NH Hospital Assoc., et al. v Burwell, et al.

2017 DNH 040

• Court: District Court, D. New Hampshire
• Decided: March 2, 2017
• Docket: 15-cv-460-LM
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

New Hampshire Hospital Association, et al.

v. Civil No. 15-cv-460-LM Opinion No. 2017 DNH 040 P Sylvia Matthews Burwell et al.

O R D E R

Several New Hampshire hospitals1 and the New Hampshire

Hospital Association (“NHHA”), a non-profit trade association,

bring this suit against the Secretary of Health and Human

Services (the “Secretary”), the Centers for Medicare and

Medicaid Services (“CMS”), and the Administrator of CMS,

alleging that defendants have set forth certain “policy

clarifications” that contradict the plain language of the

Medicaid Act and violate the Administrative Procedure Act

(“APA”). The court granted plaintiffs’ motion for a preliminary

injunction barring defendants from enforcing the policy

clarifications during the pendency of this litigation. See doc.

no. 31. The parties now cross-move for summary judgment.

1 Plaintiff hospitals are Mary Hitchcock Memorial Hospital, LRGHealthcare, Speare Memorial Hospital, and Valley Regional Hospital, Inc. Standard of Review

The parties agree that because this is an action for review

of agency action under the APA, the case can and should be

resolved on summary judgment. See 5 U.S.C. § 706; Atieh v.

Riordan, 727 F.3d 73, 76 (1st Cir. 2013). The First Circuit has

observed that the summary judgment “rubric has a special twist

in the administrative law context.” Assoc. Fisheries of Me.,

Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997). The court’s

job on summary judgment “is only to determine whether the

Secretary’s [policy] was consonant with [her] statutory powers,

reasoned, and supported by substantial evidence in the record.”

Id. On cross motions for summary judgment, the standard of

review is applied to each motion separately. See Am. Home

Assurance Co. v. AGM Marine Contractors, Inc., 467 F.3d 810, 812

(1st Cir. 2006) (applying the standard to each motion where

cross motions were filed); see also Mandel v. Bos. Phoenix,

Inc., 456 F.3d 198, 205 (1st Cir. 2006).2

Background

I. The Medicaid Act

Medicaid is a cooperative federal-state program designed to

provide medical services to those members of society who,

2The parties agree that the issues in this case raise pure questions of law that the court can resolve without an administrative record.

2 because they lack the necessary financial resources, cannot

otherwise obtain medical care. See Wilder v. Virginia Hosp.

Ass’n, 496 U.S. 498, 502 (1990). That is, the program provides

medical care to a population generally consisting of the poor,

including dependent children, the disabled, and the elderly.

See 42 C.F.R. § 430.0. Legislation creating the program, the

Medicaid Act, 42 U.S.C. §§ 1396 et seq., “provides financial

support to states that establish and administer state Medicaid

programs in accordance with federal law.” Long Term Care Pharm.

All. v. Ferguson, 362 F.3d 50, 51 (1st Cir. 2004).

“Although participation in the Medicaid program is entirely

optional, once a State elects to participate, it must comply

with the requirements of [the Medicaid Act].” Harris v. McRae,

448 U.S. 297, 301 (1980). In order to qualify for Medicaid

funding, a state must adopt a Medicaid “plan,” 42 U.S.C. §

1396a(a), which must be approved by CMS, a subdivision of the

United States Department of Health and Human Services. See

Ferguson, 362 F.3d at 51. “The state plan is required to

establish, among other things, a scheme for reimbursing health

care providers for the medical services provided to needy

individuals.” Wilder, 496 U.S. at 502. If CMS approves a

state’s plan, the federal government provides reimbursements to

the state for a portion of the expenditures that it incurs for

3 Medicaid benefits, and for necessary and proper costs of

administering the state plan. See 42 U.S.C. § 1396b(a). The

state is responsible for the remainder of its Medicaid

expenditures. See § 1396b.

Concerned with the “greater costs it found to be associated

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

District of Columbia, 224 F.3d 776, 777 (D.C. Cir. 2000),

Congress amended the Medicaid Act in 1981 to ensure that

payments to hospitals providing Medicaid-eligible services to

indigent patients “take into account . . . the situation of

hospitals which serve a disproportionate number of low-income

patients with special needs.” § 1396a(a)(13)(A)(iv).

Congress’s “intent was to stabilize the hospitals financially

and preserve access to health care services for eligible low-

income patients.” Va., Dep’t of Med. Assistance Servs. v.

Johnson, 609 F. Supp. 2d 1, 3 (D.D.C. 2009).

Under the Medicaid Act, states must ensure that such

hospitals receive an “appropriate increase in the rate or amount

of payment for such services” and that the reimbursements

“reflect not only the cost of caring for Medicaid recipients,

but also the cost of charity care given to uninsured patients.”

Louisiana Dep’t of Health & Hosps. v. Ctr. for Medicare &

Medicaid Servs., 346 F.3d 571, 573 (5th Cir. 2003) (discussing

4 42 U.S.C. § 1396r-4(b)(1), (3)). Such increased payments are

available to any hospital that treats a disproportionate share

of Medicaid patients (a “disproportionate-share hospital” or

“DSH”). § 1396r-4(b).3

In 1993, Congress amended the DSH program to limit DSH

payments on a hospital-specific basis. See § 1396r-4(g).

Congress enacted the hospital-specific limit in response to

reports that some hospitals received DSH payment adjustments

that exceeded “the net costs, and in some instances the total

costs, of operating the facilities.” Omnibus Budget

Reconciliation Act of 1993, H.R. Rep. No. 103-111, at 211–12

(1993). The hospital-specific limit was established in § 1396r-

4(g)(1), which is captioned: “Amount of adjustment subject to

uncompensated costs.” That section provides that DSH payments

made to a hospital cannot exceed:

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 [Medicaid] plan or have no health insurance (or other source of third party coverage) for services provided during the year.

3 The increased payments made to disproportionate-share hospitals are referred to as “DSH payments.”

5 § 1396r-4(g)(1)(A).4 Thus, for Medicaid patients (as opposed to

uninsured patients), the Medicaid Act sets the hospital-specific

DSH limit as the costs a hospital incurs in furnishing hospital

services to Medicaid-eligible patients “as determined by the

Secretary and net of payments” under the Medicaid Act.5

II. Audit and Reporting Requirements

In 2003, to monitor DSH payments, Congress enacted into law

a requirement that each state provide to the Secretary an annual

report and audit on its DSH program. See § 1396r-4(j). The

audit must confirm, among other things, that “[o]nly the

uncompensated care costs of providing inpatient hospital and

outpatient hospital services to individuals described in [§

1396r–4(g)(1)(A)] . . . are included in the calculation of the

hospital-specific limits.” § 1396r–4(j)(2)(C). Any

overpayments that an audit reveals must be recouped by the state

within one year of their discovery or the federal government may

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

4The term “subchapter” refers to Subchapter XIX (Grants to States for Medical Assistance Programs) of Chapter 7 of Title 42 of the U.S. Code, which is the Medicaid Act, codified at 42 U.S.C. §§ 1396 - 1396w-5.

5The parties often refer to the portion of § 1396r- 4(g)(1)(A) dealing with the costs of furnishing hospital services to Medicaid-eligible patients as the “Medicaid Shortfall.” The court uses that shorthand description at times throughout this opinion.

