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Texas Children's Hospital v. Burwell

United States District Court, D. Columbia.

December 29, 2014

TEXAS CHILDREN'S HOSPITAL and SEATTLE CHILDREN'S HOSPITAL, Plaintiffs,
v.
SYLVIA MATHEWS BURWELL, Secretary, United States Department of Health and Human Services, et al., Defendants

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For Texas Children's Hospital, Seattle Children's Hospital, Plaintiffs: Christopher H. Marraro, LEAD ATTORNEY, BAKER & HOSTETLER LLP, Washington, DC USA; Susan G. Conway, PRO HAC VICE, GRAVES DOUGHERTY HEARON & MOODY, P.C., Austin, TX USA; Geraldine E. Edens, BAKER HOSTETLER, LLP, Washington, DC USA.

For Sylvia Mathews Burwell, in her official capacity, Secretary, Department of Health and Human Services, Marilyn B. Tavenner, in her official capacity, Administrator, Centers for Medicare and Medicaid Services, Centers For Medicare And Medicaid Services, Defendants: James C. Luh, Sheila Mae Lieber, LEAD ATTORNEYS, U.S. DEPARTMENT OF JUSTICE, Washington, DC USA.

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MEMORANDUM OPINION

Emmet G. Sullivan, United States District Judge.

Medicaid is a federal program that helps to cover the costs of providing medical care to certain individuals. Some hospitals treat significantly higher percentages of Medicaid-eligible patients than others. Because Medicaid does not generally provide the same level of reimbursement as other forms of coverage, such hospitals are often at a financial disadvantage. To rectify this disadvantage, and thereby to encourage hospitals to serve Medicaid-eligible patients, Congress has provided for supplemental Medicaid payments to such hospitals. The supplemental payments are subject to limits to ensure that no hospital receives such a large payment that it makes a profit, rather than merely covering its Medicaid-related costs. This case concerns the method of calculating that limit.

Plaintiffs, Texas Children's Hospital (" Texas Children's" ) and Seattle Children's Hospital (" Seattle Children's" ), allege that the Secretary of Health and Human Services

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(" the Secretary" ), the Centers for Medicare and Medicaid Services (" CMS" ), and the Administrator of CMS have modified the method for calculating the hospital-specific limit without following notice-and-comment procedures, and in a way that conflicts with the Medicaid Act. Because defendants' calculation is allegedly being used to force Texas and Washington to recoup significant amounts of money from the plaintiffs, and because such recoupments are allegedly both irrevocable and imminent, plaintiffs seek a preliminary injunction. Upon consideration of the plaintiffs' motion, the response, reply, and surreply thereto, the applicable law, and the entire record, the Court GRANTS plaintiffs' motion.

I. Background

" Plaintiffs are two not-for-profit pediatric teaching and research hospitals dedicated to the treatment and special needs of children and the advancement of pediatric medicine." Compl. ¶ 1. They treat " [c]hildren with critical illnesses and special needs . . . from throughout the United States," and do so " regardless of their families' ability to pay for their care." Id. " More than 50 percent of Plaintiffs' patients are Medicaid patients," which means that they " treat a disproportionately larger share of Medicaid program patients." Id. ¶ ¶ 2-3. Plaintiffs also " serve many . . . very sick and medically fragile children," meaning that " they have an unusual number of patients who meet the qualifying criteria for Medicaid eligibility for reasons other than income status." Id. ¶ 48.

A. The Medicaid Act

Medicaid, 42 U.S.C. § 1396, et seq., " provid[es] federal financial assistance to States that choose to reimburse certain costs of medical treatment for needy persons." Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980). In addition to covering low-income individuals, Medicaid also provides benefits to children with certain serious illnesses, without regard to family income. See, e.g., 42 U.S.C. § 1396a(a)(10)(A)(i)(II) (children are eligible for Medicaid if they are eligible for Supplemental Security Income); 20 C.F.R. § 416.926a(m)(6) (children born weighing less than 1,200 grams are eligible for Supplemental Security Income).

To encourage states to participate in Medicaid, " [f]ederal and state governments jointly share the cost." Va. Dep't of Med. Assistance Servs. v. Johnson, 609 F.Supp.2d 1, 2 (D.D.C. 2009). Participating states administer their own program " pursuant to a state Medicaid plan which must be reviewed and approved by the Secretary." Id.; see also 42 U.S.C. § 1396a. Once the Secretary or her designee approves a state plan, the state receives federal financial participation to cover part of the costs of its Medicaid program. 42 U.S.C. § 1396b(a)(1). If a state fails to comply with the statutory or regulatory requirements governing Medicaid, the federal government may recoup federal funds from the state. See id. § 1316(a), (c)-(e).

