933 F.3d 764
D.C. Cir.2019Background
- The Medicaid Act authorizes hospital-specific Disproportionate Share Hospital (DSH) payments but caps each hospital’s DSH payment at the hospital’s “costs incurred” in furnishing services to Medicaid‑eligible and uninsured patients, “as determined by the Secretary.”
- The statutory parenthetical requires DSH calculations to be “net of payments under this subchapter [Medicaid]… and by uninsured patients,” but does not expressly mention Medicare or private insurer payments.
- CMS’s 2008 regulation required states to report hospitals’ uncompensated care costs but was silent on whether third‑party (Medicare/private) payments should be netted.
- CMS issued FAQs in 2010 and later the 2017 Rule explicitly requiring that third‑party payments (including Medicare and private insurance) be netted when calculating DSH ‘‘costs incurred.’’ Hospitals sued, arguing the 2017 Rule exceeded statutory authority and was arbitrary and capricious.
- The district court vacated the 2017 Rule; the D.C. Circuit reviews de novo and reverses, upholding the Secretary’s interpretation and reinstating the 2017 Rule.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Secretary exceeded statutory authority under 42 U.S.C. § 1396r‑4(g)(1)(A) by requiring deduction of Medicare and private insurer payments when calculating "costs incurred." | The statute lists the payments that must be netted (Medicaid and uninsured), so Congress excluded other third‑party payments; Secretary lacks authority to add Medicare/private deductions. | Congress expressly delegated determination of “costs incurred” to the Secretary; silence does not bar CMS from requiring additional offsets; the Rule reasonably implements statutory purpose. | Held for defendant: Chevron deference applies to the Secretary’s reasonable exercise of delegated authority; the Rule is within statutory authority. |
| Whether the Rule renders statutory language superfluous by adding third‑party deductions. | Adding third‑party deductions would make Congress’s express mention of Medicaid/uninsured payments meaningless. | The statute removes Secretary discretion for Medicaid/uninsured but does not prohibit consideration of other payment sources; no true superfluity. | Held for defendant: no impermissible surplusage. |
| Whether the Rule conflicts with other statutory provisions that mention third‑party payments. | Congress required third‑party consideration in a different subsection, so omission here indicates Congress did not intend it in (g)(1)(A). | The provisions serve different programs and limits; differences do not imply prohibition. | Held for defendant: no Russello presumption problem; provisions are different in purpose. |
| Whether the 2017 Rule is arbitrary and capricious (APA § 706(2)(A)) because it departs from the 2008 Rule and allegedly lacks record support. | CMS changed position without adequate explanation and the administrative record shows the Rule reduces payments to hospitals that still have high Medicaid shortfalls. | Agencies may change policy with reasoned explanation; CMS tied the change to statutory purpose (limit DSH to actual uncompensated costs) and explained why including third‑party payments furthers that purpose. | Held for defendant: the agency gave a reasoned explanation and connected the Rule to the record; not arbitrary or capricious. |
Key Cases Cited
- Wilder v. Va. Hosp. Ass'n, 496 U.S. 498 (discussion of Medicaid cooperative federal‑state scheme)
- Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (framework for deference to agency statutory interpretations)
- Motor Vehicles Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (arbitrary and capricious standard for agency rulemaking)
- Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (requirements when agency changes policy)
- Tenn. Hosp. Ass'n v. Azar, 908 F.3d 1029 (6th Cir.) (concluding 2008 Rule did not authorize excluding third‑party payments; related circuit holdings on FAQs)
- Children’s Health Care v. Ctrs. for Medicare & Medicaid Servs., 900 F.3d 1022 (8th Cir.) (construing 2008 Rule silence as uncertain re: third‑party payments)
- Transitional Hosps. Corp. of La. v. Shalala, 222 F.3d 1019 (D.C. Cir. 2000) ("as determined by the Secretary" is an express delegation)
- Nat. Cable & Telecomm. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (deference to reasonable agency change in interpretation)
- Yates v. United States, 135 S. Ct. 1074 (headings as interpretive clues)
- City of Columbus v. Ours Garage & Wrecker Serv., Inc., 536 U.S. 424 (limitations of Russello presumption)