Federal Court Holds PRRB Definition of Provider-Operated Too Narrow and Awards South Carolina Hospital Pass Through Reimbursement for Pharmacy Residency Program

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On March 29, 2021, Judge Margaret B. Seymour, in the United States District Court for the District of South Carolina, set aside a decision from CMS’s Provider Reimbursement Review Board (Board) denying reimbursement relating to a hospital’s pharmacy residency program. The issue before the court was whether the Medical University Hospital Authority (MUHA) “operated” its pharmacy residency program under the requirements of 42 C.F.R. § 413.85(f)(1) such that MUHA was entitled to reimbursement for the pass-through costs of that program. The court determined that the Board construed section 413.85(f)(1) “too narrowly” and that MUHA was entitled to Medicare reimbursement because it was the operator of the program. The hospital was represented by Dan Hettich of King & Spalding in conjunction with local counsel.

The Medicare statute requires the Secretary to share in the reasonable costs of nursing and allied health education programs operated by providers, pursuant to 42 U.S.C. § 1395x(v) and 42 C.F.R. § 413.85(d)(1). To be considered an “operator” of an allied health education program, the provider must:

  • Directly incur the training costs.
  • Have direct control of the program curriculum.
  • Control the administration of the program.
  • Employ the teaching staff.
  • Provide and control both classroom instruction and clinical training.

42 C.F.R. § 413.85(f)(1).

After years of allowing the hospital to claim the costs of the pharmacy residency program, the Medicare contractor abruptly determined that MUHA did not meet all the requirements of 42 C.F.R. § 413.85(f)(1) and, thus, was not the operator of that program. The Medicare contractor alleged that it was the Medical University of South Carolina, an affiliated medical education institution, that also partly operated the program. The contractor therefore recouped the Medicare reimbursement MUHA received for its pharmacy program.

On appeal of the contractor’s determination, the Board found that MUHA had not met all requirements under 42 C.F.R. § 413.85(f)(1). Specifically, the Board contended that because MUHA had not incurred all program costs in the first instance (in some cases it reimbursed MUSC for costs MUSC incurred initially), MUHA had failed to “directly incur” the costs of the program as required by the regulation. In other words, the Board held that “directly incur” required that all costs be “incurred in the first instance.” The Board also determined that MUHA did not control the administration of the pharmacy residency program because, while the Board acknowledged that MUHA exercised day-to-day control over the program, an affiliation agreement between MUHA and MUSC stated that an MUSC employee, the Dean of the School of Pharmacy, had “ultimate” control over the program.

MUHA appealed the Board’s decision to federal court, alleging that the Board’s narrow interpretation of the “directly incur” and “control” requirements were contrary to law, arbitrary and capricious, and created an unfair surprise on regulated hospitals. The American Society of Health-System Pharmacists, an accrediting organization for pharmacy residency programs, filed an amicus brief with the court in support of MUHA, indicating that the unfair surprise of CMS’s interpretation of the “operator” regulation “could jeopardize the continued operation of pharmacy residency programs.”

Judge Seymour held that, under section 413.85(f)(1)(i), it was not necessary for MUHA to incur the reasonable costs of the pharmacy program in the first instance in order to satisfy the “directly incur” prong. Judge Seymour critiqued that the Board’s narrow interpretation “grossly underestimates MUHA’s entitlement to reimbursement and results in the shifting of costs to non-Medicare patients.” Additionally, Judge Seymour’s opinion held that MUHA’s day-to-day control of the pharmacy residency program satisfied the administrative control prong of the regulation and that the Board erred in “simply identifying the titular head of the organization.” In sum, the court identified MUHA as the operator of the pharmacy residency program and eligible for pass-through Medicare reimbursement for those program costs.

Judge Seymour’s opinion 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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