Baylor All Saints Medical Center v. Becerra

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

BAYLOR ALL SAINTS MEDICAL

CENTER, ET AL.,

Plaintiffs,

v. No. 4:24-cv-00432-P

XAVIER BECERRA,

Defendant.

OPINION & ORDER

Before the Court is Plaintiffs’1 Motion for Preliminary Injunction

(ECF No. 8), which the Court advanced to the case’s merits under

Federal Rule of Civil Procedure 65. Having considered the briefing and

evidence of record, the Court concludes the Motion should be and hereby

is GRANTED for the reasons below.

BACKGROUND

This is a case about hospital bills. More precisely, it’s about how

healthcare providers get paid for serving our nation’s most vulnerable

demographics. Since Medicare and Medicaid were established in 1965,

federal, state, and local governments have cooperated to provide low- or

1 “Plaintiffs” in this case are a plethora of Texas-based hospitals, including:

(1) Baylor All Saints Medical Center; (2) Baylor Medical Center at Irving; (3)

Baylor Medical Center at Waxahachie; (4) Baylor Scott & White Medical

Center – Centennial; (5) Baylor Scott & White Medical Centers – Greater

North Texas; (6) Baylor University Medical Center; (7) Covenant Medical

Center; (7) El Paso County Hospital District; (8) Hillcrest Baptist Medical

Center; (9) Hunt Memorial Hospital District; (10) Lake Pointe Operating

Company, L.L.C.; (11) Scott & White Hospital – College Station; (12) Scott &

White Hospital – Marble Falls; and (13) Scott & White Memorial Hospital.

no-cost healthcare for persons otherwise unable to afford it.2 One way of

doing so is a reimbursement system for hospitals that serve Medicare

beneficiaries. Medicare reimburses hospitals for covered services via the

inpatient prospective payment system (“IPPS”), which is distributed by

diagnostic related group (“DRG”). Acronyms aside, the regime is simple:

DRGs are unique taxonomies assigned for related diagnoses with a set

payment rate. For instance, a certain rate will be more or less

appropriate for respiratory infections/inflammations, another for heart

failure and shock, and another for kidney and urinary tract infections.

The resulting DRG is a guidepost that signals how much Medicare,

Medicaid, or insurance should pay for a patient’s treatment.

By aggregating anticipated costs by DRG, the IPPS efficiently

reimburses hospitals at scale, with payments subject to myriad

adjustments. This case involves an adjustment Congress provided when

it amended the Medicare statute in 1986. Designed to help hospitals in

underprivileged communities, the 1986 amendment gives an

adjustment to Disproportionate Share Hospitals (“DSH”)—hospitals

that serve a “significantly disproportionate number of low-income

patients.” 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). To provide indigent

healthcare for disadvantaged populations, DSHs confront higher costs

and generate lower revenues. Enter the adjustment—an offset DSHs

receive to lessen this financial burden. Whether a hospital qualifies as

a DSH (and the corresponding adjustment it receives) is determined by

calculating the hospital’s DSH percentage, which functions as a “proxy

for the number of low-income patients the hospital serves.” This figure

2 In his memoirs, President Johnson provides an excellent account of his

administration’s work with Congress to enact Medicare and Medicaid,

endeavoring to provide basic healthcare to those most in need. See Lyndon

Baines Johnson, The Vantage Point: Perspectives of the Presidency, 1963–1969,

212–21 (1971). Unfortunately, such instances of effective cooperation are

increasingly rare nowadays. Over the last few years, the executive and

legislative branches seem to cooperate less and less. As here, in today’s

America, most “laws” are created through administrative fiat.

determines eligibility for an array of programs, two of which are relevant

here.3

At base, the DSH percentage is the sum of two fractions. This case

hinges on the “the Medicaid Fraction,” a moniker eponymous for the

fraction’s statutory genesis. As enunciated in the Medicaid statute, the

Medicaid Fraction is:

The fraction (expressed as a percentage), the numerator of

which is the number of the hospital’s patient days for such

period which consists of patients who (for such days) were

eligible for medical assistance under a State plan approved

under subchapter XIX [Medicaid], but who were not

entitled to benefits under part A of this subchapter, and the

denominator of which is the total number of the hospital’s

patient days for such period.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). In other words, the Medicaid

Fraction is the ratio of patient days attributable to Medicaid-eligible

patients, expressed as a function of treatment days attributable to all

inpatients at the hospital.

