Baptist Mem Hosp - Golden, et al v. Alex Azar, II,

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 18-60592

BAPTIST MEMORIAL HOSPITAL - GOLDEN TRIANGLE,
INCORPORATED; CALHOUN HEALTH SERVICES; DELTA REGIONAL
MEDICAL CENTER; MERIT HEALTH BATESVILLE, formerly known as
Tri-Lakes Medical Center, Mississippi; BAPTIST MEDICAL CENTER,
INCORPORATED; SAINT DOMINIC-JACKSON MEMORIAL HOSPITAL;
TISHOMINGO HEALTH SERVICES, INCORPORATED; GRENADA LAKE
MEDICAL CENTER,

Plaintiffs - Appellees

v.

ALEX M. AZAR, II, SECRETARY, U.S. DEPARTMENT OF HEALTH AND
HUMAN SERVICES; SEEMA VERMA, in her official capacity as
Administrator, Centers for Medicare and Medicaid Services; CENTERS FOR
MEDICARE AND MEDICAID SERVICES,

Defendants - Appellants

Appeal from the United States District Court
for the Southern District of Mississippi

Before HIGGINBOTHAM, DENNIS, and HO, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
The Medicaid Act provides each state with a fixed pool of funds to make
supplemental payments to hospitals that serve a disproportionate share of
indigent patients. These “disproportionate share hospital” (“DSH”) payments
are limited to a hospital’s “costs incurred” in caring for indigent patients. The
United States Court of Appeals
Fifth Circuit
FILED
April 20, 2020

Lyle W. Cayce
Clerk
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Secretary of the United States Department of Health and Human Services (the
“Secretary”) has significant discretion to determine how these costs are
calculated. In 2017, the Secretary issued a final rule (the “2017 Rule”)
clarifying that hospitals’ “costs incurred” are net of payments from third
parties, like Medicare and private insurers.
1

Eight Mississippi hospitals (the “Hospitals”) challenged the 2017 Rule,
contending that its definition of “costs incurred” conflicts with the Medicaid
Act. The district court granted summary judgment for the Hospitals and
enjoined enforcement of the 2017 Rule. The Secretary appealed. As have the
three other circuit courts to consider the issue, we conclude that the 2017 Rule
was consistent with the Act. We reverse.
I.
Medicaid is a joint state-federal program that pays medical expenses for
low-income patients.
2
Each state administers its own program, but is subject
to federal standards and oversight as a condition of receiving federal funding
for a portion of its costs.
3
The care of Medicaid patients and the uninsured
present financial challenges for hospitals serving a disproportionate number
of these patients. In 1981, Congress authorized states to make the
supplemental payments to “disproportionate share hospitals” to offset their
losses on Medicaid and uninsured patients.
4
To finance these DSH payments,
the Medicaid Act annually provides each state with a fixed pool of funds.
5

1
See Medicaid Program; Disproportionate Share Hospital Payments—Treatment of
Third Party Payers in Calculating Uncompensated Care Costs, 82 Fed. Reg. 16,114 (2017)
(“2017 Rule”).
2
42 U.S.C. §§ 1396-1, 1396a.
3
Id. § 1396b(a)(1).
4
See H.R. REP. NO. 103–111, at 211 (1993), as reprinted in 1993 U.S.C.C.A.N. 378,
538 (DSH payments “assist those facilities with high volumes of Medicaid patients in meeting
the costs of providing care to the uninsured patients that they serve[.]”).
5
42 U.S.C. § 1396r-4(f).
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In the early 1990s, some states were reportedly making DSH payments
to hospitals “in amounts that exceed the net costs, and in some instances the
total costs, of operating the facilities.”
6
So in 1993 Congress imposed a
“hospital-specific limit” on annual DSH payments to each hospital.
7
Under the
limit, payments are capped at a hospital’s “costs incurred” by serving Medicaid-
eligible and uninsured patients, net of other Medicaid payments and payments
from uninsured patients.
8

In 2010, the Centers for Medicare and Medicaid Services (“CMS”) issued
guidance clarifying that the “costs incurred” are also net of payments from
third parties (e.g., Medicare, private health insurance) for serving indigent
patients.
9
Some patients are covered by Medicaid and a third party. In such
cases, Medicaid is the “payer of last resort,” meaning that typically only the
third party pays the hospital. For example, when an individual enrolled in both
Medicaid and Medicare has a hospital stay, typically only Medicare will pay
for the stay. Under the 2010 guidance, when a third party reimburses a
hospital for serving a Medicaid patient, the third-party payments are excluded
from the “costs incurred.”
After hospitals filed suits around the country, four courts of appeals held
that the guidance represented a policy change and enjoined CMS from
enforcing it.
10
With these decisions, CMS withdrew the guidance, effective

