Date: 01-05-2015

Case Style: Maine Medical Center v. Sylvia M. Burwell, Secretary, U.S. Department of Health and Human Services

Case Number: 14-1557

Judge: Lynch

Court: United States Court of Appeals for the First Circuit on appeal from the District of Maine (Cumberland County)

Plaintiff's Attorney: Bill Stiles, with whom Ben Ford and Verrill Dana, LLP were on brief, for appellant.

Defendant's Attorney: Jeffrey Clair, Attorney, U.S. Department of Justice, Civil
Division, with whom Thomas E. Delahanty, II, United States
Attorney, Jill L. Steinberg, Special Assistant United States
Attorney, Assistant Regional Counsel, District of Maine, John
Osborn, Assistant United States Attorney, William B. Schultz,
General Counsel, U.S. Department of Health and Human Services, and
Nancy S. Nemon, Chief Counsel, Region I, U.S. Department of Health
and Human Services, were on brief, for appellee.

Description: Maine Medical Center ("Maine
Medical") challenges a district court ruling upholding the decision
of the Secretary for the Department of Health and Human Services
("HHS") denying Maine Medical's claim for partial federal
reimbursement of "bad debt" for two fiscal years. Maine Med. Ctr.
v. Sebelius, No. 2:13-CV-00118-JAW, 2014 WL 1234173, at *1 (D. Me.
Mar. 25, 2014). A "bad debt" is an amount considered uncollectible
arising from covered medical services that may be eligible for
federal reimbursement under certain conditions. 42 C.F.R.
§ 413.89. The bad debt at issue arose from services that Maine
Medical provided to Medicare/Medicaid "dual-eligible" patients
during fiscal years 2002 and 2003. The Secretary had required a
particular form of proof, a state-issued remittance advice ("RA"),
which Maine Medical had not acquired from Maine's Medicaid program,
MaineCare. The parties dispute both the difficulty of obtaining
such proof and the adequacy of the alternative documentation the
hospital offered.
Two legal issues are presented on appeal. The first
concerns the appropriate level of deference to afford the decision
of the Secretary as to the adequacy of Maine Medical's proof in
this case. The second concerns whether, under the appropriate
standard, the Secretary's decision denying reimbursement was
arbitrary and capricious, an abuse of discretion, otherwise
contrary to the law, or unsupported by substantial evidence.
-2-
See Visiting Nurse Ass'n Gregoria Auffant, Inc. v. Thompson, 447
F.3d 68, 72 (1st Cir. 2006) (citing 5 U.S.C. § 706(2)).
After careful consideration of the record, we affirm the
Secretary's decision. It is not arbitrary and capricious for the
Secretary to demand that Maine Medical provide documentation from
the State, including documentation confirming the identity of
Medicaid-eligible beneficiaries and qualified Medicare
beneficiaries, the amount that is the State's to pay, and the
State's refusal to pay. Nor is it arbitrary and capricious, on the
facts of this case, to deny Maine Medical's reimbursement claims
that were unsupported by such documentation. The consequence of
this decision is that Maine Medical may need to absorb roughly $3
million of bad debt; it will not receive reimbursement from the
Secretary unless it succeeds in obtaining the RAs. Whether Maine
Medical has any recourse against the State of Maine is not before
us.
I.
Maine Medical, a non-profit hospital in Portland, Maine,
provides medical services to both Medicare and Medicaid recipients.
Some of these patients are "dual-eligible," that is, indigent
patients who are covered by both Medicare, a federal health
insurance program, and the state-administered Medicaid insurance
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program, MaineCare.1 Medicare and MaineCare share responsibility
for paying the so-called "crossover claims" for services provided
to these dual-eligible patients, with Medicare the primary payer
and MaineCare the secondary payer responsible for covering
coinsurance and copayments.
Any amount remaining that is both unpaid by MaineCare and
for which MaineCare is not liable is generally considered a "bad
debt," an "amount[] considered to be uncollectible" for covered
services. 42 C.F.R. § 413.89(b)(1), (e), & (h);2 see Provider
Reimbursement Manual ("PRM") § 322. Medicare partially reimburses
bad debt, from dual-eligible and non-dual-eligible3 patients alike,
provided that reimbursement claims are adequately documented and
are supported by evidence demonstrating that the medical provider
1 Medicare is a national health insurance program for the
elderly and disabled that uses federal funding to, among other
things, reimburse providers for reasonable costs of services. 42
U.S.C. §§ 1395 et seq.; see also South Shore Hosp., Inc. v.
Thompson, 308 F.3d 91, 95 (1st Cir. 2002) (describing the statutory
scheme); Grossmont Hosp. Corp. v. Sebelius, 903 F. Supp. 2d 39, 43
(D.D.C. 2012) (same).
Medicaid is a "cooperative federal-state program that finances
medical care for the poor, regardless of age." Grossmont, 903 F.
Supp. 2d at 43-44 (citing 42 U.S.C. §§ 1396 et seq.). States can
both elect to participate in Medicaid or not, and decide the nature
of coverage, subject to approval by the Centers for Medicaid and
Medicare Services (CMS). See id.
2 42 C.F.R. § 413.89 was formerly designated as 42 C.F.R.
