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. ) Civ. Action No. 14-2060 (EGS)
)
ALEX AZAR, Secretary, )
United States Department of )
Health and Human Services, )
et al., 1 )
)
Defendants. )
________________________________ )

MEMORANDUM OPINION

On December 29, 2014, the Court granted a motion for a

preliminary injunction brought by plaintiffs Texas Children’s

Hospital (“Texas Children’s”) and Seattle Children’s Hospital

(“Seattle Children’s”)(collectively “plaintiffs”). See Order,

Dec. 29, 2014, ECF No. 19. The Court’s Order enjoined the

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

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

Administrator of CMS (collectively “defendants”) from

“enforcing, applying, or implementing FAQ No. 33” pending

1 Pursuant to Federal Rule of Civil Procedure 25(d), the
Court substitutes as defendant the Secretary of Health and Human
Services, Alex Azar, for former Secretary of Health and Human
Services Sylvia M. Burwell. Likewise, Seema Verma, Administrator
of the Centers for Medicare and Medicaid Services, is
substituted for Marilyn B. Tavenner.
further Order of this Court. Id. Currently pending before the

Court are defendants’ motion to dismiss for lack of subject

matter jurisdiction or, in the alternative, for summary

judgment, and plaintiffs’ cross-motion for summary judgment.

Upon consideration of the motions, the responses and replies

thereto, the applicable law, the entire record, and for the

reasons stated below, defendants’ motion is DENIED, and

plaintiffs’ motion is GRANTED.

I. BACKGROUND

The Court elaborated on the facts of this case in detail in

its prior Memorandum Opinion accompanying the Court’s Order

granting plaintiffs’ motion for a preliminary injunction. See

Texas Children’s Hosp. v. Burwell, 76 F. Supp. 3d 224, 228-35

(D.D.C. 2014). The Court provides only a brief summary of the

facts here.

Plaintiffs Texas Children’s and Seattle Children’s are two

not-for-profit teaching and research hospitals in Texas and

Washington state, respectively. Compl., ECF No. 1 ¶ 1. The

hospitals 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. Plaintiffs treat a “disproportionately larger share of

Medicaid program patients.” Id. ¶ 3. Plaintiffs also “serve many

. . . very sick and medically fragile children,” meaning that

2
“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 for 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

serious illnesses, without regard to family income. See, e.g.,

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

Medicaid if they are eligible for Supplemental Security Income);

20 C.F.R. § 416.934(j)(children born weighing less than 1,200

grams are eligible for Supplemental Security Income).

In 1981, 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). To defray

the costs associated with treating Medicaid patients, the

3
amendment created “payment adjustments” available to hospitals

who treat a disproportionate share of Medicaid patients (a

disproportionate-share hospital or “DSH”). 42 U.S.C. § 1396r-

4(b)-(c).

Congress amended the program in 1993 to limit DSH payments

on a hospital-specific basis. See id. § 1396r-4(g). Under the

amendment, 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). This cap on DSH payments is known

as the “hospital-specific limit.” See Compl., ECF No. 1 ¶ 25.

To ensure the appropriateness of DSH payments, Congress

implemented an annual audit requirement in 2003, which required

hospitals to certify, 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]

4
 (E) The State has separately documented and
retained a record of all 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
for payment adjustments under this section.

42 U.S.C. § 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

On December 19, 2008, CMS issued a Final Rule (“the 2008

Rule”) outlining specific audit and reporting requirements to

ensure compliance with the statutory framework for calculating

DSH payments. See Disproportionate Share Hospital Payments, 73

Fed. Reg. 77904 (Dec. 19, 2008). The 2008 Rule requires that the

states annually submit certain 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 defines

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 the 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 FFS

5
 rate payments, Medicaid managed care
organization payments, supplemental/enhanced
Medicaid payments, uninsured revenues, and
Section 1101 payments for inpatient and
outpatient hospital services.

Id. § 447.299(c)(16). The 2008 Rule further specifically defined

each type of cost and payment to be included in the calculation.

See id. § 447.299(c)(9),(10),(12),(13),(14).

C. Frequently Asked Question (“FAQ”) 33

On January 10, 2010, CMS posted to the Medicaid.gov website

answers to questions regarding the reporting and audit

requirements. See Compl., ECF No. 1 ¶ 49. At issue in this case

is FAQ 33 which reads:

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 MIUR percentages and the DSH limit in the
same way States include days, costs, and
revenues associated with individuals dually
eligible for Medicaid and Medicare?

Days, costs, 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. As Medicaid should be the payer of last
resort, hospitals should also offset both
Medicaid and third-party revenue associated
6
 with the Medicaid eligible day against the
costs for that day to determine any
uncompensated care amount.

Id. ¶ 50.

After FAQ 33 was posted, plaintiffs were informed by their

respective state health care agencies that their hospital-

specific limit calculations would be altered. See Decl. of

Robert Simon, ECF No. 3-8 ¶ 23. In particular, both hospitals

were informed that costs reimbursed by private insurance would

now be included in the calculation for their DSH payments. See,

e.g., id. ¶¶ 23-25. The inclusion of private-insurance payments

in the calculation of each hospital’s limit significantly

reduced — or eliminated entirely — each hospital’s DSH payments.

