Illinois Department of Healthcare and Family Services v. Azar II

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

ILLINOIS DEPARTMENT OF

HEALTHCARE AND FAMILY

SERVICES,

Plaintiff, Case No. 1:19-CV-1877

v. Judge John Robert Blakey

ALEX M. AZAR II, in his official

capacity as Secretary of the United

States Department of Health and

Human Services,

Defendant.

MEMORANDUM OPINION AND ORDER

The Illinois Department of Healthcare and Family Services (Illinois or DFS)

brings this action against the United States Department of Health and Human

Services (HHS). In 2016, the HHS’ Departmental Appeals Board affirmed a decision

by HHS’ Centers for Medicare and Medicaid Services disallowing $140 million in

federal reimbursements for Medicaid payments by Illinois to Illinois hospitals.

Illinois then filed suit in this Court, seeking review of the Board’s decision under the

Administrative Procedure Act (APA). The parties now cross-move for summary

judgment. [17]; [18]. For the reasons explained below, this Court grants Illinois’

motion and denies HHS’ motion.

I. Background

A. Medicaid

1. Medicaid Overview

Medicaid constitutes a cooperative federal-state program pursuant to which

the federal government provides financial assistance to participating States who

provide healthcare to Medicaid-eligible populations—typically lower-income

individuals and families. [13] at ¶¶ 19–20; Douglas v. Indep. Living Ctr. of S.

California, Inc., 565 U.S. 606, 610 (2012). In exchange for federal funding, States

participating in Medicaid must implement and operate Medicaid programs in

compliance with federally-mandated standards. Armstrong v. Exceptional Child Ctr.,

Inc., 575 U.S. 320, 323 (2015). The Centers for Medicaid and Medicare Services

(CMS)—a division of HHS—ultimately maintains responsibility for overseeing state

compliance with federal Medicaid requirements. Arkansas Dep’t of Health & Human

Servs. v. Ahlborn, 547 U.S. 268, 275 (2006).

To qualify for Medicaid funding, each participating State must enter into a

“State Plan” approved by CMS detailing the nature and scope of the State’s Medicaid

program. Douglas, 565 U.S. at 610; Armstrong, 575 U.S. at 323. CMS reviews each

State’s Plan and any later amendments to ensure they comply with statutory and

regulatory requirements governing Medicaid. Douglas, 565 U.S. at 610. Once CMS

approves a State Plan, the State becomes eligible to receive federal matching funds

for a statutorily-set percentage of the amount “expended . . . as medical assistance

under the State plan.” See 42 U.S.C. § 1396b(a)(1). Medicaid providers, such as

hospitals, receive Medicaid payments directly from the States, and the federal

government reimburses States in turn. See generally 42 U.S.C. § 1396b.

The federal government generally pays between 50 and 83 percent of the costs

the State incurs for patient care, Ahlborn, 547 U.S. at 275, and its share of a State’s

expenditures is known as the “Federal Financial Participation” or “FFP,” [13] at ¶

21; Abraham Lincoln Mem’l Hosp. v. Sebelius, 698 F.3d 536, 543 (7th Cir. 2012). Each

State Plan sets forth the terms of the FFP. [13] at ¶¶ 21–22.

States possess wide latitude in setting Medicaid reimbursement rates for

hospitals. Id. at ¶ 28; see also Smith v. Miller, 665 F.2d 172, 178 (7th Cir. 1981);

Alaska Dep’t of Health & Soc. Servs. v. Centers for Medicare & Medicaid Servs., 424

F.3d 931, 935 (9th Cir. 2005) (“Assuming that its plan meets federal requirements, a

state has considerable discretion in administering its Medicaid program, including

setting reimbursement rates.”). In general, States calculate and make Medicaid

payments to hospitals under one of two methods: a “prospective” method, or a

“retrospective” method. [13] at ¶ 8. Under a retrospective method, a state makes

estimated interim payments to hospitals, but then “settles up”—or reconciles—the

final payment amount after reviewing the hospital’s actual costs. Id.

In contrast, under a prospective method, “the amount of payment per discharge

is fixed in advance, is not based on a hospital’s actual costs, and is not subject to

retroactive adjustment.” Washington Hosp. Ctr. v. Bowen, 795 F.2d 139, 142 n.2 (D.C.

