Tenn. Hosp. Ass'n v. Azar, No. 17-5970

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: KAREN NELSON MOORE, Circuit Judge.
• Parties: TENNESSEE HOSPITAL ASSOCIATION; TAKOMA REGIONAL HOSPITAL; DELTA MEDICAL CENTER; PARKWEST HOSPITAL, Plaintiffs-Appellees/Cross-Appellants, v. ALEX M. AZAR, II, in his official capacity as Secretary of Health and Human Services; SEEMA VERMA, Administrator of the Centers for Medicare and Medicaid Services; CENTERS FOR MEDICARE AND MEDICAID SERVICES, Defendants-Appellants/Cross-Appellees.
• Docket Number: No. 17-6033,No. 17-5970
• Decision Date: 14 November 2018

TENNESSEE HOSPITAL ASSOCIATION; TAKOMA REGIONAL HOSPITAL;
DELTA MEDICAL CENTER; PARKWEST HOSPITAL, Plaintiffs-Appellees/Cross-Appellants,
v.
ALEX M. AZAR, II, in his official capacity as Secretary of Health and Human Services;
SEEMA VERMA, Administrator of the Centers for Medicare and Medicaid Services;
CENTERS FOR MEDICARE AND MEDICAID SERVICES, Defendants-Appellants/Cross-Appellees.

No. 17-5970
No. 17-6033

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: June 14, 2018
November 14, 2018

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 18a0252p.06

Appeal from the United States District Court for the Middle District of Tennessee at Nashville.
No. 3:16-cv-03263—Waverly D. Crenshaw, Jr., Chief District Judge.

Before: MOORE, KETHLEDGE, and STRANCH, Circuit Judges.

COUNSEL

ARGUED: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants. ON BRIEF: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants.

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MOORE, J., delivered the opinion of the court in which STRANCH, J., joined, and KETHLEDGE, J., joined in the result. KETHLEDGE, J. (pp. 24-28), delivered a separate opinion concurring in the judgment.

OPINION

KAREN NELSON MOORE, Circuit Judge. This case marks the latest in a string of lawsuits brought by hospitals across the country challenging efforts by the Centers for Medicare and Medicaid Services ("CMS") to direct states to recoup certain reimbursements made under the Medicaid program. Here, plaintiffs are the Tennessee Hospital Association and three of its member hospitals, Takoma Regional Hospital, Delta Medical Center, and Parkwest Hospital. These hospitals serve a disproportionate share of Medicaid-eligible patients and are thereby entitled to supplemental payments under the Medicaid Act, known as "DSH payments" or "DSH payment adjustments." The Medicaid Act limits the amount of DSH payments each hospital can receive in a given year, and CMS contends that plaintiffs in this case miscalculated their DSH payment-adjustments for fiscal year 2012 and received extra payments as a result. Plaintiffs, in turn, insist that CMS's approach to calculating DSH payment adjustments is out of step with the Medicaid Act and the regulations that CMS implemented in 2008 pursuant to the Medicaid Act. The district court agreed with plaintiffs and held that CMS's methodology was inconsistent with both the Medicaid Act and CMS's 2008 regulation. Although we agree that CMS's policy is inconsistent with its 2008 rule and cannot be enforced against plaintiffs unless it is promulgated pursuant to notice-and-comment rulemaking, we disagree with the district court's conclusion that CMS's policy exceeds the agency's authority under the Medicaid Act. We therefore AFFIRM the final judgment of the district court on the sole ground that CMS may not enforce an invalidly promulgated policy against plaintiffs and REMAND for further proceedings consistent with this opinion.

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I. BACKROUND

Plaintiffs in this case—the Tennessee Hospital Association and three of its member hospitals—are challenging efforts by the Centers for Medicare and Medicaid Services ("CMS") to direct Tennessee to recoup certain reimbursements paid to the hospitals under the Medicaid program. Plaintiffs are "Disproportionate Share Hospitals" ("DSH"), which means that they serve a disproportionate share of Medicaid-eligible and low-income patients. 42 U.S.C. §§ 1396a(a)(13)(A)(iv); 1396r-4(b). As DSH hospitals, plaintiffs receive supplemental "DSH payments" under the Medicaid Act to help offset the cost of caring for indigent individuals. See id. § 1396r-4(c). The Medicaid Act limits the amount of funds any given DSH hospital can receive in a given year to its uncompensated cost of care—i.e., the cost of caring for Medicaid-eligible and uninsured patients less certain payments made on behalf of those patients. Id. § 1396r-4(g)(1)(A).

