CHILDREN'S HOSPITAL ASSOCIATION OF TEXAS et al v. PRICE et al

Filing 34

MEMORANDUM OPINION. Signed by Judge Emmet G. Sullivan on March 6, 2018. (lcegs2)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
________________________________________
)
CHILDREN’S HOSPITAL ASSOCIATION OF
)
TEXAS; CHILDREN’S HEALTH CARE d/b/a
)
CHILDREN’S HOSPITAL AND CLINICS OF
)
MINNESOTA; GILLETTE CHILDREN’S
)
SPECIALTY HEALTHCARE; CHILDREN’S
) Civil Action No.
HOSPITAL OF THE KING’S DAUGHTERS,
) 17-844 (EGS)
INC.; and SEATTLE CHILDREN’S HOSPITAL, )
)
Plaintiffs,
)
)
v.
)
)
ALEX AZAR, in his official
)
capacity, Secretary of Health and
)
Human Services; SEEMA VERMA, in her
)
official capacity, Administrator of
)
the Centers for Medicare and Medicaid
)
Services; and CENTERS FOR MEDICARE
)
1
)
AND MEDICAID SERVICES,
)
Defendants.
)
________________________________________)
MEMORANDUM OPINION
Medicaid is a federal program that helps to cover the costs
of providing medical care to qualified individuals. Some
hospitals treat significantly higher percentages of Medicaideligible patients than others. Because Medicaid does not
generally provide the same level of reimbursement as other types

1

Pursuant to Federal Rule of Civil Procedure 25(d), the
Court substitutes as defendant the Secretary of Health and Human
Services, Alex Azar, for former Secretary of Health and Human
Services, Thomas E. Price.
1

of insurance coverage, such hospitals are often at a financial
disadvantage. To rectify this disadvantage, and thereby
encourage hospitals to serve Medicaid-eligible patients,
Congress has provided for supplemental Medicaid payments to such
hospitals. The supplemental payments are subject to limits to
ensure that no hospital receives payments that would result in a
profit, rather than covering Medicaid-related costs to rectify
the disadvantage. This case concerns the method of calculating
the limit of these supplemental payments.
Specifically, this lawsuit challenges a final rule that
defines how “costs” are to be calculated for purposes of
determining the limit on the amount of the supplemental payment
a hospital serving a disproportionate share of Medicaid-eligible
individuals is entitled to receive. See Medicaid Program:
Disproportionate Share Hospital Payments – Treatment of Third
Party Payers in Calculating Uncompensated Care Costs, 82 Fed.
Reg. 16114-02, 16117 (Apr. 3, 2017) (“Final Rule”). Defendants –
the Secretary of Health and Human Services (“the Secretary”),
Centers for Medicare and Medicaid Services (“CMS”), and the CMS
Administrator – claim that the Medicaid Act permits them to
define “costs” in the Final Rule as “costs net of third-party
payments, including, but not limited to, payments by Medicare
and private insurance.” 42 C.F.R. § 447.299(c)(10)(i).
Plaintiffs – one children’s hospital association, whose members
2

are eight free-standing children’s hospitals in the state of
Texas, and four other free-standing children’s hospitals located
in Minnesota, Virginia, and Washington – ask the Court to vacate
the Final Rule as contrary to the plain language of the Medicaid
Act and as arbitrary and capricious under the Administrative
Procedures Act.
Pending before the Court are plaintiffs’ combined motion
for a preliminary injunction and for summary judgment,
defendants’ motion to strike exhibits supporting plaintiffs’
motion for summary judgment, defendants’ motion for summary
judgment, and plaintiffs’ motion for a status hearing. Upon
consideration of the parties’ memoranda, the parties’ arguments
at the motions hearing, the administrative record, the
applicable law, and for the following reasons, the Court grants
plaintiffs’ motion for summary judgment and vacates the Final
Rule. The Court further grants defendants’ motion to strike,
denies defendants’ motion for summary judgment, denies
plaintiffs’ motion for a preliminary injunction, and denies
plaintiffs’ motion for a status hearing.
I.

BACKGROUND
A. The Medicaid Act
Medicaid is a “joint state-federal program in which

healthcare providers serve poor or disabled patients and submit
claims for government reimbursement.” Universal Health Servs.,
3

Inc. v. United States, 136 S. Ct. 1989, 1996-97 (2016). In
addition to serving low-income individuals, Medicaid also
provides benefits to children with certain serious illnesses,
without regard to family income. See, e.g., 42 U.S. C. §
1396a(a)(10)(A)(i)(II) (children are eligible for Medicaid if
they are eligible for Supplemental Security Income (“SSI”)); 20
C.F.R. § 416.934(j) (children born weighing less than 1,200
grams are presumptively eligible for SSI).
To encourage states to participate in Medicaid, “[f]ederal
and state governments jointly share the cost.” Va. Dep’t of Med.
Assistance Servs. v. Johnson, 609 F. Supp. 2d 1, 2 (D.D.C.
2009). Participating states administer their own program
“pursuant to a state Medicaid plan which must be reviewed and
approved by the Secretary of HHS.” Id.; see also 42 U.S.C. §
1396a. Once the Secretary or the Secretary’s designee approves a
state plan, the state receives federal financial participation
to cover part of the costs of its Medicaid program. 42 U.S.C. §
1396b(a)(1). If a state fails to comply with the statutory or
regulatory requirements governing Medicaid, the federal
government may recoup federal funds from the state. See id. §§
1316(a), (c)–(e).
B. Disproportionate Share Hospitals
In 1981, facing “greater costs . . . associated with the
treatment of indigent patients,” D.C. Hosp. Ass’n v. District of
4

Columbia, 224 F.3d 776, 777 (D.C. Cir. 2000), Congress amended
Medicaid to require states to ensure that payments to hospitals
“take into account . . . the situation of hospitals which serve
a disproportionate number of low-income patients with special
needs,” 42 U.S.C. § 1396a(13)(A)(iv). This amendment reflected
“Congress’s concern that [M]edicaid recipients have reasonable
access to medical services and that hospitals treating a
disproportionate share of poor people receive adequate support
from [M]edicaid.” W. Va. Univ. Hosps. v. Casey, 885 F.2d 11, 23
(3d Cir. 1989).
These payments do not compensate a hospital for providing a
particular service to a particular patient; rather, they seek to
rectify in part any deficit the hospital may face solely because
it treats more Medicaid-eligible patients than most. See
Johnson, 609 F. Supp. 2d at 3 (“The intent was to stabilize the
hospitals financially and preserve access to health care
services for eligible low-income patients.”). Accordingly, the
amendment created “payment adjustment[s]” for qualifying
hospitals. See 42 U.S.C. § 1396r-4(c). Such payments are
available to any hospital that treats a disproportionate share
of Medicaid patients (a disproportionate-share hospital or
“DSH”). See id. § 1396r-4(b). In particular, Congress “deemed”
hospitals to be DSH hospitals if “the hospital’s medicaid
inpatient utilization rate . . . is at least one standard
5

