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Department of Medical Assistance Services of Commonwealth of Virginia v. United States Department of Health and Human Services

United States District Court, District of Columbia

September 30, 2018

DEPARTMENT OF MEDICAL ASSISTANCE SERVICES OF THE COMMONWEALTH OF VIRGINIA Plaintiff,
v.
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, and ALEX M. AZAR II, Secretary, U.S. Department of Health and Human Services Defendants.

          MEMORANDUM OPINION [Dkt. ## 22, 24]

          Richard J. Leon United States District Judge.

         Plaintiff Department of Medical Assistance Services of the Commonwealth of Virginia ("Virginia" or "plaintiff) brings suit against the United States Department of Health and Human Services ("HHS") and Secretary Alex M. Azar II (collectively, "defendants" or "the Government"), asking this Court to overturn a disallowance of roughly $30 million in federal financial participation ("FFP") payments to certain in-state disproportionate share hospitals ("DSH"). The gravamen of Virginia's complaint is that, in its administration of DSH funding under Medicaid, HHS has violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq. See Compl. ¶¶ 58-63. Before this Court are the parties' Cross-Motions for Summary Judgment. See PL's Motion for Summary Judgment [Dkt. #22] ("PL's Mot."); Defs.' Cross-Motion for Summary Judgment [Dkt. # 24] ("Defs.' Mot."). For the following reasons, the defendants' motion for summary judgment [Dkt. # 24] is GRANTED and plaintiffs motion [Dkt. # 22] is DENIED.

         BACKGROUND

         I. Statutory Framework

         Title XIX of the Social Security Act (hereinafter, "the Medicaid Act" or "the Medicaid statute"), provides for joint federal and state financing of medical assistance for the benefit of aged, blind, or permanently disabled individuals and for the benefit of families with dependent children. See 42 U.S.C. §§ 1396-1396w-5. The dispute before the court arises from the complicated fiscal relationship between HHS-which Congress has empowered to administer spending under Medicaid-and states like Virginia, which Congress has long enticed with promises of matching federal funds. Therefore, a brief overview of the statutory scheme is an appropriate place to start.

         To receive federal Medicaid funds, states are required to submit a State Plan to HITS-specifically, to the Centers for Medicare and Medicaid Services ("CMS")-for approval. 42 C.F.R. § 430.10; see also 42 U.S.C. § 1396a. The State Plan must "contain[] all information necessary for CMS to determine whether the plan can be approved to serve as a basis for Federal financial participation (FFP) in the State program." 42 C.F.R. § 430.10. States generally enjoy some flexibility in providing Medicaid services, and the State Plan is meant to spell out how the state accounts for its Medicaid-eligible expenditures, including the in-patient hospital services at issue in this case. 42 U.S.C. § l396a(a)(3)(A). As with all federally-funded state matching programs, however, Congress puts limits on how states allocate and report their payment of Medicaid funds, and empowers HHS to monitor what the federal government is matching.

         This case concerns reimbursement for disproportionate share hospitals ("DSH")- those that serve a disproportionate number of low-income patients. See 42 U.S.C. § l396r-4(b), (d). States like Virginia, operating under a State Plan, spend heavily to reimburse such hospitals for providing Medicaid-covered services to the indigent, and then seek federal matching funds for those expenditures under Title XIX. Funding tracks the fiscal year, as in all other areas of the federal budget. See 42 U.S.C. § l396r-4(f). Over time, Congress has imposed restrictions on the matching of, and thus federal funding for, state DSH expenditures, like those Virginia seeks recoupment for in this case. Two are relevant here. First, Congress mandates that DSFI payments by a State "in a fiscal year" not exceed the combined state and federal DSH "allotment for the State for the fiscal year." 42 U.S.C. § l396r-4(f)(1); see also 42 C.F.R. § 497.298. This is referred to as the "statewide allotment," and in practice, it amounts to a yearly cap for each state. Conventionally understood, statewide allotments are basically the "upper...limit[]" that the federal government will match funds for each state, and Congress uses them as a tool to control the "overall level of federal DSH funding state-by-state." Virginia v. Johnson, 609 F.Supp. 2dl, 3(D.D.C. 2009).

