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Case number 18-5334, Department of Medical and System Services of the Commonwealth of

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Good morning, may it please the court.

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Susanna Vance Gopalan on behalf of the Commonwealth of Virginia.

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This case is Virginia's challenge of an HHS disallowance relating to disproportionate share hospital or DISH payments that Virginia made to two state hospitals.

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DISH payments are unusual in the Medicaid framework in that most state Medicaid expenditures are payments to healthcare providers for specific services that they provide to Medicaid patients.

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But DISH is different.

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It's a supplement that states are required to pay in some form or fashion, but using a methodology at their discretion.

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in order to, in the words of the statute, take into account the situation of hospitals that serve a disproportionate number of low-income patients with special needs.

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In this case, Virginia made the DISH payments for which federal participation has been disallowed in compliance with its state plan, the amounts it paid,

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the timing of the payments, the association of payments with years, all of that was consistent with the state plan and with federal law.

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And HHS has premised this disallowance, we believe, on essentially three fallacies, three invalid assumptions.

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And when those are clarified, there's nothing left of the disallowance.

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And the first one is that Virginia was required to design its DISH payments as reimbursement of costs incurred by hospitals.

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That is simply flatly contradicted by the statute and the Social Security Act at Section 1923C3.

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give states discretion to design a dish payment methodology that is, quote, reasonably related to the cost, volume, or proportion of services provided to Medicaid patients or low-income patients.

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That's a real discretion and states use it and Congress intended that discretion to exist.

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Virginia used it to design a DISH methodology where payments are computed in advance of the year to which they apply using Medicaid utilization or low-income utilization as the primary factor.

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So it's a proportion-based DISH payment.

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It's not intended as reimbursement of costs.

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The second HHS fallacy on which the disallowance is premised is essentially a pivot HHS has done.

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CMS is required to state the legal basis of a disallowance in its disallowance letter.

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And CMS said to Virginia, we don't agree, but they said Virginia had failed to comply with the limit on DISH referred to as the statewide allotment.

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Can you pause over the first one?

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I understood, although perhaps filtered by your opposing colleague's description, that HHS is not saying it has to be for reimbursement of costs, but it has to be for reimbursement for services in a particular year.

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The costs are related to the services, costs incurred for services, just like the language of the statute talks about cost volume.

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et cetera, of services.

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Right.

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So their allegation is not that it's a payment back for costs, which it is for the hospitals rather than the annual allocation, but rather the year in which the service is rendered.

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Right.

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And what we would say that that is.

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The legislative history on this provision is actually quite illuminating.

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Over 1990, in the conference report, Congress chose, specifically chose this wording, cost, volume, or proportion, in order to give states real flexibility.

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Which provision are you talking about?

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You're talking about C?

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Yes, section 1923, C3.

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Because before,

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Before 1990, there were two options enumerated in the statute, and C3 was added in 1990.

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I thought, yes, what Virginia's methodology does, certainly the DISH payments relate to services in that they relate to the proportion of services furnished to Medicaid patients in the year that the payments apply to.

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So for year one, Virginia has in advance of year one used Medicaid utilization data from a prior period.

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They take the hospital's inpatient operating rate, combine that together, and for year one they've developed a dish payment that's related to services in the sense that it's intended to take into account that this hospital serves a lot of Medicaid patients.

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That's how it's related to services.

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It's not related to paying hospitals back for costs that they incurred, and that's a critical distinction.

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Focus for me and explain why

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The other side's argument that we're still talking about services rendered in a particular year, not that it's reimbursed for the cost, but that it's related either to the cost or to the volume or to the proportion of services in a particular year.

[00:06:50] Speaker 02:
Certainly.

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I agree with that.

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And so say, for example, that in the year prior to year one, Virginia had a UVA hospital had 25% of their patients were Medicaid patients.

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That's a real relationship to services.

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A quarter of the services they provided were to Medicaid patients.

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And by the way, that's the way Medicare designed DISH for a long time.

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It was proportion-based, not based on payment for costs.

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So how can it end up paying for more than one fiscal year then?

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Well, so essentially, and I'm glad you asked about the

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the timing issue because we think there is great self-contradiction in what HHS is arguing here.

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Leave aside their self-contradiction.

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Okay, so your question, I'm sorry, your question is how is it possible to... If it's for services in a particular year, how is it possible that the payments, for example, for FY2004 costs

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are allocated to FY 2006 and 2009 allotments.

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The initial premise is false.

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The payment is not for 2004 costs.

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Virginia doesn't design its dish as payment for costs.

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Do the costs not relate to services in a particular year?

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Payments relate to services in that they relate to the intensity of the care furnished to specific, more intensive need and poorly reimbursed populations, Medicaid and low income patients.

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But the payments don't, they're not cost reimbursement.

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Yes.

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Okay.

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Are they in any way related to services in a particular year?

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The dish payment is...

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I'm trying not to simply rephrase what I stated before.

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It's related to services in that it's related to the proportion of services for misdemeanors.

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In a particular year.

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Right.

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So if for year one, Virginia has taken data from prior years, projected it forward to create a dispayment for year one,

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that takes into account the proportion of Medicaid patients that Virginia considers UVA or Virginia Commonwealth University will be likely to treat in that year.

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The payments are related to the proportion of services that are provided to Medicaid or low-income patients.