6
H.R. REP. NO. 103–111, at 211, 1993 U.S.C.C.A.N. at 538.
7
Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103–66, § 13621(b), 107 Stat.
66, 630 (1993).
8
42 U.S.C. § 1396r-4(g)(1)(A).
9
See CMS, Additional Information on the DSH Reporting and Audit Requirements, at
18 (2018), https://www.medicaid.gov/sites/ default/ files/2020-01/part-1-additional-info-on-
dsh-reporting-and-auditing.pdf.
10
Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029, 1037 (6th Cir. 2018); Children’s Health
Care v. CMS, 900 F.3d 1022 (8th Cir. 2018); Children’s Hosp. of the King’s Daughters, Inc. v.
Azar, 896 F.3d 615 (4th Cir. 2018); N.H. Hosp. Ass’n v. Azar, 887 F.3d 62 (1st Cir. 2018).
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December 30, 2018.
11
Meanwhile, in April 2017, the Secretary promulgated the
2017 Rule, clarifying that “costs incurred” are net of third-party payments.
That is, the 2017 Rule implements the same policy as the rescinded guidance.
12

The Hospitals sued the Secretary, claiming the 2017 Rule exceeds his
authority in violation of 5 U.S.C. § 706(2)(C). The district court agreed, relying
almost entirely on Children’s Hospital Association of Texas v. Azar, a district
court decision invalidating the 2017 Rule.
13
After the Secretary appealed and
the parties briefed this case, the D.C. Circuit overturned the district court
decision in Children’s Hospital and upheld the 2017 Rule.
14

II.
In reviewing a challenge to an administrative agency’s statutory
construction in a final rule, we apply Chevron’s two-step framework.
15
We first
employ the “traditional tools of statutory construction” to determine “whether
Congress has spoken to the precise question at issue.”
16
“If the intent of
Congress is clear, that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress.”
17

But if “the statute is silent or ambiguous with respect to the specific issue,” we
must defer to the agency’s interpretation so long as it “is based on a permissible
construction of the statute.”
18
We also must defer when the statute expressly
delegates an agency authority “to elucidate a specific provision of the statute

11
See CMS, Additional Information on the DSH Reporting and Audit Requirements
(2018), https://www.medicaid.gov/sites/default/files/2020-01/part-1-additional-info-on-dsh-
reporting-and-auditing.pdf (announcing withdrawal of FAQ No. 33 and No. 34 as of
December 30, 2018).
12
Treatment of Third Party Payers, 82 Fed. Reg. 16,114.
13
300 F. Supp. 3d 190 (D.D.C. 2018).
14
Children’s Hosp. Ass’n of Tex. v. Azar, 933 F.3d 764 (D.C. Cir. 2019).
15
Chevron, U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 (1984).
16
Id. at 842, 843 n.9.
17
Id. at 842–43.
18
Id. at 843.
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by regulation.”
19
The agency’s “legislative regulations are given controlling
weight unless they are arbitrary, capricious, or manifestly contrary to the
statute.”
20

III.
The parties dispute the proper method for calculating the hospital-
specific limit for annual DSH payments. The Medicaid Act sets the hospital-
specific limit at:
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 of third party coverage) for services
provided during the year.
21

Under the 2017 Rule, “costs incurred” are also net of payments from
third-party payers, such as Medicare and private insurers. The Secretary
asserts that its Rule is consistent with the statute’s ambiguous language. The
Hospitals disagree, arguing that the Medicaid Act unambiguously specifies the
method for calculating the hospital-specific limits, and that method does not
account for payments from third parties.
Section 1396r-4(g)(1)(A) expressly delegates gap-filling authority to the
Secretary through the “as determined by the Secretary” clause.
22
The Hospitals
do not dispute this point, instead arguing that the gap is narrow and the
statute is clear. As they see it, the hospital-specific limit is set at a hospital’s
gross costs net of other Medicaid payments and payments made by uninsured

19
Id.
20
Id.
21
42 U.S.C. § 1396r-4(g)(1)(A).
22
See Children’s Hosp. Ass’n of Tex., 933 F.3d at 770; Tenn. Hosp. Ass’n, 908 F.3d at
1039 (quoting Chevron, 467 U.S. at 843–44) (concluding that the phrase “as determined by
the Secretary” represented an “‘express delegation of authority to the agency to elucidate a
specific provision of the [Medicare] statute by regulation’”).
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patients, and the Secretary only has discretion to determine the calculation of
gross costs. In support of their reading of the Act, the Hospitals marshal
several arguments. We reject each one.
First, we cannot agree that the ordinary meaning and dictionary
definitions of “costs” and “payments” render the disputed language
unambiguous. Able judges employing these tools have reached opposing
interpretations of this provision.
23
As the Supreme Court recognized, the word
“cost” is “a chameleon,” a “virtually meaningless term” with a “protean”
nature.
24
Agencies therefore “have broad methodological leeway” to interpret
the word,
25
and courts have repeatedly upheld the Secretary’s authority to
account for offsetting payments when construing “costs” or “costs incurred.”
26

