Missouri Hospital Association v. Alex Azar, II ( 2019 )


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  •                  United States Court of Appeals
    For the Eighth Circuit
    ___________________________
    No. 18-1778
    ___________________________
    Missouri Hospital Association
    lllllllllllllllllllllPlaintiff - Appellee
    v.
    Alex M. Azar, II, Secretary of Health and Human Services, et al.
    lllllllllllllllllllllDefendants - Appellants
    ____________
    Appeal from United States District Court
    for the Western District of Missouri - Jefferson City
    ____________
    Submitted: April 17, 2019
    Filed: November 4, 2019
    ____________
    Before LOKEN, WOLLMAN, and STRAS, Circuit Judges.
    ____________
    LOKEN, Circuit Judge.
    “Disproportionate share hospitals” -- those that serve a disproportionate
    number of indigent patients -- receive supplemental Medicaid payments (“DSH
    payments”) to help ensure their financial viability. See 42 U.S.C. § 1396r-4. DSH
    payments may not exceed a hospital’s “costs incurred” in furnishing hospital services
    to eligible individuals “(as determined by the Secretary and net of [Medicaid]
    payments).” § 1396r-4(g)(1)(A). In a final rule promulgated in 2017 after notice and
    comment rulemaking (“the 2017 Rule”), the Secretary of Health and Human Services
    defined “costs incurred” as “costs net of third-party payments, including, but not
    limited to, payments by Medicare and private insurance.” 
    42 C.F.R. § 447.299
    (c)(10)
    (effective June 2, 2017).
    The Missouri Hospital Association (“MHA”), whose members include many
    disproportionate share hospitals, commenced this action against the Secretary, The
    Centers for Medicare and Medicaid Services, and its Administrator (collectively, “the
    Secretary”), seeking a declaration and injunctive relief invalidating this part of the
    2017 Rule. The district court granted summary judgment in favor of the MHA,
    concluding that the 2017 Rule was contrary to “unambiguous language of the statute
    explain[ing that] the only payments that offset a hospital’s Medicaid costs are non-
    DSH Medicaid payments.” The Secretary appeals. Reviewing de novo, we conclude
    that the 2017 Rule was a reasonable exercise of the Secretary’s expressly delegated
    discretion to interpret this provision in the statute. Accordingly, we reverse.1
    At issue is the hospital-specific limit on DSH payments. In 2003, Congress
    directed the Secretary to perform an annual audit of each DSH to verify that “[o]nly
    the uncompensated care costs of providing” services (known as the Medicaid
    shortfall) “are included in the calculation of the hospital-specific limit.” 42 U.S.C.
    § 1396r-4(j)(2)(C). The statute at issue, 42 U.S.C. § 1396r-4(g)(1)(A), implements
    that mandate. As it is not a model of clarity, we set it out in full:
    1
    MHA also challenged the Secretary’s previous adoption of the same
    interpretation in published answers to Frequently Asked Questions (“FAQs”). In
    Children’s Health Care v. Centers for Medicare & Medicaid Servs., 
    900 F.3d 1022
    ,
    1026-27 (8th Cir. 2018), we concluded this action was a legislative rule not adopted
    in accordance with Administrative Procedure Act requirements, but we reserved the
    issue of whether the Secretary had the authority to enact this interpretation through
    proper notice and comment rulemaking. Following our decision, the Secretary
    withdrew the relevant FAQ answers, so we vacate as moot this portion of the district
    court’s summary judgment order.
    -2-
    (g) Limit on amount of payment to hospital
    (1) Amount of adjustment subject to uncompensated costs
    (A) In general
    A payment adjustment during a fiscal year shall not
    be considered to be consistent with subsection (c) of this
    section with respect to a hospital if the payment adjustment
    exceeds the costs incurred during the year of furnishing
    hospital services (as determined by the Secretary and net of
    payments under this 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. For purposes of the preceding sentence,
    payments made to a hospital for services provided to
    indigent patients made by a State or unit of local
    government within a State shall not be considered to be a
    source of third party payment.
    In determining whether the Secretary’s 2017 Rule exceeded his statutory
    authority, we begin with the familiar analysis of Chevron, U.S.A., Inc. v. Natural Res.
    Def. Council, Inc., 
    467 U.S. 837
     (1984). The first question is “whether Congress has
    directly spoken to the precise question at issue.” If so, “the court, as well as the
    agency, must give effect to the unambiguously expressed intent of Congress.” 
    Id. at 842-43
    . The first parenthetical in § 1396r-4(g)(1)(A) expressly delegates to the
    Secretary the determination of “costs incurred . . . of furnishing hospital services.”
    When the Secretary acts within the scope of that express delegation, his “legislative
    regulations are given controlling weight unless they are arbitrary, capricious, or
    manifestly contrary to the statute.” Id. at 844; see 
    5 U.S.C. § 706
    (2).
