First Circuit Rejects CMS FAQs Clarifying Medicaid DSH Payment Calculations

King & Spalding

On April 4, 2018, the United States Court of Appeals for the First Circuit affirmed a district court ruling that rejected CMS’s enforcement of two FAQs that clarified how certain reimbursements made to hospitals for dual-eligible Medicaid patients would be used to calculate Medicaid disproportionate share hospital (DSH) payments. In affirming the district court decision, the First Circuit affirmed that the setoff rule announced by CMS in two FAQs in 2010 represented a substantive policy decision that could not be implemented by the agency without the appropriate notice-and-comment rulemaking.

By way of background, following a CMS rulemaking in 2008 involving Medicaid DSH payments, in 2010, CMS issued an FAQ document which was posted on that provided further guidance regarding Medicaid DSH calculations. In this FAQ document (specifically FAQs 33 and 34), CMS stated that both Medicare payments and private insurance payments associated with individuals also eligible for Medicaid should be deducted in calculating DSH payments. The policies articulated in the FAQs were significant because they would likely result in lower DSH payments to hospitals.

Numerous hospitals have successfully challenged CMS’s DSH policies that were articulated in the FAQs. In 2014, several New Hampshire hospitals and the New Hampshire Hospital Association procedurally challenged CMS’s policies which were articulated in the FAQ document, as well as challenged the substance of the DSH payment calculation policy. In March 2017, the district court granted plaintiffs’ motion for summary judgment and permanently enjoined CMS from enforcing the FAQs. The district court concluded that the FAQs resulted in a substantive policy and thus the agency was required to follow the notice-and-comment procedures. The district court did not address plaintiffs’ substantive challenge as to whether, after proper notice-and-comment rulemaking, the agency could issue the same policies that are contained in the FAQs.

The First Circuit affirmed the district court’s decision on the grounds that “the Secretary’s rule is procedurally improper for having failed to observe the notice-and-comment procedures prescribed by the [Administrative Procedure Act].”  Similar to the district court, the First Circuit declined to address plaintiffs’ substantive challenge having determined that the FAQ guidance could not be promulgated without notice and an opportunity for comment.

In response to federal court losses and as previously reported, CMS issued a proposed rule formalizing the FAQ policies in 2016. CMS finalized this rulemaking on April 3, 2017. The final rule specifies that all costs and payments associated with dual eligibles with a source of third party coverage must be included in the calculation of the hospital-specific DSH limit. See 42 C.F.R. § 447.299.

The First Circuit decision is available here. The district court decision is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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