NH Hospital Assoc. v. US Department HHS

2016 DNH 053

• Court: District Court, D. New Hampshire
• Decided: March 11, 2016
• 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. 2016 DNH 053 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”). Plaintiffs seek a preliminary injunction barring

defendants from enforcing the policy clarifications during the

pendency of this litigation. Defendants object. The court held

an evidentiary hearing on February 18, 2016, and, for the

1 Plaintiff hospitals are Mary Hitchcock Memorial Hospital (“Mary Hitchcock”), LRGHealthcare, Speare Memorial Hospital (“Speare”), and Valley Regional Hospital, Inc. (“Valley Regional”). reasons that follow, plaintiffs’ motion for preliminary

injunction is granted.

Background

I. The Medicaid Act

Medicaid is a cooperative federal-state program designed to

provide medical services to those members of society who,

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

2 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

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 paying 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).

3 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.”

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

Servs., 346 F.3d 571, 573 (5th Cir. 2003) (discussing 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).2

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

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

4 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.

§ 1396r-4(g)(1)(A). 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.3

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

3The parties often refer to the portion of § 1396r-4(g)(1) dealing with the costs of furnishing hospital services to Medicaid-eligible patients as the “Medicaid Shortfall.”

5 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).

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 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 § 1396-r(4)(g)(1), 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. at 77906. Beginning with payments made in

6 Fiscal Year 2011, any DSH overpayments must be recovered by the

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

redistributed by the State to other qualifying hospitals.” 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, http://www.medicaid.

gov/medicaid-chip-program-information/by-topics/financing-and-

reimbursement/downloads/additionalinformationonthedshreporting.p

df (last visited March 11, 2016). 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)4 does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore,

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

7 days, costs, and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit.

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

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, 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 patients.

8 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

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

dually eligible for Medicare and Medicaid.

9 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 Galdieri Decl., Ex. P (doc. no. 10-24). Plaintiffs

submitted a supplement to the petition dated June 24, 2015. See

id., Ex. Q (doc. no. 10-25). The petition and the supplement

asserted that the policies in 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 Galdieri

Decl., Ex. R (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.

10 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. Procedural History

Plaintiffs filed this lawsuit on January 15, 2016. That

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

seeks to enjoin defendants from enforcing or applying the

policies set forth in FAQs 33 and 34. Defendants objected to

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

surreply.5 On February 18, 2016, the court held an evidentiary

hearing, during which the court heard oral argument and

plaintiffs submitted evidence.

5Defendants have also moved to dismiss the complaint, and the motion is ripe for the court’s consideration. The court does not address that motion in this order.

11 Discussion

“A preliminary injunction is an ‘extraordinary and drastic

remedy;’ it is never awarded as of right.” Munaf v. Geren, 553

U.S. 674, 689–90 (2008) (quoting 11A C. Wright, A. Miller & M.

Kane, Federal Practice & Procedure § 2948, at 129 (2d ed. 1995)

(further citations omitted)). Rather, “[a] plaintiff seeking a

preliminary injunction must establish that he is likely to

succeed on the merits, that he is likely to suffer irreparable

harm in the absence of preliminary relief, that the balance of

equities tips in his favor, and that an injunction is in the

public interest.” Winter v. Natural Res. Def. Council, Inc.,

555 U.S. 7, 20 (2008); see also Bl(a)ck Tea Soc’y v. City of

Bos., 378 F.3d 8, 11 (1st Cir. 2004). The court will assess

each of these four elements in turn, mindful that the burden of

satisfying them rests and remains with the party seeking the

injunction. Esso Standard Oil Co. (P.R.) v. Monroig–Zayas, 445

F.3d 13, 18 (1st Cir. 2006).6

6 Plaintiffs’ claims arise under the APA, which sets forth standards a court may employ when considering a request for a stay of administrative action. See 5 U.S.C. § 705. Here, plaintiffs have moved for a preliminary injunction, rather than a motion for stay under the APA. Regardless, “[c]ourts use the same standard to decide applications for stays of administrative action as for preliminary injunction determinations.” First Premier Bank v. U.S. Consumer Fin. Protection Bureau, 819 F. Supp. 2d 906, 912 (D.S.D. 2011).

12 I. Likelihood of Success on the Merits

“Though each factor is important ... ‘the sine qua non of

[the] four-part inquiry is likelihood of success on the merits:

if the moving party cannot demonstrate that he is likely to

succeed in his quest, the remaining factors become matters of

idle curiosity.’” Sindicato Puertorriqueño de Trabajadores,

SEIU Local 1996 v. Fortuño, 699 F.3d 1, 10 (1st Cir. 2012) (per

curiam) (quoting New Comm Wireless Servs., Inc. v. SprintCom,

Inc., 287 F.3d 1, 9 (1st Cir. 2002) (alteration omitted)). “To

demonstrate likelihood of success on the merits, plaintiffs must

show more than mere possibility of success—rather, they must

establish a strong likelihood that they will ultimately

prevail.” Sindicato Puertorriqueño, 699 F.3d at 10 (citations

omitted) (internal quotation marks omitted). In the context of

a preliminary injunction, “the merits on which plaintiff must

show a likelihood of success encompass not only substantive

theories but also establishment of jurisdiction,” including

standing. Obama v. Klayman, 800 F.3d 559, 565 (D.C. Cir. 2015)

(Williams, J., concurring in part and dissenting in part).

Plaintiffs allege in their complaint that FAQs 33 and 34

are contrary to the plain language of the Medicaid Act and were

promulgated in violation of the APA. Defendants argue that

plaintiffs are unlikely to succeed on the merits of their claims

because they lack standing to pursue their claims, and because

13 FAQs 33 and 34 are consistent with the language of the Medicaid

Act and the 2008 Rule. The court addresses the standing issue

first, before turning to the parties’ arguments on the merits.

