for the government i'd like to reserve five minutes for and the f a q's c m s clarified that compensation costs are not uncompensated costs this policy is an interpretive rule because it explains how the medicaid shortfall applies to a particular subset of medicaid patients it's also the only position that is consistent with the rules preamble and with the purpose of the just proportionate share or dish hospital program that might be consistent with the preamble but it's not consistent it seems with the very very straightforward language of the two thousand and eight rule which is total u ncompensated thing is total cost of care less this regular medicaid rate premiums pretty simple medicaid manage here organization payments supplemental enhance medicaid payments uninsured road revenues and section one thousand and eleven payments i mean that's really straightforward and that's material i mean it's not the same thing epic user adding on to that so maybe it's consistent with the preamble but that didn't go through notice and calm this read did that's correct and if i could direct the court to page twenty four of our opening brief where the basic outline of the medicaid shortfall is set forth the paragraph you've pointed to is that includes the medicaid shortfall it includes the uninsured component as well and it looks i think more complicated and detailed than it is when you look at the medicaid shortfall eleven scribes total medicaid uncompensated care the rule also refers to that as the medicaid shortfall and that is the difference between costs incurred in by each hospital for furnishing services to medicaid eligible individuals minus the total medicaid payments in paragraph scene nine that's not including  is in medicaid shortfall and the reason that the regulation spells out the medicaid payments is that we are determining how far does medicaid fall short of covering the hospital's costs and paragraph c ten refers to costs incurred by the hospital that language is naturally susceptible to a reading that reflects offsetting payments or works of i mean cost so i mean this really goes back to the that the statutory question would be better addressed in the context of a rule that has gone through notice and comment just the twenty seventeen roll that's not at issue here on the road in terms of how we write something but to your question about cost incurred costs incurred hat in medicare that language is used in the statute and courts have held including in the kindred hospital association case and it's circuit that that a cost is not incurred if it is reimbursed way the in two thousand and eight the agency contemporaneously with the two thousand a rule explained that in the context of medicare payments a commenter said well these payments what what do we do with the cost and payments for these patients and the commenter assumed that you just don't count the cost or payments for these patients at all and c m s responded that no there is no exclusion the statute for medicaid patients who have third party insurance and it's  making that's correct it is the agency's contemporaneous explanation why did you go and who did you say you are not you are you are not you are doing it before so tell me what you did before where in the record or in your sworn statement do you show that you were already actually going after people who didn't who did not do it the way  judge stretched of the first time that c m s received audits that would have been subject to recall recruitment was twenty four team the other team and reporting requirement was not an act until two thousand and three and the rule implementing it was promulgated in two thousand and eight the first audits were not submitted until two thousand and nine and there was a grace a sort of a transition period there or so until well it was twenty five two thousand and eleven was the first so you could to see whether people were actually complying with the statute until much later right it was two thousand and three in the auditing and reporting requirement what the congress said that states need to start submitting these audits to hospitals meet the costs of treating medicaid patients without exceeding their net costs and i wanted to help hospitals that don't treat large numbers of privately insured patients plaintiffs approach is doing exactly the opposite it's allowing hospitals to exceed their not costs and it's giving hospitals who treat a large number privately insured patients are medicare dual eligible patients at the expense of other hospitals who are sharing in this limited pool of hospital payments that are available with in tennessee the record shows that st jude for example had seventy nine million dollars in uncompensated costs in twenty twelfth i'm sorry no qu because it indicates that the very purpose for which this was created would be undercut if if you don't do it if you don't do the calculations that he suggests they should be done but i think what we have to understand is when did you when did the government intervention and now with this and for that analysis and it sounds to me like what you're saying is the first time really was the two how would a hospital know that they're supposed to back that based on the reg i think the hospital looks at and says we have an obligation to report uncompensated costs and we have this year's massive compensated here's here's like the you know the original mistake in all of this which is you know uncompensated cos if as a matter of ordinary meaning i would be totally sympathetic to what what you're saying here but uncompensated costs the whole point of g one  is to define that term in to give us a formula and that formula very interestingly that provision of pressley mentions third party coverage third party payment expressly mentions it but never includes that in the payments that must be considered in determining the net and you're just trying to bake that in there and if you can bake the word if you can if you can read costs incurred not to mean outweighs which is what it normally means but to mean outlays minus third party payments then why why would congress congress then spell out net of other payments that need to be backed out if we are already doing some kind of net in the meaning of cost incurred itself it's it's nonsensical as an interpretive matter  surgeon perhaps that is operating on the page patient you're paying other people there you have overhead you have general operating costs that's the sort of stuff that's spelled out a couple visions later in w w  and and that it's those costs i mean the natural reading of this is it's those costs that the secretary in her expertise can decide count towards the meaning here when we know