New LifeCare Hospitals v. Xavier Becerra, 7f4th1215

Background

Medicare pays providers for services but leaves beneficiaries responsible for deductibles and coinsurance; Medicaid may cover those amounts for "dual-eligible" patients.
CMS permits Medicare reimbursement of "bad debts" (unpaid deductibles/coinsurance) only after providers make reasonable collection efforts; CMS's Provider Reimbursement Manual and a 2004 joint memorandum (JSM) explain the "must-bill" policy requiring providers to bill Medicaid and obtain a remittance advice (RA) documenting refusal before seeking Medicare bad-debt reimbursement.
In April 2008 four long-term care hospitals (not enrolled in Medicaid) had over $3 million in bad-debt claims denied by CMS contractors for failing to provide RAs; contractors had sometimes reimbursed similar claims earlier without RAs.
The PRRB issued mixed rulings; the CMS Administrator reversed and denied all claims, finding no evidence of a 2008 change in CMS policy and concluding states are obligated to permit limited enrollment/processing for dual-eligible billing.
The district court granted summary judgment to the Secretary; the hospitals appealed, arguing (inter alia) CMS abruptly began enforcing the RA requirement in 2008—violating the Medicare Act, the APA, and the 1987 Bad Debt Moratorium.
The D.C. Circuit affirmed, holding the Administrator’s factual findings were supported by substantial evidence and the agency action was not arbitrary and capricious; the court also declined to reach the Moratorium question because the hospitals failed to preserve it administratively.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether CMS effectuated a new interpretive rule in 2008 (triggering notice-and-comment)	CMS abruptly began enforcing the RA/must-bill requirement in April 2008, so a new interpretive rule was imposed without notice-and-comment	The 2004 JSM and PRM already set the must-bill/RA requirement; contractor auditing lapses do not equal a policy change	No change shown; Administrator’s finding that CMS policy predated 2008 was supported by substantial evidence; no notice-and-comment violation found
Whether the hospitals may press a Bad Debt Moratorium claim on judicial review	The RA requirement violates the 1987 Bad Debt Moratorium and should be adjudicated	Hospitals waived the Moratorium claim by not raising it before the CMS Administrator	Waived: courts need not reach Moratorium issue because hospitals failed to exhaust/preserve it administratively
Whether the Administrator acted arbitrarily and capriciously in denying reimbursement (e.g., ignoring states’ enrollment barriers and prior contractor practice)	Denial was arbitrary: hospitals could not enroll or obtain RAs; CMS changed past practice and relied on inconsistent contractor enforcement	Administrator considered these arguments, found prior contractor reimbursements were audit errors, and explained why states could process dual-eligible billing or be sued	Not arbitrary or capricious; agency adequately addressed the record and rationale is rationally connected to conclusions
Whether denial violates Medicare’s anti–cost-shifting principle or impermissibly coerces Medicaid enrollment	Denying bad-debt reimbursement shifts Medicare costs or effectively forces voluntary Medicaid enrollment	Medicare and Medicaid participation are voluntary; reimbursement is conditioned on complying with statutory/regulatory requirements and furnishing requested information	Denial does not contravene anti–cost-shifting; conditions on reimbursement (including documentation rules) are permissible

Key Cases Cited

Grossmont Hosp. Corp. v. Burwell, 797 F.3d 1079 (D.C. Cir. 2015) (context on bad-debt policy and Moratorium)
Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (arbitrary-and-capricious standard)
Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019) (Medicare Act does not incorporate APA’s interpretive-rule exception to notice-and-comment)
FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (principles for agency changes in policy and reasoned explanation)
CTS Corp. v. EPA, 759 F.3d 52 (D.C. Cir. 2014) (review in APA cases limited to the administrative record presented to the agency)