                           UNITED STATES DISTRICT COURT
                           FOR THE DISTRICT OF COLUMBIA

                                        )
HEALTHALLIANCE HOSPITALS,               )
INC., et al.,                           )
                                        )
              Plaintiffs,               )
                                        )
              v.                        )       No. 1:17-cv-917 (KBJ)
                                        )
ALEX M. AZAR,                           )
Secretary of Health and Human Services, )
                                        )
              Defendant.                )
                                        )

                              MEMORANDUM OPINION

      Legal issues that arise under the federal government’s Medicare and Medicaid

programs tend to be “significantly more difficult to describe than to decide[.]” Cooper

Hosp./Univ. Med. Ctr. v. Burwell, 179 F. Supp. 3d 31, 36 (D.D.C. 2016) (internal

quotation marks and citation omitted). The instant matter is no exception; it involves a

claim by twelve Massachusetts hospitals (“the Hospitals” or “Plaintiffs”) that the

Secretary of the Department of Health and Human Services (“HHS” or “Defendant”) did

not fully compensate the Hospitals in the manner that the Medicare program prescribes

for a one-year period, from October 1, 2008, to September 30, 2009. (See Compl., ECF

No. 1, ¶ 45.) Invoking the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2),

as well as a federal law that prescribes additional payments to hospitals that serve a

“disproportionate number of low-income patients” under the Medicare program, 42

U.S.C. § 1395ww(d)(5)(F)(i)(I), the Hospitals allege that they are entitled to $6 million

more from the federal government than they received during the relevant timeframe for
their service to low-income individuals, because HHS miscalculated the percentage of

patients who are eligible for Medicaid and similar services within the meaning of the

applicable regulations and thus improperly lowered the amount of money that the

federal government owes. (See Compl. ¶¶ 2, 45.)

        Whether these contentions have merit turns on a relatively narrow dispute over

the meaning of an HHS regulation that delineates how the agency will determine the

proportion of low-income individuals that a hospital serves. See 42 C.F.R.

§ 412.106(b)(4). This regulation establishes a formula that requires consideration of

“the number of the hospital’s patient days of service” for two categories of low-income

individuals: (1) Medicaid-eligible patients, and (2) patients who are “deemed eligible

for Medicaid” for the purpose of the regulation because they are “eligible for inpatient

hospital services . . . under a waiver authorized under section 1115(a)(2) of the [Social

Security Act.]” Id. § 412.106(b)(4)(i). The Hospitals contend that HHS has incorrectly

interpreted this regulation to exclude from the second category those patients who are

insured under a Massachusetts-run health insurance program for low-income individuals

known as Commonwealth Care, which received a section 1115(a)(2) waiver from HHS

and thereby indisputably “expand[s] upon the traditional Medicaid program eligibility

criteria[.]” (Compl. ¶¶ 2, 45.)

        Before this Court at present are the parties’ cross-motions for summary

judgment. (See Pls.’ Mem. in Supp. of Mot. for Summ. J. (“Pls.’ Mem.”), ECF No. 12;

Def.’s Mem. in Supp. of its Cross-Mot. for Summ. J. & Opp’n to Pls.’ Mot. for Summ.

J. (“Def.’s Mem.”), ECF No. 14-1.) 1 In its papers, HHS argues that, in order to


1
 Page-number citations to the documents that the parties have filed refer to the page numbers that the
Court’s electronic filing system automatically assigns.


                                                   2
determine whether a patient is “eligible for inpatient hospital services . . . under a

waiver authorized under section 1115(a)(2),” 42 C.F.R. § 412.106(b)(4)(i), and is thus

to be deemed eligible for Medicaid for purposes of the regulation’s calculation, see id.,

the court must “look[] to the terms of the [waiver] agreement that describe the project”

to see if the Secretary has stated explicitly that covered patients are “eligible for

inpatient hospital services” (Def.’s Reply in Supp. of its Cross-Mot. for Summ J.

(“Def.’s Reply”), ECF No. 19, at 5 (internal quotation marks and citations omitted)).

And because no such explicit statement appears in the waiver agreement that

Massachusetts and HHS entered into in regard to Commonwealth Care, HHS contends

that the patient days relating to the treatment of Commonwealth Care beneficiaries do

not count in the Medicare-reimbursement formula that the regulations prescribe. (See

id. at 5–6.) The Hospitals respond that HHS’s explicit-statement requirement is

contrary to both the plain language of the regulation and the intent behind section

412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations. (See Pls.’ Mem. at 24–

29; Pls.’ Reply in Supp. of Mot. for Summ. J. & Opp’n to Def.’s Cross-Mot. for Summ.

J. (“Pls.’ Reply”), ECF No. 16, at 8–9.) The Hospitals further maintain that HHS’s

reading departs from the agency’s practices in other cases (see Pls.’ Reply at 24–25),

and is an unfair, post-hoc rationalization that the agency did not provide or promote at

the administrative stage of this dispute. (See id. at 22–24; 25–29.)

       On September 28, 2018, this Court issued an Order that GRANTED Plaintiffs’

motion for summary judgment, and DENIED Defendant’s cross-motion for summary

judgment. (See Order, ECF No. 25.) As a result, the Court also VACATED the

challenged agency decision, and REMANDED this matter to HHS for further




                                              3
proceedings. (See id.) This Memorandum Opinion provides the Court’s reasons for

that Order.

       In short, after reviewing the parties’ briefs, examining the record, and

considering the oral arguments presented in this case, this Court concluded that HHS’s

interpretation of the unambiguous text of section 412.106(b)(4)(i) of Title 42 of the

Code of Federal Regulations to disallow the inclusion of the patient days of service that

were associated with patients who were covered by Commonwealth Care is an arbitrary

and capricious determination, and thus violates the APA. It is clear from the plain

language of the regulation’s text that patients who are eligible to receive comprehensive

medical care through an insurance program authorized under a section 1115 waiver (as

evidenced by their eligibility for inpatient hospital services) are to be included in the

Medicare reimbursement formula, and whether or not the waiver agreement through

which the Secretary authorized the program says anything about their eligibility for

inpatient hospital services is irrelevant to the calculation of a hospital’s

disproportionate share hospital adjustment. Furthermore, given that every individual

enrolled in Massachusetts’s Commonwealth Care program during the relevant time

period obtained a subsidized insurance plan that actually provided coverage for

inpatient hospital services, the Secretary’s authorization of the Commonwealth Care

program under the pertinent section 1115 waiver made every individual insured via

Commonwealth Care “eligible for inpatient hospital services” within the meaning of

section 412.106(b)(4)(i). Therefore, per the plain text of the applicable regulation,

HHS should have counted the patient days pertaining to Commonwealth Care

beneficiaries when calculating the Hospitals’ disproportionate share hospital




                                              4
adjustments under the Medicare program.