deviation above the mean medicaid inpatient utilization rate for
hospitals receiving medicaid payments in the State” or if “the
hospital’s low-income utilization rate . . . exceeds 25
percent.” Id. § 1396r-4(b)(1).
In 1993, the Medicaid program was amended to limit DSH
payments on a hospital-specific basis to assuage concerns that
some hospitals were receiving DSH payments in excess of “the net
costs, and in some instances the total costs, of operating the
facilities.” H.R. Rep. No. 103-111, at 211 (1993), reprinted in
1993 U.S.C.C.A.N. 278, 538. Congress was particularly concerned
by reports that some states were “making DSH payment adjustments
to hospitals that d[id] not provide inpatient services to
Medicaid beneficiaries” at all. Id. Because the very purpose of
DSH payments was “to assist those facilities with high volumes
of Medicaid patients,” Congress wanted to ensure that payments
were directed to hospitals that were “unlikely to have large
numbers of privately insured patients through which to offset
their operating losses on the uninsured.” Id. To mitigate these
concerns, the amendment provided that a DSH payment may not
exceed:
[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
6

have no health insurance (or other source of
third party coverage) for services provided
during the year.
42 U.S.C. § 1396r-4(g)(1)(A). Thus, for Medicaid patients, the
Medicaid Act sets the hospital-specific limit (“HSL”) for DSH
payments as “the costs incurred during the year of furnishing
hospital services” to Medicaid-eligible individuals “as
determined by the Secretary and net of payments” under the
Medicaid Act (referred to as the “Medicaid shortfall”). Id.
C. Auditing and Reporting Requirements
To ensure that DSH payments comply with statutory
requirements, the Medicaid Act was again amended in 2003 to
require that each state provide an annual report and an audit of
its DSH program. See id. § 1396r-4(j). The audit must confirm,
among other things, that:
(C) Only the uncompensated care costs of
providing inpatient hospital and outpatient
hospital services to individuals described in
[Section 1396r-4(g)(1)(A)] . . . are included
in the calculation of the hospital-specific
limits[;]
(D) The State included all payments under this
subchapter, including supplemental payments,
in the calculation of such hospital-specific
limits[; and]
(E) The State has separately documented and
retained a record of all of its costs under
this subchapter, claimed expenditures under
this
subchapter,
uninsured
costs
in
determining payment adjustments under this
section, and any payments made on behalf of
the uninsured from payment adjustments under
this section.
7

Id. § 1396r-4(j)(2). Overpayments must be recouped by the state
within one year of their discovery or the federal government may
reduce its future contribution to that state. See id. §
1396b(d)(2)(C)-(D).
In 2005, CMS issued a Notice of Proposed Rulemaking in
order to implement the 2003 amendment’s auditing and reporting
requirements. See 70 Fed. Reg. 50262 (Aug. 26, 2005). A final
rule was issued on December 19, 2008. See 73 Fed. Reg. 77904
(Dec. 19, 2008) (“2008 Rule”). The 2008 Rule made two changes to
the applicable provisions of the Code of Federal Regulations.
First, the 2008 Rule required that states begin to submit,
on an annual basis, certain information “for each DSH hospital
to which the State made a DSH payment in order to permit
verification of the appropriateness of such payments.” Id. at
77950. One such piece of information is the hospital’s “total
annual uncompensated care costs,” which the rule defined as an
enumerated set of “costs” less an enumerated set of “payments”:
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 [feefor-service] rate payments, Medicaid managed
care
organization
payments,
supplemental/enhance
Medicaid
payments,
uninsured revenues, and Section 1011 payments
for
inpatient
and
outpatient
hospital
services.
8

Id. at 77950; 42 C.F.R. § 447.229(c)(16). The regulation also
defined different types of costs and payments. See 42 C.F.R. §
447.229(c)(10) (defining total costs for Medicaid-eligible
patients as “[t]he total annual costs incurred by each hospital
for furnishing inpatient hospital and outpatient hospital
services to Medicaid eligible individuals”); id. §
447.229(c)(14) (defining total costs for uninsured individuals
as “the total costs incurred for furnishing . . . services to
individuals with no source of third party coverage for the
hospital services they receive”); id. §§ 447.229(c)(6)–(9)
(defining the various Medicaid-related payments); id. §
447.229(c)(12) (defining total uninsured revenues as “[t]otal
annual payments received by the hospital by or on behalf of
individuals with no source of third party coverage for . . .
services they receive,” exclusive of “payments made by a State
or units of local government, for services furnished to indigent
patients”); id. § 447.229(c)(13) (describing “Section 1011
payments,” which are “Federal Section 1011 payments for . . .
services provided to Section 1011 eligible aliens with no source
of third party coverage”).
Second, the 2008 Rule stated that the annual audit “must
verify,” among other things, that:
Each hospital that qualifies for a DSH payment
in the State is allowed to retain that payment
so that the payment is available to offset its
9

uncompensated care costs for
furnishing
inpatient hospital and outpatient hospital
services during the Medicaid State plan rate
year to Medicaid eligible individuals and
individuals with no source of third party
coverage for the services in order to reflect
the total amount of claimed DSH expenditures.
. . .
Only uncompensated care costs of furnishing
inpatient and outpatient hospital services to
Medicaid eligible individuals and individuals
with no third party coverage for the inpatient
and outpatient hospital services they received
as described in Section 1923(g)(1)(A) of the
Act are eligible for inclusion in the
calculation
of
the
hospital-specific
disproportionate share . . . payment limit.
73 Fed. Reg. at 77951; 42 C.F.R. § 455.304(d). To ease the move
to the new audit and reporting regime and to avoid subjecting
any state to “immediate penalties that would result in the loss
of Federal matching dollars,” CMS provided for a six-year-long
transition. 73 Fed. Reg. at 77906. Accordingly, any audits “from
Medicaid State plan rate year 2005 through 2010” would be “used
only for the purpose of determining prospective hospitalspecific cost limits and the actual DSH payments associated with
a particular year,” not for “requiring recovery of any
overpayments.” Id. For payments made for all years after 2011,
DSH overpayments would be recovered by the state, and the
federal share would be returned to the federal government unless
the excess payments “are redistributed by the State to other
qualifying hospitals.” Id.
10

D. Frequently Asked Questions (“FAQs”) 33 and 34
On January 10, 2010, CMS posted answers to FAQs regarding
the audit and reporting requirements. See A.R. 730-771,
Additional Information on the DSH Reporting and Audit
Requirements, https://www.medicaid.gov/medicaid/financing-andreimbursement/downloads/part-1-additional-info-on-dsh-reportingand-auditing.pdf. FAQ 33 asked whether “days, costs, and
revenues associated with patients that have both Medicaid and
private insurance coverage” would be included in the calculation
of the DSH limit. A.R. 747, id. at 18. In response, CMS
explained that private-insurance payments made on behalf of
Medicaid-eligible patients should be included in the calculation
of the hospital-specific DSH limit.” Id. Likewise, FAQ 34 asked
“[u]nder what circumstances” would Medicare payments on behalf
of patients dually eligible for both Medicare and Medicaid be
included in the uncompensated care costs. Id. CMS explained that
hospitals were required “to take into account” any Medicare
payments made on behalf of dually-eligible individuals in
calculating a hospital’s Medicaid DSH payment. Id.
FAQs 33 and 34 were subsequently challenged in multiple
courts as an unlawful amendment of the 2008 Final Rule and as
inconsistent with the Medicaid Act. Each of the six federal
courts to have evaluated FAQs 33 and 34 have entered either a
preliminary or permanent injunction prohibiting defendants from
11

