                        UNITED STATES DISTRICT COURT
                        FOR THE DISTRICT OF COLUMBIA
__________________________________
                                    )
BETHESDA HEALTH, INC., et al.,      )
                                    )
            Plaintiffs,             )
                                    )
       v.                           )    Civil Action No. 18-875 (RMC)
                                    )
ALEX M. AZAR II, Secretary of the   )
Department of Health and Human      )
Services,                           )
                                    )
            Defendant.              )
__________________________________ )

                                             OPINION

               This case concerns the application of a mathematical intersection between the

federal Medicare program and the joint state/federal Medicaid program insofar as inpatient

hospital care is reimbursed by Medicare. Hospitals that treat significant numbers of low-income

patients receive a higher amount per Medicare patient as a “disproportionate share hospital

(DSH) adjustment.” The size of the DSH adjustment to a given hospital is determined in part by

the percentage of the hospital’s total patient days attributed to Medicaid-eligible patients; the

more patients a hospital treats who are “eligible for Medicaid,” the greater its DSH adjustment

and the greater its reimbursement rate under Medicare. The phrase “eligible for Medicaid” thus

plays an important role in determining the amount of federal funding a hospital receives, and

much ink has been spilled over its meaning in various contexts. This case is one such example.




                                                  1
               Plaintiffs are a group of hospital organizations 1 in the State of Florida which

provide uncompensated inpatient hospital services to uninsured and underinsured patients.

These patients would not typically be “eligible for Medicaid.” However, in 2006 Florida

authorized, and the Secretary of the Department of Health and Human Services (HHS) approved,

a Medicaid “demonstration project” which reformed Florida’s Medicaid program and

established, inter alia, a federally-matched $1 billion Low Income Pool (LIP). Funds from the

LIP were used to reimburse hospitals for the uncompensated inpatient hospital services provided

to uninsured and underinsured patients.

               The Medicare statute and its regulations allow patients to be “deemed eligible for

Medicaid”—even if they are not—and counted towards a hospital’s DSH adjustment if those

patients are “eligible for inpatient hospital services” under a Medicaid demonstration project.

The question here is whether the uninsured and underinsured patients whose uncompensated

inpatient hospital services were reimbursed by the LIP, with the Secretary’s blessing, so qualify.

The Secretary has already answered “no.” Plaintiffs challenge this answer as arbitrary and

capricious. Both Parties move for summary judgment.

               The Court concludes that the uninsured and underinsured patients whose

uncompensated inpatient hospital services were reimbursed by the LIP as part of a demonstration

project were “eligible for Medicaid” within the meaning of the statute and regulation and should

have had their patient days included in the relevant DSH calculations. Accordingly, the Court




1
 Specifically, Plaintiffs are Bethesda Health, Inc.; Halifax Health; Indian River Memorial
Hospital; Lakeland Regional Medical Center, Inc.; LHP Hospital Group LLC; Martine Health
System; Naples Community Hospital; North Brevard County Hospital District; Sarasota
Memorial Hospital; and South Broward Hospital District, each doing business as various
hospitals.

                                                 2
will grant Plaintiffs’ motion for summary judgment and deny the government’s cross-motion.

The matter will be remanded for further proceedings.

                                     I.   BACKGROUND

           A. The Medicaid Statute and Medicaid Demonstration Projects

               Although this is a Medicare case, a brief introduction to Medicaid is necessary for

context. Medicaid was adopted in Title XIX of the Social Security Act (the Act), 42 U.S.C.

§ 1396 et seq. It is a joint federal-state program which “offers federal funding to States to assist

pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining

medical care.” Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 541 (2012). To receive

federal funding under Medicaid, a state must submit a plan for medical assistance for approval to

the Centers for Medicare and Medicaid Services (CMS), the agency within HHS which

administers both Medicaid and Medicare. This so-called State plan specifies who will receive

medical care and what care they will receive, among other details of the State plan’s

administration. Once a State plan is approved, CMS provides federal funds to the state

matching, to varying degrees, the amount the state itself “expended . . . as medical assistance

under the State plan.” 42 U.S.C. § 1396b(a)(1). The more “medical assistance” hospitals

provide to Medicaid patients under a State plan, the more payments the state makes to those

hospitals, and the more CMS reimburses the state.

               Generally, under a traditional State plan, CMS only matches state expenditures

for “medical assistance,” a term limited by statute to certain enumerated services provided to

certain enumerated classes of individuals. See 42 U.S.C. § 1396d(a) (defining “medical

assistance”). Title XI § 1115(a) of the Social Security Act, 42 U.S.C. § 1315(a), however,

authorizes the Secretary to waive some of Medicaid’s statutory requirements for experimental

state “demonstration projects” which, in the Secretary’s judgment, will “assist in promoting the

                                                  3
objectives of [Medicaid].” Id. These demonstration projects—also known as § 1115 waivers—

“enable the states to try new or different approaches to the efficient and cost-effective delivery of

health services, or to adapt their programs to the special needs of particular areas or groups of

recipients,” 42 C.F.R. § 430.25, and a state’s costs towards a demonstration project “shall, to the

extent and for the period prescribed by the Secretary, be regarded as expenditures under the State

plan.” 42 U.S.C. § 1315(a)(2)(A). In plain English, the law allows a state to adopt a

demonstration project, with prior approval from the Secretary, to “provide benefits to people

who wouldn’t otherwise be eligible for Medicaid benefits; and the costs of these benefits are

treated as if they are matchable Medicaid expenditures.” Forrest Gen. Hosp. v. Azar, No. 18-

60227, 2019 WL 2417409, at *2 (5th Cir. June 10, 2019). Patients not normally eligible for

Medicaid who nonetheless receive Medicaid benefits under a demonstration project are known as

“expansion waiver populations.” See Cookeville Reg’l Med. Ctr. v. Leavitt, 531 F.3d 844, 846

(D.C. Cir. 2008).

           B. The Medicare Statute and the Disproportionate Share Hospital Adjustment

               Medicare, adopted as Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et

seq., is a federal program which provides health insurance to those who qualify, mostly senior

persons receiving Social Security Income benefits at retirement or those receiving Social

Security Disability Income due to a covered disability. It is a huge program, paid for by taxes.

See Azar v. Allina, 139 S. Ct. 1804, 1808 (2019). Part A of Medicare reimburses hospitals for

the costs of inpatient medical care to such patients. Critically, Medicare no longer reimburses

hospitals for their actual operating costs. Described most simply, CMS reimburses hospitals “at

a fixed amount per patient” for each day of inpatient hospital services provided, according to a

patient’s diagnosis. Billings Clinic v. Azar, 901 F.3d 301, 303 (D.C. Cir. 2018). That fixed

amount per patient day differs among hospitals and is adjusted annually upwards or downwards
                                                 4
based on various local factors. As relevant here, Congress has determined that “[h]ospitals that

serve a disproportionate share of low-income patients have higher [M]edicare costs per case,”

H.R. Rep. No. 99-241, pt. 1, at 16 (1985), and those hospitals receive an upward adjustment to

their Medicare reimbursement, which is known as the disproportionate share hospital (DSH)

adjustment. 2

                To determine whether a hospital serves a disproportionate share of low-income

patients, CMS looks to its “disproportionate patient percentage,” which is calculated by adding

together two fractions known as the Medicare fraction and the Medicaid fraction. Together these

two fractions “provide a proxy for the total low-income patient percentage.” 3 Catholic Health

Initiative Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013). This case involves only

the Medicaid fraction,

                the numerator of which is the number of the hospital’s patient days
                for such period which consist of patients who (for such days) were
                eligible for medical assistance under a State plan approved under
                subchapter XIX [i.e., Medicaid], but who were not entitled to
                benefits under part A of this subchapter [i.e., Medicare], and the
                denominator of which is the total number of the hospital’s patient
                days for such period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Put simply, for the purposes of this case, hospitals must

count how many in-hospital days were spent treating “patients who . . . were eligible for medical

assistance under a State plan approved under [Medicaid].” The effect of this fraction is that “the

more a hospital treats patients who are eligible for medical assistance under . . . Medicaid, the



2
  The underlying concern is that low-income patients are less likely to receive regular health care
and therefore present upon admission to a hospital with greater needs than those with more
financial assets. See H.R. Rep. No. 99-241, pt. 1, at 16.
3
  Medicaid patients are a helpful proxy for the number of low-income patients a hospital serves
because the program is geared towards low-income patients who do not qualify for Medicare due
to work history, age, or similar situations.

