EMPIRE HEALTH FOUNDATION, fоr Valley Hospital Medical Center v. ALEX M. AZAR II, Secretary of the United States Department of Health and Human Services
Nos. 18-35845, 18-35872
United States Court of Appeals for the Ninth Circuit
May 5, 2020
D.C. No. 2:16-cv-00209-RMP
FOR PUBLICATION
OPINION
Appeal from the United States District Court for the Eastern District of Washington Rosanna Malouf Peterson, District Judge,
Argued and Submitted February 6, 2020 Seattle, Washington
Filed May 5, 2020
Opinion by Judge Milan D. Smith, Jr.
SUMMARY**
Medicare / Rulemaking
The panel affirmed, on different grounds, the district court’s order granting partial summary judgment for Empire Health Foundation and vacating the 2005 Rule promulgated by the Secretary of the Health and Human Services (“HHS”), interpreting a Medicare regulation.
The 2005 Rule removed the word “covered” from
Empire challenged the 2005 Rule as part of its appeal of HHS’s calculation of its 2008 reimbursement. The district court held that the 2005 Rule was substantively valid, but it should be vacated because the rulemaking process failed to meet the Administrative Procedure Act (“APA”)’s procedural requirements.
The panel held that the 2005 Rule’s rulemaking process, while not perfect, satisfied the APA’s notice-and-comment requirements. The panel reversed the district court’s contrary conclusion. The panel also held, however, that the 2005 Rule was substantively invalid, and must be vacated, because it directly conflicted with the court’s interpretation of
The panel affirmed the district court’s order vacating the 2005 Rule. The panel reinstated the prior version of
COUNSEL
Stephanie R. Marcus (argued) and Mark B. Stern, Appellate Staff; William D. Hyslop, United States Attorney; Joseph H. Hunt, Assistant Attorney General; Civil Division, United States Department of Justice, Washington, D.C.; for Defendant-Appellant/Cross-Appellee.
Daniel John Hettich (argued), King & Spalding LLP, Washington, D.C.; Teresa A. Sherman, Paukert & Troppmann PLLC, Spokane, Washington; for Plaintiff-Appellee/Cross-Appellant.
OPINION
M. SMITH, Circuit Judge:
This appeal, made pursuant to the Medicare Act’s expedited judicial review provision,
Rule removed the word “covered” from
Plaintiff Empire Health Foundation (Empire) challenged the 2005 Rule as part of its appeal оf HHS’s calculation of its 2008 reimbursement. The district court granted partial summary judgment for Empire, ruling that, while the 2005 Rule was substantively valid, it should be vacated because the rulemaking process leading to its adoption failed to meet the APA’s procedural requirements.
We affirm the district court’s summary judgment in favor of Empire, and its order vacating the 2005 Rule, but on different grounds. See McSherry v. City of Long Beach,
584 F.3d 1129, 1135 (9th Cir.2009) (“We may affirm on the basis of any ground supported by the record.”). We hold that the 2005 Rule’s rulemaking process, while not perfect, satisfied the APA’s notice-and-comment requirements. However, we also hold that the 2005 Rule is substantively invalid, and must be vacated, because it directly conflicts with our interpretation of
FACTUAL AND PROCEDURAL BACKGROUND
I. Relevant Statutory and Regulatory Background
As part of the Medicare program, a hospital that “serves a significantly disproportionate number of low-income patients,”
Qualification for the DSH Adjustment and the amount of any DSH Adjustment are determined by a hospital’s “disproportionate patient percentage” (DPP).
two fractions set forth in
non-Medicare population. Id.; Legacy Emanuel, 97 F.3d at 1265–66.
The following chart illustrates the two fractions:
| | Medicaid fraction | |
|---|---|---|
| Numerator | Patient days for patients entitled to Medicare and entitled to SSI Benefits | Patient days for patients eligible for Medicaid but not entitled to Medicare |
| Denominator | Patient days for patients entitled to Medicare | Total number of patient days |
See Catholic Health, 718 F.3d at 917 (providing the chart as a visual representation of the two fractions).
