United States Court of Appeals For the First Circuit
No. 17-1615
NEW HAMPSHIRE HOSPITAL ASSOCIATION; MARY HITCHCOCK MEMORIAL HOSPITAL; LRGHEALTHCARE; SPEARE MEMORIAL HOSPITAL; VALLEY REGIONAL HOSPITAL, INC.,
Plaintiffs, Appellees,
v.
ALEX AZAR, United States Secretary of Health and Human Services;* CENTERS FOR MEDICARE AND MEDICAID SERVICES; SEEMA VERMA, in her official capacity as Administrator, Centers for Medicare and Medicaid Services,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Landya B. McCafferty, U.S. District Judge]
Before
Kayatta, Selya, and Lipez, Circuit Judges.
Tara S. Morrissey, Attorney, Appellate Staff, Civil Division, U.S. Department of Justice, with whom Chad A. Readler, Acting Assistant Attorney General, Civil Division, U.S. Department of Justice, John J. Farley, Acting U.S. Attorney, Mark B. Stern,
* Pursuant to Fed. R. App. P. 43(c)(2), Secretary of Health and Human Services Alex Azar has been substituted for former Acting Secretary of Health and Human Services Eric D. Hargan, who had in turn been substituted for former Acting Secretary of Health and Human Services Don J. Wright. Attorney, Appellate Staff, Civil Division, U.S. Department of Justice, Heather Flick, Acting General Counsel, Centers for Medicare and Medicaid Services Division, U.S. Department of Health and Human Services, Janice L. Hoffman, Associate General Counsel, Centers for Medicare and Medicaid Services Division, U.S. Department of Health and Human Services, Susan M. Lyons, Deputy Associate General Counsel for Litigation, Centers for Medicare and Medicaid Services Division, U.S. Department of Health and Human Services, David L. Hoskins, Attorney, Office of the General Counsel, Centers for Medicare and Medicaid Services Division, U.S. Department of Health and Human Services, and Lindsay S. Goldberg, Attorney, Office of the General Counsel, Centers for Medicare and Medicaid Services Division, U.S. Department of Health and Human Services, were on brief, for appellants. Ann M. Rice, Deputy Attorney General, Civil Bureau, State of New Hampshire, and Nancy J. Smith, Senior Assistant Attorney General, Civil Bureau, State of New Hampshire, on brief for State of New Hampshire, Department of Health and Human Services, amicus curiae. W. Scott O'Connell, with whom Morgan C. Nighan and Nixon Peabody LLP were on brief, for appellees. Geraldine E. Edens, Christopher H. Marraro, Baker & Hostetler LLP, Susan Feign Harris, and Morgan Lewis & Bockius LLP on brief for Children's Hospital Association, amicus curiae.
April 4, 2018 KAYATTA, Circuit Judge. When hospitals treat Medicaid
patients, the Medicaid payments received from the government often
do not cover the full costs of care. In 1981, Congress authorized
the payment of additional sums to lessen the burden on hospitals
that treat a high number of indigent patients. Years later,
concerned that this payment adjustment overshot the mark in some
instances, Congress passed another law seeking to cap such payments
at each hospital's "costs incurred." Of particular relevance to
this litigation is to what extent "costs incurred" equals the total
costs of service, rather than the costs net of payments from other
sources, namely, Medicare and private insurance. This question
arises because some patients qualify for coverage under both
Medicaid and either Medicare or private insurance.
Rather than specifying expressly the full extent to
which "costs incurred" are limited to costs net of other sources
of payment, Congress identified two specific sources of payment
that must be offset against total costs, but otherwise simply
stated that "costs incurred" are "as determined by the Secretary"
of the United States Department of Health and Human Services. In
2008, the Secretary promulgated a regulation. But the regulatory
text, like the statute, contained no express direction on the
question at issue. Then, in 2010, the Secretary announced, in the
form of answers to "Frequently Asked Questions" posted on
medicaid.gov, that the payments to be offset against total costs
- 3 - in calculating "costs incurred" also included reimbursements
received from Medicare and private insurance. For ease of
reference, we will call this pronouncement "the FAQs" or "the FAQs
announcement."
Ruling in favor of the plaintiff hospitals and their
association, the district court found that the set-off rule
announced in the FAQs represented a substantive policy decision
that could not be adopted without notice and comment. For the
following reasons, we affirm the district court's ruling on this
same ground, without reaching the plaintiffs' other challenges.
I.
Medicaid is a cooperative federal-state health insurance
program that enables states to provide medical assistance to the
disabled, the elderly, and families with dependent children,
"whose income and resources are insufficient to meet the costs of
necessary medical services." 42 U.S.C. § 1396-1. The program is
funded by both the federal and state governments, but is
administered by the states. 42 C.F.R. § 430.0. Although
participation in Medicaid is voluntary, a state that elects to
participate must comply with the requirements imposed by federal
statute and regulations promulgated by the Secretary. See Stowell
- 4 - v. Ives, 976 F.2d 65, 68 (1st Cir. 1992) (quoting Wilder v. Va.