Cir. 1986); [13] at ¶ 8. A State pays for compensable services during the relevant

period using rates based upon information from an earlier period. [13] at ¶ 8. States

may favor the prospective method because it sets “in advance a payment rate for

treating a specific patient,” and consequently “induces the hospital to seek the most

economical means of treatment.” Gerard F. Anderson, Ph.D. & Mark A. Hall,

J.D., The Adequacy of Hospital Reimbursement Under Medicaid’s Boren Amendment,

13 J. Legal Med. 205, 206 (1992).

2. The OIG

The Inspector General of HHS maintains authority to audit State Medicaid

operations to determine whether funds “are being properly expended for the purposes

for which they were appropriated under Federal and State law and regulations,” and

to issue a report. 42 C.F.R. §§ 430.33(a)(2), (b)(2). If the report determines “that a

claim or portion of claim” by the State for FFP “is not allowable,” CMS may send the

State a “disallowance letter” explaining why Medicaid funding is unavailable for its

claims. Id. § 430.42(a).

3. DSH Payments

Under the Social Security Act, disproportionate share hospitals (DSH), which

serve a disproportionate share of Medicaid-eligible and low-income patients, receive

additional payments known as “DSH payments.” 42 U.S.C. §§ 1396a(a)(13)(A)(iv),

1396r-4(b), 1396r-4(c); [13] at ¶ 24. The Act establishes an annual DSH allotment for

each State, limiting FFP for total statewide DSH payments made to hospitals. 42

U.S.C. §§ 1396r-4(f)(3); [13] at ¶ 26. In 1993, Congress added subsection (g) to § 1923

of the Act, 42 U.S.C. § 1396r-4, which further limits the DSH payments that an

individual hospital may receive to its “shortfall”—the hospital’s costs of providing

services to Medicaid and uninsured patients, less the payments it received from (or

for) those patients. [13] at ¶¶ 4, 27.

B. Factual Background

1. The Illinois State Plan

This case concerns HHS’ interpretation of the provision of Illinois’ State Plan

governing limits on DSH payments (DSH provision), and specifically, whether the

provision allows a prospective or retrospective method, or either. [13] at 3.

Throughout the relevant period, the DSH provision has stated:

[1] In accordance with Public Law 103–66, adjustments to

individual hospital’s disproportionate share payments shall be

made if the sum of Medicaid payments (inpatient, outpatient, and

disproportionate share) made to a hospital exceed the costs of

providing services to Medicaid clients and persons without

insurance.

[2] The adjustment to hospitals will be computed by determining

a hospital[’]s cost of inpatient and outpatient services furnished

to Medicaid patients, less the amount paid to the hospital for

inpatient and outpatient services excluding DSH payments made

under this State Plan.

[3] The cost of services provided to patients who have no health

insurance or source of third-party payment less any payments

made by these patients shall be determined and added to the

Medicaid shortfall calculated above.

[4] The result shall be compared to the hospitals estimated DSH

payments.

[5] If the estimated DSH payments exceed the DSH limit

(Medicaid shortfall plus cost of uninsured) then the Department

will reduce the hospitals’ DSH rate per day so that their DSH

payments will equal the DSH limit.

[6] If necessary, retroactive adjustments will be made.

[12-5] at 20.

2. OIG Reports

During fiscal years 1997 through 2000, Illinois made approximately $338

million in DSH payments to UIC Hospital and approximately $39.8 million in DSH

payments to Mt. Sinai Hospital. [13] at ¶ 34. Both hospitals are located in Chicago,

and both serve a high percentage of low-income and uninsured individuals. Id. at ¶

25.

In 2004, HHS’ Office of Inspector General (OIG) conducted audits of Illinois’

DHS payments to these hospitals for fiscal years 1997 through 2000 and

recommended that CMS disallow $140,281,921 in FFP for Illinois’ DSH payments to

UIC Hospital and another $4,516,112 in FFP for Illinois’ DSH payments to Mt. Sinai

Hospital. Id. at ¶ 35; [12-5] at 61–62.

The OIG’s recommendation stated:

The excessive payments occurred because the State did not have

effective procedures to ensure compliance with the hospital-specific

limits or with State plan and State Administrative Code requirements.

