In a victory for Texas health care providers, in Baylor All Saints Medical Center dba Baylor Scott & White All Saints Medical Center‑Fort Worth et al. v. Xavier Becerra, case number 4:24‑cv‑00432, the United States District Court for the Northern District of Texas (“District Court”) has vacated a regulation promulgated by the U.S. Department of Health and Human Services (“HHS”) that excluded certain patient days funded by Uncompensated Care Cost (“UCC”) pools from the Medicaid Fraction used to calculate Disproportionate Share Hospital (“DSH”) adjustments.  The case underscores the ongoing legal scrutiny of HHS’s (and other agencies’) regulatory authority in a post‑Chevron world.

Background on the Exclusion Rule

In 1986, Congress amended the Medicaid program to establish national qualifying criteria for DSH payments to address financial challenges faced by hospitals that treated a higher number of low‑income patients.  Now, in the Baylor case, Texas health care providers have challenged the calculation of the “Medicaid Fraction,” which measures the ratio of patient days attributable to Medicaid‑eligible patients.  In 2005, Congress allowed for the inclusion of patient days under certain HHS-approved demonstration projects in this calculation.  However, in August 2023, HHS introduced the “Exclusion Rule,” which prevented the inclusion of patient days funded by UCC pools under the Texas Medicaid program in the Medicaid Fraction, reducing DSH payments to hospitals serving low‑income patients.

In response, a group of Texas‑based hospitals (“the Hospitals”) challenged the Exclusion Rule, arguing that it directly conflicted with the clear language of the Medicare Statute and binding Fifth Circuit precedent.

Administrative Process and Subsequent District Court Review

Initially, the Hospitals sought relief in the Provider Reimbursement Review Board (“PRRB”).  However, the PRRB dismissed the Hospitals’ challenge on jurisdictional grounds without addressing the substantive legal issues.  The Hospitals then sought judicial review in the District Court, seeking declaratory and injunctive relief.

The District Court first determined, as a threshold matter, that it had jurisdiction over the Hospitals’ challenge to the Exclusion Rule, rejecting an argument from HHS that the Hospitals had failed to exhaust their administrative remedies.  Specifically, the District Court held that the PRRB’s jurisdictional dismissal of the Hospitals’ claims was improper as the PRRB did not fulfill its obligation to gather the necessary information to determine jurisdiction.  The District Court further held that sending the case back to the PRRB would be futile as the PRRB lacked the constitutional authority to adjudicate the legal question at hand—whether the Exclusion Rule violated the Medicare Statute.

After rejecting the jurisdictional challenges, the District Court agreed with the Hospitals on the merits, ruling that the Exclusion Rule was inconsistent with the plain text of the Medicare statute under the Administrative Procedures Act.  Applying Fifth Circuit precedent, the District Court determined that the Exclusion Rule directly contradicted the plain text of Medicare Statute, which requires the inclusion of days for patients eligible for Medicaid, as well as those treated as such under a demonstration project authorized by HHS, in the Medicaid Fraction used to calculate DSH payment adjustments.  The District Court highlighted that the Fifth Circuit had already rejected similar arguments by HHS, clarifying that the Exclusion Rule improperly excluded patient days that should have been counted.[1]

Notably, while the Court granted declaratory relief, it also determined that a permanent injunction was not warranted, as the Hospitals failed to demonstrate irreparable harm—a necessary requirement for such relief.  Rather, the District Court found vacatur to be the appropriate remedy as a less drastic measure to address the unlawful overreach of the Exclusion Rule.  Thus, by vacating the Exclusion Rule, the decision restores the inclusion of UCC‑funded patient days in the Medicaid Fraction, potentially increasing DSH payments for qualifying hospitals.

What’s Next?  Implications for Health Care Providers and Other Stakeholders Operating in Regulated Industries in a Post‑Chevron World

The District Court’s decision not only reaffirms the importance of statutory adherence in agency rulemaking, but also provides a significant glimpse into the evolving landscape of agency deference in a post‑Chevron world.  Indeed, in the wake of the Supreme Court’s Loper Bright decision, the State of Texas has already hosted several cases reckoning with the deference owed to agency rulemaking.  For example, on July 3, 2024, the same District Court that issued the Baylor opinion also issued a preliminary injunction staying enforcement of the Federal Trade Commission’s proposed final rule banning most noncompete agreements.  Shortly after, the United States Court of Appeals for the Fifth Circuit affirmed the United States District Court for the Eastern District of Texas’s decision vacating key portions of regulations issued by the Biden Administration implementing the No Surprises Act.