§ 413.80. See 69 Fed. Reg. 49,254 (Aug. 11, 2004). The relevant
text remains unchanged.
3 Non-dual-eligible patients are Medicare patients who are
not eligible for Medicaid.
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made "reasonable collection efforts" but that the amount is
"actually uncollectible."4 42 C.F.R. § 413.89(e) (stating
regulatory requirements for allowable bad debt); see also id.
§ 413.89(a) & (h) (governing reimbursement of bad debt).
A. Collection Process
HHS has long interpreted "reasonable collection efforts"
to require billing those responsible for payment. See, e.g., Cmty.
Hosp. of the Monterey Peninsula v. Thompson (Monterey), 323 F.3d
782, 796, 798 (9th Cir. 2003) (discussing the policy's history and
enforcement); see also PRM §§ 310, 312, 322 (explaining the
requisite collection efforts).5 Where patients are also eligible
for Medicaid, the Secretary has historically required medical
providers to submit proof that it billed the relevant Medicaid
program but was denied payment. See Monterey, 323 F.3d at 796.
This proof usually takes the form of an RA issued by the Medicaid
4 Bad debts from certain sources are reimbursable to ensure
the costs of treating Medicare beneficiaries are not shifted to
non-Medicare beneficiaries. 42 U.S.C. § 1395x(v)(1)(A)
(prohibiting cost-shifting); 42 C.F.R. § 413.89(d) (same).
5 PRM § 310 explains that a provider's "reasonable collection
efforts" to obtain deductible and coinsurance amounts "must be
similar" to efforts to collect from non-Medicare patients,
including "the issuance of a bill . . . to the party responsible"
and "other actions such as subsequent billings."
PRM § 312 waives the PRM § 310 procedures for indigent
patients for whom "no source other than the patient would be
legally responsible for the . . . bill."
PRM § 322 explains that amounts the state Medicaid program "is
not obligated to pay can be included as bad debt . . . provided
that the requirements of § 312 or, if applicable, § 310 are met."
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program, reflecting the patient's eligibility, and payment (or
nonpayment). See, e.g., PRM-II § 1102.3L (Rev. 4) (assuming that
satisfaction of the Billing Requirement will be demonstrated
through RAs). These two requirements -- which we denominate the
"Billing Requirement" and the "RA Requirement" -- try to ensure
that the claimed amounts are in fact bad debt not covered by the
relevant Medicaid program.
Some version of this "must-bill policy" has generally
been enforced.6 From 1995 to 2003, however, the Secretary's manual
permitted providers to substantiate crossover bad debt by
submitting alternative documentation "[i]n lieu of billing." See
PRM-II § 1102.3L (Rev. 4). In March 2003, the Ninth Circuit held
that this waiver of the Billing Requirement marked a change in bad
debt reimbursement policy, violating the Congressional moratorium
on such changes, and so could not be enforced. See Monterey, 323
F.3d at 798-99 & n.9. In response, the Secretary removed the
offending language from the PRM, effective October 1, 2003. See
6 It is not clear that the consistently enforced version of
the "must-bill policy" includes both the Billing Requirement and
the RA Requirement. Cf. Grossmont, 903 F. Supp. 2d at 49, 52
(recognizing the "must-bill policy" as requiring billing, and
discussing a distinct "'mandatory State determination' policy").
The now-repealed language of PRM-II § 1102.3L suggests that HHS
assumed that billing the state Medicaid program would generate a
Medicaid RA, such that satisfaction of the Billing Requirement
entailed satisfaction of the RA Requirement. See PRM-II § 1102.3L
(Rev. 4) ("Evidence of [crossover] bad debt . . . may include a
copy of the Medicaid [RA] . . . . However, it may not be necessary
for a provider to actually bill the Medicaid program . . . ."). To
avoid ambiguity, we refer to the two requirements separately.
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Change Request 2796 at *1, 3. It is not clear that the Secretary
ever permitted broad use of this alternative document billing
provision. Compare Transcript of Proceedings at 142-43, Maine Med.
Ctr., PRRB Dec. No. 2013-D3 (Nov. 29, 2011) (Nos. 06-1318, 07-1386)
("[T]his Intermediary never followed the instructions . . . .
[T]hey always required Medicaid [RAs]."), and Monterey, 323 F.3d at
796-99 (suggesting not), with Cove Assocs. Joint Venture v.
Sebelius, 848 F. Supp. 2d 13, 28-29 (D.D.C. 2012) (providing an
example of a case where alternative documentation had been
permitted). Regardless, the Secretary provided a grace period,
issuing a memorandum instructing the Intermediaries that process
claims to "hold harmless" providers who had relied on the provision
in settling claims before January 1, 2004. See JSM-370. That
memorandum, known as JSM-370, articulated both the Billing
Requirement and the RA Requirement. See id. ("[I]n those instances
where the state owes none or only a portion . . . , the unpaid
liability for the bad debt is not reimbursable . . . until the
provider bills the State, and the State refuses payment (with a
State Remittance Advice)."). Maine Medical did not rely on this
grace period for the alternative documentation.
