                       UNITED STATES DISTRICT COURT
                       FOR THE DISTRICT OF COLUMBIA

ALLINA HEALTH SERVICES,                       )
et al.,                                       )
          Plaintiffs,                         )
                                              )
      v.                                      )         Civil Action No. 14-1415 (GK)
                                              )
SYLVIA M. BURWELL, Secretary                  )
United States Department of                   )
Health and Human Services,                    )
                                              )
             Defendant.                       )
~~~~~~~~~~~~~~~~->


                                 MEMORANDUM OPINION

      Plaintiffs Allina Health S-ervices, et al.                         ("Plaintiffs") are

nine hospitals that bring this action against Sylvia M. Burwell,

in   her   official    capacity        as          Secretary      of    the   United   States

Department     of     Health       and            Human      Services     ("Secretary"      or

"Defendant") .      They        challenge              the    calculation       of     certain

disproportionate       share      hospital             payments    as    procedurally      and

substantively invalid.

      This matter is before the Court on the Plaintiff's Motion for

Summary Judgment       [ Dkt.    No.     8]        and Defendant's Cross-Motion for

Summary Judgment [Dkt. No. 28]. Upon consideration of the Motions,

Oppositions, Replies, the entire record herein, and for the reasons

set forth below, Plaintiffs' Motion shall be denied and Def-endant' s

Motion shall be granted.




                                                   1
I .   Background

      A.     The Medicare DSH Payment System

      The Medicare program was established in 1965 and provides

health     care     coverage     for   persons    age       65   and    older,    disabled

persons, and persons with end stage renal disease who meet certain

eligibility requirements. See 42 U.S.C.                 §   426, 426a. The Secretary

administers the program through the Centers for Medicare & Medicaid

Services     (CMS),    an agency with the United States Department of

Health and Human Services. Def.'s Mot. at 4.

      Medicare       pays   benefits     through    different          plans,     three    of

which are relevant here. "Plan A covers medical services furnished

by hospitals and other institutional care providers." Ne.                               Hosp.

Corp. v. Sebelius, 657 F.3d 1, 2 (D.C.Cir.2011); 42 U.S.C.                         §§   1395c

to 1395i-5. "Part B is an optional supplemental insurance program

that pays for medical items and services not covered by Part A,

including     outpatient         physician      services,        clinical        laboratory

tests, and durable medical equipment." Ne. Hosp., 657 F.3d at 2;

42 U.S.C.    §§     1395j to 1395w-4.        "Part C governs the            'Medicare +

Choice'     (M+C)     program,     which   gives    Medicare           beneficiaries       an

alternative to the          traditional        Part A fee-for-service system,"

allowing enrollment in a managed care plan. Ne. Hosp.,                            u5 7 F. 3d

at 2; see 42 U.S.C.         §§   1395w-21 to 139Sw-29. The Secretary pays

the health care provider directly under Parts A and B, but pays




                                           2
the      managed-care              plan    under       Part       C,       which   in. turn     pays     the

provider.

          Hospitals that serve a significantly disproportionate share

of low-income patients without private health insurance are paid

"additional monies [by Medicare], on top of Medicare's normal fees-

for-service,            to help cover the costs associated with the care of

the very poor." Allina Health Servs. v. Sebelius, 904 F. Supp. 2d

7 5'      77      (D.D.C.          2012)      ("Allina            I,,) ;     see    also       42     u.s.c.
§    13 9 5 WW ( d) ( 5 ) ( F) ; 4 2 C . F . R .   §   4 12 . 1 0 6 .

         The      disproportionate            share            hospital       ("DSH")    adjustment       is

based        on     a    "disproportionate                     patient       percentage"        for     each

hospital, which is determined by a complicated statutory formula.

See 42 U.S.C.            §§    1395ww(d) (5) (F) (iv)              and (vii)-(xiii); 42 C.F.R.

§    412.106(d).          The disproportionate patient percentage is the sum

of     two     fractions,           42    U.S.C.       §       1395ww(d) (5) (F) (vi),         which     are

commonly          known       as    the    "Medicaid             fraction"         and   the    "Medicare

fraction"         (sometimes also referred to as the "SSI fraction").

         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

         [Title XVIII] and were entitled to supplemental security

         income benefits                 (excluding any State                 supplementation)

                                                           3
     under [Title] XVI of this chapter, and the denominator

     of which is the number of such hospital's patient days

     for such fiscal year which were made up of patients who

     (for such days) were entitled to benefits under part A

     of [Title XVIII] ...

42 U.S.C.       §   1395ww(d) (5) (F) (vi) (I)   (emphasis added).       In layman's

terms, thE top of the Medicare fraction is based on the number of

a hospital's patient days for individuals entitled to both Medicare

Part A and SSI benefits, and the bottom of the fraction is based

on the number of patient days for all patients under Part A. As

discussed later, the phrase "entitled to benefits under part A" is

key to the present dispute.

     The Medicaid fracti6n 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 consist of patients wh6 (for such

     days) were eligible for medical assistance under a State

     [Medicaid] plan ... but who were not entitled to benefits

     under [Medicare] Part A                and the denominator of which

     is the total number of the hospital's patient days f·or

    such period.

     Id.    §   1395ww(d) (5) (F) (vi) (II). In layman's terms, the top of

the Medicaid         fraction    is   based on · the number   of     a    hospital's

patient days for individuals who are eligible for Medicaid,                      but

                                           4
who are not entitled to benefits under Medicare Part A,                     and the

bottom is the total number of all patient days for the hospital.

For a visual representation of the fractions,                 see Ne. Hosp.,     657

F.3d 1, 3.

        M+C (also referred to as Part C) was established by Congress

in 1997 as part of the Balanced Budget Act of 1997 (BBA), Pub. L.

