Texas Children's Hospital v. Burwell

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
________________________________
)
TEXAS CHILDREN’S HOSPITAL and )
SEATTLE CHILDREN’S HOSPITAL, )
)
Plaintiffs, )
)
v. )
) Civil Action No. 14-2060 (EGS)
SYLVIA MATHEWS BURWELL, )
Secretary, United States )
Department of Health and )
Human Services, et al., )
)
Defendants. )
________________________________)

MEMORANDUM OPINION

Medicaid is a federal program that helps to cover the costs of

providing medical care to certain individuals. Some hospitals

treat significantly higher percentages of Medicaid-eligible

patients than others. Because Medicaid does not generally

provide the same level of reimbursement as other forms of

coverage, such hospitals are often at a financial disadvantage.

To rectify this disadvantage, and thereby to encourage hospitals

to serve Medicaid-eligible patients, Congress has provided for

supplemental Medicaid payments to such hospitals. The

supplemental payments are subject to limits to ensure that no

hospital receives such a large payment that it makes a profit,

rather than merely covering its Medicaid-related costs. This

case concerns the method of calculating that limit.
 Plaintiffs, Texas Children’s Hospital (“Texas Children’s”) and

Seattle Children’s Hospital (“Seattle Children’s”), allege that

the Secretary of Health and Human Services (“the Secretary”),

the Centers for Medicare and Medicaid Services (“CMS”), and the

Administrator of CMS have modified the method for calculating

the hospital-specific limit without following notice-and-comment

procedures, and in a way that conflicts with the Medicaid Act.

Because defendants’ calculation is allegedly being used to force

Texas and Washington to recoup significant amounts of money from

the plaintiffs, and because such recoupments are allegedly both

irrevocable and imminent, plaintiffs seek a preliminary

injunction. Upon consideration of the plaintiffs’ motion, the

response, reply, and surreply thereto, the applicable law, and

the entire record, the Court GRANTS plaintiffs’ motion.

I. Background

“Plaintiffs are two not-for-profit pediatric teaching and

research hospitals dedicated to the treatment and special needs

of children and the advancement of pediatric medicine.” Compl. ¶

1. They treat “[c]hildren with critical illnesses and special

needs . . . from throughout the United States,” and do so

“regardless of their families’ ability to pay for their care.”

Id. “More than 50 percent of Plaintiffs’ patients are Medicaid

patients,” which means that they “treat a disproportionately

larger share of Medicaid program patients.” Id. ¶¶ 2–3.

2
Plaintiffs also “serve many . . . very sick and medically

fragile children,” meaning that “they have an unusual number of

patients who meet the qualifying criteria for Medicaid

eligibility for reasons other than income status.” Id. ¶ 48.

A. The Medicaid Act

Medicaid, 42 U.S.C. § 1396, et seq., “provid[es] federal

financial assistance to States that choose to reimburse certain

costs of medical treatment for needy persons.” Harris v. McRae,

448 U.S. 297, 301 (1980). In addition to covering low-income

individuals, Medicaid also provides benefits to children with

certain serious illnesses, without regard to family income. See,

e.g., 42 U.S.C. § 1396a(10)(A)(i)(II) (children are eligible for

Medicaid if they are eligible for Supplemental Security Income);

42 C.F.R. § 416.926a(m)(6) (children born weighing less than

1,200 grams are eligible for Supplemental Security Income).

To encourage states to participate in Medicaid, “[f]ederal and

state governments jointly share the cost.” Va. Dep’t of Med.

Assistance Servs. v. Johnson, 609 F. Supp. 2d 1, 2 (D.D.C.

2009). Participating states administer their own program

“pursuant to a state Medicaid plan which must be reviewed and

approved by the Secretary.” Id.; see also 42 U.S.C. § 1396a.

Once the Secretary or her designee approves a state plan, the

state receives federal financial participation to cover part of

the costs of its Medicaid program. 42 U.S.C. § 1396b(a)(1). If a

3
state fails to comply with the statutory or regulatory

requirements governing Medicaid, the federal government may

recoup federal funds from the state. See id. § 1316(a), (c)–(e).

In 1981, facing “greater costs . . . associated with the

treatment of indigent patients,” D.C. Hosp. Ass’n v. District of

Columbia, 224 F.3d 776, 777 (D.C. Cir. 2000), Congress amended

Medicaid to require states to ensure that payments to hospitals

“take into account . . . the situation of hospitals which serve

a disproportionate number of low-income patients with special

needs.” 42 U.S.C. § 1396a(13)(A)(iv). This amendment reflected

“Congress’s concern that Medicaid recipients have reasonable

access to medical services and that hospitals treating a

disproportionate share of poor people receive adequate support

from Medicaid.” W. Va. Univ. Hosps. v. Casey, 885 F.2d 11, 23

(3d Cir. 1989). “The intent was to stabilize the hospitals

financially and preserve access to health care services for

eligible low-income patients.” Johnson, 609 F. Supp. 2d at 3.

The amendment created “payment adjustment[s]” for qualifying

hospitals. See 42 U.S.C. § 1396r-4(c). Such payments are

available to any hospital that treats a disproportionate share

of Medicaid patients (a disproportionate-share hospital or

“DSH”). See id. § 1396r-4(b).

In 1993, the program was amended to limit DSH payments on a

hospital-specific basis. See id. § 1396r-4(g). This was done to

4
assuage concerns that some hospitals were receiving DSH payments

in excess of “the net costs, and in some instances the total

costs, of operating the facilities.” H.R. Rep. No. 103-111, at

211 (1993), reprinted in 1993 U.S.C.C.A.N. 278, 538.

Accordingly, a DSH payment may not exceed:

[T]he 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.

42 U.S.C. § 1396r-4(g)(1)(A).

In 2003, to ensure the appropriateness of DSH payments,

Medicaid was amended to require that each state provide an

annual report and an audit of its DSH program. See id. § 1396r-

4(j). The audit must confirm, among other things, that:

(C) Only the uncompensated care costs of providing
inpatient hospital and outpatient hospital services to
individuals described in [Section 1396r-4(g)(1)(A)] .
. . are included in the calculation of the hospital-
specific limits[;]

(D) The State included all payments under this
subchapter, including supplemental payments, in the
calculation of such hospital-specific limits[; and]

(E) The State has separately documented and retained a
record of all of its costs under this subchapter,
claimed expenditures under this subchapter, uninsured
costs in determining payment adjustments under this
section, and any payments made on behalf of the
uninsured from payment adjustments under this section.

5
Id. § 1396r-4(j)(2). Overpayments must be recouped by the state

within one year of their discovery or the federal government may

reduce its future contribution. See id. § 1396b(d)(2)(C), (D).

B. The 2008 Final Rule

In 2005, CMS issued a Notice of Proposed Rulemaking regarding

these audit and reporting requirements. See Disproportionate

Share Hospital Payments, 70 Fed. Reg. 50,262 (proposed Aug. 26,

2005). A Final Rule was issued on December 19, 2008 (“the

Rule”). See Disproportionate Share Hospital Payments, 73 Fed.

Reg. 77,904 (Dec. 19, 2008). The Rule requires that the states

annually submit information “for each DSH hospital to which the

State made a DSH payment.” 42 C.F.R. § 447.299(c). One such

piece of information is the hospital’s “total annual

uncompensated care costs,” which the Rule defined as an

enumerated set of “costs” minus an enumerated set of “payments”:

The total annual uncompensated care cost equals the
total cost of care for furnishing inpatient hospital
and outpatient hospital services to Medicaid eligible
individuals and to individuals with no source of third
party coverage for the hospital services they receive
less the sum of regular Medicaid [fee-for-service]
rate payments, Medicaid managed care organization
payments, supplemental/enhanced Medicaid payments,
uninsured revenues, and Section 1011 payments.

Id. § 447.299(c)(16). The regulation specifically defined each

type of cost and payment.1

1
See id. § 447.299(c)(10) (Total Costs for Medicaid Services:
“The total annual costs incurred . . . for furnishing . . .

