On January 29, 2023, a Florida Magistrate Judge recommended denying the State of Florida’s Motion for Preliminary Injunction and granting CMS’s Motion to Dismiss in connection with the implementation and enforcement of its Informational Bulletin, dated February 17, 2023 (the Bulletin) and its financial review of Florida’s Local Provider Participation Fund (LPPF) programs (Financial Review). As further discussed below, the Magistrate Judge’s recommendations are based on a finding that the Bulletin does not constitute a final agency action.

As background, the core issue in Florida’s lawsuit against CMS (the Lawsuit) involves the financing of Medicaid payments. The Medicaid program is a jointly financed partnership between the federal government and states. The federal share of each participating state’s Medicaid expenditures is based on the state’s federal medical assistance percentage (FMAP). Florida’s FMAP percentage is currently around 60%, which means that the federal government is responsible for covering approximately 60% of the costs associated with Florida’s qualifying Medicaid expenditures, and the state’s share is the remaining 40%. The FMAP matching rate also applies to Medicaid supplemental payments, such as Florida’s directed payment programs. Florida uses various financing mechanisms to finance the state’s share of its directed payment and other Medicaid supplemental payment programs. One financing mechanism involves the LPPF program, pursuant to which private hospitals are assessed a mandatory assessment. The revenues collected from the mandatory assessment are pooled in an LPPF and then transferred to Florida’s Medicaid agency (i.e., the Agency for Health Care Administration) as the state’s share of Florida’s directed payment and other Medicaid supplemental payment programs.

States are statutorily required to comply with certain conditions when imposing special assessments or health care-related taxes like Florida’s LPPF program to fund the non-federal share of Medicaid payments. Among other requirements, states may not hold taxpaying providers harmless for the cost of the assessments or health care-related taxes. If a hold harmless arrangement exists, CMS is permitted to reduce the state’s Medicaid expenditures by the amount of the tax collections involving hold harmless arrangements, prior to calculating the federal share.

CMS’s Bulletin provides that health care-related tax arrangements involving the redistribution of Medicaid payments among taxpaying providers constitutes a “hold harmless” arrangement in violation of federal law. Relying on the position set forth in the Bulletin, CMS contends that Florida providers have instituted hold harmless arrangements through written or oral agreements among providers to “redirect or redistribute the Medicaid payments to ensure that all taxpaying providers receive all or a portion of their tax back.” CMS has concluded that it considers such private redistribution arrangements to violate federal regulations. By contrast, Florida argues that only state-controlled or state-directed guarantees holding providers harmless trigger the statutory and regulatory hold harmless provisions. Florida contends that CMS’s Bulletin attempts to amend its regulatory definition of hold-harmless provisions to target independent, private redistribution agreements without following the formal rulemaking process.

Notably, the State of Texas challenged the Bulletin on similar grounds in federal court last year. On June 30, 2023, the Court granted Texas’s motion for a preliminary injunction, concluding that Texas was likely to succeed in its claim that the Bulletin exceeds CMS’s statutory and regulatory authority. The Court reasoned that the Bulletin improperly expands the definition of the “hold-harmless provision” beyond what is contemplated under the governing statute and implementing regulations to include guarantees by private parties in private agreements. The Court held that Texas had sufficiently demonstrated that it would face substantial threat of irreparable injury if the motion was not granted. An earlier Health Headlines article, available here, covered this decision.

In the Lawsuit, Florida raised similar arguments as Texas in support of invalidating the Bulletin and Financial Review. Florida argued that it would be required to incur significant resources to meet the Bulletin’s requirements (e.g., establishing a new regulatory apparatus and obtaining necessary staffing). Florida also argued that the enforcement of the Bulletin would have adverse consequences on Florida hospitals and its ability to provide vital medical services to Medicaid beneficiaries. In addition, Florida explained that the Financial Review of the LPPFs may result in CMS disallowing federal matching funds, thereby depriving the state of necessary funding generated through the LPPFs. In summary, Florida contends that enforcement of the Bulletin would jeopardize Florida’s supplemental payment programs funded by LPPFs to the detriment of Florida hospitals.

The Magistrate Judge, however, rejected Florida’s contentions and recommended dismissing Florida’s Lawsuit on the grounds that CMS’s Financial Review of the LPPFs does not constitute final agency action. The Magistrate Judge explained that Florida must await resolution of CMS’s Financial Review and challenge CMS’s final agency decision at that time. The Magistrate Judge also disagreed with Florida’s argument that the Financial Review constitutes a final agency action because it obligates Florida to comply with the Bulletin. The Magistrate Judge explained that the Bulletin satisfies the formulaic definition of non-final agency action because the Financial Review does not itself affect Florida’s rights without CMS taking future administrative action. The Magistrate Judge further concluded that Florida does not face or allege a serious risk of penalties while awaiting the conclusion of CMS’s Financial Review. Specifically, the Magistrate Judge explained that Florida’s risk exposure is unaffected by the Financial Review, particularly considering the fact that CMS has not refused to renew or approve future directed payment programs.

Ultimately, the Magistrate Judge recommended denying Florida’s Motion for Preliminary Injunction because Florida cannot provide a substantial likelihood of success on the merits as there is no final agency action. The Magistrate Judge further recommended granting CMS’s Motion to Dismiss without prejudice because the lack of a final agency action means the court does not have subject matter jurisdiction over the Lawsuit.

The Magistrate Judge’s Report and Recommendation can be read here.