MEMORANDUM

LUDWIG, District Judge.

This action reviews the decision of the Secretary of the Department of Health and Human Services Kathleen Sebelius, dated September 11, 2012, as issued by the Administrator of CMS (Centers for Medicare and Medicaid Services). That decision followed the July 12, 2012 remand of the case to the agency by this court (doc. no. 40). It affirmed the May 17, 2010 determination by CMS, which had in turn affirmed the March 23, 2010 determination of the PRRB (Provider Reimbursement Review Board). Jurisdiction: review, 42 U.S.C. § 1395oo(f)(1); federal question, 28 U.S.C. § 1331.

The Secretary's decision denied plaintiffs' statutory claims for Medicare payments for serving a disproportionate share of low-income patients during 2002, known as "DSH adjustments,"1 Section 1886(d)(5)(F)(vi) of the Social Security Act (Act), 42 U.S.C. § 1395ww(d)(5)(F)(vi) — as to Nazareth, $250,751; St. Agnes, $312,520.

This case is unlike Cooper Univ. Hosp. v. Sebelius, 636 F.3d 44 (3d Cir.2010). The substantive issue here is whether denial of Medicare DSH payments for services to specified low-income individuals under Pennsylvania's CMS-approved Medicaid state plan was fair and reasonable given clear Constitutional requirements and the standards of the Administrative Procedures Act (APA), 5 U.S.C. §§ 701-706. Plaintiffs contend (1) the denial violated principles of equal protection and was, therefore, Constitutionally impermissible, and (2) it was arbitrary and capricious under the APA. For the reasons now discussed, plaintiffs' position will be upheld.

Plaintiffs' motion for summary judgment (doc. no. 16) asserts that under the regulation implementing the Medicare DSH statute, as amended, 42 C.F.R. § 412.106(b)(4) (2000), there are two "diametrically opposite" interpretations of the statute's requirements. Both, they say, are unreasonable and as a matter of Constitutional law disadvantage them. Pls. supp. br. (doc. no. 77 at 4-6); pls. submission on remand, supplemental administrative record (SAR) 85-86, 88-94. First, the regulation precludes Medicare DSH adjustments for days of inpatient hospital services to low-income general medical assistance (GA) patients not eligible for Medicaid. Second, it permits those adjustments in states serving similar low — income patients engaged in a Section 1115 waiver project2 under Subchapter XI, Section 1115 of the Act, 42 U.S.C. § 1315 — and this is without regard to the patient's eligibility for Medicaid.3

In 2010, plaintiff hospitals sued defendant Secretary for Medicare DSH adjustments for fiscal year 2002, together with statutory interest under 42 U.S.C. § 1395oo(f)(2). Pls. supp. br. (doc. no. 77 at 20, 28, 42); pls. supp. sur-reply br. (doc. no. 86 at 2-3).

Defendant cross-moved for summary judgment (doc. no. 21). Defendant's argument is that the challenged decisions involved two separate groups of individuals who are classified differently under the Act and who receive medical assistance through dissimilar programs. Therefore, there was no Constitutional or APA violation. The cross-motion reasserts procedural and other grounds previously ruled on in this case.4 Its foremost point is that "the result here is axiomatic in view of the dispositive decision in Cooper"; and "to include GA patients in the Medicare DSH calculation is not authorized by law." Def. supp. br. (doc. no. 79 at 1), def. supp. reply br. (doc. no. 83 at 16). This memorandum disagrees.

Agency Record Prior to July 12, 2012 Remand

For fiscal year 2002, plaintiffs' reports to the Intermediary listed costs of inpatient hospital services that were partially reimbursed by Medicare and Medicaid DSH adjustments. Pennsylvania's Medicaid state plan included a Medicaid DSH in the form of a state-specific, lump sum allotment that was distributed to eligible hospitals such as plaintiffs.5 The state plan amendment at issue here paid additional Medicaid DSH directly to plaintiff hospitals6 — Nazareth about 57 percent of actual costs and St. Agnes about 62 percent. Coyle decl. ¶ 35, SAR 114 (see Coyle's qualifications, SAR 106); pls. supp. br. (doc. no. 77 at 30 n. 24).

In their reports as to Medicare DSH adjustments, plaintiff hospitals included costs of hospital services for GA inpatients along with costs for Medicaid inpatients. They did so in protest against policies stated in CMS's Program Memorandum (PM) A-99-627 and the regulation implementing the Medicare DSH statute, 42 C.F.R. § 412.106(b)(4). On May 12, 2004 and August 20, 2004, respectively, the Intermediary notified plaintiffs that the claimed GA days were ineligible as "only State supplementation" and would not be counted — which reduced the Medicare DSH payments. Intermediary's position papers and notices of program reimbursement, administrative record (AR) 467-470, 475-476, 516-518, 828-846 (Nazareth); AR 322-325, 329-330, 333-335, 373-375, 813-822 (St. Agnes).

