UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

DEPARTMENT OF MEDICAL )
ASSISTANCE SERVICES OF THE )
COMMONWEALTH OF VIRGINIA )
)
Plaintiff, )
)
v. ) Civil Case No. 16-2008 (RJL)
)
UNITED STATES DEPARTMENT )
OF HEALTH AND HUMAN )
SERVICES, ) F I L E D
)
and ) SEP 3 0 2018
) Clerk, U.S. District & Bankruptcy
ALEX M. AZAR II, Secretary, ) Courts for the District of Columbla
U.S. Department of Health and )
Human Services )
)
Defendants. )
MEMORANDUM OPINION

 

(seprember§;/ 2018) [Dkt. ## 22, 24]

Plaintiff Department of Medical Assistance Services of the Commonwealth of
Virginia (“Virginia” or “plaintiff’) brings suit against the United States Department of
Health and Human Services (“HHS”) and Secretary Alex M. Azar II (collectively,
“defendants” or “the Government”), asking this Court to overturn a disallowance of
roughly $30 million in federal financial participation (“FFP”) payments to certain in-state
disproportionate share hospitals (“DSH”). The gravamen of Virginia’s complaint is that,
in its administration of DSH funding under Medicaid, HHS has violated the Administrative

Procedure Act (“APA”), 5 U.S.C. § 551 et seq. See Compl. 1111 58-63. Before this Court

1

are the parties’ Cross-l\/lotions for Summary Judgment. See Pl.’s Motion for Summary
Judgment [Dkt. #22] (“Pl.’s Mot.”); Defs.’ Cross-Motion for Summary Judgment [Dkt. #
24] (“Defs.’ l\/[ot.”). For the following reasons, the defendants’ motion for summary
judgment [Dl<t. # 24] is GRANTED and plaintiffs motion [Dl<t. # 22] is DENIED.
BACKGROUND
I. Statutory Framework

Title XIX of the Social Security Act (hereinafter, “the Medicaid Act” or “the
Medicaid statute”), provides for joint federal and state financing ofmedical assistance for
the benefit of aged, blind, or permanently disabled individuals and for the benefit of
families with dependent children. See 42 U.S.C. §§ l396-l396w-5. The dispute before
the court arises from the complicated fiscal relationship between HHS_which Congress
has empowered to administer spending under Medicaid_and states like Virginia, which
Congress has long enticed with promises of matching federal funds. Therefore, a brief
overview of the statutory scheme is an appropriate place to Start.

To receive federal Medicaid funds, states are required to submit a State Plan to
I-H-IS_speciiically, to the Centers for Medicare and Medicaid Services (“CMS”)_for
approval. 42 C.F.R. § 430.1(); see also 42 U.S.C. § 1396a The State Plan must “contain[]
all information necessary for CMS to determine whether the plan can be approved to serve
as a basis for Federal financial participation (FFP) in the State program.” 42 C.F.R. §
43().10. States generally enjoy some flexibility in providing Medicaid services, and the
State Plan is meant to spell out how the state accounts for its Medicaid-eligible

expenditures, including the in-patient hospital services at issue in this case. 42 U.S.C. §

2

l396a(a)(3)(A). As with all federally-funded state matching programs, however, Congress
puts limits on how states allocate and report their payment of Medicaid funds, and
empowers HHS to monitor what the federal government is matching

This case concerns reimbursement for disproportionate share hospitals (“DSH”)_
those that serve a disproportionate number oflow-income patients. See 42 U.S.C. § l396r-
4(b), (d). States like Virginia, operating under a State Plan, spend heavily to reimburse
such hospitals for providing Medicaid-covered services to the indigent, and then seek
federal matching funds for those expenditures under Title XIX. Funding tracks the fiscal
year, as in all other areas of the federal budget See 42 U.S.C. § l396r-4(1'). Over time,
Congress has imposed restrictions on the matching of, and thus federal funding for, state
DSH expenditures, like those Virginia seeks recoupment for in this case. Two are relevant
here. First, Congress mandates that DSH payments by a State “in a fiscal year” not exceed
the combined state and federal DSH “allotment for the State for the fiscal year.” 42 U.S.C.
§ l396r-4(f)(l); see also 42 C.F.R. § 497.298. This is referred to as the “statewide
allotment,” and in practice, it amounts to a yearly cap for each state. Conventionally
understood, statewide allotments are basically the “upper...liinit[]” that the federal
government will match funds for each state, and Congress uses them as a tool to control
the “overall level of federal DSH funding state-by-state.” Virginia v. JO/mson, 609 F. Supp.
2d l, 3 (D.D.C. 2009).

