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From Health Law Daily, February 7, 2018

HHS properly calculated VDA payments in compensating hospital fixed costs

By Jeffrey H. Brochin, J.D.

A federal district court has accepted a Magistrates Report and Recommendation that the decision of the HHS denying an administrative appeal by St. Anthony Regional Hospital related to the calculation of its reimbursement for the treatment of patients insured through Medicare be affirmed. The HHS construction of its regulations and the statutes it administers was entitled to substantial deference, and HHS did not err either in construing the statute or the Medicare Provider Reimbursement Manual (PRM) in calculating the hospital’s Volume Decrease Adjustment (VDA) payment (St. Anthony Regional Hospital v. Azar, February 6, 2018, Strand, L.).

Background. Hospitals are paid a fixed rate per patient based on each discharged patient’s diagnosis (referred to as the Diagnosis Related Group (DRG) payment) regardless of how much the hospital actually spends on a particular patient. This system has the potential to disadvantage a hospital if its patient volume shrinks due to the fact that hospitals have fixed operating costs such as rent, interest, depreciation and costs associated with regulatory compliance, that do not automatically shrink along with patient volume. To protect a hospital that experiences a 5 percnet or greater reduction in patient volume through no fault of its own, Congress created the VDA payment, which is to be used as may be necessary to fully compensate a hospital for the fixed costs it incurs in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.

Regulatory factors used to calculate VDA. The magistrate summarized the method used to calculate the Hospital’s VDA payment. The regulations promulgated by HHS in effect during the relevant time period did not provide a specific formula for calculating the VDA payment, rather, the regulation directed that the following factors be considered in determining the VDA payment amount: (a) the individual hospital’s needs and circumstances, including the reasonable cost of maintaining necessary core staff and services in view of minimum staffing requirements imposed by State agencies; (b) the hospital’s fixed (and semi-fixed) costs; and (c) the length of time the hospital has experienced a decrease in utilization. In addition, the regulation provided that the VDA payment could not exceed the difference between the hospital’s total Medicare costs and the hospital’s DRG payment.

Reliance on the PRM. The Magistrate also considered portions of the PRM issued around the same time as the regulation which addressed calculation of the VDA payment:

"A VDA payment is made to an eligible hospital for the fixed costs it incurs in the period in providing inpatient hospital services including the reasonable cost of maintaining necessary core staff and services, not to exceed the difference between the hospital’s Medicare inpatient operating cost and the hospital’s total DRG revenue. Fixed costs are those costs over which management has no control…[f]or purposes of the VDA payment, costs, may be considered as fixed on a case-by-case basis."

Cost classification dispute. HHS determined, and the magistrate agreed, that the hospital’s costs related to purchased laundry services, food, central distribution supplies, drugs, IV solutions, operating room supplies, and implantable devices were variable and therefore not compensable. The hospital objected to the magistrate’s conclusions (1) that the HHS methodology was a reasonable interpretation of the governing statutes requiring Chevron deference to the agency’s decision, and (2) that HHS correctly classified certain expenses as "variable" rather than "fixed" or "semi-fixed" when calculating the VDA amount. The hospital further contended that the magistrate’s recommendation in favor of HHS methodology resulted in the hospital losing its entitlement to normal reimbursement for its variable costs in accordance with other Medicare statutes.

Burden of proof on hospital. The district court agreed with the magistrate that substantial evidence supported HHS’ decision to classify purchased laundry services, food, central distribution supplies, drugs, IV solutions, operating room supplies and implantable devices as "variable" costs for which the Hospital was not entitled to reimbursement. The hospital’s argument that HHS failed to make an individualized determination of whether these costs were semi-fixed as opposed to variable was found to be without merit.

The court noted that the burden of proof for obtaining reimbursement rested on the hospital, and despite their argument that it could not reduce its expenses any further, the magistrate correctly found that HHS has routinely found similar classes of expenses to be variable, and there was nothing arbitrary or capricious about the use of categories in this manner to process claims. Accordingly, the Report and Recommendation was accepted, and the decision of HHS was affirmed.

The case is No. 3:16-cv-03117-LTS.

Attorneys: Angela Ellen Dralle (Dorsey & Whitney LLP) for St. Anthony Regional Hospital. Timothy Lawrence Vavricek, U.S. Attorney's Office, for Alex M. Azar II.

Companies: St. Anthony Regional Hospital

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