Congress amended the Medicaid Act in 2003 to require states to audit and report the amount of DSH payments distributed to each hospital. Id. § 1396r-4(j). 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). To "permit verification of the appropriateness of [each hospital's DSH] payments," the rule requires "each DSH hospital to which the State made a DSH payment" to submit certain data to CMS. 42 C.F.R. § 447.299(c) (2016).¹ The preamble to the rule refers to the various categories of required data as "data elements," 73 Fed. Reg. at 77,948, and we adopt that terminology here. For the purposes of this case, the most relevant data elements are displayed in the chart below.

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Provision	Data Element	Description
42 C.F.R. § 447.299(c)(9)	Total Medicaid; IP/OP2 Payments	The sum of the "IP/OP Medicaid fee-; for-service (FFS) basic rate; payments,"3 the "IP/OP Medicaid; managed care organization payments,"4; and the "Supplemental/enhanced; Medicaid IP/OP payments."5
42 C.F.R. § 447.299(c)(10)	Total Cost of; Care for; Medicaid IP/OP; Services	"The total annual costs incurred by; each hospital for furnishing inpatient; hospital and outpatient hospital; services to Medicaid eligible; individuals."
42 C.F.R. § 447.299(c)(11)	Total Medicaid; Uncompensated; Care	"The total amount of uncompensated; care attributable to Medicaid inpatient; and outpatient services. The amount; should be the result of subtracting the; amount identified in § 447.299(c)(9); from the amount identified in; § 447.299(c)(10). The uncompensated; care costs of providing Medicaid; physician services cannot be included; in this amount."
42 C.F.R. § 447.299(c)(12)	Uninsured IP/OP; revenue	"Total annual payments received by the; hospital by or on behalf of individuals; with no source of third party coverage; for inpatient and outpatient hospital; services they receive. This amount; does not include payments made by a; State or units of local government, for; services furnished to indigent patients."

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42 C.F.R. § 447.299(c)(13)	Total Applicable; Section 1011; Payments	"Federal Section 1011 payments6 for; uncompensated inpatient and outpatient; hospital services provided to Section; 1011 eligible aliens with no source of; third party coverage for the inpatient; and outpatient hospital services they; receive."
42 C.F.R. § 447.299(c)(14)	Total cost of; IP/OP care for; the uninsured	"[T]he total costs incurred for; furnishing inpatient hospital and; outpatient hospital services to; individuals with no source of third; party coverage for the hospital services; they receive."
42 C.F.R. § 447.299(c)(16)	Total annual; uncompensated; care costs	"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 FFS; 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."

The parties' dispute turns, in large part, on how to define properly the so-called "Medicaid shortfall" for hospitals that treat Medicaid-eligible patients who have additional sources of insurance coverage. The Medicaid shortfall is represented by the data element in 42 C.F.R. § 447.299(c)(11), and it reflects the "[t]otal annual costs incurred" ((c)(10)) in treating Medicaid-eligible patients less the total annual "Medicaid IP/OP payments" received ((c)(9)).

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The question is not as simple as it may seem. For certain hospitals—and, defendants contend, for the plaintiff-hospitals here—subtracting total annual "Medicaid IP/OP payments" received from "[t]otal annual costs incurred" does not give an accurate picture of how much money a hospital has ultimately lost in caring for indigent patients because Medicaid is not the sole source of insurance coverage for all Medicaid-eligible patients. "[C]hildren with certain disabilities may be eligible for Medicaid and have private insurance coverage through their parents," for instance, and "some elderly individuals are eligible for both Medicare and Medicaid." First Br. at 4-5 (citing 42 U.S.C. § 1396a(a)(10)(A)(i)(II), (ii)(I)). (The latter group is generally referred to as "dual eligibles." Id.) For individuals with some form of dual coverage, Medicaid typically serves as the "payer of last resort," which means that it contributes funds only if the private insurance or Medicare payments are less than what Medicaid would have paid. Massachusetts v. Sebelius, 638 F.3d 24, 26 (1st Cir. 2011) (quoting Ark. Dep't of Health & Human Servs. v. Ahlborn, 547 U.S. 268, 291 (2006)). Thus, if private insurance or Medicare compensates hospitals at a higher rate than Medicaid (which defendants contend is typical, see First Br. at 5), then Medicaid contributes nothing to defray the cost of caring for such patients. Assume, then, that a hospital spent $100 to treat a dual-eligible patient, and assume further that Medicaid would have contributed $20 to offset the cost of that care but that Medicaid instead contributed nothing because Medicare footed $40 of the bill. Under this scenario, the Medicaid shortfall is seemingly $100 (total costs incurred minus total Medicaid payments received (zero)), even though the actual loss to the hospital is only $60. See First Br. at 34.

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