Hosp. Ass'n, 496 U.S. 498, 502 (1990)).
Once a participating state establishes a state plan that
complies with the Medicaid Act, the federal government reimburses
the state for certain patient care costs. See 42 U.S.C. §§ 1396a,
1396b. The state, in turn, reimburses the medical facilities that
provided the care. These Medicaid reimbursements often do not
cover the hospitals' full costs of treating Medicaid-eligible
individuals.
Concerned about the financial burden thus placed on
hospitals that treat largely indigent communities, Congress
amended the Medicaid statute in 1981 to "take into account the
situation of hospitals which serve a disproportionate number of
low income patients with special needs." Omnibus Budget
Reconciliation Act of 1981, Pub. L. No. 97-35, § 2173, 95 Stat.
357 (codified as amended at 42 U.S.C. § 1396a(a)(13)(A)(iv)).
Giving practical effect to its intent, Congress provided a "payment
adjustment" for hospitals deemed "disproportionate share
hospitals" ("DSH"). See 42 U.S.C. § 1396r-4(c). Several years
later, Congress became aware of reports that certain types of
hospitals had received payment adjustments "that exceed the net
costs, and in some instances the total costs, of operating the
facilities." H.R. Rep. No. 103-111, at 211 (1993). According to
these reports, the excess funds were then being redirected to
- 5 - finance other state government projects, such as road construction
and maintenance. Id. at 211-12. In 1993, Congress responded to
this unintended consequence by imposing a cap on the DSH payment
adjustment ("the DSH cap"). See Omnibus Budget Reconciliation Act
of 1993, Pub. L. No. 103-66, § 13621, 107 Stat. 312 (codified at
42 U.S.C. § 1396r-4(g)). This hospital-specific DSH cap limited
the payment adjustment to the "costs incurred" in treating
Medicaid-eligible individuals, less Medicaid payments received.1
42 U.S.C. § 1396r-4(g)(1)(A). The provision now states, in
relevant part:
A payment adjustment during a fiscal year shall not . . . 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 plan or have no health insurance (or other source of third party coverage) for services provided during the year.
Id.
1 In addition to Medicaid-eligible individuals, the DSH payment adjustment also provides payments for treating individuals with no health insurance, and the statutory cap includes costs incurred in treating these patients, less "payments . . . by uninsured patients." 42 U.S.C. § 1396r-4(g)(1)(A). For the purpose of this appeal, however, we are only concerned with costs incurred in treating Medicaid-eligible individuals and any related payments.
- 6 - In 2003, Congress made a further amendment to the
Medicaid statute. This time, Congress expanded the government's
enforcement mechanism by requiring states, as a condition of
receiving DSH payments, to submit both an annual report and an
annual audit of their qualifying hospitals' expenses and received
DSH payments. See Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. No. 108-173, § 1001(d), 117
Stat. 2066 (codified at 42 U.S.C. § 1396r-4(j)). The reporting
provision of this act requires states to identify each hospital
within the state that received a payment adjustment and the amount
of that adjustment, as well as "[s]uch other information as the
Secretary determines necessary to ensure the appropriateness of
the payment adjustments made under this section." 42 U.S.C.
§ 1396r-4(j)(1)(B). In turn, the audit requirement in the 2003
legislation requires the state to "verif[y]," by "independent
certified audit," that, among other things, the payment adjustment
complied with the statutory cap and that "[o]nly the uncompensated
care costs of providing inpatient hospital and outpatient hospital
services to individuals described in [42 U.S.C. § 1396r-
4(g)(1)(A)] are included in the calculation of the hospital-
specific limits." Id. § 1396r-4(j)(2)(B)-(C).
So, in three steps, Congress provided for additional
payments to certain hospitals, imposed a limit on those payments,
and then created a mechanism for verifying compliance with the
- 7 - limit. No party claims that this statutory scheme in so many words
expressly addresses the underlying question that gives rise to
this case: how to treat, in determining Medicaid payment
adjustments, costs associated with individuals eligible for both
Medicaid and other health coverage, namely, Medicare or private
insurance. For these individuals -- to whom the parties refer as
"dual eligibles" or those with "dual coverage" -- the additional
coverage may kick in to reimburse hospital costs before Medicaid
does, as Medicaid is often the "payer of last resort."
Massachusetts v. Sebelius, 638 F.3d 24, 26 (1st Cir. 2011)
(citation omitted). So, the question arose: In calculating the
DSH cap, should states deduct Medicare and private insurance
payments for those with dual coverage when determining the
hospitals' "costs incurred"?
