                               UNITED STATES DISTRICT COURT
                               FOR THE DISTRICT OF COLUMBIA

CATHOLIC HEALTH INITIATIVES - IOWA, )
CORP. d/b/a MERCY MEDICAL CENTER - )
DES MOINES,                               )
                                          )
              Plaintiff,                  )
                                          )
v.                                        )                                 No. 10-cv-411 (RCL)
                                          )
KATHLEEN SEBELIUS, Secretary              )
United States Department of               )
Health and Human Services,                )
                                          )
              Defendant.                  )
_________________________________________ )

                                     MEMORANDUM OPINION

        Picture a law written by James Joyce 1 and edited by E.E. Cummings. Such is the

Medicare statute, which has been described as “among the most completely impenetrable texts

within human experience.” Rehab. Ass’n of Va. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir.

1994). Certain provisions of this labyrinthine 2 statutory scheme are at issue in this case, which

concerns a hospital seeking review of a final decision of the Secretary of the Department of

Health and Human Services, who denied it certain payments it believes it is owed for providing

care to low-income patients. Before the Court is plaintiff’s Motion for Summary Judgment, Pl.’s

Mot. Summ. J. [12], July 7, 2010, and defendant’s Cross-Motion for Summary Judgment. Def.’s

Cross-Mot. Summ. J. [14], Aug. 9, 2010.                Having carefully considered the motions, the

oppositions, the replies, the administrative record in this case, and the applicable law, the Court

will grant plaintiff’s Motion and deny defendant’s Cross-Motion. A review of the background of

the case, the governing law, the parties’ arguments, and the Court’s reasoning in resolving those

1
  The Court clarifies, however, that by making this analogy, it is referring not to Joyce’s early work, such as
Dubliners or A Portrait of the Artist as a Young Man, but his later period, specifically Finnegan’s Wake.
2
  See Ne. Hosp. Corp. v. Sebelius, 657 F.3d 1, 17 (D.C. Cir. 2011) (quoting Learned Hand, In Memoriam: Thomas
Walter Swan, 57 Yale L.J. 167, 169 (1947)).
arguments follows.

I.       BACKGROUND

         A. Medicare and the “Disproportionate Share Hospital” Adjustment

         Medicare is a federal program that provides health insurance for the elderly and disabled.

It reimburses qualifying hospitals for services provided to eligible patients. See generally Cty. of

Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). The Department of Health and

Human Services (“HHS”), currently led by Secretary Kathleen Sebelius, is the agency charged

with administering the Medicare program, and one of its operating components—the Centers for

Medicare and Medicaid Services (“CMS”)—handles the hospital reimbursements.

         The Medicare statute have five parts. Part A of Medicare provides insurance for hospital

and hospital-related services. 42 U.S.C. § 1395c; see Northeast Hospital, 657 F.3d at 2. This

includes coverage for “inpatient hospital services”—i.e., (generally speaking) overnight stays in

a hospital. 42 U.S.C. § 1395d(a)(1). Medicare Part A’s coverage for inpatient hospital services

is limited to a certain number of days of care, after which such coverage is “exhausted.” 3 See id.

Parts B, C, and D of Medicare concern other health care programs not relevant to this case. See

Northeast Hospital, 657 F.3d at 2–3. Part E of Medicare, among other provisions, establishes a

“prospective payment system” through which hospitals are reimbursed for Part A inpatient

hospital services. 42 U.S.C. § 1395ww(d).

         Medicare reimbursements are subject to a variety of hospital-specific adjustments. See

id. One of these adjustments is for “disproportionate share hospitals” (“DSHs”), which “serve[]

a significantly disproportionate number of low-income patients.” Id. § 1395ww(d)(5)(F)(i)(I);

see also Northeast Hospital, 657 F.3d at 3. The DSH adjustment reflects Congress’s view that

low-income Medicare patients are often in poorer health than the run-of-the-mill Medicare
3
  The first 90 days of inpatient hospital care are covered, and a beneficiary may then elect to use up to 60 “lifetime
reserve days” beyond the first 90 days. 42 C.F.R. § 409.61(a).
                                                          2
patient, and consequently more costly for a hospital to treat. See Adena Reg’l Med. Ctr. v.

Leavitt, 527 F.3d 176, 177–78 (D.C. Cir. 2008).

