United States District Court, District of Columbia
TEXAS CHILDREN'S HOSPITAL and SEATTLE CHILDREN'S HOSPITAL, Plaintiffs,
ALEX AZAR, Secretary, United States Department of Health and Human Services, et al.,  Defendants.
G. SULLIVAN UNITED STATES DISTRICT JUDGE
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
“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.
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.
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.
The Medicaid Act
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).
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).
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.
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
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).
The 2008 Final Rule
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
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).
Frequently Asked Question (“FAQ”) 33
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
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.
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).
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,
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
Defs.' Mem. in Supp. of Mot. for Summ. J.
(“Defs.' Summ. J. Mem.”), ECF No. 25-1 at