Court Opinion

ID: 4425037
Source: CourtListenerOpinion
Date Created: 2019-08-13 15:00:46.808065+00
Date Added: 2024-06-11T14:51:39.526090
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 9, 2019                 Decided August 13, 2019

                         No. 18-5135

   CHILDREN’S HOSPITAL ASSOCIATION OF TEXAS, ET AL.,
                     APPELLEES

                              v.

   ALEX MICHAEL AZAR, II, IN HIS OFFICIAL CAPACITY,
                   SECRETARY,
  DEPARTMENT OF HEALTH AND HUMAN SERVICES, ET AL.,
                   APPELLANTS

        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:17-cv-00844)

     Tara S. Morrissey, Attorney, United States Department of
Justice, argued the cause for the appellants. Mark B. Stern and
Samantha L. Chaifetz, Attorneys, Robert P. Charrow, General
Counsel, United States Department of Health & Human
Services, Janice L. Hoffman, Associate General Counsel,
Susan M. Lyons, Deputy Associate General Counsel, and
David L. Hoskins, Attorney, were with her on brief.

    David B. Salmons argued the cause for the appellees.
Geraldine E. Edens, Michael E. Kenneally, and Susan Feigin
Harris were with him on brief. Christopher H. Marraro
entered an appearance.
                                2

     Daniel G. Jarcho and Michael H. Park were on brief for
the amicus curiae Children’s Hospital Association in support
of the appellees and in support of affirmance.

   Before: HENDERSON and ROGERS, Circuit Judges, and
SENTELLE, Senior Circuit Judge.

    Opinion for the Court filed by Circuit Judge HENDERSON.

     KAREN LECRAFT HENDERSON, Circuit Judge: Under the
Medicaid Act (Act), the federal government provides each
state funds for distribution to hospitals that serve a
disproportionate number of low-income patients. See 42
U.S.C. § 1396-1. A state distributes the funds through
Disproportionate Share Hospital (DSH) payments. See id.
§ 1396r-4(b), (c). A hospital may not receive a DSH payment
that exceeds its “costs incurred” in furnishing hospital services
to low-income patients. Id. § 1396r-4(g)(1)(A). “Costs
incurred” are, inter alia, “determined by the Secretary” of the
United States Department of Health and Human Services
(Secretary). Id. In 2017, the Secretary promulgated a regulation
defining       “costs     incurred.”     Medicaid       Program;
Disproportionate Share Hospital Payments–Treatment of Third
Party Payers in Calculating Uncompensated Care Costs, 82
Fed. Reg. 16,114, 16,122 (Apr. 3, 2017) (“2017 Rule”). The
plaintiffs, a group of children’s hospitals that receive DSH
payments, argue that the regulatory definition is contrary to the
Medicaid Act and otherwise arbitrary and capricious. The
district court agreed that the definition is inconsistent with the
Act and vacated the 2017 Rule. Children’s Hosp. Ass’n of Tex.
v. Azar, 300 F. Supp. 3d 190 (D.D.C. 2018). We now reverse.
                               3
                        I. Background

      “Medicaid is a cooperative federal-state program through
which the Federal Government provides financial assistance to
States so that they may furnish medical care to needy
individuals.” Wilder v. Va. Hosp. Ass’n, 496 U.S. 498, 502
(1990). States implement their own Medicaid plans, subject to
the federal government’s review and approval. See 42 U.S.C.
§ 1396a. Treating the indigent proves costly even for hospitals
that receive Medicaid payments. Indeed, not all hospital
services are covered by Medicaid; not all costs associated with
covered services are allowed by Medicaid; and Medicaid does
not fully reimburse hospitals for all allowable costs associated
with covered services. Recognizing this, the Congress
authorizes supplemental payments (“DSH payments”) to
hospitals that serve a disproportionate share of low-income
patients (“DSH hospitals”). 42 U.S.C. § 1396a(13)(A)(iv)
(requiring that Medicaid payment rates “take into account (in a
manner consistent with section 1396r-4 of this title) the
situation of hospitals which serve a disproportionate number of
low-income patients with special needs”); 42 U.S.C. § 1396r-
4 (entitled “Adjustment in payment for inpatient hospital
services furnished by disproportionate share hospitals”). There
is both a state-specific and a hospital-specific limit on DSH
payments. The state-specific limit—not at issue in this case—
dictates that all DSH payments to DSH hospitals within a
single state must be drawn from the same pool of federal funds.
See 42 U.S.C. § 1396r-4(f). The hospital-specific limit, which
is at issue in this case, dictates that a DSH payment to a single
hospital cannot exceed:

       [T]he 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
                              4
       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.

