IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 18-60592

BAPTIST MEMORIAL HOSPITAL - GOLDEN TRIANGLE, 

INCORPORATED; CALHOUN HEALTH SERVICES; DELTA REGIONAL 

MEDICAL CENTER; MERIT HEALTH BATESVILLE, formerly known as 

Tri-Lakes Medical Center, Mississippi; BAPTIST MEDICAL CENTER, 

INCORPORATED; SAINT DOMINIC-JACKSON MEMORIAL HOSPITAL; 

TISHOMINGO HEALTH SERVICES, INCORPORATED; GRENADA LAKE 

MEDICAL CENTER, 

 Plaintiffs - Appellees

v.

ALEX M. AZAR, II, SECRETARY, U.S. DEPARTMENT OF HEALTH AND 

HUMAN SERVICES; SEEMA VERMA, in her official capacity as 

Administrator, Centers for Medicare and Medicaid Services; CENTERS FOR 

MEDICARE AND MEDICAID SERVICES, 

 Defendants - Appellants

Appeal from the United States District Court 

for the Southern District of Mississippi

Before HIGGINBOTHAM, DENNIS, and HO, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The Medicaid Act provides each state with a fixed pool of funds to make 

supplemental payments to hospitals that serve a disproportionate share of 

indigent patients. These “disproportionate share hospital” (“DSH”) payments 

are limited to a hospital’s “costs incurred” in caring for indigent patients. The 

United States Court of Appeals

Fifth Circuit

FILED

April 20, 2020

Lyle W. Cayce

Clerk

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Secretary of the United States Department of Health and Human Services (the 

“Secretary”) has significant discretion to determine how these costs are 

calculated. In 2017, the Secretary issued a final rule (the “2017 Rule”) 

clarifying that hospitals’ “costs incurred” are net of payments from third

parties, like Medicare and private insurers.1

Eight Mississippi hospitals (the “Hospitals”) challenged the 2017 Rule, 

contending that its definition of “costs incurred” conflicts with the Medicaid 

Act. The district court granted summary judgment for the Hospitals and 

enjoined enforcement of the 2017 Rule. The Secretary appealed. As have the 

three other circuit courts to consider the issue, we conclude that the 2017 Rule 

was consistent with the Act. We reverse. 

I.

Medicaid is a joint state-federal program that pays medical expenses for 

low-income patients.2 Each state administers its own program, but is subject 

to federal standards and oversight as a condition of receiving federal funding 

for a portion of its costs.3 The care of Medicaid patients and the uninsured 

present financial challenges for hospitals serving a disproportionate number 

of these patients. In 1981, Congress authorized states to make the 

supplemental payments to “disproportionate share hospitals” to offset their 

losses on Medicaid and uninsured patients.4 To finance these DSH payments, 

the Medicaid Act annually provides each state with a fixed pool of funds.5

1 See Medicaid Program; Disproportionate Share Hospital Payments—Treatment of 

Third Party Payers in Calculating Uncompensated Care Costs, 82 Fed. Reg. 16,114 (2017) 

(“2017 Rule”).

2 42 U.S.C. §§ 1396-1, 1396a.

3 Id. § 1396b(a)(1). 

4 See H.R. REP. NO. 103–111, at 211 (1993), as reprinted in 1993 U.S.C.C.A.N. 378, 

538 (DSH payments “assist those facilities with high volumes of Medicaid patients in meeting 

the costs of providing care to the uninsured patients that they serve[.]”).

5 42 U.S.C. § 1396r-4(f).

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In the early 1990s, some states were reportedly making DSH payments 

to hospitals “in amounts that exceed the net costs, and in some instances the 

total costs, of operating the facilities.”6 So in 1993 Congress imposed a

“hospital-specific limit” on annual DSH payments to each hospital.7 Under the 

limit, payments are capped at a hospital’s “costs incurred” by serving Medicaideligible and uninsured patients, net of other Medicaid payments and payments 

from uninsured patients.8

In 2010, the Centers for Medicare and Medicaid Services (“CMS”) issued 

guidance clarifying that the “costs incurred” are also net of payments from 

third parties (e.g., Medicare, private health insurance) for serving indigent 

patients.9 Some patients are covered by Medicaid and a third party. In such 

cases, Medicaid is the “payer of last resort,” meaning that typically only the 

third party pays the hospital. For example, when an individual enrolled in both 

Medicaid and Medicare has a hospital stay, typically only Medicare will pay 

for the stay. Under the 2010 guidance, when a third party reimburses a 

hospital for serving a Medicaid patient, the third-party payments are excluded 

from the “costs incurred.” 

After hospitals filed suits around the country, four courts of appeals held 

that the guidance represented a policy change and enjoined CMS from 

enforcing it.10 With these decisions, CMS withdrew the guidance, effective 

6 H.R. REP. NO. 103–111, at 211, 1993 U.S.C.C.A.N. at 538.

7 Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103–66, § 13621(b), 107 Stat. 

