`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF COLUMBIA
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`PALOMAR MEDICAL CENTER
`2185 Citracado Parkway
`Escondido, CA 92029
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`PROVIDENCE HOLY CROSS MEDICAL CENTER
`15031 Rinaldi Street
`Mission Hills, CA 91345
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`PROVIDENCE SAINT JOSEPH MEDICAL CENTER
`501 South Buena Vista Street
`Burbank, CA 91505
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`PROVIDENCE LITTLE COMPANY OF MARY
`MEDICAL CENTER
`4101 Torrance Boulevard
`Torrance, CA 90503
`
`CPMC MISSION BERNAL CAMPUS
`3555 Cesar Chavez Street
`San Francisco, CA 94110
`
`SUTTER MEDICAL CENTER OF SANTA ROSA
`30 Mark West Springs Road
`Santa Rosa, CA 95403
`
`Case No.
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`KUAKINI MEDICAL CENTER
`347 North Kuakini Street
`Honolulu, HI 96817
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`ADVENTIST HEALTH SIMI VALLEY HOSPITAL
`2975 North Sycamore Drive
`Simi Valley, CA 93065
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`SOUTH SHORE UNIVERSITY HOSPITAL
`301 East Main Street
`Bay Shore, NY 11706
`
`THE UNIVERSITY OF CHICAGO
`MEDICAL CENTER
`5841 South Maryland Avenue
`Chicago, IL 60637
`
`7015736.7
`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 2 of 36
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`SSM HEALTH SAINT ANTHONY HOSPITAL
`1000 North Lee
`Oklahoma City, OK 73102,
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` Plaintiffs,
`
`v.
`
`XAVIER BECERRA, SECRETARY,
`UNITED STATES DEPARTMENT OF HEALTH
`AND HUMAN SERVICES
`200 Independence Avenue, S.W.
`Washington, D.C. 20201,
`
`Defendant.
`
`COMPLAINT FOR JUDICIAL REVIEW AND DECLARATORY AND INJUCTIVE
`RELIEF UNDER THE MEDICARE ACT
`
`NATUIRE OF ACTION
`
`1.
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`Plaintiffs Palomar Medical Center et al. (the “Hospitals”), by and through the un-
`
`dersigned legal counsel, challenge the Secretary of Health and Human Services’ (the “Secre-
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`tary”) computation of the Medicare disproportionate share hospital (“DSH”) adjustment relating
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`to inpatients enrolled in a Medicare Advantage plan under Part C of the Medicare Act (some-
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`times referred to here as the “DSH Part C Policy”). The Hospitals filed jurisdictionally proper
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`appeals challenging the DSH Part C Policy with the Provider Reimbursement Review Board
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`(“Board” or “PRRB”) fully in compliance with the governing statute, 42 U.S.C. § 1395oo(a).
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`The Secretary seeks to thwart this appeal. First, the Secretary persists in applying the DSH Part
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`C Policy although the Court of Appeals and the Supreme Court have invalidated it. Second,
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`through unauthorized administrative action based on a mere proposed rule the Secretary deprives
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`the Hospitals of the statutory appeal rights to which they are entitled The Court should find this
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 3 of 36
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`action prototypically “arbitrary, capricious, an abuse of discretion, or otherwise not in accord-
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`ance with law.” 5 U.S.C. §706(2)(A).
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`2.
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`At issue is Medicare payment for fiscal years ended 12/31/1999 for all but one of
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`the Hospitals (SSM Saint Anthony Hospital which appeals its fiscal year ended 12/31/2006)).
