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DISPROPORTIONATE SHARE HOSPITALS-D.D.C.: CMS cannot include Medicare Part C beneficiaries in Medicare/SSI fraction of DSH calculations

By Sarah E. Baumann, JD

The Secretary of HHS could not implement a final rule that changed longstanding HHS policy by including Medicare Part C beneficiaries in the Medicare/Supplemental Security Income (SSI) fraction of the disproportionate share hospital (DSH) percentage calculation (Allina Health Services v Sebelius, November 15, 2012, Collyer, R). A district court determined that the Secretary violated the Administrative Procedure Act (APA) and the Medicare Act by failing to provide adequate notice of the change and failing to allow opportunity for comments. She also violated the APA by arbitrarily and capriciously failing to provide reasoning for the change. In a strongly worded decision, the court vacated the portions of the final rule dealing with the DSH calculation and remanded the case to the Secretary.

DSH calculation. In addition to paying for traditional Medicare fee-for-service benefits, CMS pays additional fees to DSH, which serve a disproportionate share of low-income patients, based on a calculated DSH percentage. The percentage is the sum of the Medicare/SSI fraction and the Medicaid fraction. The Medicare/SSI fraction is comprised of the number of a hospital's patient days for patients who were entitled to benefits under both Part A and SSI over the number of a hospital's patient days for patients who were entitled only to Part A benefits. The Medicaid fraction is the number of a hospital's patient days for patients who were eligible for Medicaid, but not Medicare, over the number of a hospital's patient days for all patients.

Proposed and final rules. Medicare Part C, or Medicare Advantage, is available to Medicare beneficiaries who are entitled to Part A benefits and enrolled under Part B. In 2003, the Secretary issued a Notice of Proposed Rulemaking (NPRM), discussing the issue of whether Part C beneficiaries were "entitled to" Part A benefits for purposes of the DSH percentage calculation. She proposed to clarify that a hospital's patient days for Part C patients should not be included in the Medicare/SSI fraction, but should be included in the Medicaid fraction. Instead, in 2004, the Secretary issued a final rule (Final Rule) "adopting a policy" that a hospital's patient days for Part C patients should be included in the Medicare/SSI fraction, but not in the Medicaid fraction. The Secretary did not amend the affected regulations until 2007. CMS implemented the regulations on January 1, 2008, with an effective date of October 1, 2006. It later made the regulations effective October 1, 2005.

A number of DSH, led by Allina Health Services, objected to the inclusion of Part C days in the Medicare/SSI fraction for fiscal year 2007 and eventually filed suit in federal district court. Both DSH and the Secretary filed motions for summary judgment.

Analysis. The court determined that the Secretary violated the notice and comment provisions of the APA and the Medicare Act. Together, the acts require the Secretary to provide notice of proposed rules and allow public comments for 60 days. The Secretary may only publish a final rule that differs from a proposed rule if the final rule is a "logical outgrowth" of the proposed rule. Under the APA, Secretary must provide a reasonable explanation for any changes she makes, or her actions will be considered arbitrary and capricious.

In this instance, the Secretary published an NPRM that merely proposed to clarify the existing practice of not including Part C days in the Medicare/SSI fraction. The NPRM did not suggest that the Secretary was entertaining other changes and particularly did not suggest that the Secretary would consider implementing a policy that was the polar opposite of the proposed clarification. Thus, the public was not given proper notice that a significant change might occur with respect to which it might wish to comment. Furthermore, the limited comments that were submitted in response to the NPRM expressed general confusion and misunderstanding of both the existing policy and the proposed changes. The 2004 Final Rule that the Secretary issued was therefore not a "logical outgrowth" of the 2003 NPRM.

The court also determined that the Secretary acted arbitrarily and capriciously in failing to provide a reasoned explanation for the 2004 Final Rule. In cases where an agency is changing its policy, it is particularly important for that agency to provide a detailed explanation for its decision. In this case, the court found that the Secretary simply stated that Part C beneficiaries were, "in some sense," entitled to Part A benefits-implying that, in some other sense, they might not be entitled to Part A benefits and their inclusion in the Medicare/SSI fraction might be improper.

The court granted the DSH's motion for summary judgment and denied the Secretary's motion for summary judgment. It vacated those portions of the 2004 Final Rule that applied to the DSH percentage calculation, noting that the rulemaking was seriously flawed and that vacatur would not seriously disrupt the DSH payment process for fiscal years prior to 2007, since the Secretary did not have the authority to apply rules retroactively.

The court was firm in its decision, chastising the Secretary for arguing that HHS had a longstanding policy of including Part C beneficiaries in DSH calculations, despite substantial evidence, including the Secretary's own statements, to the contrary. The court also noted the binding nature of a previously decided case, Northeast Hospital Corporation v Sebelius, in which a D.C. circuit court made such findings. In the district court's words, "The D.C. Circuit has ruled and the Secretary is not free to pretend otherwise when in this Circuit."

The case number is 10-1463 (RMC).

Allina Health Services, Highland Hospital of Rochester, Kaleida Health, Kingsbrook Jewish Medical Center, Lutheran Medical Center, Maimonides Medical Center, Methodist Dallas Medical Center, Methodist Hospitals of Dallas, Montefiore Medical Center, Mount Sinai Medical Center of Florida, Inc., New York Hospital Medical Center of Queens, New York Methodist Hospital, New York Presbyterian Hospital, North Carolina Baptist Hospital, North Shore Long Island Jewish Health System, Inc., Shands Medical Center, Inc., Shands Teaching Hospital and Clinics, Inc., University of Rochester, Florida Health Sciences Center, Inc., the Henry Ford Health System, Plaintiffs. Kathleen Sebelius, Secretary, U.S. Department of Health and Human Services.

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