                                                 5
more money it receives for each patient covered by Medicare.” Adena Reg’l Med. Ctr. v.

Leavitt, 527 F.3d 176, 178 (D.C. Cir. 2008) (internal marks omitted) (emphasis in original).

               That said, the meaning of the phrase “patients who . . . were eligible for medical

assistance under a State plan approved under [Medicaid]” is not as obvious as it may sound.

This is because there is a second part to the definition of the Medicaid fraction:

               In determining under [the Medicaid fraction] the number of the
               hospital’s patient days for such period which consist of patients who
               (for such days) were eligible for medical assistance under a State
               plan approved under [Medicaid], the Secretary may, to the extent
               and for the period the Secretary deems appropriate, include patient
               days of patients not so eligible but who are regarded as such
               because they receive benefits under a demonstration project
               approved under subchapter XI.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (emphasis added). This means that hospitals may count

“both (1) days a hospital treated patients who were Medicaid-eligible, and (2) days a hospital

treated patients who are regarded as Medicaid-eligible because they received demonstration

project benefits.” Forrest Gen. Hosp., 2019 WL 2417409, at *2 (emphasis added).

Interestingly, although the Medicare DSH provisions have existed since 1986, Congress only

recently added this second part of the Medicaid fraction statute, as § 5002(a) of the Deficit

Reduction Act of 2005, Pub. L. No. 109-71, § 5002(a), 120 Stat. 4, 31 (Feb. 8, 2006). To

understand this development, we turn to the regulations implementing the Medicaid fraction.

           C. The Medicare DSH Regulation

               The regulation implementing the Medicaid fraction of the DSH calculation is

found at 42 C.F.R. § 412.106(b)(4) and includes in the Medicaid fraction “the number of the

hospital’s patient days of service for which patients were eligible for Medicaid.” 42 C.F.R.

§ 412.106(b)(4) (emphasis added). Initially, patient days attributable to expansion waiver

populations could not be included in a hospital’s DSH calculation because CMS only considered


                                                 6
patients “eligible for Medicaid” if they were “eligible for medical assistance under an approved

Medicaid state plan.” 42 C.F.R. § 412.106(b)(4)(i) (1999). Demonstration projects, approved

under Title XI, are not part of State plans approved under Title XIX. See Cookeville, 531 F.3d at

848. This language was not applied evenly across the states, however, see id. at 846, so in

January 2000 the Secretary promulgated an Interim Final Rule allowing all patient days

attributable to expansion waiver populations to be included in the DSH adjustment calculation:

               For the purposes of counting days under paragraph (b)(4)(i) of this
               section, hospitals may include all days attributable to populations
               eligible for Title XIX matching payments through a waiver
               approved under section 1115 of the Social Security Act.

65 Fed. Reg. 3,136, 3,137 (Jan. 20, 2000) (codified at 42 C.F.R. § 412.106(b)(4)(ii)) (2000

Interim Final Rule); see also id. at 3,136 (“[W]e believe allowing hospitals to include the section

1115 expanded waiver population in the Medicare DSH calculation is fully consistent with the

Congressional goals of the Medicare DSH adjustment to recognize the higher costs to hospitals

of treating low income individuals covered under Medicaid.”).

               But while the 2000 Interim Final Rule resolved one problem, it introduced

another: Some Medicaid demonstration projects provided only limited benefits to expansion

waiver populations, such as family planning and prescription drugs benefits. While such

demonstration projects were permissible and approved, the expansion waiver populations which

received such limited benefits tended to have higher incomes than traditional Medicaid

beneficiaries and including them in the DSH calculation essentially skewed the low-income

proxy. See 68 Fed. Reg. 45,346, 45,420-21 (Aug. 1, 2003) (2003 Clarifying Rule). In August

2003, the Secretary thus clarified that his “intention in allowing hospitals to include patient days

related to section 1115 expansion waiver populations was to include patient days of

demonstration populations who receive benefits under the demonstration project that are similar


                                                 7
to traditional Medicaid beneficiaries, including inpatient benefits,” id. (emphasis added), and

amended the implementing regulation to state:

               a patient is deemed eligible for Medicaid on a given day only if the
               patient is eligible for inpatient hospital services under an approved
               State Medicaid plan or under a waiver authorized under section
               1115(a)(2) of the Act on that day . . . .

Id. at 45,470 (emphasis added) (codified at 42 C.F.R. § 412.106(b)(4)(i)).

               Congress approved this understanding of the DSH adjustment statute because in

addition to amending the statutory definition of the Medicaid fraction, as discussed above, the

Deficit Reduction Act also expressly ratified the 2000 Interim Final Rule and 2003 Clarifying

Rule. See Deficit Reduction Act § 5002(b). As a result, hospitals may now include in their DSH

calculations patient days attributable to patients “eligible for inpatient hospital services” under a

demonstration project. 42 C.F.R. § 412.106(b)(4)(i).

           D. Florida’s Demonstration Project

               The Secretary approved a five-year demonstration project for Florida’s Medicaid

program in 2006, pursuant to certain Special Terms and Conditions (STC). 4 See generally STC

at AR398-433. The demonstration project had several components, but as described in the STC,

one fundamental element was the creation of a Low Income Pool (LIP), a federally-matched $1

billion dollar capped annual allotment which was established “to ensure continued government

support for the provision of health care services to Medicaid, underinsured and uninsured

populations.” STC ¶ 91 at AR421.

               Hospitals generally provide health care services to uninsured and underinsured

patients in the form of uncompensated care—also known as charity care—which is


4
 This demonstration project was renewed for another three-year term in 2011. See Renewal of
Expenditure Authority for Florida’s Medicaid Reform Section 1115 Demonstration at AR943.

                                                  8
unreimbursed, generally because a patient has insufficient third-party health insurance, if any at

all, and cannot afford to pay the cost themselves. Without government support, the cost of

uncompensated care is borne entirely by the hospital, limiting how much care it can afford to

provide to the uninsured and underinsured. The LIP “continued government support” because

LIP funds could be used “for health care expenditures . . . that would be within the definition of

medical assistance in [42 U.S.C. § 1936d(a)],” that were incurred by hospitals “for

uncompensated medical care costs of medical services for the uninsured.” STC ¶ 94 at AR422.

The use of LIP funds was implemented according to a Reimbursement and Funding

Methodology (RFM) document negotiated between Florida and CMS and approved by the latter.

See STC ¶ 101 at AR423-24; see generally RFM at AR449-71.

               As discussed earlier, under traditional Medicaid, the federal government matches

a state’s reimbursements to its hospitals pursuant to the State plan so that more medical

assistance to Medicaid patients costs more to that state and to CMS in reimbursements. The LIP

portion of Florida’s demonstration project functioned similarly, but with a caveat: The LIP was

a capped allotment, which meant that each year Florida could receive no more than $1 billion in

matching federal funds to the LIP to reimburse hospitals for providing uncompensated care to

uninsured and underinsured patients not otherwise covered by Medicaid. While $1 billion is a

large amount of money, Florida is also a large state, and the allotment was consistently

“insufficient to fund a statewide benefit for the uninsured.” RFM at AR449. Accordingly,

Florida “adopted a basic distribution methodology similar to CMS’ methodology of providing a

predetermined pool to fund the uninsured, underinsured, and Medicaid shortfalls.” RFM at

AR450. In this way, Florida developed a formula by which hospitals could claim a share of the

limited LIP funds to reimburse them for specified expenditures for underinsured and uninsured



                                                 9
patients under the demonstration project, but no share would reimburse “100% of the cost of

services for the uninsured [and] underinsured.” RFM at AR451.

