On August 18, 2017, the United States Court of Appeals for the District of Columbia ruled that HHS had inadequately justified its inclusion of data from hospitals that allegedly “turbo-charged” their cost-to-charge ratio when calculating outlier payments to hospitals for fiscal years 2004-2006. The Medicare outlier payment program provides supplemental payments to hospitals that provide care to patients with extraordinarily costly or lengthy stays. A group of hospitals (“Hospitals”) challenged HHS, alleging that HHS violated the Administrative Procedure Act by failing to remedy flaws in its methodology for determining these supplemental payments. The Hospitals claimed that the Secretary erred in continuing to use data from “turbo-charging” hospitals in the outlier payment calculations from 2004-2006. The court agreed: “It was entirely predictable that including turbo-charged data would lead to a charge-inflation projection that greatly exceeded the actual rate of charge inflation . . . , as in fact actually happened. ”
Outlier Payment Calculations
Two sets of regulations determine whether a hospital qualifies for Medicare outlier payments: (1) payment regulations determining when an individual patient case qualifies for outlier payment, 42 C.F.R. §§ 412.80-86; and (2) annual threshold regulations determining the fixed-loss threshold, 42 C.F.R. § 412.80(c). The fixed-loss threshold ensures that the total amount of outlier payments a hospital receives is not “less than 5 percent nor more than 6 percent” of total payments the hospital is projected to receive under the inpatient prospective payment system that year. 42 U.S.C. § 1395ww(d)(5)(A)(iv).
A hospital accused of manipulating its charges to make it appear it was eligible for outlier payment when it was not is referred to as “turbo-charging” hospital. In a series of Final Rules between 2003 and 2007, HHS identified 123 turbo-charging hospitals, and attempted to remedy the weaknesses in the regulations that the alleged turbo-charging hospitals were exploiting.
The Lawsuit
The Hospitals in the current lawsuit challenged the validity of the government’s regulations, and appealed their final outlier payment determinations. One of the litigated issues was whether HHS had adequately explained its decision not to exclude the 123 identified turbo-charging hospitals from the calculation used to set the fixed-loss threshold. In 2016, the U.S. District Court for the District of Columbia granted summary judgment to HHS, concluding that HHS had provided an adequate rationale. The Hospitals appealed.
On appeal, the court ruled in favor of HHS on a wide range of outlier payment issues. However, the court reversed one part of the district court’s grant of summary judgment, holding that HHS had “inadequately explained its failure to exclude turbo-chargers from its calculation of the annual rate of charge inflation. ” Once HHS had identified turbo-charging hospitals, HHS’ “decision to project future charges using turbo-charging-infected data foreseeably allowed the effects of this inappropriate redistribution to continue into the future. ”
Next Steps
The recent ruling allows HHS another opportunity to defend its methodology to include turbo-charged data in its calculations. However, in its opinion, the D.C. Circuit notes it will vacate the portion of the 2004 Rule if “HHS is again unable to supply a satisfactory explanation for including the turbo-charged data. ”
The opinion is available here.
