The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 7, 2019 Decided August 4, 2020
No. 18-5334
DEPARTMENT OF MEDICAL ASSISTANCE SERVICES OF THE
COMMONWEALTH OF VIRGINIA,
APPELLANT
v.
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN
SERVICES AND ALEX MICHAEL AZAR, II, SECRETARY, U.S.
DEPARTMENT OF HEALTH AND HUMAN SERVICES,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:16-cv-02008)
Susannah Vance Gopalan argued the cause for appellant.
With her on the brief were Edward T. Waters, Phillip A.
Escoriaza, and Christopher J. Frisina.
Stephanie R. Marcus, Attorney, U.S. Department of
Justice, argued the cause for appellees. With her on the brief
was Mark B. Stern, Attorney, and Robert P. Charrow, General
Counsel, United States Department of Health and Human
Services. R. Craig Lawrence and Johnny H. Walker III,
Assistant U.S. Attorneys, entered appearances.
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Before: SRINIVASAN, Chief Judge, and GARLAND and
WILKINS, Circuit Judges.
Opinion for the Court filed by Chief Judge SRINIVASAN.
SRINIVASAN, Chief Judge: The Department of Health and
Human Services disallowed roughly $30 million in Medicaid
reimbursements to the Commonwealth of Virginia for
payments Virginia made to two state hospitals. HHS
determined that Virginia had materially altered its payment
methodology without notifying HHS or obtaining approval and
that the new methodology resulted in payments that
overstepped applicable federal limits. The district court upheld
HHS’s disallowance of the reimbursements. We now affirm.
I.
Medicaid is a cooperative federal-state program under
which States receive financial assistance for the provision of
health care to lower-income, disabled, and elderly persons. See
42 U.S.C. § 1396-1. At the federal level, the program is
administered by the Centers for Medicare & Medicaid Services
(CMS), an agency within HHS.
A.
States that elect to participate in Medicaid must establish
a State Medicaid plan that adheres to the federal statute and
HHS regulations. CMS must approve a State’s plan. See 42
U.S.C. § 1396a(a)–(b). A State can then seek federal
reimbursement, termed “federal financial participation,” for a
portion of the State’s payments to hospitals for Medicaid-
covered services, provided that the payments comply with the
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State’s approved plan. 42 U.S.C. § 1396b(a). Funding is
administered on an annual basis.
A State Medicaid plan must contain “all information
necessary for CMS to determine whether the plan can be
approved.” 42 C.F.R. § 430.10. The plan should describe how
the State will administer its program, including the groups of
individuals to be covered, the services to be provided, and the
methodologies to be used in calculating payments to providers.
See 42 U.S.C. § 1396a(a); 42 C.F.R. § 447.201(b).
Federal regulations require States to amend their plans in
the event of any material change “in State law, organization, or
policy, or in the State’s operation of the Medicaid program.”
42 C.F.R. § 430.12(c)(1)(ii). States must promptly submit
amendments to CMS to enable timely assessment of whether
the plan continues to meet the requirements for approval and to
ensure the availability of federal financial participation in
accordance with regulations governing the effective dates of
State plans and plan amendments. See 42 C.F.R.
§§ 430.12(c)(2), 430.20.
A State’s Medicaid plan must describe the calculation of
rates of payment for hospital services, including the provision
of services by hospitals that serve a disproportionate number of
low-income patients with special needs. 42 U.S.C. §
1396a(a)(13)(A); 42 C.F.R. § 447.201(b). Those hospitals are
known as disproportionate share hospitals. Disproportionate
share hospitals receive supplemental federal financial
participation, called DSH payments, to account for the high
volume of Medicaid recipients they serve. See 42 U.S.C.
§ 1396r-4(c). A State’s Medicaid plan identifies the State’s
disproportionate share hospitals and sets out the method used
to calculate reimbursements to those hospitals. See 42 C.F.R.
§ 447.299(c).
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A State’s DSH payment methodology is subject to two
federal limitations imposed by the Medicaid statute, each of
which limits the amount of the State’s DSH payments for
which federal financial participation will be available. The first
limit is the statewide DSH allotment, which sets an annual
(fiscal-year) limit on a State’s overall amount of DSH
payments. 42 U.S.C. § 1396r-4(f). The second limit is the
hospital-specific limit, which imposes a hospital-specific
ceiling on the amount of DSH payments to a given
disproportionate share hospital in a fiscal year based on the
hospital’s costs of services. 42 U.S.C. § 1396r-4(g)(1)(A).
B.
This case concerns DSH payments made by Virginia’s
Department of Medical Assistance Services to two State-
owned hospitals, the University of Virginia Health System and
the Virginia Commonwealth University – Medical College of
Virginia Health System. In 2015, CMS disallowed roughly
$41 million in federal financial participation for DSH payments
made by Virginia to those hospitals in fiscal years 2010 and
2011. Virginia later repaid HHS federal financial participation
of some $10 million, such that the amount ultimately at issue
in this case is just over $30 million.