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

federal court must satisfy itself as to its jurisdiction,

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

addressing his particular claims . . . .”).

A. 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

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

180-81 (2000).7

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

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. Regardless of whether the injury is procedural or substantive, plaintiffs must meet the same standard. See, e.g., U.S. Women’s Chamber of Commerce v. U.S. Small Bus. Admin., No. 1:04-CV-01889, 2005 WL 3244182, at *13 (D.D.C. Nov. 30, 2005).

15 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).

1. Recoupment of Past DSH Overpayments

Plaintiffs argue 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 the

policies in 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, as such, an injunction issued against

them in this case would not bar the State of New Hampshire8 from

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 recouping funds from plaintiff hospitals and redistributing them

to other DSH hospitals. They contend, therefore, that,

plaintiffs’ injury in the form of NHDHHS’s recoupment of past

DSH payments is not fairly traceable to the policies in 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 the

policies in 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 the policies in 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

Under the Medicaid Act, the federal government cannot 9

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 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 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’ motion for preliminary injunction, NHDHHS could

still recoup funds from plaintiff hospitals and redistribute

them to other DSH hospitals. While that may be true in a

literal sense, it defies logic to believe that NHDHHS would take

action pursuant to federal policies which defendants would be

enjoined from enforcing. In other words, if FAQs 33 and 34 are

unenforceable, then the audit of Fiscal Year 2011 based on FAQs

33 and 34 is no longer accurate. Defendants offer no

explanation as to why NHDHHS would still attempt to recoup non-

existent overpayments.

In addition, defendants’ argument is belied by the evidence

in this case. Plaintiffs attached as an exhibit to their motion

a letter dated March 3, 2015, from Kathleen Dunn, the Associate

Commissioner of NHDHHS, to Franklin Regional Hospital,

18 LRGHealthcare’s critical access hospital. See Galdieri Decl.,

Ex. N (doc. no. 10-22). In the letter, Dunn refers to the

preliminary injunction issued against defendants in Texas

Children’s Hosp., enjoining the enforcement of FAQ 33. Dunn

notes that NHDHHS “has and will continue to seek guidance from

CMS on its policy response to this court order.” Id. at 2. She

also states that because NHDHHS does not need to take recoupment

actions until the middle of Fiscal Year 2016, it will not “take

any recoupment actions on these DSH payment audit results at

this time,” and she expects that before recoupment actions must

be taken, “a clear federal policy on this issue will have been

issued in accordance with federal reviewing court decisions.”

Id. Dunn’s letter demonstrates that NHDHHS will act in

accordance with CMS’s guidance as to the enforcement of the

policies in FAQs 33 and 34, which will be directly affected by

the court’s order in this case.

In addition, at the hearing, plaintiffs submitted as an

exhibit a letter dated January 27, 2016, from Jeffrey A. Meyers,

the Acting Commissioner of NHDHHS, to Steve Ahnen, the Executive

Director of plaintiff NHHA. The letter states, in pertinent

part:

If your request for injunctive relief [in this case] is granted, it is our view that NHDHHS would not be able to require recoupment while the injunction is in place, or be obligated to redistribute, based on the 2011 Myers and Stauffer audit, to the extent that

19 recoupment is required due to the application by the auditor of the principles in FAQ Nos. 33 & 34.

Ex. 1.

Further, on January 28, 2016, NHDHHS issued a “Notice of

Overpayment and Repayment Agreement” to Franklin Regional

Hospital. Ex. 2. The notice states that NHDHHS is proceeding

with the recoupment of DSH overpayments for the 2011 Fiscal Year

that were discovered during the audit. Id. at 1-2. The

Repayment Agreement references this lawsuit, and notes that, to

the extent the court grants injunctive relief, NHDHHS will not

proceed with the recoupment of funds affected by the court’s

order.10 Id. at 5.

Defendants cite Bourgoin v. Sebelius, 296 F.R.D. 15 (D. Me.

2013) in support of their argument that plaintiffs’ injury in

the form of recoupment of past DSH overpayments is not

10Both Ex. 1 and Ex. 2 post-date the complaint and the motion for preliminary injunction. Defendants argue that plaintiffs cannot establish standing based on exhibits dated after the date the complaint was filed, citing Lujan, 504 U.S. at 570 n.4. Lujan holds that “the existence of federal jurisdiction ordinarily depends on the facts as they exist when the complaint is filed.” Id. The court, however, does not view Lujan as precluding consideration of the exhibits. The exhibits are not facts that establish the existence of the court’s jurisdiction. Rather, they are evidence that such facts existed at the time the complaint was filed. Therefore, the court considers the exhibits in ruling on plaintiffs’ motion. As explained above, however, even if the court did not consider the exhibits, it would still find that plaintiffs have met the redressability prong of the standing analysis with regard to the recoupment of past DSH overpayments.

20 redressable. In Bourgoin, the district court held that Medicaid

beneficiaries did not have standing to sue the federal

government based on their theory that a ruling against the

federal government would induce the state of Maine, which was

not a party, to provide the benefits they sought. Id. at 29-30.

Bourgoin is not dispositive on the issue of standing in this

case. In Bourgoin, the court noted several “plausible

arguments” that Maine would not be affected by the court’s order

against the federal government, “and it would be surprising if

the State did not press these arguments.” Id. at 29. Here, in

contrast, defendants fail to put forth any argument—much less a

plausible one—suggesting that NHDHHS would still recoup funds if

the court issued an injunction. Moreover, plaintiffs have

submitted evidence showing that NHDHHS would forego recoupment

in the face of an injunction in this case.11

In sum, plaintiffs have shown that defendants’ enforcement

of FAQs 33 and 34 has a sufficient causal connection to

plaintiffs’ injuries arising from the recoupment of past DSH

overpayments, and an injunction against defendants’ enforcement

In addition, in Bourgoin, the plaintiffs challenged a 11

recent amendment to Maine’s Medicaid Plan but sued only the Secretary, on the basis that she approved the amendment. Thus, the plaintiffs’ injuries in that case were far less traceable to the Secretary’s actions than in this case, and were likely not redressable by a favorable decision.

