Children's Hosp. of the King's Daughters, Inc. v. Azar

• Decision Date: 23 July 2018
• Docket Number: No. 17-2237,17-2237
• Citation: 896 F.3d 615
• Parties: CHILDREN’S HOSPITAL OF THE KING’S DAUGHTERS, INC., Plaintiff-Appellee, v. Alex M. AZAR II, in his official capacity, Secretary, Department of Health and Human Services; Seema Verma, in her official capacity, Administrator, Centers for Medicare & Medicaid Services; Centers for Medicare and Medicaid Services, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

896 F.3d 615

CHILDREN’S HOSPITAL OF THE KING’S DAUGHTERS, INC., Plaintiff-Appellee,

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

No. 17-2237

United States Court of Appeals, Fourth Circuit.

Argued: May 9, 2018

Decided: July 23, 2018

ARGUED: Samantha L. Chaifetz, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Geraldine E. Edens, MORGAN, LEWIS & BOCKIUS LLP, Washington, D.C.; Christopher Howard Marraro, BAKER & HOSTETLER, LLP, Washington, D.C., for Appellee. ON BRIEF: Chad A. Readler, Acting Assistant Attorney General, Mark B. Stern, Tara S. Morrissey, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Dana J. Boente, United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia; Brian R. Stimson, Acting General Counsel, Janice L. Hoffman, Associate General Counsel, Susan M. Lyons, Deputy Associate General Counsel for Litigation, David L. Hoskins, Lindsay S. Goldberg, Office of the General Counsel, Centers for Medicare & Medicaid Services Division, UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Washington, D.C., for Appellants. Susan Feigin Harris, MORGAN, LEWIS & BOCKIUS LLP, Houston, Texas, for Appellee.

Before TRAXLER, AGEE, and WYNN, Circuit Judges.

Affirmed in part and vacated in part by published opinion. Judge Wynn wrote the opinion, in which Judge Traxler and Judge Agee concurred.

WYNN, Circuit Judge:

Defendant-Appellant Alex Azar, in his official capacity as Secretary of the U.S. Department of Health & Human Services (the "Secretary"), appeals an order of the U.S. District Court for the Eastern District of Virginia enjoining the Secretary from enforcing a Medicaid policy set forth in a Frequently Asked Questions document ("FAQ 33"). See Children’s Hosp. of the King’s Daughters, Inc. v. Price , 258 F.Supp.3d 672 (E.D. Va. 2017). The FAQ 33 policy purported to clarify the methodology for calculating the maximum amount of financial assistance available to hospitals, like Plaintiff-Appellee Children’s Hospital of the King’s Daughters, Inc. ("Children’s Hospital"), that serve a disproportionate number of low-income or special needs patients (commonly referred to as "disproportionate share hospitals" or "DSHs"). Under the methodology in FAQ 33, Children’s Hospital would have to repay $19.1 million in DSH payments it received from the Medicaid program.

The district court enjoined the Secretary from enforcing the FAQ 33 policy against Children’s Hospital for two reasons: (1) the promulgation of the FAQ 33 policy failed to comply with the procedural requirements set forth in the Administrative Procedural Act ("APA") and (2) the FAQ 33 policy contradicted the plain and unambiguous language of the governing statute.

For the reasons that follow, we conclude that the district court correctly determined that the policy set forth in FAQ 33 constituted a "legislative rule" and, therefore, that the APA mandated that the agency establish the FAQ 33 policy through notice-and-comment rulemaking. See 5 U.S.C. § 553(a) – (c). We thus affirm the district court’s judgment enjoining the Secretary from enforcing the policy set forth in FAQ 33 against Children’s Hospital. Because we conclude that the policy violated the APA’s procedural requirements, we decline to reach the substantive challenge by Children’s Hospital to the FAQ 33 policy and vacate the part of the district court’s opinion addressing whether that policy conflicts with the language of 42 U.S.C. § 1396r-4(g).

I.

Medicaid, 42 U.S.C. § 1396 et seq. , is a cooperative federal-state program through which the federal government provides financial assistance to state Medicaid programs, which in turn provide medical insurance to qualifying individuals. Children’s Hosp. , 258 F.Supp.3d at 677. Although states have some discretion in determining which individuals are qualified to participate in their Medicaid programs, the vast majority of beneficiaries qualify to participate because their "income and resources are insufficient to meet the costs of necessary medical services." 42 U.S.C. § 1396-1. Additionally, Medicaid programs "provide[ ] benefits to children with certain serious illnesses, without regard to their family’s income ." Children’s Hosp. , 258 F.Supp.3d at 678 (emphasis added) (citing §§ 1396a(cc), 1382(a)(3)(c) ). Because their eligibility does not depend on income and resources, such Medicaid-eligible children often have private insurance coverage.