CMS denied Virginia’s claimed reimbursements because
Virginia had allocated DSH payments for the two hospitals to
fiscal years other than “the actual year in which [related] DSH
costs were incurred” by those hospitals. CMS Notice of
Disallowance Letter (Aug. 20, 2015), J.A. 46. For example, in
2010, Virginia made a DSH payment to one of the hospitals
related to costs the hospital had incurred in fiscal year 2004,
but Virginia allocated the payment to fiscal year 2006 for
purposes of complying with the annual statewide DSH
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allotment and hospital-specific limit. If Virginia had allocated
that DSH payment to the fiscal year in which the hospital’s
associated costs had been incurred, the payment would have
been in excess of the statewide DSH allotment for that year
(and thus would have been ineligible for federal financial
participation). See 42 C.F.R. § 447.297(d)(2).
HHS’s Departmental Appeals Board upheld CMS’s
disallowance. Va. Dep’t of Med. Assistance Servs., DAB No.
2727, 2016 WL 5345702, at *1 (Aug. 8, 2016). The Board
rested its decision on two independent rationales. First, the
Board determined that Virginia’s methodology for allocating
the DSH payments at issue was unsupported by the language
of the State plan and materially inconsistent with Virginia’s
previous representations about its methodology for calculating
DSH payments. Id. at *1, *6–10. In particular, in a 2002
appeal to the Board concerning Virginia’s DSH payment
practices, Virginia had represented that it allocated DSH
payments to hospitals in a manner corresponding to the year in
which the associated costs had been incurred, whereas
Virginia’s now-challenged practice allocated DSH payments
without regard to the year in which the associated costs are
incurred. See Va. Dep’t of Med. Assistance Servs., DAB No.
1838, 2002 WL 2031569, at *4 (Aug. 2, 2002). Second, and in
the alternative, the Board held that CMS’s disallowance was
consistent with the applicable federal statutes and regulations,
which contemplate the allocation of DSH payments to the
fiscal year in which the associated costs are incurred rather than
to some other year.
Virginia sought judicial review of the Board’s decision in
the district court. Va. Dep’t of Med. Assistance Servs. v. U.S.
Dep’t of Health and Human Services, 2018 WL 4705792
(D.D.C. Sept. 30, 2018). The district court upheld the Board’s
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decision and granted summary judgment in favor of HHS. Id.
at *1. Virginia now appeals.
II.
The Board’s decision disallowing federal financial
participation for Virginia’s DSH payments relied on two
independent rationales. The first is that Virginia’s payment
methodology is unsupported by the State plan’s language and
materially inconsistent with the State’s prior representations.
Because we see no basis for rejecting that ground for the
Board’s decision, we have no occasion to examine the second
ground (viz., that the disallowance is consistent with federal
statutes and regulations).
The key question is whether Virginia’s prior
representations about its DSH payment methodology are
consistent with its presently-challenged practice of allocating
its DSH payments to a fiscal year other than the year in which
the recipient hospital incurred the associated costs. Under that
practice, the State can seek federal financial participation for
its DSH payments to a hospital even if the hospital’s related
costs were incurred in a year for which the statewide allotment
limit (or hospital-specific limit) has been exhausted—the State
can simply allocate the payments to a different fiscal year for
which those limits remain unexhausted.
That practice, the Board determined, is materially
inconsistent with Virginia’s prior representations to the Board
about the meaning and operation of its State plan. The Board
explained that, in a 2002 appeal to the Board that concerned
Virginia’s DSH payments, Virginia represented that its DSH
payments from a given fiscal year matched a hospital’s
“uncompensated costs of services” during that specific year.
Va. Dep’t of Med. Assistance Servs., DAB No. 2727, 2016 WL
7
5345702, at *9); see also DAB No. 1838, 2002 WL 2031569,
at *4 (Aug. 2, 2002). Indeed, Virginia had argued that its
process in that regard “was not only permissible, but required
under its state plan.” DAB No. 2727, 2016 WL 5345702, at
*9.
In Virginia’s payment practice at issue in this case,
however, Virginia allocated its DSH payments to a hospital
without regard to the fiscal year in which the hospital incurred
the associated costs. As a result, the Board held, Virginia had
“materially changed its DSH payment practice without
notifying CMS, submitting a state plan amendment to reflect
the change, or obtaining CMS approval before implementing
the revised practices, contravening section 430.12(c) of the
Medicaid regulations.” Id. at *10. (Recall that a State must
amend its State plan if there is any material change in its
“operation of the Medicaid program.” 42 C.F.R.
§ 430.12(c)(1)(ii).)
HHS contends that substantial evidence supports the
Board’s holding that Virginia’s challenged DSH payment
methodology is materially inconsistent with the State’s prior
practice and interpretation of its plan. Virginia, for its part,
does not dispute the applicability of the substantial-evidence
standard. See Friedman v. Sebelius, 686 F.3d 813, 818 (D.C.