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But it's very clear on the face of Virginia's state plan, which as you're familiar with, I'm sure, is the critical document in how states administer their Medicaid programs,

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that these are not cost-based.

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There's a payment and Virginia can choose whether to allocate it for year one or year two.

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They have a choice.

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Virginia, even though

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We're talking about whether it relates to services rendered in a particular year.

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It turns out it actually relates, it can relate to services rendered in year one, or it can relate to services rendered in year two, or it can relate to services rendered in year three.

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It's up to you to decide.

[00:10:10] Speaker 00:
Well, that's the way you're looking at it.

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What I would say is there are three relevant limitations when Virginia pays a dish to a hospital.

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The first is the state plan methodology.

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And then the second and third are these sort of backstops, the statewide allotment, which is aggregate.

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in the hospital specific limit, which is unique to the hospital.

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And so when a state plan amount for the University of Virginia is established in advance of year one, it's $20 million.

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Virginia has determined that that's how much they're entitled to on the basis of their intensity of service to Medicaid patients.

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Then there, Virginia is the regulations countenance and its longstanding practice, affirmed by the Departmental Appeals Board, that Virginia can make a base payment to UVA in year one.

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It represents a portion of that.

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And then over the ensuing years, Virginia continues to make disbursements that all relate back to year one.

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and to that payment to which UVA was entitled because of the high volume of Medicaid patients that it served in that prior year.

[00:11:18] Speaker 00:
But then even if it's patients that were served in that prior year and you're calling it year one, and let's suppose the statewide cap is exhausted for year one.

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then what you're saying is, even though it relates to services in year one, and I get that it's, you're figuring, you're doing the reconciliation post-hoc, and so you're saying, okay, we still have some stuff that's dribbling out that's related to year one, and we look back at year one and we look, uh-oh.

[00:11:41] Speaker 00:
were capped out on year one.

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So what we're going to do is we're going to take these kind of post hoc dribble out costs, and we're just going to apply them to year four instead, because we still have room under the cap in year four.

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Right.

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No, it doesn't work that way.

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So say Virginia's UVA state plan entitlement for year one is $20 million.

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Once Virginia has made payments to UVA, which may occur on an incremental basis over a number of years,

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UVA will never receive any more.

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Virginia essentially stops paying once it is paid up to the statewide allotment or to the hospital-specific cap.

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So those backstops really do serve to limit what the hospital receives under the state plan methodology.

[00:12:29] Speaker 00:
But what about what the state gets from the federal government?

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I thought the question is, you're seeking reimbursement.

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And the way you're saying you're entitled to reimbursement is that,

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you're saying, well, even if we couldn't get reimbursement for year one because the statewide cap has been exhausted, we still have room under the cap in year four.

[00:12:50] Speaker 02:
Yes.

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No, that's not an accurate statement.

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There's a state plan amount that is calculated for a hospital in each year.

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And the commonwealth pays up to that amount to the extent allowed under the relevant limits.

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And then the same would occur for year two.

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It's a prospectively determined amount.

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And then incrementally disbursements are made.

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And frankly, the state plan methodology was designed really in order to enable Virginia to make payments

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to get just as far up to the statewide allotment as is possible, and that that is perfectly allowed and countenanced in the federal regulations, for example, which state that, you know, if a state's actual dish expenditure is applicable to a year or less than its final dish allotment for that year, the state is permitted to make additional expenditures up to the amount of its final dish allotment.

[00:13:53] Speaker 02:
So it was, you know,

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The state plan methodology did allow Virginia to make generous payments to these two state hospitals that were dispersed over the course of numerous years, but the original entitlement under the state plan was determined prospectively based on utilization data.

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Another fallacy we believe that this allowance is premised on

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is that somehow this case is about the hospital-specific limit.

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CMS stated in the disallowance letter that Virginia hadn't complied with the statewide allotment.

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We believe that they reached that conclusion because they were relying on this faulty premise that the payments had to reimburse costs, which isn't how they were designed.

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But in defending the disallowance, HHS alluded to this possibility that Virginia might have exceeded a different limitation, the hospital-specific limit.

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We want to be really clear.

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CMS did not cite any violation of the hospital-specific limit.

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They didn't refer to any of the regulations or materials that they would normally consult relating to that limit.

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And it's not clear or transparent in agency practice to essentially shift the goalposts like that, as has been done.

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We feel this case is about the statewide alignment.

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And if I might, I'd like to

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just address the statutory interpretation issue for a moment.

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The record is replete with statements where the board, HHS, the district court echoing it, state essentially that dish payments must be associated with the years when hospitals incurred costs

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that the payments relate to.

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There's been a deaf ear to the reality of what Virginia's Dish payment methodology is about throughout this.

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The interpretation is flatly contrary to 1923 C-3.

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And we feel it fails at Chevron step one because it's simply against the statute.

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And HHS is essentially shoehorned into that, this timing issue.

[00:16:24] Speaker 02:
Essentially HHS is saying, oh, we understand that you're allowed to design dish methodologies that aren't based on cost.

[00:16:32] Speaker 02:
But when you're associating your payments with years, make sure you associate them with the years that the hospitals incurred the cost that you're reimbursing.

[00:16:40] Speaker 02:
It's completely circular and self-contradictory.

[00:16:44] Speaker 02:
And once that basic premise is clarified, that the payments aren't reimbursing providers costs,

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the whole sort of edifice of disallowance falls down.