I.     BACKGROUND

       Congress authorized and established the federal Medicare and Medicaid

programs in two different subchapters of the Social Security Act, Pub L. No. 89-97

(1965), and the statutory provisions that pertain to each of these programs cross-

reference one another in various ways. See Cooper Hosp., 179 F. Supp. 3d at 36

(“Although the two programs share similarities, each functions in partial independence

of the other, albeit with many cross-references between the subchapters.”). For present

purposes, it is important to understand that “[t]he Medicare program provides federally-

funded health insurance to qualifying elderly and disabled individuals[,]” Saint Francis

Med. Ctr. v. Azar, 894 F.3d 290, 291 (D.C. Cir. 2018) (citation omitted); see also 42

U.S.C. §§ 1395–1395lll, and that, since 1983, the federal government has pursued this

goal by reimbursing hospitals for the services they provide to elderly and disabled

patients “based on the average rate of operating costs for inpatient hospital services . . .

at a fixed amount per patient, regardless of the actual operating costs” that those

hospitals incur while treating those patients. Billings Clinic v. Azar, 901 F.3d 301, 303

(D.C. Cir. 2018) (internal quotation marks and citation omitted); see also Abington

Mem. Hosp. v. Burwell, 216 F. Supp. 3d 110, 116–17 (D.D.C. 2016). Consequently, as

far as Medicare reimbursements are concerned, patient counts matter. Moreover, as

explained below, Medicare’s reimbursement formulas take into account a variety of

factors, including whether a particular hospital’s actual costs are significantly higher

than average due to its treatment of low-income individuals. Thus, the Medicare

payment system’s base per-patient rates are subject to a variety of adjustments that



                                             5
increase or decrease the total sum that the government pays each hospital. See Billings

Clinic, 901 F.3d at 304; 42 U.S.C. § 1395ww(d)(1).

       A. Medicare’s Disproportionate Share Hospital (DSH) Adjustment

       The instant dispute homes in on one of these hospital-specific adjustments to

Medicare’s base payment rates: “the disproportionate share hospital (DSH) adjustment.”

Billings Clinic, 901 F.3d at 304 (internal quotation marks and citation omitted); see also

42 U.S.C. § 1395ww(d)(5)(F)(i)(I). In essence, this adjustment constitutes a

“supplemental payment[]” to hospitals that treat a “significant number” of “very low-

income patients[.]” Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105 (D.C. Cir.

2014). The DSH adjustment reflects Congress’s recognition that “[h]ospitals that serve

a disproportionate numbers of low-income patients have higher [M]edicare costs per

case[,]” H.R. Rep. No. 99-241, pt. 1, at 16 (1985), and that absent this additional

payment, the standardized rates that Congress has authorized for certain medical

expenses would not cover the full operating costs for these hospitals, see Cooper Hosp.,

179 F. Supp. 3d at 37. Thus, under the Medicare statute, if a hospital treats a

significant number of low-income individuals—i.e., if its “disproportionate patient

percentage” is sufficiently high—it is entitled to receive additional payments from the

federal government. See 42 U.S.C. § 1395ww(d)(5)(F)(v).

       To calculate a hospital’s “disproportionate patient percentage[,]” HHS “add[s]

together two fractions”: the “Medicare fraction” and the “Medicaid fraction[.]” Allina,

746 F.3d at 1105; see also 42 C.F.R. § 412.106 (laying out how both fractions are

calculated). The instant case concerns only the Medicaid fraction, which “account[s]

for the number of Medicaid patients . . . not entitled to Medicare” that a hospital serves.

Allina, 746 F.3d at 1105 (emphasis omitted). Section 1395ww(d)(5)(F)(vi)(II) of Title


                                             6
42 of the United States Code defines that figure 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 [the Medicaid program], but who were not
        entitled to benefits under Plan A of [Medicare], and the denominator of
        which is the total number of the hospital’s patient days for such period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Put simply, “the numerator” of the Medicaid

fraction “is the number of patient days attributable to patients who (for such days) were

eligible for Medicaid, but not entitled to benefits under Medicare Part A[,]” and “[t]he

denominator is the total number of patient days[.]” Allina, 746 F.3d at 1105 (internal

quotation marks, citation, and alteration omitted). 2

        B. Medicaid’s Demonstration Project Expansion Waivers

        As the above definition makes clear, determining whether an individual is

eligible for health insurance under the Medicaid program is critical to calculating “the

Medicaid fraction” for the purpose of establishing the Medicare program’s DSH

adjustment. Unlike the Medicare program, which is a purely federal endeavor that

insures the elderly and disabled, “Medicaid is a cooperative federal-state program that

provides medical assistance to certain limited categories of low-income persons and

other individuals who face serious financial burdens in paying for needed medical

care.” Cooper Hosp., 179 F. Supp. 3d at 38 (internal quotation marks and citation

omitted). States that wish to participate in this program draw up a medical assistance

plan that conforms to the requirements laid out in the federal Medicaid statute, see 42



2
  Each “patient day” represents a day during which the hospital treated a given patient. Thus, if a
hospital treated a patient for 8 days, that patient would garner the hospital 8 patient days. Similarly, if
a hospital treated one patient for ten days and another patient for twenty days, those two patients would
confer upon the hospital a total of thirty patient days, even if those patients’ stays at the hospital
overlapped.


                                                     7
U.S.C. § 1396a(a), and once HHS approves a state’s plan, the state receives payments

from the federal government in support of that program, see id. § 1396b.

       Significantly for present purposes, some states also “try new or different

approaches to the efficient and cost-effective delivery of health care services” for low-

income residents, or seek “to adapt their [healthcare] programs to the special needs of

particular areas or groups of recipients.” Cookeville Reg’l Med. Ctr. v. Leavitt, 531

F.3d 844, 845 (D.C. Cir. 2008) (internal quotation marks and citation omitted); accord

42 C.F.R. § 430.25. To that end, the Medicaid statute gives the Secretary of HHS the

discretion to waive some of the requirements laid out in the Medicaid statute and yet

still designate the state as eligible for federal financial support under the Medicaid

program. See 42 U.S.C. § 1315. When the Secretary executes such a waiver, the state

plan for which the Secretary has waived the Medicaid statute’s requirements is termed a

“demonstration project[,]” 42 U.S.C. § 1315, and the “costs of such project”—including

the costs of patient treatment—“shall, to the extent and for the period prescribed by the

Secretary, be regarded as expenditures under the State plan or plans approved under

[the Medicaid program], or for administration of such State plan or plans, as may be

appropriate,” id. § 1315(a)(2)(A); see also Cookeville Reg’l, 531 F.3d at 845.

