A federal judge on Tuesday heard arguments over whether to overturn a new U.S. Department of Defense rule that reduces reimbursements to children’s hospitals by $36 million, with Children’s Hospital Colorado arguing its facilities in Aurora and Colorado Springs will suffer disproportionate and debilitating cuts as a result.

At the same time, U.S. District Court Judge Nina Y. Wang appeared reluctant to grant Children’s Colorado the full relief it requested and overturn the rule nationwide. The government’s lawyers cautioned her that the 2023 rule, while reducing payments to Colorado’s facilities, increases reimbursements to other children’s hospitals across the country.

“You would imagine the implications of entering a nationwide injunction, for a district court sitting in Colorado, are significant,” Wang observed.

Stacy A. Carpenter, representing Children’s Colorado, responded that her client “certainly would accept” an injunction that only carved out the Colorado Springs and Aurora facilities from the reimbursement rule.

The disputed Defense Department rule took effect in October and governs reimbursements the government pays children’s hospitals through TRICARE, the military healthcare program. With a half dozen military installations in Colorado, the Colorado Springs and Aurora children’s hospitals serve around 16,500 patients annually who are insured through TRICARE.

Children’s Colorado, whose total operating revenue is $1.8 billion, estimated its two facilities will lose between $12 million and $17 million in TRICARE reimbursements each year thanks to the new rule, representing one-third of all savings to the government. As a result, Children’s Colorado claimed it will have to turn away emergency room visitors, shutter its cancer and blood center, and reduce pediatric behavioral health programs, among other changes.

“Here, because the issues are serious and because the Department of Defense exceeded its statutory authority, the rule must be vacated,” Carpenter told Wang.

However, the government argued its new rule not only fell comfortably within Congress’s guidance, but Children’s Hospital’s position would lead to an unreasonable outcome.

In 2001, Congress ordered the Defense Department to issue regulations linking TRICARE payments to Medicare reimbursements “to the extent practicable.” The department attempted to do so gradually, without cutting TRICARE reimbursements to children’s hospitals. Instead, children’s hospitals received “hold-harmless” payments to prevent their reimbursements from declining.

In 2019, the department proposed a new rule that would more directly reimburse children’s hospitals for their actual outpatient costs, rather than continue to link current payments to past reimbursements. The rule also would authorize supplemental payments for certain hospitals beyond costs alone.

The government pointed out Children’s Colorado, under the prior arrangement, received significantly higher reimbursements in several areas than the average for large hospitals — up to 380% more.

“Congress wanted to make TRICARE more fiscally sustainable by limiting costs,” argued Alexander W. Resar with the U.S. Department of Justice.

“Plaintiff’s construction, requiring DOD as a matter of law to hold hospitals harmless relative to their prior payment amounts, would have the effect of permanently locking in the payments made to those providers under the prior reimbursement rules,” he continued. “There’s nothing in the statute that suggests Congress meant to lock in those reimbursement rates.”

Wang echoed the point to Carpenter, asking whether “I’m binding the DOD to never reduce reimbursement rates for TRICARE” if she sides with Children’s Colorado.

The hold-harmless requirement “is permanent,” Carpenter maintained. “It says, ‘Children’s hospitals, we’re not going to allow you to have a change in your payment amount because you are this specially designated caregiver.'”

She added that while other children’s hospitals would receive slightly increased reimbursements under the new TRICARE methodology, nothing would come close to the millions of dollars the Colorado Springs and Aurora hospitals would each lose.

At the outset of the hearing, Wang raised another concern separate from the facts of the case. For decades, courts have applied “Chevron deference” when determining if an executive agency’s interpretation of a law is reasonable. Currently, however, the U.S. Supreme Court is weighing whether to curtail or eliminate Chevron deference, giving agencies less authority to interpret ambiguous laws without second-guessing from the judiciary.

“I don’t have any idea when a ruling will come out and, if they change the standard, what the standard might look like, unfortunately,” Wang said.

The parties suggested there would be minimal effect from any modification to Chevron deference, but acknowledged an appellate court reviewing her order would be bound to apply any new Supreme Court guidance that arises after Wang’s ruling.

Wang will issue a written decision in the coming weeks about whether to vacate the Defense Department’s TRICARE rule.

The case is Children’s Hospital Colorado v. U.S. Department of Defense et al.