[00:16:54] Speaker 02:
It doesn't make any sense.

[00:16:56] Speaker 01:
I'm sorry, I know you've explained this before.

[00:17:00] Speaker 01:
Do you agree that it has to be in relation to the year in which the services were rendered?

[00:17:07] Speaker 02:
Yes, we believe that the dish payment relates to the proportion of services furnished to Medicaid or low-income patients in a particular year.

[00:17:21] Speaker 01:
Aren't costs incurred, in the words incurred, that has to do with having provided a service, isn't it?

[00:17:29] Speaker 02:
Excuse me?

[00:17:30] Speaker 01:
When costs are incurred, they're incurred in connection with providing a service.

[00:17:35] Speaker 02:
Certainly they are.

[00:17:38] Speaker 02:
Payment methodologies are, there's a big difference between designing a payment as a, making a provider whole for the number of dollars they've lost by serving certain patients.

[00:17:51] Speaker 01:
I understand that.

[00:17:52] Speaker 01:
Okay, I apologize.

[00:17:54] Speaker 01:
I'm just asking, doesn't the incur of costs indicate the year in which the services are rendered?

[00:18:01] Speaker 02:
No, I believe the injecting of this cost concept as an essential

[00:18:06] Speaker 02:
part of the standard relating to the payment?

[00:18:09] Speaker 01:
You think costs are incurred in a different year than the services are rendered?

[00:18:12] Speaker 02:
Right.

[00:18:13] Speaker 02:
So the only way cost comes into this equation is by virtue of the hospital-specific limit, which is a backstop on DISH.

[00:18:23] Speaker 01:
Maybe I've now said it several times and you're not listening or following.

[00:18:27] Speaker 01:
When costs are incurred, they're incurred in connection with the service, correct?

[00:18:32] Speaker 01:
Otherwise, the hospital couldn't charge a cost, right?

[00:18:36] Speaker 01:
So that means in that particular, at the time in which the costs are incurred, it relates to a particular year.

[00:18:42] Speaker 01:
Isn't that right?

[00:18:43] Speaker 01:
Regardless of whether you're reimbursed for the cost or not, it's a marker of the year in which the services were provided.

[00:18:53] Speaker 02:
Certainly, costs are incurred in a particular year.

[00:18:58] Speaker 02:
However, the limiting of DISH payments to incurred costs, it's a distinct process.

[00:19:09] Speaker 02:
It's not part of the payment methodology.

[00:19:11] Speaker 01:
So without the last clause, it's correct though that costs are incurred in connection with services in a particular year.

[00:19:19] Speaker 02:
Certainly that is correct, yes.

[00:19:21] Speaker 00:
Can I just ask, so to follow up to that, that language,

[00:19:25] Speaker 00:
As far as I know, that language is in the hospital-specific provision.

[00:19:28] Speaker 00:
I'm not aware of that language being elsewhere, about costs incurred.

[00:19:33] Speaker 00:
Right, that's right.

[00:19:34] Speaker 00:
The hospital-specific provision speaks in terms of whether the payment adjustment exceeds the, quote, costs incurred during the year of furnishing hospital services.

[00:19:43] Speaker 02:
Correct.

[00:19:46] Speaker 02:
Three, there is no reference to cost.

[00:19:49] Speaker 02:
There is no reference to uninsured individuals.

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The hospital-specific limit is truly a distinct limitation.

[00:19:55] Speaker 02:
It's not meant to transform whatever the state is using as its dish payment methodology into a cost methodology.

[00:20:03] Speaker 00:
And we think HHS is... But you do agree that the hospital-specific limit, which does use that exact language as I'm quoting it, then that provision contemplates that

[00:20:14] Speaker 00:
As far as the hospital-specific cap goes, the costs are incurred in connection with services that are rendered during that particular year.

[00:20:25] Speaker 00:
So costs and services relate to the year in which the services are furnished.

[00:20:30] Speaker 02:
Right, right, under the hospital-specific limit, yes, the payment to a hospital during a fiscal year is not to exceed the costs incurred by the hospital during that fiscal year.

[00:20:43] Speaker 00:
And the other thing that happens during that fiscal year is that's the fiscal year during which the services are rendered.

[00:20:49] Speaker 02:
Right, but these are distinct provisions in Section 1923-F, the statewide... Yeah, I know we're only talking about the hospital-specific part of it, and that's your point, and you think that's part... You think that provision's off...

[00:21:00] Speaker 00:
off the map here anyway, but for the purpose of the operation of that provision, the costs and the services are all pegged to the year in which the services are furnished.

[00:21:11] Speaker 02:
Right.

[00:21:12] Speaker 02:
The measure of the limit is cost incurred in a year compared to the payments in that same year.

[00:21:21] Speaker 02:
Yes.

[00:21:23] Speaker 01:
Okay.

[00:21:24] Speaker 01:
Thank you.

[00:21:24] Speaker 01:
Thank you.

[00:21:27] Speaker 01:
Ms.

[00:21:28] Speaker 01:
Marcus.

[00:21:39] Speaker 03:
Thank you, Your Honor.

[00:21:40] Speaker 03:
I'm Stephanie Marquez from the Department of Justice, and I represent APOLI's HHS and the Secretary of HHS.

[00:21:47] Speaker 03:
Judge Garland, I think you put our main point to opposing counsel just now, which is, regardless of what methodologies State uses, whether it be cost, volume, or proportion of services, it's tied to performing services to low-income patients in a particular fiscal year.

