New Hampshire Hospital Association et al v. US Department of Health and Human Services, Secretary et al

Filing 31

ORDER granting 10 Motion for Preliminary Injunction. So Ordered by Judge Landya B. McCafferty.(gla)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE

New Hampshire Hospital
Association, et al.
v.

Civil No. 15-cv-460-LM
Opinion No. 2016 DNH 053

Sylvia Matthews Burwell
et al.
O R D E R
Several New Hampshire hospitals1 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

Plaintiff hospitals are Mary Hitchcock Memorial Hospital
(“Mary Hitchcock”), LRGHealthcare, Speare Memorial Hospital
(“Speare”), and Valley Regional Hospital, Inc. (“Valley
Regional”).
1

reasons that follow, plaintiffs’ motion for preliminary
injunction is granted.
Background
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].”
448 U.S. 297, 301 (1980).

Harris v. McRae,

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.

2

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 lowincome patients.”

Va., Dep’t of Med. Assistance Servs. v.

Johnson, 609 F. Supp. 2d 1, 3 (D.D.C. 2009).

3

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).2
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

The increased payments made to disproportionate-share
hospitals are referred to as “DSH payments.”
2

4

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.3
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

The parties often refer to the portion of § 1396r-4(g)(1)
dealing with the costs of furnishing hospital services to
Medicaid-eligible patients as the “Medicaid Shortfall.”
3

5

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.”
447.299(c).

42 C.F.R. §

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
6

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-andreimbursement/downloads/additionalinformationonthedshreporting.p
df (last visited March 11, 2016).

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)4 does not contain an
exclusion for individuals eligible for Medicaid and
also enrolled in private health insurance. Therefore,
4

Section 1923 is the same as § 1396r-4.
7

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.
Id.
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.
8

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.

9

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.
id., Ex. Q (doc. no. 10-25).

See

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.
nos. 10-24 and 10-25.

See doc.

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.
Decl., Ex. R (doc. no. 10-26).

See Galdieri

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.

10

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.5

On February 18, 2016, the court held an evidentiary

hearing, during which the court heard oral argument and
plaintiffs submitted evidence.

Defendants have also moved to dismiss the complaint, and
the motion is ripe for the court’s consideration. The court
does not address that motion in this order.
5

11

Discussion
“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).6

Plaintiffs’ claims arise under the APA, which sets forth
standards a court may employ when considering a request for a
stay of administrative action. See 5 U.S.C. § 705. Here,
plaintiffs have moved for a preliminary injunction, rather than
a motion for stay under the APA. Regardless, “[c]ourts use the
same standard to decide applications for stays of administrative
action as for preliminary injunction determinations.” First
Premier Bank v. U.S. Consumer Fin. Protection Bureau, 819 F.
Supp. 2d 906, 912 (D.S.D. 2011).
6

12

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
13

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 satisfy itself as to its jurisdiction,
including a plaintiff’s Article III standing to sue, before
addressing his particular claims . . . .”).
A.

Standing
“Article III of the Constitution limits the jurisdiction of

federal courts to ‘Cases’ and ‘Controversies.’”

Susan B.

Anthony List v. Driehaus, 134 S. Ct. 2334, 2341 (2014) (quoting
U.S. Const., Art. III, § 2).

“The doctrine of standing gives

meaning to these constitutional limits by ‘identify[ing] those
disputes which are appropriately resolved through the judicial
process.’”

Id. (quoting Lujan v. Defenders of Wildlife, 504

U.S. 555, 560 (1992)).

To establish Article III standing, “a

plaintiff must show (1) it has suffered an ‘injury in fact’ that
is (a) concrete and particularized and (b) actual or imminent,
not conjectural or hypothetical; (2) the injury is fairly
traceable to the challenged action of the defendant; and 3) it
is likely, as opposed to merely speculative, that the injury
will be redressed by a favorable decision.”

14

Friends of the

Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167,
180-81 (2000).7
Defendants argue that the harm plaintiffs allege they will
suffer in this case—harm from potential recoupment of past DSH
overpayments and harm from reduction in prospective DSH
payments—is not fairly traceable to federal policy or likely to
be redressed by a favorable decision.
“When the suit is one challenging the legality of
government action or inaction . . . [and] a plaintiff’s asserted
injury arises from the government’s allegedly unlawful
regulation (or lack of regulation) . . . of someone else, . . .
causation and redressability ordinarily hinge on the response of
the regulated . . . third party to the government action.”
Lujan, 504 U.S. at 561-62.

In that case, “it becomes the burden

of the plaintiff to adduce facts showing that those choices have
been or will be made in such manner as to produce causation and
permit redressability of injury.”

Id. at 562.

Standing may be

established in such situations “where the record presents

Plaintiffs contend that they have both substantive
standing, because of their injuries arising out of the
recoupment and prospective loss of DSH funding, and procedural
standing, because of defendants’ failure to afford plaintiffs
the right to notice-and-comment under the APA. Regardless of
whether the injury is procedural or substantive, plaintiffs must
meet the same standard. See, e.g., U.S. Women’s Chamber of
Commerce v. U.S. Small Bus. Admin., No. 1:04-CV-01889, 2005 WL
3244182, at *13 (D.D.C. Nov. 30, 2005).
7

15

substantial evidence of a causal relationship between the
government policy and the third party conduct, leaving little
doubt as to causation and likelihood of redress.”

Constitution

Party of Penn. v. Aichele, 757 F.3d 347, 366 (3d Cir. 2014)
(citation and alteration omitted).
1.

Recoupment of Past DSH Overpayments

Plaintiffs argue that the audit of their DSH payments for
Fiscal Year 2011 revealed that plaintiff hospitals were overpaid
because the auditors followed the policies set forth in FAQs 33
and 34.

They contend, therefore, that the recoupment of past

DSH overpayments based on the audit is directly traceable to the
policies in FAQs 33 and 34.

They further argue that no

recoupment would be required if defendants were enjoined from
enforcing the policies.
Defendants contend that when, as here, a DSH audit reveals
an overpayment to a hospital, the recoupment of that overpayment
is in the hands of state authorities and subject to state law.
Defendants argue that, as such, an injunction issued against
them in this case would not bar the State of New Hampshire8 from

The New Hampshire Department of Health and Human Services
(“NHDHHS”) is the state agency charged with administration of
the Medicaid program. Therefore, NHDHHS is the entity
responsible for recouping past DSH overpayments and for making
prospective DSH payments to plaintiff hospitals.
8

16

recouping funds from plaintiff hospitals and redistributing them
to other DSH hospitals.

They contend, therefore, that,

plaintiffs’ injury in the form of NHDHHS’s recoupment of past
DSH payments is not fairly traceable to the policies in FAQs 33
and 34, and is not likely to be redressed by any action against
them.
There is no doubt that the recoupment of past DSH payments
by NHDHHS is fairly traceable to defendants’ enforcement of the
policies in FAQs 33 and 34.