               Participating hospitals entered into agreements with the state to use LIP funds “to

increase the provision of health services for the Medicaid, uninsured, and underinsured people of

. . . Florida.” See, e.g., Letter of Agreement at AR2550. So that Florida could calculate each

hospital’s shares of LIP funding, hospitals were required to submit to the state “Milestone

Reports” which summarized the “unduplicated count of Medicaid and uninsured/underinsured

visits at their respective facilities funded by LIP resources.” RFM at AR468. Hospitals were

further required “to document the number of services provided to those individuals,”

distinguishing between inpatient and outpatient hospital services provided. RFM at AR468; see,

e.g., Low Income Pool Milestone Reporting Requirements at AR1083; see also Transcript of

PRRB Hearing at AR279 (Michele Golden) (“[P]roviders . . . must maintain medical records and

track . . . the individuals they’re providing services to using the low-income pool funding, and at

any time, they may be requested to provide supporting documents or an onsite visit to verify

those.”).

               One result of this funding methodology was that although Florida hospitals

provided and documented inpatient care to individual patients, and although that inpatient care

was factored into their LIP reimbursements, the hospitals received lump sums from the LIP that

were not earmarked for any particular individual but, rather, partially reimbursed the hospitals’

costs for all qualifying inpatient hospital services provided to all uninsured and underinsured

patients.

               In each of the first three years following implementation of the LIP, hospitals

reimbursed by the LIP were estimated to have provided approximately 1.5 million days of



                                                10
inpatient hospital services to underinsured and uninsured patients, up from roughly 1 million

days in the year prior to implementation. See University of Florida, Evaluation of the Low-

Income Pool Program Using Milestone Data: SFY 2008-09 (University of Florida Study) at

AR1814, AR1841, AR1856.

           E. Procedural History

               Per standard procedure, Plaintiffs each requested Medicare reimbursements by

filing annual cost reports with a fiscal intermediary 5 (essentially, private contractors who process

and audit Medicare reimbursements for CMS). See Banner Health v. Sebelius, 715 F. Supp. 2d

142, 146 (D.D.C. 2010). Plaintiffs included inpatient days attributable to underinsured and

uninsured LIP patients in their submissions. The fiscal intermediary excluded those days.

               Plaintiffs each timely appealed to the Provider Reimbursement Review Board

(Board), a five-person independent panel within CMS which, as its name suggests, reviews

reimbursement decisions made by fiscal intermediaries. Analyzing the applicable regulation, the

Board upheld the fiscal intermediary’s consolidated decisions for three reasons. First it

explained that, based on the preamble to, and the language of, the 2000 Interim Final Rule, “the

Secretary intended to limit the inclusion of patient days in the DSH calculation to individuals

who become eligible under the terms of the waiver, or who receive specific medical services

under the waiver,” and that the DSH adjustment “is not intended to include payments made to a

hospital to compensate it for services provided to an unspecified population.” Board Decision at

AR25 (emphasis in original). Put another way, the Board considered it impermissible for the

LIP to issue to hospitals bulk reimbursements for uncompensated care to uninsured and


5
  Fiscal intermediaries are now officially called Medicare Administrative Contractors, or MACs.
However, as the regulation, the Parties’ briefs, and much of the relevant case law still refers to
fiscal intermediaries, the Court will continue to use that term here.

                                                 11
underinsured patients in lieu of payments on behalf of specific patients who were identified with

each reimbursement.

               Second, the Board found that the waiver did not “adequately describe the exact

nature of what [was] being paid for and whether it would be an ‘approved expenditure under

Title XIX.’” Id. For comparison, the Board identified a demonstration project in Massachusetts

which “established eligibility criteria” and “provided a clearly established benefit—premium

subsidy to enroll in a managed care plan which provided the same benefits as provided to

traditional Medicaid-eligible individuals.” Id. at AR26 (citing Sw. Consulting UMass Mem’l

Health Care & Steward Health 2009 DSH CCHIP Section 1115 Waiver Days Grps. v. Nat’l

Gov’t Servs., Inc., No. 2017-D4, 2017 WL 909303 (P.R.R.B. Jan. 27, 2017), rev’d 2017 WL

2403398 (CMS Adm’r Rev. Mar. 21, 2017), vacated and remanded sub nom. HealthAlliance

Hosps., Inc. v. Azar, 346 F. Supp. 3d 43 (D.D.C. 2018)). 6 The Board also identified a

demonstration project in Mississippi by which hospitals were reimbursed for uncompensated

care provided to inpatients displaced by Hurricane Katrina, because “the State of Louisiana made

expedited determinations of eligibility for specific individuals and . . . hospitals made claims

specific to these individuals.” Id. (citing CCT&B 2005-2006 Hurricane Katrina § 1115 Waiver

UCP Days Grp. v. Novitas Solutions, Inc., No. 2016-D18, 2016 WL 6299482 (P.R.R.B. Sep. 16,

2016), rev’d 2016 WL 7744987 (CMS Adm’r Rev. Nov. 18, 2016), aff’d sub nom. Forrest Gen.

Hosp. v. Hargan, No. 2:17-CV-8 (S.D. Miss. Feb. 22, 2018), rev’d and remanded Forrest Gen.

Hosp., 2019 WL 2417409). 7 In Plaintiffs’ case, the Board concluded that the lack of established


6
 The Board’s decision was reversed by the CMS Administrator whose decision, in turn, was
vacated by the district court. The court decision in HealthAlliance is discussed in Part III, infra.
7
  Forrest General Hospital also has a complicated procedural history. The Board’s decision was
reversed by the CMS Administrator, whose decision was sustained by the district court but then
reversed by the Fifth Circuit. The Circuit’s analysis is discussed in Part III, infra.

                                                 12
eligibility criteria in the § 1115 waiver documents themselves meant that there was no “defined

group of eligible . . . Section 1115 waiver individuals” and that “it is not the individual patients

whose eligibility is established and benefits paid on their behalf.” Id. at AR27.

               Finally, the Board reasoned that for “patient days to be included in the DSH

calculation, these days must be for ‘populations who receive benefits under the demonstration

project that are similar to those available to traditional Medicaid beneficiaries.’” Id. (quoting 68

Fed. Reg. 27,154, 27,207 (May 19, 2003)). The Board then concluded that patient days

attributable to expansion waiver populations whose inpatient care was reimbursed by the LIP

could not be included in the DSH calculation because the terms of the demonstration project did

not specify what benefits such populations were to receive. Id.

               Plaintiffs requested review by the CMS Administrator. Review was denied,

rendering the Board’s opinion the relevant final agency action. Plaintiffs now challenge the

Board’s decision as arbitrary and capricious under the Administrative Procedure Act (APA).

The matter is ripe for review. 8

                                   II.   LEGAL STANDARD

               Summary judgment is the proper stage for determining whether, as a matter of

law, final agency action is supported by the administrative record and is consistent with the

APA. See Fed. R. Civ. P. 56; Richards v. INS, 554 F.2d 1173, 1177 (D.C. Cir. 1977). The law

provides that “[t]he reviewing court shall . . . hold unlawful and set aside agency action” that is

“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” or that is


8
  See Pls.’ Mot. for Summ. J. (Pls.’ Mot.) [Dkt. 18]; Pls.’ Mem. in Supp. of Their Mot. for
Summ. J. (Pls.’ Mem.) [Dkt. 18]; Def.’s Mot. for Summ. J. [Dkt. 19]; Mem. of P. & A. in Opp’n
to Pls.’ Mot. for Summ. J. and in Supp. of Def.’s Cross-Mot. for Summ. J. (Def.’s Opp’n) [Dkt.
20]; Pls.’ Reply and Resp. to Def.’s Cross-Mot. for Summ. J. (Pls.’ Reply) [Dkt. 21]; Reply in
Supp. of Def.’s Mot. for Summ. J. (Def.’s Reply) [Dkt. 24].