Plaintiffs appealed the Intermediary's determination to the PRRB — Nazareth on August 25, 2004, and St. Agnes on February 17, 2005. AR 825-846; AR 35 & n. 1, 809-822. On February 29, 2008, Nazareth's case was heard on stipulated facts. AR 36-37, 82-83; 2/29/08 PRRB Hr'g, N.T. 7:22-25, AR 63. Nazareth cited the Medicare DSH statute, 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) ("number of the hospital's patient days for such period which consist of patients who (for such days) were eligible for medical assistance under a State plan approved under Subchapter XIX [Medicaid]...."). Nazareth had contended that this statutory phrase meant it should receive reimbursement because Pennsylvania provided hospital services to low-income, non-Medicaid-eligible inpatients through a Medicaid state plan approved by CMS. See 2/29/08 PRRB Hr'g, N.T. 11:18-12:16, 14:9-15:9, 28:9-25, AR 64-65, 68. (Plaintiffs acknowledge that this issue is now moot, given Cooper's holding that defendant's interpretation of the Medicare DSH statute was not improper.8)

In a final position paper, Nazareth also contended that it was unfair to disallow its costs for low-income GA inpatients. Reason: similar hospital costs were compensated under the Medicare DSH statute as implemented by the amended regulation, 42 C.F.R. § 412.106(b)(4) (2000), in states that had obtained a waiver of Medicaid eligibility requirements for patients served by a Section 1115 project.9 Under this view, both Pennsylvania's state plan and other states' Section 1115 waiver projects served low-income persons who were not eligible for Medicaid, and both used federal funds to do so.10

On March 23, 2010, the PRRB upheld the Intermediary's disallowance of the costs claimed for GA inpatients. PRRB decision, AR 33-41. CMS notified plaintiffs that the PRRB's determination would be reviewed on the Administrator's own motion and advised them of the right to submit comments, which plaintiffs did on April 27, 2010.11 AR 17-21, 28-29.

On May 17, 2010, CMS's Administrator affirmed the PRRB's ruling. AR 2-16. It determined that hospital services for GA inpatients "are for patients who are not eligible for Medicaid but rather are only eligible for State general assistance." AR 12 & n. 26. Also, the Medicare DSH statute "requires that for a day to be counted, the individual must be eligible for `medical assistance'" under the Medicaid statute. AR 13-14. The Administrator did not heed plaintiffs' April 27, 2010 comments, concluding that GA "days are not counted as Medicaid days for purposes of the Medicare DSH calculation."12 AR 2-3, 14-15.

The Administrator did not consider the rationales for amending the implementing regulation, 42 C.F.R. § 412.106(b)(4) (2000). That amendment permitted all inpatient hospital days funded under a Section 1115 waiver project to be counted in the Medicare DSH calculation — regardless of a patient's eligibility for Medicaid.13 See pls. Apr. 27, 2010 comments, AR 18-20 (rationales). As stated by the Secretary in 2000, the purpose was to compensate providers through Medicare DSH adjustments for the costs of services to Section 1115 patients who could not otherwise have been made eligible for Medicaid. Interim final rule, 65 Fed.Reg. 3136, 3137, 3139 (Jan. 20, 2000), rulemaking record (RR) 1-2, 4 (doc. no. 74 at 1-2, 4); final rule, 65 Fed.Reg. 47054, 47086-47087 (Aug. 1, 2000), RR 46, 78-79 (doc. no. 75 at 33-34).

Record on July 12, 2012 Remand

On remand, CMS's Administrator asked plaintiffs, BlueCross Blue Shield Association (BCBS) — the Medicare Administrative Contractor now assigned to plaintiffs' cases — and CMS's Director of Hospital and Ambulatory Policy Group to "respond with supporting documentation" to three questions.14 The responses "would be included in the record and considered in making the required findings and conclusions." SAR 211-212. Each responded;15 but supporting evidence was submitted only by plaintiffs. SAR 82-151.

As approved by CMS for fiscal year 2002,16 Pennsylvania's Medicaid state plan contained state plan amendment (SPA) 94-08, Attachment 4.19A at 25-26, entitled "Methods and Standards for Establishing Payment Rates-Inpatient Hospital Care" — "Additional Disproportionate Share Payment." SAR 955-956; Piper report at 2, SAR 132 (see Piper's qualifications, SAR 141). That amendment pertained to hospitals serving "a large number of Medicaid and medical assistance eligible, low[-]income patients, including those eligible for general assistance, who[m] other providers view as financially undesirable." Attachment 4.19A at 25, SAR 955; Coyle decl. ¶¶ 8, 13, SAR 107, 109; Piper report at 2, SAR132. It also set forth eligibility criteria as to a patient's low-income ceiling in order for hospital inpatient care to be covered under Pennsylvania's Medicaid plan.17 Attachment 4.19A at 25, SAR 955; Coyle decl. ¶¶ 8-11, SAR 107-108; see also stipulations before the PRRB, ¶¶ 2, 5, AR 83.18 Under SPA 94-08, plaintiffs cooperated in the delivery of inpatient care to low-income individuals who were not eligible for Medicaid in Pennsylvania.19

For fiscal year 2002, as noted, plaintiffs were partially reimbursed for their costs of inpatient hospital services under SPA 94-08. Those payments were federal funds under Sections 1903 and 1905 of the Act, 42 U.S.C. §§ 1396b, 1396d. Piper report at 1-4, SAR 131-134; Attachment 4.19A at 25-26, SAR 955-956. Some funds used to cover actual costs also came from Medicaid DSH allotments under Section 1923 of the Act, 42 U.S.C. § 1396r-4 and from plaintiff hospitals. Coyle decl. ¶¶ 34-38, 40-41, SAR 113-115.

Pennsylvania's Medicaid agency, its Department of Public Welfare (DPW), and Medicaid managed-care organizations paid hospitals for Medicaid and GA patient care in the same way20 Coyle decl. ¶¶ 22-27, SAR 111-112. "Identical payment rates appl[ied] for traditional Medicaid beneficiaries and ... GA program recipients in Pennsylvania." Id. at ¶¶ 22, 24, SAR 111. For fiscal year 2002, "Pennsylvania Medicaid used the Medicare version 19 DRG21 grouper to calculate the payment for inpatient hospital services ... using a hospital-specific base rate per case, multiplied by the applicable DRG case weight, per the applicable DRG table for both GA patients and traditional Title XIX Medicaid patients."22 Id. at 25, SAR 111; Piper report at 9, SAR 139.