Empire’s challenge concerns the 2005 Rule’s interpretation of the statutory phrase “entitled to [Medicare]” in its implementing regulation,
treatment of “dual eligible exhausted coverage patient days.”7 These are patient days attributable to patients eligible for both Medicare and Medicaid and whose hospital stаys have exceeded the 90-day limit applicable to Medicare coverage (after which Medicare ceases to cover the patient’s
results of two computations and expressing that sum as a percentage.
(2) First computation: Federal fiscal year. For each month of the Federal fiscal year in which the hospital’s cost reporting period begins, CMS—
(i) Determines the number of patient days that—
(A) Are associated with discharges occurring during each month; and
(B) Are furnished to patients who during that month were entitled to both Medicare Part A (including Medicare Advantage (Part C)) and SSI, excluding those patients who received only State supplementation; . . . .
inpatient hospital services costs).8
Pursuant to the version of
In contrast, in the 2005 Rule, HHS removed the word “covered” from
fraction when calculating a given hospital’s DSH Adjustment.10
A. The 2005 Rule’s Rulemaking Process
To arrive at the interpretation reflected in the 2005 Rule, HHS took a circuitous route. Initially, HHS proposed in 2003 to include dual eligible exhausted coverage patient days in the Medicaid fraction commencing with Fiscal Year (FY) 2004 (the 2003 Notice). 68 Fed. Reg. 27154, 27207–208 (May 19, 2003). In the 2003 Notice, HHS misstated its then-applicable rule with respect to dual eligible exhausted coverage patient days, asserting that HHS counted them in the Medicare fraction. Several comments responding to the 2003 Notice noted the misstatement and pointed out that the then-applicable regulation did not include dual eligible exhausted coverage patient days in the Medicare fraction. In its FY 2004 final rule, HHS deferred deciding whether to promulgate the proposed change, noting that it was still reviewing comments on dual eligible exhausted coverage patient days and would resрond in a different document. 68 Fed. Reg. 45346, 45421 (Aug. 1, 2003).
In 2004, as part of its rulemaking proposal for the 2005 Rule, the agency explained that it would make sure to address any comments received in response to the 2003 Notice. 69 Fed. Reg. 28196, 28286 (May 18, 2004). The new comment period ran until July 12, 2004. Days before
the comment period for the 2005 Rule closed, HHS posted a webpage acknowledging the 2003 Notice’s misstatement of the then-applicable rule.11 HHS stated that “[o]ur policy has been that only covered patient days are included in the Medicare fraction.” A few commenters acknowledged HHS’s correction. Without acknowledging HHS’s initial mistake, however, many other commenters voiced support for the erroneously stated status quo.
We received numerous comments that commenters were disturbed and confused by our recent Web site posting regarding our policy on dual-eligible patient days. The commenters believe that this posting was a modification or change in our current policy to include patient days of dual-eligible Medicare beneficiaries whose Medicare Part A coverage has expired in the Medicaid fraction of the DSH calculation. In addition, the commenters believed that the information in this notice appeared with no formal notification by CMS and without the opportunity for providers to comment.
69 Fed. Reg. at 49098. In response, HHS explained that the webpage posting “was not a change in our current policy,”
but a “correction of an inadvertent misstatement” made in the 2003 Notice.
The 2005 Rule included dual eligible exhausted coverage patient days in the Medicare fraction. 69 Fed. Reg. at 49098–99. In effect, the new rule enacted what HHS had mistakenly stated was the status quo in the 2003 Noticе. Pursuant to the 2005 Rule, HHS now counts dual eligible exhausted coverage patient days as Medicare days even if Medicare did not pay for them. 69 Fed. Reg. at 49099 (“[W]e are adopting a policy to include the days associated with dual-eligible beneficiaries in the Medicare fraction, whether or not the beneficiary has exhausted Medicare Part A hospital coverage.” (emphasis added)).