Second, Congress instructs HHS to monitor and limit hospital-specific
reimbursements Specifically, states may not seek DSH reimbursement for in-state hospital

services where such funding would exceed “the costs incurred during the year of furnishing

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hospital services (as determined by the Secretary and net of payments under this
subchapter, other than under this section, and by uninsured patients). . .for services provided
during the year.” 42 U.S.C. § 1396r-4(g)(1)(A). These are hospital-specific limits on
federal DSH reimbursement, and Congress enacted them in an effort to address the chronic
over-payment problem in which matching funding for DSH services would exceed the “net
costs, and in some instances the total costs, of operating the facilities.” Omnibus Budget
Reconciliation Act of1993, H.R. Rep. No. 103-1 1 1, at 211-12 (1993). 1n addition to these
two requirements, Congress also requires generally that states operate their state plans in
compliance with the Medicaid Act and implementing regulations See 42 U.S.C. §§ 1396a,
1396r-4; 42 C.F.R. § 430.10.
II. Procedural History

On August 20, 2015, Cl\/IS disallowed $40,830,020 in federal funding to Virginia
for DSH payments made in 2010 and 2011.l Administrative Record (“R.”) 192~98.
Virginia originally applied for FFP by submitting a Quarterly Statement of Expenditures
(or “CMS-64”) for payments made in quarters ending in June 30, 2010; September 30,
2010; September 30, 2011; and December 31, 2011. R. 137-38. According to a letter
submitted on January 6, 2011 by the Director of the Department of Medical Assistance
Services_the state agency administering the DSH payments~these payments actually

accrued during 2006, 2007, 2008, and 2009. See R. 292-93. On its Quarterly form, too,

 

1 The Court understands that, due to a later reimbursement by HHS ofroughly $10 million,
the parties agree that the amount in controversy is $30,027,540. See Pl.’s Mot. at 10 n.7.

Virginia documented several allotments, and included the allotment year to which each
requested DSH disbursement applied. R. 258-59. Virginia also included an internal
spreadsheet showing the relationship of payments to indigent care costs in a given year.
See Pl.’s 1\/lot. at 10-1 l (characterizing spreadsheet at R. 277-80).

After considering Virginia’S full submission, Cl\/lS denied Virginia’s claimed FFP
funds, reasoning that Virginia had improperly counted DSH disbursements for one fiscal
year against indigent care costs in another fiscal year, and had thus violated federal
regulations by failing to “allocate[] to the time periods in which DSH-eligible costs were
incurred by the hospitals in providing certain services.” R. 196. ln other words, Virginia
was counting costs in one year towards allotments in another, and thereby circumventing
annual federal limits on DSH disbursements Cl\/IS cited specific examples:

[T:]he State was not allocating payments to the proper DSH FY allotment. As noted
above, payments for FY 2004 costs were applied against the FY 2006 and FY 2009
DSH allotments; payments for FY 2005 costs were applied against the FY 2006 DSH
allotment; payments for FY 2008 costs were applied against the FY 2006, FY 2007,

FY 2009 and FY 2010 allotments; and payments for FY 2009 costs were applied
against the FY 2008, FY 2011, and FY 2012 allotments

R. 195.

Agency procedure calls for an appeal to the Departmental Appeals Board (“DAB”
or “the Board”), which provides the final level of review within HHS, subject to judicial
review. See 42 C.F.R. § 430.42; cf z`d. § 405.1877(a)(4) (explaining that where the
Administrator sets forth a final decision, only that decision is subject to judicial review,
not the agency decision below which was reversed, affirmed, or modified by the

Administrator). The disallowance was upheld by the Board on August 8, 2016. See Defs.’