66, 630 (1993). 

8 42 U.S.C. § 1396r-4(g)(1)(A). 

9 See CMS, Additional Information on the DSH Reporting and Audit Requirements, at 

18 (2018), https://www.medicaid.gov/sites/ default/ files/2020-01/part-1-additional-info-ondsh-reporting-and-auditing.pdf. 10 Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029, 1037 (6th Cir. 2018); Children’s Health 

Care v. CMS, 900 F.3d 1022 (8th Cir. 2018); Children’s Hosp. of the King’s Daughters, Inc. v. 

Azar, 896 F.3d 615 (4th Cir. 2018); N.H. Hosp. Ass’n v. Azar, 887 F.3d 62 (1st Cir. 2018).

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December 30, 2018.11 Meanwhile, in April 2017, the Secretary promulgated the 

2017 Rule, clarifying that “costs incurred” are net of third-party payments. 

That is, the 2017 Rule implements the same policy as the rescinded guidance.12

The Hospitals sued the Secretary, claiming the 2017 Rule exceeds his 

authority in violation of 5 U.S.C. § 706(2)(C). The district court agreed, relying 

almost entirely on Children’s Hospital Association of Texas v. Azar, a district 

court decision invalidating the 2017 Rule.13 After the Secretary appealed and 

the parties briefed this case, the D.C. Circuit overturned the district court 

decision in Children’s Hospital and upheld the 2017 Rule.14

II.

In reviewing a challenge to an administrative agency’s statutory 

construction in a final rule, we apply Chevron’s two-step framework.15 We first 

employ the “traditional tools of statutory construction” to determine “whether 

Congress has spoken to the precise question at issue.”16 “If the intent of 

Congress is clear, that is the end of the matter; for the court, as well as the 

agency, must give effect to the unambiguously expressed intent of Congress.”17

But if “the statute is silent or ambiguous with respect to the specific issue,” we 

must defer to the agency’s interpretation so long as it “is based on a permissible 

construction of the statute.”18 We also must defer when the statute expressly 

delegates an agency authority “to elucidate a specific provision of the statute 

11 See CMS, Additional Information on the DSH Reporting and Audit Requirements

(2018), https://www.medicaid.gov/sites/default/files/2020-01/part-1-additional-info-on-dshreporting-and-auditing.pdf (announcing withdrawal of FAQ No. 33 and No. 34 as of 

December 30, 2018).

12 Treatment of Third Party Payers, 82 Fed. Reg. 16,114.

13 300 F. Supp. 3d 190 (D.D.C. 2018).

14 Children’s Hosp. Ass’n of Tex. v. Azar, 933 F.3d 764 (D.C. Cir. 2019).

15 Chevron, U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 (1984). 16 Id. at 842, 843 n.9. 

17 Id. at 842–43. 18 Id. at 843. 

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by regulation.”19 The agency’s “legislative regulations are given controlling 

weight unless they are arbitrary, capricious, or manifestly contrary to the 

statute.”20

III.

The parties dispute the proper method for calculating the hospitalspecific limit for annual DSH payments. The Medicaid Act sets the hospitalspecific limit at: 

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.21

Under the 2017 Rule, “costs incurred” are also net of payments from 

third-party payers, such as Medicare and private insurers. The Secretary 

asserts that its Rule is consistent with the statute’s ambiguous language. The

Hospitals disagree, arguing that the Medicaid Act unambiguously specifies the 

method for calculating the hospital-specific limits, and that method does not 

account for payments from third parties.

Section 1396r-4(g)(1)(A) expressly delegates gap-filling authority to the 

Secretary through the “as determined by the Secretary” clause.22 The Hospitals 

do not dispute this point, instead arguing that the gap is narrow and the 

statute is clear. As they see it, the hospital-specific limit is set at a hospital’s 

gross costs net of other Medicaid payments and payments made by uninsured 

19 Id.

20 Id.

21 42 U.S.C. § 1396r-4(g)(1)(A). 

22 See Children’s Hosp. Ass’n of Tex., 933 F.3d at 770; Tenn. Hosp. Ass’n, 908 F.3d at 

1039 (quoting Chevron, 467 U.S. at 843–44) (concluding that the phrase “as determined by 

the Secretary” represented an “‘express delegation of authority to the agency to elucidate a 

specific provision of the [Medicare] statute by regulation’”). 

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patients, and the Secretary only has discretion to determine the calculation of 

gross costs. In support of their reading of the Act, the Hospitals marshal 

several arguments. We reject each one.