[00:22:08] Speaker 03:
And the provision they rely on, 1396 R4C, is expressly subject to both the statewide allotment and to the hospital-specific limit.

[00:22:21] Speaker 03:
And thus, though HHS acknowledges states do have flexibility about their DISH methodology, it nonetheless needs to be tied to services performed in a particular fiscal year,

[00:22:35] Speaker 03:
And both subsections F and G, the statewide allotment and the hospital-specific limit, speak in terms of for the fiscal year or during the year of furnishing.

[00:22:47] Speaker 00:
But only G speaks in terms of services furnished.

[00:22:51] Speaker 00:
So F, the statewide cap part, is not talking about, I'm not saying that it's inconsistent with F.

[00:22:58] Speaker 00:
the way you're looking at it, but it doesn't seem compelled by F either because F just doesn't talk about the furnishing of services.

[00:23:05] Speaker 00:
G does.

[00:23:06] Speaker 00:
G says the payment adjustment, it speaks in terms of payment adjustment exceeding the cost incurred during the year of furnishing hospital services.

[00:23:17] Speaker 00:
And then later on it says for services provided during the year.

[00:23:20] Speaker 00:
So the hospital specific provision does speak in terms of the furnishing of services during the year, but the statewide cap one

[00:23:27] Speaker 00:
I may be using the wrong terminology, but the statewide cap one, yeah, it speaks in terms of in a fiscal year and allotment for the state for the fiscal year, but it doesn't talk about services being provided during that year.

[00:23:38] Speaker 03:
It doesn't, Your Honor, but a DISH payment is an additional payment for hospitals who perform services for patients in a particular year.

[00:23:49] Speaker 03:
And the whole setup of doing DISH payments is per fiscal year or cost year.

[00:23:58] Speaker 03:
If you look at the agency's reading is the better reading of the statute because you need to take into account all of these subsections.

[00:24:05] Speaker 03:
I think on its face, though, the statewide allotment still talks in terms of having a statewide limit for a fiscal year.

[00:24:17] Speaker 00:
And then you look at what the state... But even the way they're looking at it, it still has a statewide cap for a fiscal year.

[00:24:24] Speaker 00:
It's just your point is it's not pegged to services being furnished during that year.

[00:24:29] Speaker 02:
Right.

[00:24:30] Speaker 00:
And I take it their response would be it doesn't have to be under G, because G doesn't talk about

[00:24:35] Speaker 00:
what the year in which services are furnished.

[00:24:37] Speaker 00:
G is just agnostic about that.

[00:24:39] Speaker 00:
I'm sorry, F. Sorry, I'm confusing things.

[00:24:42] Speaker 00:
F is agnostic about when services are provided, at least arguably, textually.

[00:24:47] Speaker 00:
G may not be, but F is agnostic about the year in which services are provided.

[00:24:50] Speaker 03:
But since they have to comply with G indisputably, they need to have some kind of accounting system

[00:24:56] Speaker 03:
that would not allow them to circumvent G. It's true that, and we're, the agency wasn't trying to hide a real concern or anything.

[00:25:06] Speaker 03:
They did violate the statewide allotment, and we believe the statute's clear, but we also would refer to the agency regulations that the district court relied on.

[00:25:15] Speaker 00:
When you say we believe the statute is clear, are you talking about F or are you talking about G?

[00:25:19] Speaker 00:
The statute as a whole.

[00:25:20] Speaker 00:
The statute as a whole, because F, suppose G just didn't exist.

[00:25:25] Speaker 00:
If you just had F, and they would still have the same program in effect where they say, we're still under the cap for, say, 2006, even though we're talking about services that were rendered in 2004, we're just going to apply to 2006, and we're still under the cap for 2006.

[00:25:40] Speaker 00:
And then I think their argument would be, will you look at F?

[00:25:43] Speaker 00:
F doesn't speak clearly on that.

[00:25:46] Speaker 00:
You need G, because G is the one that pegs it to the year in which services are provided.

[00:25:50] Speaker 03:
No, Your Honor, we would disagree with that because F does talk about payments to a state for dish adjustments made for quarters in a fiscal year in excess of the dish allotment for the state for the fiscal year.

[00:26:04] Speaker 03:
It's talking about one fiscal year and I would refer the Court to Page

[00:26:10] Speaker 03:
Joint appendix page 150, which is the attachment and response of Virginia to when CMS was questioning what they were doing in the years at issue here, 2010 and 2011.

[00:26:24] Speaker 03:
And the director of provider reimbursement at the Department of Medical Assistance Services wrote a letter explaining what Virginia was doing and included an attachment

[00:26:38] Speaker 03:
And, for example, on page 150 of the Joint Appendix, it's an administrative record 292, paragraph 3 explains that MCV Hospital has an enhanced DISH payment for fiscal year 2008.

[00:26:55] Speaker 03:
This is an enhanced DISH payment that the department wants to make to cover, first of all, it says to cover state-defined indigent care costs.

[00:27:03] Speaker 03:
And I do think there is some confusion

[00:27:06] Speaker 03:
in what Virginia is arguing about their regular dish payments and enhanced dish payments.

[00:27:11] Speaker 03:
What's at issue here?

[00:27:12] Speaker 03:
Isn't there regular methodology for doing their prospective payments?