Cir. 2012) (HHS’s Departmental Appeals Board findings
supported by substantial evidence “shall be conclusive.”). We
agree with HHS: substantial evidence supports the Board’s
holding that Virginia’s challenged plan’s methodology is
materially inconsistent with the State’s representations about
its plan’s operation in the 2002 dispute.
In that dispute, the official responsible for administering
Virginia’s Medicaid program stated in a declaration that
Virginia’s DSH payments are made “only after the hospitals
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have performed the services that entitle them to reimbursement
and the hospitals have submitted their annual cost reports.”
Declaration of N. Stanley Fields ¶ 10, J.A. 140–41. Virginia
then “matched [DSH payments] to the State DSH Allotment
applicable to the year in which the services were performed,”
id. at ¶ 17, J.A. 142, by making DSH payments a function of a
hospital’s unreimbursed costs of serving Medicaid and
uninsured individuals during that year. See id. at ¶ 10(a), J.A.
140. Virginia echoed that account of its practice in its briefs,
stating that DSH payments “based on the [hospitals’] annual
cost reports . . . are matched to the State DSH Allotment
applicable to the year in which the services were performed.”
Supplemental Br. for Appellant in Va. Dep’t of Med. Assistance
Servs., DAB No. 1838, 2002 WL 2031569 at 2, J.A. 162
(emphasis added). And the Board’s 2002 decision accepted
Virginia’s undisputed representations about its method of
calculating DSH payments. See Va. Dep’t of Med. Assistance
Servs., DAB No. 1838, 2002 WL 2031569, at *4. But those
representations are inconsistent with Virginia’s later operation
of the DSH payment program, in which Virginia allocated DSH
payments without regard to the year in which the hospitals
incurred the relevant costs. See Va. Dep’t of Med. Assistance
Servs., DAB No. 2727, 2016 WL 5345702, at *9–10.
Virginia asserts that any variation between its
representations in the 2002 dispute and its practices at issue in
this case are explained by “important changes in the regulatory
landscape during the intervening time.” Virginia Reply Br. 12.
The regulatory changes described by Virginia, however,
involve the audit process States use to monitor the hospital-
specific limit. See id. Virginia does not explain how those
changes bear on whether the State allocates its DSH payments
to the year in which the hospital incurs the associated costs or
instead is free to allocate the payments to any year in which the
statewide and hospital-specific limits are unexhausted. On that
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issue, Virginia’s representations in the 2002 dispute cannot be
squared with Virginia’s challenged practices in this case.
Virginia separately relies on the Second Circuit’s decision
in Concourse Rehab. & Nursing Ctr., Inc. v. DeBuono, 179
F.3d 38 (2d Cir. 1999). According to Virginia, Concourse
shows that any difference between the State’s 2002
representations and its challenged practices here do not
represent a “change” within the meaning of the regulation
calling for amendment of a State plan and presentation to CMS
for approval when there is a material change to the operation
of the State’s Medicaid program. 42 C.F.R. § 430.12(c)(1)(ii).
Virginia’s reliance on Concourse is misplaced.
In that case, a nursing home challenged a State audit that
had determined that the home had received Medicaid
reimbursements to which it was unentitled. 179 F.3d at 40.
The nursing home sued the State, contending that the State had
changed its Medicaid plan without federal approval, in
contravention of the federal regulation. In particular, the
nursing home argued that the State’s interpretation of its
Medicaid plan deviated so much from the plan’s terms as to
amount to a de facto amendment of the plan that required
federal approval. Id. at 44. The court rejected that argument,
holding that a State’s interpretation of its plan could amount to
a “change” of the plan within the meaning of the regulation
only if “the clear and unequivocal effect of the interpretation is
actually to alter the written terms of the plan.” Id. at 46.
Concourse has little to do with in this case. Concourse did
not review federal agency action and so did not involve an
application of the substantial-evidence standard, which
Virginia does not dispute is applicable here. And Concourse,
at any rate, addressed whether a State’s interpretation of its
plan departs so far from the plan’s terms to amount to a de facto
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change to the plan’s provisions. This case, by contrast, does
not turn on a comparison between the State’s interpretation of
the plan and the language of the plan. Instead, this case
involves a comparison between the State’s previous operation
of its plan—as manifested in the State’s prior representations
about the plan’s operation—and its later operation of the same
plan. And in that regard, under the plain terms of the applicable
regulation, whenever there is a “[m]aterial change” in “the
State’s operation of the Medicaid program,” the State must
amend its plan and present the amendment to CMS for
approval. 42 C.F.R. § 430.12(c)(1)(ii).
The Board did not err in finding the existence of such a
material change in this case. Consequently, we sustain the
Board’s disallowance of federal financial participation for the
Virginia DSH payments at issue.
* * * * *
For the foregoing reasons, we affirm the judgment of the
district court.
Affirmed.