Tenn. Hosp. Ass'n v. Alex M. Azar, II

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 18a0252p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

TENNESSEE HOSPITAL ASSOCIATION; TAKOMA ┐
REGIONAL HOSPITAL; DELTA MEDICAL CENTER; │
PARKWEST HOSPITAL, │
Plaintiffs-Appellees/Cross-Appellants, │
│
> Nos. 17-5970/6033
v. │
│
│
ALEX M. AZAR, II, in his official capacity as Secretary
│
of Health and Human Services; SEEMA VERMA,
│
Administrator of the Centers for Medicare and
│
Medicaid Services; CENTERS FOR MEDICARE AND
│
MEDICAID SERVICES,
│
Defendants-Appellants/Cross-Appellees. │
┘

Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 3:16-cv-03263—Waverly D. Crenshaw, Jr., Chief District Judge.

Argued: June 14, 2018

Decided and Filed: November 14, 2018

Before: MOORE, KETHLEDGE, and STRANCH, Circuit Judges.

_________________

COUNSEL

ARGUED: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN
CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants. ON
BRIEF: Tara S. Morrissey, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellants/Cross-Appellees. William H. West, BAKER DONELSON BEARMAN
CALDWELL & BERKOWITZ, PC, Nashville, Tennessee, for Appellees/Cross-Appellants.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 2

MOORE, J., delivered the opinion of the court in which STRANCH, J., joined, and
KETHLEDGE, J., joined in the result. KETHLEDGE, J. (pp. 24–28), delivered a separate
opinion concurring in the judgment.
_________________

OPINION
_________________

KAREN NELSON MOORE, Circuit Judge. This case marks the latest in a string of
lawsuits brought by hospitals across the country challenging efforts by the Centers for Medicare
and Medicaid Services (“CMS”) to direct states to recoup certain reimbursements made under
the Medicaid program. Here, plaintiffs are the Tennessee Hospital Association and three of its
member hospitals, Takoma Regional Hospital, Delta Medical Center, and Parkwest Hospital.
These hospitals serve a disproportionate share of Medicaid-eligible patients and are thereby
entitled to supplemental payments under the Medicaid Act, known as “DSH payments” or “DSH
payment adjustments.” The Medicaid Act limits the amount of DSH payments each hospital can
receive in a given year, and CMS contends that plaintiffs in this case miscalculated their DSH
payment-adjustments for fiscal year 2012 and received extra payments as a result. Plaintiffs, in
turn, insist that CMS’s approach to calculating DSH payment adjustments is out of step with the
Medicaid Act and the regulations that CMS implemented in 2008 pursuant to the Medicaid Act.
The district court agreed with plaintiffs and held that CMS’s methodology was inconsistent with
both the Medicaid Act and CMS’s 2008 regulation. Although we agree that CMS’s policy is
inconsistent with its 2008 rule and cannot be enforced against plaintiffs unless it is promulgated
pursuant to notice-and-comment rulemaking, we disagree with the district court’s conclusion that
CMS’s policy exceeds the agency’s authority under the Medicaid Act. We therefore AFFIRM
the final judgment of the district court on the sole ground that CMS may not enforce an invalidly
promulgated policy against plaintiffs and REMAND for further proceedings consistent with this
opinion.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 3

I. BACKROUND

Plaintiffs in this case—the Tennessee Hospital Association and three of its member
hospitals—are challenging efforts by the Centers for Medicare and Medicaid Services (“CMS”)
to direct Tennessee to recoup certain reimbursements paid to the hospitals under the Medicaid
program. Plaintiffs are “Disproportionate Share Hospitals” (“DSH”), which means that they
serve a disproportionate share of Medicaid-eligible and low-income patients. 42 U.S.C.
§§ 1396a(a)(13)(A)(iv); 1396r-4(b). As DSH hospitals, plaintiffs receive supplemental “DSH
payments” under the Medicaid Act to help offset the cost of caring for indigent individuals. See
id. § 1396r-4(c). The Medicaid Act limits the amount of funds any given DSH hospital can
receive in a given year to its uncompensated cost of care—i.e., the cost of caring for Medicaid-
eligible and uninsured patients less certain payments made on behalf of those patients. Id.
§ 1396r-4(g)(1)(A).

Congress amended the Medicaid Act in 2003 to require states to audit and report the
amount of DSH payments distributed to each hospital. Id. § 1396r-4(j). In 2008, CMS issued a
final rule pursuant to notice-and-comment rulemaking implementing the 2003 auditing
requirements. See Medicaid Program; Disproportionate Share Hospital Payments, 73 Fed. Reg.
77,904 (Dec. 19, 2008). To “permit verification of the appropriateness of [each hospital’s DSH]
payments,” the rule requires “each DSH hospital to which the State made a DSH payment” to
submit certain data to CMS. 42 C.F.R. § 447.299(c) (2016).1 The preamble to the rule refers to
the various categories of required data as “data elements,” 73 Fed. Reg. at 77,948, and we adopt
that terminology here. For the purposes of this case, the most relevant data elements are
displayed in the chart below.

1As discussed below, CMS issued a rule in 2017 modifying 42 C.F.R. § 447.299, but that rule was
subsequently vacated by a federal district court. Unless otherwise specified, references to “42 C.F.R. § 447.299”
refer to the pre-2017 version of the rule.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 5

42 C.F.R. § 447.299(c)(13) Total Applicable “Federal Section 1011 payments6 for
Section 1011 uncompensated inpatient and outpatient
Payments hospital services provided to Section
1011 eligible aliens with no source of
third party coverage for the inpatient
and outpatient hospital services they
receive.”
42 C.F.R. § 447.299(c)(14) Total cost of “[T]he total costs incurred for
IP/OP care for furnishing inpatient hospital and
the uninsured outpatient hospital services to
individuals with no source of third
party coverage for the hospital services
they receive.”
42 C.F.R. § 447.299(c)(16) Total annual “The total annual uncompensated care
uncompensated cost equals the total cost of care for
care costs 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 FFS
rate payments, Medicaid managed care
organization payments, supplemental /
enhanced Medicaid payments,
uninsured revenues, and Section 1011
payments for inpatient and outpatient
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) of this
section.”

The parties’ dispute turns, in large part, on how to define properly the so-called
“Medicaid shortfall” for hospitals that treat Medicaid-eligible patients who have additional
sources of insurance coverage. The Medicaid shortfall is represented by the data element in
42 C.F.R. § 447.299(c)(11), and it reflects the “[t]otal annual costs incurred” ((c)(10)) in treating
Medicaid-eligible patients less the total annual “Medicaid IP/OP payments” received ((c)(9)).

