# U ni te d S ta te s Co ur t of A pp ea ls For the Eig hth Circu it

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No. 1 7- 28 96

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Ch il dr en ’s Healt h C are, d oi ng bu si ne ss as C hi ld ren ’s Hos pi ta ls an d C li ni cs of

Mi nn es ot a; Gil le tt e Ch il dr en ’s Spe ci al ty H eal th care

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff s - Ap pe ll ees

v.

Cen te rs for

Med ic are a nd Med ic ai d S erv ic es ; Se em a Verm a, Adm in is tra to r of th e Cen te rs for Med ic are a nd Med ic ai d S erv ic es , in he r of fic ia l ca pa ci ty; Alex M. Azar, II, Se cret ary of

Heal th an d Hu m an Serv ic es , in hi s o ffi ci al cap aci ty

ll ll ll ll ll ll ll ll ll ll l Defe nd

an ts - App el la nt

s

__ __ __ __ __ __ App eal fro m

Uni te d S ta te s Di st ric t Co ur t fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

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Su bm it te d: Ju ne 13 , 20 18 Fi le d: Aug us t 2 0, 2 01 8

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Befo re WOL LMAN, ARNOLD, and KELLY , Cir cu it Ju dg es

.

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W OLLMAN, Circ ui t J ud ge

.

The Cen te rs fo r Med ic are an d Med ic ai d Serv ic es ; Seem a Verm a, th e Cen te rs ’ Adm in is t r a t o r; an d Alex M. Azar, II, Secr et ary of Heal th an d Hum an Serv ic es ,(co ll ect iv el y , th e Secr et ary), ap pe al th e di st ric t c o u r t ’s pa rti al gr an t of su m m ary 1 jud gm en t fo r Ch il dr en ’s H e a lt h Care an d Gil le tt e Ch il dr en ’s Sp eci al ty Heal th care 2 (co ll ect iv el y , Ch il dr en ’s Hos pi ta ls ). The Secr et ar y al so ch al le ng es th e di st ric t co ur t’s de ci si on to va cat e a Med ic ai d po li cy —Fr eq ue nt ly A s k e d Que st io n 33 —wh ic h

ex pl ai ne d ho w to cal cu la te a ho sp it al ’s un co m pe ns at ed m ed ic al care co s t s

. W e affi rm

.

T he fe de ra l go ve rn m en t an d in di vi du al st at es ad m ini ste r the Me dic ai d pr ogr am , whi ch pr ov id es med ic al care to in di vi du al s “ who se in co m e an d res ou rces are in su ffi ci en t to m eet th e co st s of ne ces sa ry m ed ic al se rv ic es .” See 42 U.S.C. § 13 96 -1

. Each st at e su bm it s a pl a n ex pl ai ni ng ho w it wil l pr ov id e m ed ic al care to Med ic ai d

pa ti en ts , and if t he Secr et ary fo r Heal th an d Hum an Serv ic es ap pr ov es th e p la n, t he

st at e m ay rece iv e fed eral fu nd s. Id

. The co st of tre at in g Med ic ai d pa ti en ts , ho wev er,

ex ceed s Med ic ai d’s res ou rces

. As a res ul t, Ch il dr e n ’s Hos pi ta ls as se rt th at th ey

rece iv e $0 .57 t o $ 0

. 7 0 on ev ery do ll ar sp en t pr ov id in g Med ic ai d care , res ul ti ng in

m ul ti m il li on do ll ar lo ss es each y ear. To he lp eas e su ch fin an ci al st rai n, Co ng res s

au th or iz ed Dis pr op or ti on at e Sh are Hos pi ta l Paym en ts (Ho sp it al Paym en t s)
, whi ch
al lo w st at es to pr ov id e ad di ti on al fu nd s to ho sp it al s se rv in g la rg e nu m be rs of Med ic ai d p at ie nt s. See 42 U.S.C. § 1 39 6a (a)( 13 )(A)(i v)

.

Co ng res s su bs eq ue nt ly li m it ed Hospita l Pa y m ents to th e “ co st s in cu rred du rin g th e y ear of fu rn is hi ng ho sp it al se rv ic es .” 42 U.S.C. § 13 96 r-4 (g )(1 )(A). In 20 08
, th e 3

The Hon or ab le W il he lm in a M. W rig ht
, Uni te d St at es Dis tri c t Ju dg e fo r th e 1 Dis tri ct of M in ne so ta

. Ch il dr en ’s Heal th Care do es bu si ne ss as Ch il dr en ’s Hos pi ta ls an d Cl in ic s of 2 Mi nn es ot a.