       One category of demonstration projects—known as “expansion waiver”

projects—is of particular relevance to the legal issues presented in this case. Expansion

waiver projects “provide medical assistance to expanded eligibility populations that

could not otherwise be made eligible for Medicaid.” Cooper Hosp., 179 F. Supp. 3d at

45 (internal quotation marks and citation omitted). In other words, the patients who

receive health insurance coverage through these programs either make too much money




                                             8
to have a traditional state Medicaid program pay their healthcare costs, or are otherwise

disqualified from receiving Medicaid. These patients are known as the “expansion

waiver population[.]” Cookeville Reg’l, 531 F.3d at 845; see also Banner Health v.

Sebelius, 715 F. Supp. 2d 142, 148 (D.D.C. 2010). States that seek to cover this

population can apply to the Secretary for a waiver, i.e., for approval of their proposed

coverage plan as a demonstration project, and if the waiver is granted, the state will

receive federal financial assistance as under the Medicaid program. See 42 U.S.C.

§ 1315(a); Cookeville Reg’l, 531 F.3d at 845; Banner Health, 715 F. Supp. 2d at 148.

        C. HHS’s Amendment Of The DSH Adjustment Regulation

        Before the year 2000, it was not clear whether the patient days attributable to

low-income individuals who had received healthcare coverage through an expansion

waiver demonstration project, as opposed to a traditional state Medicaid program, were

to be counted within the numerator of the Medicaid fraction for the purpose of

determining a hospital’s disproportionate share adjustment under section 412.106(b)(4)

of Title 42 of the Code of Federal Regulations. Considerable confusion arose because,

while expansion waiver patients were technically not “eligible for medical assistance

under” a state Medicaid plan, 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II), such patients had

nonetheless received medical care through an insurance program expressly authorized

under the laws that govern the Medicaid program. HHS has addressed this matter

through notice-and-comment rulemaking, although the agency’s position regarding the

issue has evolved over time. 3


3
 The agency conducted rulemaking activities to fill the gap in the statute that Congress’s silence as to
how the agency ought to treat expansion waiver populations with regard to DSH adjustment payments
had created. Congress had not spoken to the issue presumably because, “at the time the Congress
enacted the Medicare DSH adjustment provision[,] . . . there were no approved section 1115


                                                    9
       HHS initially refused to count any patient days associated with individuals

receiving medical care through an expansion waiver project in the Medicaid fraction’s

numerator unless those individuals would otherwise be covered under a state’s

Medicaid plan. See Banner Health, 715 F. Supp. 2d at 149. Then, in a regulation HHS

promulgated on January 20, 2000, the agency changed course and permitted all patient

days for expansion waiver populations to be counted in the numerator of the Medicaid

fraction. See 65 Fed. Reg. 3,136, 3,137 (Jan. 20, 2000) (“[W]e believe allowing

hospitals to include the section 1115 expanded waiver populations in the Medicare DSH

calculation is fully consistent with the Congressional goals of the Medicare DSH

adjustment[.]”); see also 42 C.F.R. § 412.106(b)(4)(ii) (codifying the understanding

that the patient days relating to expansion waiver populations may be counted in the

numerator of the Medicaid fraction). Notably, three years later, the agency added the

caveat that is at the center of the instant dispute: it clarified that a patient shall be

“deemed eligible for Medicaid on a given day”—and thus his patient days will count in

the numerator of the Medicaid fraction, see 42 C.F.R. § 412.106(b)(4)—“only if the

patient is eligible for inpatient hospital services under an approved State Medicaid plan

or under a waiver authorized under section 1115(a)(2)” of the Social Security Act, id.

§ 412.106(b)(4)(i) (emphasis added). The Federal Register provision that accompanied

this new language reiterated the agency’s position that patient days under an expansion

waiver should be included in the numerator of the Medicaid fraction to “the extent that

those individuals receive inpatient benefits under the section 1115 demonstration



demonstration projects involving expansion populations[.]” 68 Fed. Reg. 45,346, 45,421 (Aug. 1,
2003). But in 2006, Congress expressly ratified HHS’s understanding of the DSH adjustment statute
and its rulemaking activities through the enactment of the Deficit Reduction Act, Pub. L. No. 109-71,
120 Stat. 4 (Feb. 8, 2006). See Cookeville Reg’l, 531 F.3d 847.


                                                  10
project[,]” and explained that the goal of this clarification was to prevent inclusion of

patient days associated with demonstration project waiver populations that had, in fact,

received only “limited, temporary benefit[s.]” 68 Fed. Reg. 45,346, 45,421 (Aug. 1,

2003). HHS found this situation untenable, because while it is “fully consistent with

the Congressional goals of the Medicare DSH adjustment” to “include[] the section

1115 expansion populations” in the Medicaid numerator, 68 Fed. Reg. 45,420, that

policy decision applied to individuals “who received benefits under the demonstration

project that are similar to those available to traditional Medicaid beneficiaries,

including inpatient benefits[,]” id. at 45,420–21 (emphasis added); see id. at 45,421

(focusing on whether “individuals receiv[e] a comprehensive benefits package”). In

other words, for the purpose of determining what share of a hospital’s patients counted

in regard to the Medicaid fraction, the key question was whether an individual had

“receiv[ed] a comprehensive benefit package under a section 1115 demonstration

project[.]” Id. at 45,421 (emphasis added).

       D. Massachusetts’s Medicaid And Commonwealth Care Programs

       Massachusetts runs a federally-approved state Medicaid program, known as

MassHealth, which provides medical assistance “to eligible low- and moderate-income

individuals, couples, and families.” (Administrative Record Part 2 (“AR Pt 2”), ECF

No. 21-2, at 357.) That plan operates just like many other states’ Medicaid programs:

Massachusetts makes payments to health insurers and Medicaid-managed plan

operators, who arrange for hospitals to provide the required medical services to low-

income individuals (see id. at 362), and the federal government then reimburses

Massachusetts for the federal share of these expenses (see Administrative Record Part 1

(“AR Pt 1”), ECF No. 21-1, at 25).