In 2008, the Secretary promulgated a rule following
notice and comment. But in so doing, the Secretary exercised
authority not under section 1396r-4(g)(1)(A) (which established
the DSH cap), but rather under the Secretary's delegated authority
to define the scope of information necessary to satisfy the 2003
Modernization Act's reporting requirement. See Disproportionate
Share Hospital Payments, 73 Fed. Reg. 77,904, 77,904 (Dec. 19,
2008) (stating that the rule "implement[s] the reporting
- 8 - requirement in Section 1923(j)(1) of the Act"2). This regulation
requires states, as a condition of receiving DSH payments, to
report eighteen categories of information to the Centers for
Medicare and Medicaid Services ("CMS") -- the arm of the United
States Department of Health and Human Services responsible for
administering the Medicaid program -- including "Total Medicaid
Uncompensated Care." Id. at 77,950-51. But here too, the
regulatory text is silent on the proper treatment of costs and
revenues associated with dual eligibles.
The regulation's preamble, on the other hand, does
address the issue, albeit only to the extent of adding Medicare
payments as a type of reimbursement that need be offset from the
associated costs. Responding to a comment, the preamble instructs
that, "in calculating th[e] uncompensated care costs" of treating
dual eligibles, "it is necessary to take into account both the
Medicare and Medicaid payments made." Id. at 77,912.
In 2010, the Secretary provided further guidance. In a
"Frequently Asked Questions" document posted on medicaid.gov,3 but
2 Section 1923 of the Act is codified at 42 U.S.C. § 1396r- 4. 3 As best we can tell, this document is no longer accessible through general navigation on medicaid.gov. As of publication of this opinion, however, it is available at the following link: https://www.medicaid.gov/medicaid/financing-and-reimbursement/ downloads/part-1-additional-info-on-dsh-reporting-and-auditing .pdf. Consistent with First Circuit policy, a copy of the relevant page will be available on the public docket.
- 9 - issued without notice and comment, the Secretary stated that both
Medicare payments and private insurance payments associated with
individuals also eligible for Medicaid should be deducted in
calculating the DSH cap. The relevant statements appear in the
responses to FAQs 33 and 34.
Several New Hampshire hospitals and the New Hampshire
Hospital Association (collectively, "plaintiffs") subsequently
filed this challenge to the procedural propriety of the two FAQs
as well as to the substance of the policy articulated in the FAQs.
The conflict arose in 2014, when the New Hampshire Department of
Health and Human Services retained an independent accounting firm
to conduct its statutorily required audit of DSH payments made to
New Hampshire hospitals for fiscal year 2011. The auditor's report
followed the Secretary's guidance articulated in the FAQs. In
calculating the DSH cap, it thus reduced the total "costs incurred"
by the plaintiff hospitals by the amount of payments received from
both Medicare and private insurance in connection with treating
Medicaid-eligible patients. According to this calculation, the
plaintiff hospitals had received a significant overpayment in
fiscal year 2011. The regulatory scheme requires the state to
recover this sum. See 42 C.F.R. § 433.312.
Plaintiffs first petitioned CMS to withdraw the FAQs.
CMS denied their petition. Plaintiffs then brought a challenge in
federal district court under the Administrative Procedure Act,
- 10 - seeking declaratory and injunctive relief. They alleged that
because the rule articulated in the FAQs effected a substantive
regulatory change, it was procedurally improper for having been
issued without the notice-and-comment procedures prescribed by the
APA. This impropriety, according to plaintiffs, rendered the
agency's action invalid as both being taken "without observance of
procedure required by law," 5 U.S.C. § 706(2)(D), as well as being
"arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law," id. § 706(2)(A). Plaintiffs also argued
that Congress itself, by specifying only two sources of payment to
be offset against total costs (payments from Medicaid and from
uninsured patients), had precluded the Secretary from requiring
that all sources of reimbursement be offset.
The district court granted plaintiffs' request for a
preliminary injunction. Approximately a year later, the district
court granted plaintiffs' motion for summary judgment and
permanently enjoined the Secretary from enforcing FAQs 33 and 34.
In a nutshell, the court concluded that the rule set forth a
substantive policy for which the APA required the agency to follow
notice-and-comment procedures, and was thus procedurally improper
under 5 U.S.C. § 706(2)(A) and (D). Having so ruled, the district
court saw no need to reach plaintiffs' substantive challenge and
thus did not address whether the agency, after notice and comment,
could issue the same rule.
- 11 - On April 3, 2017, approximately one month after the
district court granted plaintiffs' motion for summary judgment,
the Secretary promulgated a rule following notice and comment that
amended the reporting requirement at issue in this litigation.
See Disproportionate Share Hospital Payments -- Treatment of Third
Party Payers in Calculating Uncompensated Care Costs, 82 Fed.
Reg. 16,114 (Apr. 3, 2017) (codified at 42 C.F.R. § 447.299). The
amendment defined "costs incurred" as "costs net of third-party
payments, including, but not limited to, payments by Medicare and
private insurance." Id. at 16,122 (codified at 42 C.F.R.