Under Pennsylvania's Medicaid state plan in fiscal year 2002, medical coverage was the same for GA patients and others eligible for the Medicaid program. Coyle decl. ¶ 5, SAR 106. Both categories of patients were "treated exactly the same way." Id. ¶ 6, SAR 107. Plaintiffs processed roughly the same proportion of Medicaid and GA cases — at the same cost for comparable levels of illness. Coyle decl. ¶¶ 26-27, SAR 112; id. ¶ 48, SAR 116 ("no material difference in the types of patients or acuity of care ... that turns on whether their medical assistance ... [wa]s funded" under Medicaid or GA). Because the same rates of payment applied to Medicaid and GA patients for comparable illnesses, plaintiffs lost the same amounts of money in treating both categories of patients.

As to cost-reporting, Pennsylvania's DPW and its hospitals did not distinguish between costs or other statistics for Medicaid and GA patients — "all such patient days, cases, costs, and charges [were] equally reported as undifferentiated Pennsylvania medical assistance activity." Coyle decl. ¶ 28, SAR 112; id. ¶¶ 28-32, SAR 112-113. "Indeed, the sole and exclusive reason for a Pennsylvania hospital to differentiate traditional Medicaid and GA patient statistics is CMS's differential treatment of the two categories ... for purposes of performing the Medicare DSH calculation...." Id. ¶ 31, SAR 113.

Also, there was no significant difference between costs of inpatient hospital services for GA patients as compared to Section 1115 waiver patients not eligible for Medicaid. Coyle decl. ¶¶ 47-48, SAR 116. Plaintiffs illustrated this point using a "sister" hospital — St. Francis Hospital in Wilmington, Delaware. Id. ¶¶ 43-44, SAR 115. Delaware Medicaid is administered as a Section 1115 waiver program. Allowable costs were dealt with similarly whether funded through Pennsylvania's SPA 94-08 as part of its Medicaid state plan or through a Section 1115 waiver project. Id. ¶ 47, SAR 116. CMS permitted St. Francis — like every other hospital in Delaware or other Section 1115 waiver states — to include all days funded through the state's medical assistance program in the Medicare DSH calculation. But Nazareth and St. Agnes were not permitted to do so for a greater number of comparable and even lower-income GA patients.23 "Had the Plaintiff Hospitals been located just a few miles away, in Delaware, such as their affiliated hospital, St. Francis, these additional sums all would have been paid." Id. ¶ 42, 49, SAR 115-116. This afforded Delaware hospitals a significant financial and competitive advantage over Pennsylvania hospitals. Coyle decl. ¶¶ 49-54, SAR 116-118.

In at least 1024 of the 44 states that currently utilize Section 1115 waiver programs, inpatient hospital services for low-income, non-elderly adults — i.e., patients comparable to those served by Pennsylvania's GA program — are funded with federal matching payments under Sections 1903 and 1905 of the Act, 42 U.S.C. §§ 1396b, 1396d. Piper report at 3, 5, SAR 133, 135. Hospitals in nine of those states were also permitted to count days of service to non-Medicaid-eligible expansion patients in the Medicare DSH calculation. Piper report at 6-9, SAR 136-139. Most, if not all, Pennsylvania GA patients would be eligible for inpatient hospital care under these waiver programs, if residents of those states. Id.

States typically use Medicaid DSH allotments under Section 1923 of the Act, 42 U.S.C. § 1396r-4, to pay for services to non-Medicaid-eligible Section 1115 expansion patients under budget-neutral principles — "[t]hat is, projected federal spending under the waiver is expected to be no more than projected federal spending under the traditional Medicaid State Plan program."25 Piper report at 5-6, 11, SAR 135-136, 141.

As BCBS agreed, plaintiffs were paid for hospital services to GA inpatients in 2002 "using the same methodology as categorically or medically needy Medicaid beneficiaries." SAR 154. It also found no significant distinction between inpatients receiving care under a Section 1115 waiver and those receiving care under Pennsylvania's state plan: its comment was — "it appears possible that inclusion of the Pennsylvania GA categories may have been approved in a [Section] 1115 waiver request, all things being equal...."26 SAR 155.

Rulemaking Record

The rulemaking record is not large — it includes the January 20, 2000 interim final and August 1, 2000 final rules as published in the Federal Register; public comments from 11 hospitals; and the Medicare Payment Advisory Commission (MedPAC), Report to Congress: Medicare Payment Policy (March 2000), which "HHS considered." Nov. 20, 2012 letter of def. counsel (doc. no. 73 at 2); MedPAC report, RR 203-383 (doc. no. 75 at 159-338). The record does not contain a discussion of the MedPAC report.27 Defendant certified these materials to be the complete record. Nov. 9, 2012 letter of def. counsel (doc. no. 71).

The sole record of the Secretary's analysis and response to the public comments appears in the Federal Register, in pertinent part:

Final rule, 65 Fed.Reg. 47054, 47086-87, RR 46, 78-79 (doc. no. 75 at 1, 33-34).

