On March 29, 2022, the D.C. District Court granted summary judgment in favor of a group of hospitals operated by Sentara Healthcare seeking reimbursement for bad debt from Fiscal Years (FYs) 2010-2013. The court determined that Sentara complied with applicable reimbursement rules notwithstanding its use of information provided by a credit reporting agency.

Medicare reimburses hospitals 70% of unpaid bills accumulated from patients who are Medicare beneficiaries but have not paid the hospital the amount owed for their Medicare deductible or coinsurance. To receive that “bad debt” reimbursement, hospitals must satisfy several requirements. The relevant requirement at issue in Sentara deals with the hospital’s duty to conduct a “reasonable collection effort” before deeming the patient’s debt as uncollectible. The Provider Reimbursement Manual (PRM) allows a hospital to skip that step if the hospital determines the patient is indigent according to its own “customary methods,” for which CMS provides further guidance.

In reviewing Sentara’s cost reports, the Medicare contractor disallowed reimbursement for Sentara’s claimed bad debts because of how Sentara assessed and concluded patient indigency. Primarily, the contractor took issue with Sentara’s use of Equifax scores and the fact that Equifax has a proprietary scoring methodology. Sentara appealed the Medicare contractor’s decision to the Provider Reimbursement Review Board which reversed most, but not all, of the contractor’s disallowances. The CMS Administrator subsequently reversed the Board, relying in part on a newly published CMS rule. The Administrator concluded that the PRM’s resources test is mandatory, even though the PRM language says “[t]he provider should take into account a patient’s total resources,” rather than “must.” Next, the Administrator applied the new CMS rule retroactively, rather than prospectively as stated in the rule’s preamble. And finally, the Administrator viewed the indigence categorization as chiefly determined by Equifax rather than the Hospitals, as purportedly required by the regulation. Sentara appealed to the D.C. District Court.

In district court, the government argued that PRM § 312(B) requires a hospital to verify patient assets on its own, so using Equifax for financial information caused Sentara to fail this requirement. Second, the government argued that Sentara also failed PRM § 312(A) which requires the hospital, not the patient, to determine the patient’s indigency. And third, the government argued that Sentara did not satisfy PRM § 312(D) because Sentara allegedly failed to provide adequate documentation for indigency determinations since the MAC could not audit Equifax’s proprietary assessment methodologies.

The district court did not decide whether, despite the PRM’s use of the word “should” instead of “must,” the asset and expense test, was mandatory as CMS contended. Instead, the court held that “even if PRM § 312(B) was mandatory for the cost years in question, Sentara complied with its requirements.”

Specifically, the court determined that Sentara’s use of Equifax reports was sufficiently based on the individual patient’s actual assets and liabilities, so the record did not support the Administrator’s decision to the contrary. The Equifax reports compile many pieces of information, including the estimated value of a person’s home or car based on any mortgages or loans in the person’s name, estimations of an individual’s income based on the person’s credit file and a check with a national income database, a review of any monetary judgments, and more. The Equifax reports include assets as well as liabilities, such as loans, credit card debts, delinquencies, and more. In rejecting the government’s argument, the court found that the Equifax reports were sufficiently specific to individual patients and was not based on overly broad patient categories. Additionally, Sentara checked data provided by the patient against the patient’s Equifax report and investigated when a discrepancy arose. The court observed, “[i]t is hard to imagine what else a provider could do to reasonably assess the patient’s ability to pay.”

The government argued that Sentara failed to satisfy PRM § 312(A) because, it alleged, Sentara outsourced the indigency determination to Equifax. The court rejected this argument because the record showed that Sentara did not rely on any single score from Equifax. Instead, Sentara developed and employed its own method of comparing three different scores, plus any other relevant data that it had, to make a determination of indigency. The court concluded that Sentara “did more than simply rubber-stamp” the information provided by Equifax.

Lastly, the court determined that Sentara provided adequate documentation and analysis to satisfy PRM § 312(D) which requires “documentation of the method by which indigence was determined.” Equifax’s use of a proprietary modeling method did not run afoul of § 312(D)’s documentation requirement because Sentara’s reliance on Equifax predictive scores was permissible and Sentara documented the method in its patient files. The court rejected any suggestion that the rules require hospitals “to gather (and maintain) more granular financial information” than Sentara did. The court rejected, on an independent basis, the government’s argument here because the Administrator did not rely on it in her decision. In a footnote, the court also reversed the Administrator’s decision with regard to disallowance of reimbursement for married patients.

As a result, the court determined that Sentara is entitled to reimbursement for its bad debt costs during FYs 2010-2013.

The government has until May 30, 2022 to decide whether it will appeal the decision to the D.C. Circuit.

The full text of Sentara Hospitals, et al. v. Azar is available here.