        This is where things start to get tricky. A hospital’s DSH adjustment for a particular cost

reporting period depends on the hospital’s “disproportionate patient percentage” (“DPP”). 42

U.S.C. § 1395ww(d)(5)(F)(v). The DPP is not the actual percentage of low-income patients

served by the hospital during the relevant period. It is an indirect, or “proxy measure for low

income.” H.R. Report No. 99-241, at 16 (1985), reprinted in 1986 U.S.C.C.A.N. at 594. To add

a bit more complexity, the DPP is itself the sum of two other fractions: the “Medicare fraction”

and the “Medicaid fraction.” 4 42 U.S.C. § 1395ww(d)(5)(F)(vi). The Medicare fraction is

defined as:

        the fraction (expressed as a percentage), the numerator of which is the number of
        such hospital’s patient days for such period which were made up of patients who
        (for such days) were entitled to benefits under part A [of Medicare] . . . and were
        entitled to supplementary security income benefits . . . , and the denominator of
        which is the number of such hospital’s patient days for such fiscal year which
        were made up of patients who (for such days) were entitled to benefits under part
        A [of Medicare] . . . .

Id. § 1395ww(d)(5)(F)(vi)(I). The Medicaid fraction—which is central to this case—is defined

as:

        the fraction (expressed as a percentage), the numerator of which is the number of
        the hospital’s patient days for such period which consists of patients who (for
        such days) were eligible for medical assistance under a State [Medicaid] plan . . . ,
        but who were not entitled to benefits under part A [of Medicare] . . . , and the
        denominator of which is the total number of the hospital’s patient days for such
        period.

Id. § 1395ww(d)(5)(F)(vi)(II). At the simplest level, each of these fractions is arrived at by

dividing a certain type of patient day by another type of patient day, to determine the proportion

of the first type to the second.             If these two proportions are added up, the resulting
4
  The Medicare and Medicaid fractions are sometimes called the “Medicare proxy” and the “Medicaid proxy.” To
make matters worse, the “Medicare fraction” or “proxy” is also often called the “SSI fraction” or “proxy,” since it
involves patients entitled to Social Security benefits.
                                                        3
“disproportionate patient percentage” may show that a hospital, for that cost reporting period,

served a disproportionately high number of low-income patients, was a “disproportionate share

hospital,” and so is entitled to a DSH adjustment to its Medicare reimbursement.

       Furthermore, as these two definitions show, both the Medicare and Medicaid fractions

include the phrase, “entitled to benefits under part A [of Medicare].” However, the fractions

make use of this phrase differently. While the Medicare fraction includes, in both its numerator

and denominator, patient days made up of patients who were “entitled to benefits under part A

[of Medicare],” in the Medicaid fraction, the phrase “entitled to benefits under part A [of

Medicare]” appears only in its numerator, and such days are excluded, not included. Said

another way, if a patient staying at a hospital is “entitled to benefits under part A [of Medicare],”

that day is counted in the numerator of the Medicare fraction (so long as the patient is also

“entitled” to Social Security benefits); but, that same day would not be counted in the numerator

of the Medicaid fraction, because only days attributable to patients who were “eligible” for

Medicaid and “not entitled to benefits under part A [of Medicare]” can be counted.

       Determining a hospital’s ultimate DSH adjustment involves some auditing and some

math, and the Medicare statute entrusts these tasks, not to hospitals or even HHS, but to

middlemen called “fiscal intermediaries”—usually insurance companies—which act as agents of

the Secretary. See 42 C.F.R. §§ 421.1, 421.3, 421.100–.128. Once a hospital provides its fiscal

intermediary with relevant information, the intermediary determines the total amount of

reimbursement due and furnishes the provider with a “notice of program reimbursement”

(“NPR”) reflecting its determination. Id. § 405.1803. An intermediary may reopen and revise a

reimbursement determination no later than three years following the original NPR.              Id. §

405.1885. If a hospital is dissatisfied with the intermediary’s calculation of its reimbursement,

the hospital can appeal the decision to the Provider Reimbursement Board (“PRRB”), which is
                                                 4
an administrative body appointed by the Secretary. See 42 U.S.C. §§ 1395oo(a), (h). The PRRB

can affirm, modify, or reverse the intermediary’s determination, and—if the PRRB’s decision is

appealed—the Secretary can affirm, modify, or reverse the decision of the PRRB. See id. §§

1395oo(d)–(f).

          B. This Lawsuit

          The plaintiff in this case—Catholic Health Initiatives - Iowa, Corp. (“Catholic Health”)—

is a not-for-profit corporation that owns and operates Mercy Medical Center (“the Hospital”) in

Des Moines, Iowa. Compl. [1] ¶17, Mar. 12, 2010. The Hospital participates in the Medicare

program as a “provider of services,” and so receives reimbursements from the program on a

regular basis. Id. The cost reporting period at issue in this case is the Hospital’s fiscal year

ending June 30, 1997.

          After the Hospital provided information related to its 1996 and 1997 cost reporting

periods to its fiscal intermediary, the intermediary calculated the Hospital’s Medicare

reimbursement, and furnished NPRs for those periods. 5 Id. However, in December 2002, the

intermediary revisited those calculations and issued revised NPRs. Id. Unhappy with this

revision, the Hospital appealed the intermediary’s decision to the PRRB. Id.; see also id. at 455.