§ 447.299(c)(10)). This rule, in effect, codified the policy
previously announced in the FAQs. Because the new rule did not
become operative until June of 2017, it does not apply to the
fiscal years at issue in this action. Plaintiffs challenge the
substance of the 2017 regulatory amendment in a separate action,
and we do not decide the merits of that challenge here.
II.
For purposes of this appeal, we accept arguendo the
Secretary's stated position that Congress granted the Secretary
the "latitude" to decide what, if any, other sources of payments
made in connection with Medicaid-covered costs need be offset from
the total costs of providing such services. The issue is whether
the Secretary has exercised that latitude in a procedurally proper
manner. Resolution of that issue requires us to consider two
- 12 - questions: First, is the decision to add Medicare and private
party insurance reimbursements to the list of payments that must
be offset against total costs in calculating "costs incurred" the
type of decision that must be effected through notice-and-comment
procedures under the APA? Second, if so, did the Secretary employ
such procedures?
A.
The APA generally requires that before a federal agency
adopts a rule it must first publish the proposed rule in the
Federal Register and provide interested parties with an
opportunity to submit comments and information concerning the
proposal. 5 U.S.C. § 553. Failure to abide by these requirements
renders a rule procedurally invalid. See Warder v. Shalala, 149
F.3d 73, 75 (1st Cir. 1998); see also Hoctor v. U.S. Dep't of
Agric., 82 F.3d 165, 167 (7th Cir. 1996) (stating that, unless an
exception applies, a "rule promulgated by an agency that is subject
to the [APA] is invalid unless the agency" follows notice-and-
comment procedures). As the Secretary points out, however,
exempted from this requirement are "interpretive rules, general
statements of policy, or rules of agency organization, procedure,
or practice." 5 U.S.C. § 553(b). And the Secretary argues that
the FAQs in question fit comfortably within this exception from
the notice-and-comment requirement, as a form of interpretive
rule. Whether this is so is a question of law that we review de
- 13 - novo, without the benefit of any definition in the APA itself.
Warder, 149 F.3d at 79.
An interpretive rule is issued by an agency merely to
"advise the public of the agency's construction of the statutes
and rules which it administers." Perez v. Mortg. Bankers Ass'n,
135 S. Ct. 1199, 1204 (2015) (quoting Shalala v. Guernsey Mem'l
Hosp., 514 U.S. 87, 99 (1995)). Although interpretive rules "do
not have the force and effect of law," id., they nevertheless may
have a substantial impact on regulated entities, see Levesque v.
Block, 723 F.2d 175, 182 (1st Cir. 1983). The alternative to an
interpretive rule is a legislative rule (interchangeably called a
substantive rule), for which, absent another exception, the APA
requires the agency to follow notice-and-comment procedures. See
5 U.S.C. § 553. We have said that a legislative rule is one that
"creates rights, assigns duties, or imposes obligations, the basic
tenor of which is not already outlined in the law itself." La
Casa Del Convaleciente v. Sullivan, 965 F.2d 1175, 1178 (1st Cir.
1992).
Somewhere along a spectrum, a rule transitions from
being interpretive to being legislative. But, in a refrain now
frequently recited, the point at which a rule crosses that line is
a question "enshrouded in considerable smog." Id. at 1177 (quoting
Gen. Motors Corp. v. Ruckelshaus, 742 F.2d 1561, 1565 (D.C. Cir.
1984)); see also Mortg. Bankers Ass'n, 135 S. Ct. at 1204
- 14 - (declining to "wade into" the "scholarly and judicial debate"
concerning the term's "precise meaning"). Nevertheless, in this
case five considerations lead us to conclude that the rule
announced in the FAQs is legislative.
1.
First, we look at the words of the statute. In a
subsection titled "Amount of adjustment subject to uncompensated
costs," the statutory text provides that a hospital-specific
payment adjustment shall not exceed the hospital's "costs
incurred" in furnishing hospital services to Medicaid-eligible
individuals and those without health insurance, which it says are
"as determined by the Secretary and net of payments [by Medicaid]
and by uninsured patients." 42 U.S.C. § 1396r-4(g)(1). The House
Report on the 1993 legislation confirms that Congress was well
aware of the difference between "net" and "total" costs. See
H.R. Rep. No. 103-111, at 211-12 (noting reports that DSH payments
had exceeded "the net costs, and in some instances the total costs,
of operating" healthcare facilities). But rather than specifying
the precise manner in which costs should be calculated, Congress
used the unqualified term "costs incurred" in the statute. 42
U.S.C. § 1396r-4(g)(1)(A). The statute then requires the
Secretary to net out two specific types of reimbursements, but
otherwise leaves it to the Secretary to "determine[]" the meaning
of "costs incurred." Id. This textual silence on whether to
- 15 - offset other sources of payment leads us to believe that any
authority that the Secretary may have to adopt the rule at issue
would most likely flow from Congress's delegation of a power to
make a decision that Congress chose not to make itself. And, as
the D.C. Circuit has said, "[w]here Congress has specifically
declined to create a standard, the [agency] cannot claim its
implementing rule is an interpretation of the statute." Mendoza
v. Perez, 754 F.3d 1002, 1022 (D.C. Cir. 2014).
