Fifth Circuit Orders CMS to Count Mississippi Hospitals’ UCCP Days in the Medicaid Fraction of the Medicare DSH Payment Formula

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In a ruling dated June 10, 2019, the United States Court of Appeals for the Fifth Circuit sided with Mississippi hospitals in a dispute over the calculation of the Medicare DSH payment. Forrest General Hospital v. Azar, No. 18-60227, 2019 WL 2417409 (5th Cir. 2019). The question before the Court was whether inpatient days attributable to individuals who received benefits by means of payments made to hospitals from Mississippi’s uncompensated care pool (UCCP) established under a Section 1115 waiver should be included in the Medicaid fraction in the Medicare DSH payment formula. In a unanimous decision, the Fifth Circuit answered in the affirmative, holding that the outcome was dictated by the unambiguous text of the statute and regulation.

The Medicare program makes DSH payments to hospitals that treat a disproportionate number of low-income patients. Whether and to what extent a hospital qualifies for Medicare DSH depends on its “disproportionate patient percentage.” One component of the disproportionate patient percentage is the Medicaid fraction, which is calculated by taking the sum of a hospital’s days attributable to inpatients who are not entitled to Medicare benefits but are either eligible for Medicaid benefits or are “regarded as such” by the Secretary because they receive benefits under a Section 1115 demonstration project, and dividing that figure by the hospital’s total number of Medicaid inpatient days. A higher Medicaid fraction means a higher disproportionate patient percentage, which improves a hospital’s eligibility for DSH, increases the amount of DSH funding it will receive, and may qualify the hospital for 340B eligibility.

The plaintiffs in Forrest General, two Mississippi hospitals, argued that their Medicare DSH payments were understated because CMS calculated their Medicaid fractions without including days attributable to patients for whom the hospitals received payment from an uncompensated care pool that was established under a Section 1115 demonstration project.

Section 1115 of the Social Security Act authorizes CMS to waive certain Medicaid requirements for experimental demonstration projects to provide benefits to people who would not otherwise be eligible for Medicaid. In the aftermath of Hurricane Katrina, CMS approved a demonstration project permitting the Mississippi Medicaid program to expand Medicaid eligibility to individuals displaced or otherwise affected by the hurricane. That same demonstration project also established the UCCP, which allowed Mississippi to reimburse hospitals that incurred uncompensated care costs for individuals affected by Hurricane Katrina who did not have any public or private insurance coverage.

The Forrest General plaintiffs contended that the UCCP was a demonstration project authorized under Section 1115 of the Social Security Act, and therefore the days attributable to patients for whom the plaintiffs received UCCP payments should have been counted in their Medicaid fractions. Since 2000, CMS has permitted hospitals to include in the Medicaid fraction the inpatient days of individuals who receive inpatient hospital benefits under a demonstration project. 42 C.F.R. § 412.106. CMS countered that the UCCP was not a Section 1115 demonstration project because, although it helped hospitals defray expenses incurred treating patients for whom they did not receive compensation, it did not expressly expand Medicaid eligibility to those patients. On that basis, CMS likened UCCP days to “general assistance” days, which courts have roundly said cannot be included in the Medicaid fraction.

The Fifth Circuit was unmoved by CMS’s reasoning. The court found irrelevant the fact that the terms of the UCCP did not expressly expand Medicaid eligibility to the patients for whom the hospitals received payment. Under the court’s reading of the statute and regulation, the controlling question is whether the patients received benefits under a demonstration project. If so, the statute regards them as Medicaid-eligible and the days associated with their treatment must be included in the Medicaid fraction. The court ruled that the UCCP payments, although paid to the hospitals, were benefits to the patients because they received “medical assistance” in the form of payment for their inpatient care. Therefore, CMS was required to include those days in the plaintiff hospitals’ Medicaid fractions.

Forrest General is not the first case of its kind. In HealthAlliance Hospitals, Inc. v Azar, decided on October 26, 2018, Judge Ketanji Brown Jackson of the United States District Court for the District of Columbia held on nearly identical facts that patients under the Massachusetts Commonwealth Care program should be counted in the Medicaid fraction. HealthAlliance Hospitals, Inc. v Azar, 346 F. Supp. 3d 43, 60-61 (D.D.C. 2018), appeal docketed, No. 18-5372 (DC. Cir. Dec. 28, 2018). In addition, there is currently ongoing litigation in D.C. District Court regarding whether patient days attributable to individuals who received inpatient services as members of Florida’s Low Income Pool Medicaid Eligibility Group should be counted in the Medicaid fraction. Bethesda Health, Inc. v. Azar, No. 18-00875 (D.D.C. filed Apr. 13, 2018). The Fifth Circuit’s decision in Forrest General could open the door for hospitals in other states with uncompensated care payment pools established under a Section 1115 waiver to claim additional inpatient days in their Medicaid fractions.

A copy of the Forrest General Fifth Circuit opinion is available here and a copy of the HealthAlliance Hospitals District Court 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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