42 U.S.C. § 1396r-4(g)(1)(A). This sentence—although not the
picture of clarity—establishes a few matters clearly. A DSH
hospital cannot receive a DSH payment that exceeds its “costs
incurred during the year of furnishing hospital services” to
Medicaid-eligible and uninsured individuals. The Secretary is
assigned the task of determining “costs incurred.” And “costs
incurred” are “net of payments under this subchapter, other
than under this section, and by uninsured patients”; in other
words, payments made by Medicaid and uninsured individuals
must be subtracted out when calculating a hospital’s “costs
incurred.” The dispute here is about whether payments made
by Medicare and private insurers should also be subtracted out.

     In 2003, the Congress enacted legislation requiring states
to submit annual reports and independent certified audits
regarding their DSH programs. See 42 U.S.C. § 1396r-4(j). The
reports must identify which hospitals receive DSH payments
and the audits must verify that the DSH payments comply with
the statutory requirements. Id.

    In 2008, the Centers for Medicare & Medicaid Services
(CMS), using the authority delegated it by the Secretary,
promulgated a regulation implementing the reporting and
auditing requirements. Medicaid Program; Disproportionate
Share Hospital Payments, 73 Fed. Reg. 77,904 (Dec. 19, 2008)
(“2008 Rule”). The 2008 Rule provided that each state must
report to CMS the cost of each DSH hospital’s “Total Medicaid
Uncompensated Care.” Id. at 77,950 (codified at 42 C.F.R.
§ 447.299(c)(11)). The 2008 Rule did not state whether third-
party payments, including payments by Medicare and private
                                5
insurers, were meant to be included in calculating the amount.
See id. Three courts of appeals concluded from this silence that
the 2008 Rule left uncertain whether these payments should be
considered. See Children’s Health Care v. Ctrs. for Medicare
& Medicaid Servs., 900 F.3d 1022, 1025 (8th Cir. 2018);
Children’s Hosp. of the King’s Daughters, Inc. v. Azar, 896
F.3d 615, 621 (4th Cir. 2018); N.H. Hosp. Ass’n v. Azar, 887
F.3d 62, 75 (1st Cir. 2018). One court of appeals concluded that
the 2008 Rule made clear that these payments should not be
considered. See Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029,
1043–44 (6th Cir. 2018).

     In 2010, CMS posted a Frequently Asked Questions
document on its website clarifying that payments made by
Medicare and private insurers should be included. See CMS,
Additional Information on the DSH Reporting and Audit
Requirements,        FAQs        33        and     34      (2010),
https://www.medicaid.gov/medicaid/finance/downloads/part-
1-additional-info-on-dsh-reporting-and-auditing.pdf.             A
number of hospitals brought suit, arguing that the FAQs
posting was invalid because it represented a substantive policy
change without notice and an opportunity for public comment.
In response, CMS issued a notice of proposed rulemaking and
subsequently promulgated the 2017 Rule. The 2017 Rule
establishes that payments by Medicare and private insurers are
to be included in calculating a hospital’s “costs incurred.” 82
Fed. Reg. at 16,122 (codified at 42 C.F.R. § 447.299(c)(10)).
It provides, inter alia, “costs . . . [a]re defined as costs net of
third-party payments, including, but not limited to, payments
by Medicare and private insurance.” Id. The Secretary explains
that considering payments by Medicare and private insurers
“best fulfills the purpose of the DSH statute,” is “necessary to
ensure that limited DSH resources are allocated to hospitals
that have a net financial shortfall in serving Medicaid patients”
and “is necessary to facilitate the Congressional directive . . .
                                6
of limiting the DSH payment to a hospital’s uncompensated
care costs.” Id. at 16,116, 16,118. He maintains that the 2017
Rule did not effect a legal change but instead continued the
preexisting policy. Id. at 16,119.