                                                 13
“in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C.

§ 706(2)(A), (C). That said, arbitrary and capricious review is “narrow.” Citizens to Pres.

Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). A court is not to “substitute its judgment

for that of the agency.” Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 43 (1983).

               Courts may set aside as arbitrary and capricious agency action which contradicts

that agency’s own regulations. See Erie Boulevard Hydropower, LP v. Fed. Energy Regulatory

Comm’n, 878 F.3d 258, 269 (D.C. Cir. 2017). However, deference is due to an agency’s

interpretation of its own otherwise ambiguous regulation, unless that interpretation is “plainly

erroneous or inconsistent with the regulation.” Auer v. Robbins, 519 U.S. 452, 461 (1997).

Deference to an agency’s interpretation of its own ambiguous regulation is particularly called for

when the regulation concerns a highly technical or complex area, such as Medicare, and the

agency has unique expertise. See Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).

               A court’s review is normally limited to the administrative record, Holy Land

Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 160 (D.C. Cir. 2003), and the party

challenging an agency’s action bears the burden of proof, City of Olmsted Falls v. FAA, 292 F.3d

261, 271 (D.C. Cir. 2002).

                                       III.   ANALYSIS

               At the risk of repeating the procedural history of this case, it is helpful to state at

the outset specifically what agency action this Court is reviewing. As described above, the

Secretary has promulgated a regulation, codified at 42 C.F.R. § 412.106(b)(4), that instructs

fiscal intermediaries as to which patient days shall be included in the Medicaid fraction of the

Medicare DSH adjustment. The fiscal intermediary, applying that regulation, determined that

patient days attributable to underinsured and uninsured patients who received inpatient hospital
                                                  14
services, but which services were reimbursed en gros by the Florida LIP, should be excluded

from Plaintiffs’ Medicaid fraction. Plaintiffs appealed that determination to the Board, which

interpreted the Secretary’s intent animating said regulations and affirmed the fiscal

intermediary’s decisions. At bottom, then, the question for this Court is whether the Board and

the fiscal intermediary correctly interpreted and applied 42 C.F.R. § 412.106(b)(4).

               This same question has recently been addressed by two different courts. In

HealthAlliance Hospitals, Inc. v. Azar, 346 F. Supp. 3d 43, Judge Ketanji Jackson of this District

Court considered the same regulation in an almost identical case and reversed the CMS

Administrator based on the plain language of the regulation. In that case, the Commonwealth of

Massachusetts had applied for, and the Secretary had approved, a demonstration project known

as Commonwealth Care, which allowed Massachusetts to subsidize private health insurance for

many individuals who were not otherwise eligible for insurance under Medicare or Medicaid. Id.

at 50. Neither Massachusetts’ application nor the Secretary’s waiver identified any particular

benefit or type of coverage that was mandated. Id. at 51. As a matter of fact, however,

Commonwealth Care required all subsidized insurance plans to cover the same inpatient hospital

services for their subscribers that were extended to Medicaid patients. Id. Nonetheless, because

of this omission from the § 1115 waiver documents themselves, the CMS Administrator reversed

the Board and found that Commonwealth Care patients were not “eligible” for such inpatient

hospital services under the demonstration project. Id. at 53. The CMS Administrator thus

disapproved inclusion of the waiver expansion population’s patient days in the DSH calculation.

Id.

               On review, Judge Jackson held that the CMS Administrator’s decision was

arbitrary and capricious, explaining that the “plain language of the applicable regulation



                                                15
unambiguously requires that all patient days attributable to individuals receiving health insurance

through Medicaid or through a roughly equivalent authorized demonstration project (as

evidenced by the provision of ‘inpatient hospital services’) must be counted in the Medicaid

fraction’s numerator.” Id. at 56 (emphasis added). Judge Jackson further explained that the

language of the waiver was irrelevant to the fiscal intermediary’s calculation because the

regulation at § 412.106(b)(4) does not define, discuss, or otherwise cross-reference those

portions of the Code of Federal Regulations addressing the requirements for a demonstration

project, and as such there was no reason for the fiscal intermediary to look beyond the plain

language of § 412.106(b)(4). See id at 58. Thus, “the only . . . question from the standpoint of

the fiscal intermediary who is charged with counting the patient days associated with an

approved demonstration project under section 412.106(b)(4) . . . is whether patients covered by

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

plans this program financed,” which the court determined in the affirmative. Id. at 60.

               In Forrest General Hospital v. Azar, 2019 WL 2417409, the Fifth Circuit also

considered the same regulation and statute. Plaintiffs there were Mississippi hospitals which

provided inpatient hospital services to Hurricane Katrina evacuees under a demonstration project

that permitted Mississippi “to reimburse providers that incurred uncompensated care costs for

medically necessary services . . . for Katrina evacuees and affected individuals who did not have

coverage under . . . Medicaid, . . . private insurance, or under State-funding health insurance

programs for a five-month period—the uncompensated care pool (UCCP).” Id. at *4.

Notwithstanding, when Mississippi hospitals sought reimbursement under Medicare, the CMS

Administrator reversed the Board and disallowed UCCP patient days from their DSH

calculations. As in this case, the CMS Administrator analogized all uncompensated care to state-



                                                16
only charity care and found that uninsured patients were not “eligible for medical assistance

under a State plan approved under [Medicaid],” despite the approved waiver. Id.

               The Fifth Circuit found the Secretary’s decision there also arbitrary and

capricious, holding that the unambiguous “statute means that patients who aren’t actually

Medicaid-eligible still count towards the Medicaid fraction’s numerator if they’re considered or

accounted to be capable of receiving a demonstration project’s helpful or useful effects by reason

of a demonstration project’s authority.” Id. at *7; see also id. at *11 (“The law governing the

inclusion of § 1115 waiver patient days in the Medicaid fraction is straightforward: The plain

regulatory text demands that such days be included—period.”). As a result, the Fifth Circuit

concluded that even though UCCP patients were uninsured or underinsured and otherwise

Medicaid-ineligible, they nonetheless “were capable of receiving inpatient health services” as

uncompensated care “under a § 1115 demonstration” that was clearly authorized by the Secretary

and so should have been included in the DSH calculation. See id. at *11.

           A. 42 C.F.R. § 412.106(b)(4)

               1. Interpreting the Regulation

               To recap, the DSH implementing regulation for the Medicaid fraction states:

               (4) Second computation. The fiscal intermediary determines . . .
               the number of the hospital’s patient days of service for which
               patients were eligible for Medicaid but not entitled to [Medicare],
               and divides that number by the total number of patient days in the
               same period. For purposes of this second computation, the
               following requirements apply:

               (i) For purposes of this computation, a patient is deemed eligible
               for Medicaid on a given day only if the patient is eligible for
               inpatient hospital services under an approved State Medicaid plan
               or under a waiver authorized under section 1115(a)(2) of the Act on
               that day, regardless of whether particular items or services were
               covered or paid under the State plan or the authorized waiver.



                                                17
                (ii) . . . [F]or purposes of counting days under paragraph (b)(4)(i) of
                this section, hospitals may include all days attributable to
                populations eligible for [Medicaid] matching payments through a
                waiver approved under section 1115 of the Social Security Act.

42 C.F.R. § 412.106(b)(4). As did the courts in HealthAlliance and Forrest General Hospital,

this Court finds that the regulation is clear and unambiguous, and that the government’s

interpretation warrants no deference.

