On September 12, 2012, the Eighth Circuit issued its decision Kindred Hospital East, LLC v. Sebelius, No. 11-3555 (8th Cir.) affirming the District Court’s order upholding the CMS Administrator’s decision that Kindred Hospital - Kansas City and Kindred Hospital - St. Louis (Kindred) should have reduced its provider tax expense by the amount it received from certain privately administered pool funds on its 2000-2003 cost report.  During the relevant time period, Missouri imposed a provider tax on hospitals, referred to as the Federal Reimbursement Allowance Tax (FRA Tax).  The FRA Tax was used by Missouri to generate federal matching Medicaid funds for hospitals.  However, because the FRA Tax was imposed on all hospitals regardless of their Medicaid payor mix, hospitals that treated a large number of Medicaid patients disproportionately benefitted from the Medicaid payments generated by the FRA Tax.  As a result, Missouri hospitals initiated a privately operated pooling system.

Under the pooling system, Missouri hospitals contributed their Medicaid supplemental payments into a single pool.  The private pool administrator was tasked with determining whether a hospital was a “pool recipient” or a “pool contributor.”  Pool recipients consisted of those hospitals whose FRA Tax exceeded their Medicaid supplemental payments.  Pool contributors, on the other hand, were comprised of hospitals whose Medicaid supplemental payments exceeded their FRA Tax. 

Kindred was a pool recipient during for its fiscal years 2000-2003.  On its Medicare cost report for those time periods, Kindred claimed 100 percent of its FRA Tax as an expense.  Kindred did not reduce its FRA Tax expense by the amount of pool payments it received during those fiscal years as a pool recipient.  If Kindred had offset its FRA Tax expense with its pool payments on its fiscal years 2000-2003 cost report, Kindred would have received approximately $3 million less in Medicare payments.  Following the recommendation of the OIG, CMS instructed Kindred to reclassify the pool payments as refunds to be offset against its FRA Tax expense.  Kindred appealed this determination to the PRRB, which issued a decision finding the adjustments inconsistent with the facts, Medicare laws, and program guidance.  The CMS Administrator reversed the PRRB’s decision and reinstated the adjustments.  Kindred appealed the CMS Administrator’s decision to the District Court, which affirmed the CMS Administrator’s decision in all respects.  Kindred then appealed the District Court’s order to the Eight Circuit. 

On appeal, Kindred argued that (i) the pool payments were not “refunds” under 42 C.F.R. § 413.98, (ii) the CMS Administrator inappropriately relied on Provider Reimbursement Manual guidance in making its decision, and (iii) the pool payments were donations or unrestricted grants from one hospital to another.  The Eight Circuit, however, concluded that the CMS Administrator’s decision that Kindred’s FRA Tax should have been offset by its pool payments was supported by substantial evidence.  First, the circuit court found that the CMS Administrator had authority to interpret its regulations and the applicable statute as requiring that the FRA Tax expense be offset by the pool payments—which constituted reductions of Kindred’s reimbursable expenses.  Second, the circuit court determined that, even if the CMS Administrator inappropriately relied on Provider Reimbursement Manual Guidance, the CMS Administrator’s decision “was a reasonable decision based upon its authority under 42 U.S.C. § 1395x that payments from the pool functionally reduce Kindred’s Medicare costs.”  Finally, the circuit court found that there was substantial evidence in the record to support the CMS Administrator’s conclusion that the “pool payments were not donations or unrestricted grants from one hospital to another.”

The Eight Circuit’s decision is available here. 

Reporter, Adam Robison, Houston, +1 713 276 7306, arobison@kslaw.com.