Children's Hospital Association of Texas v. Price

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

CHILDREN’S HOSPITAL ASSOCIATION
OF TEXAS; CHILDREN’S HEALTH
CARE d/b/a CHILDREN’S HOSPITAL
AND CLINICS OF MINNESOTA;
GILLETTE CHILDREN’S SPECIALTY
HEALTHCARE; CHILDREN’S HOSPITAL
OF THE KING’S DAUGHTERS,
INCORPORATED; SEATTLE
CHILDREN’S HOSPITAL,

Plaintiffs,

v. Civil Action No. 17-844 (EGS)

ALEX MICHAEL AZAR, II, in his
official capacity, Secretary,
Department of Health and Human
Services; SEEMA VERMA, in her
official capacity,
Administrator, Centers for
Medicare and Medicaid
Services; and the CENTERS FOR
MEDICARE AND MEDICAID
SERVICES,

Defendants.

MEMORANDUM OPINION

Under the Medicaid Act (“Act”), the federal government

provides each state funds for distribution to hospitals that

treat significantly higher percentages of Medicaid-eligible

patients to help cover the costs of providing medical care to

such individuals. However, these supplemental payments are

subject to limits to ensure that no hospital receives payments

that would result in a profit, rather than covering only
Medicaid-related costs. On May 8, 2017, Plaintiffs—one

children’s hospital association, whose members are eight free-

standing children’s hospitals in the state of Texas, and four

other free-standing children’s hospitals located in Minnesota,

Virginia, and Washington—filed suit in this Court challenging a

final rule that defines how “costs” are to be calculated for

purposes of determining the limit on the amount of the

supplemental payment a hospital serving a disproportionate share

of Medicaid-eligible individuals is entitled to receive. See

Medicaid Program; Disproportionate Share Hospital Payments –

Treatment of Third Party Payers in Calculating Uncompensated

Care Costs, 82 Fed. Reg. 16,114, 16,117 (Apr. 3, 2017) (“Final

Rule”). The Final Rule permits Defendants—the Secretary of

Health and Human Services (“the Secretary”), Centers for

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

Administrator—to define “costs” as those “costs net of third-

party payments, including, but not limited to, payments by

Medicare and private insurance.” 42 C.F.R. § 447.299(c)(10)(i).

On March 6, 2018, this Court granted Plaintiffs’ motion for

summary judgment and vacated the Final Rule, holding that the

Final Rule’s definition of “costs” was inconsistent with the

2
Act. Mem. Op., ECF No. 34 at 30, 44-45. 1 Defendants timely

appealed, and the United States Court of Appeals for the

District of Columbia Circuit (“D.C. Circuit”) reversed this

Court’s ruling, finding that the Final Rule was “consistent with

the statute’s context and purpose” and that it was not arbitrary

or capricious. Children’s Hosp. Ass’n of Tex. v. Azar, 933 F.3d

764, 772, 774 (D.C. Cir. 2019). The Court reinstated the Final

Rule and remanded the case for further proceedings consistent

with the opinion. Id. at 774.

Pending before the Court is Plaintiffs’ motion to clarify

the effective date of the Final Rule, in view of the D.C.

Circuit’s reinstatement of the Final Rule. See Pls.’ Mot. Mem.

Clarify Effective Date Final Rule (“Pls.’ Mot.”), ECF No. 44.

Plaintiffs argue that the effective date of the Final Rule

should be no earlier than the date the D.C. Circuit’s mandate

issued on November 19, 2019. Id at 5. Defendants, on the other

hand, ask the Court to find that the Final Rule is effective as

of its initial effective date of June 2, 2017. Defs.’ Opp’n

Pls.’ Mot. Clarify Effective Date Final Rule (“Defs.’ Opp’n”),

ECF No. 46 at 7-8.

1 When citing electronic filings throughout this Opinion, the
Court cites to the ECF page number, not the page number of the
filed document.
3
 Upon consideration of the parties’ submissions, the

applicable law, and the entire record herein, Plaintiffs’ motion

is DENIED.