B. Maine's Process
The Centers for Medicaid and Medicare Services (CMS),
acting on behalf of the Secretary, processes crossover claims from
Maine pursuant to a trading partner agreement with MaineCare. See
-7-
Grossmont Hosp. Corp. v. Sebelius, 903 F. Supp. 2d 39, 43-45
(D.D.C. 2012) (citing 42 U.S.C. §§ 1395h, 1395u). Under the
agreement, medical providers like Maine Medical submit crossover
claims to an Intermediary, a private-sector contractor that
processes the claims for CMS. The Intermediary (1) pays the
Medicare portion as primary payer, and (2) identifies and
aggregates crossover claims, which (3) it submits -- i.e., "bills"
-- to MaineCare on a weekly basis. Ordinarily, MaineCare then
processes these billed claims, issuing RAs that confirm receipt of
the billed claims and identify MaineCare's obligations for each
claim. Providers use these RAs to substantiate their bad debt
reimbursement claims for amounts exceeding MaineCare's obligations.
For FY 2002 and FY 2003, the cost years at issue, Maine
Medical submitted its crossover claims to the Intermediary. The
Intermediary then submitted these claims to MaineCare, pursuant to
the trading partner agreement.7 But from November 15, 2001 to
August 21, 2003, MaineCare failed to process these crossover claims
and to issue RAs for them due to an "anomaly of unknown origin" in
MaineCare's claim management system ("MMIS"). Maine Med. Ctr.,
2014 WL 1234173 at *4. Maine Medical does not appear to have
7 The parties do not meaningfully dispute that Maine Medical
submitted these crossover claims to the Intermediary, or that the
Intermediary submitted these claims to MaineCare, pursuant to the
trading partner agreement. We would reach the same outcome in any
event: if Maine Medical failed to submit its claims to the
Intermediary, then there would be absolutely no evidence that it
made "reasonable collection efforts."
-8-
sought the missing RAs from MaineCare or taken other steps to
rectify the problem during this period of over twenty months.
The MMIS program continued to encounter technical
difficulties, and by the end of 2004 was unable to process any
claims for anyone. In November 2004, the Maine Hospital
Association, of which Maine Medical is a member, urged the Maine
Department of Health and Human Services ("Maine DHHS") to adopt
regulations requiring the issuance of RAs within sixty days after
the close of the hospital fiscal year. But Maine DHHS denied the
request as outside the scope of the rulemaking because it concerned
reports that "d[id] not affect Medicaid reimbursement." MMIS was
taken offline in January 2005, and replaced by a new system, MeCMS.
The new system still encountered difficulties, which Maine is
working to resolve.8
Despite these problems, Maine Medical does not appear to
have taken any individual action to acquire the missing RAs until
early 2005, three years after the problem began in November 2001
8 Evidence in the record suggests that Maine is working both
to resolve the technological glitch and to arrive at settlements
with providers. For example, MaineCare has again authorized Maine
Medical's CPA in this case, Roland Mercier, on behalf of other
clients, to work with MaineCare Eligibility files and "to perform
claim level detail to MaineCare eligibility verification for Maine
Providers who cannot verify MaineCare eligibility prior to
September 1, 2010." Maine DHHS granted the authorization because
Maine DHHS had "recently received data requests from Maine
Providers regarding verification of MaineCare Eligibility" but did
"not have the time or resources to dedicate to respond to these
individual claim level detail data requests."
-9-
and over a year after the relevant cost years concluded in
September 2003. At that time, Maine Medical's CPA, Roland Mercier,
"request[ed] assistance [from MaineCare] . . . for th[e]
discrepancy in crossover processing for [Maine Medical]."
According to Mercier, MaineCare's response suggested that between
the uncertainty of the cause and ongoing difficulties with the
MeCMS, "it was apparent that this older problem could not be
remediated [sic] with the new environment." Instead, Mercier
sought and received permission from MaineCare officials to work
with the Muskie Institute, a "quasi-state agency that assists
MaineCare with certain functions and has MaineCare eligibility
data," to develop alternative documentation.
Mercier submitted the bad debt logs and alternative
documentation to the Intermediary in July 2005. But the CMS
Central Office rejected Mercier's alternative methodology for
compiling crossover bad debts, citing the Congressional moratorium
on CMS's bad debt policy. When informing Mercier of this decision,
the Intermediary lamented that "[i]t is unfortunate that [Mercier]
did not present his methodology to our office prior to us being in
the field for [Maine Medical's] audit, so that an earlier decision
could have been obtained from CMS and communicated to [Maine
Medical]."
Mercier again pressed the Intermediary in early 2006, and
the Intermediary again iterated its position that RAs would be
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required and that bad debt reimbursement claims for FY 2002 and FY
2003 would be rejected without them. It added that Mercier's claim
that "the State cannot produce these [RAs] contradicts" what state
representatives had told them. The Intermediary then denied Maine
Medical's reimbursement claims for crossover bad debt from FY 2002
and FY 2003, totaling $2,859,083, because the bad debt
reimbursement claims were not substantiated by the requisite RAs
denying payment.
