CC 03-3012 United Hospital v. Thompson 9/7/04

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 03-3012  
___________  

United Hospital, *

*

Appellant, *

* Appeal from the United States  
v. * District Court for the  
* District of Minnesota.  
Tommy G. Thompson, in his official *  
capacity as Secretary of the Department *  
of Health and Human Services, *

*

Appellee. *

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Submitted: May 12, 2004

Filed: September 7, 2004

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Before LOKEN, Chief Judge, BRIGHT, Circuit Judge, and DORR,^* District Judge.  
___________  

BRIGHT, Circuit Judge.

United Hospital ("United"), a private healthcare provider in St. Paul,  
Minnesota, appeals from the district court?s¹ summary judgment in favor of the  
Secretary of Health & Human Services ("the Secretary"). United seeks certain  

*The Honorable Richard E. Dorr, United States District Judge for the Western  
District of Missouri, sitting by designation.  

¹Hon. Donovan W. Frank, United States District Judge for the District of  
Minnesota.

payments under the Secretary?s Medicare reimbursement program for hospital  
expenses related to the treatment of poor and disabled patients. The district court  
approved the Secretary?s decision not to reimburse United for the claimed expenses  
as not arbitrary, capricious, or contrary to law. We agree with the district court?s  
decision against United and affirm.  

I. Background  

Pursuant to the Medicare (for the elderly) and Medicaid (for the poor and  
disabled) programs established by Congress, the Secretary reimburses hospitals for  
costs incurred in treating patients who qualify for insurance under these programs.  
Hospitals receive reimbursement for some costs on the basis of the treatment  
provided; for example, the hospital would receive a predetermined amount of money  
for every treatment it provides for a covered patient?s broken arm. Hospitals also  
receive payment based on characteristics of the hospital, rather than the particular  
treatment provided. For example, since 1986, those hospitals which serve an  
unusually high number of Medicaid patients are entitled to a "disproportionate share  
hospital" ("DSH") adjustment. See 42 U.S.C. § 1395ww(d)(5)(F)(i)(I) (authorizing  
supplemental payments to a hospital that "serves a significantly disproportionate  
number of low-income patients"). The Secretary applies a statutory formula to  
determine how much the DSH adjustment for a particular hospital should be, based  
on the number of days that Medicaid patients spent in the hospital (known as  
"Medicaid days").  

Some states, including Minnesota, provide health insurance to indigent  
residents who are not eligible for federally-funded Medicaid. Patients? time spent in  
hospitals under this type of program is known as "state-only" days, indicating that the  
state foots the bill by itself, apart from Medicaid. Even when a patient does receive  
benefits under Medicaid, the reimbursement comes to the hospital via the states,  
which administer the Medicaid program on behalf of the Secretary. Poor patients  

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may have their treatment costs covered either by the state?s own independent program  
or under Medicaid, but in either case the hospital receives payment from the state.  
However, only Medicaid days count toward establishing a particular hospital?s DSH  
rate. The state?s provision of benefits under its own program does not work to  
increase the federal government?s reimbursement rate under Medicaid.  

This accounting issue caused confusion for some hospitals, which were  
submitting all low-income-patient days for the Secretary?s calculation of DSH rates,  
regardless of whether the reimbursement came under the state?s own program or  
under the federally funded Medicaid program. To make clear that only Medicaid  
days could be counted toward the DSH rate, the Secretary, acting through the agency  
now known as the Centers for Medicare and Medicaid Services ("the Centers"),  
issued a letter to Congressional oversight officials on October 15, 1999. The letter  
explained that the Centers would not seek to recoup payments to hospitals already  
made (erroneously) for state-only days, but that in the future hospitals would have to  
abide by the statutory requirement that only Medicaid days count toward DSH  
payments.² Later, the Centers formalized this position in Program Memorandum A-  
99-62 ("Program Memo"), issued December 1, 1999. The Program Memo established  
that hospitals that had been reimbursed for state-only days prior to October 15, 1999,  
or that had appealed a denial of reimbursement for state-only days as of October 15,  
1999, would not face recoupment action from the Secretary and further would have  
any money already recouped returned to the hospitals. Furthermore, the Program  
Memo provided that the Secretary would pay out to hospitals "that did not receive  
payments reflecting the erroneous inclusion of otherwise ineligible days[, if those  
hospitals] filed a jurisdictionally proper appeal to the [administrative appeal board]  
 

²See 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (defining the Medicaid component  
of the DSH payment as "the fraction . . . the numerator of which is the number of the  
hospital?s patient days . . . which consist of patients who . . . were eligible for medical  
assistance under a State plan approved under [the Medicaid program] . . . .").  
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on the issue of the exclusion of these types of days from the Medicare DSH formula  
before October 15, 1999."  

