Court: Court of Appeals for the D.C. Circuit; June 1, 2018; Federal Appellate Court
On December 29, 2014, United States District Judge Emmet G. Sullivan granted a preliminary injunction requested by Texas Children's Hospital and Seattle Children's Hospital, prohibiting the Secretary of Health and Human Services, the Centers for Medicare and Medicaid Services (CMS), and its Administrator from enforcing FAQ No. 33 until further notice. The Court is currently reviewing defendants' motion to dismiss for lack of subject matter jurisdiction or for summary judgment, alongside plaintiffs' cross-motion for summary judgment. After consideration of all motions and legal standards, the Court denied the defendants' motion and granted the plaintiffs' motion.
The plaintiffs, two non-profit teaching and research hospitals, provide care to critically ill children regardless of their families' financial situations and serve a disproportionately high number of Medicaid patients. The Medicaid Act, which provides federal financial assistance to states for medical treatment of needy individuals, includes provisions for children with serious illnesses irrespective of family income. Specific eligibility criteria exist for Medicaid, including those related to Supplemental Security Income for children with low birth weights.
Congress amended Medicaid in 1981 to ensure that hospitals treating a significant number of low-income patients receive adequate support through Disproportionate Share Hospital (DSH) payments. These payments are intended to cover the costs associated with treating Medicaid patients, and subsequent amendments have limited DSH payments based on hospital-specific costs incurred. The current regulation restricts DSH payments to the actual costs incurred by hospitals for services rendered to eligible individuals or uninsured patients.
In 2003, Congress established an annual audit requirement for Disproportionate Share Hospital (DSH) payments, mandating hospitals to certify that: (C) only uncompensated care costs for inpatient and outpatient services to specified individuals are included in hospital-specific limits; (D) all payments under the relevant subchapter, including supplemental payments, are accounted for in these limits; and (E) the state maintains separate documentation of all costs, claimed expenditures, uninsured costs, and payments made on behalf of the uninsured. Overpayments discovered must be recouped within one year, or the federal government may reduce future contributions.
On December 19, 2008, CMS issued the 2008 Final Rule, detailing specific audit and reporting requirements to ensure compliance with the DSH payment calculation framework. States are required to submit annual reports for each DSH hospital receiving payments, including the total annual uncompensated care costs, defined as the total costs of care for eligible Medicaid individuals and the uninsured minus specific payments. The Rule provides detailed definitions for each type of cost and payment included in this calculation.
Additionally, on January 10, 2010, CMS released FAQ 33, indicating that days, costs, and revenues for patients with both Medicaid and private insurance should be included in the Medicaid inpatient utilization rate (MIUR) calculations for determining DSH payment eligibility. The statute does not exclude individuals eligible for Medicaid who also have private insurance, and hospitals must offset both Medicaid and third-party revenues against costs to ascertain any uncompensated care amounts.
Plaintiffs were notified by state health care agencies that the calculations for their hospital-specific limits would change following the posting of FAQ 33, specifically incorporating costs reimbursed by private insurance into the calculation for their Disproportionate Share Hospital (DSH) payments. This adjustment significantly decreased or eliminated DSH payments for both hospitals, with Texas Children's Hospital facing a reduction of approximately $12 million. On December 5, 2014, plaintiffs filed a lawsuit and a motion for a preliminary injunction to prevent the enforcement of FAQ 33. The court granted this motion on December 29, 2014, halting the policy's enforcement in Texas and Washington and notifying state Medicaid programs of the injunction. Since then, other hospitals have filed similar lawsuits in federal courts across several states, leading to various courts granting injunctions against the enforcement of FAQ 33. Notable cases include decisions from courts in New Hampshire, Tennessee, Minnesota, and Virginia, all resulting in rulings that prevent the application of FAQ 33 to the plaintiffs' hospitals.
The standard of review for a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) requires the plaintiff to prove jurisdiction by a preponderance of the evidence, as established in Lujan v. Defs. of Wildlife. Federal courts operate under limited jurisdiction, with a presumption against jurisdiction in cases outside this scope, as noted in Kokkonen v. Guardian Life Insurance Co. of America. Subject matter jurisdiction is an inherent requirement that cannot be conferred by party actions. Unlike motions to dismiss under Rule 12(b)(6), courts considering jurisdictional motions are not confined to the complaint's allegations and may review materials outside the pleadings, as stated in Hohri v. United States.
For motions for summary judgment, the process determines whether an agency action aligns with the administrative record and the standards of the Administrative Procedure Act (APA). Courts have a limited role in reviewing agency decisions and do not apply standard summary judgment criteria under Rule 56(c). Instead, the agency is tasked with resolving factual issues based on the administrative record, while the court assesses the legality of the agency's decision. When addressing cross-motions for summary judgment, the court may grant judgment if one party is entitled based on undisputed material facts. A reviewing court has authority to overturn agency actions deemed arbitrary, capricious, or legally inconsistent, as per 5 U.S.C. 706(2)(A).