Defendants do not meaningfully

dispute that (i) NHDHHS is set to recoup past DSH payments for
Fiscal Year 2011 from plaintiff hospitals; and (ii) it will
recoup those payments because its audit revealed overpayments to
those hospitals based on the policies in FAQs 33 and 34.
Therefore, plaintiffs’ injury is fairly traceable to defendants’
conduct that is challenged in this case.9

See Nat’l Wrestling

Coaches Assoc. v. Dep’t of Educ., 383 F.3d 1047, 1049 (D.C. Cir.
2004) (Plaintiffs could show causation “if they could show that
the agency’s allegedly illicit action was a substantial factor

Under the Medicaid Act, the federal government cannot
compel states to recoup funds from disproportionate-share
hospitals in the event of an overpayment. Rather, in those
circumstances, the federal government adjusts the amount paid to
the states one year after the overpayment is discovered. See 42
U.S.C. § 1396b(d)(2)(C). As discussed below, however, evidence
in the record establishes that NHDHHS is set to recoup DSH
overpayments revealed in the Fiscal Year 2011 audit from
plaintiff hospitals.
9

17

in bringing about the injurious conduct of the third parties.”)
(internal quotation marks and citation omitted); see also Wine &
Spirits Retailers, Inc. v. Rhode Island, 418 F.3d 36, 45 (1st
Cir. 2005) (“The requirement that an alleged injury be fairly
traceable to the defendant’s action does not mean that the
defendant’s action must be the final link in the chain of events
leading up to the alleged harm.”).
The same is true for redressability.

Defendants argue that

plaintiffs’ injury in the form of recoupment of past DSH
overpayments is not redressable because even if the court grants
plaintiffs’ motion for preliminary injunction, NHDHHS could
still recoup funds from plaintiff hospitals and redistribute
them to other DSH hospitals.

While that may be true in a

literal sense, it defies logic to believe that NHDHHS would take
action pursuant to federal policies which defendants would be
enjoined from enforcing.

In other words, if FAQs 33 and 34 are

unenforceable, then the audit of Fiscal Year 2011 based on FAQs
33 and 34 is no longer accurate.

Defendants offer no

explanation as to why NHDHHS would still attempt to recoup nonexistent overpayments.
In addition, defendants’ argument is belied by the evidence
in this case.

Plaintiffs attached as an exhibit to their motion

a letter dated March 3, 2015, from Kathleen Dunn, the Associate
Commissioner of NHDHHS, to Franklin Regional Hospital,
18

LRGHealthcare’s critical access hospital.
Ex. N (doc. no. 10-22).

See Galdieri Decl.,

In the letter, Dunn refers to the

preliminary injunction issued against defendants in Texas
Children’s Hosp., enjoining the enforcement of FAQ 33.

Dunn

notes that NHDHHS “has and will continue to seek guidance from
CMS on its policy response to this court order.”

Id. at 2.

She

also states that because NHDHHS does not need to take recoupment
actions until the middle of Fiscal Year 2016, it will not “take
any recoupment actions on these DSH payment audit results at
this time,” and she expects that before recoupment actions must
be taken, “a clear federal policy on this issue will have been
issued in accordance with federal reviewing court decisions.”
Id.

Dunn’s letter demonstrates that NHDHHS will act in

accordance with CMS’s guidance as to the enforcement of the
policies in FAQs 33 and 34, which will be directly affected by
the court’s order in this case.
In addition, at the hearing, plaintiffs submitted as an
exhibit a letter dated January 27, 2016, from Jeffrey A. Meyers,
the Acting Commissioner of NHDHHS, to Steve Ahnen, the Executive
Director of plaintiff NHHA.

The letter states, in pertinent

part:
If your request for injunctive relief [in this case]
is granted, it is our view that NHDHHS would not be
able to require recoupment while the injunction is in
place, or be obligated to redistribute, based on the
2011 Myers and Stauffer audit, to the extent that
19

recoupment is required due to the application by the
auditor of the principles in FAQ Nos. 33 & 34.
Ex. 1.
Further, on January 28, 2016, NHDHHS issued a “Notice of
Overpayment and Repayment Agreement” to Franklin Regional
Hospital.

Ex. 2.

The notice states that NHDHHS is proceeding

with the recoupment of DSH overpayments for the 2011 Fiscal Year
that were discovered during the audit.

Id. at 1-2.

The

Repayment Agreement references this lawsuit, and notes that, to
the extent the court grants injunctive relief, NHDHHS will not
proceed with the recoupment of funds affected by the court’s
order.10

Id. at 5.

Defendants cite Bourgoin v. Sebelius, 296 F.R.D. 15 (D. Me.
2013) in support of their argument that plaintiffs’ injury in
the form of recoupment of past DSH overpayments is not

Both Ex. 1 and Ex. 2 post-date the complaint and the
motion for preliminary injunction. Defendants argue that
plaintiffs cannot establish standing based on exhibits dated
after the date the complaint was filed, citing Lujan, 504 U.S.
at 570 n.4. Lujan holds that “the existence of federal
jurisdiction ordinarily depends on the facts as they exist when
the complaint is filed.” Id. The court, however, does not view
Lujan as precluding consideration of the exhibits. The exhibits
are not facts that establish the existence of the court’s
jurisdiction. Rather, they are evidence that such facts existed
at the time the complaint was filed. Therefore, the court
considers the exhibits in ruling on plaintiffs’ motion. As
explained above, however, even if the court did not consider the
exhibits, it would still find that plaintiffs have met the
redressability prong of the standing analysis with regard to the
recoupment of past DSH overpayments.
10

20

redressable.

In Bourgoin, the district court held that Medicaid

beneficiaries did not have standing to sue the federal
government based on their theory that a ruling against the
federal government would induce the state of Maine, which was
not a party, to provide the benefits they sought.

Id. at 29-30.

Bourgoin is not dispositive on the issue of standing in this
case.

In Bourgoin, the court noted several “plausible

arguments” that Maine would not be affected by the court’s order
against the federal government, “and it would be surprising if
the State did not press these arguments.”

Id. at 29.

Here, in

contrast, defendants fail to put forth any argument—much less a
plausible one—suggesting that NHDHHS would still recoup funds if
the court issued an injunction.

Moreover, plaintiffs have

submitted evidence showing that NHDHHS would forego recoupment
in the face of an injunction in this case.11
In sum, plaintiffs have shown that defendants’ enforcement
of FAQs 33 and 34 has a sufficient causal connection to
plaintiffs’ injuries arising from the recoupment of past DSH
overpayments, and an injunction against defendants’ enforcement

In addition, in Bourgoin, the plaintiffs challenged a
recent amendment to Maine’s Medicaid Plan but sued only the
Secretary, on the basis that she approved the amendment. Thus,
the plaintiffs’ injuries in that case were far less traceable to
the Secretary’s actions than in this case, and were likely not
redressable by a favorable decision.
11

21

of the FAQs would likely redress plaintiffs’ injuries in that
regard.
2.