II. The Proceedings in this Case
Empire acquired the outstanding Medicare reimbursement owed to Valley Hospital Medical Center for periods prior to October 1, 2008, including the 2008 fiscal year at issue here.12 Dissatisfied with its total reimbursement amount for FY 2008, Empire timely appealed HHS’s calculation of Empire’s FY 2008 reimbursement and requested a hearing before the Provider Reimbursement Review Board (PRRB). The PRRB granted Empire’s request for expedited judicial review pursuant to
2005 Rule in the district court.13 Empire timely filed this action in the district court, challenging the 2005 Rule’s interpretation of “entitled to [Medicare]” as both procedurally and substantively invalid pursuant to the APA.14
The parties cross-moved for summary judgment. The district court granted Empire’s summary judgment motion in part, denied HHS’s summary judgment motion, and vacated the 2005 Rule, ruling that the 2005 Rule’s rulemaking process violated the APA because HHS did not give more time for comment after correcting its misstatement in the 2003 Notice. However, the district court sided with HHS on the
JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction over this appeal pursuant to
ANALYSIS
I. The Procedural Validity of the 2005 Rule
Empire asserts that the 2005 Rule violated the APA’s procedural requirements because HHS did not provide the public with an additional comment period after admitting that it misrepresented the status quo in the 2003 Notice. We disagree.
The APA requires an agency to comply with notice-and-comment procedures when the agency amends its regulations.
opportunity to comment on the proposal, “participat[ing] in the rule making through submission of written data, views, or arguments.”
We will set aside an agency action that we find to be “without observance of procedure required by law.”
Other considerations to determine the adequacy of notice include “whether a new round of notice and comment wоuld provide the first opportunity for interested parties to offer comments that could persuade the agency to modify its rule,” NRDC II, 279 F.3d at 1186 (quoting Am. Water Works Ass’n v. EPA, 40 F.3d 1266, 1274 (D.C. Cir. 1994)), and whether “the notice ‘fairly apprise[s] interested persons of the subjects and issues before the [a]gency,’” Louis v. U.S. Dep’t of Labor, 419 F.3d 970, 975 (9th Cir. 2005) (quoting NRDC II, 279 F.3d at 1186).
Here, HHS undoubtedly misstated the then-applicable rule in the 2003 Notice. Nevertheless, the 2003 Notice did describe the content of the 2005 Rule, even if it incorrectly characterized it as the then-applicable rule. 68 Fed. Reg. 27154, 27207. HHS corrected its misstatement of the then-applicable rule before the end of the second comment period. Mоreover, many sophisticated commenters, including several large hospital associations, supported placing dual eligible exhausted coverage patient days in the Medicare fraction, as the 2005 Rule finally did. The rulemaking process was certainly not perfect, and some commenters expressed confusion with HHS’s correction notice. 69 Fed. Reg. 48916, 49098. However, the 2005 Rule was a logical outgrowth of the proposed rule change, and HHS’s 2003 Notice provided adequate notice to commenters of what the agency was considering. As another district court observеd in upholding the 2005 Rule’s notice-and-comment process: “Numerous commenters during both the initial and the second comment periods wrote in support of the misstated status quo—that is, the policy that was ultimately adopted—to ‘urge that CMS not change the rules for counting dual eligible days.’” Stringfellow, 317 F. Supp. 3d at 187 (quoting record).
We conclude that the procedural error alleged by Empire here is similar to the one the Supreme Court addressed in Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174–75 (2007). There, the Court rejected a procedural challenge to a final rule that was the opposite of what was contained in a rulemaking proposal. Id. The final rule exempted сertain domestic workers from the Fair Labor Standards Act (FLSA), when the proposal had contemplated including them within the FLSA’s ambit. Id. Nevertheless, the court held that the final rule was “reasonably foreseeable” and the proposal had provided fair notice to commenters. Id. at 175.
