Children's Hosp. of the King's Daughters, Inc. v. Azar , 896 F.3d 615 ( 2018 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 17-2237
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.
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: May 9, 2018 Decided: July 23, 2018
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.
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.
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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
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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
added) (citing §§ 1396a(cc), 1382(a)(3)(c)). Because their eligibility does not depend on
income and resources, such Medicaid-eligible children often have private insurance
coverage.
Children’s Hospital is a non-profit pediatric hospital located in Norfolk, Virginia.
Most of Children’s Hospital’s pediatric patients are eligible to participate in the Medicaid
program, either because of their poverty or because they have a qualifying illness or
disability. See id. (noting that Children’s Hospital’s “Medicaid Inpatient Utilization
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Ratio (‘MIUR’) (the ratio of Medicaid inpatient days to total hospital days) was 69.65%
in 2012,” the highest MIUR in Virginia).
The Medicaid statute provides for state Medicaid programs to make “payment
adjustment[s]” to certain hospitals, like Children’s Hospital, that “serve a
disproportionate number of low-income patients with special needs.” §§
1396a(a)(13)(A)(iv), 1396r-4(c). The statute further establishes an aggregate limit on the
amount of payment adjustments state programs can allocate to all qualifying DSHs in
their state. § 1396r-4(f)(3). In a provision titled “Amount of adjustment subject to
uncompensated costs,” the statute also caps the amount of DSH funding any particular
hospital may receive in a given year at:
[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 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. For purposes of the preceding
sentence, payments made to a hospital for services provided to indigent
patients made by a State or a unit of local government within a State shall
not be considered to be a source of third party payment.
§ 1396r-4(g)(1)(A). In a 1994 guidance document, the agency characterized the “first
part” of this hospital specific limit as the hospital’s “Medicaid ‘shortfall’”—“the cost of
services furnished to Medicaid patients, less the amount paid under the non-DSH
payment method under the State plan.” J.A. 172. “The second part of the formula is the
cost of services provided to patients who have no health insurance or source of third party
payment for services provided during the year, less the amount of payments made by
these patients.” Id. Together, these two parts of the hospital specific limit constitute a
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DSH’s “uncompensated care costs.” See Medicaid Program; Disproportionate Share
Hospital Payments, 73 Fed. Reg. 77,904, 77,904 (Dec. 19, 2008) (codified at 42 CFR pts.
447 & 455).
In a regulation promulgated in 2008 to implement new statutory DSH reporting
and auditing requirements, the Centers for Medicare & Medicaid Services (“CMS”), a
division of the Department of Health & Human Services, set forth the methodology for
calculating the “payment adjustment.” 42 C.F.R. § 447.299. In particular, a section
titled “Total annual uncompensated care costs” provides:
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 [fee-for-service] rate payments, Medicaid managed care
organization payments, supplemental/enhanced Medicaid payments,
uninsured revenues, and Section 1011 payments for inpatient and outpatient
hospital services. This should equal the sum of paragraphs (c)(9), (c)(12),
and (c)(13) subtracted from the sum of paragraphs (c)(10) and (c)(14) of
this section.
§ 447.299(c)(16). Of particular relevance to this appeal, Section 447.299(c)(10) defines
the “Total Cost of Care for Medicaid [Inpatient/Outpatient] Services” as “The total
annual costs incurred by each hospital for furnishing inpatient hospital and outpatient
hospital services to Medicaid eligible individuals.” And Section 447.299(c)(9) defines
“Total Medicaid [Inpatient/Outpatient] Payments” as the sum of Medicaid fee-for-service
payments, Medicaid managed care payments, and supplemental Medicaid payments.