Reduction in Prospective DSH Payments

Defendants contend that any reduction in prospective DSH
payments is not traceable to federal policy, because prospective
payments are governed by a settlement agreement between the New
Hampshire state government and New Hampshire hospitals,
including plaintiffs, which resolved lawsuits over the
implementation of the New Hampshire Medicaid plan.12

Defendants

argue that plaintiffs’ voluntary decision to enter into the
settlement agreement precludes them from claiming they are
injured by the federal standards that are incorporated into the
agreement.
Defendants’ argument is without merit.

It is true that the

settlement agreement changed New Hampshire’s DSH program
beginning in Fiscal Year 2016, and provides that DSH funding
levels are set at a specific percentage, depending on the
hospital, of a hospital’s total annual uncompensated care costs.
Defendants’ alleged conduct, however, has the effect of lowering
the calculation of total annual uncompensated care costs, which
necessarily lowers the DSH funding levels.

Therefore,

Unlike the recoupment of DSH overpayments, defendants do
not argue lack of redressability from the reduction in
prospective DSH payments.
12

22

plaintiffs have shown that there is a causal relationship
between defendants’ enforcement of the policies in FAQs 33 and
34 and the reduction in prospective DSH payments.
Defendants cite Pennsylvania v. New Jersey, 426 U.S. 660
(1976) (per curiam) for the proposition that plaintiffs’ injury
is self-inflicted and, therefore, not traceable to defendants’
conduct.

In Pennsylvania, the Supreme Court held that the

plaintiff states lacked standing to contest the defendant
states’ laws taxing a portion of nonresidents’ incomes.

The

plaintiffs alleged that the defendants’ taxes injured them
because the plaintiffs gave their residents credits for taxes
paid to other states, and the defendants’ taxes increased the
amount of those credits, causing the plaintiffs to lose revenue.
Id. at 663.

The Supreme Court noted that “[t]he injuries to the

plaintiffs’ fiscs were self-inflicted . . . and nothing prevents
[plaintiffs] from withdrawing [the] credit for taxes paid to
[defendant states].”

Id. at 664.

Here, defendants’ change to

the calculation of total annual uncompensated care costs would
have injured plaintiffs regardless of the settlement agreement,
because it would have materially lowered the yearly DSH payment.
In other words, unlike the plaintiffs in Pennsylvania,
plaintiffs in this case would be adversely affected by
defendants’ policies regardless of the settlement agreement.

23

To illustrate how defendants’ argument does not withstand
scrutiny, imagine a family of four children.

Each year, the

parents buy the children a pie to share from the same bakery.
After an argument, the children and parents agree that each
child will be entitled to exactly 25% of the pie.

Without

warning and without lowering the price, the bakery reduces the
size of the pie significantly.

Under defendants’ theory, the

children’s injury—a much smaller portion of the pie than usual—
has not been caused by the bakery, but instead is “selfinflicted,” because they agreed on how to divide up the pie.
For obvious reasons, that argument fails.
Accordingly, plaintiffs have met their burden to show a
likelihood of causation and redressability.

Therefore,

plaintiffs have shown a likelihood of standing.13
B.

Claims
Plaintiffs’ motion seeks a preliminary injunction on Counts

I-III of their complaint.

Although each count represents a

separate challenge to defendants’ actions, all allege that
defendants’ enforcement of the policies in FAQs 33 and 34
violate the APA.

At its center, plaintiffs’ likelihood of

Defendants do not dispute that if plaintiff hospitals
have standing, the NHHA has standing as well. See, e.g.,
Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc.,
528 U.S. 167, 180-81 (2000).
13

24

success on the merits turns on a single question: Do the
directives contained in FAQs 33 and 34 substantively alter the
obligations established in the Medicaid Act and the 2008 Rule?
If plaintiffs show that the answer to that question is likely
yes, then defendants have likely violated the APA.

If they do

not, then defendants have likely not violated the APA.
Under the APA, a court must “hold unlawful and set aside
agency action, findings, and conclusions” that are “in excess of
statutory jurisdiction, authority, or limitations, or short of
statutory right,” 5 U.S.C. § 706(2)(C), “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with
law,” id. § 706(2)(A), or “without observance of procedure
required by law,” id. § 706(2)(D).

Plaintiffs assert that

defendants’ implementation and enforcement of the policies in
FAQs 33 and 34 violate all three sections of the APA.

Although

the standard of review for challenges under the sections
“overlap, they are not identical.”

Individual Reference Servs.

Grp., Inc. v. F.T.C., 145 F. Supp. 2d 6, 25 (D.D.C. 2001).
Therefore, in the interest of clarity, the court will address
plaintiffs’ challenges according to the manner in which
plaintiffs organized them: first, with respect to their
challenge that the policies in FAQs 33 and 34 conflict with the
plain language of the Medicaid Act in violation of § 706(2)(C)
and, then, whether defendants’ actions had to be, but were not,
25

subject to notice-and-comment rulemaking under §§ 706(2)(A),
(D).
1.

FAQS 33 and 34 Violate the Medicaid Act

Plaintiffs contend that the policies in FAQs 33 and 34
violate § 706(2)(C) of the APA because they conflict with the
unambiguous language of the Medicaid Act.
4(g)(1)(A).

See § 1396r-

Defendants argue that FAQs 33 and 34 do not

conflict with the Medicaid Act, and instead represent a
“reasonable interpretation of the statute entitled to deference”
under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837 (1984).”14

Obj. (doc. no. 17) at 29 of 53.

A court considering whether to defer to an administrative
construction of a statute must follow the two-step inquiry set
forth by the Supreme Court in Chevron.

“First, [courts] look to

the statute to ascertain whether ‘Congress has directly spoken
to the precise question at issue.’”

Santana v. Holder, 731 F.3d

50, 55 (1st Cir. 2013) (quoting Chevron, 467 U.S. at 842).

“If

the statute is clear in its meaning, [courts] must ‘give effect
to the unambiguously expressed intent of Congress.’”
(quoting Chevron, 467 U.S. at 842–43).

Id.

In determining if

The parties agree that claims brought under § 706(2)(C)
are analyzed under the Chevron framework. See, e.g.,
AstraZeneca Pharm. LP v. Food and Drug Admin., 872 F. Supp. 2d
60, 77 (D.D.C. 2012).
14

26

Congress has spoken on the relevant question, courts use all
appropriate tools of statutory interpretation.

See id.

Only if

Congress’s intent remains unclear after deploying these tools
does the court move to “step two.”

Id.