Congress gave the Medicaid Fraction a facelift in the 2005 Deficit

Reduction Act, which adds the following proviso to the calculus:

In determining [the Medicaid fraction,] the number of the

hospital’s patient days for such period which consist of patients

who (for such days) were eligible for medical assistance under a

State plan approved under [Medicaid], the Secretary may, to the

extent and for the period the Secretary determines appropriate,

include patient days of patients not so eligible but who are

regarded as such because they receive benefits under a

demonstration project approved under title XI.

42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). Under this revamped provision, “the

Medicaid fraction’s numerator includes both (1) days a hospital treated

patients who were Medicaid-eligible, and (2) days a hospital treated

patients who are regarded as Medicaid-eligible because they received

3As is perhaps obvious, the first is the DSH adjustment itself. The second

is an ancillary program for DSHs, the 340B Drug Discount (the “340B

Program”). Under the 340B Program, qualifying DSHs receive a substantial

rebate on many drugs, enabling them to use such drugs at or below a statutory

price ceiling. See generally 42 U.S.C. § 256b.

demonstration project benefits.” Forrest Gen. Hosp. v. Azar, 926 F.3d

221, 224 (5th Cir. 2019) (emphasis added).

So, what’s a demonstration project? As one might guess, the answer

requires more acronyms. To obtain federal funds under Medicaid, states

submit a “State Plan” for approval by the Centers for Medicare &

Medicaid Services (“CMS”). The State Plan lays out who will receive

medical assistance, what kind of assistance they’ll receive, and other

matters of import. If CMS approves the State Plan, that state gets access

to federal Medicaid funding. But as noted above, Title XI § 1115 of the

Social Security Act authorizes Defendant Becerra, as Secretary of

Health and Human Services (“HHS”), to authorize “demonstration

projects”—pilot programs that “assist in promoting the objectives of

[Medicaid].” 42 U.S.C. § 1315(a). With Mr. Becerra’s approval, standard

Medicaid requirements are waived for demonstration projects. “In other

words, these § 1115 waivers are Congress’s green light to the Secretary

to relax the usual state-plan-approval requirements.” Forrest, 926 F.3d

at 224.

A lot hinges on Becerra’s approval for demonstration projects: “if the

Secretary approves a demonstration project, then [courts] regard patient

days involving patients who ‘receive benefits under a demonstration

project’ as if they were patient days attributable to Medicaid-eligible

patients (which means those days also go into the numerator).” Id. at

228. And the bigger the numerator, the greater the proportion of patient

days factored into the DSH percentage, resulting in more money for

qualifying DSHs. Why does this matter? Because in 2012, the Supreme

Court made Medicaid expansion optional for states. See Nat. Fed. of

Indep. Bus. v. Sebelius, 567 U.S. 519 (2012). Since then, many states

(like Texas) have declined to expand the program, opting to chart their

own path and rely upon § 1115 waivers to access federal funding.4

4 Indeed, as Justice Brandeis aptly recognized, one of the hallmarks of our

federal system is that it allows for experimentation and innovation in

policymaking at the state level. See New State Ice Co. v. Liebmann, 285 U.S.

262, 311 (1932) (Brandeis, J., dissenting).

That’s why it was a big deal when the Texas Healthcare

Transformation and Quality Improvement Program (“THTQIP”) got

§ 1115 approval. Under THTQIP, the Texas Medicaid program provides

direct payments to hospitals from Uncompensated Care Cost (“UCC”)

pools as remuneration for indigent care services. In simple terms, a UCC

pool is a bucket of funds reserved for hospitals to cover unmonetized

services rendered. If for some reason the bills don’t get paid, hospitals

can access funds from a UCC pool to help bridge the gap. The Secretary

approved this plan in January 2021. This approval was big news for

Plaintiffs, who are a group of regional hospitals and healthcare

providers (collectively, “the Hospitals”). With approval for THTQIP

programming, patients could have their medical costs offset by UCC pool

payments and the Hospitals could include those patients in calculating

their respective Medicaid Fractions.

