     Case: 13-30240      Document: 00512620407         Page: 1    Date Filed: 05/06/2014




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT    United States Court of Appeals
                                                      Fifth Circuit

                                                                                FILED
                                                                              May 6, 2014
                                      No. 13-30240
                                                                             Lyle W. Cayce
                                                                                  Clerk
STATE OF LOUISIANA DEPARTMENT OF HEALTH AND HOSPITALS,

                                                 Plaintiff – Appellant

v.

UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES;
KATHLEEN SEBELIUS, Secretary of the United States Department of Health
and Human Services, in her official capacity,

                                                 Defendants – Appellees


                   Appeal from the United States District Court
                       for the Middle District of Louisiana
                              USDC No. 3:11-CV-76


Before JONES, WIENER, and GRAVES, Circuit Judges.
EDITH H. JONES, Circuit Judge:*
       At issue in this appeal is whether the State of Louisiana, through its
Department of Health and Hospitals, must repay the federal government
nearly $240 million that it received in Medicaid funds for charity care at nine
public hospitals from 1996-2006. The state challenges an adverse decision of
the Departmental Appeals Board (“The Board”) of the United States
Department of Health and Human Services (“HHS”) and thus faces the narrow


       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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scope of review afforded by the Administrative Procedure Act. We may only
reverse the agency decision if it was arbitrary and capricious, not in accord
with law, or unsupported by substantial evidence.      5 U.S.C. § 706(2)(A),(E);
Cedar Lake Nursing Home v. U.S. Dep’t. of Health and Human Servs., 619 F.3d
453, 456 (5th Cir. 2010). The State reiterates the arguments that the Board
and the district court rebuffed. Finding no reversible error of fact or law, we
affirm the district court judgment for essentially the same reasons.
      To do so, it is unnecessary fully to recount the complex Medicaid
reimbursement standards or several years of procedural jockeying that
preceded the Board’s ruling against the State. Instead, we frame the basic
issues and add a few comments concerning Louisiana’s principal arguments.
                               BACKGROUND
      Centers for Medicare and Medicaid Services’ (“CMS”) audits revealed
that over a decade, nine Louisiana public hospitals received hundreds of
millions of dollars in excess payments over their uncompensated costs (“UCC”)
of caring for low-income patients. The State made payments from federal
funding under a series of Medicaid plans that were pre-approved by CMS. The
plans paid each hospital’s interim estimated UCC costs quarterly in advance,
with a full accounting and settlement (reflecting the actual costs incurred) to
occur at the end of the year. From 1995-97, the plan provided that “[i]f at audit
or final settlement . . . the actual uncompensated costs are determined to be
less than the estimated uncompensated costs, appropriate action shall be
taken to recover such overpayment.” (Louisiana concedes that this provision
required it to repay excess amounts for those years.)         From 1997-2003,
however, an amended plan deleted this explicit reimbursement duty, but the
plan provided that “[relevant] payments to a hospital . . . shall not exceed the
hospital’s net uncompensated cost . . . for the state fiscal year to which the
payment is applicable.”     Further, the payment system is deemed to be
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“retrospective,” in accord with the procedure outlined in the prior plan. The
only reference to recoupment of overpayments from providers was modified to
state that, “[a]ppropriate action shall be taken to recover any overpayments
resulting from the use of erroneous data, or if it is determined upon audit that
a hospital did not qualify.” Finally, from 2003-05, the plan remained like the
1997-2003 plan and continued to state that “[f]inal payment will be based on
the uncompensated cost data per the audited cost report for the period(s)
covering the state fiscal year.” 1
      Although the Medicaid statute generally states that a hospital may not
receive more than its actual UCC in payments for low-income patient care,
42 U.S.C. § 1396r-4(g)(1)(A), and requires overpayments to states to be
reimbursed to the federal government, 42 U.S.C.§ 1396b(d)(2)(C), neither the
Board nor the district court relied on these provisions to uphold Louisiana’s
reimbursement obligation. Instead, the Board, whose decision we review,
relied on the plain language of Louisiana’s “retrospective” plans and decided
that compliance with the plans required Louisiana to account for and recoup
excess UCC payments at the end of each fiscal year.
      Louisiana’s challenge to the administrative decision focuses on two
arguments.       First, the State contends that its plans distinguished
“retrospective” payment from “recoupment,” and after 1997, the plans
expressly did not require recoupment of overpaid UCC from the hospitals and
reimbursement to the federal government. Second, the State’s removal of a
recoupment provision from the later plans means that the State was no longer
obliged to seek recoupment. We discuss each of these.




