4th Cir.: Medicaid payment-adjustment policy invalid

Rebecca M. Lightle//July 29, 2018

4th Cir.: Medicaid payment-adjustment policy invalid

Rebecca M. Lightle//July 29, 2018

A U.S. Department of Health & Human Services policy for “payment adjustment” calculations by hospitals serving disproportionately needy populations is legislative in nature and should have been promulgated through notice-and-comment rulemaking. Thus, the policy cannot be enforced against a Virginia hospital that otherwise faced $19 million in overpayment liability.


Plaintiff-Appellee Children’s Hospital of the King’s Daughters Inc. is a non-profit pediatric hospital in Norfolk. Most of its pediatric patients are eligible for Medicaid. The Medicaid framework provides for state Medicaid programs to make payment adjustments to facilities like Children’s Hospital that serve a disproportionate number of low-income patients with special needs (“disproportionate-share hospitals”).

Defendant-Appellant Alex Azar, in his official capacity as Secretary of the U.S. Department of Health & Human Services, appeals an order enjoining enforcement of a Medicaid policy set forth in a Frequently Asked Questions document (“FAQ 33”) released by the Department in 2010. The FAQ 33 policy – which was not promulgated through notice-and-comment rulemaking – purported to clarify the methodology for calculating the maximum amount of financial assistance available to disproportionate-share hospitals.

The dispute between Children’s Hospital and the Secretary turns on whether payments by private insurers should be accounted for in determining Children’s Hospital’s payment adjustment. Until it understood FAQ 33’s import in late 2016, Children’s Hospital did not include such payments in calculating its payment adjustment. Thus, an outside auditor determined that the hospital was obliged to repay $19.1 million as a result of overpayments.

However, the district court enjoined the Secretary from enforcing the FAQ 33 policy against Children’s Hospital, concluding that the policy amounted to a substantive rule that should have been promulgated through notice-and-comment rule-making.

Notice-and-comment required

The policy set forth in FAQ 33 is legislative in nature. First, requiring disproportionate-share hospitals to account for private insurance payments in calculating their uncompensated care costs does not derive from 42 U.S.C. § 1396r-4(g)(1)(A) or its 2008 implementing rule. Second, the agency relies on the Secretary’s statutorily delegated authority to determine what constitutes “costs incurred” for purposes of calculating a disproportionate-share hospital’s payment adjustment as the legal basis supporting the policy.

The statute provides that a qualifying hospital’s payment adjustment shall not exceed the hospital’s costs incurred in providing services to Medicaid-eligible and uninsured patients. The amount of costs incurred are to be “determined by the Secretary and net of payments [by Medicaid] and by uninsured patients.” Payments by private insurers are not, therefore, one of the two types of “payments” that the statute explicitly requires a disproportionate-share hospital to “net” out in determining its “costs incurred.” Likewise, the 2008 rule’s formula for calculating “total annual uncompensated care” expressly requires hospitals to subtract only Medicaid payments and payments by uninsured individuals.

The textual silence on whether to offset private insurance payments suggests that any authority the Secretary may have to adopt the rule at issue would most likely flow from Congress’s delegation of a power to make a decision that Congress chose not to make itself. When an agency relies on expressly delegated authority to establish policy — as the Secretary does with regard to FAQ 33 — courts generally treat the agency action as legislative, rather than interpretive, rulemaking.

So even if Congress authorized the Secretary to require disproportionate-share hospitals to account for private insurance payments in exercising his statutorily delegated discretion to define “costs incurred,” the absence of statutory or regulatory language compelling or even suggesting such a policy required the agency to promulgate its FAQ 33 policy through notice-and-comment rulemaking. The Secretary failed to do so, and Children’s Hospital faces the prejudicial result of being obliged to repay at least $19.1 million to the state Medicaid program. Therefore, the district court properly enjoined the Secretary from enforcing the FAQ 33 policy against Children’s Hospital.

Affirmed in part; vacated in part.

Children’s Hosp. of the King’s Daughters Inc. v. Azar, Case No. 17-2237, July 23, 2018. 4th Cir. (Wynn), from EDVA at Norfolk (Smith). Samantha L. Chaifetz for Appellants; Geraldine E. Edens & Christopher Howard Marraro for Appellee. VLW No. 018-2-152, 18 pp.


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