The issue before the PRRB in this 2003 appeal was whether the intermediary incorrectly

calculated the Hospital’s DSH adjustment by excluding the Hospital’s “Medicaid-eligible patient

days attributable to two patients who had exhausted Medicare Part A benefits.” Id. at 101.

However, in early September 2004, before the PRRB considered the appeal, the parties reached

an “Administrative Resolution” of the reimbursement dispute. Id. at 455. Pursuant to this

settlement, the intermediary agreed to include some, but not all, of the “Part A exhausted days at

issue in the Medicaid fraction for the 1996 and 1997 cost reporting periods.” Id. at 102.

5
    These NPRs were furnished in September 2008. AR at 850.
                                                       5
         However, in June 2005, the intermediary—based upon what it called “a recent

clarification received from CMS”6—announced that it would once again revisit the Hospital’s

DSH adjustment for the 1996 and 1997 cost reporting periods. Id. The intermediary then issued

another set of revised NPRs, which excluded the same patient days that it had agreed to include

pursuant to the September 2004 settlement. Id. The Hospital again appealed the intermediary’s

decision to the PRRB. Id.

         As was the case in the Hospital’s 2003 appeal, the issue before the PRRB in this latest

appeal was whether the intermediary erred by excluding from the numerator of the Medicaid

fraction patient days attributable to patients who were eligible for Medicaid but who had

exhausted their Medicare Part A inpatient hospital services benefits. Id. at 31. In March 2009,

the PRRB reversed the intermediary’s decision, holding that the disputed days should have been

included. Id. Its decision was based upon the statutory text as well as its reading of previous

statements and administrative decisions of CMS and the Secretary. Id. at 31–34.

         Regarding the Medicare statute, the PRRB concluded that the statute defined “entitled to

benefits under part A [of Medicare]”—that is, the phrase in the numerator of the Medicaid

percentage, see 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II)—as “the right to have payment made on the

patient’s behalf for covered services.” AR at 31 (citing 42 U.S.C. §§ 1395(a), 426(c)(1)). Since

the disputed days were attributable to patients who had exhausted their Medicare Part A inpatient

hospital services benefit, those patients—the PRRB reasoned—did not have the right to have

payment made by Medicare for those days, and so were “not entitled to benefits under part A [of

Medicare]” as specified in the Medicaid percentage. Id. Therefore the statute’s plain language

required the inclusion of those days, because they were attributable to patients who were


6
  This “clarification” from CMS is its August 2004 final rule, related to Medicare’s prospective payments systems,
in which it stated that it would not allow the inclusion, in the Medicaid fraction, of “dual-eligible beneficiaries who
have exhausted their Part A hospital coverage . . . .” 69 Fed. Reg. 48,916, 49,099 (Aug. 11, 2004).
                                                          6
“eligible [for Medicaid]” and “not entitled to benefits under part A [of Medicare].” See 42

U.S.C. § 1395ww(d)(5)(F)(vi)(II).

       The PRRB supported this plain-language argument by referencing prior statements of

CMS and the Secretary. It noted that CMS, in a preamble to a 1990 Federal Register notice, had

stated that “[e]ntitlement to payment under Part A ceases after the beneficiary” has exhausted his

or her Medicare Part A inpatient hospital services benefit. AR at 31 (quoting 55 Fed. Reg.

35,990, 35,996 (Sept. 4, 1990)). This text, however, did not specifically interpret the phrase

“entitled to benefits under part A [of Medicare]” in the definition of the Medicaid percentage, but

that same phrase as it appears in a subsequent provision of the DSH statute, namely 42 U.S.C. §

1395ww(d)(5)(G)(iv)(IV). The PRRB also noted that CMS’s current policy, at least as of

August 2004, was to count only “covered patient days in the Medicare fraction,” a position that

obviously reflects CMS’s interpretation of the phrase “entitled to benefits under part A [of

Medicare]” in the Medicare fraction to mean “covered” or “paid for” by Medicare. AR at 33

(quoting 69 Fed. Reg. 48,916, 49,098 (Aug. 11, 2004)). Finally, the PRRB considered a 1996

administrative decision of the Secretary that specifically concerned the issue of whether days

attributable to patients who were eligible for Medicaid but who had exhausted their Medicare

Part A inpatient hospital services benefits should be included in the numerator of the Medicaid

percentage—that is, the precise question before the PRRB (and this Court). Id. at 32 (citing

Presbyterian Med. Ctr. of Philadelphia v. Aetna Life Ins. Co., CMS Adm’r Dec., reprinted in

Medicare & Medicaid Guide (CCH) ¶ 45,032 (Nov. 29, 1996)). According to the PRRB, the

Secretary, in Presbyterian, affirmed the PRRB’s decision that such days are properly included in

the Medicaid fraction. AR at 32. These, and other, arguments persuaded the PRRB that the

Hospital’s DSH adjustment for the 1996 and 1997 cost reporting periods had been incorrectly

calculated by the fiscal intermediary.
                                                7
       The Secretary, however, was not persuaded. In an opinion dated January 14, 2010, the

CMS Administrator reversed the PRRB’s decision. Id. at 10. The Administrator’s decision was

based upon what it dubbed a “long-standing policy” of “excluding [] exhausted days from the

Medicaid fraction . . . .” Id. at 6, 8. The Administrator also disagreed with the PRRB’s plain-

language argument, finding that the term “entitled” in the Medicare statute’s definitions of the

Medicare and Medicaid fractions “is not in reference to the right of payment of a benefit, but

rather the legal status of the individual as a Medicare beneficiary under the law.” Id. at 9.