“At Chevron’s second

step, the inquiry focuses on ‘whether the agency’s answer is
based on a permissible construction of the statute.’”
(quoting Chevron, 467 U.S. at 843).

Id.

The court “defer[s] to the

agency’s interpretation unless that interpretation is
unreasonable.”

Lovgren v. Locke, 701 F.3d 5, 31 (1st Cir.

2012); see also Saysana v. Gillen, 590 F.3d 7, 13 (1st Cir.
2009).
a.

Step One under Chevron

As discussed above, the Medicaid Act defines the hospitalspecific DSH limit in § 1396r-4(g)(1).

The section defines the

Medicaid Shortfall, in relevant part, as follows:
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 . . .) by the hospital to
individuals who . . . are eligible for medical
assistance under the State [Medicaid] plan . . . for
services provided during the year.
Id. (emphasis added).

The unambiguous language of § 1396r-

4(g)(1) provides that the payments which are to be subtracted
from Medicaid costs in calculating the Medicaid Shortfall are

27

“payments under this subchapter . . . .”15

Defendants do not

argue that payments from private health insurance or Medicare
are “payments under this subchapter” for purposes of § 1396r4(g)(1).

Therefore, because the language defining the payments

that are to be deducted from costs is unambiguous, and that
language does not include payments from private health insurance
or Medicare, defendants’ interpretation of the Medicaid Act
appears to fail at step one of Chevron’s analytical framework.
To avoid the plain language of the statute, defendants
craft a novel argument: that payments from private health
insurance and Medicare should be considered in the definition of
the term “costs,” rather than in the definition of the phrase
“net of payments under this subchapter.”

Defendants argue that

§ 1396r-4(g)(1) specifically grants the Secretary discretion in
interpreting the term “costs,” and, therefore, the court should
proceed to step two of Chevron’s framework.
The court agrees that the language of § 1396r-4(g)(1)
grants the Secretary the authority to determine the meaning of
the term “costs.”

The Medicaid Act states that the “costs” to

be included in the calculation of the hospital-specific DSH
limit are costs “as determined by the Secretary.”

§ 1396r-

The term “subchapter” refers to Subchapter XIX (Grants to
States for Medical Assistance Programs) of Chapter 7 of Title 42
of the U.S. Code, which is the Medicaid Act, codified at 42
U.S.C. §§ 1396 - 1396w-5.
15

28

4(g)(1).

The use of the phrase “as determined by the Secretary”

shows that “Congress has provided ‘an express delegation of
authority to the agency to elucidate a specific provision of the
statute by regulation.’”

Transitional Hosps. Corp. of La., Inc.

v. Shalala, 222 F.3d 1019, 1026 (D.C. Cir. 2000) (quoting
Chevron, 467 U.S. at 843-44).

“This . . . takes the case out of

the realm of Chevron step one’s de novo review, and into the
realm of Chevron step two—which asks only whether the agency’s
interpretation is reasonable.”

Id.; see also San Bernadino

Mountains Cmty. Hosp. Dist. v. Sec’y of Health & Human Servs.,
63 F.3d 882, 886-87 (9th Cir. 1995).
Therefore, the court will proceed to step two of Chevron’s
analysis on the question of the Secretary’s interpretation of
the term “costs” as used in § 1396r-4(g)(1).

Thus, the court

asks only whether the Secretary’s interpretation of the term
“costs” to mean “unreimbursed costs” is reasonable.
b.

Step Two under Chevron16

The Medicaid Act calculates the Medicaid Shortfall by using
the following straightforward equation:
Medicaid Costs – Medicaid Payments = Medicaid Shortfall

In plaintiffs’ objection to defendants’ motion to
dismiss, which they incorporate into their reply to defendants’
objection to their motion for preliminary injunction, plaintiffs
argue that the court should not engage in step two of Chevron’s
analysis because the Secretary’s interpretation of the Medicaid
16

29

As just mentioned, the Act specifically defines the “payments”
that are to be subtracted from the “costs” to obtain the
Medicaid Shortfall.

The defined payments do not include

payments from private insurance or Medicare.

Nevertheless,

defendants argue that, for several reasons, an interpretation of
“costs” to include payments from private health insurance and
Medicare is reasonable.
i.

Costs can mean unreimbursed or uncompensated
costs

Defendants urge an interpretation of the Medicaid Shortfall
that defines the term “costs” as “unreimbursed” or
“uncompensated” costs.

In other words, defendants contend that

the following interpretation of the Medicaid Shortfall equation
is reasonable:
(Medicaid Costs – Payments) – Medicaid Payments = Medicaid
Shortfall

Act in FAQs 33 and 34 was not promulgated in the exercise of her
authority to make rules that carry the force of law. See United
States v. Mead Corp., 533 U.S. 218, 226-27 (2001). Plaintiffs
argue that to the extent the Secretary’s interpretation survives
Chevron’s first step, it should be analyzed under Skidmore v.
Swift & Co., 323 U.S. 134 (1944), which would give it, at best,
only some “weight.” Rather than devoting pages to explaining
the intricacies of the various levels of deference that can be
afforded an agency’s interpretation of its governing statute,
the court will assume without deciding that the higher level of
deference under Chevron’s second step applies.
30

That interpretation is unreasonable and is not entitled to
deference.

Defendants’ reading of the Medicaid Act would double

count Medicaid payments—first as reimbursements or compensation
to be subtracted to determine the “costs” figure, and then again
as payments specifically set forth in the statute to be
subtracted from the overall costs figure.
Hosp., 76 F. Supp. 3d at 237-38.

Cf. Texas Children’s

Therefore, that interpretation

“exceeds the bounds of the permissible.”

Barnhart v. Walton,

535 U.S. 212, 218 (2002).
ii.

Costs means costs less payments from private
insurance and Medicare

Perhaps recognizing the futility of that interpretation,
defendants appear to urge another reading of the term “costs,”
which would capture only payments from private insurance and
Medicare, but not Medicaid payments.

Thus, defendants appear to

urge the following alternative interpretation of the Medicaid
Shortfall equation:
(Medicaid Costs – Payments other than Medicaid Payments) –
Medicaid Payments = Medicaid Shortfall
Although that interpretation would not double count Medicaid
payments, it is also unreasonable.

The 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
31

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.
See TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (“It is ‘a
cardinal principle of statutory construction’ that ‘a statute
ought, upon the whole, to be so construed that, if it can be
prevented, no clause, sentence, or word shall be superfluous,
void, or insignificant.’”) (quoting Duncan v. Walker, 533 U.S.
167, 174 (2001)).
iii. Costs is a flexible term
Defendants assert that “costs,” as used in § 1396r-4(g)(1),
is a “flexible term,” which gives an agency “broad
methodological leeway” to interpret the definition.

An agency

gets such broad leeway, however, when the term “costs” stands
“without any better indication of meaning than the unadorned
term.”