6 On December 19, 2008, CMS promulgated a final rule

implementing the statutory reporting and auditing requirement

(the “2008 Rule”). See Disproportionate Share Hospital

Payments, 73 Fed. Reg. 77904 (Dec. 19, 2008). The 2008 Rule

requires that states annually submit information “for each DSH

hospital to which the State made a DSH payment.” 42 C.F.R. §

447.299(c). One such piece of required information is the

hospital’s “total annual uncompensated care costs,” which is

defined as follows:

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

§ 447.299(c)(16). This section establishes a formula for a

state to determine whether the hospital-specific DSH limit, as

set forth in § 1396r-4(g)(1)(A), was calculated correctly.

The 2008 Rule also provides that any audits of DSH payments

made prior to Fiscal Year 2011 would not result in the

recoupment or reduction of federal funds used for DSH payments.

See 73 Fed. Reg. 77906. Beginning with payments made in Fiscal

Year 2011, any DSH overpayments must be recovered by the state

7 and returned to the federal government, unless they “are

redistributed by the State to other qualifying hospitals.” Id.

III. FAQs 33 and 34

On January 10, 2010, CMS posted answers on its website to

“frequently asked questions” regarding the audit and reporting

requirements of the 2008 Rule. See Additional Information on

the DSH Reporting and Auditing Requirement,

https://www.medicaid.gov/medicaid/financing-and-

reimbursement/downloads/part-1-additional-info-on-dsh-reporting-

and-auditing.pdf (last visited March 2, 2017). Two of the

frequently asked questions, FAQ 33 and FAQ 34, and CMS’s

responses to those questions are at issue in this case. FAQ 33

and CMS’s response thereto are as follows:

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

Days, cost[s], and revenues associated with patients that are dually eligible for Medicaid and private insurance should be included in the calculation of the Medicaid inpatient utilization rate (MIUR) for the purposes of determining a hospital eligible to receive DSH payments. Section 1923(g)(1)6 does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore, days, costs, and revenues associated with patients that are eligible for Medicaid and also have private

6 Section 1923 is the same as § 1396r-4.

8 insurance should be included in the calculation of the hospital-specific DSH limit.

Id. at 18. FAQ 34 and CMS’s response thereto state:

34. The regulation states that costs for dual eligibles should be included in uncompensated care costs. Could you please explain further? Under what circumstances should we include Medicare payments?

Section 1923(g) of the Act defines hospital-specific limits on FFP for Medicaid DSH payments. Under the hospital-specific limits, a hospital’s DSH payment must not exceed the costs incurred by that hospital in furnishing services during the year to Medicaid and uninsured patients less payments received for those patients. There is no exclusion in section 1923(g)(1) for costs for, and payment made, on behalf of individuals dually eligible for Medicare and Medicaid. Hospitals that include dually-eligible days to determine DSH qualification must also include the costs attributable to dual eligibles when calculating the uncompensated costs of serving Medicaid eligible individuals. Hospitals must also take into account payment made on behalf of the individual, including all Medicare and Medicaid payments made on behalf of dual eligibles. In calculating the Medicare payment for service, the hospital would have to include the Medicare DSH adjustment and any other Medicare payments (including, but not limited to Medicare IME and GME) with respect to that service. This would include payments for Medicare allowable bad debt attributable to dual eligibles.

Id.

Thus, CMS’s responses to FAQs 33 and 34 provide that in

calculating the hospital-specific DSH limit, a state must

subtract payments received from private health insurance (FAQ

33) and Medicare (FAQ 34) for dually-eligible Medicaid patients

from the costs incurred in providing hospital services to those

9 patients. In the remainder of this order, the court uses “FAQ

33” and “FAQ 34” to refer to CMS’s responses to those FAQs and

the requirements stated in the responses.

IV. Texas Children’s Hospital v. Burwell

On December 5, 2014, two disproportionate-share hospitals,

Texas Children’s Hospital and Seattle Children’s Hospital,

brought suit against the same defendants named in this case in

the District Court for the District of Columbia. See Texas

Children’s Hospital v. Burwell, Civil Action No. 14-2060 (EGS)

(D.D.C. 2014). The plaintiffs in Texas Children’s Hospital

assert that FAQ 33 is contrary to the provisions of the Medicaid

Act and that CMS’s publication of FAQ 33 violates the procedural

requirements of the APA. On December 29, 2014, the court in

Texas Children’s Hospital granted the plaintiffs’ motion for

preliminary injunction and entered an order enjoining CMS from

enforcing, applying, or implementing FAQ 33 pending further

order of the court. Texas Children’s Hosp. v. Burwell, 76 F.

Supp. 3d 224, 246-47 (D.D.C. 2014). The court further ordered

CMS to notify the Texas and Washington State Medicaid programs

that, pending further order by the court, the enforcement of FAQ

33 is enjoined and CMS will take no action to recoup federal DSH

funds provided to Texas and Washington based on the states’

noncompliance with FAQ 33. Id. The plaintiffs in that case

10 have not challenged FAQ 34 or CMS’s policy regarding patients

dually eligible for Medicare and Medicaid.

V. Plaintiffs’ Petition to CMS

On June 17, 2015, plaintiffs petitioned CMS requesting that

the agency repeal the policies referenced in FAQs 33 and 34

regarding the inclusion of private health insurance and

Medicare payments in the calculation of the Medicaid Shortfall.

See doc. no. 10-24. Plaintiffs submitted a supplement to the

petition dated June 24, 2015. See doc. no. 10-25. The petition

and the supplement asserted that FAQs 33 and 34 operate as

substantive amendments to existing federal law and regulations,

as well as to the New Hampshire State Medicaid Plan. See doc.

nos. 10-24 and 10-25. The petition and supplement also asserted

that the policies are illegal and void and requested that CMS

repeal and revoke them. Id.

In a letter dated October 6, 2015, CMS Acting Administrator

Andrew Slavitt responded to plaintiffs’ petition. See doc. no.

10-26. In the letter, Slavitt stated:

The CMS continues to maintain that this longstanding, consistent policy, which is reflected in FAQ No. 33 with respect to private insurance payments, and is discussed elsewhere in the FAQs and in the preamble to the December 2008 regulation with respect to Medicare payments for dually-eligible beneficiaries, reflects a valid interpretation of the statute governing the calculation of uncompensated care costs for purposes of the DSH hospital-specific limit, 42 U.S.C. § 1396r-4, and the associated regulations.

11 Id. at 2 (citations omitted). Slavitt acknowledged the

preliminary injunction in Texas Children’s Hospital, but stated:

For all other states, including New Hampshire, CMS may disallow federal financial participation if a state does not comply with the policy articulated in FAQ No. 33.

Moreover, for state plan rate year 2011 and thereafter, any other audit-identified DSH payments that exceed documented hospital-specific DSH limits may be treated as provider overpayments that, pursuant to 42 CFR Part 433, Subpart F, trigger the return of the federal share to the federal government.

Id. at 2-3.

VI. Preliminary Injunction

Plaintiffs filed this lawsuit on January 15, 2016. That

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

sought to enjoin defendants from enforcing or applying FAQs 33

and 34 during the pendency of this case. Defendants objected to

the motion, plaintiffs filed a reply, and defendants filed a

surreply. On February 18, 2016, the court held an evidentiary

hearing, during which the court heard oral argument and

plaintiffs submitted evidence.

On March 11, 2016, the court granted plaintiffs’ motion for

a preliminary injunction. See N.H. Hosp. Assoc. v. Burwell, 15-

cv-460-LM, 2016 WL 1048023 (D.N.H. Mar. 11, 2016). The court

held that plaintiffs had carried their burden to show that they

were likely to prove that defendants violated the APA and that

12 they would suffer irreparable harm absent a preliminary

injunction, and that the remaining factors weighed in favor of

granting a preliminary injunction. The parties now cross-move

for summary judgment.