First, we cannot agree that the ordinary meaning and dictionary 

definitions of “costs” and “payments” render the disputed language 

unambiguous. Able judges employing these tools have reached opposing 

interpretations of this provision.23 As the Supreme Court recognized, the word 

“cost” is “a chameleon,” a “virtually meaningless term” with a “protean” 

nature.24 Agencies therefore “have broad methodological leeway” to interpret 

the word,25 and courts have repeatedly upheld the Secretary’s authority to 

account for offsetting payments when construing “costs” or “costs incurred.”26

We are also unpersuaded by the Hospitals’ argument that the statute

draws a “clear line” between costs and payments. In their view, the statute 

grants the Secretary discretion to determine the calculation of gross costs, but 

23 Compare Mo. Hosp. Ass’n v. Azar, 941 F.3d 896, 901 (8th Cir. 2019) (Stras, J., 

concurring in the judgment) (citing THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH 

LANGUAGE 891 (5th ed. 2016) and WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1146 

(2002)) (concluding that the 2017 Rule is consistent with the plain meaning of the text), with

Tenn. Hosp. Ass’n, 908 F.3d at 1048 (Kethledge, J., concurring in the judgment) (citing 

OXFORD ENGLISH DICTIONARY (online ed. 2018)) (concluding that CMS’s 2010 guidance, 

which pursued the same policy as the 2017 Rule, violated the plain meaning of the text). 24 Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467, 500–01 (2002) (internal quotations 

omitted).

25 Id. at 500. 26 See Dana–Farber Cancer Inst. v. Hargan, 878 F.3d 336, 341 (D.C. Cir. 2017) 

(deferring to agency’s determination that a provider’s “‘actually incurred’ cost” of tax liability 

must reflect offsetting payments that “reduc[e] the cost” of the taxes); Abraham Lincoln 

Mem’l Hosp. v. Sebelius, 698 F.3d 536, 549–50 (7th Cir. 2012) (explaining that CMS policy 

requiring providers to offset refunds is consistent with the statutory directive limiting 

reimbursement to “costs that are ‘actually incurred’”) (quoting 42 U.S.C. § 1395x(v)(1)(A)); 

Kindred Hosps. E., LLC v. Sebelius, 694 F.3d 924, 928–29 (8th Cir. 2012) (noting that hospital 

was “effectively reimbursed” for its taxes by an offsetting payment); cf. Sta-Home Home 

Health Agency, Inc. v. Shalala, 34 F.3d 305, 308–10 (5th Cir. 1994) (concluding that “amounts 

paid back” are refunds that CMS may offset because they were not “‘costs actually incurred,’” 

as doing otherwise would “have the effect of inflating the provider’s costs”) (quoting 42 U.S.C. 

§ 1395x(v)(1)(A)).

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not to select payments to subtract from those costs. This argument “flies in the 

teeth of the statutory text.”27 Because “‘costs incurred’ are both ‘as determined 

by the Secretary’ and “net of payments under [Medicaid] and by uninsured 

patients[,] . . . the statute requires that some payments be considered in 

calculating a hospital’s ‘costs incurred.’”28 For this reason, “costs incurred” 

refers to net costs, not gross costs. And because the statute does not direct the 

Secretary to exclude “only” payments from Medicaid and uninsured patients, 

it is within the Secretary’s expressly delegated authority to interpret “costs 

incurred” to exclude other payments as well.29

We likewise reject the Hospitals’ contention that Congress, by expressly 

excluding payments from Medicaid and the uninsured, meant to exclude only 

those payments and no others. The Hospitals rely on the canon of Expressio 

Unius Est Exclusio Alterius, which provides that “expressing one item of [an] 

associated group or series excludes another left unmentioned.”30 This canon 

“applies only when circumstances support a sensible inference that the term 

left out must have been meant to be excluded.”31 Such an inference is not 

warranted here. Congress may have wanted to ensure the deduction of “the 

most common sources of payment”—Medicaid and the uninsured—while 

allowing the Secretary “to decide whether less-common sources of payment 

should be [deducted] as well.”32 Affording the Secretary this discretion makes 

27 Children’s Hosp. Ass’n of Texas, 933 F.3d at 772. 

28 Id.

29 See id. at 770 (“Although 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.”) (original emphases omitted and emphasis added); see also Mo. Hosp. 

Ass’n, 941 F.3d at 899 (same, quoting Children’s Hosp. Ass’n of Tex., 933 F.3d at 770); Tenn. 

Hosp. Ass’n, 908 F.3d at 1038 (“[T]he statute does not instruct CMS to deduct only those 

payments from the determination of costs; the fact that certain payments must be deducted

from costs does not mean that other payments cannot be.”).