1\/lot. at 2; R. at l. lsike Cl\/lS, the Board concluded that Virginia’s method for allocating
payments to an allotment year was “inconsistent with the federal limitations on DSH
spending.” See R. 1. The opinion additionally observed that Virginia had itself“previously
argued that the process ofmatching DSH payments to the state DSH allotment applicable
to the year in which services were performed was not only permissible, but required under
its state plan.” R. l l-l2. Thus, the Board agreed with Cl\/lS that “Virginia’s approach was
not reasonable because it allowed ‘for a constructive end-run around the state and hospital-
specific limits imposed by Congress.”’ R. 17 (quoting Cl\/lS Br. at 17). The Board’s
decision reaffirmed the authority and prerogative of HHS to administer Medicaid funds,
and process DSH reimbursement, so as to assure no hospital in a given fiscal year would
be reimbursed in any amount that exceeded the costs incurred by that hospital during the
same fiscal year. R. 17.

Virginia filed this suit on October 7, 2016 as permitted by the Medicaid statute. See
42 C.F.R. § 430.38 (affirming the right to judicial review of federal disallowances of
Medicaid payments). After several extensions of the briefing schedule, Virginia filed its
motion for summary judgment on November 30, 2017, seeking reversal of the Board’s
decision, and HHS filed its cross-motion for summary judgment on January 19, 2018.
Here, l review the Board’s decision. After considering the briefs and relevant portions of
the administrative record, l conclude for the following reasons that the Board’s decision,
and the Government’s interpretation of the statutory scheme, was well within the bounds

of discretion afforded by law.

ANALYSIS

I. Standard of RevieW
Summary judgment “‘is an appropriate procedure for resolving a challenge to a
federal agency's administrative decision when review is based upon the administrative
record,”’ as it is here. Bloch v. Powell, 227 F. Supp. 2d 25, 30-31 (D.D.C. 2002) (quoting
Fzmclfor Anz'mals v. Babbl`lt, 903 F. Supp. 96, 105 (D.D.C. 1995)). ln such cases, the
district court “sits as an appellate tribunal” and “the entire case...is a question of law.”
Amerl`can Bl`oscl`ence, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001) (internal
citations omitted). Judicial review of a final determination rendered by a federal agency
generally is governed by the Administrative Procedure Act, 5 U.S.C. § 701 el seq.
(“APA”). Courts will thus defer to the agency’s “findings of fact if they are supported by
Substantial evidence and the |:agency’s] other findings and conclusions if they are not
arbitrary, capricious, an abuse of discretion, or contrary to law.” Momgomery Kone, lnc.
v. Sec’y ofLabor, 234 F.3d 720, 722 (D.C. Cir. 2000) (internal quotation marks omitted);

see also 5 U.S.C. § 706(2)(A).2

ln reviewing the Board’s decision under the APA, l must apply the two-step

 

2 Our Circuit has observed that “[w]hen the arbitrary or capricious standard is performing
that function of assuring factual support, there is no substantive difference between what it
requires and what would be required by the substantial evidence test, since it is impossible
to conceive of a ‘nonarbitrary’ factual judgment supported only by evidence that is not
substantial in the APA sense ....” See Ass’n of Dala Processing Se/”v. Orgam'zatz'ons, Inc. v.
Ba’. of Governors ofFeal. Reserve Sys., 745 F.2d 677, 683-84 (D.C. Cir. 1984). l thus
review questions of law and fact together for whether or not the Board’s decision was
reasonable.