The dispute between Children’s Hospital and the Secretary turns on whether
payments by private insurance companies to Children’s Hospital on behalf of Medicaid-
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eligible patients should be accounted for in determining Children’s Hospital DSH
payment adjustment. In a Frequently Asked Questions document released in 2010, FAQ
33, which was not promulgated through notice-and-comment rulemaking, CMS took the
position that
days, costs, and revenues associated with patients that are eligible for
Medicaid and also have private insurance should be included in the
calculation of the hospital-specific DSH limit. As Medicaid should be the
payer of last resort, hospitals should also offset both Medicaid and third-
party revenue associated with the Medicaid eligible day against the costs
for that day to determine any uncompensated amount.
Children’s Hosp., 258 F. Supp. 3d at 679–80 (emphasis added). Until it understood FAQ
33’s import in October 2016—as a result of an audit by an outside auditor working on
behalf of Virginia’s Medicaid program—Children’s Hospital did not include payments
from private insurers in calculating its payment adjustment. The auditor determined that
Children’s Hospital was obliged to repay $19.1 million to the State Medicaid program as
a result of DSH overpayments Children’s Hospital received because it failed to include
private insurance payments in its payment adjustment calculation.
On March 7, 2017, Children’s Hospital filed a complaint seeking declaratory and
injunctive relief. Children’s Hospital sought a declaration that FAQ 33’s requirement
that private insurance payments be included in calculating the payment adjustment is
contrary to the plain and unambiguous language of Section 1396r-4(g)(1), and therefore
is unlawful and must be vacated under the Administrative Procedure Act, 5 U.S.C. §
706(2)(c). Alternatively, Children’s Hospital argued that the FAQ 33 policy constituted a
substantive amendment to the calculation methodology set forth in the 2008 rule and
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therefore that CMS unlawfully sought to effect a regulatory policy change without
completing notice-and-comment rulemaking. Children’s Hospital sought an injunction
barring the Secretary from enforcing FAQ 33’s policy of requiring inclusion of private
insurance payments in calculating the payment adjustment.
In an opinion and order entered June 20, 2017, the district court concluded that the
FAQ 33 policy amounted to a substantive rule that should have been promulgated
through notice-and-comment rulemaking and that the policy conflicted with the plain and
unambiguous language of Section 1396r-4(g)(1). Children’s Hosp., 258 F. Supp. 3d at
687, 689. The district court preliminarily enjoined the Secretary from enforcing the
policy set forth in FAQ 33 against Children’s Hospital. Id. at 692. At the request of the
parties, the district court subsequently converted its preliminary injunction opinion and
order into an award of summary judgment to Children’s Hospital and, therefore, an
appealable final judgment. The Secretary timely appealed.
II.
On appeal, the Secretary makes two arguments: (1) that the FAQ 33 policy
constitutes an “interpretative”—rather than “legislative”—rule and therefore need not
have been the product of notice-and-comment rulemaking, and (2) that the policy set
forth in FAQ 33 amounts to a reasonable administrative construction of the governing
statutory language and therefore is entitled to judicial deference. We review both
questions de novo. Ray Commc’ns, Inc. v. Clear Channel Commc’ns, Inc., 673 F.3d 294,
297 (4th Cir. 2012) (reviewing de novo legal determinations underlying an award of
summary judgment).
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A.
The APA requires that all “rules” be issued through a statutorily prescribed notice-
and-comment process. See 5 U.S.C. § 553(a)–(c). “Rules issued through the notice-and-
comment process are often referred to as ‘legislative rules’ because they have the ‘force
and effect of law.’” Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1203 (2015)
(quoting Chrysler Corp. v. Brown, 441 U.S. 281, 302–03 (1979)). By contrast, “the APA
provides that, unless another statute states otherwise, the notice-and-comment
requirement ‘does not apply’ to ‘interpretative rules, general statements of policy, or rules
of agency organization, procedure, or practice.’” Id. at 1203–04. (quoting § 553(b)(A)).
According to Children’s Hospital, FAQ 33 amounts to a “legislative rule,” and
therefore should have been issued through the notice-and-comment process prescribed in
Section 553(a)–(c). On the other hand, the Secretary argues that the rule is “interpretive”
and therefore did not need to go through the notice-and-comment process.
