Florida Hospitals Prevail in D.C. Circuit Appeal Regarding the Exclusion of Low-Income Pool Days from the Medicare Disproportionate Share Hospital Payment Calculation

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On November 13, 2020, the United States Court of Appeals for the District of Columbia Circuit affirmed a grant of summary judgment to the Florida Hospital Association and ten Florida hospitals represented by King & Spalding in their challenge to the calculation of their Medicare Disproportionate Share Hospital (DSH) payments, directing CMS to include in the hospitals’ Medicaid fraction inpatient days attributable to uninsured and underinsured patients covered by the Florida Low-Income Pool. See Bethesda Health, Inc. v. Azar, No. 19-5260 (D.C. Cir. 2020).

The appeal concerned a single issue: whether the government’s calculation of the hospitals’ Medicare DSH adjustment should treat as “Medicaid eligible” those patients who received inpatient care funded by Florida’s Low-Income Pool (LIP). The Medicare program pays higher reimbursement rates to hospitals that treat a “disproportionate share” of needy patients. To determine the proportion of needy patients a hospital serves, the Medicare statute includes a formula that counts two groups of patients among the needy. First, the formula necessarily counts as needy all patients who were eligible for traditional Medicaid at the time they received care. Second, the formula allows CMS to regard a patient as needy if he or she receives medical assistance under a section 1115 waiver project. In exercise of this “regarding” power, CMS promulgated regulations that call for a patient to be counted as needy if he or she receives inpatient hospitals services under a section 1115 waiver.

The Florida LIP program was part of a section 1115 waiver that CMS had approved and helped fund in 2006. Despite the fact that hospitals received reimbursement under the waiver based on the inpatient care they provided to uninsured or underinsured LIP patients, CMS refused to count those individuals in the DSH formula. The hospitals sued, alleging that the statute and CMS’s implementing regulation did not allow CMS to exclude these patients from the calculation.

Judge Collyer of the United States District Court for the District of Columbia sided with the hospitals, reasoning that patients did, in fact, receive inpatient hospital services funded by a section 1115 waiver and must be counted in the DSH formula under CMS’s regulation. Judge Collyer rejected the government’s argument that these days could not be counted because the patients were not made eligible under the section 1115 waiver for traditional Medicaid – and that the LIP program did not function like traditional Medicaid or commercial health insurance.

In reaching this conclusion, Judge Collyer relied in part on the Fifth Circuit’s decision in Forrest General Hospital v. Azar, 926 F.3d 221 (5th Cir. 2019), which had reached a similar ruling with respect to a 1115 waiver approved for Mississippi. Importantly, both courts distinguished the D.C. Circuit’s earlier decision in Adena Regional Medical Center v. Leavitt, 527 F.3d 176 (D.C. Cir. 2008), and similar cases in which patients had received inpatient hospital services funded not by 1115 waiver authority but by state-law mandates or Medicaid DSH grants.

Writing for the D.C. Circuit, Judge Ginsburg — who authored Adena — saw “no flaw in Judge Collyer’s analysis and therefore embrace[d] the district court’s opinion as the law” of the D.C. Circuit. This is an enormous development, as hospitals whose states operate similar uncompensated care pools established under section 1115 waivers may challenge similar patient-day exclusions in the District of Columbia.

Ashley C. Parrish argued the appeal for the hospitals. He was joined on the briefs by Mark D. Polston and Christopher P. Kenny, who represented the hospitals throughout this litigation, as well as Gabriel Krimm, an associate with the firm’s appellate, constitutional, and administrative law team.

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