Children's Hosp. Ass'n of Tex. v. Azar

• Citation: 507 F.Supp.3d 249
• Decision Date: 30 November 2020
• Docket Number: Civil Action No. 17-844 (EGS)
• Parties: CHILDREN'S HOSPITAL ASSOCIATION OF TEXAS; Children's Health Care d/b/a Children's Hospital and Clinics of Minnesota; Gillette Children's Specialty Healthcare; Children's Hospital of the King's Daughters, Incorporated; Seattle Children's Hospital, Plaintiffs, v. Alex Michael AZAR, II, in his official capacity, Secretary, Department of Health and Human Services; Seema Verma, in her official capacity, Administrator, Centers for Medicare and Medicaid Services; and the Centers for Medicare and Medicaid Services, Defendants.
• Court: United States District Courts. United States District Court (Columbia)

507 F.Supp.3d 249

CHILDREN'S HOSPITAL ASSOCIATION OF TEXAS; Children's Health Care d/b/a Children's Hospital and Clinics of Minnesota; Gillette Children's Specialty Healthcare; Children's Hospital of the King's Daughters, Incorporated; Seattle Children's Hospital, Plaintiffs,

v.Alex Michael AZAR, II, in his official capacity, Secretary, Department of Health and Human Services; Seema Verma, in her official capacity, Administrator, Centers for Medicare and Medicaid Services; and the Centers for Medicare and Medicaid Services, Defendants.

Civil Action No. 17-844 (EGS)

United States District Court, District of Columbia.

Signed November 30, 2020

Bridget Springer McCabe, Baker & Hostetler LLP, Los Angeles, CA, Christopher H. Marraro, Baker & Hostetler LLP, David B. Salmons, Michael E. Kenneally, Morgan, Lewis & Bockius LLP, Washington, DC, Susan Feigin Harris, Morgan, Lewis & Bockius LLP, Houston, TX, Geraldine E. Edens, Geraldine Edens PA, Tampa, FL, for Plaintiffs.

Steven A. Myers, James C. Luh, United States Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

Emmet G. Sullivan, United States District Judge Under the Medicaid Act ("Act"), the federal government provides each state funds for distribution to hospitals that treat significantly higher percentages of Medicaid-eligible patients to help cover the costs of providing medical care to such individuals. However, these supplemental payments are subject to limits to ensure that no hospital receives payments that would result in a profit, rather than covering only Medicaid-related costs. On May 8, 2017, 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—filed suit in this Court challenging 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. 16,114, 16,117 (Apr. 3, 2017) ("Final Rule"). The Final Rule permits Defendants—the Secretary of Health and Human Services ("the Secretary"), Centers for Medicare and Medicaid Services ("CMS"), and the CMS Administrator—to define "costs" as those "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).

On March 6, 2018, this Court granted Plaintiffs’ motion for summary judgment and vacated the Final Rule, holding that the Final Rule's definition of "costs" was inconsistent with the Act. Mem. Op., ECF No. 34 at 30, 44-45.¹ Defendants timely appealed, and the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") reversed this Court's ruling, finding that the Final Rule was "consistent with the statute's context and purpose" and that it was not arbitrary or capricious. Children's Hosp. Ass'n of Tex. v. Azar , 933 F.3d 764, 772, 774 (D.C. Cir. 2019). The Court reinstated the Final Rule and remanded the case for further proceedings consistent with the opinion. Id. at 774.

Pending before the Court is Plaintiffs’ motion to clarify the effective date of the Final Rule, in view of the D.C. Circuit's reinstatement of the Final Rule. See Pls.’ Mot. Mem. Clarify Effective Date Final Rule ("Pls.’ Mot."), ECF No. 44. Plaintiffs argue that the effective date of the Final Rule should be no earlier than the date the D.C. Circuit's mandate issued on November 19, 2019. Id. at 5. Defendants, on the other hand, ask the Court to find that the Final Rule is effective as of its initial effective date of June 2, 2017. Defs.’ Opp'n Pls.’ Mot. Clarify Effective Date Final Rule ("Defs.’ Opp'n"), ECF No. 46 at 7-8.

Upon consideration of the parties’ submissions, the applicable law, and the entire record herein, Plaintiffs’ motion is DENIED .

