District Court Invalidates Medicare GME Regulation and Orders CMS to Recalculate Hospitals’ Medicare Reimbursement

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Teaching hospitals should find that their Medicare reimbursement for training physicians will be a little sweeter thanks to a decision by the United States District Court for the District of Columbia.  Milton S. Hershey Medical Center, et al. v. Becerra, No. 19-2680 (D.D.C. May 17, 2021).  The hospitals challenged a 1997 regulation that set out a formula for counting the number of full-time residents and fellows. Under the Medicare statute, the government reimburses hospitals for salaries and administrative costs directly related to graduate medical education (“GME”). The statute contains a formula for determining the weighted number of full-time equivalent residents (“FTEs”) employed by the hospital.  The formula weights FTEs based on the length of their employment, and imposes a cap on the number of FTEs that a hospital can count for Medicare reimbursement. 42 U.S.C. § 1395ww(h)(3-5).  The formula also counts residents differently from fellows, who have completed a residency in a specialty and are receiving further training in a subspecialty; for purposes of the FTE count, the weighting factor for residents is 1.0 and for fellows the weighting factor is 0.5. 42 U.S.C. § 1395ww(h)(4)(C).  Congress also capped the number of FTEs that can be counted for purposes of Medicare reimbursement at the FTE count for that hospital as of December 31, 1996.

CMS waded into this accounting in 1997, when it published a final regulation that addressed those situations where a hospital exceeds its FTE resident cap. The regulation mandated that when this occurred, the hospital’s FTE count would be reduced “in the same proportion that the number of FTE residents for that cost reporting period exceeds the number of FTE residents for the most recent cost reporting period ending on or before December 31, 1996.” 42 C.F.R. § 413.79(c)(2)(iii).

This left a sour taste in the mouths of teaching hospitals because the regulation could reduce the total FTE count below the number reached by following the statute alone if it exceeded its FTE cap. Several hospitals that trained residents and employed fellows challenged the validity of the regulation, arguing that it conflicted with the statutory formula and unlawfully reduced their Medicare GME reimbursement. The District Court agreed.

The court’s decision rejected the Secretary’s arguments and the challenged regulation melted away.  The court found that the hospitals had not waived their opposition to the regulation simply because they had not submitted comments opposing it during the notice-and-comment period in 1997. Next, the court concluded that the FTE formula in the Medicare statute was not a simple confection; it did not give the Secretary the authority to change the weights assigned to residents and fellows in determining the number of FTEs for a given hospital. Rather than defer to the Secretary, the court relied on Step One of the well-established test set out in Chevron v. Natural Resources Defense Council, 467 U.S. 837, 843 (1984), which limits the analysis to the plain language of the statute when Congress has addressed the issue directly through legislation and its intent is clear. In this case, although Congress had delegated rulemaking authority to the Secretary, it did state that those rules “shall” count a resident with a weight of 1.0 and a fellow as 0.5 for all periods after July 1, 1987. Although the Secretary referred to other language in the statute that addresses various aspects of GME reimbursement in general terms and delegated authority to the Secretary to publish regulations, there were no gaps in the statute for counting FTEs that needed to be filled through rulemaking.

If the decision stands, then those hospitals that were affected by the regulation and still have pending appeals should see their Medicare reimbursement increased.  This decision is also  noteworthy because the court relied on the Chevron framework.  That decision has been under attack, but Hershey is an example that shows how Chevron remains good law and reaffirms the approach of many courts that judicial deference to agency rulemaking should not be presumed, even with a statutory scheme as intricate as the Social Security Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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