The st at ut e st at es in pa rt: 3

A pa y m en t ad

jus tm en t du rin g a fis cal y ear sh al l no t be co ns id ered to be

-2

-Secr et ary pr om ul ga te d th e fo ll owi ng f o r m ul a fo r cal cu la ti ng “ [t]ot al an nu al

un co m pe ns at ed care co st s: ”

The to ta l an nu al un co m

pe ns at ed care co st eq ua ls th e to ta l co st of care fo r fu rn is hi ng in pa ti en t ho sp it al an d ou tp at ie nt ho s p i t al se rv ic es to Med ic ai d el ig ib le in di vi du al s an d to in di vi du al s wit h no so ur ce of th ird
pa rty co ve rag e fo r th e ho sp it al se rv ic es th ey rece i v e l e s s th e su m of
reg ul ar Med ic ai d FFS rat e pa y m en ts , Med ic ai d m an a g e d c are

or ga ni zat io n pa y

m en ts , su pp le m en ta l/ en ha nc ed Med ic ai d pa y m en ts , un in su red rev en ue s, an d Sect io n 10 11 pa y m en ts f o r i n pa ti en t an d

ou tp at ie nt ho sp it al ser vi ces

.

42 C.F.R. § 44 7.2 99 (c)( 16 ) (2 00 9)

. Und er th is fo rm ul a, a h o s p i t a l cal cu la te s th e 4

to ta l co st of pr ov id in g m ed ic al care to Med ic ai d el ig ib le pa t i en ts an d un in su red

pa ti en ts

. Fro m

th at to ta l, t he ho sp it al su bt ract s p ay m en ts rece iv ed fro m Med ic ai d, 5

co ns is te nt wit h s ub se ct io n (c ) of th is se ct io n wit h res pe ct to a ho sp it al if th e pa y m en t ad

jus tm en t ex ceed s th e co st s in cu rred du rin g th e y ear of fu rn is hi ng ho sp it al se rv ic es (as de te rm in ed by the Secr et ary an d n et of
pa y m en ts un de r th is su bc ha pt er, o t he r th an un de r th is se ct io n, an d by

un in su red pa ti en ts ) by th e ho sp it al to in di vi du al s who ei th er are el ig ib le fo r m ed ic al as si st an ce un de r th e St at e pl an or ha ve no he al th in su ran ce (o r ot he r so ur ce of th ird pa rty co ve rag e) fo r se rv ic es pr ov id ed du rin g th e y ear.

The Secr et ary am en de d th e r e le va nt la ng ua ge of th e co nt ro ll in g 4
reg ul at io n— 42 C.F.R. § 44 7.2 99 ( c)— on Ju ne 2, 20 17

. Ch il dr en ’s Hos pi ta ls ’

co m pl ai nt ch al le ng es th e reg ul at io n as it ex is te d be fo re th e am en dm en t. The cu rren t reg ul at io n is no t at is su e in th is cas e, an d we m ak e no le ga l de te rm in at io ns reg ard in g it

. The Secr et ary ad va nc es a st rai ne d read in g of § 44 7.2 99 (c)( 9) -(1 1)
, whi ch us es

5 la ng ua ge si m il ar to § 44 7.2 99 (c)( 16 ). In es se nc e, th e Secr et ary arg ue s th at th e wor ds

“ to ta l co st of care fo r fu rn is hi ng

. . . h o s p it al se rv ic es ,” acco un t fo r pa y m en ts fro m Med ic ai d an d pr iv at e in su ran ce in rad ic a l l y di ffer en t m an ne rs

. Not hi ng in th e reg ul at io n o r th e u nd erl y in g s ta tu te s i nd ic at es th at th os e wor ds op erat e in th at way

.
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-pa y m en ts by uni ns ur ed pa ti en ts , and pa y m en ts un de r Sec ti on 10 11