Discussion

Plaintiffs’ complaint sets forth four counts, all of which

allege violations of the APA: (1) violation of 5 U.S.C. §

706(2)(C) (Count I); (2) violation of 5 U.S.C. §§ 706(2)(A), (D)

(Count II); (3) violation of 5 U.S.C. §§ 706(2)(A), (D) (Count

III); and (4) violation of 5 U.S.C. § 706(2)(A) (Count IV).

Plaintiffs state in their summary judgment memorandum that they

“are no longer pressing Count IV of their complaint.” Doc. no.

33-1 at n.1. The parties move for summary judgment on each of

the three remaining counts.

As a threshold matter, defendants argue in their summary

judgment motion that they are entitled to summary judgment

because plaintiffs lack standing to pursue their claims.

Plaintiffs argue in their summary judgment motion and objection

to defendants’ motion that they do have standing to pursue their

claims. Therefore, the court addresses the parties’ arguments

as to standing before proceeding to the merits of each claim.

See Pagan v. Calderon, 448 F.3d 16, 26 (1st Cir. 2006) (“A

federal court must satisfy itself as to its jurisdiction,

13 including a plaintiff’s Article III standing to sue, before

addressing his particular claims . . . .”).

I. Standing

“Article III of the Constitution limits the jurisdiction of

federal courts to ‘Cases’ and ‘Controversies.’” Susan B.

Anthony List v. Driehaus, 134 S. Ct. 2334, 2341 (2014) (quoting

U.S. Const., Art. III, § 2). “The doctrine of standing gives

meaning to these constitutional limits by ‘identify[ing] those

disputes which are appropriately resolved through the judicial

process.’” Id. (quoting Lujan v. Defenders of Wildlife, 504

U.S. 555, 560 (1992)). To establish Article III standing, “a

plaintiff must show (1) it has suffered an ‘injury in fact’ that

is (a) concrete and particularized and (b) actual or imminent,

not conjectural or hypothetical; (2) the injury is fairly

traceable to the challenged action of the defendant; and (3) it

is likely, as opposed to merely speculative, that the injury

will be redressed by a favorable decision.” Friends of the

Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167,

180-81 (2000).7

7 Plaintiffs contend that they have both substantive standing, because of their injuries arising out of the recoupment and prospective loss of DSH funding, and procedural standing, because of defendants’ failure to afford plaintiffs the right to notice-and-comment under the APA. Because, as discussed below, the court finds that plaintiffs have

14 Defendants argue that the harm plaintiffs allege they will

suffer in this case—harm from potential recoupment of past DSH

overpayments and harm from reduction in prospective DSH

payments—is not fairly traceable to federal policy or likely to

be redressed by a favorable decision.

“When the suit is one challenging the legality of

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

injury arises from the government’s allegedly unlawful

regulation (or lack of regulation) of someone else . . .,

causation and redressability ordinarily hinge on the response of

the regulated . . . third party to the government action.”

Lujan, 504 U.S. at 561-62. In that case, “it becomes the burden

of the plaintiff to adduce facts showing that those choices have

been or will be made in such manner as to produce causation and

permit redressability of injury.” Id. at 562. Standing may be

established in such situations “where the record presents

substantial evidence of a causal relationship between the

government policy and the third party conduct, leaving little

doubt as to causation and likelihood of redress.” Constitution

Party of Penn. v. Aichele, 757 F.3d 347, 366 (3d Cir. 2014)

(citation and alteration omitted).

substantive standing, the court does not address plaintiffs’ arguments concerning procedural standing.

15 A. Recoupment of Past DSH Overpayments

Plaintiffs assert that the audit of their DSH payments for

Fiscal Year 2011 revealed that plaintiff hospitals were overpaid

because the auditors followed the policies set forth in FAQs 33

and 34. They contend, therefore, that the recoupment of past

DSH overpayments based on the audit is directly traceable to

FAQs 33 and 34. They further argue that no recoupment would be

required if defendants were enjoined from enforcing the

policies.

Defendants contend that when, as here, a DSH audit reveals

an overpayment to a hospital, the recoupment of that overpayment

is in the hands of state authorities and subject to state law.

Defendants argue that, because the state controls recoupments,

an injunction issued against them in this case would not bar the

State of New Hampshire from recouping funds from plaintiff

hospitals and redistributing them to other disproportionate-

share hospitals.8 They contend, therefore, that plaintiffs’

injury due to NHDHHS’s recoupment of past DSH payments is not

8 The New Hampshire Department of Health and Human Services (“NHDHHS”) is the state agency charged with administration of the Medicaid program. Therefore, NHDHHS is the entity responsible for recouping past DSH overpayments and for making prospective DSH payments to plaintiff hospitals.

16 fairly traceable to FAQs 33 and 34, and is not likely to be

redressed by any action against them.

There is no doubt that the recoupment of past DSH payments

by NHDHHS is fairly traceable to defendants’ enforcement of FAQs

33 and 34. Defendants do not meaningfully dispute that (i)

NHDHHS is set to recoup past DSH payments for Fiscal Year 2011

from plaintiff hospitals; and (ii) it will recoup those payments

because its audit revealed overpayments to those hospitals based

on FAQs 33 and 34. Therefore, plaintiffs’ injury is fairly

traceable to defendants’ conduct that is challenged in this

case.9 See Nat’l Wrestling Coaches Assoc. v. Dep’t of Educ., 383

F.3d 1047, 1049 (D.C. Cir. 2004) (Plaintiffs could show

causation “if they could show that the agency’s allegedly

illicit action was a substantial factor in bringing about the

injurious conduct of the third parties.”) (internal quotation

marks and citation omitted); see also Wine & Spirits Retailers,

Inc. v. Rhode Island, 418 F.3d 36, 45 (1st Cir. 2005) (“The

9 Under the Medicaid Act, the federal government cannot compel states to recoup funds from disproportionate-share hospitals in the event of an overpayment. Rather, in those circumstances, the federal government adjusts the amount paid to the states one year after the overpayment is discovered. See 42 U.S.C. § 1396b(d)(2)(C). As discussed below, however, evidence in the record establishes that NHDHHS is set to recoup DSH overpayments revealed in the Fiscal Year 2011 audit from plaintiff hospitals.

17 requirement that an alleged injury be fairly traceable to the

defendant’s action does not mean that the defendant’s action

must be the final link in the chain of events leading up to the

alleged harm.”).

The same is true for redressability. Defendants argue that

plaintiffs’ injury in the form of recoupment of past DSH

overpayments is not redressable because even if the court grants

plaintiffs’ summary judgment motion, NHDHHS could still recoup

funds from plaintiff hospitals and redistribute them to other

disproportionate-share hospitals. If FAQs 33 and 34 are

unenforceable, however, the audit of Fiscal Year 2011 based on

FAQs 33 and 34 is no longer accurate. Defendants do not explain

why NHDHHS would recoup funds from plaintiff hospitals if no

overpayments were made.

In addition, defendants’ argument is belied by the evidence

in this case. As the court explained in its order granting

plaintiffs’ motion for preliminary injunction, evidence in the

record at the time the court granted the motion, including

several communications from NHDHHS, demonstrated that NHDHHS

would act in accordance with CMS’s guidance as to the

enforcement of FAQs 33 and 34, and would not seek recoupment of

past DSH payments if FAQs 33 and 34 were unenforceable. See

doc. no. 31 at 18-20.