                                            11
      In 2006, Massachusetts decided to overhaul the landscape of its state healthcare

system, and in so doing, established a novel health insurance program, called

Commonwealth Care, to supplement its other state insurance plans. (See Compl. ¶ 34.)

Commonwealth Care is “a private insurance-based premium assistance program for

currently uninsured individuals at or below [three-hundred percent of the Federal

Poverty Line] who are not eligible for MassHealth (Medicaid or SCHIP) or Medicare.”

(Id. at 361.) Thus, Massachusetts opted to provide health insurance for many

individuals who were not otherwise eligible for insurance via either the Medicare or

Medicaid programs (see id.), and to secure federal matching funds for the premium

assistance it provided through this program, Massachusetts applied to the Secretary of

HHS for a waiver of the requirements of the Medicaid statute pursuant to section

1115(a)(2) of the Social Security Act. Massachusetts first applied for an expansion

waiver pertaining to Commonwealth Care in 2006, and then again in 2008 (see id. at

355–74), and the Secretary approved the state’s applications, thereby confirming that

“expenditures made by Massachusetts for the items identified below . . . shall, for the

period of this Demonstration extension, be regarded as expenditures under the State’s

[Medicaid] plan” (AR Pt 2 at 15; see also id. at 18 (discussing the premium assistance

for Commonwealth Care specifically)).

      Importantly, neither Massachusetts’s waiver application nor the Secretary’s

written approval of that waiver stated that any particular benefit or type of coverage

would necessarily be included in the insurance packages that Commonwealth Care

funded. (See AR Pt 1 at 355–74; AR Pt 2 at 15–20.) But the Commonwealth Care

program in fact guaranteed that subscribers had an insurance plan that included




                                            12
inpatient services: for those individuals who had an income of up to “100 percent of the

federal poverty level,” the Commonwealth Care program required a comprehensive care

plan (AR Pt 1 at 329), and for those eligible subscribers whose income exceeded 100

percent of the federal poverty level, every authorized insurance plan under the

Commonwealth Care program during the relevant time period covered “inpatient

hospital services” (id. at 99 n.39; see also id. at 28).

        E. Procedural History

        After the close of the fiscal year running from October 1, 2008, through

September 30, 2009, twelve Massachusetts hospitals submitted cost reports to a fiscal

intermediary in order to obtain reimbursement payments through the Medicare program.

(See id. at 24.) 4 In determining what sums the federal government owed the Hospitals

for that time period, the private contractor handling the Hospitals’ cost reports decided

to exclude from the numerator of the Medicaid fraction of the Medicare DSH

adjustment calculation any patient days associated with individuals who had obtained

premium assistance for health insurance through the Commonwealth Care program.

(See id.) The contractor maintained that participating in the Commonwealth Care

program did “not make a patient . . . ‘eligible for Medicaid’ as required by federal

regulation” (id. at 26) because: (1) Commonwealth Care patients were not eligible for

Medicaid by definition, given that the program sought to assist those individuals above

Medicaid’s income limits (see id. at 27), and (2), unlike traditional Medicaid programs,




4
  These submissions were consistent with standard practice: to receive reimbursements from the federal
government under the Medicare and Medicaid programs, “eligible hospitals file cost reports with their
fiscal intermediaries (usually private contractors and auditors) at the end of each fiscal year[,]” and the
intermediaries issue a Notice of Program Reimbursement, wherein they determine the amount the
Secretary owes participating hospitals. Banner Health, 715 F. Supp. 2d at 146.


                                                    13
Commonwealth Care paid for premiums on insurance instead of the “inpatient services

themselves” (id.). This decision to exclude the patient days for individuals who were

insured through Commonwealth Care decreased the Medicaid fraction for the Hospitals

and thereby reduced the Hospital’s DSH payments by approximately $6 million. (See

id. at 24.)

       The Hospitals appealed the Contractor’s decision to the Provider Reimbursement

Review Board (“PRRB”) pursuant to section 1395oo(f)(1) of Title 42 of the United

States Code. (See id.) The five-member Board voted to overturn the contractor’s

decision, with a majority of the members specifically concluding that “[t]he [section]

1115 waiver’s expenditure authority undeniably allowed Massachusetts to claim Federal

reimbursement” for its expenses related to the Commonwealth Care program. (Id. at

28.) The Board observed that the patient days resulting from Commonwealth Care

“relate[d] to individuals who were enrolled in the same managed care plans and

received the same core health benefits as other MassHealth recipients, including

inpatient hospital services.” (Id.) And the Board rejected “the Contractor’s argument

that the terms of [sections 412.106(b)(4)(i) and (ii) of Title 42 of the Code of Federal

Regulations] were designed to include [only] days of care furnished to patients who

were eligible for Medicaid services that were paid for with Title XIX funds,” as

opposed to a state’s “providing a premium subsidy” to Commonwealth Care-eligible

individuals “to purchase health care from the same managed care plan as provided to

traditional Medicaid-eligible individuals.” (Id.)

       Two members of the PRRB filed a concurring opinion, wherein they also

concluded that the Medicaid fraction’s numerator must take into account the patient




                                            14
days attributable to patients who received health insurance premium assistance through

Commonwealth Care. (Id.) The concurring opinion identified the “key” issue as

whether or not the “medical assistance” provided to Commonwealth Care enrollees did,

in fact, include “inpatient benefits.” (Id. at 30.) And, in that regard, the concurring

PRRB members observed that, while “there [was] no explicit statutory or regulatory

requirement” that individuals covered under Commonwealth Care and earning “greater

than 100 percent of the Federal poverty level” receive inpatient hospital services

benefits, the record contained “information that confirms that all [Commonwealth Care]

beneficiaries . . . did in fact receive inpatient benefits.” (Id. at 31 (emphasis altered).)

Therefore, according to the concurrence, there was “sufficient evidence to find that

[Commonwealth Care] beneficiaries received inpatient benefits as part of their benefit

package under the [section] 1115 waiver.” (Id. at 32.)

       In the course of their analysis, the concurring members of the PRRB also

expressly rejected the idea “that inpatient benefits must be delineated in the [section]

1115 waiver documents approved by [the agency] and/or that such benefits must be

guaranteed under the [section] 1115 waiver.” (Id. at 31 (emphasis added).) Instead,

the concurrence opined that, for the associated patient days to be counted in the

Medicaid fraction under the applicable regulation, inpatient hospital services benefits

need only “be ‘received’ under the [section] 1115 waiver.” (Id.)