[00:27:18] Speaker 03:
These are these enhanced payments that are only to two state-owned hospitals.

[00:27:24] Speaker 03:
And they are done, as you can see here, they were done much later.

[00:27:29] Speaker 03:
And it says these costs were accrued to 06, 07, 08, and 09.

[00:27:35] Speaker 03:
Because so that we think on its face violates a statewide allotment, which is talking about one year.

[00:27:41] Speaker 03:
And I don't – whatever states have flexibility to do, it's not this.

[00:27:47] Speaker 03:
I don't think Congress would have written the statute this way.

[00:27:50] Speaker 03:
I mean, we have G if you need it, but I think even looking at F,

[00:27:55] Speaker 03:
The way the language is phrased, it doesn't contemplate a state just going back and saying, well, I think we have some room here and some room there.

[00:28:03] Speaker 03:
They could just keep doing this on in perpetuity each year.

[00:28:06] Speaker 00:
What's subject to the cap each year?

[00:28:08] Speaker 03:
Subject to the cap in retrospect each year, but if there's something, I mean, we think that this is the only

[00:28:17] Speaker 03:
way to comply with the regulations here.

[00:28:23] Speaker 03:
The agency has regulations implementing the statewide allotment, and it's 42 CFR 447.297 D3 and D2.

[00:28:33] Speaker 03:
And in D3, it says if the state's actual dish expenditure is applicable to a federal fiscal year or less than its final state allotment for that federal fiscal year, it may, to the extent allowed by its plan, make additional expenditures applicable to that federal fiscal year.

[00:28:51] Speaker 03:
And our interpretation, which

[00:28:54] Speaker 03:
If you do not think it's reflected by the clear language of the statutes, it certainly is entitled to deference.

[00:29:02] Speaker 03:
Is applicable to the federal fiscal year has to mean when the services were performed.

[00:29:07] Speaker 00:
And where's that interpretation spelled out?

[00:29:09] Speaker 03:
The interpretation is applicable to the federal fiscal year up to the amount of its final allotment for that federal fiscal year, and it's spelled out in both not just the disallowance letter, but the departmental medical board's decision.

[00:29:28] Speaker 00:
Because in the medical board decision, there's three prongs to the medical board decision.

[00:29:33] Speaker 00:
The first one we haven't talked about this morning.

[00:29:35] Speaker 00:
Right.

[00:29:35] Speaker 03:
And that's an independent ground that you can affirm.

[00:29:38] Speaker 00:
Right.

[00:29:38] Speaker 00:
So let's leave that aside as a potential independent ground.

[00:29:40] Speaker 00:
But the bulk of the analysis in the medical board decision is about this independent ground.

[00:29:44] Speaker 00:
It's about whether what Virginia wants to do is consistent with what Virginia's been doing.

[00:29:48] Speaker 00:
Yes.

[00:29:48] Speaker 00:
Right.

[00:29:49] Speaker 00:
OK.

[00:29:49] Speaker 00:
So then we get to the parts that intersect with federal law.

[00:29:52] Speaker 00:
And that's kind of the back quarter, maybe, of the analysis.

[00:29:57] Speaker 00:
And on that there's two prongs, one of which is entitled B, which starts on JA-40 and goes to 43.

[00:30:10] Speaker 00:
And it says the disallowance is consistent with DSH statutes and regulations.

[00:30:16] Speaker 00:
And it's just a little bit odd for an agency to say we have an interpretation that we think is the best one and it's the one to which you should defer when all the agency is saying is the disallowance is consistent with the regulations.

[00:30:28] Speaker 00:
It's not saying that this is the way we read the regulation and the regulation is best read

[00:30:36] Speaker 00:
to support the disallowance, it's saying there's a disallowance because the state breached its own way of doing things, and that disallowance isn't inconsistent with the regulation.

[00:30:46] Speaker 00:
That's how I read it.

[00:30:49] Speaker 03:
It actually, the board actually said that that we therefore agree with CMS that for purposes of determining whether DISH payments are within limitations specified.

[00:31:01] Speaker 03:
I'm sorry, where are you reading from?

[00:31:03] Speaker 03:
I'm sorry, this is on JA 41.

[00:31:04] Speaker 00:
It's just the next page.

[00:31:05] Speaker 00:
Yeah, got it.

[00:31:05] Speaker 03:
You were referring to.

[00:31:07] Speaker 03:
Yeah.

[00:31:07] Speaker 03:
Are necessarily allocated to the time periods in which DISH eligible costs were incurred by the hospitals in providing certain services.

[00:31:15] Speaker 03:
And

[00:31:16] Speaker 03:
So this, maybe the subheading throws it off a little, but they are actually the board in, you know, there was a full briefing.

[00:31:24] Speaker 03:
This was a formal adjudication.

[00:31:26] Speaker 03:
They wrote a very thorough opinion, and as set forth in our brief, we also think it could be affirmed on the alternative grounds that Virginia made representations about what was required by its plan, and that they're violating that as well.

[00:31:41] Speaker 03:
But, Your Honor, the

[00:31:44] Speaker 03:
The board did adopt, set forth CMS's interpretation.

[00:31:50] Speaker 00:
And on that part where it says, and that's a good sentence, it closes at the top of page 41 with DSH payments that are necessarily allocated to the time periods in which DSH dish eligible costs were incurred by the hospitals in providing certain services.

