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Texas Children's Hospital v. Azar

United States District Court, District of Columbia

June 1, 2018

TEXAS CHILDREN'S HOSPITAL and SEATTLE CHILDREN'S HOSPITAL, Plaintiffs,
v.
ALEX AZAR, Secretary, United States Department of Health and Human Services, et al., [1] Defendants.

          MEMORANDUM OPINION

          EMMET G. SULLIVAN UNITED STATES DISTRICT JUDGE

         On December 29, 2014, the Court granted a motion for a preliminary injunction brought by plaintiffs Texas Children's Hospital (“Texas Children's”) and Seattle Children's Hospital (“Seattle Children's”)(collectively “plaintiffs”). See Order, Dec. 29, 2014, ECF No. 19. The Court's Order enjoined the Secretary of Health and Human Services (“the Secretary”), the Centers for Medicare and Medicaid Services (“CMS”), and the Administrator of CMS (collectively “defendants”) from “enforcing, applying, or implementing FAQ No. 33” pending further Order of this Court. Id. Currently pending before the Court are defendants' motion to dismiss for lack of subject matter jurisdiction or, in the alternative, for summary judgment, and plaintiffs' cross-motion for summary judgment. Upon consideration of the motions, the responses and replies thereto, the applicable law, the entire record, and for the reasons stated below, defendants' motion is DENIED, and plaintiffs' motion is GRANTED.

         I. BACKGROUND

         The Court elaborated on the facts of this case in detail in its prior Memorandum Opinion accompanying the Court's Order granting plaintiffs' motion for a preliminary injunction. See Texas Children's Hosp. v. Burwell, 76 F.Supp.3d 224, 228-35 (D.D.C. 2014). The Court provides only a brief summary of the facts here.

         Plaintiffs Texas Children's and Seattle Children's are two not-for-profit teaching and research hospitals in Texas and Washington state, respectively. Compl., ECF No. 1 ¶ 1. The hospitals 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. Plaintiffs treat a “disproportionately larger share of Medicaid program patients.” Id. ¶ 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 for medical treatment for needy persons.” Harris v. McRae, 448 U.S. 297, 301 (1980). In addition to covering low-income individuals, Medicaid also provides benefits to children with 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. § 416.934(j)(children born weighing less than 1, 200 grams are eligible for Supplemental Security Income).

         In 1981, 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 Medicaid recipients have reasonable access to medical services and that hospitals treating a disproportionate share of poor people receive adequate support from Medicaid.” W.Va. Univ. Hosps. v. Casey, 885 F.2d 11, 23 (3d Cir. 1989). To defray the costs associated with treating Medicaid patients, the amendment created “payment adjustments” available to hospitals who treat a disproportionate share of Medicaid patients (a disproportionate-share hospital or “DSH”). 42 U.S.C. § 1396r-4(b)-(c).

         Congress amended the program in 1993 to limit DSH payments on a hospital-specific basis. See Id. § 1396r-4(g). Under the amendment, 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). This cap on DSH payments is known as the “hospital-specific limit.” See Compl., ECF No. 1 ¶ 25.

         To ensure the appropriateness of DSH payments, Congress implemented an annual audit requirement in 2003, which required hospitals to certify, 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 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 for payment adjustments under this section.

42 U.S.C. § 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

         On December 19, 2008, CMS issued a Final Rule (“the 2008 Rule”) outlining specific audit and reporting requirements to ensure compliance with the statutory framework for calculating DSH payments. See Disproportionate Share Hospital Payments, 73 Fed. Reg. 77904 (Dec. 19, 2008). The 2008 Rule requires that the states annually submit certain 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 defines 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 the 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 FFS rate payments, Medicaid managed care organization payments, supplemental/enhanced Medicaid payments, uninsured revenues, and Section 1101 payments for inpatient and outpatient hospital services.

Id. § 447.299(c)(16). The 2008 Rule further specifically defined each type of cost and payment to be included in the calculation. See Id. § 447.299(c)(9), (10), (12), (13), (14).

         C. Frequently Asked Question (“FAQ”) 33

         On January 10, 2010, CMS posted to the Medicaid.gov website answers to questions regarding the reporting and audit requirements. See Compl., ECF No. 1 ¶ 49. At issue in this case is FAQ 33 which reads:

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 MIUR percentages and the DSH limit in the same way States include days, costs, and revenues associated with individuals dually eligible for Medicaid and Medicare?
Days, costs, 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. As Medicaid should be the payer of last resort, hospitals should also offset both Medicaid and third-party revenue associated with the Medicaid eligible day against the costs for that day to determine any uncompensated care amount.

Id. ¶ 50.

         After FAQ 33 was posted, plaintiffs were informed by their respective state health care agencies that their hospital-specific limit calculations would be altered. See Decl. of Robert Simon, ECF No. 3-8 ¶ 23. In particular, both hospitals were informed that costs reimbursed by private insurance would now be included in the calculation for their DSH payments. See, e.g., id. ¶¶ 23-25. The inclusion of private-insurance payments in the calculation of each hospital's limit significantly reduced - or eliminated entirely - each hospital's DSH payments. See, e.g., id. ¶ 24(stating that Texas Children's hospital-specific limit was reduced by approximately $12 million when third-party insurance payments were used to offset Medicaid-allowable costs).

         D. Preliminary Injunction

         Plaintiffs filed this lawsuit on December 5, 2014. See Compl., ECF No. 1. That same day, they filed a motion for a preliminary injunction requesting that the Court enjoin defendants from enforcing or applying FAQ 33 during the pendency of this case. See Pls.' Mem. in Supp. of Mot. for Prelim. Inj., ECF No. 3-1. On December 29, 2014, the Court granted plaintiffs' motion for a preliminary injunction to prevent the enforcement of the policy embodied in FAQ 33. See Texas Children's Hospital v. Burwell, 76 F.Supp.3d 224 (D.D.C. 2014). Accordingly, defendants

temporarily halt[ed] the enforcement, application, and implementation of FAQ No. 33 in Texas and Washington, notifying the Texas and Washington state Medicaid programs that, pending further order by the Court, the enforcement of FAQ No. 33 is enjoined and that defendants will take no action to recoup any federal DSH funds provided to Texas and Washington . . . based on a state's noncompliance with FAQ 33.

Defs.' Mem. in Supp. of Mot. for Summ. J. (“Defs.' Summ. J. Mem.”), ECF No. 25-1 at 8.[2]

         E. ...


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