Reported / Citable
Background
Hospitals that serve a “significantly disproportionate number of low-income patients” can qualify as Disproportionate Share Hospitals (DSH), making them eligible for increased Medicare payments and other federal programs. A hospital’s DSH status depends on a calculation called the “Medicaid Fraction,” which is, simply put, the ratio of patient days for Medicaid-eligible patients to total patient days. A higher fraction leads to more federal funding.
The Medicare statute allows the Secretary of Health and Human Services (HHS) to approve state “demonstration projects” under Section 1115 of the Social Security Act. These projects can provide healthcare to individuals who would not otherwise be eligible for Medicaid, and the statute allows patient days from these projects to be included in the Medicaid Fraction. Texas established such a project, the “Texas Healthcare Transformation and Quality Improvement Program” (THTQIP), which uses funds from Uncompensated Care (UCC) pools to reimburse hospitals for indigent care. HHS approved this program.
In August 2023, HHS issued a new regulation, the “Exclusion Rule,” which declared that patient days paid for by UCC pools under a Section 1115 project could *not* be included in the Medicaid Fraction. Covenant Medical Center, a Texas hospital, sued HHS, arguing the rule was unlawful and would improperly reduce its DSH payments.
The Court’s Holding
The court granted summary judgment for Covenant Medical Center, declaring the Exclusion Rule unlawful and vacating it. The decision rested on binding precedent from the U.S. Court of Appeals for the Fifth Circuit, Forrest Gen. Hosp. v. Azar. In Forrest, the Fifth Circuit held that once the HHS Secretary exercises their discretion to approve a state’s Section 1115 demonstration project, the patient days for beneficiaries of that project must be included in the Medicaid Fraction. The Secretary cannot then use a new rule to “take-back” that approval.
The court found that the Secretary had exercised his discretion when he approved the Texas THTQIP plan. Therefore, HHS’s subsequent Exclusion Rule, which contradicted the effect of that approval, was contrary to the plain text of the Medicare statute as interpreted by the Fifth Circuit. The court rejected HHS’s attempts to rely on the Supreme Court’s recent decision in Advocate Christ Medical Center v. Kennedy, finding it factually and legally distinguishable.
While the court vacated the unlawful rule, it denied the hospital’s request for a permanent injunction. The court reasoned that an injunction is a “drastic and extraordinary remedy” and was not warranted here because the hospital had not suffered an irreparable injury. Any financial losses could be recovered through the standard Medicare administrative reimbursement process, making an injunction unnecessary. Vacatur, the court noted, was the “less drastic remedy” sufficient to resolve the hospital’s harm.
Key Takeaways
- An agency’s statutory discretion may be exhausted once it is exercised. After HHS approved a state’s demonstration project, it could not use a new rule to reverse the statutory consequences of that approval.
- Agencies cannot use new regulations to circumvent binding circuit court precedent. The court found that HHS’s Exclusion Rule was an attempt to enforce an interpretation of the statute that the Fifth Circuit had already rejected in Forrest v. Azar.
- Vacatur is a distinct and “less drastic remedy” than an injunction. A court may find a rule unlawful and vacate it while still denying an injunction if the plaintiff can be made whole through other means, such as administrative reimbursement channels.
Why It Matters
This decision provides critical financial stability for Texas hospitals that rely on federal DSH funding to care for low-income patients. By invalidating the Exclusion Rule, the court ensures that these “safety-net” hospitals can continue to include patient days covered by the state’s UCC pools in their DSH calculations, maximizing their Medicare reimbursements and preserving their eligibility for other vital programs like the 340B Drug Discount Program. The ruling is especially significant in states like Texas that have not expanded Medicaid and rely heavily on Section 1115 waivers to fund indigent care.
The ruling also reinforces an important administrative law principle: an agency cannot use subsequent rulemaking to undo a binding judicial interpretation of a statute. It affirms that once a court of appeals has spoken on a statute’s meaning, the agency cannot simply issue a new rule that codifies its previously rejected position. This provides a measure of certainty for providers and states who structure long-term programs based on approved Section 1115 waivers.