Health Law Daily Injunction stands prohibiting HHS reduction of DSH reimbursements
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Tuesday, July 24, 2018

Injunction stands prohibiting HHS reduction of DSH reimbursements

By David Yucht, J.D.

The federal Court of Appeals for the Fourth Circuit determined that an HHS policy, requiring Medicaid reimbursements for disproportionate share hospitals (DSH) be reduced by payments received from private health insurance, constituted a "legislative rule." Consequently, the Administrative Procedures Act (APA) mandated that HHS establish this policy only through notice-and-comment rulemaking. The Fourth Circuit, accordingly, affirmed the lower court’s judgment enjoining HHS from enforcing this policy. The appellate court declined to reach the substantive challenge by Children’s Hospital to the policy and vacated the part of the district court’s opinion addressing whether that policy conflicts with statutory language (Children’s Hospital Of The King’s Daughters, Inc. v. Azar, July 23, 2018, Wynn, J.).

DSH reimbursement and FAQ 33. Children’s Hospital of The King’s Daughters, Inc. is a not-for-profit pediatric hospital. A majority of its inpatient cases were eligible for Medicaid. The hospital served a disproportionate number of low-income patients with special needs and therefore participated in the DSH reimbursement program. In 2008, CMS promulgated a rule implementing a statutory reporting and auditing requirement for each DSH hospital. In January, 2010, CMS posted on its website FAQs regarding these requirements. FAQ 33 provided that in calculating each hospital’s DSH limit, a state must subtract payments received from private health insurance. In October, 2016, the hospital learned that FAQ 33 seriously jeopardized its funding, and in February, 2017, it was informed that it had 33 days to repay $19.1 million in DSH payments.

Lawsuit. The hospital brought a law suit by which it sought an order enjoining collection of this money and the enforcement of this rule as interpreted by FAQ 33. The district court ruled for the hospital and granted the requested injunctive relief. The district court found that when issuing the FAQ 33 policy, HHS failed to comply with the Administrative Procedural Act (APA), and the FAQ 33 policy contradicted the language of the governing statute (see Children’s hospital entitled to injunctive relief over $19.1 million repayment demand by HHS based on FAQ 33 DSH adjustment June 28, 2017). HHS appealed.

Lack of notice-and-comment. The Fourth Circuit upheld the lower court’s judgment prohibiting the enforcement of the policy enunciated in FAQ 33. At issue was the distinction between legislative rulemaking and interpretative rulemaking. Interpretative rules simply state what an agency thinks a statute means, and remind affected parties of existing duties, whereas, legislative rules have the force of law, and create new law or impose new rights or duties. Legislative rules may only be adopted according to the terms of the APA. APA procedures do not apply to making interpretative rules. Despite HHS’s argument to the contrary, the Fourth Circuit found that the policy issued via FAQ 33 was a legislative rule because the policy of requiring DSHs to account for private insurance payments in calculating a DSH reimbursement did not derive from the statute or prior rule and HHS incorrectly relied on its statutorily delegated authority to determine what constituted "costs incurred for purposes of calculating a DSH’s payment adjustment as the legal basis for supporting its policy." Since it was a legislative rule, HHS was obligated to afford notice and an opportunity for interested parties to be heard before issuance. Since notice and a hearing opportunity were not afforded prior to issuing FAQ 33, it was invalid and unenforceable. Because it was unnecessary for the appellate court to address the claim that FAQ 33 was inconsistent with HHS’s statutory mandate, it vacated the lower court’s judgment concerning that issue.

The case is No. 17-2237.

Attorneys: Geraldine E. Edens (Morgan, Lewis & Bockius LLP) and Christopher Howard Marraro (Baker & Hostetler LLP) for Children's Hospital of the King's Daughters. Samantha Lee Chaifetz, U. S. Department of Justice, for Alex M. Azar, II.

Companies: Children's Hospital of the King's Daughters

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