                  UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF COLUMBIA
________________________________________
                                         )
CHILDREN’S HOSPITAL ASSOCIATION OF       )
TEXAS; CHILDREN’S HEALTH CARE d/b/a      )
CHILDREN’S HOSPITAL AND CLINICS OF       )
MINNESOTA; GILLETTE CHILDREN’S           )
SPECIALTY HEALTHCARE; CHILDREN’S         ) Civil Action No.
HOSPITAL OF THE KING’S DAUGHTERS,        ) 17-844 (EGS)
INC.; and SEATTLE CHILDREN’S HOSPITAL, )
                                         )
               Plaintiffs,               )
                                         )
          v.                             )
                                         )
ALEX AZAR, in his official               )
capacity, Secretary of Health and        )
Human Services; SEEMA VERMA, in her      )
official capacity, Administrator of      )
the Centers for Medicare and Medicaid   )
Services; and CENTERS FOR MEDICARE       )
AND MEDICAID SERVICES, 1                 )
                                         )
               Defendants.               )
________________________________________)

                       MEMORANDUM OPINION

     Medicaid is a federal program that helps to cover the costs

of providing medical care to qualified individuals. Some

hospitals treat significantly higher percentages of Medicaid-

eligible patients than others. Because Medicaid does not

generally provide the same level of reimbursement as other types




1    Pursuant to Federal Rule of Civil Procedure 25(d), the
Court substitutes as defendant the Secretary of Health and Human
Services, Alex Azar, for former Secretary of Health and Human
Services, Thomas E. Price.
                                1
of insurance coverage, such hospitals are often at a financial

disadvantage. To rectify this disadvantage, and thereby

encourage hospitals to serve Medicaid-eligible patients,

Congress has provided for supplemental Medicaid payments to such

hospitals. The supplemental payments are subject to limits to

ensure that no hospital receives payments that would result in a

profit, rather than covering Medicaid-related costs to rectify

the disadvantage. This case concerns the method of calculating

the limit of these supplemental payments.

     Specifically, this lawsuit challenges a final rule that

defines how “costs” are to be calculated for purposes of

determining the limit on the amount of the supplemental payment

a hospital serving a disproportionate share of Medicaid-eligible

individuals is entitled to receive. See Medicaid Program:

Disproportionate Share Hospital Payments – Treatment of Third

Party Payers in Calculating Uncompensated Care Costs, 82 Fed.

Reg. 16114-02, 16117 (Apr. 3, 2017) (“Final Rule”). Defendants –

the Secretary of Health and Human Services (“the Secretary”),

Centers for Medicare and Medicaid Services (“CMS”), and the CMS

Administrator – claim that the Medicaid Act permits them to

define “costs” in the Final Rule as “costs net of third-party

payments, including, but not limited to, payments by Medicare

and private insurance.” 42 C.F.R. § 447.299(c)(10)(i).

Plaintiffs – one children’s hospital association, whose members

                               2
are eight free-standing children’s hospitals in the state of

Texas, and four other free-standing children’s hospitals located

in Minnesota, Virginia, and Washington – ask the Court to vacate

the Final Rule as contrary to the plain language of the Medicaid

Act and as arbitrary and capricious under the Administrative

Procedures Act.

     Pending before the Court are plaintiffs’ combined motion

for a preliminary injunction and for summary judgment,

defendants’ motion to strike exhibits supporting plaintiffs’

motion for summary judgment, defendants’ motion for summary

judgment, and plaintiffs’ motion for a status hearing. Upon

consideration of the parties’ memoranda, the parties’ arguments

at the motions hearing, the administrative record, the

applicable law, and for the following reasons, the Court grants

plaintiffs’ motion for summary judgment and vacates the Final

Rule. The Court further grants defendants’ motion to strike,

denies defendants’ motion for summary judgment, denies

plaintiffs’ motion for a preliminary injunction, and denies

plaintiffs’ motion for a status hearing.


I.   BACKGROUND

       A. The Medicaid Act

     Medicaid is a “joint state-federal program in which

healthcare providers serve poor or disabled patients and submit

claims for government reimbursement.” Universal Health Servs.,
                               3
Inc. v. United States, 136 S. Ct. 1989, 1996-97 (2016). In

addition to serving low-income individuals, Medicaid also

provides benefits to children with certain serious illnesses,

without regard to family income. See, e.g., 42 U.S. C. §

1396a(a)(10)(A)(i)(II) (children are eligible for Medicaid if

they are eligible for Supplemental Security Income (“SSI”)); 20

C.F.R. § 416.934(j) (children born weighing less than 1,200

grams are presumptively eligible for SSI).

     To encourage states to participate in Medicaid, “[f]ederal

and state governments jointly share the cost.” Va. Dep’t of Med.

Assistance Servs. v. Johnson, 609 F. Supp. 2d 1, 2 (D.D.C.

2009). Participating states administer their own program

“pursuant to a state Medicaid plan which must be reviewed and

approved by the Secretary of HHS.” Id.; see also 42 U.S.C. §

1396a. Once the Secretary or the Secretary’s designee approves a

state plan, the state receives federal financial participation

to cover part of the costs of its Medicaid program. 42 U.S.C. §

1396b(a)(1). If a state fails to comply with the statutory or

regulatory requirements governing Medicaid, the federal

government may recoup federal funds from the state. See id. §§

1316(a), (c)–(e).

       B. Disproportionate Share Hospitals

     In 1981, facing “greater costs . . . associated with the

treatment of indigent patients,” D.C. Hosp. Ass’n v. District of

                               4
Columbia, 224 F.3d 776, 777 (D.C. Cir. 2000), Congress amended

Medicaid to require states to ensure that payments to hospitals

“take into account . . . the situation of hospitals which serve

a disproportionate number of low-income patients with special

needs,” 42 U.S.C. § 1396a(13)(A)(iv). This amendment reflected

“Congress’s concern that [M]edicaid recipients have reasonable

access to medical services and that hospitals treating a

disproportionate share of poor people receive adequate support

from [M]edicaid.” W. Va. Univ. Hosps. v. Casey, 885 F.2d 11, 23

(3d Cir. 1989).

     These payments do not compensate a hospital for providing a

particular service to a particular patient; rather, they seek to

rectify in part any deficit the hospital may face solely because

it treats more Medicaid-eligible patients than most. See

Johnson, 609 F. Supp. 2d at 3 (“The intent was to stabilize the

hospitals financially and preserve access to health care

services for eligible low-income patients.”). Accordingly, the

amendment created “payment adjustment[s]” for qualifying

hospitals. See 42 U.S.C. § 1396r-4(c). Such payments are

available to any hospital that treats a disproportionate share

of Medicaid patients (a disproportionate-share hospital or

“DSH”). See id. § 1396r-4(b). In particular, Congress “deemed”

hospitals to be DSH hospitals if “the hospital’s medicaid

inpatient utilization rate . . . is at least one standard

                               5
deviation above the mean medicaid inpatient utilization rate for

hospitals receiving medicaid payments in the State” or if “the

hospital’s low-income utilization rate . . . exceeds 25

percent.” Id. § 1396r-4(b)(1).

