CHILDREN‘S HOSPITAL OF THE KING‘S DAUGHTERS, INC., Plaintiff - Appellee, v. ALEX M. AZAR II, in his official capacity, Secretary, Department of Health and Human Services; SEEMA VERMA, in her official capacity, Administrator, Centers for Medicare & Medicaid Services; CENTERS FOR MEDICARE AND MEDICAID SERVICES, Defendants - Appellants.
No. 17-2237
United States Court of Appeals, Fourth Circuit
Argued: May 9, 2018 Decided: July 23, 2018
PUBLISHED
Appeal from the United States District Court for the Eastern District of Virginia, at Norfolk. Rebecca Beach Smith, Chief District Judge. (2:17-cv-00139-RBS-LRL)
Before TRAXLER, AGEE, and WYNN, Circuit Judges.
Affirmed in part and vacated in part by published opinion. Judge Wynn wrote the opinion, in which Judge Traxler and Judge Agee concurred.
ARGUED: Samantha L. Chaifetz, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Geraldine E. Edens, MORGAN, LEWIS & BOCKIUS LLP, Washingtоn, D.C.; Christopher Howard Marraro, BAKER & HOSTETLER, LLP, Washington, D.C., for Appellee. ON BRIEF: Chad A. Readler, Acting Assistant Attorney General, Mark B. Stern, Tara S. Morrissey, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Dana J. Boente, United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia; Brian R. Stimson, Acting General Counsel, Janice L. Hoffman, Associate General Counsel, Susan M. Lyons, Deputy Associate General Counsel for Litigation, David L. Hoskins, Lindsay S. Goldberg, Office of the General Counsel, Centers for Medicare & Medicaid Services Division, UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Washington, D.C., for Appellants. Susan Feigin Harris, MORGAN, LEWIS & BOCKIUS LLP, Houston, Texas, for Appellee.
Defendant-Appellant Alex Azar, in his official capacity as Sеcretary of the U.S. Department of Health & Human Services (the “Secretary“), appeals an order of the U.S. District Court for the Eastern District of Virginia enjoining the Secretary from enforcing a Medicaid policy set forth in a Frequently Asked Questions document
The district court enjoined the Secretary from enforcing the FAQ 33 policy against Children‘s Hospital for two reasons: (1) the promulgation of the FAQ 33 policy failed to comply with the procedural requirements set forth in the Administrative Procedural Act (“APA“) and (2) the FAQ 33 policy contradicted the plain and unambiguous language of the governing statute.
For the reasons that follow, we conclude that the district court correctly determined that the policy set forth in FAQ 33 constituted a “legislative rule” and, therefore, that the APA mandated that the agency establish the FAQ 33 policy through notice-and-comment rulemaking. See
I.
Medicaid,
Children‘s Hospital is a non-profit pediatric hospital located in Norfolk, Virginia. Most of Children‘s Hospital‘s pediatric patients are eligible to participate in the Medicaid program, either because of their poverty or because they have a qualifying illness or disability. See id. (noting that Children‘s Hospital‘s “Medicaid Inpatient Utilization Ratio (‘MIUR‘) (the ratio of Medicaid inpatient days to total hospital days) was 69.65% in 2012,” the highest MIUR in Virginia).
The Medicaid statute provides for state Medicaid programs to make “payment adjustment[s]” to certain hospitals, like Children‘s Hospital, that “serve a disproportionate number of low-income patiеnts with special needs.”
[T]he costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year. For purposes of the preceding sentence, payments made to a hospital for services provided to indigent patients made by a State or a unit of local government within a State shall not be considered to be a source of third party payment.
In a regulation promulgated in 2008 to implement new statutory DSH reporting and auditing requirements, the Centers for Medicare & Medicaid Services (“CMS“), a division of the Department of Health & Human Services, set forth the methodology for calculating the “payment adjustment.”