For example, the State did not use actual cost data from the prior year

to calculate the DSH payment add-on for the next year. The State also

did not compare Medicaid payments (including DSH payments) with

actual Medicaid and charity care costs and did not adjust DSH payments

as required by the State plan’s retroactive adjustment provisions.

[12-5] at 61.

About two years later, in 2006, the OIG issued a summary report regarding

Illinois and similar states that had used a prospective method to calculate DSH

limits, further recommending that CMS seek recovery of excess FFP payments. [13]

at ¶ 38; [12-5] at 106–29. The report stated, in pertinent part:

Nine of the ten States reviewed did not comply with the hospital-specific

DSH limits imposed by section 1923(g) of the Act. As a result, DSH

payments exceeded the hospital specific limits by approximately $1.6

billion ($902 million Federal share). The $902 million Federal share

included the following: Four States (California, Illinois, Texas, and

Washington) made approximately $679 million in excess DSH payments

based primarily on historical costs rather than actual costs. These

States did not later adjust the payments using actual costs. . . . [T]he

Illinois State plan required retroactive adjustments of estimated DSH

payments to actual costs. . . .

[12-5] at 116. On December 21, 2005, the then-CMS administrator, in response to

OIG’s draft report and recommendations, wrote: “We interpret this recommendation

as a prospective resolution and not a requirement to recoup any Federal payments

associated with these findings.” [12-5] at 127. CMS did not take any immediate

action to recoup any federal payments.

3. 2016 Disallowances and Administrative Appeal

But over a decade later, on July 25, 2016, CMS wrote to Illinois, notifying the

State that it would impose disallowances of $140,281,921 for UIC Hospital and

$4,516,112 for Mt. Sinai Hospital and concurring with and adopting the OIG’s 2004

findings. [13] at ¶ 40; [12-5] at 131–38. Illinois then requested reconsideration of

both disallowances, but CMS denied the requests. [13] at ¶ 41; [12-2] at 36–39.

Illinois then timely appealed to the HHS’ Departmental Appeals Board

(Board), which consolidated the appeals of the two disallowances. [13] at ¶ 42. On

April 2, 2018, in the consolidated appeal, the Board upheld CMS’ disallowances. [13]

at ¶ 43; [12-2] at 1–18. In its opinion, the Board summarized OIG’s 2004 findings

that Illinois “had prospectively calculated each hospital’s DSH limit for the coming

rate year by combining estimated Medicaid inpatient costs, estimated Medicaid

outpatient costs, and estimated uncompensated charity case costs.” [12-2] at 5. The

Board also noted that the Illinois’ rate year ran from October 1 through September

30, and that Illinois notified hospitals of their DSH amounts prior to the October 1

start of the coming rate year. Id. at 4.

In its opinion, the Board never reached the question of whether Illinois’

calculation of the hospital-specific DSH limits violated § 1923(g) of the Social Security

Act. [13] at ¶ 44; [12-2] at 1–18. Instead, in affirming the disallowances, the Board

held that “the process that Illinois used to calculate and apply the hospital-specific

DSH limits during the audit period cannot reasonably be considered consistent with

the methodology that Illinois established, and CMS approved, in the State plan.” [12-

2] at 8. In reaching this conclusion, the Board considered the language of the State

Plan: “If the wording is clear, then it will control. If the language is subject to more

than one possible interpretation, that is, if it is ambiguous, the Board will defer to

the state’s proposed interpretation if it is reasonable.” Id. at 9.

The Board found the DSH provision ambiguous. Id. at 11. But the Board then

found Illinois’ interpretation that it allowed a prospective method unreasonable:

“Notwithstanding the ambiguities in the State plan language that are reflected in the

parties’ different interpretations, we find that Illinois’ process for calculating each

hospital’s DSH limit during the audit period cannot reasonably be considered to have

followed the methodology that Illinois established, and CMS approved, in the State

plan.” Id. at 11.

Illinois timely sought reconsideration of the Board’s decision. [13] at ¶ 47. But,

on January 27, 2019, the Board sustained its original decision, concluding that

Illinois failed to identify a clear error of law or fact. Id. at ¶ 49; [12-2] at 19–32.