     In 1993, the Medicaid program was amended to limit DSH

payments on a hospital-specific basis to assuage concerns that

some hospitals were receiving DSH payments in excess of “the net

costs, and in some instances the total costs, of operating the

facilities.” H.R. Rep. No. 103-111, at 211 (1993), reprinted in

1993 U.S.C.C.A.N. 278, 538. Congress was particularly concerned

by reports that some states were “making DSH payment adjustments

to hospitals that d[id] not provide inpatient services to

Medicaid beneficiaries” at all. Id. Because the very purpose of

DSH payments was “to assist those facilities with high volumes

of Medicaid patients,” Congress wanted to ensure that payments

were directed to hospitals that were “unlikely to have large

numbers of privately insured patients through which to offset

their operating losses on the uninsured.” Id. To mitigate these

concerns, the amendment provided that a DSH payment may not

exceed:

          [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

                                 6
          have no health insurance (or other source of
          third party coverage) for services provided
          during the year.

42 U.S.C. § 1396r-4(g)(1)(A). Thus, for Medicaid patients, the

Medicaid Act sets the hospital-specific limit (“HSL”) for DSH

payments as “the costs incurred during the year of furnishing

hospital services” to Medicaid-eligible individuals “as

determined by the Secretary and net of payments” under the

Medicaid Act (referred to as the “Medicaid shortfall”). Id.

       C. Auditing and Reporting Requirements

     To ensure that DSH payments comply with statutory

requirements, the Medicaid Act was again amended in 2003 to

require that each state provide an annual report and an audit of

its DSH program. See id. § 1396r-4(j). The audit must confirm,

among other things, that:

          (C) Only the uncompensated care costs of
          providing inpatient hospital and outpatient
          hospital services to individuals described in
          [Section 1396r-4(g)(1)(A)] . . . are included
          in the calculation of the hospital-specific
          limits[;]

          (D) The State included all payments under this
          subchapter, including supplemental payments,
          in the calculation of such hospital-specific
          limits[; and]

          (E) The State has separately documented and
          retained a record of all of its costs under
          this subchapter, claimed expenditures under
          this   subchapter,   uninsured    costs   in
          determining payment adjustments under this
          section, and any payments made on behalf of
          the uninsured from payment adjustments under
          this section.

                                7
Id. § 1396r-4(j)(2). Overpayments must be recouped by the state

within one year of their discovery or the federal government may

reduce its future contribution to that state. See id. §

1396b(d)(2)(C)-(D).

     In 2005, CMS issued a Notice of Proposed Rulemaking in

order to implement the 2003 amendment’s auditing and reporting

requirements. See 70 Fed. Reg. 50262 (Aug. 26, 2005). A final

rule was issued on December 19, 2008. See 73 Fed. Reg. 77904

(Dec. 19, 2008) (“2008 Rule”). The 2008 Rule made two changes to

the applicable provisions of the Code of Federal Regulations.

     First, the 2008 Rule required that states begin to submit,

on an annual basis, certain information “for each DSH hospital

to which the State made a DSH payment in order to permit

verification of the appropriateness of such payments.” Id. at

77950. One such piece of information is the hospital’s “total

annual uncompensated care costs,” which the rule defined as an

enumerated set of “costs” less an enumerated set of “payments”:

          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/enhance     Medicaid    payments,
          uninsured revenues, and Section 1011 payments
          for   inpatient   and    outpatient   hospital
          services.

                                8
Id. at 77950; 42 C.F.R. § 447.229(c)(16). The regulation also

defined different types of costs and payments. See 42 C.F.R. §

447.229(c)(10) (defining total costs for Medicaid-eligible

patients as “[t]he total annual costs incurred by each hospital

for furnishing inpatient hospital and outpatient hospital

services to Medicaid eligible individuals”); id. §

447.229(c)(14) (defining total costs for uninsured individuals

as “the total costs incurred for furnishing . . . services to

individuals with no source of third party coverage for the

hospital services they receive”); id. §§ 447.229(c)(6)–(9)

(defining the various Medicaid-related payments); id. §

447.229(c)(12) (defining total uninsured revenues as “[t]otal

annual payments received by the hospital by or on behalf of

individuals with no source of third party coverage for . . .

services they receive,” exclusive of “payments made by a State

or units of local government, for services furnished to indigent

patients”); id. § 447.229(c)(13) (describing “Section 1011

payments,” which are “Federal Section 1011 payments for . . .

services provided to Section 1011 eligible aliens with no source

of third party coverage”).

     Second, the 2008 Rule stated that the annual audit “must

verify,” among other things, that:

          Each hospital that qualifies for a DSH payment
          in the State is allowed to retain that payment
          so that the payment is available to offset its

                                9
          uncompensated care costs for       furnishing
          inpatient hospital and outpatient hospital
          services during the Medicaid State plan rate
          year to Medicaid eligible individuals and
          individuals with no source of third party
          coverage for the services in order to reflect
          the total amount of claimed DSH expenditures.

          . . .

          Only uncompensated care costs of furnishing
          inpatient and outpatient hospital services to
          Medicaid eligible individuals and individuals
          with no third party coverage for the inpatient
          and outpatient hospital services they received
          as described in Section 1923(g)(1)(A) of the
          Act are eligible for inclusion in the
          calculation    of    the     hospital-specific
          disproportionate share . . . payment limit.

73 Fed. Reg. at 77951; 42 C.F.R. § 455.304(d). To ease the move

to the new audit and reporting regime and to avoid subjecting

any state to “immediate penalties that would result in the loss

of Federal matching dollars,” CMS provided for a six-year-long

transition. 73 Fed. Reg. at 77906. Accordingly, any audits “from

Medicaid State plan rate year 2005 through 2010” would be “used

only for the purpose of determining prospective hospital-

specific cost limits and the actual DSH payments associated with

a particular year,” not for “requiring recovery of any

overpayments.” Id. For payments made for all years after 2011,

DSH overpayments would be recovered by the state, and the

federal share would be returned to the federal government unless

the excess payments “are redistributed by the State to other

qualifying hospitals.” Id.

                               10
       D. Frequently Asked Questions (“FAQs”) 33 and 34

     On January 10, 2010, CMS posted answers to FAQs regarding

the audit and reporting requirements. See A.R. 730-771,

Additional Information on the DSH Reporting and Audit

Requirements, https://www.medicaid.gov/medicaid/financing-and-

reimbursement/downloads/part-1-additional-info-on-dsh-reporting-

and-auditing.pdf. FAQ 33 asked whether “days, costs, and

revenues associated with patients that have both Medicaid and

private insurance coverage” would be included in the calculation

of the DSH limit. A.R. 747, id. at 18. In response, CMS

explained that private-insurance payments made on behalf of

Medicaid-eligible patients should be included in the calculation

of the hospital-specific DSH limit.” Id. Likewise, FAQ 34 asked

“[u]nder what circumstances” would Medicare payments on behalf

of patients dually eligible for both Medicare and Medicaid be

included in the uncompensated care costs. Id. CMS explained that

hospitals were required “to take into account” any Medicare

payments made on behalf of dually-eligible individuals in

calculating a hospital’s Medicaid DSH payment. Id.

     FAQs 33 and 34 were subsequently challenged in multiple

courts as an unlawful amendment of the 2008 Final Rule and as

inconsistent with the Medicaid Act. Each of the six federal

courts to have evaluated FAQs 33 and 34 have entered either a

preliminary or permanent injunction prohibiting defendants from

                               11
reducing a hospital’s DSH payment through enforcement of the

FAQs. See, e.g., Texas Children’s Hosp. v. Burwell, 76 F. Supp.

3d 224 (D.D.C. 2014) (granting preliminary injunction

prohibiting the enforcement of FAQ 33); New Hampshire Hosp.

Ass’n v. Burwell, No. 15-cv-460, 2017 WL 822094 (D.N.H. Mar. 2,

2017) (permanently enjoining defendants from enforcing FAQs 33

and 34); Children’s Hosp. of the King’s Daughters, Inc. v.

