                United States Court of Appeals
                           For the Eighth Circuit
                       ___________________________

                               No. 17-2896
                       ___________________________

  Children’s Health Care, doing business as Children’s Hospitals and Clinics of
              Minnesota; Gillette Children’s Specialty Healthcare

                      lllllllllllllllllllllPlaintiffs - Appellees

                                          v.

Centers for Medicare and Medicaid Services; Seema Verma, Administrator of the
 Centers for Medicare and Medicaid Services, in her official capacity; Alex M.
   Azar, II, Secretary of Health and Human Services, in his official capacity

                     lllllllllllllllllllllDefendants - Appellants
                                      ____________

                    Appeal from United States District Court
                   for the District of Minnesota - Minneapolis
                                  ____________

                            Submitted: June 13, 2018
                             Filed: August 20, 2018
                                 ____________

Before WOLLMAN, ARNOLD, and KELLY, Circuit Judges.
                         ____________

WOLLMAN, Circuit Judge.

     The Centers for Medicare and Medicaid Services; Seema Verma, the Centers’
Administrator; and Alex M. Azar, II, Secretary of Health and Human Services,
(collectively, the Secretary), appeal the district court’s1 partial grant of summary
judgment for Children’s Health Care2 and Gillette Children’s Specialty Healthcare
(collectively, Children’s Hospitals). The Secretary also challenges the district court’s
decision to vacate a Medicaid policy—Frequently Asked Question 33—which
explained how to calculate a hospital’s uncompensated medical care costs. We
affirm.

       The federal government and individual states administer the Medicaid program,
which provides medical care to individuals “whose income and resources are
insufficient to meet the costs of necessary medical services.” See 42 U.S.C. § 1396-1.
Each state submits a plan explaining how it will provide medical care to Medicaid
patients, and if the Secretary for Health and Human Services approves the plan, the
state may receive federal funds. Id. The cost of treating Medicaid patients, however,
exceeds Medicaid’s resources. As a result, Children’s Hospitals assert that they
receive $0.57 to $0.70 on every dollar spent providing Medicaid care, resulting in
multimillion dollar losses each year. To help ease such financial strain, Congress
authorized Disproportionate Share Hospital Payments (Hospital Payments), which
allow states to provide additional funds to hospitals serving large numbers of
Medicaid patients. See 42 U.S.C. § 1396a(a)(13)(A)(iv).

       Congress subsequently limited Hospital Payments to the “costs incurred during
the year of furnishing hospital services.” 42 U.S.C. § 1396r-4(g)(1)(A).3 In 2008, the


      1
       The Honorable Wilhelmina M. Wright, United States District Judge for the
District of Minnesota.
      2
      Children’s Health Care does business as Children’s Hospitals and Clinics of
Minnesota.
      3
          The statute states in part:

      A payment adjustment during a fiscal year shall not be considered to be

                                          -2-
Secretary promulgated the following formula for calculating “[t]otal annual
uncompensated care costs:”

      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 FFS rate payments, Medicaid managed care
      organization payments, supplemental/enhanced Medicaid payments,
      uninsured revenues, and Section 1011 payments for inpatient and
      outpatient hospital services.

42 C.F.R. § 447.299(c)(16) (2009).4 Under this formula, a hospital calculates the
total cost of providing medical care to Medicaid eligible patients and uninsured
patients.5 From that total, the hospital subtracts payments received from Medicaid,


      consistent with subsection (c) of this section with respect to a hospital
      if the payment adjustment exceeds 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.
      4
       The Secretary amended the relevant language of the controlling
regulation—42 C.F.R. § 447.299(c)—on June 2, 2017. Children’s Hospitals’
complaint challenges the regulation as it existed before the amendment. The current
regulation is not at issue in this case, and we make no legal determinations regarding
it.
      5
        The Secretary advances a strained reading of § 447.299(c)(9)-(11), which uses
language similar to § 447.299(c)(16). In essence, the Secretary argues that the words
“total cost of care for furnishing . . . hospital services,” account for payments from
Medicaid and private insurance in radically different manners. Nothing in the
regulation or the underlying statutes indicates that those words operate in that way.

                                         -3-
payments by uninsured patients, and payments under Section 1011.6

       Although the language of the regulation may appear comprehensive, it does not
state that private insurance payments should be deducted when calculating the “total
annual uncompensated care costs” for Medicaid eligible individuals.7 To address this
issue, the Secretary posted an online set of Frequently Asked Questions regarding
§ 447.299. Question 33—which was not subject to notice and comment procedures
under the Administrative Procedures Act—explained that “hospitals should [] offset
both Medicaid and third-party revenue associated with the Medicaid eligible day
against the costs for that day to determine any uncompensated amount.” Question 33
requires hospitals to include private insurance payments when calculating
“uncompensated care costs.” The district court determined that because Question 33
constituted a legislative rule that was subject to notice and comment procedures, the
Secretary was without authority to adopt it as an interpretative rule.

       We review de novo whether an agency’s promulgated rule is legislative or
interpretative. Iowa League of Cities v. EPA, 711 F.3d 844, 872 (8th Cir. 2013).


one set of words should simultaneously have two different, opposing meanings. We
thus decline to adopt this interpretation.
      6
       Section 1011 payments dealt with emergency health services provided to
undocumented aliens. These payments are not relevant here. Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, § 1011,
117 Stat. 2066, 2432-35.
      7
       Some children may have private insurance coverage through their parents and
be eligible for Medicaid because they have a qualifying disability. See 42 U.S.C.
§ 1396a(a)(10)(A)(i)(II), (ii)(I). When this dual eligibility occurs, the insurance
company covers the insured’s medical costs, and Medicaid covers any deficiency
between the insurance company’s coverage and Medicaid’s standard payment. The
Secretary asserts that, in practice, this results in Medicaid routinely paying nothing.