No. 105-33 (1997). In order to enroll in M+C, an individual must

be "entitled to benefits under part A                  and enrolled under part

B." 42 U.S.C.    §   1395w-21 (a) (3) (A). After M+C was implemented, "the

Secretary routinely excluded M+C            [inpatient hospital]       days from

the Medicare fraction" from 1999 to 2004. Ne. Hosp.,                  657 F.3d at

15. That is, M+C patients were not counted in the numerator of the

Medicare fraction as part of the patients "entitled to benefits

under Part A .            and entitled to          [SSI]   benefits." 42 U.S.C.

§    1395ww(d) (5) (F) (vi) (I). It was not until 2007 that the Secretary

began    to   collect   the   data   needed   to    include    M+C   days   in   the

Medicare/SS I fraction.       Id.; see Change Request 564 7, CMS Pub. 100-

04, Transmittal No. 1331 (July 20, 2007).

        Central to this case is whether,            once enrolled in Part C,

enrollees continue to be entitled to benefits under Part A. If the

agency considers enrollees to be entitled to benefits under Part A,

then they should be included in the Medicare fraction. If they are

no    longer entitled to benefits under             Part A,    because they are

receiving benefits under Part C, then they should be excluded from

                                        5
the Medicare fraction.                The financial impact on the hospitals of

this    seemingly minor detail                is       in the hundreds          of millions           of

dollars. See Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105

(D.C. Cir. 2014)             ("Allina I Appeal").

        B.      Factual Background

        In Allina I,          a group of hospitals,               including the Plaintiffs

in the present case, challenged a 2004 rulemaking by the Sedietary

("2004 Final Rule"). See 904 F. Supp. 2d at 77. The 2004 rulemaking

adopted a policy whereby Part C patients were to be considered as

"entitled to benefits under part A," and therefore counted in the

numerator of the Medicare fraction.                        In November 2012,            the Court

(Collyer, J.) granted summary judgment for the plaintiffs, finding

that    the     2004    Final     Rule      was    not    a     logical     outgrowth      of        the

proposed rule and therefore violated the procedural requirements

of the Administrative Procedure Act ("APA"). See Allina I, 904 F.

Supp. 2d at 89-90.

        On appeal,       our Court of Appeals                   affirmed the part of the

Allina I Court's decision vacating the 2004 Final Rule. But, the

Court     of    Appeals       held    that    the       Allina     I    Court   erred     when        it

directed        the    Secretary       to     calculate          the      DSH   payments        in     a

particular manner,             rather    than          simply    remanding.          See Allina        I

Appeal,        746    F.3d    1102,    1111       (D.C.    Cir.        2014).   On    remand,        the

Secretary addressed the issue of the appropriate DSH calculation

methodology through an adjudication. The Administrator determined

                                                   6
 that, prior to 2004, the regulation did not specify where the Part

 C enrollees should be counted in the DSH percentage.                                                  Allina I,

 Adm'r Dec.             at 26      (Dec.     2,    2015)       [Dkt.    28-2].          The Administrator

 further concluded that the better statutory interpretation is that

 Part C enrollees are "entitled to benefits under Part A" within

 the meaning of the DSH provisions, and therefore should be included

 in the Medicare fraction. Id. at 35-45.

           C.          Procedural Background

            Shortly after our Court of Appeals' decision in Allina I, the

 Secretary published calculations for federal fiscal year 2012 DSH

 payments ("2012 DSH Calculations") . 1 See 2012 Part A/SSI Fraction

 Data File, available at http://www.cms.gov/Medicare/Medicare-Fee-

 for-Service-Payment/AcuteinpatientPPS/Downloads/FY-2012-SSI-

 Ratios-for-web-posting. zip.                       Plaintiffs allege that the 2012 DSH

Calculations are based on the 2004 Final Rule that was vacated.

They        al~o       allege that the 2012 DSH Calculations are procedurally

invalid and arbitrary and capricious. Compl.                                   'J['J[   46-52. Plaintiffs

timely          appealed          the      2012      DSH       Calculations             to    the         Provider




1The present act~on is not considered part of the Allina I re~and,
because it concerns a later year. In 2013, the HHS adopted a
legislative rule that interprets the statute to require Part C
days in the Medicare fraction. 78 Fed. Reg. 50,496, 50,614 (Aug.
-1--9, -   2-Q-1~-)-   -("-2-G±-2----Rtoi-1--emaking-~)-. --T--fle--l-eg-i-s-1-a~i-v-e   --r:-ttl-.e   --0R-l-Y---l:i.-O-&>
prospective application, and therefore does not apply to this case
or the Allina I remand. Id. at 50,620.
                                                           7
Reimbursement           Review     Board        ("PRRB"),      see Compl.        '.lI'.lI    36-39,     and

requested that the PRRB grant expedited judicial review. Id. '.lI 41.

      The        PRRB   is    an    independent            administrative         tribunal             that

resolves disputes regarding hospital reimbursement determinations

by Medicare contractors or the Centers for Medicare                                          &   Medicaid

Services ("CMS"). See 42 U.S.C.                      §    1395oo(a). The PRRB may resolve

certain     payment          disputes          without       following     low-level               policy

guidance, see 42 C.F.R.              §   405.1867; however, it is bound by agency

regulation and rulings, id., and cannot decide "question[s] of law

or regulations." 42 U.S. C.                §   13 9500 ( f) ( 1) . Section 13 9500 ( f) gives

providers "the right to obtain judicial review of any action

which involves a question of law or regulations .                                           whenever the

[PRRB] determines . . . that it is without the authority to decide

the question." Id.

      By letter dated August 13, 2014, the PRRB granted Plaintiffs'

request for expedited judicial review, finding that "it is without

the   authority         to      decide         the   legal     question     of              whether     the

regulation        regarding        the     [2012         DSH Calculations]          is        valid and

whether     the Secretary's              actions         subsequent   to    the decisipn                 in

Allina     [I]    are    legal."         Letter      from the     Provider          Reimbursement

Review Board to Stephanie Webster 6 (Aug. 13, 2014)                          [Dkt. No. 14-1]

("PRRB Decision").