Then HHS decided to shake things up. In August 2023, HHS adopted

a new regulation the excludes patients receiving UCC pool benefits from

the Medicaid Fraction numerator. In relevant part, the new regulation

provides that:

Patients whose health care costs, including inpatient hospital

services costs, for a given day are claimed for payment by a

provider from an uncompensated, undercompensated, or other

type of funding pool authorized under section 1115(a) of the Act

to fund providers’ uncompensated care costs are not regarded as

eligible for Medicaid for purposes of [42 C.F.R. § 412.106(b)(4)(ii)]

To stay experimentation [at the states] in things social and economic

is a grave responsibility. Denial of the right to experiment may be

fraught with serious consequences to the nation. It is one of the happy

incidents of the federal system that a single courageous state may, if

its citizens choose, serve as a laboratory; and try novel social and

economic experiments without risk to the rest of the country.

Id.; see also Letter from Thomas Jefferson to Joseph C. Cabell (Feb. 2, 1816),

in 12 The Works of Thomas Jefferson (Lipscomb & Bergh, eds., Fed. ed. 1904–

05) (“The way to have good and safe government, is not to trust it all to one,

but to divide it among the many, distributing to every one exactly the

functions he is competent to.”).

on that day and the days of such patients may not be included in

[the Medicaid Fraction].

88 Fed. Reg. 58,640, 59,332 (Aug. 28, 2023), promulgated at 42 C.F.R.

§ 412.106(b)(4)(iii) (hereinafter, “the Exclusion Rule”).

The Hospitals say the Exclusion Rule conflicts with the clear wording

of 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) and the Fifth Circuit’s binding

interpretation of the same in Forrest Gen. Hosp. v. Azar, 926 F.3d 221

(5th Cir. 2019). The Hospitals took their concerns to the appropriate

administrative body, the Provider Reimbursement Review Board

(“PRRB”). The PRRB reviewed and sua sponte dismissed their challenge

on jurisdictional grounds, rendering no decision on the underlying legal

dispute. The Hospitals sought judicial review in this Court on May 10,

2024, seeking declaratory and injunctive relief. As the material facts are

not in dispute, the Court advanced the Hospitals’ Motion for Preliminary

Injunction (ECF No. 7) to the merits. As explained below, the Fifth

Circuit has already rejected HHS’s interpretation of the Exclusion Rule,

warranting declaratory relief in the Hospitals’ favor. Further,

considering the Rule’s illegitimacy, the Court agrees with the Hospitals

that equitable relief is warranted.

LEGAL STANDARD

Summary judgment is proper if “there is no genuine dispute as to

any material fact and the movant is entitled to judgment as a matter of

law.” FED. R. CIV. P. 56(a). A dispute is “genuine” if the evidence

presented would allow a reasonable jury to return a verdict for the non-

movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 242–43 (1986). A

fact is “material” if it would affect a case’s outcome. Id. at 248. Generally,

the “substantive law will identify which facts are material,” and

“[f]actual disputes that are irrelevant or unnecessary will not be

counted.” Id. The Court views evidence in the light most favorable to the

non-movant when making this call. Cunningham v. Circle 8 Crane

Servs., LLC, 64 F.4th 597, 600 (5th Cir. 2023). The Court may rely on

any evidence of record but need only consider materials cited by the

parties. FED. R. CIV. P. 56(c)(1)–(3); see generally Celotex Corp. v. Catrett,

477 U.S. 317, 322 (1986) (noting summary judgment is proper “if the

pleadings, depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is no genuine

issue as to any material fact and that the moving party is entitled to

judgment as a matter of law”). But the Court need not mine the record

for evidence supporting the nonmovant; the burden falls on the moving

party to simply show a lack of evidence supporting the nonmovant’s

case. See Malacara v. Garber, 353 F.3d 393, 404–05 (5th Cir. 2003).

ANALYSIS

The Hospitals say the Exclusion Rule is unlawful, seeking

declaratory and injunctive relief. See ECF Nos. 1, 7. Beyond the Rule

itself, the Hospitals say the PRRB’s dismissal of their administrative

appeal was arbitrary and capricious. See ECF No. 1 at 25, 28. HHS

pushes back on the merits and on jurisdictional grounds. The Court

tackles the jurisdictional dispute first. See United States v. Rodriguez,

33 F.4th 807, 811 (5th Cir. 2022) (“[C]ourts must assess their

jurisdiction before turning to the merits.”).

A. The Court has continuing jurisdiction over the Hospitals’

challenge because remand to the PRRB would be futile.

HHS says the Court lacks jurisdiction because the Hospitals failed

to exhaust their administrative remedies as required when suing under

the Medicaid statute. See ECF No. 14 at 6. Exhaustion requires the

PRRB to make a “final decision” on the Hospitals’ administrative

challenge, thus entitling them to judicial review. See 42 U.S.C.