6
 To ease the transition to the new audit and reporting regime,

CMS provided for a six-year transition, to avoid subjecting any

state to “immediate penalt[ies] that would result in the loss of

Federal matching dollars.” 73 Fed. Reg. at 77,906. Accordingly,

any audits “from Medicaid State plan rate year 2005 through

2010” would be “used only for the purpose of determining

prospective hospital-specific cost limits and the actual DSH

payments associated with a particular year.” Id. For 2011

payments, the audit of which must be completed by December 31,

2014, Simon Decl., ECF No. 3-8 ¶ 18, and all subsequent years,

DSH overpayments must be recovered by the state and returned to

the federal government, unless they “are redistributed by the

State to other qualifying hospitals.” 73 Fed. Reg. at 77,906.

C. FAQ Number 33

On January 10, 2010, CMS posted answers to “frequently asked

questions” regarding the audit and reporting requirements. See

Additional Information on the DSH Reporting and Auditing

Requirement, http://www.medicaid.gov/Medicaid-CHIP-Program-

services to Medicaid eligible individuals”); id. §
447.299(c)(14) (Total Costs for Uninsured Individuals: “[T]he
total costs incurred for furnishing . . . services to
individuals with no source of third party coverage”); id. §§
447.299(c)(6)–(8) (defining each Medicaid-related payment); id.
§ 447.299(c)(12) (Uninsured Revenues: “Total annual payments
received . . . by or on behalf of individuals with no source of
third party coverage”); id. § 447.299(c)(13) (Section 1011
Payments: “[P]ayments for . . . services provided to Section
1011 eligible aliens with no source of third party coverage”).

7
Information/By-Topics/Financing-and-Reimbursement/Downloads/

AdditionalInformationontheDSHReporting.pdf (last visited Dec.

29, 2014). Question Number 33 forms the crux of this case:

33. Would days, costs, and revenues associated with
patients that have both Medicaid and private insurance
coverage (such as Blue Cross) also be included in the
calculation of the . . . DSH limit in the same way
States include days, costs and revenues associated
with individuals dually eligible for Medicaid and
Medicare?

Days, cost[s], and revenues associated with patients
that are dually eligible for Medicaid and private
insurance should be included in the calculation of the
Medicaid inpatient utilization rate (MIUR) for the
purposes of determining a hospital eligible to receive
DSH payments. Section 1923(g)(1) does not contain an
exclusion for individuals eligible for Medicaid and
also enrolled in private health insurance. Therefore,
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.

Id. at 18 (emphasis added).

D. Factual Background

1. Seattle Children’s

On June 15, 2011, the Washington State Health Care Authority

informed Seattle Children’s that the agency “would be revising

its [hospital-specific limit] calculation for the . . . 2012

Medicaid DSH application.” Kinzig Decl., ECF No. 3-14 ¶ 14. The

Authority stated that recent audits revealed that “some

hospitals were not reporting all charges and payments received

for providing care to Medicaid-eligible patients” and therefore

8
mandated that “in the case that a Medicaid-eligible patient has

insurance or other third-party coverage, these charges and

payments should be included in the DSH cap calculation.” Id.

Seattle Children’s submitted its 2012 DSH application in July

2011, but the new calculation rendered its hospital-specific

limit negative, making it ineligible for DSH payments. See id. ¶

16. Seattle Children’s was also “advised . . . that if the audit

process . . . determined that the hospital was paid more than

its DSH cap . . . the state would force the hospital to pay back

to the state any identified overpayment.” Id. ¶ 18.

Seattle Children’s hired a consultant “to identify why [the

Washington State Health Care Authority] was using a new

calculation”; “[t]he consultant determined that [the] new

calculation was drawn from . . . FAQ No. 33.” Id. ¶ 19. Seattle

Children’s sent multiple letters to the state agency in October

and November of 2011 describing this impact. See id. ¶ 24. The

agency responded, and “has consistently advised in . . .

communications and, finally, in a meeting held . . . on July 23,

2014, . . . that it would follow CMS instructions and, therefore

would have to recoup Medicaid DSH payments in excess of a

[hospital-specific limit].” Id. ¶ 25.

Seattle Children’s has also “lodged multiple appeals with [the

Washington State Health Care Authority],” since 2012, all to no

avail. See id. ¶ 26. “In each instance in which [Seattle

9
Children’s] sought relief from the application of FAQ No. 33,

[the State] denied [those] appeals.” Id. In 2012, 2013, and

2014, moreover, the Washington State Health Care Authority

denied Seattle Children’s application for any DSH payments. See

id. ¶¶ 27–29. On July 23, 2014, however, Seattle Children’s met

with the Washington State agency, which agreed to support

Seattle Children’s efforts to lobby CMS to modify FAQ 33. See

Harris Decl., ECF No. 16-1 ¶ 29.

In September 2014, Seattle Children’s received a preliminary

report on the audit of its 2011 DSH payments. See Kinzig Decl.,

ECF No. 3-14 ¶ 31. That audit “retrospectively calculated

Seattle Children’s 2011 [hospital-specific limit] to be

negative.” Id. “As such, the auditors found that all of the

$7,060,567 in 2011 DSH funds . . . exceeded Seattle Children’s

2011 adjusted [hospital-specific limit].” Id. The Washington

State Health Care Authority, moreover, “has consistently warned

that it has the power to recoup any DSH payments in excess of a

[hospital-specific limit],” and to redistribute those funds to

other DSHs. Id. ¶ 32. The Washington State Health Care Authority

is in the process of promulgating rules regarding the recoupment

and distribution process, but the proposed rules “do not offer

an administrative process” for reversing a recoupment or

recovering payments that have been redistributed. See id. ¶ 33.

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 2. Texas Children’s

In December 2010, Texas Children’s learned that its 2011

hospital-specific limit “was being calculated at approximately

$8 million less than . . . expected.” Simon Decl., ECF No. 3-8 ¶

23. It did not then know about FAQ 33. See id. In March 2012,

Texas Children’s learned that its 2012 hospital-specific limit

would be significantly lower than expected, due to three

“calculation errors” and a “$12 million reduction . . .

resulting from [the Texas Health and Human Services

Commission’s] use of third-party insurance payments to offset

Medicaid-allowable costs.” Id. ¶ 24. The Texas Health and Human

Services Commission (“the Commission”) ultimately corrected the

calculation errors, “but rejected Texas Children’s appeal of the

third-party-payment offset.” Id. In reviewing this issue in

2012, Texas Children’s learned that the same issue was the cause

of its lower-than-expected 2011 DSH payment. See id. ¶ 25.

Texas Children’s contacted the Commission in an attempt to

resolve this issue. See Harris Decl., ECF No. 16-1 ¶ 3. Texas

Children’s met with the Commission, which subsequently “agreed

in an October 2012 letter to work with Texas Children’s in

seeking a clarification from [CMS] regarding the DSH [hospital-

specific limit] calculation issues.” Id. ¶ 4; see also id. ¶ 5.

A December 14, 2012 letter from the Commission to CMS also

supported Texas Children’s: “[T]he children’s hospitals have

11
identified a legitimate issue of federal law and policy that

would benefit from a clarification by CMS.” Ex. A-2 to Pls.’

Reply, ECF No. 15-3 at 4.

Texas Children’s wrote to CMS in November 2012 to request “a

face-to-face meeting to discuss FAQ No. 33.” Harris Decl., ECF

No. 16-1 ¶ 6. A meeting was held on December 18, 2012 with CMS

at which representatives of Seattle Children’s and Texas

Children’s “set forth the issues and the specific manner in

which the FAQ approach was incorrect and inconsistent with the

statute and regulations.” Id. ¶ 9. “CMS agreed to consider the

proposed options and respond.” Id.

In March 2013, believing it was bound by FAQ 33, the

Commission proposed new regulations that would have

“incorporated a calculation methodology similar to the FAQ No.

33 methodology.” Id. ¶ 11. Texas Children’s then “turned its

attention to challenging the adoption of the new state rules.”

Id. This challenge was complicated when, on May 26, 2013, the

Texas State Legislature adopted a change to state law that

declared that the calculation of hospital-specific limits would

not include private-insurance payments for Medicaid-eligible

patients. See S.B. 7, 83d Leg., Reg. Sess. (Tex. 2013). Despite

this change, Texas continued to operate under a state Medicaid

plan that it viewed as incorporating FAQ 33’s calculation. See

Harris Decl., ECF No. 16-1 ¶ 20.

12
 Texas Children’s accordingly continued to lobby CMS. In April

2013, CMS wrote Texas Children’s regarding the issue:

The 2008 final rule and the [FAQ Document] . . .
clarified how costs and revenues associated with
individuals dually eligible for Medicaid and Medicare
and individuals who are eligible for Medicaid and have
private insurance coverage must be treated when
calculating Medicaid hospital-specific DSH limits.