We are also unpersuaded by the Hospitals’ argument that the statute
draws a “clear line” between costs and payments. In their view, the statute
grants the Secretary discretion to determine the calculation of gross costs, but

23
Compare Mo. Hosp. Ass’n v. Azar, 941 F.3d 896, 901 (8th Cir. 2019) (Stras, J.,
concurring in the judgment) (citing T
HE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH
LANGUAGE 891 (5th ed. 2016) and WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1146
(2002)) (concluding that the 2017 Rule is consistent with the plain meaning of the text), with
Tenn. Hosp. Ass’n, 908 F.3d at 1048 (Kethledge, J., concurring in the judgment) (citing
O
XFORD ENGLISH DICTIONARY (online ed. 2018)) (concluding that CMS’s 2010 guidance,
which pursued the same policy as the 2017 Rule, violated the plain meaning of the text).
24
Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467, 500–01 (2002) (internal quotations
omitted).
25
Id. at 500.
26
See Dana–Farber Cancer Inst. v. Hargan, 878 F.3d 336, 341 (D.C. Cir. 2017)
(deferring to agency’s determination that a provider’s “‘actually incurred’ cost” of tax liability
must reflect offsetting payments that “reduc[e] the cost” of the taxes); Abraham Lincoln
Mem’l Hosp. v. Sebelius, 698 F.3d 536, 549–50 (7th Cir. 2012) (explaining that CMS policy
requiring providers to offset refunds is consistent with the statutory directive limiting
reimbursement to “costs that are ‘actually incurred’”) (quoting 42 U.S.C. § 1395x(v)(1)(A));
Kindred Hosps. E., LLC v. Sebelius, 694 F.3d 924, 928–29 (8th Cir. 2012) (noting that hospital
was “effectively reimbursed” for its taxes by an offsetting payment); cf. Sta-Home Home
Health Agency, Inc. v. Shalala, 34 F.3d 305, 308–10 (5th Cir. 1994) (concluding that “amounts
paid back” are refunds that CMS may offset because they were not “‘costs actually incurred,’”
as doing otherwise would “have the effect of inflating the provider’s costs”) (quoting 42 U.S.C.
§ 1395x(v)(1)(A)).
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not to select payments to subtract from those costs. This argument “flies in the
teeth of the statutory text.”
27
Because “‘costs incurred’ are both ‘as determined
by the Secretary’ and “net of payments under [Medicaid] and by uninsured
patients[,] . . . the statute requires that some payments be considered in
calculating a hospital’s ‘costs incurred.’”
28
For this reason, “costs incurred”
refers to net costs, not gross costs. And because the statute does not direct the
Secretary to exclude “only” payments from Medicaid and uninsured patients,
it is within the Secretary’s expressly delegated authority to interpret “costs
incurred” to exclude other payments as well.
29

We likewise reject the Hospitals’ contention that Congress, by expressly
excluding payments from Medicaid and the uninsured, meant to exclude only
those payments and no others. The Hospitals rely on the canon of Expressio
Unius Est Exclusio Alterius, which provides that “expressing one item of [an]
associated group or series excludes another left unmentioned.”
30
This canon
“applies only when circumstances support a sensible inference that the term
left out must have been meant to be excluded.”
31
Such an inference is not
warranted here. Congress may have wanted to ensure the deduction of “the
most common sources of payment”—Medicaid and the uninsured—while
allowing the Secretary “to decide whether less-common sources of payment
should be [deducted] as well.”
32
Affording the Secretary this discretion makes

27
Children’s Hosp. Ass’n of Texas, 933 F.3d at 772.
28
Id.
29
See id. at 770 (“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.”) (original emphases omitted and emphasis added); see also Mo. Hosp.
Ass’n, 941 F.3d at 899 (same, quoting Children’s Hosp. Ass’n of Tex., 933 F.3d at 770); Tenn.
Hosp. Ass’n, 908 F.3d at 1038 (“[T]he statute does not instruct CMS to deduct only those
payments from the determination of costs; the fact that certain payments must be deducted
from costs does not mean that other payments cannot be.”).
30
NLRB v. Sw. Gen., Inc., 137 S. Ct. 929, 940 (2017) (alteration in original).
31
Id.
32
Children’s Hosp. Ass’n of Tex., 933 F.3d at 771.
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sense given the array of private and public payers (Medicare, private health
insurance, TRICARE, etc.) and the potential for unforeseeable changes in how
these payers reimburse hospitals.
33

