Grant Medical Center v. Hargan, 875 F.3d 701

Background

Medicare’s Inpatient Prospective Payment System reimburses hospitals using formulas that include IME and DSH adjustments, both of which depend in part on a hospital’s inpatient bed count.
Pre-October 1, 2003 regulation (42 C.F.R. § 412.105(b)) specified certain exclusions from bed counts but did not expressly mention “swing beds” or “observation beds”; CMS historically excluded those beds in practice.
The Sixth Circuit in Clark Regional Medical Center held that the regulation’s text did not permit excluding swing and observation beds, prompting CMS to revise the regulation prospectively (effective Oct. 1, 2003) to expressly exclude those beds.
For pre-October 2003 discharges, CMS issued JSM-109 and applied the Sixth Circuit’s Clark interpretation to hospitals within the Sixth Circuit while maintaining its prior policy elsewhere; the Administrator affirmed that approach in St. Vincent.
Ten Ohio hospitals (located in the Sixth Circuit) challenged the PRRB’s decision applying Clark to their pre-2003 claims; the PRRB upheld the application as controlled by Sixth Circuit precedent, the Administrator declined review, the district court granted summary judgment for CMS, and this appeal followed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether PRRB should have applied the revised (post-2003) regulation to pre-2003 discharges	Hospitals: PRRB should apply the regulation in effect when it decided the case (retroactive application)	CMS: Revised regulation is explicitly prospective; agencies and statutes presumptively operate prospectively	Held: CMS reasonably applied the pre-2003 rule to pre-2003 discharges; prospective effective date controls
Whether PRRB’s reliance on Sixth Circuit Clark (acquiescence) was required or arbitrary	Hospitals: PRRB wrongly treated Clark as binding and had to apply its own circuit’s independent interpretation	CMS: Agency permissibly chose to acquiesce within the Sixth Circuit for orderly administration and uniform treatment	Held: CMS had discretion and provided a reasoned basis for acquiescence; not arbitrary or capricious
Whether treating providers differently by location was arbitrary or violated equal protection principles	Hospitals: Similar providers should be treated alike regardless of location; differential treatment lacks rational basis	CMS: Different circuit law gives a legitimate, rational reason to treat providers by forum jurisdiction	Held: Geographic distinction justified by intracircuit precedent and administrative constraints; not arbitrary
Whether CMS’s acquiescence could be sustained if Sixth Circuit’s interpretation was unreasonable	Hospitals: Agency may not rely on an unreasonable or unlawful sister-circuit interpretation	CMS: Believed Clark permissible given regulatory ambiguity and then promptly revised the rule prospectively	Held: Clark’s interpretation was a permissible reading of ambiguous text; CMS’s acquiescence therefore lawful

Key Cases Cited

Thomas Jefferson University v. Shalala, 512 U.S. 504 (discusses complexity of Medicare reimbursement regulation)
Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (presumption against retroactive application of statutes/rules)
Clark Regional Medical Center v. HHS, 314 F.3d 241 (Sixth Circuit decision interpreting bed-count regulation to include swing/observation beds)
Johnson v. U.S. Railroad Retirement Board, 969 F.2d 1082 (agency nonacquiescence and intracircuit considerations)
Heartland Plymouth Court MI, LLC v. NLRB, 838 F.3d 16 (requirements and limits for intracircuit nonacquiescence)
Holland v. Nat’l Mining Ass’n, 309 F.3d 808 (agency cannot rely on an unlawful interpretation simply because a court adopted it)
Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695 (review of agency choice among reasonable alternatives)