     The plaintiffs are four children’s hospitals in Minnesota,
Virginia and Washington and an association representing eight
children’s hospitals in Texas. They claim the 2017 Rule
violates the Administrative Procedure Act because it exceeds
the Secretary’s authority under the Medicaid Act and is the
product of arbitrary and capricious reasoning. See 5 U.S.C.
§ 706(2)(A), (C). The district court entered summary judgment
for the plaintiffs, holding that the Rule “is inconsistent with the
plain language of the Medicaid Act,” which “clearly indicates
which payments can be subtracted from the total costs incurred
during the year by hospitals” and “nowhere mentions
subtracting other third-party payments made on behalf of
Medicaid-eligible patients from the total costs incurred.”
Children’s Hosp. Ass’n of Tex., 300 F. Supp. 3d at 205, 207.
Having held the 2017 Rule invalid under § 706(2)(C) (“ultra
vires” prohibition), the district court did not reach the
plaintiffs’ § 706(2)(A) challenge (“arbitrary and capricious”
prohibition). Id. at 205. The district court ultimately vacated
the 2017 Rule and the Secretary timely appealed. Id. at 210–
11. Our review is de novo. See Ark Initiative v. Tidwell, 816
F.3d 119, 126–27 (D.C. Cir. 2016).

                          II. Analysis

               A. Exceeds Statutory Authority

    The plaintiffs first challenge the Rule as exceeding the
Secretary’s authority under the Medicaid Act, in violation of 5
U.S.C. § 706(2)(C). The familiar Chevron framework guides
our review. See Ass’n of Private Sector Colls. & Univs. v.
Duncan, 681 F.3d 427, 441 (D.C. Cir. 2012) (“Appellant’s
                                7
claims that various provisions of the challenged regulations are
‘in excess of statutory jurisdiction, authority, or limitations, or
short of statutory right,’ are reviewed under the well-known
Chevron framework.” (citation omitted) (quoting 5 U.S.C.
§ 706(2)(C))). “Under that framework, we ask whether the
statute is ambiguous and, if so, whether the agency’s
interpretation is reasonable.” King v. Burwell, 135 S. Ct. 2480,
2488 (2015). “This approach ‘is premised on the theory that a
statute’s ambiguity constitutes an implicit delegation from
Congress to the agency to fill in the statutory gaps.’” Id.
(quoting FDA v. Brown & Williamson Tobacco Corp., 529
U.S. 120, 159 (2000)). Because the delegation at issue here is
express rather than implied, see 42 U.S.C. § 1396r-4(g)(1)(A)
(“[T]he costs incurred during the year of furnishing hospital
services (as determined by the Secretary . . .) . . . .” (emphasis
added)); see also Transitional Hosps. Corp. of La. v. Shalala,
222 F.3d 1019, 1025 (D.C. Cir. 2000) (“as determined by the
Secretary” is “express delegation”), we have no need to search
for statutory ambiguity. We skip straight to asking whether the
Rule is reasonable. See Chevron U.S.A. Inc. v. Nat. Res. Def.
Council, Inc., 467 U.S. 837, 843–44 (1984) (“If Congress has
explicitly left a gap for the agency to fill, there is an express
delegation of authority to the agency to elucidate a specific
provision of the statute by regulation. Such legislative
regulations are given controlling weight unless they are
arbitrary, capricious, or manifestly contrary to the statute.”);
see also Transitional Hosps. Corp. of La., 222 F.3d at 1025 (if
delegation is express “we are bound to uphold [the Secretary’s]
determination as long as she exercises [her] discretion in a
reasonable way”).

    The plaintiffs offer four principal reasons the statute does
not grant the Secretary authority to require that payments by
Medicare and private insurers be considered in calculating a
hospital’s “costs incurred.” First, the statute exclusively
                               8
specifies which payments can be considered. Second, the Rule
renders superfluous the statute’s specification that certain
payments must be considered. Third, the Congress required
consideration of third-party payments in a different statutory
provision but not in the relevant provision. Fourth, the statute
plainly distinguishes costs and payments. We reject all four
arguments.1

     First, we disagree with the plaintiffs’ argument that the
statute exclusively specifies which payments can be considered
in calculating “costs incurred.” See Plaintiffs’ Br. at 58;
Children’s Hosp. Ass’n of Tex., 300 F. Supp. 3d at 207 (“On its
face, the statute clearly indicates which payments can be
subtracted from the total costs incurred during the year by
hospitals: (1) ‘payments under this subchapter,’ i.e., payments
made by Medicaid; and (2) payments made by uninsured
patients. The statute nowhere mentions subtracting other third-
party payments made on behalf of Medicaid-eligible patients
from the total costs incurred.”). 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. To conclude otherwise, we
would have to rely on the interpretive canon expressio unius
est exclusio alterius, which means “expressing one item of [an]
associated group or series excludes another left unmentioned.”
Chevron U.S.A. Inc. v. Echazabal, 536 U.S. 73, 80 (2002)
(alteration in original) (quoting United States v. Vonn, 535 U.S.
55, 65 (2002)). But that canon has been called a “feeble helper
in an administrative setting.” Adirondack Med. Ctr. v. Sebelius,
740 F.3d 692, 697 (D.C. Cir. 2014) (quoting Cheney R.R. Co.
v. ICC, 902 F.2d 66, 69 (1990)). And, in any setting, it “applies
only when ‘circumstances support[] a sensible inference that