                “The regulation describes the pool of qualifying hospital patient days.” Forrest

General, 2019 WL 2417409, at *8. Clearly, a fiscal intermediary is required to include all “days

of service for which patients were eligible for Medicaid” in the DSH calculation. 42 C.F.R.

§ 412.106(b)(4). The regulation further states that a patient is “deemed eligible for Medicaid . . .

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

under a waiver authorized under section 1115(a)(2).” Id. § 412.106(b)(4)(i) (emphasis added).

Thus, this provision equates, for the purposes of the DSH calculation, patient days for otherwise

Medicaid-ineligible patients with patient days for Medicaid-eligible patients if such ineligible

patients receive inpatient hospital services under a demonstration project “authorized under

section 1115(a)(2).” Id. Section 412.106(b)(4)(i) accomplishes this equivalency by using the

same “eligible for Medicaid” terminology found in § 412.106(b)(4) and by connecting Medicaid-

eligible patients to demonstration projects patients with the word “or.” Id. “On a given day”

also directs the fiscal intermediary to look at the patient’s actual eligibility for inpatient hospital

services directly under Medicaid or under a § 1115 waiver demonstration project authorized by

the Secretary. HealthAlliance, 346 F. Supp. 3d at 57. “What does not matter for purposes of this

regulation is what the plan documents say about eligibility for particular services.” Forrest Gen.

Hosp., 2019 WL 2417409, at *8 (emphasis in original).




                                                  18
               Moreover, the key words of subsection (i) are plain to understand. “Eligible” is

no term of art and is generally construed to mean “capable of receiving.” See Jewish Hosp., Inc.

v. Sec’y of Health & Human Servs., 19 F.3d 270, 274 (6th Cir. 1994); Covenant Health Sys. v.

Sebelius, 820 F. Supp. 2d 4, 12 (D.D.C. 2011); cf. Eligible, Black’s Law Dictionary 634 (11th

ed. 2019) (“Fit and proper to be selected or to receive a benefit.”). “Under” also has no special

meaning and is best read in context to mean “subject or pursuant to” or “by reason of the

authority of.” HealthAlliance, 346 F. Supp. 3d at 57-58. Taken together, then, “the phrase

‘eligible for inpatient hospital services . . . under a waiver authorized under section 1115(a)(2)’ is

plainly understood as describing those individuals who were capable of receiving inpatient

hospital services pursuant to the project that the Secretary approved in the section 1115(a)(2)

waiver.” HealthAlliance, 346 F. Supp. 3d at 58 (emphasis in original).

               The words of subsection (ii) are similarly clear. “Eligible” and “under” share the

same meaning, and “through” in this context means “because of” or “on account of.” Through,

Oxford English Dictionary, https://www.oed.com/view/Entry/201386. Thus, “populations

eligible for [Medicaid] matching payments through a waiver approved under section 1115” are

populations capable of receiving Medicaid matching payments on account of a waiver approved

pursuant to section 1115.

               2. Applying the Regulation

               The record in this case could not state any more clearly that the Secretary

intended to designate uninsured and underinsured patients as an expansion waiver population

under Florida’s demonstration project and to make matching federal payments for their care

through the LIP. It is also uncontested that uninsured and underinsured patients actually

received inpatient hospital services, and that Plaintiffs determined on a case-by-case basis

whether that care was entitled to funding under the LIP.
                                                 19
               We begin with the Expenditure Authority for Florida’s Medicaid Reform Section

1115 Demonstration (Expenditure Authority), by which the Secretary explicitly exercised his

authorities under 42 U.S.C. § 1315(a)(2) to waive expenditure restrictions so that CMS could

match “not otherwise matchable” “[e]xpenditures made by Florida for costs related to providing

health care services to uninsured and or underinsured.” Expenditure Authority at AR440. This

purpose was made manifest in the Special Terms and Conditions, which established the LIP “to

ensure continued government support for the provision of health care services to Medicaid,

underinsured and uninsured populations.” STC ¶ 91 at AR421. Further, the Special Terms and

Conditions approved a distinct eligibility group for LIP patients. See STC ¶ 108(b) at AR426

(“The Florida Medicaid Reform eligibility groups (MEGs) . . . include . . . MEG 3: Low Income

Pool.”); id. ¶ 109(b) at AR430 (“The term ‘Demonstration eligibles’. . . refers to the following

categories of enrollees [including] . . . MEG 3: Low Income Pool.”); cf. Nazareth Hosp. v. Sec’y

U.S. Dep’t of Health & Human Servs., 747 F.3d 172, 179 (“The eligibility criteria for the

individual State section 1115 populations are federally approved and set forth in the terms and

conditions of the section 1115 waiver project.”).

               CMS also plainly acknowledged that the LIP would fund “[h]ealth care

expenditures” that could include “uncompensated costs of medical services for the uninsured”:

               Funds from the LIP may be used for health care expenditures that
               would be within the definition of medical assistance [in] section
               1905(a) of the Social Security Act. Health care expenditures may
               be incurred by the State, hospitals, clinics, or by other providers for
               uncompensated costs of medical services for the uninsured.

LIP Expenditure Authorization Letter (June 30, 2006) at AR435 (emphasis added); see also STC

¶ 94 at AR422 (same). Consistent in purpose to the Expenditure Authority, under the Special

Terms and Conditions CMS agreed to “provide [federal financial payments] . . . for . . . [n]et

expenditures associated with the Low Income Pool.” STC ¶ 111 at AR429; see also LIP
                                                 20
Expenditure Authorization Letter at AR435 (“The availability of Federal matching funds for the

LIP is contingent upon the State meeting all LIP Milestones.”). These were not misstatements:

Other than these documents, CMS confirmed that LIP costs were eligible for matching payments

in a subsequent regulatory statement. See 72 Fed. Reg. 29,748, 29,814 (May 29, 2007) (“For

Florida, while we are still working with the State to define expenditures that can be made

through the Low Income Pool, approved expenditures will be eligible for Medicaid matching

consistent with the authority under section 1115(a)(2).”); cf. id (“Under the [California]

demonstration, the uninsured costs are considered eligible under Medicaid . . . .”).

               Milestone Reports submitted pursuant to the negotiated Reimbursement and

Funding Methodology show that Florida hospitals actually used LIP resources to provide

inpatient services to uninsured and underinsured patients. See, e.g., Low Income Pool Milestone

Reporting Requirements at AR1083; see also University of Florida Study at AR1841 (“Hospitals

receiving LIP payments served approximately 3.6-3.8 million Medicaid, uninsured, and

underinsured individuals in the first three years of Medicaid Reform, in comparison to

approximately 2.0 million in the year prior.”); University of Florida Study at AR1856

(estimating hospitals reimbursed by the LIP increased uninsured and underinsured inpatient days

by approximately 500,000 yearly). Although the Milestone Reports are summaries, “the patient

specific claims underlying [the reporting documents] must be maintained by the provider and

must be furnished to the State upon request.” Florida Memorandum on Medicaid Waiver Patient

Days at AR473. Hospitals were thus required to “evaluate, essentially, account by account,

encounter by encounter, and eligibility determination by eligibility determination, whether the

individuals that make up these statistics” received inpatient hospital services, were uninsured or

underinsured, and were eligible for reimbursement for inpatient hospital care from the LIP.



                                                21
Transcript of PRRB Hearing at AR208 (Scott Davis); see also id. at AR268 (Michele Golden)

(“[U]pon request those records could be identified for the individual that received services, . . .

their health records, what services were received, to demonstrate that that low-income pool

funding was being used for the purposes of those services for those individuals.”). In short,

Plaintiffs had an auditable “paper trail” (probably maintained electronically) for each patient day

attributed to a patient whose inpatient hospital care was reimbursed by the LIP under Florida’s

demonstration project. See Transcript of PRRB Hearing at AR268 (Michele Golden).

               In sum, it is obvious to the Court that uninsured and underinsured patients

received inpatient hospital services through the LIP—which was authorized by the

demonstration project and received matching federal funds—and their patient days should have

been included in the Medicaid fraction of the Medicare DSH calculation.

