United States District Court, District of Columbia
CHILDREN'S HOSPITAL ASSOCIATION OF TEXAS; CHILDREN'S HEALTH CARE d/b/a CHILDREN'S HOSPITAL AND CLINICS OF MINNESOTA; GILLETTE CHILDREN'S SPECIALTY HEALTHCARE; CHILDREN'S HOSPITAL OF THE KING'S DAUGHTERS, INC.; and SEATTLE CHILDREN'S HOSPITAL, Plaintiffs,
ALEX AZAR, in his official capacity, Secretary of Health and Human Services; SEEMA VERMA, in her official capacity, Administrator of the Centers for Medicare and Medicaid Services; and CENTERS FOR MEDICARE AND MEDICAID SERVICES,  Defendants.
G. Sullivan United States District Judge.
is a federal program that helps to cover the costs of
providing medical care to qualified 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 types of insurance coverage, such hospitals are often
at a financial disadvantage. To rectify this disadvantage,
and thereby 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
payments that would result in a profit, rather than covering
Medicaid-related costs to rectify the disadvantage. This case
concerns the method of calculating the limit of these
this lawsuit challenges a final rule that defines how
“costs” are to be calculated for purposes of
determining the limit on the amount of the supplemental
payment a hospital serving a disproportionate share of
Medicaid-eligible individuals is entitled to receive.
See Medicaid Program: Disproportionate Share
Hospital Payments - Treatment of Third Party Payers in
Calculating Uncompensated Care Costs, 82 Fed. Reg. 16114-02,
16117 (Apr. 3, 2017) (“Final Rule”). Defendants -
the Secretary of Health and Human Services (“the
Secretary”), Centers for Medicare and Medicaid Services
(“CMS”), and the CMS Administrator - claim that
the Medicaid Act permits them to define “costs”
in the Final Rule as “costs net of third-party
payments, including, but not limited to, payments by Medicare
and private insurance.” 42 C.F.R. §
447.299(c)(10)(i). Plaintiffs - one children's hospital
association, whose members are eight free-standing
children's hospitals in the state of Texas, and four
other free-standing children's hospitals located in
Minnesota, Virginia, and Washington - ask the Court to vacate
the Final Rule as contrary to the plain language of the
Medicaid Act and as arbitrary and capricious under the
Administrative Procedures Act.
before the Court are plaintiffs' combined motion for a
preliminary injunction and for summary judgment,
defendants' motion to strike exhibits supporting
plaintiffs' motion for summary judgment, defendants'
motion for summary judgment, and plaintiffs' motion for a
status hearing. Upon consideration of the parties'
memoranda, the parties' arguments at the motions hearing,
the administrative record, the applicable law, and for the
following reasons, the Court grants plaintiffs' motion
for summary judgment and vacates the Final Rule. The Court
further grants defendants' motion to strike, denies
defendants' motion for summary judgment, denies
plaintiffs' motion for a preliminary injunction, and
denies plaintiffs' motion for a status hearing.
The Medicaid Act
is a “joint state-federal program in which healthcare
providers serve poor or disabled patients and submit claims
for government reimbursement.” Universal Health
Servs., Inc. v. United States, 136 S.Ct. 1989,
1996-97 (2016). In addition to serving 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 (“SSI”)); 20 C.F.R.
§ 416.934(j) (children born weighing less than 1, 200
grams are presumptively eligible for SSI).
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 of
HHS.” Id.; see also 42 U.S.C. §
1396a. Once the Secretary or the Secretary's 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),
Disproportionate Share Hospitals
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 (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(13)(A)(iv). This amendment reflected
“Congress's concern that [M]edicaid recipients have
reasonable access to medical services and that hospitals
treating a disproportionate share of poor people receive
adequate support from [M]edicaid.” W.Va. Univ.
Hosps. v. Casey, 885 F.2d 11, 23 (3d Cir. 1989).
payments do not compensate a hospital for providing a
particular service to a particular patient; rather, they seek
to rectify in part any deficit the hospital may face solely
because it treats more Medicaid-eligible patients than most.
See Johnson, 609 F.Supp.2d at 3 (“The intent
was to stabilize the hospitals financially and preserve
access to health care services for eligible low-income
patients.”). Accordingly, 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
particular, Congress “deemed” hospitals to be DSH
hospitals if “the hospital's medicaid inpatient
utilization rate . . . is at least one standard deviation
above the mean medicaid inpatient utilization rate for
hospitals receiving medicaid payments in the State” or
if “the hospital's low-income utilization rate . .
. exceeds 25 percent.” Id. §
1993, the Medicaid program was amended to limit DSH payments
on a hospital-specific basis 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.
Congress was particularly concerned by reports that some
states were “making DSH payment adjustments to
hospitals that d[id] not provide inpatient services to
Medicaid beneficiaries” at all. Id. Because
the very purpose of DSH payments was “to assist those
facilities with high volumes of Medicaid patients, ”
Congress wanted to ensure that payments were directed to
hospitals that were “unlikely to have large numbers of
privately insured patients through which to offset their
operating losses on the uninsured.” Id. To
mitigate these concerns, the amendment provided that 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). Thus, for Medicaid
patients, the Medicaid Act sets the hospital-specific limit
(“HSL”) for DSH payments as “the costs
incurred during the year of furnishing hospital
services” to Medicaid-eligible individuals “as
determined by the Secretary and net of payments” under
the Medicaid Act (referred to as the “Medicaid
Auditing and Reporting Requirements
ensure that DSH payments comply with statutory requirements,
the Medicaid Act was again amended in 2003 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 to
that state. See Id. § 1396b(d)(2)(C)-(D).