18 After the court issued the preliminary injunction, NHDHHS

took no action to recoup alleged overpayments from plaintiff

hospitals created by FAQs 33 and 34. See doc. nos. 33-4 at ¶ 6;

33-5 at ¶ 4; 33-6 at ¶ 4; 33-7 at ¶ 4. Therefore, plaintiffs

have shown that defendants’ enforcement of FAQs 33 and 34 has a

sufficient causal connection to plaintiffs’ injuries arising

from recoupment of past DSH payments, and judgment for

plaintiffs which would enjoin defendants’ enforcement of the

FAQs would likely redress plaintiffs’ injuries in that regard.

B. Reduction in Prospective DSH Payments

Defendants contend that any reduction in prospective DSH

payments would not be traceable to federal policy.10 Defendants

note that the New Hampshire state government and New Hampshire

hospitals, including plaintiffs, had, until 2014, been involved

in several lawsuits concerning New Hampshire’s Medicaid

reimbursement system. Defendants assert that those lawsuits

were resolved in 2014 by a global settlement agreement, which

governs prospective DSH payments beginning in 2016. That

10Defendants do not appear to argue lack of redressability from the reduction in prospective DSH payments. Even if they had made such an argument, it would be without merit. The record evidence shows that after the court issued the preliminary injunction, the NHDHHS entered into a letter agreement with the NHHA permitting plaintiff hospitals to omit data relating to Medicare and other third party payments from 2016 uncompensated care costs for purposes of calculating the 2016 hospital-specific DSH limit. See doc. no. 33-3.

19 settlement agreement sets out formulas for determining each of

plaintiff hospitals’ DSH funding levels. Defendants argue that

plaintiffs’ voluntary decision to enter into the settlement

agreement precludes them from claiming they are injured by the

federal standards that are incorporated into the agreement.

Defendants’ argument is without merit. The settlement

agreement changed New Hampshire’s DSH program beginning in

Fiscal Year 2016, and provides that DSH funding levels are set

at a specific percentage, depending on the hospital, of a

hospital’s total annual uncompensated care costs. The hospital-

specific DSH limit, however, applies to plaintiff hospitals

regardless of the existence of the settlement agreement. FAQs

33 and 34 have the effect of lowering the calculation of the

total annual uncompensated care costs, which necessarily lowers

the DSH funding levels. Therefore, plaintiffs have shown that

there is a causal relationship between defendants’ enforcement

of FAQs 33 and 34 and the reduction in prospective DSH payments.

Accordingly, plaintiffs have standing to maintain their

claims.11

11Defendants do not dispute that if plaintiff hospitals have standing, the NHHA has standing as well. See, e.g., Friends of the Earth, 528 U.S. at 180-81.

20 II. Claims

The parties cross-move for summary judgment on Counts I-III

of the complaint. Although each count represents a separate

challenge to defendants’ actions, all allege that defendants’

enforcement of FAQs 33 and 34 violates the APA.

Under the APA, a court must “hold unlawful and set aside

agency action, findings, and conclusions” that are “in excess of

statutory jurisdiction, authority, or limitations, or short of

statutory right,” 5 U.S.C. § 706(2)(C), “arbitrary, capricious,

an abuse of discretion, or otherwise not in accordance with

law,” id. § 706(2)(A), or “without observance of procedure

required by law,” id. § 706(2)(D).12 Plaintiffs assert that

defendants’ implementation and enforcement of FAQs 33 and 34

violate all three sections of the APA.13

Count I alleges a violation of § 706(2)(C). Counts II 12

and III allege separate violations of both § 706(2)(A) and § 706(2)(D).

A prerequisite to plaintiffs’ APA claims is that FAQs 33 13

and 34 represent “final agency action” that may be challenged under 5 U.S.C. § 704. Although plaintiffs allege that the FAQs represent “final agency action,” neither plaintiffs nor defendants address that requirement in their motions for summary judgment. Therefore, the court assumes the parties agree that this requirement is met. See Texas Children’s Hosp., 76 F. Supp. 3d at 240-41 (holding that FAQ 33 “likely constitutes a final agency action that may be challenged pursuant to 5 U.S.C. § 704”).

21 A. Count I

Count I alleges that in promulgating and enforcing FAQs 33

and 34, defendants have acted in excess of their statutory

authority under the Medicaid Act. Specifically, plaintiffs

allege that FAQs 33 and 34 conflict with the unambiguous

language of the Medicaid Act. See § 1396r-4(g)(1)(A).

Defendants argue that FAQs 33 and 34 do not conflict with the

Medicaid Act, and instead represent a reasonable interpretation

of the statute entitled to deference under Chevron, U.S.A., Inc.

v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).

Plaintiffs contend that FAQs 33 and 34 are not entitled to

any deference but, if they are so entitled, the court should

give them “at most, weight under Skidmore v. Swift & Co., 323

U.S. 134 (1944).” Doc. no. 33-1 at 20. Plaintiffs argue that,

regardless of whether FAQs 33 and 34 are entitled to any level

of deference, defendants’ interpretation of the Medicaid Act

still violates the APA.

1. Chevron Deference

In Chevron, the Supreme Court established a test for

determining whether to afford deference to an agency’s

interpretation of a law which the agency administers. See

Chevron, 467 U.S. at 842–43. “First, [courts] look to the

statute to ascertain whether ‘Congress has directly spoken to

22 the precise question at issue.’” Santana v. Holder, 731 F.3d

50, 55 (1st Cir. 2013) (quoting Chevron, 467 U.S. at 842). “If

the statute is clear in its meaning, [courts] must ‘give effect

to the unambiguously expressed intent of Congress.’” Id.

(quoting Chevron, 467 U.S. at 842–43). Only if Congress’s

intent is unclear does the court move to step two. Id. “At

Chevron’s second step, the inquiry focuses on ‘whether the

agency’s answer is based on a permissible construction of the

statute.’” Id. (quoting Chevron, 467 U.S. at 843). The court

“defer[s] to the agency’s interpretation unless that

interpretation is unreasonable.” Lovgren v. Locke, 701 F.3d 5,

31 (1st Cir. 2012); see also Saysana v. Gillen, 590 F.3d 7, 13

(1st Cir. 2009).

In recent years, however, the Supreme Court has limited the

applicability of Chevron deference. In United States v. Mead

Corp., 533 U.S. 218 (2001), the Supreme Court introduced a

threshold inquiry to determine whether the two-step Chevron

analysis is applicable to the agency action in question.14 The

Supreme Court held “that administrative implementation of a

particular statutory provision qualifies for Chevron deference

14This threshold inquiry into whether the Chevron framework applies at all is often referred to as “Chevron Step Zero.” Pharm. Research & Mfrs. of Am. v. United States Dep’t of Health & Human Servs., 43 F. Supp. 3d 28, 36 (D.D.C. 2014).

23 when it appears that Congress delegated authority to the agency

generally to make rules carrying the force of law, and that the

agency interpretation claiming deference was promulgated in the

exercise of that authority.” Mead, 533 U.S. at 226–27. If the

agency action fails that threshold step, it is not entitled to

Chevron deference. Id.

Plaintiffs do not dispute that, in the Medicaid Act,

Congress delegated authority to CMS to make rules carrying the

force of law. The Medicaid Act defines the hospital-specific

DSH limit in § 1396r-4(g)(1)(A). That section defines the

Medicaid Shortfall, in relevant part, as follows:

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 . . .) by the hospital . . . .

Id. (emphasis added). The use of the phrase “as determined by

the Secretary” shows that “Congress has provided ‘an express

delegation of authority to the agency to elucidate a specific

provision of the statute . . . .’” Transitional Hosps. Corp. of

La., Inc. v. Shalala, 222 F.3d 1019, 1026 (D.C. Cir. 2000)

(quoting Chevron, 467 U.S. at 843-44). Therefore, whether FAQs

33 and 34 are entitled to Chevron deference depends on whether

these FAQs were promulgated in the exercise of that authority.