Several Pennsylvania hospitals28 commented on the January 20, 2000 interim final rule that unfavorably contrasted non-Medicaid-eligible GA patients and non-Medicaid-eligible Section 1115 patients. Pa. hospital comments, RR 5-45 (doc. no. 74 at 5-45). Comments by Hospital & Health System Association of Pa. (HAP) — a seemingly objective authority — presented questions central to this litigation.29

Discussion

Defendant's rulemaking and reimbursement decisions are reviewed under the standards of the APA, 5 U.S.C. §§ 701-706. Under the APA "we `hold unlawful and set aside agency action, findings, and conclusions' that are found to be `arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'" CBS Corp. v. FCC, 663 F.3d 122, 137 (3d Cir. 2011) (quoting 5 U.S.C. § 706(2)(A)), cert. denied, ___ U.S. ___, 132 S.Ct. 2677, 183 L.Ed.2d 712 (U.S. June 29, 2012); Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Ins. Co., 463 U.S. 29, 41, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (agency standards promulgated under the informal rulemaking procedures of § 553 of the APA governed by § 706(2)(A)). See also Robert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 280-82, 284 (3d Cir.2002) (APA governed review where the broad deference of Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) applied to the agency's Medicare policy guidelines).

The scope of review of Constitutional questions is "more searching." CBS Corp., 663 F.3d at 137. In cases involving equal protection of the laws, "we must consider the facts and circumstances behind the law, the interests which the State claims to be protecting, and the interests of those who are disadvantaged by the classification." Biener v. Calio, 361 F.3d 206, 214 (3d Cir.) (Nygaard, J.) (citation and internal quotation marks omitted), cert. denied, 543 U.S. 817, 125 S.Ct. 55, 160 L.Ed.2d 24 (2004). Equal protection "keeps governmental decisionmakers from treating differently persons who are in all relevant respects alike." Nordlinger v. Hahn, 505 U.S. 1, 10, 112 S.Ct. 2326, 120 L.Ed.2d 1 (1992); FCC v. Beach Commc'n, Inc., 508 U.S. 307, 313-14, 113 S.Ct. 2096, 124 L.Ed.2d 211 (1993) (primary inquiry is whether there is a rational basis for the challenged classification). For standards and scope of review, see rulings Oct. 16, 2012 mem. (doc. no. 66 at 3-11, 2012 WL 4889278).

Here, defendant's reimbursement decisions were based in large part on Title 55 of Pennsylvania's administrative code that governs the state's medical assistance program. In defendant's view, as set out in various regulations, GA hospital inpatients receive "health care services under a State-only approved and funded program." Adm. supp. decision, SAR 41. GA recipients are eligible for "state-only" benefits, including "[o]ne acute care inpatient hospital admission per fiscal year" — i.e., "only State-funded for this classification of patient" and "funded solely by State funds." Id., SAR 37-38, 41 ("hospital is paid for covered GA inpatient services through a State-only funded payment"). Furthermore: "State-only paid and funded" inpatient hospital services for GA patients "are not in the State plan, but rather are referenced and authorized by the State Code." Id., SAR at 37. "State-only" refers to the regulatory scheme and source of funding as characterized by defendant.

These assertions are not supported by substantial evidence or consistent with the public comments in the rulemaking record. See CBS Corp., 663 F.3d at 137 (agency action is arbitrary and capricious where "`an explanation ... runs counter to the evidence'") (quoting State Farm, 463 U.S. at 43, 103 S.Ct. 2856). Each as well "`is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.'" Id. The cited state regulatory law is immaterial because SPA 94-08 governs here. See id. ("`agency has relied on factors which Congress has not intended it to consider'"). SPA 94-08 was misread by defendant — or not properly considered. See id. ("`entirely failed to consider an important aspect of the problem'").

Medicaid is "a cooperative program between the state and federal governments to provide medical assistance to those with limited financial resources." Lewis v. Alexander, 685 F.3d 325, 331 (3d Cir.2012), cert. denied, ___ U.S. ___, 133 S.Ct. 933, 184 L.Ed.2d 724 (U.S. Jan. 14, 2013). State participation in the Medicaid program is voluntary. In order to qualify, a state must create a "state plan" for medical assistance consistent with the requirements of Section 1902 of the Act, 42 U.S.C. § 1396a, State plans for medical assistance. Lewis, 685 F.3d at 331-32; Cooper, 686 F.Supp.2d at 486 (citing 42 C.F.R. § 430.10).30 A state plan "must ... provide that it shall be in effect in all political subdivisions of the State, and, if administered by them, be mandatory upon them." 42 U.S.C. § 1396a(a)(1). Once a state elects to participate, it must comply with federal statutes, regulations, and standards — this includes conforming to its particular Medicaid state plan. See Lewis, 685 F.3d at 335, 342-43, 345-46 (Medicaid statute preempted conflicting state law requirements by virtue of the Supremacy Clause); Elizabeth Blackwell Health Ctr. for Women v. Knoll, 61 F.3d 170, 178-79 (3d Cir.1995) (Supremacy Clause "compels compliance ... with federal law and regulations").

In fiscal year 2002, Pennsylvania's Medicaid state plan contained SPA 94-08, and the plan, as amended, had been approved by CMS. As mandated by Section 1902 of the Act, 42 U.S.C. § 1396a(a)(13)(A)(iv), the plan was required to "take into account ... the situation of hospitals which serve a disproportionate number of low-income patients with special needs." Id. This is what Pennsylvania did in SPA 94-08 — authorizing the payment of Medicaid funds under Sections 1903 and 1905 of the Act, 42 U.S.C. §§ 1396b, 1396d to acute care hospitals for inpatient services to medical assistance beneficiaries, including non-Medicaid-eligible GA inpatients.31 Attachment 4.19A at 26, SAR 956; see also 42 C.F.R. § 430.10 ("plan contains all information necessary for ... Federal financial participation").