The Court observed that commenters could reasonably foresee that “after . . . consideration [of the proposal] the Department might choose to adopt the proposal or to withdraw it.” Id. Commenters on the 2005 Rule were similarly apprised of a binary choice—under the new rule, dual eligible exhаusted coverage patient days would be included in either the Medicare or the Medicaid fraction. In the end, they were included in the Medicare fraction.
Allina Health Services v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014), on which Empire relies, is inapposite. Allina involved a challenge to a different portion of the final rule that also contained the 2005 Rule. Id. at 1106–07. In the applicable notice of proposed rulemaking, the agency proposed to “clarify” an existing practice and stated that it did not expect the clarification to have a major financial impact. Id. at 1106. But the final rule in Allina was an entirely new policy with enormous financial consequences. Id. at 1107. The D.C. Circuit held that the rule was not a “logical outgrowth”
Because we conclude that the 2005 Rule was a logical outgrowth of the notice and the comments received, we reverse the district court’s contrary conclusion. Nevertheless, we ultimately affirm the district court’s summary judgment in favor of Empire and order vacating the 2005 Rule, because we hold that the 2005 Rule is substantively invalid.
II. The Substantive Validity of the 2005 Rule
Having determined that the 2005 Rule met the APA’s procedural requirements, we next consider its substantive validity pursuant to the APA. Empire argues that our decision in Legacy Emanuel forecloses HHS’s interpretation of “entitled to [Medicare]” in the 2005 Rule. HHS, citing Sixth and D.C. Circuit decisions, maintains that we are not bound by Legacy Emanuel’s analysis of “entitled to,” because there, according to HHS’s argument, we decided only the meaning of the phrase “eligible for medical assistance under . . . [Medicaid].” According to HHS, our analysis of the phrase “entitled to [Medicare]” is nothing more than “non-binding dicta.” Government’s Reply Brief at 28. We agree with Empire that Legacy Emanuel is directly at odds with the 2005 Rule, and thus conclude thаt the rule is substantively invalid.
In a substantive APA challenge to a notice-and-comment rule, we apply the Chevron two-step framework. See United States v. Mead Corp., 533 U.S. 218, 230–31 (2001). At Chevron step one, we ask whether Congress “has directly spoken to the precise question at issue” in the statutory text. Chevron, 467 U.S. at 842. We employ “traditional tools of statutory construction” to determine whether “Congress had an intention on the precise question at issue[.]” Id. at 843 n. 9. If the statute is silent or ambiguous, however, we proceed to Chevron step two and ask “whether the agency’s answer
is based on a permissible construction of the statute.” Id. at 843.
Judicial precedent affects how we apply the Chevron framework. “[A] judicial precedent holding that the statute unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction.” Brand X, 545 U.S. at 982–83. This occurs “if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” Id. at 982. In other words, if the prior court decision was decided at Chevron step one, there is no need to proceed to Chevron step two.
Our ruling in Legacy Emanuel was clearly a Chevron step one decision. 97 F.3d at 1265 (“We believe the language of the Medicare reimbursement provision is clear[.]”). In Legacy Emanuel, we considered the meaning of the words “entitled” and “eligible” in tandem. We interpreted the word “entitled” to mean that a patient has an “absolute right . . . to payment.” Id. In contrast, we interpreted the word “eligible” to mean that a patient simply meets the Medicaid statutory criteria: “if Congress had wanted to limit the Medicaid proxy to days for which Medicaid actually paid, Congress could have used ‘entitled’ or expressly specified that it was to include only those days actually paid for by Medicaid.” Id. We held that Congress used a “broader word” than entitled in the Medicaid fraction to fulfill its intent of compensating hospitals for treating low-income patients. Id. And we noted that the use of “entitled” in the Medicare fraction did not frustrate that purpose, because the low-income proxy in the Medicare fraction is ultimately determined by entitlement to SSI, not Medicare. Id. at 1265–66. The 2005 Rule’s interpretation of “entitled,”
in contrast, resembles our understanding of the term “eligible” in Legacy Emanuel by embracing even those patient days for which Medicare coverage is exhausted (i.e., for which there is no absolute right to payment). 69 Fed. Reg. at 49099. Thus, the 2005 Rule mistakenly treats as ambiguous statutory language that we deemed clear, and rewrites that language in contravention of our interpretation.