reducing a hospital’s DSH payment through enforcement of the
FAQs. See, e.g., Texas Children’s Hosp. v. Burwell, 76 F. Supp.
3d 224 (D.D.C. 2014) (granting preliminary injunction
prohibiting the enforcement of FAQ 33); New Hampshire Hosp.
Ass’n v. Burwell, No. 15-cv-460, 2017 WL 822094 (D.N.H. Mar. 2,
2017) (permanently enjoining defendants from enforcing FAQs 33
and 34); Children’s Hosp. of the King’s Daughters, Inc. v.
Price, 258 F. Supp. 3d 672 (E.D. Va. 2017) (granting preliminary
injunction prohibiting the enforcement of FAQ 33 against
plaintiff); Tennessee Hosp. Ass’n v. Price, No. 16-cv-3263, 2017
WL 2703540 (M.D. Tenn. June 21, 2017) (granting plaintiffs’
summary judgment and enjoining defendants from applying FAQ 33
to plaintiffs’ hospitals); Children's Health Care v. Centers for
Medicare & Medicaid Servs., No. 16-cv-4064, 2017 WL 3668758 (D.
Minn. June 26, 2017)(permanently enjoining defendants from
enforcing FAQ 33); Missouri Hosp. Ass’n. v. Hargan, No. 17-cv4052, 2018 WL 814589 (W.D. Mo. Feb. 9, 2018) (permanently
enjoining enforcement of the final rule).
Each of these courts found the FAQs invalid on procedural
grounds – i.e., that defendants violated the Administrative
Procedure Act (“APA”), 5 U.S.C. § 500 et seq., by failing to
properly promulgate the policy embodied in the FAQs in
accordance with the notice-and-comment provisions of section
553. Two of these courts also evaluated whether the FAQs
12

violated section 706(2) of the APA because they conflict with
the plain language of the Medicaid Act. See Children’s Hosp. of
the King’s Daughters, 2017 WL 2936801, at *8 (finding that the
Medicaid statute is “unambiguous” and foreclosed defendants’
interpretation as set forth in FAQ 33); Tennessee Hosp. Ass’n,
2017 WL 2703540, at *8 (“the Court finds that Defendants’
policies set forth in the responses to FAQs 33 and 34 violate
the APA because they conflict with the unambiguous language of
the Medicaid Act”).
E. 2017 Final Rule
On August 15, 2016, defendants published a notice of
proposed rulemaking to address the HSL on DSH payments. 81 Fed.
Reg. 53980, 53981 (Aug. 15, 2016). Specifically, defendants
explained that the new rule was intended to “make clearer . . .
an existing interpretation” – which was also embodied in FAQs 33
and 34 – that “uncompensated care costs include only those costs
for Medicaid eligible individuals that remain after accounting
for payments received by hospitals by or on behalf of Medicaid
eligible individuals, including Medicare and other third party
payments that compensate the hospitals for care furnished to
such individuals.” Id. (emphasis added). In other words, under
the proposed rule, the HSL must be based on the costs for
Medicaid-eligible individuals for which a “hospital has not
received payment from any source.” Id.
13

On April 3, 2017, CMS published the Final Rule entitled
“Medicaid Program: Disproportionate Share Hospital Payments –
Treatment of Third Party Payers in Calculating Uncompensated
Care Costs.” 82 Fed. Reg. 16114-02, 16117 (Apr. 3, 2017). CMS
stated that it “received 161 timely comments from state Medicaid
agencies, provider associations, providers, and other interested
parties” in response to the proposed rule. 82 Fed Reg. 16114,
16117 (Apr. 3, 2017). Defendants identified ten general comment
areas in which they received multiple comments, along with nine
additional specific comments that did not fit into any of the
general areas, and provided responses to those comments. Id. at
16117-16120. Many commentators “suggested that CMS’
interpretation of the hospital-specific limit” was “inconsistent
with the statutory language” of the amendment. Id. at 16117.
Defendants disagreed, explaining that the statute explicitly
gave the Secretary authority to determine the “costs” of
providing services, and therefore the Secretary had “discretion
to take Medicare and other third party payments into account
when determining a hospital’s costs for the purpose of
calculating Medicaid DSH payments.” Id. at 16117-18.
Other commentators suggested that the proposed rule should
not apply to patients eligible for both Medicaid and another
source of insurance (“dual-eligible patients”) in cases where
Medicaid does not actually pay on behalf of that patient. Id. at
14

16118. According to these commentators, application of the
proposed rule to hospitals serving a high number of dualeligible patients would render those hospitals “ineligible for
DSH funds, even though they have substantial losses for
Medicaid-paid admissions and for the uninsured.” Id. In
response, defendants pointed out that the statutory language
referred to those “eligible for medical assistance” and did “not
condition eligibility on whether the cost of the service was
claimed.” Id. As such, “all costs and payments associated with
Medicaid eligible individuals must be included in the hospitalspecific limit calculation, regardless of whether Medicaid made
a payment.” Id. Defendants also stated that the commentators’
belief that, under the proposed rule, a hospital could incur
substantial losses for treating Medicaid-eligible and uninsured
individuals despite receiving a DSH payment was “incorrect.” Id.
Although these hospitals may incur losses for “[a]ncillary
programs and services,” any “actual uncompensated care costs for
furnishing [inpatient and outpatient] hospital services” would
be eligible to be covered by DSH payments. The purpose of the
rule, according to defendants, was simply to ensure that a DSH
payment did not constitute “double pay for costs that ha[d]
already been compensated” by, for example, private insurance or
Medicare. Id.

15

The Final Rule modifies 42 C.F.R. § 447.299(c)(10) “to make
it explicit that ‘costs’ for purposes of calculating hospitalspecific DSH limits are costs net of third-party payments
received.” Id. Specifically, the Final Rule provides:
(10) Total Cost of Care for Medicaid IP/OP
Services. The total annual costs incurred by
each
hospital
for
furnishing
inpatient
hospital and outpatient hospital services to
Medicaid eligible individuals. The total
annual costs are determined on a hospitalspecific basis, not a service-specific basis.
For purposes of this section, costs—
(i) Are defined as costs net of third-party
payments, including, but not limited to,
payments by Medicare and private insurance.
(ii) Must capture the total burden on the
hospital
of
treating
Medicaid
eligible
patients prior to payment by Medicaid. Thus,
costs must be determined in the aggregate and
not by estimating the cost of individual
patients. For example, if a hospital treats
two Medicaid eligible patients at a cost of
$2,000 and receives a $500 payment from a
third party for each individual, the total
cost to the hospital for purposes of this
section is $1,000, regardless of whether the
third party payment received for one patient
exceeds the cost of providing the service to
that individual.
Id. at 16122 (emphasis added). The Final Rule became effective
June 2, 2017. Id. at 16115. Defendants note that, because the
Final Rule merely “provid[es] clarification to existing policy,”
there is “no issue of retroactivity, nor a need for a transition
period.” Id. at 16118.