       The Administrator of the Center for Medicare & Medicaid Services considered—

and reversed—the PRRB’s decision. (Id. at 17.) See also 42 C.F.R. § 405.1875

(establishing the Administrator’s authority to “review any decision of the Board”).

Although the Administrator’s lengthy written opinion is not a model of clarity, the




                                             15
following language appears to summarize her conclusion:

       In sum, the Administrator finds that[] a § 1115 demonstration project
       for which patients are eligible must include inpatient hospital benefits
       in order for the hospital inpatient days to be counted as Medicaid days
       in the calculation of a hospital’s DSH patient percentage. The record
       shows that patients only become eligible for inpatient services under the
       [Commonwealth Care program] if they buy the insurance offered
       thereunder. The fact that the subsidized premiums can be used to
       purchase inpatient benefits is irrelevant. As such, the Administrator
       finds and concludes that [Commonwealth Care] patients are not eligible
       for Medicaid or made eligible for inpatient services under the § 1115
       waiver, and so the days of care furnished to these patients cannot be
       included in the Medicaid fraction pursuant to 42 C.F.R. §
       412.106(b)(4)(i).

(Id. at 21.) Thus, the Administrator appears to have reasoned that because

Commonwealth Care (i.e., the relevant “demonstration project”) does not require

subscribers to enroll in plans that provide inpatient hospital benefits, and thus does not

cover such benefits directly, the patient days that individuals covered under the

Commonwealth Care program generate do not factor into the Medicaid fraction’s

numerator. (Id.; see also id. at 17–18.)

       The Hospitals filed the instant action on May 16, 2017, as section 1395oo(f)(1)

of Title 42 of the United States Code allows. (See Compl., ¶ 55.) Their complaint

claims that the agency’s decision to exclude the patient days attributable to

Commonwealth Care patients was arbitrary and capricious, in violation of the standards

of the Administrative Procedure Act, 5 U.S.C. § 706(2) (see id.), which applies to

Medicare disputes, see 42 U.S.C. § 1395oo(f)(1). The Hospitals maintain that the

Administrator’s decision conflicts with both the “plain language of the Secretary’s DSH

regulation” and “the agency’s intent at the time of [that regulation’s] adoption.”

(Compl. ¶ 58; see also Pls.’ Mem. at 2.) In response, the government has focused on a




                                            16
line of argument that the PRRB addressed (rather than on the line of argument taken up

by the Administrator); to wit, that the patient days generated through a demonstration

project will count in the Medicaid fraction’s numerator only if the Secretary’s waiver

expressly states that the demonstration project is authorized to provide inpatient

hospital services. (See Def.’s Mem. at 19–22; see also Hr’g Tr., ECF No. 24, at 45:16–

46:5.)

         The parties’ cross-motions are fully briefed (see Pls.’ Reply in Supp. of Mot. for

Summ. J. & Opp’n to Def.’s Cross-Mot. for Summ. J. (“Pls.’ Reply”), ECF No. 17;

Def.’s Reply; Pls.’ Sur-reply to Def.’s Reply in Supp. of its Cross-Mot. for Summ. J.

(“Pls.’ Surreply”), ECF No. 20-1), and this Court heard oral arguments from both

parties at a motion hearing on September 17, 2018 (see Hr’g Tr.).


II.      LEGAL STANDARDS

            A. Summary Judgment In APA Cases

         The Federal Rules of Civil Procedure require a court to grant summary judgment

“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). However, in

the context of a Medicare case, like in an APA case, that summary judgment standard

“does not apply because of the limited role of a court in reviewing the administrative

record.” Standing Rock Sioux Tribe v. U.S. Army Corps of Eng’rs, 301 F. Supp. 3d 50,

58 (D.D.C. 2018) (internal quotation marks and citation omitted); see also Cooper

Hosp., 179 F. Supp. 3d at 39 (explaining that the summary judgment standard for

Medicare claims is the same as the summary judgment standard for APA cases); Banner

Health, 715 F. Supp. 2d at 153 (same). Thus, when confronting cross-motions for



                                             17
summary judgment in a case such as this, “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) (internal quotation marks and citation omitted).

       Consequently, with respect to claims brought under the APA, “[t]he entire case

on review is a question of law, and only a question of law[,]” Marshall Cty. Health

Care Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir. 1993), and a court must limit its

review to the “administrative record” and the facts and reasons contained therein in

order to determine whether the agency’s action was “consistent with the relevant APA

standard of review[,]” Ho-Chunk, Inc. v. Sessions, 253 F. Supp. 3d 303, 307 (D.D.C.

2017); see also Caiola v. Carroll, 851 F.2d 395, 398 (D.C. Cir. 1988).

          B. Arbitrary And Capricious Review

       Under the APA, any person “adversely affected or aggrieved” by agency action

has the right to seek “judicial review” of that agency decision, 5 U.S.C. § 702, so long

as the agency has taken a “final agency action for which there is no other adequate

remedy in a court[,]” id. § 704. As relevant here, the “reviewing court shall . . . hold

unlawful and set aside agency action, findings, and conclusions found to be arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with law[,]” as well

as any agency action that is not “supported by substantial evidence” in the

administrative record. Id. § 706(2). Because this legal standard is quite broad, a

plaintiff can challenge agency decision-making under the APA in various ways. See

Pac. Ranger, LLC v. Pritzker, 211 F. Supp. 3d 196, 210 (D.D.C. 2016).

       One of the most well-known limitations on agency action is the longstanding

prohibition on agency determinations that contradict the agency’s own regulations. See


                                            18
Policy & Research, LLC v. U.S. Dep’t of Health & Human Servs., 313 F. Supp. 3d 62,

72 (D.D.C. 2018), appeal filed, No. 18-5190 (D.C. Cir. June 15, 2018). To be sure, “it

is within the power of an agency to amend or repeal its own regulations,” Nat’l Envtl.

Dev. Ass’n’s Clean Air Project v. Envtl. Prot. Agency, 752 F.3d 999, 1009 (D.C. Cir.

2014) (internal quotation marks, citation, and alterations omitted); however, “an agency

is not free to ignore or violate its regulations while they remain in effect[,]” id. (internal

quotation marks, citation, and alteration omitted). Thus, “if an agency action fails to

comply with its [own] regulations, that action may be set aside as arbitrary and

capricious.” Erie Boulevard Hydropower, LP v. Fed. Energy Regulatory Comm’n, 878

F.3d 258, 269 (D.C. Cir. 2017).