Here, FAQs 33 and 34 fail this threshold inquiry, and the

Chevron analysis is inapplicable to the facts of this case. The

24 phrase “as determined by the Secretary” grants an agency the

authority to interpret a statute by regulation. Texas

Children’s Hosp., 76 F. Supp. 3d at 236 (“At most, [§ 1396r-

4(g)(1)(A)] might have delegated to the Secretary the ability to

determine by regulation that additional payments should be

considered.”); Transitional Hosps. Corp. of La., 222 F.3d at

1026 (noting that “as determined by the Secretary” means that

Congress has granted an agency the authority to interpret a

statute “by regulation”); see also Anderson v. U.S. Sec’y of

Agric., 30 C.I.T. 1742, 1747 (Fed. Cl. 2006) (same).

FAQs 33 and 34 are not regulations. Thus, although in §

1396r-4(g)(1)(A) Congress delegated authority to CMS to make

rules carrying the force of law, i.e., regulations, FAQs 33 and

34 were not “promulgated in the exercise of that authority.”

Therefore, they are not entitled to Chevron deference. See

Nat’l Ass’n of the Deaf v. Harvard Univ., No. 3:15-cv-30023-MGM,

2016 WL 3561622, at *8 (D. Mass. Feb. 9, 2016) (noting that the

Department of Education’s responses to frequently asked

questions represent “non-regulatory general pronouncements . . .

. [that] are not eligible for Chevron deference” (citing

Massachusetts v. FDIC, 102 F.3d 615, 621 (1st Cir. 1996)),

report and recommendation adopted, No. CV 15-30023-MGM, 2016 WL

6540446 (D. Mass. Nov. 3, 2016); U.S., ex rel. Jamison v.

25 McKesson Corp., 784 F. Supp. 2d 664, 677 n.10 (N.D. Miss. 2011)

(noting that answers to FAQs posted on an agency’s website “lack

the force of law [and] do not warrant judicial deference”

(internal quotation marks and citation omitted)); see also

Merrimon v. Unum Life Ins. Co. of Am., 758 F.3d 46, 55 (1st Cir.

2014) (noting that the Department of Labor’s interpretation of

certain ERISA provisions set forth in an amicus brief requested

by the court was not entitled to Chevron deference because it

was spoken “with something less than the force of law”).

Defendants assert that the Secretary’s interpretation of §

1396r-4(g)(1)(A) as stated in FAQs 33 and 34 finds it source in

the 2008 Rule, which is a regulation and, therefore, is entitled

to Chevron deference. Defendants point to the following

language in the Preamble to the 2008 Rule:

[T]he uncompensated care cost eligible under the hospital-specific DSH limit include the unreimbursed costs of providing inpatient and outpatient hospital services to Medicaid eligible individuals and the unreimbursed costs of providing inpatient and outpatient hospital services to individuals with no source of third party reimbursement for the inpatient and outpatient hospital services they receive.

73 Fed. Reg. 77920. Defendants assert that because the policies

in FAQs 33 and 34 can be found in the 2008 Rule, which carries

the force of law, Chevron deference applies.

Defendants’ argument is without merit. The text of the

2008 Rule and other sections in the Preamble make clear that the

26 “Rule cannot support defendants’ policy and that FAQ 33 [and FAQ

34 are] the sole authority for it.” Texas Children’s Hosp., 76

F. Supp. 3d at 238.

The Preamble, read as a whole, is not consistent with the

Secretary’s interpretation. For example, the Preamble discusses

the “reporting form” which provides the “necessary data elements

to fulfill the audit and reporting requirements.” 73 Fed. Reg.

77921. It states:

The data element referring to “Total Annual Uncompensated Care Costs” represents the total amount of unreimbursed care to be considered under the hospital-specific DSH limit. This figure is the result of summing “Total Cost of Care Medicaid IP/OP Services” and “Total Cost of IP/OP for uninsured” and then subtracting “Total Medicaid IP/OP Payments” and “IP/OP Uninsured Revenues,” and “Total Applicable Section 1011 Payments.”

Id. (emphasis added). As such, the hospital and auditor are

directed to add up the costs of certain services provided and

then subtract certain payments and revenue from the total of the

costs. That calculation is consistent with the language of §

1396r-4(g)(1)(A). In addition, the Preamble lists the three

types of payments and revenues to be subtracted from the costs

of care, and the list does not include payments from private

health insurance or Medicare.

27 The Preamble consistently refers to the specific costs and

payments that are used to calculate the Medicaid Shortfall. For

example, the Preamble states:

 “[The statute] plainly identifies the limited population

[of those individuals covered], whose costs were to be

included in the calculation, and specifies offsets of

revenues associated with those costs.” 73 Fed. Reg.

77921.

 “Section 1923(j) of the Act instructs States to audit and

report specific payments and specific costs.” Id. at

77932.

 “In order to [calculate the hospital-specific DSH limit],

all applicable revenues must be offset against all

eligible costs. For purposes of determining the hospital-

specific DSH limit, revenues would include all Medicaid

payments made to hospitals for providing inpatient and

outpatient services to Medicaid individuals . . . and all

payments made by or on behalf of patients with no source

of third party coverage for the inpatient and outpatient

hospital services they received.” Id. at 77946.

Each of these sections of the Preamble limits the revenues and

payments to be considered to those enumerated in § 1396r-

4(g)(1)(A), which do not include payments from private health

28 insurance or Medicare. Therefore, the Preamble to the 2008 Rule

does not support defendants’ contention that the Secretary

established the relevant policies in the 2008 Rule.

In addition, the text of the 2008 Rule plainly does not

include Medicare or private insurance payments for Medicaid-

eligible services in calculating the hospital-specific DSH

limit. The 2008 Rule defines “total annual uncompensated care

costs” as:

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

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

defined elsewhere in the 2008 Rule, and they do not include

payments from Medicare or private insurance for Medicaid-

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

In short, the evidence in the record shows that the

authority for the relevant policies is FAQs 33 and 34. For the

reasons discussed above, the FAQs do not carry the force of law

and, therefore, do not qualify for Chevron deference.

29 2. Skidmore Deference

For agency actions that fail the Chevron threshold

analysis, the agency’s interpretation may still be entitled to

deference, albeit less deference, as provided in Skidmore, 323

U.S. at 139-40. The application of Skidmore deference depends

upon the circumstances of the case and requires courts to give

“some deference to informal agency interpretations of ambiguous

statutory dictates.” Cathedral Candle Co. v. U.S. Int’l Trade

Comm’n, 400 F.3d 1352, 1365 (Fed. Cir. 2005).

Skidmore deference has “produced a spectrum of judicial

responses, from great respect . . . to near indifference.” Id.

(internal citation omitted); Christensen v. Harris Cty., 529

U.S. 576, 587 (2000) (“‘[i]nterpretations such as those in

opinion letters’” are “‘entitled to respect’” in proportion to

their “‘power to persuade’” (quoting Skidmore, 323 U.S. at

134)); Metro. Stevedore Co. v. Rambo, 521 U.S. 121, 136 (1997)

(“Director’s reasonable interpretation . . . brings at least

some added persuasive force”); Martin v. Occupational Safety &

Health Review Comm’n, 499 U.S. 144, 157 (1991) (“informal

interpretations are still entitled to some weight on judicial

review”). Overall, the level of deference depends “‘upon the

thoroughness evident in its consideration, the validity of its

reasoning, its consistency with earlier and later

30 pronouncements, and all those factors which give it power to

persuade, if lacking power to control.’” Mead, 533 U.S. at 228

(quoting Skidmore, 323 U.S. at 140). A court may also consider

“the formality of the agency process that produced the

decision.” Tangney v. Burwell, 186 F. Supp. 3d 45, 55 (D. Mass.