In 1981, facing " greater costs . . . associated with the treatment of indigent patients," D.C. Hosp. Ass'n v. District of Columbia, 224 F.3d 776, 777, 343 U.S.App.D.C. 133 (D.C. Cir. 2000), Congress amended Medicaid to require states to ensure that payments to hospitals " take into account . . . the situation of hospitals which serve a disproportionate number of low-income patients with special needs." 42 U.S.C. § 1396a(a)(13)(A)(iv). This amendment reflected " Congress's concern that Medicaid recipients have reasonable access to medical services and that hospitals treating a disproportionate share of poor people receive adequate support from Medicaid."

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W.Va. Univ. Hosps. v. Casey, 885 F.2d 11, 23 (3d Cir. 1989). " The intent was to stabilize the hospitals financially and preserve access to health care services for eligible low-income patients." Johnson, 609 F.Supp.2d at 3. The amendment created " payment adjustment[s]" for qualifying hospitals. See 42 U.S.C. § 1396r-4(c). Such payments are available to any hospital that treats a disproportionate share of Medicaid patients (a disproportionate-share hospital or " DSH" ). See id. § 1396r-4(b).

In 1993, the program was amended to limit DSH payments on a hospital-specific basis. See id. § 1396r-4(g). This was done to assuage concerns that some hospitals were receiving DSH payments in excess of " the net costs, and in some instances the total costs, of operating the facilities." H.R. Rep. No. 103-111, at 211 (1993), reprinted in 1993 U.S.C.C.A.N. 278, 538. Accordingly, a DSH payment may not exceed:

[T]he costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year.

42 U.S.C. § 1396r-4(g)(1)(A).

In 2003, to ensure the appropriateness of DSH payments, Medicaid was amended to require that each state provide an annual report and an audit of its DSH program. See id. § 1396r-4(j). The audit must confirm, among other things, that:

(C) Only the uncompensated care costs of providing inpatient hospital and outpatient hospital services to individuals described in [Section 1396r-4(g)(1)(A)] . . . are included in the calculation of the hospital-specific limits[; ]
(D) The State included all payments under this subchapter, including supplemental payments, in the calculation of such hospital-specific limits[; and]
(E) The State has separately documented and retained a record of all of its costs under this subchapter, claimed expenditures under this subchapter, uninsured costs in determining payment adjustments under this section, and any payments made on behalf of the uninsured from payment adjustments under this section.

Id. § 1396r-4(j)(2). Overpayments must be recouped by the state within one year of their discovery or the federal government may reduce its future contribution. See id. § 1396b(d)(2)(C), (D).

B. The 2008 Final Rule

In 2005, CMS issued a Notice of Proposed Rulemaking regarding these audit and reporting requirements. See Disproportionate Share Hospital Payments, 70 Fed.Reg. 50,262 (proposed Aug. 26, 2005). A Final Rule was issued on December 19, 2008 (" the Rule" ). See Disproportionate Share Hospital Payments, 73 Fed.Reg. 77,904 (Dec. 19, 2008). The Rule requires that the states annually submit information " for each DSH hospital to which the State made a DSH payment." 42 C.F.R. § 447.299(c). One such piece of information is the hospital's " total annual uncompensated care costs," which the Rule defined as an enumerated set of " costs" minus an enumerated set of " payments" :

The total annual uncompensated care cost equals the total cost of care for furnishing inpatient hospital and outpatient hospital services to Medicaid eligible individuals and to individuals with no source of third party coverage for the

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hospital services they receive less the sum of regular Medicaid [fee-for-service] rate payments, Medicaid managed care organization payments, supplemental/enhanced Medicaid payments, uninsured revenues, and Section 1011 payments.