. 6

Alt ho ug h th e la ng ua ge of th e reg ul at ion m ay ap pe ar co m pr eh en si ve , it do es no t
st at e th at pr iv at e in su ran ce pa y m en ts sh ou ld be de du ct ed whe n cal cu la ti ng th e “ to ta l

an nu al un co m

pe ns at ed care co st s” fo r Med ic ai d el ig ib le in di vi du al s. To ad dr es s th is 7
is su e, th e Secr et ary po st ed an on li ne se t of Freq ue nt ly Ask e d Que st io ns reg ard in g § 44 7.2 99

. Que st io n 33 —wh ic h was no t su bjec t to no ti ce an d co m m en t pr oc ed ur es

un de r th e Adm in is tra ti ve Pro ced ur es Act— ex pl ai ne d th at “ ho sp it al s sh ou ld [] of fs et b ot h Med ic ai d an d th ird -p art y rev en ue as so ci at ed wit h th e Med ic ai d el ig i b l e d a y
ag ai ns t th e co st s fo r th at da y to de te rm in e an y un co m pe ns at ed am ou nt .” Que st io n 33

req ui res ho sp it al s to in cl u d e pr iv at e in su ran ce pa y m en ts whe n cal cu la ti ng

“ un co m pe ns at ed care co st s.” The di st ric t co ur t de te rm in ed th at be cau se Que st io n 33

co ns ti tu te d a le gi sl at iv e ru le th at was su bjec t to no ti ce an d co m m en t pr oc ed ur es , th e Secr et ary was wit ho ut au th or it y to ad op t i t as an in te rp ret at iv e ru le

.

W e rev ie w de no vo whe th er an ag en cy ’s pr om ul ga te d ru le is l e g i s l a t i ve or i nt erp ret at iv e. Io wa Leag ue of Ci ti es v. EPA, 71 1 F.3 d 84 4, 87 2 (8 th Ci r. 20 1 3 )

.

on e se t of wor ds sh ou ld si m ul ta ne ou sl y ha ve two di ffer en t, op po si ng m ean in gs

. W e th us de cl in e to ad op t t hi s i nt erp ret at io n.

Sect io n 10 11 pa y m en ts de al t wit h em er g e n c y he al th se rv ic es pr ov id ed to 6

un do cu m en te d al ie ns

. The se pa y m en ts are no t rel ev an t he re. Med ic are Pres cri pt io n Dru g, Im pr ov em en t, an d M od ern iz at io n Act o f 20 03 , Pub . L. No. 10 8- 17 3, § 10 11
, 11 7 S ta t. 2 06 6, 2 43 2- 35

.
So m e ch il dr en m ay ha ve pr iv at e in su ran ce co ve rag e th ro ug h th ei r pa ren ts an d 7 be el ig ib le fo r Med ic ai d be cau se th ey ha ve a qu al ifyin g di sa bi li ty. See 42 U.S.C. § 13 96 a(a) (1 0) (A)(i )(II)
, (ii )(I). W he n th is du al el ig ib il it y oc cu rs , th e i n s u r a n ce

c o mp a n y co ve rs th e in su red ’s m ed ic al co st s, an d Med ic ai d co ve rs an y de fic ie n c y be twee n th e in su ran ce co m pa ny’ s co ve rag e an d Med ic ai d’s st an da rd pa y m en t. The Secr et ary as se rts th at , in pr act ic e, th is res ul ts in Med ic ai d ro ut in el y pa y in g no th in g.

-4

-Wh e n r e v i e win g an ag en cy ’s act io ns , we wil l “ ho ld un la wfu l an d se t as id e” an y

act io n th at is “ wit ho ut ob se rv an ce of pr oc ed ur e req ui red b y l a w

. ” 5 U.S.C. § 70 6( 2) (D). Und er 5 U.S.C. § 55 3( b ) an d (c), “ [a]gen ci es m us t co nd uc t ‘rule

m ak in g’ in acco rd wit h th e [A d m in is tra ti ve Pro ced ur e Act’s] no ti ce an d co m m en t
pr oc ed ur es .” Io wa Leag ue of Ci ti es , 71 1 F.3 d at 85 5 (ci ti ng 5 U.S.C. § 55 3( b)
, (c))

. Thi s req ui rem en t ap pl ie s to al l ne w le gi sl at iv e ru le s bu t ex cl ud es in te rp ret at iv e ru le s

an d ge ne ral st at em en ts of po li cy

. Id

. (ci ta ti on s om it te d)