Part of the reason these types of challenges may have seen such success in Texas is that the plaintiffs filing these challenges were already incorporated there, providing them with a natural forum for litigation.  On the other hand, Texas may be evolving into a favored jurisdiction for litigants seeking to curtail agency authority, as the State is seen by some as having a judiciary (both at the district court and appellate levels) that is more receptive to arguments aimed at limiting agency authority.  Future alerts will tell…

The foregoing notwithstanding, while the District Court’s ruling in the Baylor case marks a notable win for health care providers, the legal landscape pertaining to the Exclusion Rule remains dynamic and uncertain.  HHS may appeal the decision or consider revising its regulation to align with the District Court’s interpretation.  As the boundaries of agency authority continue to be tested, health care providers should stay vigilant and retain skilled counsel to help them adapt to further regulatory changes that could have significant financial implications.

Proskauer’s Health Care Group is closely monitoring developments in this area.  For more insights on health care law and policy, subscribe to Proskauer’s Health Care Law Brief.

[1] See, e.g., Forrest Gen. Hosp. v. Azar, 926 F.3d 221 (5th Cir. 2019) (clarifying that Medicaid Fraction includes hospital days of Medicaid‑eligible patients treated under certain HHS‑approved demonstration projects).

Posted in Healthcare, Hospitals & Health Systems, Providers, Regulatory, Reimbursement
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Photo of Vinay Kohli Vinay Kohli

Vinay Kohli is a partner in the Health Care Group and Litigation Department.  Vinay is a seasoned trial lawyer with more than a decade of experience representing clients in the health care provider industry—including hospital systems, physicians, and post-acute care facilities as well…

Vinay Kohli is a partner in the Health Care Group and Litigation Department.  Vinay is a seasoned trial lawyer with more than a decade of experience representing clients in the health care provider industry—including hospital systems, physicians, and post-acute care facilities as well as healthcare technology and revenue cycle management companies.

Recognized for his focus and commitment to the healthcare industry, a wide range of health care businesses use Vinay as an outside general counsel to guide them on strategic planning issues, compliance matters, operational questions, and reimbursement issues.  He provides regulatory, compliance, reimbursement advice on topics that range from venture formation and risk management to an array of contract negotiations.

He is also experienced in defending health care fraud and abuse litigation, prosecuting managed care disputes against payors, and handling government investigations.  He is frequently called upon to serve as lead trial counsel in commercial litigation disputes for health care industry clients that span the gamut from trade secret misappropriation, unfair business practices, and breach of fiduciary claims.

Vinay received his B.B.A., magna cum laude, M.A., and J.D. from the University of Texas at Austin in 2005, 2006, and 2009 respectively.

Prior to joining Proskauer, Vinay was a partner in the Healthcare and Commercial Litigation groups at King & Spalding.

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Photo of D. Austin Rettew D. Austin Rettew

Austin Rettew is an associate in the Corporate and Litigation Departments and a member of the Health Care Group at Proskauer.  His practice focuses on regulatory litigation and compliance within the health care sector.  He provides strategic counsel to health care providers on…

Austin Rettew is an associate in the Corporate and Litigation Departments and a member of the Health Care Group at Proskauer.  His practice focuses on regulatory litigation and compliance within the health care sector.  He provides strategic counsel to health care providers on managed care and commercial payer disputes, offering comprehensive regulatory, compliance, and reimbursement guidance to a diverse client base, including hospital systems, dialysis providers, anesthesia associations, physician practices, post-acute care service providers, and healthcare technology and revenue cycle management companies.

Austin is experienced in regulatory litigation and routinely advises clients operating within the complex landscape of the heavily regulated health care industry.  His work in this area addresses compliance issues related to ERISA, the Affordable Care Act, the Medicare Secondary Payer Act, the Medicare Advantage program, the federal No Surprises Act, state surprise billing laws, state insurance laws, and the Mental Health Parity and Addiction Equity Act.  He has represented providers, pharmaceutical manufacturers, and other health care companies in government investigations involving the Anti-Kickback Statute, the False Claims Act, and qui tam “whistleblower” lawsuits, working closely with company executives and consultants to develop effective compliance regimes while minimizing business disruption.

Austin also advises investors, owners, operators, and developers of long-term care and senior housing communities on health care transactions, regulatory compliance, corporate due diligence, and change of ownership procedures for state licensure, certificate of need, and Medicare and Medicaid certifications.  He also drafts industry-specific comment letters for proposed regulations, ensuring that client perspectives and concerns are clearly communicated to regulatory bodies.

While in law school, Austin was an articles editor of the George Washington University Law School’s Public Contract Law Journal.  Austin also served as a judicial intern for Judge Elizabeth S. Stong of the U.S. Bankruptcy Court for the Eastern District of New York and Magistrate Judge Lois Bloom of the U.S. District Court for the Eastern District of New York.

Prior to joining Proskauer, Austin was an associate in the Complex Litigation group at ArentFox Schiff.

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