Plaintiffs contend that FAQ 33 was issued without proper notice-and-comment procedures, violating the Administrative Procedure Act (APA), and that it substantively contravenes the Medicaid Act. Defendants counter these claims and assert that the plaintiffs lack standing to challenge FAQ 33. They argue that FAQ 33 does not serve as the legal basis for the policy mandating the inclusion of private-insurance payments in the hospital-specific limit for Disproportionate Share Hospital (DSH) payments and has no independent legal effect.
The Court prioritizes the issue of FAQ 33's independent legal effect before addressing the standing and merits of the plaintiffs' claims. Defendants maintain that FAQ 33 merely reiterates a longstanding interpretation of the governing statute, 42 U.S.C. § 1396r-4, and 42 C.F.R. § 447.299. The Court notes that the policy in FAQ 33 is not codified in the Medicaid Act and recognizes the definition of the hospital-specific limit for DSH payments, which includes costs incurred for hospital services but excludes private-insurance payments.
Defendants interpret the statute's "costs incurred" to refer solely to "uncompensated costs," asserting that private-insurance payments should be deducted from the cost calculations. They reference the heading of the relevant statute section, which mentions "uncompensated costs." However, plaintiffs argue that the heading cannot override the statute's clear language. The Court acknowledges that while headings can assist in interpreting statutory meaning, they are not conclusive on their own.
Headings in legal texts should not restrict the plain meaning of the statute's language. The statute at issue, specifically section 1396r-4(g)(1)(A), does not include an offset for private-insurance payments when defining costs incurred for hospital services. The defendants' interpretation, which suggests that "uncompensated costs" should include reimbursements from private insurers, contradicts the statute's plain text. Additionally, the following subsection (g)(2)(A) explicitly allows for offsets of third-party payments for particular hospitals, indicating Congress's intent to treat these provisions differently. This differentiation suggests that Congress deliberately excluded private insurance offsets from subsection (g)(1). Moreover, the 2008 Rule does not support the defendants' policy because it does not mandate a private-insurance payment offset and instead outlines a calculation for DSH payments that contradicts the defendants' interpretation. Although the statute allows for rule-making discretion, the 2008 Rule itself does not align with the defendants' policy, leading to a direct conflict. The defendants' claims of textual support from the rule and accompanying Federal Register notice, along with assertions of deference under Seminole Rock, are addressed but do not resolve the inconsistencies between the rule and their interpretation.
The 2008 Rule provides a specific definition of "uncompensated care costs," which directly contradicts the defendants' interpretation. Defendants argue that the terms "costs" and "incurred" exclude expenses offset by payments or reimbursements, asserting that the regulatory text requires excluding private insurance reimbursements from hospital-specific limits. However, the court emphasizes the necessity of interpreting the rule's language within its broader statutory context. The rule defines "Total annual uncompensated care costs" as the total cost of care for Medicaid-eligible individuals and those without third-party coverage, minus specific payments, including those from Medicaid and uninsured revenues, but explicitly excluding payments from private insurance. The calculation process is detailed, outlining which payments are included and emphasizing that costs reimbursed by private insurers do not factor into the "uncompensated care costs." Thus, the defendants’ assertion that "costs incurred" must exclude reimbursed costs is unfounded, as the regulatory framework does not support this interpretation.
Defendants' argument to include private-insurance payments in the "costs incurred" under the 2008 Rule misinterprets the regulation's context. While other payments like Medicaid and those from the uninsured are explicitly deducted from the payments side, attempting to deduct private-insurance payments from the costs side is inconsistent with the regulation's plain reading. The term "costs incurred" is clearly defined within the regulation, and the defendants' reliance on case law, such as PhRMA, to support their interpretation is deemed unpersuasive. Furthermore, defendants reference the Preamble of the 2008 Rule, claiming it aids in interpreting the regulation; however, it cannot contradict the regulation's text. The D.C. Circuit has established that a preamble does not hold the same weight as the regulation itself and cannot alter unambiguous statutory language. The 2008 Rule provides precise definitions for "unreimbursed costs," which take precedence over any contradictory statements in the Preamble. Thus, the clear definitions within the rule govern the calculations for hospital-specific limits, rendering the Preamble's conflicting interpretations invalid.
Defendants claim that their interpretation of "costs incurred" should be upheld due to deference given to an agency's interpretation of its regulations under the Seminole Rock, Auer standard. This standard allows a court to grant "controlling weight" to an agency's interpretation unless it is plainly erroneous or inconsistent with the regulations. The court in Kaiser Foundation denied deference to a Secretary's interpretation that contradicted the regulation's plain language. Similarly, the court finds that the Secretary's interpretation in FAQ 33 conflicts with the plain text of the 2008 Rule, thus deference is unwarranted, and FAQ 33 has independent legal effect.