. “ W he th er or no t a bi nd in g
pr on ou nc em en t is in effe ct a le gi sl at iv e ru le th at sh ou ld ha ve be en su bjec te d to no ti ce

an d co m m en t pr oc ed ur es th u s de pe nd s on whe th er it su bs ta nt iv el y am en ds or ad ds

to , ve rs us si m

pl y in te rp ret in g t he co nt ou rs of, a pr eex is ti ng ru le .” Id

. at 87 3 (cit in g U.S. Tele co m

m

. Ass ’n v. FCC, 40 0 F.3 d 29
, 34 -3 5 (D.C. Ci r. 20 05 )). “ Exp an di ng th e fo ot pr in t of a reg ul at io n by im po si ng ne w req ui rem en ts , rat he r th an s i m pl y in te rp ret in g t he le ga l no rm s Con gr es s or the ag en cy it se lf has pr ev io us ly crea te d, i s th e h al lm ark of l eg is la ti ve rul es .” Id . (ci ta ti on s o m it te d)

.

The Secr et ary arg ue s th at Q u e s t io n 33 is an in te rp ret at iv e ru le be cau se it

m erel y cl ari fie s an d ex pl ai ns ho w th e ex is ti ng la w a p p l i e s t o a pa rti cu la r si tu at io n. Th e Secr et ary co m

pa res Que st io n 33 to th e “ in fo rm al Med ic are rei m bu rs em en t
gu id el in e” in Sh al al a v. Gue rn se y Mem or ia l H o s p i ta l, 51 4 U.S. 87
, 90 (1 99 5)
, in
whi ch th e Su pr em e Co ur t up he ld a rei m bu rs em en t gu id el in e th a t ex pl ai ne d th e Secr et ary’ s de ci si on to de pa rt f r o m g e n eral ly acce pt ed acco un ti ng pr in ci pl es whe n

am or ti zi ng bo nd de fea s a n ce lo ss es

. Id

. at 10 1. The Co ur t reas on ed in pa rt th at al th ou gh th e reg ul at io ns req ui red th e us e of “ [s ]tan da rd iz ed de fin it io ns , acco un ti ng , st at is ti cs , and rep or ti ng pr act ic es ,” th e rei m bu rs em en t gu id el in e di d “ no t am ou nt to

a s ub st an ti ve ch an ge to th e reg ul at io ns ” be cau se th e Secr et ary was no t req ui red to

“ ad dr es s ev ery co nc ei va bl e qu es ti on ” th at m ig ht ari se “ in th e pr oc es s of de te rm in in g
eq ui ta bl e rei m

bu rs em en t.” Id

. at 92
, 96
, 10 1. The Secr et ary w a s t h u s f r ee to di st in gu is h be twee n ho sp it al acco un ti ng pr act ic es an d rei m bu rs em en t pr act ic es

. Id

. 92 -9 5. The Secr et ary arg ue s t h a t Que st io n 33 , l ik e th e rei m bu rs em en t gu id el in e in

-5

-Sh al al a, m erel y cl ari fie s wha t is al read y in th e reg ul at io n an d i t s pr eam bl e. The 8
Secr et ary as se rts th at th e wor ds “ un co m pe ns at ed ” an d “ un rei mb ur se d” ne ces sa ril y
req ui re Ch il dr en ’s Hos pi ta ls to in cl ud e pr iv at e in su ran ce pa y m en ts whe n cal cu la ti ng th ei r el ig ib il it y

for Hos pi ta l Pa y m en ts . W e d is ag ree.

Lik e th e di st ric t co u r t , we co nc lu de th at by im po si ng ne w rep or ti ng
req ui rem en ts fo r pr iv at e in su ran ce pa y m en ts , Que st io n 33 ex pa nd ed th e fo ot pr in t of § 4 47 .29 9 a nd th us co ns ti tu te d a su bs ta nt iv e ch an ge in th e reg ul at io n. As no te d b y th e Fo ur th Ci rcu it Co ur t of App eal s, Que st io n 33 is a le gi sl at iv e ru le
, in pa rt, be cau se it “ do es no t de riv e fro m th e [u nd erl y in g] st at ut e or th e 20 08 ru le .” Ch il dr en ’s Hos p. of th e Kin g’s Dau gh te rs , In c. v. Azar, -- F.3 d --, 20 18 W L 35 20 39 9 (4 th Ci r. Ju ly 23
, 2 0 1 8 )

