D.C. Circuit Holds Three-Year Cost Report Reopening Limitation Does Not Preclude Correction of Prior Year Errors’ Effects on Subsequent Years’ Payments

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In a decision with potentially far-reaching implications, the U.S. Court of Appeals for the D.C. Circuit ruled last Tuesday that a hospital’s full-time equivalent (FTE) residency cap can be corrected, for purposes of its application in “open” cost reporting periods, even if the cost reporting period in which the cap was established is outside of the three-year reopening window.  Kaiser Foundation Hospitals v. Sebelius, No. 12-0537 (D.C. Cir. March 5 2013) available here.  The court’s decision was based on its finding that under CMS’s regulations, a cost reporting period is only “reopened” if the amount of reimbursement for that period is modified.  See 42 C.F.R. §§ 405.1885(a), 405.1801(a).  The court reasoned that merely correcting predicate facts in that period that may affect payment in subsequent years does not constitute a reopening and is not subject to the three-year limitation on reopenings.    

Providers, therefore, now have an opportunity to review prior-year determinations for errors that affect payments in subsequent years.  Examples include errors in calculating base year FTE caps (which was the issue in Kaiser), other “base year” determinations such as base year hospital-specific rates for SCHs and MDHs and TEFRA target amounts for PPS-exempt hospitals, prior-year FTE counts that affect the three-year rolling average, and prior-year intern and resident to bed ratios.  If a provider discovers such an error but the intermediary either cannot reopen the prior determination because the three-year reopening window has expired, or simply refuses to reopen the determination, the provider can nonetheless appeal to have the error corrected for cost reporting periods going forward. This is a two-edged sword, however, since CMS can also claim the authority to review “closed” cost reporting periods to correct errors affecting payment in “open” periods.  In addition, CMS has the authority to make such changes to any open cost reporting period, while providers only have guaranteed appeal rights going forward.  This decision, therefore, may force a reevaluation of the principle of administrative finality that may have been taken for granted until now.

At issue in Kaiser was the calculation of the Hospitals’ base year graduate medical education (GME) FTE caps.  By statute, a hospital’s FTE count for cost report periods beginning on or after October 1, 1997 “may not exceed the number … of such full-time equivalent residents for the hospital’s most recent cost reporting period ending on or before December 31, 1996.”  42 U.S.C. 1395ww(h)(4)(F).  The Kaiser Hospitals received an increase in their indirect medical education (IME) FTE caps to reflect “residents rotating through the affiliated clinics of other Kaiser-owned hospitals,” but they did not timely appeal for a corresponding adjustment to the Hospitals’ GME FTE caps.  The intermediary and Secretary argued that the cost reporting periods in which the GME FTE caps were established were outside of the three-year reopening window and that they therefore “could not adjust . . . GME FTE caps without violating the three-year limit on reopening.”  The Hospitals argued that since they were only seeking to correct an erroneous factual predicate that affects subsequent open years, this does not constitute an improper reopening.

The D.C. District Court ruled last year that as long as “the hospitals do not seek adjusted reimbursement for closed years, changing predicate facts does not constitute a reopening,” and the circuit court upheld that determination.  In particular, the circuit ruled against the Secretary on two separate grounds. First, the court found that the regulation was clear that a year is only “reopened” if the amount of total reimbursement for that year is modified and that there is no reopening when predicate facts are merely changed.  The court denied the Secretary’s plea for deference in the interpretation of her regulation stating that such “deference is unmerited where the interpretation is ‘plainly erroneous or inconsistent with the regulation . . . .’”  Id. at 9.  Alternatively, the court also found that the Secretary “acted arbitrarily in treating similarly situated parties differently.”  In particular, the court found that “HHS routinely championed a permissive interpretation of the reopening regulation when correction of the predicate facts would have resulted in a windfall for the agency, see, e.g., HealthEast, 164 F.3d at 416, but adopted a contrary view here, where the benefits would inure to the provider.”  Id. at 14.  The court found that there was “no reason to think that this inherently suspicious record was the product of reasoned, good faith decisionmaking.”  Id.

In Kaiser, the base year GME FTE cap was clearly erroneous and there was no dispute on that point.  Although the reasoning employed by the court in no way limits the application of this rule to “clear errors,” it is not entirely clear how courts will apply this rule when establishing the prior-year error is fact intensive and disputed.

Reporter, Daniel J. Hettich, Washington D.C., +1 202 626 9128, dhettich@kslaw.com.