framework set out in Chevron U.S.A., [nc. v. Natural Resoarces Defense Cozmcil, lnc., 467
U.S. 837 (1984); Va. Dep’l ofMea'. Assl`sz‘ance Servs. V. U.S. HHS, 678 F.3d 918, 921 (D.C.
Cir. 2012).3 First, 1 must ask whether “Congress has directly spoken to the precise question
at issue,” and, if so, “give effect to Congress’s unequivocal intent.” Chev)”on, 467 U.S. at
842-43. Second, ifthe statute “is silent or ambiguous with respect to the specific issue,” l
must determine “whether the agency’s [interpretation] is based on a permissible
construction of the statute,” giving “considerable weight” to the agency’s interpretation
Ia’. at 843. Virginia challenges HHS’s decision under both prongs of Chevron. First,
Virginia calls HHS’s determination “bogus” and “antithetical to the statute and
implementing regulations.” Pl.’s l\/Iot. at l2. Second, Virginia challenges HHS’s denial
as arbitrary and capricious because it (i) failed to defer to Virginia’s interpretation of its
State Plan and (ii) departed from prior HHS practice. See Pl.’s l\/lot. at 15-20. l disagree
as to both.
II. The Board’s lnterpretation Was Not Contrary to Law

l first turn to whether Congress’s intent emerges clearly from the wording of the
Medicaid statute. At the outset, it is worth noting that the parties dispute the plain meaning
of statutory language surrounding Congress’s restrictions on DSH disbursements

Specifically, the parties contest whether the text mandates that DSH reimbursements in any

 

3 Plaintist assertion that Clzevron deference should not be accorded laws promulgated
under the Spending Clause, see Pl.’s Opp. To Defs.’ l\/Iot. [Dkt. # 28] at 5-6, has no strong
support and is contravened by years of practice in this Circuit. Frieclman v. Sebelz`as, 686
F.3d 813, 818 (D.C. Cir. 2012) (citing Sullz`van v. Everhart, 494 U.S. 83, 88-89 (1990))
(both applying Chevron deference in reviewing HHS’s interpretation of the Social Security
Act). Thus, l reject plaintiffs argument.

given fiscal year cover only those specific services provided in that fiscal year, and thus
match only those costs actually and effectively incurred in that fiscal year.

Plaintiff contends that “Congress plainly required DSH payments to be associated
with allotment years,” Pl.’s l\/lot. at 13-14 (emphasis added), by which it means Congress
expressly allowed State Plans to employ DSH funding formulas ofthe type Virginia relied
on in making its request for reimbursement in this case. HHS arguesjust the opposite; that
is, that Congress intended to link hospital-specific limits to “the costs incurred by the
hospital...during that year.” Defs.’ Mot. at 4, 14 (quoting 42 U.S.C. § 139r-4(g)), thus
necessitating its disallowance ofreimburseinents which would, under Virginia’s State Plan,
have matched costs incurred in a separate fiscal year. One interpretation allows states to
treat costs as fungible and recordable across years, and the other insists that Congress has
sought to prohibit that as a matter of cost control. Both, of course, cannot be plainly
reflected in the words ofthe statute. And, yet, neither interpretation is facially implausible
Discerning Congress’s intent here is difficult; the only plain thing about this dispute is that
it will not be resolved at Chevron ’s first step. '[`he language of the statute is ambiguous
enough regarding whether states must match costs to allocation on an annual basis that the
Board’s decision must be reviewed for its reasonableness, and with careful regard for the
broad agency discretion afforded under Chevroit step two.

III. The Board’s Interpretation Was Reasonable

Both parties agree that Congress entrusted the administration of the l\/ledicaid statute

to HHS, and therein empowered it to manage both the overall funds distributed to each

state pursuant to Congress’s limits on annual disbursements (state allotment) and

