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Missouri Hospital Association v. Azar

United States Court of Appeals, Eighth Circuit

November 4, 2019

Missouri Hospital Association Plaintiff- Appellee
v.
Alex M. Azar, II, Secretary of Health and Human Services, et al. Defendants - Appellants

          Submitted: April 17, 2019

          Appeal from United States District Court for the Western District of Missouri - Jefferson City

          Before LOKEN, WOLLMAN, and STRAS, Circuit Judges.

          LOKEN, Circuit Judge.

         "Disproportionate share hospitals" -- those that serve a disproportionate number of indigent patients -- receive supplemental Medicaid payments ("DSH payments") to help ensure their financial viability. See 42 U.S.C. § 1396r-4. DSH payments may not exceed a hospital's "costs incurred" in furnishing hospital services to eligible individuals "(as determined by the Secretary and net of [Medicaid] payments)." § 1396r-4(g)(1)(A). In a final rule promulgated in 2017 after notice and comment rulemaking ("the 2017 Rule"), the Secretary of Health and Human Services defined "costs incurred" 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) (effective June 2, 2017).

         The Missouri Hospital Association ("MHA"), whose members include many disproportionate share hospitals, commenced this action against the Secretary, The Centers for Medicare and Medicaid Services, and its Administrator (collectively, "the Secretary"), seeking a declaration and injunctive relief invalidating this part of the 2017 Rule. The district court granted summary judgment in favor of the MHA, concluding that the 2017 Rule was contrary to "unambiguous language of the statute explain[ing that] the only payments that offset a hospital's Medicaid costs are non-DSH Medicaid payments." The Secretary appeals. Reviewing de novo, we conclude that the 2017 Rule was a reasonable exercise of the Secretary's expressly delegated discretion to interpret this provision in the statute. Accordingly, we reverse.[1]

         At issue is the hospital-specific limit on DSH payments. In 2003, Congress directed the Secretary to perform an annual audit of each DSH to verify that "[o]nly the uncompensated care costs of providing" services (known as the Medicaid shortfall) "are included in the calculation of the hospital-specific limit." 42 U.S.C. § 1396r-4(j)(2)(C). The statute at issue, 42 U.S.C. § 1396r-4(g)(1)(A), implements that mandate. As it is not a model of clarity, we set it out in full:

(g) Limit on amount of payment to hospital
(1) Amount of adjustment subject to uncompensated costs (A) In general
A payment adjustment during a fiscal year shall not be considered to be consistent with subsection (c) of this section with respect to a hospital if the payment adjustment exceeds 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. For purposes of the preceding sentence, payments made to a hospital for services provided to indigent patients made by a State or unit of local government within a State shall not be considered to be a source of third party payment.

         In determining whether the Secretary's 2017 Rule exceeded his statutory authority, we begin with the familiar analysis of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). The first question is "whether Congress has directly spoken to the precise question at issue." If so, "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43. The first parenthetical in § 1396r-4(g)(1)(A) expressly delegates to the Secretary the determination of "costs incurred . . . of furnishing hospital services." When the Secretary acts within the scope of that express delegation, his "legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Id. at 844; see 5 U.S.C. § 706(2).

         MHA, while conceding that § 1396r-4(g)(1)(A) expressly delegates discretion to the Secretary, argues that it is discretion only to determine "costs incurred," whereas the statute unambiguously provides that the only "payments" that may reduce the determination of "costs incurred" are Medicaid payments "other than under this section [non-DSH payments] and [payments] by uninsured patients." MHA argues that Congress unambiguously mandated a specific formula: Medicaid shortfall = Medicaid costs - Medicaid payments.

         We agree with MHA's statutory analysis up to a point. Section 1396r-4(g)(1)(A) does not delegate to the Secretary unfettered discretion to determine "costs incurred." The statute's discretion-conferring parenthetical specifically directs the Secretary to offset Medicaid payments. However, as the D.C. Circuit has noted, "[a]lthough the statute establishes that payments by Medicaid and the uninsured must be considered, it nowhere states that those are the only payments that may be considered." Children's Hosp. Ass'n of Tex. v. Azar, 933 F.3d 764, 770 (D.C. Cir. 2019) (emphasis in original). The final sentence of § 1396r-4(g)(1)(A) contains another limitation on the Secretary's discretion -- "payments made to a hospital for services provided to indigent patients made by a State or a unit of local government within a State shall not be considered to be a source of third party payment." Contrary to MHA's argument, if the statute unambiguously prohibited the Secretary from considering any "payments" other than those included in the "net of payments" parenthetical, this sentence would be superfluous.

         Moreover, we disagree with MHA and the district court that the terms "costs incurred" and "net of payments" have plain, unambiguous meanings. The Supreme Court has noted that the term "costs" can have different technical meanings in different contexts. "The fact is that without any better indication of meaning than the unadorned term, the word 'cost' in [47 U.S.C.] § 252(d)(1), as in accounting generally, is a 'chameleon,' a 'virtually meaningless' term. As Justice Breyer put it in [a prior decision], words like 'cost' 'give ratesetting commissions broad methodological leeway' . . . ." Verizon Commun's, Inc. v. F.C.C., 535 U.S. 467, 500 (2002). Closer to the textual issue in this case, in Kindred Hospitals East, LLC v. Sebelius, we concluded that the Secretary was not arbitrary and capricious in ...


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