# Baylor All Saints Medical Center v. Becerra

> District Court, N.D. Texas · August 15, 2024

URL: https://www.frixlaw.com/law-library/cases/10672314

## Case

- **Court:** District Court, N.D. Texas
- **Decided:** August 15, 2024
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10672314

## How later opinions describe it (automated extraction)

- noting an equitable remedy must be “narrowly tailored to the injury it is remedying”

## Opinion text

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10672314. Public record. Not legal advice.