6Federal government reimbursements to hospitals for emergency health services provided to undocumented
aliens. See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173,
§ 1011, 117 Stat. 2066, 2432.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 6

The question is not as simple as it may seem. For certain hospitals—and, defendants
contend, for the plaintiff-hospitals here—subtracting total annual “Medicaid IP/OP payments”
received from “[t]otal annual costs incurred” does not give an accurate picture of how much
money a hospital has ultimately lost in caring for indigent patients because Medicaid is not the
sole source of insurance coverage for all Medicaid-eligible patients. “[C]hildren with certain
disabilities may be eligible for Medicaid and have private insurance coverage through their
parents,” for instance, and “some elderly individuals are eligible for both Medicare and
Medicaid.” First Br. at 4–5 (citing 42 U.S.C. § 1396a(a)(10)(A)(i)(II), (ii)(I)). (The latter group
is generally referred to as “dual eligibles.” Id.) For individuals with some form of dual
coverage, Medicaid typically serves as the “payer of last resort,” which means that it contributes
funds only if the private insurance or Medicare payments are less than what Medicaid would
have paid. Massachusetts v. Sebelius, 638 F.3d 24, 26 (1st Cir. 2011) (quoting Ark. Dep’t of
Health & Human Servs. v. Ahlborn, 547 U.S. 268, 291 (2006)). Thus, if private insurance or
Medicare compensates hospitals at a higher rate than Medicaid (which defendants contend is
typical, see First Br. at 5), then Medicaid contributes nothing to defray the cost of caring for such
patients. Assume, then, that a hospital spent $100 to treat a dual-eligible patient, and assume
further that Medicaid would have contributed $20 to offset the cost of that care but that Medicaid
instead contributed nothing because Medicare footed $40 of the bill. Under this scenario, the
Medicaid shortfall is seemingly $100 (total costs incurred minus total Medicaid payments
received (zero)), even though the actual loss to the hospital is only $60. See First Br. at 34.

Defendants argue that the Medicaid Act should not be read to require such a perverse
result, and that CMS has in fact directed hospitals to account for third-party payments (such as
the $40 Medicare payment in the above hypothetical) on three separate occasions. First,
defendants insist that CMS “articulated [its] payment-deduction policy” in the “Discussion of
Public Comments” section of the preamble to the 2008 rule. First Br. at 10. In response to a
question about how to calculate the costs attributable to “dual eligibles”—i.e., patients with both
Medicaid and Medicare coverage—CMS advised that “the costs attributable to dual eligibles
should be included in the calculation of the uncompensated costs of serving Medicaid eligible
individuals. But in calculating those uncompensated care costs, it is necessary to take into
account both the Medicare and Medicaid payments made, since those payments are contemplated
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 7

under Title XIX [of the Social Security Act].” 73 Fed. Reg. at 77,912. To defendants, this
response plainly directs hospitals to “take both the good and the bad when calculating the
uncompensated costs of treating dual eligibles”—i.e., to account for both the gross costs and the
offsetting Medicare payments. First Br. at 26. Plaintiffs, however, stress that the published text
of 42 C.F.R. § 447.299(c) contains no similar instructions regarding dual eligibles or Medicare
patients, and, in fact, does not mention dual-insured patients at all. See Second Br. at 7, 9.

Next, defendants point to two “Frequently Asked Questions” (“FAQs”) and responses
that CMS published on its website in 2010. FAQ 33 asks, in essence, whether costs and
revenues associated with patients who have “both Medicaid and private insurance” should be
included in the “DSH limit.” R. 45-1 (Van Cleave Decl., Ex. A, “Additional Information on the
DSH Reporting and Audit Requirements” at 18) (Page ID #607). CMS responds that both
“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. FAQ 34,
in turn, notes that “[t]he regulation states that costs for dual eligibles should be included in
uncompensated care costs” and asks, “[u]nder what circumstances should [hospitals] include
Medicare payments?” Id. In response, CMS explains that hospitals must “include the costs
attributable to dual eligibles when calculating the uncompensated costs of serving Medicaid
eligible individuals,” but “must also take into account payment[s] made on behalf of the
individual, including all Medicare and Medicaid payments made on behalf of dual eligibles.” Id.
Neither FAQ 33 nor FAQ 34 was promulgated through notice-and-comment rulemaking.

Finally, in August 2016, CMS issued a notice of proposed rulemaking that proposed to
amend subpart (c)(10) of the 2008 rule to define the “total annual costs incurred by each
hospital” for treating Medicaid-eligible patients as “costs net of third-party payments, including,
but not limited to, payments by Medicare and private insurance.” Medicaid Program;
Disproportionate Share Hospital Payments—Treatment of Third Party Payers in Calculating
Uncompensated Care Costs, 81 Fed. Reg. 53,980, 53,985 (Aug. 15, 2016). The final rule was
published in April 2017 with the same language as quoted above, and it went into effect on a
prospective basis on June 2, 2017. Medicaid Program; Disproportionate Share Hospital
Payments—Treatment of Third Party Payers in Calculating Uncompensated Care Costs, 82 Fed.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 8

Reg. 16,114, 16,122 (Apr. 3, 2017). The District Court for the District of Columbia
subsequently determined that the final rule was “inconsistent with the plain language of the
Medicaid Act,” and vacated the rule. See Children’s Hosp. Ass’n of Tex. v. Azar, 300 F. Supp.
3d 190, 205, 211 (D.D.C. 2018). That case is currently on appeal before the D.C. Circuit.

Notwithstanding CMS’s purported payment-deduction policy, plaintiffs here did not
account for third-party payments when calculating their DSH payment adjustment. On
December 1, 2016, Tennessee’s Medicaid program (TennCare) notified plaintiffs that audits of
their 2012 payment adjustments revealed that they had received significant DSH overpayments
for the 2012 fiscal year and directed plaintiffs to repay the excess funds to the state.7 R. 16
(Am. Compl. Ex. D) (Page ID #260–68). In response, plaintiffs sued. As is relevant for
purposes of this appeal, plaintiffs alleged in their complaint that CMS’s payment-deduction
policy was contrary to the unambiguous language in the Medicaid Act (Count One), ran afoul of
the published text of the 2008 rule (Count Two), and had not been promulgated pursuant to the
required notice-and-comment rulemaking process (also Count Two). See R. 16 (Am. Compl.
¶¶ 74–89) (Page ID #217–20). The district court granted summary judgment in plaintiffs’ favor,
reasoning that the policy was arbitrary and capricious, procedurally invalid, and promulgated in
excess of CMS’s statutory authority. Tenn. Hosp. Ass’n v. Price, No. 3:16-CV-3263, 2017 WL
2703540, at *7–8 (M.D. Tenn. June 21, 2017). For the remedy, the district court “permanently
enjoined” defendants from enforcing the “policies reflected in FAQs 33 and 34” against
plaintiffs, “for the fiscal years 2012–2016.” R. 85 (Order at 1) (Page ID #1441). Defendants
now appeal the district court’s judgment in plaintiffs’ favor, and plaintiffs appeal the district
court’s failure to impose a permanent injunction.

7Under the preamble to the 2008 rule, if an audit for fiscal year 2011 and onward reveals an overpayment,
the states must, within one year, return the federal share of the overpayment to CMS or redistribute the overpayment
to other qualifying hospitals, if the state plan provides for such redistribution. 73 Fed. Reg. at 77,906; 42 C.F.R.
§ 433.312. According to letters from CMS notifying plaintiffs of the audit results, Takoma Adventist Hospital owed
$188,987, R. 16 (Am. Compl., Ex. D at 2) (Page ID #260), Parkwest Medical Center owed $987,566, id. at 5 (Page
ID #263), and Delta Medical Center owed $994,894, id. at 8 (Page ID #266).
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 9

II. DISCUSSION

As the discussion below will show, defendants are correct to insist that CMS’s payment-
deduction policy, as purportedly established in the preamble to the 2008 rule and as plainly set
forth in the 2010 FAQs, is consistent with the Medicaid Act. We agree, however, with plaintiffs
and the district court that CMS failed to promulgate this policy in a procedurally valid fashion.
We further agree (now with only plaintiffs) that the district court’s chosen remedy—to enjoin
CMS from enforcing its policy from fiscal years 2012 to 2016—was insufficient. We therefore
AFFIRM the final judgment of the district court because FAQs 33 and 34 are not procedurally
valid legislative rules, and we REMAND this case to the district court with instructions to
permanently enjoin defendants from enforcing FAQs 33 and 34 against plaintiffs.