         Second, Congress instructs HHS to monitor and limit hospital-specific reimbursements. Specifically, states may not seek DSFI reimbursement for in-state hospital services where such funding would exceed "the 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).. .for services provided during the year." 42 U.S.C. § l396r-4(g)(1)(A). These are hospital-specific limits on federal DSH reimbursement, and Congress enacted them in an effort to address the chronic over-payment problem in which matching funding for DSH services would exceed the "net costs, and in some instances the total costs, of operating the facilities." Omnibus Budget Reconciliation Act of 1993, H.R. Rep. No. 103-111, at 211-12 (1993). In addition to these two requirements, Congress also requires generally that states operate their state plans in compliance with the Medicaid Act and implementing regulations. See 42 U.S.C. §§ 1396a, l396r-4;42C.F.R. §430.10.

         II. Procedural History

         On August 20, 2015, CMS disallowed $40, 830, 020 in federal funding to Virginia for DSH payments made in 2010 and 2011.[1] Administrative Record ("R.") 192-98. Virginia originally applied for FFP by submitting a Quarterly Statement of Expenditures (or "CMS-64") for payments made in quarters ending in June 30, 2010; September 30, 2010; September 30, 2011; and December 31, 2011. R. 137-38. According to a letter submitted on January 6, 2011 by the Director of the Department of Medical Assistance Services-the state agency administering the DSH payments-these payments actually accrued during 2006, 2007, 2008, and 2009. See R. 292-93. On its Quarterly form, too, Virginia documented several allotments, and included the allotment year to which each requested DSH disbursement applied. R. 258-59. Virginia also included an internal spreadsheet showing the relationship of payments to indigent care costs in a given year. See PL's Mot. at 10-11 (characterizing spreadsheet at R. 277-80).

         After considering Virginia's full submission, CMS denied Virginia's claimed FFP funds, reasoning that Virginia had improperly counted DSH disbursements for one fiscal year against indigent care costs in another fiscal year, and had thus violated federal regulations by failing to "allocate[] to the time periods in which DSH-eligible costs were incurred by the hospitals in providing certain services." R. 196. In other words, Virginia was counting costs in one year towards allotments in another, and thereby circumventing annual federal limits on DSH disbursements. CMS cited specific examples:

[T]he State was not allocating payments to the proper DSH FY allotment. As noted above, payments for FY 2004 costs were applied against the FY 2006 and FY 2009 DSFI allotments; payments for FY 2005 costs were applied against the FY 2006 DSFI allotment; payments for FY 2008 costs were applied against the FY 2006, FY 2007, FY 2009 and FY 2010 allotments; and payments for FY 2009 costs were applied against the FY 2008, FY 2011, and FY 2012 allotments.

R.195.

         Agency procedure calls for an appeal to the Departmental Appeals Board ("DAB" or "the Board"), which provides the final level of review within HF1S, subject to judicial review. See 42 C.F.R. § 430.42; cf. Id. § 405.1877(a)(4) (explaining that where the Administrator sets forth a final decision, only that decision is subject to judicial review, not the agency decision below which was reversed, affirmed, or modified by the Administrator). The disallowance was upheld by the Board on August 8, 2016. See Defs.' Mot. at 2; R. at 1. Like CMS, the Board concluded that Virginia's method for allocating payments to an allotment year was "inconsistent with the federal limitations on DSH spending." See R. 1. The opinion additionally observed that Virginia had itself "previously argued that the process of matching DSH payments to the state DSH allotment applicable to the year in which services were performed was not only permissible, but required under its state plan." R. 11-12. Thus, the Board agreed with CMS that "Virginia's approach was not reasonable because it allowed 'for a constructive end-run around the state and hospital-specific limits imposed by Congress.'" R. 17 (quoting CMS Br. at 17). The Board's ...


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