[00:32:06] Speaker 00:
And that's relating to something that the board had said in a prior determination.

[00:32:12] Speaker 03:
And I'm sorry, off the top of my head it says Virginia Exhibit 1.

[00:32:17] Speaker 03:
So we can look that up.

[00:32:20] Speaker 03:
It would be in the record.

[00:32:23] Speaker 03:
So I'm not sure right now what that is, but it's clear.

[00:32:29] Speaker 03:
We think that, and CMS also in its disallowance letter, which the Board was considering and here saying we agree,

[00:32:37] Speaker 03:
that it's saying in the allowance letter itself that, oh, you know what?

[00:32:45] Speaker 03:
That's what this is.

[00:32:46] Speaker 03:
I apologize, Your Honor.

[00:32:49] Speaker 03:
Basically, they are adopting what is in the CMS disallowance letter where CMS said where the state dish allotment for a year has not been exhausted,

[00:33:01] Speaker 03:
the regulation provides that a state may make additional expenditures applicable to that fiscal year up to the DISH allotment for that fiscal year.

[00:33:10] Speaker 03:
It doesn't allow the state to make additional DISH expenditures and it does, and it says, then right after that it says the DISH statute and regulations do not allow DISH payments to be disconnected

[00:33:22] Speaker 03:
from the periods in which the hospitals incurred dish eligible costs in providing certain services.

[00:33:29] Speaker 03:
So we agree that it's when the services were provided that's the key, but that is what gives rise to the costs which, you know, ultimately is a reason that Congress wanted to provide for additional pay.

[00:33:42] Speaker 00:
But what we'd be deferring to is the board decision.

[00:33:44] Speaker 00:
Yes, yes.

[00:33:45] Speaker 00:
And what you're saying is that the board decision incorporates

[00:33:48] Speaker 00:
the CMS determination, and that has the interpretation to do it.

[00:33:52] Speaker 03:
Yes, it not – it says it agrees with it, it quotes it, and then it refers to the exhibit, and then the letter itself goes on more at length.

[00:34:00] Speaker 03:
And there – and basically, the board is saying we agree with this explanation.

[00:34:05] Speaker 00:
So – One more question along this line, and then I'll stop.

[00:34:07] Speaker 00:
So on the hospital-specific portion of this, as far as I can tell from the board's decision, that only comes into play in the last

[00:34:15] Speaker 00:
two pages.

[00:34:16] Speaker 00:
Is that right?

[00:34:17] Speaker 00:
That's where the board makes the point that if we were to allow what Virginia wants to do, then it would enable a circumvention of both the statewide allotment and the hospital-specific cap.

[00:34:31] Speaker 00:
But elsewhere, the hospital-specific cap isn't part of the rationale of the adjudication to which you want us to attach

[00:34:41] Speaker 00:
Wait, you're saying the hospital specific part comes into play just in this last paragraph?

[00:34:46] Speaker 00:
I'm not saying that means that it doesn't come into play.

[00:34:48] Speaker 00:
I'm just saying that there's nowhere else that you would point us to look.

[00:34:52] Speaker 03:
I don't think so, Your Honor.

[00:34:53] Speaker 03:
I think that it would.

[00:34:54] Speaker 03:
But we do think that is a full explanation of why they could avoid that limitation.

[00:35:02] Speaker 03:
Because if you're not tracking, if you say, oh, if there's no connection to when the services were performed,

[00:35:10] Speaker 03:
then they could allocate that money to a year in which the hospital didn't perform as many services and say, oh, well, it didn't reach its hospital-specific limit in that year.

[00:35:23] Speaker 03:
But for the year in which it actually had, and again, on page one,

[00:35:29] Speaker 03:
If you see the way that they actually allocated the payments, that becomes clear because they, by using in one fiscal year and allocating to a number of different years, and they also said that there could

[00:35:47] Speaker 03:
that the standard process is to accrue the payments the oldest year, that there's hospital-specific dish limit and statewide dish allotment, but that if the services were performed in a different year, it may end up, you know, the dish, the hospital-specific limit could be circumvented for that other year.

[00:36:06] Speaker 03:
So we ask that the court... One more question.

[00:36:09] Speaker 01:
This is on the difference between perspective and retrospective.

[00:36:12] Speaker 01:
The way we've all been talking about it is as if

[00:36:16] Speaker 01:
The way it's been discussed with you is as if it's retrospectively applied to a year in which the services were rendered.

[00:36:23] Speaker 01:
I understand that HHS has said in other places that it can be done prospectively, so how do those two relate to each other?

[00:36:31] Speaker 03:
Well, Your Honor, and this does – Virginia's plan is mostly a prospective plan, as they've stated, and these are the regular payments.

[00:36:41] Speaker 03:
And HHS sets forth the statewide allotment by April 1st of the fiscal year.

[00:36:48] Speaker 03:
But as Virginia itself explained in its briefing in the prior appeal, that just because of the way the system works, there are different numbers that are coming in and out, and they do need, even if you have a prospective system, they acknowledged they needed this settlement or verification process, and they also acknowledged

[00:37:11] Speaker 03:
And again, referring to pages 150 and 151 of the Joint Appendix, that they are going back in 2010 and 2011, and these are just for these enhanced payments just to the two state-owned hospitals.

[00:37:25] Speaker 03:
This isn't talking about the regular payments under the rest of the plan.