that net of payments is actually describing cost incurred we know that that it's we're looking at an aggregate amount what are the costs incurred and we know that that's already not of some payments so the sekret circumscribe the secretary's authority to corresponds to use subsection c and of the of this room for forty seven to ninety nine seat in that that is gross col she literally uses that term and so as practiced in the two thousand and twelve audit which is the one by which the c m s seeks to take back the money from the from the hospitals their own senior executive says oh yeah we use gross cost and so the question is why did they do that well they did that because that is the way the regulation is set up if you look at the the if you look at the two thousand and eight rig and i think judge catholic you touched on this earlier if you go what you have to remember is not only don't do the hospitals have to subject themselves to an audit that the state in the state gets the audit done and they package it they do a report called the data element report and along with it and that's required by the statute or regulation and then they refer report on that which is not so and what they did was they in that in that they the element which is a spreadsheet which is also attached is exhibit b to misplay and decoration is also an attachment to mr van cleave declaration in the record behalf of the hospital association there's a a very detailed spreadsheet that i had to magnify in order to be able to read but it has a series of headings across the top they have there's a list of about twenty columns and each of those headings ties back to a specific subsection of four four seven to nine and see so when we say cetin it referring to the to the regulation that's column j ohn a spreadsheet so when ms finance is column j has a gross cost she's talking about c t and wished which is the total talk total cost of care for medicaid am i right that see tensors total annual costs incurred by each hospital for furnishing services to medicaid eligible and yes the title i was giving it was off the chart i think that's from the regulation though and that's the regulation as it existed that we're trying to interpret it's so why doesn't that have the possibility of being totaling a cost incurred by each hospital prefer seeing services if they serve or if they furnish services to a medicaid eligible person who is actually getting medicare and medicare is paying for it why would the total costs incurred by the hospital be medicaid costs if medicare is paying for it because that is the way congress set up the statute and then the and the way the regulation itself the set up mentions only deducting medicare when it comes to the medical we call the medicaid shortfall which is the portion of the d s h calculation that's limited to medicaid that's only it only says you can deduct the medicaid payments that were made on behalf of the u s ok so we really want to get to the statute which i'm so glad you took us there so gee one says the costs in that the d h and d s age panel payments may not surpass the costs incurred as determined by the secretary which is what the government's relying on and net of payments under this subchapter and by uninsured patients so it doesn't list your doesn't list medicare it does say specifically payments by uninsured patients so that is that is a specific thing but why isn't as determined by the secretary broad enough to cover if the secretary so chooses properly medicare and payments by insured people  as to cost and payments and if the judge prince charles analysis was and we think he's right there when it when they talk about payments the statute specific about the year of furnishing hospital services as determined by the secretary comes after that it's only after the as determined by the secretary that we have payments i don't see how as determined by the secretary could modify the payments it's not a separate secretary's discretion as to what payments can be considered in this net it's only the kinds of costs which would make perfect sense because hospitals have all kinds of costs and they can't maybe they can't attribute you know a share of everything to medicaid patients well i grew that in the sense that only payments can be deducted from the only medicaid payments for example of the shortfall can be deducted from the cost in there's no statutory or right well as you pointed out it's up to congress to decide the policy but i'm just asking if if we read the statute your way we would have to say the congress has made some sense here whereas if we read the statute the way i was offering as a possibility there there would be the opportunity to deduct the costs of a person who is say wholly paid by medicare and where medicaid is not paying anything even though the person qualifies for about and i'm just wondering why your view would make sense because we have to assume congress makes sense yes your honor but again i go back to the legislative history the what in the legislative history supports your view that it's right for the hospitals to count the costs the ephemeral the imaginary costs incurred that were possibly let me back up stephanie's point about the d s h process hospitals don't bill medicaid for d s h payments for each patient that comes through or whatever the their data is each hospital's data is aggregated and analyzed by the auditor and so forth in the payments are made and i think this is in the record because we had a an issue about when when the tennessee fiscal year in did it because we were coming up against that and that's why judge  it issued a temporary injunction in early june to sort of slow things down so he could make a ruling on this and so it's the those are costs that the costs that are that are incurred in the sense of the hospital had the cost it paid for whatever and whoever it billed for the cost of separate but the hospital incurred in the sense of it was exposed to the financial obligation to pay the but i'm asking why does it make any sense to say for instance that you're going to put to one side the cases of uninsured patients but you're not going to let the secretary say hey people who are paid by their whose costs are paid by their insurer if they have you know blue cross or people who are paid by their medicare are not the same as the situations where there were payments by uninsured pays the i mean it just seems logical to me that the secretary should be able to decide perhaps so i'm looking for any answer as to why as a matter of logic treating the medicare people the same as the uninsured people who make payments i could give you an at and answer as a matter of law and the logic i think is