Children’s Hospital is a non-profit pediatric hospital located in Norfolk, Virginia. Most of Children’s Hospital’s pediatric patients are eligible to participate in the Medicaid program, either because of their poverty or because they have a qualifying illness or disability. See id. (noting that Children’s Hospital’s "Medicaid Inpatient Utilization Ratio (‘MIUR’) (the ratio of Medicaid inpatient days to total hospital days) was 69.65% in 2012," the highest MIUR in Virginia).

The Medicaid statute provides for state Medicaid programs to make "payment adjustment[s]" to certain hospitals, like Children’s Hospital, that "serve a disproportionate number of low-income patients with special needs." §§ 1396a(a)(13)(A)(iv), 1396r-4(c). The statute further establishes an aggregate limit on the amount of payment adjustments state programs can allocate to all qualifying DSHs in their state. § 1396r-4(f)(3). In a provision titled "Amount of adjustment subject to uncompensated costs," the statute also caps the amount of DSH funding any particular hospital may receive in a given year at:

[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. For purposes of the preceding sentence, payments made to a hospital for services provided to indigent patients made by a State or a unit of local government within a State shall not be considered to be a source of third party payment.

§ 1396r-4(g)(1)(A). In a 1994 guidance document, the agency characterized the "first part" of this hospital specific limit as the hospital’s "Medicaid ‘shortfall’ "—"the cost of services furnished to Medicaid patients, less the amount paid under the non-DSH payment method under the State plan." J.A. 172. "The second part of the formula is the cost of services provided to patients who have no health insurance or source of third party payment for services provided during the year, less the amount of payments made by these patients." Id. Together, these two parts of the hospital specific limit constitute a DSH’s "uncompensated care costs." See Medicaid Program; Disproportionate Share Hospital Payments, 73 Fed. Reg. 77,904, 77,904 (Dec. 19, 2008) (codified at 42 CFR pts. 447 & 455).

In a regulation promulgated in 2008 to implement new statutory DSH reporting and auditing requirements, the Centers for Medicare & Medicaid Services ("CMS"), a division of the Department of Health & Human Services, set forth the methodology for calculating the "payment adjustment." 42 C.F.R. § 447.299. In particular, a section titled "Total annual uncompensated care costs" provides:

The total annual uncompensated care cost equals the total cost of care for furnishing inpatient hospital and outpatient hospital services to 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 [fee-for-service] rate payments, Medicaid managed care organization payments, supplemental/enhanced Medicaid payments, uninsured revenues, and Section 1011 payments for inpatient and outpatient hospital services. This should equal the sum of paragraphs (c)(9), (c)(12), and (c)(13) subtracted from the sum of paragraphs (c)(10) and (c)(14) of this section.

§ 447.299(c)(16). Of particular relevance to this appeal, Section 447.299(c)(10) defines the "Total Cost of Care for Medicaid [Inpatient/Outpatient] Services" as "The total annual costs incurred by each hospital for furnishing inpatient hospital and outpatient hospital services to Medicaid eligible individuals." And Section 447.299(c)(9) defines "Total Medicaid [Inpatient/Outpatient] Payments" as the sum of Medicaid fee-for-service payments, Medicaid managed care payments, and supplemental Medicaid payments.

The dispute between Children’s Hospital and the Secretary turns on whether payments by private insurance companies to Children’s Hospital on behalf of Medicaid-eligible patients should be accounted for in determining Children’s Hospital DSH payment adjustment. In a Frequently Asked Questions document released in 2010, FAQ 33, which was not promulgated through notice-and-comment rulemaking, CMS took the position that

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 amount.

Children’s Hosp. , 258 F.Supp.3d at 679–80 (emphasis added). Until it understood FAQ 33’s import in October 2016—as a result of an audit by an outside auditor working on behalf of Virginia’s Medicaid program—Children’s Hospital did not include payments from private insurers in calculating its payment adjustment. The auditor determined that Children’s Hospital was obliged to repay $19.1 million to the State Medicaid program...