See, e.g., id. ¶ 24(stating that Texas Children’s hospital-

specific limit was reduced by approximately $12 million when

third-party insurance payments were used to offset Medicaid-

allowable costs).

D. Preliminary Injunction

Plaintiffs filed this lawsuit on December 5, 2014. See

Compl., ECF No. 1. That same day, they filed a motion for a

preliminary injunction requesting that the Court enjoin

defendants from enforcing or applying FAQ 33 during the pendency

of this case. See Pls.’ Mem. in Supp. of Mot. for Prelim. Inj.,

ECF No. 3-1. On December 29, 2014, the Court granted plaintiffs’

motion for a preliminary injunction to prevent the enforcement

7
of the policy embodied in FAQ 33. See Texas Children’s Hospital

v. Burwell, 76 F. Supp. 3d 224 (D.D.C. 2014). Accordingly,

defendants

temporarily halt[ed] the enforcement,
application, and implementation of FAQ No. 33
in Texas and Washington, notifying the Texas
and Washington state Medicaid programs that,
pending further order by the Court, the
enforcement of FAQ No. 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 33.

Defs.’ Mem. in Supp. of Mot. for Summ. J. (“Defs.’ Summ. J.

Mem.”), ECF No. 25-1 at 8. 2

E. Other Litigation

Since the Court’s Order granting plaintiffs’ motion for a

preliminary injunction on December 29, 2014, similar lawsuits by

other hospitals challenging FAQ 33 have been filed in federal

courts in New Hampshire, Virginia, Tennessee, Missouri, and

Minnesota. Several of those courts have adjudicated the merits

of plaintiffs’ claims and, in each instance, have enjoined

defendants from enforcing FAQ 33. See New Hampshire Hosp. Ass’n

v. Burwell, No. 15-cv-460, 2017 WL 822094 (D.N.H. Mar. 2, 2017),

ECF No. 39-1 (permanently enjoining defendants from enforcing

FAQs 33 and 34), aff’d, 887 F.3d 62 (1st Cir. 2018); Tennessee

2 When citing to the electronic filings in this opinion, the
Court cites to the ECF page numbers, not the page number of the
filed document.
8
Hosp. Ass’n v. Price, No. 16-cv-3263, 2017 WL 2703540 (M.D.

Tenn. June 21, 2017), ECF No. 42-1 (granting plaintiffs’ summary

judgment and enjoining defendants from applying FAQ 33 to

plaintiffs’ hospitals); Children’s Health Care v. Burwell, 16-

cv-4064 (D. Minn. June 26, 2017), ECF No. 43-1 (permanently

enjoining defendants from enforcing FAQ 33); Children’s Hosp. of

the King’s Daughters, Inc. v. Price, 258 F. Supp. 3d 672 (E.D.

Va. 2017), ECF No. 41-1 (granting plaintiff’s motions for

preliminary-injunctive relief and enjoining defendants from

taking any action “to enforce against the Plaintiff FAQ 33,

absent further order of the court”); Missouri Hosp. Ass’n v.

Hargan, No. 2:17-cv-4052, 2018 WL 814589 (W.D. Mo. Feb. 9,

2018), ECF No. 44-1 (granting plaintiff’s motion for summary

judgment and enjoining defendants from enforcing FAQ 33).

II. Standard of Review

A. Motion to Dismiss for Lack of Subject Matter
Jurisdiction

Under Rule 12(b)(1), the plaintiff bears the burden of

establishing jurisdiction by a preponderance of the evidence.

See Lujan v. Defs. Of Wildlife, 504 U.S. 555, 561 (1992);

Shekoyan v. Sibley Int’l Corp., 217 F. Supp. 2d 59, 63 (D.D.C.

2002). Federal courts are courts of limited jurisdiction and the

law presumes that “a cause lies outside this limited

jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511

9
U.S. 375, 377 (1994); see also Gen. Motor Corp. v. Envtl. Prot.

Agency, 363 F.3d 442, 448 (D.C. Cir. 2004) (“As a court of

limited jurisdiction, we begin, and end, with an examination of

our jurisdiction.”). “[B]ecause subject-matter jurisdiction is

‘an Article III as well as statutory requirement . . . no action

of the parties can confer subject-matter jurisdiction upon a

federal court.’” Akinseye v. Dist. of Columbia, 339 F.3d 970,

971 (D.C. Cir. 2003) (quoting Ins. Corp. of Ir., Ltd. v.

Compangine des Bauxites de Guinee, 456 U.S. 694, 702 (1982)).

When considering a motion to dismiss for lack of

jurisdiction, unlike when deciding a motion to dismiss under

Rule 12(b)(6), the court “is not limited to the allegations of

the complaint.” Hohri v. United States, 782 F.2d 227, 241 (D.C.

Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987).

Rather, “a court may consider such materials outside the

pleadings as it deems appropriate to resolve the question [of]

whether it has jurisdiction to hear the case.” Scolaro v. Dist.

of Columbia Bd. of Elections & Ethics, 104 F. Supp. 2d 18, 22

(D.D.C. 2000); see also Jerome Stevens Pharms., Inc. v. Food and

Drug Admin., 402 F.3d 1249, 1253 (D.C. Cir. 2005).