      On    August        19,      2014,        Plaintiffs      filed      their             Complaint,

pursuant to the PRRB' s grant of expedited judicial revi-ew                                           [ Dkt.

                                                     8
No. l]. Plaintiffs filed a Notice of Related Case on the same day

[Dkt. No. 2]. Judge Collyer granted Defendant's objection to the

related case designation on May 18, 2015, and the case was randomly

reassigned tp this Court. Minute Order dated May 18,                          2015; Case

Assignment [Dkt. No. 20].

        On October 27,       2014,   Defendant filed her Motion to Dismiss

for Lack of Jurisdiction or in the Alternative for Voluntary Remand

[Dkt.    No.    15],   arguing       that   the   PRRB      improvidently        granted

expedited judicial review,            or in the alternative,            for voluntary

remand to allow the PRRB to adjudicate Plaintiffs' claims without

consideration of the 2004 Final Rule. Motion to Dismiss at 2. The

Court denied Defendant's Motion to Dismiss on October 29,                              2015

[Dkt. No. 21].

        Plaintiffs filed their present Motion for Summary Judgment on

September 29, 2014 [Dkt. No. 8], prior to Defendant's response.to

the Complaint. On October 1 7, 2014, the Court (Collyer, J.) granted

Defendant's Motion        to   hold    in abeyance         the Motion        for Summary

Judgment until the Motion to Dismiss was filed and decided.                              See

October 17, 2014 Minute         Ord~r.   After this Court denied Defendant's

Motion to Dismiss, Defendant filed her Answer on November 12, 2015

[Dkt. No. 24], and her Cross-Motion for Summary Judgment ("Def.'s

Mot.") on December 15, 2015 [Dkt. No. 29]. Plaintiffs filed their

Opposition      ("Opp' n")     on    January    14,    2016    [ Dkt.    No.    30 J    and

Defendant      filed   her Reply      ("Reply")       on   February     4,   2016      [Dkt.

                                            9
No. 33]. On February 12, 2016, Plaintiffs filed a Motion for Leave

to File a Sur-Reply [Dkt. No.                    34], which Defendant opposed [Dkt.

No. 35], and the Court denied on February 18, 2016 [Dkt. No. 36].

II.    Legal Standard

       A.     Motion for Summary Judgment

       Summary judgment will be granted when there is no genuine

issue as to any material fact. See Fed. R. Civ. P. 56(a). Because

this case involves a challenge to a final administrative decision,

the    Court's       review       on         summary    judgment       is     limited         to     the

administrative           record.       Holy     Land    Found.       for     Relief      &    Dev.    v.

Ashcroft, 333 F.3d 156, 160 (D.C. Cir. 2003)                          (citing Camp v. Pitts,

411    U.S.   138,       142   (1973));          Fund   for       Animals     v.     Babbitt,        903

F. Supp. 96,         105       (D.D.C.          1995)     ("Summary          judgment          is     an

appropriate        procedure           for    resolving       a    challenge       to     a   federal

agency's administrative decision when review is based upon the
                                   )




administrative record").

       "Summary judgment thus serves as the mechanism for deciding,

as a matter of law, whether the agency action is supported by the

administrative           record        and     otherwise          consistent       with       the    APA

standard of review." Sierra Club v. Mainella, 459 F. Supp. 2d 76,

90    (D.D.C. 2006)        (citing Richards v.             INS,      554 F.2d 1173, 1177               &


n. 28 (D.C. Cir. 1977)). In reviewing agency action, the district

court "sits as an appellate tribunal, not as a court authorized to

determine     in     a    trial-type           proceeding          whether     the      Se·cretary' s

                                                  10
[action] was factually flawed." Marshall Cnty. Health Care Auth.

v. Shalala, 988 F.2d 1221, 1225 (D.C. Cir. 1993).

       B.      Requirements of the APA and Medicare Act

       Under the APA and the Medicare Act, legislative rules - rules

that have the "force and effect of law," Chrysler Corp. v. Brown,

441 U.S.     281,        302-303,     (1979))      -   are issued through notice-and-

comment rulemaking, in which the Secretary must provide the public

with adequate notice of a                  proposed rule and an opportunity to

comment     thereon.         See     5    U.S.C.       §    553(b)-(c) (APA);        42     U.S.C.

§   1395hh (b) (1)        (Medicare)      (" [B] efore       issuing in final          form any

regulation      .           the Secretary shall provide for notice of the

proposed regulation in the Federal Register and a period of not

less    than        60    days      for    public          comment     thereon.").        "Notice

requirements are designed                 (1)   to ensure that agency regulations

are tested via exposure to diverse public comment,                             (2)    to ensure

fairness to affected parties, and (3) to give affected parties an

opportunity to develop evidence in the record to support their

objections to th-e rule and thereby enhance the quality of judicial

review."    Int'l Union,            UMWA v.     MSHA,        407     F.3d 1250,      1259    (D.C.

Cir. 2005) .        The    2012     DSH Calculations were               not   issued through

notice and comment rulemaking, although Plaintiffs argue that they

should have beBn. Pls.' Mot. at 9; Pls.' Reply at 10.

       Not all rules require notice-and-comment prior to.issuance.

Section 4(b) (A) of the APA provides that, unless another statute

                                                11
states     otherwise,       the   notice-and-comment       requirement        "does        not

apply" to "interpretative rules, general statements of policy, or

rules of agency organization,               procedure,     or practice." 5 U.S.C.

§   553(b) (A). "[T]he critical feature of interpretive rules is that

they are 'issued by an agency to advise the public of the agency's

construction of the statutes and rules which it administers.'"

