Louisiana Dept. of Health v. Center for Medicare, 02-60834.

• Decision Date: 22 September 2003
• Docket Number: No. 02-60834.,02-60834.
• Citation: 346 F.3d 571
• Parties: LOUISIANA DEPARTMENT OF HEALTH AND HOSPITALS, Petitioner, v. CENTER FOR MEDICARE AND MEDICAID SERVICES; Thomas A. Scully, in his official capacity as Administrator of the Centers for Medicare and Medicaid Services; United States Department of Health and Human Services; Tommy G. Thompson, in his official capacity as Secretary of the U.S. Department of Health and Human Services, Respondents.
• Court: U.S. Court of Appeals — Fifth Circuit

346 F.3d 571

LOUISIANA DEPARTMENT OF HEALTH AND HOSPITALS, Petitioner, v. CENTER FOR MEDICARE AND MEDICAID SERVICES; Thomas A. Scully, in his official capacity as Administrator of the Centers for Medicare and Medicaid Services; United States Department of Health and Human Services; Tommy G. Thompson, in his official capacity as Secretary of the U.S. Department of Health and Human Services, Respondents.

No. 02-60834.

United States Court of Appeals, Fifth Circuit.

September 22, 2003.

Caroline Montrose Brown (argued), Maura Ann Dalton, Charles A. Miller, Covington & Burling, Washington, DC, for Petitioner.

Carole Faith Kagan (argued), U.S. Dept. of Health & Human Services, Washington, DC, James R. Farris, U.S. Dept. of Health & Human Services, Office of Gen. Counsel, Region VI, Dallas, TX, for Respondents.

Jack Mark Stolier (argued), James Peter Kovata, Sullivan, Stolier & Resor, New Orleans, LA, for Rural Hosp. Coalition Inc., Amicus Curiae.

Appeal from the Administrator of the Center for Medicare and Medicaid Services.

Before WIENER, CLEMENT, and PRADO, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

This appeal arises following the determination, by the Administrator of the Center for Medicare and Medicaid Services, that Rural Health Clinics in Louisiana do not furnish "hospital services", and hence are not eligible for certain reimbursements. Because we find that interpretation to be unreasonable, we REVERSE.

I. FACTS AND PROCEEDINGS

A. Statutory and regulatory background

(1) The Medicaid program

Medicaid is designed to enable states to offer medical assistance to certain low-income, elderly, and disabled individuals whose income and resources are inadequate to pay for necessary medical services. See 42 U.S.C. § 1396 (2003). Under the Medicaid statute, the federal government and the states cooperate and share the cost of providing medical assistance to Medicaid-eligible persons.

The Medicaid statute gives each state flexibility in designing and administering its own Medicaid program. Under the statute, a state that elects to participate in the program submits a "state plan" for review and approval by the Secretary ("Secretary") of the Department of Health and Human Services ("HHS"). See generally 42 U.S.C. § 1396a. A state that seeks to change its state plan may submit a "state plan amendment" to the Center for Medicare and Medicaid Services ("CMS") for review and approval. See 42 C.F.R. §§ 430.14-430.15 (2002) (recording Secretary's delegation of authority for approving state plan amendments to CMS). CMS, on behalf of the Secretary, is required to approve a state plan amendment that complies with all applicable statutes and regulations. 42 U.S.C. § 1396a(b). Once CMS approves a state plan amendment, the Secretary pays the state a percentage of the "total amount [the state] expended ... as medical assistance under the State plan." 42 U.S.C. § 1396b(a)(1). The percentage for Louisiana for the current fiscal year is 71.28%. See 66 Fed.Reg. 59790 (Nov. 30, 2001); see also 67 Fed.Reg. 69223 (Nov. 15, 2002) (raising Louisiana's percentage to 71.63% for the fiscal year starting October 1, 2003).

