### IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 13

- 30240

STATE OF LOUISIANA DEPARTMENT OF HEALTH AND HOSPITALS,

Plaintiff

– Appellant

v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; KATHLEEN SEBELIUS, Secretary of the United States Department of Health and Human Services, in her official capacity,

Defendants

– Appellees

Appeal from the United States District Court for the Middle District of Louisiana USDC No. 3:11

- CV

- 76

Before JONES, WIENER, and GRAVES , Circuit Judges. EDITH H. JONES, Circuit Judge: * At issue in this appeal is whether the State of Louisiana, through its Department of Health and Hospitals, must repay t he federal government nearly $24 0 million that it received in Medicaid funds for charity care at nine public hospitals from 1996

- 2006. The s tate challenges an adverse decision of the Departmental Appeals Board (“The Board”) of the United States Department of Health and Human Services (“HHS”) and thus faces the narrow

* Pursuant to 5 TH C IR . R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5 TH C IR . R. 47.5.4. United States Court of Appeals Fifth Circuit 

### FILED May 6, 2014 Lyle W. Cayce Clerk Case: 13-30240 Document: 00512620407 Page: 1 Date Filed: 05/06/2014No. 13

- 30240 scope of review afforded by the Administrative Procedure Act. We may only reverse the agency decision if it was arbitrary and capricious, not in accord with law, or unsupported by substantial evidence. 5 U

. S

. C

. § 706(2)(A),(E); Cedar Lake Nursing Home v. U.S. Dep ’ t. of H ealth and Human Servs., 619 F.3d 453, 456 (5th Cir. 2010)

. The State reiterates the arguments that the Board and the district court rebuffed. Finding no reversible error of fact or law, we affirm the district court judgment for essentially the same reasons

. To do so, it is unnecessary fully to recount the complex Medicaid reimbursement standards or several years of procedural jockeying that preceded the Board’ s ruling against the State. Instead, we frame the basic issues and add a few comments concerning L ouisian a’ s principal arguments. BACKGROUND Centers for Medicare and Medicaid Services ’ (“ CMS ”) audits revealed that over a decade, nine Louisiana public hospitals received hundreds of millions of dollars in excess payments o ver their uncompensated costs (“UCC” ) of caring for low

- income patients. The Stat e made payments from federal funding under a series of Medic aid plans that were pre
- approved by CMS. The plans paid each hospital’ s interim estimated UCC costs quarterly in advance, with a full accounting and settlement (reflecting the actual costs incurr ed) t o occur at the end of the year. From 1995

- 97, the pl an provided that “ [i]f at audit or final settlement

. . . the actual uncompensated costs are determined to be less than the estimated uncompensated costs, appropriate action shall be tak en to recove r such overpayment.” (Louisiana concedes that this provision require d it to repay e xcess amounts for those years.) From 1997

- 2003, however, an amended plan deleted this explicit reimbursement du ty, but the plan provided that “ [relevant] payments to a hosp ital

. . . shall not exceed the hospital’ s net uncompensated cost

. . . for the state fiscal year to w hich the payment is applicable.” Further, the payment system is deemed to be 2 Case: 13-30240 Document: 00512620407 Page: 2 Date Filed: 05/06/2014No. 13

- 30240

“ retrospective, ” in accord with the proced ure outlined in the prior plan. The only reference to recoupment of overpayments from providers was m odified to state that, “ [a]ppropriate action shall be taken to recover any overpayments resulting from the use of erroneous data, or if it is determined upon audit t hat a hospital did n ot qualify.” Finally, from 2003

- 05, the plan remained like the
1997

- 2003 plan and continued to state that “ [f]inal payment will be based on the uncompensated cost data per the audited cost report for the period(s) covering the state fiscal year. ” 1 Altho ugh the Medicaid statute generally states that a hospital may not receive more than its actual UCC in payments for low

- income patient care,
42 U

. S

. C

. § 1396r

- 4(g)(1)(A), and requires overpayments to states to be reimbursed to the federal government, 42 U

. S

. C .§ 1396b(d)(2)(C), neither the Board nor the district court relied on these provisions to uphold Louisiana’ s reimbursement obligation. Instead, the Board, whose decision we review, relied on the plain language of Louisiana’s “retrospective” plans and de cided that compliance with the plans required Louisiana to ac count for and recoup excess UCC payments at the end of each fiscal year. Louisiana’ s challenge to the administrative dec ision focuses on two arguments. First, the State contend s that its plans distinguished “retrospective” payment from “ recoupment, ” and after 1997, the plans expressly did not require recoupment of overpaid UCC from the hospi tals and reimbursement to the federal government. Second, the State’ s removal of a recoupment provi sion from the later plans means that the State was no lon ger obliged to seek recoupment. We discuss each of th ese.

1 Louisiana did n o t furnish a separate plan for 2005

- 06 but the parties treat it like these predecessor plans. 3 Case: 13-30240 Document: 00512620407 Page: 3 Date Filed: 05/06/2014No. 13

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1. Retrospective payments versus recoupment. Louisiana argues that the Board failed to distinguish the State’ s payment system from a (feder ally non

- existent) duty to recoup overpayments at the end of the year from hospitals that, according to audits, were overcompensated for their UCC. According to the State, a proper interpretation of its post

- 1997 plans is that while the State could seek f urther reimbursement for the public hospitals whose UCC had been underpaid b y the federal government, there was no provision for recoupment of overpayments. In other words, the State lays claim to an asymmetrical retrospective payment system and further a spires to bind HHS to t hat system because States have

“ flexibility ” in designing their Medicaid plans, and the Boa rd ordinarily defers to a State’ s reasonable interpretation of its own p lan. We do not find the Board’ s rejection of this position arbitrary and capricious or not in accord with law. Noting that the 1997