Therefore, according to the Administrator, “while a Medicare beneficiary’s benefit period may

exhaust or expire, the entitlement for Medicare does not expire.” Id. As a result, the patient days

of patients who were eligible for Medicaid but whose Medicare Part A inpatient hospital services

benefit had expired should not be included in the Medicaid fraction because such patients remain

“entitled to benefits under part A.” Id. The Administrator did not address, however, its 1996

decision in Presbyterian, see supra at 7, which contradicted this conclusion, except to state (in a

footnote) that “[t]o the extent [that] any prior Administrator decisions have otherwise held, they

were not consistent with CMS’s policy.” Id. at 9 n.15.

       In March 2010, Catholic Health filed this lawsuit, alleging that the Secretary’s decision is

contrary to law, arbitrary, and capricious, and not based upon substantial evidence. 7 Compl. [1]

¶53 (citing 42 U.S.C. § 1395oo(f) and 5 U.S.C. § 706). Catholic Health also alleges that the

Secretary’s decision to exclude the disputed days from the numerator of the Medicaid fraction is

contrary to the plain meaning of the DSH provisions of the Medicare statute, and inconsistent

with the applicable regulations and the Secretary’s policy during the relevant period. Id. ¶53–56.

Catholic Health asks the Court to declare the Secretary’s decision invalid, to direct her to

recalculate the Hospital’s DSH payment for the 1997 cost reporting period and pay interest on
7
 This case was reassigned by consent from the Honorable Robert L. Wilkins to this Court in October 2011.
Reassignment [21] Oct. 7, 2011.
                                                   8
that sum, and to pay Catholic Health’s legal fees and costs. Id. ¶59. 8 The Secretary filed a copy

of the administrative record with the Court in June 2010. Def.’s Notice [9] 1, Jun. 11, 2010. In

July 2010, Catholic Health filed a motion for summary judgment, Pl.’s Mot. Summ. J. [12] July

1, 2010, and the Secretary filed a cross-motion for summary judgment the next month. Def.’s

Cross-Mot. Summ. J. [14] Aug. 9, 2010.

II.     STANDARD OF REVIEW

        Summary judgment is appropriate when the pleadings and evidence show that “there is

no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(a). However, in cases involving review of agency action

under the Administrative Procedure Act (“APA”), Rule 56 doesn’t apply due to the limited role

of a court in reviewing the administrative record. Select Specialty Hosp. - Akron, LLC v.

Sebelius, No. 10-cv-926, 2011 WL 5042021, *7 (D.D.C. Oct. 25, 2011). Under the APA, the

agency’s role is to resolve factual issues and arrive at a decision that is supported by the

administrative record, and the court’s role 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.”

Occidental Eng’g Co. v. INS, 753 F.2d 766, 769–70 (9th Cir. 1985). Summary judgment thus

serves as a mechanism for deciding, as a matter of law, whether an agency’s action is supported

by the administrative record and is otherwise consistent with the APA standard of review. See

Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977).

        Under the APA, a court must “hold unlawful and set aside agency action, findings, and

conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law,” 5 U.S.C. § 706(2)(A), in excess of statutory authority, id. § 706(2)(C), or


8
 While the patient days at issue in this case appear to involve both the Hospital’s 1996 and 1997 cost reporting
periods, Catholic Health has only sought recalculation of its DSH payment for the 1997 period. See Compl. [1] ¶59,
Mar. 12, 2010; see also Pl.’s Mot. Summ. J. [12] 4, July 1, 2010.
                                                        9
“without observance of procedures required by law.” Id. § 706(2)(D); see also 42 U.S.C. §

1395oo(f)(1). However, the scope of review is narrow. See Motor Vehicle Mfrs. Ass’n of U.S.,

Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The agency’s decision is

presumed to be valid. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415

(1971). Also, a court must not “substitute its judgment for that of the agency.” State Farm, 463

U.S. at 43. A court must be satisfied, however, that the agency has examined the relevant data

and articulated a satisfactory explanation for its action, “including a rational connection between

the facts found and the choice made.” Alpharma, Inc. v. Leavitt, 460 F.3d 1, 6 (D.C. Cir. 2006)

(citations and quotation marks omitted).

