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

• Decision Date: 13 August 2019
• Docket Number: No. 18-5135,18-5135
• Citation: 933 F.3d 764
• Parties: CHILDREN’S HOSPITAL ASSOCIATION OF TEXAS, et al., Appellees v. Alex Michael AZAR, II, in his official capacity, Secretary, Department of Health and Human Services, et al., Appellants
• Court: U.S. Court of Appeals — District of Columbia Circuit

933 F.3d 764

CHILDREN’S HOSPITAL ASSOCIATION OF TEXAS, et al., Appellees

v.Alex Michael AZAR, II, in his official capacity, Secretary, Department of Health and Human Services, et al., Appellants

No. 18-5135

United States Court of Appeals, District of Columbia Circuit.

Argued April 9, 2019

Decided August 13, 2019

Tara S. Morrissey, Attorney, United States Department of Justice, argued the cause for the appellants. Mark B. Stern and Samantha L. Chaifetz, Attorneys, Robert P. Charrow, General Counsel, United States Department of Health & Human Services, Janice L. Hoffman, Associate General Counsel, Susan M. Lyons, Deputy Associate General Counsel, and David L. Hoskins, Attorney, were with her on brief.

David B. Salmons, Washington, DC, argued the cause for the appellees. Geraldine E. Edens, Michael E. Kenneally, Washington, DC, and Susan Feigin Harris were with him on brief. Christopher H. Marraro, Washington, DC, entered an appearance.

Daniel G. Jarcho and Michael H. Park, Washington, DC, were on brief for the amicus curiae Children’s Hospital Association in support of the appellees and in support of affirmance.

Before: Henderson and Rogers, Circuit Judges, and Sentelle, Senior Circuit Judge.

Karen LeCraft Henderson, Circuit Judge

Under the Medicaid Act (Act), the federal government provides each state funds for distribution to hospitals that serve a disproportionate number of low-income patients. See 42 U.S.C. § 1396-1. A state distributes the funds through Disproportionate Share Hospital (DSH) payments. See id. § 1396r-4(b), (c). A hospital may not receive a DSH payment that exceeds its "costs incurred" in furnishing hospital services to low-income patients. Id. § 1396r-4(g)(1)(A). "Costs incurred" are, inter alia , "determined by the Secretary" of the United States Department of Health and Human Services (Secretary). Id. In 2017, the Secretary promulgated a regulation defining "costs incurred." Medicaid Program; Disproportionate Share Hospital Payments–Treatment of Third Party Payers in Calculating Uncompensated Care Costs, 82 Fed. Reg. 16,114, 16,122 (Apr. 3, 2017) ("2017 Rule"). The plaintiffs, a group of children’s hospitals that receive DSH payments, argue that the regulatory definition is contrary to the Medicaid Act and otherwise arbitrary and capricious. The district court agreed that the definition is inconsistent with the Act and vacated the 2017 Rule. Children’s Hosp. Ass’n of Tex. v. Azar , 300 F. Supp. 3d 190 (D.D.C. 2018). We now reverse.

I. Background

"Medicaid is a cooperative federal-state program through which the Federal Government provides financial assistance to States so that they may furnish medical care to needy individuals." Wilder v. Va. Hosp. Ass’n , 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990). States implement their own Medicaid plans, subject to the federal government’s review and approval. See 42 U.S.C. § 1396a. Treating the indigent proves costly even for hospitals that receive Medicaid payments. Indeed, not all hospital services are covered by Medicaid; not all costs associated with covered services are allowed by Medicaid; and Medicaid does not fully reimburse hospitals for all allowable costs associated with covered services. Recognizing this, the Congress authorizes supplemental payments ("DSH payments") to hospitals that serve a disproportionate share of low-income patients ("DSH hospitals"). 42 U.S.C. § 1396a(13)(A)(iv) (requiring that Medicaid payment rates "take into account (in a manner consistent with section 1396r-4 of this title) the situation of hospitals which serve a disproportionate number of low-income patients with special needs"); 42 U.S.C. § 1396r-4 (entitled "Adjustment in payment for inpatient hospital services furnished by disproportionate share hospitals"). There is both a state-specific and a hospital-specific limit on DSH payments. The state-specific limit—not at issue in this case—dictates that all DSH payments to DSH hospitals within a single state must be drawn from the same pool of federal funds. See 42 U.S.C. § 1396r-4(f). The hospital-specific limit, which is at issue in this case, dictates that a DSH payment to a single hospital cannot 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 sentence—although not the picture of clarity—establishes a few matters clearly. A DSH hospital cannot receive a DSH payment that exceeds its "costs incurred during the year of furnishing hospital services" to Medicaid-eligible and uninsured individuals. The Secretary is assigned the task of determining "costs incurred." And "costs incurred" are "net of payments under this subchapter, other than under this section, and by uninsured patients"; in other words, payments made by Medicaid and uninsured individuals must be subtracted out when calculating a hospital’s "costs incurred." The dispute here is about whether payments made by Medicare and private insurers should also be subtracted out.