2016) (citing Doe v. Leavitt, 552 F.3d 75, 81 (1st Cir. 2009)).

Here, after consideration of the relevant factors, the

court finds that FAQs 33 and 34 are not entitled to any

deference under Skidmore because they lack the “power to

persuade.” As discussed above, FAQs 33 and 34 are inconsistent

with the 2008 Rule and CMS had not consistently, if ever,

applied those policies to the hospital-specific DSH limit prior

to issuing the FAQs. See, e.g., Statesman II Apartments, Inc.

v. United States, 66 Fed. Cl. 608, 623 (Fed. Cl. 2005) (holding

that HUD’s interpretation of the Housing Act set forth in a

notice was not entitled to Skidmore deference because “it is

inconsistent with HUD’s various earlier interpretations of” the

statute).15 In addition, there is no evidence in the record

15Defendants cite an August 16, 2002 letter from CMS to State Medicaid Directors to support their contention that the policies in FAQs 33 and 34 reflect the Secretary’s consistent interpretation. Even if the letter supported the policies reflected in FAQs 33 and 34, it would be insufficient to overcome the evidence that the Secretary has not consistently applied those policies. That evidence includes the plain text of the 2008 Rule and a 1994 letter from CMS to State Medicaid Directors defining the Medicaid Shortfall, which makes no

31 about CMS’s process by which the policies set forth in the FAQs

were considered or formed. See Tangney, 186 F. Supp. 3d at 56

(the validity of the interpretation depends “on whether the

agency has consulted appropriate sources, employed sensible

heuristic tools, and adequately substantiated its ultimate

conclusion” (quoting Leavitt, 552 F.3d at 82)); Neang Chea Taing

v. Napolitano, 567 F.3d 19, 30 (1st Cir. 2009) (holding that an

agency interpretation lacks the power to persuade when it “does

not engage in an adequate analysis of the statutory text”); De

La Mota v. U.S. Dep’t of Educ., 412 F.3d 71, 82 (2d Cir. 2005)

(noting that an agency interpretation is not entitled to

Skidmore deference “when there is no indication in the record of

the process through which the agency arrived at its

interpretation . . . because we cannot say with confidence that

the agency’s interpretation came about as the result of a

reasoned process.” (internal quotation marks, citation and

alterations omitted)).

mention of Medicare or private insurance payments as offsets. See Letter from Sally K. Richardson, Ctrs. for Medicare & Medicaid Servs., U.S. Dep’t of Health and Human Servs., to State Medicaid Directors (Aug. 17, 1994), https://downloads.cms.gov/cmsgov/archived- downloads/SMDL/downloads/SMD081794.pdf (last visited March 2, 2017). It also includes CMS’s approval of the New Hampshire State Medicaid Plan, which does not include Medicare or private insurance as offsets, from 2004 to 2013.

32 In light of the relevant Skidmore factors, FAQs 33 and 34

lack the power to persuade. Therefore, they are not entitled to

any deference under Skidmore.

3. Excess of Statutory Jurisdiction or Authority

Plaintiffs allege in Count I that FAQs 33 and 34 were

promulgated “in excess of statutory jurisdiction, authority, or

limitations, or short of statutory right.” § 706(2)(C).

A claim that agency action is “in excess of statutory

jurisdiction, authority, or limitations, or short of statutory

right [under] 5 U.S.C. § 706(2)(C) . . . . necessarily entails a

firsthand judicial comparison of the claimed excessive action

with the pertinent statutory authority.” Louisiana Forestry

Ass’n Inc. v. Sec’y U.S. Dep’t of Labor, 745 F.3d 653, 679 (3d

Cir. 2014) (internal quotation marks and citation omitted). A

determination of whether an agency has acted within the

limitations of its delegated authority “begins with a

delineation of the scope of the [agency’s] authority and

discretion.” Citizens to Preserve Overton Park, Inc. v. Volpe,

401 U.S. 402, 415–16 (1971), abrogated on other grounds by

Califano v. Sanders, 430 U.S. 99 (1977); see also Schilling v.

Rogers, 363 U.S. 666, 676–77 (1960). Then, the court determines

whether it can “reasonably conclude that the agency’s grant of

authority contemplates the actions taken.” Comite de Apoyo a

33 los Trabajadores Agricolas v. Solis, 933 F. Supp. 2d 700, 711

(E.D. Pa. 2013) (citing Citizens to Preserve Overton Park, 401

U.S. at 415–16).

As discussed above, the Medicaid Act defines the Medicaid

Shortfall in § 1396r-4(g)(1)(A). The Medicaid Shortfall is

comprised of the “costs incurred” in furnishing hospital

Secretary and net of” Medicaid payments. Id. The Medicaid

Shortfall makes no mention of Medicare payments or private

insurance payments as offsets to costs.

The phrase “as determined by the Secretary” necessarily

grants the Secretary discretion to define “costs incurred.”

Defendants contend that this grant of authority includes the

discretion to include Medicare payments and private insurance

payments as offsets to costs.

Assuming without deciding that § 1396r-4(g)(1)(A) grants

the Secretary such interpretive discretion, the statute does not

authorize the Secretary’s actions that are challenged in this

case. “At most, the statute might have delegated to the

Secretary the ability to determine by regulation that additional

payments should be considered.” Texas Children’s Hosp., 76 F.

Supp. 3d at 236. As discussed above, the Secretary did not

exercise that discretion in the 2008 Rule. Instead, the

34 Secretary expressed the new interpretation, that Medicare

payments and private insurance payments were included in the

statutory phrase “costs incurred,” by issuing FAQs 33 and 34.

Defendants offer no support for the theory that the

Secretary has the power to define the phrase “costs incurred” in

FAQs. Thus, even if § 1396r-4(g)(1)(A) authorizes the Secretary

to interpret the statute to mean that Medicare payments and

private insurance payments should be included as offsets to

costs, the statute does not authorize the Secretary to do so

through FAQs on CMS’s website. Because FAQs 33 and 34 are not

regulations, in promulgating those FAQs, defendants acted “in

excess of statutory jurisdiction, authority . . . or short of

statutory right.” § 706(2)(C). Therefore, plaintiffs are

entitled to summary judgment on Count I.16

16In granting plaintiffs’ motion for preliminary injunction, the court assumed without deciding that the Chevron framework applied and held that, based on the limited record before it at the time, FAQs 33 and 34 failed under that analysis. See doc. no. 31. With the benefit of the entire record and for the reasons discussed above, the court concludes that the Secretary’s interpretation of the Medicaid Act as set forth in FAQs 33 and 34 is not entitled to deference under either Chevron or Skidmore. The court does not address the separate question, not raised here, as to whether § 1396r- 4(g)(1)(A) could support a validly promulgated rule that codifies defendants’ policy, or the extent to which that rule might be entitled to any deference. See Texas Children’s Hosp., 76 F. Supp. 3d at 241 (“Considerations of judicial economy and restraint counsel against deciding whether 42 U.S.C. § 1396r– 4(g)(1)(A) could support a validly promulgated rule that codified the defendants’ policy in the future.”).