After the Board issued its decision on Illinois’ motion for reconsideration, CMS

began recovering the disputed DSH payments at around $20 million per quarter, plus

interest, by offsetting that amount against HHS’ FFP in Illinois’ ongoing Medicaid

payments. [13] at ¶ 50.

Illinois filed suit in this Court, seeking review of the Board’s decision. [1].

II. Standard of Review

The APA provides for judicial review of final agency decisions. Cook County,

Illinois v. Wolf, 962 F.3d 208, 221 (7th Cir. 2020); 5 U.S.C. §§ 702, 706. This case

calls for this Court to review an agency decision interpreting a State Plan, which

constitutes a contract between the state and federal government subject to federal

Medicaid law. See Iowa Dep’t of Human Servs., DAB 1248 (H.H.S. May 3, 1991) (a

“state plan is in the nature of a contract between the State and the federal

government.”) (quoting Tennessee Dept. of Health and Environment, DAB No. 950

(H.H.S. 1988)).

The majority of circuits have adopted the view that courts must review an

agency’s contract interpretation under the two-step framework set forth in Chevron

U.S.A., Incorporated v. Natural Resources Defense Council, Incorporated, 467 U.S.

838 (1984) where, as here, the contract’s subject matter concerns the agency’s

specialized expertise. Sternberg v. Sec’y, Dep’t Of Health And Human Servs., 299

F.3d 1201, 1205 (10th Cir. 2002); Muratore v. U.S. Office of Pers. Mgmt., 222 F.3d

918, 922 (11th Cir. 2000); Williams Nat. Gas Co. v. F.E.R.C., 3 F.3d 1544, 1549 (D.C.

Cir. 1993) (explaining that Chevron “implicitly modified earlier cases that adhered to

the traditional rule of withholding deference on questions of contract interpretation”)

(internal quotation omitted); but see, e.g., Meadow Green-Wildcat Corp. v. Hathaway,

936 F.2d 601, 605 (1st Cir. 1991) (Chevron deference inapplicable to “the agency's

interpretation of a contract that it makes with an outside party”).1

Chevron’s two-step framework answers the “overriding question” of whether

the agency’s interpretation “is one the text will permit.” Wolf, 962 F.3d at 221. At

step one, this Court decides whether the disputed text has spoken directly to the

precise question in issue. Id.; Coyomani–Cielo v. Holder, 758 F.3d 908, 912 (7th Cir.

2014). If it has done so unambiguously, the inquiry ends, and this Court gives full

effect to the unambiguous text. Holder, 758 F.3d at 912. But if the text is ambiguous,

this Court moves to step two, which asks “whether the agency has promulgated a

reasonable interpretation.” Our Country Home Enterprises, Inc. v. Comm’r of

Internal Revenue, 855 F.3d 773, 785 (7th Cir. 2017) (quoting Brumfield v. City of

Chicago, 735 F.3d 619, 626 (7th Cir. 2013)). At this second step, this Court defers to

the agency’s interpretation only “if it is reasonable.” Indiana v. E.P.A., 796 F.3d 803,

811 (7th Cir. 2015); Wolf, 962 F.3d at 221.

1 The Supreme Court has yet to resolve the circuit split on this point. In fact, Justice Gorsuch has

observed that whether “Chevron-type deference warrants a place in the canons of contract

interpretation is surely open to dispute.” Scenic Am., Inc. v. Dep’t of Transp., 138 S. Ct. 2 (2017)

(statement of Gorsuch, J., joined by Roberts, C.J., and Alito, J., respecting the denial of certiorari).

III. Analysis

Illinois challenges the HHS Board’s determination that Illinois’ application of

a prospective method to DSH payments is unreasonable under the language of the

State Plan. [17]; [22]. This Court addresses a threshold legal issue before turning to

the merits of the Board’s decision.

A. Waiver

HHS argues that Illinois has waived certain interpretive arguments it now

raises because it did not raise them before the Board. [18] at 37–38. Courts recognize

the “hard and fast rule of administrative law, rooted in simple fairness, that issues

not raised before an agency are waived and will not be considered by a court on

review.” Nuclear Energy Inst., Inc. v. Envtl. Prot. Agency, 373 F.3d 1251, 1297 (D.C.