Verizon Comm’ns Inc. v. FCC, 535 U.S. 467, 500 (2002).

Here, although § 1396r-4(g)(1) does not define the term “costs,”
it provides that the “costs” must be offset against certain
defined payments.

Therefore, at a minimum, Congress gave the

indication that “costs” does not include “payments,” and the
Secretary is not afforded “leeway” to interpret the term
otherwise.

32

In addition, this is not a case where, as in the cases
cited by defendants, the Secretary is simply altering the
methodology used to determine “costs.”

See id. at 500-501

(discussing whether the term “costs” should be calculated as
rates set on a forward-looking basis or those tied to historical
investment under the Telecommunications Act); Am. Elec. Power
Serv. Corp. v. FCC, 708 F.3d 183, 189 (D.C. Cir. 2013) (holding
that the Federal Communications Commission reasonably
reformulated pole attachment rates that utilities could charge
telecommunications carriers in order to achieve equivalency with
rate charged to cable television systems).

Instead, the

Secretary here is defining “costs” in a way that would render
superfluous the specific payments defined as offsets in the
statute.

See TRW Inc., 534 U.S. at 31.
iv.

Consistent interpretation

Defendants argue that the Secretary has been consistent in
her adherence to the interpretation of the term “costs” as set
forth in FAQs 33 and 34, which, they contend, supports their
claim that the interpretation is reasonable.

In support,

defendants cite select portions of the Preamble to the 2008
Rule.

For example, defendants point to the following language:
[T]he costs attributable to dual eligibles should be
included in the calculation of the uncompensated costs
of serving Medicaid eligible individuals. But in
calculating those uncompensated care costs, it is
33

necessary to take into account both the Medicare and
Medicaid payments made, since those payments are
contemplated under Title XIX.
73 Fed. Reg. 77912.

Defendants are correct that this language

is consistent with the Secretary’s interpretation of FAQ 34.
Other language in the Preamble, however, is not consistent
with the Secretary’s interpretation.

For example, the Preamble

discusses the “reporting form” which contains the “necessary
data elements to fulfill the audit and reporting requirements.”
Id. at 77921.

It states:

The data element referring to “Total Annual
Uncompensated Care Costs” represents the total amount
of unreimbursed care to be considered under the
hospital-specific DSH limit. This figure is the
result of summing “Total Cost of Care Medicaid IP/OP
Services” and “Total Cost of IP/OP for uninsured” and
then subtracting “Total Medicaid IP/OP Payments” and
“IP/OP Uninsured Revenues,” and “Total Applicable
Section 1011 Payments.”
Id. (emphasis added).

This language instructs that the hospital

and auditor should first consider the cost of services and then,
separately, subtract certain payments.

This instruction is

consistent with the language of § 1396r-4(g)(1).

In addition,

this part of the Preamble specifically defines the payments and
revenues to be subtracted from the costs of care, and it does
not include payments from private health insurance or Medicare.
In explaining the way to calculate the hospital-specific
DSH limit, the Preamble is replete with language separating the
“costs” associated with providing hospital services to Medicaid
34

patients and the “payments” received for those services.

For

example, the Preamble states:


“[The statute] plainly identifies the limited population
[of those individuals covered], whose costs were to be
included in the calculation, and specifies offsets of
revenues associated with those costs.”

73 Fed. Reg. at

77921.


“Section 1923(j) of the Act instructs States to audit and
report specific payments and specific costs.”

Id. at

77932.


“In order to [calculate the hospital-specific DSH limit],
all applicable revenues must be offset against all
eligible costs.

For purposes of determining the hospital-

specific DSH limit, revenues would include all Medicaid
payments made to hospitals for providing inpatient and
outpatient services to Medicaid individuals . . . and all
payments made by or on behalf of patients with no source
of third party coverage for the inpatient and outpatient
hospital services they received.”

Id. at 77946.

Each of these sections of the Preamble (i) separates “costs”
from “revenues” and “payments” in calculating the hospitalspecific DSH limit, and (ii) limits the revenues and payments to
be considered to those enumerated in that section, which do not
include payments from private health insurance or Medicare.
35

Therefore, the Preamble to the 2008 Rule does not support
defendants’ contention that the Secretary has consistently
interpreted the term “costs” to include payments.17
v.

Common sense

Finally, defendants argue that common sense demonstrates
that the Secretary’s interpretation of § 1396r-4(g)(1) is
reasonable.

They argue that the Medicaid Act limits hospital-

specific DSH payments to “uncompensated costs” incurred by the
hospital in providing care to Medicaid-eligible patients.

They

contend, therefore, that it “defies logic and conflicts with the
law” to conclude that costs that are offset by private health
insurance and Medicare payments should be counted as
uncompensated costs.

Doc. no. 17 at 9 of 53.

Divorced from the language of the statute, defendants’
argument has merit.

In the end, however, that interpretation

cannot be given weight because it is directly contrary to the
plain language of § 1396r-4(g)(1).

See, e.g., Connecticut Nat’l

Bank v. Germain, 503 U.S. 249, 253-54 (1992) (noting the

Defendants also cite an August 16, 2002 letter from CMS
to State Medicaid Directors to support their contention that the
policies in FAQs 33 and 34 reflect the Secretary’s consistent
interpretation. Although the letter suggests that the Medicaid
Shortfall should consider “net of third party payments,” that
language is insufficient to overcome the overwhelming evidence
that the Secretary has not consistently interpreted the
definition of “costs” to include “payments” in § 1396r-4(g)(1).
17

36

“cardinal canon” of statutory interpretation is “that a
legislature says in a statute what it means and means in a
statute what it says there”).

Moreover, the term “uncompensated

costs” is not used in the language of the statute itself, but
rather in the caption of the statute.

See § 1396r-4(g)(1)

(titled “Amount of adjustment subject to uncompensated costs”).
“The caption of a statute . . . cannot undo or limit that which
the statute’s text makes plain.”

Intel Corp. v. Advanced Micro

Devices, Inc., 542 U.S. 241, 256 (2004) (internal quotation
marks, citation, and alteration omitted).18
vi.

Conclusion of Chevron deference

For all of the above reasons, FAQs 33 and 34 represent an
unreasonable agency interpretation of the Medicaid Act, which is
not entitled to deference under Chevron.

Therefore, plaintiffs

are likely to show that defendants acted “in excess of statutory
jurisdiction, authority . . . or short of statutory right” in
promulgating and enforcing the policies in FAQs 33 and 34.

See

§ 706(2)(C).

Moreover, the Preamble to the 2008 Rule suggests that the
use of the term “uncompensated” as it applies to the hospitalspecific DSH limit is not as broad as defendants proffer. See
73 Fed. Reg. at 77921 (“The Medicare program uses a different,
broader, definition of uncompensated care than is authorized for
purposes of the Medicaid DSH hospital-specific limit.”).
18

37

2.

