Alameda Health Sys. v. Ctrs. for Medicare & Medicaid Servs.

Citation287 F.Supp.3d 896
Decision Date18 December 2017
Docket Number Case No. 16–cv–6553–PJH,Case No. 16–cv–5903–PJH
CourtU.S. District Court — Northern District of California
Parties ALAMEDA HEALTH SYSTEM, et al., Plaintiffs, v. CENTERS FOR MEDICARE AND MEDICAID SERVICES, et al., Defendants. County of Santa Clara, Plaintiff, v. Eric D. Hargan, in his official capacity as Acting Secretary, U.S. Department of Health and Human Services; et al., Defendants.

Diane Ung, John Joseph Atallah, Robert Cary Leventhal, Foley and Lardner LLP, Los Angeles, CA, for Plaintiffs.

Carol Federighi, USDJ, Washington, DC, for Defendants.

ORDER RE CROSS–MOTIONS FOR SUMMARY JUDGMENT

PHYLLIS J. HAMILTON, United States District Judge

The parties' cross-motions for summary judgment came on for hearing before this court on August 23, 2017. Plaintiffs Alameda Health System, County of Contra Costa, Regents of the University of California, County of San Mateo, and County of Santa Clara appeared by their counsel Robert C. Leventhal, and plaintiff County of Santa Clara appeared by its counsel Danny Y. Chou. Defendants Centers for Medicare and Medicaid Services ("CMS"), Eric D. Hargan in his official capacity as Acting Secretary of the United States Department of Health and Human Services ("HHS"),1 and Seema Verna in her official capacity as Administrator of CMS, appeared by their counsel Carole Federighi. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby GRANTS plaintiffs' motion and DENIES defendants' motion as follows.

BACKGROUND

These two related cases arise under the Medicaid Act, Title XIX of the Social Security Act, 42 U.S.C. § 1396, et seq. The plaintiffs—five California public health care districts—bring a challenge under the Administrative Procedures Act, 5 U.S.C. § 701, et seq. ("APA"), to the federal government's interpretation of statutes and regulations governing compensation for outpatient hospital services under the Medicaid program.

A. Medicaid Act

Medicaid is a cooperative federal-state program under which the United States provides funds to participating states to administer "medical assistance" to individuals whose income and resources are insufficient to meet the costs of necessary medical services. Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 503, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990), superseded on other grounds by statute; see also Cal. Assoc. of Rural Health Clinics v. Douglas, 738 F.3d 1007, 1010 (9th Cir. 2013). The federal government pays a percentage of the costs a state incurs for patient care, and, in return, the state complies with certain federal requirements. See 42 U.S.C. § 1396a.

Administration of the program is entrusted to the Secretary of HHS, who also has the authority to promulgate rules and regulations regarding Medicaid that are "not inconsistent" with the statute and are "necessary to the efficient administration of the functions" with which the Secretary is charged under the statute. See 42 U.S.C. § 1302.

State participation in the Medicaid program is voluntary, but participating states must comply with federal requirements, including Title XIX requirements, in order to receive funds. Wilder, 496 U.S. at 502, 110 S.Ct. 2510. In accordance with federal law, "each State decides eligible beneficiary groups, types and ranges of services, payment levels for services, and administrative and operative procedures. Payments for services are made directly by the State to the individuals or entities that furnish the services." 42 C.F.R. § 430.0.

The scope of a state's Medicaid program is set forth in a Medicaid "State Plan" promulgated by that state and approved by CMS. See 42 U.S.C. §§ 1316(a)(1), 1396a(b). The State Plan describes how that state administers its Medicaid program, including groups of individuals to be covered, services to be provided, methodologies for providers to be reimbursed, and the administrative requirements that states must meet to participate. 42 U.S.C. §§ 1396a(a), 1396d(a).

If CMS approves a State Plan, the federal government provides reimbursement to the state for a portion of the cost of its Medicaid benefits and plan administration, and the state pays the remainder of its Medicaid expenses. 42 U.S.C. § 1396b. The federal government calculates the federal medical assistance percentage, which determines the federal share of the cost of Medicaid services in each state, based on a formula tied to the per capita income in each state. 42 U.S.C. § 1396d(b).