On the other hand, from January 1, 2000 forward, no state-only days accrued  
would count toward DSH reimbursement and hospitals raising the reimbursement  
issue for state-only days for the first time after the October 15 cut-off date would not  
prevail on that issue on appeal. In effect, the Program Memo exempts certain  
hospitals that misconstrued the DSH statutes and rules from the otherwise-harsh costs  
of their errors.  

The basic structure of the Program Memo distinguished between hospitals that  
wrongly believed themselves eligible for reimbursement for state-only days, and  
hospitals that correctly realized they were not eligible but then pursued benefits once  
it became clear that the mistaken hospitals would not have to pay for their error. The  
primary issues on appeal in this case, then, are whether United falls into the latter  
category or not, and if it does, whether the Secretary?s refusal to pay that category on  
the same basis as the first category is arbitrary and capricious.  

II. Procedural Posture  

United brought appeals to the appropriate administrative body, the Provider  
Reimbursement Review Board ("the Board"), in 1996 and 1997, raising issues related  
to its cost reports for 1992 and 1993, but not seeking the addition of state-only days  
to its DSH calculation. United had not sought the inclusion of state-only days since  
the start of the DSH concept in the mid-1980s. After the Centers issued the Program  
Memo, United argued for the first time, in March 2000, that it deserved to have the  
state-only days retroactively incorporated into its DSH reimbursements.³ The Board

³Apparently, United?s appeals filed in both 1996 and 1997 were still pending  
before the Board, four years later. Perhaps a speedier resolution of the original  
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provided a hearing and considered United?s position, but concluded that the statutory  
restrictions on reimbursement precluded relief for United, and that United did not fall  
in any of the exceptions to the statutory restrictions outlined in the Program Memo.  

In August 2002, United then appealed the Board?s decision to the district court,  
pursuant to 42 U.S.C. § 1395oo(f)(1) (granting jurisdiction to the district court over  
this type of appeal). The district court considered four issues raised by United: first,  
whether United fell under the protections of the Program Memo; second, if not,  
whether the Program Memo denied United its procedural rights; third, whether the  
Program Memo?s authorization of reimbursement for some hospitals but not others  
was arbitrary; and fourth, whether the reimbursement for some hospitals but not  
others denied United equal protection of the laws as construed under the Fifth  
Amendment of the federal Constitution.  

The district court concluded that because United?s appeals before the Board did  
not raise the specific issue of DSH rates until March 2000, United could not claim  
protection under the Program Memo, which the district court held to limit relief by  
its plain terms to hospitals raising the DSH issue prior to October 15, 1999. The  
district court rejected United?s second procedural argument by observing that the  
Board gave a hearing and full consideration to United?s claims on the DSH issue. A  
right to have claims heard before the Board does not equate to a right to the  
substantive relief claimed. Finally, the district court rejected United?s arguments  
under the "arbitrary and capricious" standard and the Fifth Amendment standard that  
the Program Memo?s terms irrationally discriminate against hospitals like United.  
The district court noted that the Program Memo rationally advanced the Secretary?s  
goal of solving the DSH confusion by "separat[ing] those hospitals who were  
legitimately confused from those hospitals who sought to benefit from the confusion  
of others."  

appeals might have avoided the present controversy.  
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United now timely appeals from the district court?s grant of summary judgment  
to the Secretary. On appeal, United strongly asserts the same four arguments raised  
before the trial court concerning the applicability and validity of the Program Memo.  

III. Discussion  

We review the district court?s grant of summary judgment de novo. See Henry  
v. United States Dep?t of the Navy, 77 F.3d 271, 272 (8th Cir. 1996). We examine  
agency action with great deference, setting aside the Secretary?s action only if it is  
"arbitrary, capricious, an abuse of discretion, unsupported by substantial evidence,  
or otherwise not in accordance with the law." Creighton Omaha Regional Health  
Care Corp. v. Bowen, 822 F.2d 785, 789 (8th Cir. 1987).  

First, we consider whether the Secretary?s interpretation of the Program Memo  
to exclude United constituted arbitrary and capricious agency action. United adopts  
a three-step argument to advance its point. First, United states the undisputed fact  
that its jurisdictionally proper cost appeals on unrelated issues were pending before  
the Board prior to October 15, 1999. Second, United states the undisputed legal  
conclusion that the agency review process allows new issues to be raised before the  
Board at any time, even after the appeals were first filed. Finally, United argues that  
therefore, its March 2000 introduction of the DSH issues to its pending appeals  
should be treated under the Program Memo as if the DSH issues had been raised  
when the appeals were first filed (i.e., prior to the October 15 cut-off).  

