Court Enjoins CMS’s Interpretation of Medicaid DSH Reimbursement Formula

Challenging actions by the Centers for Medicare & Medicaid Services (CMS) under the Administrative Procedures Act (APA), Texas Children’s Hospital and Seattle Children’s Hospital obtained a preliminary injunction that enjoins CMS’s actions concerning informal instructions it provided to its auditors for calculating disproportionate share hospital (DSH) hospital specific limits (HSL) in Medicaid, commonly referred as Frequently Asked Question No. 33 (FAQ #33). Texas Children’s Hospital v. Burwell, 2014 BL 364694, D.D.C., No. 1:14-cv-2060, 12/29/2014.

FAQ #33 required the auditors to include revenues from commercial third-party insurers in calculating the Medicaid shortfall component of the HSL calculation. CMS’s change to the formula for calculating DSH HSLs meant payments from commercial insurers made on behalf of their insureds, who were also in many cases Medicaid-eligible based on the severity of their medical conditions, would be included in the formula as Medicaid payments even though the hospitals never billed the Medicaid program or received any Medicaid reimbursement for these patients. The impact of FAQ #33 on the hospitals’ 2011 audit calculations, first identified for the hospitals in the late fall, would have identified an “overpayment” of more than $28 million, collectively.

U.S. District Judge Emmet Sullivan of the U.S. District Court for the District of Columbia issued his order on January 29, 2014, only days before the states were required to file their final 2011 DSH audits with CMS. Submission of the final audit could have triggered the states’ recoupment from the hospitals of the $28 million in identified “overpayments.”

The court’s action and decision could have a far-reaching impact on other hospitals that have similarly been subjected to the erroneous application of the DSH HSL Medicaid shortfall component of the formula.

Specifically, Judge Sullivan enjoined CMS from “enforcing, applying or implementing FAQ #33 pending further action of the Court”; ordered CMS to immediately notify the Texas and Washington state Medicaid programs that, pending further order by the court, the enforcement of FAQ #33 is enjoined and that CMS will take no action to recoup any federal DSH funds provided to Texas and Washington based on a state’s noncompliance with FAQ #33; and that any request to stay the order pending appeal will be denied.

The accompanying 46-page opinion details Judge Sullivan’s analysis relating to the comprehensive implementation by CMS of informal guidance issued on their website. Judge Sullivan agreed that FAQ #33 materially changed the law and that CMS skipped over its legal responsibility under the APA to provide notice and comment to stakeholders. “The Act does not include private insurance payments among those that are specifically enumerated as offsets,” wrote Sullivan. Further, Judge Sullivan found that Seattle Children’s and Texas Children’s “are likely to succeed in arguing that FAQ #33 must be set aside as unlawful.”

Additionally of import, Judge Sullivan’s decision articulates the link in Medicaid between the state agencies and federal action, recognizing the inextricable link in the state/federal partnership and the fact that the states are acting at the behest of the federal agency. “Medicaid is a ‘cooperative venture between the federal and state governments,’” wrote Judge Sullivan. “The defendants enjoy significant authority over this venture: they can reject state plans that do not comport with their view of Medicaid’s requirements (as they did for Texas’s state plan which sought to avoid FAQ #33) and may revoke federal financial participation.”

BakerHostetler, led by partner Susan Feigin Harris, pursued the issue against CMS through a number of venues, including directly before CMS and in state district and ultimately federal district court. “These are non-profit institutions that treat children needing transplants, cancer patients and premature newborns. Eliminating their DSH payments arbitrarily by recharacterizing private insurance payments as Medicaid payments should be vetted by Congress and the healthcare community, rather than slipped through a frequently asked question on a website.”

The team from BakerHostetler that successfully argued the case on behalf of their clients in federal court included Chris Marraro and Geraldine Edens, in addition to Susan Feigin Harris, and Susan Conway from Graves Daugherty. For more information relating to this case, contact Susan Feigin Harris at or 713.646.1307.