FAQs 33 and 34 Alter the 2008 Rule

Plaintiffs assert that, in addition to being contrary to
the language of the Medicaid Act, FAQs 33 and 34 substantively
alter the obligations imposed by 42 C.F.R. § 447.299(c)(16) of
the 2008 Rule.

Plaintiffs contend that, as substantive rules,

the FAQs had to be, but were not, promulgated using notice-andcomment rulemaking under the APA.

They argue that the policies

referenced in FAQs 33 and 34 should be vacated pursuant to §
706(2)(A), because they are “arbitrary, capricious, an abuse of
discretion, [and] not in accordance with law.”19

Defendants

argue that the Secretary’s policies are consistent with the 2008
Rule and “the explanatory text the Secretary published in the
[Preamble] at the time she issued the regulation.”
at 38 of 53.

Doc. no. 17

They argue that the court should defer to the

policies set forth in FAQs 33 and 34 as reasonable
interpretations of the 2008 Rule.
a.

Consistency with the 2008 Rule

A plaintiff’s challenge to agency action under § 706(2)(A)
of the APA generally focuses on the agency’s decision-making
process, as opposed to the actual decision.

See, e.g., Motor

Plaintiffs argue that the Secretary’s failure to afford
them notice-and-comment rights violates §§ 706(2)(A) and (D).
As § 706(2)(A) contains a more clearly-defined standard, the
court addresses the challenges based on that section.
19

38

Vehicle Mfrs. Ass’n v. State Farm Mut. Auto Ins. Co., 463 U.S.
29, 43 (1983) (noting that under § 706(2)(A), “the agency must
examine the relevant data and articulate a satisfactory
explanation for its action, including a ‘rational connection
between the facts found and the choice made’”).

However, in an

arbitrary and capricious analysis, a court must also determine
if an agency’s construction of its own regulation “is plainly
erroneous or inconsistent with the regulation.”

Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (internal
quotation marks omitted); see also Auer v. Robbins, 519 U.S.
452, 458-59 (1997).

Although an agency’s interpretation of its

own regulation is due “substantial deference,” the court will
overturn the interpretation if an “alternative reading is
compelled by the regulation’s plain language or by other
indications of the Secretary’s intent at the time of the
regulation’s promulgation.”

Thomas Jefferson Univ., 512 U.S. at

512 (internal quotation marks omitted).
The APA standard gives CMS even greater deference than
Chevron.

Nevertheless, even applying heightened deference, the

Secretary’s interpretation of the 2008 Rule is plainly
erroneous.

Section 447.299(c)(16), which provides the proper

calculation of the hospital-specific DSH limit for auditing
purposes, states as follows:

39

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 . . . .
42 C.F.R. § 447.299(c)(16) (emphasis added).

The Rule further

defines each payment to be subtracted from the cost of care, and
does not mention private insurance or Medicare.
Defendants again argue that it is reasonable to interpret
the term “cost” in § 447.299(c)(16) as “unreimbursed” or
“uncompensated” cost.

As discussed above, that interpretation

of the term “cost” with respect to the Medicaid Act is
unreasonable.

The Preamble states several times that the 2008

Rule does not alter the calculation of the hospital-specific DSH
limit as established in the Medicaid Act.

See 73 Fed. Reg. at

77907 (“Moreover, the [2008] rule does not substantively change
the standards for DSH payments, or for the review of hospitalspecific limits on such payments.”); id. at 77921 (“[T]his
regulation does not change the underlying statutory requirements
for DSH payments.”); id. at 77906 (“This regulation does not
alter any of the substantive standards regarding the calculation
of hospital costs.”).

Therefore, defendants’ argument with

respect to the Secretary’s interpretation of the 2008 Rule is
unavailing for the same reasons the court rejected their
40

arguments under Chevron.

See New York State Bar Ass’n v.

F.T.C., 276 F. Supp. 2d 110, 140 (D.D.C. 2003) (“The Court need
not spend much time on [the arbitrary and capricious] question
because the review of this challenge overlaps, to a large
degree, with the Court’s analysis under the second step of
Chevron.”).
In addition, at several points, the Preamble references a
“General DSH Audit and Reporting Protocol,” which CMS made
available on its website to “assist States and auditors in using
information from each source identified above to determine
uncompensated care costs consistent with the statutory
requirements.”
77936.

73 Fed. Reg. at 77921; see id. at 77930, 77931,

The Preamble states that the Protocol provides “detailed

identification of the data elements necessary to comply with
Congressional instruction on such reporting and auditing.”
at 77921.

Id.

It further states that “[t]he definitions of the data

elements track the statutory language, and do not change the
calculation that should have always been performed.”

Id.

The

Protocol does not include as “data elements” payments from
either private insurance or Medicare.
Despite the substantial deference the court must give to
CMS’s interpretation of its own regulation under the APA, the
court cannot credit defendants’ argument as to the 2008 Rule
because CMS has offered a “plainly erroneous interpretation.”
41

FAQs 33 and 34 are plainly inconsistent with § 447.299(c)(16) of
the 2008 Rule, and substantively alter the calculation of the
hospital-specific DSH limit.
b.

Notice-and-Comment

Under the APA, substantive rules are subject to notice-andcomment rulemaking, and interpretative rules are not.
§ 553.

5 U.S.C.

“A substantive rule has the force of law, while an

interpretive rule is merely a clarification or explanation of an
existing statute or rule and is issued by an agency to advise
the public of the agency’s construction of the statutes and
rules which it administers.”

La Casa Del Convaleciente v.

Sullivan, 965 F.2d 1175, 1178 (1st Cir. 1992) (internal
quotation marks and citation omitted); see also Warder v.
Shalala, 149 F.3d 73, 80 (1st Cir. 1998) (“If a rule creates
rights, assigns duties, or imposes obligations, the basic tenor
of which is not already outlined in the law itself, then it is
substantive.”).

Thus, where an agency’s “interpretation [of a

regulation] has the practical effect of altering the regulation,
a formal amendment—almost certainly prospective and after notice
and comment—is the proper course.”

United States v. Hoyts

Cinemas Corp., 380 F.3d 558, 569 (1st Cir. 2004).

42

In light of its analysis above, the court need not engage
in a lengthy discussion of plaintiffs’ APA arguments.20

FAQs 33

and 34 made substantive changes to the formula for calculating
the hospital-specific DSH limit, bind state Medicaid agencies,
and effectively amend the 2008 Rule.

See Texas Children’s

Hosp., 76 F. Supp. 3d at 236-241 (finding that FAQ. No. 33 was a
substantive rule because it had the force and effect of law,
bound state Medicaid agencies, and had the effect of amending an
existing legislative rule).

Therefore, FAQs 33 and 34 should

have been issued in accordance with the notice-and-comment
provisions of § 553.