Letter from Kristin Fan, Acting Director, Financial Management

Group, CMS, to Susan Feigin Harris, Counsel for Texas Children’s

(Apr. 17, 2013), ECF No. 15-5 at 1. The letter nonetheless

indicated that CMS was “open to meeting to discuss this

information and our interpretation in greater depth” and that

“[w]e are continuing to review DSH policies as a result of the

audits and in anticipation of further DSH revisions included in

the Affordable Care Act.” Id. at 1, 2.

Texas Children’s and Seattle Children’s next began to lobby

their congressional representatives. See Harris Decl., ECF No.

16-1 ¶ 15. This resulted in a series of meetings on Capitol

Hill, id. ¶ 16, and, on July 11, 2013, the Texas congressional

delegation sent a letter to CMS stating that the FAQ 33

“interpretation . . . does not seem consistent with our

understanding of how the DSH program should work.” Letter from

Texas Congressional Delegation, to Kathleen Sebelius, Secretary,

U.S. Department of Health and Human Services (July 11, 2013),

ECF No. 15-7 at 2.

13
 At the same time, the Commission continued to support the

efforts of Texas Children’s. On April 22, 2013, the Commission

sent an email to a representative of Texas Children’s:

[W]e’d be solidly behind an argument that supports the
work of the children’s hospitals and encourages CMS to
take a broader view of the impact. I think we need to
address the double payment myth.

Email from Steve Aragon, Chief Counsel, Texas Health and Human

Services Commission, to Susan Feigin Harris, Counsel for Texas

Children’s (Apr. 22, 2013), ECF No. 15-6 at 1. Later that year,

after meeting with CMS, the Commission’s Executive Commissioner

informed a representative for Texas Children’s “that he

understood that we may have to take more aggressive action and

subsequently, sent . . . a text message indicating that [Texas

Children’s] should ‘sue him.’” Harris Decl., ECF No. 16-1 ¶ 19.

On August 2, 2013, Texas Children’s did just that, filing a

lawsuit to enjoin Texas from applying the calculation codified

by FAQ 33. See id. ¶ 20; Tex. Children’s Hosp. v. Tex. Health &

Hum. Servs. Comm’n, No. D-1-GN-13-002619 (200th Dist. Ct.,

Travis Cnty. filed Aug. 2, 2013). Texas Children’s obtained a

temporary injunction on November 15, 2013. Harris Decl., ECF No.

16-1 ¶ 20. On March 31, 2014, however, the state court “denied

the hospital’s request for declaratory judgment and permanent

injunction,” without a written opinion. Id. Texas Children’s

elected not to appeal because an appeal would neither “have

14
stayed the 2013 distribution,” “allowed later recovery of those

losses as damages, [n]or had any binding effect on CMS.” Id.

While that lawsuit was still ongoing, the Commission proposed

to CMS an amendment to the Texas Medicaid Plan that would have

revised the calculation to reflect the law passed by the state

legislature. See id. ¶ 22. In February 2014, CMS requested

additional information regarding the proposal, and Texas

Children’s participated in this process by submitting comments

on the Commission’s proposed response. See id. ¶ 23. CMS did not

act until July 14, 2014, when it denied the proposed amendment.

See id. ¶ 24. In denying the proposal, CMS relied at least in

part on FAQ 33, which CMS noted “‘clarified’ that ‘all third

party payer revenues received by the hospital on behalf of

[individuals eligible for Medicaid with a source of private

insurance coverage] must be included in the calculation of the

hospital-specific DSH limit.’” Compl. ¶ 55; see also Harris

Decl., ECF No 16-1 ¶ 24. Texas had sixty days from the July 14,

2014 decision to appeal, but declined to do so “[d]espite Texas

Children’s’ urging.” Harris Decl., ECF No. 16-1 ¶ 24.

At this point, Texas Children’s returned to its Congressional

delegation to “test CMS’s prior expressions of willingness to

further consider its position with respect to FAQ No. 33.” Id. ¶

25. A meeting took place on August 29, 2014, between

representatives of Seattle Children’s, Texas Children’s, and

15
CMS, but “CMS refused to change its position.” Id. ¶ 26.

Meanwhile, the audit of fiscal-year 2011 DSH payments was

ongoing. See id. ¶ 27. Texas Children’s did not receive its

preliminary audit report until October 7, 2014. See Simon Decl.,

ECF No. 3-8 ¶ 28. The preliminary report indicated that Texas

Children’s would have its hospital-specific limit reduced to a

negative number. See id. On October 20, 2014, Texas Children’s

learned of the Commission’s determination that the entirety of

its 2011 DSH payment—$21,707,266—was an overpayment. See id. The

Commission’s notice indicates that it “‘will recoup any

overpayment of DSH funds’ that is identified in the state’s

final 2011 audit report to CMS.” Id.; see also Ex. 2-B to Simon

Decl., ECF No. 3-10 at 1. On November 19, 2014, Texas Children’s

appealed that finding, but its appeal was denied on November 24,

2014. See Simon Decl., ECF No. 3-8 ¶ 30.

E. Procedural History

Plaintiffs filed this lawsuit on December 5, 2014. That same

day, they filed a motion for a preliminary injunction, which

requests that the Court enjoin the defendants from enforcing or

applying FAQ 33, and that the Court direct the defendants to

send a letter to the state agencies in Texas and Washington

notifying them that the Court has enjoined FAQ 33. See Mem. in

Supp. of Mot. for Prelim. Inj. (“Mot.”), ECF No. 3-1. The

defendants filed their opposition on December 12, 2014. See

16
Gov’t’s Opp. to Mot. for Prelim. Inj. (“Opp.”), ECF No. 14. The

plaintiffs filed their reply brief on December 15, 2014. See

Pls.’ Reply (“Reply”), ECF No. 15. In light of plaintiffs’

inclusion of additional exhibits with their reply brief, the

Court directed the government to file a surreply, which was

filed on December 19, 2014. See Gov’t’s Surreply (“Surreply”),

ECF No. 17. The motion is ripe for the Court’s consideration.

II. Standard of Review

A plaintiff seeking a preliminary injunction must establish

“(1) a substantial likelihood of success on the merits, (2) that

it would suffer irreparable injury if the injunction were not

granted, (3) that an injunction would not substantially injure

other interested parties, and (4) that the public interest would

be furthered by the injunction.” Chaplaincy of Full Gospel

Churches v. England, 454 F.3d 290, 297 (D.C. Cir. 2006). “The

purpose of a preliminary injunction is merely to preserve the

relative positions of the parties until a trial on the merits

can be held.” Univ. of Tex. v. Camenisch, 451 U.S. 390, 395

(1981). It is “an extraordinary and drastic remedy” and “should

not be granted unless the movant, by a clear showing, carries

the burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968,

972 (1997) (emphasis omitted). In this Circuit, the four factors

have typically been evaluated on a “sliding scale,” such that if

“the movant makes an unusually strong showing on one of the

17
factors, then it does not necessarily have to make as strong a

showing on another factor.” Davis v. Pension Benefit Guar.

Corp., 571 F.3d 1288, 1291–92 (D.C. Cir. 2009).

In the wake of the Supreme Court’s decision in Winter v.

Natural Resources Defense Council, 555 U.S. 7 (2008), “the D.C.

Circuit has suggested that a positive showing on all four

preliminary injunction factors may be required.” Holmes v. FEC,

No. 14-1243, 2014 WL 5316216, at *3 n.4 (D.D.C. Oct. 20, 2014);

see also Sherley v. Sebelius, 644 F.3d 388, 393 (D.C. Cir. 2011)

(“[W]e read Winter at least to suggest if not to hold that a

likelihood of success is an independent, free-standing

requirement for a preliminary injunction.”) (quotation marks

omitted). Nonetheless, “the Circuit has had no occasion to

decide this question because it has not yet encountered a post-

Winter case where a preliminary injunction motion survived the

less rigorous sliding-scale analysis.” ConverDyn v. Moniz, No.

14–1012, 2014 WL 4477555, at *8 n.2 (D.D.C. Sept. 12, 2014).