Price, 258 F. Supp. 3d 672 (E.D. Va. 2017) (granting preliminary

injunction prohibiting the enforcement of FAQ 33 against

plaintiff); Tennessee Hosp. Ass’n v. Price, No. 16-cv-3263, 2017

WL 2703540 (M.D. Tenn. June 21, 2017) (granting plaintiffs’

summary judgment and enjoining defendants from applying FAQ 33

to plaintiffs’ hospitals); Children's Health Care v. Centers for

Medicare & Medicaid Servs., No. 16-cv-4064, 2017 WL 3668758 (D.

Minn. June 26, 2017)(permanently enjoining defendants from

enforcing FAQ 33); Missouri Hosp. Ass’n. v. Hargan, No. 17-cv-

4052, 2018 WL 814589 (W.D. Mo. Feb. 9, 2018) (permanently

enjoining enforcement of the final rule).

     Each of these courts found the FAQs invalid on procedural

grounds – i.e., that defendants violated the Administrative

Procedure Act (“APA”), 5 U.S.C. § 500 et seq., by failing to

properly promulgate the policy embodied in the FAQs in

accordance with the notice-and-comment provisions of section

553. Two of these courts also evaluated whether the FAQs

                               12
violated section 706(2) of the APA because they conflict with

the plain language of the Medicaid Act. See Children’s Hosp. of

the King’s Daughters, 2017 WL 2936801, at *8 (finding that the

Medicaid statute is “unambiguous” and foreclosed defendants’

interpretation as set forth in FAQ 33); Tennessee Hosp. Ass’n,

2017 WL 2703540, at *8 (“the Court finds that Defendants’

policies set forth in the responses to FAQs 33 and 34 violate

the APA because they conflict with the unambiguous language of

the Medicaid Act”).

       E. 2017 Final Rule

     On August 15, 2016, defendants published a notice of

proposed rulemaking to address the HSL on DSH payments. 81 Fed.

Reg. 53980, 53981 (Aug. 15, 2016). Specifically, defendants

explained that the new rule was intended to “make clearer . . .

an existing interpretation” – which was also embodied in FAQs 33

and 34 – that “uncompensated care costs include only those costs

for Medicaid eligible individuals that remain after accounting

for payments received by hospitals by or on behalf of Medicaid

eligible individuals, including Medicare and other third party

payments that compensate the hospitals for care furnished to

such individuals.” Id. (emphasis added). In other words, under

the proposed rule, the HSL must be based on the costs for

Medicaid-eligible individuals for which a “hospital has not

received payment from any source.” Id.

                               13
     On April 3, 2017, CMS published the Final Rule entitled

“Medicaid Program: Disproportionate Share Hospital Payments –

Treatment of Third Party Payers in Calculating Uncompensated

Care Costs.” 82 Fed. Reg. 16114-02, 16117 (Apr. 3, 2017). CMS

stated that it “received 161 timely comments from state Medicaid

agencies, provider associations, providers, and other interested

parties” in response to the proposed rule. 82 Fed Reg. 16114,

16117 (Apr. 3, 2017). Defendants identified ten general comment

areas in which they received multiple comments, along with nine

additional specific comments that did not fit into any of the

general areas, and provided responses to those comments. Id. at

16117-16120. Many commentators “suggested that CMS’

interpretation of the hospital-specific limit” was “inconsistent

with the statutory language” of the amendment. Id. at 16117.

Defendants disagreed, explaining that the statute explicitly

gave the Secretary authority to determine the “costs” of

providing services, and therefore the Secretary had “discretion

to take Medicare and other third party payments into account

when determining a hospital’s costs for the purpose of

calculating Medicaid DSH payments.” Id. at 16117-18.

     Other commentators suggested that the proposed rule should

not apply to patients eligible for both Medicaid and another

source of insurance (“dual-eligible patients”) in cases where

Medicaid does not actually pay on behalf of that patient. Id. at

                               14
16118. According to these commentators, application of the

proposed rule to hospitals serving a high number of dual-

eligible patients would render those hospitals “ineligible for

DSH funds, even though they have substantial losses for

Medicaid-paid admissions and for the uninsured.” Id. In

response, defendants pointed out that the statutory language

referred to those “eligible for medical assistance” and did “not

condition eligibility on whether the cost of the service was

claimed.” Id. As such, “all costs and payments associated with

Medicaid eligible individuals must be included in the hospital-

specific limit calculation, regardless of whether Medicaid made

a payment.” Id. Defendants also stated that the commentators’

belief that, under the proposed rule, a hospital could incur

substantial losses for treating Medicaid-eligible and uninsured

individuals despite receiving a DSH payment was “incorrect.” Id.

Although these hospitals may incur losses for “[a]ncillary

programs and services,” any “actual uncompensated care costs for

furnishing [inpatient and outpatient] hospital services” would

be eligible to be covered by DSH payments. The purpose of the

rule, according to defendants, was simply to ensure that a DSH

payment did not constitute “double pay for costs that ha[d]

already been compensated” by, for example, private insurance or

Medicare. Id.



                               15
     The Final Rule modifies 42 C.F.R. § 447.299(c)(10) “to make

it explicit that ‘costs’ for purposes of calculating hospital-

specific DSH limits are costs net of third-party payments

received.” Id. Specifically, the Final Rule provides:

          (10) Total Cost of Care for Medicaid IP/OP
          Services. The total annual costs incurred by
          each   hospital   for  furnishing    inpatient
          hospital and outpatient hospital services to
          Medicaid eligible individuals. The total
          annual costs are determined on a hospital-
          specific basis, not a service-specific basis.
          For purposes of this section, costs—

          (i) Are defined as costs net of third-party
          payments, including, but not limited to,
          payments by Medicare and private insurance.

          (ii) Must capture the total burden on the
          hospital   of   treating  Medicaid   eligible
          patients prior to payment by Medicaid. Thus,
          costs must be determined in the aggregate and
          not by estimating the cost of individual
          patients. For example, if a hospital treats
          two Medicaid eligible patients at a cost of
          $2,000 and receives a $500 payment from a
          third party for each individual, the total
          cost to the hospital for purposes of this
          section is $1,000, regardless of whether the
          third party payment received for one patient
          exceeds the cost of providing the service to
          that individual.

Id. at 16122 (emphasis added). The Final Rule became effective

June 2, 2017. Id. at 16115. Defendants note that, because the

Final Rule merely “provid[es] clarification to existing policy,”

there is “no issue of retroactivity, nor a need for a transition

period.” Id. at 16118.




                               16
     The only other federal court to have adjudicated a

challenge to the Final Rule found that it was enacted in excess

of defendants’ statutory authority under the Medicaid Act. See

Missouri Hosp. Ass’n. v. Hargan, No. 17-cv-4052, 2018 WL 814589,

at *10-12 (W.D. Mo. Feb. 9, 2018). The court held that “42

U.S.C. § 1396r-4(g)(1)(A) is unambiguous that the calculation of

a DSH hospital's HSL does not involve consideration of private

insurance or Medicare payments, and a DSH hospital's total

uncompensated costs of care for calculating the HSL is reduced

only by the total of other Medicaid program payments.” 2018 WL

814589, at *12. In so holding, the court found that the context

and legislative history of the statute supported plaintiffs’

reading of the statute that only Medicaid payments were to be

included in the HSL. Id. Based on the language of the statute,

its context, and its legislative history, the court concluded

that, “[w]hile the Secretary may be authorized to define

‘costs,’” under the statute, the Secretary’s “authority stops

short of defining ‘payments.’” Id.