The total annual uncompensated care cost equals the total cost of care for furnishing inpatient hospital and outpatient hospital services to Medicaid eligible individuals and to individuals with no source of third party coverage for the hospital services they receive less the sum of regular Medicaid [fee-for-service] rate payments, Medicaid managed care organization payments, supplemental/enhanced Medicaid payments, uninsured revenues, and Section 1011 payments for inpatient and outpatient hospital services. This should equal the sum of paragraphs (c)(9), (c)(12), and (c)(13) subtracted from the sum of paragraphs (c)(10) and (c)(14) of this section.
The dispute between Children‘s Hospital and the Secretary turns on whether payments by private insurance companies to Children‘s Hospital on behalf of Medicaid- eligible patients should be accounted for in determining Children‘s Hospital DSH payment adjustment. In a Frequently Asked Questions document released in 2010, FAQ 33, which was not promulgated through notice-and-comment rulemaking, CMS took the position that
days, costs, and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit. As Medicaid should be the payer of last resort, hospitals should also offset both Medicaid and third-party revenue associated with the Medicaid eligible day against the costs for that day to determine any uncompensated amount.
Children‘s Hosp., 258 F. Supp. 3d at 679–80 (emphasis added). Until it understood FAQ 33‘s import in October 2016—as a result of an audit by an outside auditor working on behalf of Virginia‘s Medicaid program—Children‘s Hospital did not include payments from private insurers in calculating its payment adjustment. The auditor determined that Children‘s Hospital was obliged to repay $19.1 million to the State Medicaid program as a result of DSH overpayments Children‘s Hospital received because it failed to include private insurance payments in its payment adjustment calculation.
On March 7, 2017, Children‘s Hospital filed a complaint seeking declaratory and injunctive relief. Children‘s Hospital sought a declaration that FAQ 33‘s requirement that private insurance payments be included in сalculating the payment adjustment is contrary to the plain and unambiguous language of
In an opinion and order entered June 20, 2017, the district court concluded that the FAQ 33 policy amounted to a substantive rule that should have been promulgated through notice-and-comment rulemaking and that the policy conflicted with the plain and unambiguous language of
II.
On appeal, the Secretary makes two arguments: (1) that the FAQ 33 policy constitutes an “interpretative“—rather than “legislative“—rule and therefore need not have been the product of notice-and-comment rulemaking, and (2) that the policy set forth in FAQ 33 amounts to a reasonable administrative construction of the governing statutory language and therefore is entitled to judicial deference. We review both questions de novo. Ray Commc’ns, Inc. v. Clear Channel Commc’ns, Inc., 673 F.3d 294, 297 (4th Cir. 2012) (reviewing de novo legal determinations underlying an award of summary judgment).
A.
The APA requires that all “rules” be issued through a statutorily prescribed notice-and-comment process. See
According to Children‘s Hospital, FAQ 33 amounts to a “legislative rule,” and therefore should have been issued through the notice-and-comment process prescribed in
The Supreme Court recently acknowledged that the “precise meaning” of the term “interpretive rule” in the APA “is the sourcе of much scholarly and judicial debate,” and expressly declined to “wade into that debate.” Id. at 1204; see also Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1108–09 (D.C. Cir. 1993) (describing the distinction between interpretive and legislative rules as “enshrouded in considerable smog” (internal quotation marks omitted)); Jerri‘s Ceramic Arts, Inc. v. Consumer Prod. Safety Comm‘n, 874 F.2d 205, 207 (4th Cir. 1989) (recognizing that the “distinction between ‘interpretative’ rules and ‘something more,’ i.e., ‘substantive’ or ‘legislative’ rules, is not always easily made“). Nonetheless, the Perez Court stated that “the critical feature of interpretive rules is that they are ‘issued by an agency to advise the public of the agency‘s construction of thе statutes and rules which it administers.‘” Perez, 135 S. Ct. at 1204 (quoting Shalala v. Guernsey Mem‘l Hosp., 514 U.S. 87, 99 (1995)).