16

The only other federal court to have adjudicated a
challenge to the Final Rule found that it was enacted in excess
of defendants’ statutory authority under the Medicaid Act. See
Missouri Hosp. Ass’n. v. Hargan, No. 17-cv-4052, 2018 WL 814589,
at *10-12 (W.D. Mo. Feb. 9, 2018). The court held that “42
U.S.C. § 1396r-4(g)(1)(A) is unambiguous that the calculation of
a DSH hospital's HSL does not involve consideration of private
insurance or Medicare payments, and a DSH hospital's total
uncompensated costs of care for calculating the HSL is reduced
only by the total of other Medicaid program payments.” 2018 WL
814589, at *12. In so holding, the court found that the context
and legislative history of the statute supported plaintiffs’
reading of the statute that only Medicaid payments were to be
included in the HSL. Id. Based on the language of the statute,
its context, and its legislative history, the court concluded
that, “[w]hile the Secretary may be authorized to define
‘costs,’” under the statute, the Secretary’s “authority stops
short of defining ‘payments.’” Id.
F. This Lawsuit
The plaintiffs in this case represent twelve not-for-profit
children’s hospitals located in Texas, Washington, Minnesota,
and Virginia. Compl. ¶¶ 13-17, ECF No. 1. The hospitals are
“dedicated to the treatment and special needs of children and
the advancement of pediatric medicine” and provide care for
17

critically-ill children “regardless of whether their families
have health insurance or ability to pay for their care.” Id. ¶¶
13-17. As a result, these hospitals each serve a
disproportionate number of Medicaid and uninsured patients. See,
e.g., id. ¶ 13 (the Children’s Hospital Association of Texas’
“members have among the highest Medicaid utilization rates of
all hospitals in the state of Texas”); id. ¶ 14 (“Children’s
Minnesota is federally ‘deemed’ a DSH hospital entitled to
receive DSH funding under the Medicaid Act.”); id. ¶ 15
(“Gillette Children’s typically serves the highest proportion of
patients covered by Medicaid in Minnesota.”); id. ¶ 16
(Children’s Hospital of the King’s Daughters “is federally
‘deemed’ a DSH hospital entitled to receive DSH funding under
the Medicaid Act because it serves a disproportionate number of
Medicaid and uninsured patients.”).
Plaintiffs filed this lawsuit on May 8, 2017. Compl., ECF
No. 1. On May 15, 2017, plaintiffs filed a motion for a
preliminary injunction requesting the Court to “enjoin[]
Defendants – on a nationwide basis – from enforcing, applying,
or implementing (or requiring any state to enforce, apply, or
implement)” the Final Rule. Mot. for Prelim. Inj., ECF No. 8. On
May 23, 2017, in accordance with the Court’s May 19, 2017 Order,
the parties filed a joint status report in which they agreed
that plaintiffs’ motion for a preliminary injunction could “be
18

combined with the merits and treated also as a motion for
summary judgment.” Joint Status Report at 2, ECF No. 11. The
Court entered an order consolidating plaintiffs’ motion for a
preliminary injunction with a determination of the merits under
Federal rule of Civil Procedure 65(a)(2) on May 24, 2017.
Plaintiffs filed a combined application for a preliminary
injunction and summary judgment on June 5, 2017. Pls.’ Combined
Mem. in Supp. of Appl. for a Prelim. Inj. and for Summ. J.
(“Pls.’ Mem.”), ECF No. 12-1. On June 16, 2017, in addition to
filing their combined response to plaintiffs’ motion and crossmotion for summary judgment, defendants moved to strike certain
exhibits filed in support of plaintiffs’ motion. Defs.’ Mot. to
Strike, ECF No. 14; Defs.’ Mem. in Supp. of Mot. for Summ. J.
and Opp. to Pls.’ Mot. for Prelim. Inj. and Summ. J. (“Defs.’
Opp.”), ECF No. 15. The parties’ briefing on their cross-motions
for summary judgment and defendants’ motion to strike was
complete on July 12, 2017, and the Court held a hearing on the
motions on August 1, 2017. Those motions are now ripe for the
Court’s considerations. Because the Court’s opinion decides the
underlying merits, plaintiffs’ request for a preliminary
injunction is moot.

19

II.

Defendants’ Motion to Strike
Plaintiffs attach thirty-six exhibits to their “combined

application for a preliminary injunction and for summary
judgment,” see ECF Nos. 12-3 to 12-38, seventeen of which were
not “presente[ed] to the agency in the administrative process,”
see Defs.’ Mot. Strike at 1, ECF No. 14. These seventeen
exhibits consist of: (1) declarations from representatives of
each plaintiff, see ECF Nos. 12-3, 12-5, 12-7, 12-24, 12-26, 1228, and 12-34; (2) two publications from the Journal of the
American Medical Association (“JAMA”), ECF Nos. 12-12 and 12-38;
(3) various documents attached to the Declaration of Robert
Simon (“Simon Declaration”) purporting to explain the
relationship between Medicaid cost-reporting principles and
inclusion of third-party payments in the HSL calculation, see
ECF Nos. 12-30, 12-31,12-32, and 12-33; and (4) various
documents setting forth facts specific to certain plaintiffhospitals, see ECF Nos. 12-27, 12-35, 12-36, and 12-37.
Defendants move to strike these seventeen exhibits, arguing that
judicial review under the APA “is limited to the administrative
record, which consists of the materials directly or indirectly
considered by the agency decision-makers at the time they made
the challenged decision.” Defs.’ Mot. Strike at 3, ECF No. 14.
“[I]t is black-letter administrative law that in an APA
case, a reviewing court ‘should have before it neither more nor
20

less information that did the agency when it made its
decision.’” Hill Dermaceuticals, Inc. v. Food & Drug Admin., 709
F.3d 44, 47 (D.C. Cir. 2013) (quoting Walter O. Boswell Mem’l
Hosp. v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984)). This is
because, under the APA, the court is confined to reviewing “the
whole record or those parts of it cited by a party,” 5 U.S.C. §
706, and the administrative record only includes the “materials
‘compiled’ by the agency that were ‘before the agency at the
time the decision was made,’” James Madison Ltd. by Hecht v.
Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (citations omitted).
Accordingly, when, as here, plaintiffs seek to place before
the court additional materials that the agency did not review in
making its decision, a court must exclude such material unless
plaintiffs “can demonstrate unusual circumstances justifying
departure from th[e] general rule.” Am. Wildlands v. Kempthorne,
530 F.3d 991, 1002 (D.C. Cir. 2008) (citation omitted). For
example, a court may appropriately consider extra-record
materials: (1) if the agency deliberately or negligently
excluded documents that may have been adverse to its decision;
(2) if background information is needed to determine whether the
agency considered all the relevant factors; and (3) in cases
where the agency failed to explain the administrative action so
as to frustrate judicial review. Id.

21

Plaintiffs make three arguments as to why the Court should
consider their proffered extra-record materials: (1) the
declarations, and certain exhibits attached to them, should be
considered because they support plaintiffs’ request for a
preliminary injunction and establish plaintiffs’ standing, Pls.’
Strike Opp. at 4-7, ECF No. 22; (2) that certain paragraphs of
the Simon Declaration and all of the exhibits attached to it are
proper extra-record evidence because they show that defendants
did not adequately explain their decision, id. at 7-9; and (3)
one JAMA study is included merely to support a “statement of
fact” that “put[s] into context the specialized care Plaintiffs
provide to Medicaid children” and thus is appropriately before
the Court, id. at 10. The Court considers each argument in turn.
A. The Court Need Not Consider Extra-Record Materials To
Determine Whether Plaintiffs Will Suffer Irreparable
Harm Or Have Standing.
Plaintiffs are correct that in APA cases, courts have
considered declarations offered to prove that plaintiffs will
suffer “irreparable harm” absent a preliminary injunction. See
id. at 4; see also, e.g., Am. Rivers v. U.S. Army Corps of
Eng’rs, 271 F. Supp. 2d 230, 247 (D.D.C. 2003) (“the Court
concludes that this case fits squarely within one of our
Circuit’s stated exceptions for allowing consideration of extrarecord declarations in administrative review cases – cases
involving preliminary injunctions”). Here, however, plaintiffs
22