Id. § 447.299(c)(16). The regulation specifically defined each type of cost and payment.[1]

To ease the transition to the new audit and reporting regime, CMS provided for a six-year transition, to avoid subjecting any state to " immediate penalt[ies] that would result in the loss of Federal matching dollars." 73 Fed.Reg. at 77,906. Accordingly, any audits " from Medicaid State plan rate year 2005 through 2010" would be " used only for the purpose of determining prospective hospital-specific cost limits and the actual DSH payments associated with a particular year." Id. For 2011 payments, the audit of which must be completed by December 31, 2014, Simon Decl., ECF No. 3-8 ¶ 18, and all subsequent years, DSH overpayments must be recovered by the state and returned to the federal government, unless they " are redistributed by the State to other qualifying hospitals." 73 Fed.Reg. at 77,906.

C. FAQ Number 33

On January 10, 2010, CMS posted answers to " frequently asked questions" regarding the audit and reporting requirements. See Additional Information on the DSH Reporting and Auditing Requirement, http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Financing-and-Reimbursement/Downloads/AdditionalInformationontheDSHReporting.pdf (last visited Dec. 29, 2014). Question Number 33 forms the crux of this case:

33. Would days, costs, and revenues associated with patients that have both Medicaid and private insurance coverage (such as Blue Cross) also be included in the calculation of the . . . DSH limit in the same way States include days, costs and revenues associated with individuals dually eligible for Medicaid and Medicare?
Days, cost[s], and revenues associated with patients that are dually eligible for Medicaid and private insurance should be included in the calculation of the Medicaid inpatient utilization rate (MIUR) for the purposes of determining a hospital eligible to receive DSH payments. Section 1923(g)(1) does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore, days, costs, and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit.

Id. at 18 (emphasis added).

D. Factual Background

1. Seattle Children's

On June 15, 2011, the Washington State Health Care Authority informed Seattle Children's that the agency " would be revising its [hospital-specific limit] calculation

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for the . . . 2012 Medicaid DSH application." Kinzig Decl., ECF No. 3-14 ¶ 14. The Authority stated that recent audits revealed that " some hospitals were not reporting all charges and payments received for providing care to Medicaid-eligible patients" and therefore mandated that " in the case that a Medicaid-eligible patient has insurance or other third-party coverage, these charges and payments should be included in the DSH cap calculation." Id. Seattle Children's submitted its 2012 DSH application in July 2011, but the new calculation rendered its hospital-specific limit negative, making it ineligible for DSH payments. See id. ¶ 16. Seattle Children's was also " advised . . . that if the audit process . . . determined that the hospital was paid more than its DSH cap . . . the state would force the hospital to pay back to the state any identified overpayment." Id. ¶ 18.

Seattle Children's hired a consultant " to identify why [the Washington State Health Care Authority] was using a new calculation" ; " [t]he consultant determined that [the] new calculation was drawn from . . . FAQ No. 33." Id. ¶ 19. Seattle Children's sent multiple letters to the state agency in October and November of 2011 describing this impact. See id. ¶ 24. The agency responded, and " has consistently advised in . . . communications and, finally, in a meeting held . . . on July 23, 2014, . . . that it would follow CMS instructions and, therefore would have to recoup Medicaid DSH payments in excess of a [hospital-specific limit]." Id. ¶ 25.

Seattle Children's has also " lodged multiple appeals with [the Washington State Health Care Authority]," since 2012, all to no avail. See id. ¶ 26. " In each instance in which [Seattle Children's] sought relief from the application of FAQ No. 33, [the State] denied [those] appeals." Id. In 2012, 2013, and 2014, moreover, the Washington State Health Care Authority denied Seattle Children's application for any DSH payments. See id. ¶ ¶ 27-29. On July 23, 2014, however, Seattle Children's met with the Washington State agency, which agreed to support Seattle Children's efforts to lobby CMS to modify FAQ 33. See Harris Decl., ECF No. 16-1 ¶ 29.

In September 2014, Seattle Children's received a preliminary report on the audit of its 2011 DSH payments. See Kinzig Decl., ECF No. 3-14 ¶ 31. That audit " retrospectively calculated Seattle Children's 2011 [hospital-specific limit] to be negative." Id. " As such, the auditors found that all of the $7,060,567 in 2011 DSH funds . . . exceeded Seattle Children's 2011 adjusted [hospital-specific limit]." Id. The Washington State Health Care Authority, moreover, " has consistently warned that it has the power to recoup any DSH payments in excess of a [hospital-specific limit]," and to redistribute those funds to other DSHs. Id. ΒΆ 32. The Washington State Health Care Authority is in the process of promulgating rules regarding the recoupment and distribution process, but ...


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