    MHA, while conceding that § 1396r-4(g)(1)(A) expressly delegates discretion
    to the Secretary, argues that it is discretion only to determine “costs incurred,”
    whereas the statute unambiguously provides that the only “payments” that may reduce
    -3-
    the determination of “costs incurred” are Medicaid payments “other than under this
    section [non-DSH payments] and [payments] by uninsured patients.” MHA argues
    that Congress unambiguously mandated a specific formula: Medicaid shortfall =
    Medicaid costs - Medicaid payments.
    We agree with MHA’s statutory analysis up to a point. Section 1396r-
    4(g)(1)(A) does not delegate to the Secretary unfettered discretion to determine “costs
    incurred.” The statute’s discretion-conferring parenthetical specifically directs the
    Secretary to offset Medicaid payments. However, as the D.C. Circuit has noted,
    “[a]lthough the statute establishes that payments by Medicaid and the uninsured must
    be considered, it nowhere states that those are the only payments that may be
    considered.” Children’s Hosp. Ass’n of Tex. v. Azar, 
    933 F.3d 764
    , 770 (D.C. Cir.
    2019) (emphasis in original). The final sentence of § 1396r-4(g)(1)(A) contains
    another limitation on the Secretary’s discretion -- “payments made to a hospital for
    services provided to indigent patients made by a State or a unit of local government
    within a State shall not be considered to be a source of third party payment.”
    Contrary to MHA’s argument, if the statute unambiguously prohibited the Secretary
    from considering any “payments” other than those included in the “net of payments”
    parenthetical, this sentence would be superfluous.
    Moreover, we disagree with MHA and the district court that the terms “costs
    incurred” and “net of payments” have plain, unambiguous meanings. The Supreme
    Court has noted that the term “costs” can have different technical meanings in
    different contexts. “The fact is that without any better indication of meaning than the
    unadorned term, the word ‘cost’ in [47 U.S.C.] § 252(d)(1), as in accounting
    generally, is a ‘chameleon,’ a ‘virtually meaningless’ term. As Justice Breyer put it
    in [a prior decision], words like ‘cost’ ‘give ratesetting commissions broad
    methodological leeway’ . . . .” Verizon Commun’s, Inc. v. F.C.C., 
    535 U.S. 467
    , 500
    (2002). Closer to the textual issue in this case, in Kindred Hospitals East, LLC v.
    Sebelius, we concluded that the Secretary was not arbitrary and capricious in treating
    -4-
    “pool payments” as expense refunds that reduced a hospital’s “costs actually
    incurred” under 42 U.S.C. § 1395x(v)(1)(A). 
    694 F.3d 924
    , 928-29 (8th Cir. 2012).
    MHA’s interpretation of “costs” and “payments” is not plainly mandated by the
    structure of the first parenthetical in § 1396r-4(g)(1)(A). The statute does not isolate
    “as determined by the Secretary” in its own parenthetical, separating the Secretary’s
    discretion to determine costs from the term specifying “net of” some payments.
    Instead, the entire parenthetical modifies the term “costs incurred.” As the Secretary
    has acted within the scope of this express delegation, the 2017 Rule, a legislative
    regulation, must be “given controlling weight unless [it is] arbitrary, capricious, or
    manifestly contrary to the statute.” Chevron, 
    467 U.S. at 844
    .
    We conclude the Secretary’s interpretation of “costs incurred” is reasonable in
    light of the statute’s purpose and design. When Medicaid-eligible patients have third
    party coverage such as Medicare or private insurance, the third party insurer pays the
    hospital first, because Medicaid serves as the “payer of last resort.” Congress has
    directed the Secretary to ensure that only “uncompensated care costs” are reimbursed.
    § 1396r-4(j)(2)(C). As the Secretary explained in promulgating the 2017 Rule:
    In light of the statutory requirement limiting DSH payments on a
    hospital-specific basis to uncompensated care costs, it is inconsistent
    with the statute to assist hospitals with costs that have already been
    compensated by third party payments. . . . This policy is necessary to
    ensure that only actual uncompensated care costs are included in the
    Medicaid hospital-specific DSH limit.
    82 Fed. Reg. at 16,117. It is not arbitrary for the Secretary to construe
    “uncompensated costs” as “costs” net of third party reimbursements, even
    reimbursements that are called “payments.” Accord Children’s Hosp. Ass’n of Tex.,
    933 F.3d at 773-74; Tenn. Hosp. Ass’n v. Azar, 
    908 F.3d 1029
    , 1047 (6th Cir. 2018)
    (declaring the online interpretation procedurally invalid but upholding the Secretary’s
    -5-
    substantive authority to adopt this interpretation). Like the “pool payments” treated
    as expense refunds in Kindred Hospitals, 
    694 F.3d 924
    , 928-29, third party payments
    by Medicare and by private insurers in fact reduce a hospital’s “total amount of
    uncompensated care attributable to Medicaid inpatient and outpatient services.” 