       Of course, when determining whether or not an agency has acted in a manner that

is contrary to its regulations, the court must first determine what the regulations

require. And to the extent that the agency has offered up an interpretation, courts

generally “accord ‘substantial deference’” to the agency’s interpretation under the

doctrine of Auer v. Robbins, 519 U.S. 452 (1997), so long as it is not “plainly erroneous

or inconsistent with the regulation.” Mellow Partners v. Commn’r of Internal Revenue

Serv., 890 F.3d 1070, 1079 (D.C. Cir. 2018); see also Otsuka Pharmaceutical Co. v.

Burwell, 302 F. Supp. 3d 375, 390 (D.D.C. 2016) (“[T]he Auer standard provides for an

even greater degree of deference to the agency than the standard that Chevron

establishes.” (internal quotation marks, citation, and alteration omitted)).

       “Courts typically consider three factors when deciding whether to apply Auer

deference.” Mellow Partners, 890 F.3d at 1079. First, “the language of the regulation

in question must be ambiguous[.]” Drake v. Fed. Aviation Admin., 291 F.3d 59, 68




                                             19
(D.C. Cir. 2002). Second, “there must be ‘no reason to suspect that the interpretation

does not reflect the agency’s fair and considered judgment on the matter in question[,]’”

id. (quoting Auer, 519 U.S. at 462), and third, the agency’s interpretation must “be

fairly supported by the text of the regulation itself, so as to ensure that adequate notice

of that interpretation is contained within the rule[,]” id. If these criteria are met, courts

will generally defer to the agency’s interpretation of its regulation, even if that

interpretation does not reflect the “best” possible reading of the regulation. Decker v.

Northwest Envtl. Def. Ctr., 568 U.S. 597, 613 (2013).


III.   ANALYSIS

       The parties in the instant case chiefly dispute whether HHS correctly interpreted

the phrase “the patient is eligible for inpatient hospital services . . . under a waiver

authorized under section 1115(a)(2)[.]” 42 C.F.R. § 412.106(b)(4)(i). HHS says this

language requires that the Secretary must have stated in the terms and conditions of the

section 1115 waiver that individuals obtaining insurance through the given

demonstration project are “eligible for inpatient hospital services[.]” (See Def.’s Reply

at 5.) But the agency never explains why the regulation concerning DSH adjustments

would contain such a requirement, and for the reasons explained fully below, this Court

concludes that it does not.

       In short, the plain language of the applicable regulation unambiguously requires

that all patient days attributable to individuals receiving health insurance through

Medicaid or through a roughly equivalent authorized demonstration project (as

evidenced by the provision of “inpatient hospital services”) must be counted in the

Medicaid fraction’s numerator. There is no dispute that the coverage provided to



                                             20
subscribers of Massachusetts’s Commonwealth Care program is roughly equivalent to

Medicaid insofar as every individual covered under the Commonwealth Care program

did in fact receive premium assistance with respect to a health insurance plan that

provided benefits for inpatient hospital services; moreover, when the Commonwealth

Care waiver was issued, the Secretary incorporated the entirety of that state-run

healthcare coverage program into the authorized demonstration project. This means

that, for the purpose of the calculation at issue, the fact that the waiver document itself

makes no reference to “inpatient hospital services” is irrelevant, and HHS acted in a

manner that was contrary to its own regulations when it refused to count the patient

days associated with the Commonwealth Care program in the numerator of the

Hospitals’ Medicaid fractions. Accordingly, and on this basis alone, HHS’s

determination must be set aside.

          A. Under Section 412.106(b)(4), The Patient Days Attributable To
             Individuals Who Are Eligible For Inpatient Services Pursuant To A
             Waived Demonstration Project Must Be Included In The Medicaid
             Fraction’s Numerator

       The plain language of section 412.106(b) of Title 42 of the Code of Federal

Regulations establishes certain requirements for calculating a hospital’s DSH

adjustment; moreover, and importantly, it also provides the context in which the

established computation is to be made. It is crucial to recall that context, for it appears

that HHS has lifted words from the middle of the applicable text, and has presented

them standing alone, thereby suggesting that the provision at issue requires something

quite different than its unambiguous meaning when the terms of the regulation are

considered as a whole. There can be no question that, like the words of a statute, the

words of a regulation must be viewed in context. See Utility Air Regulatory Grp. v.



                                             21
Envtl. Prot. Agency, 134 S. Ct. 2427, 2441 (2014) (pointing to “the ‘fundamental canon

of statutory construction that the words of a statute must be read in their context and

with a view to their place in the overall statutory scheme’” (internal quotation marks

and citation omitted)). And the relevant requirements of section 412.106(b) could not

be clearer.

        To start, the regulation plainly indicates that it is “[t]he fiscal intermediary” who

“determines . . . the number of the hospital’s patient days of service for which patients

were eligible for Medicaid but not entitled to Medicare Part A[.]” 42 C.F.R. §

412.106(b)(4). This is the number that becomes the numerator of the Medicaid fraction

(which the regulation calls “the second computation”), and thus, any subsequent

language clarifying how the fiscal intermediary is to arrive at that number—including

the language that HHS has seized upon—has to be considered relative to this ultimate

objective. See id. (introducing the subsequent directions by stating that “[f]or purposes

of this second computation, the following requirements apply”). 5

        As relevant here, the regulation then proceeds to expand the pool of qualifying

hospital patient days of service, from merely those “days of service for which patients

were eligible for Medicaid[,]” 42 C.F.R. § 412.106(b)(4), to include the days of service

in which a patient “is eligible for inpatient hospital services under an approved State

Medicaid plan or under a waiver authorized under section 115(a)(2)”—which is


5
  For further context, recall that subdivision (4) is part of a section—412.106(b)—that pertains to the
calculation of the disproportionate patient percentage. It states that HHS will “add[] the results of two
computations[,]” i.e., the Medicare and Medicaid fractions, 42 C.F.R. § 412.106(b)(1), and then lays
out in detail how the agency will calculate each of these fractions, see id. §§ 412.106(b)(2), (b)(4); see
also Baystate Med. Ctr. v. Leavitt, 545 F. Supp. 2d 20, 50 n.32 (D.D.C. 2008) (“42 C.F.R. §
412.106(b)[] only sets forth the method for computing the disproportionate patient percentage[.]”).
Section 412.106(b) thus focuses solely on what the federal government owes to hospitals that treat a
disproportionate share of low-income individuals.



