Florida Hospitals Prevail in Litigation Challenging the Exclusion of Low Income Pool Days from the Medicare Disproportionate Share Hospital Payment Calculation

King & Spalding

On July 23, 2019, Judge Rosemary Collyer of the United States District Court for the District of Columbia issued an opinion ruling in favor of ten Florida hospitals in their case challenging the calculation of their Medicare Disproportionate Share Hospital (DSH) payments. Bethesda Health v. Azar, No. 18-875, 2019 WL 3297061 (D.D.C. 2019). Attorneys from King & Spalding represented the hospitals. The question before the court was whether inpatient days attributable to individuals who received care for which the hospitals were reimbursed by Florida’s Low Income Pool (LIP)—established under a CMS-approved section 1115 waiver—should be included in Medicare DSH payments. Judge Collyer agreed with the hospitals that the Medicare statute and regulations unambiguously regard such individuals as “Medicaid eligible” and, therefore, CMS must count Florida LIP days in the so-called Medicaid fraction of the Medicare DSH formula.

The Medicare program makes an upward adjustment in inpatient rates for hospitals that treat a “disproportionate share” of low-income patients. Whether a hospital qualifies for Medicare “DSH” payments, and the amount it receives, depends in part on the number of Medicaid-eligible inpatients it serves. Specifically, the Medicare statute requires CMS to calculate a fraction for each hospital, the numerator of which consists of all inpatient days attributable to individuals who are “eligible under” an approved Medicaid state plan. The denominator consists of all inpatient days for all patients. 42 U.S.C. Sect. 1395ww(d)(5)(F). The more Medicaid eligible days, the larger the hospital’s fraction, and the higher the hospital’s DSH payments. The Medicare statute also allows CMS to include in the numerator of the Medicaid fraction the inpatients days of individuals who, although not “eligible under” a state plan, are “regarded as such” because they receive benefits under a waiver approved by CMS under Section 1115 of the Social Security Act. Id. Sect. 1395ww(d)(5)(F). Relying on this authority, CMS adopted a regulation in 2000 that allows hospitals to count the inpatient days of individuals who are “eligible to receive inpatient benefits” pursuant to a Section 1115 waiver. 42 C.F.R. Sect. 412.106(b). Therefore, all demonstration populations that are eligible for matching funds under a Section 1115 waiver may be counted as “Medicaid eligible” for purposes of calculating the Medicaid fraction. Id. Sect. 412.106(b). Depending on the state waiver, such “waiver” days can significantly increase a hospital’s DSH payments.

The dispute in Bethesda concerned whether inpatient days covered under Florida’s section 1115 waiver should be counted in the numerator of the Medicaid fraction. Section 1115 of the Social Security Act authorizes CMS to relax certain federal Medicaid requirements to establish demonstration projects that promote the objectives of the Medicaid program. For example, CMS can use its section 1115 authority to waive Medicaid eligibility requirements, thereby creating a population of individuals who receive benefits from the Medicaid program under the waiver despite not being eligible for Medicaid. In 2006, CMS exercised its section 1115 waiver authority to approve a demonstration project for Florida Medicaid. Among other things, the project established a LIP consisting of $1 billion to be distributed to Florida hospitals for providing uncompensated medical services to the uninsured, also referred to as the LIP eligibility group.

The plaintiff hospitals in Bethesda attempted to include in their Medicaid fractions all days attributable to inpatients for whom they received reimbursement under the LIP (LIP days). But when CMS’s Medicare Administrative Contractor (MAC) settled the plaintiffs’ cost reports, it removed all LIP days from the hospitals’ Medicaid fractions. The hospitals retained King & Spalding to file appeals with the Provider Reimbursement Review Board (PRRB) to challenge the MAC’s adjustments. After the PRRB upheld the MAC’s adjustments, the hospitals brought their appeal to federal court.

Before Judge Collyer, the hospitals argued that both the Medicare statute and DSH regulation unambiguously require CMS to credit hospitals for inpatient days attributable to Florida LIP recipients. Such patients, they argued, are “eligible” for inpatient benefits in the sense that they are “capable” of receiving them (and in fact do) under the LIP program. Further, the federal government under the Terms and Conditions of Florida’s waiver considers LIP expenditures to be “medical assistance” and matches the State’s LIP expenditures relying on its authority under Section 1115.

The government countered that the DSH regulation only requires CMS to count inpatient days attributable to populations that receive a specific set of benefits under an identifiable benefit package. Because the LIP program benefits the hospitals that provide the uncompensated care, not the uninsured individuals themselves, the government argument, the DSH statute and regulation did not require CMS to count LIP inpatient days in the hospitals’ Medicaid fractions.

Judge Collyer concurred with the plaintiffs’ interpretation of the relevant authorities. She interpreted the Medicare statute and DSH regulation to mean that any day in which a patient is eligible for inpatient hospital services under a section 1115 demonstration project is a waiver day that should be counted in the Medicaid fraction. She disagreed with the government’s position, concluding that CMS was adding conditions that did not appear in the plain language of the regulation. Judge Collyer also found ample evidence in the Florida waiver that CMS had intended to designate uninsured patients as an expansion population.

Bethesda is the latest decision to hold that hospitals may count in their Medicaid fractions inpatient days attributable to individuals whose inpatient care is paid for, in full or in part, by payments that a hospital receives through a funding pool approved and match by the federal government under section 1115. Last month, the United States Court of Appeals for the Fifth Circuit ruled that days paid under Mississippi’s uncompensated care pool are waiver days that should be counted in the Medicaid fraction. Forrest General Hospital v. Azar, 926 F.3d 221 (5th Cir. 2019). These decisions are significant for a few reasons. Not only do higher Medicare DSH percentages mean higher DSH payments, but a higher DSH percentage could make the difference as to whether a hospital will qualify for the 340B drug discount program. Finally, some states that did not expand Medicaid under the Affordable Care Act elected to provide “uncompensated care pool” funding to hospitals instead, matched by the federal government. These decisions may help level the playing field between hospitals in those states and hospitals in states that expanded Medicaid. CMS has allowed expansion-state hospitals to include expansion populations, like childless adults, in their DSH formulae. But until now, CMS has refused to include inpatient days for uninsured individuals whose care is covered by an uncompensated care pool.

A copy of the Bethesda decision is available here and a copy of the Forrest General 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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