A week later, on March 22, 2006, Mercier finally
contacted MaineCare to request the missing RAs for FY 2002 and
FY 2003. But MaineCare declined to issue them. The claims had
never been processed in MaineCare's system, and so MaineCare could
not "at this point verify that [the claims] were ever received as
claimed by the Medicare intermediary." Similarly, because the
claims were never processed, an RA was never issued "and in
addition, obviously cannot now be generated" two to four years
after the fact. "[I]n an effort to resolve [the] issue" between
Maine Medical and Medicare auditors, the Director of Maine DHHS
emphasized that he was "completely confident in the analysis of
[the Muskie Institute] . . . and believe[d] it to be the best
available solution to this problem." In suggesting this solution,
Maine DHHS did not deny or otherwise specify MaineCare's liability
for the claims, or confirm that, had they been processed, MaineCare
would have denied them completely.
-11-
The Muskie Institute had used MaineCare's eligibility
data to verify MaineCare eligibility for patients on crossover
listings from FY 2002 and FY 2003. But the alternative
documentation produced omitted two important types of information
ordinarily present on RAs. First, the alternative documentation
failed to distinguish between crossover claims for Qualified
Medicare Beneficiaries ("QMB") and crossover claims for non-
Qualified Medicare Beneficiaries ("non-QMB").9 Second, the
documentation did not include a claim-by-claim analysis of
MaineCare's obligations because the Muskie Institute assumed that
MaineCare's payment would have been $0 under a MaineCare regulation
eliminating payment for all crossover claims that had been in
effect during the relevant period.10 But the parties vigorously
dispute whether MaineCare would have, or lawfully could have,
denied all reimbursement for Maine Medical's FY 2002 and FY 2003
crossover claims. In particular, the Secretary argues that states
cannot escape at least some liability for QMB crossover claims.
9 To the best of our understanding, the verification of
Medicaid eligibility for all crossover claims, QMB and non-QMB
alike, is important to providers because dual-eligible patients are
presumed indigent under PRM § 312, relieving the provider of the
need to bill the patient for the outstanding debt. The distinction
between QMB and non-QMB patients is important, however, because
while the state could eliminate payment for non-QMB crossover
claims, it cannot escape at least some liability for QMB crossover
claims.
10 MaineCare adopted this regulation on July 1, 1999, and it
continued through 2006. According to Maine Medical, MaineCare
consistently applied this policy to crossover claims.
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See 42 U.S.C. § 1396a(a)(10)(E)(i) (requiring state plans to
provide for Medicare cost-sharing for QMBs); see also PRM § 322
(stating that amounts the state is statutorily obligated to pay are
"not allowable as bad debts"). Yet the alternative documentation
did not identify any of these QMB crossover claims, or calculate
the extent of the resulting obligation.
C. Procedural History
Despite these shortcomings, Maine Medical used this
alternative documentation to appeal the Intermediary's decision
denying reimbursement to the Medicare Provider Reimbursement Review
Board ("PRRB"). The PRRB ruled in favor of Maine Medical, finding
that there is not an "absolute requirement" to bill state Medicaid
programs and obtain a Medicaid RA before claiming crossover bad
debt. The PRRB reasoned that neither the regulation (42 C.F.R.
§ 413.89(e)) nor the relevant manual provisions (PRM §§ 308, 310,
312, and 322) contain a Billing Requirement, but rather require
only "that a provider make reasonable collection efforts and apply
sound business judgment to determine that the debt was actually
uncollectible when claimed." The PRRB relied in part on another
manual provision, PRM-II § 1102.3L, which expressly permitted
alternative documentation in lieu of billing and which was in
effect during the relevant cost years. It accorded JSM-370's
articulation of the RA Requirement "little weight" because it
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neither "set policy, nor convey[ed] new instructions or
clarification of existing requirements to intermediaries."
The CMS Administrator, on the Secretary's behalf,
reversed, reasoning that the PRRB had been incorrect to discount
JSM-370, because it restated HHS's "longstanding" must-bill policy
including the RA Requirement. The decision then proceeded to make
what we interpret to be two findings.
First, it appeared to have applied a per se RA
Requirement (regardless of circumstances), finding that "the
failure to produce the Medicaid [RAs] represents a failure on the
part of [Maine Medical] to meet the necessary criteria for Medicare
payment . . . ." The Secretary also said: "[R]egardless of any
omissions by the State to provide the Medicaid [RAs], [Maine
Medical] was required to bill for and produce the [RA] before
including crossover bad debt claims on its cost reports."
Second, it found that Maine Medical's attempt to provide
alternative documentation did not demonstrate, in any event, that
the regulatory requirements of 42 C.F.R. § 413.89(e) had been met.
The alternative documentation assumed that MaineCare liability
would have been zero. But this was based on Chapter III, Section
45 from the Maine Medicaid Manual that purported to "eliminate"
payments for crossover claims. The difficulty is that Section
1905(p)(3) of the Social Security Act imposes cost-sharing on
states for Qualified Medicare Beneficiaries. See 42 U.S.C.
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§ 1396a(a)(10)(E)(i). While a state may effectively limit
liability by capping Medicaid rates below Medicare rates, it may
not decline payment altogether.11 The Administrator explained why
this makes obtaining a determination from the state necessary:
[T]he State maintains the most current and accurate
information to determine if the beneficiary is dually
eligible at the time of service, and the State's
liability for any unpaid deductible and coinsurance
amounts through the State's issuance of a [RA] after
being billed by the provider. Regardless of a State's
pronouncements, only through billing and receiving a
State Medicaid [RA] can a provider demonstrate that a
State is or is not liable for any portion thereof.