       F. This Lawsuit

     The plaintiffs in this case represent twelve not-for-profit

children’s hospitals located in Texas, Washington, Minnesota,

and Virginia. Compl. ¶¶ 13-17, ECF No. 1. The hospitals are

“dedicated to the treatment and special needs of children and

the advancement of pediatric medicine” and provide care for

                               17
critically-ill children “regardless of whether their families

have health insurance or ability to pay for their care.” Id. ¶¶

13-17. As a result, these hospitals each serve a

disproportionate number of Medicaid and uninsured patients. See,

e.g., id. ¶ 13 (the Children’s Hospital Association of Texas’

“members have among the highest Medicaid utilization rates of

all hospitals in the state of Texas”); id. ¶ 14 (“Children’s

Minnesota is federally ‘deemed’ a DSH hospital entitled to

receive DSH funding under the Medicaid Act.”); id. ¶ 15

(“Gillette Children’s typically serves the highest proportion of

patients covered by Medicaid in Minnesota.”); id. ¶ 16

(Children’s Hospital of the King’s Daughters “is federally

‘deemed’ a DSH hospital entitled to receive DSH funding under

the Medicaid Act because it serves a disproportionate number of

Medicaid and uninsured patients.”).

     Plaintiffs filed this lawsuit on May 8, 2017. Compl., ECF

No. 1. On May 15, 2017, plaintiffs filed a motion for a

preliminary injunction requesting the Court to “enjoin[]

Defendants – on a nationwide basis – from enforcing, applying,

or implementing (or requiring any state to enforce, apply, or

implement)” the Final Rule. Mot. for Prelim. Inj., ECF No. 8. On

May 23, 2017, in accordance with the Court’s May 19, 2017 Order,

the parties filed a joint status report in which they agreed

that plaintiffs’ motion for a preliminary injunction could “be

                               18
combined with the merits and treated also as a motion for

summary judgment.” Joint Status Report at 2, ECF No. 11. The

Court entered an order consolidating plaintiffs’ motion for a

preliminary injunction with a determination of the merits under

Federal rule of Civil Procedure 65(a)(2) on May 24, 2017.

Plaintiffs filed a combined application for a preliminary

injunction and summary judgment on June 5, 2017. Pls.’ Combined

Mem. in Supp. of Appl. for a Prelim. Inj. and for Summ. J.

(“Pls.’ Mem.”), ECF No. 12-1. On June 16, 2017, in addition to

filing their combined response to plaintiffs’ motion and cross-

motion for summary judgment, defendants moved to strike certain

exhibits filed in support of plaintiffs’ motion. Defs.’ Mot. to

Strike, ECF No. 14; Defs.’ Mem. in Supp. of Mot. for Summ. J.

and Opp. to Pls.’ Mot. for Prelim. Inj. and Summ. J. (“Defs.’

Opp.”), ECF No. 15. The parties’ briefing on their cross-motions

for summary judgment and defendants’ motion to strike was

complete on July 12, 2017, and the Court held a hearing on the

motions on August 1, 2017. Those motions are now ripe for the

Court’s considerations. Because the Court’s opinion decides the

underlying merits, plaintiffs’ request for a preliminary

injunction is moot.




                               19
II.   Defendants’ Motion to Strike

      Plaintiffs attach thirty-six exhibits to their “combined

application for a preliminary injunction and for summary

judgment,” see ECF Nos. 12-3 to 12-38, seventeen of which were

not “presente[ed] to the agency in the administrative process,”

see Defs.’ Mot. Strike at 1, ECF No. 14. These seventeen

exhibits consist of: (1) declarations from representatives of

each plaintiff, see ECF Nos. 12-3, 12-5, 12-7, 12-24, 12-26, 12-

28, and 12-34; (2) two publications from the Journal of the

American Medical Association (“JAMA”), ECF Nos. 12-12 and 12-38;

(3) various documents attached to the Declaration of Robert

Simon (“Simon Declaration”) purporting to explain the

relationship between Medicaid cost-reporting principles and

inclusion of third-party payments in the HSL calculation, see

ECF Nos. 12-30, 12-31,12-32, and 12-33; and (4) various

documents setting forth facts specific to certain plaintiff-

hospitals, see ECF Nos. 12-27, 12-35, 12-36, and 12-37.

Defendants move to strike these seventeen exhibits, arguing that

judicial review under the APA “is limited to the administrative

record, which consists of the materials directly or indirectly

considered by the agency decision-makers at the time they made

the challenged decision.” Defs.’ Mot. Strike at 3, ECF No. 14.

      “[I]t is black-letter administrative law that in an APA

case, a reviewing court ‘should have before it neither more nor

                                20
less information that did the agency when it made its

decision.’” Hill Dermaceuticals, Inc. v. Food & Drug Admin., 709

F.3d 44, 47 (D.C. Cir. 2013) (quoting Walter O. Boswell Mem’l

Hosp. v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984)). This is

because, under the APA, the court is confined to reviewing “the

whole record or those parts of it cited by a party,” 5 U.S.C. §

706, and the administrative record only includes the “materials

‘compiled’ by the agency that were ‘before the agency at the

time the decision was made,’” James Madison Ltd. by Hecht v.

Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (citations omitted).

     Accordingly, when, as here, plaintiffs seek to place before

the court additional materials that the agency did not review in

making its decision, a court must exclude such material unless

plaintiffs “can demonstrate unusual circumstances justifying

departure from th[e] general rule.” Am. Wildlands v. Kempthorne,

530 F.3d 991, 1002 (D.C. Cir. 2008) (citation omitted). For

example, a court may appropriately consider extra-record

materials: (1) if the agency deliberately or negligently

excluded documents that may have been adverse to its decision;

(2) if background information is needed to determine whether the

agency considered all the relevant factors; and (3) in cases

where the agency failed to explain the administrative action so

as to frustrate judicial review. Id.



                               21
     Plaintiffs make three arguments as to why the Court should

consider their proffered extra-record materials: (1) the

declarations, and certain exhibits attached to them, should be

considered because they support plaintiffs’ request for a

preliminary injunction and establish plaintiffs’ standing, Pls.’

Strike Opp. at 4-7, ECF No. 22; (2) that certain paragraphs of

the Simon Declaration and all of the exhibits attached to it are

proper extra-record evidence because they show that defendants

did not adequately explain their decision, id. at 7-9; and (3)

one JAMA study is included merely to support a “statement of

fact” that “put[s] into context the specialized care Plaintiffs

provide to Medicaid children” and thus is appropriately before

the Court, id. at 10. The Court considers each argument in turn.

       A. The Court Need Not Consider Extra-Record Materials To
          Determine Whether Plaintiffs Will Suffer Irreparable
          Harm Or Have Standing.

     Plaintiffs are correct that in APA cases, courts have

considered declarations offered to prove that plaintiffs will

suffer “irreparable harm” absent a preliminary injunction. See

id. at 4; see also, e.g., Am. Rivers v. U.S. Army Corps of

Eng’rs, 271 F. Supp. 2d 230, 247 (D.D.C. 2003) (“the Court

concludes that this case fits squarely within one of our

Circuit’s stated exceptions for allowing consideration of extra-

record declarations in administrative review cases – cases

involving preliminary injunctions”). Here, however, plaintiffs

                               22
concede that consolidation of their motions for preliminary-

injunctive relief and summary judgment under Federal Rule of

Civil Procedure 65 “effectively moots the Court’s consideration

of the preliminary injunctive factors because the court will

enter judgment on the merits.” Pls.’ Mem. at 2, ECF No. 12-1.

