Morgan Lewis partner Susan Feigin Harris.

All her life, Houston health care lawyer Susan Feigin Harris grew up immersed in the world of children's hospitals.

Her father, Dr. Ralph Feigin, was a world renowned pediatrician who specialized in infectious diseases, wrote a seminal pediatric disease textbook and served as president of Baylor College of Medicine and physician-in-chief of Texas Children's Hospital. Harris said he helped to build that hospital into what it is today.

That's why it was personal for her to win a huge victory for 12 children's hospitals—Texas Children's and seven other Lone Star State institutions among them—when a federal court vacated an erroneous administrative rule, allowing her clients and hospitals nationwide to again expect the federal government and their states to compensate them properly for treating large numbers of Medicaid patients.

“I watched my father fight for so many years,” said Harris, partner in Morgan, Lewis & Bockius in Houston, who fought the battle alongside Morgan Lewis of counsel Summer Swallow and partner Geri Edens. “This involved children's hospitals and I got to fight for and win on their behalf. It sustains me—it makes me so proud.”

The March 6 memorandum opinion in Children's Hospital Association of Texas v. Azar in the U.S. District Court for the District of Columbia explained that some hospitals treat significantly more patients who use Medicaid, which covers poor or disabled patients and children of any income who have certain serious illnesses—such as premies born under 1,200 grams in weight. Both federal and state funding contributes to Medicaid, which generally pays a hospital less than other types of insurance, creating a financial disadvantage for hospitals that serve a ton of Medicaid patients.

To stabilize their finances and encourage them to take Medicaid patients, Congress provided for supplemental payments to such hospitals. However, Congress later set a limit to how much a hospital can get in supplemental payments, based on a calculation involving a hospital's uncompensated costs to treat Medicaid patients.

The case challenged a rule that defined “uncompensated costs” used in the calculation of the limit. The rule by the Centers for Medicare & Medicaid Services said uncompensated costs were costs for which a hospital hadn't received any third-party payment from any source. If the hospital received some payment from Medicare or private insurance, they had to subtract it, along with any payment they got from Medicaid itself.

The plaintiffs argued that the Medicare Act had its own definition of uncompensated costs: The cost to care for Medicaid patients, minus any payments from Medicaid and uninsured patients. They argued that the defendants acted outside their authority in the Medicaid Act by making hospitals subtract any other third-party payments.

The defendants countered that the Medicaid Act clearly says that only “uncompensated” costs should be included. They argued that well-compensated costs don't count as uncompensated, according to the opinion.

U.S. District Judge Emmet G. Sullivan wrote, siding with the plaintiffs, found that the rule was inconsistent with the Medicaid Act. The act said that only Medicaid payments and uninsured patients' payments could be subtracted from the total costs. Nowhere did the law mention subtracting other third-party payments.

The court vacated the Centers for Medicare & Medicaid Services' rule, eliminating it all over the country.

The government defendants have appealed to the U.S. Circuit Court of Appeals for the D.C. Circuit.

Harris noted that if she had lost the case, there was a lot on the line, because some hospitals were “in the red” without the Medicaid supplemental payment funds at issue, ranging from an estimated $9 million to $80 million annually, depending on the hospital. On the dire end, some smaller, rural hospitals might have closed eventually. Not so drastic elsewhere, the funding gap nevertheless would have forced larger hospitals to think of laying off non-essential staff, scaling back technological investments and research initiatives, or canceling social service or outreach programs.

“It was so significant: It eliminated all their supplemental dollars,” explained Harris. “Hospitals provide these services, whether they are covered or not, to all patients. The fact they may be chronically underpaid by the Medicaid program doesn't mean just those patients are affected—It affects every patient.”

Angela Morris is a freelance journalist. Follow her on Twitter at @AMorrisReports