30 NLRB v. Sw. Gen., Inc., 137 S. Ct. 929, 940 (2017) (alteration in original).

31 Id.

32 Children’s Hosp. Ass’n of Tex., 933 F.3d at 771. 

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sense given the array of private and public payers (Medicare, private health 

insurance, TRICARE, etc.) and the potential for unforeseeable changes in how 

these payers reimburse hospitals.33

We also reject the Hospitals’ argument that the express exclusion of 

third-party payments in a related Medicaid provision indicates that Congress 

chose not to deduct third-party payments in § 1396r-4(g)(1)(A). They point to 

§ 1396r-4(g)(2)(A), which allowed states to make extra DSH payments to 

certain hospitals until 1995. But states had to certify that the extra 

payments—i.e., payments in excess of the hospital-specific limit “as described 

in paragraph (g)(1)(A)”—were “used for health services.”34 Under subsection 

(g)(2), the amount “used for health services” excluded “any amounts 

received . . . from third party payors (not including the State plan under this 

subchapter).”35 The Hospitals claim that “it is compelling that Congress did 

not include payments by third-party insurers in subsection (g)(1), despite 

excluding precisely such payments in . . . subsection (g)(2).”

The Supreme Court has explained that the Hospitals’ presumption—

“that the presence of a phrase in one provision and its absence in another 

reveals Congress’s design—grows weaker with each difference in the 

formulation of the provisions under inspection.”36 Here, there are significant 

differences between subsections (g)(1)(A) and (g)(2)(A).37 Unlike subsection

33 For example, in 2003, Congress appropriated funds to reimburse hospitals for 

providing emergency care to undocumented aliens. Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003, Pub. L. No. 108–173, § 1011, 117 Stat. 2066, 

2432. In 2008, CMS clarified that these payments are excluded from the calculation of the 

Medicaid shortfall. See Medicaid Program; Disproportionate Share Hospital Payments, 73 

Fed. Reg. 77,904, 77,912 (Dec. 19, 2008). 

34 42 U.S.C. § 1396r-4(g)(2)(A).

35 Id.

36 Columbus v. Ours Garage & Wrecker Serv., Inc., 536 U.S. 424, 435-36 (2002). 37 Children’s Hosp. Ass’n of Tex., 933 F.3d at 772 (describing these subsections as 

“fundamentally different”). 

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(g)(1)(A), subsection (g)(2)(A) did not exclude third-party payments from the 

limit on payments to a hospital; rather, it required states to account for thirdparty payments when determining whether the extra DSH payments were 

“used for health services.” Further, we see “no tension . . . in Congress 

requiring third-party payment deductions in subsection (g)(2)(A) and allowing 

third-party payment deductions in subsection (g)(1)(A).”38 Because “[t]he DSH 

payments provided for in (g)(2)(A) are above and beyond those mandated by 

(g)(1)(A),” Congress may have wanted to impose tighter limits on these extra 

payments “while giving CMS more discretion to calibrate the appropriate cap 

on the ‘standard’ DSH payments discussed in (g)(1)(A).”39

Finally, we see no basis for the Hospitals’ argument that the 2017 Rule 

conflicts with the statutory purpose of the hospital-specific limit. The Hospitals

contend that the DSH payments are designed to offset the financial burden of 

treating not only Medicaid patients but also uninsured patients. They rely 

heavily on a committee report to the 1987 bill creating the Medicaid DSH 

payments. It explained that the DSH payments are meant “at a minimum [to] 

meet the needs of those facilities which . . . serve a large number of Medicaideligible and uninsured patients who other providers view as financially 

undesirable.”40 It signifies that when Congress created the hospital-specific 

limit in 1993, that same House committee was “concerned by reports” of states 

making DSH payments “in amounts that exceed the net costs, and in some 

instances the total costs, of operating the facilities.”41 “In essence, Congress 

was concerned that hospitals were double dipping by collecting DSH payments 

38 Tenn. Hosp. Ass’n, 908 F.3d at 1039.

39 Id.

40 H.R. REP. NO. 100–391(I) at 524 (1987), as reprinted in 1987 U.S.C.C.A.N. 2313–1, 

2313–344 (emphasis added). 

41 H.R. REP. NO. 103–111, at 211, 1993 U.S.C.C.A.N. at 538.

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to cover costs that had already been reimbursed.”42 The 2017 Rule addresses 

this concern by safeguarding against states paying hospitals for costs that have 

already been reimbursed by a third party.43 It “ensures that DSH payments 

will go to hospitals that have been compensated least and are thus most in 

need.”44 We conclude that the 2017 Rule is a reasonable reading of the 

Medicaid Act and does not violate § 706(2)(C).

IV.

For these reasons, we reverse and remand for further proceedings 

consistent with this opinion.

42 Tenn. Hosp. Ass’n, 908 F.3d at 1040.

43 See id. at 1039–40; Children’s Hosp. Ass’n of Tex., 933 F.3d at 772. 44 Children’s Hosp. Ass’n of Tex., 933 F.3d at 772. 

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