Because the State is required to "process the bills or claims,"
providers may not "write-off a Medicare bad debt as worthless
11 PRM § 322, Medicare Bad Debts under State Welfare Programs,
explains that:
Where the State is obligated either by statute or under the
terms of its plan to pay all, or any part, of the Medicare
deductible or coinsurance amounts, those amounts are not
allowable as bad debts under Medicare. Any portion of such
deductible or coinsurance amounts that the State is not
obligated to pay can be included as a bad debt under Medicare,
provided that the requirements of § 312 or, if applicable,
§ 310 are met.
In some instances, the State has an obligation to pay, but
either does not pay anything or pays only part of the
deductible or coinsurance because of a State payment
"ceiling." For example, assume that a State pays a maximum of
$42.50 per day for SNF services and the provider's cost is
$60.00 a day. The coinsurance is $32.50 a day so that
Medicare pays $27.50 ($60.00 less $32.50). In this case, the
State limits its payment towards the coinsurance to $15.00
($42.50 less $27.50). In these situations, any portion of the
deductible or coinsurance that the State does not pay that
remains unpaid by the patient, can be included as a bad debt
under Medicare . . . .
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without first billing and receiving the [RA] from the State," even
in cases where the "provider has calculated that the State has no
liability." As the Administrator explained, this is consistent
with the regulation in 42 C.F.R. § 413.89(f) governing "the timing
of when a bad debt can be claimed consistent with the general
Medicare documentation requirements." Section 413.89(f) provides
that "amounts uncollectible from specific beneficiaries are to be
charged off as bad debts in the accounting period in which the
accounts are deemed to be worthless." That is, a provider may not
claim a bad debt until the account has been deemed worthless, and,
because the state has the final word on whether it will pay, a
provider cannot deem an account's crossover claims worthless until
it has affirmatively been denied payment from the state.12
12 The Secretary's decision explained that "[t]he basic effect
of [42 C.F.R. § 413.89 and the PRM § 314] is to bar providers from
reporting bad debts on an accrual accounting basis." Palms of
Pasadena Hosp. v. Sullivan, 932 F.2d 982, 983-84 (D.C. Cir. 1991)
(citing 42 C.F.R. § 413.80). Instead, 42 C.F.R. § 413.89 requires
that Medicare bad debts be treated "on a cash basis." Id.
"Accrual" accounting recognizes revenue "when earned,
regardless of when collected," and expenses "when incurred,
regardless of when paid." Id. at 983 (citations omitted).
Similarly, accrual accounting estimates bad debt "[w]hen an account
receivable is created," regardless of when payment is denied, "in
light of experience." Id. By contrast, "cash-based" accounting
only recognizes bad debts "in the accounting period when the
particular account receivable actually becomes worthless." Id. at
984.
Because 42 C.F.R. § 413.89 requires that providers treat
Medicare bad debt on a cash basis, providers may only report (and
receive reimbursement for) Medicare bad debts in the accounting
period in which the account "actually becomes worthless." Palms of
Pasadena Hosp., 932 F.2d at 983-84 (rejecting bad debt
reimbursement claim based on "an estimate of the receivables [the
-16-
The district court affirmed, according substantial
deference to what it characterized as "the Secretary's
interpretation -- through the PRM and must-bill policy -- of her
own regulations." Maine Med. Ctr., 2014 WL 1234173 at *1, 14. The
district court upheld the application of a "bright-line rule," as
it was appropriate to keep the burden "on the potential recipient"
rather than on the federal government "to demonstrate it does not
owe reimbursement." Id. at *20.
II.
Our review of the district court's judgment on the record
is de novo, "applying the same standards to the Secretary's final
action that the district court was bound to apply." Doe v.
Leavitt, 552 F.3d 75, 78 (1st Cir. 2009). We may reverse and set
aside agency actions, findings, or conclusions only "if they are
'arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law' or 'unsupported by substantial evidence.'"
Visiting Nurse, 447 F.3d at 72 (quoting 5 U.S.C. § 706(2)). In so
doing, we are not wed to the district court's reasoning and may
affirm "on any ground made manifest by the record," see Doe, 552
F.3d at 78, but we are limited to the "rationale advanced by the
agency in the administrative proceeding," Citizens Awareness
Network, Inc. v. United States, 391 F.3d 338, 349 (1st Cir. 2004)
(citing SEC v. Chenery Corp., 318 U.S. 80, 95 (1943)).
provider] ultimately would not collect").
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The parties agree on these standards, but dispute the
appropriate level of deference to accord this application of the
Secretary's must-bill policy, and the RA Requirement in particular.
The first question, one of the appropriate deferential
framework, depends on the characterization of the Secretary's
decision. Maine Medical disputes in this appeal the district
court's characterization of the Secretary's decision as applying
the Secretary's direct interpretation of the relevant regulations.
Maine Medical insists instead that the RA Requirement interprets
the interpretative rules (articulated in the PRM) that themselves
interpret the regulations. Maine Medical now also argues that the
RA Requirement interprets JSM-370, a memorandum that itself
interprets the PRM, adding a further layer of interpretation.