Regarding standing, defendants argue that plaintiffs lack jurisdictional standing due to redressability issues, asserting that FAQ 33 has no independent effect and that state health care authorities, not the federal government, are responsible for recouping DSH payments. However, the court has determined FAQ 33 has independent legal effect and previously ruled that an injunction against the defendants' enforcement of FAQ 33 could likely address plaintiffs' injuries. Although state agencies are not part of the lawsuit, their decisions on recoupment are closely related to the enforcement of FAQ 33 by the defendants.
Standing can be established through evidence showing a causal relationship between government policy and the conduct of regulated third parties. The D.C. Circuit requires that agency action be a substantial factor in motivating these third-party actions. Medicaid is characterized as a "cooperative venture" between federal and state governments, with the Centers for Medicare & Medicaid Services (CMS) holding significant authority over state agencies. The involvement and support of state health agencies for the plaintiffs indicate that the enforcement of FAQ 33 is a substantial motivating factor for third-party actions. This supports the plaintiffs' standing to seek redress.
Upon determining that FAQ 33 has independent legal effect and that the plaintiffs have standing, the focus shifts to whether FAQ 33 violates the Administrative Procedure Act (APA). The APA mandates notice-and-comment procedures for new rules, exempting interpretative rules, general policy statements, or procedural rules. Courts can invalidate agency actions that fail to adhere to required procedures. Agency actions are only reviewable if they are "final," meaning they conclude the agency's decision-making process and affect rights or obligations.
The APA does not define "interpretive rule," leading to scholarly debate, but the D.C. Circuit employs a four-part test to distinguish between legislative and interpretive rules: (1) adequacy of legislative basis for enforcement without the rule; (2) publication of the rule in the Code of Federal Regulations; (3) explicit invocation of legislative authority by the agency; and (4) whether the rule amends a prior legislative rule. Positive responses to any of these criteria indicate a legislative rule.
FAQ 33 was not published in the Code of Federal Regulations, and CMS did not use its general rulemaking authority to issue it. The analysis indicates that FAQ 33 is a legislative rule because it lacks an adequate legislative basis for agency action without it, as neither the statute nor the 2008 Rule supports the defendants' policy. The distinction between legislative and interpretive regulations hinges on whether a new rule results in a substantive regulatory change. Despite defendants claiming FAQ 33 is simply advisory and non-binding, the Court concludes it effects a substantive change in the law by altering the formula for calculating the hospital-specific limit, which is not addressed by prior rules or statutes. FAQ 33 is also inconsistent with the prior legislative rule, thus amending the 2008 Rule. The defendants' assertion that their interpretation of the statute is permissible and entitled to Chevron deference is countered by the principle that Chevron does not apply to interpretations lacking the force of law, such as opinion letters or policy statements. The policy in FAQ 33 is not codified by the Medicaid Act, which further supports the conclusion that it does not warrant Chevron deference.
The statute allows the Secretary to determine additional payments related to hospital service costs, but FAQ 33 was not issued under this authority and therefore does not qualify for Chevron deference. Courts have ruled that as FAQs are not formal regulations, they lack the deference typically granted under Chevron, particularly when procedural errors are present in their issuance. Although informal agency interpretations may receive some deference, FAQ 33 fails to persuade in light of the Medicaid Act's clear language, and it constitutes a substantive change to the DSH limit calculation, effectively amending the 2008 Rule. Consequently, it must adhere to notice-and-comment procedures under the Administrative Procedure Act (APA) and is deemed illegally promulgated. The Court denied the defendants' motion to dismiss or for summary judgment, granting the plaintiffs' motion instead. Additionally, since the plaintiffs do not qualify as high disproportionate-share hospitals, subsection (g)(2)(A) is not applicable to them; however, the defendants reference statutory reporting requirements concerning the exclusion of private insurance payments from DSH calculations.
The argument presented is flawed for two key reasons: first, "uncompensated care costs" is a term defined in the statute under subsection (g), and second, "uncompensated costs" is defined differently under the 2008 Rule. Defendants reference a 2002 CMS letter to state Medicaid agencies to support their claim that the Medicaid Act requires the subtraction of third-party insurance payments, asserting this interpretation is longstanding. However, the 2002 letter is not a legislative rule and lacks the necessary procedural compliance, rendering it interpretive guidance rather than a legal basis for the defendants' policy. Even if the letter supported the defendants' view, it contradicts the clear language of the 2008 Rule, which was established through proper notice-and-comment procedures.
Defendants also argue that considerations of equity justify denying plaintiffs' relief, claiming that allowing plaintiffs to recoup payments would lead to lower Medicaid DSH payments for other hospitals treating more Medicaid-eligible patients without private insurance. Plaintiffs counter that equity favors them because their DSH payments do not fully compensate for the high number of Medicaid-eligible children they treat. However, the Court's role is to assess whether FAQ 33 violates the Administrative Procedure Act (APA), not to evaluate the merits of the policy itself. The Court concludes that FAQ 33 does violate the APA and does not address plaintiffs' secondary argument regarding a substantive violation of the Medicaid statute, as the resolution of the challenge to FAQ 33 effectively resolves the issue.
