Federal Court Affirms Denial of Medicare Payment for Inpatient On-Call Services to Critical Access Hospital

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On March 31, 2021, Judge Carl Nichols of the United Stated District Court for the District of Columbia issued a decision upholding CMS’s denial of reimbursement to a California Critical Access Hospital (CAH) for compensation it paid to physicians for being on call to provide inpatient services. St. Helena Clear Lake Hospital v. Becerra, No. 19-00141 (D.D.C. 2021). In so holding, the court rejected the hospital’s argument that these services were “necessary and proper” to comply with the Emergency Medical Treatment and Labor Act (EMTALA) and state licensing requirements.

Medicare reimburses most acute care hospitals for inpatient and outpatient services through prospective payment systems, whereby hospitals receive fixed payments for services notwithstanding actual costs. Congress has carved out an exception for CAHs, which are generally small and remote rural hospitals. CAHs receive 101 percent of the “reasonable costs” they incur furnishing inpatient and outpatient services to Medicare beneficiaries. CMS has defined reasonable costs as those that are “necessary and proper” in maintaining the operation of a hospital.

In 1998, CMS (then known as the Health Care Financing Administration) adopted implementing regulations for CAHs. A commenter to that rule inquired whether CAHs could claim reimbursement for compensation paid to physicians for being available to come to the hospital when their services are required. CMS answered in the negative, stating that Medicare does not recognize costs of on-call physicians.

Congress intervened in the Consolidated Appropriations Act, 2001, which says that Medicare will reimburse CAHs for the reasonable cost of compensation paid to physicians for being on call to provide outpatient emergency room services. Soon thereafter, CMS amended the CAH regulations to reflect this Congressional mandate.

St. Helena Clear Lake Hospital (St. Helena) contracted with surgeons, obstetricians, pediatricians and cardiologists to provide on-call coverage for inpatient hospital services, and attempted to claim reimbursement from Medicare for the compensation it paid under those agreements. The Medicare Administrative Contractor (MAC) denied reimbursement for those costs on the grounds that CMS’s regulations only permit on-call reimbursement for emergency outpatient services.

St. Helena appealed the MAC’s decision to the Provider Reimbursement Review Board (Board). St. Helena argued that its inpatient on-call costs should be allowed because they were “necessary and proper” to operate the hospital. In particular, St. Helena contended that it needed these on-call services to comply with the mandate of EMTALA, which requires hospitals to stabilize patients before they can be transferred to another facility. St. Helena also claimed that it needed to have on-call surgeons, obstetricians, pediatricians and cardiologists to meet California state licensing requirements.

The Board affirmed the MAC’s decision denying reimbursement. The Board reasoned that by permitting on-call reimbursement only for emergency outpatient services, CMS’s regulations denote the agency’s intent to exclude reimbursement for inpatient on-call services. Furthermore, the Board was not persuaded that St. Helena’s on-call costs were necessary and proper. While the Board acknowledged that EMTALA requires hospitals to stabilize patients before transferring them, it found that St. Helena had existing contracts with emergency room physicians who were qualified to meet that mandate. The Board also found that California’s licensing laws did not require St. Helena to have on-call contracts with surgeons, obstetricians, pediatricians and cardiologists. And even if they did, the Board ruled that “state laws that conflict with clear federal Medicare payment regulations would not change the outcome of this appeal.”

St. Helena filed suit in the D.C. District Court challenging the Board’s decision after CMS declined to reverse it. In its motion for summary judgment, St. Helena assailed the Board’s decision on three principal grounds: (1) the Board erred in interpreting CMS’s regulations permitting reimbursement for outpatient on-call services as prohibiting reimbursement for inpatient on-call services, (2) the Board’s ruling that the on-call costs in question were not necessary and proper was arbitrary and capricious, and (3) CMS cannot disallow inpatient on-call costs until it adopts a regulation to that effect through notice-and-comment rulemaking.

The court disagreed with St. Helena on all three counts. First, the court deferred to the Board’s interpretation of the regulation permitting on-call reimbursement for emergency outpatient services, finding it was reasonable to infer that the regulation prohibited reimbursement for inpatient on-call services. The court also found that the Board articulated rational reasons for concluding that neither EMTALA nor California licensing laws required St. Helena to have on-call surgeons, obstetricians, pediatricians and cardiologists. Lastly, the court ruled that it was not necessary for CMS to adopt a rule prohibiting payment for inpatient on-call services because it was entitled to deny payment through the adjudicatory process. Accordingly, the court denied St. Helena’s motion for summary judgment and affirmed the Board’s decision.

A copy of the court’s decision is available here. A copy of the underlying Board decision is available here.

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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