§ 1395oo(f)(1). The question then lies in what “final decision” means. The

Court’s analysis on this point is largely framed by precedents

interpreting the Social Security Act, which, like Medicaid, requires a

“final decision” for judicial review. See Matthews v. Eldridge, 424 U.S.

319, 328 (1976); cf. 42 U.S.C. § 1395oo(f)(1); 42 U.S.C. § 405(g). As both

Acts contain the same requirement, the presumption of consistent usage

suggests the term “final decision” would function the same way in both.

See Smith v. City of Jackson, 544 U.S. 228, 233 (2005) (“when Congress

uses the same language in two statutes having similar purposes . . . it is

appropriate to presume that Congress intended that text to have the

same meaning in both statutes”).

While the Fifth Circuit has not addressed this specific question, the

Court agrees with the First, Fourth, Ninth, Eleventh, and D.C. Circuits

that Matthews v. Eldridge provides the correct interpretation. See

generally Lee Mem’l Hosp. v. Becerra, 10 F.4th 859, 866–67 (D.C. Cir.

2021) (explicating the relevant doctrinal framework). In Matthews, the

Supreme Court construed the term “final decision” in 42 U.S.C. § 405(g)

to “consist[] of two elements, only one of which is purely ‘jurisdictional’ .

. . .” Matthews, 424 U.S. at 328. The first element, which can’t be waived,

is that a claim must be “presented to the Secretary.” Id. It is undisputed

that the Hospitals brought a claim to the PRRB and the PRRB dismissed

all claims. See ECF No. 7 (PRRB’s findings and dismissal of the

Hospitals’ challenge). Thus, the Hospitals satisfy the nonwaivable

element. See Matthews, 242 U.S. at 328. The next element, which can be

waived, is that “the administrative remedies prescribed by the Secretary

be exhausted.” Id. Exhaustion is waivable when “a claimant’s interest

in having a particular issue resolved promptly is so great that deference

to the agency’s judgment is inappropriate.” Id. at 330.

The Supreme Court reaffirmed this holding in Smith v. Berryhill and

added that when an agency dismisses a claim and the district court

disagrees with the dismissal, “there would be jurisdiction for [the] court

to proceed to the merits.” 587 U.S. 471, 487 (2019). However, the Court

stressed that federal courts cannot use this end-run around

jurisdictional dismissals to decide questions expressly delegated to the

agency. See id.

Here, the PRRB dismissed the Hospitals’ challenge on jurisdictional

grounds. See ECF No. 7 at 21. When pressed, the PRRB simply said

“factual gaps” prevented it from adequately assessing its jurisdiction.

Id. at 19. But even accepting that as true, it would then be incumbent

upon the Board to seek out the information needed to determine

jurisdiction. See 42 C.F.R. § 405.1842(e)(3)(ii). That’s the crux of the

Hospitals’ first and third causes of action. See ECF No. 1 at 25, 28. And

they’re right: the PRRB was affirmatively required to seek out the

information needed to rule on the Hospitals’ request for expedited

judicial review. 42 C.F.R. § 405.1842(e)(3)(ii). To close the door on their

administrative appeal without offering them the chance to provide

further information, the PRRB transgressed its clearly enumerated

procedural mandate. Id.

While the PRRB’s findings are subject to judicial deference,

Williamson v. Lee Optical of Okla., 348 U.S. 483, 488–89 (1955), that

deference does not give them carte blanche to violate binding rules of

procedure. “Procedural perfection in administrative proceedings is not

required” as long as “the substantial rights of a party have not been

affected.” Mays v. Bowen, 837 F.2d 1362, 1364 (5th Cir. 1988). But in

this instance, the procedural violation was claim-dispositive. Simply

put, the rules governing executive agencies—whether in the APA or

otherwise—make the executive stay in its lane. HHS cannot shrug aside

42 C.F.R. § 405.1842(e)(3)(ii) as too burdensome and it cannot give lip-

service to compliance by performing a perfunctory factual inquiry.

In any event, the PRRB was wrong. Medical providers are entitled to

a PRRB hearing if they are dissatisfied with “a final determination of

the Secretary as to the amount of the payment under subsection . . . (d)

of section 1395ww,” which includes both per-patient payment rates and

the DSH adjudgment to those rates. See 42 U.S.C. §§ 1395oo(a)(1)(A)(i)–

(ii); 1395ww(d)(1)(A)(iii), (d)(5)(F). That was precisely the issue the

Hospitals took to the PRRB here. See ECF 7 at 11. Consequently, the

Court finds that PRRB’s jurisdictional dismissal was improper.

