United States District Court, D. New Hampshire
New Hampshire Hospital Association, et al.
Sylvia Matthews Burwell et al. Opinion No. 2016 DNH 053
Landya McCafferty, United States District Judge
Several New Hampshire hospitals and the New Hampshire Hospital Association (“NHHA”), a non-profit trade association, bring this suit against the Secretary of Health and Human Services (the “Secretary”), the Centers for Medicare and Medicaid Services (“CMS”), and the Administrator of CMS, alleging that defendants have set forth certain “policy clarifications” that contradict the plain language of the Medicaid Act and violate the Administrative Procedure Act (“APA”). Plaintiffs seek a preliminary injunction barring defendants from enforcing the policy clarifications during the pendency of this litigation. Defendants object. The court held an evidentiary hearing on February 18, 2016, and, for the reasons that follow, plaintiffs’ motion for preliminary injunction is granted.
I. The Medicaid Act
Medicaid is a cooperative federal-state program designed to provide medical services to those members of society who, because they lack the necessary financial resources, cannot otherwise obtain medical care. See Wilder v. Virginia Hosp. Ass’n, 496 U.S. 498, 502 (1990). That is, the program provides medical care to a population generally consisting of the poor, including dependent children, the disabled, and the elderly. See 42 C.F.R. § 430.0. Legislation creating the program, the Medicaid Act, 42 U.S.C. §§ 1396 et seq., “provides financial support to states that establish and administer state Medicaid programs in accordance with federal law.” Long Term Care Pharm. All. v. Ferguson, 362 F.3d 50, 51 (1st Cir. 2004).
“Although participation in the Medicaid program is entirely optional, once a State elects to participate, it must comply with the requirements of [the Medicaid Act].” Harris v. McRae, 448 U.S. 297, 301 (1980). In order to qualify for Medicaid funding, a state must adopt a Medicaid “plan, ” 42 U.S.C. § 1396a(a), which must be approved by CMS, a subdivision of the United States Department of Health and Human Services. See Ferguson, 362 F.3d at 51. “The state plan is required to establish, among other things, a scheme for reimbursing health care providers for the medical services provided to needy individuals.” Wilder, 496 U.S. at 502. If CMS approves a state’s plan, the federal government provides reimbursements to the state for a portion of the expenditures that it incurs for Medicaid benefits, and for necessary and proper costs of administering the state plan. See 42 U.S.C. § 1396b(a). The state is responsible for paying the remainder of its Medicaid expenditures. See § 1396b.
Concerned with the “greater costs it found to be associated with the treatment of indigent patients, ” D.C. Hosp. Ass’n v. District of Columbia, 224 F.3d 776, 777 (D.C. Cir. 2000), Congress amended the Medicaid Act in 1981 to ensure that payments to hospitals providing Medicaid-eligible services to indigent patients “take into account . . . the situation of hospitals which serve a disproportionate number of low-income patients with special needs.” § 1396a(a)(13)(A)(iv). Congress’s intent “was to stabilize the hospitals financially and preserve access to health care services for eligible low-income patients.” Va., Dep’t of Med. Assistance Servs. v. Johnson, 609 F.Supp.2d 1, 3 (D.D.C. 2009).
Under the Medicaid Act, states must ensure that such hospitals receive an “appropriate increase in the rate or amount of payment for such services” and that the reimbursements “reflect not only the cost of caring for Medicaid recipients, but also the cost of charity care given to uninsured patients.” La. Dep’t of Health & Hosps. v. Ctr. for Medicare & Medicaid Servs., 346 F.3d 571, 573 (5th Cir. 2003) (discussing 42 U.S.C. § 1396r-4(b)(1), (3)). Such increased payments are available to any hospital that treats a disproportionate share of Medicaid patients (a “disproportionate-share hospital” or “DSH”). § 1396r-4(b).
In 1993, Congress amended the DSH program to limit DSH payments on a hospital-specific basis. See § 1396r-4(g). Congress enacted the hospital-specific limit in response to reports that some hospitals received DSH payment adjustments that exceeded “the net costs, and in some instances the total costs, of operating the facilities.” Omnibus Budget Reconciliation Act of 1993, H.R. Rep. No. 103-111, at 211-12 (1993). The hospital-specific limit was established in § 1396r-4(g)(1), which is captioned: “Amount of adjustment subject to uncompensated costs.” That section provides that DSH payments made to a hospital cannot exceed:
the 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 [Medicaid] plan or have no health insurance (or other source of third party coverage) for services provided during the year.
§ 1396r-4(g)(1)(A). Thus, for Medicaid patients (as opposed to uninsured patients), the Medicaid Act sets the hospital-specific DSH limit as the costs a hospital incurs in furnishing hospital services to Medicaid-eligible patients “as determined by the Secretary and net of payments” under the Medicaid Act.