A. Is the “Payment-Deduction Policy” Consistent with the Medicaid Act?

The Administrative Procedure Act (“APA”) prohibits agencies from taking action “in
excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C.
§ 706(2)(C). We review the propriety of agency action under the two-step framework set forth
in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). At
the first step of Chevron, we employ “traditional tools of statutory construction” to determine
whether “Congress had an intention on the precise question at issue.” Id. at 843 n.9. “If the
intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of Congress.” Id. at 842–43. But if the statute
is instead “silent or ambiguous with respect to the specific issue,” we then ask, at step two of the
analysis, “whether the agency’s answer is based on a permissible construction of the statute.” Id.
at 843.

The relevant statutory provision here is 42 U.S.C. § 1396r-4(g)(1)(A), which states that
annual DSH payments to a hospital may not surpass:

the 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.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 10

Id. (emphasis added). Defendants highlight the express delegation to the Secretary to
“determine[]” the “costs incurred” as dispositive evidence that CMS’s decision to define “costs
incurred” as costs net of payments by Medicare and private insurers is reasonable under the
statute. In other words, defendants argue that CMS’s proposed interpretation of the statute is
permissible under Chevron step two. See Third Br. at 15–21. Plaintiffs disagree, arguing that
Congress capped CMS’s discretion to “determine[]” the “costs incurred” by directly specifying
which “payments” must be “net[ted]” from the final figure. See 42 U.S.C. § 1396r-4(g)(1)(A).
In Chevron parlance, plaintiffs argue that the statute unambiguously precludes the agency’s
interpretation, such that CMS’s payment-deduction policy fails at step one of the analysis. See
Second Br. at 55; Fourth Br. at 9. For six reasons, defendants prevail on this point.

First, the ambiguity of the statute is demonstrated by plaintiffs’ lack of strong textual
basis for their position. Allowing defendants to define “costs incurred” as “costs incurred net of
Medicare and private insurance payments” does not render the reference to other “payments” in
the provision superfluous. To be superfluous, one statutory phrase must be subsumed by
another. See, e.g., McDonnell v. United States, 136 S. Ct. 2355, 2367–69 (2016) (rejecting the
government’s broad interpretation of “question” and “matter” in a statute that governs public
officials’ actions “on any question, matter, cause, suit, proceeding or controversy” because the
government’s “unlimited” interpretation would mean that “every ‘cause, suit, proceeding or
controversy’ would also be a ‘question’ or ‘matter’”). Here, CMS’s proposed interpretation of
“costs incurred” would not subsume a statutory definition of “payments”—in part because
42 U.S.C. § 1396r-4(g)(1)(A) does not actually define “payments.” Rather, 42 U.S.C. § 1396r-
4(g)(1)(A) instructs CMS to deduct payments “by uninsured patients” and “payments under this
subchapter”—i.e., Medicaid payments from the state and federal governments—from hospitals’
final calculation of costs. 42 U.S.C. § 1396r-4(g)(1)(A). But the statute does not instruct CMS
to deduct only those payments from the determination of costs; the fact that certain payments
must be deducted from costs does not mean that other payments cannot be. To hold otherwise
would be “to read into the statute requirements that are simply not there.” Rote v. Zel Custom
Mfg. LLC, 816 F.3d 383, 395 (6th Cir.), cert. denied, 137 S. Ct. 199 (2016); see also Sage v.
United States, 250 U.S. 33, 38 (1919) (rejecting an argument that “reads into the words of the
statute what is not there”).
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 11

Defendants, meanwhile, point to a host of textual signals indicating that CMS has wide
latitude to define “costs incurred” as it sees fit. Defendants first note that agencies generally
have “broad methodological leeway” to interpret “words like ‘cost,’” Verizon Commc’ns, Inc. v.
FCC, 535 U.S. 467, 500 (2002) (first quote quoting AT&T Corp. v. Iowa Utilities Bd., 525 U.S.
366, 432 (Breyer, J., concurring in part and dissenting in part)), and the phrase “costs incurred”
has been interpreted, in other settings, to mean costs net of certain reimbursements, see, e.g.,
Pharm. Research & Mfrs. of Am. v. Thompson, 251 F.3d 219, 226 (D.C. Cir. 2001) (holding that
state Medicaid payments to pharmacies are not “costs” for the purposes of 42 U.S.C.
§ 1315(a)(2)(A) because manufacturers fully reimburse the state for the payments). See First Br.
at 28–29; 39. Defendants further argue that their interpretational discretion in this case is
particularly far-reaching because the statutory phrase “as determined by the Secretary” marks
“an express delegation of authority to the agency to elucidate [the] specific provision of the
statute.” Transitional Hosps. Corp. of La. v. Shalala, 222 F.3d 1019, 1026 (D.C. Cir. 2000)
(second quote quoting Chevron, 467 U.S. at 843–44) (alteration in original); see also First Br. at
37–38. Taken all together, these textual arguments demonstrate the statute’s ambiguity and
show that CMS has broad power to interpret “costs incurred.”

Second, plaintiffs’ structural argument suffers the same defect as their textual claim: they
again assume that if Congress did not require third-party and Medicare payment deductions, then
CMS may not require such deductions. Plaintiffs focus on 42 U.S.C. § 1396r-4(g)(2)(A), which
provides for additional DSH payments to certain hospitals to be used for “health services.”
Under that provision, the additional payments cannot

exceed 200 percent of the costs of furnishing hospital services described in
[42 U.S.C. § 1396r-4(g)(1)(A), and] . . . there shall be excluded any amounts
received under the Public Health Service Act, subchapter V of this chapter,
subchapter XVIII of this chapter, or from third party payors (not including the
State plan under this subchapter) that are used for providing such services during
the year.

Id. (emphasis added). According to plaintiffs, Congress’s express direction to exclude payments
from third-party payors in subsection (g)(2)(A) coupled with its failure to include any similar
language in subsection (g)(1)(A) show that Congress did not intend to give CMS authority to
exclude private-party payments from the “costs incurred” in (g)(1)(A). See Second Br. at 23–24;
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 12

see also Loughrin v. United States, 134 S. Ct. 2384, 2390 (2014) (“[W]hen ‘Congress includes
particular language in one section of a statute but omits it in another’—let alone in the very next
provision—this Court ‘presume[s]’ that Congress intended a difference in meaning.” (quoting
Russello v. United States, 464 U.S. 16, 23 (1983)) (second alteration in original)). There is no
tension, however, in Congress requiring third-party payment deductions in subsection (g)(2)(A)
and allowing third-party payment deductions in subsection (g)(1)(A). The DSH payments
provided for in (g)(2)(A) are above and beyond those mandated by (g)(1)(A); it therefore makes
sense for Congress to impose a hard limit on the ceiling of the (g)(2)(A) funds—i.e., no more
than 200% of the costs of serving Medicaid-eligible patients, less payments from Medicaid,
uninsured patients, and “third party payors”—while giving CMS more discretion to calibrate the
appropriate cap on the “standard” DSH payments discussed in (g)(1)(A). While the statute does
not require CMS to use the calculation proposed here, it may reasonably be interpreted to allow
for third-party deductions.