Having found the PRRB’s jurisdictional dismissal was erroneous, the

Court must next assess whether deciding the Hospitals’ challenge on the

merits would usurp the agency’s delegated authority. See Berryhill, 587

U.S. at 488. In such situations, the Court must send the claim back to

the executive. But that isn’t required “when administrative remedies

are inadequate.” Info Res., Inc. v. United States, 950 F.2d 1122, 1126

(5th Cir. 1992) (cleaned up). And they would be here. While the PRRB

has authority over questions arising under the statutory regime, it lacks

the Constitutional power to adjudicate the legal question here: whether

the Exclusion Rule as promulgated violates 42 U.S.C.

§ 1395ww(d)(5)(F)(vi)(II). See 42 U.S.C. § 1395oo(f)(1). Any PRRB

determination apropos of the Hospitals’ challenge would have to assume

the Exclusion Rule is valid. See 42 C.F.R. § 405.1867 (noting “the Board

must comply with all the provisions of Title XVIII of the Act and

regulations issued thereunder”). That’s where judicial review comes into

play. See Sebelius v. Auburn Reg. Med. Ctr., 568 U.S. 145, 157 (2013) (“A

court lacks authority to undermine the regime established by the

Secretary unless [his] regulation is arbitrary, capricious, or manifestly

contrary to the statute.” (cleaned up)).

So, sending the Hospitals back to PRRB would be lengthy, costly, and

futile. The law does not require such procedural absurdity, so “there is

no jurisdictional bar to a court’s reaching the merits.” Berryhill, 587 U.S.

at 488. Indeed, “[u]nder bedrock separation-of-powers principles, Article

III courts need not—indeed must not—outsource their constitutionally

assigned interpretive duty to Article II agencies when the Article I

Congress has spoken clearly.” Forrest, 926 F.3d at 228. Moreover, the

administrative process should not be used as a weapon to stymy the

judicial review of agency action. Having found jurisdiction and assessed

the PRRB’s dismissal of the Hospitals’ claims, the Court now turns to

the Exclusion Rule.

B. The Exclusion Rule is unlawful.

This case is simple on the merits. Resolving this dispute doesn’t

require the judicial skills of Learned Hand or Oliver Wendall Holmes.

While HHS may protest, a recent “spotted dog” decision by the Fifth

Circuit directly controls the Court’s inquiry—and clarifies that the

Exclusion Rule contradicts the statute’s plain text. See Forrest, 926 F.3d

at 228–29. Statutorily, the Medicaid Fraction includes: “patients who . .

. were eligible for medical assistance under a State plan approved under

[Medicaid].” 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). And since 2005, the

Secretary has been empowered to authorize demonstration projects, the

beneficiaries of which are to be included in the Medicaid Fraction’s

numerator:

In determining [the Medicaid fraction,] the number of the

hospital’s patient days for such period which consist of patients

who (for such days) were eligible for medical assistance under a

State plan approved under [Medicaid], the Secretary may, to

the extent and for the period the Secretary determines

appropriate, include patient days of patients not so eligible

but who are regarded as such because they receive benefits

under a demonstration project approved under title XI.

Deficit Reduction Act of 2005, Pub. L. No. 109–171, § 5002(a), 120 Stat. 4

(2006) (codified at 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II)) (emphasis

added). And the Fifth Circuit has already rejected the arguments HHS

raises here, clarifying that the numerator includes hospital days of

Medicaid-eligible patients and those treated as such pursuant to a

§ 1115 waiver. See Forrest, 926 F.3d at 228.

As noted, the Secretary approved UCC pool payments under

THTQIP. See ECF No. 6 at 12–13. But the Exclusion Rule swept this

approval under the rug, stating the beneficiaries of such pool payments

“are not regarded as eligible for Medicaid for purposes of [the Medicaid

Fraction] . . . and the days of such patients may not be included in this

[] computation.” 42 C.F.R. § 412.106(b)(4)(iii). Fifth Circuit precedent

roundly rejects this position. Forrest, 926 F.3d at 228. Indeed, the clarity

of Forrest General obviates the need for additional analysis vis-à-vis

HHS’s already-rejected arguments here.

