Medicare DSH Payment Calculation

Court Decision Appealed

In Empire Health, the plaintiff hospital challenged a 2005 Medicare regulation that addresses the Medicare DSH calculation. The issues involve the treatment of dual eligible exhausted days, i.e., days eligible for both Medicare and Medicaid where Medicare benefits were exhausted and thus no benefit was paid by Medicare.

Hospitals that serve a disproportionately high number of low-income patients receive a DSH adjustment, which is intended to reimburse those hospitals for the higher costs associated with providing services to this patient population. The DSH adjustment is determined by adding together two fractions: the Medicare fraction and the Medicaid fraction. Under the DSH statute, days for patients "entitled to" Medicare benefits are to be included in the Medicare fraction but not the Medicaid fraction.

Prior to 2005, the implementing regulation required that, for entitled days to be included in the Medicare fraction, they must be "covered days." Since dual eligible exhausted days are not paid by Medicare, they are not considered covered or entitled and were, therefore, excluded from the Medicare fraction. This was beneficial to hospitals as it could have resulted in larger DSH adjustment payments. The 2005 regulation removed the word "covered" from the description of entitled days such that dual eligible exhausted days were included in the Medicare fraction, which was not beneficial to hospitals and could have resulted in smaller DSH adjustment payments.

Empire Health challenged the 2005 regulation on two grounds. First, the hospital asserted that the agency's promulgation of the 2005 regulation failed to meet the notice and comment rulemaking requirements of the Administrative Procedure Act and the Medicare statute. Although the lower court had found in favor of the hospital on this argument, the Ninth Circuit disagreed. Distinguishing the D.C. Court of Appeals decision in Allina Health Servs. v. Sebelius, 746 F.3d 1102 (2014), the Ninth Circuit found that the 2005 rule was a "logical outgrowth" of the proposed rule and that the proposed rulemaking gave adequate notice to commentors of what the agency was considering.

Second, the hospital asserted that an earlier decision by the Ninth Circuit in Legacy Emanuel Hosp. & Health Ctr. v. Shalala, 97 F.3d 1261 (1996) barred the agency from implementing the 2005 change to the regulation. The appeals court agreed with the hospital. The court ruled that its decision in Legacy Emanual mandates that "entitled to [Medicare]" means that a patient has an absolute right to payment, i.e., that the days are covered. The court therefore struck down the 2005 rule and ordered that the rule previously in place be applied.

This is not the first time this challenge has been raised in a federal appeals court. Both the D.C. Court of the Appeals and the Sixth Circuit have addressed this issue, and both upheld the 2005 rule. See Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914 (D.C. Cir. 2013); Metro Hosp. v. HHS, 712 F.3d 248 (6th Cir. 2013). The Ninth Circuit's split from the D.C. and Sixth Circuit was likely a contributing factor in the Supreme Court's decision to accept this case, as allowing the same federal laws to be interpreted and applied differently in different parts of the country would not make sense and could cause confusion.

Accepting review of this case will allow the Supreme Court to make a universally applicable determination on how the statutory term "entitled to [Medicare]" should be interpreted. The court's decision could have implications beyond the treatment of dual eligible exhausted benefit days in the DSH calculation, reaching overarching issues of deference to agency action.

Hospital Implications

Providers should continue to protect their DSH calculations by protesting on their cost reports the agency's inclusion of certain dual eligible days in the Medicare fraction and its exclusion of these days from the Medicaid fraction. Additionally, providers should appeal this same issue to the Provider Reimbursement Review Board. This would enable providers to assert their rights to include the dual eligible days in their Medicaid rather than Medicare fractions, based on the final judicial action in this pending Supreme Court case.

Medicare Payments to 340B Hospitals

Court Decision Appealed

The Court also agreed to hear arguments in American Hospital Assn., et. al. v. Becerra, a suit brought by hospital groups and hospital co-plaintiffs against payment cuts of nearly 30 percent for Medicare Part B drugs billed by 340B hospitals. CMS first implemented the payment cuts in 2018. Under the 2018 Outpatient Prospective Payment System (OPPS) final rule, CMS reduced reimbursement to certain 340B hospitals for separately payable Part B drugs without pass-through status from average sales price (ASP) plus six percent, down to ASP minus 22.5 percent.

Hospital associations and hospital co-plaintiffs challenged the legality of the cuts in a September 2018 lawsuit filed in the U.S. District Court for the District of Columbia, arguing that the cuts exceeded the government's authority under the Medicare statute. The district court sided with the plaintiffs in December 2018, but on July 31, 2020, the D.C. Circuit Court of Appeals issued a decision reversing the lower court decision and upholding the payment policy.

The Circuit Court reviewed CMS's payment policy under the Chevron standard. The court described the Chevron standard as asking whether the statute directly speaks to the question at issue and, if it does not, then the court should defer to an agency's reasonable interpretation of the statute. Here, the court found that the Medicare statute does not foreclose HHS's interpretation and that the payment cut was reasonable. Therefore, the court deferred to the agency's position and upheld the payment cuts.

Agreeing to hear the case may allow the Court to reconsider the reach of the Chevron standard and agency deference, something that several justices have expressed interest in. However, it is possible the Court could decide the case on procedural grounds and not reach the question of agency deference. When granting the petition to hear the case, the Court indicated an interest in considering not only the legality of the Medicare payment policy, but also whether the challenge is precluded by the Medicare statute's limitation on judicial review of certain actions under 42 U.S.C. § 1395l(t)(12).

Hospital Implications

While hospitals await the Court's consideration of the Medicare payment policy for 340B hospitals, Medicare continues to pay hospitals for 340B drugs at rates that are significantly lower than the rates paid for non-340B drugs. Meanwhile, on July 19, 2021, CMS issued for public inspection a Proposed Rule outlining 2022 OPPS payment rates. CMS proposed to continue the payment reduction to 340B hospitals in 2022. Hospitals are expected to urge the agency to abandon the reduced payment rates for 340B drugs moving forward and revert to Medicare's pre-2018 policy to pay for 340B drugs at the same rate as paid for non-340B drugs.

It is noteworthy that, although the government defended the reduced payment rate in response to the hospitals' petition for the Court to hear their appeal, the government also indicated that the petitioners could raise their policy concerns with CMS as part of the annual rulemaking process, suggesting the possibility of a change in the payment policy. The government highlighted the fact that, although the D.C. Circuit found that the reduced payment rates were permissible under the Medicare statute, the reduced rates are not required under the statute.