      1 Louisiana did not furnish a separate plan for 2005-06 but the parties treat it like
these predecessor plans.
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                                  No. 13-30240
        1. Retrospective payments versus recoupment.
        Louisiana argues that the Board failed to distinguish the State’s
payment system from a (federally non-existent) duty to recoup overpayments
at the end of the year from hospitals that, according to audits, were
overcompensated for their UCC.              According to the State, a proper
interpretation of its post-1997 plans is that while the State could seek further
reimbursement for the public hospitals whose UCC had been underpaid by the
federal government, there was no provision for recoupment of overpayments.
In other words, the State lays claim to an asymmetrical retrospective payment
system and further aspires to bind HHS to that system because States have
“flexibility” in designing their Medicaid plans, and the Board ordinarily defers
to a State’s reasonable interpretation of its own plan.      We do not find the
Board’s rejection of this position arbitrary and capricious or not in accord with
law.
        Noting that the 1997-2003 plan itself describes the payment system for
public hospitals as “retrospective,” rather than “prospective,” the Board
explained that its decisions have long recognized that “retrospective” is a term
of art in healthcare reimbursement. In a retrospective system, a state makes
payments to a provider based on estimates of the UCC for the upcoming year.
At the end of the year, the provider submits a report of the actual costs
incurred, which is subject to audit and potential appeal. Interim payments are
then reconciled to actual costs and final payment is made, aligning the
payments with the actual costs. In contrast, payments made in a “prospective
system” are not adjusted based on actual costs incurred during the year.
Compare Washington Hosp. Ctr. v. Bowen, 795 F.2d 139, 142 n.2 (D.C. Cir.
1986) (explaining prospective payment system as “not based on a hospital’s
actual costs . . . and not subject to retroactive adjustment”), with Massachusetts
v. Sec’y of Health & Human Servs., 749 F.2d 89, 90-91 (1st Cir. 1984)
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(describing a state Medicaid “retrospective rate-setting” in which a state sets
an “interim rate” and “advances to the provider an interim amount” which is
recovered or offset at the end of the period to match actual costs, as determined
from subsequent reports and audits). The Board also maintained that “federal
law has always required states to reimburse hospitals according to the
methodology in the approved Medicaid state plan, and, with very limited
exceptions that do not apply here, requires states to return the federal share
of any payments to hospitals in excess of the amount determined according to
the state plan.” 2
       The Board interpreted Louisiana’s plans according to their precise terms
and held them to be “retrospective” and therefore to require an annual
reconciliation of payments to actual costs incurred by the hospitals and a
return of excess payments. We need not “defer” to the Board’s interpretation
of the Louisiana law to conclude that it correctly reads the plans.                  That
Louisiana advocates its ability to “recoup” additional funds from the federal
government in case of UCC underpayments demonstrates how retrospective
reconciliation works in its plans, and there is no textual basis in the plans for
the State’s asymmetrical interpretation. The Board’s decision in this respect
was neither arbitrary and capricious nor contrary to law.




       2 We do not discuss the impact of a federal provision enacted in 2003 and much later
regulations that deal specifically with reimbursement of the federal government for excess
UCC, as those measures post-date the events here.
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       2. Removal and revision of the recoupment provision.
       Louisiana removed the express recoupment provision from its plans after
1997 and replaced it with a provision stating that, “Appropriate action shall be
taken to recover any overpayments resulting from the use of erroneous data,
or if it is determined upon audit that a hospital did not qualify.” According to
the State, this change demonstrated its intent only to seek recoupment for
overpayments other than UCC from the public hospitals. The State asserts
that by eliminating recoupment of UCC overpayments, the State promoted
administrative efficiency and limited disruption to the hospitals that serve
principally needy families, “especially . . . where Louisiana expected its
forecasts of UCC to avoid significant overstatement, such that recoupments
would serve little purpose.” Consequently, the Board erred by rejecting its
interpretation. 3
       The Board responded to the State’s argument in several ways. First, the
Board noted that to the extent the revision refers to “erroneous data,” it is
generally applicable to all hospitals in Louisiana, including private hospitals
that operate on a prospective payment system as well as the public hospitals
that receive compensation on a retrospective system. Second, the absence of a
specific recoupment provision does not alter the plan’s general methodology
from that of a retrospective payment system, which by its nature and terms
relies on an end-of-year accounting and reconciliation process. Further, the
Board questioned “whether a State plan provision specifically permitting
recovery from a provider is a necessary prerequisite for recovery of an amount
in excess of what the State plan allows as reimbursement for Medicaid
services.” Where “a state has effectively overpaid itself, adjustment of the



       If the State so carefully adjusted its forecasts to avoid significant overstatement of
       3

UCC, how did it amass $240 million in overpayments in ten years?
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federal share is more important than the specific source of state funds used to
make the adjustment.” In other words, where a state has overpaid Medicaid
funds to the public hospitals for UCC, whether and how a state recovers the
overpayments from public hospitals does not affect whether the state must
return the overpaid federal share. Even if we were to disagree with the Board’s
conclusion that the removal of the recoupment provision was “inadvertent,” the
other reasons for the Board’s decision are compelling and render its decision
neither arbitrary and capricious nor contrary to law.
      Further supporting the Board’s position is that other circuit courts
uniformly uphold states’ obligations to return the federal share of Medicaid
overpayments before the state recovers the overpayment amount from
individual provider hospitals. Dep’t. of Soc. Servs., Div. of Family Servs. v.
Bowen, 804 F.2d 1035, 1040 (8th Cir. 1986); Perales v. Heckler, 762 F.2d 226,
227 (2d Cir. 1985); Massachusetts v. Sec’y of Health & Human Servs., supra at
90, 95. That these decisions did not deal with UCC overpayments is irrelevant,
as all relied on 42 U.S.C. § 1396b(d)(2)(C), the generally applicable Medicaid
payment adjustment provision.
      For the foregoing reasons, the district court judgment, affirming the
Board’s decision against Louisiana, is AFFIRMED.




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