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From Health Law Daily, December 30, 2014

Court enjoins CMS from changing DSH eligibility via website FAQs

By Bryant Storm, J.D.

A district court granted a preliminary injunction to prevent HHS and CMS from altering the method for calculating the hospital-specific limit for two disproportionate share hospitals (DSHs) without following notice-and-comment procedures. The court held that the injunction was appropriate because the hospitals were likely to be able to show at trial that the CMS calculation method, which was altered by the Medicaid website frequently asked questions section (FAQ), was implemented in violation of the Administrative Procedures Act (APA) (5 U.S.C. § 706) and because the hospitals would suffer irreparable harm without an injunction  (Texas Children’s Hospital v. Burwell, December 29, 2014, Sullivan, E.).

DSH. Medicaid makes payment adjustments to certain qualifying hospitals, known as DSHs, which take on a disproportionate share of Medicaid patients. The intention of the DSH payments is to financially stabilize the disproportionately burdened hospitals while ensuring that eligible low-income patients retain meaningful access to health care services. The hospital specific payments are subject to an annual audit to determine whether DSH hospitals are receiving more than their net costs.  In the event that overpayments are made, the overpayments can either be recouped by the state or states are permitted to reduce future contributions to an overpaid hospital. In a 2008 Final rule, CMS explained the annual reporting and auditing requirements regarding DSH costs reports (73 FR 77,904, December 19, 2008).

FAQ 33. On January 10, 2010, CMS posted answers to FAQs regarding the audit and reporting requirements on the Medicaid website. The FAQ section in answer 33 indicated “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.”

Hospital challenges. Texas Children’s Hospital and Seattle Children’s Hospital are both hospitals “dedicated to the treatment and special needs of children and the advancement of pediatric medicine” with over 50 percent of their patients on Medicaid. Seattle Children learned in 2011 that its hospital-specific limit for its DSH application was being revised. Using a new calculation method, which the hospital learned was based upon FAQ 33, the state Medicaid agency determined that Seattle Children’s was ineligible for DSH payment. In September, 2014, Seattle Children learned that an audit of its 2011 DSH payments revealed that all of the hospital’s $7,060,567 in 2011 DSH funds were in excess of Seattle Children’s 2011 adjusted hospital-specific limit.

Lobbying. In December 2010, Texas Children’s learned that its 2011 DSH payment was being calculated at about $8 million less than the hospital expected.  Upon learning that the change in the hospital’s hospital-specific DSH limit was changed based upon FAQ 33, the Texas Children began to lobby CMS to eliminate the change to the DSH limit calculations. Both hospitals also began to lobby Congress in the hopes of influencing CMS and HHS. All the while, the Texas Medicaid agency continued to use a hospital-specific calculation methodology that was consistent with FAQ answer 33.

First injunction. On August 2, 2013, Texas Children’s brought a lawsuit against the state Medicaid agency seeking a preliminary injunction from applying the calculation method established from FAQ 33. While the preliminary injunction was granted, the court denied the hospital’s request for declaratory judgment and a permanent injunction. When Texas Children received its audit reports for its 2011 DSH payments on October 20, 2014, the hospital learned that it, like Seattle Children’s had a negative hospital-specific limit, making it ineligible for DSH payments. The entirety of Texas Children’s $21,707,266 DSH payment for 2011 was determined to be an overpayment.

Preliminary injunction. Both hospitals filed a lawsuit on December 5, 2014, and requested a preliminary injunction enjoining CMS and HHS from enforcing FAQ 33 and requiring that CMS and HHS notify the Texas and Washington state Medicaid agencies that a court enjoined FAQ 33. To determine whether to grant the preliminary injunction, the court considered whether the hospitals were: likely to succeed on the merits of their claim that FAQ 33 violated the APA and Medicaid law, would suffer irreparable injury without the injunction, would not cause injury to others by being granted the injunction, and would further the public interest by obtaining the injunction.

Merits. The court disagreed with HHS and CMS’s assertion that the policy of requiring the inclusion of private-insurance payments for Medicaid services in the calculation of a hospital-specific limit had a basis in the 2008 Final rule. Accordingly, because the court held that the essence of FAQ 33 was not codified in Medicaid law or meaningfully found within the 2008 Final rule, the court found that it was likely that the hospitals could show that FAQ 33 was the sole authority for the CMS, HHS, and state Medicaid agencies’ change in the DSH limit calculations. The court also rejected HHS and CMS’s argument that the hospital’s lacked standing to challenge the DSH hospital-specific limit calculation methods. In essence the court determined that HHS and CMS were wrong in their argument that FAQ 33 had no legal effect and therefore the court could not grant relief to the hospitals. The court reasoned that the invalidation of FAQ 33 would alter the state agencies’ calculations and eliminate the DHS ineligibility and recoupment decisions, thus providing relief to the hospitals.

APA. Therefore, the court was able to reach the question of whether the hospitals could show that FAQ 33 violated the APA. The court held that the hospitals could make such a showing because, as the hospitals alleged, FAQ 33 had the force and effect of law but was not issued through the notice and comment rulemaking procedures which are required of final agency actions under the APA. The court found that the legal effects of FAQ 33—specifically the modification of a formula with binding effect that governs the hospital specific limit—indicated that FAQ 33 effectively amended the 2008 Final rule without undergoing the required administrative procedures.

Harm. The court also determined that the hospitals faced significant and irreparable harm without the injunction because they would be forced to repay millions of dollars, would be shut out of the DSH program indefinitely, and would be force to find other sources of payment to subsidize the care to the disproportionate number of Medicaid beneficiaries they provide services to. The court held that the economic injuries facing the hospitals were “certain, imminent, and unrecoverable.” Additionally, the court reasoned that the harm was irreparable because the hospitals were not for-profit entities at risk of losing profit but non-profit entities at risk of being unable to provide much needed health care services to children. The court finally determined that the balance of equities and the public interest favored an injunction, in part because of the “robust public interest in safeguarding access to health care for those eligible for Medicaid.”

The case number is 14-2060 (EGS).

Attorneys: Christopher H. Marraro (Baker & Hostetler LLP) for Texas Children's Hospital, and Seattle Children's Hospital. James C. Luh, U.S. Department of Justice, for Sylvia Mathews Burwell, Marilyn B. Tavenner, and Centers for Medicare and Medicaid Services.

Companies: Texas Children's Hospital; Seattle Children's Hospital; Centers for Medicare and Medicaid Services

MainStory: TopStory DSHNews MedicaidPaymentNews CMSNews DistrictofColumbiaNews TexasNews WashingtonNews

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