We observe that United did raise the DSH issue before the Board and obtain  
a decision on that issue, albeit an adverse decision. However, logic clearly does not  
support the leap United asks this court to make: that any issue raised and resolved  
by the Board at any time must be treated as constructively raised at the start of the  
administrative appeal. Neither does any statutory or regulatory provision support this  
backdating. To the contrary, the plain language of the Program Memo expressly  

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excludes hospitals in United?s position from gaining its protections, declaring a  
hospital?s eligibility for reimbursement only if the hospital filed "a jurisdictionally  
proper appeal to the [Board] on the issue of the exclusion of these types of days from  
the Medicare DSH formula before October 15, 1999."⁴ United?s position would have  
us read the crucial phrase "on the issue of the exclusion of these types of days" out  
of the Program Memo, allowing DSH reimbursement if the hospital?s appeals were  
filed before the cut-off date on any issue. We decline to alter the plain text of the  
Program Memo. United falls outside the protections established by the Secretary.  

United further asserts that if it is not entitled to the challenged DSH payments  
under the Program Memo, then the Program Memo itself must be illegal. First,  
United argues that the Program Memo improperly restricted United?s procedural  
rights to raise issues before the Board. As we have discussed above, however, the  
Board did have a full hearing and gave careful consideration to United?s claims.  
Obviously, United then took full advantage of its statutory right to appeal the Board?s  
decision to the district court and to this court. That each of the relevant adjudicators  
decided against United does not establish any lack of statutory due process.  

United finally argues that its exclusion from the safe havens of the Program  
Memo is irrational, thereby failing the arbitrary and capricious test under the  
Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (requiring reviewing courts to  
invalidate agency action that is "arbitrary, capricious, an abuse of discretion, or  

⁴The Program Memo goes on to instruct:  

Do not reopen a cost report and revise the Medicare DSH payment to  
reflect the inclusion of these types of days as Medicaid days if, on or  
after October 15, 1999, a hospital added the issue of the exclusion of  
these types of days to a jurisdictionally proper appeal already pending  
before [the Board].  
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App. at E4.

otherwise not in accordance with law") and the rational purpose test of our equal  
protection jurisprudence under the Fifth Amendment to the United States  
Constitution, see, e.g., Arkansas Pharmacists Ass?n v. Harris, 627 F.2d 867, 871 (8th  
Cir. 1980) ("[A] court must uphold [economic] regulations if they bear a rational  
relation to a legitimate congressional purpose").  

United fails on both arguments, because the Secretary had an amply rational  
basis for distinguishing between hospitals that correctly understood that only  
Medicaid days could count toward DSH reimbursement, and other hospitals that  
believed state-only days could also count. United asserts that "[t]he high costs  
associated with treating a disproportionate share of low income patients are felt no  
less acutely by Minnesota urban hospitals than New York and Pennsylvania urban  
hospitals." We have no reason to doubt that assertion. However, the basis for the  
Secretary?s distinction between the Minnesota hospitals and the New York and  
Pennsylvania hospitals lies not in geography, but in chronology. The New York and  
Pennsylvania hospitals argued, before the Secretary?s decision to allow overpayments  
to go unrecovered had been announced, that they deserved to have their state-only  
days included in the DSH calculations. United did not make that argument until it  
already knew the other hospitals would get to keep money received on that basis.  
Because the statute makes clear that only Medicaid days can be included in the DSH  
calculations, the Secretary had to set a date beyond which the erroneous  
overpayments would cease. The date of October 15, 1999 satisfies common sense  
(and the rational basis test) because any claims raised for the first time after that date  
would come from hospitals that knew full well that the Secretary?s previous payments  
were undeserved. Once some hospitals misconstrued their eligibility for DSH  
reimbursement, the Secretary had no choice but to seek a solution. The solution  
provided, while incomplete, more than satisfies the rational basis test. The perfect  
must not become the enemy of the good. See Alcala v. Burns, 545 F.2d 1101, 1105  
(8th Cir. 1976) ("[The] Equal Protection Clause does not require that [an agency]  
 

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must choose between attacking every aspect of a problem or not attacking the  
problem at all." (quoting Dandridge v. Williams, 397 U.S. 471, 487 (1970)).  

IV. Conclusion  

The Secretary erroneously overpaid certain hospitals who believed themselves  
eligible for extra reimbursement. Now United, which never operated under the  
misapprehension suffered by the other hospitals, seeks the same unearned payments.  
The Secretary?s refusal to compound the error was not irrational or discriminatory.  
Accordingly, we affirm the judgment of the district court.

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