II. Audit and Reporting Requirements
In 2003, to monitor DSH payments, Congress enacted into law a requirement that each state provide to the Secretary an annual report and audit on its DSH program. See § 1396r-4(j). The audit must confirm, among other things, that “[o]nly the uncompensated care costs of providing inpatient hospital and outpatient hospital services to individuals described in [§ 1396r-4(g)(1)(A)] . . . are included in the calculation of the hospital-specific limits.” § 1396r-4(j)(2)(C). Any overpayments that an audit reveals must be recouped by the state within one year of their discovery or the federal government may reduce its future contribution. See § 1396b(d)(2)(C).
On December 19, 2008, CMS promulgated a final rule implementing the statutory reporting and auditing requirement (the “2008 Rule”). See Disproportionate Share Hospital Payments, 73 Fed. Reg. 77904 (Dec. 19, 2008). The 2008 Rule requires that states annually submit information “for each DSH hospital to which the State made a DSH payment.” 42 C.F.R. § 447.299(c). One such piece of information is the hospital's “total annual uncompensated care costs, ” which is defined as follows:
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 . . . .
§ 447.299(c)(16). This section establishes a formula for a state to determine whether the hospital-specific DSH limit, as set forth in § 1396-r(4)(g)(1), was calculated correctly.
The 2008 Rule also provides that any audits of DSH payments made prior to Fiscal Year 2011 would not result in the recoupment or reduction of federal funds used for DSH payments.
See 73 Fed. Reg. at 77906. Beginning with payments made in Fiscal Year 2011, any DSH overpayments must be recovered by the state and returned to the federal government, unless they “are redistributed by the State to other qualifying hospitals.” Id.
III. FAQs 33 and 34
On January 10, 2010, CMS posted answers on its website to “frequently asked questions” regarding the audit and reporting requirements of the 2008 Rule. See Additional Information on the DSH Reporting and Auditing Requirement, http://www.medicaid. gov/medicaid-chip-program-information/by-topics/financing-and-reimbursement/downloads/additionalinformationonthedshreporting.pdf (last visited). Two of the frequently asked questions, FAQ 33 and FAQ 34, and CMS’s responses to those questions are at issue in this case. FAQ 33 and CMS’s response thereto, are as follows:
33: Would days, costs, and revenues associated with patients that have both Medicaid and private insurance coverage (such as Blue Cross) also be included in the calculation of the ... DSH limit in the same way States include days, costs and revenues associated with individuals dually eligible for Medicaid and Medicare?
Days, cost[s], and revenues associated with patients that are dually eligible for Medicaid and private insurance should be included in the calculation of the Medicaid inpatient utilization rate (MIUR) for the purposes of determining a hospital eligible to receive DSH payments. Section 1923(g)(1) does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore, 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.
Id. at 18. FAQ 34 and CMS’s response thereto, states:
34. The regulation states that costs for dual eligibles should be included in uncompensated care costs. Could you please explain further? Under what circumstances should we include Medicare payments?
Section 1923(g) of the Act defines hospital-specific limits on FFP for Medicaid DSH payments. Under the hospital-specific limits, a hospital’s DSH payment must not exceed the costs incurred by that hospital in furnishing services during the year to Medicaid and uninsured patients less payments received for those patients. There is no exclusion in section 1923(g)(1) for costs for, and payment made, on behalf of individuals dually eligible for Medicare and Medicaid. Hospitals that include dually-eligible days to determine DSH qualification must also include the costs attributable to dual eligibles when calculating the uncompensated costs of serving Medicaid eligible individuals. Hospitals must also take into account payment made on behalf of the individual, including all Medicare and Medicaid payments made on behalf of dual eligibles. In calculating the Medicare payment for service, the hospital would have to include the Medicare DSH adjustment and any other Medicare payments (including, but not limited to Medicare IME and GME) with respect to that service. This would include payments for Medicare allowable bad debt attributable to dual eligibles.
Thus, FAQs 33 and 34 provide that in calculating the hospital-specific DSH limit, a state must subtract payments received from private health insurance (FAQ 33) and Medicare (FAQ 34) for dually-eligible Medicaid patients from the costs incurred in providing hospital services to those patients.
IV. Texas Children’s Hospital v. Burwell
On December 5, 2014, two disproportionate-share hospitals, Texas Children’s Hospital and Seattle Children’s Hospital, brought suit against the same defendants named in this case in the District Court for the District of Columbia. See Texas Children’s Hospital v. Burwell, Civil Action No. 14-2060 (EGS) (D.D.C. 2014). The plaintiffs in Texas Children’s Hospital assert that FAQ 33 is contrary to the provisions of the Medicaid Act and that CMS’s publication of FAQ 33 violates the procedural requirements of the APA. On December 29, 2014, the court in Texas Children’s Hospital granted the plaintiffs’ motion for preliminary injunction and entered an order enjoining CMS from enforcing, applying, or implementing FAQ 33 pending further order of the court. Texas Children’s Hosp. v. Burwell, 76 F.Supp. 3d 224, 246-47 (D.D.C. 2014). The court further ordered CMS to notify the Texas and Washington State Medicaid programs that, pending further order by the court, the enforcement of FAQ 33 is enjoined and CMS will take no action to recoup federal DSH funds provided to Texas and Washington based on the states’ noncompliance with FAQ 33. Id. The plaintiffs in that case have not challenged FAQ 34 or CMS’s policy regarding patients dually eligible for Medicare and Medicaid.