In Forrest, the Fifth Circuit addressed a Mississippi plan, which, like

Texas’s plan, includes patients not eligible for Medicaid. See Forrest, 926

F.3d at 226. Like the Texas Plan, Mississippi’s was also approved by the

Secretary. Id. Promulgating a new rule does not change the statutory

text or the Fifth Circuit’s interpretation, especially when “the governing

statutory text is clear.” Id. at 228. Section 1395ww(d)(5)(F)(vi)(II)

requires HHS to “include days that a hospital treated patients eligible

under a Medicaid-approved state plan in the Medicaid fraction’s

numerator.” Id. The only other court to address this question–the D.C.

Circuit–agrees. Bethesda Health, Inc. v. Azar, 389 F. Supp. 3d 32, 43–44

(D.C. 2019), aff’d, 980 F.3d 121 (D.C. Cir. 2020). And what the Fifth

Circuit has already addressed this Court need not entertain further. See

Forrest, 926 F.3d at 226.

As in Forrest General, HHS again argues the Secretary has

discretion to decide which days go in the calculation. See ECF No. 14 at

20–25. But the Fifth Circuit addressed this point in Forrest General,

noting “[t]he Secretary may exercise discretion, and the Secretary did

exercise discretion when he authorized the [state plan].” Forrest, 926

F.3d at 233 (emphasis added). Thus, the Secretary exercised his

discretion when he approved Texas’s plan. “No take-backs.” Id.

To be fair, the Court is not unsympathetic to HHS’s statutory

interpretation. It’s far from an implausible interpretation to read the

Deficit Act’s proviso as warranting discretion in the eligibility

determination itself, as well as in the authorization of a state’s plan. See,

e.g., 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) (stating “the Secretary may, to

the extent and for the period the Secretary determines appropriate,

include patient days of patients not so eligible but who are regarded as

such because they receive benefits under a demonstration project”)

(emphasis added). But this Court will not resurrect an argument

scotched by the Fifth Circuit. Accordingly, the Court DECLARES 42

C.F.R. § 412.106(b)(4)(iii) to be unlawful under the statute. See 5 U.S.C.

§ 706(2)(A) (empowering the court to deem unlawful any agency action

that is “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law”). Having granted declaratory relief, the Court now

turns to the Hospitals’ requests for additional equitable remedies.

C. Vacatur is appropriate but a permanent injunction isn’t.

The Hospitals ask the Court to declare the Exclusion Rule unlawful,

vacate it, and permanently enjoin its enforcement. ECF No. 1 at 29.

Having granted declaratory relief, the Court now turns to their requests

for equitable remedies. In doing so, the Court is mindful that “Plaintiffs

don’t get [injunctive relief] just because they got a declaratory judgment.

Nuziard v. Minority Bus. Dev. Agency, ---F. Supp. 3rd---, 2024 WL

965299, at *44 (N.D. Tex. Mar. 5, 2024) (Pittman, J.). As explained

below, the Hospitals fail to carry their burden in seeking permanent

injunctive relief. Nevertheless, considering the Exclusion Rule’s

manifest impropriety, vacatur is warranted under 5 U.S.C. § 706.

1. The Exclusion Rule should not be permanently enjoined.

The Hospitals want an injunction. See ECF No. 7. But an injunction

“is not a remedy which issues as of course.” Harrisonville v. W.S. Dickey

Clay Mfg. Co., 289 U.S. 334, 337–38 (1933). Indeed, injunctive relief is a

“drastic and extraordinary remedy.” Monsanto Co. v. Geertson Seed

Farms, 561 U.S. 139, 165 (2010). To get an injunction, the Hospitals

must show:

(1) that [they have] suffered an irreparable injury; (2) that

remedies available at law, such as monetary damages, are

inadequate to compensate for that injury; (3) that, considering the

balance of hardships between the plaintiff and defendant, a

remedy in equity is warranted; and (4) that the public interest

would not be disserved by a permanent injunction.

eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006). And they

must “clearly carry[] the burden of persuasion on all [four] elements.”

Bluefield Water Ass’n, Inc. v. City of Starkville, Miss., 577 F.3d 250, 253

(5th Cir. 2009). They fail to do so. Specifically, they win on factors two

through four, but lose on factor one.

To start with the wins, the Hospitals show inadequacy of legal

remedies. See eBay, 547 U.S. at 391. Because they sue the government,

money damages are off the table. See Wages & White Lion Invs., LLC v.

