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From Health Law Daily, June 4, 2018

Lack of APA notice-and-comment procedures invalidated FAQ 33 on DSH

By Jeffrey H. Brochin, J.D.

A federal district court in the District of Columbia has enjoined CMS from implementing FAQ 33 which was posted to the website as part of online answers to questions regarding the reporting and audit requirements for hospitals which disproportionately serve Medicaid patients and children with critical illnesses and special needs. The FAQ 33 policy on how disproportionate share hospital (DSH) payments were to be calculated was not codified in the text of the Medicaid statute, and improperly included private insurance reimbursements received by DSH providers (Texas Children’s Hospital and Seattle Children’s Hospital v. Azar, June 1, 2018, Sullivan, E.).

Legislative history. In 1981 Congress amended the Medicaid Act to require states to ensure that payments to hospitals would take into account the servicing of a disproportionate number of low-income patients with special needs. In 1993, Congress further amended the program to limit DSH payments on a hospital-specific basis under which a DSH payment could not exceed the costs incurred during the year of furnishing hospital services (the "hospital-specific limit").

In 2008 CMS issued their Final Rule outlining specific annual audit and reporting requirements under which states had to submit information on a DSH hospital’s total annual uncompensated care costs. CMS’s 2010 FAQ 33 informed DSH hospitals that for patients who had both Medicaid and private insurance coverage, the private insurance payments would be included in the calculation of a limit; this significantly reduced—or eliminated entirely—each hospital’s DSH payments. The court granted a preliminary injunction in December 2014 enjoining CMS from implementing FAQ 33 (see Court enjoins CMS from changing DSH eligibility via website FAQs, December 30, 2014).

Independent legal effect. The hospitals argued that (1) FAQ 33 was promulgated without appropriate notice-and-comment procedures in violation of the APA; and (2) the policy set forth in FAQ 33 was a substantive violation of the Medicaid Act. CMS countered that FAQ 33 was not the legal source of the policy requiring the inclusion of private-insurance payments in the hospital-specific limit calculation, and that FAQ 33 had no independent legal effect. The court determined that FAQ 33 was not codified by the Medicaid Act which used a different definition for setting hospital-specific limits for DSH payments. Specifically, the statute did not list private-insurance payments as payments that were to be offset.

Statutory headings not dispositive. CMS referred to the heading of the statute to support the position that FAQ 33 was in fact grounded in statute. However, the court ruled that although the heading of a statutory section is one tool available for the resolution of a doubt about the meaning of a statute, the heading cannot limit the plain meaning of the text. In the instant case, the statute clearly did not include an offset for private-insurance payments, and because the language of the statute did not unambiguously require the implementation of the policy set forth in FAQ 33, the statute could not be the legal source of the policy.

APA notice-and-comment required. The court concluded that FAQ 33 made a substantive change to the formula for calculating a hospital's DSH limit and effectively amended the 2008 rule, and was therefore an attempt to promulgate a legislative rule. The policy embodied in FAQ 33 needed to be implemented in accordance with notice-and-comment procedures under the APA. Because FAQ 33 was issued without notice and comment, it was an illegally promulgated rule, and the court set it aside, and granted summary judgment in favor of the hospitals.

The case is No. 1:14-cv-02060-EGS.

Attorneys: Christopher H. Marraro (Baker & Hostetler LLP) and Susan G. Conway (Graves Dougherty Hearon & Moody, PC) for Texas Children's Hospital and Seattle Children's Hospital. James C. Luh, U.S. Department of Justice, for Alex Azar.

Companies: Texas Children's Hospital; Seattle Children's Hospital

MainStory: TopStory CaseDecisions CMSNews DSHNews MedicaidPaymentNews DistrictofColumbiaNews

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