B. Motion for Summary Judgment

“Summary judgment is the proper mechanism for deciding, as

a matter of law, whether an agency action is supported by the

administrative record and consistent with the [Administrative

10
Procedure Act] standard of review.” Loma Linda Univ. Med. Ctr.

v. Sebelius, 684 F. Supp. 2d 42, 52 (D.D.C. 2010) (citing

Stuttering Found. Of Am. v. Springer, 498 F. Supp. 2d 203, 207

(D.D.C. 2007)). Due to the limited role of a court in reviewing

the administrative record, however, the typical summary judgment

standards set forth in Rule 56(c) are not applicable.

Stuttering, 498 F. Supp. 2d at 207 (internal citation omitted).

Rather, under the Administrative Procedure Act (“APA”), “it is

the role of the agency to resolve factual issues to arrive at a

decision that is supported by the administrative record, whereas

‘the function of the district court is to determine whether or

not as a matter of law the evidence in the administrative record

permitted the agency to make the decision it did.’” Id.

(citation omitted). In ruling on cross-motions for summary

judgment, the court shall grant summary judgment only if one of

the moving parties is entitled to judgment as a matter of law

upon material facts that are not genuinely disputed. See

Citizens for Responsibility & Ethics in Wash. v. U.S. Dep't of

Justice, 658 F. Supp. 2d 217, 224 (D.D.C. 2009) (citation

omitted). A reviewing court may “hold unlawful and set aside

agency action, findings, and conclusions found to be . . .

arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with the law.” Ludlow v. Mabus, 793 F. Supp. 2d

352, 354 (D.D.C. 2001) (quoting 5 U.S.C. § 706(2)(A)).

11
III. DISCUSSION

Plaintiffs argue 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 is a substantive

violation of the Medicaid Act. See generally Pls.’ Mem. in Supp.

of Mot. for Summ. J. (“Pls.’ Summ. J. Mem.”), ECF No 26-1.

Defendants dispute both of these arguments and further argue

that plaintiffs lack standing to challenge FAQ 33. See generally

Defs.’ Summ. J. Mem., ECF No. 25-1. Defendants contend that FAQ

33 is not the legal source of the policy requiring the inclusion

of private-insurance payments in the hospital-specific limit

calculation, and that FAQ 33 has no independent legal effect.

Id. at 10-12. Defendants’ standing and merits argument both

turn, in part, on resolution of the same question, namely

whether FAQ 33 has an independent legal effect. Accordingly, the

Court addresses that question first, before turning to

defendants’ arguments on standing and the merits of plaintiffs’

claims.

A. FAQ 33 Has An Independent Legal Effect.

Defendants assert that FAQ 33 is not the source of the

policy requiring private-insurance payments to be included in

the hospital-specific limit calculation for DSH payments (herein

after “the policy”) and that FAQ 33 merely “restates a

longstanding and consistent interpretation of the governing

12
statute.” Defs.’ Summ. J. Mem., ECF No. 25-1 at 11. The Court

considers the governing statute, 42 U.S.C. § 1396r-4, and the

governing rule, 42 C.F.R. § 447.299, in turn.

1. The Medicaid Statute Does Not Compel
Implementation Of The Policy.

As the Court’s previous opinion recognized, the policy set

forth in FAQ 33 is “not codified by the Medicaid Act.” Texas

Children’s, 76 F. Supp. 3d at 236. The Medicaid Act defines the

hospital-specific limit for DSH payments as:

[T]he costs incurred during the year of
furnishing hospital services (as defined by
the Secretary and net of payments under this
subchapter, other than under this section, by
uninsured patients) by the hospital to
individuals who either are eligible for
medical services 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. § 139r-4(g)(1)(A). The text of the statute requires

that Medicaid payments (“payments under this subchapter”) and

“payments . . . by uninsured patients” be offset against the

“costs incurred” by the hospital. But the statute does not list

private-insurance payments as payments that must be offset.

Defendants argue that the phrase “costs incurred” in the

text of the statute only refers to “uncompensated costs.” Defs.’

Summ J. Mem., ECF No. 25-1 at 19-20. Thus, according to

defendants’ interpretation, any private-insurance payments must

be subtracted from the cost side of the hospital-specific limit

13
calculation. As support for their position, defendants point to

the heading of subsection 1396r-4(g)(1) which reads: “Amount of

adjustment subject to uncompensated costs.” Id. at 20.

Plaintiffs respond that the text of the heading “cannot overcome

the plain language of the statute that unambiguously defines

uncompensated costs.” Pls.’ Summ. J. Mem., ECF No. 26-1 at 31-

32.

The heading of a statutory section is a tool “available for

the resolution of a doubt about the meaning of a statute.” Yates

v. United States, 135 S. Ct. 1074, 1083 (2015) (quoting

Almenarez-Torres v. United States, 523 U.S. 224, 234 (1998)).