           B. The Government’s Arguments Are Unpersuasive and Post-Hoc Lawyering

               Given the record summarized above, the government’s position appears to be that,

despite the broad authority granted to the Secretary under § 1115 to explore “new or different

approaches to the efficient and cost-effective delivery of health services” and to help states

“adapt their programs to the special needs of particular areas or groups of recipients,” 42 C.F.R.

§ 430.25, the Secretary cannot make expansion waiver populations eligible for inpatient hospital

services under a demonstration project by reimbursing hospitals for such uncompensated care.

The government offers a smorgasbord of arguments which meander back and forth between the

statute and the regulation. Only some of its arguments support the reasons expressed by the

Board. None is convincing.




                                                 22
               1. The statutory text does not require uninsured and underinsured patients to
                  enroll in a health insurance plan

               Not once does the government address or attempt to distinguish HealthAlliance. 9

Instead, it starts its argument by insisting that the statutory text—not the text of the regulation—

drives the outcome here.

               Plaintiffs readily concede that LIP patients are not eligible for medical assistance

under a traditional State plan, Pls.’ Reply at 15, but note that “the Secretary may, to the extent

and for the period the Secretary determines appropriate, include patient days of patients not so

eligible but who are regarded as such because they receive benefits under a demonstration

project approved under subchapter XI.” 42 U.S.C. §1395ww(d)(5)(F)(vi)(II). The government

argues that this provision cannot save Plaintiffs because the Secretary has interpreted the phrase

“not so eligible but who are regarded as such because they receive benefits under a

demonstration project” to mean that “a specific patient is to receive a specific benefit package

under the demonstration project.” Opp’n at 21 (emphasis added). 10

               When “a statute is silent or ambiguous with respect to a specific issue” within an

agency’s expertise, courts generally give considerable deference to that agency’s reasonable

interpretation. See Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844

(1984). Agencies are generally free to establish their interpretations through either rulemaking

or case-by-case adjudication, see United States v. Mead Corp., 533 U.S. 218, 243-44 (2001)

(Scalia, J. dissenting), and precedent instructs that an agency’s interpretation warrants no less


9
 The HealthAlliance decision was issued before the government filed its Opposition and was
mentioned several times in Plaintiffs’ Reply brief.
10
   The government cites C.F.R. § 412.106(b)(4)(i) to support its interpretation, but the phrases
“specific patient” and “specific benefit package” are nowhere to be found in the regulation or the
statute.


                                                 23
deference if made on a case-by-case basis instead of through notice and comment. See I.N.S. v.

Cardoza-Fonseca, 480 U.S. 421, 448 (1987). But cf. Azar v. Allina, 139 S. Ct. 1804, 1811-14

(2019) (leaving open whether notice-and-comment requirements apply to all Medicare statutory

interpretations). The government asks for Chevron deference here. 11

               The government’s proposed interpretation would informally add new and limiting

phrases to a statute that is already clear when unadorned. See Forrest Gen. Hosp., 2019 WL

2417409, at *5-6 (“[T]he statute means that patients who aren’t actually Medicaid-eligible still

count towards the Medicaid fraction’s numerator if they’re considered or accounted to be

capable of receiving a demonstration project’s helpful or useful effects by reason of a

demonstration project’s authority. There’s only one plausible way to read this.”); cf. Benefit,

Black’s Law Dictionary (11th ed. 2019) (defining “benefit” as the “the helpful or useful effect

something has”). But even if the law were ambiguous, the government is not entitled to

deference because it points to no agency source for its interpretation. That is, it is apparent from

the Board’s decision on Plaintiffs’ appeal that the Board was interpreting only the regulation

without regard to the statute. See Board Decision at AR25 (discussing the effects of the 2000

Interim Final Rule); id (“Second, federal DSH regulation specifies . . . .”); id at AR27 (“Finally,

the most recent amendment to the DSH regulation in 2003 clarified . . . .”); see generally id. at

AR24-27 (including no citations to the Medicare statute). Indeed, there was no need for the



11
   The government argues that its interpretation is also compelled by policy: The Medicaid
fraction is a proxy for the number of low-income patients served by a hospital which will be
distorted by allowing hospitals in different states to count different patients. But even if this
post-hoc rationale is correct, such distortion would have long been inherent to any expansion
waiver population included in the DSH calculation, and the government does not explain why
the expansion waiver population here should be treated differently from any other similarly
approved by the Secretary.


                                                 24
Board to interpret the statute instead of the regulation because the question before the Board was

whether the fiscal intermediary had properly interpreted the already-existing regulation that

guides its work. 12

                “It is well-established that an agency’s action must be upheld, if at all, on the

basis articulated by the agency itself.” Motor Vehicle Mfrs., 463 U.S. at 50. Post hoc

rationalizations will not suffice. Id. at 49-50; see also Inv. Co. Inst. v. Camp, 401 U.S. 617, 628

(1971) (“Congress has delegated to the administrative official and not to appellate counsel the

responsibility for elaborating and enforcing statutory commands.”). Because the Board did not

rely on a new interpretation of the statute in its decision, the government may not attempt to do

so now.

                2. The regulatory text does not require uninsured and underinsured patients to
                   enroll in a health insurance plan

                The Board was concerned that the Florida “waiver does not adequately describe

the exact nature of what is being paid for and whether it would be an ‘approved expenditure

under Title XIX.’” Board Decision at AR25. The Board thought this ambiguity could have been

resolved if uninsured and underinsured patients were “eligible to enroll” in some program on an

individuated basis, as in two other decisions where the Board had included expansion waiver

population days (although each was reversed by the CMS Administrator). Board Decision at

AR26 (citing Sw. Consulting, 2017 WL 909303; UCP Days Grp., 2016 WL 6299482).




12
  Although Congress separately added language to the Medicare statute, see DRA § 5002(a),
and ratified the existing regulation, see DRA § 5002(b), the Board appears to understand both
parts together as merely ratifying the existing regulation. See, e.g., UCP Days Grp., 2016 WL
6299482, at *4 (stating 42 C.F.R. § 412.106(b)(4) was “‘ratified’ . . . when Congress amended
the federal DSH statute” at 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II)).

                                                  25
               Reversed twice by the CMS Administrator, perhaps the Board offered the best

analysis it could consistent with the Administrator’s previous decisions. But the Board’s

interpretation has no basis in the regulatory text. As the court in HealthAlliance made clear, and

the government concedes here, the government “cannot[] explain why the express terms of the

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

solely concerned with the fiscal intermediary’s proper calculation of a hospital’s DSH

adjustment.” HealthAlliance, 346 F. Supp. 3d at 58 (emphasis in original); see also Forrest Gen.

Hosp., 2019 WL 2417409, at *8 (“What does not matter for purposes of this regulation is what

the plan documents say about eligibility for particular services.”). The regulation tasks the fiscal

intermediary only with determining whether a patient was eligible for inpatient hospital services

under a demonstration project on a given day; neither the words nor the concepts of “enroll” or

“eligible to enroll” appear anywhere in the DSH adjustment statute or the regulation. Cf. 42

U.S.C. § 1395ww(d)(12) (describing individuals in a different adjustment program as “enrolled

for[] benefits under [Medicare]”). Thus, both federal courts which have since ruled on Southwest

Consulting and UCP Days Group, 13 in HealthAlliance and Forrest General Hospital,

respectively, included expansion waiver patient days in the DSH calculation based on the care

expansion waiver patients actually received, not on the text of the waiver or on the structure of

the hospitals’ reimbursement claims. See Forrest Gen. Hosp., 2019 WL 2417409, at *10.