The Secretary accepts that the statute leaves
"unaddressed" the question of whether to offset Medicare and
private insurance payments, and agrees that "Congress expressly
delegated authority to the Secretary to address such issues." The
Secretary nevertheless posits that an agency need not
"always . . . exercise expressly delegated authority by
regulation." That may be true. But, as our case law makes clear,
when Congress leaves such a policy choice to an agency, we should
lean toward finding that the agency's making of that choice
requires notice and comment. See Warder, 149 F.3d at 80; La Casa
Del Convaleciente, 965 F.2d at 1179; Levesque, 723 F.2d at 182.
Otherwise, it would be "difficult to imagine what regulations would
require notice and comment procedures." Mendoza, 754 F.3d at 1021.
Thus, contrary to the Secretary's argument, this is not
a case like Guernsey Memorial Hospital. There, the Secretary
argued, and the Court appeared to agree, that the only plausible
- 16 - interpretation of the statutory and regulatory scheme was the one
advanced by the Secretary. See 514 U.S. at 98-99. The Secretary
was thus simply following the statutory command, and was not making
a discretionary policy judgment. We would have a similar situation
in this case if, for example, Congress had expressly specified
that all sources of third party reimbursements be offset from costs
incurred, and the Secretary then implemented that directive by
identifying Medicare payments as just such a reimbursement.
In sum, assuming that the Secretary has the authority
asserted here, the text read in context suggests that any such
authority is the result of Congress's decision to delegate a
substantive policymaking choice to the Secretary.
2.
Second, we look at the explanation or lack thereof given
by the agency in adopting a policy. Had the Secretary merely been
interpreting the governing statute and regulation, then one would
expect that the agency's justification for the rule would rely on
an interpretive methodology. See Warder, 149 F.3d at 78 (noting
that the agency discussed "relevant statutes, regulations,
legislative history, and administrative materials before reaching
its conclusion"); Metro. Sch. Dist. of Wayne Twp. v. Davila, 969
F.2d 485, 490 (7th Cir. 1992) (stating that the Secretary's
reliance on "the language of both the statute and an implementing
regulation, and the legislative history of the Act" in a letter
- 17 - announcing the rule was an "important" factor "weigh[ing] in favor
of a determination that the rule is interpretive" (internal
citation omitted)); Gen. Motors Corp., 742 F.2d at 1565 (noting
that the agency's "entire justification for the rule" in the
Federal Register "is comprised of reasoned statutory
interpretation, with reference to the language, purpose and
legislative history of" the statute). Here, however, in announcing
and explaining the FAQs, the Secretary offered no meaningful hint
that the Secretary derived the policy announced in the FAQs from
an interpretation of the statute or the regulation. And to the
degree that the Secretary articulated the same policy in the
preamble to the 2008 regulation, that announcement is no different.
Although not dispositive, such an announcement, without reasoned
interpretive explanation, looks to us more as if the Secretary is
using delegated power to announce a new policy out of whole cloth,
rather than engaging in an interpretive exercise.
Even now, on appeal, the Secretary does not meaningfully
contend that the agency's rule is the result of a strictly
interpretive exercise. The Secretary does place weight on the
terms "uncompensated" costs and "costs incurred," as used in both
the statute and the regulation. But the Secretary nowhere argues
that further defining or applying these terms necessarily calls
only for interpretation rather than policymaking. To the contrary,
the Secretary repeatedly and expressly refers to the agency's
- 18 - position as a "policy," and even goes so far as to characterize
the rule as an exercise of a delegated authority to make "policy
judgments."
The Secretary does stress that the agency has "broad
methodological leeway" to interpret terms like "costs." Verizon
Commc'ns, Inc. v. FCC, 535 U.S. 467, 500 (2002). While the cases
relied on by the Secretary may stand for the proposition that the
agency has broad authority in this realm, see Abraham Lincoln Mem'l
Hosp. v. Sebelius, 698 F.3d 536, 549-50 (7th Cir. 2012); Kindred
Hosps. E., LLC v. Sebelius, 694 F.3d 924, 928-29 (8th Cir. 2012);
Cheshire Hosp. v. N.H.-Vt. Hospitalization Serv., Inc., 689 F.2d
1112, 1119 (1st Cir. 1982), the existence of authority is not our
concern in our current procedural inquiry. Rather, assuming the
agency has the authority to establish the rule at issue (a question
we do not decide), we are concerned only with the manner in which
the agency can exercise that authority. And, cutting against the
Secretary's position, the agency's description of that authority
as "broad" nudges us along the spectrum toward finding an act more
akin to a legislative rule for which notice and comment is
required.
