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Children's Hospital Association of Texas v. Azar

United States District Court, District of Columbia

March 6, 2018

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, [1] Defendants.


          Emmet G. Sullivan United States District Judge.

         Medicaid 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 supplemental payments.

         Specifically, 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.

         Pending 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.

         I. BACKGROUND

         A. The Medicaid Act

         Medicaid 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).

         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 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), (c)-(e).

         B. Disproportionate Share Hospitals

         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 (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).

         These 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. § 1396r-4(b)(1).

         In 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 shortfall”). Id.

         C. Auditing and Reporting Requirements

         To 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).

         In 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.

         First, 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”).

         Second, 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.

         D. Frequently Asked Questions (“FAQs”) 33 and 34

         On 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 Requirements, 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. Id.

         FAQs 33 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 ...

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