Defendant abstracts a separate, more general category of Medicaid DSH under Pennsylvania's state plan as authorized by Section 1923 of the Act, 42 U.S.C. § 1396r-4(f) (lump sum allotments paid to disproportionate share hospitals). Adm. supp. decision, SAR 39-40 & n. 39 (citing Attachment 4.19A at 16-17, SAR 918-921; 55 Pa.Code §§ 1163.24, 1163.67). See Children's Seashore House v. Waldman, 197 F.3d 654, 656 (3d Cir.1999) (§ 1396r-4 "outlines the specifications" and "set the parameters for a state's provision of [these] DSH adjustments"); Univ. of Wash. v. Sebelius, 634 F.3d 1029, 1035 (9th Cir.2011) (comparable general DSH provision).32 But this DSH provision is not at issue here. Plaintiffs sought Medicare DSH adjustments for services provided under SPA 94-08 inasmuch as its plain terms permitted Medicaid DSH payments "in addition to ... disproportionate share payments described in other portions of this state plan." Attachment 4.19A at 25, SAR 955.

Though noting SPA 94-08, defendant's explanation is that it "relates to an `additional' Medicaid DSH payment which is made for patients of Institutions for Mental Disease (IMD) and is not a description of the foregoing general DSH formula."33 Adm. supp. decision, SAR 40 n. 38. There is no dispute but that SPA 94-08 extended DSH payments to institutions providing mental health services for certain patients. See Attachment 4.19A at 25, SAR 955 (IMD patients "also qualify"). However, that does not negate the accompanying grant of additional DSH payments to acute care hospitals for services to GA inpatients. To this significant extent, defendant has disregarded SPA 94-08's other provisions.

Uncertainty about the contents of Pennsylvania's state plan may have led to other misconceptions. Defendant asserts that a qualifying hospital's Medicaid DSH payment "is not a DRG payment based on the costs of a particular GA inpatient." Adm. supp. decision, SAR 39 (citing 55 Pa.Code § 1163.67(i), (j) (DPW "will determine prospectively the annual [DSH] payment for each qualifying acute care general hospital... [and] divide the annual ... payment into 12 monthly payments")). While this may be a fair synopsis of the more general DSH provision, it is not an accurate summary of SPA 94-08. It sets forth eligibility criteria as to an individual inpatient's low-income status and the method for paying hospitals — on a per patient and per case, diagnostic-specific basis — according to the same rates used for Medicare-Medicaid beneficiaries. Attachment 4.19A at 26, SAR 956. And the funding mechanism for services to Medicaid and GA inpatients is also the same — federal matching payments under Sections 1903 and 1905 of the Act, 42 U.S.C. §§ 1396b, 1396d.

Pennsylvania's GA program is a creature of state law. But for fiscal year 2002, the record does not show what effect, if any, the cited regulations had on the administration of SPA 94-08.34 Moreover, the regulations cited to support the "state-only" rationale are put forth primarily in the inapposite context of the more generalized DSH provision. Adm. supp. decision, SAR 37-41. For the most part, the regulations were adopted before October 12, 1995, the date of CMS's approval of SPA 94-08. Some were amended after SPA 94-08 became retroactively effective to October 30, 1994. But none of the amended regulations had an effect on SPA 94-08 — with an exception referred to by defendant as particularly important: the one-day annual limit on inpatient hospital stays for GA recipients. Id., SAR 37, 41, 43. Defendant: "GA patients are eligible for a state-only benefit which includes certain limited hospital services," which "may be considered to be overly restrictive." Id., SAR 37, 43. However, the one-day limitation was not in effect until 2005. During fiscal year 2002, hospital inpatient services were not so limited. See Dept. of Public Welfare, 35 Pa. Bulletin 4811 (No. 35 Aug. 27, 2005); 55 Pa.Code §§ 1101.31(e)(iv)(A), 1101.31(f)(1)(i) (as amended effective Aug. 29, 2005).35

Here, the distinctions made in the agency's rulemaking and reimbursement decisions do not justify the disparate treatment of two groups of hospitals — hospitals in Pennsylvania that serve GA inpatients under SPA 94-08 versus hospitals in other states that also serve non-Medicaid-eligible, low-income inpatients under a Section 1115 waiver. "A classification such as this one `must be reasonable, not arbitrary, and must rest upon some ground of difference having a fair and substantial relationship to the object of the legislation, so that all persons similarly circumstanced shall be treated alike.'" Medora v. Colautti, 602 F.2d 1149, 1152 (3d Cir.1979) (quoting Reed v. Reed, 404 U.S. 71, 76, 92 S.Ct. 251, 30 L.Ed.2d 225 (1971)). In Medora, the state agency's regulatory classification contravened the equal protection clause because it "ignore[d] the common denominator of need, and create[d] a classification that bears no relation to the legislatively declared purpose of the general assistance program." Id. See Muwekma Ohlone Tribe v. Kempthorne, 452 F.Supp.2d 105, 115-16 (D.D.C.2006) (equal protection inquiry was whether the agency proffered a rational basis for requiring an Indian tribe to adhere to regulatory procedures while exempting other similarly situated tribes).

That defendant's classification had a significant adverse financial impact on plaintiff hospitals is undisputed. In the August 1, 2000 final rule, the Secretary acknowledged receipt of public comments from 11 hospitals that expressed their concerns: "States that did not have a Medicaid expansion waiver in place received an unfair advantage," and "comments from Pennsylvania hospitals supported the continued inclusion of general assistance days in ... the Medicare DSH adjustment calculation as well as waiver days." 65 Fed.Reg. 47054, 47086 (Aug. 1, 2000), RR 78 (doc. no. 75 at 33). Defendant's response was brief: "While this does advantage States that have a Section 1115 expansion waiver in place, these days are considered to be Title XIX days by Medicaid standards."36 Id. at 47087, RR 79 (doc. no. 75 at 34). But simply noting this does not justify why hospitals such as plaintiffs were treated differently.