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`The Hospitals’ challenge to the DSH Part C Policy is definitively supported by decisions of the
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`Court of Appeals and the Supreme Court. Specifically, in Northeast Hosp. Corp. v. Sebelius, 657
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`F.3d 1, 16–17 (D.C. Cir. 2011) the Secretary attempted to apply its DSH Part C Policy through a
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`retroactive rule change for cost years prior to the October 1, 2004 effective date of the rule. The
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`Court of Appeals found that the retroactive application to periods prior to October 1, 2004 vio-
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`lated the Supreme Court’s longstanding decision in Bowen v. Georgetown University Hospital,
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`488 U.S. 204, 208 (1988). 657 F.3d at 16. The Court held that “the Secretary’s present interpreta-
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`tion, which marks a substantive departure from his prior practice of excluding [Part C] days from
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`the Medicare fraction, may not be retroactively applied” to the fiscal years at issue. Id. at 17.1
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`See also Allina Health Services v. Sebelius, 746 F.3d 1102, 1105 (D.C. Cir. 2014) (“Allina I”)
`
`(vacating 2004 rule as not a logical outgrowth of proposed rule); Allina Health Servs. v. Price,
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`863 F.3d 937, 943–44 (D.C. Cir. 2017) (“Allina II”) (agency required to conduct notice-and-
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`comment rulemaking before the policy of the 2004 vacated rule can take effect); Azar v. Allina
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`Health Servs., 139 S. Ct. 1804 (2019) (affirming Allina II).
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`1 TDL-1239, which was issued following the Northeast Hosp. Corp. decision, instructed contrac-
`tors to “include any disallowed patient days attributable to patients who were enrolled in a Medi-
`care Part C Plan and also eligible for Medicaid for discharges occurring on or after January 1, 1999
`through September 30, 2004 in the Medicaid fraction” of the DSH calculation. This instruction
`applies to the Hospitals’ properly filed appeals. Id. at 1–2.
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 4 of 36
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`3.
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`Apparently undaunted by these judicial decisions, the Secretary, through the Cen-
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`ters for Medicare & Medicaid Services (“CMS”) continues to apply the DSH Part C Policy adopt-
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`ed in the now-vacated 2004 rule. The Court should find that the application of the DSH Part C
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`Policy unlawful because it is procedurally invalid, as the Court of Appeals has now twice ruled
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`(and as the Supreme Court has affirmed), fails any test of reasoned decision-making, and is incon-
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`sistent with congressional intent in adopting the Medicare DSH statute.
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`4.
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`As part of its apparent “denial” of the Allina I and Allina II, on August 6, 2020
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`CMS published in the Federal Register a notice of proposed rulemaking announcing a proposal
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`to adopt retroactively for periods prior to October 1, 2013 (and even prior to the vacated 2004
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`rule) the same DSH Part C Policy previously vacated in Allina I and Allina II. 85 Fed. Reg.
`
`47,723 (the “Proposed Rule”). (Exhibit 3) The Proposed Rule posits that, due to the vacatur of
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`the 2004 rule, the agency has no rule governing the treatment of Part C days and must, under the
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`Supreme Court decision in Allina II requiring notice-and-comment rulemaking, engage in retro-
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`active rulemaking. Id. at 47,724. The Proposed Rule erroneously relies on two bases for its use of
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`retroactivity: (1) that retroactive rulemaking is necessary to comply with the statutory require-
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`ment to calculate Medicare DSH payments, and (2) that retroactive rulemaking is in the “public
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`interest” because, absent retroactive rulemaking, the agency “would be unable to calculate and
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`confirm proper DSH payments for the time periods before FY 2014 . . . .” Id. Remarkably, CMS
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`states in the preamble to the Proposed Rule “[w]e do not expect this proposal to have an effect on
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`payments as payments previously made reflect the proposed policy.” Id. at 47726.
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`5.
`
`On August 17, 2020 CMS then issued CMS Ruling 1739-R (the “Ruling”) (Ex-
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`hibit 4), purporting to deprive the PRRB of jurisdiction over any pending jurisdictionally proper
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`administrative appeals “regarding the treatment of patient days associated with patients enrolled
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 5 of 36
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`in [Part C] Medicare Advantage plans in the Medicare and Medicaid fractions of the dispropor-
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`tionate patient percentage” so that contractors can apply the result of the retroactive rulemaking
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`to those pending appeals once the new rule is in place. Ruling at 1-2. The purported authority
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`for the Ruling is merely the Proposed Rule. The Ruling addresses appeals of the “Part C day
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`DSH issue” for periods prior to October 1, 2013, including for periods prior to the enactment of
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`the 2004 rule. Id. at 7–8. The Ruling, which is “binding” and affects hospitals’ substantive Medi-
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`care payment and appeal rights, was not adopted through notice-and-comment rulemaking. See
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`id. at 1; see also 42 C.F.R. § 405.1867 (requiring the Board to comply with CMS rulings); id. §
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`401.108 (defining CMS ruling and explaining they are binding on agency adjudicators).