21 of the FAQs would likely redress plaintiffs’ injuries in that

regard.

2. Reduction in Prospective DSH Payments

Defendants contend that any reduction in prospective DSH

payments is not traceable to federal policy, because prospective

payments are governed by a settlement agreement between the New

Hampshire state government and New Hampshire hospitals,

including plaintiffs, which resolved lawsuits over the

implementation of the New Hampshire Medicaid plan.12 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. It is true that 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.

Defendants’ alleged conduct, however, has the effect of lowering

the calculation of total annual uncompensated care costs, which

necessarily lowers the DSH funding levels. Therefore,

12Unlike the recoupment of DSH overpayments, defendants do not argue lack of redressability from the reduction in prospective DSH payments.

22 plaintiffs have shown that there is a causal relationship

between defendants’ enforcement of the policies in FAQs 33 and

34 and the reduction in prospective DSH payments.

Defendants cite Pennsylvania v. New Jersey, 426 U.S. 660

(1976) (per curiam) for the proposition that plaintiffs’ injury

is self-inflicted and, therefore, not traceable to defendants’

conduct. In Pennsylvania, the Supreme Court held that the

plaintiff states lacked standing to contest the defendant

states’ laws taxing a portion of nonresidents’ incomes. The

plaintiffs alleged that the defendants’ taxes injured them

because the plaintiffs gave their residents credits for taxes

paid to other states, and the defendants’ taxes increased the

amount of those credits, causing the plaintiffs to lose revenue.

Id. at 663. The Supreme Court noted that “[t]he injuries to the

plaintiffs’ fiscs were self-inflicted . . . and nothing prevents

[plaintiffs] from withdrawing [the] credit for taxes paid to

[defendant states].” Id. at 664. Here, defendants’ change to

the calculation of total annual uncompensated care costs would

have injured plaintiffs regardless of the settlement agreement,

because it would have materially lowered the yearly DSH payment.

In other words, unlike the plaintiffs in Pennsylvania,

plaintiffs in this case would be adversely affected by

defendants’ policies regardless of the settlement agreement.

23 To illustrate how defendants’ argument does not withstand

scrutiny, imagine a family of four children. Each year, the

parents buy the children a pie to share from the same bakery.

After an argument, the children and parents agree that each

child will be entitled to exactly 25% of the pie. Without

warning and without lowering the price, the bakery reduces the

size of the pie significantly. Under defendants’ theory, the

children’s injury—a much smaller portion of the pie than usual—

has not been caused by the bakery, but instead is “self-

inflicted,” because they agreed on how to divide up the pie.

For obvious reasons, that argument fails.

Accordingly, plaintiffs have met their burden to show a

likelihood of causation and redressability. Therefore,

plaintiffs have shown a likelihood of standing.13

B. Claims

Plaintiffs’ motion seeks a preliminary injunction on Counts

I-III of their complaint. Although each count represents a

separate challenge to defendants’ actions, all allege that

defendants’ enforcement of the policies in FAQs 33 and 34

violate the APA. At its center, plaintiffs’ likelihood of

13Defendants do not dispute that if plaintiff hospitals have standing, the NHHA has standing as well. See, e.g., Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000).

24 success on the merits turns on a single question: Do the

directives contained in FAQs 33 and 34 substantively alter the

obligations established in the Medicaid Act and the 2008 Rule?

If plaintiffs show that the answer to that question is likely

yes, then defendants have likely violated the APA. If they do

not, then defendants have likely not violated 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). Plaintiffs assert that

defendants’ implementation and enforcement of the policies in

FAQs 33 and 34 violate all three sections of the APA. Although

the standard of review for challenges under the sections

“overlap, they are not identical.” Individual Reference Servs.

Grp., Inc. v. F.T.C., 145 F. Supp. 2d 6, 25 (D.D.C. 2001).

Therefore, in the interest of clarity, the court will address

plaintiffs’ challenges according to the manner in which

plaintiffs organized them: first, with respect to their

challenge that the policies in FAQs 33 and 34 conflict with the

plain language of the Medicaid Act in violation of § 706(2)(C)

and, then, whether defendants’ actions had to be, but were not,

25 subject to notice-and-comment rulemaking under §§ 706(2)(A),

(D).

1. FAQS 33 and 34 Violate the Medicaid Act

Plaintiffs contend that the policies in FAQs 33 and 34

violate § 706(2)(C) of the APA because they 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).”14 Obj. (doc. no. 17) at 29 of 53.

A court considering whether to defer to an administrative

construction of a statute must follow the two-step inquiry set

forth by the Supreme Court in Chevron. “First, [courts] look to

the statute to ascertain whether ‘Congress has directly spoken

to 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). In determining if

The parties agree that claims brought under § 706(2)(C) 14

are analyzed under the Chevron framework. See, e.g., AstraZeneca Pharm. LP v. Food and Drug Admin., 872 F. Supp. 2d 60, 77 (D.D.C. 2012).

26 Congress has spoken on the relevant question, courts use all

appropriate tools of statutory interpretation. See id. Only if

Congress’s intent remains unclear after deploying these tools

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).

a. Step One under Chevron

As discussed above, the Medicaid Act defines the hospital-

specific DSH limit in § 1396r-4(g)(1). The 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 to individuals who . . . are eligible for medical assistance under the State [Medicaid] plan . . . for services provided during the year.