Nevertheless, headings are “not dispositive.” Id. (Alito, J.,

concurring)(noting that without other textual features

supporting a particular interpretation, the “title would not be

enough on its own.”). Furthermore, “the heading of a section

cannot limit the plain meaning of the text.” Id. at 1094 (Kagan,

J., dissenting) (quoting Trainmen v. Baltimore & Ohio R.R. Co.,

331 U.S. 519, 528-29 (1947)).

The text of the statute in this case clearly does not

include an offset for private-insurance payments: section 1396r-

4(g)(1)(A) defines the costs incurred of furnishing hospital

services as “determined by the Secretary and net of payments

under this subchapter, other than under this section, by

uninsured patients.” While defendants’ reading of “uncompensated

14
costs” suggests that costs reimbursed by private-insurance

companies should be offset, the heading “cannot limit the plain

meaning of the text.” Yates, 135 S. Ct. 1094.

Even if the statute’s text were ambiguous, headings are not

dispositive, but merely one tool of interpretation. Id. Indeed,

other textual clues directly contradict the defendants’ reading

of subsection (g)(1). For example, in the subsection immediately

following subsection (g)(1), Congress establishes a formula for

payment adjustments to certain hospitals with a high

disproportionate-share during a two-year transitional period.

See 42 U.S.C. § 1396r-4(g)(2)(A). 3 That subsection explicitly

offsets “any amount received . . . from third party payors (not

including the State plan under this title.”). Id. (emphasis

added). Thus, during the transitional period, Congress

specifically provided for an offset of private-insurance

payments for high disproportionate-share hospitals. Congress had

the opportunity and knew how to include private insurance in

defining the offset under subsection (g)(1), but chose not to.

In such a case, “when Congress includes particular language in

one section of a statute but omits in in another — let alone the

3 Plaintiffs do not allege they are high disproportionate-
share hospitals. Thus, subsection (g)(2)(A) is not directly
applicable to plaintiffs, though the comparison is useful for
purposes of statutory interpretation.

15
very next provision — this Court presumes that Congress intended

a difference in meaning.” Loughrin v. United States, 134 S. Ct.

2384, 2390 (2014).

In short, because the language of the statute does not

unambiguously require the implementation of the policy set forth

in FAQ 33, the statute cannot be the legal source of the policy. 4

2. The 2008 Rule is Not the Legal Source of the
Policy Because the Rule and the Policy Contradict
One Another.

Defendants argue that if the Medicaid Act itself is not the

source of the policy, then the 2008 Rule which was promulgated

through notice-and-comment procedures is the legal source of the

policy. See Defs.’ Summ J. Mem., ECF No. 26-1 at 12-17.

Undoubtedly, the statute provides the Secretary with some

discretion to promulgate rules through notice-and-comment

procedures to determine the boundaries of “costs incurred during

the year of furnishing hospital services.” 42 U.S.C. § 1396r-

4 Defendants also point to 42 U.S.C. § 1396r-(j)(2)(C), which
sets forth the state annual reporting requirements, arguing that
because states are required to certify in the audit that “[o]nly
the uncompensated care costs” of services are included in the
hospital-specific limit calculation, private insurance payments
must be excluded from the costs side of the DSH calculation.
Defs.’ Summ J. Mem., ECF No. 26-1 at 15. This argument is flawed
in at least two respects: first, the phrase “uncompensated care
costs” is used as a term of art to refer to costs as previously
defined in the statute under subsection (g), and second, the
term “uncompensated costs” is specifically defined otherwise in
the 2008 Rule. See infra Section III.A.2.

16
4(g)(1)(A). The 2008 Rule, 42 C.F.R. § 447.299, however, not

only does not require a private-insurance payment offset, but

also precludes implementation of the defendants’ policy. The

text of the 2008 Rule specifically describes how to calculate

the hospital-specific limit for DSH payments and does not

include an offset for private-insurance payments in that

calculation. As such, the policy stands in direct conflict with

the 2008 Rule.

Defendants argue that the 2008 Rule itself, through its use

of the term “costs incurred,” “provide[s] a clear textual

foundation for the agency’s interpretation.” Defs.’ Summ J.

Mem., ECF No. 25-1 at 12-16. They contend that their

interpretation is further supported by reading the 2008 Rule

with the accompanying Federal Register notice. Id. at 13.

Moreover, defendants assert that their interpretation must be

given “controlling weight” under the Seminole Rock-Auer

deference standard unless it is “plainly erroneous or

inconsistent with the regulations.” Id. at 16. The Court

addresses each of these arguments in turn.

a. The 2008 Rule Clearly Defines “Uncompensated
Care” and “Costs Incurred” in Such a Way
that Precludes Defendants’ Interpretation.

Defendants make a number of arguments in support of their

contention that FAQ 33 is consistent with the 2008 Rule. First,

they argue that the term “costs” and “incurred” have been

17
interpreted by numerous courts “as excluding expenses that are

offset by payments or reimbursements.” Defs.’ Summ J. Mem., ECF

No. 25-1 at 13-14. Defendants also contend that the use of the

term “uncompensated care costs” in the heading of 42 C.F.R. §

447.299(c)(16) and the reference to “costs incurred” in 42

C.F.R. § 447.299(c)(10) require that costs reimbursed by private

insurance not be included in the hospital-specific limit

calculation. Id. at 13.

