Tenn. Hosp. Ass'n v. Azar

908 F.3d 1029

TENNESSEE HOSPITAL ASSOCIATION; Takoma Regional Hospital; Delta Medical Center; Parkwest Hospital, Plaintiffs-Appellees/Cross-Appellants,

v.Alex M. AZAR, II, in His Official Capacity as Secretary of Health and Human Services; Seema Verma, Administrator of the Centers for Medicare and Medicaid Services; Centers for Medicare and Medicaid Services, Defendants-Appellants/Cross-Appellees.

Nos. 17-597/6033

United States Court of Appeals, Sixth Circuit.

Argued: June 14, 2018

Decided and Filed: November 14, 2018

ARGUED: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants. ON BRIEF: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants.

Before: MOORE, KETHLEDGE, and STRANCH, Circuit Judges.

MOORE, J., delivered the opinion of the court in which STRANCH, J., joined, and KETHLEDGE, J., joined in the result. KETHLEDGE, J. (pp. 1047–50), delivered a separate opinion concurring in the judgment.

KAREN NELSON MOORE, Circuit Judge.

This case marks the latest in a string of lawsuits brought by hospitals across the country challenging efforts by the Centers for Medicare and Medicaid Services ("CMS") to direct states to recoup certain reimbursements made under the Medicaid program. Here, plaintiffs are the Tennessee Hospital Association and three of its member hospitals, Takoma Regional Hospital, Delta Medical Center, and Parkwest Hospital. These hospitals serve a disproportionate share of Medicaid-eligible patients and are thereby entitled to supplemental payments under the Medicaid Act, known as "DSH payments" or "DSH payment adjustments." The Medicaid Act limits the amount of DSH payments each hospital can receive in a given year, and CMS contends that plaintiffs in this case miscalculated their DSH payment-adjustments for fiscal year 2012 and received extra payments as a result. Plaintiffs, in turn, insist that CMS’s approach to calculating DSH payment adjustments is out of step with the Medicaid Act and the regulations that CMS implemented in 2008 pursuant to the Medicaid Act. The district court agreed with plaintiffs and held that CMS’s methodology was inconsistent with both the Medicaid Act and CMS’s 2008 regulation. Although we agree that CMS’s policy is inconsistent with its 2008 rule and cannot be enforced against plaintiffs unless it is promulgated pursuant to notice-and-comment rulemaking, we disagree with the district court’s conclusion that CMS’s policy exceeds the agency’s authority under the Medicaid Act. We therefore AFFIRM the final judgment of the district court on the sole ground that CMS may not enforce an invalidly promulgated policy against plaintiffs and REMAND for further proceedings consistent with this opinion.

I. BACKGROUND

Plaintiffs in this case—the Tennessee Hospital Association and three of its member hospitals—are challenging efforts by the Centers for Medicare and Medicaid Services ("CMS") to direct Tennessee to recoup certain reimbursements paid to the hospitals under the Medicaid program. Plaintiffs are "Disproportionate Share Hospitals" ("DSH"), which means that they serve a disproportionate share of Medicaid-eligible and low-income patients. 42 U.S.C. §§ 1396a(a)(13)(A)(iv) ; 1396r-4(b). As DSH hospitals, plaintiffs receive supplemental "DSH payments" under the Medicaid Act to help offset the cost of caring for indigent individuals. See id . § 1396r-4(c). The Medicaid Act limits the amount of funds any given DSH hospital can receive in a given year to its uncompensated cost of care—i.e., the cost of caring for Medicaid-eligible and uninsured patients less certain payments made on behalf of those patients. Id . § 1396r-4(g)(1)(A).

Congress amended the Medicaid Act in 2003 to require states to audit and report the amount of DSH payments distributed to each hospital. Id . § 1396r-4(j). In 2008, CMS issued a final rule pursuant to notice-and-comment rulemaking implementing the 2003 auditing requirements. See Medicaid Program; Disproportionate Share Hospital Payments, 73 Fed. Reg. 77,904 (Dec. 19, 2008). To "permit verification of the appropriateness of [each hospital’s DSH] payments," the rule requires "each DSH hospital to which the State made a DSH payment" to submit certain data to CMS. 42 C.F.R. § 447.299(c) (2016).¹ The preamble to the rule refers to the various categories of required data as "data elements," 73 Fed. Reg. at 77,948, and we adopt that terminology here. For the purposes of this case, the most relevant data elements are displayed in the chart below.

Provision Data Element Description
  42 C.F.R. § 447.299(c)(9)      Total Medicaid       The sum of the "IP/OP Medicaid fee-for-service
                                   IP/OP2 Payments      (FFS) basic rate
                                                      payments,"3 the "IP/OP Medicaid
                                                      managed care organization payments,"4
                                                      and the "Supplemental/enhanced
                                                      Medicaid IP/OP payments."5
  42 C.F.R. § 447.299(c)(10)     Total Cost of        "The total annual costs incurred by
                                 Care for             each hospital for furnishing inpatient
                                 Medicaid IP/OP       hospital and outpatient hospital
                                 Services             services to Medicaid eligible
                                                      individuals."
  42 C.F.R. § 447.299(c)(11)     Total Medicaid       "The total amount of uncompensated
                                 Uncompensated        care attributable to Medicaid inpatient
                                 Care                 and outpatient services. The amount
                                                      should be the result of subtracting the
                                                      amount identified in § 447.299(c)(9)
                                                      from the amount identified in
                                                      § 447.299(c)(10). The uncompensated
                                                      care costs of providing Medicaid
                                                      physician services cannot be included
                                                      in this amount."
  42 C.F.R. § 447.299(c)(12)     Uninsured IP/OP      "Total annual payments received by the
                                 revenue              hospital by or on behalf of individuals
                                                      with no source of third party coverage
                                                      for inpatient and outpatient hospital
                                                      services they receive. This amount
                                                      does not include payments made by a
                                                      State or units of local government, for
                                                      services furnished to indigent patients."
  42 C.F.R. § 447.299(c)(13)     Total Applicable     "Federal Section 1011 payments6 for
                                 Section 1011         uncompensated inpatient and outpatient
                                 Payments             hospital services provided to Section
                                                      1011 eligible aliens with no source of
                                                      third party coverage for the inpatient
                                                      and outpatient hospital services they
                                                      receive."
  42 C.F.R. § 447.299(c)(14)     Total cost of        "[T]he total costs incurred for
                                 IP/OP care for       furnishing inpatient hospital and
                                 the uninsured        outpatient hospital services to
                                                      individuals with no source of third
                                                      party coverage for the hospital services
                                                      they receive."
  42 C.F.R. § 447.299(c)(16)     Total annual         "The total annual uncompensated care
                                 uncompensated        cost equals the total cost of care for
                                 care costs           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 FFS
                                                      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

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