Children's Health Care, doing business as Children's Hospitals and Clinics of Minnesota; Gillette Children's Specialty Healthcare Plaintiffs - Appellees
Centers for Medicare and Medicaid Services; Seema Verma, Administrator of the Centers for Medicare and Medicaid Services, in her official capacity; Alex M. Azar, II, Secretary of Health and Human Services, in his official capacity Defendants - Appellants
Submitted: June 13, 2018
from United States District Court for the District of
Minnesota - Minneapolis
WOLLMAN, ARNOLD, and KELLY, Circuit Judges.
WOLLMAN, CIRCUIT JUDGE.
Centers for Medicare and Medicaid Services; Seema Verma, the
Centers' Administrator; and Alex M. Azar, II, Secretary
of Health and Human Services, (collectively, the Secretary),
appeal the district court's partial grant of summary judgment
for Children's Health Care and Gillette Children's
Specialty Healthcare (collectively, Children's
Hospitals). The Secretary also challenges the district
court's decision to vacate a Medicaid policy-Frequently
Asked Question 33-which explained how to calculate a
hospital's uncompensated medical care costs. We affirm.
federal government and individual states administer the
Medicaid program, which provides medical care to individuals
"whose income and resources are insufficient to meet the
costs of necessary medical services." See 42
U.S.C. § 1396-1. Each state submits a plan explaining
how it will provide medical care to Medicaid patients, and if
the Secretary for Health and Human Services approves the
plan, the state may receive federal funds. Id. The
cost of treating Medicaid patients, however, exceeds
Medicaid's resources. As a result, Children's
Hospitals assert that they receive $0.57 to $0.70 on every
dollar spent providing Medicaid care, resulting in
multimillion dollar losses each year. To help ease such
financial strain, Congress authorized Disproportionate Share
Hospital Payments (Hospital Payments), which allow states to
provide additional funds to hospitals serving large numbers
of Medicaid patients. See 42 U.S.C. §
subsequently limited Hospital Payments to the "costs
incurred during the year of furnishing hospital
services." 42 U.S.C. §
1396r-4(g)(1)(A). In 2008, the
Secretary promulgated the following formula for calculating
"[t]otal annual uncompensated care costs:"
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 FFS rate payments, Medicaid managed care
organization payments, supplemental/enhanced Medicaid
payments, uninsured revenues, and Section 1011 payments for
inpatient and outpatient hospital services.
42 C.F.R. § 447.299(c)(16) (2009). Under this
formula, a hospital calculates the total cost of providing
medical care to Medicaid eligible patients and uninsured
patients. From that total, the hospital subtracts
payments received from Medicaid, payments by uninsured
patients, and payments under Section 1011.
the language of the regulation may appear comprehensive, it
does not state that private insurance payments should be
deducted when calculating the "total annual
uncompensated care costs" for Medicaid eligible
individuals. To address this issue, the Secretary
posted an online set of Frequently Asked Questions regarding
§ 447.299. Question 33-which was not subject to notice
and comment procedures under the Administrative Procedures
Act-explained that "hospitals should  offset both
Medicaid and third-party revenue associated with the Medicaid
eligible day against the costs for that day to determine any
uncompensated amount." Question 33 requires hospitals to
include private insurance payments when calculating
"uncompensated care costs." The district court
determined that because Question 33 constituted a legislative
rule that was subject to notice and comment procedures, the
Secretary was without authority to adopt it as an
review de novo whether an agency's promulgated
rule is legislative or interpretative. Iowa League of
Cities v. EPA, 711 F.3d 844, 872 (8th Cir. 2013). When
reviewing an agency's actions, we will "hold
unlawful and set aside" any action that is "without
observance of procedure required by law." 5 U.S.C.
§ 706(2)(D). Under 5 U.S.C. § 553(b) and (c),
"[a]gencies must conduct 'rule making' in accord
with the [Administrative Procedure Act's] notice and
comment procedures." Iowa League of Cities, 711
F.3d at 855 (citing 5 U.S.C. § 553(b), (c)). This
requirement applies to all new legislative rules but excludes
interpretative rules and general statements of policy.
Id. (citations omitted). "Whether or not a
binding pronouncement is in effect a legislative rule that
should have been subjected to notice and comment procedures
thus depends on whether it substantively amends or adds to,
versus simply interpreting the contours of, a preexisting
rule." Id. at 873 (citing U.S. Telecomm.
Ass'n v. FCC, 400 F.3d 29, 34-35 (D.C. Cir. 2005)).
"Expanding the footprint of a regulation by imposing new
requirements, rather than simply interpreting the legal norms
Congress or the agency itself has previously created, is the
hallmark of legislative rules." Id. (citations
Secretary argues that Question 33 is an interpretative rule
because it merely clarifies and explains how the existing law
applies to a particular situation. The Secretary compares
Question 33 to the "informal Medicare reimbursement
guideline" in Shalala v. Guernsey Memorial
Hospital, 514 U.S. 87, 90 (1995), in which the Supreme
Court upheld a reimbursement guideline that explained the
Secretary's decision to depart from generally accepted
accounting principles when amortizing bond defeasance losses.
Id. at 101. The Court reasoned in part that although
the regulations required the use of "[s]tandardized
definitions, accounting, statistics, and reporting
practices," the reimbursement guideline did "not
amount to a substantive change to the regulations"
because the Secretary was not required to "address every
conceivable question" that might arise "in the
process of determining equitable reimbursement."
Id. at 92, 96, 101. The Secretary was thus free to
distinguish between hospital accounting practices and
reimbursement practices. Id. 92-95. The Secretary
argues that Question 33, like the reimbursement guideline in
Shalala, merely clarifies what is already in the
regulation and its preamble. The Secretary asserts that the
words "uncompensated" and "unreimbursed"
necessarily require Children's Hospitals to include
private insurance payments when calculating their eligibility
for Hospital Payments. We disagree.
the district court, we conclude that by imposing new
reporting requirements for private insurance payments,
Question 33 expanded the footprint of § 447.299 and thus
constituted a substantive change in the regulation. As noted
by the Fourth Circuit Court of Appeals, Question 33 is a
legislative rule, in part, because it "does not derive
from the [underlying] statute or the 2008 rule."
Children's Hosp. of the King's Daughters, Inc. v.
Azar, -- F.3d --, 2018 WL 3520399 (4th Cir. July 23,
2018). No authority cited by the Secretary-other than
Question 33-addresses private insurance payments. Unlike the
general regulations at issue in Shalala, §
447.299 has specific language explicitly stating what
payments must be deducted from each hospital's
"total cost of care." The preamble that the
Secretary relies on defines "uncompensated care
costs" as "the costs incurred by that hospital in
furnishing services during the year to Medicaid patients and
the uninsured, less other Medicaid payments made to the
hospital, and payments made by uninsured patients." 73
Fed. Reg. at 77, 904. ...