Cir. 2004) (citing United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37

(1952)); see also Underwood v. Berryhill, No. 18-CV-326-SLC, 2019 WL 1276091, at

*5 (W.D. Wis. Mar. 20, 2019) (“The failure to raise an argument during

the administrative proceedings means that the issue is waived on appeal.”), aff’d sub

nom. Underwood v. Saul, 805 F. App’x 403 (7th Cir. 2020).

HHS argues that Illinois has for the first time raised the arguments: (1) that

the fifth sentence of the DSH provision is the operative clause; (2) that the first four

sentences are temporally neutral; and (3) that the “retroactive adjustments” in the

sixth sentence could reasonably be read to apply to rates, not payments. Id. But

these interpretive arguments support Illinois’ position that its State Plan permitted

its use of a prospective methodology, and Illinois has maintained this position

throughout the administrative proceedings, including before the Board. See [12-2] at

13. While some aspects of Illinois’ argument in this Court differ from their

presentation before the Board, Illinois consistently presented the heart of its

argument throughout the administrative appeal and in litigating before this Court:

that its State Plan permits a prospective method. As such, based upon the record

here, Illinois has not waived that issue, so this Court considers it on the merits.

B. Chevron Analysis

1. Step One

At Chevron step one, this Court begins with analyzing the disputed text and

determining whether an ambiguity exists. Wolf, 962 F.3d at 222. Interpreting a

federal government contract requires this Court to apply federal common law.

Funeral Fin. Sys. v. United States, 234 F.3d 1015, 1018 (7th Cir. 2000). Under federal

common law, a contract is ambiguous if “it is susceptible to more than one reasonable

interpretation.” Cent. States, Se. & Sw. Areas Pension Fund v. Waste Mgmt. of

Michigan, Inc., 674 F.3d 630, 634 (7th Cir. 2012) (quoting Neuma, Inc. v. AMP, Inc.,

259 F.3d 864, 873 (7th Cir. 2001)). In deciding whether a contract gives rise to

multiple interpretations, courts interpret its language “in an ordinary and popular

sense as would a person of average intelligence and experience.” Funeral Fin., 234

F.3d at 1018 (internal quotation marks omitted).

Applying these rules, this Court finds the relevant text ambiguous as to

whether the State Plan demands a retrospective or prospective method of calculating

DSH limits. The DSH provision states:

[1] In accordance with Public Law 103–66, adjustments to individual

hospital’s disproportionate share payments shall be made if the sum of

Medicaid payments (inpatient, outpatient, and disproportionate share)

made to a hospital exceed the costs of providing services to Medicaid

clients and persons without insurance.

[2] The adjustment to hospitals will be computed by determining a

hospital[’]s cost of inpatient and outpatient services furnished to

Medicaid patients, less the amount paid to the hospital for inpatient and

outpatient services excluding DSH payments made under this State

Plan.

[3] The cost of services provided to patients who have no health

insurance or source of third-party payment less any payments made by

these patients shall be determined and added to the Medicaid shortfall

calculated above.

[4] The result shall be compared to the hospital[’]s estimated DSH

payments.

[5] If the estimated DSH payments exceed the DSH limit (Medicaid

shortfall plus cost of uninsured) then [Illinois] will reduce the

hospital[’]s DSH rate per day so that their DSH payments will equal the

DSH limit.

[6] If necessary, retroactive adjustments will be made.

[12-5] at 20.

The first four sentences generally describe the process by which Illinois

calculates and implements DSH limits for each hospital. Illinois contends that these

sentences are time-neutral in that they do not command either a prospective or a

retrospective method, [22] at 13–14, and this Court agrees. The sentences describe,

at a high level: (1) that Illinois will make “adjustments” to hospitals’ DSH payments;

and (2) how Illinois will compute these “adjustments.” The text does not further

clarify whether said “adjustments” refer to a reconciliation process by which Illinois

settles up its interim payments with actual costs hospitals incurred (consistent with

a retrospective method), or whether they instead describe how Illinois projects DSH

payments for the following year (consistent with a prospective method). Thus, while

the first four sentences of the provision may reasonably be interpreted to require a

retrospective calculation, they may just as reasonably be interpreted to require a

prospective calculation. Offering no real analysis, HHS merely responds with the

conclusory assertion—without any support or basis—that “costs” in the provision

mean “actual costs” and not “projected costs.” [18] at 40–41.