concede that consolidation of their motions for preliminaryinjunctive relief and summary judgment under Federal Rule of
Civil Procedure 65 “effectively moots the Court’s consideration
of the preliminary injunctive factors because the court will
enter judgment on the merits.” Pls.’ Mem. at 2, ECF No. 12-1.
Accordingly, the Court need not determine whether plaintiffs
will suffer “irreparable harm” absent an injunction – and,
therefore, plaintiffs’ extra-record proof of such harm need not
be considered.
Whether plaintiffs may supplement the record in order to
establish standing is a closer question. See, e.g., Amfac
Resorts, L.L.C. v. U.S. Dep’t of the Interior, 282 F.3d 818, 830
(D.C. Cir. 2002) (stating that those challenging agency action
must establish that they have standing and, in so doing, “[t]hey
are not confined to the administrative record,” but rather,
“must support their claim of injury with evidence”); Chesapeake
Climate Action Network v. Export–Import Bank of the U.S., 78 F.
Supp. 3d 208, 217 (D.D.C. 2015) (“Although judicial review of
agency action is typically confined to the administrative
record, where there is not sufficient evidence of standing in
the record because the question was not before the agency,
plaintiffs may submit extra-record evidence to establish
standing.”). Notably, although defendants do not contest
standing here – perhaps because this Court previously found that
23

at least one of the plaintiffs in this case, Seattle Children’s
Hospital, likely did have standing to challenge defendants’
enforcement of FAQ 33, see Texas Children’s, 76 F. Supp. 3d at
238-39 – defendants recognize that plaintiffs may be “entitled
to make a record on standing for purposes of further review.”
Defs.’ Reply in Supp. Mot. Strike at 3, ECF No. 25. Furthermore,
even when no party challenges standing, “federal courts, being
courts of limited jurisdiction, must assure themselves of
jurisdiction over any controversy they hear.” Noel Canning v.
N.L.R.B., 705 F.3d 490, 496 (D.C. Cir. 2013).
Here, given that there is no dispute that plaintiffs are
subject to the Final Rule, the Court finds that plaintiffs’
standing is self-evident and therefore the Court need not
consider the declarations attached to plaintiffs’ motion. See
Sierra Club v. E.P.A., 292 F.3d 895, 899-900 (D.C. Cir. 2002)
(“In many if not most cases the petitioner’s standing to seek
review of administrative action is self-evident; no evidence
outside the administrative record is necessary for the court to
be sure of it.”); see also Fund For Animals, Inc. v. Norton, 322
F.3d 728, 733 (D.C. Cir. 2003) (confirming that parties are “not
require[d]. . . to file evidentiary submissions in support of
standing in every case”). In particular, when, as here,
plaintiffs are the “object of the [agency] action (or foregone
action) at issue . . . there should be little question that the
24

action or inaction has caused him injury, and that a judgment
preventing or requiring the action will redress it.” Id.
(citation and internal quotation marks omitted). No party
contests that the Final Rule, if allowed to stand, could “have
the effect of shifting DSH funds from Plaintiffs to other DSH
hospitals within each of their respective states.” Defs.’ Opp.
at 31, ECF No. 15. These recoupment decisions – or, going
forward, decisions about how to allocate DSH funds – by state
Medicaid agencies are inextricably intertwined with defendants’
promulgation and enforcement of the Final Rule. See Texas
Children’s, 76 F. Supp. 3d at 239 (noting that defendants could
“revoke federal financial participation” from states that do not
comport with defendants’ view of Medicaid’s requirements)
(citing 42 U.S.C. §§ 1316(a), (c)–(e), 1396a, 1396b).
Accordingly, the Court need not consider plaintiffs’ proffered
declarations in conducting its analysis of the Final Rule. 2

2

This conclusion is buttressed by the fact that plaintiffs’
declarations appear to address topics that far exceed the
standing inquiry. See, e.g., Declaration of Todd Ostendorf ¶ 5
(“Medicaid currently reimburses Children’s Minnesota an average
of only $0.65 for every dollar of the cost to provide care to
Medicaid patients.”) (cited at Pls.’ Mem. at 12); Declaration of
Stephen Kimmel ¶ 5 (“Cook Child’s sustains significant losses
treating large numbers of Medicaid patients”) (cited at Pls.’
Mem. at 32). As another court recently found, “plaintiffs may
not smuggle in extra-record evidence relevant to the merits of
this APA action by contending that the evidence pertains to
standing.” Hispanic Affairs Project v. Acosta, No. 15-CV-01562
(BAH), 2017 WL 2951881, at *7 (D.D.C. July 7, 2017). This Court
25

B. The Esch Exceptions Do Not Apply.
Plaintiffs invoke Esch v. Yeutter, 876 F.2d 976 (D.C. Cir.
1989), to argue that certain paragraphs of the Simon Declaration
and all of the exhibits to that declaration are proper extrarecord evidence. Pls.’ Strike Opp. at 7-9, ECF No. 22. In
particular, plaintiffs urge the Court to consider portions of
the Simon Declaration because, during the notice-and-comment
process, CMS dismissed Mr. Simon’s comment “with an explanation
that failed to address the issue raised” as to whether the
inclusion of third-party payments in the calculation of the
hospital-specific limit violates Medicare/Medicaid cost
reporting principles. Id. at 8. The Court of Appeals for the
District of Columbia Circuit (“D.C. Circuit”), however, has
“severely limited” the application of Esch to allow such extrarecord evidence. Chamber of Commerce v. NLRB, 118 F. Supp. 3d
171, 188 n.12 (D.D.C. 2015). In Hill Dermaceuticals, for
example, the D.C. Circuit explained that, at most, Esch “may be
invoked to challenge gross procedural deficiencies – such as
where the administrative record itself is so deficient as to

agrees. See also Watersheds Project v. Salazar, 766 F. Supp. 2d
1095, 1104 (D. Mont. 2011) (“The Court believes that the
Declarations containing both standing allegations and the extrarecord submission should be stricken in full because standing is
not in dispute and the extra-record submissions are intermixed
with the standing allegations.”).
26

preclude effective review.” 709 F.3d at 47 (emphases added); see
also American Wildlands v. Kempthorne, 530 F.3d 991, 1002 (D.C.
Cir. 2008) (exception only applies when an agency’s failure to
adequately explain its actions “frustrates judicial review”).
Here, plaintiffs offer no evidence that CMS’s decision was
so procedurally deficient as to preclude judicial review. Given
that courts have repeatedly held that an agency’s decision need
not “be a model of analytic precision to survive a challenge,”
such evidence would need to be provided to justify consideration
of the extra-record evidence. Dickinson v. Sec. of Defense, 68
F.3d 1396, 1404-05 (D.C. Cir. 1995); see also Camp v. Pitts, 411
U.S. 138, 143 (1973) (rejecting argument that agency had failed
to provide an adequate explanation when agency had provided a
“contemporaneous explanation” that simply stated that “a new
bank was an uneconomic venture in light of the banking services
already available in the surrounding community”; “[t]he
explanation may have been curt but it surely indicated the
determinative reason for the final action taken”).
C. The Court Declines To Consider The 2016 JAMA Study.
Plaintiffs also contend that the Court should consider a
2016 study published in Pediatrics, a JAMA publication, because
it supports plaintiffs’ argument that free-standing Children’s
hospitals rely heavily on DSH funding. Pls.’ Opp. at 7, 10, ECF
No. 22. Defendants maintain that the Court must strike the
27

article because it was “not presented to the agency in the
course of the rulemaking process.” Defs.’ Mot. Strike at 5. The
Court agrees, and therefore also strikes the article from the
record. See Hispanic Affairs Project v. Acosta, No. 15-CV-01562
(BAH), 2017 WL 2951881, at *9 (D.D.C. July 7, 2017) (agreeing
that the Court was not permitted to consider “the two referenced
news articles” in an exhibit attached to plaintiffs’ summaryjudgment motion in APA action).
In sum, the Court strikes ECF Nos. 12-3, 12-5, 12-7, 12-12,
12-24, 12-26 to 12-28, and 12-30 to 12-38 from the record.
III.

