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Children's Hospital Association of Texas v. Azar

United States Court of Appeals, District of Columbia Circuit

August 13, 2019

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

          Argued April 9, 2019

          Appeal from the United States District Court for the District of Columbia (No. 1:17-cv-00844)

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

          Daniel G. Jarcho and Michael H. Park 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.

          OPINION

          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 (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. ...


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