Third, CMS’s proposed interpretation aligns with the statutory purpose behind the
hospital-specific DSH limit, thereby buttressing the conclusion that, at Chevron step two, the
proposed interpretation is reasonable. According to the legislative history accompanying the
1993 amendment to the Medicaid Act,

[t]he purpose of the Medicaid DSH payment adjustment is to assist those facilities
with high volumes of Medicaid patients in meeting the costs of providing care to
the uninsured patients that they serve, since these facilities are unlikely to have
large numbers of privately insured patients through which to offset their operating
losses on the uninsured.

H. R. Rep. No. 103-111, at 211 (1993) (emphasis added). But allowing hospitals to receive DSH
payments for costs that private insurance companies and Medicare have already compensated
would do more than help hospitals “meet[] the costs” of serving Medicaid-eligible patients—it
would doubly “offset their operating losses on the uninsured.” See id. Indeed, the record shows
that plaintiffs had already been fully compensated for the costs of caring for Medicaid-eligible
and uninsured patients before receiving DSH payments in fiscal year 2012. See R. 42 (Fan Decl.
at 3) (Page ID #551); R. 42-2 (Fan Decl., Exhibit B, “State of Tennessee Schedule of Annual
Reporting Requirements For The Year Ended June 30, 2012”) (Page ID #562).
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 13

What is more, one of the concerns Congress identified as motivating its enactment of
hospital-specific DSH-payment caps—that some state psychiatric or university hospitals had
received DSH payments “in amounts that exceed the net costs, and in some instances the total
costs, of operating the facilities” and had then transferred their excess funds to the “State general
fund” to be used for other projects—is at least partially addressed by CMS’s payment-deduction
policy. H. R. Rep. No. 103-111, at 211 (emphasis added). In essence, Congress was concerned
that hospitals were double dipping by collecting DSH payments to cover costs that had already
been reimbursed. CMS’s payment-deduction policy responds to that double-dipping concern.
While there is no indication that the plaintiffs were transferring excess DSH funds to
Tennessee’s “general fund,” plaintiffs are conspicuously careful not to claim that their net
operating costs exceeded their compensation in fiscal year 2012. See Second Br. at 43 (arguing
that two of the three plaintiff hospitals “were running at losses in 2015 and part of 2016”—but
not in 2012—and noting that “[t]heir DSH funds were far below” the “costs they experienced in
2012”—meaning, presumably, the total costs experienced in 2012). Thus, the payment-
deduction policy may very well help alleviate some of the issues motivating the hospital-specific
DSH-payment limit in the first place.

Fourth, the legislative history more broadly does not foreclose CMS’s proffered
interpretation. Plaintiffs note that a later House Conference Report describes the statutory
provision setting hospital-specific DSH-payment limits, in relevant part, as follows:

Assuring Proper Payments to Disproportionate Share Hospitals (Section 13621).–
Prohibits designation of a hospital as a disproportionate share hospital for
purposes of Medicaid reimbursement unless the hospital has a Medicaid inpatient
utilization rate of at least one percent. Limits disproportionate share hospital
(DSH) payment adjustments to no more than the costs of providing inpatient
and outpatient services to Medicaid and uninsured patients, less payments
received from Medicaid (other than DSH payment adjustments) and
uninsured patients.

H.R. Conf. Rep. 103–213, at 835 (1993) (emphasis added). Plaintiffs are correct to insist that
nothing in this description of 42 U.S.C. § 1396r-4(g)(1)(A) suggests that CMS should interpret
costs to exclude payments from Medicare or private insurers, or that Congress contemplated that
such payments would be deducted from the final cost calculation. But plaintiffs go a step too far
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 14

when they argue that the bolded sentence above precludes CMS from “consider[ing] Medicare
payments or private insurance payments in th[e] DSH analysis.” Second Br. at 25–26.
Congressional silence on a matter is simply not the same as a congressional prohibition. To the
contrary, when silence is coupled with an express delegation, it indicates that multiple reasonable
interpretations of the statute are possible.

Fifth, if plaintiffs are right that only Medicaid payments and payments from uninsured
patients may be deducted from the gross costs of caring for Medicaid-eligible and uninsured
individuals, then the 2008 rule would itself be contrary to the Medicaid Act—an issue that no
hospital appears to have raised in any court. The 2008 rule directs hospitals to deduct “Section
1011” payments from the hospitals’ total costs each year, even though 42 U.S.C. § 1396r-4(g)(1)
does not call for such deductions.8 During the notice-and-comment period for the 2008 rule, at
least some affected parties recognized the discrepancy between the statute and the regulation, as
“[n]umerous commenters” asked CMS “to amend the proposed rule to eliminate the proposed
treatment of Section 1011 payments” because such payments “do not appear to fit in the
statutory categories of Medicaid payments, health plan payments, or payments made by
uninsured patients[] that are required to be ‘netted’ from cost for the purpose of the DSH limit
calculations.” 73 Fed. Reg. at 77,916. CMS declined to make this modification, and it seems
that no party subsequently challenged CMS’s authority to exclude Section 1011 payments from
the DSH cost calculation. While the affected parties’ acquiescence to the 2008 rule does not
resolve this case, it lends additional credence to the conclusion that CMS could reasonably
instruct hospitals to deduct payments beyond those expressly identified in 42 U.S.C. § 1396r-
4(g)(1)(A) when determining the hospitals’ DSH-payment limits.

Last, plaintiffs argue extensively that CMS has changed its interpretation of 42 U.S.C.
§ 1396r-4(g)(1)(A) over time. See Second Br. at 26–27, 29–31. This argument will become
relevant in the context of our discussion of Count Two, but it is not clear how this point furthers
plaintiffs’ claim under the Medicaid Act. “Unexplained inconsistency” in statutory interpretation

8Under the Section 1011 program, the federal government reimbursed hospitals for emergency health
services provided to undocumented aliens. See Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, Pub. L. No. 108-173, § 1011, 117 Stat. 2066, 2432. The Section 1011 program sunset at the end of the
2016 fiscal year. See First Br. at 8 n.1.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 15

may be “a reason for holding an interpretation to be an arbitrary and capricious change from
agency practice under the Administrative Procedure Act,” but it is “not a basis for declining to
analyze the agency’s interpretation under the Chevron framework.” Nat’l Cable & Telecomms.
Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005). Count One of plaintiffs’ complaint
alleges that CMS exceeded its statutory authority in enacting and enforcing a policy that was
contrary to the plain statutory text—not that CMS’s conduct was arbitrary and capricious
because it was inadequately explained. See R. 16 (Am. Compl. ¶¶ 74–80) (Page ID #217–18).
Following Brand X, it is hard to see how CMS’s purported inconsistencies have any bearing on
CMS’s statutory authority to pursue its payment-deduction policy. Put differently, Brand X
forecloses parties from arguing that an agency’s construction of a statute is unreasonable simply
because it conflicts with a prior interpretation—yet this is precisely the argument that plaintiffs
here seem to make. For this reason and the five that precede it, we conclude that CMS’s
payment-deduction policy is a reasonable interpretation of an ambiguous section of the Medicaid
Act.

