908 F.3d 1029
6th Cir.2018Background
- Tennessee Hospital Association and three member hospitals (DSH hospitals) received Medicaid DSH supplemental payments for FY2012; Tennessee audited and CMS directed recoupment alleging hospitals miscalculated DSH limits by not netting third-party payments.
- Medicaid Act caps DSH payments at hospitals’ "costs incurred" net of specified payments (Medicaid payments and payments by uninsured patients); Congress delegated determination of "costs incurred" to the Secretary. 42 U.S.C. § 1396r-4(g)(1)(A).
- CMS issued a detailed 2008 regulation (42 C.F.R. § 447.299) setting data elements for DSH reporting; the regulatory text defines "total annual costs incurred" without expressly requiring deduction of Medicare/private-insurer payments.
- CMS later articulated a payment-deduction policy in the 2008 rule preamble and in 2010 FAQs (FAQs 33 & 34), directing hospitals to net third-party payments (Medicare/private insurance) when calculating uncompensated costs; these FAQs were not promulgated via notice-and-comment.
- CMS proposed and then finalized a 2017 rule prospectively requiring costs net of third-party payments, but that rule was later vacated in district court; plaintiffs sued TennCare/CMS and the district court ruled for plaintiffs, enjoining enforcement of the FAQs for FY2012–2016.
- Sixth Circuit affirmed summary judgment for plaintiffs but limited the ground: CMS’s payment-deduction policy is a procedurally invalid legislative rule (not promul gated by notice-and-comment) and therefore unenforceable against plaintiffs; remanded with instructions to permanently enjoin enforcement of FAQs 33 and 34 against these plaintiffs unless a valid rule is promulgated.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CMS’s payment-deduction policy (netting Medicare/private payments when calculating DSH uncompensated costs) exceeds statutory authority under 42 U.S.C. § 1396r-4(g)(1)(A) | Statute unambiguously caps DSH by costs less only Medicaid and uninsured payments; CMS cannot treat third-party payments as reduc ing "costs incurred" | Statute is ambiguous; delegation "as determined by the Secretary" permits CMS reasonably to define "costs incurred" to net third-party payments | Court: Statute ambiguous re: third-party deductions; CMS’s interpretation is a permissible Chevron step-two construction (CMS did not exceed statutory authority) |
| Whether CMS’s payment-deduction policy as communicated in the 2008 preamble and 2010 FAQs is a valid interpretive rule (no notice-and-comment required) | Policy substantively amends the 2008 regulation and creates new duties; thus it is a legislative rule requiring notice-and-comment | CMS treats the FAQs/preamble as interpretive clarification of existing reporting obligations | Court: Policy is inconsistent with the text of the 2008 regulation and functions as a legislative rule; thus FAQs 33 & 34 (and the preamble policy) are procedurally invalid for lack of notice-and-comment |
| Appropriate remedy and scope of injunction | Plaintiffs sought permanent injunction barring enforcement of the policy | Defendants argued limits based on later 2017 rule and other considerations | Court: Permanent injunction appropriate against enforcing FAQs 33 & 34 (and preamble policy) as applied to these plaintiffs until such time as CMS lawfully promulgates the policy; district court's FY2012–2016 cutoff was erroneous and injunction must be permanent unless replaced by a lawful rule |
| Deference to agency materials (preamble/FAQs) when regulation text is clear | Preamble/FAQs cannot override clear regulatory text; deference unwarranted if regulation unambiguous | CMS urged deference to preamble/agency contemporaneous statements | Court: Regulation §447.299(c)(10) unambiguously defines "total annual costs incurred"; preamble/FAQs cannot contradict the regulation and cannot be used to impose new substantive obligations without notice-and-comment |
Key Cases Cited
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984) (establishes two-step framework for reviewing agency statutory interpretations)
- Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199 (2015) (distinguishes interpretive rules from legislative rules and addresses notice-and-comment requirement)
- Shalala v. Guernsey Memorial Hospital, 514 U.S. 87 (1995) (permitting deference to an interpretive guideline that fills the only gap in an otherwise comprehensive regulation)
- Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (agency may change interpretations; unexplained inconsistency may bear on APA review but not on Chevron deference)
- Verizon Communications, Inc. v. FCC, 535 U.S. 467 (2002) (agencies generally have methodological leeway in defining "cost" for statutory schemes)
- McDonnell v. United States, 136 S. Ct. 2355 (2016) (canon against rendering statutory language superfluous)