Maine Medical argues that because the decision is appropriately
characterized as the latter, considerably less deference is owed;
otherwise agencies would be able to insulate themselves from
judicial review by promulgating vague regulations and vague
interpretations of those regulations. See, e.g., Elgin Nursing &
Rehab. Ctr. v. U.S. Dep't of Health & Human Servs., 718 F.3d 488,
493-94 (5th Cir. 2013) (holding that agency's "interpretation of
its manual interpreting its [published] interpretative regulation"
was not entitled to deference, citing concerns about ensuring fair
notice and preventing agencies from insulating themselves against
review).
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Whatever its merits, this argument has been waived.
Maine Medical not only failed to raise this theory before the
district court, but itself characterized the challenged RA
Requirement as "the Secretary's interpretation of her own
regulations." Pl.'s Mot. J. Admin. R. at *12, Maine Med. Ctr. v.
Sebelius, No. 2:13-CV-00118-JAW, 2014 WL 1234173 (D. Me. Mar. 25,
2014), ECF No. 13 (emphasis added). See Rockwood v. SKF USA, Inc.,
687 F.3d 1, 9 (1st Cir. 2012) ("[A]rguments not raised in the
district court cannot be raised for the first time on appeal."
(citations and internal quotation marks omitted)). We proceed to
treat the Secretary's decision as applying an interpretation of the
regulations in 42 C.F.R. § 413.89.13
Similarly, Maine Medical waived any argument that
Skidmore deference applies under our precedent in Visiting Nurse
Ass'n Gregoria Auffant, Inc. v. Thompson, 447 F.3d 68, 73 (1st Cir.
2006), rather than Seminole Rock substantial deference. In arguing
before the district court, Maine Medical only cited cases applying
Seminole Rock substantial deference (and exceptions thereto), like
Thomas Jefferson University v. Shalala, 512 U.S. 504 (1994). As a
result, we apply the substantial deference framework to the whole
of the Secretary's decision.
13 Indeed, this outcome may be appropriate in this case for
a different reason. Even if the RA Requirement is not a direct
interpretation of the regulations, the Secretary directly
interpreted the C.F.R. regulations in concluding that the
alternative documentation was inadequate. See Parts I & III.
-19-
Accordingly, we afford substantial deference to the
application of the must-bill policy unless it is a "plainly
erroneous" interpretation or "inconsistent with" the regulation's
language. South Shore Hosp., Inc. v. Thompson, 308 F.3d 91, 97
(1st Cir. 2002) (quoting Thomas Jefferson, 512 U.S. at 512). On
its face, the must-bill policy is neither a plainly erroneous
interpretation nor inconsistent with the regulations. Neither
portion of the must-bill policy, the Billing Requirement and the RA
Requirement, contradicts the four "[c]riteria for allowable bad
debt" under 42 C.F.R. § 413.89(e): (1) that the debt is "related to
covered services and derived from deductible and coinsurance
amounts," (2) that the provider made "reasonable collection
efforts," (3) that the debt was "actually uncollectible when
claimed as worthless," and (4) that "[s]ound business judgment
established that there was no likelihood of recovery at any time in
the future." 42 C.F.R. § 413.89(e); see also, e.g., Monterey, 323
F.3d at 790 n.7; Grossmont, 903 F. Supp. 2d at 52. Rather, the
Billing Requirement is a natural interpretation of these
regulations, and the RA Requirement provides a standardized way to
document that it has been met. Cf., e.g., Grossmont, 903 F. Supp.
2d at 52 ("[T]he Secretary reasonably believes that permitting
individual States to rely on their own protocols for bad debt
reimbursement -- whether with respect to billing or supporting
documentation -- could wreak administrative havoc on the Medicare
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system."). Indeed, the Secretary is authorized by statute to
require a provider to "furnish[] such information as the Secretary
may request." 42 U.S.C. § 1395g(a).
While we find that a general RA requirement appears
entitled to deference (subject to one concern, below), we agree
with Maine Medical that a per se RA Requirement would not be. The
Secretary has made exceptions and accepted alternative
documentation from the State where circumstances warranted the
exception. See Grossmont, 903 F. Supp. 2d at 45-46, 48. A per se
RA Requirement is also inconsistent with the regulatory language
that requires "reasonable collection efforts" and the exercise of
"[s]ound business judgment" to determine that there is "no
likelihood of [future] recovery." 42 C.F.R. § 413.89(e)(2) & (4)
(emphasis added); see also Cove, 848 F. Supp. 2d at 28 (recognizing
the possibility that a provider might be denied Medicaid RAs
despite reasonable collection efforts). And the now-repealed PRMII
§ 1102.3L demonstrates that RAs are not the sine qua non of
proof. But while the enforcement of a per se RA Requirement would
not be entitled to deference, it is not inconsistent with the
regulations to require a particular type of documentation, except
under certain circumstances, to demonstrate that the Billing
Requirement has been met. Cf. Grossmont, 903 F. Supp. 2d at 52.
