United States Court of Appeals, District of Columbia Circuit
April 9, 2019
from the United States District Court for the District of
Columbia (No. 1:17-cv-00844)
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.
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
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.
LeCraft Henderson, Circuit Judge.
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.
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
[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.
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.
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. ...