I. Background

Medicaid is a “joint state-federal program in which

healthcare providers serve poor or disabled patients and submit

claims for government reimbursement.” Universal Health Servs.,

Inc. v. United States, 136 S. Ct. 1989, 1996-97 (2016). In

addition to serving low-income individuals, Medicaid also

provides benefits to children with certain serious illnesses,

without regard to family income. See, e.g., 42 U.S.C. §

1396a(a)(10)(A)(i)(II) (children are eligible for Medicaid if

they are eligible for Supplemental Security Income (“SSI”)); 20

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

grams are presumptively eligible for SSI). Individual states,

subject to the federal government’s review and approval,

administer their own program. See 42 U.S.C. § 1396-1. Once the

Secretary or the Secretary’s designee approves a state plan, the

state receives federal financial participation to cover part of

the costs of its Medicaid program. Id. § 1396b(a)(1). If a state

fails to comply with the statutory or regulatory requirements

governing Medicaid, the federal government may recoup federal

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

4
 The cost of treating Medicaid patients is high. To help

ease the financial strain, Congress authorized supplemental

payments (“DSH payments”) to hospitals that serve a

disproportionate share of low-income patients (“DSH hospitals”).

See 42 U.S.C. § 1396a(a)(13)(A)(iv). In 1993, to assuage

concerns that some hospitals were receiving DSH payments in

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

of operating the facilities,” Congress amended the Medicaid

program to cap DSH payments at each hospital’s costs incurred.

H.R. Rep. No. 103-111, at 211 (1993), as reprinted in 1993

U.S.C.C.A.N. 278, 538. For Medicaid patients, the Act sets the

hospital-specific limit (“HSL”) for DSH payments as “the costs

incurred during the year of furnishing hospital services” to

Medicaid-eligible individuals “as determined by the Secretary

and net of payments” under the Act (referred to as the “Medicaid

shortfall”). 42 U.S.C. § 1396r-4(g)(1)(A).

To ensure that DSH payments comply with statutory

requirements, the Medicaid Act was again amended in 2003 to

require that each state provide an annual report and an audit of

its DSH program. See id. § 1396r-4(j). The reports must identify

which hospitals receive DSH payments and the audits must verify

that the DSH payments comply with the statutory requirements.

Id. In 2008, CMS issued a final rule pursuant to notice-and-

comment rulemaking implementing the 2003 auditing requirements.

5
See Medicaid Program; Disproportionate Share Hospital Payments,

73 Fed. Reg. 77,904 (Dec. 19, 2008) (“2008 Rule”). The 2008 Rule

provided that each state must report to CMS the cost of each DSH

hospital’s “Total Medicaid Uncompensated Care,” but did not

state whether third-party payments, including payments by

Medicare and private insurers, were meant to be included in

calculating the amount. Id. at 77,950 (codified at 42 C.F.R. §

447.299(c)(11)).

On January 10, 2010, CMS posted answers to FAQs regarding

the audit and reporting requirements, clarifying that payments

made by Medicare and private insurers should be included. See

Mem. Op., ECF No. 34 at 11. The FAQs were subsequently

challenged in multiple courts as an unlawful amendment of the

2008 Rule and as inconsistent with the Medicaid Act, and each of

the courts to consider the issue found the FAQs invalid on

procedural grounds for failing to properly promulgate the policy

embodied in the FAQs in accordance with notice-and-comment

requirements. See id. at 11-13 (collecting cases).

On August 15, 2016, CMS issued a notice of proposed

rulemaking and subsequently promulgated the Final Rule. 81 Fed.

Reg. 53980, 53981 (Aug. 15, 2016). The Final Rule establishes

that payments by Medicare and private insurers are to be

included in calculating a hospital’s “costs incurred.” 82 Fed.

Reg. 16,114, 16,122 (Apr. 3, 2017) (codified at 42 C.F.R. §

6
447.299(c)(10)). It provides, among other things, that “costs .

. . [a]re defined as costs net of third-party payments,

including, but not limited to, payments by Medicare and private

insurance.” Id. The Final Rule went into effect on June 2, 2017.

Id. at 16,115. Defendants noted that, because the Final Rule

merely “provid[es] clarification to existing policy,” there is

“no issue of retroactivity, nor a need for a transition period.”