Defendants’ arguments fail. When the text of a rule is

plain, the Court must enforce it according to its terms. See

King v. Burwell, 135 S. Ct. 2480, 2589 (2015). But “oftentimes

the meaning — or ambiguity — of certain words or phrases may

only become evident when placed in context. So when deciding

whether there is a plain reading of the language, we must read

the words in their context and with a view to their place in the

overall statutory scheme.” Id. (internal citations omitted).

The 2008 Rule defines “Total annual uncompensated care

costs” as follows:

The total annual uncompensated care cost
equals the total cost of care for furnishing
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 FFS rate payments,
Medicaid managed care organization payments,
supplemental/enhanced Medicaid payments,
uninsured revenues, and Section 1101
payments for inpatient and outpatient

18
 hospital services. This should equal the sum
of paragraphs (c)(9), (c)(12), and (c)(13)
subtracted from the sum of paragraphs
(c)(10) and (c)(14).

42 C.F.R. § 447.299(c)(16).
Reading the phrase “uncompensated care costs” in context,

the Rule defines specifically how to calculate the uncompensated

care costs: by adding certain enumerated payments and then

subtracting from that sum the “total cost of care” for inpatient

and outpatient services. See id. The payments side of the

equation includes: (1) certain specialized Medicaid payments,

see 42 C.F.R. § 447.299(c)(9); (2) payments made by individuals

with no source of third party coverage, see id. §

447.299(c)(12); and (3) applicable section 1101 payments, see

id. § 447.299(c)(13). Notably, these enumerated payments do not

include payments received from private-insurance companies on

behalf Medicaid-eligible patients.

Defendants point to the “costs” side of the equation to

support their interpretation and the policy embodied in FAQ 33.

The “costs” to be considered in determining “uncompensated care

costs” include (1) “[t]he total annual costs incurred by each

hospital for furnishing hospital and outpatient hospital

services to Medicaid eligible individuals,” see 42 C.F.R. §

447.299(c)(10); and (2) “the total costs incurred for furnishing

inpatient hospital and outpatient hospital services to

individuals with no source of third party coverage,” see §

19
447.299(c)(14). Defendants argue that a plain reading of the

phrase “costs incurred” in subsection (c)(10) must necessarily

exclude costs reimbursed by third-party payors because “costs

cannot be considered ‘incurred’ if they are compensated from

other sources.” Defs.’ Summ. J. Mem., ECF No. 25-1 at 14.

Defendants attempt to shoehorn private-insurance payments into

the costs portion of the equation set forth by the regulation

ignores the necessity of reading the phrase “costs incurred” in

context. After all, all other payments — i.e., Medicaid

payments, payments from the uninsured, and Section 1101 payments

— are expressly considered and subtracted from the payments side

of the equation. Simply put, subtracting private-insurance

payments from the costs side of the equation, while other

payments are subtracted from the payments side, is inconsistent

with the plain reading of the 2008 Rule. Moreover, because the

meaning of “costs incurred” within the text of the 2008 Rule as

a whole is clear, defendants’ reliance on cases such as PhRMA

for the proposition that the Secretary’s interpretation of

“costs” as “excluding amounts that were offset by compensating

amounts,” see Defs.’ Summ. J. Mem., ECF No. 25-1 at 14, is

unpersuasive.

In sum, defendants’ interpretation is unsupported by a

plain reading of the text of the 2008 Rule because subsection

20
(c)(16) contains a specific formula for “uncompensated care

costs” that does not exclude private-insurance payments.

b. Because the Text of the 2008 Rule is Clear,
the Preamble Cannot Be Used to Create
Ambiguity and Contradict the Text.

Next, defendants point to the Preamble of the 2008 Rule to

argue that the “text contained in the preamble to a regulation

can inform the proper interpretation of a regulation.” Defs.’

Summ J. Mem., ECF No. 25-1 at 16-19. The Preamble explains that

“uncompensated care costs” include the “unreimbursed costs of

providing . . . services to Medicaid eligible individuals and .

. . to individuals with no source of third party reimbursement.”

73 Fed. Reg. 77904, 77914 (emphasis added). Defendants cite to

United Steel Works of America v. Marshall, 647 F.2d 1189 (D.C.

Cir. 1981), and other cases that they claim make clear that an

agency can rely on “preamble text to elaborate on or supplement

provisions published in the Code of Federal Regulations.” Defs.’

Summ. J. Mem., ECF No. 25-1 at 18.

To be clear, the preamble to a statute or rule may be used

to help inform the proper interpretation of an ambiguous text.

See e.g., United Steel Workers, 647 F.2d at 1224 (using the

preamble of a regulation to resolve an apparently contradictory

standard within the regulation). The preamble cannot, however,

be used to contradict the text of the statute or rule at issue.

Nat’l Wildlife Fed’n v. Envtl. Prot. Agency, 286 F.3d 554, 569-

21
70 (D.C. Cir. 2002). The Court of Appeals for the District of

Columbia Circuit (“D.C. Circuit”) has explained:

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 a statute and it does not enlarge or confer
powers on administrative agencies or officers.
Where the enacting or operative parts of a
statute are unambiguous, the meaning of the
statute cannot be controlled by language in
the preamble.

