258 F. Supp. 3d 672
E.D. Va.2017Background
- Plaintiff: Children’s Hospital of the King’s Daughters (not-for-profit freestanding pediatric hospital) serves a very high Medicaid population (MIUR ~70%); DMAS/CMS demanded repayment of ~$19.1M based on CMS FAQ 33.
- FAQ 33 (CMS website guidance, 2010) directs states to subtract private insurance payments from the DSH hospital-specific limit (HSL) calculation, effectively reducing prior DSH payments and requiring recoupment.
- Plaintiff contends its DSH payment compensates uncompensated care for patients actually paid by Medicaid, and that private-insured but "Medicaid-eligible" patients are never paid by Medicaid and thus their private proceeds cannot reduce DSH amounts.
- Procedural posture: Plaintiff moved for emergency/preliminary injunctive relief; court held hearing and granted injunction preventing enforcement of FAQ 33 against the plaintiff pending further order, conditioned on $100,000 bond.
- Legal claims: FAQ 33 is final agency action but (1) exceeds CMS authority under the Medicaid Act (contrary to statutory text), and (2) is a substantive rule adopted without notice-and-comment, violating the Administrative Procedure Act (APA).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FAQ 33 is final agency action subject to APA review | FAQ 33 is binding, enforced since 2010, creates concrete legal obligations and recoupment demands | FAQ 33 is guidance, not a final rule; states implement recoupment; not judicially reviewable | Court: FAQ 33 is final agency action — it creates legal consequences and is enforceable against hospitals |
| Whether CMS has statutory authority under Medicaid Act to require subtraction of private insurer payments from DSH HSL | Statute unambiguously requires subtracting Medicaid payments only; Congress did not require deducting private insurer payments; treating private payments as offsets conflicts with text and purpose | Secretary may define "costs" and exercised discretion to treat third-party payments as offsets; statutory language ambiguous | Court: Likely success for plaintiff — statute does not permit deduction of private-insurer proceeds; CMS interpretation is not permissible under Chevron analysis |
| Whether FAQ 33 was subject to APA notice-and-comment rulemaking | FAQ 33 changes substantive DSH calculation (overrules 2008 Rule) and thus required notice-and-comment | FAQ 33 is interpretative guidance, not a substantive rule; later finalized by rulemaking (but after enforcement attempts) | Court: FAQ 33 functions as a substantive rule and should have been promulgated with notice-and-comment; plaintiff likely to succeed on APA procedural claim |
| Whether plaintiff will suffer irreparable harm absent injunction | Repayment would cause immediate, unrecoverable harm to hospital operations and patients; sovereign immunity prevents later monetary recovery | Harm is financial and remediable via audit appeals or state procedures; federal regulations govern timing; state law may permit reimbursement if reversal | Court: Irreparable harm shown — financial loss would threaten hospital services and cannot be fully remedied due to sovereign immunity; equities and public interest favor injunction |
Key Cases Cited
- Winter v. Natural Res. Def. Council, 555 U.S. 7 (Sup. Ct.) (preliminary injunction standard requiring likelihood of success, irreparable harm, balance of equities, and public interest)
- Bennett v. Spear, 520 U.S. 154 (Sup. Ct.) (tests for final agency action under the APA)
- Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (Sup. Ct.) (framework for reviewing agency statutory interpretations)
- Franklin v. Massachusetts, 505 U.S. 788 (Sup. Ct.) (practical-effect test for finality of agency action)
- Pashby v. Delia, 709 F.3d 307 (4th Cir.) (clarifies preliminary injunction burden in Fourth Circuit)
- Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498 (Sup. Ct.) (describes Medicaid as cooperative federal-state program and states’ obligations)
- Manufactured Housing Inst. v. EPA, 467 F.3d 391 (4th Cir.) (distinguishes substantive rules from interpretative guidance for notice-and-comment analysis)
- Skidmore v. Swift & Co., 323 U.S. 134 (Sup. Ct.) (deference afforded to agency interpretations under informal guidance)