Children's Hosp. of the King's Daughters, Inc. v. Azar, 896 F.3d 615

Children’s Hospital of the King’s Daughters (pediatric, high Medicaid utilization) was notified via an audit that it must repay $19.1 million in DSH payments for failing to include private-insurer payments when calculating its hospital-specific DSH limit.
CMS published FAQ 33 (2010) — not via notice-and-comment — instructing that payments from private insurers for Medicaid-eligible patients must be offset when calculating a DSH’s uncompensated care costs.
The relevant statute caps a hospital’s DSH adjustment at "costs incurred" for furnishing services to Medicaid-eligible and uninsured patients, with those costs to be "determined by the Secretary and net of payments under this subchapter and by uninsured patients" (42 U.S.C. § 1396r-4(g)(1)(A)).
A 2008 CMS regulation (42 C.F.R. § 447.299(c)(16)) set a formula for "total annual uncompensated care costs," listing Medicaid and uninsured payments to be subtracted, but does not mention private-insurer payments.
Children’s Hospital sued seeking declaratory and injunctive relief: (1) that FAQ 33 unlawfully contradicted the statute, and (2) that FAQ 33 was a substantive change requiring notice-and-comment rulemaking.
The district court enjoined CMS from enforcing FAQ 33 against Children’s Hospital on both procedural (APA) and substantive statutory-interpretation grounds; the Fourth Circuit affirmed the procedural ruling and vacated the district court’s substantive holding without deciding the merits.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether FAQ 33 is a legislative rule requiring notice-and-comment under the APA	FAQ 33 imposes a substantive new requirement (deduct private-insurer payments) and thus is a legislative rule needing notice-and-comment	FAQ 33 is interpretive: it merely explains existing statute/regulation (uncompensated care) and so need not undergo notice-and-comment	FAQ 33 is a legislative rule; APA notice-and-comment was required and not followed — injunction affirmed
Whether FAQ 33 is a permissible interpretation entitled to deference under Chevron/agency authority	FAQ 33 conflicts with the plain statutory text (which only requires netting Medicaid and uninsured payments)	Secretary contends statute delegates authority to "determine" costs incurred, so CMS reasonably exercised that discretion to include private-insurer payments	Court declined to reach substantive Chevron-style question because procedural invalidation was dispositive; district court’s substantive ruling vacated (no opinion on merits)

Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199 (2015) (distinguishes interpretive rules from legislative rules under APA)
Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87 (1995) (informal guidance was interpretive where statute and regulation compelled the result)
Chevron U.S.A., Inc. v. Natural Resources Def. Council, 467 U.S. 837 (1984) (framework for judicial deference to reasonable agency statutory interpretations)
Iowa League of Cities v. EPA, 711 F.3d 844 (8th Cir. 2013) (agency action creating new requirements via delegated authority is legislative rule requiring notice-and-comment)
N.H. Hosp. Ass'n v. Azar, 887 F.3d 62 (1st Cir. 2018) (concluded FAQ 33 is a legislative rule; persuasive precedent on the same FAQ)