Rejecting Empire’s challenge to the 2005 Rule’s substantive validity, the district court determined that Legacy Emanuel does not control the meaning of the statutory text at issue here and thus proceeded to Chevron step two. HHS adopts that position here and argues that that Legacy Emanuel did not actually decide the meaning of the term “entitled” in the Medicare fraction. We reject this reading of Legacy Emanuel. Legacy Emanuel’s analysis of “eligible for [Medicaid]” is inextricable from its analysis of “entitled to [Medicare].” Consequently, we are bound by Legacy Emanuel’s interpretation of “entitled to [Medicare]” unless and until change comes from our court sitting еn banc or the Supreme Court. Miller v. Gammie, 335 F.3d 889, 899 (9th Cir. 2003) (en banc). Pursuant to Brand X, Legacy Emanuel’s unambiguous interpretation of “entitled to [Medicare]” in
We recognize, as HHS argues on appeal, that the Sixth and D.C. Circuits have affirmed the 2005 Rule’s interpretation of the phrase “entitled to [Medicare]” in
binding circuit precedent holding that the statutory language was unambiguous, as Legacy Emanuel did.
For example, in Catholic Health, the D.C. Circuit relied on circuit precedent determining that the statutory language in question was ambiguous. 718 F.3d at 920 (citing Northeast Hosp. v. Sebelius, 657 F.3d 1, at 13 (D.C. Cir. 2011).16 So Brand X could not have warranted a different result in Catholic Health.
The Sixth Circuit’s binding precedent construing
contrast of “entitled” and “eligible” as a “‘back-up’ analysis”).
HHS argues that the Sixth Circuit’s reading of Jewish Hospital, as set forth in Metropolitan Hospital, should somehow control our analysis here because we cited Jewish Hospital as part of our statutory interpretation in Legacy Emanuel. But Legacy Emanuel’s holding, construing the unambiguous language of
III. Vacatur of 2005 Rule
Having affirmed, on different grounds, thе district court’s summary judgment in favor of Empire, we also affirm its order vacating the 2005 Rule. See Nat. Res. Def. Council v. EPA (NRDC III), 526 F.3d 591, 608 (9th Cir. 2008)
(vacating rule held to be unlawful under Chevron analysis). We have observed that “when a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated—not that their application to the individual petitioners is proscribed.” Univ. of Cal. v. U.S. Dep’t Homeland Sec., 908 F.3d 476, 511 (9th Cir. 2018) (quoting Nat’l Mining Ass’n v. U.S. Army Corps. of Eng’rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998)). Accordingly, we reinstate the prior version of
CONCLUSION
While HHS’s notice-and-comment procedure for the 2005 Rule was not without flaws, it met the APA’s requirements. However, the 2005 Rule violated the unambiguous
AFFIRMED AND REMANDED.
Notes
(vi) In this subparagraph, the term “disproportionate patient percentage” means, with respect to a cost reporting period of a hospital, the sum of—
(I) 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 this subchapter and were entitled to supplementary security income benefits (excluding any State supplementation) under subchapter XVI of this chapter, 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 benefits under part A of this subchapter, and
(II) 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 patients who (for such days) were eligible for medical assistance under a State plan approved under subchapter XIX, but who were not entitled to benefits under part A of this subchapter, and the denominator of which is the total number of the hospital’s patient days for such period.
(b) Determination of a hospital’s disproportionate patient percentage—
(1) General rule. A hospital’s disproportionate patient percentage is determined by adding the