13
  The Board states that it was significant in UCP Days Group that “the State of Louisiana made
expedited determinations of eligibility for specific individuals and . . . hospitals made claims
specific to these individuals.” Board Decision at AR26 (citing UCP Days Grp., 2016 WL
6299482). The Court finds no mention of expedited determinations or specific hospital claims in
the cited decision. That said, the Court notes that the Board in UCP Days Group
“distinguish[ed] between patient days ‘sanctioned’ as part of an § 1115 waiver and those ‘state
only’ days, such as general assistance or charity care days, for which Medicare hospitals have
long argued should be included in the Medicare DSH calculation,” and found that the former
“should be included in the Medicare DSH calculation.” Id. at *6.

                                                 26
                As applied here, the government does not contest that uninsured and underinsured

patients received inpatient hospital services funded by the LIP. Regardless of whatever else the

LIP may have paid for, this is enough to satisfy the regulation.

                3. Benefits similar to those available to traditional Medicaid beneficiaries means
                   inpatient hospital services

                The 2003 Clarifying Rule states that the Secretary intended to include in the DSH

calculation only “patient days of demonstration populations who receive benefits under the

demonstration project that are similar to traditional Medicaid beneficiaries, including inpatient

benefits.” 68 Fed. Reg. at 45,420. The government contends that the Secretary thereby “made

clear that the phrase ‘inpatient hospital services’ refers to a specific benefit of eligibility that is

cued to the ‘benefit package’ available to a Medicaid beneficiary.” Def.’s Reply at 10.

Similarly, the Board stated that “it cannot determine whether the benefit to the patient was

similar to those available to traditional Medicaid beneficiaries, limited or otherwise” because

Florida’s waiver does not specify the benefits to be received. Board Decision at AR27.

                The government reads more into these words than they will support. “Inpatient

hospital services” cannot also imply a broader “benefit package,” since inpatient services are

already an enumerated subset of the benefits Medicaid provides. 42 U.S.C. § 1396d(a)(1). Nor

can “eligible” support the government’s argument, since it does not imply any specific

mechanism for providing inpatient hospital services. Indeed, such an implication would be so

context specific that it could not possibly comport with the plain meaning of the word. Cf. Sw.

Consulting, 2017 WL 909303, at *7 (Nix and Benson, Bd. Members, concurring) (“[T]he

preamble discussion [to § 412.106(b)(4)] only states in generic terms that inpatient benefits must

be ‘received’ under the § 1115 waiver.”).




                                                   27
               Contrary to these contortions, the regulation is clear on its face: for their patient

days to be included in the DSH calculation, Medicaid-ineligible patients must be “eligible for

inpatient hospital services under . . . a waiver authorized under section 1115(a)(2).” 42 C.F.R.

§ 412.106(b)(4)(i). That is to say, Medicaid-ineligible patients in demonstration projects receive

“similarly comprehensive” benefits to Medicaid-eligible patients when they receive inpatient

hospital services. See Forrest Gen. Hosp., 2019 WL 2417409, at *8; HealthAlliance, 346 F.

Supp. 3d at 56 (finding “roughly equivalent” benefits are “evidenced by the provision of

‘inpatient hospital services’”); see also 68 Fed. Reg. 45,421 (including expansion waiver

population patient days is appropriate “only to the extent that those individuals receive inpatient

benefits under the section 1115 demonstration project”); cf. Transcript of PRRB Hearing at

AR266 (Michele Golden) (“[T]he design of the low-income pool was to provide the same

services that would have been provided if the member . . . was . . . a typical Medicaid eligible.”).

Further, it makes sense that the 2003 Clarifying Rule ultimately identified inpatient hospital

services as the critical Medicaid service; unlike the government’s vague allusions to a specific

benefit package, eligibility for inpatient hospital services is a clear, definite standard by which to

determine whether a patient receives benefits similar to those available to traditional Medicaid

beneficiaries. The government’s position leaves unclear by what yardstick “similar benefits”

would be measured.

               4. The statutory definition of medical assistance is irrelevant

               The government devotes lengthy pages to arguing that the definition of “medical

assistance” is limited and patients under Florida’s demonstration project whose inpatient hospital

services are reimbursed by the LIP do not qualify. To start, it is unclear that the government’s

premise is correct. The record demonstrates that, in the context of demonstration projects,

neither Congress, CMS, nor the Judiciary has limited the use of the term “medical assistance” to
                                                  28
individuals already eligible for Medicaid. See, e.g., Deficit Reduction Act § 6201(a)(1)(B)

(authorizing funding, “with respect to evacuees who do not have coverage for such assistance

through insurance . . . under [Medicaid], . . . for those evacuees receiving medical assistance

under the [demonstration] project for the total uncompensated care costs incurred”); LIP

Expenditure Authorization Letter at AR435 (“[H]ealth care expenditures that would be within

the definition of medical assistance . . . may be incurred by . . . hospitals . . . for uncompensated

costs of medical services for the uninsured.”); STC ¶ 94 at AR422 (same); Forrest Gen. Hosp.,

2019 WL 2417409, at *11 (finding uninsured patients received “medical assistance” through an

uncompensated care pool); Adventist Health Sys./Sunbelt, Inc. v. Sebelius, 715 F.3d 157, 159

(6th Cir. 2013) (finding the Secretary may “waive, among other things, statutory eligibility

limitations on the payment of ‘medical assistance’ to individuals under the Medicaid

program”). 14

                But all of this is ultimately beside the point because the government’s argument

patently ignores critical language of the Medicare statute. The Secretary may count in the DSH

calculation patient days for patients who were “eligible for medical assistance” and for “patients

not so eligible but regarded as such because they receive benefits under a demonstration project

approved under subchapter XI.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II); cf. Regard, Oxford

English Dictionary, https://www.oed.com/view/Entry/161187 (“To consider, look on, view, as

being something specified.”). There is no doubt that uninsured and underinsured patients in

Florida received benefits under a demonstration project and that even if not strictly eligible for


14
  The government relies heavily on the D.C. Circuit’s decision in Adena to anchor the definition
of “medical assistance,” but as with the government’s other cited cases, Adena addressed only
whether patients who received uncompensated care reimbursed by Medicaid DSH supplemental
funding received “medical assistance under a State plan approved under [Medicaid].” Adena,
527 F.3d at 178. All references to “medical assistance” were limited to that context.

                                                 29
“medical assistance,” as the government contends, these uninsured and underinsured patients in

Florida were “regarded as such.” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). The government cannot

explain why the definition of medical assistance matters here; all of the cases upon which the

government relies that discuss “medical assistance” and the DSH calculation concern only the

first half of 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II), which addresses patients eligible for traditional

Medicaid, and not the second, which addresses Medicare-ineligible patients who are “regarded

as” eligible for medical assistance under a demonstration project for purposes of inclusion in the

DSH calculation. See also 42 U.S.C. § 1315(a)(2) (stating demonstration project costs “shall, to

the extent and for the period prescribed by the Secretary, be regarded as expenditures under the

State plan”).

                5. The regulation does not differentiate between payments to hospitals and
                   patients

                In its decision on Plaintiffs’ appeal, the Board stated that the Medicare DSH

calculation is “intended to limit the inclusion of patient days in the DSH calculation to

individuals who become eligible under the terms of the waiver” and not “payments made to a

hospital to compensate it for services provided to an unspecified population.” Board Decision at

AR25 (emphasis in original); see also id (“Florida’s Low-Income Pool provides a gross payment

to hospitals . . . for services provided to uninsured and underinsured individuals as an

undifferentiated group, not identified or qualified individually for waiver services.”). Thus,

according to the Board, because the LIP “provides a gross payment to hospitals . . . to reimburse

them for services provided to uninsured and underinsured individuals,” it is inconsistent with the

regulation. In a similar vein, the Board expressed concern that LIP patients are “not required to

apply for the hospital’s charity care program, do not apply or receive a Medicare card, a

certificate of coverage, have a right of reconsideration on appeal and do not receive a bill or


                                                 30
notification when a claim is paid.” Board Decision at AR27. In this way, the Board concluded

“that it is not the individual patients whose eligibility is established and benefits paid on their

behalf,” as required by the regulation which “focuses on individuals.” Id.