V. Plaintiffs’ Petition to CMS
On June 17, 2015, plaintiffs petitioned CMS requesting that the agency repeal the policies referenced in FAQs 33 and 34 regarding the inclusion of private health insurance and Medicare payments in the calculation of the Medicaid Shortfall. See Galdieri Decl., Ex. P (doc. no. 10-24). Plaintiffs submitted a supplement to the petition dated June 24, 2015. See id., Ex. Q (doc. no. 10-25). The petition and the supplement asserted that the policies in FAQs 33 and 34 operate as substantive amendments to existing federal law and regulations, as well as to the New Hampshire State Medicaid Plan. See doc. nos. 10-24 and 10-25. The petition and supplement also asserted that the policies are illegal and void and requested that CMS repeal and revoke them. Id.
In a letter dated October 6, 2015, CMS Acting Administrator Andrew Slavitt responded to plaintiffs’ petition. See Galdieri Decl., Ex. R (doc. no. 10-26). In the letter, Slavitt stated:
The CMS continues to maintain that this longstanding, consistent policy, which is reflected in FAQ No. 33 with respect to private insurance payments, and is discussed elsewhere in the FAQs and in the preamble to the December 2008 regulation with respect to Medicare payments for dually-eligible beneficiaries, reflects a valid interpretation of the statute governing the calculation of uncompensated care costs for purposes of the DSH hospital-specific limit, 42 U.S.C. § 1396r-4, and the associated regulations.
Id. at 2 (citations omitted). Slavitt acknowledged the preliminary injunction in Texas Children’s Hospital, but stated:
For all other states, including New Hampshire, CMS may disallow federal financial participation if a state does not comply with the policy articulated in FAQ No. 33.
Moreover, for state plan rate year 2011 and thereafter, any other audit-identified DSH payments that exceed documented hospital-specific DSH limits may be treated as provider overpayments that, pursuant to 42 CFR Part 433, Subpart F, trigger the return of the federal share to the federal government.
Id. at 2-3.
VI. Procedural History
Plaintiffs filed this lawsuit on January 15, 2016. That same day, they filed a motion for preliminary injunction, which seeks to enjoin defendants from enforcing or applying the policies set forth in FAQs 33 and 34. Defendants objected to the motion, plaintiffs filed a reply, and defendants filed a surreply. On February 18, 2016, the court held an evidentiary hearing, during which the court heard oral argument and plaintiffs submitted evidence.
“A preliminary injunction is an ‘extraordinary and drastic remedy;’ it is never awarded as of right.” Munaf v. Geren, 553 U.S. 674, 689-90 (2008) (quoting 11A C. Wright, A. Miller & M. Kane, Federal Practice & Procedure § 2948, at 129 (2d ed. 1995) (further citations omitted)). Rather, “[a] plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008); see also Bl(a)ck Tea Soc’y v. City of Bos., 378 F.3d 8, 11 (1st Cir. 2004). The court will assess each of these four elements in turn, mindful that the burden of satisfying them rests and remains with the party seeking the injunction. Esso Standard Oil Co. (P.R.) v. Monroig-Zayas, 445 F.3d 13, 18 (1st Cir. 2006).
I. Likelihood of Success on the Merits
“Though each factor is important ... ‘the sine qua non of [the] four-part inquiry is likelihood of success on the merits: if the moving party cannot demonstrate that he is likely to succeed in his quest, the remaining factors become matters of idle curiosity.’” Sindicato Puertorriqueño de Trabajadores, SEIU Local 1996 v. Fortuño, 699 F.3d 1, 10 (1st Cir. 2012) (per curiam) (quoting New Comm Wireless Servs., Inc. v. SprintCom, Inc., 287 F.3d 1, 9 (1st Cir. 2002) (alteration omitted)). “To demonstrate likelihood of success on the merits, plaintiffs must show more than mere possibility of success-rather, they must establish a strong likelihood that they will ultimately prevail.” Sindicato Puertorriqueño, 699 F.3d at 10 (citations omitted) (internal quotation marks omitted). In the context of a preliminary injunction, “the merits on which plaintiff must show a likelihood of success encompass not only substantive theories but also establishment of jurisdiction, ” including standing. Obama v. Klayman, 800 F.3d 559, 565 (D.C. Cir. 2015) (Williams, J., concurring in part and dissenting in part).
Plaintiffs allege in their complaint that FAQs 33 and 34 are contrary to the plain language of the Medicaid Act and were promulgated in violation of the APA. Defendants argue that plaintiffs are unlikely to succeed on the merits of their claims because they lack standing to pursue their claims, and because FAQs 33 and 34 are consistent with the language of the Medicaid Act and the 2008 Rule. The court addresses the standing issue first, before turning to the parties’ arguments on the merits. See Pagan v. Calderon, 448 F.3d 16, 26 (1st Cir. 2006) (“A federal court must ...