                                                    22
indisputably not a state Medicaid plan—“regardless of whether particular items or

services were covered or paid under the State plan or the authorized waiver[,]” 42

C.F.R. § 412.106(b)(4)(i) (emphasis added). (See also Def.’s Reply at 6 n.1

(acknowledging that HHS uses the word “waiver” in this context synonymously with

the phrase “demonstration project”).) Notably, this expansion of the kinds of patient

days that are to be included in the Medicaid fraction’s numerator occurs via the

regulation’s instruction that “[f]or purposes of this computation, a patient is deemed

eligible for Medicaid on a given day only if the patient is eligible for inpatient hospital

services under” either the state Medicaid plan or a demonstration project waiver. 42

C.F.R. § 412.106(b)(4)(i) (emphasis added). This “deemed eligible for Medicaid”

language is crucial, because that phrase unambiguously equates the patient days for

Medicaid-eligible patients (which are expressly included in the Medicaid fraction

computation per the prior paragraph) with the patient days of patients who, while not

technically eligible for Medicaid, receive healthcare coverage under similarly

comprehensive state-authorized plans, i.e., plans that include inpatient hospital service

benefits. Cf. Black’s Law Dictionary 504 (10th ed. 2014) (defining “deem” as “[t]o

treat (something) as if (1) it were really something else, or (2) it has qualities that it

does not have”). Furthermore, when read as a whole, section 412.106(b)(4)(i) plainly

indicates that a patient’s actual eligibility for Medicaid, or an equivalent state-run

healthcare plan, “on a given day” is what matters—that is what the fiscal intermediary

is called upon to figure out—regardless of what the plan documents might say about

eligibility for any particular service, and even if the hospital at issue provided the

patient with “items or services” that were not themselves covered by the state Medicaid




                                              23
plan or waiver.

       In this regard, when a fiscal intermediary undertakes to determine who is

“eligible for Medicaid” on a given day for the purpose of the Medicaid fraction, the

word “eligible” is generally construed to mean “capable of receiving[.]” See Covenant

Health Sys. v. Sebelius, 820 F. Supp. 2d 4, 12 (D.D.C. 2011); accord Jewish Hosp., Inc.

v. Sec’y of Health and Human Servs., 19 F.3d 270, 274 (6th Cir. 1994); see also Black’s

Law Dictionary 634 (10th ed. 2014) (defining “eligible” as “[f]it and proper to be

selected or to receive a benefit”). Meanwhile, to the extent that a qualifying patient

must be “eligible for inpatient hospital services under” a state Medicaid plan or

approved waiver, the most natural meaning of the word “under” (and, indeed, the only

one of its many potential definitions that appears appropriate here) is “subject or

pursuant to” or “by reason of the authority of.” Ardestani v. Immigration &

Naturalization Serv., 502 U.S. 129, 135 (1991) (internal quotation marks, citation, and

alteration omitted); see also id. (remarking that “[t]he word ‘under’ has many

dictionary definitions and must draw its meaning from its context”). Thus, once the

fiscal intermediary turns to the task of evaluating which patients are to be deemed

eligible for Medicaid on a given day for the purpose of the Medicaid fraction because

they were “eligible for inpatient hospital services . . . under a waiver authorized under

section 1115(a)(2)” on that day, the phrase “eligible for inpatient hospital services . . .

under a waiver authorized under section 1115(a)(2)” is plainly understood as describing

those individuals who were capable of receiving inpatient hospital services pursuant to

the project that the Secretary approved in the section 1115(a)(2) waiver. 42 C.F.R.

§ 412.106(b)(4)(i).




                                             24
       HHS’s insistence that the appropriate interpretation of this language turns,

instead, on whether the legal terms and conditions that authorize the demonstration

project themselves explicitly “require that inpatient services be provided to participants

in that program” (Def.’s Mem. at 5) is wholly unpersuasive. First of all, and perhaps

most importantly, HHS does not, and cannot, explain why the express terms of the

demonstration project waiver agreement matter in the context of a regulation that is

simply and solely concerned with the fiscal intermediary’s proper calculation of a

hospital’s DSH adjustment given the population that it serves. HHS has plunged

headlong into dictionary definitions of purportedly ambiguous terms, divorced from

context, and in so doing has unquestionably lost its moorings: again, the point of the

section at issue is to explain how HHS will determine who is to be deemed eligible for

Medicaid for the purpose of the Medicaid fraction (see Part IV.A., supra); see also

Baystate Med. Ctr., 545 F. Supp. 2d at 50 n.32, and other agency rules address the

contents of a demonstration project waiver—no part of section 412.106(b)(4) defines

what a “demonstration project” is; expounds upon what a section 1115 waiver must or

may contain; or describes the financial and legal obligations that the federal

government incurs as a result of executing a section 1115 waiver. Compare 42 C.F.R. §

412.106(b)(4) with id. § 430.25 (laying out some of the requirements for the contents of

these waivers); id. § 431.55 (setting forth the requirements for waiver applications). It

is clear, then, that with respect to the task at hand, the Secretary’s understanding of the

scope of the demonstration project as expressed in the waiver agreement, or whether the

Secretary “know[s], when he approves a demonstration project, whether or not he is




                                            25
committing federal funds” via the DSH adjustment (Def.’s Reply at 8), is utterly

irrelevant.

       Given that section 412.106(b)(4) says nothing about the particular contents of a

section 1115 waiver, and does not so much as cross-reference the portions of the Code

of Federal Regulations that do in fact address a section 1115 waiver’s requirements, it

makes little sense to require fiscal intermediaries to look to the terms of the waiver

agreement to identify those patients who are to be deemed eligible for Medicaid for the

purpose of section 412.106(b)(4)’s Medicaid fraction computation, as HHS suggests

here. Even so, requiring the Secretary to have stated affirmatively that the covered

patients would be “eligible for inpatient hospital services” runs counter to the structure

of the Medicaid program and the waiver system that Congress authorizes in section

1115, both of which make crystal clear that inpatient hospital coverage is the default,

and that any explicit statement of the Secretary in the section 1115 process would waive

such coverage, not authorize it. That is, by law, a state-run Medicaid program has to

include benefits for inpatient hospital services, see 42 U.S.C. § 1396a (noting the

requirements for “[a] State plan for medical assistance[,]” i.e., a traditional Medicaid

program); id. § 1396d(a)(1) (defining “medical assistance” to include the provision of

“inpatient hospital services”), but the Secretary may waive this requirement (and

others) through a section 1115 waiver, thereby treating such a demonstration project as

a Medicaid program for reimbursement purposes, see id. § 1315(a)(1) (permitting the