B. Is the “Payment-Deduction Policy” a Valid Interpretative Rule?

Though CMS may reasonably direct states to deduct Medicare and private-insurance
payments from costs when determining each hospital’s DSH-payment limit, CMS has not
exercised its authority to do so in a procedurally proper way. The APA sets different procedural
requirements for “legislative rules” and “interpretive rules”: the former must be promulgated
pursuant to notice-and-comment rulemaking; the latter need not. Perez v. Mortg. Bankers Ass’n,
135 S. Ct. 1199, 1203–04 (2015); see also 5 U.S.C. § 553(b)(A). If an agency attempts to issue a
legislative rule without abiding by the APA’s procedural requirements, the rule is invalid. See
S. Forest Watch, Inc. v. Jewell, 817 F.3d 965, 972 (6th Cir. 2016).

The distinction between a legislative rule and an interpretive rule can be difficult to
discern, though the Supreme Court and this court have drawn some helpful lines. For one,
legislative rules have the “force and effect of law,” and interpretive rules do not. Perez, 135 S.
Ct. at 1203 (quoting Chrysler Corp. v. Brown, 441 U.S. 281, 302–03 (1979)). Thus, a rule that
“intends to create new law, rights or duties” is legislative, while a rule that “simply states what
the administrative agency thinks the statute means, and only reminds affected parties of existing
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 16

duties” is interpretive. Michigan v. Thomas, 805 F.2d 176, 182–83 (6th Cir. 1986) (quoting Gen.
Motors Corp. v. Ruckelshaus, 742 F.2d 1561, 1565 (D.C. Cir. 1984)); see also Perez, 135 S. Ct.
at 1204 (“[T]he critical feature of interpretive rules is that they are ‘issued by an agency to advise
the public of the agency’s construction of the statutes and rules which it administers.’” (quoting
Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995)). Because interpretive rules cannot
“effec[t] a substantive change in the regulations,” a rule that “adopt[s] a new position
inconsistent with any of the Secretary’s existing regulations” is necessarily legislative. Guernsey
Mem’l Hosp., 514 U.S. at 100 (citation omitted) (first alteration in original).

Here, defendants argue that the payment-deduction policy, as set forth in the preamble to
the 2008 rule and the 2010 FAQs, is a valid interpretative rule that answers “unaddressed”
questions raised by the Medicaid Act and the 2008 rule. See First Br. at 25. According to
defendants, the payment-deduction policy merely “clarifies how to comply with the preexisting
regulatory obligation to report ‘uncompensated care costs,’” and thus “did not create ‘new rights
or duties.’” Third Br. at 6 (first quoting 42 C.F.R. § 447.299(c)(11); then quoting Friedrich v.
Sec. of Health & Human Servs., 894 F.2d 829, 835 (6th Cir. 1990)). In particular, defendants
explain that the payment-deduction policy makes clear that 42 C.F.R. § 447.299(c)(10), which
directs hospitals to report their total annual costs attributable to Medicaid-eligible patients,
excludes payments from Medicare and private insurers. Plaintiffs, of course, disagree, arguing
that the policy substantively alters the existing regulatory framework, and therefore could not be
enacted or enforced except through notice-and-comment rulemaking. See, e.g., Second Br. at
35–37. On this point, plaintiffs have the better argument.

As three circuit courts and several district courts have now held, the payment-deduction
policy elucidated in the FAQs and hinted at in the preamble to the 2008 rule seeks to amend,
rather than merely clarify, the 2008 regulations. See, e.g., Children’s Health Care v. Ctrs. for
Medicare & Medicaid Servs., 900 F.3d 1022, 1026–27 (8th Cir. 2018); Children’s Hosp. of the
King’s Daughters, Inc. v. Azar, 896 F.3d 615, 623, (4th Cir. 2018); N.H. Hosp. Ass’n v. Azar,
887 F.3d 62, 74 (1st Cir. 2018).

When an agency acts pursuant to an express delegation that directs the agency to issue
regulations or set permissible standards, the resulting rule is generally (although not universally)
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 17

considered to be legislative. See Mendoza v. Perez, 754 F.3d 1002, 1022 (D.C. Cir. 2014)
(“[R]ather than setting out a substantive standard . . ., the statute delegates authority for the
Secretary of Labor to create the substantive standard. Where Congress has specifically declined
to create a standard, the Department cannot claim its implementing rule is an interpretation of the
statute.”); Hoctor v. U.S. Dep’t of Agric., 82 F.3d 165, 169–70 (7th Cir. 1996) (deeming a
binding rule promulgated pursuant to a delegation of legislative authority “the clearest possible
example of a legislative rule”). As defendants have repeatedly reminded us, 42 U.S.C. § 1396r-
4(g)(1)(A) contains just such an express delegation of authority.

The agency exercised that delegated authority by promulgating the 2008 regulations,
which define the “Total Cost of Care for Medicaid IP/OP [inpatient and outpatient] Services” as
“[t]he total annual costs incurred by each hospital for furnishing inpatient hospital and outpatient
hospital services to Medicaid eligible individuals.” 42 C.F.R. § 447.299(c)(10). Having defined
the “Total Cost of Care” to Medicaid-eligible patients as the “total annual costs incurred” in a
binding regulation, CMS cannot now interpret the “Total Cost of Care” to mean something less.

It may seem odd to hold that the regulatory language is unambiguous while the statutory
language is open to multiple permissible constructions. In truth, however, the two positions are
well aligned. Congress offered CMS an opportunity to determine the “costs incurred” as it saw
fit. CMS then enacted a regulation that interpreted that statutory term expansively—i.e., to mean
the “total” annual costs hospitals incurred in treating Medicaid-eligible patients. CMS cannot
now narrow the regulatory definition through an interpretive rule.

Defendants resist the plain reading of 42 C.F.R. § 447.299(c)(10) and remind us that
“‘expressio unius’ type argument[s]” should not be used to reject an agency’s interpretation of its
own regulation. See First Br. at 31 (quoting Ky. Res. Council, Inc. v. EPA, 467 F.3d 986, 994
(6th Cir. 2006)). But defendants’ reliance on Kentucky Resources Council is unavailing. There,
a regulation listed two exceptions to a particular regulatory requirement, and the EPA
successfully argued that this express naming of two exceptions did not preclude the agency from
reading other language in the regulation to allow a third exception. See 467 F.3d at 993–94. The
flexibility evident in the regulation at issue in Kentucky Resources Council is absent here, as the
2008 rule says precisely what “total annual costs incurred” encompasses. An “‘expressio unius’
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 18

type argument” is not needed to hold that regulatory terms defined to mean one thing cannot be
interpreted to mean the opposite.