Id. (emphasis added). The unambiguous language of § 1396r-

4(g)(1) provides that the payments which are to be subtracted

from Medicaid costs in calculating the Medicaid Shortfall are

27 “payments under this subchapter . . . .”15 Defendants do not

argue that payments from private health insurance or Medicare

are “payments under this subchapter” for purposes of § 1396r-

4(g)(1). Therefore, because the language defining the payments

that are to be deducted from costs is unambiguous, and that

language does not include payments from private health insurance

or Medicare, defendants’ interpretation of the Medicaid Act

appears to fail at step one of Chevron’s analytical framework.

To avoid the plain language of the statute, defendants

craft a novel argument: that payments from private health

insurance and Medicare should be considered in the definition of

the term “costs,” rather than in the definition of the phrase

“net of payments under this subchapter.” Defendants argue that

§ 1396r-4(g)(1) specifically grants the Secretary discretion in

interpreting the term “costs,” and, therefore, the court should

proceed to step two of Chevron’s framework.

The court agrees that the language of § 1396r-4(g)(1)

grants the Secretary the authority to determine the meaning of

the term “costs.” The Medicaid Act states that the “costs” to

be included in the calculation of the hospital-specific DSH

limit are costs “as determined by the Secretary.” § 1396r-

15The 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.

28 4(g)(1). 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 by regulation.’” 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). “This . . . takes the case out of

the realm of Chevron step one’s de novo review, and into the

realm of Chevron step two—which asks only whether the agency’s

interpretation is reasonable.” Id.; see also San Bernadino

Mountains Cmty. Hosp. Dist. v. Sec’y of Health & Human Servs.,

63 F.3d 882, 886-87 (9th Cir. 1995).

Therefore, the court will proceed to step two of Chevron’s

analysis on the question of the Secretary’s interpretation of

the term “costs” as used in § 1396r-4(g)(1). Thus, the court

asks only whether the Secretary’s interpretation of the term

“costs” to mean “unreimbursed costs” is reasonable.

b. Step Two under Chevron16

The Medicaid Act calculates the Medicaid Shortfall by using

the following straightforward equation:

Medicaid Costs – Medicaid Payments = Medicaid Shortfall

16In plaintiffs’ objection to defendants’ motion to dismiss, which they incorporate into their reply to defendants’ objection to their motion for preliminary injunction, plaintiffs argue that the court should not engage in step two of Chevron’s analysis because the Secretary’s interpretation of the Medicaid

29 As just mentioned, the Act specifically defines the “payments”

that are to be subtracted from the “costs” to obtain the

Medicaid Shortfall. The defined payments do not include

payments from private insurance or Medicare. Nevertheless,

defendants argue that, for several reasons, an interpretation of

“costs” to include payments from private health insurance and

Medicare is reasonable.

i. Costs can mean unreimbursed or uncompensated costs

Defendants urge an interpretation of the Medicaid Shortfall

that defines the term “costs” as “unreimbursed” or

“uncompensated” costs. In other words, defendants contend that

the following interpretation of the Medicaid Shortfall equation

is reasonable:

(Medicaid Costs – Payments) – Medicaid Payments = Medicaid

Shortfall

Act in FAQs 33 and 34 was not promulgated in the exercise of her authority to make rules that carry the force of law. See United States v. Mead Corp., 533 U.S. 218, 226-27 (2001). Plaintiffs argue that to the extent the Secretary’s interpretation survives Chevron’s first step, it should be analyzed under Skidmore v. Swift & Co., 323 U.S. 134 (1944), which would give it, at best, only some “weight.” Rather than devoting pages to explaining the intricacies of the various levels of deference that can be afforded an agency’s interpretation of its governing statute, the court will assume without deciding that the higher level of deference under Chevron’s second step applies.

30 That interpretation is unreasonable and is not entitled to

deference. Defendants’ reading of the Medicaid Act would double

count Medicaid payments—first as reimbursements or compensation

to be subtracted to determine the “costs” figure, and then again

as payments specifically set forth in the statute to be

subtracted from the overall costs figure. Cf. Texas Children’s

Hosp., 76 F. Supp. 3d at 237-38. Therefore, that interpretation

“exceeds the bounds of the permissible.” Barnhart v. Walton,

535 U.S. 212, 218 (2002).

ii. Costs means costs less payments from private insurance and Medicare

Perhaps recognizing the futility of that interpretation,

defendants appear to urge another reading of the term “costs,”

which would capture only payments from private insurance and

Medicare, but not Medicaid payments. Thus, defendants appear to

urge the following alternative interpretation of the Medicaid

Shortfall equation:

(Medicaid Costs – Payments other than Medicaid Payments) –

Medicaid Payments = Medicaid Shortfall

Although that interpretation would not double count Medicaid

payments, it is also unreasonable. The Medicaid Act separately

describes the “payments” that are subtracted from the “costs” to

obtain the Medicaid Shortfall. Congress could not have intended

to grant the Secretary the discretion to include other payments

31 within the term “costs,” while separately defining payments. If

it did, the definition of payments that must be subtracted from

costs to determine the Medicaid Shortfall would be surplusage.

See TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (“It is ‘a

cardinal principle of statutory construction’ that ‘a statute

ought, upon the whole, to be so construed that, if it can be

prevented, no clause, sentence, or word shall be superfluous,

void, or insignificant.’”) (quoting Duncan v. Walker, 533 U.S.

167, 174 (2001)).

iii. Costs is a flexible term

Defendants assert that “costs,” as used in § 1396r-4(g)(1),

is a “flexible term,” which gives an agency “broad

methodological leeway” to interpret the definition. An agency

gets such broad leeway, however, when the term “costs” stands

“without any better indication of meaning than the unadorned

term.” Verizon Comm’ns Inc. v. FCC, 535 U.S. 467, 500 (2002).