Standard of Review
Although “summary judgment is [the] appropriate procedure”

when a party seeks review of an agency action under the APA, the
normal standards for summary judgment set forth in Federal Rule
of Civil Procedure 56 do not apply. See Assoc. Builders &
Contractors, Inc. v. Shiu, 30 F. Supp. 3d 25, 34 (D.D.C. 2014);
Bimini Superfast Operations LLC v. Winkowski, 994 F. Supp. 2d
106, 119 (D.D.C. 2014). Instead, the court’s function is limited
to reviewing the administrative record to “determine whether or
not as a matter of law the evidence in the administrative record
permitted the agency to make the decision it did.” Nicopure
Labs, LLC v. Food & Drug Admin., No. 16-cv-0878, 2017 WL
3130312, at *13 (D.D.C. July 21, 2017).

28

In reviewing agency action, the court must be “thorough and
probing, but if the court finds support for the agency action,
it must step back and refrain from assessing the wisdom of the
decision unless there has been a ‘clear error of judgment.’”
Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995)
(quoting Marsh v. Oregon Natural Res. Council, 490 U.S. 360, 378
(1989)). In its review, a court should consider “whether the
agency acted within the scope of its legal authority, whether
the agency has explained its decision, whether the facts on
which the agency purports to have relied have some basis in the
record, and whether the agency considered the relevant factors.”
Id.
Under the APA, a reviewing court must set aside a
challenged agency action that is found to be, inter alia, “in
excess of statutory jurisdiction, authority, or limitations, or
short of statutory right,” 5 U.S.C. § 706(2)(C), or “arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law,” id. § 706(2)(A). The party challenging the
agency action bears the burden of proof. See Abington Crest
Nursing & Rehab. Ctr. v. Sebelius, 575 F.3d 717, 722 (D.C. Cir.
2009).
IV.

Analysis
Plaintiffs challenge the Final Rule on two grounds: (1)

defendants acted in excess of their statutory authority under
29

the Medicaid Act; and (2) the Final Rule is arbitrary and
capricious because (a) the agency’s justification of the Final
Rule is contravened by the record evidence, (b) the Final Rule
is not a product of reasoned decisionmaking, and (c) the Final
Rule is not merely a clarification of existing policy. As set
forth below, because the Court finds that the Final Rule is
inconsistent with the plain language of the Medicaid Act, the
Court need not reach plaintiffs’ second argument. See, e.g., Am.
Petroleum Inst. v. S.E.C., 953 F. Supp. 2d 5, 23 (D.D.C. 2013)
(“Because the Court has invalidated the Rule, other APA
arguments cannot change the disposition.”).
A. The Final Rule is Inconsistent with the Plain Language
of the Medicaid Act.
Plaintiffs and defendants both argue that the relevant
statutory language is clear and unambiguously compels a decision
in their respective favor. Plaintiffs contend that “the DSH
provisions of the Medicaid Act are unambiguous that only
Medicaid payments are netted out in the Medicaid shortfall
component” of the hospital-specific limit. Pls.’ Mem. at 16, ECF
No. 12-1. Defendants, on the other hand, argue that the Medicaid
Act “is unambiguous that only ‘uncompensated’ costs are to be
included” in calculating the hospital-specific limit. Defs.’
Opp. at 13, ECF No. 15.

30

A court’s review of whether an agency has acted within its
statutory jurisdiction falls under the well-worn framework set
out in Chevron U.S.A., Inc. v. Natural Resources Def. Council,
Inc., 467 U.S. 837 (1984). Under Chevron’s two-step framework, a
reviewing court must first determine “whether Congress has
directly spoken to the precise question at issue.” Id. at 843.
To decide whether Congress has spoken to the precise question,
the court must “employ[] traditional tools of statutory
construction.” Chevron, 467 U.S. at 843 n.9. These tools include
“examination of the statute’s text, legislative history, and
structure, as well as its purpose.” Petit v. U.S. Dep’t of
Educ., 675 F.3d 769, 781 (D.C. Cir. 2012); see also Pharm.
Research & Mfrs. of Am. v. Fed. Trade Comm’n, 44 F. Supp. 3d 95,
112 (D.D.C. 2014) (tools of statutory construction “include
evaluation of the plain statutory text at issue, the purpose and
structure of the statute as a whole, while giving effect, if
possible, to every clause and word of a statute, and – where
appropriate – the drafting history”).
Importantly, to prevail under Chevron step one, plaintiffs
“must show that the statute unambiguously forecloses the
agency’s interpretation.” Petit, 675 F.3d at 781 (citation and
internal quotation marks omitted). The statute may foreclose the
agency’s interpretation if the statute “prescrib[es] a precise
course of conduct other than the one chosen by the agency” or if
31

the statute “grant[s] the agency a range of interpretive
discretion that the agency has clearly exceeded.” Vill. of
Barrington, Ill. v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C.
Cir. 2011). “[I]f the agency has either violated Congress’s
precise instructions or exceeded the statute’s clear boundaries
then, as Chevron puts it, ‘that is the end of the matter’ – the
agency’s interpretation is unlawful.” Id. at 660 (quoting
Chevron, 467 U.S. at 842). On the other hand, if the statute’s
“ambiguity has left the agency with a range of possibilities”
and if the “agency’s interpretation falls within that range,
then the agency will have survived Chevron step one.” Id.
Thus, under Chevron step one, the threshold determination –
whether the Secretary’s determination that the calculation of
the hospital-specific limit should include only costs not
otherwise reimbursed by private insurers is consistent with the
Medicaid Act – turns on whether Congress has directly spoken on
the issue. To make this determination, the Court examines the
statutory text, the structure and context of the statute as a
whole, and the legislative history in turn.
(1)

Statutory Text

The 1993 amendments to Medicaid imposed hospital-specific
limits on the amount of payment adjustments received by DSH
hospitals. Specifically, the statute makes clear that a DSH
payment cannot exceed:
32

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 plan or
have no health insurance (or other source of
third party coverage) for services provided
during the year.
42 U.S.C. § 1396r-4(g)(1)(A) (emphases added).
Plaintiffs argue that this section “unambiguously specifies
the ‘payments’ that are to be included in the calculation of a
hospital’s HSL” – “i.e., Medicaid payments and payments made by
or on behalf of uninsured patients.” Pls.’ Mem. at 16-17, ECF
No. 12-1. In other words, because the statutory provision sets
forth a formula for calculating a hospital’s HSL, and because
that formula makes clear what payments can be considered, the
Final Rule’s inclusion of payments by third parties “contravenes
the plain language of the statute.” Id. at 17. Moreover,
plaintiffs claim that the statute plainly forecloses defendants’
attempt to “rewrite” the statutory formula by mandating that
third-party payments be subtracted from the “cost” side of the
equation. Id.
Defendants argue that the heading, which refers only to
“uncompensated” costs, along with the language of the audit
provision makes clear that “Congress did not intend to treat