    1
      We have also considered and reject the plaintiffs’ other
arguments.
                                9
the term left out must have been meant to be excluded.’” NLRB
v. SW Gen., Inc., 137 S. Ct. 929, 940 (2017) (quoting
Echazabal, 536 U.S. at 81); see also Barnhart v. Peabody Coal
Co., 537 U.S. 149, 168 (2003) (“[W]e do not read the
enumeration of one . . . to exclude the other unless it is fair to
suppose that Congress considered the unnamed possibility and
meant to say no to it.”). There is reason to believe the Congress
did not intend to exclude Medicare and private insurance
payments from consideration. Indeed, the parties agree that the
most common sources of payment for treating Medicaid-
eligible and uninsured individuals are Medicaid and the
uninsured. The Congress may have wanted to ensure that the
most common sources of payment must be considered but at
the same time allow the Secretary to decide whether less-
common sources of payment should be as well. Especially in
light of this plausible alternative explanation, we will not rely
on the expressio unius canon to find that the statute exclusively
specifies which payments can be considered in calculating
“costs incurred.” See Indep. Ins. Agents of Am., Inc. v. Hawke,
211 F.3d 638, 644 (D.C. Cir. 2000) (“[I]f there are other
reasonable explanations for an omission in a statute, expressio
unius may not be a useful tool.”).

    Second, we disagree with the plaintiffs’ argument that the
Rule renders superfluous the statute’s specification that
payments by Medicaid and the uninsured must be considered.
See Plaintiffs’ Br. 41–42; Children’s Hosp. Ass’n of Tex., 300
F. Supp. 3d at 207 (“To allow the Secretary to redefine ‘costs’
to net out a third category of payments—i.e., ‘third-party
payments, including but not limited to, payments by Medicare
and private insurance’ . . .—would ‘render the Congressional
definition of payments in the very same clause superfluous.’”
(quoting Children’s Hosp. of the King’s Daughters, Inc. v.
Price, 258 F. Supp. 3d 672, 687 (E.D. Va. 2017))); id.
(“[D]efendants’ interpretation of the statute would render
                              10
portions of the statutory language superfluous.”). The statute’s
specification that two forms of payment must be considered
removes the Secretary’s discretion as to those two forms of
payment. But it does nothing to disturb the Secretary’s
discretion as to other forms of payment, which may be
considered. See Tenn. Hosp. Ass’n, 908 F.3d at 1038 (“[T]he
fact that certain payments must be deducted from costs does
not mean that other payments cannot be.”); N.H. Hosp. Ass’n,
887 F.3d at 66 (“Congress identified two specific sources of
payment that must be offset against total costs, but otherwise
simply stated that ‘costs incurred’ are ‘as determined by the
Secretary.’”).

     Third, we reject the plaintiffs’ argument that we should
infer from the Congress’s requiring consideration of third party
payments under 42 U.S.C. § 1396r-4(g)(2)(A)—a provision
that, before 1995, allowed certain hospitals to receive
payments that exceeded their uncompensated costs—that it
meant to prohibit consideration of third party payments under
§ 1396r-4(g)(1)(A). Plaintiffs’ Br. 34–35. This argument is
based on the so-called “Russello presumption—that the
presence of a phrase in one provision and its absence in another
reveals Congress’ design.” City of Columbus v. Ours Garage
& Wrecker Serv., Inc., 536 U.S. 424, 435–36 (2002) (citing
Russello v. United States, 464 U.S. 16 (1983)). But that
presumption “grows weaker with each difference in the
formulation of the provisions under inspection.” Id. at 436.
Because sections (g)(1)(A) and (g)(2)(A) are fundamentally
different, we find the plaintiffs’ argument unpersuasive. See
Tenn. Hosp. Ass’n, 908 F.3d at 1039 (“There is no tension,
however, in Congress requiring third-party payment
deductions in subsection (g)(2)(A) and allowing third-party
payment deductions in subsection (g)(1)(A). The DSH
payments provided for in (g)(2)(A) are above and beyond those
mandated by (g)(1)(A); it therefore makes sense for Congress
                                11
to impose a hard limit on the ceiling of (g)(2)(A) funds—i.e.,
no more than 200% of the costs of serving Medicaid-eligible
patients, less payments from Medicaid, uninsured patients, and
‘third party payors’—while giving CMS more discretion to
calibrate the appropriate cap on the ‘standard’ DSH payments
discussed in (g)(1)(A).”).