9

Congressional limits on each hospital’s disbursement (hospital-specific limit). Courts must
defer to an agency’s interpretation of a statute so long as it is “rational and supported by
the record.” Oceana, lnc. v. Locke, 670 F.3d 1238, 1240 (D.C. Cir. 2011); see also
Chevron, 467 U.S. at 844 (courts give “considerable def`erence” to an agency’s statutory
interpretation). Furthermore, it is also well-established that “an agency's interpretation of
one of its own regulations commands substantial judicial deference.” Drake v. FAA, 291
F.3d 59, 68 (D.C. Cir. 2002) (citing Bowles v. Se/ninole Rock & Sana’ Co., 325 U.S. 410
(1945)). lmportantly, l need not decide whether HHS’s interpretation was the only
plausible reading of the relevant statutory language; merely whether it was a reasonable
one. See Chevron, 467 U.S. at 842-45; KNEnergy, Inc. v. F.E.R.C., 968 F.2d 1295, 1299-
1300 (D.C. Cir. 1992) (“Our role is not to ensure that [the agency’s] reading is the most
natural or the most logical, but only that it is ‘reasonable and consistent with the
regulation.”’) (quoting National Trastfor Historic Preservation v. Dole, 828 F.2d 776, 782
(D.C. Cir. 1987)).

Virginia argues that Board’s finding imposes a “fourth requirement” on state plans
that is in neither the statute and regulations, nor the Board’s prior precedent vis-a-vis
Virginia’s State Plan. Pl.’s l\/lot. at l. According to Virginia, Hl-»lS’s interpretation was
unreasonable because Virginia’s allocation of payments under its State Plan is explicitly
authorized by the l\/fedicaid regulations:

lfa State’s actual DSH expenditures applicable to a Federal fiscal year are less than its
final State DSH allotment for that Federal fiscal year, the State is permitted, to the
extent allowed by its approved State plan, to make additional DSH expenditures

applicable to that Federal fiscal year up to the amount of its final DSH allotment for
that F ederal fiscal year.

10

Pl.’s l\/lot. at 20 (quoting 42 C.F.R. § 447.297(d)(3)).

HHS, for its part, argues that the Medicaid statute and regulations require a
relationship between the fiscal year in which the costs were incurred and the fiscal year in
which the allocation is made. Because the hospital-specific limit was designed to cap
yearly payments per hospital, the arguments goes, “the State payment methodology cannot
be administered in such a way as to potentially thwart the clearly stated purpose of the
hospital-specific limits.” Defs.’ l\/lot. at 14. The Board’s decision explains that Virginia’s
calculation method risks making an end-run around federal spending limits on Medicaid
and that CMS’s disallowinent was based squarely in the state’s violation of those limits
See Defs.’ l\/lot. at 13 (citing R. 16-17).

While far from clear, it does appear that Congress framed both the state allotment
and hospital-specific limit provisions as an annual limit of sorts. 42 U.S.C. § 1396r-4(D(1)
(capping the “allotment for the State for the fiscal year”); 42 U.S.C. § l396r-4(g)(1)(/-\)
(prohibiting hospital disbursements in excess of “the costs incurred during the year of
furnishing hospital services...for services provided during the year.”). lndeed, HHS’s
regulations are more explicit, making reference to both “expenditures” and “allotment[s]”
within a “Federal fiscal year.” 42 C.F.R. § 447.297(d)(3). Here, the Board concluded that
Congress’s statutory aim of limiting annual DSH funding could only be accomplished if
there was some relationship between allocation and costs in a given fiscal year. As such,

when it came to Virginia’s allocation of Medicaid funds one year to the next, costs are not

treated as fungible, and a formal yearly matching between expenditure and reimbursement

11

is not optional. That interpretation was reasonable, even if not the only compelled.4

As a secondary challenge, Virginia also argues that the Board’s decision “departed”
from one of its 2002 decisions, as well as from preamble language to a 2008 rulemaking
addressing DSH audits Pl.’s l\/fot. at 17, 22. ln that 2002 holding, the Board upheld
Virginia’s interpretation of its own State Plan to allow DSH payments to be made in “on a
quarterly basis” in and beyond the fiscal year to which the costs applied. See Virginia
Department ofMea’ical Assistance Services, DAB No. 183 8, 2002 WL 2031569 (2002).
HHS’s departure from this precedent, asserts Virginia, is arbitrary and capricious

Virginia’s argument, however, is on doubly-shaky ground. First, the current Board
decision is at least consistent_if not perfectly harmonious-with its prior decision
upholding Virginia’s practice of making payments in installments ln fact, Virginia’s
application for FFP DSH payments in this case requested federal funding for four
installments over a two-year period: June 30, 2010; September 30, 2010; September 30,
2011; and December 31, 2011. R. 4, 196. As such, the Board took no issue with Virginia’s
“prospective” payment methodology Defs.’ l\/lot. at 14-15. The issue here instead was
that Virginia’s payments in 2010-2011 related to costs incurred in prior years, all the way

back to 2006. See R. 6.