Perez v.     Mortgage Bankers Ass'n,             135 S.    Ct.       1199,   1204    (2015)

(quoting Shalala v. Guernsey Memorial Hospital,                        514 U.S.      87,    99

(1995)).

       The D.C. Circuit had long held that, even though notice and

comment was not necessary for new interpretive rules issued by an

agency, notice and comment was nonetheless required when an agency

changed its prior interpretation.                Paralyzed Veterans of Am.                  v.

D.C.   Arena      L.P.,     117    F.3d   579    (1997).   Overturning         Paralyzed

Veterans    and    its     subsequent     line    of cases,      the Supreme          Court

recently    held     that    an    agency    need   not    use   notice-and-comment

procedures "when it wishes to issue a new interpretation of a

regulation that deviates significantly from one the agency has

previously adopted." Perez, 135 S. Ct. 1199 at 1203.

       The APA also allows a reviewing court to set aside an agency

action that is "arbitrary, capricious, an abuse of discrBti0n, or

otherwise not in accordance with law." 5 U.S.C.                  §    706(2) (A); Tourus

Records,    Inc.    v.    DEA,    259 F.3d 731,     736    (D.C. Cir.        2001)     "The

scope of review under the 'arbitrary and capricious' standard is

                                            12
.
     narrow and a court is not to substitute its judgment for that of

     the agency." Motor Vehicle Mfrs. Ass'n of U.S. v. State Farm Mut.

     Auto. Ins. Co.,            463 U.S. 29, 43        (1983)~   The court must "consider

     whether the decision was based on a consideration of the relevant

     factors and whether there has been a clear error of judgment."

     S. Co. Servs., Inc. v. FCC, 313 F.3d 574, 579-80 (D.C. Cir. 2002);

     see also United States v.               Paddack,     825 F,.2d 504,       514   (D.C. Cir.

     1987) .

           An agency satisfies the arbitrary and capricious standard if

     it "examine[s] the relevant data and articulate[s] a satisfactory

    explanation          for     its    action    including       a     'rational    connection

    between the facts found and the choice made.'" Motor Vehicle Mfrs.

    Ass'n,      463 U.S.        at 43     (quoting Burlington Truck Lines v.             United

    States,      371     U.S.      156,     168   (1962));       Lichoulas      v.   FERC,   606

    F.3d 769, 775         (D.C. Cir. 2010). However, courts "do not defer to

    the agency's conclusory or unsupported suppositions." McDonnell

    Douglas      Corp.     v.    U.S.     Dep't of     the Air        Force,   375   F.3d 1182,

    1186-87 (D.C. Cir. 2004).

    III .. Analysis

           A.     The Evidence Is Not Convincing that CMS Calculated the
                  2012 DSH Fractions Based on the Vacated 2004 Final Rule.

           Plaintiffs argue that the Secretary improperly relied on the

    vacated 2004 Final Rule to formulate the 2012 DSH Calculations,

    -P±s~'- --Mot-~   -at --6--7; -whi--le---Be-fendant- counters --that- t-he-:2012-BSH---



                                                  13
Calculations were reached by CMS in reliance on the language of

the    disproportionate patient                percentage      statute     itself.       Def.' s

Mot. at 9.

        What is central to this dispute is the parties' disagreement

as to the impact of the vacatur of the 2004 Final Rule. Defendant

argues that "the agency was faced with. an ambiguous direction from

Congress"        and    that     the     pre-2004       version    of      the    applicable

regulation did not specify where Part C days should be counted.

Id. at 10. Plaintiffs on the other hand argue that pre-2004, the

agency had a policy of excluding Part C days from the Medicare

fraction.      Pls.' Reply at 4. In the alternative,                     Plaintiffs argue

that even if there was not a policy or regulation excluding Part C

days from the Medicare fraction,                    the agency had a prior practice

of    excl1:J.ding   the   Part    C days,       which was        reinstated after           the

vacatur of the 2004 Final Rule.                  Id.- (citing Croplife Am. v. EPA,

329 F.3d 876, 880, 884-85 (D.C. Cir. 2003).

       Defendant       contends        that    there    is   no evidence         to   directly

suggest that the 2012 DSH Calculations were based on the vacated

2004    Final     Rule,       rather    than    on     CMS's   interpretation           of   the

statute. Def.'s Mot. at 10. Conversely, Plaintiff argues that there

is no evidence to suggest that the Secretary did not rely on the

vacated rule.          The Secretary states that CMS "inevitably had to

employ     one    of    two    possible        interpretations        of    the       statutory

language," and the one it chose                      for   the 2012     DSH Calculations

                                               14
reflected    CMS's    best   understanding    of    the   statutory   language

itself.    Def.' s Mot.   at 10   (citing Declaration of Ing Jye Cheng

("Cheng Deel.") i i 7,       8 [Dkt. No. 29-3]). Acknowledging that the

2004 Final Rule is no longer in effect, the Secretary cites to the

Allina I Administrator decision as evidence that the agency is no

longer relying on the vacated 2004 Final Rule. Id.

      Our Court of Appeals,        in remanding Allina       I   to allow the

agency to consider the interpretive issue anew, made it clear that

it   was   possible   the    agency   could   and   might    adopt    the   same

interpretation contained in the 2004 Final Rule. Allina I Appeal,

746 F.3d at 1111. Consequently, it follows that the fact that the

agency did adopt the same interpretation as the 2004 Final Rule is

not - in and of itself - indicative that the 2004 Final Rule was

relied upon.

      While it may have been far better if the agency had provided

an explanation of its interpretation of the DSH statute along with

the 2012 DSH Calculations, particularly in light of the vacatur of

the 2004 Final Rule, there is no convincing evidence that Defendant

actually relied on the vacated rule in promulgating the 2012 DSH

Calculations. Indeed, as the Court later concludes, the Secretary

appropriately relied on and interpreted the underlying DSH statute

to calculate the 2012 DSH Calculations.




