parole Comm'n, 194 F.3d 152, 154 (D.C.Cir.1999) (citing Cleburne v. Cleburne Living Ctr., Inc., 473 U.S. 432, 439, 105 S.Ct. 3249, 87 L.Ed.2d 313 (1985)). In the face of an equal protection challenge, a court must uphold agency action if there was a rational basis for such action. FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 313, 113 S.Ct. 2096, 124 L.Ed.2d 211 (1993).
The Hospitals assert that the geographical location of the hospitals is an arbitrary basis for determining whether to apply Clark or the Final Rule. As explained above, however, the Secretary's decision to promulgate and apply JSM-109 was reasonable. The geographical boundaries that govern are those of the Sixth Circuit
For the reasons set forth above, Plaintiffs' motion for summary judgment [Dkt. 22] will be denied, and the Secretary's cross motion for summary judgment [Dkt. 23] will be granted. Judgment will be entered in favor of the Secretary. A memorializing Order accompanies this Opinion.