Secretary to waive the requirements of section 1396a of Title 42 of the United States

Code). Thus, the statutory scheme establishes baseline circumstances that are precisely

the opposite of the interpretation that HHS proposes here—i.e., the Secretary acts




                                            26
affirmatively to waive the requirement that inpatient services be provided to covered

patients, not the other way around—yet HHS insists that, for patients who are covered

through a demonstration project to be included in the relevant reimbursement formula,

section 412.106(b)(4)(i) of Title 42 of the Code of Federal Regulations requires an

affirmative and express adoption of inpatient hospital coverage by the agency. (See

Def.’s Reply at 5 (suggesting that “[t]he special terms and conditions of the

Massachusetts demonstration project” must state “that Commonwealth Care

beneficiaries would be eligible to have the costs of their inpatient hospital services

covered by the insurance they purchased” (emphasis added)).) The agency’s inversion

of the background rule to imbue the waiver’s silence with a meaning that is inconsistent

with the waiver scheme itself creates a conflict with the Medicaid statute that renders

the agency’s reading “plainly erroneous[.]” Drake, 291 F.3d at 68 (explaining that

“plainly erroneous” interpretations of agency rules are not entitled to Auer deference).

       Finally, it is clear that HHS’s statements during rulemaking do not support the

interpretation that it seeks to advance now. The propositions that expansion waiver

populations are “specific, finite populations identifiable in the award letters” and that

“special terms and conditions apply to the demonstrations” (Def.’s Reply at 8 (quoting

68 Fed. Reg. at 45,420)) plainly stand merely for the unremarkable notion that a section

1115 waiver must identify the population that a demonstration project will serve, and

that a section 1115 waiver needs “special terms and conditions” because the proposed

demonstration project deviates from the statutory Medicaid requirements. See, e.g., 42

C.F.R. § 430.25(d) (discussing the details of a waiver of Medicaid requirements). Thus,

HHS has distorted these Federal Register statements in much the same manner as the




                                            27
text of the regulation at issue; it finds significance in various words plucked from their

context, when none actually suggests in the slightest that the Secretary must

affirmatively state that patients are authorized to receive inpatient hospital services

under the demonstration project when the waiver is approved in order for those patients

to be deemed eligible for Medicaid for the purpose of computing the Medicare DSH

adjustment.

       In short, HHS’s interpretation is out of sync with both the overall statutory

Medicaid scheme and the structure of the Code of Federal Regulations, and thus this

Court owes it no deference. See Drake, 291 F.3d at 68; see also Christensen v. Harris

Cnty., 529 U.S. 576, 588 (2000) (“To defer to the agency’s position would be to permit

the agency, under the guise of interpreting a regulation, to create de facto a new

regulation.”).

          B. Because Patients Who Were Covered By Commonwealth Care During
             The Relevant Timeframe Were Eligible To Receive Inpatient Services,
             The Patient Service Days Attributable To Such Patients Must Be
             Counted

       Based on the waiver that the Secretary executed with respect to Massachusetts’s

Commonwealth Care program, there can be little doubt that the patient days attributable

to patients who were covered by the Commonwealth Care program must be included in

the Hospitals’ Medicaid fraction. Notably, the section 1115(a)(2) waivers relevant to

this case contained no carveouts that are relevant to this issue—i.e., the waivers

incorporated the entirety of the Commonwealth Care plan. Indeed, when describing the

contours of what was being approved as a demonstration project and what populations

would be covered under that project, the Secretary simply and solely stated the

following:



                                            28
       Commonwealth Care. Expenditures for premium assistance for the
       purchase of commercial health insurance products for uninsured
       individuals with income at or below 300 percent of the FPL who are
       not otherwise eligible under the Massachusetts State plan or any other
       eligibility category.

(AR Pt 2 at 17; see also id. at 22.)

       Thus, the demonstration project at issue in this case encompassed the entirety of

the Commonwealth Care program, and the only other general question from the

standpoint of the fiscal intermediary who is charged with counting the patient days

associated with an approved demonstration project under section 412.106(b)(4) of Title

42 of the Code of Federal Regulations is whether patients covered by Commonwealth

Care were capable of receiving inpatient health services through the insurance plans

this program financed. The record is unambiguous on this point, and there is no dispute

among the parties: every Commonwealth Care patient was, in fact, eligible for inpatient

hospital services. (See AR Pt 1 at at 28 (explaining that “[t]he record also shows that

the [Commonwealth Care] days in this appeal relate to individuals who were enrolled in

the same managed care plans and received the same core health benefits as other

MassHealth recipients, including inpatient hospital services”); see Hr’g Tr. at 23: 6–9

(government counsel acknowledging that “Commonwealth Care apparently

guaranteed[,] [] though it was not required by the demonstration project, it did in

practice, under state law, guarantee inpatient hospital coverage”).)

       Accordingly, per the unambiguous language of section 412.106(b)(4), and in

light of the undisputed facts pertaining to the healthcare plan at issue, any patient

service days attributable to patients whom the Hospitals treated and who were covered

by Commonwealth Care on those service days should have been included within the




                                            29
numerator of the Medicaid fraction for the purpose of calculating the Hospitals’ DSH

adjustments. Consequently, HHS’s refusal to include such patient days in the

numerator of the Medicaid fraction when calculating the Hospitals’ DSH adjustments

for the period between October 1, 2008, and September 30, 2009, was arbitrary and

capricious agency action that must be vacated under the APA. 6


IV.    CONCLUSION

       For the reasons explained above, and as set forth in the September 28, 2018,

Order, this Court has GRANTED Plaintiffs’ motion for summary judgment, and

DENIED Defendant’s cross-motion for summary judgment. The Court has also

VACATED the agency’s decision, and REMANDED this case to the agency for further

proceedings consistent with this Memorandum Opinion.



DATE: October 26, 2018                         Ketanji Brown Jackson
                                               KETANJI BROWN JACKSON
                                               United States District Judge




6
  Because this Court concludes that HHS has acted in a manner that is inconsistent with the clear and
unequivocal mandate contained within its regulations, this Court has no need to opine on the other
arguments that the Hospitals have raised, including their contentions that HHS changed course without
explanation; that the government has advanced a post-hoc rationalization in these proceedings to
legitimize the underlying agency decision; or that HHS’s interpretation would deprive the Hospitals of
the fair notice to which they are entitled as a matter of constitutional due process.


                                                  30