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`6.
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`Before taking any action on an appeal of the DSH Part C Policy, the Ruling re-
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`quires the Board to determine whether an appeal “satisfies the applicable jurisdictional and proce-
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`dural requirements of section 1878 of the [Medicare] Act, the Medicare regulations, and other
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`agency rules and guidance.” Ruling at 7. The Ruling generally provides for remand of jurisdic-
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`tionally proper appeals of the “Part C day DSH issue” pending at the Board back to the contrac-
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`tors that issued the payment determinations under appeal. Id. at 2, 7-8. Despite depriving the Hos-
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`pitals of the relief to which they are entitled, although the Proposed Rule has not been finalized,
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`and while CMS concedes that the Proposed Rule has no payment effect, the Ruling claims the
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`Proposed Rule “eliminates any actual case or controversy regarding the hospital’s previously cal-
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`culated SSI and Medicaid fractions and its DSH payment adjustment and thereby renders moot
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`each properly pending claim in a DSH appeal involving the issue resolved by the Supreme Court
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`in Allina . . . .” Id. at 8.
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 6 of 36
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`7.
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`The Hospitals filed a jurisdictionally proper appeal with the Board in compliance
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`with the Medicare Act, 42 U.S.C. § 1395oo(a), challenging their DSH determinations based on
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`the DSH Part C Policy.
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`8.
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`The Board remanded the Hospitals’ jurisdictionally proper appeals solely in reli-
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`ance on the Proposed Rule and the Ruling entirely in disregard to Northeast Hosp. Corp. (Ex-
`
`hibits 1 and 2).
`
`9.
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`The Hospitals seek judicial review of the final remand order issued by the Board.
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`The Board’s remand order, which states the PRRB’s finding that it possessed jurisdiction over
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`each Hospital’s appeal, are the final agency decisions of the Secretary for purposes of judicial
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`review because no further payment determination will be made upon remand. As noted, CMS
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`states in the preamble to the Proposed Rule “[w]e do not expect this proposal to have an effect on
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`payments as payments previously made reflect the proposed policy.” Id. at 47726. As the re-
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`mand simply confirms the very payment determinations that the Hospitals challenge, it consti-
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`tutes final payment determinations.
`
`a.
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`The Board’s remand decision must be set aside because, inter alia, the Ruling
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`unilaterally, arbitrarily, and otherwise unlawfully (a) declares the Hospitals’ long-pending juris-
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`dictionally-proper PRRB appeals moot, (b) remands them for recalculation of the DSH payments
`
`at issue using criteria that were set forth in a proposed notice-and-comment rule that purports to
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`have retroactive effect but that has not yet been finalized while, at the same time, prohibits reo-
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`pening, which is the action necessary to issue the recalculated payments, (c) declares that the
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`PRRB lacks jurisdiction over the appeals while, at the same time, requiring the PRRB to find that
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`it has jurisdiction before remanding the appeals and (d) is based solely on the purported authority
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`of the Proposed Rule. Further, there are no provisions in the Ruling that provide for review of
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`39095151.1
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`6
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 7 of 36
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`the final payment calculations, as required by Medicare’s statutory appeal provisions. Nor does
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`the Ruling establish any definitive time period for the contractors to act. Simply put, the Ruling
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`requires remands for recalculated payments that apparently will never be made, thus effectively
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`extinguishing the Hospitals’ statutory appeal rights for the payments at issue.
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`b.
