United States Court of Appeals

For the Eighth Circuit

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No. 17-2896

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Children’s Health Care, doing business as Children’s Hospitals and Clinics of

Minnesota; Gillette Children’s Specialty Healthcare

lllllllllllllllllllllPlaintiffs - Appellees

v.

Centers for Medicare and Medicaid Services; Seema Verma, Administrator of the

Centers for Medicare and Medicaid Services, in her official capacity; Alex M.

Azar, II, Secretary of Health and Human Services, in his official capacity

lllllllllllllllllllllDefendants - Appellants

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Appeal from United States District Court 

for the District of Minnesota - Minneapolis

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Submitted: June 13, 2018

Filed: August 20, 2018

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Before WOLLMAN, ARNOLD, and KELLY, Circuit Judges.

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WOLLMAN, Circuit Judge.

The Centers for Medicare and Medicaid Services; Seema Verma, the Centers’

Administrator; and Alex M. Azar, II, Secretary of Health and Human Services,
(collectively, the Secretary), appeal the district court’s partial grant of summary 1

judgment for Children’s Health Care and Gillette Children’s Specialty Healthcare 2

(collectively, Children’s Hospitals). The Secretaryalso challengesthe district court’s

decision to vacate a Medicaid policy—Frequently Asked Question 33—which

explained how to calculate a hospital’s uncompensated medical care costs. We

affirm.

The federal government and individualstates administer theMedicaid program,

which provides medical care to individuals “whose income and resources are

insufficient to meet the costs of necessarymedicalservices.” See 42 U.S.C. § 1396-1. 

Each state submits a plan explaining how it will provide medical care to Medicaid

patients, and if the Secretary for Health and Human Services approves the plan, the

state may receive federal funds. Id. The cost of treating Medicaid patients, however,

exceeds Medicaid’s resources. As a result, Children’s Hospitals assert that they

receive $0.57 to $0.70 on every dollar spent providing Medicaid care, resulting in

multimillion dollar losses each year. To help ease such financial strain, Congress

authorized Disproportionate Share Hospital Payments (Hospital Payments), which

allow states to provide additional funds to hospitals serving large numbers of

Medicaid patients. See 42 U.S.C. § 1396a(a)(13)(A)(iv).

Congress subsequently limited Hospital Paymentsto the “costs incurred during

the year of furnishing hospitalservices.” 42 U.S.C. § 1396r-4(g)(1)(A). In 2008, the

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The Honorable Wilhelmina M. Wright, United States District Judge for the

1

District of Minnesota.

Children’s Health Care does business as Children’s Hospitals and Clinics of 2

Minnesota.

The statute states in part: 3

A payment adjustment during a fiscal year shall not be considered to be

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Secretary promulgated the following formula for calculating “[t]otal annual

uncompensated care costs:”

The total annual uncompensated care cost equals the total cost of care

for furnishing inpatient hospital and outpatient hospital services to

Medicaid eligible individuals and to individuals with no source of third

party coverage for the hospital services they receive less the sum of

regular Medicaid FFS rate payments, Medicaid managed care

organization payments, supplemental/enhanced Medicaid payments,

uninsured revenues, and Section 1011 payments for inpatient and

outpatient hospital services.

42 C.F.R. § 447.299(c)(16) (2009). Under this formula, a hospital calculates the

4

total cost of providing medical care to Medicaid eligible patients and uninsured

patients. From that total, the hospital subtracts payments received from Medicaid, 5

consistent with subsection (c) of this section with respect to a hospital

if the payment adjustment exceeds 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 ofthird party coverage) for services provided during the

year.

The Secretary amended the relevant language of the controlling

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regulation—42 C.F.R. § 447.299(c)—on June 2, 2017. Children’s Hospitals’

complaint challenges the regulation as it existed before the amendment. The current

regulation is not at issue in this case, and we make no legal determinations regarding

it. 

The Secretary advances a strained reading of § 447.299(c)(9)-(11), which uses 5

language similar to § 447.299(c)(16). In essence, the Secretary argues that the words

“total cost of care for furnishing . . . hospital services,” account for payments from

Medicaid and private insurance in radically different manners. Nothing in the

regulation or the underlying statutes indicates that those words operate in that way.

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payments by uninsured patients, and payments under Section 1011. 

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Although the language ofthe regulation may appear comprehensive, it does not

state that private insurance payments should be deducted when calculating the “total

annual uncompensated care costs” for Medicaid eligible individuals. To address this 7

issue, the Secretary posted an online set of Frequently Asked Questions regarding

§ 447.299. Question 33—which was not subject to notice and comment procedures

under the Administrative Procedures Act—explained that “hospitals should [] offset

both Medicaid and third-party revenue associated with the Medicaid eligible day

against the costs for that day to determine any uncompensated amount.” Question 33

requires hospitals to include private insurance payments when calculating

“uncompensated care costs.” The district court determined that because Question 33

constituted a legislative rule that was subject to notice and comment procedures, the

Secretary was without authority to adopt it as an interpretative rule.

We review de novo whether an agency’s promulgated rule is legislative or

interpretative. Iowa League of Cities v. EPA, 711 F.3d 844, 872 (8th Cir. 2013). 

one set of words should simultaneously have two different, opposing meanings. We

thus decline to adopt this interpretation.

Section 1011 payments dealt with emergency health services provided to 6

undocumented aliens. These payments are not relevant here. Medicare Prescription

Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, § 1011,

117 Stat. 2066, 2432-35.

Some children may have private insurance coverage through their parents and

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be eligible for Medicaid because they have a qualifying disability. See 42 U.S.C.

