958 F.3d 873
9th Cir.2020Background
- The DSH (disproportionate share hospital) adjustment increases Medicare inpatient reimbursements for hospitals that serve many low‑income patients; it is calculated using a Medicare fraction and a Medicaid fraction under 42 U.S.C. § 1395ww(d)(5)(F)(vi).
- Before 2005, CMS’s regulation (42 C.F.R. § 412.106(b)(2)(i)) included only “covered” Medicare patient days in the Medicare fraction, so dual‑eligible patients whose Medicare Part A coverage was exhausted were not counted in either fraction.
- The 2005 Rule removed the word “covered” from § 412.106(b)(2)(i), causing CMS to include dual‑eligible exhausted coverage days in the Medicare fraction even when Medicare did not pay for those days.
- Empire Health Foundation challenged the 2005 Rule in district court, arguing both procedural APA defects (inadequate notice‑and‑comment because of a mistaken 2003 Notice and a late web correction) and substantive invalidity (conflict with the Ninth Circuit’s prior decision in Legacy Emanuel).
- The district court vacated the 2005 Rule on procedural grounds but upheld it substantively; the Ninth Circuit reversed the procedural holding (finding notice adequate) but affirmed vacatur on different grounds, holding the 2005 Rule substantively invalid because it conflicts with Legacy Emanuel and Brand X.
- The Ninth Circuit vacated the 2005 Rule, reinstated the prior regulation reading that counted only “covered” days, and remanded to the district court for further remand to the PRRB on remaining issues.
Issues
| Issue | Plaintiff's Argument (Empire) | Defendant's Argument (HHS/CMS) | Held |
|---|---|---|---|
| Procedural: Was the 2005 Rule adopted with adequate notice‑and‑comment? | The 2003 Notice misstated the status quo and CMS’s late web correction required a new comment period. | The proposal and later notice reasonably apprised commenters; the final rule was a "logical outgrowth," so no new comment period was required. | Court: Notice adequate; rulemaking met APA notice‑and‑comment (reversing district court’s procedural vacatur). |
| Substantive: Does the 2005 Rule’s interpretation of “entitled to [Medicare]” conflict with statute/precedent under Chevron and Brand X? | Legacy Emanuel unambiguously interpreted “entitled” to mean an actual entitlement/right to payment, so including exhausted‑coverage days conflicts with that clear statutory meaning. | Legacy Emanuel didn’t decide the Medicare‑fraction meaning of “entitled”; other circuits upheld the 2005 Rule at Chevron step two; agency interpretation is permissible. | Court: Legacy Emanuel construed "entitled" at Chevron step one; Brand X requires following that unambiguous precedent; the 2005 Rule conflicts with controlling Ninth Circuit law and is substantively invalid. |
| Remedy/Relief: What is the appropriate relief and next steps? | Vacatur of the 2005 Rule and reinstatement of the prior regulation (count only "covered" days); remand to PRRB for remaining computations. | CMS sought to keep the 2005 Rule in force. | Court: Vacated the 2005 Rule, reinstated prior regulation language, and remanded to the district court with instructions to remand to the PRRB for unresolved issues. |
Key Cases Cited
- Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (a prior judicial construction of a statute that forecloses an agency interpretation binds the agency under the Chevron framework)
- Chevron U.S.A., Inc. v. Nat. Res. Def. Council, 467 U.S. 837 (1984) (two‑step framework for reviewing agency statutory interpretation)
- Legacy Emanuel Hosp. & Health Ctr. v. Shalala, 97 F.3d 1261 (9th Cir. 1996) (construing “entitled” versus “eligible” and interpreting “entitled to [Medicare]” as unambiguous)
- Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) (contrast on logical‑outgrowth/notice analysis where a final rule was not foreseeable from the notice)
- Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914 (D.C. Cir. 2013) (D.C. Circuit upheld the 2005 Rule under Chevron step two)
- Metro. Hosp. v. HHS, 712 F.3d 248 (6th Cir. 2013) (Sixth Circuit upheld the 2005 Rule at Chevron step two)
- Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007) (Supreme Court upheld a final rule as reasonably foreseeable from the proposal in a notice‑and‑comment challenge)
- Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003) (en banc) (panel courts are bound by prior circuit precedent)