Id. at 16,118.

Plaintiffs filed suit on May 8, 2017, arguing that the

Final Rule violates the Administrative Procedure Act because it

exceeds the Secretary’s authority under the Medicaid Act and is

arbitrary and capricious. Compl., ECF No. 1. On May 15, 2017,

Plaintiffs filed a motion for a preliminary injunction

requesting the Court to “enjoin[] Defendants – on a nationwide

basis – from enforcing, applying, or implementing (or requiring

any state to enforce, apply, or implement)” the Final Rule. Mot.

Prelim. Inj., ECF No. 8 at 1. On May 23, 2017, in accordance

with the Court’s May 19, 2017 Order, the parties filed a joint

status report in which they agreed that Plaintiffs’ motion for a

preliminary injunction could “be combined with the merits and

treated also as a motion for summary judgment.” Joint Status

Report, ECF No. 11 at 2. The Court entered an order

consolidating Plaintiffs’ motion for a preliminary injunction

with a determination of the merits under Federal Rule of Civil

7
Procedure 65(a)(2) on May 24, 2017. Plaintiffs filed a combined

application for a preliminary injunction and summary judgment on

June 5, 2017. Pls.’ Combined Mem. Supp. Appl. Prelim. Inj. Summ.

J. (“Pls.’ Mem.”), ECF No. 12-1.

On March 6, 2018, this Court vacated the Final Rule and

entered summary judgment for Plaintiffs, holding that the Rule

“is inconsistent with the plain language of the Medicaid Act,”

which “clearly indicates which payments can be subtracted from

the total costs incurred during the year by hospitals” and

“nowhere mentions subtracting other third-party payments made on

behalf of Medicaid-eligible patients from the total costs

incurred.” Mem. Op., ECF No. 34 at 30, 34. Defendants timely

appealed. Notice Appeal, ECF No. 37.

While the appeal was pending, Defendants indicated on the

CMS website that “[i]n light of the decision in Children’s Hosp.

Ass’n of Texas v. Azar, No. 17-cv-844 (D.D.C. March 2, 2018),

appeal docketed, No. 18-5135 (D.C. Cir. May 9, 2018), CMS will

not be enforcing the 2017 rule (published at 82 Fed. Reg. 16114

and codified at 42 U.S.C. § 447.299(c)(10)), as long as the

Children’s Hospital Ass’n of Texas decision remains operative in

its current form. The government’s appeal of that decision is

pending at this time.” See Ex. A to Kenneally Decl., ECF No. 44-

3 at 5. States also continued to make DSH supplemental payments

8
to Plaintiffs using a formula that did not take into account the

Final Rule. Pls.’ Mot., ECF No. 44 at 8-9.

On August 13, 2019, the D.C. Circuit “reverse[d] the

judgment of [this Court], reinstate[d] the 2017 Rule and

remand[ed] the case for further proceedings consistent with

[its] opinion.” Children’s Hosp. Ass’n of Tex., 933 F.3d at 774.

The D.C. Circuit held that the Final Rule is “consistent with

the statute’s context and purpose, both of which suggest DSH

payments are meant to assist those hospitals that need them most

by covering only those costs for which DSH hospitals are in fact

uncompensated.” Id. at 772. The court further held that the

Final Rule was not the product of arbitrary and capricious

reasoning because CMS had adequately explained the reasons for

the departure from the 2008 Rule and the Secretary had tied the

Final Rule to the record. Id. at 773-74. The mandate issued on

November 19, 2019. Mandate, ECF No. 40.

On November 20, 2019, Plaintiffs moved to set a status

conference date or, in the alternative, a briefing schedule

concerning any outstanding questions following the D.C.

Circuit’s decision. Pls.’ Mot. Mem. Set Status Conf., ECF No.

39. Defendants opposed the motion. Mem. Opp’n, ECF No. 41. On

November 29, 2019, the Court denied Plaintiffs’ motion for a

hearing, but granted the motion for a briefing schedule to

resolve any remaining issues. Min. Order (Dec. 3, 2019).