The Supreme Court recently acknowledged that the “precise meaning” of the term
“interpretive rule” in the APA “is the source of much scholarly and judicial debate,” and
expressly declined to “wade into that debate.” Id. at 1204; see also Am. Mining Cong. v.
Mine Safety & Health Admin., 995 F.2d 1106, 1108–09 (D.C. Cir. 1993) (describing the
distinction between interpretive and legislative rules as “enshrouded in considerable
smog” (internal quotation marks omitted)); Jerri’s Ceramic Arts, Inc. v. Consumer Prod.
Safety Comm’n, 874 F.2d 205, 207 (4th Cir. 1989) (recognizing that the “distinction
between ‘interpretative’ rules and ‘something more,’ i.e., ‘substantive’ or ‘legislative’
rules, is not always easily made”). Nonetheless, the Perez Court stated that “the critical
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feature of interpretive rules is that they are ‘issued by an agency to advise the public of
the agency’s construction of the statutes and rules which it administers.’” Perez, 135 S.
Ct. at 1204 (quoting Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995)).
This Court has recognized that “courts are in general agreement that interpretative
rules simply state what the administrative agency thinks the statute means, and only
‘remind’ affected parties of existing duties.” Jerri’s, 874 F.2d at 207. Put differently,
“[a]n interpretive rule is merely a clarification or explanation of an existing statute or
rule.” Chen Zhou Chai v. Carroll, 48 F.3d 1331, 1341 (4th Cir. 1995) (emphasis added)
(quoting Guardian Fed. Sav. & Loan Ass’n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658,
664 (D.C. Cir. 1978)); see also Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014)
(“Interpretative rules are those that clarify a statutory or regulatory term, remind parties
of existing statutory duties, or merely track preexisting requirements and explain
something the statute or regulation already required.” (internal quotation marks omitted)).
By contrast, “a substantive or legislative rule, pursuant to properly delegated
authority, has the force of law, and creates new law or imposes new rights or duties.”
Jerri’s, 874 F.3d at 207 (citations omitted). To that end, “[a] rule is legislative if it
supplements a statute, adopts a new position inconsistent with existing regulations, or
otherwise effects a substantive change in existing law or policy.” Mendoza, 754 F.3d at
1021 (citations omitted). Likewise, a rule is legislative if it “expand[s] the footprint of a
regulation by imposing new requirements, rather than simply interpreting the legal norms
Congress or the agency itself has previously created.” Iowa League of Cities v. E.P.A.,
711 F.3d 844, 873 (8th Cir. 2013) (citations omitted).
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We conclude that the policy set forth in FAQ 33 falls on the legislative end of the
“spectrum,” N.H. Hosp. Ass’n v. Azar, 887 F.3d 62, 70 (1st Cir. 2018), because (1) the
policy of requiring DSHs to account for private insurance payments in calculating a
DSH’s uncompensated care costs does not derive from the statute or the 2008 rule and (2)
the agency relied on—and continues to rely on—the Secretary’s statutorily delegated
authority to “determine[]” what constitutes “costs incurred” for purposes of calculating a
DSH’s payment adjustment as the legal basis supporting the policy. See 42 U.S.C. §
1396r-4(g)(1)(A).
As to the first reason—that the policy in FAQ 33 does not derive from the statute
or 2008 rule—the statute provides that a qualifying hospital’s payment adjustment shall
not exceed the hospital’s “costs incurred” in providing services to Medicaid-eligible and
uninsured patients. Id. The amount of “costs incurred” are to be “determined by the
Secretary and net of payments [by Medicaid] and by uninsured patients.” Id. Payments
by private insurers are not, therefore, one of the two types of “payments” that the statute
explicitly requires a DSH to “net” out in determining its “costs incurred.” Likewise, the
2008 rule’s formula for calculating “total annual uncompensated care” expressly requires
hospitals to subtract only Medicaid payments and payments by uninsured individuals. 42
C.F.R. § 447.299(c)(16). Payments by private insurers, therefore, are not among the
“payments” that the 2008 rule expressly requires DSHs to account for in determining
their “total annual uncompensated care.”