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`Moreover, even if the Secretary issues the payment criteria to be used when mak-
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`ing the recalculated payments in a final rule, the remands required under the Ruling unlawfully
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`prejudice the Hospitals by limiting (if not depriving them entirely of) their statutory right under
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`42 U.S.C. §1395oo and other authorities to (a) challenge the effect of the finalized payment crite-
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`ria on the DSH payments at issue in the remanded appeals by prohibiting the issuance of recalcu-
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`lated DSH payments that the Hospitals could appeal to the PRRB, and (b) seek interest for their
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`incorrect DSH payments, some of which extend back more than 15 years (the fiscal periods at
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`issue all predate October 1, 2013, but some go back much further in time). The Ruling is also
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`unlawful procedurally because it was not adopted using notice-and-comment rulemaking, as re-
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`quired by statute, despite its substantive impact on the Hospitals’ Medicare payment rights, and
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`has an unlawful retroactive effect.
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`10.
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`But for the Proposed Rule and the Ruling, either at the Hospitals’ request or on its
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`own motion the Board would order expedited judicial review (“EJR”), 42 U.S.C. 1395oo(f)(1).
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`An EJR order requires a determination that the PRRB possesses jurisdiction and that it is bound
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`by statute, regulation or CMS ruling. Id. Both of those requirements is satisfied here. The
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`PRRB’s remand orders on their face evidence that the Hospitals filed jurisdictionally proper ap-
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`peals challenging the DSH Part C Policy. And, the PRRB is bound by the DSH Part C Policy,
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`which is set forth in a CMS regulation. It is, therefore, a certainty that the PRRB would order
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`EJR. Accordingly, the Court should assert its jurisdiction over and review the merits of the Hos-
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`39095151.1
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`7
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 8 of 36
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`pitals’ claims. Thus, the Court should find that each of their DSH determinations is invalid be-
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`cause it continues to apply the DSH Part C Days policy which has been invalidated by the Court
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`of Appeals and the Supreme Court, supra.
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`11.
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`Alternatively, because the Ruling is unlawful procedurally and substantively, the
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`Hospitals seek an order (a) setting aside the provisions of the Ruling that declare the Hospitals’
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`appeals to the PRRB moot and require the PRRB to remand their Allina II claims to the Secre-
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`tary’s contractors for recalculation of the Hospitals’ DSH payments, (b) reversing the PRRB’s
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`remand orders, and (c) instructing the PRRB to reinstate the Hospitals’ appeals.
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`12.
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`Because the Board’s remand order relies solely on the Ruling, which in turn relies
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`solely on the Proposed Rule, the Hospitals also seek judicial review of the legal validity of the
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`Proposed Rule. It is apparent that CMS believes that the Proposed Rule authorized it to take ac-
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`tion via the Ruling. Of course, justice mandates that the Hospitals should have the right to chal-
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`lenge, and that this Court should possess jurisdiction to review, such action. Under these novel
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`circumstances the Court should find that it possesses jurisdiction over the Proposed Rule and the
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`Court should find that it is invalid to the extent that it prejudices the Hospitals’ statutory appeal
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`rights.
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`JURISDICTION AND VENUE
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`13.
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`This Court has jurisdiction under 42 U.S.C. § 1395oo(f) (appeal of final Medicare
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`program agency decision) and 28 U.S.C. §§ 1331 (federal question) and 1361 (mandamus).
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`14.
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`Venue lies in this judicial district under 42 U.S.C. § 1395oo(f) and 28 U.S.C.
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`§1391.
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`PARTIES
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`15.
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`During the relevant periods, the Hospitals were qualified as Medicare-
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`participating, general acute-care hospital-providers under the federal Medicare program pursuant
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 9 of 36
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`to the Medicare Act. The Hospitals, Medicare provider numbers and cost reporting periods at
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`issue in this action are as follows:2
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`a.
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`b.
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`c.
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`d.
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`e.
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`f.
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`g.
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`h.
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`i.
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`j.
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`k.