                                      15
       B.      Notice and Comment Rulemaking Was Not Required

               i.     The APA

       The parties agree that the Secretary did not undertake notice

and comment rulemaking to implement a rule including Part C days

in    the   Medicare        fraction   that    is     applicable      to    the    2012   DSH

Calculations. The issue is whether the Secretary should have.

       The APA requires notice and comment when agencies implement

new legislative rules.            5 U.S.C.     §    553(b).       Plaintiffs argue that

the 2012 DSH Calculations were not a one-time decision, but instead

were the beginning of an ongoing                   patt~rn   and therefore should be

considered a legislative rule. Pls.' Reply at 23. Plaintiffs reason

that the 2012 DSH Calculations "'reflect'                     a universal policy of

treating part C days as part A days for all hospitals," because

the agency has continued to include Part C days in the Medicare

fraction       in     all    future    actions.        Id.    Therefore,          Plaintiffs

continue,       the     2012     DSH   Calculations          constitute       "an     agency

statement of general or particular applicability and future effect

designed to implement, interpret, or prescribe law or policy," and

are therefore a "rule" for purposes of the APA Id.                        (citing 5 U.S. C.

§   551(4)).

       Defendant takes issue with the characterization of the 2012

DSH   Calculations          as   involving     a     rule    at    all.    The     2012   DSH




                                              16
Calculations are comprised solely of a spreadsheet of percentages, 2

which Defendant characterizes as "preliminary, provider-specific

determinations calculated on the basis of services that had already

been rendered." In other words, Defendant argues that the 2012 DSH

Calculations         are    more        appropriately        viewed     as       a   step    in    an

adjudication rather than as a rule. Def.'s Mot. at 12.

       However,       Defendant             acknowledges      that     the       fractions        "do

reflect an interpretation of the statute that Part C days are

included in the Medicare fraction." Id.                         (emphasis in original) .

The    2012     DSH       Calculations          were    not     merely       a       step    in    an

adjudication,         but    reflect a         decision by the agency to                    include

Part C       days    in     the        Medicare    fraction.         Thus,       the    2012      DSH

Calculations         are    not        appropriately         viewed    as    a       step    in    an

adjudication but rather as a rule.

       The Court must now, determine whether the agency was announcing

a    new legislative         rule or simply interpreting the                         statute and

announcing an interpretive rule. A "legislative rule," is a rule

intended      to    have     and       does    have    the    force     of       law.   "A     valid

legislative rule is binding upon all persons, and on the courts,

to    the    same    extent       as    a    congressional      statute.         When Congress

delegates rulemaking authority to an agency, and the agency adopts


2      The         2012       DSH           Calculations         are         available             at
http:/!'www-. cms.gov!'Medicare/Med~care=F'ee--Fo-r,-Service­
Payment/AcuteinpatientPPS/Downloads/FY-2012-SSI-Ratios-for-web-
posting.zip.
                                                  17
legislative rules, the agency stands in the place of Congress and

makes law. An 'interpretative' rule, by contrast, does not contain

new    substance        of         its     own       but       merely       expresses           the    agency's

understanding          of      a     congressional              statute."              Nat' 1   Latino      Media

Coal. v. F.C.C., 816 F.2d 785, 787-88 (D.C. Cir. 1987).

       Factors to consider when determining whether a rule has a

"legal effect" include "asking 1)                               whether in the absence of the

rule     there    would             not    be        an    adequate          legislative              basis     for

enforcement action or other agency action to confer benefits or

ensure    the    performance               of        duties,        ( 2)    whether         the   agency        has

published the rule in the Code of Federal Regulations,                                            (3) whether

the    agency         has      explicitly                 invoked          its    general         legislative

authority,       or     ( 4)       whether the             rule effectively amends                      a     prior

legislati v.e     rule.            If    the    answer         to    any of            these questions           is

affirmative, we have a legislative, not an interpretive rule." Am.

Min. Cong.       v.    Mine Safety               &    Health Admin.,               995 F.2d 1106,              1112

(D.C. Cir. 1993).

       The answer to all of the above questions is "no." As our Court

of Appeals has previously recognized, the DSH statute is ambiguous

and could be interpreted to include or exclude Part C days. Ne.

Hosp.,    65 7   F. 3d         at       5-6.    The        fact     that         the     statute       could     be

interpreted to          include Part C days                         indicates that there                    is an

adequate legislative basis for the agency's decision. The rule of

including Part C days in the Medicare fraction, as applied to the

                                                          18
    2012 DSH Calculations,            was not published in the Code of Federal

    Regulations, nor did the agency explicitly invoke its legislative

    authority.      Lastly,       the rule does not amend a prior legislative

    rule.   3



            For these reasons,            the Court concludes that the agency did

 not        issue    a    legislative        rule       when     it     issued       the     2012   DSH

 Calculations,            and   therefore         APA     notice       and        comment    were   not

 necessary.          Instead,       the    2012     DSH       Calculations          constitute      the

 agency's interpretation of the disproportionate patient percentage

 statute.       The       statute    itself       provides       an     "adequate          legislative

 basis" for including Part C days in the Medicare fraction,                                         and

 therefore          the    rule     underlying          the    2012         DSH    Calculations      is

 interpretive. See Am. Min. Cong., 995 F.2d at 1112.