That said, there may be another hurdle less readily
overcome: While in our view the Billing Requirement and a general
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RA Requirement (which is not a per se rule but admits limited
exceptions) are consistent with the statute and regulations, see 42
U.S.C. § 1395hh(a)(1); 42 C.F.R. § 413.89(e), the Secretary has not
consistently adhered to this interpretation. See South Shore, 308
F.3d at 102 (citing Good Samaritan Hosp. v. Shalala, 508 U.S. 402,
417 (1993); INS v. Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987))
("[I]f, over time, an agency interprets a regulation erratically,
that inconsistency may warrant a court in declining to defer to the
agency in a particular situation."). During the cost years in
question, the since-repealed PRM-II § 1102.3L expressly waived the
Billing Requirement and, with it, the RA Requirement. See PRM-II
§ 1102.3L (Rev. 4) (repealed September 2003). "In lieu of
billing," the Secretary would accept alternative documentation of:
" Medicaid eligibility at the time services were
rendered (via valid Medicaid eligibility number),
and
" Non-payment that would have occurred if the
crossover claim had actually been filed with
Medicaid.
Id. The payment calculation would then be audited "based on the
state's Medicaid plan in effect on the date that services were
furnished." Id. Maine Medical argues that this inconsistency
entails that the Secretary's decision -- denying alternative
documentation it previously would have found adequate -- is
entitled to less deference, even within the substantial deference
framework applicable to agency interpretations of their own
-22-
regulations. Cf. South Shore, 308 F.3d at 102 (citing Good
Samaritan, 508 U.S. at 417).
The extent to which inconsistency in interpretation
undermines Seminole Rock deference remains uncertain, but it is
well-established in this circuit that agencies are afforded "a
substantial measure of freedom to refine, reformulate, and even
reverse their precedents in the light of new insights and changed
circumstances." See South Shore, 308 F.3d at 102 (citation and
internal quotation marks omitted); M.C. Stephenson & M. Pogoriler,
Seminole Rock's Domain, 79 Geo. Wash. L. Rev. 1449, 1472-81 (2011)
(collecting cases) (discussing ambiguity in the doctrine regarding
the significance of inconsistency). The repeal of this provision
occurred under unusual circumstances: the Ninth Circuit found that
the since-repealed PRM-II § 1102.3L itself marked a change in the
Secretary's bad-debt-reimbursement policy away from the must-bill
policy we are now asked to affirm. See Monterey, 323 F.3d at 797-
99. But Congress had imposed a moratorium on changes in bad-debtreimbursement
policies. See id. at n.9 (noting that "the Secretary
lacked authority" to effect a change). Following this decision,
the Secretary reinstated the pre-1995 language of PRM-II § 1102.3L,
repealing the billing waiver. See JSM-370. This suggests that the
Secretary did not alter her policy without reason.14
14 Monterey also addressed this inconsistency between the PRMII
§ 1102.3L and the Secretary's application of the must-bill
policy, deferring to the latter. 323 F.3d at 798-99. However,
-23-
The concerns that such a radical shift in policy might
create are also not evident here. Maine Medical concedes that it
did not rely on PRM-II § 1102.3L when responding to the lack of
RAs. Cf. Cove, 848 F. Supp. 2d at 30 (remanding for determination
"of whether Plaintiffs were justified in relying on CMS' prior
failure to enforce the must-bill policy" (emphasis added)). And
Maine Medical also does not suggest that the grace period, created
by the Secretary to "hold harmless" those who acted in reliance on
the alternative documentation scheme before January 2004, should
apply. See JSM-370. That is, on the facts of this case, the
policy shift does not implicate concerns about reliance interests
or inconsistent treatment.
In light of these circumstances, we reject Maine
Medical's argument that the Secretary's inconsistency undermines
the deference owed to the Secretary's determination that the
regulations demand satisfaction of the Billing and general RA
Requirements, subject to limited exceptions. Because such
exceptions to this policy appear to be made on a case-by-case
basis, there remains only the question of whether the Secretary's
there are two significant differences between Monterey and this
case. First, Monterey involved the Secretary's rejection of a
scheme that would avoid billing altogether, not the state's denial
of RAs due to a technical glitch by the state. See id. Second,
PRM-II § 1102.3L was not in existence during the relevant cost
years in Monterey, but was in existence during the cost years here.
See id.
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determination that this was not such an exceptional case was
arbitrary and capricious.
III.
We find that the rejection of Maine Medical's alternative
documentation was not arbitrary and capricious, and affirm on that
basis. Although the Secretary's decision relied heavily on Maine
Medical's failure to provide RAs, the Secretary also found that
Maine Medical failed to demonstrate satisfaction of the statutory
and regulatory requirements. In particular, the Secretary found
that Maine Medical's documentation failed to show that at least two
of the four required bad debt criteria had been met, namely, that
"[t]he debt was actually uncollectible when claimed as worthless,"
42 C.F.R. § 413.89(e)(3), and that Maine Medical had made
"reasonable collection efforts," 42 C.F.R. § 413.89(e)(2).15
The Secretary found that Maine Medical failed to satisfy
the regulatory requirement that the debt be "actually uncollectible
when claimed as worthless" because it lacked adequate documentation
that MaineCare was not liable for any portion of the claimed debt.