               The distinction the Board makes between LIP reimbursements for individuals and

reimbursements for groups of individuals is nowhere to be found in the plain text of the

regulation. The Board is correct that § 412.106(b)(4) does not mention gross payments made to

hospitals for services rendered to a group of persons. But nor does it mention or require specific

payments to hospitals for services rendered to individual patients. In fact, it does not mention

payments at all. Section 412.106(b)(4) only directs the fiscal intermediary to count patient days

for patients who were eligible for inpatient hospital services, and the fiscal intermediary is

directed to include qualifying patient days in the DSH calculation “regardless of whether

particular items or services were covered or paid under the State plan or the authorized waiver.”

42 C.F.R. § 412.106(b)(4)(i) (emphasis added).

               This is not to say that the hospitals may provide inpatient hospital services to just

anyone and include those patient days in their DSH calculations. To the Board’s point, under 42

C.F.R. § 412.106(b)(4)(iii), hospitals must make individual patient eligibility determinations and

further be able to justify those determinations to CMS. See 42 C.F.R. § 412.106(b)(4)(iii). But it

is important that the requirements of subsection (iii) are separate from subsections (i) and (ii);

what day the hospital finds convenient to make eligibility determinations—before or after

services are provided—does not itself figure into whether or when patients are eligible for

inpatient hospital services. Further, the record is clear that hospitals did make individuated

patient eligibility determinations, and that documents related to those patient-specific

determinations were available for audit by CMS, and in fact had been audited. See Medicaid



                                                  31
Reform in Florida: Key Events and Activities in 2008 at AR1712. The Board’s reliance on

cards, certificates, and rights of appeal as indicia of eligibility has no basis in the regulation.

                6. The charity care cases are inapplicable

                The government argues that several cases have already held that uninsured and

underinsured patients receiving charity care, i.e., uncompensated care, are not “eligible for

Medicaid” and may not be included in the DSH calculation. Opp’n at 32 (citing Adena, 527 F.3d

at 179; Owensboro Health, Inc. v. U.S. Dep’t of Health & Human Servs., 832 F.3d 615, 623 (6th

Cir. 2016); Ne. Hosp. Corp. v. Sebelius, 699 F. Supp. 2d 81, 86-87 (D.D.C. 2010)). As the

government puts it, “this case is identical to the charity care cases . . . except for the fact that the

uncompensated care subsidy is authorized under a Section 1115 demonstration project rather

than the Medicaid state plan.” Def.’s Reply at 11 (emphasis in original); see also Opp’n at 11

n.6 (“Functionally, the Florida LIP fund is equivalent to an additional pool of money available

for [State-plan uncompensated care] payments made to hospitals.”). 15

                The Court agrees that “patients who obtain charity care” are not “eligible for

medical assistance under a State plan approved under [Medicaid]” and cannot be included in the

DSH calculation. See Adena, 527 F.3d at 179. But the government’s description of the case law

provides the critical distinction: section 412.106(b)(4)(i) instructs that patients are “deemed

eligible for Medicaid” if they are “eligible for inpatient hospital services under an approved State

Medicaid plan or a waiver authorized under section 1115(a)(2).” 42 C.F.R. § 412.106(b)(4)(i)


15
   States also receive capped federal allotments under traditional Medicaid, which they can use to
reimburse hospitals for uncompensated care to low-income patients as part of their own
Medicaid DSH adjustment. See 42 U.S.C. § 1396r-4. Unlike the LIP, a state’s uncompensated
care and Medicaid DSH programs are approved as part of a traditional State plan approved under
Title XIX. See Adena, 527 F.3d at 179. Interestingly, during the relevant time periods, Florida
received both LIP funding and a Medicaid DSH allotment. See Report of the Low Income Pool
(LIP) Cost Limit Work Group (Feb. 20, 2006) at AR568.

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(emphasis added). In each of the cases cited by the government, the health care providers argued

that their patients were eligible for inpatient hospital services under an approved State Medicaid

plan, not under a demonstration project. See, e.g., Adena, 527 F.3d at 178 (“It is clear . . . that

under Ohio law HCAP patients do not receive care pursuant to the Medicaid plan.”); Owensboro

Health, 832 F.3d at 620 (“KHCP patient days can be rationally distinguished from § 1115 patient

days based on the fact that statutes treat the two groups differently and on the fact that the federal

government has control over § 1115 projects but not over KHCP.”); Ne. Hosp. Corp., 699 F.

Supp. at 90 (“[T]he treatment these charity care patients receive is not provided ‘under a State

[Medicaid] plan.’” (internal quotes omitted)). So, the only question before those courts was

whether uncompensated care fell within the ambit of a State plan approved under Medicaid;

plainly it did not. However, those courts did not address how uncompensated care should be

treated when authorized and funded by a demonstration project. Cf. Verdant Health Comm’n v.

Hargan, 708 Fed. App’x 459, 460 (9th Cir. 2018) (finding patients who receive uncompensated

care through traditional State plans are “legally distinct from § 1115 expansion populations, even

if they share certain characteristics”); Forrest Gen. Hosp., 2019 WL 2417409, at *11 (including

uncompensated care patient days authorized by a demonstration project in the DSH calculation).

The government admits the distinction and then, by sleight of hand, ignores it. The attempt to

persuade fails.

                  7. The Secretary has already exercised his discretion to include LIP patients in
                     the DSH calculation

                  Finally, the government suggests that the Secretary merely exercised his inherent

authority to exclude LIP patient days from the DSH calculation, a point not relied upon by the

Board and seemingly invented for this litigation. The Secretary may have such discretion if

reasonably exercised and explained. See Cookeville, 531 F.3d at 848 (“Plausibly, the ‘to the


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extent’ language is a grant of discretion to the Secretary to determine which costs or how much

of the costs are to be treated as expenditures.”). But such discretion must be exercised

“prospectively,” see id. at 848, not after a demonstration project has already been fully approved

and implemented and the bill comes due. See Forrest Gen. Hosp., 2019 WL 2417409, at *10

(“Once the Secretary authorizes a demonstration project, no take-backs.”).

               On this record, the government cannot reasonably argue that the Secretary has

exercised such discretion vis-à-vis the Florida demonstration project. While the Secretary had

multiple opportunities to disapprove Florida’s demonstration project, to disapprove the LIP, to

negotiate different provisions and definitions in the Special Terms and Conditions, and to

disapprove the Reimbursement and Funding Methodology guiding implementation of the LIP, he

did none of those things. Instead, notwithstanding any administrative complications highlighted

by the Board, at each of those stages the Secretary made obvious that he intended to provide

medical care to Florida’s underinsured and uninsured patients—however poorly that group might

be defined—by reimbursing hospitals for uncompensated care with matching Medicaid funds

through a demonstration project. See Letter from HHS Secretary Michael O. Leavitt to Governor

Jeb Bush Approving Florida’s Section 1115 Waiver (Oct. 19, 2005) at AR899 (“My Department

looks forward to working with your staff as Florida implements . . . a Low Income Pool to

provide services to uninsured individuals.”). The Secretary’s § 1115 waiver included no caveats

as to the Medicare DSH adjustment, even though the demonstration project had natural

consequences for such hospital funding. The government’s briefs argue to the contrary without

explanation of or regard to the record evidence.




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                                   IV.    CONCLUSION

               Plaintiffs’ Motion for Summary Judgment, Dkt. 18, will be granted and

Defendant’s Cross-Motion for Summary Judgment, Dkt. 19, will be denied. The Court will

vacate the Board’s decision and will remand this case for further proceedings consistent with this

Opinion. A memorializing Order accompanies this Opinion.



Date: July 23, 2019
                                                    ROSEMARY M. COLLYER
                                                    United States District Judge




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