III. Analysis

A. Plaintiffs Are Likely to Succeed on the Merits.

Plaintiffs argue that FAQ 33 was promulgated in violation of

the Administrative Procedure Act and that it is contrary to the

Medicaid Act. The defendants dispute this and also assert that

plaintiffs are unlikely to succeed on the merits because they

lack standing. Underlying these arguments is a more fundamental

18
disagreement about the nature of this case: The parties agree

that the defendants have a policy of requiring the inclusion of

private-insurance payments for Medicaid services in the

calculation of a hospital-specific limit, but they disagree on

the legal basis for that policy. Plaintiffs assert that neither

the Medicaid Act nor the 2008 Rule provides a basis for the

policy, so FAQ 33 must be its source. The defendants maintain

that FAQ 33 is not the source of the policy, but it took some

time for them to identify what is the source. During the

December 8, 2014 status hearing, the government could not do so.2

The government now contends that the 2008 Rule provides a legal

basis for its policy. The Court must resolve this dispute before

assessing the parties’ legal arguments.

1. Plaintiffs Are Likely to Show that FAQ 33 Has
Independent Effect.

Defendants’ policy is not codified by the Medicaid Act, which

defines the hospital-specific limit as:

[T]he 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

2
See Transcript of Dec. 8, 2014 Hearing, ECF No. 13 at 20:2–
21:12. Defendants agreed that “[t]he agency’s position is
essentially that which is in FAQ 33.” Id. at 20:16–17. They
could not identify why, however, stating “[i]t may be that there
are other documents that state that . . . principle which we
believe to be longstanding.” Id. at 20:23–25. When asked by the
Court “[w]ell, what is the final agency action?” the government
had no answer. See id. at 21:10–12.

19
 medical assistance under the State plan or have no
health insurance (or other source of third party
coverage) for services provided during the year.

42 U.S.C. § 1396r-4(g)(1)(A). The Act does not include private-

insurance payments among those that are specifically enumerated

as offsets. Only Medicaid payments—those “under this

subchapter”—are mentioned. See id. At most, the statute might

have delegated to the Secretary the ability to determine by

regulation that additional payments should be considered.

Even if the Secretary had such discretion, she did not

exercise it in the 2008 Rule. Although defendants claim that the

Rule supports them, they largely ignore its text in favor of

selected portions of its Preamble. The government is correct

that the Preamble states that the “costs” to be considered in

calculating the hospital-specific limit are “the unreimbursed

costs of providing . . . services to Medicaid eligible

individuals and the unreimbursed costs of providing . . .

services to individuals with no source of third party

reimbursement.” 73 Fed. Reg. at 77,920; see also id. at 77,914.

According to the government, the term “unreimbursed costs” means

that costs included in calculating the hospital-specific limit

must be only those for which no reimbursement is received from

any source. As a plain-meaning reading of the phrase, this

argument may have some appeal. The phrase, however, cannot be

divorced from its context—which includes a specific definition

20
of the calculation and all relevant inputs. See Colautti v.

Franklin, 439 U.S. 379, 392 n.10 (1979) (“a definition which

declares what a term means . . . excludes any meaning that is

not stated”) (quotation marks omitted); Fla. Dep’t of Banking &

Fin. v. Bd. of Governors of Fed. Reserve Sys., 800 F.2d 1534,

1536 (11th Cir. 1986) (“It is an elementary precept of statutory

construction that the definition of a term in the definitional

section of a statute controls the construction of that term

wherever it appears throughout the statute.”). It is this

context that renders the defendants’ argument untenable.

First, the statements in the Preamble cited by the government

are not representative. The Preamble also stated on multiple

occasions that the Rule did not effect any change in the

calculation of the hospital-specific limit. See 73 Fed. Reg. at

77,921 (“[W]e disagree that this rule changes the definition of

uncompensated care that is counted in calculating the hospital-

specific DSH limit.”); id. at 77,906 (“This regulation does not

alter any of the substantive standards regarding the calculation

of hospital costs.”). Despite this language, the defendants have

identified the Rule as implementing a new method of calculating

the hospital-specific limit.

Second, a preamble does not create law; that is what a

regulation’s text is for. The actual regulatory text included a

step-by-step guide to calculating the “unreimbursed costs,”

21
including specific definitions of what makes up the “cost” side

of the equation and what makes up the “payment” side. To the

extent that this definition is contradicted by the Rule’s

Preamble, the definition controls. See Barrick Goldstrike Mines,

Inc. v. Whitman, 260 F. Supp. 2d 28, 36 (D.D.C. 2003) (when “the

preamble to [a] rulemaking is inconsistent with the plain

language of the regulation, it is invalid”) (citation omitted);

Nat’l Wildlife Fed. v. EPA, 286 F.3d 554, 569–70 (D.C. Cir.

2002) (“The preamble to a rule is not more binding than a

preamble to a statute. ‘A preamble no doubt contributes to a

general understanding of a statute, but it is not an operative

part of the statute and it does not enlarge or confer powers on

administrative agencies or officers.’”) (quoting Ass’n of Am.

R.Rs. v. Costle, 562 F.2d 1310, 1316 (D.C. Cir. 1977)).

The formula codified by the Rule did not contemplate the

inclusion of private-insurance payments for Medicaid-eligible

services. It defined “total annual uncompensated care costs” as:

[T]he total cost of care for furnishing inpatient
hospital and outpatient hospital services to Medicaid
eligible individuals and to individuals with no source
of third party coverage for the hospital services they
receive less the sum of regular Medicaid [fee-for-
service] rate payments, Medicaid managed care
organization payments, supplemental/enhanced Medicaid
payments, uninsured revenues, and Section 1011
payments.

22
See 42 C.F.R. § 447.299(c)(16). These components are further

defined, making no mention of payments from private insurance

for Medicaid-eligible patients. See id. §§ 447.299(c)(6)–(15).

Defendants offer no convincing interpretation of this

regulation. They argue that the regulation’s definition of

“costs” from which various Medicaid payments are later

subtracted should be read to mean “unreimbursed costs.” Surreply

at 12. But the regulation defines the cost-side of the equation

and does not limit it to costs that are “unreimbursed” or

“uncompensated.” 42 C.F.R. § 447.299(c)(10). This is sensible,

as the regulation separately describes the various payments that

are subtracted from the “costs” to obtain the “annual

uncompensated costs.” See id. §§ 447.299(c)(6)–(9). Defendants’

reading would appear to double count Medicaid-related payments

(first as “reimbursements” to be subtracted to arrive at the

“cost” figure, then again as payments specifically enumerated in

the regulation as being subtracted from the overall cost figure

to obtain the “unreimbursed costs”). Accordingly, plaintiffs are

likely to succeed in arguing that the Rule cannot support

defendants’ policy and that FAQ 33 is the sole authority for it.3

3
To be sure, the Court must “give substantial deference to an
agency’s interpretation of its own regulations.” Thomas
Jefferson Univ. v. Shalala, 512 U.S 504, 512 (1994). The
government, however, has offered a “plainly erroneous
interpretation,” id., which ignores a specific definition

23
 2. Plaintiffs Likely Have Standing to Challenge these
Defendants’ Enforcement of FAQ 33.

Having found that FAQ 33 has independent legal effect, the

Court addresses defendants’ argument that plaintiffs are

unlikely to succeed on the merits because they lack standing. To

establish Article III standing, plaintiffs “‘must establish that

(1) [they] suffered an injury-in-fact; (2) there is a causal

connection between the injury and the conduct complained of; and

(3) the injury will likely be redressed by a favorable

decision.’” Associated Builders & Contractors, Inc. v. Shiu, No.

13-1806, 2014 WL 1100779, at *4 (D.D.C. Mar. 21, 2014) (quoting

In re Polar Bear Endangered Species Act Listing, 627 F. Supp. 2d

16, 24 (D.D.C. 2009)). The redressability prong of this test

asks “whether the relief sought, assuming that the court chooses

to grant it, will likely alleviate the particularized injury

alleged by the plaintiff.” Food & Water Watch v. EPA, 5 F. Supp.

3d 62, 78 (D.D.C. 2013). “[E]ven at the pleading stage,

[plaintiffs] must make factual allegations showing that the

relief [they] seek[] will be likely to redress [their] injury.”

Renal Physicians Ass’n v. U.S. Dep’t of Health & Hum. Servs.,

489 F.3d 1267, 1276 (D.C. Cir. 2007). Defendants make two

standing arguments, both of which challenge plaintiffs’ ability

to obtain redress from this Court.

provided by the regulation, and relies solely on creative
readings of certain portions of the Rule’s Preamble.