Nat’l Wildlife Fed’n, 286 F.3d at 569-70 (citations and internal

quotation marks omitted).

Here, the text of the 2008 Rule included a step-by-step

guide to calculating the “unreimbursed costs,” including

specific definitions of what constitutes “costs” and what

constitutes “payments”. To the extent that these are

contradicted by the Preamble of the Rule, the definitions

control. See, e.g., 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). In other words,

this is not a situation in which the Preamble to the 2008 Rule

is needed to inform the proper interpretation of ambiguous text;

rather, the text of the 2008 Rule clearly defines the costs and

22
payments to be included in the calculation of the hospital-

specific limit, and that text must control. 5

c. Seminole Rock-Auer Deference Does Not Apply.

Finally, defendants argue that their interpretation of the

phrase “costs incurred” should control because an agency’s

interpretation of its own regulations are entitled to deference.

Defs.’ Reply, ECF No. 29 at 21 (citing, inter alia, Auer v.

Robbins, 519 U.S. 452, 462 (1997)).

Under the Seminole Rock-Auer standard of deference, a court

will grant “controlling weight” to an agency’s interpretation of

its own regulations “unless it is plainly erroneous or

inconsistent with the regulations.” Bowles v. Seminole Rock &

Sand Co., 325 U.S. 410, 414 (1945); see also Kaiser Found.

Hosps. V. Sebelius, 708 F.3d 226, 230-31 (D.C. Cir.

2013)(“[D]eference is unmerited where the interpretation is

5 Defendants also point to a 2002 letter from CMS to state
Medicaid agencies as further evidence that defendants’
interpretation that the Medicaid Act requires subtraction of
third-party insurance payments is “longstanding and consistent.”
Defs.’ Summ J. Mem., ECF No. 25-1 at 12. As an initial matter,
the 2002 letter is not a legislative rule promulgated through
appropriate notice-and-comment procedures, but rather
interpretive guidance of the governing statute. Thus, the 2002
letter would suffer from the same procedural deficiencies as FAQ
33 and therefore cannot provide a legal basis for the
defendants’ policy. Moreover, even if the 2002 letter did
support defendants’ interpretation as embodied in FAQ 33, the
letter conflicts with the plain text of the 2008 Rule, which was
promulgated through notice-and-comment procedures.

23
plainly erroneous or inconsistent with the regulation.”). In

Kaiser Foundation, the court declined to give deference to the

Secretary’s interpretation because it contradicted the plain

language of the regulation. Kaiser Found., 708 F.3d at 230-31.

Here too, for all of the reasons set forth above, the

Secretary’s interpretation as embodied in FAQ 33 is in conflict

with the plain text of the 2008 Rule and therefore deference is

not warranted.

Accordingly, as neither the text of the governing statute

nor the text of the governing rule support defendants’ policy,

FAQ 33 has an independent legal effect.

B. Plaintiffs Have Standing to Challenge the
Defendants’ Enforcement of FAQ 33.

As they did in opposing plaintiffs’ motion for a

preliminary injunction, defendants argue that plaintiffs lack

standing to bring this lawsuit because the plaintiffs fail to

meet the redressability requirement for jurisdictional standing.

Defs.’ Summ J. Mem., ECF No. 25-1 at 9-10. Defendants argue that

the Court will be unable to redress plaintiffs’ injuries

because: (1) FAQ 33 has no independent legal effect; and (2) it

is the state health care authorities rather than the federal

government that are responsible for recoupment of DSH payments.

Id. Having determined that FAQ 33 has an independent legal

effect, the Court turns to defendants’ second argument.

24
 Defendants argue that this Court is incapable of redressing

the plaintiffs’ injuries because the injuries are caused by the

state health care authorities, who are responsible for

recoupment of payments, and not by the federal defendants.

Defs.’ Summ J. Mem., ECF No. 25-1 at 9-10. Because the state

agencies are not parties to this lawsuit, defendants assert that

the Court cannot appropriately redress plaintiffs’ injures. Id.

The Court addressed this argument in its previous opinion,

concluding that “an injunction against the defendants’

enforcement of FAQ 33 would likely redress plaintiffs’

injuries.” Texas Children’s, 76 F. Supp. 3d at 239. While the

state agencies are not parties to this lawsuit, “[t]he

recoupment decisions of the state Medicaid agencies are

inextricably intertwined with the defendant’s enforcement of FAQ

33.” Id. As the Court’s prior opinion explained:

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 the causation and
the likelihood of redress.” 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
party’s actions.”

Id. (quoting Nat’l Wrestling Coaches Ass’n v. Dep’t of Educ.,

336 F.3d 930, 938 (D.C. Cir. 2004) and Tozzi v. U.S. Dep’t of

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

25
 Further, “Medicaid is a ‘cooperative venture between the

federal and state governments.’” Id. (quoting Virginia v.