                                         -4-
When reviewing an agency’s actions, we will “hold unlawful and set aside” any
action that is “without observance of procedure required by law.” 5 U.S.C.
§ 706(2)(D). Under 5 U.S.C. § 553(b) and (c), “[a]gencies must conduct ‘rule
making’ in accord with the [Administrative Procedure Act’s] notice and comment
procedures.” Iowa League of Cities, 711 F.3d at 855 (citing 5 U.S.C. § 553(b), (c)).
This requirement applies to all new legislative rules but excludes interpretative rules
and general statements of policy. Id. (citations omitted). “Whether or not a binding
pronouncement is in effect a legislative rule that should have been subjected to notice
and comment procedures thus depends on whether it substantively amends or adds
to, versus simply interpreting the contours of, a preexisting rule.” Id. at 873 (citing
U.S. Telecomm. Ass’n v. FCC, 400 F.3d 29, 34-35 (D.C. Cir. 2005)). “Expanding
the footprint of a regulation by imposing new requirements, rather than simply
interpreting the legal norms Congress or the agency itself has previously created, is
the hallmark of legislative rules.” Id. (citations omitted).

        The Secretary argues that Question 33 is an interpretative rule because it
merely clarifies and explains how the existing law applies to a particular situation.
The Secretary compares Question 33 to the “informal Medicare reimbursement
guideline” in Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 90 (1995), in
which the Supreme Court upheld a reimbursement guideline that explained the
Secretary’s decision to depart from generally accepted accounting principles when
amortizing bond defeasance losses. Id. at 101. The Court reasoned in part that
although the regulations required the use of “[s]tandardized definitions, accounting,
statistics, and reporting practices,” the reimbursement guideline did “not amount to
a substantive change to the regulations” because the Secretary was not required to
“address every conceivable question” that might arise “in the process of determining
equitable reimbursement.” Id. at 92, 96, 101. The Secretary was thus free to
distinguish between hospital accounting practices and reimbursement practices. Id.
92-95. The Secretary argues that Question 33, like the reimbursement guideline in



                                         -5-
Shalala, merely clarifies what is already in the regulation and its preamble.8 The
Secretary asserts that the words “uncompensated” and “unreimbursed” necessarily
require Children’s Hospitals to include private insurance payments when calculating
their eligibility for Hospital Payments. We disagree.

       Like the district court, we conclude that by imposing new reporting
requirements for private insurance payments, Question 33 expanded the footprint of
§ 447.299 and thus constituted a substantive change in the regulation. As noted by
the Fourth Circuit Court of Appeals, Question 33 is a legislative rule, in part, because
it “does not derive from the [underlying] statute or the 2008 rule.” Children’s Hosp.
of the King’s Daughters, Inc. v. Azar, -- F.3d --, 2018 WL 3520399 (4th Cir. July 23,
2018). No authority cited by the Secretary—other than Question 33—addresses
private insurance payments. Unlike the general regulations at issue in Shalala,
§ 447.299 has specific language explicitly stating what payments must be deducted
from each hospital’s “total cost of care.” The preamble that the Secretary relies on
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. The Secretary’s own definition of “uncompensated care
costs” does not include private insurance payments. In essence, the Secretary asks
us to read substantive changes into the regulation under the guise of interpretation.

      8
          The 2008 preamble states in part:

      [W]e believe the costs attributable to dual eligibles [for Medicare and
      Medicaid] should be included in the calculation of the uncompensated
      costs of serving Medicaid eligible individuals. But in calculating those
      uncompensated care costs, it is necessary to take into account both the
      Medicare and Medicaid payments made, since those payments are
      contemplated under Title XIX.

73 Fed. Reg. at 77,912.

                                          -6-
We decline to do so.

       Furthermore, assuming that Congress delegated the Secretary the authority to
enact Question 33—an issue we do not now decide—the use of “expressly delegated
authority” leads the courts to “generally treat the agency action as legislative, rather
than interpretive, rulemaking.” Children’s Hosp. of the King’s Daughters, Inc., --
F.3d at -- (citing Iowa League of Cities, 711 F.3d at 873); see also N.H. Hosp. Ass’n
v. Azar, 887 F.3d 62, 71 (1st Cir. 2018) (same). As noted by the First Circuit Court
of Appeals, this general rule is appropriate here because Rule 33 did not rely on an
“interpretive methodology,” but “looks to us more as if the Secretary is using
delegated power to announce a new policy out of whole cloth, rather than engaging
in an interpretive exercise.” N.H. Hosp. Ass’n, 887 F.3d at 72. For these reasons, we
join the First and Fourth Circuits in concluding that Question 33 is a legislative rule
that was not adopted in accordance with the procedure required by law and thus must
be set aside, notwithstanding the Secretary’s policy arguments to the contrary. N.H.
Hosp. Ass’n, 887 F.3d at 70, 77; Children’s Hosp. of the King’s Daughters, Inc., --
F.3d at --; 5 U.S.C. § 706(2)(D).

      The judgment is affirmed.
                     ______________________________




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