24
 Defendants’ first argument is that the Court cannot redress

plaintiffs’ injuries because FAQ 33 has no legal effect. See

Opp. at 22–23. As discussed above, this is incorrect. See supra

Part III.A.1. A Court order enjoining the enforcement of FAQ 33

would “likely alleviate the particularized injury alleged by

[plaintiffs].” Food & Water Watch, 5 F. Supp. 3d at 78.

Defendants’ second argument is that plaintiffs’ injury is

caused by the pending recoupment by state Medicaid agencies,

neither of which are parties to this case, making it impossible

for the Court to grant relief. See Opp. at 23–24. Defendants

argue that any injunction against the enforcement of FAQ 33 by

CMS “would have no effect on either the states’ obligation to

comply with the December 2008 final rule or the states’ efforts

to recoup any excess DSH payments from plaintiffs.” Id. at 24.

For one, the Rule has no bearing on this issue. See supra Part

III.A.1. As for the effect an injunction against CMS’s

enforcement of FAQ 33 would have, the relationship between CMS

and the state agencies is not as independent as defendants aver.

“When the suit is one challenging the legality of government

action or inaction . . . [and] a plaintiff’s asserted injury

arises from the government’s allegedly unlawful regulation . . .

of someone else . . . it becomes the burden of the plaintiff to

adduce facts showing that those choices have been or will be

made in such a manner as to produce causation and permit

25
redressability of injury.” Lujan v. Defenders of Wildlife, 504

U.S. 555, 561–62 (1992) (emphasis omitted); see also Simon v. E.

Ky. Welfare Rights Org., 426 U.S. 26, 41–42 (1976). In such

circumstances, “mere unadorned speculation as to the existence

of a relationship between the challenged government action and

the third-party conduct will not suffice to invoke the federal

judicial power.” Nat’l Wrestling Coaches Ass’n v. Dep’t of

Educ., 366 F.3d 930, 938 (D.C. Cir. 2004) (quotation marks

omitted). Standing may be established “on the basis of injuries

caused by regulated third parties where the record present[s]

substantial evidence of a causal relationship between the

government policy and the third-party conduct, leaving little

doubt as to causation and the likelihood of redress.” Id. at

941. To show this, the D.C. Circuit “ha[s] required only a

showing that the agency action is at least a substantial factor

motivating the third parties’ actions.” Tozzi v. U.S. Dep’t of

Health & Hum. Servs., 271 F.3d 301, 308 (D.C. Cir. 2001)

(quotation marks omitted).

The recoupment decisions of the state Medicaid agencies are

inextricably intertwined with the defendants’ enforcement of FAQ

33. Medicaid is “a cooperative venture between the federal and

state governments,” Johnson, 609 F. Supp. 2d at 2, aligning the

state Medicaid agencies with the defendants. The defendants

enjoy significant authority over this venture: they can reject

26
state plans that do not comport with their view of Medicaid’s

requirements (as they did for Texas’s state plan which sought to

avoid FAQ 33), and may revoke federal financial participation.

See 42 U.S.C. §§ 1316(a), (c)–(e), 1396a, 1396b. Against this

backdrop, FAQ 33 functions to require the states to include

private-insurance payments for Medicaid-eligible services in

calculating a hospital-specific limit. At a minimum, this makes

defendants’ enforcement of FAQ 33 “a substantial factor

motivating the third parties’ actions.” Tozzi, 271 F.3d at 308.

Not only is FAQ 33 enforced against the state agencies, the

state agencies have also indicated their support for plaintiffs’

position; they follow CMS’s lead only because they have to. See

Harris Decl., ECF No. 16-1 ¶¶ 4–5, 19, 22–24, 29; Ex. A-2 to

Pls.’ Reply, ECF No. 15-3 at 4; Email from Steve Aragon, Chief

Counsel, Texas Health and Human Services Commission, to Susan

Feigin Harris, Counsel for Texas Children’s (Apr. 22, 2013), ECF

No. 15-6 at 1. FAQ 33 is the only thing standing between the

plaintiffs and redress of their injuries; in other words, the

state agencies’ actions are “not made substantially independent

of” the defendants’ enforcement of FAQ 33. Competitive Enterp.

Inst. v. Nat’l Highway Traffic Safety Admin., 901 F.2d 107, 116

(D.C. Cir. 1990). For that reason, an injunction against the

defendants’ enforcement of FAQ 33 would likely redress

plaintiffs’ injuries.

27
 3. Plaintiffs Are Likely to Show that FAQ 33 Violates the
Administrative Procedure Act.

Having found that FAQ 33 likely has independent legal effect

and that plaintiffs are likely to have standing to challenge its

enforcement, the Court turns to plaintiffs’ argument that FAQ 33

violates the Administrative Procedure Act. Two interrelated

issues arise. First, whether FAQ 33 is “final agency action”

that may be challenged under 5 U.S.C. § 704. Second, whether FAQ

33 is subject to the notice-and-comment requirements of 5 U.S.C.

§ 553, which are triggered unless the agency has promulgated

“interpretative rules, general statements of policy, or rules of

agency organization, procedure, or practice.”

Final agency action arises upon satisfaction of two

conditions:

First, the action must mark the consummation of the
agency’s decisionmaking process—it must not be of a
merely tentative or interlocutory nature. And second,
the action must be one by which rights or obligations
have been determined, or from which legal consequences
will flow.

Bennett v. Spear, 520 U.S. 154, 177–78 (1997) (quotation marks

and citations omitted). Thus, a rule that has no legal effect

independent of the source it purports to interpret is not final

agency action. See, e.g., Am. Tort Reform Ass’n v. OSHA, 738

F.3d 387, 395 (D.C. Cir. 2013). The defendants argue that FAQ 33

is not final agency action because “CMS’s interpretation is

28
embodied in the 2008 final rule. As such, FAQ 33 changes

nothing.” Opp. at 25.

Relatedly, an agency pronouncement requires “public notice and

comment” if it has “force and effect of law.” Nat’l Mining Ass’n

v. McCarthy, 758 F.3d 243, 250 (D.C. Cir. 2014) (quotation marks

omitted). Notice and comment is not required for “[a]n agency

action that merely interprets a prior statute or regulation, and

does not itself purport to impose new obligations or

prohibitions or requirements on regulated parties.” Id. at 252;

see also Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014)

(“The court’s inquiry in distinguishing legislative rules from

interpretative rules is whether the new rule effects a

substantive regulatory change to the statutory or regulatory

regime.”) (quotation marks omitted). An interpretive rule is one

that “derive[s] a proposition from an existing document whose

meaning compels or logically justifies the proposition.”

Mendoza, 754 F.3d at 1021 (quotation marks omitted). The

defendants make essentially the same argument here—“FAQ 33

merely explains how the Secretary’s existing December 2008 rule

applies . . . and FAQ 33 does not modify or depart from that

earlier rule.” Opp. at 26.

The arguments therefore overlap significantly: FAQ 33 is a

final agency action if it is one “by which rights or obligations

have been determined, or from which legal consequences will

29
flow,” Bennett, 520 U.S. at 178 (quotation marks omitted), and

it is subject to mandatory notice and comment if it has the

“force and effect of law.” Nat’l Mining Ass’n, 758 F.3d at 250.

The Court addresses these related issues jointly.4

In determining whether FAQ 33 has legal effect sufficient to

make it a final agency action that requires notice and comment,

“[t]he most important factor concerns the actual legal effect

(or lack thereof) of the agency action in question on regulated

entities.” Nat’l Mining Ass’n, 758 F.3d at 252; see also

Mendoza, 754 F.3d at 1021 (“[a] rule is legislative if it . . .

effects a substantive change in existing law or policy”). FAQ 33

modifies the formula for calculating the hospital-specific limit

in a manner that is not provided for by any prior rule or

statutory source. See supra Part III.A.1. Defendants argument

that FAQ 33’s addition of private-insurance payments for

Medicaid services is a mere gloss on the Rule’s use of the term

“costs” is wholly unconvincing—that term was defined in the Rule

in a manner that does not include private-insurance payments for

Medicaid-eligible services. See supra at 23. This is not a

situation where the challenged agency action “as a legal matter

. . . is meaningless.” Nat’l Mining Ass’n, 758 F.3d 252. Rather,

4
Although there is an additional requirement for a finding of
“final agency action”—that “the action . . . mark the
consummation of the agency’s decisionmaking process,” Bennett,
520 U.S. at 178 (quotation marks omitted)—the defendants have
not pressed that point.