42 C.F.R. § 413.89(e)(3); see also PRM § 322 (explaining that
amounts the state is obligated to pay by statute are not allowable
as bad debts). Rather, Maine Medical -- together with the Muskie
15 Because all four criteria must be met to claim a bad debt,
we need not reach the Secretary's finding that Maine Medical failed
to demonstrate that "[s]ound business judgment established that
there was no likelihood of recovery at any time in the future." 42
C.F.R. § 413.89(e)(4).
-25-
Institute -- assumed that MaineCare's liability would be zero based
on a provision in the Maine Medicaid Manual purporting to
"eliminate[]" payment for crossover claims. The Secretary rejected
this inference. By statute, states may only limit their costsharing
liability for QMB crossover claims to the Medicaid rate.
See 42 U.S.C. § 1396a(a)(10)(E)(i). The state has the "most
current and accurate information . . . to determine the State's
cost sharing liability," and thus remains the final authority on
the state's liability. We observe that Maine Medical neither
secured express denial of liability -- even in the letter from the
state authorizing cooperation with the Muskie Institute -- nor
performed its own claim-by-claim analysis to either identify QMB
crossover claims for which MaineCare was statutorily liable or to
determine the extent of the resulting obligation based on
MaineCare's rate for the services provided. It simply assumed that
the state would not pay.
The Secretary found that this first failure also violated
the regulatory requirement in 42 C.F.R. § 413.89(f) that accounts
may only be "charged off as bad debts in the accounting period in
which the accounts are deemed to be worthless." "The basic effect
of these provisions is to bar providers from reporting bad debts on
an accrual accounting basis." Palms of Pasedena Hosp. v. Sullivan,
932 F.2d 982, 983-84 (D.C. Cir. 1991). The Secretary thus found
that Maine Medical's assumption that MaineCare would not pay was
-26-
essentially an attempt to report these bad debts on an accrual
accounting basis, anticipating that the accounts would become
unrecoverable rather than having confirmation that the accounts had
actually become unrecoverable. Because there is no state-issued
determination contemporaneous with the cost-reporting periods of FY
2002 and FY 2003, the debts did not "become worthless" during those
periods.
With respect to the second bad debt criterion, the
Secretary was skeptical that Maine Medical had demonstrated that it
had made "reasonable collection efforts" as required by 42 C.F.R.
§ 413.89(e)(2). Although the Secretary's decision does not
expressly discuss the time gap between the first missing RAs in
late 2001 and the request for assistance in early 2005, the
Secretary did discuss Maine Medical's failure to "maintain
verifiable and supporting documents to justify their requests for
payment." The Secretary's repeated insistence that Maine Medical
"bill" MaineCare or "submit[] claims" to the state indicates that
Maine Medical had an obligation to seek the documentation
confirming MaineCare's denial of payment, and so too to promptly
inquire when such documentation was not forthcoming. This
obligation also stems from the record-keeping requirements of 42
C.F.R. § 413.20, which the Secretary interprets as requiring
providers "to keep 'contemporaneous' records and documentation
throughout the cost year and to then make available those records
-27-
to the intermediary." See 42 C.F.R. § 413.20(a) ("The principles
of cost reimbursement require that providers maintain sufficient
financial records . . . for proper determination of costs payable
under the program." (emphasis added)). But Maine Medical failed to
acknowledge or seek the missing RAs until several years later, in
violation of § 413.20's record-keeping requirements. This
violation of § 413.20 suggests that Maine Medical failed to make
reasonable collection efforts under § 413.89.
Finally, we reject Maine Medical's argument based on
dicta in Cove, 848 F. Supp. 2d at 28, that the Secretary's refusal
to make an exception and accept the alternative documentation is
arbitrary and capricious under the circumstances. This is not a
case, alluded to in Cove, where Maine Medical has "establish[ed]
that they have submitted the correct forms and made the right
applications," but the Secretary has "not accept[ed] an alternative
form of documentation or . . . require[d] that the states comply
with her regulations." Cove, 848 F. Supp. 2d at 28 (suggesting
such a decision would be arbitrary and capricious). Although Maine
Medical initially submitted the correct forms to the Intermediary,
it failed to address the missing RAs in a timely manner. This is
not a case where MaineCare has flatly refused to issue the RAs; it
is a case where a technical glitch impeded the issuance of RAs, and
the provider waited years before seeking to address the issue. As
-28-
the Secretary had been aware, Maine Medical was the only hospital
to encounter this problem.16
What happened here is unfortunate: MaineCare's computer
dysfunctions deprived Maine Medical of the RAs it could have
expected to receive in ordinary course; Maine Medical did not
notice the absence of these RAs right away; and the Secretary (who
needs to have a system that can reliably process millions of
transactions from a large number of providers in 50 states)
concluded that Maine Medical's efforts to address the problem were
not enough to justify reimbursement in the absence of RAs. In
affirming that conclusion, we do not ourselves determine that Maine
Medical acted unreasonably. Rather, we merely sustain the
Secretary's determination that Maine Medical's efforts did not
justify an exception to the RA Requirement because we cannot say
that determination was arbitrary and capricious.

* * *

16 It is not apparent from the record whether other hospitals
successfully produced RAs because they followed up on the error
within an adequate time or because the technical issue did not
affect the processing of their claims in FY 2002 and FY 2003.
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Outcome: We affirm. No costs are awarded.

Plaintiff's Experts:

Defendant's Experts:

Comments: