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From Health Law Daily, February 5, 2016

A hospital can be rural and urban at the same time

By Bryant Storm, J.D.

The Second Circuit struck down an HHS regulation limiting hospitals’ ability to be designated as “urban” for one purpose and “rural” for another. The court reasoned that HHS overstepped when it issued a regulation prohibiting a hospital that had been reclassified from urban to rural under Section 401 of the Medicare statute from receiving an additional reclassification by the Medicare Geographic Classification Review Board (MGCRB). The Second Circuit held that the two sections were not ambiguous or in conflict and, therefore, HHS’ “reclassification rule” conflicted with the plain language of the statute (Lawrence + Memorial Hospital v. Burwell, February 4, 2016, Rakoff, J.).

MGCRB. Medicare payment rates under the inpatient prospective payment system (IPPS) and outpatient prospective payment system (OPPS) are adjusted to account for geographical variations in labor costs. Specifically, a hospital is reimbursed according to the wage index of the Core Based Statistical Area (CBSA) in which it is physically located. Because the wage index sometimes led to inequitable results where a rural hospital was forced to compete with an urban hospital for the same labor pool, Congress created the MGCRB, which considers hospitals’ applications to change their geographic classification for wage index reimbursement purposes. Specifically, under 42 U.S.C. § 1395ww(d)(10), the MGCRB is authorized to classify a hospital as urban for wage reimbursement purposes despite its classification as rural for other purposes.

Section 401. Under 42 U.S.C. § 1395ww(d)(8)(E)—known as Section 401—a hospital geographically located in an urban area is permitted to be designated as rural for reimbursement purposes. Among other benefits, rural hospitals are eligible to be treated as Rural Referral Centers (RRCs), which increases the likelihood that a hospital will qualify for preferable drug pricing under the 340B program. Under the 340B drug discount program, some Medicaid providers, including RRCs, are able to receive certain outpatient drugs at a discounted price due to pharmaceutical pricing agreements that HHS enters into with drug manufacturers.

Reclassification rule. Following the passage of Section 401, HHS became concerned that hospitals might take advantage of the MGCRB process by first seeking reclassification as rural under Section 401 and then seeking a second reclassification as urban, through the MGCRB, for wage index purposes. To address the concerns, HHS promulgated the reclassification rule—42 C.F.R. Sec. 412.230(a)(5)(iii). The reclassification rule provided that a hospital reclassified from urban to rural under Section 401 could not then receive an additional reclassification from the MGCRB under subsection (d)(10). To obtain such a subsequent reclassification, a hospital would have to first cancel its rural status under Section 401 for the years it is seeking reclassification from the MGCRB.

Reclassification. Lawrence + Memorial Hospital, an acute care hospital, originally designated as urban, sought reclassification under Section 401 and the designation of RRC. CMS granted both requests. Immediately after the requests were granted, Lawrence applied to the MGCRB seeking reclassification for wage reimbursement purposes. Because the reclassification would likely violate the reclassification rule, the hospital filed an action in district court seeking to enjoin HHS, CMS, and the MGCRB from applying the reclassification regulation to the hospital’s application. The injunction was denied and, under protest, the hospital requested cancellation of its rural status under Section 401, which caused the hospital to lose its eligibility to participate in the 340B program (see Hospital cannot benefit from both rural and urban classification, December 9, 2013).

Lawsuit. The hospital then filed an amended complaint asserting that the reclassification rule violated Medicare law and the Administrative Procedures Act (APA) (5 U.S.C. § 706). The district court disagreed with the hospital and held that the rule was a reasonable agency interpretation of an ambiguous Medicare law (see Hospital prohibited from being classified as urban and rural, December 29, 2014).

Second Circuit. The hospital filed an appeal to the Second Circuit. The Second Circuit disagreed with the district court’s decision and held that the Medicare statute was unambiguous. Specifically, the court reasoned that the plain language of Section 401 and the MGCRB provision directed HHS to consider MGCRB applications from hospitals granted rural status under Section 401 no differently than it treats any other rural hospitals. The court reasoned that to read the statute any other way would undermine the law by not giving effect to all of its provisions. The Second Circuit explained that the statute was clear and non-discretionary, affording HHS no authority to contravene the law through a regulation. The court, therefore, declared the regulation invalid.

The case is No. 15-164-cv.

Attorneys: Joseph D. Glazer (Law Office of Joseph D. Glazer, PC) for Lawrence & Memorial Hospital. Sandra Slack Glover, United States Attorney's Office, for Marilyn Tavenner, Robert G. Eaton and Sylvia Mathews Burwell.

Companies: Lawrence & Memorial Hospital

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