30
FAQ 33 “effects a substantive change in existing law,” which

subjects it to notice-and-comment requirements, Mendoza, 754

F.3d at 1021; relatedly, it “alter[s] the legal regime to which

the action agency is subject,” which renders it “final agency

action.” Bennett, 520 U.S. at 178.

The change wrought by FAQ 33 is also binding on state Medicaid

agencies, a factor that bolsters plaintiffs’ argument. See

Natural Resources Defense Council v. EPA, 643 F.3d 311, 320

(D.C. Cir. 2011) (EPA guidance that “binds EPA regional

directors” constituted “final agency action”). Indeed, FAQ 33

has been cited as support for CMS actions, including its

rejection of the proposed amendment to the Texas Medicaid plan.

See Harris Decl., ECF No 16-1 ¶ 24. This, too, counsels in favor

of finding that FAQ 33 has legal effect akin to a final

legislative rule:

If an agency acts as if a document issued at
headquarters is controlling in the field, it if treats
the document in the same manner as it treats a
legislative rule, if it bases enforcement actions on
the policies or interpretations formulated in the
document, if it leads private parties or State
permitting authorities to believe that it will declare
permits invalid unless they comply with the terms of
the document, then the agency’s document is for all
practical purposes “binding.”

Appalachian Power Co. v. EPA, 208 F.3d 1015, 1021 (D.C. Cir.

2000).

31
 FAQ 33, moreover, effectively amends the 2008 Rule, which was

a legislative rule. This weighs in favor of finding that FAQ 33

is also a legislative rule. See Shalala v. Guernsey Mem’l Hosp.,

514 U.S. 87, 100 (1995) (“APA rulemaking would still be required

if [the agency’s Medicare reimbursement calculation] adopted a

new position inconsistent with . . . existing regulations”);

Mendoza, 754 F.3d at 1021 (“[a] rule is legislative if it . . .

adopts a new position inconsistent with existing regulations”).

This is intuitive: “[I]f a second rule repudiates or is

irreconcilable with a prior legislative rule, the second rule

must be an amendment of the first; and, of course, an amendment

to a legislative rule must itself be legislative.” Am. Mining

Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1109 (D.C.

Cir. 1993) (quotation marks and alterations omitted).

Because FAQ 33 makes a substantive change to the formula for

calculating a hospital’s DSH limit, binds state Medicaid

agencies, and effectively amends the 2008 Rule, it likely

constitutes a final agency action that may be challenged

pursuant to 5 U.S.C. § 704, and may only be promulgated in

accordance with the notice-and-comment provisions of 5 U.S.C. §

553. There is no dispute that FAQ 33 was not subject to notice-

32
and-comment procedures, so plaintiffs are likely to succeed in

arguing that FAQ 33 must be set aside as unlawful.5

B. Plaintiffs Face Irreparable Harm.

“The failure to demonstrate irreparable harm is ‘grounds for

refusing to issue a preliminary injunction, even if the other

three factors . . . merit such relief.’” Nat’l Mining Ass’n v.

Jackson, 768 F. Supp. 2d 34, 50 (D.D.C. 2011) (quoting

Chaplaincy of Full Gospel Churches, 454 F.3d at 297). “In this

Circuit, a litigant seeking a preliminary injunction must

satisfy ‘a high standard’ for irreparable injury.” ConverDyn,

2014 WL 4477555, at *8 (quoting Chaplaincy of Full Gospel

Churches, 454 F.3d at 297). The movant must demonstrate that it

faces an injury that is “both certain and great; it must be

actual and not theoretical,” and of a nature “of such imminence

that there is a clear and present need for equitable relief to

prevent irreparable harm.” Wis. Gas Co. v. FERC, 758 F.2d 669,

674 (D.C. Cir. 1985) (quotation marks and emphasis omitted).

Plaintiffs assert that the defendants’ enforcement of FAQ 33

creates irreparable harm in three ways: (1) plaintiffs

“imminently will be forced to repay millions of dollars in DSH

5
Because plaintiffs are likely to argue successfully that there
is no validly promulgated rule codifying the defendants’ policy,
the Court declines to reach the parties’ competing Chevron
arguments. Considerations of judicial economy and restraint
counsel against deciding whether 42 U.S.C. § 1396r-4(g)(1)(A)
could support a validly promulgated rule that codified the
defendants’ policy in the future.

33
funding . . . with no possible recourse to recover the DSH

payments”; (2) plaintiffs are shut out of the DSH program

entirely; and (3) plaintiffs must “reallocate even more

resources from other sources to subsidize the actual losses they

continue to incur in treating Medicaid patients.” Mem. at 36–42.

“[I]n general, ‘economic loss does not, in and of itself,

constitute irreparable harm.’” ConverDyn, 2014 WL 4477555, at *9

(quoting Wis. Gas. Co., 758 F.2d at 674). Economic losses may be

sufficient where “the loss threatens the very existence of the

movant’s business.” Wis. Gas. Co., 758 F.2d at 674.

Additionally, “if a movant seeking a preliminary injunction will

be unable to sue to recover any monetary damages against a

government agency in the future . . . financial loss can

constitute irreparable injury.” Nat’l Mining Ass’n, 768 F. Supp.

2d at 52; see also Bracco Diagnostics, Inc. v. Shalala, 963 F.

Supp. 20, 29 (D.D.C. 1997). “[T]he fact that economic losses may

be unrecoverable does not absolve the movant from its

considerable burden of proving that those losses are certain,

great and actual.” Nat’l Mining Ass’n, 768 F. Supp. 2d at 52

(quotation marks and emphases omitted). Ultimately, “[i]f a

plaintiff has shown that financial losses are certain, imminent,

and unrecoverable, then the imposition of a preliminary

injunction is appropriate and necessary.” Id. at 53.

34
 Plaintiffs’ injuries, while economic in nature, are “certain,

imminent, and unrecoverable.” Id. They are unrecoverable because

neither Washington nor Texas has a procedure for recovering DSH

funds once they have been recouped by the state. See Kinzig

Decl., ECF No. 3-14 ¶¶ 32–34; Wallace Decl., ECF No. 3-17 ¶¶ 8,

11; Simon Decl., ECF No. 3-8 ¶¶ 32–33. Similarly unrecoverable

economic loss has been found to be “more than sufficient,

especially when considered with the other [preliminary-

injunction] factors, to justify a [preliminary] injunction.”

Brendsel v. Office of Fed. Hous. Enterprise Oversight, 339 F.

Supp. 2d 52, 67 (D.D.C. 2004); see also Kan. Health Care Ass’n

v. Kan. Dep’t of Soc. & Rehab. Servs., 31 F.3d 1536, 1543 (10th

Cir. 1994) (“Because the Eleventh Amendment bars a legal remedy

in damages, and . . . no adequate state administrative remedy

existed . . . plaintiffs’ injury was irreparable.”).6

6
Plaintiffs cite a number of decisions in support of their claim
that they could not have sued the states in this Court due to
the Eleventh Amendment. See Springfield Hosp. v. Hoffman, No. 9-
cv-254, 2010 WL 3322716, at *6–7 (D. Vt. Apr. 9, 2010)
(hospital’s claim against a state for retrospective DSH payments
and a corresponding declaratory judgment “is barred by the
Eleventh Amendment”), aff’d 488 F. App’x 534, 534 (2d Cir.
2012); cf. Davidson v. Howe, 749 F.3d 21, 28 (1st Cir. 2014)
(“states do not waive their Eleventh Amendment immunity merely
be participating in the Medicaid program”) (quotation marks and
alteration omitted). Defendants responded with a cursory
argument made in a footnote, stating that plaintiffs “ignore[]
the many cases in which such rights of action have been found to
exist.” Surreply at 14 n.5. Defendants cited not a single
authority in support of that proposition, and the Court declines
to credit an unsupported, cursory argument made only in a

35
 Plaintiffs’ harms are “certain” because the state agencies

must recoup the alleged overpayments within one year of

discovering them, 42 C.F.R. § 433.312(a), or the federal

government will recoup its share. 42 U.S.C. § 1316(a), (c)–(e).

