D.C. Circuit Rejects HHS’s Retroactive Application of New Medicare Reimbursement Policy

Northeast Hospital Corp. v. Sebelius, No. 10-5163 (Sept. 13, 2011) (Griffith, J., joined by Garland, J., with concurrence in the judgment by Kavanaugh, J.)

In this case, the D.C. Circuit affirms summary judgment in favor of a hospital that was undercompensated by Medicare. Although the majority concludes the statutory formula for calculating a hospital’s “disproportionate share hospital” (“DSH”) adjustment is ambiguous as to how Medicare Part C enrollees should be counted, all three members of the panel agree HHS’s application of a new statutory interpretation was impermissibly retroactive. The case raises questions about the direction of the Court’s retroactivity doctrine.


Under Part C of the Medicare statute (“Medicare+Choice” or “M+C”), an individual may opt out of the traditional Part A fee-for-service coverage in favor of an HMO or other “managed care” plan. But for their Part C election, M+C enrollees would be eligible for Part A coverage. This case presented the question whether an M+C enrollee is “entitled to benefits under Part A” for purposes of the statutory DSH formula, which affects the amount a hospital is reimbursed. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I), (II). A hospital receives less money if, as HHS interprets the statute, M+C patients are “entitled to benefits under Part A.”


A. Ambiguity

Judge Griffith, writing for a divided Court, concludes the statutory DSH formula is ambiguous, so it does not foreclose HHS’s interpretation under Chevron step one. Other provisions of the Balanced Budget Act of 1997, which enacted Medicare Part C, assume that M+C enrollees remain entitled to Part A benefits, so the DSH formula does not unambiguously foreclose HHS’s interpretation.

The Court stops short of upholding HHS’s interpretation as reasonable under Chevron step two, though that result seems all but dictated by the Court’s conclusion that the statute is ambiguous. A healthcare provider could show HHS’s interpretation to be unreasonable going forward by convincing a court that the agency may not reasonably interpret “entitled” to mean merely eligible to enroll in Part A in provisions like the DSH formula while interpreting the same word to mean immediately entitled to have payment made under Part A in others. That will be an uphill battle in light of the statutory evidence Judge Griffith marshals for the proposition that Congress itself treats M+C enrollees as eligible for Part A benefits in some statutory contexts. See slip op. at 11–20. If Congress is inconsistent in its terminology, it would be difficult to hold the agency to a higher standard. The question is not merely academic because, as the Court points out, “[n]ationwide, the practical consequences of this dispute number in the hundreds of millions of dollars.” Slip op. at 9.

B. Retroactivity

Despite the ambiguous statutory language, the Court affirms the district court’s grant of summary judgment against HHS because, during the relevant time period, HHS’s practice was to exclude M+C patients from the relevant calculation, just as the hospital urges it should continue to do. Because HHS’s new policy, adopted in a 2004 rulemaking, “alter[ed] the past legal consequences of past actions,” slip op. at 25, it was impermissibly retroactive as applied to the hospital’s reimbursements for fiscal years 1999-2002.

The court’s retroactivity analysis is noteworthy in two respects.

First, the court rearticulates a clear statement rule on which another panel of the court had recently cast doubt. Compare slip op. at 25 (“It is well settled that an agency may not promulgate a retroactive rule absent express congressional authorization.” (emphasis added)), with Nat’l Petrochemical & Refiners Ass’n v. EPA, 630 F.3d 145, 163 (D.C. Cir. 2010) (concluding the EPA’s retroactive regulations was permissible because the statute provided “implicit authority” for retroactivity).

Second, it is not immediately clear why the retroactivity at issue here is not shielded by a broad exception to the rule against retroactive rulemaking that the court recently announced for retroactive rules that are subsequently enforced in agency adjudications. See St. Luke’s Hosp. v. Sebelius, 611 F.3d 900, 907 (D.C. Cir. 2010) (“[A]ny potential retroactive effect [of HHS’s program memorandum] was completely subsumed in the permissible retroactivity of the agency adjudication.” (quotation marks omitted)). Presumably the Provider Reimbursement Review Board, whose decision the Secretary affirmed, applied HHS’s 2004 policy when it adjudicated the hospital’s appeal of its fiscal intermediary’s award.

One member of the court has criticized both of these deviations from a bright-line anti-retroactivity rule. See Nat’l Petrochemical & Refiners Ass’n v. EPA, No. 10-1070, 643 F.3d 958 (D.C. Cir. 2011) (Brown, J., dissenting from the denial of reh’g en banc); Forsyth Mem’l Hosp., Inc. v. Sebelius, No. 09–5448, 2011 U.S. App. LEXIS 16855 (D.C. Cir. Aug. 16, 2011) (Brown, J., dissenting from the denial of reh’g en banc). This case may signal that the D.C. Circuit’s retroactivity doctrine is still in flux.


Judge Kavanaugh disagrees that HHS’s new policy of counting an individual enrolled in Part C as being “entitled to benefits under Part A” is consistent with the plain meaning of the DSH formula. He emphasizes that the formula requires a calculation of patient days “made up of patients who (for such days) were entitled to benefits under [P]art A,” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I) (emphasis added), and a patient cannot be entitled to benefits under Part A and Part C for the same days. See Kavanaugh Op. at 3–4. Pointing out that HHS formerly followed the hospital’s interpretation of the DSH formula, which the agency now disavows, Judge Kavanaugh disagrees with the majority’s claim that anomalies would arise in other provisions of the Medicare statute if HHS’s former interpretation were to continue in force. (Although the majority does not address this argument directly, it might have observed an important difference between HHS’s former policy and the hospital’s current interpretation: The hospital’s interpretation depends on a claim that the statute is unambiguous, but the agency’s old policy did not.)

The dueling opinions engage in an interesting footnote debate about when the Court should reach alternative holdings. Judge Kavanaugh argues that the Court should not have decided the whether the DSH formula was ambiguous under Chevron step one, because the agency’s retroactive application of that interpretation was unreasonable in any event. Kavanaugh Op. at 7 n.3. In response, Judge Griffith notes that the Court “commonly say[s] why the district court erred before affirming on other grounds,” and concludes that “considerations of judicial economy counsel strongly in favor of doing so here, where the district court is likely to confront the same difficult statutory interpretation question again in the near future.” Slip op. at 9, n.2.

One response to “D.C. Circuit Rejects HHS’s Retroactive Application of New Medicare Reimbursement Policy

  1. Pingback: D.C. Circuit Approves Retroactive Application of FERC’s New Interpretation of the Natural Gas Act | D.C. Circuit Review

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