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Inc. v. Azar

United States Court of Appeals, Fourth Circuit

July 23, 2018

CHILDREN'S HOSPITAL OF THE KING'S DAUGHTERS, INC., Plaintiff - Appellee,
v.
ALEX M. AZAR II, in his official capacity, Secretary, Department of Health and Human Services; SEEMA VERMA, in her official capacity, Administrator, Centers for Medicare & Medicaid Services; CENTERS FOR MEDICARE AND MEDICAID SERVICES, Defendants - Appellants.

          Argued: May 9, 2018

          Appeal from the United States District Court for the Eastern District of Virginia, at Norfolk. Rebecca Beach Smith, Chief District Judge. (2:17-cv-00139-RBS-LRL)

         ARGUED:

          Samantha L. Chaifetz, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants.

          Geraldine E. Edens, MORGAN, LEWIS & BOCKIUS LLP, Washington, D.C.; Christopher Howard Marraro, BAKER & HOSTETLER, LLP, Washington, D.C., for Appellee.

         ON BRIEF:

          Chad A. Readler, Acting Assistant Attorney General, Mark B. Stern, Tara S. Morrissey, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Dana J. Boente, United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia; Brian R. Stimson, Acting General Counsel, Janice L. Hoffman, Associate General Counsel, Susan M. Lyons, Deputy Associate General Counsel for Litigation, David L. Hoskins, Lindsay S. Goldberg, Office of the General Counsel, Centers for Medicare & Medicaid Services Division, UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Washington, D.C., for Appellants.

          Susan Feigin Harris, MORGAN, LEWIS & BOCKIUS LLP, Houston, Texas, for Appellee.

          Before TRAXLER, AGEE, and WYNN, Circuit Judges.

         Affirmed in part and vacated in part by published opinion. Judge Wynn wrote the opinion, in which Judge Traxler and Judge Agee concurred.

          WYNN, Circuit Judge:

         Defendant-Appellant Alex Azar, in his official capacity as Secretary of the U.S. Department of Health & Human Services (the "Secretary"), appeals an order of the U.S. District Court for the Eastern District of Virginia enjoining the Secretary from enforcing a Medicaid policy set forth in a Frequently Asked Questions document ("FAQ 33"). See Children's Hosp. of the King's Daughters, Inc. v. Price, 258 F.Supp.3d 672 (E.D. Va. 2017). The FAQ 33 policy purported to clarify the methodology for calculating the maximum amount of financial assistance available to hospitals, like Plaintiff-Appellee Children's Hospital of the King's Daughters, Inc. ("Children's Hospital"), that serve a disproportionate number of low-income or special needs patients (commonly referred to as "disproportionate share hospitals" or "DSHs"). Under the methodology in FAQ 33, Children's Hospital would have to repay $19.1 million in DSH payments it received from the Medicaid program.

         The district court enjoined the Secretary from enforcing the FAQ 33 policy against Children's Hospital for two reasons: (1) the promulgation of the FAQ 33 policy failed to comply with the procedural requirements set forth in the Administrative Procedural Act ("APA") and (2) the FAQ 33 policy contradicted the plain and unambiguous language of the governing statute.

         For the reasons that follow, we conclude that the district court correctly determined that the policy set forth in FAQ 33 constituted a "legislative rule" and, therefore, that the APA mandated that the agency establish the FAQ 33 policy through notice-and-comment rulemaking. See 5 U.S.C. § 553(a)-(c). We thus affirm the district court's judgment enjoining the Secretary from enforcing the policy set forth in FAQ 33 against Children's Hospital. Because we conclude that the policy violated the APA's procedural requirements, we decline to reach the substantive challenge by Children's Hospital to the FAQ 33 policy and vacate the part of the district court's opinion addressing whether that policy conflicts with the language of 42 U.S.C. § 1396r-4(g).

         I.

         Medicaid, 42 U.S.C. § 1396 et seq., is a cooperative federal-state program through which the federal government provides financial assistance to state Medicaid programs, which in turn provide medical insurance to qualifying individuals. Children's Hosp., 258 F.Supp.3d at 677. Although states have some discretion in determining which individuals are qualified to participate in their Medicaid programs, the vast majority of beneficiaries qualify to participate because their "income and resources are insufficient to meet the costs of necessary medical services." 42 U.S.C. § 1396-1. Additionally, Medicaid programs "provide[] benefits to children with certain serious illnesses, without regard to their family's income." Children's Hosp., 258 F.Supp.3d at 678 (emphasis ...


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