            Plaintiffs       argue        that,     because           the     agency        previously

 promulgated the            same     interpretation            through       notice     and comment

 rulemaking         in the 2004           Final   Rule        and the       2013     Rulemaking,     it

 should continue to do so for the 2012 DSH Calculations. Pls.' Reply

 at 28-30. However, there is no requirement that the agency continue

 to do so. For example, an agency may choose to invoke its general




3
    Plaintiffs argue that the agency had a prior policy, rather than
   simply a practice, of excluding Part C days. See Pls.' Opp' n
   at 7-8. The facts do not support a fin ding of a policy, rather
   than simply a practice.            Even if the agency did have a prior
·· p-0-1-±cy, --tt--woul-ct-not--have- -b-een-a--i:eg±-s-i-at±ve -po-licy-re-qu±r±ng ·
   notice and comment to change it~

                                                   19
legislating authority out of an abundance of caution.                           Am.   Min.

Cong.,       995     F.2d   at   1110-11.      Therefore,      the    agency's        prior

invocation of its general legislating authority                       (here,    the 2004

Final Rule),         is not per se evidence that it needed to do so and

does not negate the Court's finding that the agency's action was

interpretive.

               ii.    The Medicare Statute

       The Medicare statute also requires notice and comment prior

to    the    Secretary        issuing    final       regulations.     See      42   U.S.C.

§    1395hh(b). Plaintiffs argue that the Medicare statute requires

"rulemaking for a more expansive set of agency pronouncements than

the Pi.PA." Pls.' Reply at 11. Plaintiffs cite to no cases in support

of     their       argument      and    the        Court   finds     their      statutory

interpretation arguments unpersuasive. Pls. Reply at 11-13.

       Our Court of Appeals has not decided whether the Medicare

statute "creates a more stringent obligation                       [than the APA]        or

whether it somehow changes the dividing line between legislative

and interpretive rules." Monmouth Med. Ctr. v. Thompson, 257 F.3d

807, 814 (D.C. Cir. 2001). However, the Court of Appeals did note

that, because the Medicare statute was adopted after the APA, it

was fair to infer that            "§   1385hh ( c) 's reference to, 'interpretive

rules'      without any further definition adopted an exemption                         [to

notice and comment requirements] at least similar in scope to that

of the APA." Id.        (internal citation omitted). Other circuit courts

                                              20
•.



     have similarly concluded, though without thorough analysis, that

     the standards imposed by the APA and Medicare are not materially

     different. See Baptist Health v. Thompson, 458 F.3d 768, 776 (8th

     Cir. 2006)       (42 U.S.C.     §    1395hh(a) (2) "imposes no standards greater

     than those established by the APA."); Erringer v. Thompson,                                   371

     F.3d 625, 633 (9th Cir. 2004)                  (declining to determine whether the

     Medicare Act "draws the line between substantive and interpretive

     rules in a different place than the APA"); Warder v. Shalala, 149

     F.   3d   73,     79    n.4    (1st     Cir.    1998)       ("the    [Medicare        statute's]

     language, drafted after the APA's, can fairly be read to duplicate

     the APA on this score.").

             Even     if     the    Medicare        statute        was   more    demanding,        the

     Secretary's          interpretation of the              DSH    statute     is   not    a   "rule,

     requirement, or other statement of policy                                . that establishes

     or changes        a    subs tan ti ve    legal       standard"      such that notice          and

     comment        would    be    required.· See          42   U.S.C.    §     1395hh(a) (2).      As

     discussed previously,               in the absence of any regulation or rule,

     there     is    an     "adequate      legislative          basis"    for    the   Secretary's

     interpretation. and application of the                         statute.     American Mining

     Congress,       995    F. 2d at 1112.          The agency's interpretation of the

     statute does not require rulemaking under the Medicare statute.

                     iii. Rulemaking Through Adjudication

             Defendant argues that notice and comment rulemaking is not

     necessary because it is "well-established that an agency may employ

                                                     21
...


      a new interpretation in the course of an individual adjudication."

      Def.' s Mot.     at 12    (citing Shalala v.             Guernsey Mem' 1 Hosp.,           514

      U.S. 87, 97 (1995)       ("The APA does not require that all the specific

      applications of a rule evolve by further, more precise rules rather

      than by adjudication. The Secretary's mode of determining benefits

      by both      rulemaking       and adjudication           is,     in    our view,    a proper

      exercise of her statutory mandate" (internal citations omitted)));

      see also Clark-Cowlitz Joint Operating Agency v.                            FERC,   826 F.2d

      1074, 1081 (D.C. Cir. 1987)              (en bane)       ("[W]hen as an incident of

      adjudicatory function an agency interprets a statute, it may apply

      that new interpretation in the proceeding before it.") . Def.endant

      also   points    out    that    the   decision whether                to make   new policy

      through      adjudication       or    rulemaking         is     generally       within    the

      agency's discretion. Id. at 13 (citing NLRB v. Bell Aerospa6e Co.

      Div.    of   Textron,     416     U.S.    267,         291-94        (1974)).   Given    this,

      authority,      Defendant      concludes     that       it     was    "well within CMS' s

      discretion to employ the interpretation it did in the course of

      calculating the 2012 [OHS Calculations]." Id.

             Whether    or    not     Defendant        can     issue        new   interpretations

      through adjudication is not relevant to this case,                              because the

      agency did not engage in an adjudication to reach the 2012 DSH

      Calculations. Defendant attempts to rely on a 2007 adjudication as

      authority for its policy in the 2012 DSH Calculations, but this

      reliance is misplaced. Def.'s Mot. at 14 (citing St. Joseph's Hosp.

                                                  22
-.


     v. Blue Cross/Blue Shield Ass'n,                2007 WL 4861952 at *5            (Nov. 13,

     2007)) .     St.    Joseph's was not a          forward     looking policy and was

     limited to fiscal years 1998, 1999, and 2000. St. Joseph's Hosp.,

     2007 WL 4861952 at *1. In addition, the PRRB reached its decision,

     later affirmed by the Administrator,                    with reference to the now

     vacated 2004 Final Rule, which calls into question any prospective

     validity St.         Joseph's may have had.           See PRRB Decision          (Aug.    27,

     2004),        available        at       https://www.cms.gov/Regulations-and-

     Guidance/Review-Boards/PRRBReview/Downloads/2007d68.pdf

           Therefore,        an   agency's   ability        to   issue· new       interpretive

     rules through adjudication does not help Defendant's case here.