9
 On or around January 10, 2020, CMS updated its website to

indicate that it intended to enforce the Final Rule. Pls.’ Mot.,

ECF No. 44 at 9; Defs.’ Opp’n, ECF No. 46 at 9. The website

stated that “[i]n the absence of an operative judicial ruling

vacating or enjoining the 2017 rule, the 2017 rule applies with

respect to all hospital services furnished on or after June 2,

2017, and CMS intends to enforce it accordingly.” Ex. B to

Kenneally Decl., ECF No. 44-3 at 12 (excluding the state of

Mississippi from enforcement due to the litigation pending in

the United States Court of Appeals for the Fifth Circuit at that

time).

On January 13, 2020, Plaintiffs filed the pending motion.

III. Analysis

In view of the D.C. Circuit’s reversal of this Court’s

decision vacating the Final Rule, the parties ask the Court to

clarify the effective date of the Final Rule. Plaintiffs contend

that the Court should find that the Final Rule’s effective date

is no earlier than the issuance of the D.C. Circuit’s mandate on

November 19, 2019. Pls.’ Mot., ECF No. 44 at 12. Defendants, on

the other hand, contend that the reinstated Final Rule should be

effective as of the originally scheduled effective date of June

2, 2017. Defs.’ Opp’n, ECF No. 46 at 7-8. The Court agrees with

Defendants and holds that the effective date of the Final Rule

is June 2, 2017.

10
 A. The Retroactivity Rule From Harper Applies

The Court finds that the retroactivity principles

articulated in Harper v. Virginia Department of Taxation, 509

U.S. 86 (1993), compels the conclusion that the D.C. Circuit’s

reinstatement of the Final Rule should apply with full

retroactive effect. Under the Supreme Court’s decision in

Harper, judicial decisions, as opposed to statutes and

regulations, presumptively apply retroactively. 509 U.S. at 97.

Accordingly, when the Supreme Court or federal court of appeals

for the circuit in question applies “a rule of federal law to

the parties before it, that rule is the controlling

interpretation of federal law and must be given full retroactive

effect in all cases still open on direct review and as to all

events, regardless of whether such events predate or postdate

[the] announcement of the rule.” Id. at 95, 97 (“‘[T]he nature

of judicial review’ strips us of the quintessentially

‘legislat[ive]’ prerogative to make rules of law retroactive or

prospective as we see fit.” (second alteration in original)

(quoting Griffith v. Kentucky, 479 U.S. 314, 322 (1987))); see

also James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 535-

36 (1991). “[T]he decision of a federal court must be given

retroactive effect regardless whether it is being applied by a

court or an agency.” Nat’l Fuel Gas Supply Corp. v. FERC, 59

F.3d 1281, 1289 (D.C. Cir. 1995). If a court of appeals

11
overrules a district court, then that district court decision is

rendered a “legal nullity” and “requires that it be treated

thereafter as though it never existed.” Khadr v. United States,

529 F.3d 1112, 1115-16 (D.C. Cir. 2008) (quoting Butler v.

Eaton, 141 U.S. 240, 244 (1891)). Thus, “a party against whom an

erroneous judgment or decree has been carried into effect is

entitled, in the event of a reversal, to be restored by his

adversary to that which he has lost thereby.” Arkadelphia

Milling Co. v. St. Louis Sw. Ry. Co., 249 U.S. 134, 145 (1919).

Plaintiffs concede that it is a “well-settled principle

that judicial decisions announce the law retroactively.” Pls.’

Reply, ECF No. 48 at 9. However, Plaintiffs argue that Harper is

inapplicable to the present situation for several reasons.

First, Plaintiffs argue that, because the Court’s vacatur

rendered the Final Rule void and Defendants did not seek a stay

pending appeal, the Final Rule may not be enforced any earlier

than the date of the D.C. Circuit’s mandate. Pls.’ Mot., ECF No.

