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

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

-3-

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.

-4-

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."

-5-

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.

-6-

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

-10-

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.

-12-

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

-13-

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.

-14-

§ 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 . . . .

-15-

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").

-17-

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).

-18-

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

-20-

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,

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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.

-24-

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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We affirm. No costs are awarded.