       In reviewing an agency’s interpretation of a statute, courts use the two-step analysis

outlined in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Step

one involves determining whether Congress has spoken directly to the “precise question at

issue,” for if it has, then “the court, as well as the agency, must give effect to the unambiguously

expressed intent of Congress.” Id. at 842–43. If it has, then that is the end of the matter. Nat’l

Treasury Employees Union v. Fed. Labor Relations Auth., 392 F.3d 498, 500 (D.C. Cir. 2004).

However, if the statute is silent or ambiguous on the question (Chevron “step two”), “the

question for the court is whether the agency’s answer is based on a permissible construction of

the statute.” Chevron, 467 U.S. at 843. The agency’s interpretation only needs to be reasonable

to warrant deference. Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991).

III.   THE PARTIES’ MOTIONS FOR SUMMARY JUDGMENT

       Catholic Health, eager to at long last receive the DSH payments it believes it has been

owed for over fifteen years, moves for summary judgment on two independent grounds. First, it

argues that the Secretary’s current interpretation of the words “entitled to benefits under part A

[of Medicare]” in the DSH statute flunks the familiar two-step test for judicial review of agency
                                                10
interpretations of statutes set out in Chevron. Pl.’s Mot. Summ. J. [12] 2–4. Second, it argues

that even if the Secretary’s current reading of the DSH statute is entitled to deference under

Chevron, the application of that interpretation to the 1997 period at issue is impermissibly

retroactive, and that the Secretary is therefore bound to her contemporaneous interpretation of

the relevant statutory terms. In response, and in support of her own motion, the Secretary argues

that the Medicare statute unambiguously forecloses Catholic Health’s interpretation, and that, in

any case, her interpretation of the relevant language is reasonable and entitled to Chevron

deference. Def.’s Cross-Mot. Summ. J. [14] 18–19, 30–36. While the Secretary does not

squarely address Catholic Health’s retroactivity argument, she suggests that it has failed to

adequately support its claim that the Secretary’s contemporaneous understanding of the

Medicaid fraction allowed the inclusion of the patient days at issue in this case. See id. at 39.

       The Court has considered the entire record in this case, the applicable law, and the

parties’ arguments, and concludes that regardless of whether the Secretary’s current

interpretation of the DSH statute is entitled to deference under Chevron, that interpretation

cannot be applied retroactively to Catholic Health’s 1997 DSH adjustment. Accordingly, the

Court will grant Catholic Health’s Motion for Summary Judgment and deny the Secretary’s

Cross-Motion on this ground, without reaching the question of whether the Secretary’s current

interpretation satisfies the Chevron test.

       A. Legal Standard

       Agencies may not promulgate retroactive rules without express congressional

authorization.    Northeast Hospital, 657 F.3d at 13.          To determine whether a rule is

“impermissibly” retroactive, courts “first look to see whether [the rule] effects a substantive

change from the agency’s prior regulation or practice.” Id. at 14 (quoting Nat’l Mining Ass’n v.

Dep’t of Labor, 292 F.3d 849, 860 (D.C. Cir. 2002)). “If the rule departs from established
                                                 11
practice, we then examine its impact, if any, on the legal consequences of prior conduct.” Id. A

rule that alters the “past legal consequences of past actions” is retroactive, while a rule that only

alters the future effect of past actions is not. Id. (quoting Mobile Relay Assocs. v. F.C.C., 457

F.3d 1, 11 (D.C. Cir. 2006)). Said another way, if a new rule is “substantively inconsistent” with

prior agency practice and “attaches new legal consequences to events completed before its

enactment,” the new rule is retroactive. Id. (quoting Arkema Inc. v. E.P.A., 618 F.3d 1, 7 (D.C.

Cir. 2010)).

       B. Analysis

       The Secretary’s 2010 administrative decision, in which she applied the agency’s current

policy of not including in the numerator of the Medicaid fraction patient days attributable to

patients who were eligible for Medicaid but who had exhausted their Medicare Part A inpatient

hospital services benefits, operates retroactively as applied to the 1997 cost reporting period

because HHS’s current policy is substantively inconsistent with its past policy and practice and

because it attaches new legal consequences to events that transpired in 1997. Since the Secretary

is not authorized to apply rules retroactively in the context of DSH calculations, see Northeast

Hospital, 657 F.3d at 17, her decision is impermissibly retroactive and invalid.

       The Secretary practically concedes that the agency has flip-flopped over the years on the

question of whether dual-eligible exhausted patient days should be counted in the numerator of

the Medicaid fraction, by failing to present any agency statements, regulations, administrative

decisions—or anything else—suggesting that HHS’s views in 1997 and before were consistent

with those expressed in later materials. See Def.’s Cross-Mot. Summ. J. [14] 37–42. At best, the

Secretary discredits a portion of Catholic Health’s support for its contention that the agency’s

policy and practice during the relevant period was to include the disputed days. However,

certain items in the record demonstrate conclusively that the Secretary was for including dual-
                                                 12
eligible exhausted benefit days in the Medicaid fraction before she was against it.

             1. The 1986 rulemaking

        The Court’s first task is to determine whether the Secretary’s 2004 final rule, 69 Fed.

Reg. 48,916, 49,099 (Aug. 11, 2004), effected a substantive change from HHS’s prior policies

and practices with respect to the DSH calculation.                  See Nat’l Mining, 292 F.3d at 860.

Therefore, the Court will begin at the beginning, by discussing certain statements of the

Secretary in interim and final rules implementing the DSH statute in 1986.

        In the 1986 interim final rule, the Secretary interpreted the phrase “entitled to benefits

under part A [of Medicare]” in the Medicare fraction as including only “covered Medicare Part

A inpatient days . . . .” 51 Fed. Reg. 16,772, 16,777 (May 6, 1986) (emphasis added). At the

time, the Secretary offered the same interpretation of the phrase “eligible [for Medicaid]” in the

Medicaid fraction, stating that “[a]ny day of a Medicaid patient’s hospital stay that is not payable

by the Medicaid program will not be counted” in the Medicaid fraction. 9 Id. This interpretation

of “eligible” as “covered” or “paid for” stemmed from the Secretary’s reading of the

parenthetical phrase “for such days” in the definition of the Medicaid fraction, which suggested

to the Secretary that Congress intended that only “Medicaid covered days” be included. 51 Fed.

Reg. 31,454, 31,460 (Sept. 3, 1986) (emphasis added).                       The Secretary noted that this

interpretation “is consistent with our interpretation of the Medicare portion . . . (which uses

similar language) to refer only to Medicare covered days.” Id.

        Therefore, what’s clear is that, in 1986, the Secretary interpreted the phrase “entitled to

benefits under part A [of Medicare]” in the Medicare fraction as referring only to days “covered”

or “paid for” by Medicare. Left up in the air, however, is the question of whether, in 1986, the

Secretary interpreted the same words—i.e., “entitled to benefits under part A [of Medicare]”—in
9
 The Secretary subsequently reversed this position in response to a series of contrary court decisions. See 63 Fed.
Reg. 40,954, 40,985 (July 31, 1998).
                                                        13
the Medicaid fraction in the same way. The Court notes that the parenthetical that drew the

Secretary’s attention in the Medicare and Medicaid fractions—“for such days”—modifies

“entitled to benefits under part A [of Medicare]” in the Medicare fraction, but not the Medicaid

fraction.     Compare 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I) with § 1395ww(d)(5)(F)(vi)(II).

Therefore, it would not have been strange if the Secretary had held a different opinion about the

meaning of “entitled to benefits under part A [of Medicare]” in the Medicaid fraction. However,

subsequent statements of the Secretary show that she did interpret the same language the same

way in both fractions.

             2. The 1995 rulemaking

         While neither party—including, oddly enough, Catholic Health 10—brought this to the

Court’s attention, it is clear that the Secretary, in a 1995 rulemaking related to the Medicare

program’s prospective payment systems, interpreted the Medicaid fraction to include in its

numerator patient days attributable to patients whose hospital days were not “covered” by

Medicare:

         A hospital’s disproportionate share adjustment is determined by calculating two
         patient percentages (Medicare Part A/Supplemental Security Income (SSI)
         covered days to total Medicare covered days, and Medicaid but not Part A
         covered days to total inpatient hospital days), adding them together, and
         comparing that total percentage to the hospital’s qualifying criteria.

60 Fed. Reg. 45,778, 45,811 (Sept. 1, 1995) (emphasis added). The proposed rule contained the

same language. See 60 Fed. Reg. 29,202, 29,244 (Jun. 2, 1995). This language was also

repeated, verbatim, in later notices published by CMS in the Federal Register. See 61 Fed. Reg.

27,444, 27,273 (May 31, 1996) (proposed rule); 61 Fed. Reg. 46,166, 46,206 (Aug. 30, 1996)

(final rule).    Therefore, while the 1986 rulemaking did not expressly tie “entitlement” to

Medicare Part A to payment for purposes of the Medicaid fraction, subsequent statements of the
10
  Catholic Health does reference a different page of this regulation, to make a different point, in its Opposition to
the Secretary’s Cross-Motion for Summary Judgment. Pl.’s Opp’n [16] 44 n.12, Sept. 9, 2010.
                                                         14
Secretary show that she did take this step, interpreting the phrase “entitled to benefits under part

A [of Medicare]” in both the Medicare and Medicaid fractions to require that Medicare have

paid for, or covered, the relevant patient days.

           3. A 1996 CMS Administrator decision: Presbyterian Medical Center v.
              Aetna Life Insurance

       This interpretation of the DSH statute to include in the numerator of the Medicaid

fraction patient days that were not “covered” or “paid for” by Medicare is reinforced by a

November 1996 decision of the CMS Administrator. See Presbyterian Med. Ctr. of Philadelphia

v. Aetna Life Ins. Co., CMS Adm’r Dec., reprinted in Medicare & Medicaid Guide (CCH) ¶

45,032 (Nov. 29, 1996)); AR at 341.           There were essentially two questions before the

Administrator in Presbyterian. First, the Administrator considered whether the PRRB had erred

in requiring the inclusion, in the Medicaid fraction, of days for which a patient was “eligible” for

Medicaid—in the sense of meeting the program’s income and status requirements—but which

were not actually covered or paid for by Medicaid. AR at 341. Second, the Administrator

considered the PRRB’s finding that two categories of days—namely, “days of care for the

Provider’s Medicaid patients [that] were approved for payment by HealthPASS,” id. at 344, and

days “billed to Medicaid because the patients had exhausted their Medicare benefits”—“should

be included in the DSH calculation, subject to audit.” Id. at 342. As to the first question, which

takes up almost the entire opinion of the Administrator, the Administrator reversed the PRRB,

finding that the relevant regulations and the Medicare statute required the inclusion, in the

Medicaid fraction, of days that were actually “paid by Medicaid.” Id. at 343.

       The Administrator, at the very end of the opinion, turned to the second question:

       Finally, the Administrator notes that the [PRRB] found that subsequent to the
       Intermediary’s audit a number of days of care for the Provider’s Medicaid patients
       were approved for payment by HealthPASS, and that a number of days of care
       were billed to Medicaid because the patients had exhausted their Medicare
                                                   15
       benefits . . . . The [PRRB] held that both types of days should be included in the
       DSH calculation, subject to audit. The Administrator finds that the Intermediary
       should review the data concerning these days of care, and to the extent that these
       days were paid for by Medicaid, they may be properly included in the DSH
       calculation, consistent with 42 C.F.R. [§] 412.106.

Id. at 344 (emphasis added). Therefore, on the exact question before this Court—namely,

whether patient days attributable to patients who were eligible for Medicaid but who had

exhausted their Medicare benefits should be included in the Medicaid fraction—the

Administrator affirmed the PRRB’s decision, finding that such days “may be properly included

in the DSH calculation . . . .” Id. While the Administrator provided no reasons for allowing the

inclusion of these exhausted benefit days, the decision is consistent with the Secretary’s

statements, discussed above, interpreting “entitled to part A [of Medicare]” in the Medicaid

fraction as patient days “paid for” or “covered” by Medicare. See, e.g., 60 Fed. Reg. at 45,811.

           4. Subsequent administrative decisions

       The summary above shows that at least as of November 1996—that is, the date of the

Presbyterian decision—HHS had a policy or practice of allowing the inclusion, in the Medicaid

fraction, of patient days attributable to patients who were eligible for Medicaid but who had

exhausted their Medicare Part A inpatient hospital services benefits. This policy or practice was

consistent with the Secretary’s understanding of the phrase “entitled to benefits under part A [of

Medicare]” in both the Medicare and Medicaid fractions. However, at some point following the

Presbyterian case, HHS’s position changed.

       The first case before the Administrator post-Presbyterian that considered whether dual-

eligible exhausted benefit days should be included in the Medicaid fraction is Jersey Shore Med.

Ctr. v. Blue Cross & Blue Shield Ass’n, PRRB Dec. No. 99-D4, reprinted in Medicare &

Medicaid Guide (CCH) ¶ 80,083 (Aug. 26, 1998); AR at 347. In Jersey Shore, decided in

August 1998, the Administrator vacated the PRRB’s determination that two categories of days—
                                               16
including dual-eligible exhausted benefit days—should be included in the numerator of the

Medicaid fraction. AR at 357. However, the Administrator’s basis for vacating that decision

related only to the PRRB’s decision as to the first category of days—i.e., days for which a patient

“was eligible for benefits under the State’s ‘Charity Care’ plan.” Id. at 356, 357. The PRRB’s

decision with respect to dual-eligible exhausted benefit days was also vacated, but the only

reason given by the Administrator for doing so was procedural: to “avoid bifurcation of the

case.” Id. at 357. There is no information in the record indicating what occurred in this case

following the Administrator’s decision. Therefore, the Jersey Shore decision is not inconsistent

with Catholic Health’s position—namely, that HHS had a policy or practice during the relevant

period of allowing dual-eligible exhausted benefit days to be included in the numerator of the

Medicaid proxy—but undercuts the Secretary’s claim that HHS has a “long-standing” policy of

excluding such days. See id. at 6. One would expect that the Administrator in Jersey Shore, if

such a policy had been in effect, would have made that clear and would have reversed the PRRB

on that basis.