FDA, 16 F.4th 1130, 1142 (5th Cir. 2021). That’s a win for factor two.

eBay, 547 U.S. at 391. And factors three and four “merge when the

Government is the opposing party.” Nken v. Holder, 556 U.S. 418, 435

(2009). As applied to the Parties themselves, the Court “looks to the

relative harm to both parties if the injunction is granted or denied.” Def.

Distrib. v. U.S. Dept’ of State, 838 F.3d 451, 460 (5th Cir. 2016). A denied

injunction could disqualify the Hospitals from myriad federal programs

by operation of an invalid regulation. A granted injunction merely stops

HHS from enforcing a single unlawful regulation promulgated last year.

That balance clearly favors the Hospitals. Def. Distrib., 838 F.3d at 460.

If the private-interests inquiry favors the Hospitals, the public-

interests inquiry does so even more. The Exclusion Rule forces the

Hospitals to cut costs and limit services for low-income patients in

Texas. See ECF No. 8 at 5. “Such a consequence would harm the public

at large.” Career Colleges & Sch. of Tex. v. United States Dep’t of Educ.,

98 F.4th 220, 255 (5th Cir. 2024) (holding the public interest favors an

injunction because “a failure to stay the Rule would significantly

constrain schools’ operations and prevent them from devoting resources

to educating their students, upgrading facilities, and constructing new

ones.”). “But even more fundamentally, the public interest is served

when administrative agencies comply with their obligations under the

APA.” Carroll Indep. Sch. Dist. v. United States Dep’t of Educ., No. 4:24-

CV-00461-O, 2024 WL 3381901, at *7 (N.D. Tex. July 11, 2024)

(O’Connor, J.). There is generally no public interest in the perpetuation

of unlawful agency action. See Wages & White Lion Invs., 16 F.4th at

1143.

Indeed, in most cases, the avoidance of improper laws is “the highest

public interest at issue.” Def. Distrib., 838 F.3d at 460. That interest is

implicated here. But it’s the penultimate interest for this case given the

significant public-health considerations. See Roman Catholic Diocese of

Brooklyn v. Cuomo, 492 U.S. 14, 19–20 (2020) (noting public health is

paramount in injunctive-relief analyses). Yet despite these decisive

victories, the Hospitals must “clearly carry[] the burden of persuasion

on all elements” to obtain a permanent injunction. Bluefield Water Ass’n,

577 F.3d at 253. And they fail to do so for the first factor: the

irreparability of their injury. eBay, 547 U.S. at 391.

Without an irreparable injury, you can’t get an injunction—full stop.

See id. As noted, the Hospitals can’t get damages here. See Wages &

White Lion Invs., 16 F.4th at 1142. That ordinarily indicates a harm is

irreparable. See Sampson v. Murray, 415 U.S. 61, 90 (1974) (“The key

word in in this consideration is irreparable. Mere injuries, however

substantial, . . . are not enough. The possibility that adequate

compensatory or other corrective relief will be available at a later date .

. . weighs heavily against a claim of irreparable harm.”). But what about

“other relief”? See id. HHS contends that the Hospitals can seek relief

through the established administrative processes, which include the

recovery of any underpaid DSH payments with interest, thereby

negating the claim of irreparable harm. See ECF No. 14 at 1, 23.

Furthermore, HHS argues that not all plaintiffs are likely to succeed on

their 340B drug discount claims. See id. at 2. Specifically, some plaintiffs

may not be directly impacted by the regulation in a way that would

result in irreparable harm, thus undermining their case for injunctive

relief. See id. This further demonstrates that the Hospitals have not met

their burden of showing irreparable injury, particularly when

alternative remedies are available to address any potential financial

harm. Indeed, the Hospitals seem to recognize their 340b arguments are

the only viable path to injunctive relief. See ECF No. 8 at 22–24.

The record simply cannot carry the day for the Hospitals on this

point. William Galinsky’s Declaration suggests that only four of the

fourteen hospitals may lose 340B eligibility as a result of the challenged

rule, indicating that not all plaintiffs would be affirmatively impacted.