44 at 12-14. Citing to Bowen v. Georgetown University Hospital,

488 U.S. 204 (1988), Plaintiffs contend that to hold otherwise

would constitute impermissible retroactive rulemaking. Id. But

in so arguing, Plaintiffs appear to conflate the retroactivity

principles of judicial decisions with the retroactivity

principles of regulations and statutes. In Bowen, the Supreme

Court explained that because statutes and regulations change the

12
law, they are presumptively not applied retroactively. See 488

U.S. at 208-09 (holding that HHS lacked statutory authority to

promulgate a rule requiring private hospitals to refund Medicare

payments for services rendered before promulgation of the rule).

Bowen did not address the situation here, where the dispute

instead centers on the retroactive effect and operation of a

judicial decision.

Indeed, the majority of federal courts faced with

circumstances closely mirroring the procedural posture in this

case have applied Harper’s retroactivity principles and have

concluded that an agency rule that is vacated but ultimately

reinstated on appeal has an effective date as of the agency’s

initially scheduled date. See, e.g., U.S. W. Commc’ns., Inc. v.

Jennings, 304 F.3d 950, 957 (9th Cir. 2002) (following Harper

and holding that, with respect to previously vacated rules, the

Supreme Court’s reinstatement of the rules meant that the court

“should apply those rules to all interconnection agreements

arbitrated under the Act, including agreements arbitrated before

the rules were reinstated”); GTE S., Inc. v. Morrison, 199 F.3d

733, 740 (4th Cir. 1999) (“[T]he Supreme Court’s determination

that the FCC has jurisdiction to issue pricing rules would

appear to compel the conclusion that the FCC always had such

jurisdiction and that the rules apply as of the effective date

originally scheduled.” (citation omitted)); Tagaeva v. BNV Home

13
Care Agency, Inc., No. 16-cv-6869 (RRM) (RLM), 2018 WL 1320661,

at *3 (E.D.N.Y. Mar. 13, 2018) (noting that the argument that a

judicial decision “applies only prospectively flies in the face

of the Supreme Court’s repeated warning that prospective

application of laws is a doctrine that ‘smack[s] of the

legislative process’” (quoting Harper, 509 U.S. at 108)

(alteration in original)); Green v. Humana at Home, Inc., No.

16-cv-7586 (AJN), 2017 WL 9916832, at *8 (S.D.N.Y. Sept. 29,

2017) (concluding that finding that a “judicial decision does

not create liability for an individual’s actions prior to the

issuance of the court’s mandate” would be “irreconcilable with

the very principle of retroactivity”).

The United States Court of Appeals for the Ninth Circuit’s

(“Ninth Circuit”) decision in Ray v. County of Los Angeles, 935

F.3d 703 (9th Cir. 2019), is instructive. In Ray, the Ninth

Circuit addressed whether a Department of Labor (“DOL”) rule—

which had been vacated by a court in this District and then

later reinstated by the D.C. Circuit—was effective as of the

original effective date or effective as of the date the mandate

issued. 935 F.3d at 713-14. The lower court in Ray had held

that, although the D.C. Circuit decision applied retroactively,

“that decision was merely that the DOL could amend the [statute]

and that those amendments were not arbitrary and capricious.

This . . . differed from ‘the retroactive application of the

14
amended regulations themselves.’” Id. at 707. The Ninth Circuit

disagreed, explaining that “[w]hen the D.C. Circuit held that

the DOL had the rulemaking authority to promulgate the new rule

and that its new rule was a reasonable exercise of that

authority, . . . it did not change the law but merely explained

what the law always was—the district court’s erroneous contrary

holding notwithstanding.” Id. at 714. The Ninth Circuit

emphasized that, though the lower court had found that it would

be unfair to act as if the vacatur of the regulations had never

occurred, “it would be equally unfair” to penalize the

plaintiffs “just because a single district court issued an

erroneous decision that another court reversed on appeal.” Id.

at 715. And although the decision to rely on the vacatur may

have been reasonable, “it created a monetary risk” because

defendants were “well aware that an appellate court might uphold

the regulations on appeal.” Id. The Ninth Circuit noted that to

hold that “an erroneous vacatur can[] postpone a rule’s

effective date until an appellate court corrects the error

sometime in the future” could “encourage dilatory appellate

litigation.” Id.

Plaintiffs, however, point out that not all courts have

followed Harper in determining the effective date of a

reinstated rule. Pls.’ Reply, ECF No. 48 at 12-13. For example,

Plaintiffs rely on the rationale in MCI Telecommunications Corp.