§ 1396a(a)(10)(A)(i)(II), (ii)(I). When this dual eligibility occurs, the insurance

company covers the insured’s medical costs, and Medicaid covers any deficiency

between the insurance company’s coverage and Medicaid’s standard payment. The

Secretary asserts that, in practice, this results in Medicaid routinely paying nothing. 

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When reviewing an agency’s actions, we will “hold unlawful and set aside” any

action that is “without observance of procedure required by law.” 5 U.S.C.

§ 706(2)(D). Under 5 U.S.C. § 553(b) and (c), “[a]gencies must conduct ‘rule

making’ in accord with the [Administrative Procedure Act’s] notice and comment

procedures.” Iowa League of Cities, 711 F.3d at 855 (citing 5 U.S.C. § 553(b), (c)). 

This requirement applies to all new legislative rules but excludes interpretative rules

and general statements of policy. Id. (citations omitted). “Whether or not a binding

pronouncement isin effect a legislative rule thatshould have been subjected to notice

and comment procedures thus depends on whether it substantively amends or adds

to, versus simply interpreting the contours of, a preexisting rule.” Id. at 873 (citing

U.S. Telecomm. Ass’n v. FCC, 400 F.3d 29, 34-35 (D.C. Cir. 2005)). “Expanding

the footprint of a regulation by imposing new requirements, rather than simply

interpreting the legal norms Congress or the agency itself has previously created, is

the hallmark of legislative rules.” Id. (citations omitted).

The Secretary argues that Question 33 is an interpretative rule because it

merely clarifies and explains how the existing law applies to a particular situation. 

The Secretary compares Question 33 to the “informal Medicare reimbursement

guideline” in Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 90 (1995), in

which the Supreme Court upheld a reimbursement guideline that explained the

Secretary’s decision to depart from generally accepted accounting principles when

amortizing bond defeasance losses. Id. at 101. The Court reasoned in part that

although the regulations required the use of “[s]tandardized definitions, accounting,

statistics, and reporting practices,” the reimbursement guideline did “not amount to

a substantive change to the regulations” because the Secretary was not required to

“address every conceivable question” that might arise “in the process of determining

equitable reimbursement.” Id. at 92, 96, 101. The Secretary was thus free to

distinguish between hospital accounting practices and reimbursement practices. Id.

92-95. The Secretary argues that Question 33, like the reimbursement guideline in

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Shalala, merely clarifies what is already in the regulation and its preamble. The 8

Secretary asserts that the words “uncompensated” and “unreimbursed” necessarily

require Children’s Hospitals to include private insurance payments when calculating

their eligibility for Hospital Payments. We disagree.

Like the district court, we conclude that by imposing new reporting

requirements for private insurance payments, Question 33 expanded the footprint of

§ 447.299 and thus constituted a substantive change in the regulation. As noted by

the Fourth Circuit Court of Appeals, Question 33 is a legislative rule, in part, because

it “does not derive from the [underlying] statute or the 2008 rule.” Children’s Hosp.

of the King’s Daughters, Inc. v. Azar, -- F.3d --, 2018 WL 3520399 (4th Cir. July 23,

2018). No authority cited by the Secretary—other than Question 33—addresses

private insurance payments. Unlike the general regulations at issue in Shalala,

§ 447.299 has specific language explicitly stating what payments must be deducted

from each hospital’s “total cost of care.” The preamble that the Secretary relies on

defines “uncompensated care costs” as “the costs incurred by that hospital in

furnishing services during the year to Medicaid patients and the uninsured, less other

Medicaid payments made to the hospital, and payments made by uninsured patients.” 

73 Fed. Reg. at 77,904. The Secretary’s own definition of “uncompensated care

costs” does not include private insurance payments. In essence, the Secretary asks

us to read substantive changes into the regulation under the guise of interpretation. 

The 2008 preamble states in part: 8

[W]e believe the costs attributable to dual eligibles [for Medicare and

Medicaid] should be included in the calculation of the uncompensated

costs of serving Medicaid eligible individuals. But in calculating those

uncompensated care costs, it is necessary to take into account both the

Medicare and Medicaid payments made, since those payments are

contemplated under Title XIX.

73 Fed. Reg. at 77,912. 

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We decline to do so. 

Furthermore, assuming that Congress delegated the Secretary the authority to

enact Question 33—an issue we do not now decide—the use of “expressly delegated

authority” leads the courts to “generally treat the agency action as legislative, rather

than interpretive, rulemaking.” Children’s Hosp. of the King’s Daughters, Inc., --

F.3d at -- (citing Iowa League of Cities, 711 F.3d at 873); see also N.H. Hosp. Ass’n

v. Azar, 887 F.3d 62, 71 (1st Cir. 2018) (same). As noted by the First Circuit Court

of Appeals, this general rule is appropriate here because Rule 33 did not rely on an

“interpretive methodology,” but “looks to us more as if the Secretary is using

delegated power to announce a new policy out of whole cloth, rather than engaging

in an interpretive exercise.” N.H. Hosp. Ass’n, 887 F.3d at 72. For these reasons, we

join the First and Fourth Circuits in concluding that Question 33 is a legislative rule

that was not adopted in accordance with the procedure required by law and thus must

be set aside, notwithstanding the Secretary’s policy arguments to the contrary. N.H.

Hosp. Ass’n, 887 F.3d at 70, 77; Children’s Hosp. of the King’s Daughters, Inc., --

F.3d at --; 5 U.S.C. § 706(2)(D).

The judgment is affirmed.

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