Johnson, 609 F. Supp. 2d 1, 2 (D.D.C. 2009)). In working with

state governments, CMS has “significant authority” over state

agencies. Id.; see also 42 U.S.C. §§ 1316(a), (c)-(e), 1396a and

1396b. Indeed, the record in this case reflects that the state

health care agencies have expressed their support for the

plaintiffs’ position. Harris Decl., ECF No. 16-1 ¶¶ 4-5; 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. Defendants’

control over the state health agencies, coupled with these

agencies’ beliefs that FAQ 33 is binding on them, indicates that

“[a]t a minimum . . . defendants’ enforcement of FAQ 33 [is] a

substantial factor motivating the third parties’ actions.” Texas

Children’s, 76 F. Supp. 3d at 239 (citing Tozzi, 271 F.3d at

308)). Accordingly, plaintiffs have satisfied the redressability

requirement for purposes of finding standing.

C. FAQ 33 Violates the Administrative Procedure Act.

Having found that FAQ 33 has independent legal effect and

that plaintiffs have standing to challenge its enforcement, the

Court turns to whether FAQ 33 violates the Administrative

Procedure Act (“APA”), 5 U.S.C. § 701 et seq.

26
 The Administrative Procedure Act requires an agency to

follow notice-and-comment procedures when proposing new rules,

except where the agency is merely promulgating “interpretative

rules, general statements of policy, or rules of agency

organization, procedure, or practice.” 5 U.S.C. § 553(b). If an

agency does not follow proper rule-making procedures where

required, a court can “hold unlawful and set aside agency

action, findings, and conclusions found to be . . . without

observance of procedure required by law.” 5 U.S.C. § 706(2)(D).

Courts only have the authority to review “final agency

action[s].” 5 U.S.C. § 704. An action is considered “final” if

it is one which “mark[s] the consummation of the agency’s

decision-making process . . . [and] by which rights or

obligations have been determined or from which legal

consequences will flow.” Bennett v. Spear, 520 U.S. 154, 177-78

(1998).

The APA does not define “interpretive rule,” and “its

precise meaning is the source of much scholarly and judicial

debate.” Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1204

(2015). The D.C. Circuit, however, has recognized a four-part

test for determining if a rule is legislative or interpretive.

Whether “the purported interpretive rule has ‘legal effect’” is

determined by:

27
 (1) [W]hether in the absence of the rule there
would not be an adequate legislative basis for
enforcement action or other agency action to
confer benefits or ensure the performance of
duties; (2) whether the agency has published
the rule in the Code of Federal Regulations;
(3) whether the agency has explicitly invoked
its general legislative authority; and (4)
whether the rule effectively amends a prior
legislative rule. If the answer to any of
these questions is affirmative, we have a
legislative rule.

Am. Mining Cong. v. Mine Safety and Health Admin., 995 F.2d

1106, 1112 (D.C. Cir. 1993)).

The second and third factors are not contested here: FAQ 33

was not published in the Code of Federal Regulations and CMS did

not explicitly invoke its general rulemaking authority in

promulgating FAQ 33. The first factor clearly suggests that FAQ

33 is a legislative rule. As discussed above, “in the absence of

[FAQ 33]” there is no “adequate legislative basis for . . .

agency action . . . to ensure performance of duties” because

neither the statute nor the 2008 Rule support defendants’

policy. See supra Part III.A.

With respect to the fourth factor, “[t]he practical

question inherent in the distinction between legislative and

interpretive regulations is whether the new rule effects a

substantive regulatory change to the statutory or regulatory

regime.” Elec. Privacy Info. Ctr. v. U.S. Dep’t of Homeland

Sec., 653 F.3d 1, 6-7 (D.C. Cir. 2011). Notwithstanding

28
defendants’ arguments that FAQ 33 is merely the “type of

workaday advice letter that agencies prepare countless times per

year in dealing with the regulated community” that “is not

binding on the agencies or on third parties,” Defs.’ Summ. J.

Mem., ECF No. 25-1 at 10-11, the Court finds that FAQ 33 effects

a substantive change in existing law. As explained above, FAQ 33

modifies the formula for calculating the hospital-specific limit

in a manner not provided for by any prior rule or statutory

source. See supra Part III.A.

Moreover, FAQ 33 “is irreconcilable with a prior

legislative rule” and thus “the second rule must be an amendment

of the first.” Am. Mining. Cong., 995 F.3d at 1109 (internal

alterations omitted). As discussed above, the 2008 Rule clearly

defines what is included in calculating “uncompensated care

costs.” See supra III.A.2. Thus, FAQ 33, which alters the

calculation of the hospital-specific limit, effectively amends

the 2008 Rule. This, too, weighs in favor of finding that FAQ 33

is 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

v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014 (“[a] rule is

legislative if it ... adopts a new position inconsistent with

existing regulations”).

29
 Finally, defendants argue that even if the statute or

regulations do not compel their interpretation, “that

interpretation is at least permissible, and thus is entitled to

deference under Chevron[.]” Defs.’ Reply, ECF No. 30 at 3.