15
v. GTE Northwest, Inc., 41 F. Supp. 2d 1157 (D. Or. 1999), to

argue that courts are not required to “pretend that the binding

ruling depriving the regulation of legal force never happened.”

Pls.’ Reply, ECF No. 48 at 14-15. In MCI, the district court

declined to apply the reinstated regulations from their original

effective date because the “court perceive[d] a crucial

distinction between applying a new interpretation of a law that

admittedly was in effect during the relevant time period, versus

applying a substantive regulation that never was in effect to

begin with.” 41 F. Supp. 2d at 1163 (citation omitted).

Plaintiffs argue the same distinction applies here. However, the

Court is persuaded that “the distinction observed by the MCI

court between judicial decisions reversing a rule’s vacatur and

those reversing course on a prior, contrary interpretation of a

rule in fact makes no difference to the applicability of the

Harper retroactivity rule.” Brittmon v. Upreach, LLC, 285 F.

Supp. 3d 1033, 1040 (S.D. Ohio 2018); see Jennings, 304 F.3d at

956–58 (reversing U.S. W. Commc’ns, Inc. v. Jennings, 46 F.

Supp. 2d 1004, 1009 (D. Ariz. 1999), which had relied on MCI for

the proposition that the FCC regulations did not take effect

until the stay and vacatur orders were reversed); Morrison, 199

F.3d at 740–41 (finding that a straightforward analysis under

Harper “would appear to compel” the court to find that

reinstated agency rules applied as of the effective date

16
originally scheduled). When the D.C. Circuit reinstated the

Final Rule, this Court’s decision became a legal nullity. Thus,

the D.C. Circuit’s determination that the Final Rule was valid

requires the conclusion that it was always valid and that the

Final Rule applies as of the initial effective date. See

Brittmon, 285 F. Supp. 3d at 1040 (“Practically speaking,

adoption of the legal fiction that a former judicial decision

was never really the law in the first place is precisely what

the Harper rule requires.”).

Plaintiffs further attempt to distinguish the cases

applying Harper by noting that some of the cases were decided

“in the context in which private parties have a statutory right

to enforce the agency’s regulations through civil litigation.”

Pls.’ Mot., ECF No. 44 at 15 n.2 (citing Ray, 935 F.3d at 715)).

Plaintiffs argue that “[h]ere, where private parties lack any

right of action to enforce CMS’s Final Rule,” the D.C. Circuit’s

decision in Heartland Regional Medical Center v. Sebelius, 566

F.3d 193 (D.C. Cir. 2009), “is the most relevant authority to

guide this Court’s decision.” Id. In Heartland, the D.C. Circuit

was tasked with determining whether an ambiguous district court

order had intended to vacate an agency rule or to remand it to

the agency for further consideration. 566 F.3d at 195-96.

Because, among other things, “vacatur . . . would have raised

substantial doubt about HHS’s ability to recoup payments it made

17
for years prior to reinstatement” of the rule, the D.C. Circuit

held that the lower court had not vacated the rule. Id. at 197-

98. Thus, Plaintiffs argue, if this Court retroactively applied

the original effective date here, it would “conflict with the

Heartland court’s objective of avoiding disruptive

consequences.” Pls.’ Mot., ECF No. 44 at 16. Critically, though,

Heartland does not involve an agency rule that has been vacated

by a lower court and then later reinstated on appeal. Without

this key fact, Heartland is inapposite. As in Bowen, the primary

principles underlying the case concern those of regulatory

retroactivity, not judicial decision retroactivity.

Accordingly, the Court finds that the Harper retroactivity

principles apply to this case.

B. Equitable Considerations Do Not Warrant Departing
From The Retroactivity Principles Set Forth In Harper

Even if the Harper retroactivity principles apply,

Plaintiffs argue that this Court still has the “equitable

discretion to limit the agency’s retroactive enforcement of the

Final Rule.” Pls.’ Reply, ECF No. 48 at 5 (citing Arkadelphia

Milling Co., 295 U.S. at 310; Atl. Coast Line R.R. Co. v.