On remand, defendant found as "a matter of law" that "GA patients and Section 1115 patients are not the same." Adm. supp. decision, SAR 41, 43, 41-47. Also, the "category of patients, the services covered, the means of financing to maintain budget neutrality, the delivery system, and impact on other parts of the state plan reflect[] that these plan[s] are separate and distinct from each other and not interchangeable, as in `but for the lack of a waiver approval' similarity." Id., SAR 47.

One such distinction made by defendant is that the patient populations are different. Adm. supp. decision, SAR 41. As to Pennsylvania's GA inpatients: "State-only inpatients are just that — patients receiving support for health care services under a State-only approved and funded program." Id., SAR 41. And "the funding source[s] for Section 1115 patients and the GA patients... are not the same, but separate and distinct methods of financing." Id., SAR 42. This also seems inapt. The talisman of "state-only" does not overcome the substantial evidence that during fiscal year 2002, SPA 94-08 was contained in Pennsylvania's CMS-approved Medicaid state plan. Under that plan amendment, inpatient hospital services were funded with federal matching funds — the same source of funds as used for Medicaid services and Section 1115 waiver projects.

Another difference as to patient populations: "Section 1115 patients are part of an expanded population whose care is considered an approved Federal expenditure under Medicaid.... [T]he costs associated with the populations are matched based on Section 1115 authority." Adm. supp. decision, SAR 41. In this litigation37 defendant says that unlike Section 1115 waivers, "no statute vests in the Secretary the authority to depart from the rule that patients must be `eligible for Medicaid' in order to be included in the Medicare DSH calculation." Def. supp. reply br. (doc. no. 83 at 14). "There is no [statutory] basis for the Secretary to exercise her discretion... broadly enough to include GA patients." Id.

Defendant's argument emphasizes Subchapter XI, Section 1115 of the Act, 42 U.S.C. § 1315. But it discounts evidence of record that under SPA 94-08 inpatient hospital services for Pennsylvania's GA patients was specified by the authority of Subchapter XIX, Section 1902 of the Act, 42 U.S.C. § 1396a (Medicaid state plans). Neither the inpatients nor the hospital services made available under SPA 94-08 in contrast to Section 1115 waiver programs differ significantly — except as to the hospital's statutory path to federal matching funds. It is unclear why one route should be viewed as more authoritatively supported or administratively desirable than the other.

Section 1115 empowers the Secretary to waive specific requirements of the Act, including those for a state's Medicaid plan, for "any experimental, pilot, or demonstration project which, in the judgment of the Secretary, is likely to assist in promoting the objectives of Subchapter ... XIX [Medicaid]...." 42 U.S.C. § 1315(a)(1). And the "costs of such project ... shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures" under the state plan. Id. § 1315(a)(2)(A). Other than this language, the statute contains no procedure or criteria for decision-making that the Secretary must follow in approving a waiver project. On the surface, the statute can be read to suggest that Congress delegated a "total" and "unfettered" discretionary power — as defendant candidly asserts here. See, e.g., def. supp. reply br. (doc. no. 83 at 13). Nevertheless, detailed regulations have been promulgated governing waiver projects. See 42 C.F.R. § 430.25, Waivers of State plan requirements.

Under Subchapter XIX — Medicaid — specific statutory and regulatory requirements must also be met for approval of a state plan or a plan amendment that serves as a basis for federal financial participation. See 42 U.S.C. § 1396a; 42 C.F.R. §§ 430.10-430.20 (submittal, review, and effective dates of state plans and plan amendments). Under SPA 94-08, payments are made directly to a hospital as part of the state Medicaid program — no waiver of state plan requirements is required. See HAP comments, RR 28-29 (doc. no. 74 at 28-29) ("Indeed ... a better case can be made for including Pennsylvania general assistance days in the Medicare DSH.... [A]n expansion waiver under Section 1115 is not part of a state plan... it is a waiver of certain required state plan provisions...."). See also pls. supp. br. (doc. no. 77 at 22-24, 26-28) (excerpts of comments by Pa. hospitals).

As to issues of federal and state sovereignty, "state-only" also refers to the choice to undertake the costs and burdens of a particular medical assistance program. Defendant: the "eligibility criteria for ... Section 1115 populations are federally approved and set forth in the terms and conditions of the ... project." And "the Section 1115 waiver has been reviewed and approved by the Federal government as likely to assist in promoting the objectives of Medicaid." Id., SAR 41-42. "No such Federal determination has been made with respect to a State-only program." Id., SAR 42; see also def. supp. br. (doc. no. 79 at 21) ("State-only GA benefits ... are created, determined, and administered exclusively by the State ... with absolutely no oversight or involvement from the federal government.").

SPA 94-08, however, is not limited to a "state-only" program. It is an essential part of the Medicaid system and subject to CMS's oversight. CMS reviewed and approved the eligibility criteria and other terms set forth in that state plan amendment. It determined that the objectives of the Medicaid statute were promoted by authorizing under SPA 94-08 "additional payments to meet the needs of those facilities which serve a large number of Medicaid and medical assistance eligible, low[-]income patients, including those eligible for general assistance, who[m] other providers view as financially undesirable." Attachment 4.19A at 25, SAR 955.

