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From Health Law Daily, November 4, 2014

Court rejects challenge to CMS’ payment methods during delay of IPF PPS implementation

By Michelle L. Oxman, JD, LLM

An inpatient psychiatric facility (IPF) was not entitled to have its target reimbursement rate for fiscal years (FY) 2003 and 2004 calculated using its Tax Equity and Fiscal Responsibility Act (TEFRA) base period plus adjustments. CMS properly applied Soc. Sec. Act sec. 1886(b)(3) when it calculated the 2003 target rate using the 2002 target even though the effect was to extend the effects of caps that expired in 2002 (Washington Regional Medicorp, d/b/a Fayetteville City Hospital v Burwell, October 31, 2014, Cooper, C).

The reimbursement caps. As a psychiatric hospital, Fayetteville City Hospital (FCH) had been exempt from the inpatient hospital prospective payment system (IPPS). Before enactment of the Balanced Budget Act of 1997 (BBA) (P.L. 105-33), its reimbursement was a target amount plus adjustments, governed by the Tax Equity and Fiscal Responsibility Act of 1982, (P.L. 97-248), codified at Soc. Sec. Act sec. 1886(b)(3). The first year’s target amount was determined using the hospital’s cost report from the previous year, when it had been reimbursed under the reasonable cost system. The BBA amended sec. 1886 to limit the target amounts for psychiatric hospitals to the 75th percentile of the target amount for hospitals in the same class for the previous year, effective from FY 1998 through FY 2002.

In 1999, Congress enacted the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) (P.L. 106-113), which required the Secretary to develop a PPS for psychiatric hospitals effective for cost years beginning on or after October 1, 2002. CMS had not completed the development of the PPS by that date, however, so it published notice in the Federal Register that payments for FY 2003 would be computed according to TEFRA, i.e., the previous year’s target amount plus an adjustment factor.

The hospital’s claims. FCH argued that CMS could not lawfully base the FY 2003 rates on the FY 2002 target amounts because that would continue the limits imposed under the BBA after they expired. Instead, it contended, CMS should use the rate from the TEFRA base period plus the adjustment factors under Soc. Sec. Act sec. 1886(b)(3)(A)(i).

Standard of review. Because the case was brought under sec. 701 of the Administrative Procedure Act (APA), the court could set aside the agency’s action only if it was arbitrary and capricious or not in accordance with the law. First, it was required to determine whether the language of the statute (TEFRA) was ambiguous. If it was not, then it must be applied as written. If the court found it was ambiguous, it must defer to the agency’s interpretation of the statute as long as that interpretation is reasonable, even if the court would have interpreted it differently.

The court examined the language of sec. 1886(b)(3)(A). Subparagraph (i), the paragraph on which FCH relied, specifically applied only to the first year that TEFRA target amounts were applied to the hospital. Thereafter, subparagraph (ii) provided the target amount was defined as “the target amount for the preceding 12-month cost reporting period,” increased by the adjustment for the cost year.

CMS regulations at 42 CFR sec. 413.40(c)(4)(iii) described the calculation of the target amount for each of FYs 1998 through 2002 as “the lower of” (A) the hospital’s net allowable costs for the base period increased by the adjustment factors or (B) the 75th percentile target. FCH argued that only subparagraph (B) expired with the caps because the language of the regulation did not specifically limit the application of paragraph (iii) to the period from 1998 through 2002.

Interpretation of the statute. The court reasoned that the regulation must be interpreted consistently with the statute. It rejected the argument that CMS’ interpretation unlawfully extended the caps. Congress enacted both the caps and the IPF PPS to slow the growth of costs of psychiatric hospital services, and it was not reasonable to interpret the regulation to undo the limits from the previous four years. The caps were not extended; rather, they had an “echo effect.” In reaching this conclusion, the court relied on Mich. Dep’t of Cmty. Health, 496 F. App’x at 526, 533; and Ancora Psychiatric Hosp. v. Sec’y of the U.S. Dept. of Health and Human Servs., 417 F. App’x 171, 176 (3d Cir. 2011), which had been presented with the same question.

Retroactivity. In 2005, CMS had amended subparagraph (iii) to limit its application to the cost reporting years from FY 1998 through 2002. FCH argued that the amendment was unlawful because it was retroactive. The court disagreed, however, because the amendment did not change past legal obligations.

The case number is 1:13-cv-00622 (CRC)

Attorneys: Dan Mark Peterson (Dan M. Peterson PLLC) for Washington Regional Medicorp. Bridgette L. Kaiser, U.S. Department of Health & Human Services, for Sylvia M. Burwell.

Companies: Washington Regional Medicorp

MainStory: TopStory IPFNews CostReportNews CMSNews IPPSNews DistrictofColumbiaNews

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