Florida, 295 U.S. 301, 310 (1935)). In Plaintiffs’ view, the

Court retains this discretion, contending the “equitable nature

of this inquiry” explains the outcomes in many of the cases

concluding that the effective date of a reinstated rule is the

18
original date. Id. at 11. Relying on this rationale, Plaintiffs

argue that the “equities are decidedly against Defendants” here.

Id. at 6. Plaintiffs contend that “Defendants effectively

ratified this Court’s vacatur and shifted the effective date of

the Final Rule themselves” by posting the statement on the

Medicaid website providing that “[i]n light of the decision in

Children’s Hosp. Ass’n of Texas v. Azar, No. 17-cv-844 (D.D.C.

March 2, 2018) . . . CMS will not be enforcing the 2017 rule . .

. as long as the Children’s Hospital Ass’n of Texas decision

remains operative in its current form.” Pls.’ Mot., ECF No. 44

at 17-18 (citation omitted). Plaintiffs contend that states

relied on this statement and the fact that Defendants did not

seek a stay of the vacatur, and paid Plaintiffs more than $100

million in DSH interim payments while the Final Rule was

vacated. Id.; Pls.’ Reply, ECF No. 48 at 7-8. Moreover,

Plaintiffs argue that the initial effective date is now

inappropriate in view of the D.C. Circuit’s rejection of

Defendants’ justification for choosing that date, which omitted

a transition period. See Pls.’ Mot., ECF No. 44 at 16;

Children’s Hosp. Ass’n of Tex., 933 F.3d at 773 n.3 (explaining

that the Final Rule marked a departure from existing policy).

However, under Supreme Court precedent, equitable

considerations are largely irrelevant when considering the

19
retroactivity of judicial decisions. As the D.C. Circuit

explained in National Fuel Gas Supply Corp.:

where Harper is applicable, a remedy other than
retroactive application can be awarded only in four
specific circumstances: [A] court may find (1) an
alternative way of curing the constitutional violation,
(2) a previously existing, independent legal basis
(having nothing to do with retroactivity) for denying
relief, or (3) as in the law of qualified immunity, a
well-established legal rule that trumps the new rule of
law . . . , or (4) a principle of law . . . that limits
the principle of retroactivity itself.

59 F.3d at 1288 (quoting Hyde, 514 U.S. at 751) (first and third

alteration in original). “[S]imple reliance . . . is

insufficient to warrant a departure from the rule of Harper.”

Id. at 1290 (citing Hyde, 514 U.S. at 757-58); see also Harper,

509 U.S. at 97 (explaining that to prevent the selective

application of federal law, courts “can scarcely permit ‘the

substantive law [to] shift and spring’ according to ‘the

particular equities of [individual parties’] claims’ of actual

reliance on an old rule and of harm from a retroactive

application of the new rule” (alterations in original) (quoting

Beam, 501 U.S. at 543)); Brittmon, 285 F. Supp. 3d at 1040

(“[T]he Supreme Court has expressly rejected the reliance

rationale . . . .”). Because Plaintiffs’ alleged harms

ultimately arise from their reliance and certain states’

reliance on the 2008 Rule, the Court will not be swayed by such

arguments. See York Assocs., Inc. v. Sec’y, Dep’t of Housing &

20
Urban Dev., 845 F. Supp. 24, 27 (D.D.C. 1994) (concluding that

under Harper, “equitable considerations,” including the cost to

the government of $40 million if the court applied a judicial

decision retroactively, were “irrelevant”); see also Hawknet,

Ltd. v. Overseas Shipping Agencies, 590 F.3d 87, 91 n.7 (2d Cir.

