On February 4, 2016, the United States Court of Appeals for the Second Circuit struck down HHS regulations that prohibited hospitals from seeking classification as “urban” for purposes of their standardized amount and wage index, and “rural” for other reimbursement purposes such as the 340B Drug Pricing Program.  The court held that the plain meaning of the statute indicated that “Congress intended hospitals with ‘acquired rural status’ to be treated like ‘geographically rural’ hospitals when applying for [Medicare Geographic Classification Review Board (MGCRB)] reclassification.” The case is Lawrence + Memorial Hospital v. Burwell, et al., Docket No. 15-164-cv (2d Cir. Feb. 4, 2016).  

The regulations (referred to as the Reclassification Rule) prohibited hospitals granted re-designation as “rural” under 42 U.S.C. § 1395ww(d)(8)(E) (commonly referred to as Section 401) from seeking an additional reclassification by the MGCRB under 42 U.S.C. § 1395ww(d)(10) as “urban” for a year where the Section 401 rural re-designation was in effect. Further, hospitals re-designated as rural under Section 401 were required to maintain rural status for at least one full twelve-month cost reporting period after re-designation before they could cancel that rural status and reapply for reclassification as “urban” by the MGCRB.

Rural Referral Centers (RRCs) enjoy several benefits including the ability to qualify for preferable drug pricing under the 340B program with a lower Disproportionate Share Hospital (DSH) percentage.  As a result, the Reclassification Rule forced certain hospitals, such as the plaintiffs, to choose between benefiting from the more lenient 340B qualification standards or a higher urban wage index.

While the district court upheld the Secretary’s regulation as a permissible construction of the statute, the Second Circuit found that the statutory language clearly allowed hospitals to be treated as “rural” for some purposes and “urban” for others, and declared the Reclassification Rule invalid.  In particular, the court held that the “Secretary’s purported distinction between ‘geographically rural’ hospitals and hospitals with ‘acquired rural status’ for the purposes of an MGCRB application appears nowhere in the statute.”  The court thereby joined the Third Circuit, which made a similar finding in July 2015.  See Geisinger Community Med. Ctr. v. Sec’y U.S. Dep’t of Health & Human Servs., 794 F.3d 383 (3d Cir. 2015). 

Reporter, Lara Compton, Los Angeles, +1 213 443 4369, lcompton@kslaw.com.