Under the Chevron deference standard, a court “must give

effect to an agency’s rule containing a reasonable

interpretation of an ambiguous statute.” Chevron, U.S.A., Inc.

v. NRDC, Inc., 467 U.S. 837, 843 (1984)). In determining whether

an agency determination warrants deference, a court first asks

“whether Congress has directly spoken to the precise question at

issue. If the intent of Congress is clear, that is the end of

the matter.” Chevron, 467 U.S. at 842. “[I]f the statute is

silent or ambiguous with respect to the specific issue, the

question for the court is whether the agency’s answer is based

on a permissible construction of the statute.” Id. at 843.

However, “[i]nterpretations such as those in opinion letters –

like interpretations contained in policy statements, agency

manuals, and enforcement guidelines, all of which lack the force

of law – do not warrant Chevron-style deference.” Christensen v.

Harris County, 529 U.S. 576, 587 (2000); see also United States

v. Mead Corp., 533 U.S. 218, 226-27 (2001) (“administrative

implementation of a particular statutory provision qualifies for

Chevron deference when it appears that Congress delegated

authority to the agency generally to make rules carrying the

30
force of law, and that the agency interpretation claiming

deference was promulgated in the exercise of that authority”)

(emphasis added).

As explained above, the policy embodied in FAQ 33 is not

codified by the Medicaid Act. See supra Part III.A.1; see also

Texas Children’s, 76 F. Supp. 3d 224 (“At most, the statute

might have delegated to the Secretary the ability to determine

by regulation that additional payments should be considered.”)

(emphasis added). And although Congress delegated authority to

the Secretary to determine “the costs incurred during the year

of furnishing hospital services,” 42 U.S.C. § 1396r-4(g)(1)(A),

FAQ 33 undisputedly was not “promulgated in the exercise of that

authority,” Mead, 533 U.S. at 227; see also Christensen, 529

U.S. at 587. Accordingly, Chevron deference is not warranted.

See also, e.g., New Hampshire Hosp. Ass'n v. Burwell, No. 15-cv-

460, 2017 WL 822094, at *9 (D.N.H. Mar. 2, 2017) (because “FAQs

33 and 34 are not regulations . . . . they are not entitled to

Chevron deference”); Tennessee Hosp. Ass'n v. Price, No. 3:16-

cv-3263, 2017 WL 2703540, at *7 (M.D. Tenn. June 21, 2017)

(“Even if the FAQs were considered regulations, which they are

not, Chevron deference is not warranted where a regulation is

procedurally defective — where, as here, the agency erred by

failing to follow the correct procedures in issuing the

regulation.”).

31
 Moreover, although the Supreme Court has recognized that

“an agency’s [informal] interpretation may merit some deference”

in view of the agency’s specialized experience and to support

uniformity in agency administration of laws, Mead, 533 U.S. at

234, FAQ 33 is not entitled to such deference here. Informal

interpretations merit deference to the extent they have the

“power to persuade.” Skidmore v. Swift & Co., 323 U.S. 134, 140

(1944). Here, the statutory or regulatory interpretation set

forth in FAQ 33 lacks the “power to persuade” in view of the

plain language of the Medicaid Act, see Children's Hosp. Ass'n

of Texas v. Azar, No. 17-cv-844, 2018 WL 1178024, at *10-14

(D.D.C. Mar. 6, 2018), and therefore is not entitled to

deference.

In sum, because FAQ 33 makes a substantive change to the

formula for calculating a hospital's DSH limit and effectively

amends the 2008 Rule, it is an attempt to promulgate a

legislative rule, not a mere interpretation of a governing

statute or regulations. Therefore, the policy embodied in FAQ 33

must be implemented in accordance with notice-and-comment

procedures under the APA. Because FAQ 33 was issued without

notice and comment, it is an illegally promulgated rule, and the

Court must set it aside. 6

6 Defendants also argue that “considerations of equity”
support denying plaintiffs’ requested relief. Defs.’ Mem. Supp.
32
IV. CONCLUSION

For the reasons stated above, defendants’ motion to dismiss

for lack of subject matter jurisdiction or, in the alternative,

for summary judgment is hereby DENIED, and plaintiffs’ motion

for summary judgment is hereby GRANTED. An appropriate order

accompanies this Memorandum Opinion.

SO ORDERED.

Signed: Emmet G. Sullivan
United States District Judge
June 1, 2018

at 20. Defendants argue that if state authorities are unable to
recoup payments from plaintiffs, other hospitals “that treated
greater numbers of Medicaid-eligible patients without private
insurance” would receive lower Medicaid DSH payments.” Id.
Plaintiffs counter that considerations of equity weigh in their
favor because the DSH payments they receive still do not make
them whole based on the high number of Medicaid eligible
children they treat. But it is not the Court’s role to evaluate
the merits of the challenged policy; rather, the Court’s task is
simply to decide whether FAQ 33 violates the APA. Having
concluded that it does, the Court declines to reach plaintiffs’
second argument that FAQ 33 is a substantive violation of the
Medicaid statute. In any event, the Court’s intervening
resolution of a challenge to a rule capturing the policy set
forth in FAQ 33 effectively decides this issue. See Children’s
Hospital Ass’n of Texas v. Azar, No. 17-844, 2018 WL 1178024
(D.D.C Mar. 6, 2018).

33