. No au th or it y ci te d by th e Secr et ary—ot he r th an Que st io n 33 —ad dr es se s
pr i v a t e in su ran ce pa y

m en ts

. Unl ik e th e ge ne ral reg ul at io ns at is su e in Sh al al a, § 4 47 .29 9 has sp eci fic la ng ua ge ex pl ic it ly st at in g what pa y m en ts m us t b e d ed uc te d
fro m each ho sp it al ’s “ to ta l co st of care .” The p r e a mble th at th e Secr et ary rel ie s on de fin es “ un co m

pe ns at ed ca r e co st s” as “ th e co st s in cu rred by th at ho sp it al in
fu rn is hi ng se rv ic es du rin g th e y ear to Med ic ai d pa ti en ts an d th e un in su red
, le ss ot he r Med ic ai d pa y m en ts m ad e to th e ho sp it al
, an d pa y m en ts m ad e by un in su red pa ti en ts .”
73 Fed

. Reg

. at 77 ,90 4. The Secr et ary’ s own de fin it io n of “ un co m pe ns at ed care

c o s t s” do es no t in cl ud e pr iv at e in su ran ce pa y m en ts

. In es se nc e, th e Secr et ar y a s k s

us to read su bs ta nt iv e ch an ge s in to th e reg ul at io n un de r th e gu is e of in te rp ret at io n.

The 20 08 pre am

bl e st at es in pa rt: 8

[W] e be li ev e th e co st s at tri bu ta bl e to du al el ig ib le s [fo r Med ic are an d Med ic ai d] sh ou ld be in cl ud ed in th e cal cu la ti on of t he un co m pe ns at ed

co st s of se rv in g Med ic ai d el ig ib le in di vi du al s. Bu t in cal cu la ti ng th os e

un co m pe ns at ed care co st s, i t i s nec es sa ry to tak e in to acco un t b ot h t he Med i care an d Med ic ai d pa y m en ts m ad e, si nc e th os e pa y m en ts are

co nt em pl at ed un de r Tit le XIX.

73 Fed . Reg . at 7 7,9 12

.
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-W e d ecl in e to do so

.

Fu rth erm or e, as su m in g th at Co ng res s de le ga te d th e Secr et ary th e au th or it y to

en act Que st io n 33 —an is su e we do no t no w de ci de —t he us e of “ ex pr es sl y de le ga te d

au th or it y ” le ad s th e co ur ts to “ ge ne ral ly tre at th e ag en cy act io n as le gi sl at iv e, rat he r th an in t e r pr et iv e, ru le m ak in g.” Ch il dr en ’s Hos p. of th e Kin g’s Dau gh te rs , In c.,

-- F.3 d at -- (ci ti ng Io wa Leag ue of Ci ti es , 71 1 F.3 d at 87 3) ; se e al so N.H. Hos p. Ass ’n

v. Azar, 88 7 F.3 d 62
, 71 (1 st Ci r. 20 18 ) (s am e). As no te d by th e Fi rs t Ci rcu it Co ur t of App eal s, th is ge ne ral ru le is ap pr op ria te he re be cau se Ru le 33 di d no t rel y on an

“ in te rp ret iv e m et ho do lo gy,” bu t “ lo ok s to us m or e as if th e Secr et ary is us in g de le ga te d po wer to ann ou nc e a ne w po li cy ou t of whol e cl ot h, rath er tha n eng ag in g in an in te rp ret iv e ex erci se .” N.H. Hos p. Ass ’n, 88 7 F.3 d at 72

. Fo r th es e reas on s, we joi n th e Fi rs t an d Fo ur th Ci rcu it s in co nc lu di ng th at Que st io n 33 is a le gi sl at iv e ru le
th at was no t ad op te d in acco rd an ce wit h th e pr oc ed ur e req ui red by la w an d th us m us t be se t as id e, no twi th st an di ng th e Secr et ary’ s po li cy arg um en ts to th e co nt rary. N.H.
Hos p. Ass ’n, 8 87 F.3 d at 70 , 7 7; Ch il dr en ’s Hos p. o f th e Kin g’s Dau gh te rs , I nc ., -- F.3 d a t -- ; 5 U.S.C. § 7 06 (2 )(D).

The jud gm en t i s af

fir m ed

.

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