Indeed, the Texas Health and Human Services Commission has

already informed Texas Children’s that it “‘will recoup any

overpayment of DSH funds’ that is identified in the state’s

final 2011 audit report to CMS.” Simon Decl., ECF No. 3-8 ¶ 28;

see also Ex. 2-B to Simon Decl., ECF No. 3-10 at 1. Washington’s

Medicaid agency has also indicated that “the state would force

the hospital to pay back to the state any identified

overpayment.” Kinzig Decl., ECF No. 3-14 ¶ 18.

The harms are imminent because the final audit reports for the

2011 DSH payments are due on December 31, 2014, and as soon as

they are submitted, complete recoupment may occur. Simon Decl.,

ECF No. 3-8 ¶¶ 18, 28. Defendants assert that this potential

that the states could wait until September 2015 to recoup the

funds counsels against a finding of imminence, Opp. at 16, but

this misses the point: The states could move to recoup those

funds immediately and irrevocably on January 1, 2015. See Tucker

Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir.

1989) (finding irreparable harm where “there is ample evidence

footnote. See Jones v. Ottenberg’s Bakers, Inc., 999 F. Supp. 2d
185, 188 n.3 (D.D.C. 2013) (citing Hutchins v. District of
Columbia, 188 F.3d 531, 539 n.3 (D.C. Cir. 1999)).

36
of plaintiffs’ imminent bankruptcy, absent the issuance of a

preliminary injunction” in light of various liabilities

including loans “due on demand,” including some to individuals

“who could demand payment at any time and . . . bring down the

whole house of cards”) (quotation marks omitted).

Plaintiffs, moreover, are not for-profit entities facing the

loss of profit; rather, they are non-profits for whom lost funds

would mean reducing hospital services to children, many of whom

are Medicaid-eligible. The funds that Texas Children’s stands to

lose could:

[P]ay the hospital’s costs of: 52 heart or lung
transplants and related hospital stays . . .; 61 liver
transplants; 78 bone marrow transplants; 123 kidney
transplants; 955 newborn C-section deliveries;
hospital care for 1,052 low-weight newborns . . .;
32.6 percent of the pharmaceuticals purchased annually
by Texas Children’s; over 40 percent of Texas
Children’s’ annual unfunded research operations; or
the annual salaries and benefits for 192 full-time
registered nurses.

Mem. at 38 (citing Simon Decl., ECF No. 3-8 ¶ 34). Similarly,

the approximately $7,000,000 that Seattle Children’s stands

imminently to lose “can pay the hospital’s costs of: 5 heart

transplants and related inpatient stays; 25–30 liver

transplants; 30–35 intestinal transplants; 50–55 kidney

transplants; or 25–30 bone marrow transplants.” Id. (citing

Kinzig Decl., ECF No. 3-14 ¶ 22). This imminent loss is

compounded by plaintiffs’ effective exclusion from the DSH

37
program, which adds additional millions in lost funds annually.

Finally, the recoupment of the 2011 “overpayments” from

plaintiffs harms “other important services and programs funded

by Plaintiffs” by forcing them to reallocate resources to cover

even more of the costs of treating Medicaid patients. Mem. at

39; see also Simon Decl., ECF No. 3-8 ¶¶ 35–36. While this harm

would not drive plaintiffs out of business, it is different in

kind from economic loss suffered by a for-profit entity.7

Defendants’ argument that “plaintiffs inexplicably waited

years to file this suit, thereby creating their own purported

emergency,” Opp. at 12, is unconvincing. Excessive delay may

counsel against a finding of irreparable harm “[i]f the

plaintiff has failed to prosecute its claim for injunctive

relief promptly, and if it has no reasonable explanation for its

delay.” NRDC v. Pena, 147 F.3d 1012, 1026 (D.C. Cir. 1998); see

also Newdow v. Bush, 355 F. Supp. 2d 265, 292 (D.D.C. 2005) (“An

unexcused delay in seeking extraordinary injunctive relief may

be grounds for denial because such delay implies a lack of

7
Defendants argument that “monetary loss constitutes irreparable
harm only where the loss threatens the very existence of the
[movant’s] business,” Opp. at 17, misses the point—plaintiffs
may not be driven out of business, but programs they provide may
be. Moreover, the case cited by the defendants in support of
this argument, Bill Barrett Corp. v. United States Department of
Interior, 601 F. Supp. 2d 331 (D.D.C. 2009), relied on the fact
that the evidence was “at best, inconclusive as to whether [the
harm plaintiff sought to avoid] is likely to occur” and the
plaintiff “ha[d] not established that corrective or compensatory
relief is otherwise unavailable.” Id. at 335, 336.

38
urgency and irreparable harm.”). Plaintiffs, however, have

explained why they filed suit when they did.

Plaintiffs did not become aware of the policy until June 2011

(Seattle Children’s) and March 2012 (Texas Children’s). See

Kinzig Decl., ECF No. 3-14 ¶ 14; Simon Decl., ECF No. 3-8 ¶ 24.8

In light of the nontraditional nature of FAQ 33—an answer to a

frequently-asked question posted on an agency website—plaintiffs

reasonably pursued non-litigation avenues first. They lobbied

CMS to make clear that FAQ 33 was the sole source for the new

calculation and therefore an unlawful regulation, protested with

their state Medicaid agencies, and pressed the issue with

sympathetic members of Congress. See supra at 9–13, 15.

Texas Children’s engaged in further steps, suing its state

Medicaid agency, which found itself bound by CMS’s guidance, and

pressing the state to amend its Medicaid plan to avoid FAQ 33.

See supra at 14–15. Texas Children’s had not exhausted these

options until mid-September 2014, when the state decided—over

Texas Children’s’ objections—not to appeal CMS’s rejection of

its proposed amendment. See Harris Decl., ECF No. 16-1 ¶ 24.

Meanwhile, neither hospital received the results of the audit

of 2011 payments—the first audit that triggers recoupment—until

8
Defendants assert that plaintiffs should have been aware of the
injury they seek to remedy on December 19, 2008, when the Rule
was promulgated. See Opp. at 13. This is irrelevant because the
Rule did not codify the policy. See supra Part III.A.1.

39
the fall of 2014. In Seattle Children’s’ case, they learned of

the result on September 19, 2014, Kinzig Decl., ECF No. 3-14 ¶

31, Texas Children’s learned that its protest of the preliminary

audit result had been unsuccessful on November 24, 2014. See

Simon Decl., ECF No. 3-8 ¶ 30. This case was filed soon after,

on December 5, 2014.

In light of plaintiffs’ diligent pursuit of a variety of

avenues for reversing a policy that now appears to have been

based solely on an answer to a frequently-asked question posted

on an agency’s website, plaintiffs’ “delay” does not give rise

to an inference that the harm is not irreparable and imminent.

See, e.g., Kan. Health Care Ass’n, 31 F.3d at 1544 (“Within

three months of having failed to reach such a settlement

[regarding Medicaid payments] plaintiffs commenced this action.

Under those circumstances, we are reluctant to hold that

plaintiffs’ delay should be fatal to their claim of irreparable

injury.”).9 Even if plaintiffs had waited rather than pursuing a

9
The decisions cited by defendants involved extensive delay,
unexplained delay, or delay that rendered the dispute moot. See,
e.g., Indep. Bankers Ass’n v. Heimann, 627 F.2d 486, 488 (D.C.
Cir. 1980) (weighing against a finding of irreparable harm the
fact that the plaintiff “waited twelve years before commencing
this action,” even though it had standing to do so years
earlier, when its members began to experience the allegedly
unlawful effects of the regulation); Fund for Animals v.
Frizzell, 530 F.2d 982, 987–88 (D.C. Cir. 1975) (denying request
for a preliminary injunction in part due to “the delay of the
appellants in seeking one” where “they delayed bring any action
until 44 days [after their injury arose]” and “an injunction

40
variety of remedies, the totality of the harm would not

necessarily have been immediately apparent. “[T]ardiness is not

particularly probative in the context of ongoing, worsening

injuries” because “the magnitude of the potential harm becomes

apparent gradually, undermining any inference that the plaintiff

was sleeping on its rights.” Arc of Cal. v. Douglas, 757 F.3d

975, 990 (9th Cir. 2014) (quotation marks omitted); id. at 991

(where “the harm alleged . . . related in part to the continued

economic viability of service providers in the face of cuts in

compensation,” the impact may take time to “become irreparable,”

so “waiting to file for preliminary relief until a credible case

for irreparable harm can be made is prudent rather than

dilatory”); see also Kan. Health Care Ass’n, 31 F.3d at 1544

(courts are “reluctant to criticize plaintiffs for awaiting

specific and concrete documentation of the adequacy of their

Medicaid reimbursement rates [because] [w]ithout such

documentation, they run the risk of having their claimed injury

be deemed speculative”). Accordingly, the harm the plaintiffs

face is irreparable.

would be all but futile at this time, . . . [where the harm] was
admitted to be ‘pretty well over’ on the day the case was argued
in this court”); Mylan Pharms., Inc. v. Shalala, 81 F. Supp. 2d
30, 44 (D.D.C. 2000) (claim by generic-drug maker that it
suffered irreparable harm due to its product being kept off the
market was undermined by eight-month delay; “[t]hough such a
delay is not dispositive of the issue, it further militates
against a finding of irreparable harm”).