Another difference according to defendant: "State-only programs may offer no, or varying levels of payment for health care services ..., which vary even from county to county or municipal jurisdiction within a state." Adm. supp. decision, SAR 41, 43 ("services provided and eligibility criteria widely vary"), 43-45 (itemizing the "complexity and unique nature" of GA benefits — mostly other than inpatient services). But in fiscal year 2002, SPA 94-08 applied statewide rates for unlimited inpatient hospital services that had been developed according to nationwide, CMS-approved Medicare DRG rates. See 42 U.S.C. § 1396a(a)(1) (state plan "shall be in effect in all political subdivisions of the State").

Furthermore, Section 1115 waiver projects share with state plans a lack of uniformity in their diverse medical assistance benefits. See 42 C.F.R. §§ 430.25(d)(1), 430.25(d)(2)(i)-(iii) (waiving Medicaid requirements for "Statewideness," "Comparability of services," and "Income and resource rules"); 68 Fed.Reg. 27154, 27207 (May 19, 2003) ("we have become aware that there are certain Section 1115 demonstration projects ... with benefit packages so limited that the benefits are not similar to ... a Medicaid State Plan"); pls. supp. br., listing examples (doc. no. 77 at 39 & n. 32) ("CMS routinely approves State Plans that limit the total number of days of inpatient care payable for traditional Medicad patients"); pls. submission on remand, SAR 98-99 & n. 13 (same). The record also contains evidence that many waiver projects in practice "are, or soon evolve into indefinite, alternative models under which medical assistance services not otherwise eligible for FMAP [federal medical assistance payments] under Section 1903 [Medicaid, 42 U.S.C. § 1396b] are federally funded," and "[i]n effect, they have become simply a reasonably routine alternative to providing medical assistance through a typical State Plan." Piper report at 5, SAR 135.

An additional distinction: Section 1115 waiver projects must be "budget-neutral" — waiver applicants must demonstrate to CMS that their proposals will not lead to increased federal Medicaid expenditures. Adm. supp. decision, SAR 42. The record shows that states may and commonly do reallocate unspent Medicaid DSH funds to their expansion projects in order to demonstrate budget neutrality. See, e.g., Piper report at 6, SAR 136. SPA 94-08 differs in this respect — hospitals are paid directly with federal matching funds. But as a part of Pennsylvania's state plan, it was budget-neutral by definition — and CMS reviewed and approved its prospective expenditures and their likely impact on the Medicaid program.

On remand, defendant did not reconsider SPA 94-08 or the reasons given for amending the implementing regulation, 42 C.F.R. § 412.106(b)(4) (2000). That regulation permitted all inpatient hospital days funded under a Section 1115 waiver project to be counted in the Medicare DSH calculation — regardless of a patient's eligibility for Medicaid. As stated by the Secretary in 2000, the purpose was to compensate providers through federal matching payments for costs of services furnished to Section 1115 expansion populations who could not otherwise have been made eligible for Medicaid. The Secretary found that allowing hospitals to include Section 1115 patients in the Medicare DSH

Interim final rule, 65 Fed.Reg. 3136, 3137 (Jan. 20, 2000), RR 2 (doc. no. 74 at 2); see also final rule, 65 Fed.Reg. 47054, 47086-47087 (Aug. 1, 2000), RR 78-79 (doc. no. 75 at 33-34).38 Furthermore, the Secretary stated:

Interim final rule, 65 Fed.Reg. at 3139, RR 4 (doc. no. 74 at 4).

Defendant acknowledges that allowing Medicare DSH credits for Section 1115 waiver populations furthers public policies underlying the waiver statute and may encourage states to "adopt innovative programs that promote the objectives of Medicaid." Def. supp. br. (doc. no. 79 at 38-39). Other interests and values are involved as well.

Section 1115 projects may occur on a more or less extensive waiver of Medicaid statutory requirements — in Delaware, for example, Medicaid has been effectively dismantled in favor of an ongoing, statewide medical assistance waiver program.39 The Secretary is empowered to determine whether the program "promotes the objectives of Medicaid." Yet an adequate explanation has not been given for crediting hospitals in states that have obtained Medicaid waivers with significant Medicare DSH funds, whereas similar hospitals in states that have chosen to participate in Medicaid, such as plaintiffs, are refused those funds. Medicare DSH adjustments are not only an incentive, but also a financial necessity for hospitals that lose money in providing services to more, even lower-income, non-Medicaid-eligible patients than those served by waiver projects. Patients ultimately suffer. St. Agnes hospital "depended heavily on Medicare DSH adjustments for its financial viability," but the "provision of large amounts of charity and below cost care contributed to its eventual demise." Coyle decl. ¶¶ 37, 40-41, SAR 114-115.

Defendant also refers to the Deficit Reduction Act of 2005(DRA), Pub. L. No. 109-171, § 5002, 120 Stat. 31 (Feb. 8, 2006), 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (2007). Section 5002 amended the Medicare DSH statute40 and ratified the January 20, 2000 interim final rule as well as certain regulations promulgated in 2003.41 The ratification was narrow: "insofar as such regulations provide for the treatment of individuals eligible for medical assistance under a demonstration project approved under Title XI of the Social Security Act ... under [the Medicare DSH statute]." Id. § 5002; see also footnote 40, § 5002's amendment of the Medicare DSH ("Secretary may ... include patient days of patients not so eligible). In defendant's estimate, this ratification supports the decision to exclude from the Medicare DSH calculation days of inpatient hospital services for GA patients. Adm. supp. decision, SAR 49 & n. 52.