35 B. Count II

Count II alleges that FAQs 33 and 34 violate the APA

because they represent agency action that is “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law,” § 706(2)(A), and “without observance of

procedure required by law.” § 706(2)(D). Specifically,

plaintiffs allege that FAQs 33 and 34 substantively alter the

obligations imposed by a section of the 2008 Rule, 42 C.F.R. §

447.299(c)(16). Plaintiffs contend that, as substantive rules,

the FAQs had to be, but were not, promulgated using notice-and-

comment rulemaking under the APA. Defendants contend that the

policies in FAQs 33 and 34 are “compatible with the terms of”

the 2008 Rule and, therefore, are not substantive rules that

implicate plaintiffs’ notice-and-comment rights. Doc. no. 35-1

at 29.

Under the APA, substantive rules are subject to notice-and-

comment rulemaking, and interpretative rules are not. 5 U.S.C.

§ 553. “A substantive rule has the force of law, while an

interpretive rule is merely a clarification or explanation of an

existing statute or rule and is issued by an agency to advise

the public of the agency’s construction of the statutes and

rules which it administers.” La Casa Del Convaleciente v.

Sullivan, 965 F.2d 1175, 1178 (1st Cir. 1992) (internal

36 quotation marks and citation omitted); see also Warder v.

Shalala, 149 F.3d 73, 80 (1st Cir. 1998) (“If a rule creates

rights, assigns duties, or imposes obligations, the basic tenor

of which is not already outlined in the law itself, then it is

substantive.” (internal quotation marks and citation omitted)).

Thus, where an agency’s “interpretation [of a regulation] has

the practical effect of altering the regulation, a formal

amendment—almost certainly prospective and after notice and

comment—is the proper course.” United States v. Hoyts Cinemas

Corp., 380 F.3d 558, 569 (1st Cir. 2004).

As discussed above, § 447.299(c)(16), which provides the

proper calculation of the hospital-specific DSH limit for

auditing purposes, provides as follows:

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

§ 447.299(c)(16) (emphasis added). Other sections of the 2008

Rule further define each payment to be subtracted from the cost

of care, and do not mention private insurance or Medicare.

Defendants argue that it is reasonable to interpret the

“total cost of care” as that phrase is used in § 447.299(c)(16)

37 to mean “unreimbursed” or “uncompensated” cost. The Preamble to

the 2008 Rule, however, states several times that the 2008 Rule

does not alter the calculation of the hospital-specific DSH

limit as established in the Medicaid Act. See 73 Fed. Reg.

77907 (“Moreover, the [2008] rule does not substantively change

the standards for DSH payments, or for the review of hospital-

specific limits on such payments.”); id. at 77921 (“[T]his

regulation does not change the underlying statutory requirements

for DSH payments.”); id. at 77906 (“This regulation does not

alter any of the substantive standards regarding the calculation

of hospital costs.”). As discussed above, the Medicaid Act does

not include payments from Medicare or private insurance in the

Medicaid Shortfall. Therefore, defendants’ argument with

respect to the Secretary’s interpretation of the 2008 Rule is

unavailing.

In addition, at several points, the Preamble references a

“General DSH Audit and Reporting Protocol,” which CMS made

available on its website to “assist States and auditors in using

information from each source identified above to determine

uncompensated care costs consistent with the statutory

requirements.” 73 Fed. Reg. 77921; see id. at 77930, 77931,

77936. The Preamble states that the Protocol provides “detailed

identification of the data elements necessary to comply with

38 Congressional instruction on such reporting and auditing.” Id.

at 77921. It 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.

Unlike FAQs 33 and 34, the Protocol does not include as “data

elements” payments from either private insurance or Medicare.

FAQs 33 and 34 add payments that must be deducted in

calculating the costs incurred in furnishing hospital services

for purposes of the hospital-specific DSH limit. As such, FAQs

33 and 34 change the calculation provided in § 447.299(c)(16) of

the 2008 Rule. Therefore, the FAQs are considered substantive

rules, and should have been, but were not, promulgated through

notice-and-comment rulemaking under the APA. Because of the

lack of rulemaking procedure, FAQs 33 and 34 represent agency

action that is “arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law,” § 706(2)(A), and

“without observance of procedure required by law.” § 706(2)(D).

See Coal. for Common Sense in Gov’t Procurement v. Sec’y of

Veterans Affairs, 464 F.3d 1306, 1319 (Fed. Cir. 2006) (setting

aside agency’s substantive rule under § 706(2)(D) because agency

failed to follow notice-and-comment procedures); see also

Dialysis Patient Citizens v. Burwell, No. 4:17-CV-16, 2017 WL

365271, at *3-6 (E.D. Tex. Jan. 25, 2017) (granting plaintiffs’

39 motion for a preliminary injunction because plaintiffs were

likely to show that agency’s failure to follow notice-and-

comment procedures violated § 706(2)(A)).17

Accordingly, plaintiffs are entitled to summary judgment on

Count II.

C. Count III

As with Count II, Count III alleges FAQs 33 and 34

represent agency action that is “arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law,” §

706(2)(A), and “without observance of procedure required by

law.” § 706(2)(D). Specifically, plaintiffs allege that from

July 1, 1995 to November 1, 2013, the New Hampshire State

Medicaid Plan (the “State Plan”) required only Medicaid payments

to be deducted from costs when determining the Medicaid

Shortfall component of the hospital-specific DSH limit.

17In arguing that FAQs 33 and 34 are compatible with the 2008 Rule, defendants assert that the court should give “substantial deference to an agency’s interpretation of its own regulations,” relying on Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Although defendants continually refer to FAQs 33 and 34 as interpretative rules, for the reasons discussed above, they are substantive rules. See Stuttering Found. of Am. v. Springer, 498 F. Supp. 2d 203, 211 (D.D.C. 2007) (holding that a court should “not defer to the agency's view that its regulations are a mere clarification of an existing rule pursuant to the APA; instead, the court conducts its own inquiry into whether the new rules work substantive changes in prior regulations” (internal quotation marks and citations omitted)).

40 Plaintiffs allege that FAQs 33 and 34 are contrary to the plain

language of the State Plan and, therefore, substantively amend

it. Plaintiffs argue that under 42 U.S.C. § 1396a(a)(13)(A) and

42 C.F.R. § 447.205, they had to be, but were not, provided with

federal notice-and-comment rights prior to any amendments to

their State Plan.

As discussed above, in order to qualify for Medicaid

1396a(a), which must be approved by CMS. See Ferguson, 362 F.3d

at 51. “Before granting approval, [CMS] reviews the State’s

plan and amendments to determine whether they comply with the

statutory and regulatory requirements governing the Medicaid

program.” Douglas v. Indep. Living Ctr. of S. Cal., Inc., 565

U.S. 606, 610 (2012); see 42 U.S.C. § 1396a(b).

42 C.F.R. § 430.12 governs the “submittal of State plan and

plan amendments.” The regulation provides that a state plan

“must provide that it will be amended whenever necessary to

reflect—(i) Changes in Federal law, regulations, policy

interpretations, or court decisions.” § 430.12(c)(1)(i).

Before a state plan can be amended, the state must provide

plaintiffs and Medicaid patients an opportunity for notice and

comment. See § 1396a(a)(13)(A) (noting that a State plan must

provide “for a public process for determination of rates of

41 payment under the plan for hospital services”); Dartmouth-

Hitchcock Clinic v. Toumpas, 856 F. Supp. 2d 315, 323 (D.N.H.

2012) (“Broadly speaking, subsection (13)(A) requires something

on the order of notice and comment rule-making for states in

their setting of rates for reimbursement of hospital services .

. . provided under the Medicaid Act.” (internal quotation marks

and citations omitted)); see also § 447.205 (requiring “public

notice of changes in Statewide methods and standards for setting

payment rates”).