33

care that is well compensated as uncompensated.” Defs.’ Opp. at
13-14, ECF No. 15.
The Court agrees with plaintiffs. On its face, the statute
clearly indicates which payments can be subtracted from the
total costs incurred during the year by hospitals: (1) “payments
under this subchapter,” i.e., payments made by Medicaid; and (2)
payments made by uninsured patients. The statute nowhere
mentions subtracting other third-party payments made on behalf
of Medicaid-eligible patients from the total costs incurred. Id.
Furthermore, while the statute expressly delegates to the
Secretary the authority to determine “costs,” the remainder of
the statutory text forecloses the reading offered by defendants
in the Final Rule. That text, after all, indicates that only
payments made by Medicaid and by uninsured patients may be
netted out from “costs” to arrive at the hospital-specific
limit. To allow the Secretary to redefine “costs” to net out a
third category of payments – i.e., “third-party payments,
including but not limited to, payments by Medicare and private
insurance,” 82 Fed. Reg. 16114-02, 16117 – would “render the
Congressional definition of ‘payments’ in the very same clause
superfluous.” Children’s Hosp. of the King’s Daughters, Inc. v.
Price, No. 2:17CV139, 2017 WL 2936801, at *9 (E.D. Va. June 20,
2017); see also New Hampshire Hosp. Ass’n v. Burwell, No. 15-CV460-LM, 2016 WL 1048023, at *12 (D.N.H. Mar. 11, 2016) (“The
34

Medicaid Act separately describes the ‘payments’ that are
subtracted from the ‘costs’ to obtain the Medicaid Shortfall.
Congress could not have intended to grant the Secretary the
discretion to include other payments within the term “costs,”
while separately defining payments. If it did, the definition of
payments that must be subtracted from costs to determine the
Medicaid Shortfall would be surplusage.”).
Because the Court must “give effect, if possible, to every
clause and word of a statute,” see United States v. Menasche,
348 U.S. 528, 538-39 (1955), and because defendants’
interpretation of the statute would render portions of the
statutory language superfluous, the Court rejects defendants’
reading of the statute to permit the Secretary to define “costs”
to include certain “payments” when “payments” are defined in the
statutory language.
(2)

Statutory Structure and Context

The fact that Congress specifically provided for
subtracting Medicaid payments but not payments by third parties
becomes all the more salient upon examination of the subsequent
statutory section. That section permits additional DSH payments
to certain state-owned hospitals during a transitional period so
long as the state certifies that the additional payments are
used for “health services.” 42 U.S.C. § 1396r-4(g)(2). In

35

particular, section 1396r-4(g)(2)(A) provides, in relevant part,
as follows:
In determining the amount that is used for
[health] services during a year, there shall
be excluded any amounts received . . . from
third party payors (not including the State
plan under this subchapter) that are used
for providing such services during the year.
42 U.S.C. § 1396r-4(g)(2)(A)(emphasis added).
Thus, while Congress expressly excluded amounts received
from third-party payors in section 1396r-4(g)(2)(A), it declined
to do so in section 1396r-4(g)(1)(A). That omission is
significant. Indeed, it is well-settled that, “[w]here Congress
includes particular language in one section of a statute but
omits it in another section of the same Act, it is generally
presumed that Congress acts intentionally and purposely in the
disparate inclusion or exclusion.” Russello v. United States,
464 U.S. 16, 23 (1983) (citation and internal quotation marks
omitted); see also Jama v. Immigration & Customs Enforcement,
543 U.S. 335, 341 (2005) (“We do not lightly assume that
Congress has omitted from its adopted text requirements that it
nonetheless intends to apply, and our reluctance is even greater
when Congress has shown elsewhere in the same statute that it
knows how to make such a requirement manifest.”); D.C. Hosp.
Ass’n. v. D.C., 224 F.3d 776, 780 (D.C. Cir. 2000) (fact that
Congress had specified that only a State’s “direct” payments

36

were to be taken into account in preceding section of statute
was compelling evidence that Congress did not intend to limit
the computation of payments in such a way under the section at
issue, which did not include such a limitation).
To be clear, the fact that Congress specifically excluded
payments by third party insurers in subsection (g)(2) does not
necessarily demonstrate intent to exclude payments by third
party insurers in other subsections. See, e.g., Waterkeeper All.
v. Envtl. Prot. Agency, 853 F.3d 527, 534–35 (D.C. Cir. 2017)
(“The canon of expressio unius est exclusio alterius is ‘an
especially feeble helper in an administrative setting, where
Congress is presumed to have left to reasonable agency
discretion questions that it has not directly resolved.’”)
(citation omitted). Indeed, had Congress done nothing more than
instruct the Secretary to determine the “costs incurred” by each
hospital receiving DSH funds, the Court could reasonably
conclude that the Secretary had discretion to determine,
consistent with the purpose of the statute, which payments ought
to be subtracted in completing that calculation. Here, however,
by granting the Secretary discretion to determine “costs,”
Congress specifically mandated which payments should be
subtracted to arrive at the hospital-specific limit. Thus, it is
compelling that Congress did not include payments by third-party

37

insurers in subsection (g)(1), despite excluding precisely such
payments in the subsection (g)(2).
Defendants attempt to muddy the waters by pointing to other
aspects of the statutory structure that they claim show that
Congress intended for the hospital-specific limit to be based on
“uncompensated costs.” Defs.’ Opp. at 13-14. Specifically,
defendants point to the heading of section 1396r-4(g)(1)(A) –
“Amount of adjustment subject to uncompensated costs” – and to
the audit requirements that require states to certify that
“[o]nly the uncompensated care costs . . . are included in the
calculation of the hospital-specific limits” described in §
1396r-4(g)(1)(A)). See id. (citing 42 U.S.C. § 1396r-4(g)(1) and
§ 1396r-4(g)(1)(A)). Neither argument is persuasive.
First, although the heading of the section may “supply
cues” as to Congress’ intent, Yates v. United States, 135 S. Ct.
1074, 1083 (2015), a reviewing court must “place[] less weight
on captions” than on statutory text, Lawson v. FMR LLC, 134 S.
Ct. 1158, 1169 (2014). In Lawson, the defendant pointed to two
statutory headings that read, in relevant part, “Protection for
Employees of Publicly Traded Companies” to argue that the
statutory provisions were limited to “employees of public
companies.” Id. Rejecting this conclusion, Justice Ginsburg
explained that other aspects of the statute made it “apparent”
that the statutory headings were “under-inclusive[].” Id.
38

Accordingly, the headings were nothing more than “a short-hand
reference to the general subject matter of the provision, not
meant to take the place of the more detailed provisions of the
text.” Id. (citation and internal quotation marks omitted). So
here too. While the heading of the section at issue refers to
“uncompensated costs,” the statutory text indicates precisely
which payments Congress intended to be subtracted to derive a
hospital’s costs. Consequently, the Court will not rely on the
provision’s heading to alter the plain meaning of the statutory
text.
Second, the legislative history belies defendants’ argument
with respect to the language used in the audit provision. This
is because the summary of the law contained in the Conference
Report reiterates the statutory definition of uncompensated care
costs – i.e., “the costs of providing inpatient and outpatient
services to Medicaid and uninsured patients at that hospital,
less payments received from or on behalf of Medicaid and
uninsured patients.” H.R. Conf. Rep. 108-391, 808, reprinted at
2003 U.S.C.C.A.N. 1808, 2160 (emphasis added). Moreover, as
plaintiffs point out, the auditor-reporting protocol makes clear
that “Medicaid IP/OP hospital costs (including Medicaid managed
care costs) must be measured against Medicaid IP/OP revenue
received for such services” in determining the existence of a
Medicaid shortfall. Pls.’ Mem. at 21 (citing General DSH Audit
39

and Rep. Protocol, CMS-2198-F), ECF No. 12-1. Again, neither the
legislative history not the auditor-reporting protocol mention
exclusion of third-party payments.
(3)