As ratified, the January 20, 2000 interim final rule was based on the Secretary's paraphrase of Section 1115: "costs of such project which would not otherwise be included as expenditures under [Medicaid, Section 1903 of the Act, 42 U.S.C. § 1396b] shall, to the extent and for the period prescribed by the Secretary, be regarded as expenditures ... approved under (Title XIX)." 65 Fed.Reg. 3136, 3137 (Jan. 20, 2000), RR 2 (doc. no. 74 at 2); cf. 42 U.S.C. § 1315(a)(2)(A) (stating instead, "approved under a State plan"). Defendant construed that statutory phrase as "allow[ing]... the expansion populations to be treated as Medicaid beneficiaries."42 65 Fed. Reg. at 3137. In addition, the Medicare DSH statute was construed to allow days of inpatient hospital services for waiver patients "to be included as Medicaid days for purposes of the Medicare DSH adjustment calculation." Id.

This narrow finding does not help to reconcile why under Pennsylvania's SPA 94-08 inpatient hospital services for GA patients are not includable in the Medicare DSH. Section 5002 does not preclude recognition of those days as Medicaid days. Congress' endorsement is consistent with plaintiffs' position — the Secretary could and should have eliminated from the August 1, 2000 final rule the distinction between days of inpatient hospital services under SPA 94-08 and those under Section 1115 projects. Pls. reply br. (doc. no. 80 at 33-35).

Defendant further contends that § 5002 — without its expressly saying so — affirmed the entirety of the January 20, 2000 interim final and August 1, 2000 final rules, including a rule that days of hospital services for GA inpatients shall not be counted. Def. supp. br. (doc. no. 79 at 14-15 & n. 2)43 This misreads § 5002 — which is silent as to whether days of inpatient hospital services for GA patients should be excluded from the Medicare DSH calculation. It does not mention PM A-99-62, which prohibited hospitals from counting GA days after fiscal year 1999. Defendant acknowledges this: DRA "left untouched CMS['s] longstanding policy on general assistance days." Adm. supp. decision, SAR 50. Defendant still has discretion to allow days of hospital services for GA inpatients under SPA 94-08 to be included as Medicaid days for purposes of the Medicare DSH calculation.

Here, the extraordinary discretionary power granted under Section 1115, as ratified by § 5002 of the DRA, has been unduly underscored by defendant. It is not an unfettered power to selectively "deem" non-Medicaid-eligible populations — Section 1115 patients — to be Medicaid-eligible individuals: "GA patients are not Medicaid eligible, while expansion populations under Section 1115 Waiver programs are deemed Medicaid eligible."44 Def. supp. br. (doc. no. 79 at 32) (emphasis in original). This misses the point. Defendant's statutory interpretation of Section 1115 is not the issue. And whether Section 1115 expansion patients may permissibly be "deemed" to be Medicaid-eligible individuals also need not be decided. Many expansion hospital inpatients are ineligible for medical assistance under the Medicaid statute. Yet, without regard to their greater income and lesser need, days of hospital services for them may be counted in the Medicare DSH.

The Medicare DSH rules are not a matter of unlimited discretion. Under Section 1115, Congress granted discretion to waive statutory requirements for a state's Medicaid plan, but not to waive requirements of the Medicare statute. See 42 U.S.C. § 1315(a) (delegated waiver power not extended to Subchapter XVIII, Medicare). Perhaps the best illustration of this is the Secretary's recognition of Section 1115 waiver patients as Medicaid beneficiaries for purposes of the Medicare DSH. See the January 20, 2000 interim final and August 1, 2000 final rules that led to the amended regulation, 42 C.F.R. § 412.106(b)(4) (2000), and its progeny.

But those regulations expressed two opposing views of the Medicare DSH statute's requirement that patients be "eligible for medical assistance under a State plan approved under Subchapter XIX...." 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). One interpretation: a patient's eligibility for Medicaid as statutorily defined is strictly required. The other: a patient's eligibility for Medicaid is not required if the patient were regarded as Medicaid-eligible based on the Secretary's construction of Section 1115 of the Act, 42 U.S.C. § 1315.

Whether considered vis-a-vis the APA's standards for lawful agency action or the Constitution's guarantee of equal protection, the record does not disclose a rational basis for defendant's rulemaking or adverse reimbursement decisions. Defendant has not satisfactorily articulated why plaintiffs' non-Medicaid-eligible GA hospital inpatients should not also be regarded as Medicaid beneficiaries for purposes of the Medicare DSH calculation. Under SPA 94-08, the costs of inpatient hospital services for non-Medicaid-eligible GA inpatients are not to be regarded as Medicaid expenditures. They are expenditures under Pennsylvania's CMS-approved state plan — and payable with federal matching funds. The record does not show any significant differences in costs, rates of payment, services, types of hospital inpatients, or the reporting of costs as among Pennsylvania's state plan amendment SPA 94-08 and other Section 1115 waiver projects. On this record, plaintiff hospitals in all relevant respects are indistinguishable from other hospitals in Section 1115 waiver states.

An order accompanies this memorandum.

ORDER

AND NOW, this 8th day of April, 2013, the "Motion of Plaintiffs Nazareth Hospital and St. Agnes Medical Center for Summary Judgment" (doc. no. 16) is granted, and the "United States of America's Cross-Motion for Summary Judgment" (doc. no. 21) is denied. The decision of defendant Kathleen Sebelius, Secretary of the Department of Health and Human Services, of September 11, 2012 (doc. no. 61), is reversed, and judgment is entered in favor of plaintiffs and against defendant.

Consistent with the memorandum accompanying this order, defendant shall recalculate the Medicare disproportionate share hospital adjustments owed plaintiffs for the fiscal year ending December 31, 2002 under 42 U.S.C. § 1395ww(d)(5)(F)(vi). Adjustments not previously made shall be remitted to plaintiffs, together with interest on those amounts as calculated under 42 U.S.C. § 1395oo(f)(2).