Plaintiffs assert that defendants’ enforcement of FAQs 33

and 34 represents a de facto amendment to the State Plan, which

requires defendants to follow the amendment provisions of

§ 430.12(c) and, therefore, the notice-and-comment requirements

of § 1396a(a)(13)(A) and § 447.205. Plaintiffs assert that

defendants’ failure to comply with those requirements violates

the APA.

As discussed above, defendants were required to provide

notice-and-comment rights prior to implementing FAQs 33 and 34

because the FAQs substantively amended the 2008 Rule.

Plaintiffs, however, fail to explain persuasively how the public

notice requirements of § 1396a(a)(13)(A) and § 447.205 are

implicated by defendants’ actions.

42 Sections 1396a(13)(A) and 447.205 impose public notice

obligations on the state prior to submitting any amendment to a

state plan to CMS. Section 1396a(13)(A) establishes the

requirement that “a state must provide notice of proposed rates

together with the methodologies and justifications used to

establish those rates, and give concerned state residents . . .

a reasonable opportunity to review and comment on them.” Christ

the King Manor, Inc. v. Sec’y U.S. Dep’t of Health & Human

Servs., 730 F.3d 291, 315 (3d Cir. 2013) (internal quotation

marks and citations omitted) (emphasis added); HCMF Corp. v.

Allen, 238 F.3d 273, 276 (4th Cir. 2001) (noting that §

1396a(a)(13)(A) “requires that states determine their

reimbursement rates via a public process that allows providers

notice and an opportunity to comment on the proposed rates”

(internal quotation marks and citation omitted)); Am. Soc. of

Consultant Pharmacists v. Concannon, 214 F. Supp. 2d 23, 28 (D.

Me. 2002) (noting that § 1396a(a)(13)(A) addresses the “duty of

the state to provide . . . individuals with a reasonable

opportunity for review and comment” (internal quotation marks

and citation omitted)). Section 447.205 provides “further

guidance on the substantive requirements of that notice,” which

“must be satisfied in order for a state plan amendment to

receive approval.” Christ the King Manor, 730 F.3d at 315; see

43 also 46 Fed. Reg. 58677-78 (Dec. 3, 1981) (noting that § 447.205

is directed toward the states); Indep. Acceptance Co. v.

California, 204 F.3d 1247, 1251 (9th Cir. 2000) (noting that §

447.205 “require[s] the State to furnish public notice of any

significant proposed change in its methods and standards for

setting payment rates for services”).

A state’s failure to provide notice-and-comment rights

prior to amending a state plan may support a claim under §§

706(2)(A) or (D) against CMS if CMS approved a state plan

amendment but the state failed to comply with its relevant

public notice obligations. See Christ the King Manor, 730 F.3d

at 315 (noting that a claim against the Secretary under §

706(2)(A) based on failure to comply with § 1396a(13)(A)

necessarily focuses on whether the Secretary acted arbitrarily

and capriciously when she accepted the state’s “assurance that

it had provided adequate notice of the proposed changes” to the

state plan); Indep. Acceptance Co., 204 F.3d at 1252 (“Thus the

inquiry for our review is whether the Secretary acted

arbitrarily or capriciously when she accepted the State’s

assurance of notice [under § 447.205] as satisfactory to her, in

light of the record presented by the State regarding notice for

SPA 90-20.”). That is not the case here.

44 Plaintiffs offer no developed argument to show that the

Secretary or CMS can be held liable absent those circumstances

outlined above based on their failure to comply with the public

notice requirements of § 1396a(a)(13)(A) and § 447.205.

Therefore, defendants are entitled to summary judgment on Count

III.

D. Relief Sought

Defendants argue that they are entitled to summary judgment

because plaintiffs’ requests for specific relief are improper.

They note that in addition to asking defendants to set aside

FAQs 33 and 34, the complaint requests that the court

“permanently enjoin” enforcement of those policies and “to notify New Hampshire’s Medicaid program that . . . the enforcement of those policies are enjoined and that Defendants will take no action to recoup any federal funds provided to New Hampshire or to penalize New Hampshire in any way for its noncompliance with those policies.”

Doc. no. 35-1 at 30 (quoting doc. no. 1 at 33) (alterations

omitted). Defendants argue that this “kind of relief would

effectively put the Court in the position of supervising future

agency action, which is not authorized by the APA.” Id.

Plaintiffs’ successful claims challenged defendants’

actions in promulgating and enforcing FAQs 33 and 34, in

45 violation of the APA, 5 U.S.C. §§ 706(2)(C) and 706(2)(A) & (D).

In similar circumstances, District Judge Emmet Sullivan

concluded that appropriate relief for actions in violation of

the APA would be “that the agency’s previous practice . . . is

reinstated and remains in effect unless and until it is replaced

by a lawfully promulgated regulation.” Texas Children’s Hosp.,

76 F. Supp. 3d at 247 (quoting Croplife Am. v. EPA, 329 F.3d

876, 884–85 (D.C. Cir. 2003) (internal quotation marks omitted).

As provided below, that is the relief granted to plaintiffs in

this case, and it is appropriate under the APA.

III. Motion to Intervene

On February 6, 2017, more than a year after plaintiffs

filed their complaint and more than eight months after

plaintiffs filed their summary judgment motion, Jeffrey Meyers,

the Commissioner of NHDHHS, moved to intervene (doc. no. 46).

Plaintiffs object.

Meyers offers no persuasive justification for his failure

to move to intervene sooner. Therefore, Meyers’ motion is

denied. Daggett v. Comm’n on Governmental Ethics & Election

Practices, 172 F.3d 104, 113 (1st Cir. 1999) (A “district court

can consider almost any factor rationally relevant but enjoys

46 very broad discretion in granting or denying [a] motion” to

intervene under Rule 24(b).).18

Conclusion

For the foregoing reasons, plaintiffs’ motion for summary

judgment (doc. no. 33) is granted as to Counts I and II and

denied as to Count III as provided in this order. Defendants’

motion for summary judgment (doc. no. 35) is granted as to Count

III but denied as to Counts I and II. Count IV is voluntarily

dismissed.

Defendants are permanently enjoined from enforcing FAQs 33

and 34. Defendants shall follow the policies and procedures in

effect before defendants issued FAQs 33 and 34, until and unless

those policies and procedures are replaced by an enforceable and

properly promulgated regulation.

Jeffrey Meyers’ motion to intervene (doc. no. 46) and

plaintiffs’ motion to strike Meyers’ motion to intervene (doc.

no. 50) are denied. The clerk of court is directed to enter

judgment accordingly.

Plaintiffs’ complaint asks this court to “[a]ward

Plaintiffs their reasonable attorney’s fees and costs pursuant

18Plaintiffs move to strike Meyers’ motion to intervene. See doc. no. 50. Although that motion is not yet ripe, the court sees no reason to strike Meyers’ motion from the record. Therefore, plaintiffs’ motion to strike (doc. no. 50) is denied.

47 to 28 U.S.C. 2412(d)(1)(A).” Doc. no. 1 at 34. To the extent

plaintiffs intend to seek an award of fees, within 30 days of

the date judgment is entered, plaintiffs shall submit to the

court an application of fees in accordance with 28 U.S.C. §

2412(d)(1)(B).

SO ORDERED.

__________________________ Landya McCafferty United States District Judge

March 2, 2017

cc: Anthony J. Galdieri, Esq. James C. Luh, Esq. Gordon J. MacDonald, Esq. W. Scott O’Connell, Esq. Nancy J. Smith, Esq.