                   iv.     Prior Definitive Interpretation

           As     discussed       previously,        in    Perez,         the   Supreme      Court

     overruled the Court of Appeals' Paralyzed Veterans doctrine, which

     had created a judge-made procedural requirement that an agency use

     notice-and-comment           rulemaking     whenever            it     changed      a    rule

     interpreting a statute, even though such notice-and-comment would

     not have been required when interpreting the statute in the first

     instance. See supra, 12. Plaintiffs acknowledge that changes to an

     interpretive rule are no longer subject to notice and comment under

     the   APA,     and    have   withdrawn     that       argument.        See   Pls.'      Reply

     at 16 n. 10.

           Even     so,    Plaintiffs    contend          that   a    "policy     that       'works

     substantive changes' or makes 'major substantive legal additions'

                                                23
to existing regulations requires notice and comment.' Pls.' Reply

at 19 (quoting U.S. Telecom Ass'n v. FCC, 400 F.3d 29, 34-35 (D.C.

Cir.     2005)).       Plaintiffs      argue       that       the    2012     DSH   Calculations

effected a substantive change and therefore should have undergone

notice      and    comment       procedures.            Id.    at     19-20.    This    argument

misunderstands           U.S.    Telecom,          which       does     not    stand    for   the

proposition that there are certain instances where interpretive

rules require notice and comment. Rather, it held that new rules

that affect substantive changes or amend prior legislative rules

may more appropriately be considered legislative rules rather than

interpretive rules.             U.S.   Telecom Ass'n,               400 F.3d at 34-35.        The

Court has already determined that the policy that was effectively

announced in the 2012 DSH Calculations was an interpretive one,

not legislative.· See supra 19.                    Because the agency's action was

interpretive, notice and comment was not required.

       C.      The Decision to Include Part C Days Is Not Arbitrary and
               Capricious

       Plaintiffs argue that              the Secretary's decision to include

Part C days in the Medicare fraction was arbitrary and capricious.

See    Pls.'   Reply at         32.    Plaintiffs'            contention has        two prongs:

first,      that       the   agency's        "no-process            determination       for   all

hospitals"        is    arbitrary      and    capricious,             and   second,    that   the

agency's       decision         is     impermissibly             inconsistent          with   the

underlying stat:utory scneme. ·              ra~   at    3Z-=33.



                                               24
        As    to     the   first,      Plaintiffs      contend that        the    Secretary's

policy       determination          is    arbitrary         and    capricious     because          the

agency has not "articulated any rationale for its choice." Pls.

Reply        at     33     (quoting       Republican         Nat'l     Comm.     v.         FEC,    76

F.3d 400, 407            (D.C.   Cir.     1996).      The    scope of review under the

arbitrary and capricious standard is a narrow one. The Court is

not to substitute its own judgment, but the "agency must examine

the relevant data and articulate a satisfactory explanation for

its action." Motor Vehicle Mfrs. Ass'n v.                            State Farm Mut. Auto.

Ins.    Co.,       463 U.S.      29,     42-43   (1983).       The court may not supply

reasoning that             the agency itself has not provided.                        Id.     at· 43.

However,          the court will "uphold a decision of less than ideal

clarity if the agency's path may reasonably be discerned." Id.

(quoting Bowman Transp.                  Inc. v. Arkansas-Best Freight Sys.,                       419

U.S. 281, 286 (1974)).

       Defendant blames the absence of a contemporaneous explanation

for its decision to include Part C days in the Medicare fraction

in the 2012 DSH Calculations on the unique posture of the case.

Def.'s Mot. at 25-26. Defendant explains that the agency expected

further           administrative         proceedings          in     connection        with        the

challenge and regarded the decision as non-final. Id. at 26. Even

if the       Defendant expected "further administrative development"

before the PRRB and Administrator,                      id.,       it is not clear why the

agency would not provide any contemporaneous explanation with the

                                                 25
issuance of the 2012 DSH Calculations. The agency also contends it

was a one-time interpretive decision and as such,                                  Plaintiffs are

not entitled to expect an explanation of the sort that CMS would

provide for a final prospective rule. Id.

       Despite the lack of explanation,                       Defendant argues that the

interpretative choi6e "can be readily sustained on the basis of

the.explanation set forth in the Administrator's decision in the

Allina I remand." Id. at 27. Defendant concedes that the Court's

review     is    ordinarily          limited       to     the     contemporaneous              record

developed by the agency, but argues that an exception is warranted.

Id.    (citing    SEC    v.     Chenery Corp.,             318    U.S.        80    (1943);     Glob.

Crossing Telecomms.,            Inc.    v.       Metrophones Telecomms.,                   Inc.,    550

U.S. 45, 63-64 (2007)).

       Chenery stands for the proposition that "an agency's decision

must   reflect     the     reasons      for       its    action,        and    that        subsequent

rationalizations           cannot           be        substituted          on        appeal         for

contemporaneous          reasoned       decisionmaking."                Pub.       Serv.      Co.   of

Indiana v.       I.C.C.,       749   F.2d 753,          759     (D.C.    Cir.       1984)     (citing

Chenery, 318 U.S. at 92-95). But Chenery is not absolute. In Global

Crossing,   ~he    Supreme Court found that the FCC's initial opinion

did not explain its determination,                        but nevertheless upheld the

determination,       finding         that    the        "context    and        cross-referenced

opinions    ma[d]e       the    FCC's       rationale         obvious."            Glob.     Crossing

Telecomms., 550 U.S. at 63 (internal citations omitted).

                                                 26
        The Secretary argues that the instant case is akin to Global
                                                                        .
