Federal Court Invalidates Medicare DGME Rule that Penalizes Hospitals for Training Fellows

King & Spalding

On Monday, May 17, 2021, Judge Timothy Kelly of the United States District Court for the District of Columbia issued a decision setting aside a regulatory formula CMS has adopted to compute Medicare DGME payments to hospitals. Milton S. Hershey Medical Center, et al., v. Becerra, No. 19-02680 (D.D.C. 2021). The plaintiffs, consisting of nearly fifty teaching hospitals, alleged that the regulation is contrary to the Medicare statute and otherwise arbitrary and capricious because it penalizes hospitals for training “fellows”—i.e., residents who are training beyond their initial residency period. The District Court held that the regulation violates the statute and remanded the case back to CMS to recalculate the DGME payments owed to the plaintiff hospitals. King & Spalding represents thirty-two of the hospitals in the suit.

Medicare makes direct graduate medical education (DGME) payments to hospitals to compensate them for the direct costs they incur hosting physician residency programs, such as resident stipends and teacher salaries. DGME payments are calculated annually. One factor that directly affects the amount of DGME payments is the number of residents the hospital trained during the year, as measured in units of full-time equivalents (FTEs). The number of FTEs a hospital trains is further “weighted” depending on whether residents are in their initial residency period—the minimum number of years necessary to satisfy the requirements for initial board eligibility—or are participating in a training program beyond the residency period to pursue a certification from a subspecialty board. Residents who train beyond their initial residency period are commonly referred to as “fellows,” and the Medicare statute requires that they be given one-half the weight (0.5 FTE) of residents training in their initial residency periods.

The Medicare statute also limits the number of resident FTEs that can be used in computing DGME payments. This limitation is known as the FTE cap. For most hospitals, the FTE cap is equal to the unweighted count of resident FTEs claimed by the hospital on its 1996 cost report.

CMS has adopted a regulation to implement these two requirements—giving fellows half the weight of initial residents and applying the FTE cap. Under that regulation, if a hospital trains resident FTEs in excess of its FTE cap, then a formula is used to adjust the count of FTEs. This formula sets the hospital’s FTE count as the product of the hospital’s current weighted FTE count (i.e., the FTE count after applying the 0.5 weighting factor for fellows), multiplied by the ratio of the hospital’s historic FTE cap to its current unweighted FTE count. The cap-adjusted weighted FTE count is used to determine the hospital’s DGME payment for the year.

The plaintiffs in Milton contend that CMS’s formula for calculating the cap-adjusted weighted FTE count is contrary to the Medicare statute and arbitrary and capricious because it has the effect of penalizing hospitals for training fellows—those residents who are in programs beyond their initial residency period. It is a mathematical certainty that, if a hospital is training residents in excess of its FTE cap, and any of its residents are fellows, then the hospital’s cap-adjusted weighted FTE count will be lower than it would have been had the hospital trained fewer (and in many cases zero) fellows.

The following hypothetical illustrates the penalty imposed by CMS’s regulation. Hospitals A and B both have an FTE cap of 100, and both train 150 residents who are in their initial residency period. Hospital A does not train any additional residents. Hospital B, on the other hand, also trains 50 fellows who are not in their initial residency period. After applying CMS’s FTE cap formula (illustrated below), Hospital A’s cap-adjusted weighted FTE count is 100. Hospital B’s, on the other hand, is only 87.5. CMS’s FTE cap regulation penalized Hospital B by 12.5 FTEs because it trained 50 fellows. Had Hospital B trained zero fellows, its cap-adjusted weighted FTE count would have been the same as Hospital A’s.

Each of the plaintiffs in Milton are teaching hospitals that train residents in excess of their FTE caps and also train fellows. As a result, they are penalized by CMS’s formula every year. This prompted the Milton plaintiffs to bring their suit challenging the regulation.

In their federal court briefings, the Milton plaintiffs alleged that CMS’s regulation violates the statute in at least two ways. First, it is contrary to the statutory weighting factors because it has the effect of weighting fellows at less than 0.5. Second, it contradicts Congress’s intent to pay—not penalize—hospitals for training fellows, albeit at a lower rate than residents training in their initial residency period. The Milton plaintiffs also contended that the regulation is arbitrary and capricious because there is no rational basis for penalizing hospitals that train fellows in excess of their FTE caps.

In its briefing, the government countered that the plaintiffs had waived their claims by not raising them in comments when the regulation was first adopted in 1997. The government also defended the regulation by arguing that the statute gives CMS wide latitude to adopt rules for calculating DGME payments and does not expressly prohibit CMS from modifying the weighting factors for hospitals that train fellows in excess of its FTE caps.

The District Court rejected the government’s waiver argument, noting that failure to raise an issue during rulemaking does not foreclose future challenges to those affected by the application of the rule. Turning to the merits, the court ruled that the regulation violates the statute because it applies a weighting factor to fellows that is lower than the factor prescribed by the statute. The court acknowledged that the statute gives CMS discretion to adopt DGME payment rules but found that the statute expressly requires those rules to be “consistent with” the DGME provisions of the statute, including the weighting factors. The District Court further acknowledged that the statute does not expressly prohibit CMS from changing the weighting factors of hospitals training fellows in excess of their FTE caps, but rejected the notion that this rendered the statute silent. “A statute is not silent simply because it fails to address every conceivable set of circumstances to which it might apply.”

A copy of the District Court’s decision is available here.

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