Accordingly, the Court need not determine whether plaintiffs

will suffer “irreparable harm” absent an injunction – and,

therefore, plaintiffs’ extra-record proof of such harm need not

be considered.

     Whether plaintiffs may supplement the record in order to

establish standing is a closer question. See, e.g., Amfac

Resorts, L.L.C. v. U.S. Dep’t of the Interior, 282 F.3d 818, 830

(D.C. Cir. 2002) (stating that those challenging agency action

must establish that they have standing and, in so doing, “[t]hey

are not confined to the administrative record,” but rather,

“must support their claim of injury with evidence”); Chesapeake

Climate Action Network v. Export–Import Bank of the U.S., 78 F.

Supp. 3d 208, 217 (D.D.C. 2015) (“Although judicial review of

agency action is typically confined to the administrative

record, where there is not sufficient evidence of standing in

the record because the question was not before the agency,

plaintiffs may submit extra-record evidence to establish

standing.”). Notably, although defendants do not contest

standing here – perhaps because this Court previously found that

                               23
at least one of the plaintiffs in this case, Seattle Children’s

Hospital, likely did have standing to challenge defendants’

enforcement of FAQ 33, see Texas Children’s, 76 F. Supp. 3d at

238-39 – defendants recognize that plaintiffs may be “entitled

to make a record on standing for purposes of further review.”

Defs.’ Reply in Supp. Mot. Strike at 3, ECF No. 25. Furthermore,

even when no party challenges standing, “federal courts, being

courts of limited jurisdiction, must assure themselves of

jurisdiction over any controversy they hear.” Noel Canning v.

N.L.R.B., 705 F.3d 490, 496 (D.C. Cir. 2013).

     Here, given that there is no dispute that plaintiffs are

subject to the Final Rule, the Court finds that plaintiffs’

standing is self-evident and therefore the Court need not

consider the declarations attached to plaintiffs’ motion. See

Sierra Club v. E.P.A., 292 F.3d 895, 899-900 (D.C. Cir. 2002)

(“In many if not most cases the petitioner’s standing to seek

review of administrative action is self-evident; no evidence

outside the administrative record is necessary for the court to

be sure of it.”); see also Fund For Animals, Inc. v. Norton, 322

F.3d 728, 733 (D.C. Cir. 2003) (confirming that parties are “not

require[d]. . . to file evidentiary submissions in support of

standing in every case”). In particular, when, as here,

plaintiffs are the “object of the [agency] action (or foregone

action) at issue . . . there should be little question that the

                               24
action or inaction has caused him injury, and that a judgment

preventing or requiring the action will redress it.” Id.

(citation and internal quotation marks omitted). No party

contests that the Final Rule, if allowed to stand, could “have

the effect of shifting DSH funds from Plaintiffs to other DSH

hospitals within each of their respective states.” Defs.’ Opp.

at 31, ECF No. 15. These recoupment decisions – or, going

forward, decisions about how to allocate DSH funds – by state

Medicaid agencies are inextricably intertwined with defendants’

promulgation and enforcement of the Final Rule. See Texas

Children’s, 76 F. Supp. 3d at 239 (noting that defendants could

“revoke federal financial participation” from states that do not

comport with defendants’ view of Medicaid’s requirements)

(citing 42 U.S.C. §§ 1316(a), (c)–(e), 1396a, 1396b).

Accordingly, the Court need not consider plaintiffs’ proffered

declarations in conducting its analysis of the Final Rule. 2


2    This conclusion is buttressed by the fact that plaintiffs’
declarations appear to address topics that far exceed the
standing inquiry. See, e.g., Declaration of Todd Ostendorf ¶ 5
(“Medicaid currently reimburses Children’s Minnesota an average
of only $0.65 for every dollar of the cost to provide care to
Medicaid patients.”) (cited at Pls.’ Mem. at 12); Declaration of
Stephen Kimmel ¶ 5 (“Cook Child’s sustains significant losses
treating large numbers of Medicaid patients”) (cited at Pls.’
Mem. at 32). As another court recently found, “plaintiffs may
not smuggle in extra-record evidence relevant to the merits of
this APA action by contending that the evidence pertains to
standing.” Hispanic Affairs Project v. Acosta, No. 15-CV-01562
(BAH), 2017 WL 2951881, at *7 (D.D.C. July 7, 2017). This Court
                                25
       B. The Esch Exceptions Do Not Apply.

     Plaintiffs invoke Esch v. Yeutter, 876 F.2d 976 (D.C. Cir.

1989), to argue that certain paragraphs of the Simon Declaration

and all of the exhibits to that declaration are proper extra-

record evidence. Pls.’ Strike Opp. at 7-9, ECF No. 22. In

particular, plaintiffs urge the Court to consider portions of

the Simon Declaration because, during the notice-and-comment

process, CMS dismissed Mr. Simon’s comment “with an explanation

that failed to address the issue raised” as to whether the

inclusion of third-party payments in the calculation of the

hospital-specific limit violates Medicare/Medicaid cost

reporting principles. Id. at 8. The Court of Appeals for the

District of Columbia Circuit (“D.C. Circuit”), however, has

“severely limited” the application of Esch to allow such extra-

record evidence. Chamber of Commerce v. NLRB, 118 F. Supp. 3d

171, 188 n.12 (D.D.C. 2015). In Hill Dermaceuticals, for

example, the D.C. Circuit explained that, at most, Esch “may be

invoked to challenge gross procedural deficiencies – such as

where the administrative record itself is so deficient as to




agrees. See also Watersheds Project v. Salazar, 766 F. Supp. 2d
1095, 1104 (D. Mont. 2011) (“The Court believes that the
Declarations containing both standing allegations and the extra-
record submission should be stricken in full because standing is
not in dispute and the extra-record submissions are intermixed
with the standing allegations.”).

                               26
preclude effective review.” 709 F.3d at 47 (emphases added); see

also American Wildlands v. Kempthorne, 530 F.3d 991, 1002 (D.C.

Cir. 2008) (exception only applies when an agency’s failure to

adequately explain its actions “frustrates judicial review”).

      Here, plaintiffs offer no evidence that CMS’s decision was

so procedurally deficient as to preclude judicial review. Given

that courts have repeatedly held that an agency’s decision need

not “be a model of analytic precision to survive a challenge,”

such evidence would need to be provided to justify consideration

of the extra-record evidence. Dickinson v. Sec. of Defense, 68

F.3d 1396, 1404-05 (D.C. Cir. 1995); see also Camp v. Pitts, 411

U.S. 138, 143 (1973) (rejecting argument that agency had failed

to provide an adequate explanation when agency had provided a

“contemporaneous explanation” that simply stated that “a new

bank was an uneconomic venture in light of the banking services

already available in the surrounding community”; “[t]he

explanation may have been curt but it surely indicated the

determinative reason for the final action taken”).

       C. The Court Declines To Consider The 2016 JAMA Study.

     Plaintiffs also contend that the Court should consider a

2016 study published in Pediatrics, a JAMA publication, because

it supports plaintiffs’ argument that free-standing Children’s

hospitals rely heavily on DSH funding. Pls.’ Opp. at 7, 10, ECF

No. 22. Defendants maintain that the Court must strike the

                               27
 article because it was “not presented to the agency in the

 course of the rulemaking process.” Defs.’ Mot. Strike at 5. The

 Court agrees, and therefore also strikes the article from the

 record. See Hispanic Affairs Project v. Acosta, No. 15-CV-01562

 (BAH), 2017 WL 2951881, at *9 (D.D.C. July 7, 2017) (agreeing

 that the Court was not permitted to consider “the two referenced

 news articles” in an exhibit attached to plaintiffs’ summary-

 judgment motion in APA action).