The Secretary concedes “[t]he regulatory formula does not specifically address
payments by Medicare or private insurers, and offers no explicit instructions to States or
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hospitals as to how to account for Medicaid-eligible patients who have additional
insurance.” Appellant’s Br. 26. Nevertheless, the Secretary argues that the policy in
FAQ 33 has its genesis in the 2008 rule and its preamble because those provisions
characterize the calculation as determining a DSH’s “uncompensated care costs.” See 42
C.F.R. § 447.299(c)(16) (emphasis added); 73 Fed. Reg. at 77,910-11. According to the
Secretary, because care provided by a DSH that is reimbursed by a private insurer is
“compensated,” the policy set forth in FAQ 33 derives from the 2008 rule and its
preamble.
We disagree. The calculation methodology in the rule itself does not mention—let
alone specifically address—payments by private insurers. § 447.299(c)(16).
Additionally, the preamble 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 (emphasis added). Again, that definition
does not mention private insurance payments, and conspicuously omits payments by
private insurers from the two types of “payments” that DSHs must deduct when
calculating “uncompensated care costs.” And the preamble to the 2008 rule refers to data
fields in a form for calculating and reporting “total uncompensated care costs.” 73 Fed.
Reg. at 77,921. Once again, none of those data fields addresses payments by private
insurers. Id.
The Secretary also emphasizes that the preamble to the 2008 rule directs DSHs to
include payments by Medicare in calculating their hospital-specific limit,
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notwithstanding that the statute does not explicitly address whether Medicare payments
should be netted out. See 73 Fed. Reg. at 77,912. The Secretary maintains that this
language indicated that CMS intended for non-Medicaid payments to be accounted for in
calculating a DSH’s “costs incurred.” But again, neither that specific provision in the
preamble nor the preamble in general mentions payments by private insurers, much less
addresses whether such payments must be deducted. Accordingly, FAQ 33’s policy of
requiring DSHs to deduct payments by private insurers in calculating their “costs
incurred” does not derive “from an existing [statute or regulation] whose meaning
compels or logically justifies the proposition,” thereby weighing in favor of treating the
FAQ 33 policy as a legislative rule. Mendoza, 754 F.3d at 1021 (citation omitted).
The second consideration supporting our conclusion that the policy in FAQ 33
amounts to a legislative rule—that the agency relies on the Secretary’s statutorily
delegated authority to “determine[]” what constitute “costs incurred” for purposes of
calculating a DSH’s uncompensated care costs as the legal basis supporting the policy—
is closely connected to the statute’s and 2008 rule’s silence as to whether DSHs must net
out private insurance payments in calculating their “costs incurred.” As the First Circuit
explained in concluding that FAQ 33 constituted a legislative rule, “[t]his textual silence
on whether to offset [private insurance] payment[s] leads us to believe that any authority
that the Secretary may have to adopt the rule at issue would most likely flow from
Congress’s delegation of a power to make a decision that Congress chose not to make
itself.” N.H. Hosp., 887 F.3d at 71. The Secretary concedes as much, asserting that the
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policy set forth in FAQ 33 reflects a “reasonable exercise of the Secretary’s expressly
delegated authority to determine how to calculate ‘costs incurred.’” Appellant’s Br. 40.
When an agency relies on expressly delegated authority to establish policy—as the
Secretary does with regard to FAQ 33—courts generally treat the agency action as
legislative, rather than interpretive, rulemaking. Iowa League of Cities, 711 F.3d at 873
(“When an agency creates a new ‘legal norm based on the agency’s own authority’ to
engage in supplementary lawmaking, as delegated from Congress, the agency creates a
legislative rule.” (quoting Syncor Int’l Corp. v. Shalala, 127 F.3d 90, 95 (D.C. Cir.
