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 the federal government 

nearly $240 million that it received in Medicaid funds for charity care at nine 

public hospitals from 1996-2006. The state 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 5TH CIR. 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 5TH 

CIR. R. 47.5.4.

United States Court of Appeals

Fifth Circuit

FILED

May 6, 2014

Lyle W. Cayce

Clerk

 

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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 Health 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 Louisiana’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 over their uncompensated costs (“UCC”) 

of caring for low-income patients. The State made payments from federal 

funding under a series of Medicaid 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 incurred) to 

occur at the end of the year. From 1995-97, the plan 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 

taken to recover such overpayment.” (Louisiana concedes that this provision 

required it to repay excess amounts for those years.) From 1997-2003, 

however, an amended plan deleted this explicit reimbursement duty, but the 

plan provided that “[relevant] payments to a hospital . . . shall not exceed the 

hospital’s net uncompensated cost . . . for the state fiscal year to which the 

payment is applicable.” Further, the payment system is deemed to be 

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“retrospective,” in accord with the procedure outlined in the prior plan. The 

only reference to recoupment of overpayments from providers was modified 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 that 

a hospital did not 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

Although 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 decided 

that compliance with the plans required Louisiana to account for and recoup 

excess UCC payments at the end of each fiscal year. 

Louisiana’s challenge to the administrative decision focuses on two 

arguments. First, the State contends that its plans distinguished 

“retrospective” payment from “recoupment,” and after 1997, the plans 

expressly did not require recoupment of overpaid UCC from the hospitals and 

reimbursement to the federal government. Second, the State’s removal of a 

recoupment provision from the later plans means that the State was no longer 

obliged to seek recoupment. We discuss each of these. 

1 Louisiana did not furnish a separate plan for 2005-06 but the parties treat it like

these predecessor plans.

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1. Retrospective payments versus recoupment. 

Louisiana argues that the Board failed to distinguish the State’s 

payment system from a (federally 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 further 

reimbursement for the public hospitals whose UCC had been underpaid by 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 aspires to bind HHS to that system because States have 

“flexibility” in designing their Medicaid plans, and the Board ordinarily defers 

to a State’s reasonable interpretation of its own plan. 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 decisions have long recognized that “retrospective” 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, which 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. In 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 subject to retroactive adjustment”), with Massachusetts 

v. Sec’y of Health & Human Servs., 749 F.2d 89, 90-91 (1st Cir. 1984)

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(describing 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 offset 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 state plan, and, with very limited 

exceptions that do not apply here, requires states to return the federal share 

of any payments to hospitals in excess of the amount determined according to 

the state plan.”2 

The Board interpreted Louisiana’s plans according to their precise terms 

and held them to be “retrospective” and therefore to require an annual 

reconciliation of payments to actual costs incurred by the hospitals and a 

return of excess payments. We need not “defer” to the Board’s interpretation 

of the Louisiana law to conclude that it correctly reads the plans. That 

Louisiana advocates its ability to “recoup” additional funds from the federal 

government in case of UCC underpayments demonstrates how retrospective 

reconciliation works in its plans, and there is no textual basis 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.

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2. Removal and revision of the recoupment provision. 

Louisiana removed the express 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 that a hospital did not qualify.” According to 

the State, this change 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 

administrative efficiency and limited disruption to the hospitals that serve 

principally needy families, “especially . . . where Louisiana expected its 

forecasts of UCC to avoid significant overstatement, such that recoupments 

would serve little purpose.” Consequently, the Board erred by rejecting its 

interpretation.3

The 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 general 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 questioned “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 reimbursement for Medicaid 

services.” Where “a state has effectively overpaid itself, adjustment of the 

3 If the State so carefully adjusted its forecasts to avoid significant overstatement of 

UCC, how did it amass $240 million in overpayments in ten years?

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federal share is more important than the specific source of state funds used to 

make the adjustment.” In other words, 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 of the recoupment provision was “inadvertent,” the 

other reasons for the Board’s decision are compelling and render its decision 

neither arbitrary and capricious nor contrary to law.

Further supporting the Board’s position is that other circuit courts 

uniformly uphold states’ obligations to return the federal share of Medicaid 

overpayments before 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 (2d Cir. 1985); Massachusetts v. Sec’y of Health & Human Servs., supra at 

90, 95. That these decisions did not deal with UCC overpayments is irrelevant, 

as all relied on 42 U.S.C. § 1396b(d)(2)(C), the generally applicable Medicaid 

payment adjustment provision. 

For the foregoing reasons, the district court judgment, affirming the 

Board’s decision against Louisiana, is AFFIRMED.

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