Sentara Hospitals v. Azar, Civil Action No. 2020-3771

Background

Medicare reimburses 70% of qualifying hospital bad debt; PRM allowed hospitals to use their own "customary methods" to determine patient indigency pre-2020.
Sentara operates a charity-care program (uniform methods for Medicare and non-Medicare patients) and used Equifax credit reports (including three predictive healthcare scores) plus patient applications to decide indigency via two tracks: "Charity-by-Application" and "Charity-by-Model."
For cost years 2010–2013 Sentara sought bad-debt reimbursement; the MAC disallowed reimbursement alleging improper reliance on Equifax; the PRRB reversed most disallowances.
CMS issued a 2020 rule (prospectively effective) tightening verification requirements; shortly after, the CMS Administrator reversed the PRRB and disallowed Sentara’s claims, finding Sentara improperly outsourced determinations and failed to verify assets.
The District Court reviewed the Administrator’s decision under the APA on cross-motions for summary judgment and concluded Sentara complied with PRM requirements, granting Sentara relief.

Issues

Issue	Sentara's Argument	Azar/CMS's Argument	Held
Whether PRM §312(B) ("should take into account" assets) imposed a mandatory verification requirement pre-2020	"Should" is permissive; PRM allowed flexibility and did not mandate exhaustive verification	Agency historically treated §312(B) as mandatory; 2020 rule clarified preexisting requirement	Court did not need to decide textual debate; but noted "should" is permissive in prior cases and, in any event, found Sentara complied even if §312(B) were mandatory
Whether Sentara actually considered patients' assets, liabilities, income, and expenses as required	Equifax reports contain patient-specific mortgage, auto loans, collections, judgments, and income-predictor data; Sentara also collected applicant documentation and validated against Equifax	Equifax is an unverified predictive tool that may miss liquid investments and does not "verify" assets	Court held record shows Sentara analyzed actual assets/liabilities (via Equifax data plus applicant documentation) and complied with PRM §312(B); Administrator’s contrary finding lacks substantial evidence
Whether Sentara improperly outsourced indigency determinations in violation of PRM §312(A) (provider must determine indigence)	Sentara employees created the scoring/categories, reviewed Equifax data with other information, prepared applications, and managers approved/denied charity write-offs	Sentara merely segmented beneficiaries by Equifax scores and rubber-stamped third-party assessments	Court held Sentara made provider determinations using Equifax data as an input; it did not outsource the legal determination of indigency
Whether Sentara failed to document its method under PRM §312(D) because Equifax's model is proprietary/un-auditable	Sentara documented the method used (Equifax data plus internal procedures and managerial approvals) and included backup financial data when available	Contractor/Administrator said proprietary Equifax scoring was not auditable and thus documentation was inadequate	Court found Sentara provided adequate documentation of its method and that the agency’s reliance on the audibility argument was unsupported or not the agency’s operative rationale

Key Cases Cited

Baptist Healthcare Sys. v. Sebelius, 646 F. Supp. 2d 28 (D.D.C. 2009) (construing PRM §312's "should" as permissive, not a mandatory asset-verification test)
Shalala v. St. Paul-Ramsey Med. Ctr., 50 F.3d 522 (8th Cir. 1995) (PRM §312 does not impose implied verification requirement)
Harris Cty. Hosp. Dist. v. Shalala, 64 F.3d 220 (5th Cir. 1995) (affirming district court view that PRM did not require additional implied verification)
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (1994) (standards for judicial review of Medicare reimbursement decisions)
Indus. Union Dep’t, AFL-CIO v. Am. Petroleum Inst., 448 U.S. 607 (1980) (Chenery principle: courts must judge agency action on agency's stated reasons)