Because they were not, plaintiffs are

likely to succeed in arguing that FAQs 33 and 34 are unlawful.
3.

Summary

Plaintiffs are likely to succeed on their claims in Count I
and Count II of their complaint.

For that reason, the court

declines to address plaintiffs’ claim in Count III that
defendants’ enforcement of the policies in FAQs 33 and 34
violate the Medicaid Act and the APA because the policies

Indeed, defendants’ objection devotes less than two pages
to plaintiffs’ notice-and-comment arguments, asserting simply
that FAQs 33 and 34 are “compatible with the applicable statute
and regulation [and, therefore,] should be analyzed as
‘interpretive’ rules . . . [which] are not subject to the
notice-and-comment requirements of the APA.” Doc. no. 17 at 43
of 53. For the reasons discussed above, the court disagrees
that FAQs 33 and 34 are merely interpretive rules, compatible
with the Medicaid Act or the 2008 Rule.
20

43

conflict with the language of the New Hampshire state plan but
were promulgated without being subject to the state plan
amendment process.
II.

Irreparable Harm
The obligation of the movant to demonstrate irreparable

harm is an important prerequisite to obtaining preliminary
injunctive relief.

Voice of the Arab World, Inc. v. MDTV Med.

News Now, Inc., 645 F.3d 26, 32 (1st Cir. 2011).

It is not

enough that the movant demonstrate the mere possibility of
irreparable harm; rather, the movant must show that, in the
absence of a temporary injunction, irreparable harm is likely.
Respect Maine PAC v. McKee, 622 F.3d 13, 15 (1st Cir. 2010).
Plaintiffs assert that defendants’ enforcement of the
policies in FAQs 33 and 34 creates irreparable economic harm
because of “(1) the imminent recoupment of millions of dollars
in DSH overpayments for [Fiscal Year] 2011 within the next
several months; and (2) substantially reduced DSH payments due
to all New Hampshire DSH hospitals on or before May 31, 2016,
and thereafter.”

Pls.’ Mem. (doc. no. 10-2) at 32.

Plaintiffs

also claim that they will suffer irreparable harm absent a
preliminary injunction because they have been deprived of their
notice-and-comment rights under the APA and the Medicaid Act.
Defendants argue that plaintiffs claim only economic harm due to

44

“temporary cash flow problems,” and that procedural violations
do not amount to irreparable harm.21
In general, “economic harm in and of itself is not
sufficient to constitute irreparable injury.”

OfficeMax Inc. v.

Cty. Qwick Print, Inc., 709 F. Supp. 2d 100, 113 (D. Me. 2010)
(internal quotation marks and citation omitted); see also Puerto
Rico Hosp. Supply, Inc. v. Bos. Sci. Corp., 426 F.3d 503, 507
(1st Cir. 2005).

“Yet, it has also been recognized that some

economic losses can be deemed irreparable.”

Vaqueria Tres

Monjitas, Inc. v. Irizarry, 587 F.3d 464, 485 (1st Cir. 2009)
(noting that economic loss can establish irreparable harm where
it threatens a substantial loss of business or revenues).

In

addition, courts have recognized that economic harm is
irreparable where no adequate remedy at law exists for a
plaintiff to recover its alleged damages.

See Rosario-Urdaz v.

Rivera-Hernandez, 350 F.3d 219, 222 (1st Cir. 2003) (“Where a
plaintiff stands to suffer a substantial injury that cannot
adequately be compensated by an end-of-case award of money
damages, irreparable harm exists.”); Itek Corp. v. First Nat’l
Bank of Boston, 730 F.2d 19, 22 (1st Cir. 1984) (“Itek’s harm is

Defendants also argue that plaintiffs cannot show that a
preliminary injunction is needed to prevent irreparable harm
because a preliminary injunction would not prevent recoupment of
payments by NHDHHS. As discussed above, that argument is
unavailing.
21

45

‘irreparable’ and warrants an injunction only if Itek has no
adequate remedy at law to reclaim money in the Ministry’s hands
that rightfully belongs to Itek.”); see also Mank ex rel.
Hannaford Health Plan v. Green, 297 F. Supp. 2d 297, 304 (D. Me.
2003) (irreparable harm exists where plaintiff could not recover
funds that it would lose to defendants absent a preliminary
injunction).
Here, absent a preliminary injunction, plaintiffs will
sustain an imminent injury.

NHDHHS will begin the recoupment

process for DSH overpayments revealed in the audit of Fiscal
Year 2011 sometime this month,22 and the funds will be
redistributed to other hospitals on March 31, 2016.
no. 15-1 at 2.

See doc.

NHDHHS will make its next DSH payment on or

before May 31, 2016, and that payment will be significantly
reduced absent a preliminary injunction.23

State agencies must recoup alleged overpayments within
one year of discovering them, 42 C.F.R. § 433.312(a), or the
federal government will recoup its share. 42 U.S.C. § 1316(a).
New Hampshire submitted its audit of Fiscal Year 2011 to CMS in
March 2015.
22

Plaintiffs estimate their lost funds as follows: Mary
Hitchcock would have to pay $3,584,099 in recoupment, and its
upcoming DSH payment will be reduced by approximately
$21,870,057, see Naimie Decl. (doc. no. 10-7) ¶¶ 15, 16;
LRGHealthcare would have to pay $1,502,015 in recoupment, and
its upcoming DSH payment will be reduced by approximately
$3,500,000, see Lipman Decl. (doc. no. 10-4) ¶¶ 22, 24, 25;
Speare would have to pay $1,595,602 in recoupment, and its
upcoming DSH payment will be reduced by approximately
$1,375,908, see McEwen Decl. (doc. no. 10-5) ¶¶ 17, 20); and
23

46

The harm plaintiffs will suffer absent a preliminary
injunction cannot be adequately redressed even if plaintiffs
ultimately succeed in the case.

A plaintiff cannot recover

money damages for an APA violation.

See, e.g., Bank of N.H. v.

United States, 115 F. Supp. 2d 214, 219 (D.N.H. 2000) (“By its
express terms, the APA does not waive the government’s sovereign
immunity with regard to claims seeking money damages.”).

Thus,

plaintiffs will be unable to recover the funds lost from the
substantially reduced prospective DSH payments.

In addition,

New Hampshire does not have a procedure for recovering DSH funds
once they have been recouped by NHDHHS and, therefore, those
funds are also unrecoverable.