reflected in some of the cases which say it's clear and congress understand that it's not when it makes medicaid distribution to hospitals or comes through c m s those distribute those payments do not cover all the medicaid cost and that's just sort of orsen of only a portion of it and so i think congress to the extent we can to the extent we can and we can afford it in our in our legislative processes  this way i mean you can you explain also the reg in two thousand eight hundred standing and correct me if i'm wrong excluded section ten eleven payments from the da a its calculations i'm not an expert on section ten eleven but i think it's a program that pays for health care for aliens yes and is that provided for in the statute g one  no maybe that's a problem so how could the rule in two thousand provide for something that was not in the statute under your interpretation how could it not be it's not in the closed quiet my understanding is that you're saying it's a close quiet it's medicaid payments and it's uninsured payments that's what congress decided but what i think gives us concerns is that nobody is disputing ten eleven payments so you already have an example that shows that it's not a closed client and in they at if it's not a close class to b admission of all the parties and by and by no challenges to the ten eleven parliaments then how can the secretary's determination which included the capacity to have ten eleven not include the capacity to add other issue then we can decide what the secretary had the right and it appears that it is not a close class so now we're in a different ballpark we're asking whether the secretary's exercise of her power to you was appropriate well that that provision of the rules may also be subject to the same challenge we just because we had no there were no financial reasons for my clients to pursue that in my understanding of the actual record in the larger context and that there were comments about the tim eleven payments challenging them initially and the government responded that this is an appropriate deduction and no  earlier rule that there was this back and forth but what we're talking about what does the spec sheet say about the client and what is actually happened about the client and i think that what is actually happened about the cl indicates that it's an important client and if it's an open class walk in the secretary mike the determination that other payments accrued coming to the hospital to offset its costs get to the judge in was in the missouri case had it did this the secretary has delegated the capacity to in determining cost the sector is not delegated the power to determine which payments can be used those are set out in statute it would apply it would argue much no i think if someone were to challenge it on that basis that they would they would not be utilized either you say nobody no money has been ten eleven has not affected any payments to hospitals tennessee so nobody would have a reason to bring a challenge as a ten eleven i mean surely you would agree that the failure of private parties to challenge a particular action of the secretary namely inclusion of ten eleven does not empower the secretary to promulgated a regulation that exceeds the permissible meaning of the statute itself i agree with that if i may just very briefly i mean i was kind of holding off one thing i want to ask kind of in line with judge moore's questions about you know why would this make sense is it your understanding that under thirteen ninety six are for a two deeds so this is earlier in the same statutory section you know it talks there about it because let me back up the state as i understand it the state obviously has a role in determining which hospitals get these supplemental payments and how much of that money they get zacharias and eighty two d refers to the states methodology to quote identify and make payments to disproportionate share hospitals being the ones that disproportionately treat medicaid patients is it your understanding that the state would have the state of tennessee if it so chose  the state under this provision in developing its methodology could choose to read not to reimburse hospitals for costs and i use that in the ordinary english sense of the term costs for which some third party insurer blue cross etc has reimbursed it already i think that particular section if i have it correctly refers to an early early in the early process of the d s h funding cycle there were some extra funds that were being sent out to particular types of hospitals general provision i understand it correctly  could be wrong that's kind of want to ask it seems i mean my point is it seems that this allows the states considerable flexibility because very constrained to development methodology about as among the  instructions from the auditor to the hospitals for example is the develop the audit in this in this case in two thousand and twelve the instructions are in the in the record it was a power point split if they gave and there are a specific instructions flowing through from c m s saying for example saying we will enforce of this not quite the way they put it but the fact thirty three in fact thirty four have to be applied so there's specific controls that well i think i think there's a compilation of data based on all hospitals within the it's white so the money that you're hospitals were said to back if you don't open it back your hospital keeps that is that correct correct so if you are in a more well to do area and you have who are covered patients who also hey of individual insurance then doesn't that if if you do not accept what the government has suggested isn't the practical outcome of they at that rather than helping the hospitals that truly deliver free care you're with higher d s h payments you are in fact giving higher d s h payments to the hospitals that are fortunate enough to have people who have private insurance i think the record if i may an answer to the record in this case shows that it effectively is not the case because i thought she saw jews who gives a great deal of free care was worth did not  comparable the b s h payments to it as compared to your facilities which have more private insurance payments that are not deducted i cannot recall standing here exactly what the level of d s h payments were to st judes but my understanding is the government's complaint is not that st jude got none or got very little bit that they had a higher load which of course everybody knows their place circle worldwide population of patients it's a jews also has a large url a related large and private foundation that raises significant funds for them so they they may show be returned not