     Fourth, we disagree with the plaintiffs’ argument that the
statute plainly distinguishes between costs and payments such
that payments can never be considered in calculating “costs
incurred.” See Plaintiffs’ Br. at 26, 30, 33, 40, 57. The statute
establishes that a hospital’s DSH payment cannot exceed its
“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).” 42 U.S.C. § 1396r-4(g)(1)(A). Both of the
parenthetical’s adjoining phrases modify “costs incurred”—
that is, “costs incurred” are both “as determined by the
Secretary” and “net of payments under [Medicaid] and by
uninsured patients.” Id. In other words, the statute requires that
some payments be considered in calculating a hospital’s “costs
incurred.” The argument that the statute separates costs and
payments therefore flies in the teeth of the statutory text.

    Contrary to the plaintiffs’ contention, we believe the 2017
Rule is consistent with the statute’s context and purpose, both
of which suggest DSH payments are meant to assist those
hospitals that need them most by covering only those costs for
which DSH hospitals are in fact uncompensated. See 42 U.S.C.
§ 1396r-4(g)(1) (heading of provision at issue: “Amount of
adjustment subject to uncompensated costs”); 2 42 U.S.C.
§ 1396r-4(j)(2)(C) (requiring states to certify that “[o]nly the

    2
      Headings, although “not commanding,” “supply clues” about
Congressional intent. Yates v. United States, 135 S. Ct. 1074, 1083
(2015).
                               12
uncompensated care costs of providing inpatient hospital and
outpatient hospital services to individuals described in
[(g)(1)(A)] are included in the calculation of the hospital-
specific limits.”); H.R. Rep. No. 103-111, at 211 (in enacting
DSH payment limit, Congress noted “some States have made
DSH payment[s] . . . to State psychiatric or university hospitals
in amounts that exceed the net costs, and in some instances the
total costs, of operating the facilities”); Tenn. Hosp. Ass’n, 908
F.3d at 1040 (“essence” of Congressional concern in enacting
statute was “that hospitals were double dipping by collecting
DSH payments to cover costs that had already been
reimbursed”). By requiring the inclusion of payments by
Medicare and private insurers, the 2017 Rule ensures that DSH
payments will go to hospitals that have been compensated least
and are thus most in need. Because the 2017 Rule is consistent
with the statute, it does not violate § 706(2)(C).

                B. Arbitrary and Capricious

      The plaintiffs next challenge the 2017 Rule as the product
of arbitrary and capricious reasoning, in violation of 5 U.S.C.
§ 706(2)(A). A reviewing court “shall . . . hold unlawful and
set aside agency action, findings, and conclusions found to be
. . . arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law.” 5 U.S.C. § 706(2)(A). An agency
rulemaking is arbitrary and capricious “if the agency has relied
on factors which Congress has not intended it to consider,
entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the
evidence before the agency, or is so implausible that it could
not be ascribed to a difference in view or the product of agency
expertise.” Motor Vehicles Mfrs. Ass’n of U.S. v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

    The plaintiffs first contend that “CMS has never
acknowledged, let alone justified, its new Rule’s departure
                                 13
from the 2008 rule.” Plaintiffs’ Br. 27–28. We disagree.
“Agencies are free to change their existing policies as long as
they provide a reasoned explanation for the change.” Encino
Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016). An
agency need not provide a more detailed justification for a
changed policy than it would for a brand-new policy. Id. But it
must provide “a reasoned explanation . . . for disregarding facts
and circumstances that underlay or were engendered by the
prior policy.” Id. at 2126 (quoting FCC v. Fox Television
Stations, Inc., 556 U.S. 502, 516 (2009)). An “unexplained
inconsistency” with an earlier position renders a changed
policy arbitrary and capricious. Id. (quoting Nat. Cable &
Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981
(2005)).