    42 C.F.R. § 447.299
    (c)(11). Under Missouri’s plan, the State redistributes overpayments
    above a particular hospital’s DSH annual limit proportionately among other DSH
    hospitals that are below their hospital-specific limits, redistributions that should
    benefit the most imperiled DSH members of the MHA.
    The Opinion and Order of the district court dated February 9, 2018, and the
    Judgment dated March 27, 2018, are reversed, and the case is remanded for further
    proceedings not inconsistent with this opinion.
    STRAS, Circuit Judge, concurring in the judgment.
    The court and I arrive at the same destination, but I would take a more direct
    route. Unwieldy as the statute may at first appear,2 Congress unambiguously
    2
    For ease of reference, the statute is reproduced in relevant part here:
    A payment adjustment during a fiscal year [may 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. For purposes of the
    preceding sentence, payments made to a hospital for services provided
    to indigent patients made by a State or a unit of local government within
    a State shall not be considered to be a source of third party payment.
    42 U.S.C. § 1396r-4(g)(1)(A).
    -6-
    instructed the Secretary of Health and Human Services to “determine[]” the “costs
    incurred” from “furnishing hospital services” to Medicaid patients. 42 U.S.C.
    § 1396r-4(g)(1)(A). Based on a disagreement with the Secretary’s decision to deduct
    insurance and Medicare payments from the calculation, the Missouri Hospital
    Association challenges his decision-making authority. My analysis begins and ends
    with the plain language of the statute.
    The parties’ dispute is straightforward: may the Secretary exclude from “costs
    incurred” those expenses that have been reimbursed by insurance companies and
    other third-party payors? The only possible answer under the statute is yes.
    Whatever ambiguity lies in the word “costs,” ante at 4, is cleared up by the following
    word, “incurred.” To incur a cost is to “sustain” it or be “liable or subject to” it. The
    American Heritage Dictionary of the English Language 891 (5th ed. 2016); accord
    Webster’s Third New International Dictionary 1146 (2002). Hospitals have not
    sustained, and are not liable for, any costs that have been reimbursed by third parties,
    including by Medicare and private insurance. So the Secretary has the authority to
    exclude them.
    Indeed, the statute’s grammatical structure leaves no possible alternative
    reading. After all, the phrase “costs incurred” is followed by a parenthetical that both
    clarifies its meaning (“net of payments”) and contains an express grant of authority
    (“as determined by the Secretary”). Aside from the specific statutory directions about
    how to treat payments from Medicaid, uninsured patients, and state and local
    governments, the Secretary gets to make the call.
    The Association nevertheless urges us to read the words, “as determined by the
    Secretary,” as narrowly as possible. It says that the statute empowers the Secretary
    to take only two actions: calculate each hospital’s total costs from treating Medicaid
    patients and then deduct reimbursements from Medicaid and payments by uninsured
    -7-
    patients. According to the Association, the statute’s express instruction to treat these
    two categories of payments as deductible means that all others are not, regardless of
    what the Secretary says.
    There are at least two problems with this interpretation. The first is that, if the
    Association is right that the listing of two deductible categories means that everything
    else is excluded, the last sentence would be redundant because there would be no
    reason to specifically exclude payments by state and local governments. See
    Loughrin v. United States, 
    573 U.S. 351
    , 358 (2014) (applying the “cardinal
    principle” that “courts must give effect, if possible, to every clause and word of a
    statute” (internal quotation marks and citation omitted)). The second is that, because
    states calculate “payment adjustment[s]” and “report” them to the Secretary, 42
    U.S.C. § 1396r-4(c), (j)(1), there would be nothing left for the Secretary to
    “determine[].” See Star Athletica, L.L.C. v. Varsity Brands, Inc., 
    137 S. Ct. 1002
    ,
    1010 (2017) (“Interpretation of a phrase of uncertain reach is not confined to a single
    sentence when the text of the whole statute gives instruction as to its meaning.”
    (brackets and citation omitted)). But see Tenn. Hosp. Ass’n v. Azar, 
    908 F.3d 1029
    ,
    1049 (6th Cir. 2018) (Kethledge, J., concurring in judgment) (stating that there is still
    plenty left for the Secretary to “determine[]” even if excluding other third-party
    payments is beyond his power).
    The bottom line is that the Secretary did exactly as instructed by
    “determin[ing]” which payments to deduct in calculating “costs incurred.” Faced
    with a clear statute and no challenge to the scope of the delegation, I would end the
    analysis there. See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 
    467 U.S. 837
    , 842–43, 843 n.9 (1984). See generally Gundy v. United States, 
    139 S. Ct. 2116
    (2019).
    ______________________________
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