that you don't want hospitals to be helped because we all know how desperate the media has to support hospital facilities everywhere but i'm wondering the underlying policy to make sure that those hospitals that actually render care to indigent people and have no reimbursement isn't the goal of this plan to think that they receive the lion's share your as opposed to the hospitals that have a private insurance but i've i think that is a goal and i think they do receive those i mean a bill for example delta medical center one of our plan of hospitals it's in a poor neighborhood in memphis but they have one of the house medicaid in utilization rates in the state because another category this reported on this report and i think tacoma regional which is up in east in the city in greenville similarly has a relatively high medicaid in place and you listen asian right in both of those serve significant volumes delta has a higher medicaid inflation utilization rate they got a little less than a million dollars into it in the two thousand and twelve audit would have caused him to pay back about nine hundred ninety thousand  that they ran a loss i think the record shows in two thousand and twelve so the theory the theory of the government here was that those hospitals that you're mentioning that are your clients had reimbursements for the care of people who qualified both for medicaid and medicare they had reimbursements from medicare that took total care costs away from medicaid having to pay and so then the question sort of builds on judge strands is is is there a set pot of money for d c h payments to go to the hospitals in tennessee is it is it a closed amount such that if your position wins and your hospitals receive the money that other hospitals will not be able to receive money is that a fact that is if there is say three hypothetically there's one hundred million dollars to be spent on dia payments in tennessee so if fandor bill were to pay back eight million does that eight million the instructions to the states as i understand it are to recapture the funds and to pay them to any hospital that may not have received its share of the s h i don't know how that's identified because we didn't issue the a p a has been violated here and that alone is sufficient grounds for the injunction and to and there was no explanation or justification budget crunch job of why he ended it at the end of fiscal year twenty sixteen you saw without any need to address the substance of the statute under count one correct yes and that's what the first circuit do right it's actually what the circuits have done that has addressed this yesterday i have except for the two thousand seventeen which is now pending on appeal before the big c started yes and that's right and it would that would be sufficient to protect our my clients against of facts thirty three and thirty four which is what which is our go on judge judge crenshaw c with the full background in that case why would the most practical thing if we were resolving it in your opponents by you were for example to go only on count to limit it to q's being a violation of notice and comment requirements why would there be a need to address the substantive statutory provision of joint stance and that unfortunate situation for us there would be no need to address the substantive question and courts courts of appeals have held that when there is a procedural de facto and an agency policy it is appropriate to not short circuit the notice and comment process and to wait for that an actual notice and comment rule in order to really fully assess the validity of that brought there's additional reason mean there are it's a clear you know chevron case there's just no need to recheck my understanding of your argument of four discrete things none of which include private insurance and you're saying is i recall your argument during the first round you said well the cost of care itself i ncorporates a net of private payments and that's why even though it's not spelled out there and frankly nobody would know it that's why this this  two thousand and eight reg does the legislative work denying including third party insurance payments in the amounts that are backed out from what the supplemental payments can reimburse now it would seem like you know if that's the government's argument it would seem that we have to do we we do have to address the question whether you're right that the word cost is a net concept in the statute and not it's ordinary meaning in your view you referred to the statute as the basis for reading total cost of care not to mean outlays but outlays minus certain payments which are not enumerated in this reg and if that's a stat i mean and you're relying on the statute for that and that's baked into the procedural issue i think your honor in the notice and com question is really it's an interpretation of the regulation and so the question is whether it adds something substantively new to the regulation and whether to worry about the statute but if we decide that it's legislative you've missed noticing con man and that the other guy violation irrespective of what we would say the statute yes that's absolutely correct and in judge moore you're correct that it's a closed universe judge strands you're absolutely correct but the plaintiff's approach here benefits hospitals that have medicaid populations that are wealthier and better insured this is an open class as you described there the negative implications are not warranted here for several reasons these are medicaid medicaid payments are specifically called out because we're calculating the medicaid shortfall and medicaid is the most natural source of payment for medicaid patients it is also just in general a weak presumption in the the administrative context to assume that there is some negative inference that should be drawn as opposed to leaving that question to the agency especially when it would undermine the purpose of the regulation and the statute and especially when it would treat compensating cost as uncompensated costs which is directly counter to everything pending before the i'm sorry yes that's correct judge and i thank you it's a cleaner record would you agree this is my last question for you would you agree mr morsy that under a two d this state in determining its methodology for apportioning the supplemental payments among eligible hospitals that the state could choose to give less to hospitals that have received third party payments or medicaid in the regulations in see where we've been talking about see eleven total medicaid uncompensated care and see ten total annual costs is there anything that defines either compensated cost or uncompensated