Defendants argue that the 2008 rule does, in fact, contain the sort of textual hooks needed
to sustain defendants’ proposed interpretation. For instance, defendants note that “[t]he
regulation describes the Medicaid shortfall as the ‘Total Medicaid Uncompensated Care’ or
‘[t]he total amount of uncompensated care attributable to Medicaid inpatient and outpatient
services.’” First Br. at 30 (quoting 42 C.F.R. § 447.299(c)(11)) (emphasis in original).
Defendants further note that the regulation describes the Medicaid shortfall as a component of
each hospital’s “total annual uncompensated care cost[s].” Id. § 447.299(c)(16) (emphasis
added). According to defendants, such references to uncompensated costs support defendants’
subsequent instruction to deduct third-party payments from hospitals’ total costs of caring for
Medicaid-eligible patients. The trouble for defendants, however, is that the regulation already
defines “uncompensated costs” in a manner that forecloses defendants’ current interpretation.
42 C.F.R. § 447.299(c)(11), for example, explains that the “total amount of uncompensated care”
attributable to Medicaid patients “should be the result of subtracting the amount identified in
§ 447.299(c)(9) [total Medicaid payments] from the amount identified in § 447.299(c)(10) [total
cost of caring for Medicaid-eligible patients],” and as already described above, § 447.299(c)(10)
defines the cost of caring for Medicaid-eligible patients as the “total annual costs incurred by
each hospital”—not the total uncompensated or unreimbursed costs. The regulation therefore
cannot support defendants’ proposed gloss.

For this reason, defendants’ dependence on the “Discussion of Public Comments” portion
of the preamble to the 2008 rule as evidence of CMS’s “contemporaneous” interpretation of the
2008 regulations is misplaced. Courts grant great deference “to an agency’s interpretation of its
own ambiguous regulation,” Ohio Dep’t of Medicaid v. Price, 864 F.3d 469, 477 (6th Cir. 2017)
(quoting Thornton v. Graphic Commc’ns Conference of Int’l Bhd. of Teamsters Supplemental
Ret. & Disability Fund, 566 F.3d 597, 611 (6th Cir. 2009)), and “[w]hen a regulation is
ambiguous, [courts] consult the preamble of the final rule as evidence of context or intent of the
agency promulgating the regulations.” City of Las Vegas v. FAA, 570 F.3d 1109, 1117 (9th Cir.
2009). But whether a regulation is ambiguous is a “threshold matter.” Ohio Dep’t of Medicaid,
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 19

864 F.3d at 477. “If the regulation is not ambiguous, [the court must] forego deference and
apply the plain language of the regulation as written.” Id. “A regulation is ambiguous when its
meaning is ‘not free from doubt,’ and its language ‘compel[s]’ no particular interpretation.” Id.
(first quoting Martin v. Occupational Safety & Health Review Comm’n, 499 U.S. 144, 150
(1991); then quoting Thomas Jefferson Univ., 512 U.S. at 512) (alteration in original). As
discussed above, 42 C.F.R. § 447.299(c)(10) unambiguously declines to exclude third-party
payments from hospitals’ calculation of their total annual incurred costs. Deference to the
preamble is therefore unwarranted.

Moreover, even if it were appropriate to consider the preamble when assessing the
meaning of the 2008 rule, the preamble does as much to harm defendants’ cause as to advance it.
The preamble explains that the 2008 rule is intended to provide “detailed identification of the
data elements necessary to comply with such reporting and auditing requirements expressly
contained in [the] statute.” 73 Fed. Reg. at 77,907. The preamble further states that “[t]he
definitions of the data elements track the statutory language, and do not change the calculation
that should have always been performed.” Id. at 77,921. Yet, as plaintiffs detail in their briefs,
none of the “data elements” set forth in 42 C.F.R. §§ 447.299(c)(6)–(c)(16) accounts for
payments by Medicare or private insurance. See, e.g., Second Br. at 7. There is thus a
disconnect between the preamble—which assures hospitals that the 2008 rule identifies all the
data necessary to calculate and report their respective DSH limits—and CMS’s current
interpretation—which essentially says that proper calculation and reporting requires additional
data (i.e., third-party payments) that are never directly mentioned or requested in the published
text of the rule.

Indeed, the mismatch between the “data elements” the rule identifies as “necessary to
comply with [the statute’s] reporting and auditing requirements,” 73 Fed. Reg. at 77,907, and the
payments CMS now argues the hospitals ought to have deducted may explain why Tennessee’s
own auditor violated the 2008 rule in its efforts to comply with CMS’s payment-deduction
policy. A declaration submitted by Casey Dungan, the former Chief Financial Officer for
TennCare, explained that the auditor of TennCare’s DSH program accounted for Medicare and
private insurance payments by placing those funds in the “Regular IP/OP Medicaid FFS Rate
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 20

Payments” column of the DSH audit spreadsheet that the state submitted to CMS in accordance
with its audit and reporting requirements. See R. 44 (Dungan Decl. at 2) (Page ID #568); see
also R. 60 (Joint Stipulations of Fact ¶ 24) (Page ID #836) (explaining that the column headings
in the “Schedule of Annual Reporting Requirements” are virtually identical to the “categories of
payments and costs set forth in 42 C.F.R. § 447.299(c)” and that CMS generated the Schedule
form and used the Schedule in reviewing Tennessee’s 2012 DSH audit). Plainly, this accounting
methodology violates the 2008 rule, which defines the “IP/OP Medicaid fee-for-service (FFS)
basic rate payments” as “[t]he total annual amount paid to the hospital under the State plan,
including Medicaid FFS rate adjustments, but not including DSH payments or
supplemental/enhanced Medicaid payments, for inpatient and outpatient services furnished to
Medicaid eligible individuals.” 42 C.F.R. § 447.299(c)(6). Defendants argue that the auditor’s
misaccounting shows only that “that the auditor misunderstood precisely how the regulation
accounts for third-party payments” but not “whether the regulation accounts for third-party
payments.” Third Br. at 27. But the auditor cited the FAQs—not the regulation—as the basis
for its decision to deduct third-party payments from hospitals’ gross costs, see R. 44 (Dungan
Decl. at 2) (Page ID #568), and the misalignment between the auditor’s Schedule and the FAQs
more likely shows that CMS’s payment-deduction policy cannot be squared with the 2008 rule’s
requirements.

Two final considerations weigh in favor of treating CMS’s payment-deduction policy as a
legislative rule. First, defendants themselves seemed to recognize that the policy ought to be
implemented through notice-and-comment rulemaking, as they attempted to formalize the
payment-deduction policy through a proposed rule in August 2016—three-and-a-half months
before they then attempted to enforce the FAQs directly against plaintiffs in this case. See
81 Fed. Reg. at 53,985.

Second, as the First Circuit recently recognized, “pragmatic considerations” support
classifying the payment-deduction policy as legislative: “The precise question addressed by the
rule—whether to offset Medicare and third-party reimbursements—calls for a categorical
resolution that affects a broad range of payments and scenarios and likely involves large sums of
money.” N.H. Hosp. Ass’n, 887 F.3d at 73. Such sweeping policy initiatives are seemingly not
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 21

what the Supreme Court had in mind when it held that agencies need not “address every
conceivable question” that could arise in a regulatory scheme through notice-and-comment
rulemaking. Guernsey Mem’l Hosp., 514 U.S. at 96. In Guernsey, the Supreme Court held that
“an informal Medicare reimbursement guideline” was a valid interpretive rule because it
answered “[t]he only question unaddressed by the otherwise comprehensive regulations on this
particular subject.” 514 U.S. at 90, 97. “There, the Secretary argued, and the Court appeared to
agree, that the only plausible interpretation of the statutory and regulatory scheme was the one
advanced by the Secretary.” N.H. Hosp. Ass’n, 887 F.3d at 71. Thus, CMS was “simply
following the statutory command.” Id. Here, by contrast, CMS’s payment-deduction policy is
not filling the last hole in a regulation that it is otherwise “comprehensive and intricate in detail.”
Guernsey Mem’l Hosp., 514 U.S. at 96. It is instead attempting to exercise its delegated
discretion to “determine[]” the “costs incurred” in serving Medicaid-eligible patients—but this is
precisely the sort of agency action that requires notice-and-comment rulemaking. See 42 U.S.C.
§ 1396r-4(g)(1)(A). Because the APA does not authorize such a maneuver, we AFFIRM the
district court’s grant of summary judgment to plaintiffs on Count Two of their complaint.