See Lipman Decl. (doc. no. 10-4)

¶ 22; Wright Decl. (doc. no. 10-6) ¶ 19.24

Valley Regional would have to pay $998,898 in recoupment, and
its upcoming DSH payment will be reduced by approximately
$1,817,000, see Wright Decl. (doc. no. 10-6) ¶¶ 19, 21.
Both Lipman and Wright state in their declarations that
it is their “understanding” that the hospitals will be unable to
challenge or appeal the recoupment. They do not state where
that understanding comes from. The court has not found any
procedure which would allow plaintiff hospitals to recover
recouped DSH funds from the state of New Hampshire, and
defendants have not alerted the court to any such mechanism.
The lack of any procedure to recover DSH funds recouped by the
state of New Hampshire would be consistent with at least two
other states. See Texas Children’s Hosp., 76 F. Supp. 3d at 242
(noting the lack of procedure for recovering recouped DSH
payments in Texas and Washington). Therefore, the court credits
Lipman’s and Wright’s understanding that the recouped funds
would be unrecoverable from the state.
24

47

Plaintiffs have shown that the “harm from the challenged
conduct could not be adequately redressed with traditional legal
or equitable remedies” at the conclusion of the case.

Gonzalez

v. Wright, No. 09-cv-234-JD, 2009 WL 2982792, at *1 (D.N.H.
Sept. 10, 2009).

Therefore, plaintiffs have carried their

burden to show irreparable harm.25
III. Balance of the Equities and the Public Interest
The remaining elements required for preliminary injunctive
relief call upon the court to assess the balance of the equities
among the parties, and the public interest in the issuance of an
injunction.26
The balancing of the equities inquiry requires the court to
weigh “the hardship that will befall the nonmovant if the
injunction issues contrasted with the hardship that will befall
the movant if the injunction does not issue.”

Borinquen Biscuit

Corp. v. M.V. Trading Corp., 443 F.3d 112, 115 (1st Cir. 2006).

Because plaintiffs have shown that the harm arising out
of the recoupment of past DSH payments and reduction in
prospective DSH payments is irreparable, the court does not
address their arguments concerning the irreparable harm arising
out of their loss of notice-and-comment rights under the APA.
25

Defendants do not meaningfully dispute that if plaintiffs
have shown a likelihood of success on the merits and irreparable
harm, the remaining factors weigh in plaintiffs’ favor.
Defendants argue simply that the remaining factors weigh in
their favor because plaintiffs are not entitled to relief on the
merits of their claims.
26

48

Here, the balance of the equities weighs in plaintiffs’ favor.
Absent an injunction, the loss of funds will have a significant
adverse impact on plaintiff hospitals.

NHDHHS’s recoupment of

DSH overpayments will likely cause LRGHealthcare, Speare, and
Valley Regional, all not-for-profit corporations, to fall out of
compliance with their bond covenants.

LRGHealthcare and Valley

Regional will likely need to cut programs and services to their
patient populations, including programs and services they
provide to Medicaid patients.

This harm represents more than

“temporary cash flow problems,” and its impact on plaintiffs is
significant.

In contrast, if the court issues an injunction,

defendants will still be able to recover all overpayments that
plaintiff hospitals receive if defendants ultimately prevail,
because they can “adjust[] . . . the Federal Payment to [the]
State on account of such overpayment.”

§ 1396b(d)(2)(C).

“It

is thus not the case that the alleged irreparable economic
injury suffered by [plaintiffs] would be offset by the
corresponding economic injury to the Secretary.”

Texas

Children’s Hosp., 76 F. Supp. 3d at 246.
The public interest weighs in favor of granting preliminary
injunctive relief.

The Medicaid Act and its regulations are

designed to protect the public interest by ensuring that
disproportionate-share hospitals remain open and able to serve
their patient populations.

Plaintiff hospitals are not-for49

profit corporations and are not fully compensated for all of the
uncompensated care they provide.

Consequently, a substantial

loss of DSH funds is not in the public interest.
Accordingly, the final two factors weigh in favor of
granting a preliminary injunction.
IV.

Remedy
Plaintiffs request a preliminary injunction with two

components.

First, they seek an injunction preventing

defendants “from enforcing, applying, or implementing the
policies referenced in FAQ Nos. 33 & 34 pending further Order of
this Court.”

Proposed Order (doc. no. 10-1) at 5 of 6.

Second,

they request that the court order that “[d]efendants shall
immediately notify the New Hampshire state Medicaid program
that, pending further order by the Court, the enforcement of FAQ
Nos. 33 & 34 is enjoined and that defendants will take no action
to recoup any federal DSH funds provided to New Hampshire based
on New Hampshire’s noncompliance with FAQ Nos. 33 & 34.”

Id.

Defendants argue that this second “kind of relief would
effectively put the Court in position of supervising future
agency action, which is not authorized by the APA.”
at 47 of 53.

Doc. no. 17

“Plaintiffs, however, ask only that the Court

direct [] defendants to inform their state partners-whose
funding is contingent on compliance with [] defendants’

50

directives-of the injunction.”
Supp. 3d at 247.

Texas Children’s Hosp., 76 F.

The court does not view this directive as

going beyond the scope of the APA, and it is necessary to
prevent the irreparable harm that plaintiffs face.
V.

Bond
Typically, Federal Rule of Civil Procedure 65 requires

parties obtaining injunctive relief to post a bond sufficient
“to pay the costs and damages sustained by any party found to
have been wrongfully enjoined or restrained.”

Fed. R. Civ. P.

65(c). Here, however, the court concludes that no bond is
required.

First, and perhaps most importantly, defendants have

not asked that plaintiffs post a bond.

See generally Aoude v.

Mobil Oil Corp., 862 F.2d 890, 896 (1st Cir. 1988) (rejecting a
challenge to an injunction because “posting of a bond is not a
jurisdictional prerequisite to the validity of a preliminary
injunction, and because appellant did not raise the matter
below”).

Moreover, “[a]lthough the rule speaks in mandatory

terms, an exception to the bond requirement has been crafted
for, inter alia, cases involving the enforcement of public
interests arising out of comprehensive federal health and
welfare statutes.”

Dartmouth-Hitchcock Clinic v. Toumpas, No.

11-CV-358-SM, 2012 WL 748575, at *1 (D.N.H. Mar. 2, 2012)
(internal quotation marks and citation omitted).

51

Conclusion
For the foregoing reasons, plaintiffs’ motion for
preliminary injunction (doc. no. 10) is granted as follows:
a.

Defendants are hereby enjoined from enforcing,

applying, or implementing the policies referenced in FAQs 33 &
34 pending further Order of this Court; and
b. Defendants shall immediately notify the New Hampshire
state Medicaid program that, pending further order by the Court,
the enforcement of FAQs 33 & 34 is enjoined and that defendants
will take no action to recoup any federal DSH funds provided to
New Hampshire based on New Hampshire’s noncompliance with FAQs
33 & 34.
SO ORDERED.

__________________________
Landya McCafferty
United States District Judge
March 11, 2016
cc:

Holly J. Barcroft, Esq.
Anthony J. Galdieri, Esq.
James C. Luh, Esq.
Gordon J. MacDonald, Esq.

52