Here, although § 1396r-4(g)(1) does not define the term “costs,”

it provides that the “costs” must be offset against certain

defined payments. Therefore, at a minimum, Congress gave the

indication that “costs” does not include “payments,” and the

Secretary is not afforded “leeway” to interpret the term

otherwise.

32 In addition, this is not a case where, as in the cases

cited by defendants, the Secretary is simply altering the

methodology used to determine “costs.” See id. at 500-501

(discussing whether the term “costs” should be calculated as

rates set on a forward-looking basis or those tied to historical

investment under the Telecommunications Act); Am. Elec. Power

Serv. Corp. v. FCC, 708 F.3d 183, 189 (D.C. Cir. 2013) (holding

that the Federal Communications Commission reasonably

reformulated pole attachment rates that utilities could charge

telecommunications carriers in order to achieve equivalency with

rate charged to cable television systems). Instead, the

Secretary here is defining “costs” in a way that would render

superfluous the specific payments defined as offsets in the

statute. See TRW Inc., 534 U.S. at 31.

iv. Consistent interpretation

Defendants argue that the Secretary has been consistent in

her adherence to the interpretation of the term “costs” as set

forth in FAQs 33 and 34, which, they contend, supports their

claim that the interpretation is reasonable. In support,

defendants cite select portions of the Preamble to the 2008

Rule. For example, defendants point to the following language:

[T]he costs attributable to dual eligibles should be included in the calculation of the uncompensated costs of serving Medicaid eligible individuals. But in calculating those uncompensated care costs, it is

33 necessary to take into account both the Medicare and Medicaid payments made, since those payments are contemplated under Title XIX.

73 Fed. Reg. 77912. Defendants are correct that this language

is consistent with the Secretary’s interpretation of FAQ 34.

Other language in the Preamble, however, is not consistent

with the Secretary’s interpretation. For example, the Preamble

discusses the “reporting form” which contains the “necessary

data elements to fulfill the audit and reporting requirements.”

Id. at 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). This language instructs that the hospital

and auditor should first consider the cost of services and then,

separately, subtract certain payments. This instruction is

consistent with the language of § 1396r-4(g)(1). In addition,

this part of the Preamble specifically defines the payments and

revenues to be subtracted from the costs of care, and it does

not include payments from private health insurance or Medicare.

In explaining the way to calculate the hospital-specific

DSH limit, the Preamble is replete with language separating the

“costs” associated with providing hospital services to Medicaid

34 patients and the “payments” received for those services. 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. at

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 (i) separates “costs”

from “revenues” and “payments” in calculating the hospital-

specific DSH limit, and (ii) limits the revenues and payments to

be considered to those enumerated in that section, which do not

include payments from private health insurance or Medicare.

35 Therefore, the Preamble to the 2008 Rule does not support

defendants’ contention that the Secretary has consistently

interpreted the term “costs” to include payments.17

v. Common sense

Finally, defendants argue that common sense demonstrates

that the Secretary’s interpretation of § 1396r-4(g)(1) is

reasonable. They argue that the Medicaid Act limits hospital-

specific DSH payments to “uncompensated costs” incurred by the

hospital in providing care to Medicaid-eligible patients. They

contend, therefore, that it “defies logic and conflicts with the

law” to conclude that costs that are offset by private health

insurance and Medicare payments should be counted as

uncompensated costs. Doc. no. 17 at 9 of 53.

Divorced from the language of the statute, defendants’

argument has merit. In the end, however, that interpretation

cannot be given weight because it is directly contrary to the

plain language of § 1396r-4(g)(1). See, e.g., Connecticut Nat’l

Bank v. Germain, 503 U.S. 249, 253-54 (1992) (noting the

17Defendants also 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. Although the letter suggests that the Medicaid Shortfall should consider “net of third party payments,” that language is insufficient to overcome the overwhelming evidence that the Secretary has not consistently interpreted the definition of “costs” to include “payments” in § 1396r-4(g)(1).

36 “cardinal canon” of statutory interpretation is “that a

legislature says in a statute what it means and means in a

statute what it says there”). Moreover, the term “uncompensated

costs” is not used in the language of the statute itself, but

rather in the caption of the statute. See § 1396r-4(g)(1)

(titled “Amount of adjustment subject to uncompensated costs”).

“The caption of a statute . . . cannot undo or limit that which

the statute’s text makes plain.” Intel Corp. v. Advanced Micro

Devices, Inc., 542 U.S. 241, 256 (2004) (internal quotation

marks, citation, and alteration omitted).18

vi. Conclusion of Chevron deference

For all of the above reasons, FAQs 33 and 34 represent an

unreasonable agency interpretation of the Medicaid Act, which is

not entitled to deference under Chevron. Therefore, plaintiffs

are likely to show that defendants acted “in excess of statutory

jurisdiction, authority . . . or short of statutory right” in

promulgating and enforcing the policies in FAQs 33 and 34. See

§ 706(2)(C).

18Moreover, the Preamble to the 2008 Rule suggests that the use of the term “uncompensated” as it applies to the hospital- specific DSH limit is not as broad as defendants proffer. See 73 Fed. Reg. at 77921 (“The Medicare program uses a different, broader, definition of uncompensated care than is authorized for purposes of the Medicaid DSH hospital-specific limit.”).