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`Palomar Medical Center, Medicare Provider No. 05-0115, appeals fiscal year
`ended (“FYE”) 6/30/1999,
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`Providence Holy Cross Medical Center, Medicare Provider No. (05-0278), ap-
`peals FYE 12/31/1999,
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`Providence Saint Joseph Medical Center, Medicare Provider No. (05-0235), ap-
`peals FYE 12/31/1999,
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`Providence Little Company of Mary Medical Center, Medicare Provider No. (05-
`0353), appeals FYE 6/30/1999,
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`CPMC Mission Bernal Campus (formerly known as Saint Luke's Hospital), Med-
`icare Provider No. (05-0055), appeals FYE 6/30/1999,
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`Sutter Medical Center of Santa Rosa, Medicare Provider No. (05-0291), appeals
`FYE 6/30/1999,
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`Kuakini Medical Center, Medicare Provider No. (12-0007), appeals FYE
`6/30/1999,
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`Adventist Health Simi Valley Hospital, Medicare Provider No. (05-0236), appeals
`FYE 12/31/2000,
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`South Shore University Hospital (formerly known as Southside Hospital), Medi-
`care Provider No. (33-0043), appeals FYE 12/31/1999,
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`The University of Chicago Medical Center, Medicare Provider No. (14-0088),
`appeals FYE 6/30/1999,
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`SSM Health Saint Anthony Hospital, Medicare Provider No. (37-0037), appeals
`FYE 12/31/2006.
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`16.
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`The defendant is Xavier Becerra in his official capacity as Secretary of the United
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`States Department of Health and Human Services (“Secretary”), the federal agency that adminis-
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`2 The Hospitals, their Medicare provider numbers and the fiscal years on appeal are stated
`in the decisions of the PRRB attached as Exhibits 1 and 2 with the exception of Parkview
`Community Hospital and Victor Valley Global Medical Center which do not participate in this
`Complaint. In the event of any other discrepancy between this listing and Exhibits 1 and 2, the
`latter shall govern.
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 10 of 36
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`ters the Medicare program. References to the Secretary herein are meant to refer to him, to his
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`subordinates, and to his official predecessors or successors as the context requires.
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`17.
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`The Centers for Medicare & Medicaid Services (“CMS”) is the component of the
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`Secretary’s agency with responsibility for day-to-day operation and administration of the Medi-
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`care program. CMS was formerly known as the Health Care Financing Administration. Refer-
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`ences to CMS herein are meant to refer to the agency and its predecessors.
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`LEGAL AND REGULATORY BACKGROUND
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`Medicare DSH Payment
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`18.
`
`Part A of the Medicare Act covers “inpatient hospital services.” 42 U.S.C.
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`§ 1395d(a)(l). Since 1983, the Medicare program has paid most hospitals for the operating costs
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`of inpatient hospital services under the prospective payment system (“PPS”). 42 U.S.C.
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`§ 1395ww(d); 42 C.F.R. Part 412. Under PPS, Medicare pays predetermined, standardized
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`amounts per discharge, subject to certain payment adjustments. Id. One of the PPS payment ad-
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`justments is the DSH payment. See 42 U.S.C. § 1395ww(d)(5)(F); 42 C.F.R. § 412.106.
`
`19.
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`A hospital that serves a disproportionate share of low-income patients is entitled
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`to an upward percentage adjustment to the standard PPS rates per discharge. See 42 U.S.C.
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`§ 1395ww(d)(5)(F); see also 42 C.F.R. § 412.106. A hospital may qualify for a DSH adjustment
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`based on its “disproportionate patient percentage.” See 42 U.S.C. §§ 1395ww(d)(5)(F)(i)(I) and
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`(d)(5)(F)(v); 42 C.F.R. § 412.106(c)(1). The disproportionate patient percentage determines both
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`a hospital’s qualification for the DSH payment and the amount of the payment. See 42 U.S.C.
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`§§ 1395ww(d)(5)(F)(iv) and (vii)-(xiii); 42 C.F.R. § 412.106(d). The disproportionate patient
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`percentage is defined as the sum of two fractions expressed as percentages. 42 U.S.C.
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`§ 1395ww(d)(5)(F)(vi).
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 11 of 36
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`20.
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`The first fraction that is used to compute the DSH payment is commonly known
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`as the “Medicaid fraction.” The statute defines the Medicaid fraction as:
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`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 pa-
`tients who (for such days) were eligible for medical assistance under a
`State plan approved under [the Medicaid statute, title XIX of the Social
`Security Act], but who were not entitled to benefits under part A of [the
`Medicare statute, title XVIII of the Social Security Act], and the denomi-
`nator of which is the total number of the hospital’s patient days for such
`period.