That being said, it is certainly true that the "agency's
own characterization" of its rule as interpretive warrants
attention. Warder, 149 F.3d at 80. But the probative value of
the Secretary's own characterization of a pronouncement as
- 19 - interpretive is limited, and we do not place on it more weight
than its merits can bear. See La Casa Del Convaleciente, 965 F.2d
at 1178 (describing the agency's own characterization as "not
conclusive"). Otherwise, we would create an easy end run around
the APA's procedural protections.
3.
Third, we look to whether the rule is "inconsistent with
another rule having the force of law," Warder, 149 F.3d at 81
(quoting Chief Prob. Officers v. Shalala, 118 F.3d 1327, 1337 (9th
Cir. 1997)), or otherwise "alter[s] or enlarg[es] obligations
imposed by a preexisting regulation," Aviators for Safe & Fairer
Regulation, Inc. v. FAA, 221 F.3d 222, 226-27 (1st Cir. 2000). As
the Secretary points out, the FAQs do not explicitly conflict with
any existing regulations. But mere consistency, while perhaps
necessary, cannot be sufficient to render a rule interpretive when
the range of "consistent" choices includes materially different
policy options that alter or enlarge existing obligations.4
4 To illustrate the point, the D.C. Circuit, in an apt analogy, said:
Consistency with the statute may be enough to sustain a rule duly promulgated after notice and comment, just as consistency with the Commerce Clause, Art. I, § 8, cl. 3, may be enough to sustain the constitutionality of a statute. But no one would say, for instance, that the detailed provisions of the Clean Air Act were interpretations of the language of the Constitution.
- 20 - Otherwise, the first time an agency promulgates a rule on a subject
it could always avoid notice and comment by pointing out that the
new rule does not conflict with any prior regulation.
4.
Fourth, we consider the manner in which the Secretary's
actions fit within the statutory and regulatory scheme. See
Warder, 149 F.3d at 81. In Warder, the agency issued an
administrative ruling classifying certain wheeled medical braces
as "durable medical equipment" rather than "braces" for Medicare
reimbursement purposes. 149 F.3d at 75. A "comprehensive
classification of equipment" in the statutes and regulations as
either braces or durable medical equipment, id. at 81, including
several qualitative criteria, id. at 76-77, informed the agency's
decision. Thus, in addressing a "small overlap in this scheme,"
id. at 81, the agency in Warder constructed its decision using the
tools of statutory interpretation, id. at 78. Here, by contrast,
the statute has a gap rather than an overlap, and it is a gap that
the Secretary has sought to fill by exercising what it tells us is
its policy prerogative.
5.
Finally, pragmatic considerations reinforce our decision
to classify the rule at issue in this case as legislative. The
Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 496 (D.C. Cir. 2010).
- 21 - precise question addressed by the rule -- whether to offset
Medicare and third party reimbursements -- calls for a categorical
resolution that affects a broad range of payments and scenarios
and likely involves large sums of money. Additionally, in contrast
to the circumstances present in Aviators, 221 F.3d at 227, the
Secretary points to no evidence that the agency consistently
implemented the statute between 1993 and 2010 in accord with the
Secretary's present policy. Indeed, at oral argument the Secretary
was unable to point to any evidence that the agency had ever
previously enforced the policy articulated in the FAQs.
Instead, the Secretary can only point to the fact that
in one letter in 2002 to state Medicaid directors on the subject
of payments for prisoner inmate care and supplemental upper payment
limits, CMS noted that the DSH cap must be calculated "net of
Medicaid payments (except DSH) made under the state plan and net
of third party payments." That sentence simply paraphrases the
statute, albeit replacing "uninsured payments" with "third party
payments." See 42 U.S.C. § 1396r-4(g)(1)(A). Read literally, in
hindsight, the substituted term is broad enough to include Medicare
and private insurance payments. But such a statement in a single
letter that emphasizes the offset "of Medicaid payments" falls far
short of demonstrating any longstanding -- or even short-standing
- 22 - -- actual implementation of the statute as calling for the offset
of Medicare and private insurance payments.5
In short, the FAQs announced a new policy on a matter of
some considerable import. In such circumstances, the burdens that
might weigh against requiring notice and comment for interstitial,
minor, or confirmatory pronouncements guiding agency operation are
much more easily justified in order to ensure the benefits of
notice and comment.
B.
Our conclusion that the decision to require the set-off
of Medicare and private insurance reimbursements in calculating
"costs incurred" cannot be implemented without notice and comment
brings us to our next inquiry: Whether the agency followed the
necessary procedures in issuing its policy.
The Secretary concedes that the FAQs were not themselves
the result of notice and comment. Instead, the Secretary points
to the notice and comment that preceded the promulgation of the
2008 regulation. The Secretary then argues that the FAQs are
exempt from notice and comment as a mere interpretive explanation
of that regulation. A logically necessary intermediate step in
this argument is that, if the decision to offset Medicare and
5 We note, too, that the letter was written years before the adoption of the 2008 regulation that the Secretary says is the object of the FAQ's interpretive exercise.