 

4 Take a simplified example: in year one, Virginia DSH facilities incur costs of “4”, and
then in year two, costs of “8”. Now, imagine a state-specific allotment cap of “6” for
reimbursement Naturally, Virginia would like an effective “credit” for its unused
reimbursement capacity of “2” from year one, and would like that credit applied in year
two, where the state is over its allotment. That makes some sense, given that HHS will not
exceed overall spending limits for the two-year period. But it also frustrates HHS’s goal
of controlling costs on a year-by-year basis

12

As to the 2008 rulemaking preamble, Virginia cites CMS’s refusal to add language
tying DSH payments directly to services rendered in a given fiscal year. Virginia argues,
effectively, that the Board’s hands are now bound, and that HHS may no longer insist that
annual payments relate to annual costs Pl.’s l\/fot. at 17 (citing 58 Fed. Reg. at 43,177).
The Board explicitly considered the 2008 rule, see R. 15-16, but concluded that “[t]he fact
that DSH payment adjustment is not calculated based on, or directly incorporated in, the
standard rates billed and paid for day-to-day services does not mean that the DSH payments
bear no relationship to the costs incurred by the hospitals in a fiscal year.” R. 16.

Virginia does not, and cannot, challenge the fact that the Board carefully considered
and analyzed the statute and regulations, Virginia’s State Plan, and even its own prior
practice in considering the claims at issue here. The Board explicitly considered,
discussed, and reconciled each of these things Nor am l swayed that the Board failed to
properly defer to Virginia’s interpretation of its own State Plan. See Pl.’s 21~24.
Plaintif`fs citations on this point are weak at best. See Pl.’s l\/lot. at 21 (quoting a 1988
Board decision and 1975 Ninth Circuit case). While it is clear that Congress provides the
states flexibility as part of the overall Medicaid scheme, see 42 C.F.R. § 430.10, it is,
nonetheless, axiomatic that the federal government may attach conditions to the
disbursement of federal matched funds so long as those conditions are unambiguous See
Arlington Cent. Sch. Dist. Ba’. OfEa’uc. V. Marplty, 548 U.S. 291, 296 (2006). Here, the
Board appropriately considered Virginia’s role in deciding on a disbursement
methodology, but found that methodology at odds with the federal limits on overall DSH

spending. As defendants put it, “[w]hile the hospital-specific limit does not supplant a

13

State’s payment methodology, the State payment methodology cannot be administered in
such a way as to potentially thwart the clearly stated purpose of the hospital-specific
limits.” Defs.’ l\/lot. at 14. Thus, l find that, far from imposing an illegitimate “fourth
requirement,” HHS’s interpretation was merely a reasonable interpretation of the existing
statutory scheme and was not arbitrary and capricious.5
CONCLUSION

For the reasons outlined above, l find that defendants’ disallowance ofFFP was not
contrary to law or arbitrary and capricious Thus, for all of the reasons outlined in this
Opinion, defendants’ Motion for Summary Judgment [Dkt. #24] is GRANTED and
plaintiffs Cross-l\/lotion for Summary Judgment [Dkt. #22] is DENIED. HHS’s decision

is upheld.

l _
Rlci--lARMoN

United States District Judge

 

5 Virginia also claims that the Board’s interpretation was a “new rule” requiring notice and
coinment. Pl.’s l\/lot. at 17-18. Because l find that HHS’s interpretation was instead a
reasonable interpretation of existing regulations, l reject Virginia’s argument that the lack
of notice and comment was arbitrary and capricious

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