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`42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (emphasis added). As reflected in the italicized language
`
`above, the numerator of the Medicaid fraction consists of days for patients who were both eligi-
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`ble for medical assistance under the Medicaid statute and “not entitled to benefits under part A”
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`of the Medicare statute.
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`21.
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`The other fraction that is used to compute the DSH payment is the “Medicare part
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`A/SSI fraction” or “SSI fraction.” The statute defines this fraction as:
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`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
`[the Medicare statute] and were entitled to supplemental security income
`benefits (excluding any State supplementation) . . . , 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 bene-
`fits under part A of [the Medicare statute]...
`
`42 U.S.C. § 1395ww(d)(5)(F)(vi)(I) (emphasis added). As the italicized language indicates, the
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`Medicare part A/SSI fraction consists solely of days for patients who were “entitled to benefits
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`under part A” of Medicare. The denominator includes all Medicare part A days, whereas the nu-
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`merator includes only those part A days for patients who are also entitled to social security in-
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`come (“SSI”) benefits under title XVI of the Social Security Act. The Medicare part A/SSI frac-
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`tion is computed for each federal fiscal year by CMS, and must be used to compute a hospital’s
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`39095151.1
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 12 of 36
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`DSH payment for the cost reporting period beginning in the federal fiscal year. 42 C.F.R. §§
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`412.106(b)(2)-(3).
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`Medicare Part C
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`22.
`
`Section 4001 of the Balanced Budget Act of 1997, Pub. Law No. 105-33, added a
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`new part C to the Medicare statute to establish a Medicare program that was originally called the
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`Medicare+Choice program and is now called Medicare Advantage.3 A Medicare beneficiary can
`
`elect to receive Medicare benefits either through the original fee-for-service program under Med-
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`icare parts A and B, or through enrollment in a Medicare Advantage plan under Medicare part C.
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`42 U.S.C. § 1395w-21(a)(1); 42 C.F.R. § 422.50; see also 63 Fed. Reg. 34,968, 34,968 (June 26,
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`1998) (“Under section 1851(a)(1), every individual entitled to Medicare Part A and enrolled un-
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`der Part B ... may elect to receive benefits through either the existing Medicare fee-for-service
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`program or a Part C M+C plan.”) (emphasis added).
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`23.
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`Prior to the 2004 rulemaking at issue, in which the agency attempted to adopt a
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`new policy on the treatment of part C days in the Medicare DSH payment calculation, “the Sec-
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`retary treated Part C patients as not entitled to benefits under Part A.” Allina I, 746 F.3d at 1106.
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`The pre-2004 regulation limited the Medicare part A/SSI fraction to Medicare patient days that
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`were covered, or paid, by Medicare part A and included other Medicare patient days (not cov-
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`ered under part A) in the numerator of the Medicaid fraction to the extent that those patients
`
`were also eligible for Medicaid. See 42 C.F.R. § 412.106(b)(2)(i) (2003); see also 42 C.F.R.
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`§ 409.3 (defining “covered” as services for which payment is authorized). As the Secretary ex-
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`plained when he adopted it, the pre-2004 regulation mandated that only “covered Medicare Part
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`A inpatient days” be included in the part A/SSI fraction. 51 Fed. Reg. 16,772, 16,788 (May 6,
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`3 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub.
`L. 108173), amended part C and renamed it.
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`39095151.1
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`12
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`Case 1:21-cv-01538-RDM Document 1 Filed 06/08/21 Page 13 of 36
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`1986); see also 51 Fed. Reg. 31,454, 31,460-61 (Sept. 3, 1986) (stating that limiting the Medi-
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`caid fraction to days where “the Medicaid program is the primary payor” was “consistent with”
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`the part A/SSI fraction being limited to “covered days”); Catholic Health Initiatives-Iowa Corp.
`
`v. Sebelius, 718 F.3d 914, 921 n.5 (D.C. Cir. 2013) (noting that the pre-2004 regulation unam-
`
`biguously limited the part A/SSI fraction to “covered Medicare Part A inpatient days”).
`
`24.