       In sum, the Court strikes ECF Nos. 12-3, 12-5, 12-7, 12-12,

 12-24, 12-26 to 12-28, and 12-30 to 12-38 from the record.

III.   Standard of Review

       Although “summary judgment is [the] appropriate procedure”

 when a party seeks review of an agency action under the APA, the

 normal standards for summary judgment set forth in Federal Rule

 of Civil Procedure 56 do not apply. See Assoc. Builders &

 Contractors, Inc. v. Shiu, 30 F. Supp. 3d 25, 34 (D.D.C. 2014);

 Bimini Superfast Operations LLC v. Winkowski, 994 F. Supp. 2d

 106, 119 (D.D.C. 2014). Instead, the court’s function is limited

 to reviewing the administrative record to “determine whether or

 not as a matter of law the evidence in the administrative record

 permitted the agency to make the decision it did.” Nicopure

 Labs, LLC v. Food & Drug Admin., No. 16-cv-0878, 2017 WL

 3130312, at *13 (D.D.C. July 21, 2017).



                                   28
      In reviewing agency action, the court must be “thorough and

probing, but if the court finds support for the agency action,

it must step back and refrain from assessing the wisdom of the

decision unless there has been a ‘clear error of judgment.’”

Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995)

(quoting Marsh v. Oregon Natural Res. Council, 490 U.S. 360, 378

(1989)). In its review, a court should consider “whether the

agency acted within the scope of its legal authority, whether

the agency has explained its decision, whether the facts on

which the agency purports to have relied have some basis in the

record, and whether the agency considered the relevant factors.”

Id.

      Under the APA, a reviewing court must set aside a

challenged agency action that is found to be, inter alia, “in

excess of statutory jurisdiction, authority, or limitations, or

short of statutory right,” 5 U.S.C. § 706(2)(C), or “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law,” id. § 706(2)(A). The party challenging the

agency action bears the burden of proof. See Abington Crest

Nursing & Rehab. Ctr. v. Sebelius, 575 F.3d 717, 722 (D.C. Cir.

2009).

IV.   Analysis

      Plaintiffs challenge the Final Rule on two grounds: (1)

defendants acted in excess of their statutory authority under

                                29
the Medicaid Act; and (2) the Final Rule is arbitrary and

capricious because (a) the agency’s justification of the Final

Rule is contravened by the record evidence, (b) the Final Rule

is not a product of reasoned decisionmaking, and (c) the Final

Rule is not merely a clarification of existing policy. As set

forth below, because the Court finds that the Final Rule is

inconsistent with the plain language of the Medicaid Act, the

Court need not reach plaintiffs’ second argument. See, e.g., Am.

Petroleum Inst. v. S.E.C., 953 F. Supp. 2d 5, 23 (D.D.C. 2013)

(“Because the Court has invalidated the Rule, other APA

arguments cannot change the disposition.”).

       A. The Final Rule is Inconsistent with the Plain Language
          of the Medicaid Act.

     Plaintiffs and defendants both argue that the relevant

statutory language is clear and unambiguously compels a decision

in their respective favor. Plaintiffs contend that “the DSH

provisions of the Medicaid Act are unambiguous that only

Medicaid payments are netted out in the Medicaid shortfall

component” of the hospital-specific limit. Pls.’ Mem. at 16, ECF

No. 12-1. Defendants, on the other hand, argue that the Medicaid

Act “is unambiguous that only ‘uncompensated’ costs are to be

included” in calculating the hospital-specific limit. Defs.’

Opp. at 13, ECF No. 15.




                               30
     A court’s review of whether an agency has acted within its

statutory jurisdiction falls under the well-worn framework set

out in Chevron U.S.A., Inc. v. Natural Resources Def. Council,

Inc., 467 U.S. 837 (1984). Under Chevron’s two-step framework, a

reviewing court must first determine “whether Congress has

directly spoken to the precise question at issue.” Id. at 843.

To decide whether Congress has spoken to the precise question,

the court must “employ[] traditional tools of statutory

construction.” Chevron, 467 U.S. at 843 n.9. These tools include

“examination of the statute’s text, legislative history, and

structure, as well as its purpose.” Petit v. U.S. Dep’t of

Educ., 675 F.3d 769, 781 (D.C. Cir. 2012); see also Pharm.

Research & Mfrs. of Am. v. Fed. Trade Comm’n, 44 F. Supp. 3d 95,

112 (D.D.C. 2014) (tools of statutory construction “include

evaluation of the plain statutory text at issue, the purpose and

structure of the statute as a whole, while giving effect, if

possible, to every clause and word of a statute, and – where

appropriate – the drafting history”).

     Importantly, to prevail under Chevron step one, plaintiffs

“must show that the statute unambiguously forecloses the

agency’s interpretation.” Petit, 675 F.3d at 781 (citation and

internal quotation marks omitted). The statute may foreclose the

agency’s interpretation if the statute “prescrib[es] a precise

course of conduct other than the one chosen by the agency” or if

                               31
the statute “grant[s] the agency a range of interpretive

discretion that the agency has clearly exceeded.” Vill. of

Barrington, Ill. v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C.

Cir. 2011). “[I]f the agency has either violated Congress’s

precise instructions or exceeded the statute’s clear boundaries

then, as Chevron puts it, ‘that is the end of the matter’ – the

agency’s interpretation is unlawful.” Id. at 660 (quoting

Chevron, 467 U.S. at 842). On the other hand, if the statute’s

“ambiguity has left the agency with a range of possibilities”

and if the “agency’s interpretation falls within that range,

then the agency will have survived Chevron step one.” Id.

     Thus, under Chevron step one, the threshold determination –

whether the Secretary’s determination that the calculation of

the hospital-specific limit should include only costs not

otherwise reimbursed by private insurers is consistent with the

Medicaid Act – turns on whether Congress has directly spoken on

the issue. To make this determination, the Court examines the

statutory text, the structure and context of the statute as a

whole, and the legislative history in turn.

             (1)    Statutory Text

     The 1993 amendments to Medicaid imposed hospital-specific

limits on the amount of payment adjustments received by DSH

hospitals. Specifically, the statute makes clear that a DSH

payment cannot exceed:

                               32
          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.

42 U.S.C. § 1396r-4(g)(1)(A) (emphases added).

     Plaintiffs argue that this section “unambiguously specifies

the ‘payments’ that are to be included in the calculation of a

hospital’s HSL” – “i.e., Medicaid payments and payments made by

or on behalf of uninsured patients.” Pls.’ Mem. at 16-17, ECF

No. 12-1. In other words, because the statutory provision sets

forth a formula for calculating a hospital’s HSL, and because

that formula makes clear what payments can be considered, the

Final Rule’s inclusion of payments by third parties “contravenes

the plain language of the statute.” Id. at 17. Moreover,

plaintiffs claim that the statute plainly forecloses defendants’

attempt to “rewrite” the statutory formula by mandating that

third-party payments be subtracted from the “cost” side of the

equation. Id.

     Defendants argue that the heading, which refers only to

“uncompensated” costs, along with the language of the audit

provision makes clear that “Congress did not intend to treat




                               33
care that is well compensated as uncompensated.” Defs.’ Opp. at

13-14, ECF No. 15.