In 2003, the Congress enacted legislation requiring states to submit annual reports and independent certified audits regarding their DSH programs. See 42 U.S.C. § 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, the Centers for Medicare & Medicaid Services (CMS), using the authority delegated it by the Secretary, promulgated a regulation implementing the reporting and auditing requirements. 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." Id. at 77,950 (codified at 42 C.F.R. § 447.299(c)(11) ). The 2008 Rule did not state whether third-party payments, including payments by Medicare and private insurers, were meant to be included in calculating the amount. See id. Three courts of appeals concluded from this silence that the 2008 Rule left uncertain whether these payments should be considered. See Children’s Health Care v. Ctrs. for Medicare & Medicaid Servs. , 900 F.3d 1022, 1025 (8th Cir. 2018) ; Children’s Hosp. of the King’s Daughters, Inc. v. Azar , 896 F.3d 615, 621 (4th Cir. 2018) ; N.H. Hosp. Ass’n v. Azar , 887 F.3d 62, 75 (1st Cir. 2018). One court of appeals concluded that the 2008 Rule made clear that these payments should not be considered. See Tenn. Hosp. Ass’n v. Azar , 908 F.3d 1029, 1043–44 (6th Cir. 2018).

In 2010, CMS posted a Frequently Asked Questions document on its website clarifying that payments made by Medicare and private insurers should be included. See CMS, Additional Information on the DSH Reporting and Audit Requirements , FAQs 33 and 34 (2010), https://www.medicaid.gov/medicaid/finance/downloads/part-1-additional-info-on-dsh-reporting-and-auditing.pdf. A number of hospitals brought suit, arguing that the FAQs posting was invalid because it represented a substantive policy change without notice and an opportunity for public comment. In response, CMS issued a notice of proposed rulemaking and subsequently promulgated the 2017 Rule. The 2017 Rule establishes that payments by Medicare and private insurers are to be included in calculating a hospital’s "costs incurred." 82 Fed. Reg. at 16,122 (codified at 42 C.F.R. § 447.299(c)(10) ). It provides, inter alia , "costs ... [a]re defined as costs net of third-party payments, including, but not limited to, payments by Medicare and private insurance." Id. The Secretary explains that considering payments by Medicare and private insurers "best fulfills the purpose of the DSH statute," is "necessary to ensure that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients" and "is necessary to facilitate the Congressional directive ... of limiting the DSH payment to a hospital’s uncompensated care costs." Id. at 16,116, 16,118. He maintains that the 2017 Rule did not effect a legal change but instead continued the preexisting policy. Id. at 16,119.

The plaintiffs are four children’s hospitals in Minnesota, Virginia and Washington and an association representing eight children’s hospitals in Texas. They claim the 2017 Rule violates the Administrative Procedure Act because it exceeds the Secretary’s authority under the Medicaid Act and is the product of arbitrary and capricious reasoning. See 5 U.S.C. § 706(2)(A), (C). The district court entered summary judgment for the plaintiffs, holding that the Rule "is inconsistent with the plain language of the Medicaid Act," which "clearly indicates which payments can be subtracted from the total costs incurred during the year by hospitals" and "nowhere mentions subtracting other third-party payments made on behalf of Medicaid-eligible patients from the total costs incurred." Children’s Hosp. Ass’n of Tex. , 300 F. Supp. 3d at 205, 207. Having held the 2017 Rule invalid under § 706(2)(C) ("ultra vires " prohibition), the district court did not reach the plaintiffs’ § 706(2)(A) challenge ("arbitrary and capricious" prohibition). Id. at 205. The district court ultimately vacated the 2017 Rule and the Secretary timely appealed. Id. at 210–11. Our review is de novo . See Ark Initiative v. Tidwell , 816 F.3d 119, 126–27 (D.C. Cir. 2016).

II. Analysis

A. Exceeds Statutory Authority

The plaintiffs first challenge the Rule as exceeding the Secretary’s authority under the Medicaid Act, in violation of 5 U.S.C. § 706(2)(C). The familiar Chevron framework guides our review. See Ass’n of Private Sector Colls. & Univs. v....