- 2003 plan itself describes the payment system for public hospitals as “retrospective,” rather than “prospective,” the Board explained that its decis ions have long recognized that “ retrospectiv e ” is a term of art in healthcare reimbursement. In a retrospective system, a state makes payments to a provider based on estimates of the UCC for the upcoming year. At the end of the year, the provider submits a report of the actual costs incurred, whic h is subject to audit and potential appeal. Interim payments are then reconciled to actual costs and final payment is made, aligning the payments with the actual costs. I n contrast, payments made in a “prospective system” are not adjusted based on actual costs incurred during the year. Compare Washington Hosp. Ctr. v. Bowen , 795 F.2d 139, 142 n.2 (D.C. Cir. 1986) (explaining prospective payment system as “not based on a hospital ’ s actual costs

. . . and not su bject to retroactive adjustment” ) , with Massachusetts v. Sec ’y of H ealth & Human Servs. , 749 F.2d 89, 90

- 91 (1st Cir. 1984) 4 Case: 13-30240 Document: 00512620407 Page: 4 Date Filed: 05/06/2014No. 13

- 30240 (describi ng a state Medicaid “ retrospective rate

- setting ” in which a state sets an “interim rate” and “ advances to the provider an interim amount” which is recovered or off set at the end of the period to match actual costs, as determined from subsequent reports and audits). The Board also maintained that “ federal law has always required states to reimburse hospitals according to the methodology in the approved Medicaid stat e plan, and, with very limited excepti ons that do not apply here, requires states to return the federal share of any payments to hospitals in excess of the amount determine d according to the state plan.” 2 The Board interpreted Louisiana ’ s plans according to their pre cise terms and held them to be “retrospective” and therefore to require an annual reconciliation of payments to actual costs incurred by the hospitals a nd a return of excess payments. We need not “ defer ” to the Board ’ s interpretation of the L ouisiana law to conclude tha t it correctly reads the plans. That
Lo uisiana advocates its a bility to “ recoup ” additional funds from the federal government in case of UCC underpayments demonstrates how retrospective reconciliation works in its plans , and th ere is no textual b asis in the plans for the State’s asymmetrical interpretation. The Board’ s decision in this respect was neither arbitrary and capricious nor contrary to law.

2 We do not discuss the impact of a federal provision enacted in 2003 and much later regulations that deal specifically with reimbursement of the federal government for excess UCC, as those measures post

- date the events here. 5 Case: 13-30240 Document: 00512620407 Page: 5 Date Filed: 05/06/2014No. 13

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2. Removal and revision of the recoupment provision. Louisiana removed the exp ress recoupment provision from its plans after 1997 and replaced it with a provision stating that, “ Appropriate action shall be taken to recover any overpayments resulting from the use of erroneous data, or if it is determined upon audit t hat a hospital di d not qualify.” According to the State, this ch ange demonstrated its intent only to seek recoupment for overpayments other than UCC from the public hospitals. The State asserts that by eliminating recoupment of UCC overpayments, the State promoted admini strative efficiency and limited disruption to the hospitals that serve principally needy fa milies, “ especially

. . . where Louisiana expected its forecasts of UCC to avoid significant overstatement, such that recoupme nts would serve little purpose.” Consequently, the Board e rred by rejecting its interpretation

. 3
T he Board responded to the State’s argument in several ways. First, the Board noted that to the extent the revision refers to “ erroneous data , ” it is generally applicable to all hospitals in Louisiana, including private hospitals that operate on a prospective payment system as well as the public hospitals that receive compensation on a retrospective system. Second, the absence of a specific recoupment provision does not alter the plan’s gener al methodology from that of a retrospective payment system, which by its nature and terms relies on an end

- of

- year accounting and reconciliation process. Further, the Board ques tioned “ whether a State plan provision specifically permitting recovery from a provider is a necessary prerequisite for recovery of an amount in excess of what the State plan allows as reimb ursement for Medicaid services.” Where “ a state has effectively overpaid itself, adjustment of the

3 I f the State so carefully adjusted its forecasts to avoid significant overstatement of UCC, how did it amass $2 4 0 million in overpayments in ten years? 6 Case: 13-30240 Document: 00512620407 Page: 6 Date Filed: 05/06/2014No. 13

- 30240 federal share is more important than the spe cific source of state fun ds used to make the adjustment.” In other wor ds, where a state has overpaid Medicaid funds to the public hospitals for UCC, whether and how a state recovers the overpayments from public hospitals does not affect whether the state must return the overpaid federal share. Even if we were to disagree with the Board’ s conclusion that the removal o f the recoupment provision was “inadvertent,” the other reasons for the Board’ s decision are compelling and render its decision neither arbit rary and capricious nor contrary to law. Further supporting the Board’ s position is that other circuit courts uniformly uphold states’ obligations to r eturn the federal share of Medicaid overpayments befor e the state recovers the overpayment amount from individual provider hospitals. Dep ’ t. of Soc. Servs

. , Div

. of Family Servs

. v. Bowen , 804 F.2d 1035, 1040 (8th Cir. 1986); Perales v. Heckler , 762 F.2d 226, 227 (2 d Cir. 1985); Mass achusetts v. Sec’y of Heal th & Human Servs. , supra at 90, 95. That these decisions did not deal with UCC overpayments is irrelevant, as all relied on 42 U

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. § 1396b(d)(2)(C), the generally applicable Medicaid payment adjustment provision. For the foregoing reasons, the distr ict court judgment, affirming the Board ’ s decision against Louisiana, is AFFIRMED

.

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