        It appears that, for nearly two years following the Administrator’s decision in Jersey

Shore, the PRRB still held the view that dual-eligible exhausted benefit days were properly

included in the numerator of the Medicaid fraction. In Edgewater Med. Ctr. v. Blue Cross Blue

Shield Ass’n, decided in April 2000, the PRRB said, in dicta, that it “continues to maintain that

the DSH numerator should include days of dually eligible patients whose Medicare Part A

benefits were exhausted and who were eligible for reimbursement under the State’s Medicaid

plan.” Edgewater Med. Ctr. v. Blue Cross Blue Shield Ass’n, PRRB Dec. No. 94-0616 (Apr. 7,

2000), available at 2000 WL 394354, at *4. The PRRB cited for this proposition its decision in

Jersey Shore, noting that it had been vacated by the Administrator as summarized above. Id.

        However, on appeal, the Administrator took issue with the PRRB’s statement that dual-
                                                17
eligible exhausted benefit days should be included in the numerator of the Medicaid fraction.

Edgewater Med. Ctr. v. Blue Cross Blue Shield Ass’n, reprinted in Medicare & Medicaid Guide

(CCH) ¶ 80,525 (Jun. 19, 2000); AR at 363. The Administrator stated that the DSH statute’s text

“forecloses the inclusion of the days at issue in this case in the numerator of the Medicaid

[fraction].” Id. In support of this position, the Administrator held that “the relevant language of

the Medicaid [fraction] indicates that it is the status of the patients, as opposed to the payment of

the day, which determines whether a patient day is included in the numerator of the Medicaid

[fraction].” Id. Accordingly, the Administrator concluded that “days of dually eligible patients

are not included in the DSH calculation regardless of whether these days include patients who

have exhausted their Medicare Part A benefit.” AR at 364. However, at no point in its decision

did the Administrator grapple with its prior decision in Presbyterian, which allowed the

inclusion of such days in the Medicaid fraction, or with HHS’s prior statements, discussed

above, indicating that a different interpretation of the phrase “entitled to benefits under part A” in

the Medicaid fraction held sway before the Administrator’s June 2000 decision in Edgewater.

As far as this Court can determine—and the Secretary has not persuaded the Court otherwise—

the Administrator’s Edgewater decision represents the first instance in which HHS interpreted

the Medicaid fraction to exclude dual-eligible exhausted benefit days.

       Following the Administrator’s decision in the Edgewater, HHS appears to have firmly

settled on a new policy of excluding dual-eligible exhausted patient days from the numerator of

the Medicaid fraction, based upon a new interpretation of the phrase “entitled to benefits under

part A [of Medicare]” in the Medicaid fraction. This culminated in a 2004 rulemaking in which

the Secretary stated definitively that it would not permit the inclusion of dual-eligible exhausted

benefit days in the Medicaid fraction. See 69 Fed. Reg. 49,916, 49,099 (Aug. 11, 2004). It was

this guidance from the Secretary that led the Hospital’s intermediary, in June 2005, to revisit its
                                                 18
calculation of the Hospital’s DSH adjustment for the 1996 and 1997 cost reporting periods. AR

at 852–53.

          Therefore, the Court finds that the Secretary’s Edgewater decision, as well as her 2004

final rule, 69 Fed. Reg. 48,916, 49,099 (Aug. 11, 2004), effected a substantive change from

HHS’s policies and practices with respect to the DSH calculation during the period at issue in

this case. See Nat’l Mining, 292 F.3d at 860. The Court further finds that this change attaches

new legal consequences to the Hospital’s treatment of low-income patients during the disputed

period.     See Northeast Hospital, 657 F.3d at 14.      Since DSHs are entitled to receive an

“additional payment” from HHS under the Medicare statute, 42 U.S.C. § 1395ww(d)(5)(F)(i),

and since whether a hospital qualifies for this payment and the amount of this payment depends

on how the DPP is calculated, any rule that changes how these fractions are calculated changes

the legal consequences of treating low-income patients. See Northeast Hospital, 657 F.3d at 17.

Therefore, since the Secretary is not authorized to promulgate retroactive rules for DSH

calculations, and because the Secretary’s current interpretation represents a substantive change

from her prior policy and practice of including dual-eligible exhausted benefit days in the

Medicaid fraction, the Secretary’s current interpretation may not be retroactively applied to the

1997 cost reporting period.

IV.       CONCLUSION

          Therefore, for the reasons stated above, the Court will grant plaintiff’s Motion [12] for

Summary Judgment, will deny defendant’s Cross-Motion [14] for Summary Judgment, will

vacate the Secretary’s final decision, and will remand this matter to the Secretary for further

proceedings consistent with this Memorandum Opinion.

          A separate Order consistent with this Memorandum Opinion shall issue this date.

          Signed by Royce C. Lamberth, Chief Judge, on January 30, 2012.
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