`
`Further, written guidance prior to 2004 repeatedly expressed the Secretary’s policy
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`that part C days, as days for which patients were not entitled to part A payment, were to be ex-
`
`cluded from the part A/SSI fraction. This guidance included instructions to hospitals and program
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`memoranda transmitting the part A/SSI fractions on an annual basis. See, e.g., Northeast Hosp.
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`Corp. v. Sebelius, 657 F.3d 1, 15 (D.C. Cir. 2011) (describing written guidance).
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`25.
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`The agency’s consistent policy and practice, before the adoption of the 2004 rule,
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`was to treat part C days as not part A days. Northeast Hosp. Corp., 657 F.3d at 16-17 (policy an-
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`nounced in 2004 “contradicts [Secretary’s] former practice of excluding M+C days from the
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`Medicare fraction”); Sw. Consulting DSH Medicare + Choice Days Grps. v. BlueCross
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`BlueShield Ass’n, PRRB Dec. No. 2010–D52, 2010 WL 4211391, at *12 (Sept. 30, 2010), re-
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`printed in MEDICARE & MEDICAID GUIDE (CCH) ¶ 82,679 (reviewing evidence that from
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`1999 to 2004, the Secretary “never count[ed] M+C days in the [Medicare] fraction except rarely,
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`and then by mistake”).
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`26.
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`In a 2003 proposed rule, the Secretary proposed “to clarify” his long-held position
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`that “once a beneficiary elects Medicare Part C, those patient days attributable to the beneficiary
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`should not be included in the Medicare fraction of the DSH patient percentage.” 68 Fed. Reg.
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`27,154, 27,208 (May 19, 2003). Further, the agency explained that “[t]hese days should be in-
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`cluded in the count of total patient days in the Medicaid fraction (the denominator), and the pa-
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`tient’s days for a [part C] beneficiary who is also eligible for Medicaid would be included in the
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`numerator of the Medicaid fraction.” Id. The Secretary explained that “once a beneficiary has
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`elected to join a Medicare Advantage plan, that beneficiary’s benefits are no longer administered
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`under Part A.” Id.
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`27.
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`In the preamble to a final rule adopted in 2004, however, the Secretary reversed
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`course and “abruptly announced a change in policy.” Allina Health Servs. v. Sebelius,
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`904 F. Supp. 2d 75, 78 (D.D.C. 2012), aff’d, 746 F.3d at 1107-10. That 2004 rule announced that
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`the Secretary would “adopt a policy” to include part C days in the Medicare part A/SSI fraction
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`and exclude them from the Medicaid fraction effective October 1, 2004. 69 Fed. Reg. 48,916,
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`49,099 (Aug. 11, 2004); see also Northeast Hosp.Corp., 657 F.3d at 16 (“[I]n the 2004 rulemak-
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`ing [the Secretary] announced that she was ‘adopting a policy’ of counting [part C] days in the
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`Medicare fraction”).
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`28.
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`In the 2004 final rule, the Secretary amended the regulation text by deleting the
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`word “covered.” 69 Fed. Reg. at 49,246. When CMS initially transmitted the part A/SSI frac-
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`tions for federal fiscal years 2005 and 2006, however, those fractions continued to exclude part C
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`days. See CMS Pub. 100-04, Transmittal 1091 (Oct. 27, 2006), reprinted in MEDICARE &
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`MEDICAID GUIDE (CCH) ¶ 156,277 (transmitting federal fiscal year 2005 part A/SSI fractions
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`and specifying that the fractions include only “covered Medicare days,” and referring to the ratio
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`of SSI days and “covered Medicare days” as “the ratio of Medicare Part A patient days attributa-
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`ble to SSI recipients”); CMS Pub. 100-04, Transmittal 1396 (Dec. 14, 2007), reprinted in id. ¶
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`156,930 (same for federal fiscal year 2006 fractions).
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`29.
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`In July 2007, CMS issued a revision to a Medicare program manual, with a “pur-
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`ported ‘effective date’ of October 1, 2006,” that permitted hospitals to submit the data necessary
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`to implement the new policy regarding part C days. Allina Health Servs., 904 F. Supp. 2d at 82.
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`Thereafter, in August 2007, the Secretary further amended the text of the DSH regulation gov-
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`erning part C days without affording hospitals prior notice or opportunity for comment. 72 Fed.