37 2. FAQs 33 and 34 Alter the 2008 Rule

Plaintiffs assert that, in addition to being contrary to

the language of the Medicaid Act, FAQs 33 and 34 substantively

alter the obligations imposed by 42 C.F.R. § 447.299(c)(16) of

the 2008 Rule. Plaintiffs contend that, as substantive rules,

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

comment rulemaking under the APA. They argue that the policies

referenced in FAQs 33 and 34 should be vacated pursuant to §

706(2)(A), because they are “arbitrary, capricious, an abuse of

discretion, [and] not in accordance with law.”19 Defendants

argue that the Secretary’s policies are consistent with the 2008

Rule and “the explanatory text the Secretary published in the

[Preamble] at the time she issued the regulation.” Doc. no. 17

at 38 of 53. They argue that the court should defer to the

policies set forth in FAQs 33 and 34 as reasonable

interpretations of the 2008 Rule.

a. Consistency with the 2008 Rule

A plaintiff’s challenge to agency action under § 706(2)(A)

of the APA generally focuses on the agency’s decision-making

process, as opposed to the actual decision. See, e.g., Motor

19Plaintiffs argue that the Secretary’s failure to afford them notice-and-comment rights violates §§ 706(2)(A) and (D). As § 706(2)(A) contains a more clearly-defined standard, the court addresses the challenges based on that section.

38 Vehicle Mfrs. Ass’n v. State Farm Mut. Auto Ins. Co., 463 U.S.

29, 43 (1983) (noting that under § 706(2)(A), “the agency must

examine the relevant data and articulate a satisfactory

explanation for its action, including a ‘rational connection

between the facts found and the choice made’”). However, in an

arbitrary and capricious analysis, a court must also determine

if an agency’s construction of its own regulation “is plainly

erroneous or inconsistent with the regulation.” Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (internal

quotation marks omitted); see also Auer v. Robbins, 519 U.S.

452, 458-59 (1997). Although an agency’s interpretation of its

own regulation is due “substantial deference,” the court will

overturn the interpretation if an “alternative reading is

compelled by the regulation’s plain language or by other

indications of the Secretary’s intent at the time of the

regulation’s promulgation.” Thomas Jefferson Univ., 512 U.S. at

512 (internal quotation marks omitted).

The APA standard gives CMS even greater deference than

Chevron. Nevertheless, even applying heightened deference, the

Secretary’s interpretation of the 2008 Rule is plainly

erroneous. Section 447.299(c)(16), which provides the proper

calculation of the hospital-specific DSH limit for auditing

purposes, states as follows:

39 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 . . . .

42 C.F.R. § 447.299(c)(16) (emphasis added). The Rule further

defines each payment to be subtracted from the cost of care, and

does not mention private insurance or Medicare.

Defendants again argue that it is reasonable to interpret

the term “cost” in § 447.299(c)(16) as “unreimbursed” or

“uncompensated” cost. As discussed above, that interpretation

of the term “cost” with respect to the Medicaid Act is

unreasonable. The Preamble 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. at

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.”). Therefore, defendants’ argument with

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

unavailing for the same reasons the court rejected their

40 arguments under Chevron. See New York State Bar Ass’n v.

F.T.C., 276 F. Supp. 2d 110, 140 (D.D.C. 2003) (“The Court need

not spend much time on [the arbitrary and capricious] question

because the review of this challenge overlaps, to a large

degree, with the Court’s analysis under the second step of

Chevron.”).

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. at 77921; see id. at 77930, 77931,

77936. The Preamble states that the Protocol provides “detailed

identification of the data elements necessary to comply with

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. The

Protocol does not include as “data elements” payments from

either private insurance or Medicare.

Despite the substantial deference the court must give to

CMS’s interpretation of its own regulation under the APA, the

court cannot credit defendants’ argument as to the 2008 Rule

because CMS has offered a “plainly erroneous interpretation.”

41 FAQs 33 and 34 are plainly inconsistent with § 447.299(c)(16) of

the 2008 Rule, and substantively alter the calculation of the

hospital-specific DSH limit.

b. Notice-and-Comment

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

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.”). 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).

42 In light of its analysis above, the court need not engage

in a lengthy discussion of plaintiffs’ APA arguments.20 FAQs 33

and 34 made substantive changes to the formula for calculating

the hospital-specific DSH limit, bind state Medicaid agencies,

and effectively amend the 2008 Rule. See Texas Children’s

Hosp., 76 F. Supp. 3d at 236-241 (finding that FAQ. No. 33 was a

substantive rule because it had the force and effect of law,

bound state Medicaid agencies, and had the effect of amending an

existing legislative rule). Therefore, FAQs 33 and 34 should

have been issued in accordance with the notice-and-comment

provisions of § 553. Because they were not, plaintiffs are

likely to succeed in arguing that FAQs 33 and 34 are unlawful.

3. Summary

Plaintiffs are likely to succeed on their claims in Count I

and Count II of their complaint. For that reason, the court

declines to address plaintiffs’ claim in Count III that

violate the Medicaid Act and the APA because the policies

20Indeed, defendants’ objection devotes less than two pages to plaintiffs’ notice-and-comment arguments, asserting simply that FAQs 33 and 34 are “compatible with the applicable statute and regulation [and, therefore,] should be analyzed as ‘interpretive’ rules . . . [which] are not subject to the notice-and-comment requirements of the APA.” Doc. no. 17 at 43 of 53. For the reasons discussed above, the court disagrees that FAQs 33 and 34 are merely interpretive rules, compatible with the Medicaid Act or the 2008 Rule.

43 conflict with the language of the New Hampshire state plan but

were promulgated without being subject to the state plan

amendment process.

II. Irreparable Harm

The obligation of the movant to demonstrate irreparable

harm is an important prerequisite to obtaining preliminary

injunctive relief. Voice of the Arab World, Inc. v. MDTV Med.

News Now, Inc., 645 F.3d 26, 32 (1st Cir. 2011). It is not

enough that the movant demonstrate the mere possibility of

irreparable harm; rather, the movant must show that, in the

absence of a temporary injunction, irreparable harm is likely.

Respect Maine PAC v. McKee, 622 F.3d 13, 15 (1st Cir. 2010).