1997))); Walton v. Greenbrier Ford, Inc., 370 F.3d 446, 452 (4th Cir. 2004) (“Legislative
regulations are those in which ‘Congress has explicitly left a gap for the agency to fill,
[thus] there is an express delegation of authority to the agency to elucidate the specific
provision of the statute by regulation.’” (alteration in original) (quoting Chevron U.S.A.,
Inc. v. NRDC, Inc., 467 U.S. 837, 843–44 (1984)). As the First Circuit correctly held
with regard to the policy in FAQ 33, in particular, even if we were to “accept arguendo
the Secretary’s stated position that Congress granted the Secretary the ‘latitude’ to decide
what, if any, other sources of payments made in connection with Medicaid-covered costs
need be offset from the total costs of providing such services, . . . when Congress leaves
such a policy choice to the agency, we should lean toward finding that the agency’s
making of that choice requires notice and comment.” N.H. Hosp., 887 F.3d at 70–71
(citations omitted). “Otherwise, it would be ‘difficult to imagine what regulations would
require notice and comment procedures.’” Id. (quoting Mendoza, 754 F.3d at 1021). Put
differently, even if Congress authorized the Secretary to require DSHs to account for
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private insurance payments in exercising his statutorily delegated discretion to define
“costs incurred,” the absence of statutory or regulatory language compelling—or even
suggesting such a policy—required the agency to promulgate its FAQ 33 policy through
notice-and-comment rulemaking.
The statute’s and 2008 rule’s silence as to private insurance payments—and the
Secretary’s reliance on his delegated authority to determine what constitute “costs
incurred”—also sets this case apart from the principal case relied on by the Secretary,
Shalala v. Guernsey Memorial Hospital, 514 U.S. 87 (1995). Guernsey involved a
provision in the Medicare statute that provides for hospital reimbursement based on
“reasonable costs,” defined as the “costs actually incurred” for providing services to
beneficiaries. 514 U.S. at 91 (quoting 42 U.S.C. § 1395x(v)(1)(A)). The statute further
authorized the Secretary to promulgate regulations establishing the methodology to be
used for determining “reasonable costs,” directing the Secretary to “consider, among
other things, the principles generally applied by national organizations.” Id. (quoting 42
U.S.C. § 1395x(v)(1)(A)). Pursuant to that authority, on an annual basis, the Secretary
promulgated regulations establishing methods for determining reasonable cost
reimbursement. Id. at 92. Those regulations required hospitals to follow “[s]tandardized
definitions, accounting, statistics, and reporting practices that are widely accepted in the
hospital and related fields.” Id. (quoting 42 C.F.R. § 413.20(a)). After promulgating an
annual regulation, the agency distributed an informal Medicare reimbursement
guideline—which was not promulgated through notice-and-comment rulemaking—
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stating that, in determining “reasonable costs” incurred, hospitals must amortize the cost
of refinancing bonds over the life of the old bonds. Id. at 90-91.
Emphasizing that generally accepted accounting practices did not require
amortizing the cost of the bond refinancing, the hospital argued that the amortization
requirement was inconsistent with the regulation and therefore should have been
promulgated through notice-and-comment rulemaking. The Supreme Court disagreed,
concluding that the informal reimbursement guideline constituted a “prototypical”
interpretive rule. Id. at 99. In reaching this conclusion, the Court explained that the
policy set forth in the guideline was required both by a statutory provision prohibiting the
Medicare program from cross-subsidizing other health insurance programs and vice versa
and by a regulation providing “that only the actual cost of services rendered to
beneficiaries during a given year [could] be reimbursed.” Id. (emphasis added).