(2) Provisions for disproportionate share hospitals

In 1981, Congress added a requirement that state plans include higher reimbursement rates for "public hospitals and teaching hospitals which serve a large Medicaid and low income population [and which] are particularly dependent on Medicaid reimbursement ..." 42 U.S.C. § 1396a(a)(13)(A) (noting that a state plan must "provide for a public process for determination of rates of payment under the plan for hospital services" under which "such rates take into account ... the situation of hospitals which serve a disproportionate number of low-income patients with special needs"). To meet the so-called disproportionate share ("DSH") requirement, states must define and list DSH hospitals that serve a greater percentage of Medicaid and low-income patients. 42 U.S.C. § 1396r-4(a)(1); see also 42 U.S.C. § 1396r-4(b)(1) (restricting DSH designation to hospitals with low-income utilization rates exceeding 25% or to hospitals whose Medicaid inpatient utilization rate is at least one standard deviation above the mean Medicaid inpatient utilization rate of all in-state hospitals receiving Medicaid payments). States must provide an "appropriate increase in the rate or amount of payment for such services." Id. Additionally, the statute contemplates that reimbursements will reflect not only the cost of caring for Medicaid recipients, but also the cost of charity care given to uninsured patients. Id. § 1396r-4(b)(3) (basing definition of "low-income utilization rate" in part on quantity of charity care provided by the hospital). In 1987 and 1988, Congress added specific requirements for states to comply with this general mandate through higher payments to designated hospitals.

(3) State-specific and hospital-specific limits on DSH payment adjustments

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) (capping Louisiana's DSH allotment for fiscal year 2002 at $631 million and for future fiscal years to the 2002 cap adjusted by the consumer price index). In 1993, Congress responded to reports that some hospitals received DSH payment adjustments that exceeded "the net costs, and in some instances the total costs, of operating the facilities," by requiring hospital-specific limits on DSH payments. See H.R. REP. No. 103-111, at 211-212 (1993), reprinted in 1993 U.S.C.C.A.N. 278, 538-539 (noting DSH payment adjustments seeped into state general funds to cover non-health care items including road construction).

The hospital-specific limitations are at the heart of the dispute in this case. The 1993 amendment limits the amount of DSH payments to a specific hospital to

the costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this title, 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) (emphasis added).

CMS has not promulgated any regulations specifically addressing the hospital-specific DSH limit and thus has not addressed the use of the term "hospital services" as it relates to those limits. In a letter to State Medicaid directors dated August 17, 1994, the Health Care Financing Administration ("HCFA"), CMS's predecessor agency, stated:

There are several important considerations that must be made in determining the cost of services under the DSH limit, whether for Medicaid or uninsured individuals. First, the legislative history of this provision makes it clear that States may include both inpatient and outpatient costs in the calculation of the limit. Second, in defining "costs of services" under this provision, HCFA would permit the State to use the definition of allowable costs in its State plan, or any other definition, as long as the costs determined under such a definition do not exceed the amounts that would be allowable under the Medicare principles of cost reimbursement.... HCFA believes this interpretation of the term "costs incurred" is reasonable because it provides States with a great deal of flexibility up to a maximum standard that is widely known and used in the determination of hospital costs.

Letter from Sally K. Richardson, Department of Health & Human Services, to State Medicaid Directors 3 (Aug. 17, 1994) (emphasis added).

(4) Rural Health Clinics ("RHCs")

RHCs generally furnish "those diagnostic and therapeutic services and supplies that are commonly furnished in a physician's office or at the entry point into the health care delivery system." 42 C.F.R. § 491.9(c)(1). RHCs also provide "medical emergency procedures as a first response to common life-threatening injuries and acute illness and has available the drugs and biologicals commonly used in life saving procedures, such as analgesics, anesthetics (local), antibiotics, anticonvulsants, antidotes and emetics, serums and toxoids." Id. 491.9(c)(3). Services in RHCs are furnished by a physician or a mid-level practitioner, such as a nurse practitioner or physician assistant, acting under the direction of a physician. Id. § 440.20(b)(1)-(3).

B. Louisiana's efforts to increase DSH payment adjustments

Louisiana is largely rural and most of the rural areas are medically under-served. See 67 Fed.Reg. 21962-67 (May 1, 2002) (listing urban areas from the 2000 census). Recognizing that small rural hospitals bear significant costs for the services they provide to low-income uninsured patients through their "hospital-based" clinics,¹ Louisiana sought guidance from HHS as to how those costs could be taken into account as part of a rural hospital's DSH payment adjustment. In a January 19, 1999 letter U.S. Senator John Breaux asked Donna Shalala, the then Secretary of HHS, to clarify when RHC costs could be taken into account for DSH purposes. In her response, Secretary Shalala wrote:

While I agree that a state has discretion to "license or formally approve" a hospital-based RHC as an outpatient hospital clinic for purposes of the Medicaid DSH program, I [cannot] require that states consider the costs of such a facility in calculating DSH limits. Under applicable law, a State has the flexibility to include a hospital-based RHC under the license of the hospital, to separately license a hospital-based RHC, or to issue a license which recognizes the dual nature of the clinic as both an outpatient hospital clinic and an RHC. Where a state has chosen to license these clinics as hospital outpatient departments, and they are certified as part of the hospital, the...