See ECF No. 8-1. While the Hospitals contend the rule’s impact on 340B

eligibility will indirectly affect all Plaintiffs by lowering DSH

percentages and thereby increasing the risk of disqualification from

340B, see ECF No. 15 at 10, that argument cannot warrant such an

“extraordinary and drastic remedy” for all named plaintiffs. Monsanto,

561 U.S. at 165. Although the Court sympathizes with their arguments

on this point, case law is clear that the Hospitals must “clearly carry[]

the burden of persuasion on all [four] elements” to obtain injunctive

relief. Bluefield Water Ass’n, 577 F.3d at 253. And while all plaintiffs

may face an irreparable injury without an injunction, the Hospitals do

not clearly carry their burden on the instant record. See id. Thus, the

Court must DENY a permanent injunction. Nevertheless, as explained

below, vacatur takes some of the sting from the denial.

2. The Exclusion Rule should be vacated.

Having denied a permanent injunction, the Court still has equitable

instruments in its toolkit when evaluating an invalid agency action. In

deciding which to use, the Court must always consider the “least severe”

equitable remedy to resolve a plaintiff’s harm. See Nuziard, 2024 WL

965299, at *44–49 (collecting cases); see generally O’Donnell v. Harris

Cnty., 892 F.3d 147, 155 (5th Cir. 2018) (noting an equitable remedy

must be “narrowly tailored to the injury it is remedying”). And while this

Court doubts the APA intended to authorize vacatur, see Nuziard, 2024

WL 965299, at *41–44, the Fifth Circuit’s “ordinary practice is to vacate

unlawful agency action.” Data Mktg. P’ship, LP v. U.S. Dep’t of Lab., 45

F.4th 846, 859 (5th Cir. 2022); see also Brown v. U.S. Dep’t of Educ., 640

F. Supp. 3d 644, 667 (N.D. Tex. Nov. 10, 2022) (Pittman, J.) (vacated on

other grounds). Having considered the briefing and evidence of record,

the Court will follow that well-trod path here.

The Exclusion Rule is unlawful. See supra pp. 9–11; see also 5 U.S.C.

§ 706 (empowering courts to “set aside” unlawful agency actions).

Between alternatives, vacatur is less severe on HHS but still remedies

the Hospitals’ harm. See Texas v. United States, 40 F.4th 205, 219 (5th

Cir. 2022) (citing Monsanto, 561 U.S. at 165) (“There are meaningful

differences between an injunction, which is a ‘drastic and extraordinary

remedy,’ and vacatur, which is ‘a less drastic remedy.’”). And vacatur is

considerably less severe here considering the record’s inability to

support an injunction, warranting endorsement of the Fifth Circuit’s

standard practice. See Data Mktg. P’ship, 45 F.4th at 859.

The Hospitals say vacatur is warranted and the Court agrees,

especially considering “vacatur does nothing but re-establish the status

quo absent unlawful agency action.” Texas, 40 F.4th at 220. As such,

“[a]part from the constitutional or statutory basis on which the court

invalidated an agency action, vacatur neither compels nor restrains

further agency decision-making.” Id. Accordingly, while this Court’s

doubts regarding vacatur under the APA are well known, see Nuziard,

2024 WL 965299, at *43–44, the remedy is warranted considering the

Exclusion Rule’s patent invalidity. See 42 C.F.R. § 412.106(b)(4)(iii); see

also Forrest, 926 F.3d 221. Because the Fifth Circuit prefers vacatur to

remedy unlawful agency actions, see Data Mktg. P’ship, 45 F.4th at 859,

and because the Exclusion Rule warrants a lesser equitable remedy

than an injunction, the Court must GRANT the Hospitals’ request for

vacatur under 5 U.S.C. § 706. See ECF No. 1 at 26.

CONCLUSION

For the above reasons, the Court concludes Plaintiffs’ appeals are

jurisdictionally proper, the Board erred in dismissing Plaintiffs’ appeals,

and the Exclusion Rule is unlawful. Accordingly, the Court GRANTS

summary judgment in the Hospitals’ favor on Counts 1–3 and

DECLARES 42 C.F.R. § 412.106(b)(4)(iii) to be unlawful. The agency

action being unlawful, the Court hereby VACATES 42 C.F.R. §

412.106(b)(4)(iii).

The Court further notes the Hospitals’ request for fees and costs. See

ECF No. 1 at 26. Should the Hospitals intend to pursue an award of fees

and/or costs, the Court ORDERS them to submit a properly supported

motion for same within five days of the date of this Order.

SO ORDERED on this 15th day of August 2024.

Mark T. Pittman

UNITED STATES DISTRICT JUDGE

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