Next, the fifth sentence of the DSH provision reads: “If the estimated DSH

payments exceed the DSH limit (Medicaid shortfall plus cost of uninsured) then the

Department [Illinois] will reduce the hospital[’]s DSH rate per day so that their DSH

payments will equal the DSH limit.” [12-5] at 20. Like the first four sentences of the

provision, the plain language of the fifth—either alone or in combination with the

first four—simply does not define a purely retrospective or a prospective method. On

one hand, this sentence could refer to a process of reconciliation and payment

adjustment for each hospital under a retrospective method. See e.g., Louisiana Dep’t

of Health & Hosps. v. U.S. Dep’t of Health & Human Servs., 566 F. App’x 384, 387

(5th Cir. 2014) (under a retrospective method, interim payments are “reconciled to

actual costs and final payment is made, aligning the payments with the actual

costs.”). But this fifth sentence could also refer equally to a DSH rate adjustment

process for the year ahead, as consistent with a prospective method. The plain text

remains susceptible to at least two alternate constructions, either of which this Court

finds reasonable.

Finally, the sixth sentence—the “If Necessary” clause—provides: “If necessary,

retroactive adjustments will be made.” [12-5] at 20. One obvious interpretation of

this clause—and the one HHS advocates—is that it refers again to the year-end

reconciliation process described in the fifth sentence. See [18] at 43. But the clause

does not say what type of “adjustments” will be made (such as whether the

adjustment is to a “rate” or a “payment”), nor when an “adjustment” may be

“necessary.” Enter Illinois’ interpretation:

[T]he If Necessary Clause anticipated a contingency in which a hospital’s

DSH rate already being applied would be adjusted if necessary, as of the

beginning of the rate year, to correspond to the DSH limit if a calculation

error or the hospital’s successful appeal of its DSH status of basic add-

on rate required such an adjustment.

[22] at 4. Illinois explains in further detail that the contingency arises where

a hospital successfully appeals the determination of its Medicaid

inpatient utilization data or rate, not only leading to an increase in its

DSH add-on rate after the beginning of the rate year, but also

potentially triggering application of its hospital-specific DSH limit

determined under a prospective method and requiring a retroactive

adjustment of that add-on rate that takes account of the DSH limit’s

effect.

[17-1] at 44.

This Court agrees that the text could give rise to Illinois’ interpretation, as it

does not specify the type of “adjustments” that Illinois would make. This

interpretation also makes sense when considering the settled principle that courts

should not “interpret contracts in a manner that would render specific contractual

language mere surplusage.” Cent. States, Se. & Sw. Areas Pension Fund v. Standard

Elec. Co., 87 F. Supp. 3d 810, 816 (N.D. Ill. 2015) (quoting Thompson v. Amoco Oil

Co., 903 F.2d 1118, 1121 (7th Cir. 1990)). That is, if the fifth sentence did actually

command a retrospective calculation method, as HHS contends, then the “If

Necessary” clause—the text of which provides for “retroactive adjustments”—

becomes arguably duplicative (and thus superfluous) because it says and means the

same thing. In other words, under HHS’ construction, both the fifth sentence and the

“If Necessary” clause describe a year-end reconciliation process and thus mandate a

retrospective method. Such construction, while not necessarily incorrect, violates the

canon of construction that courts, where possible, ought to avoid reading a provision

as surplusage. Conversely, Illinois’ interpretation avoids surplusage and gives proper

effect to the provision as a whole; that is, reading the fifth sentence as prescribing a

prospective method harmonizes with an interpretation of the “If Necessary” clause as

a catchall that permits rate adjustments when a contingency gives rise to that need.

Further, absent some contextual indication to the contrary, this Court gives

words their ordinary meaning. The word “retroactive” (in the “If Necessary” clause)

means “extending in scope or effect to a prior time” or “made effective as of a date

prior to . . . imposition.” Retroactive, Merriam-Webster Online Dictionary (last visited

July 16, 2020). Applying this ordinary definition of the word “retroactive” comports

with Illinois’ understanding of the clause as providing for a contingency that would

require a rate change, such as a hospital’s successful appeal. [17-1] at 42, 44.