Plaintiffs assert that defendants’ enforcement of the

policies in FAQs 33 and 34 creates irreparable economic harm

because of “(1) the imminent recoupment of millions of dollars

in DSH overpayments for [Fiscal Year] 2011 within the next

several months; and (2) substantially reduced DSH payments due

to all New Hampshire DSH hospitals on or before May 31, 2016,

and thereafter.” Pls.’ Mem. (doc. no. 10-2) at 32. Plaintiffs

also claim that they will suffer irreparable harm absent a

preliminary injunction because they have been deprived of their

notice-and-comment rights under the APA and the Medicaid Act.

Defendants argue that plaintiffs claim only economic harm due to

44 “temporary cash flow problems,” and that procedural violations

do not amount to irreparable harm.21

In general, “economic harm in and of itself is not

sufficient to constitute irreparable injury.” OfficeMax Inc. v.

Cty. Qwick Print, Inc., 709 F. Supp. 2d 100, 113 (D. Me. 2010)

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

Rico Hosp. Supply, Inc. v. Bos. Sci. Corp., 426 F.3d 503, 507

(1st Cir. 2005). “Yet, it has also been recognized that some

economic losses can be deemed irreparable.” Vaqueria Tres

Monjitas, Inc. v. Irizarry, 587 F.3d 464, 485 (1st Cir. 2009)

(noting that economic loss can establish irreparable harm where

it threatens a substantial loss of business or revenues). In

addition, courts have recognized that economic harm is

irreparable where no adequate remedy at law exists for a

plaintiff to recover its alleged damages. See Rosario-Urdaz v.

Rivera-Hernandez, 350 F.3d 219, 222 (1st Cir. 2003) (“Where a

plaintiff stands to suffer a substantial injury that cannot

adequately be compensated by an end-of-case award of money

damages, irreparable harm exists.”); Itek Corp. v. First Nat’l

Bank of Boston, 730 F.2d 19, 22 (1st Cir. 1984) (“Itek’s harm is

21Defendants also argue that plaintiffs cannot show that a preliminary injunction is needed to prevent irreparable harm because a preliminary injunction would not prevent recoupment of payments by NHDHHS. As discussed above, that argument is unavailing.

45 ‘irreparable’ and warrants an injunction only if Itek has no

adequate remedy at law to reclaim money in the Ministry’s hands

that rightfully belongs to Itek.”); see also Mank ex rel.

Hannaford Health Plan v. Green, 297 F. Supp. 2d 297, 304 (D. Me.

2003) (irreparable harm exists where plaintiff could not recover

funds that it would lose to defendants absent a preliminary

injunction).

Here, absent a preliminary injunction, plaintiffs will

sustain an imminent injury. NHDHHS will begin the recoupment

process for DSH overpayments revealed in the audit of Fiscal

Year 2011 sometime this month,22 and the funds will be

redistributed to other hospitals on March 31, 2016. See doc.

no. 15-1 at 2. NHDHHS will make its next DSH payment on or

before May 31, 2016, and that payment will be significantly

reduced absent a preliminary injunction.23

22State agencies must recoup alleged overpayments within one year of discovering them, 42 C.F.R. § 433.312(a), or the federal government will recoup its share. 42 U.S.C. § 1316(a). New Hampshire submitted its audit of Fiscal Year 2011 to CMS in March 2015.

23Plaintiffs estimate their lost funds as follows: Mary Hitchcock would have to pay $3,584,099 in recoupment, and its upcoming DSH payment will be reduced by approximately $21,870,057, see Naimie Decl. (doc. no. 10-7) ¶¶ 15, 16; LRGHealthcare would have to pay $1,502,015 in recoupment, and its upcoming DSH payment will be reduced by approximately $3,500,000, see Lipman Decl. (doc. no. 10-4) ¶¶ 22, 24, 25; Speare would have to pay $1,595,602 in recoupment, and its upcoming DSH payment will be reduced by approximately $1,375,908, see McEwen Decl. (doc. no. 10-5) ¶¶ 17, 20); and

46 The harm plaintiffs will suffer absent a preliminary

injunction cannot be adequately redressed even if plaintiffs

ultimately succeed in the case. A plaintiff cannot recover

money damages for an APA violation. See, e.g., Bank of N.H. v.

United States, 115 F. Supp. 2d 214, 219 (D.N.H. 2000) (“By its

express terms, the APA does not waive the government’s sovereign

immunity with regard to claims seeking money damages.”). Thus,

plaintiffs will be unable to recover the funds lost from the

substantially reduced prospective DSH payments. In addition,

New Hampshire does not have a procedure for recovering DSH funds

once they have been recouped by NHDHHS and, therefore, those

funds are also unrecoverable. See Lipman Decl. (doc. no. 10-4)

¶ 22; Wright Decl. (doc. no. 10-6) ¶ 19.24

Valley Regional would have to pay $998,898 in recoupment, and its upcoming DSH payment will be reduced by approximately $1,817,000, see Wright Decl. (doc. no. 10-6) ¶¶ 19, 21.

24Both Lipman and Wright state in their declarations that it is their “understanding” that the hospitals will be unable to challenge or appeal the recoupment. They do not state where that understanding comes from. The court has not found any procedure which would allow plaintiff hospitals to recover recouped DSH funds from the state of New Hampshire, and defendants have not alerted the court to any such mechanism. The lack of any procedure to recover DSH funds recouped by the state of New Hampshire would be consistent with at least two other states. See Texas Children’s Hosp., 76 F. Supp. 3d at 242 (noting the lack of procedure for recovering recouped DSH payments in Texas and Washington). Therefore, the court credits Lipman’s and Wright’s understanding that the recouped funds would be unrecoverable from the state.

47 Plaintiffs have shown that the “harm from the challenged

conduct could not be adequately redressed with traditional legal

or equitable remedies” at the conclusion of the case. Gonzalez

v. Wright, No. 09-cv-234-JD, 2009 WL 2982792, at *1 (D.N.H.