- 23 - private insurance payments from total costs is indeed a legislative
decision delegated to the Secretary, then the Secretary made that
decision in promulgating the 2008 regulation, with the FAQs serving
only to add a mere interpretative gloss to the regulation. Under
this view, the FAQs did not alter, enlarge, or otherwise effect a
substantive regulatory change, and thus functioned outside the
scope of actions that require lawmaking power. See Aviators, 221
F.3d at 226-27; see also Warder, 149 F.3d at 80 ("[A] rule is
exempt from notice and comment as an interpretive rule if it does
not 'effect a substantive change in the regulations.'" (quoting
Guernsey Mem'l Hosp., 514 U.S. at 100)).
The 2008 regulation provides an unlikely vehicle for
exercising the Secretary's delegated power to "determine[]" costs
incurred under the DSH cap. 42 U.S.C. § 1396r-4(g)(1)(A). It
never addresses the substance of the cap, nor even purports to
implement the cap legislation itself. Rather, it claims to
implement the reporting requirement of the 2003 Modernization Act.
See 73 Fed. Reg. at 77,904. The regulation then lays out various
categories of information that must be reported to the Secretary,
including "Total Medicaid Uncompensated Care," which it defines as
the "total amount of uncompensated care attributable to Medicaid
inpatient and outpatient services." 42 C.F.R. § 447.299(c)(11)
- 24 - (2012).6 It further clarifies that this "amount should be the
result of subtracting the amount identified in § 447.299(c)(9)
from the amount identified in § 447.299(c)(10)." Id. Subsection
(c)(10) presents the "total annual costs incurred by each hospital
for furnishing inpatient hospital and outpatient hospital services
to Medicaid eligible individuals," while subsection (c)(9) lists
the various Medicaid payments deducted.
The Secretary points to two terms as the basis of the
rule: "costs incurred" as used in subsection (c)(10), and
"uncompensated" care as used in subsection (c)(11), which, as
explained above, is defined to incorporate "costs incurred." The
Secretary argues that the subsequent FAQs simply fleshed out in an
interpretive manner that those two terms meant that Medicare and
third party insurance payments need be offset.
If the DSH cap statute itself left the Secretary the
broad latitude the Secretary claims in deciding whether to classify
Medicare and third party insurance payments as requiring set-offs
in calculating "costs incurred," then the regulation itself cannot
reasonably be read as manifesting the exercise of that latitude.
Rather, the regulatory text, as the Secretary concedes, is silent
6 We cite the 2012 version of the rule because the rule originally promulgated in 2008 contained several technical, but substantial errors. These were corrected in 2009. See 74 Fed. Reg. 18,656, 18,656-57 (Apr. 24, 2009). The current version of the rule, however, incorporates the Secretary's 2017 amendment, which is not at issue in this case.
- 25 - as to the proper treatment of third-party payments, i.e., payments
from Medicare and private insurance. And the portions of the
regulation from which the Secretary claims to derive the rule --
the terms "uncompensated" and "costs incurred" -- merely parrot
the statutory language. Indeed, the term "costs incurred" is
exactly the term used in the statute and the term "uncompensated
costs" is the caption of the pertinent statutory subsection. See
42 U.S.C. § 1396r-4(g)(1)(A). Nothing in this regulation mentions
-- either directly or indirectly -- payments from Medicare or from
private insurance.
So the sequence is this: Congress specified that the
DSH payment adjustment not exceed "uncompensated costs," which it
defined as "costs incurred" less received Medicaid payments, and
one specified other source of payments, and charged the Secretary
with more precisely determining "costs incurred." Without
providing such further definition, the Secretary enacted a
regulation that in material respects simply parrots the statute.
Then, in a purportedly interpretive rule published a few years
later on the Medicaid website, the Secretary announced that "costs
incurred" excludes payments received from Medicare and private
insurance associated with individuals eligible for dual coverage.
Thus, the Secretary exercised delegated power not
through notice-and-comment regulation, but in a guidance document
issued without the APA's procedural protections. To deem this
- 26 - adequate would mean an agency could largely eliminate pre-decision
public comment on the merits of the agency's exercise of its
delegated powers to make substantive choices: The agency would
simply adopt a regulation parroting the statute, and then reveal
its choice through a rule "interpreting" the regulation. As the
D.C. Circuit has recognized,
the purpose of the APA would be disserved if an agency with a broad statutory command . . . could avoid notice-and-comment rulemaking simply by promulgating a comparably broad regulation . . . and then invoking its power to interpret that statute and regulation in binding the public to a strict and specific set of obligations.
Elec. Privacy Info. Ctr. v. U.S. Dep't of Homeland Sec., 653 F.3d
1, 7 (D.C. Cir. 2011).