C. Did the District Court Err in Declining to Grant Plaintiffs a Permanent Injunction?

Though plaintiffs largely prevailed in the district-court proceedings, they argue that the
district court erred in enjoining defendants from “enforcing the policies reflected in FAQs 33 and
34 against Plaintiffs” only “for the fiscal years 2012–2016.” R. 85 (Order) (Page ID #1441). We
employ “a number of different standards when reviewing a district court’s decision to grant or
deny a permanent injunction: ‘Factual findings are reviewed under the clearly erroneous
standard, legal conclusions are reviewed de novo, and the scope of injunctive relief is reviewed
for an abuse of discretion.’” King v. Zamiara, 788 F.3d 207, 217 (6th Cir. 2015) (quoting
Worldwide Basketball & Sport Tours, Inc. v. Nat’l Collegiate Athletic Ass’n, 388 F.3d 955, 958
(6th Cir. 2004)).

The district court’s injunction here is puzzling. The district court offered no explanation
for its expiration date, though it presumably assumed that the 2017 rule would govern CMS’s
enforcement efforts for fiscal years 2017 onward. As the 2017 rule has since been vacated, see
Children’s Hosp. Ass’n of Tex., 300 F. Supp. 3d at 211, nothing now precludes CMS from
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 22

enforcing the policies established in FAQ 33 and 34 against plaintiffs from purported
overpayments discovered after fiscal year 2016. Because the deficiencies with CMS’s policy as
currently formulated did not end in 2016, the district court’s cut-off date is based on “erroneous
factual findings,” and is thus an abuse of discretion. See S. Elec. Health Fund v. Bedrock Servs.,
146 F. App’x 772, 779 (6th Cir. 2005).

This does not mean, however, that the district court’s injunction—as it is currently
drafted—should be extended indefinitely. A permanent injunction should reach only “the
conduct which has been found to have been pursued or is related to the proven unlawful
conduct.” Perez v. Ohio Bell Tel. Co., 655 F. App’x 404, 412 (6th Cir. 2016) (quoting Howe v.
City of Akron, 801 F.3d 718, 753 (6th Cir. 2015)). We hold now that CMS’s payment-deduction
policy is invalid because it failed to follow the proper notice-and-comment requirements, but not
because it is at odds with the Medicaid Act. In such circumstances, the proper remedy is to
“reinstate[]” the “agency’s previous practice” and instruct that such practice must “remain[] in
effect unless and until it is replaced by a lawfully promulgated regulation.” N.H. Hosp. Ass’n v.
Burwell, No. 15-CV-460-LM, 2017 WL 822094, at *16 (D.N.H. Mar. 2, 2017), aff’d sub nom.
N.H. Hosp. Ass’n, 887 F.3d 62 (quoting Tex. Children’s Hosp. v. Burwell, 76 F. Supp. 3d 224,
247 (D.D.C. 2014)). We now so hold: defendants are permanently enjoined from enforcing
against plaintiffs FAQs 33 and 34 or the purported payment-deduction policy hidden in the
preamble of the 2008 rule, but defendants are not permanently enjoined from enforcing the
policies embedded in FAQs 33 and 34 or the preamble to the 2008 rule, in the event that CMS
promulgates (or has promulgated, via the 2017 rule) those policies through a procedurally valid
rule.

III. CONCLUSION

Plaintiffs are distressed by CMS’s efforts to claw back DSH payments based on a
procedurally invalid payment-deduction policy, and CMS is now permanently enjoined from
attempting to enforce this policy, in its current procedural form, against plaintiffs. CMS is right,
however, that it may reasonably interpret an ambiguous section of the Medicaid Act to require
deductions of third-party payments. We therefore leave it to CMS to devise a procedurally valid
legislative rule that accomplishes this statutory goal. We therefore AFFIRM the district court’s
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 23

grant of summary judgment based only on CMS’s failure to promulgate its payment-deduction
policy in a procedurally valid fashion, and we REMAND this case to the district court with
instructions to permanently enjoin defendants from enforcing FAQ 33, FAQ 34, or the purported
payment-deduction policy in the preamble of the 2008 rule against plaintiffs.
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 24

______________________________________

CONCURRING IN THE JUDGMENT
______________________________________

KETHLEDGE, Circuit Judge, concurring in the judgment. In this case the Centers for
Medicare and Medicaid Services (CMS) has offered opposite interpretations of § 1396r-
4(g)(1)(A) of the Medicaid Act. The first interpretation came in a 2008 regulation that, as the
majority recognizes, essentially echoes the statute, see Maj. Op. at 17, the second in an informal
2010 publication (responses to “Frequently Asked Questions”) in which the echoes are quite
different. That inconsistency is not only “[u]nexplained” by the agency, Nat’l Cable & Telecom.
Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005), but unacknowledged by it. Nor is
the Act’s relevant language ambiguous. Thus, on this record, either the Act’s meaning has
changed without any action by Congress—a “Living Statute,” so to speak—or else one of the
agency’s interpretations is wrong. I think the agency’s 2010 interpretation (if one can call it that)
is wrong, whereas the Majority essentially concludes that both interpretations are right. Hence I
write separately.

The question presented is whether determination of a hospital’s “costs incurred[,]” as
§ 1396r-4(g)(1)(A) uses that term, requires a hospital not only to add up its outlays in providing
services to Medicaid patients (which is the usual sense of “cost”), but also to subtract certain
payments that the hospital receives for those services. The short answer—as a matter of ordinary
English usage, and as § 1396r-4(g)(1)(A) uses these terms—is that costs and payments are
different concepts, and that the payments a hospital receives for services are not part of its “costs
incurred” in providing them.

Section 1396r-4(g)(1)(A) provides:

(g) Limit on amount of payment to hospital
(1) Amount of adjustment subject to uncompensated costs
(A) In general
A payment adjustment [i.e., payment under § 1396r-4] during a fiscal year shall
not be considered to be consistent with [§ 1396r-4] with respect to a hospital if the
payment adjustment exceeds the costs incurred during the year of furnishing
hospital services (as determined by the Secretary and net of payments under this
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 25

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. . . .

(Emphasis added.)