[00:37:28] Speaker 01:
So in your view, in what way is a prospective plan allowed?

[00:37:34] Speaker 03:
Well, it would still be subject to the – it's allowed so long as they have a system in place – so long as states have a system in place where they can make sure for that year that neither the statewide – Can they not project services in the next year based on services in the previous year and make the payments with respect to projected services?

[00:38:04] Speaker 01:
So you have a certain volume, certain amount, whatever the amount is last year, and we as the state are going to project into the next year that it's going to be the same or it's going to be different, assume for some reasonable, rational reason.

[00:38:20] Speaker 01:
Can the allotment not be sent to those state hospitals, including the enhanced payments based on the projection?

[00:38:31] Speaker 03:
The – my understanding was the enhanced ones were done later.

[00:38:35] Speaker 03:
That's the way that you're saying – I say you're saying Virginia does it.

[00:38:39] Speaker 01:
I'm asking you whether some other state could do it some other way based solely on projections.

[00:38:46] Speaker 03:
Your Honor, as long as they comply with the federal limits, and as long as they have a methodology that complies with C, what we're, as we said here, is the Court doesn't need to figure out what methodologies would satisfy this.

[00:39:05] Speaker 03:
What we're saying here is Virginia does not, and that's what the Board decided here.

[00:39:10] Speaker 03:
And it's hard to think of all the possible ways the state could do it, but the state... So conceptually, can I just follow on this?

[00:39:17] Speaker 00:
So conceptually, suppose the state says at the beginning of the year, we project our costs to be 10 million.

[00:39:26] Speaker 00:
And the statewide cap is, it's short of the statewide cap for that year.

[00:39:32] Speaker 00:
And then if it turns out that

[00:39:37] Speaker 00:
How do you determine, for example, whether the hospital-specific cap then is exceeded?

[00:39:41] Speaker 00:
Because you're only talking about a projection.

[00:39:45] Speaker 00:
So you're looking forward, but then the way you understand the hospital-specific cap, it turns on the services that are in fact rendered in a particular year, but you don't know yet what the services are going to be for that year because it's a forward-looking projection.

[00:39:59] Speaker 03:
That's right your honor and actually that's what we have quoted Virginia's brief saying that's why they had to look at when they were making now some of these I think some of the regular payments are would are they don't have a they just

[00:40:15] Speaker 03:
know from projections or what's happening in real time that it's not exceeding the limits, but these enhanced payments, they have a very large multiplier of the regular payments, which are more, which they have, the state has acknowledged it's never paid up to that amount, but the state plan would authorize 16 or 17 times the regular payments.

[00:40:39] Speaker 03:
So for this particular

[00:40:41] Speaker 03:
set up of payments, for those payments, there's a real chance that those payments could and do exceed the limits.

[00:40:49] Speaker 03:
So for those, they do.

[00:40:51] Speaker 00:
And I'm – I – And then if they do exceed the limits, then the federal government won't reimburse.

[00:40:56] Speaker 03:
Right.

[00:40:57] Speaker 00:
Right.

[00:40:57] Speaker 00:
And so it means that in theory they can use a project forward method.

[00:41:01] Speaker 03:
Yes.

[00:41:01] Speaker 03:
But in fact – And they can use – yes.

[00:41:03] Speaker 00:
They can use perspective like an estimate, a perspective estimate, but in fact what turns out happening is you can't rely on that perspective estimate because it has to actually comply with the costs that in fact are incurred for services rendered during that year.

[00:41:19] Speaker 00:
So basically the allowance to use a perspective method is at the state's own risk because it can use that as an estimate, but then if it turns out that it's making payments that

[00:41:31] Speaker 00:
turn out to exceed the hospital-specific caps and the federal government's not going to reimburse it.

[00:41:35] Speaker 03:
But then that's why it may do a system where it has a combination, where it's sure about a certain baseline of payments.

[00:41:43] Speaker 03:
But I don't think there's any need to speculate about possible payment methods that a state could use because the one we have before us now does violate the statewide allotment and does apply

[00:42:00] Speaker 03:
payments that are associated with services performed in a fiscal year to four or five different state allotments, and that violates the statute.

[00:42:11] Speaker 03:
And we ask that you affirm the agency's decision.

[00:42:15] Speaker 01:
Thank you.

[00:42:27] Speaker 02:
I wanted to clarify a couple of items, and then I would like to address this prospective issue, which we feel is critical.

[00:42:36] Speaker 02:
First of all, the Departmental Appeals Board itself has acknowledged that its decision is not a formal adjudication when it is reviewing a Medicaid disallowance because the provision of the APA defining a formal adjudication

[00:42:51] Speaker 02:
calls for there to be a hearing on the record, and the DAB has acknowledged it's not a DAB – Medicaid disallowance decision is not that.

[00:43:01] Speaker 02:
So to the extent that influences whether CMS interpretation is – has the level of congressional delegation that would entitle it to Chevron deference.

[00:43:11] Speaker 01:
Haven't we given it that credit in other cases?

[00:43:14] Speaker 02:
I'm sorry?

[00:43:15] Speaker 01:
Haven't we given it that deference in other cases?

[00:43:17] Speaker 02:
I know you have given Chevron deference in, for example, in Gentiva, which I believe involved review of a Medicare Appeals Council decision.

