United States Court of Appeals, District of Columbia Circuit
October 3, 2017
from the United States District Court for the District of
Columbia (No. 1:14-cv-01269)
Carleen M. Zubrzycki, Attorney, U.S. Department of Justice,
argued the cause for appellant. With her on the briefs were
Michael S. Raab, Attorney, Janice L. Hoffman, Associate
General Counsel, U.S. Department of Health & Human
Services, and Susan Maxson Lyons, Deputy Associate General
Counsel for Litigation. R. Craig Lawrence, Assistant U.S.
Attorney, entered an appearance.
Douglas H. Hallward-Driemeier argued the cause for appellee.
With him on the brief was Deborah K. Gardner.
Before: Rogers, Kavanaugh, and Wilkins, Circuit Judges.
Rogers, Circuit Judge.
issue on appeal concerns Medicare reimbursement owed to the
Dana-Farber Cancer Institute, Inc. for a tax that it paid
monthly to the Commonwealth of Massachusetts, the receipts of
which Massachusetts used to compensate Dana-Farber for
services provided to uninsured, low-income individuals. The
Provider Reimbursement Review Board in the U.S. Department of
Health and Human Services determined that by statute and
regulation Dana-Farber was entitled to reimbursement only for
the net of Medicare's share of the tax and compensation
Dana-Farber received from Massachusetts. Dana-Farber
appealed, and the district court granted it partial summary
judgment, agreeing that Dana-Farber was entitled to full
reimbursement of Medicare's share of the tax paid and
vacating the Board's decision. The Secretary of Health
and Human Services appeals, and for the following reasons, we
is a federal insurance program that compensates hospitals for
certain healthcare services provided to eligible patients. 42
U.S.C. § 1395 et seq. Eligible patients must be
at least 65 years of age or suffering from disabilities.
Id. § 1395c. The Secretary is authorized to
award Medicare compensation only for "reasonable costs,
" id. § 1395f(l), which Congress
has determined is the "cost actually incurred, "
id. § 1395x(v)(1)(A). The Secretary is also to
establish methods for determining "reasonable
costs" so "the necessary costs of efficiently
delivering covered services to individuals covered by
[Medicare] will not be borne by individuals not so covered,
and the costs with respect to individuals not so covered will
not be borne by [Medicare.]" Id. The Secretary,
acting through the Centers for Medicare and Medicaid Services
("CMS"), 42 U.S.C. § 1395b-9(a)(1), (3), has
by regulation defined "reasonable costs" as
"all necessary and proper costs incurred in furnishing
the [Medicare] services, " 42 C.F.R. § 413.9(a).
"All discounts, allowances, and refunds of expenses are
reductions in the cost of goods or services purchased and are
not income." Id. § 413.98(c). Thus,
"refunds of previous expense payments are clearly
reductions in costs and must be reflected in the
determination of allowable costs." Id. §
1985, Massachusetts has levied a tax on acute care hospitals
based upon each hospital's share of private-sector care
provided. 1985 Mass. Acts 855. CMS approved the tax
("Hospital Tax") as a permissible means for
generating revenue to fund Medicaid payments; the tax is
uniformly imposed, broadly based, and does not contain a
"hold harmless" feature, 42 U.S.C. §
1396b(w)(1)(A)(ii), (iii), (4); 42 C.F.R. § 433.68(b),
(f). Revenue from the Hospital Tax is deposited into a trust
fund ("Fund"), which is also funded by State
appropriations and private insurance companies. The Fund is
used to reimburse hospitals for care provided to low-income
individuals under Medicaid, as well as to compensate medical
care organizations and experimental programs supporting
scheme administered by Massachusetts, acute care hospitals
are notified monthly of their estimated Hospital Tax
liabilities and Fund payments, if any. A Fund payment is
deposited into the hospital's designated bank account.
Next, the hospital deposits its estimated tax liability minus
the anticipated Fund payment into the same account - a net
amount. Finally, Massachusetts collects the entire amount of
money in the hospital's bank account, which is the sum of
the deposited Fund payment and tax liability.
parties agree that the Hospital Tax is an allowable cost
under Medicare. From fiscal years 2004 to 2008, Dana-Farber
incurred and paid a total of $23, 402, 239 in Hospital Tax
liability. Dana-Farber also received Fund payments during
each fiscal year, totaling $9, 001, 366. Dana-Farber then
sought Medicare reimbursement for the full amount of Hospital
Tax assessment attributable to Medicare. A Medicare
intermediary ruled Dana-Farber was entitled only to the net
of the Hospital Tax assessment less the Fund payments
received in each fiscal year. For example, in fiscal year
2007 Dana-Farber paid $5, 245, 830 in Hospital Tax liability
and received $2, 479, 708 in Fund payments, so the
intermediary determined Dana-Farber actually incurred only
the net of these two amounts, $2, 766, 122.
consolidated its challenges to the intermediary's
decisions and appealed to the Provider Reimbursement Review
Board. See 42 U.S.C. § 1395oo; 42 C.F.R. §
405.1845. The Board affirmed the intermediary's
decisions, except for a mathematical error not relevant to
this appeal. The Board determined that the statutory
directive to reimburse providers only for "reasonable
cost[s] . . . actually incurred, " 42 U.S.C. §
1395x(v)(1)(A), and the implementing regulations, 42 C.F.R.
§§ 413.9, 413.98, meant that Dana-Farber was
entitled to reimbursement only for the net amount of the
Hospital Tax it actually paid. Further, the Board concluded
that, under 42 U.S.C. § 1395x(v)(1)(A) and 42 C.F.R.
§ 413.9, "the uncompensated care payments act
as a refund to reduce cost (i.e., the
Tax)" and that this interpretation was consistent with
42 C.F.R. § 413.98 and the Provider Reimbursement
Manual, pub. 15-1, pt. 1 §§ 800, 804. Dana
Farber Cancer Inst., 2014 WL 11127854, at *10 (May 28,
2014) (emphasis added). When the Administrator of CMS
declined to review the Board's decision, and the
Secretary took no action to revise or reverse it, the Board
decision became final. 42 U.S.C. § 1395oo(f)(1); 42
C.F.R. § 405.1877(b)(2).
appealed, arguing in the district court that the decision to
offset the Fund payments from the gross amount of
Dana-Farber's Hospital Tax was arbitrary and capricious
under the Administrative Procedure Act ("APA"), 5
U.S.C. §§ 701-06. The parties filed cross motions
for summary judgment, and the district court partially
granted Dana-Farber's motion. The district court reasoned
that under a "plain reading" of the regulation, a
refund has a "temporal and substantive
relationship" such that "the amount paid back must
be for a 'previous expense payment' to reduce the
'related expense.'" Dana-Farber Cancer Inst.
v. Burwell, 216 F.Supp.3d 49, 58-59 (D.D.C. 2016)
(quoting 42 C.F.R. § 413.98(a)). Finding the Fund
payments were made to reduce Dana-Farber's costs of
providing care to under- and uninsured patients, and not to
reduce the expense of the Hospital Tax, the district court
vacated the Board's decision. Id. ...