    There is no unexplained inconsistency with an earlier
position here. To be clear, we agree with the plaintiffs that the
2017 Rule and the 2008 Rule establish different policies.3 But
it makes no difference. CMS explained why the statute’s
purposes are better fulfilled by a policy that requires
consideration of payments by Medicare and private insurers

    3
        The Secretary maintains that the 2017 Rule is consistent with
the 2008 Rule and so does not establish a new policy. That argument
has been rejected by four courts of appeals, all of which found the
2010 FAQs procedurally invalid because the policy established
therein, which is the same policy established by the 2017 Rule,
marked a departure from the policy established by the 2008 Rule
without notice and an opportunity for public comment. See Tenn.
Hosp. Ass’n, 908 F.3d at 1043 (“As three circuit courts and several
district courts have now held, the payment-deduction policy
elucidated in the FAQs and hinted at in the preamble to the 2008 rule
seeks to amend, rather than merely clarify, the 2008 regulations.”
(citing Children’s Health Care, 900 F.3d at 1026–27; Children’s
Hosp. of the King’s Daughters, 896 F.3d at 623; N.H. Hosp. Ass’n,
887 F.3d at 74)). We agree with our sister circuits.
                               14
(the 2017 Rule) than one that does not (the 2008 Rule, as we
interpret it):

       In light of the statutory requirement limiting
       DSH payments on a hospital-specific basis to
       uncompensated care costs, it is inconsistent
       with the statute to assist hospitals with costs that
       have already been compensated by third party
       payments. [The 2017] rule is designed to
       reiterate the policy and make explicit within the
       terms of the regulation that all costs and
       payments associated with dual eligible and
       individuals with a source of third party
       coverage must be included in calculating the
       hospital-specific DSH limit. This policy is
       necessary to ensure that only actual
       uncompensated care costs are included in the
       Medicaid hospital-specific DSH limit. And,
       because state DSH payments are limited to an
       annual federal allotment, this policy is also
       necessary to ensure that limited DSH resources
       are allocated to hospitals that have a net
       financial shortfall in serving Medicaid patients.

82 Fed. Reg. at 16,117. This explanation is more than sufficient
to survive review under § 706(2)(A).

     The plaintiffs also claim that the Secretary has not tied the
2017 Rule to the administrative record. According to their
reading, the record shows that CMS reduces DSH payments to
the plaintiff hospitals when it considers private insurance
payments, notwithstanding “they have among the highest
Medicaid inpatient utilization rates in their respective states
and the highest net financial shortfalls in serving Medicaid
patients.” Plaintiffs Br. 65. The plaintiffs claim this outcome is
inconsistent with the purpose of the 2017 Rule, which is “to
                               15
ensure that limited DSH resources are allocated to hospitals
that have a net financial shortfall in serving Medicaid patients.”
82 Fed. Reg. at 16,117.

     Their argument is doubly flawed. For starters, “Medicaid
inpatient utilization rates” are not mentioned in § 1396r-
4(g)(1)(A). See 42 U.S.C. § 1396r-4(g)(1)(A). More
importantly, the plaintiffs misstate which hospitals suffer a
“net financial shortfall.” Programs and services a hospital
provides that are not paid for by Medicaid are not relevant to
the shortfall calculation. See 42 U.S.C. § 1396r-4(j)(2)(C)
(“Only the uncompensated care costs of providing inpatient
hospital and outpatient hospital services to individuals
described in paragraph [(g)(1)(A)] are included in the
calculation of the hospital-specific limits under such
subsection.”). Indeed, the statute does not consider a hospital’s
actual costs; it considers only those costs that Medicaid pays
for. See 82 Fed. Reg. at 16,118 (“Ancillary programs and
services that hospitals provide to patients may be laudable, but
they are not paid for by Medicaid because they are not costs
associated with furnishing inpatient and outpatient hospital
services.”). Calculating “net financial shortfall” using only
those costs that Medicaid pays for, no hospital that suffers a
“net financial shortfall” will be denied a DSH payment. Thus,
we disagree with the plaintiffs’ argument that the Secretary has
failed to tie the Rule to the record. Like their § 706(2)(C)
challenge, their § 706(2)(A) challenge fails.

     For the foregoing reasons, we reverse the judgment of the
district court, reinstate the 2017 Rule and remand the case for
further proceedings consistent with this opinion.

                                                     So ordered.