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Federal Judge's Ruling Could Block Lower DSH Payments to Hospitals

News  |  By Christopher Cheney  
   February 15, 2018

In first blow to a CMS 2017 Final Rule, a court ruling in Missouri has invalidated the agency's attempt to deduct Medicare and private insurance payments as offsets when calculating outlays to hospitals under the DSH program.

A federal District Court ruling has invalidated an attempt to change the payment formula for the Disproportionate Share Hospital program in a way that would reduce payments for hospitals across the country.

If the ruling withstands an anticipated appeal, it could spare hospitals nationwide DSH payment recoupment ranging into hundreds of millions of dollars.

The case was filed by the Missouri Hospital Association against the secretary of the federal Department of Health & Human Services and the Centers for Medicare & Medicaid Services. The primary issue is CMS rule-making, including 2010 FAQ guidance and a 2017 Final Rule requiring hospitals to deduct private insurance and Medicare payments as offsets when calculating outlays to hospitals under the DSH program.

The CMS 2017 Final Rule, "Disproportionate Share Hospital Payments—Treatment of Third Party Payers in Calculating Uncompensated Care Costs," became effective June 2, 2017. The is the first time the Final Rule has been invalidated in federal court, and it is also facing federal District Court challenges in Washington, D.C., and New Hampshire.

Under federal Medicaid law, hospitals in states participating in the Medicaid program receive federal DSH payments to cover some of the Medicaid-payment shortfall associated with care of Medicaid-eligible patients.

In his Feb. 9 ruling, District Court Judge Brian Wimes highlighted the competing DSH formulas favored by MHA and CMS:

  • MHA formula based on laws and regulations prior to 2010: Total cost of treatment for Medicaid-eligible patients – total payments from Medicaid not under the DSH program = Medicaid shortfall
  • CMS formula based on 2010 FAQ guidance and 2017 Final Rule: Total cost of treatment for Medicaid-eligible patients – (total payments from non-DSH Medicaid + total payments received for Medicaid eligible treatments from Medicare and private insurance) = Medicaid shortfall

In a declaration submitted to the court, an executive from St. Louis-based Barnes Jewish Hospital said deducting payments received for Medicaid-eligible care from Medicare and private insurance would cost the hospital millions of dollars annually. Larry Kayser, vice president of finance at Barnes Jewish Hospital, wrote the new CMS formula would result in recoupment of $5.9 million for fiscal year 2011 alone.

Under the FAQ guidance, CMS conducted DSH hospital payment audits under the new formula from 2011 to 2014. For the 2011 and 2012 fiscal years, Missouri hospitals face recoupment of $95.7 million if the new DSH payment calculation formula withstands legal challenges, according to the MHA.

National impact uncertain

While last week's ruling blocks recoupment of DSH payments in Missouri, it is unclear whether the decision will have a national effect, says Jane Drummond, general counsel of the MHA.

"We asked for a nationwide injunction in our lawsuit, but the opinion that was rendered just says our motion for summary judgment was granted. It is not specific on whether the court intended the ruling to apply nationwide."

Unless Judge Wimes issues a national injunction, CMS' reaction to the ruling will determine whether it has a national impact, she says. "There was an injunction issued on the FAQs in the federal District Court in Washington, D.C., but CMS took the position that the injunction only applied to the parties in that case, so it did not have nationwide effect."

Drummond expects the Missouri ruling will be appealed. "We are one of three cases that have challenged the Final Rule and this is the first decision invalidating it, so they will most certainly appeal to preserve their position in those other two cases."

If MHA prevails in an appeal, the hospital association expects the DSH payment audits conducted from 2011 to 2014 under the new calculation formula would be repeated under the old formula, sparing hospitals nationwide hundreds of millions in recoupment. If it loses an appeal, CMS would have to seek legislation from Congress to include Medicare and private insurance payments in the DSH outlay formula, Drummond says.

MHA pevails in federal court

Wimes sided with the MHA's claims against the 2017 Final Rule as well as FAQ 33 and FAQ 34 of reporting and auditing guidance promulgated in 2010. Both the Final Rule and the FAQs seek to establish the new CMS DSH formula.

In his decision, Wimes first invalidated the FAQs on the basis that they were promulgated without any notice or consent process such as publishing them in the Federal Register.

While the judge did not make a formal ruling on two other claims the MHA had made against the FAQs, he did write that those additional claims were valid:

  • Wimes wrote that the FAQs exceeded DHHS' statutory authority because they "substantively alter the formula for the calculation of uncompensated care costs for DSH hospitals"
  • Wimes wrote that the FAQs are contrary to the "unambiguous language" of the Medicaid statute, which does not include private insurance and Medicare payments in the formula that determines outlays to hospitals under the DSH program

Drummond says the judge's commentary on the FAQs regarding the Medicaid statute formed the basis of his invalidation of the 2017 Final Rule.

"Even had DHHS moved forward and done this change with substantive rulemaking, the FAQs would be invalid anyway because they are contrary to the Medicaid statute," she says. "While this was not a holding of the court, the judge did discuss those points and agree with our arguments, then used that rationale to invalidate the Final Rule."

Christopher Cheney is the CMO editor at HealthLeaders.

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