United States: D.C. Circuit Reverses District Court In DSH Case

Last Updated: August 20 2019
Article by Kristyn Bunce DeFilipp

We have long covered the handful of lawsuits that have been filed over the past several years concerning Medicaid disproportionate share hospital ("DSH") payment policies. These lawsuits all revolve around some steps that CMS had taken in recent years to exclude payments made for dual-eligible (Medicaid and Medicare) patients and payments made by private insurers from DSH hospitals' uncompensated care costs. CMS promulgated a rule to this effect, which became effective June 2, 2017. ("2017 DSH Rule").

In the first quarter of 2018, two district courts invalidated the 2017 DSH Rule, finding that the policy espoused in that rule is a substantive violation of the Administrative Procedure Act. Children's Hosp. Ass'n of Tex. v. Azar, 2018 U.S. Dist. LEXIS 35962 (D.D.C. Mar. 6, 2018); Missouri Hospital Association v. Hargan, 2018 U.S. Dist. LEXIS 22024 (W.D. Mo. Feb. 9, 2018). In June of last year, the Southern District of Mississippi followed suit. Baptist Memorial Hospital-Golden Triangle, Inc. et al. v. Azar et al., No. 17-cv-00491 (S.D. Miss. Jun. 25, 2018). The Secretary appealed each of these cases to the D.C. Circuit, 8th Circuit, and 5th Circuit Courts of Appeals, respectively. In the meantime, at least six other cases challenging the 2017 DSH Rule in D.C. were stayed pending the decision on Children's Hospital Association case, and another case challenging the rule in New Hampshire was dismissed without prejudice in light of the nationwide invalidation holding by the U.S. District Court of D.C. in Children's Hospital.

This week, the D.C. Circuit reversed the district court's decision in the Children's Hospital case, reinstating the 2017 DSH Rule and setting the stage for similar results in all of the above lawsuits. As in the underlying district court case, plaintiffs argued that Congress did not intend the uncompensated care cost calculation to take into account payments from private insurers and Medicare that would reduce hospitals' uncompensated care costs, but the court made short work of plaintiffs' arguments, holding that the statue's context and purpose "suggest DSH payments are meant to assist those hospitals that need them most by covering only those costs for which DSH hospitals are in fact uncompensated." Therefore, the court held that "[b]y requiring the inclusion of payments by Medicare and private insurers, the 2017 Rule ensures that DSH payments will go to hospitals that have been compensated least and are thus most in need."

The court also rejected plaintiffs' arguments that the 2017 DSH Rule was arbitrary and capricious. Plaintiffs argued that the agency had reversed course from an earlier 2008 DSH rule without acknowledgment or justification. Although the court agreed with plaintiffs that the 2017 DSH Rule was a departure from the 2008 rule (thereby also agreeing with the three circuit courts that had invalidated CMS's attempt to change the policy using FAQs rather than regulations), the court found that the change "makes no difference," because CMS had adequately explained its reasoning in the preamble to the rule.

Plaintiffs also argued to no avail that the 2017 DSH Rule would yield results inconsistent with the administrative record. Plaintiffs claimed that CMS's goal of "ensur[ing] that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients" would be subverted by the rule itself, which would reduce payments to plaintiffs despite their having "among the highest Medicaid inpatient utilization rates in their respective states and the highest net financial shortfalls in serving Medicaid patients." The court rejected this reasoning, too, noting the irrelevance of the Medicaid inpatient utilization rate and "[p]rograms and services a hospital provides that are not paid for by Medicaid." In other words, the DSH payment is not intended to subsidize a DSH hospital's non-Medicaid offerings.

The next question is: what is going to happen with DSH now? On the issue addressed in the Texas Children's Hospital litigation, CMS may now feel emboldened to step up enforcement of its policy. But other DSH issues await. As of October 1, the ACA mandated reductions in the statewide DSH allotments will take effect, unless Congress steps in to delay or repeal the cuts. MACPAC has also recommended that Congress restructure the existing state allotments. The Office of Management and Budget is also reviewing a CMS proposed rule mysteriously titled "Medicaid Fiscal Accountability" that will likely propose to curtail state financing techniques such as DSH and supplemental payments.

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