Legislative History

The legislative history accompanying the amendment setting
hospital-specific limits demonstrates that Congress intended to
ensure hospitals providing inpatient services to a
disproportionate share of “Medicaid and other low-income
patients with special needs” were receiving DSH payments. H.R.
Rep. No. 103-213, at 211 (1993), reprinted in 1993 U.S.C.C.A.N.
378, 538. Congress noted two concerns that prompted the
amendment, neither of which are relevant here.
First, Congress was “concerned by reports that some States
[we]re making DSH payment adjustments to hospitals that do not
provide inpatient services to Medicaid beneficiaries.” Id.
According to the Committee, the purpose of the supplemental
payments was “to assist those facilities with high volumes of
Medicaid patients in meeting the costs of providing care to the
uninsured patients that they serve, since th[ose] facilities
[we]re unlikely to have large numbers of privately insured
patients through which to offset their operating losses on the
uninsured.” Id. Thus, Congress prohibited states from
designating a hospital as a disproportionate-share hospital
eligible for supplemental Medicaid funds unless “at least 1
40

percent of the facility’s inpatient days [we]re attributable to
Medicaid patients.” Id. Here, both parties agree that plaintiffs
“treat an extremely high percentage of Medicaid patients” and
“are deemed DSH hospitals that are eligible to receive DSH
payments.” Defs.’ Opp. at 24; Pls.’ Mem. at 23-24.
Second, Congress was also concerned by “reports that some
States have made DSH payment adjustments to State psychiatric or
university hospitals in amounts that exceed the net costs, and
in some instances the total costs, of operating the facilities.”
H.R. Rep. No. 103-213, at 211. Those excess Medicaid DSH
payments were then “transferred to the State general fund, where
they may be used to fund public health or mental health
services, to draw down more Federal Medicaid matching funds, or
to finance other functions of State government, such as road
construction and maintenance.” Id. at 211-212. Such use of
federal Medicaid funds was, according to Congress, “a clear
abuse of the program.” Id. at 212. Here, there is no indication
that plaintiffs are transferring DSH funds to “finance other
functions of State government”; accordingly, this concern is
also irrelevant to the Court’s analysis.
B. The Proper Remedy is Vacatur.
Defendants assert that, should the Court find the Final
Rule invalid, “the appropriate remedy would be to set aside the
Final Rule as it applies to Plaintiffs.” Defs.’ Opp. at 32 n.11,
41

ECF No. 15. According to defendants, because “‘litigation is
conducted by and on behalf of the individual named parties
only,’” any remedy should be limited to “‘provid[ing] complete
relief to the plaintiff[s]’” only. Id. (quoting Califano v.
Yamasaki, 442 U.S. 682, 700-701 (1979)).
Under the APA, a court must “hold unlawful and set aside
agency action” that is found to be “in excess of statutory
jurisdiction, authority or limitations, or short of statutory
right.” 5 U.S.C. § 706(2)(C) (emphasis added). Accordingly,
“‘[w]hen a reviewing court determines that agency regulations
are unlawful, the ordinary result is that the rules are vacated
– not that their application to the individual petitioners is
proscribed.’” Nat’l Min. Ass’n v. U.S. Army Corps of Eng’rs, 145
F.3d 1399, 1409 (D.C. Cir. 1998) (quoting Harmon v. Thornburgh,
878 F.2d 484, 495 n. 21 (D.C. Cir. 1989)). In National Mining
Association, the district court invalidated a Corps of Engineers
regulation and entered an injunction prohibiting the Corps and
the Environmental Protection Agency from enforcing the
regulation nationwide. 145 F.3d at 1408. The D.C. Circuit upheld
that nationwide application, notwithstanding the fact that nonparties to the litigation would specifically be affected. Id. at
1409-10.
Defendants argue that vacatur is particularly inappropriate
here given that “other federal district judges are considering
42

the questions that are at issue in this case,” and an order
vacating the Final Rule here “would effectively prevent those
other courts from reaching their own decisions.” Defs.’ Opp. at
32 n.11. But in National Mining Association, the D.C. Circuit
addressed this very argument, pointing out that a District of
Columbia court’s “refusal to sustain a broad injunction is
likely merely to generate a flood of duplicative litigation”
given that venue is often proper in this court for challenges to
agency actions. 145 F.3d at 1409. Accordingly, some diminishment
in the scope of the “non-acquiescence doctrine” was “an
inevitable consequence of the venue rules in combination with
the APA’s command that rules ‘found to be . . . in excess of
statutory jurisdiction’ shall be not only ‘h[e]ld unlawful but
‘set aside.’” Id. at 1410.
Defendants further contend that, even if vacatur of an
unlawful regulation is the “ordinary result,” it need not always
be required. Defs.’ Summ. J. Reply at 17 n.9, ECF No. 21. The
Court agrees that “[a]n inadequately supported rule . . . need
not necessarily be vacated.” Allied-Signal, Inc. v. U.S. Nuclear
Regulatory Comm’n, 988 F.2d 146, 150–51 (D.C. Cir. 1993).
Rather, “[t]he decision whether to vacate depends on ‘the
seriousness of the [regulation’s] deficiencies (and thus the
extent of doubt whether the agency chose correctly) and the
disruptive consequences of’” vacatur. Id. (quoting International
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Union, UMW v. FMSHA, 920 F.2d 960, 967 (D.C. Cir. 1990)); see
also Humane Soc’y of the United States v. Jewell, 76 F. Supp. 3d
69, 136 (D.D.C. 2014) (“The law in this Circuit directs
consideration of two principal factors in deciding whether to
vacate a flawed agency action: (1) the seriousness of the . . .
deficiencies’ of the action, that is, how likely it is the
[agency] will be able to justify its decision on remand; and (2)
the disruptive consequences of vacatur.”) (citations and
internal quotation marks omitted).
Here, application of these factors militates strongly in
favor of vacatur.
First, the Final Rule’s deficiency is not merely
procedural; rather, as explained above, the Court finds that the
agency acted outside of the scope of its statutory authority
under the Medicaid Act. Thus, this is not a case where the
agency could conceivably “be able to substantiate its decision
on remand.” Allied-Signal, 988 F.2d at 151. To the contrary,
“the agency cannot arrive at the same conclusions reached in the
Final Rule because the actions taken were not statutorily
authorized.” Humane Soc’y, 76 F. Supp. 3d at 137.
Second, the Court concludes that it is unlikely that
vacating the rule would have “disruptive consequences” given
that the Final Rule only became effective on June 2, 2017 – and
given that defendants were already previously enjoined from
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enforcing the policies underlying the Final Rule as embodied in
their FAQs. Accordingly, vacatur of the Final Rule is the
appropriate remedy in this matter.
V.

CONCLUSION
Accordingly, for the reasons set forth in this Memorandum

Opinion, plaintiffs’ motion for summary judgment is GRANTED, and
defendants’ motion for summary judgment is DENIED. The Final
Rule promulgated by CMS, published at 82 Fed. Reg. 16114, 16117,
is VACATED. Defendants’ motion to strike is GRANTED. Plaintiffs’
motions for a preliminary injunction and for a hearing are
DENIED AS MOOT. An appropriate Order was entered on March 2,
2018.
SO ORDERED.
SIGNED:

Emmet G. Sullivan
United States District Judge
March 6, 2018

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