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From Health Law Daily, October 27, 2016

2005 changes to Medicare wage index reporting rules upheld

By Robert B. Barnett Jr., J.D.

A 2005 Final rule and a related amendment to the Medicare Provider Reimbursement Manual (PRM) addressing concerns that Medicare was overpaying hospitals because the wage index was being distorted by inconsistent accounting for unfunded post-retirement costs were lawfully promulgated, the U.S. District Court for the District of Columbia has ruled. In rejecting a claim by 493 hospitals from across the country that HHS had under-reimbursed them by making changes that violated the Administrative Procedures Act (APA) and the Medicare statute, the court concluded that HHS’s changes complied with all legal requirements, were sufficiently explained to the hospitals, and were not applied in an impermissibly retroactive manner (Abington Memorial Hospital v. Burwell, October 26, 2016, Jackson, J.).

Medicare reporting. The regional wage index that HHS uses to adjust Medicare payments made to hospitals to smooth out regional cost differences is based on reports that the hospitals file as part of their Medicare reimbursement requirements. Those reporting requirements have a long and tortured history but the salient point is that HHS became concerned that the regional wage index was being distorted by hospital reports that included, as part of wages paid to employees, large amounts of unfunded pension and other deferred compensation costs. Including those amounts in the reports drove up both the regional wage index and, as a result, the amount that hospitals were reimbursed.

HHS’ response to the need for more accurate reporting was a 2005 Final rule (70 FR 47278) that sought to impose clarity by requiring that hospitals report only those post-retirement costs that were actually funded. The new rule was to be applied beginning in 2007. After the issuance of the 2005 Final Rule, HHS amended its PRM and changed the methodology for determining pension costs to match the new requirements. HHS also distributed an optional spreadsheet that Medicare contractors could use to help them audit the wage-index data.

Case history. Four hundred and ninety-three hospitals from all over the U.S. filed a consolidated administrative proceeding before the Provider Reimbursement Review Board, contending that the new rules caused the regional wage indices to be defective and resulted in under-payments of Medicare reimbursements. After exhausting their administrative efforts without success, the 439 hospitals filed suit in federal court, asserting HHS (1) failed to comply with the APA in issuing the 2005 Final Rule, (2) violated the APA in issuing Transmittal 436 to amend the PRM, (3) applied the new rules retroactively, and (4) violated the Medicare statute by gathering wage data inconsistently (because some of the Medicare contractors used the spreadsheet but others did not). Both parties filed motions for summary judgment.

APA violations. The hospitals’ argument that HHS violated the APA by providing insufficient notice of the changes was without merit. The first sentence of the summary of the 2005 Proposed rule and subsequently the Final rule clearly stated that the intent was to revise the rules and to implement changes. Furthermore, the comments received regarding the Proposed rule showed that an awareness existed that the requirements were being changed. The fact that a separate comment period was not provided for the Final Rule was irrelevant because the Final Rule was an almost verbatim copy of the Proposed Rule. Similarly, the hospitals waived the argument that Transmittal 436 required a separate comment period because they never offered any evidence that Transmittal 436 amounted to a change in policy.

The hospitals’ argument that HHS violated the APA by failing to explain adequately the reasons for the 2005 Final Rule was also baseless. HHS clearly was aware that it was announcing a change to existing policy. It satisfied the APA’s requirement by stating that the new rule sought to address inconsistent reporting among hospitals and to develop a reasonable approach to reporting on deferred compensation costs.

Medicare violations. The hospitals argued that the 2005 Final Rule and Transmittal 436 violated the Medicare statute by being arbitrary and by not properly reflecting statutory mandates. The arbitrariness, they alleged, was caused by the Medicare contractors’ inconsistent application of the data, resulting in wage indices that were not uniform, as required by Medicare. The Medicare statute, however, does not required scientific certainty. A reasonable approximation is all that is required. Thus, the bar that the hospitals had to clear to establish a violation was high. They did not clear it. They never explained, for example, how the alleged disparate treatment impacted the wage indices or whether the wage indices were, in fact, inaccurate.

Retroactive effect. The retroactivity charges were mostly waived because the hospitals failed to develop any arguments in support of their contention. Regardless, their claim would have failed anyway because, in the administrative context, a rule is retroactive only if takes away a vested right, creates a new duty, or attaches a new disability to a past transaction. In this case, the new rule merely disrupted expectations of what the hospitals would receive. They had no vested right in those payments.

As a result, the court granted summary judgment to the Secretary and denied summary judgment to the hospitals.

The case is No. 13-cv-1765 (KBJ).

Attorneys: Angela M. Smith (Hall, Render, Killian, Heath & Lyman, P.C.) and Roy Ira Niedermayer (Paley Rothman) for Abington Memorial Hospital, Adventist GlenOaks Hospital and Adventist Hinsdale Hospital. Eric J. Soskin, U.S. Department of Justice, for Sylvia Mathews Burwell.

Companies: Abington Memorial Hospital; Adventist GlenOaks Hospital; Adventist Hinsdale Hospital

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