I. Background

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 , ––– U.S. ––––, 136 S. Ct. 1989, 1996-97, 195 L.Ed.2d 348 (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). Individual states, subject to the federal government's review and approval, administer their own program. See 42 U.S.C. § 1396-1. 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. Id. § 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).

The cost of treating Medicaid patients is high. To help ease the financial strain, Congress authorized supplemental payments ("DSH payments") to hospitals that serve a disproportionate share of low-income patients ("DSH hospitals"). See 42 U.S.C. § 1396a(a)(13)(A)(iv). In 1993, 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," Congress amended the Medicaid program to cap DSH payments at each hospital's costs incurred. H.R. Rep. No. 103-111, at 211 (1993), as reprinted in 1993 U.S.C.C.A.N. 278, 538. For Medicaid patients, the 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 Act (referred to as the "Medicaid shortfall"). 42 U.S.C. § 1396r-4(g)(1)(A).

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 reports must identify which hospitals receive DSH payments and the audits must verify that the DSH payments comply with the statutory requirements. Id. In 2008, CMS issued a final rule pursuant to notice-and-comment rulemaking implementing the 2003 auditing requirements. See Medicaid Program; Disproportionate Share Hospital Payments, 73 Fed. Reg. 77,904 (Dec. 19, 2008) ("2008 Rule"). The 2008 Rule provided that each state must report to CMS the cost of each DSH hospital's "Total Medicaid Uncompensated Care," but did not state whether third-party payments, including payments by Medicare and private insurers, were meant to be included in calculating the amount. Id. at 77,950 (codified at 42 C.F.R. § 447.299(c)(11) ).

On January 10, 2010, CMS posted answers to FAQs regarding the audit and reporting requirements, clarifying that payments made by Medicare and private insurers should be included. See Mem. Op., ECF No. 34 at 11. The FAQs were subsequently challenged in multiple courts as an unlawful amendment of the 2008 Rule and as inconsistent with the Medicaid Act, and each of the courts to consider the issue found the FAQs invalid on procedural grounds for failing to properly promulgate the policy embodied in the FAQs in accordance with notice-and-comment requirements. See id. at 11-13 (collecting cases).

On August 15, 2016, CMS issued a notice of proposed rulemaking and subsequently promulgated the Final Rule. 81 Fed. Reg. 53980, 53981 (Aug. 15, 2016). The Final Rule establishes that payments by Medicare and private insurers are to be included in calculating a hospital's "costs incurred." 82 Fed. Reg. 16,114, 16,122 (Apr. 3, 2017) (codified at 42 C.F.R. § 447.299(c)(10) ). It provides, among other things, that "costs ... [a]re defined as costs net of third-party payments, including, but not limited to, payments by Medicare and private insurance." Id. The Final Rule went into effect on June 2, 2017. Id. at 16,115. Defendants noted that, because the Final Rule merely "provid[es] clarification to existing policy," there is "no issue of retroactivity, nor a need for a transition period." Id. at 16,118.

Plaintiffs filed suit on May 8, 2017, arguing that the Final Rule violates the Administrative Procedure Act because it exceeds the Secretary's authority under the Medicaid Act and is arbitrary and capricious. Compl., ECF No. 1. On May 15, 2017, Plaintiffs filed a motion for a preliminary injunction requesting the Court to "enjoin[ ] Defendants – on a nationwide basis – from enforcing, applying, or implementing (or requiring any state to enforce, apply, or implement)" the Final Rule. Mot. Prelim. Inj., ECF No. 8 at 1. On May 23, 2017, in accordance with the Court's May 19, 2017 Order, the parties filed a joint status report in which they agreed that Plaintiffs’ motion for a preliminary injunction could "be combined with the merits and treated also as a motion for summary judgment." Joint Status Report, ECF No. 11 at 2. The Court entered an order consolidating Plaintiffs’ motion for a preliminary injunction with a determination of the merits under Federal Rule of Civil Procedure 65(a)(2) on May 24, 2017. Plaintiffs filed a combined application for a preliminary injunction and summary judgment on June 5, 2017. Pls.’ Combined Mem. Supp. Appl. Prelim. Inj. Summ. J. ("Pls.’ Mem."), ECF No. 12-1.

On March 6, 2018, this Court vacated the Final Rule and entered summary judgment for Plaintiffs, holding that the Rule "is inconsistent with the plain language of the Medicaid Act,"...