We also reject the Hospitals’ argument that the express exclusion of
third-party payments in a related Medicaid provision indicates that Congress
chose not to deduct third-party payments in § 1396r-4(g)(1)(A). They point to
§ 1396r-4(g)(2)(A), which allowed states to make extra DSH payments to
certain hospitals until 1995. But states had to certify that the extra
payments—i.e., payments in excess of the hospital-specific limit “as described
in paragraph (g)(1)(A)”—were “used for health services.”
34
Under subsection
(g)(2), the amount “used for health services” excluded “any amounts
received . . . from third party payors (not including the State plan under this
subchapter).”
35
The Hospitals claim that “it is compelling that Congress did
not include payments by third-party insurers in subsection (g)(1), despite
excluding precisely such payments in . . . subsection (g)(2).”
The Supreme Court has explained that the Hospitals’ presumption—
“that the presence of a phrase in one provision and its absence in another
reveals Congress’s design—grows weaker with each difference in the
formulation of the provisions under inspection.”
36
Here, there are significant
differences between subsections (g)(1)(A) and (g)(2)(A).
37
Unlike subsection

33
For example, in 2003, Congress appropriated funds to reimburse hospitals for
providing emergency care to undocumented aliens. Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, Pub. L. No. 108–173, § 1011, 117 Stat. 2066,
2432. In 2008, CMS clarified that these payments are excluded from the calculation of the
Medicaid shortfall. See Medicaid Program; Disproportionate Share Hospital Payments, 73
Fed. Reg. 77,904, 77,912 (Dec. 19, 2008).
34
42 U.S.C. § 1396r-4(g)(2)(A).
35
Id.
36
Columbus v. Ours Garage & Wrecker Serv., Inc., 536 U.S. 424, 435-36 (2002).
37
Children’s Hosp. Ass’n of Tex., 933 F.3d at 772 (describing these subsections as
“fundamentally different”).
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(g)(1)(A), subsection (g)(2)(A) did not exclude third-party payments from the
limit on payments to a hospital; rather, it required states to account for third-
party payments when determining whether the extra DSH payments were
“used for health services.” Further, we see “no tension . . . in Congress
requiring third-party payment deductions in subsection (g)(2)(A) and allowing
third-party payment deductions in subsection (g)(1)(A).”
38
Because “[t]he DSH
payments provided for in (g)(2)(A) are above and beyond those mandated by
(g)(1)(A),” Congress may have wanted to impose tighter limits on these extra
payments “while giving CMS more discretion to calibrate the appropriate cap
on the ‘standard’ DSH payments discussed in (g)(1)(A).”
39

Finally, we see no basis for the Hospitals’ argument that the 2017 Rule
conflicts with the statutory purpose of the hospital-specific limit. The Hospitals
contend that the DSH payments are designed to offset the financial burden of
treating not only Medicaid patients but also uninsured patients. They rely
heavily on a committee report to the 1987 bill creating the Medicaid DSH
payments. It explained that the DSH payments are meant “at a minimum [to]
meet the needs of those facilities which . . . serve a large number of Medicaid-
eligible and uninsured patients who other providers view as financially
undesirable.”
40
It signifies that when Congress created the hospital-specific
limit in 1993, that same House committee was “concerned by reports” of states
making DSH payments “in amounts that exceed the net costs, and in some
instances the total costs, of operating the facilities.”
41
“In essence, Congress
was concerned that hospitals were double dipping by collecting DSH payments

38
Tenn. Hosp. Ass’n, 908 F.3d at 1039.
39
Id.
40
H.R. REP. NO. 100–391(I) at 524 (1987), as reprinted in 1987 U.S.C.C.A.N. 2313–1,
2313–344 (emphasis added).
41
H.R. REP. NO. 103–111, at 211, 1993 U.S.C.C.A.N. at 538.
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to cover costs that had already been reimbursed.”
42
The 2017 Rule addresses
this concern by safeguarding against states paying hospitals for costs that have
already been reimbursed by a third party.
43
It “ensures that DSH payments
will go to hospitals that have been compensated least and are thus most in
need.”
44
We conclude that the 2017 Rule is a reasonable reading of the
Medicaid Act and does not violate § 706(2)(C).
IV.
For these reasons, we reverse and remand for further proceedings
consistent with this opinion.

42
Tenn. Hosp. Ass’n, 908 F.3d at 1040.
43
See id. at 1039–40; Children’s Hosp. Ass’n of Tex., 933 F.3d at 772.
44
Children’s Hosp. Ass’n of Tex., 933 F.3d at 772.
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