41
 C. The Balance of Equities Favors an Injunction.

The balance-of-equities factor directs the Court to “‘balance

the competing claims of injury and . . . consider the effect on

each party of the granting or withholding of the requested

relief.’” ConverDyn, 2014 WL 4477555, at *12 (D.D.C. Sept. 12,

2014) (quoting Winter, 555 U.S. at 24). “When the issuance of a

preliminary injunction, while preventing harm to one party,

causes injury to the other, this factor does not weigh in favor

of granting preliminary injunctive relief.” Id.; see also Serono

Labs., Inc. v. Shalala, 158 F.3d 1313, 1326 (D.C. Cir. 1998). By

contrast, the balance of equities may favor a preliminary

injunction that serves only “‘to preserve the relative positions

of the parties until a trial on the merits can be held.’” Rufer

v. FEC, No. 14-837, 2014 WL 4076053, at *7 (D.D.C. Aug. 19,

2014) (quoting Camenisch, 451 U.S. at 395).

Plaintiffs largely seek to preserve the status quo. Absent an

injunction, the 2011 DSH payments they already received will be

subject to immediate and irrevocable recoupment by their

respective state Medicaid agencies. See supra at 36. The

corollary to plaintiffs’ argument is that the issuance of a

preliminary injunction may mean that the plaintiffs would retain

funds that would otherwise have been recovered by the government

or distributed to other DSHs. Defendants, however, did not argue

that this poses the same imminent and irrevocable risk. Indeed,

42
the deadline for the states to recoup the 2011 DSH overpayments

is one year from the discovery of any overpayment—approximately

September 2015. See 42 C.F.R. § 433.312(a). Moreover, if the

state-recoupment period lapsed, the federal government would

still have the right to “adjust[] . . . the Federal payment to

[the] State on account of such overpayment.” 42 U.S.C. §

1396b(d)(2)(C). It is thus not the case that “the alleged

irreparable economic injury suffered by the Plaintiffs would be

offset by the corresponding economic injury to the Secretary.”

Allina Health Servs. v. Sebelius, 756 F. Supp. 2d 61, 69 (D.D.C.

2010). The balance of equities therefore favors an injunction.

D. The Public Interest Weighs in Favor of an Injunction.

Courts have frequently found that it is in the public interest

to issue an injunction in connection with the Medicaid Act. See

e.g., Edmonds v. Levine, 417 F. Supp. 2d 1323, 1342 (S.D. Fla.

2006) (“Issuance of an injunction to enforce the federal

Medicaid Act is without question in the public interest”);

Children’s Mem’l Hosp. v. Ill. Dep’t of Pub. Aid, 562 F. Supp.

165, 174 (N.D. Ill. 1983) (the public interest was served by

issuing a preliminary injunction to prohibit the implementation

of Medicaid “in a way that conflicts with the national public

interest as articulated in [the Medicaid Act and accompanying

regulations]”). Where, as here, the plaintiffs are hospitals

that disproportionately serve Medicaid-eligible patients, it is

43
important to keep in mind that “there is a robust public

interest in safeguarding access to health care for those

eligible for Medicaid, whom Congress has recognized as ‘the most

needy in the country.’” Indep. Living Ctr. v. Maxwell-Jolly, 572

F.3d 644, 659 (9th Cir. 2009) (quoting Schweiker v. Hogan, 457

U.S. 569, 590 (1982)), vacated on other grounds by Douglas

Indep. Living Ctr., 132 S. Ct. 1204 (2012). Further, as courts

have held in the context of Medicare-reimbursement cases, “the

Secretary’s compliance with applicable law constitutes a

separate, compelling public interest.” In re Medicare

Reimbursement Litig., 309 F. Supp. 2d 89, 99 (D.D.C. 2004); see

also N. Mariana Islands v. United States, 686 F. Supp. 2d 7, 21

(D.D.C. 2009) (“The public interest is served when

administrative agencies comply with their obligations under the

APA.”). Accordingly, this factor weighs in favor of granting a

preliminary injunction.

IV. Remedy

Plaintiffs request a preliminary injunction with two

components. First, they seek an injunction preventing defendants

“from enforcing, applying, or implementing FAQ No. 33.” Proposed

Order, ECF No. 3-2 at 2. Second, they seek an order “that

Defendants shall notify the Texas and Washington state Medicaid

programs (in the form of the letter attached hereto) that,

pending further order by the Court, the enforcement of FAQ No.

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33 is enjoined and that Defendants will take no action to recoup

any federal DSH funds provided to Texas and Washington based on

a state’s noncompliance with FAQ No. 33.” Id. Defendants assert

that the latter is an improper request because it seeks “a

mandatory injunction that would compel defendants to

affirmatively perform a discretionary act.” Opp. at 18. It is

true that the standard for obtaining an injunction is

significantly heightened when a plaintiff requests affirmative

injunctive relief. See, e.g., Bradshaw v. Veneman, 338 F. Supp.

2d 139, 144 (D.D.C. 2004). Plaintiffs, however, ask only that

the Court direct the defendants to inform their state partners—

whose funding is contingent on compliance with the defendants’

directives—of the injunction. By contrast, the plaintiffs in the

cases cited by the defendants sought not only to maintain the

status quo, but also to obtain affirmative relief that was

different in kind, for example, the recovery of funds lost in

the past—effectively a retrospective, compensatory remedy. See

id.10

10
See also Bennett v. Donovan, 703 F.3d 582, 588–89 (D.C. Cir.
2013) (noting that the court would not direct an agency on
remand “to take a precise series of steps” with respect to
plaintiffs’ mortgage, including “accept[ing] assignment of the
mortgage, pay[ing] off the balance . . . and then declin[ing] to
foreclose”); Palisades Gen. Hosp., Inc. v. Leavitt, 426 F.3d
400, 403 (D.C. Cir. 2005) (once the district court set aside as
unlawful “the Secretary’s decision rejecting the hospital’s
revised wage data,” it had no “jurisdiction to order either
reclassification based upon those adjusted wage data or an

45
 The relief sought by the plaintiffs is in keeping with what

the D.C. Circuit has suggested should flow from the finding that

a legislative rule was promulgated without notice-and-comment:

“The consequence is that the agency’s previous practice . . . is

reinstated and remains in effect unless and until it is replaced

by a lawfully promulgated regulation.” Croplife Am. v. EPA, 329

F.3d 876, 884–85 (D.C. Cir. 2003). Preventing the irreparable

harm that plaintiffs face can be accomplished by ensuring that

the states learn of the Court’s injunction immediately.

V. Conclusion

For the foregoing reasons, the Court GRANTS the plaintiffs’

motion for a preliminary injunction. Any request to stay this

decision pending appeal will be denied for substantially the

same reasons as those articulated in this Opinion. An

appropriate Order accompanies this Memorandum Opinion.

SO ORDERED.

Signed: Emmet G. Sullivan
United States District Judge
December 29, 2014

adjusted reimbursement payment that would reflect such a
reclassification”); Cnty. of L.A. v. Shalala, 192 F.3d 1005,
1011–12 (D.C. Cir. 1999) (district court erred when, after
holding “that the Secretary had misinterpreted [part of the
Medicare statute],” it “directed the Secretary to calculate the
amount of . . . payments due to the Hospitals and to make
payment accordingly”).

46