Sept. 10, 2009). Therefore, plaintiffs have carried their

burden to show irreparable harm.25

III. Balance of the Equities and the Public Interest

The remaining elements required for preliminary injunctive

relief call upon the court to assess the balance of the equities

among the parties, and the public interest in the issuance of an

injunction.26

The balancing of the equities inquiry requires the court to

weigh “the hardship that will befall the nonmovant if the

injunction issues contrasted with the hardship that will befall

the movant if the injunction does not issue.” Borinquen Biscuit

Corp. v. M.V. Trading Corp., 443 F.3d 112, 115 (1st Cir. 2006).

25Because plaintiffs have shown that the harm arising out of the recoupment of past DSH payments and reduction in prospective DSH payments is irreparable, the court does not address their arguments concerning the irreparable harm arising out of their loss of notice-and-comment rights under the APA.

26Defendants do not meaningfully dispute that if plaintiffs have shown a likelihood of success on the merits and irreparable harm, the remaining factors weigh in plaintiffs’ favor. Defendants argue simply that the remaining factors weigh in their favor because plaintiffs are not entitled to relief on the merits of their claims.

48 Here, the balance of the equities weighs in plaintiffs’ favor.

Absent an injunction, the loss of funds will have a significant

adverse impact on plaintiff hospitals. NHDHHS’s recoupment of

DSH overpayments will likely cause LRGHealthcare, Speare, and

Valley Regional, all not-for-profit corporations, to fall out of

compliance with their bond covenants. LRGHealthcare and Valley

Regional will likely need to cut programs and services to their

patient populations, including programs and services they

provide to Medicaid patients. This harm represents more than

“temporary cash flow problems,” and its impact on plaintiffs is

significant. In contrast, if the court issues an injunction,

defendants will still be able to recover all overpayments that

plaintiff hospitals receive if defendants ultimately prevail,

because they can “adjust[] . . . the Federal Payment to [the]

State on account of such overpayment.” § 1396b(d)(2)(C). “It

is thus not the case that the alleged irreparable economic

injury suffered by [plaintiffs] would be offset by the

corresponding economic injury to the Secretary.” Texas

Children’s Hosp., 76 F. Supp. 3d at 246.

The public interest weighs in favor of granting preliminary

injunctive relief. The Medicaid Act and its regulations are

designed to protect the public interest by ensuring that

disproportionate-share hospitals remain open and able to serve

their patient populations. Plaintiff hospitals are not-for-

49 profit corporations and are not fully compensated for all of the

uncompensated care they provide. Consequently, a substantial

loss of DSH funds is not in the public interest.

Accordingly, the final two factors weigh in favor of

granting a preliminary injunction.

IV. Remedy

Plaintiffs request a preliminary injunction with two

components. First, they seek an injunction preventing

defendants “from enforcing, applying, or implementing the

policies referenced in FAQ Nos. 33 & 34 pending further Order of

this Court.” Proposed Order (doc. no. 10-1) at 5 of 6. Second,

they request that the court order that “[d]efendants shall

immediately notify the New Hampshire state Medicaid program

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

Nos. 33 & 34 is enjoined and that defendants will take no action

to recoup any federal DSH funds provided to New Hampshire based

on New Hampshire’s noncompliance with FAQ Nos. 33 & 34.” Id.

Defendants argue that this second “kind of relief would

effectively put the Court in position of supervising future

agency action, which is not authorized by the APA.” Doc. no. 17

at 47 of 53. “Plaintiffs, however, ask only that the Court

direct [] defendants to inform their state partners-whose

funding is contingent on compliance with [] defendants’

50 directives-of the injunction.” Texas Children’s Hosp., 76 F.

Supp. 3d at 247. The court does not view this directive as

going beyond the scope of the APA, and it is necessary to

prevent the irreparable harm that plaintiffs face.

V. Bond

Typically, Federal Rule of Civil Procedure 65 requires

parties obtaining injunctive relief to post a bond sufficient

“to pay the costs and damages sustained by any party found to

have been wrongfully enjoined or restrained.” Fed. R. Civ. P.

65(c). Here, however, the court concludes that no bond is

required. First, and perhaps most importantly, defendants have

not asked that plaintiffs post a bond. See generally Aoude v.

Mobil Oil Corp., 862 F.2d 890, 896 (1st Cir. 1988) (rejecting a

challenge to an injunction because “posting of a bond is not a

jurisdictional prerequisite to the validity of a preliminary

injunction, and because appellant did not raise the matter

below”). Moreover, “[a]lthough the rule speaks in mandatory

terms, an exception to the bond requirement has been crafted

for, inter alia, cases involving the enforcement of public

interests arising out of comprehensive federal health and

welfare statutes.” Dartmouth-Hitchcock Clinic v. Toumpas, No.

11-CV-358-SM, 2012 WL 748575, at *1 (D.N.H. Mar. 2, 2012)

(internal quotation marks and citation omitted).

51 Conclusion

For the foregoing reasons, plaintiffs’ motion for

preliminary injunction (doc. no. 10) is granted as follows:

a. Defendants are hereby enjoined from enforcing,

applying, or implementing the policies referenced in FAQs 33 &

34 pending further Order of this Court; and

b. Defendants shall immediately notify the New Hampshire

state Medicaid program that, pending further order by the Court,

the enforcement of FAQs 33 & 34 is enjoined and that defendants

will take no action to recoup any federal DSH funds provided to

New Hampshire based on New Hampshire’s noncompliance with FAQs

33 & 34.

SO ORDERED.

__________________________ Landya McCafferty United States District Judge

March 11, 2016

cc: Holly J. Barcroft, Esq. Anthony J. Galdieri, Esq. James C. Luh, Esq. Gordon J. MacDonald, Esq.