In sum, the DSH provision gives rise to two different meanings: one requiring

Illinois to utilize a prospective method, and the other requiring Illinois to use a

retrospective method. This Court thus finds the provision ambiguous as a matter of

law.

2. Step Two

Because this Court finds the provision ambiguous as to whether it supports a

prospective or retrospective method of calculation, it moves to step two of the Chevron

analysis. At step two, this Court considers “whether the agency’s answer is based on

a permissible construction” of the contract. Wolf, 962 F.3d at 226 (quoting Chevron,

467 U.S. at 843). This Court finds that it is not and thus that the Board’s opinion is

not entitled to deference.

The Board properly recognized that the DSH provision is ambiguous yet

concluded that it could not defer to Illinois’ interpretation because it was

“unreasonable.” [12-2] at 1, 11. The Board’s analysis focused primarily upon the “If

Necessary” clause, determining that the clause “referred to the computation

described in the immediately-preceding sentences.” Id. at 14. In rejecting Illinois’

position that the clause’s reference to “retroactive adjustments” means adjustments

made after hospital appeals, the Board reasoned that “no mention of the hospital

appeal process appears in the text of the hospital-specific DSH limit provision,” that

“the criteria for calculating each hospital’s DSH add-on amount were set out in a

different section of the State plan . . . and the appeal process for a hospital to request

review of its DSH add-on amount appears to have been established and described in

an entirely different chapter of the State plan.” Id. at 13.

The Board’s reasoning is flawed. First, as discussed above, construing the

clause’s reference to “retroactive adjustments” to mean reconciliation of DSH

payments to actual costs (under a retrospective method) renders the clause

superfluous to the immediately preceding fifth sentence, which—under the Board’s

logic—says the exact same thing. Standard Elec. Co., 87 F. Supp. 3d at 816 (courts

should avoid interpretations that render any part of a contract mere surplusage). In

contrast, Illinois’ construction avoids rendering any part of the DSH provision

redundant.

Second, the Board relied heavily upon its observation that the State Plan’s

provision on the hospital appeals process exists in a different chapter (Chapter IX)

than the DSH provision. [12-2] at 13–14. But the State Plan—two sub-paragraphs

before the DSH provision—also explicitly references hospital appeals of their DSH

payment “ineligibility” or “payment amounts” pursuant to the appeals process more

fully set out in Chapter IX. See [12-5] at 19–20. Thus, no clear separation actually

exists between the State Plan’s provisions on DSH limits and hospital appeals.

Regardless, the Board offered no justification for its view that paragraphs of the State

Plan must be self-contained. This Court thus finds the Board’s analysis unreasonable

on this point as well.

Finally, the Board agreed with CMS’ argument that the phrase “estimated

DSH payments” in the fifth sentence of the DSH provision means “interim” DSH

payments because the word “estimated” only qualifies “DSH payments” and not other

elements of the DSH limit, such as component costs. [12-2] at 14. Critically, however,

the Board failed to acknowledge that the fifth sentence mentions “DSH payments”

twice but uses the word “estimated” to qualify just one of those instances: “If the

estimated DSH payments exceed the DSH limit . . . then the Department will reduce

the hospital[’]s DSH rate per day so that their DSH payments will equal the DSH

limit.” [12-5] at 20 (emphasis added). Under a plausible reading of this phrasing,

“estimated” only qualifies the first instance because it identifies projected DSH

payments a hospital receives before a DSH-limit rate adjustment.

In sum, the Board held that it could not defer to Illinois’ interpretation of the

State Plan, finding unreasonable Illinois’ view that the State Plan allowed for a

prospective method. But as discussed above, this Court finds that the State Plan is

susceptible to more than one reasonable interpretation and that the Board’s

conclusion otherwise conflicts with the plain text. This Court thus declines to defer

to the Board under Chevron and instead reverses and remands this matter to the

agency for further proceedings.

IV. Conclusion

For the reasons set forth above, this Court grants Illinois’ motion for summary

judgment [17] and denies HHS’ motion for summary judgment [18]. The Board’s

decision upholding the disallowances is hereby vacated and the matter is remanded

to the agency for further proceedings consistent with this opinion. Civil case

terminated.

Dated: September 25, 2020

Entered:

John Robert Blakey Z

United States District Judge

20