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Dana-Farber Cancer Institute v. Hargan

United States Court of Appeals, District of Columbia Circuit

December 22, 2017

Dana-Farber Cancer Institute, Appellee
v.
Eric D. Hargan, Acting Secretary, United States Department of Health and Human Services, Appellant

          Argued October 3, 2017

         Appeal 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.

          OPINION

          Rogers, Circuit Judge.

         The 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 reverse.

         I.

         Medicare 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. § 413.98(d)(2).

         Since 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 low-income individuals.

         In the 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.

         The 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.

         Dana-Farber 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).

         Dana-Farber 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. ...


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