[00:43:27] Speaker 02:
But there, that's more of an ALJ decision where there is a hearing on the record than the Pharma case that was cited.

[00:43:35] Speaker 02:
That relates to review of state plan material, which is a different standard as well.

[00:43:41] Speaker 02:
So I couldn't find any DC Circuit case where you had held that Chevron deference is due to a DAP decision reviewing a Medicaid disallowance, for what that's worth.

[00:43:53] Speaker 02:
I also wanted to note with respect to the comments of Mr. Lassard that my colleague mentioned, Mr. Lassard took care to mention that Virginia had chosen to make disbursements of enhanced dish

[00:44:08] Speaker 02:
taking into account certain indigent care criteria that are part of state policy, but he also took care to say, the documentation supports state indigent care policy and is therefore not relevant to determining compliance with the state plan.

[00:44:25] Speaker 02:
set its DISH payment to hospitals prospectively in advance of the year.

[00:44:31] Speaker 02:
Once the hospitals had that entitlement, Virginia used it, it made base payments, and then it dispersed them incrementally over time.

[00:44:40] Speaker 02:
And the motivation of Virginia for making any given

[00:44:45] Speaker 02:
payment of dish to which the hospital is entitled under the methodology, it's not relevant under the state plan.

[00:44:53] Speaker 02:
And we do feel that HHS decision here, it just completely ignores this language in the state plan, which I would like to commend to you to read, join appendix page 64, the payments shall be prospectively determined in advance of the state fiscal year to which they apply.

[00:45:12] Speaker 02:
They're final, not subject to settlement, except when necessary due to the relevant federal limits.

[00:45:20] Speaker 02:
It's only when you get to the hospital-specific limit that the concept of cost enters this equation at all, and CMS has been very clear, for example, in its 2008 rulemaking,

[00:45:34] Speaker 02:
which CMS, for the first time, 15 years after the enactment of the hospital-specific limit, they implemented an audit protocol for states to determine if payments exceeded the hospital-specific limit.

[00:45:48] Speaker 02:
And CMS explicitly said, we recognize states have discretion in their methodologies.

[00:45:53] Speaker 02:
We're not meaning to constrain that.

[00:45:55] Speaker 02:
This audit mechanism serves as a separate guardrail, where after the fact, because Judge Srinivasan, you're correct.

[00:46:02] Speaker 02:
you can make these payments prospectively under any manner of methodology, and as long as there's a separate guardrail in place with this audit, then ultimately the payments aren't going to be made that exceed FFP, and CMS acknowledged that.

[00:46:20] Speaker 02:
So we feel that they are conflating this limit with the payment methodology in a way that very much doesn't give respect to the language of the state plan, which is so key in the federal-state partnership that represents Medicaid.

[00:46:37] Speaker 02:
And we would respectfully request that you reverse the decision of the district parties.

[00:46:43] Speaker 01:
What about the representations made in the

[00:46:49] Speaker 01:
2002 filing with DHS.

[00:46:53] Speaker 02:
Right.

[00:46:55] Speaker 02:
So maybe in 2002, the Departmental Appeals Board ruled essentially countenance to this methodology.

[00:47:03] Speaker 01:
So the statement at Joint Appendix 162, using the accrual method, these payments are matched

[00:47:10] Speaker 01:
the state DSH dish allotment applicable for the year in which the services were performed.

[00:47:15] Speaker 02:
Right, right.

[00:47:17] Speaker 02:
So we would say basically Virginia there was describing the method that it uses to make sure that the dish paid out does not exceed the relevant federal limitations.

[00:47:29] Speaker 02:
And we would note that these declarations and briefs were written and filed

[00:47:34] Speaker 02:
17 years ago, and in the intervening time, a whole structure of regulations was promulgated that directed states how to enforce and monitor their hospital-specific limit.

[00:47:47] Speaker 02:
So a lot of the specific statements here about how Virginia kept track of its compliance with the hospital-specific limit are rendered somewhat obsolete by the intervening.

[00:47:59] Speaker 01:
So this method that was used in that year

[00:48:04] Speaker 01:
change somehow between 2002 and now, or the year in which we're talking about now?

[00:48:11] Speaker 02:
Well, the declarant says, I mean I think Mr. Fields, the declarant, is basically stating that

[00:48:18] Speaker 02:
that when Virginia makes a payment of this enhanced dish, it verifies that the payment will not exceed either of the relevant limitations before it makes the payment.

[00:48:29] Speaker 01:
And yeah, if you look at the new regulations, I'm sorry.

[00:48:32] Speaker 01:
I'm hung up on the words applicable to the year in which the services were proposed.

[00:48:36] Speaker 02:
Right, so the dish regulations, which were promulgated in 2008, state that for purposes of these audits, the state has to report dish payments in a year and compare it with costs incurred in that year.

[00:48:54] Speaker 02:
It's necessarily a retrospective exercise.

[00:49:00] Speaker 02:
And this process described by Mr. Fields, where this

[00:49:05] Speaker 02:
state would ascertain when it makes the payment that it didn't exceed the hospital's specific cap.

[00:49:12] Speaker 02:
That's no longer really relevant in the same way since this new regulation has been promulgated.

[00:49:21] Speaker 01:
Further questions?

[00:49:24] Speaker 01:
We'll take them out on our submission.

[00:49:25] Speaker 01:
Thanks very much.

[00:49:25] Speaker 01:
Thank you very much.