2005, CMS issued a Notice of Proposed Rulemaking in order to
implement the 2003 amendment's auditing and reporting
requirements. See 70 Fed. Reg. 50262 (Aug. 26,
2005). A final rule was issued on December 19, 2008.
See 73 Fed. Reg. 77904 (Dec. 19, 2008) (“2008
Rule”). The 2008 Rule made two changes to the
applicable provisions of the Code of Federal Regulations.
the 2008 Rule required that states begin to submit, on an
annual basis, certain information “for each DSH
hospital to which the State made a DSH payment in order to
permit verification of the appropriateness of such
payments.” Id. at 77950. One such piece of
information is the hospital's “total annual
uncompensated care costs, ” which the rule defined as
an enumerated set of “costs” less 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
hospital services they receive less the sum of regular
Medicaid [fee-for-service] rate payments, Medicaid managed
care organization payments, supplemental/enhance Medicaid
payments, uninsured revenues, and Section 1011 payments for
inpatient and outpatient hospital services.
Id. at 77950; 42 C.F.R. § 447.229(c)(16). The
regulation also defined different types of costs and
payments. See 42 C.F.R. § 447.229(c)(10)
(defining total costs for Medicaid-eligible patients as
“[t]he total annual costs incurred by each hospital for
furnishing inpatient hospital and outpatient hospital
services to Medicaid eligible individuals”);
id. § 447.229(c)(14) (defining total costs for
uninsured individuals as “the total costs incurred for
furnishing . . . services to individuals with no source of
third party coverage for the hospital services they
receive”); id. §§ 447.229(c)(6)-(9)
(defining the various Medicaid-related payments);
id. § 447.229(c)(12) (defining total uninsured
revenues as “[t]otal annual payments received by the
hospital by or on behalf of individuals with no source of
third party coverage for . . . services they receive, ”
exclusive of “payments made by a State or units of
local government, for services furnished to indigent
patients”); id. § 447.229(c)(13)
(describing “Section 1011 payments, ” which are
“Federal Section 1011 payments for . . . services
provided to Section 1011 eligible aliens with no source of
third party coverage”).
the 2008 Rule stated that the annual audit “must
verify, ” among other things, that:
Each hospital that qualifies for a DSH payment in the State
is allowed to retain that payment so that the payment is
available to offset its uncompensated care costs for
furnishing inpatient hospital and outpatient hospital
services during the Medicaid State plan rate year to Medicaid
eligible individuals and individuals with no source of third
party coverage for the services in order to reflect the total
amount of claimed DSH expenditures.
Only uncompensated care costs of furnishing inpatient and
outpatient hospital services to Medicaid eligible individuals
and individuals with no third party coverage for the
inpatient and outpatient hospital services they received as
described in Section 1923(g)(1)(A) of the Act are eligible
for inclusion in the calculation of the hospital-specific
disproportionate share . . . payment limit.
73 Fed. Reg. at 77951; 42 C.F.R. § 455.304(d). To ease
the move to the new audit and reporting regime and to avoid
subjecting any state to “immediate penalties that would
result in the loss of Federal matching dollars, ” CMS
provided for a six-year-long transition. 73 Fed. Reg. at
77906. 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, ” not for
“requiring recovery of any overpayments.”
Id. For payments made for all years after 2011, DSH
overpayments would be recovered by the state, and the federal
share would be returned to the federal government unless the
excess payments “are redistributed by the State to
other qualifying hospitals.” Id.
Frequently Asked Questions (“FAQs”) 33 and
January 10, 2010, CMS posted answers to FAQs regarding the
audit and reporting requirements. See A.R. 730-771,
Additional Information on the DSH Reporting and Audit
FAQ 33 asked whether “days, costs, and revenues
associated with patients that have both Medicaid and private
insurance coverage” would be included in the
calculation of the DSH limit. A.R. 747, id. at 18.
In response, CMS explained that private-insurance payments
made on behalf of Medicaid-eligible patients should be
included in the calculation of the hospital-specific DSH
limit.” Id. Likewise, FAQ 34 asked
“[u]nder what circumstances” would Medicare
payments on behalf of patients dually eligible for both
Medicare and Medicaid be included in the uncompensated care
costs. Id. CMS explained that hospitals were
required “to take into account” any Medicare
payments made on behalf of dually-eligible individuals in
calculating a hospital's Medicaid DSH payment.
and 34 were subsequently challenged in multiple courts as an
unlawful amendment of the 2008 Final Rule and as inconsistent
with the Medicaid Act. Each of the six federal courts to have
evaluated FAQs 33 and 34 have entered either a preliminary or
permanent injunction prohibiting defendants from reducing a
hospital's DSH payment through enforcement of the FAQs.
See, e.g., Texas Children's Hosp. v.
Burwell, 76 F.Supp.3d 224 (D.D.C. 2014) (granting
preliminary injunction prohibiting the enforcement of FAQ
33); New Hampshire Hosp. Ass'n v. Burwell, No.
15-cv-460, 2017 WL 822094 (D.N.H. Mar. 2, 2017) (permanently
enjoining defendants from enforcing FAQs 33 and 34);
Children's Hosp. of the King's Daughters, Inc. v.
Price, 258 F.Supp.3d 672 (E.D. Va. 2017) (granting
preliminary injunction prohibiting the enforcement of FAQ 33
against plaintiff); Tennessee Hosp. Ass'n v.
Price, No. 16-cv-3263, 2017 WL 2703540 (M.D. Tenn. June
21, 2017) (granting plaintiffs' summary judgment and
enjoining defendants from applying FAQ 33 to plaintiffs'
hospitals); Children's Health Care v. Centers for