     The Court agrees with plaintiffs. On its face, the statute

clearly indicates which payments can be subtracted from the

total costs incurred during the year by hospitals: (1) “payments

under this subchapter,” i.e., payments made by Medicaid; and (2)

payments made by uninsured patients. The statute nowhere

mentions subtracting other third-party payments made on behalf

of Medicaid-eligible patients from the total costs incurred. Id.

     Furthermore, while the statute expressly delegates to the

Secretary the authority to determine “costs,” the remainder of

the statutory text forecloses the reading offered by defendants

in the Final Rule. That text, after all, indicates that only

payments made by Medicaid and by uninsured patients may be

netted out from “costs” to arrive at the hospital-specific

limit. To allow the Secretary to redefine “costs” to net out a

third category of payments – i.e., “third-party payments,

including but not limited to, payments by Medicare and private

insurance,” 82 Fed. Reg. 16114-02, 16117 – would “render the

Congressional definition of ‘payments’ in the very same clause

superfluous.” Children’s Hosp. of the King’s Daughters, Inc. v.

Price, No. 2:17CV139, 2017 WL 2936801, at *9 (E.D. Va. June 20,

2017); see also New Hampshire Hosp. Ass’n v. Burwell, No. 15-CV-

460-LM, 2016 WL 1048023, at *12 (D.N.H. Mar. 11, 2016) (“The

                               34
Medicaid Act separately describes the ‘payments’ that are

subtracted from the ‘costs’ to obtain the Medicaid Shortfall.

Congress could not have intended to grant the Secretary the

discretion to include other payments within the term “costs,”

while separately defining payments. If it did, the definition of

payments that must be subtracted from costs to determine the

Medicaid Shortfall would be surplusage.”).

     Because the Court must “give effect, if possible, to every

clause and word of a statute,” see United States v. Menasche,

348 U.S. 528, 538-39 (1955), and because defendants’

interpretation of the statute would render portions of the

statutory language superfluous, the Court rejects defendants’

reading of the statute to permit the Secretary to define “costs”

to include certain “payments” when “payments” are defined in the

statutory language.

             (2)      Statutory Structure and Context

     The fact that Congress specifically provided for

subtracting Medicaid payments but not payments by third parties

becomes all the more salient upon examination of the subsequent

statutory section. That section permits additional DSH payments

to certain state-owned hospitals during a transitional period so

long as the state certifies that the additional payments are

used for “health services.” 42 U.S.C. § 1396r-4(g)(2). In



                                 35
particular, section 1396r-4(g)(2)(A) provides, in relevant part,

as follows:

          In determining the amount that is used for
          [health] services during a year, there shall
          be excluded any amounts received . . . from
          third party payors (not including the State
          plan under this subchapter) that are used
          for providing such services during the year.

42 U.S.C. § 1396r-4(g)(2)(A)(emphasis added).

     Thus, while Congress expressly excluded amounts received

from third-party payors in section 1396r-4(g)(2)(A), it declined

to do so in section 1396r-4(g)(1)(A). That omission is

significant. Indeed, it is well-settled that, “[w]here Congress

includes particular language in one section of a statute but

omits it in another section of the same Act, it is generally

presumed that Congress acts intentionally and purposely in the

disparate inclusion or exclusion.” Russello v. United States,

464 U.S. 16, 23 (1983) (citation and internal quotation marks

omitted); see also Jama v. Immigration & Customs Enforcement,

543 U.S. 335, 341 (2005) (“We do not lightly assume that

Congress has omitted from its adopted text requirements that it

nonetheless intends to apply, and our reluctance is even greater

when Congress has shown elsewhere in the same statute that it

knows how to make such a requirement manifest.”); D.C. Hosp.

Ass’n. v. D.C., 224 F.3d 776, 780 (D.C. Cir. 2000) (fact that

Congress had specified that only a State’s “direct” payments


                               36
were to be taken into account in preceding section of statute

was compelling evidence that Congress did not intend to limit

the computation of payments in such a way under the section at

issue, which did not include such a limitation).

     To be clear, the fact that Congress specifically excluded

payments by third party insurers in subsection (g)(2) does not

necessarily demonstrate intent to exclude payments by third

party insurers in other subsections. See, e.g., Waterkeeper All.

v. Envtl. Prot. Agency, 853 F.3d 527, 534–35 (D.C. Cir. 2017)

(“The canon of expressio unius est exclusio alterius is ‘an

especially feeble helper in an administrative setting, where

Congress is presumed to have left to reasonable agency

discretion questions that it has not directly resolved.’”)

(citation omitted). Indeed, had Congress done nothing more than

instruct the Secretary to determine the “costs incurred” by each

hospital receiving DSH funds, the Court could reasonably

conclude that the Secretary had discretion to determine,

consistent with the purpose of the statute, which payments ought

to be subtracted in completing that calculation. Here, however,

by granting the Secretary discretion to determine “costs,”

Congress specifically mandated which payments should be

subtracted to arrive at the hospital-specific limit. Thus, it is

compelling that Congress did not include payments by third-party



                               37
insurers in subsection (g)(1), despite excluding precisely such

payments in the subsection (g)(2).

     Defendants attempt to muddy the waters by pointing to other

aspects of the statutory structure that they claim show that

Congress intended for the hospital-specific limit to be based on

“uncompensated costs.” Defs.’ Opp. at 13-14. Specifically,

defendants point to the heading of section 1396r-4(g)(1)(A) –

“Amount of adjustment subject to uncompensated costs” – and to

the audit requirements that require states to certify that

“[o]nly the uncompensated care costs . . . are included in the

calculation of the hospital-specific limits” described in §

1396r-4(g)(1)(A)). See id. (citing 42 U.S.C. § 1396r-4(g)(1) and

§ 1396r-4(g)(1)(A)). Neither argument is persuasive.

     First, although the heading of the section may “supply

cues” as to Congress’ intent, Yates v. United States, 135 S. Ct.

1074, 1083 (2015), a reviewing court must “place[] less weight

on captions” than on statutory text, Lawson v. FMR LLC, 134 S.

Ct. 1158, 1169 (2014). In Lawson, the defendant pointed to two

statutory headings that read, in relevant part, “Protection for

Employees of Publicly Traded Companies” to argue that the

statutory provisions were limited to “employees of public

companies.” Id. Rejecting this conclusion, Justice Ginsburg

explained that other aspects of the statute made it “apparent”

that the statutory headings were “under-inclusive[].” Id.

                               38
Accordingly, the headings were nothing more than “a short-hand

reference to the general subject matter of the provision, not

meant to take the place of the more detailed provisions of the

text.” Id. (citation and internal quotation marks omitted). So

here too. While the heading of the section at issue refers to

“uncompensated costs,” the statutory text indicates precisely

which payments Congress intended to be subtracted to derive a

hospital’s costs. Consequently, the Court will not rely on the

provision’s heading to alter the plain meaning of the statutory

text.

     Second, the legislative history belies defendants’ argument

with respect to the language used in the audit provision. This

is because the summary of the law contained in the Conference

Report reiterates the statutory definition of uncompensated care

costs – i.e., “the costs of providing inpatient and outpatient

services to Medicaid and uninsured patients at that hospital,

less payments received from or on behalf of Medicaid and

uninsured patients.” H.R. Conf. Rep. 108-391, 808, reprinted at

2003 U.S.C.C.A.N. 1808, 2160 (emphasis added). Moreover, as

plaintiffs point out, the auditor-reporting protocol makes clear

that “Medicaid IP/OP hospital costs (including Medicaid managed

care costs) must be measured against Medicaid IP/OP revenue

received for such services” in determining the existence of a

Medicaid shortfall. Pls.’ Mem. at 21 (citing General DSH Audit

                               39
and Rep. Protocol, CMS-2198-F), ECF No. 12-1. Again, neither the

legislative history not the auditor-reporting protocol mention

exclusion of third-party payments.