The Secretary argues that the regulation here does more
than parrot the pertinent statutory term. For one, while the
statute spells out that costs incurred relate to "hospital
services," the regulation further specifies that the costs
incurred must be attributable to "inpatient hospital and
outpatient hospital services." Similarly, while the statute says
that costs incurred should net out Medicaid payments, the
regulation specifies three particular categories of Medicaid
payments, and includes payments under Section 1011. See 42 C.F.R
§ 447.299(c)(6)-(8), (13). But these specifications that go
beyond the statutory text have no bearing whatsoever on the issue
- 27 - at hand, as evidenced by the fact that the Secretary relies on
none of these added specifications as providing any basis for
deeming "costs incurred" to be limited to costs net of Medicare or
other third party insurance payments.
As a fallback position, the Secretary argues that the
agency established the relevant policy in the preamble to the 2008
reporting regulation, rather than in its text. The preamble does
clearly state, at least with respect to individuals eligible for
both Medicare and Medicaid (but not private insurance payments),
that Medicare payments should be deducted from the hospitals'
"costs incurred." See 73 Fed. Reg. at 77,912. But this argument
fails because, if the agency did establish its rule in the
preamble, it is procedurally improper for the same reasons we
deemed the FAQs announcement procedurally improper. Although the
2008 regulation was subject to notice and comment, the preamble,
like the FAQs announcement, was not. See Leslie Salt Co. v. United
States, 55 F.3d 1388, 1393 (9th Cir. 1995) ("It is undisputed that
the preamble has not been subjected to notice and comment."). A
rule stated in a preamble is subject to the same analysis of
whether its articulated policy is interpretive or legislative, and
if it is the latter, it is procedurally improper. See id. at 1393-
94 (conducting this analysis for a rule articulated in a preamble);
Fertilizer Inst. v. EPA, 935 F.2d 1303, 1307-09 (D.C. Cir. 1991)
(same). Thus, because we concluded that the relevant policy choice
- 28 - is one that must be made through notice and comment, the agency's
implementation of this delegated lawmaking authority in a preamble
is procedurally improper.
Finally, to the degree the Secretary argues that we
should defer to the preamble to discern the meaning of the
regulation, we are similarly unconvinced. Because the adoption of
a substantive policy in a preamble added to a regulation after
notice and comment is procedurally improper, cf. Leslie Salt Co.,
55 F.3d at 1393-94; Fertilizer Inst., 935 F.2d at 1307-09, such a
policy cannot be the source of an interpretation to which a court
defers, see Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117,
2125 (2016) ("Chevron deference is not warranted where the
regulation is 'procedurally defective' -- that is, where the agency
errs by failing to follow the correct procedures in issuing the
regulation."(quoting United States v. Mead Corp., 533 U.S. 218,
227 (2001))). But even if that were not the case, we would harbor
doubts about whether deference is appropriate here. It is true
that, in certain circumstances, we have deferred to a regulation's
preamble as an agency's interpretation of its own ambiguous
regulation. See, e.g., Rucker v. Lee Holding Co., 471 F.3d 6, 12
(1st Cir. 2006). But here, we see no ambiguity in the relevant
sense. As we explained above, we assume, without deciding, that
the agency has the power to adopt a policy following notice and
comment that excludes dual-eligible Medicare payments from the
- 29 - definition of "costs incurred." Had the regulation been ambiguous
about whether the agency intended to adopt this policy, then
deferring to the preamble to resolve the ambiguity may have been
appropriate. But that is not the case. Nowhere in the regulatory
text does the Secretary mention Medicare payments or individuals
eligible for dual-coverage, nor does the text provide any other
hook -- beyond the terms also used in the statute -- to which the
Secretary can point to demonstrate ambiguity about whether the
Secretary intended to adopt the rule at issue. It is insufficient
that there may be ambiguity about what rule the agency would adopt,
given the choice. Where the agency is granted broad delegated
authority, but makes no overtures in the regulatory text about its
intention to adopt a policy pursuant to that authority, there is
no relevant ambiguity that can be resolved by the preamble.
Our conclusion that deference is inappropriate in this
circumstance is buttressed by what we see as strong policy
considerations. The Secretary concedes that both the statutory
and regulatory texts are silent on the operative question of
whether "costs incurred" includes Medicare payments and private
insurance payments. We have determined that this issue reflects
a substantive policy choice for which the APA requires notice and
comment. Thus, if deference to the preamble allowed the agency to
implement its dual-eligible policy, the agency would be able to
execute a substantive policy choice without notice and comment.
- 30 - We find such a subversion of the APA's procedural requirements
unacceptable.
III.
Because we affirm the district court's decision on the
grounds that the Secretary's rule is procedurally improper for
having failed to observe the notice-and-comment procedures
prescribed by the APA, we decline to reach plaintiffs' substantive
challenge under 5 U.S.C. § 706(2)(C). In so doing, we neither
express nor imply any view on whether the agency can adopt the
policy articulated in the FAQs following notice-and-comment
rulemaking. Nor do we accept the plaintiffs' invitation to pass
judgment upon the validity of the 2017 regulation; that is a matter
for another day.
For the foregoing reasons, the district court's decision
is affirmed.
- 31 -