This Court has recognized that “courts are in general agreement that interpretative rules simply state what the administrative agency thinks the statute means, and only ‘remind’ affected parties of existing duties.” Jerri‘s, 874 F.2d at 207. Put differently, “[a]n interpretive rule is merely a clarification or explanation of an existing statute or rule.” Chen Zhou Chai v. Carroll, 48 F.3d 1331, 1341 (4th Cir. 1995) (emphasis added) (quoting Guardian Fed. Sav. & Loan Ass‘n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658, 664 (D.C. Cir. 1978)); see also Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014) (“Interpretative rules are those that clarify a statutory or regulatory term, remind parties of existing statutory duties, or merely track preexisting requirements and explain something the statute or regulation already required.” (intеrnal quotation marks omitted)).
By contrast, “a substantive or legislative rule, pursuant to properly delegated authority, has the force of law, and creates new law or imposes new rights or duties.” Jerri‘s, 874 F.2d at 207 (citations omitted). To that end, “[a] rule is legislative if it supplements a statute, adopts a new position inconsistent with existing regulations, or otherwise effects a substantive change in existing law or policy.” Mendoza, 754 F.3d at 1021 (citations omitted). Likewise, a rule is legislative if it “expand[s] the footprint of a regulation by imposing new requirements, rather than simply interpreting the legal norms Congress or the agency itself has previously created.” Iowa League of Cities v. E.P.A., 711 F.3d 844, 873 (8th Cir. 2013) (citations omitted).
We conclude that the policy set forth in FAQ 33 falls on the legislative end
As to the first reason—that the policy in FAQ 33 does not derive from the statute or 2008 rule—the statute provides that a qualifying hospital‘s payment adjustment shall not exceed the hospital‘s “costs incurred” in providing services to Medicaid-eligible and uninsured patients.
The Secretary concedes “[t]he regulatory formula does not specifically address payments by Medicarе or private insurers, and offers no explicit instructions to States or hospitals as to how to account for Medicaid-eligible patients who have additional insurance.” Appellant‘s Br. 26. Nevertheless, the Secretary argues that the policy in FAQ 33 has its genesis in the 2008 rule and its preamble because those provisions characterize the calculation as determining a DSH‘s “uncompensated care costs.” See
We disagree. The calculation methodology in the rule itself does not mention—let alone specifically address—payments by private insurers.
The Secretary also emphasizes that the preamble to the 2008 rule directs DSHs to include payments by Medicare in calculating their hospital-specific limit, notwithstanding that the statute does not explicitly address whether Medicare payments should be netted out. See 73 Fed. Reg. at 77,912. The Secretary maintains that this language indicated that CMS intended for non-Medicaid payments to be accounted for in calculating a DSH‘s “costs incurred.” But again, neither that specific provision in
The second consideration supporting our conclusion that the policy in FAQ 33 amounts to a legislative rule—that the agency relies on the Secretary‘s statutorily delegated authority to “determine[]” what constitute “costs incurred” for purposes of calculating a DSH‘s uncompensated care costs as the legal basis supporting the policy—is closely connected to the statute‘s and 2008 rule‘s silence as to whether DSHs must net out private insurance payments in calculating their “costs incurred.” As the First Circuit explained in concluding that FAQ 33 constituted a legislative rule, “[t]his textual silence on whether to offset [private insurance] payment[s] leads us to believe that any authority that the Secretary may have to adopt the rule at issue would most likely flоw from Congress‘s delegation of a power to make a decision that Congress chose not to make itself.” N.H. Hosp., 887 F.3d at 71. The Secretary concedes as much, asserting that the policy set forth in FAQ 33 reflects a “reasonable exercise of the Secretary‘s expressly delegated authority to determine how to calculate ‘costs incurred.‘” Appellant‘s Br. 40.