Accordingly, unlike the policy set forth in FAQ 33—in which the Secretary purports to
exercise his delegated authority to define “costs incurred” in a manner not specifically
addressed in the statute or regulation—the policy at issue in Guernsey derived “from an
existing document whose meaning compels or logically justifies the proposition,”
Mendoza, 754 F.3d at 1021—namely both the statute and its implementing regulation.
In sum, we conclude that the policy set forth in FAQ 33 constitutes a legislative,
rather than interpretive, rule. Because that policy amounts to a legislative rule, the APA
required that agency promulgate the policy through notice-and-comment rulemaking. 5
U.S.C. § 553(a)-(c). The Secretary failed to do so, and Children’s Hospital faces the
prejudicial result of being obliged to repay at least $19.1 million to the State Medicaid
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program. See Nat’l Ass’n of Home Builders v. Defs. of Wildlife, 551 U.S. 644, 659–60
(2007) (“In administrative law, . . . there is a harmless error rule.”); Utility Solid Waste
Activities Grp. v. EPA, 236 F.3d 749, 755 (D.C. Cir. 2001) (noting prejudice can arise
from a party’s inability to comment on a rule before an agency promulgates it);
Children’s Hosp., 258 F. Supp. 3d at 689–91. Therefore, the district court properly
enjoined the Secretary from enforcing the FAQ 33 policy against Children’s Hospital.
B.
In addition to concluding that the policy in FAQ 33 violated the APA’s procedural
requirements, the district court further held that the policy conflicts with the plain and
unambiguous language of Section 1396r-4(g)(1). Children’s, 258 F. Supp. 3d at 689. In
particular, the district court concluded that the statutory language does not authorize “the
Secretary [to] define ‘costs’ to include private insurance payments.” Id. at 686-87.
Courts have recognized that there is no bright-line rule as to whether a court that
has decided to vacate an agency action on procedural grounds should nonetheless address
a substantive claim. See NRDC v. EPA, 643 F.3d 311, 321 (D.C. Cir. 2011) (noting that
case law provides “little direction on whether, having determined to vacate on procedural
grounds, we should nonetheless address substantive claims”). Given this absence of
authority, we do not fault the district court for addressing Children’s Hospital’s
substantive claim.
Nevertheless, because it is unnecessary for us to address that claim to affirm the
district court’s judgment, we decline to address Children’s Hospital’s substantive
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challenge and, for the same reason, vacate the district court’s decision as to that claim. 1
However, our decision to vacate the district court’s ruling as to Children’s Hospital
substantive claim should not be read as expressing or implying any view on the merits of
that claim or the validity of any amendment to the 2008 rule.
III.
For the foregoing reasons, we affirm the judgment of the district court enjoining
the Secretary from enforcing the policy set forth in FAQ 33 against Children’s Hospital,
and vacate the district court’s opinion to the extent it concludes that that policy conflicts
with the language of Section 1396r-4(g), but without prejudice to Children’s Hospital’s
right to raise that argument in another proceeding.
AFFIRMED IN PART AND VACATED IN PART
1
This approach also is consistent with the approach taken by other courts that
have invalidated the policy in FAQ 33 on procedural grounds. See N.H. Hosp., 887 F.3d
at 77; Children’s Health Care v. Centers for Medicare & Medicaid Servs., No. 16-cv-
4064, 2017 WL 3668758, at *9 (D. Minn. June 26, 2017) (declining to reach substantive
challenge after vacating FAQ 33 on procedural grounds because “it would be merely
advisory for this Court to decide whether Defendants would exceed their statutory
authority if they attempted to promulgate the rule expressed in FAQ 33 by following the
required procedures”); Texas Children’s Hosp. v. Burwell, 76 F. Supp. 3d 224, 240 n.5
(D.D.C. 2014) (“Considerations of judicial economy and restraint counsel against
deciding whether 42 U.S.C. § 1396r–4(g)(1)(A) could support a validly promulgated rule
that codified [FAQ 33’s] policy in the future.”).
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