             (3)    Legislative History

     The legislative history accompanying the amendment setting

hospital-specific limits demonstrates that Congress intended to

ensure hospitals providing inpatient services to a

disproportionate share of “Medicaid and other low-income

patients with special needs” were receiving DSH payments. H.R.

Rep. No. 103-213, at 211 (1993), reprinted in 1993 U.S.C.C.A.N.

378, 538. Congress noted two concerns that prompted the

amendment, neither of which are relevant here.

     First, Congress was “concerned by reports that some States

[we]re making DSH payment adjustments to hospitals that do not

provide inpatient services to Medicaid beneficiaries.” Id.

According to the Committee, the purpose of the supplemental

payments was “to assist those facilities with high volumes of

Medicaid patients in meeting the costs of providing care to the

uninsured patients that they serve, since th[ose] facilities

[we]re unlikely to have large numbers of privately insured

patients through which to offset their operating losses on the

uninsured.” Id. Thus, Congress prohibited states from

designating a hospital as a disproportionate-share hospital

eligible for supplemental Medicaid funds unless “at least 1

                               40
percent of the facility’s inpatient days [we]re attributable to

Medicaid patients.” Id. Here, both parties agree that plaintiffs

“treat an extremely high percentage of Medicaid patients” and

“are deemed DSH hospitals that are eligible to receive DSH

payments.” Defs.’ Opp. at 24; Pls.’ Mem. at 23-24.

     Second, Congress was also concerned by “reports that some

States have made DSH payment adjustments to State psychiatric or

university hospitals in amounts that exceed the net costs, and

in some instances the total costs, of operating the facilities.”

H.R. Rep. No. 103-213, at 211. Those excess Medicaid DSH

payments were then “transferred to the State general fund, where

they may be used to fund public health or mental health

services, to draw down more Federal Medicaid matching funds, or

to finance other functions of State government, such as road

construction and maintenance.” Id. at 211-212. Such use of

federal Medicaid funds was, according to Congress, “a clear

abuse of the program.” Id. at 212. Here, there is no indication

that plaintiffs are transferring DSH funds to “finance other

functions of State government”; accordingly, this concern is

also irrelevant to the Court’s analysis.

       B. The Proper Remedy is Vacatur.

     Defendants assert that, should the Court find the Final

Rule invalid, “the appropriate remedy would be to set aside the

Final Rule as it applies to Plaintiffs.” Defs.’ Opp. at 32 n.11,

                               41
ECF No. 15. According to defendants, because “‘litigation is

conducted by and on behalf of the individual named parties

only,’” any remedy should be limited to “‘provid[ing] complete

relief to the plaintiff[s]’” only. Id. (quoting Califano v.

Yamasaki, 442 U.S. 682, 700-701 (1979)).

     Under the APA, a court must “hold unlawful and set aside

agency action” that is found to be “in excess of statutory

jurisdiction, authority or limitations, or short of statutory

right.” 5 U.S.C. § 706(2)(C) (emphasis added). Accordingly,

“‘[w]hen a reviewing court determines that agency regulations

are unlawful, the ordinary result is that the rules are vacated

– not that their application to the individual petitioners is

proscribed.’” Nat’l Min. Ass’n v. U.S. Army Corps of Eng’rs, 145

F.3d 1399, 1409 (D.C. Cir. 1998) (quoting Harmon v. Thornburgh,

878 F.2d 484, 495 n. 21 (D.C. Cir. 1989)). In National Mining

Association, the district court invalidated a Corps of Engineers

regulation and entered an injunction prohibiting the Corps and

the Environmental Protection Agency from enforcing the

regulation nationwide. 145 F.3d at 1408. The D.C. Circuit upheld

that nationwide application, notwithstanding the fact that non-

parties to the litigation would specifically be affected. Id. at

1409-10.

     Defendants argue that vacatur is particularly inappropriate

here given that “other federal district judges are considering

                               42
the questions that are at issue in this case,” and an order

vacating the Final Rule here “would effectively prevent those

other courts from reaching their own decisions.” Defs.’ Opp. at

32 n.11. But in National Mining Association, the D.C. Circuit

addressed this very argument, pointing out that a District of

Columbia court’s “refusal to sustain a broad injunction is

likely merely to generate a flood of duplicative litigation”

given that venue is often proper in this court for challenges to

agency actions. 145 F.3d at 1409. Accordingly, some diminishment

in the scope of the “non-acquiescence doctrine” was “an

inevitable consequence of the venue rules in combination with

the APA’s command that rules ‘found to be . . . in excess of

statutory jurisdiction’ shall be not only ‘h[e]ld unlawful but

‘set aside.’” Id. at 1410.

     Defendants further contend that, even if vacatur of an

unlawful regulation is the “ordinary result,” it need not always

be required. Defs.’ Summ. J. Reply at 17 n.9, ECF No. 21. The

Court agrees that “[a]n inadequately supported rule . . . need

not necessarily be vacated.” Allied-Signal, Inc. v. U.S. Nuclear

Regulatory Comm’n, 988 F.2d 146, 150–51 (D.C. Cir. 1993).

Rather, “[t]he decision whether to vacate depends on ‘the

seriousness of the [regulation’s] deficiencies (and thus the

extent of doubt whether the agency chose correctly) and the

disruptive consequences of’” vacatur. Id. (quoting International

                               43
Union, UMW v. FMSHA, 920 F.2d 960, 967 (D.C. Cir. 1990)); see

also Humane Soc’y of the United States v. Jewell, 76 F. Supp. 3d

69, 136 (D.D.C. 2014) (“The law in this Circuit directs

consideration of two principal factors in deciding whether to

vacate a flawed agency action: (1) the seriousness of the . . .

deficiencies’ of the action, that is, how likely it is the

[agency] will be able to justify its decision on remand; and (2)

the disruptive consequences of vacatur.”) (citations and

internal quotation marks omitted).

     Here, application of these factors militates strongly in

favor of vacatur.

     First, the Final Rule’s deficiency is not merely

procedural; rather, as explained above, the Court finds that the

agency acted outside of the scope of its statutory authority

under the Medicaid Act. Thus, this is not a case where the

agency could conceivably “be able to substantiate its decision

on remand.” Allied-Signal, 988 F.2d at 151. To the contrary,

“the agency cannot arrive at the same conclusions reached in the

Final Rule because the actions taken were not statutorily

authorized.” Humane Soc’y, 76 F. Supp. 3d at 137.

     Second, the Court concludes that it is unlikely that

vacating the rule would have “disruptive consequences” given

that the Final Rule only became effective on June 2, 2017 – and

given that defendants were already previously enjoined from

                               44
enforcing the policies underlying the Final Rule as embodied in

their FAQs. Accordingly, vacatur of the Final Rule is the

appropriate remedy in this matter.

V.   CONCLUSION

     Accordingly, for the reasons set forth in this Memorandum

Opinion, plaintiffs’ motion for summary judgment is GRANTED, and

defendants’ motion for summary judgment is DENIED. The Final

Rule promulgated by CMS, published at 82 Fed. Reg. 16114, 16117,

is VACATED. Defendants’ motion to strike is GRANTED. Plaintiffs’

motions for a preliminary injunction and for a hearing are

DENIED AS MOOT. An appropriate Order was entered on March 2,

2018.

     SO ORDERED.

SIGNED:   Emmet G. Sullivan
          United States District Judge
          March 6, 2018




                               45