In California, the Medicaid program, which is known as the California Medical Assistance Program or "Medi–Cal," covers a broad array of hospital services. Cal. Welf. & Inst. Code § 14000 et seq. ; 22 Cal. Code Regs. § 50000 et seq. California has designated its Department of Health Care Services ("CDHCS") as the agency responsible for the administration of the Medi–Cal program. See Cal. Welf. & Inst. Code §§ 10720, 14000. Medi–Cal is operated under a State Plan promulgated by CDHCS and approved by CMS. See http://www.dhcs.ca.gov/formsandpubs/laws/Pages/SPdocs.aspx. ("Cal. State Medicaid Plan").

B. Disproportionate Share Hospital Payments

In 1981, Congress amended the Medicaid Act to provide additional funding to hospitals that "serve a disproportionate number of low-income patients with special needs" through "Disproportionate Share Hospital" (or "DSH") payments. See Omnibus Budget Reconciliation Act ("OBRA") of 1981, Pub. L. No. 97–35, Title XXI § 2173(B)(ii), 95 Stat. 357 (1981), codified at 42 U.S.C. § 1396a(a)(13)(A)(iv) ("DSH Statute"); see also N.H. Hosp. Ass'n v. Burwell, 2017 WL 822094, at *2 (D.N.H. Mar. 2, 2017) ; Virginia Dep't of Med. Assistance Servs. v. Johnson, 609 F.Supp.2d 1, 3 (D.D.C. 2009) (" VDMAS").

The 1981 DSH Statute created a "payment adjustment" for hospitals that treat a disproportionate share of Medicaid patients. See 42 U.S.C. § 1396r–4(c), (d). Generally, states have discretion in deciding which hospitals receive DSH payments and the level of funds those hospitals will receive, see 42 U.S.C. § 1396r–4, subject to certain limits. Only costs that are not otherwise paid for by the patient, by insurance, by another third party, by Medicaid, or by any other program are eligible for DHS reimbursement. SeeVDMAS, 609 F.Supp.2d at 3. In California, DSH payments are available to cover the otherwise uncompensated costs of care hospitals give to Medi–Cal patients and to the uninsured. See http://www.dhcs.ca.gov/provgovpart/Pages/DisproportionateShareHospital.aspx (last visited Dec. 18, 2017).

In 1991, Congress directed the Secretary to determine state-specific limits on federal funding for DSH payments for each fiscal year, using a statutory formula. See 42 U.S.C. § 1396r–4(f). Subject to an overall federal DSH allotment, the aggregate amount of federal funding for DSH payments that a particular state can claim is limited by the difference between the costs that all eligible hospitals incur in providing services to Medicaid beneficiaries and to individuals with no third-party coverage for the services they receive, and the compensation (Medicaid and uninsured patient payments) received for the services. See id. This aggregate cap is referred to as the "DSH Limit" or the "State–Specific Limit." See La. Dept. of Health & Hosps. v. Ctr. for Medicare and Medicaid Servs., 346 F.3d 571, 573–74 (5th Cir. 2003). The DSH Limit is calculated based on data contained in cost reports filed by eligible hospitals. See 42 U.S.C. § 1396r–4(f).

In 1993, through the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), Congress amended the program to limit Medicaid DSH payments to qualifying hospitals to the amount of eligible uncompensated costs incurred. Pub. L. No. 103–66, § 13621, 107 Stat. 312, 629–33 (1993). This amendment was motivated by 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 211–212 (1993), reprinted in 1993 U.S.C.C.A.N. 278, 538.

Thus, the hospital-specific limit ("HSL") requires that DSH payments not 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) 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). While the amount of DSH payments that a specific hospital may receive is determined by the state-controlled allocation process described in the State Plan, the amount may not exceed that hospital's "uncompensated costs" of serving Medicaid and uninsured patients. For purposes of this calculation, a hospital's "uncompensated costs" are the hospital's "uncompensated care costs of providing inpatient hospital and outpatient hospital services" to Medicaid and uninsured patients. See 42 U.S.C. § 1396r–4(j)(2)(C).

Following enactment of OBRA 1993, the Health Care Financing Administration ("HCFC"), predecessor to CMS, issued a letter dated August 17, 1994, to State Medicaid Directors ("1994 CMS Letter"), to provide guidance on the meaning and effect of the new enactment. See Administrative Record ("AR") 001608–14.2 With regard to determining the cost of services under the DSH Limit, the 1994 CMS Letter stated that "the legislative history of this provision makes it clear that States may include both inpatient and outpatient costs in the calculation of the limit," and that in defining "costs of services" under this provision, States would be permitted to use the definition of allowable costs in the State Plan, "or any other definition," so long as the costs determined under such a definition do not exceed the amounts that would be allowable" under Medicare principles of cost reimbursement (which also provide the general upper payment limit under the...

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