Crossing in that the Administrator's Allina I                   decision provides

evidence    of the   agency's    reasoning      and therefore         the    agency's

rationale is adequately explained.             Def.'s Reply at 27.           However,

the Administrator's Decision, which was issued in December 2015,

was not yet issued at the time of the 2012 DSH Calculations, which

were issued in 2014. Although the 2013 Rulemaking had been issued,

it   is    prospective   only.    See     78    Fed.    Reg.      50,496,      50,614

(Aug. 19, 2013). In addition, unlike Global Crossing, the 2012 DSH

Calculations do not include any cross-references to opinions or

documents that shed light on the agency's rationale.

        Defendant argues that it "'would be a waste of time to review

only'     the   contemporaneous     agency      record     to     the       2012    DSH

Calculations when the agency has subsequently issued in 2015 a

'better    considered'   decision   upon which         review may be          based."

Def.'s Mot. at 28 (quoting Pub. Serv. Co., 749 F.2d at 760). Public

Service    is   easily distinguished      from the       case    at   hand,    as    it

involved a clarifying opinion.       The Commission had provided a first

opinion, but then at the request of the petitioners to reopen the

decision, reconsidered the record and issued a second clarifying

opinion. The issue there was whether the second opinion could be

considered. Such is not the case here. The Administrator's Allina I

decision is precisely     th~    type of post-hoc rationalization that




                                     27
Chenery says cannot be .substituted on appeal for contemporaneous,

reasoned decisionmaking. Chenery, 318 U.S. at 92-95.

       The dangers of post-hoc rationalizations for agency action

are that the judiciary,              rather than the agency,               will supply the

reasons underlying the action and that the "real reasons for agency

action will escape judicial scrutiny altogether." Women Involved

in Farm Econ. v. U.S.            Dep't of. Agric.,          876 F.2d 994, 1000             (D.C.

Cir. 1989). These concerns are not present here. Here, the agency

has    supplied its    reasons         on multiple         occasions,         including the

Administrator's recent decision and the 2013 Rulemaking. This is

also not a case where the agency's reasoning will escape judicial

review given that the issue has been before the courts on multiple

occasions, as demonstrated in this opinion. See infra, 29-30.

       Viewing the situation in its entirety,                        the Court concludes

that   the process underlying the 2012                     DSH Calculations was              not

arbitrary and capricious.              Although the agency gave no explicit

contemporaneous        explanation,             the        concerns         for      post-hoc

rationalization       are      not     present.       The        agency     had     made     its

interpretation    of     the     statute       clear       in    the   2004    Final       Rule,

although that rule was later vacated, and the 2013 Regulation, and

has    also   subsequently        made    it    clear           in   the   Administrator's

decision.     Although      no    explanation          accompanied          the     2012     DSH

Calculations,    it    is   not       difficult       to    understand        the    agency's

reasoning,    there is no concern that subsequent rationalizations

                                           28
are substituting contemporaneous reasoned decisionmaking, nor is

there a concern that the judiciary is providing the reasons for

the agency's action, rather than the agency.

       Turning to Plaintiffs' second allegation that the Secretary's

interpretation        is   inconsistent         with   the   statute,   our Court   of

Appeals has already held that the statutory text does not foreclose

the Secretary's interpretation. Ne. Hosp. Corp.,                    657 F.3d at 13.

In evaluating the same question of whether Part C enrollees are

entitled to benefits under Part A,                 the Northeast Hospital court

stated, at step 1 of the Chevron analysis,                     that "Congress ha[d]

not clearly foreclosed the Secretary's interpretation that                       [Part

C]   enrollees are entitled to benefits under Part A." Id.                       While

Northeast Hospital found that. the Secretary's interpretation was

not foreclosed by the statute, it did not reach the Chevron step

2    analysis   to    determine      if   the    Secretary's     interpretation was

reasonable.     See Ne.      Hosp.    Corp.,     65 7 F. 3d at 13.      The Northeast

Hospital court held that it was for the Secretary, not the Court,

to determine the proper interpretation. Id. That is precisely what

the Secretary has done in this instance.

       In   Catholic       Health     Initiatives       v.    Sebelius,    the   Court

considered the phrase "entitled to benefits under Part A," also

key to the case at hand, though not in the context of Part C days.

718 F.3d 914·,       917   (2013).   The Secretary argues that the Court's

decision in Catholic Health is instructive here, Def.'s Mot. at 32,

                                            29
as the Court def erred under Chevron step 2 to the Secretary's

interpretation that "entitlement" is "simply a matter of meeting

the    statutory    criteria,         not    a    matter   of    receiving   payment."

Catholic Health, 718 F. 3d at 919-920.

       Plaintiffs offer no meaningful distinction between the case

at hand and Catholic Health. See Pls.' Reply at 30-31, 39. Although

the type of days specifically at issue are different,                           the core

dispute is the same.           Defendant argues that "entitlement" refers

simply to meeting the statutory requirements,                      Def.'s Mot at 31,

while Plaintiffs argue that "entitlement" requires the ability to

be paid under Part A. Pls.' Reply at 3, 39-40. The Catholic Health

Court deferred to the agency's interpretation, and that deference

is applicabie to this case as well.

       In light of our Court of Appeals'                   decisions      in Northeast

Hospital and Catholic Health,                as well as the narrow standard of

review,    the Court concludes that the Secretary's interpretation

that patients enrolled in Part C continue to be "eligible" for

Part   A   is    well    within    her      authority      and    not   arbitrary    and

capricious.

IV.    Conclusion

       For the    foregoing       reasons,        Plaintiffs'    Motion for      Summary

Judgment    shall       be   denied    and       Defendant's     Motion   for    Summary




                                             30
Judgment shall be granted. An Order shall accompany this Memorandum

Opinion.




August 17, 2016




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