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`Reg. 47,130, 47,384 (Aug. 22, 2007). Following the amendments in 2004 and 2007, the regula-
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`tion provided that the part A/SSI fraction includes all patient days (not just “covered” days) for
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`“patients entitled to Medicare Part A (or Medicare Advantage (Part C)).” Id. at 47,411 (amend-
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`ing §§ 412.106(b)(2)(i)(B) and (iii)(B)) (emphasis added). The amendment of the regulation was
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`made effective October 1, 2007, the beginning of federal fiscal year 2008. Id. at 47,130; see also
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`Allina Health Servs., 904 F. Supp. 2d at 82.
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`The Northeast Hosp. Corp. Litigation
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`30.
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`In Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 16–17 (D.C. Cir. 2011) the Sec-
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`retary attempted to apply its DSH Part C Policy through a retroactive rule change for cost years
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`prior to the October 1, 2004 effective date of the rule. The Court of Appeals found that the retro-
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`active application to periods prior to October 1, 2004 violated the Supreme Court’s longstanding
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`decision in Bowen v. Georgetown University Hospital, 488 U.S. 204, 208 (1988). 657 F.3d at 16.
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`The Court held that “the Secretary’s present interpretation, which marks a substantive departure
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`from his prior practice of excluding [Part C] days from the Medicare fraction, may not be retro-
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`actively applied” to the fiscal years at issue. Id. As noted, at issue is Medicare payment for fiscal
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`years ended 12/31/1999 for all but one of the Hospitals (SSM Saint Anthony Hospital which ap-
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`peals its fiscal year ended 12/31/2006)).
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`The Allina I Litigation
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`39095151.1
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`31.
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`In July 2009, the Secretary first published part A/SSI fractions for hospital cost
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`reporting periods beginning in federal fiscal year 2007. These fractions for the first time included
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`part C days.
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`32.
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`In Allina I, hospitals challenged the applicability of the 2004 rule on the treatment
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`of part C days in the DSH payment calculation for cost reporting periods beginning in federal fis-
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`cal year 2007, contending, among other things, that the abrupt reversal in policy did not meet no-
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`tice and comment requirements and was not the product of reasoned decision making because the
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`agency failed to acknowledge or explain its departure from past policy.
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`33.
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`This Court agreed and held that the policy announced in the 2004 final rule re-
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`garding part C days was not the logical outgrowth of the 2003 proposed rule. 904 F. Supp. 2d at
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`89-92. This Court also held that the “cursory explanation in the 2004 Final Rule failed to meet
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`the requirements of the APA” because “the Secretary [] fail[ed] to acknowledge her
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`‘about-face,’” and “her reasoning for the change was brief and unconvincing.” Id. at 93 (quoting
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`Northeast Hosp. Corp., 657 F.3d at 15). Accordingly, this Court concluded that “[t]he portion of
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`the 2004 Final Rule ... that announced the Secretary’s interpretation of the Medicare Dispropor-
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`tionate Share Hospital Fraction, as codified in 2007 at 42 C.F.R. § 412.106(b)(2) and as further
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`modified in 2010, will be vacated, and the case will be remanded to the Secretary for further ac-
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`tion consistent with this Opinion.” Id. at 95.
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`34.
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`On April 1, 2014, the D.C. Circuit affirmed this Court’s Allina I decision on the
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`merits, “agree[ing] with the district court that the Secretary’s final rule was not a logical out-
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`growth of the proposed rule.” 746 F.3d at 1109. Because this procedural failure was a sufficient
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`basis to vacate the rule, the D.C. Circuit did not reach the arbitrariness of the Secretary’s expla-
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`nation. Id. at 1111.
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`35. With respect to remedy, the D.C. Circuit held that this Court “correctly concluded
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`that vacatur was warranted.” Id. The court reversed, however, a part of this Court’s order that
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`required “the Secretary to recalculate the hospitals’ reimbursements ‘without using the interpre-
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`tation set forth in the 2004 Final Rule.’” Id. (quoting the Post-Judgment Order). The Court of
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`Appeals instead remanded, n