When an agency relies on expressly delegated authority to establish policy—as the Secretary does with regard to FAQ 33—courts generally treat the agency aсtion as legislative, rather than interpretive, rulemaking. Iowa League of Cities, 711 F.3d at 873 (“When an agency creates a new ‘legal norm based on the agency‘s own authority’ to engage in supplementary lawmaking, as delegated from Congress, the agency creates a legislative rule.” (quoting Syncor Int‘l Corp. v. Shalala, 127 F.3d 90, 95 (D.C. Cir. 1997))); Walton v. Greenbrier Ford, Inc., 370 F.3d 446, 452 (4th Cir. 2004) (“Legislative regulations are those in which ‘Congress has explicitly left a gap for the agency to fill, [thus] there is an express delegation of authority to the agency to elucidate the specific provision of the statute by regulation.‘” (alteration in original) (quoting Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 843–44 (1984))). As the First Circuit correctly held with regard to the policy in FAQ 33, in particular, even if we were to “accept arguendo the Secretary‘s stated position that Congress granted the Secretary the ‘latitude’ to decide what, if any, other sources of payments made in connection with Medicaid-covered costs need be offset from the total costs of providing such services, . . . when Congress leaves such a policy choice to the agency, we should lean toward finding that the agency‘s making of that choice requires notice and comment.” N.H. Hosp., 887 F.3d at 70–71 (citations omitted). “Otherwise, it would be ‘difficult to imagine what regulations would require notice and comment procedures.‘” Id. (quoting Mendoza, 754 F.3d at 1021). Put differently, even if Congress authorized the Secretary to require DSHs to account for private insurance payments in exercising his statutorily delegated discretion to define “costs incurred,” the absence of statutory or regulatory language compelling or even suggesting such a policy—required the agency to promulgate its FAQ 33 policy through notice-and-comment rulemaking.
The statute‘s and 2008 rule‘s silence as to private insurance payments—and the Secretary‘s reliance on his delegated authority
Emphasizing that generally accepted accounting practices did not require amortizing the cost of the bond refinancing, the hospital argued that the amortization requirement was inconsistent with the regulation and therefore should have been promulgated through notice-and-comment rulemaking. The Supreme Court disagreed, concluding that the informal reimbursement guideline constituted a “prototypical” interpretive rule. Id. at 99. In reaching this conclusion, the Court explained that the policy set forth in the guideline was required both by a statutory provision prohibiting the Medicare program from cross-subsidizing other health insurance programs and vice versa and by a regulation providing “that only the actual cost of services rendered to beneficiaries during a given year [could] be reimbursed.” Id. (emphasis addеd). Accordingly, unlike the policy set forth in FAQ 33—in which the Secretary purports to exercise his delegated authority to define “costs incurred” in a manner not specifically addressed in the statute or regulation—the policy at issue in Guernsey derived “from an existing document whose meaning compels or logically justifies the proposition,” Mendoza, 754 F.3d at 1021—namely both the statute and its implementing regulation.
In sum, we conclude that the policy set forth in FAQ 33 constitutes a legislative, rather than interpretive, rule. Because that policy amounts to a legislative rule, the APA required that agency promulgate the рolicy through notice-and-comment rulemaking.
In addition to concluding thаt the policy in FAQ 33 violated the APA‘s procedural requirements, the district court further held that the policy conflicts with the plain and unambiguous language of
Courts have recognized that there is no bright-line rule as to whether a court that has decided to vacate an agency action on procedural grounds should nonetheless address a substantive claim. See NRDC v. EPA, 643 F.3d 311, 321 (D.C. Cir. 2011) (noting that case law provides “little direction on whether, having determined to vacate on procedural grounds, we should nonetheless address substantive claims“). Given this absence of authority, we do not fault the district court for addressing Children‘s Hospital‘s substantive claim.
Nevertheless, because it is unnecessary for us to address that claim to affirm the district court‘s judgment, we decline to address Children‘s Hospital‘s substantive challenge and, for the same reason, vacate the district court‘s decision as to that claim.1 However, our decisiоn to vacate the district court‘s ruling as to Children‘s Hospital substantive claim should not be read as expressing or implying any view on the merits of that claim or the validity of any amendment to the 2008 rule.
III.
For the foregoing reasons, we affirm the judgment of the district court enjoining the Secretary from enforcing the policy set forth in FAQ 33 against Children‘s Hospital, and vacate the district court‘s opinion to the extent it concludes that that policy conflicts with the language of
AFFIRMED IN PART AND VACATED IN PART