2009) (finding that despite the fact that “the parties relied on

[a prior overruled decision] when structuring their

transactions, the Supreme Court has held that a reliance

interest is insufficient to overcome the presumption of

retroactivity set forth in Harper”). To the extent Plaintiffs

argue that the statement on the Medicaid website misled them as

to Defendants’ true intentions, this Court also finds that a

fair reading of the statement does not indicate that Defendants

had precluded themselves from deciding to enforce the Final Rule

if the D.C. Circuit reversed this Court’s decision. Defendants,

after all, only stated that they would not enforce the Final

Rule as long as this Court’s decision “remain[ed] operative in

its current form” and that they had appealed. Ex. A to Keneally

Decl., ECF No. 44-3 at 5. Moreover, the retroactive application

of the D.C. Circuit’s decision does not fall into any of the

four circumstances described above. Thus, per Harper,

Plaintiffs’ circumstances do not warrant relief from

retroactivity.

21
 Even were the Court not limited by Harper and its progeny,

the Court is not persuaded that “the equities are decidedly

against Defendants.” Pls.’ Reply, ECF No. 48 at 6. In reversing

this Court’s decision, the D.C. Circuit held that the Final Rule

is “consistent with the statute’s context and purpose, both of

which suggest DSH payments are meant to assist those hospitals

that need them most by covering only those costs for which DSH

hospitals are in fact uncompensated.” Children’s Hosp. Ass’n of

Tex., 933 F.3d at 772. In declining to apply the effective date

as of the original date, the Court would therefore be in danger

of thwarting the Act’s purpose and operation by keeping other

qualifying hospitals from receiving the full DSH payments to

which the D.C. Circuit found they are entitled. See Pls.’

Combined Mem. Law Supp. Appl. Prelim. Inj. Summ. J., ECF No. 12

at 49-50 (stating that application of the Final Rule will cause

funds to be recouped from Plaintiffs and redistributed to other

qualifying hospitals); see also Children’s Hosp. Ass’n of Tex.,

933 F.3d at 772 (“By requiring the inclusion of payments by

Medicare and private insurers, the 2017 Rule ensures that DSH

payments will go to hospitals that have been compensated least

and are thus most in need.”); Richert v. LaBelle HomeHealth Care

Service LLC, No. 16-cv-437, 2017 WL 4349084, at *3 (S.D. Ohio

Sept. 29, 2017) (finding the purpose of the statute “would be

thwarted if the legal error of the district court . . . caused

22
employees protected by the [statute] to be unable to recover for

over ten months of overtime wages”).

Despite the statement on the Medicaid website that

Defendants would not enforce the Final Rule while the Court’s

vacatur remained operative, Plaintiffs were aware that

Defendants had appealed the Court’s decision and that the D.C.

Circuit had the authority to reverse the decision. See Ex. A to

Kenneally Decl., ECF No. 44-3 at 5. In this situation, other

courts have likewise reasoned that “a party who relies upon the

wrong interpretation of the law should not be rewarded over a

party who relies upon the correct interpretation.” Dillow v.

Home Care Network, Inc., No. 1:16-cv-612, 2017 WL 749196, at *4

(S.D. Ohio Feb. 27, 2017); see also Lewis-Ramsey v. Evangelical

Lutheran Good Samaritan Soc'y, 215 F. Supp. 3d 805, 810 (S.D.

Iowa 2016) (“[I]t strikes the Court as far more ‘unfair’ to

allow Defendant to escape liability for nearly a year’s worth of

overtime wages based on a district court decision that was

ultimately deemed to be error.”). This is so even when it is a

third-party that relied on the old rule, as Plaintiffs allege

that certain states did here. See Ray, 935 F.3d at 715 (“The

State gambled that Weil I would be affirmed. The effect of that

gamble might be unfair to the County, but the County must seek

any recourse from the State. It is not fair for the homecare

23
providers to bear the financial consequences of the State’s

calculated risk.”).

Finally, although Plaintiffs correctly note that the D.C.

Circuit rejected Defendants’ justification underlying the reason

for the June 2, 2017 effective date, Plaintiffs do not argue

that the effective date itself caused harm or otherwise was in

violation of the Administrative Procedure Act. Without more, the

Court therefore does not find that the effective date is

inappropriate.

IV. Conclusion

For the reasons stated above, Plaintiffs’ Motion to Clarify

the Effective Date of the Final Rule, ECF No. 44, is DENIED. An

appropriate Order accompanies this Memorandum Opinion.

SO ORDERED.

Signed: Emmet G. Sullivan
United States District Judge
November 30, 2020

24