This provision limits the amount of reimbursement a hospital receives under § 1396r-4 to
the hospital’s “uncompensated costs[,]” which is itself a term of art defined by the formula set
forth in § 1396r-4(g)(1)(A). That formula includes three core elements: “costs,” “payments,”
and “net.” All are easy enough to define. The “cost” of providing a service is what one loses in
providing that service. See, e.g., Oxford English Dictionary (online ed. 2018) (defining “cost” as
the “[t]he spending or outlay of money”). Indeed § 1396r-4 itself defines cost in this way. That
section provides not only a cap—in § 1396r-4(g)(1)(A)—for the payment that a particular
hospital may receive, but also a floor. That floor can be calculated several ways; the first among
them depends on the hospital’s “operating costs for inpatient hospital services[.]” § 1396r-
4(c)(1). And those costs in turn are defined as “all routine operating costs, ancillary service
operating costs, and special care unit operating costs with respect to inpatient hospital
services”—in other words, the money that a hospital spends to serve patients. § 1395ww(a)(4).

In contrast, a “payment” is what one receives in return for providing a service. See, e.g.,
Oxford English Dictionary (online ed. 2018) (defining “payment” as “[a] sum of money . . . in
return for goods or services”). The Act is clear about which payments count for purposes of
§ 1396r-4(g)(1)(A): specifically, payments from Medicaid (i.e., “payments under this
subchapter”) and from patients themselves (i.e., “by uninsured patients”).

The “net,” in turn, is what remains after deducting payments from costs. See, e.g.,
Oxford English Dictionary (online ed. 2018) (defining “net” as what “remain[s] after all
necessary deductions”). Section 1396r-4(g)(1)(A) therefore provides a straightforward formula
to determine the cap for a hospital’s § 1396r-4 payment: the hospital’s “costs incurred” in
providing Medicaid services, minus certain “payments[,]” equals the “net,” i.e., its
“uncompensated costs[.]” Thus, the maximum that a hospital may receive under § 1396r-4 in a
given year is the difference between the money it spent serving Medicaid patients that year and
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 26

certain payments (specifically, payments from Medicaid and from uninsured patients) it received
in return.

The 2008 regulation is as clear as the Act. As the Majority points out, the regulation
specifically lists the payments that hospitals must deduct. Payments from Medicare and private
insurers are not among them. See 42 C.F.R. § 447.299 (2008).

But now—per the agency’s 2010 responses to “Frequently Answered Questions” (and
later in a regulation promulgated in 2017, see 42 C.F.R. § 447.229(c)(10)(i))—the agency asserts
that payments from Medicare and private insurers indeed must be included in the calculation set
forth in § 1396r-4(g)(1)(A). That calculation, to reiterate, is simple: a hospital’s “costs
incurred” in providing Medicaid services, minus certain enumerated payments (which do not
include payments from Medicare or private insurers), equals the “net,” i.e., the hospital’s
“uncompensated costs.” Payments from Medicare and private insurers (referred to from here as
“unenumerated payments”) do not, in the agency’s view, actually count as “payments” in this
calculation. Instead, the agency says, unenumerated payments are part of the determination of a
hospital’s costs incurred in providing Medicaid services. Specifically, the agency points out that,
under § 1396r-4(g)(1)(A), “‘costs incurred’ are ‘as determined by the Secretary[,]’” CMS Br. at
18 (agency’s emphasis); and thus, the agency argues, the Secretary (meaning here CMS), has
discretion to deduct unenumerated payments for Medicaid services from the hospital’s outlays
for those services in determining the hospitals’ “costs incurred” for them.

In making that argument the agency seriously overplays its hand. True, § 1396r-
4(g)(1)(A) expressly grants the agency a measure of discretion in prescribing what counts
towards a hospital’s “costs incurred.” And that means the agency has discretion to prescribe, in
the sort of minute detail that calls upon its expertise, the specific outlays that count towards a
hospital’s “costs incurred” for a particular service. Those outlays might include, for example,
the hospital’s direct costs of providing the service (for which the agency might prescribe a rate
schedule), plus some portion (as prescribed by the agency) of the hospital’s costs for overhead.

But just as the statutory delegation is circumscribed by the English language, so too is the
agency’s discretion. As an initial matter, per the statute’s plain terms, the express grant of
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 27

discretion (“as determined by the Secretary”) modifies only “costs incurred[,]” not “net of
payments.” And § 1396r-4(g)(1)(A) clearly enumerates the payments that count in this
calculation (i.e., payments from Medicaid and by the patients themselves), without any catchall
language that would bring in payments from third parties generally. Thus, § 1396r-4(g)(1)(A) is
“silent” as to whether other, unenumerated payments count in this calculation only in the sense
that, say, “children 12 and under admitted free” is silent as to whether 13-year-olds must pay.
Moreover, § 1396r-4(g)(1)(A) itself, as well as § 1396r-4(g)(2)(A), make clear that, when
Congress wanted to refer to “third party payment” or “third party payors[,]” respectively, it was
fully capable of doing so. For good reason, then, CMS focuses instead on its discretion to
determine what counts as “costs incurred.”

As for that discretion, “costs” are outflows of money; “payments” are inflows. And
nothing in the phrase “costs incurred . . . as determined by the Secretary” allows the agency to
redefine “costs” to include “payments.” The agency counters (and the Majority agrees) that
“‘words like “cost” give’ agencies ‘broad methodological leeway.’” CMS Br. at 39 (quoting
Verizon Communications, Inc. v. FCC, 535 U.S. 467, 500 (2002)). But again that leeway does
not extend to treating “payments” as “costs,” as Verizon itself illustrates. There, as here, “cost”
was “an intermediate term” in a formula for determining another statutory number—there, the
“just and reasonable rates” that a telecommunications provider could charge its customers. Id. at
499-500. The agency’s “leeway” there concerned the “expenditures”—which is to say, the
outlays—that would count as “costs” for purposes of that determination. Id. at 498-99 (emphasis
added). Thus, the agency here seeks to cross a linguistic line that Verizon never contemplated.
Moreover, § 1396r-4(g)(1)(A) expressly treats “costs,” “payments,” and “net” as separate
concepts; and “it would have been passing strange” to think that, “in the very same sentence,”
Congress meant to collapse all three concepts into one. See id. at 500. Yet that is what CMS
does when it says that a hospital’s “costs incurred” in providing a service are the net of its
outlays for that service minus unenumerated payments (from which net, in the agency’s view, the
hospital then deducts the enumerated payments, for the “net” of its uncompensated costs).

Agencies have a strong incentive (namely, Chevron) to make statutory language seem
more complicated than it actually is. Here, as shown above, the statutory formula is
 Nos. 17-5970/6033 Tenn. Hosp. Ass’n et al. v. Azar et al. Page 28

straightforward: costs, minus certain clearly enumerated payments, equals the net of a hospital’s
“uncompensated costs.” The only confusion inheres in the agency’s own efforts to convince us
to read the statute contrary to its terms. Meanwhile, the plaintiffs, for their part, have chosen not
to argue that the agency’s responses to “Frequently Asked Questions” are unworthy of deference,
and that the only agency action to which we ever could defer in this case is the 2008 regulation—
which says the opposite of what the agency says now.

In the end, however, the formula in § 1396r-4(g)(1)(A) is discernable easily enough by
means of “the traditional tools of statutory construction.” Chevron, U.S.A., Inc. v. Nat. Res. Def.
Council, Inc., 467 U.S. 837, 843 n.9 (1984). The agency’s 2008 regulation substantially honors
the statute’s terms, whereas the agency’s later about-face does not. Thus, the agency’s current
interpretation of § 1396r-4(g)(1)(A) is invalid substantively, as well as (in this case)
procedurally. Hence the district court was right on both points.