DC Circuit Issues Latest DSH Decision, Reducing Reimbursements

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On June 11, 2013, the D.C. Circuit Court issued the latest ruling relating to the proper calculation of hospitals’ disproportionate share hospital (DSH) payment, leading to potentially lower Medicare reimbursements related to admissions of low-income patients.  See Catholic Health Initiatives - Iowa Corp. d/b/a Mercy Medical Center - Des Moines v. Sebelius, Case No. 12-5092, available here. The question in this case was whether the Secretary’s exclusion of dual-eligible (i.e., Medicare and Medicaid-eligible) patient days for which a patient’s Medicare Part A benefits have been exhausted from the Medicaid Fraction component of the DSH calculation was permissible.  In holding that it was permissible, the court overturned a D.C. District Court ruling in favor of Catholic Health Initiatives (CHI).  Catholic Health Initiatives - Iowa Corp. d/b/a Mercy Medical Center - Des Moines v. Sebelius, Case 1:10-cv-00411-RCL (Jan. 30, 2012), available here

The case involved payments related to the hospital’s 1997 fiscal year that were reduced years later.  Among other arguments, the hospital argued that under the DSH statute, which defines the Medicaid Fraction as containing patient days for “patients who (for such days) were eligible for medical assistance under [Medicaid] but who were not entitled to benefits under part A of [Medicare],” dual-eligible Part A exhausted days belong in the Medicaid Fraction.  The theory behind this argument is that “entitlement” to Part A benefits is synonymous with “payment”—if a day is not paid by Part A because the patient’s Part A benefits are exhausted, then the patient was not “entitled to benefits under Part A” for that day.  Under this theory, a hospital’s patients classified as low-income for purposes of the DSH payment would generally increase based on the mathematics involved in the payment calculation, which in turn would lead to a rise in the hospital’s DSH revenue.  Although the D.C. Circuit found CHI’s theory reasonable, the court determined that the district court erred in finding that the HHS Secretary’s denial of Medicare reimbursements for DSH adjustments was impermissible and that a 2004 rule requiring dual-eligible days to be included in the Medicare fraction for the DSH calculation could not be retroactively applied to the 1997 cost-reporting period.  Underpinning the Circuit’s decision was the finding that the language of the mathematical calculation in the DSH statute “is downright byzantine and its meaning not easily discernible.”  The court therefore granted significant deference to the agency’s interpretation, and found that it was not arbitrary.  Moreover, the D.C. Circuit reasoned that even if the policy for excluding dual-eligible exhausted days from the Medicaid fraction was retroactively applied to the 1997 cost-reporting period, “it would not constitute the sort of unfair retroactivity that may render an agency decision arbitrary and capricious.”

The D.C. Circuit’s decision will likely have a significant impact on pending appeals with a similar issue.  A more detailed background about the Catholic Health Initiatives case and the D.C. District Court’s January 30, 2012 decision is available at the February 6, 2012 Health Headline entitled “DC Court Issues Latest DSH Decision,” available here.   

Reporter, Juliet M. McBride, Houston, +1 713 276 7448, jmcbride@kslaw.com.