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From Health Law Daily, April 2, 2014

Final rule resulting in significantly reduced reimbursement rates to low income hospitals vacated

By Melissa Skinner, JD

A final rule that dictated Medicare Part C recipients are technically entitled to Part A benefits and, as such, are to be counted in the Medicare fraction for purposes of computing the disproportionate share hospital (DSH) reimbursement percentage was vacated by the court. The court held that the final rule, which resulted in a large adjustment to the Medicare fraction used to determine the DSH percentage and in turn significantly reduced reimbursement rates for DSHs, did not provide adequate notice and opportunity for comment. Although the court confirmed the lower court’s finding with respect to vacating the final rule, the court reversed the district court’s finding to the extent it ordered the Secretary of HHS (the Secretary) to recalculate the DSH percentage using the initially proposed method (Allina Health Services v Sebelius, April 1, 2014, Silberman, L).

DSH percentage. Reimbursement for DSHs is determined by adding two fractions, which are often referred to as the Medicare fraction and the Medicaid fraction. The numerator of the Medicare fraction is the number of patient days for patients who were entitled to both benefits under Part A and social security benefits, while the denominator is “the total number of patient days for such fiscal year which were made up of patients (for such days) were entitled to benefits for Part A.” With regard to the Medicaid fraction, the numerator accounts for patient days for those eligible for Medicaid but not entitled to benefits under Part A and the denominator represents the total number of patient days “regardless of whether patients were enrolled in a federal medical benefits program.”

2004 final rule. Prior to 2003, Medicare Part C recipients were considered to not be entitled to benefits under Part A and, therefore, included in the Medicaid fraction. To clarify the appropriate classification of the beneficiaries of Medicare Part C in the DSH adjustment computation, in 2003 the Secretary issued proposed rulemaking that confirmed this prior practice of considering Part C recipients as not entitled to Part A and of including Part C beneficiaries in the denominator of the Medicaid fraction and in the numerator, if those patients were also eligible for Medicaid. However, in 2004, the Secretary announced the adoption of a final rule which applied the exact opposite interpretation, that is, the rule dictated that Part C benefits should be included in the Medicare fraction because “they are still, in some sense, entitled to Part A benefits.” The court noted that the inclusion of Part C beneficiaries in the Medicare fraction had significant consequences for the DSH adjustment percentage and resulted in significantly reduced reimbursement rates.

Analysis. This court confirmed the finding of the district court that the final rule was not subject to adequate notice or an appropriate comment period and, therefore, it should be vacated. An agency may issue a rule that is different from a proposed rule only if the final rule is a “logical outgrowth” of the proposed rule. The court found that the final rule was not a logical outgrowth of the proposed rule in this scenario because the proposed rule’s intention was to clarify and confirm the long-standing practice of excluding Part C from the Medicare fraction rather than to weigh two different methods of computation hinging on the definition of Part C beneficiaries. The court also rejected the Secretary’s argument that even if the final rule was not a logical outgrowth of the proposed rulemaking, the adoption of the differing final rule was harmless error. In denying this assertion, the court noted that the lack of comments submitted to the proposed rule made it clear that the final rule was not anticipated by the affected parties and could not be considered harmless error. However, the court did not confirm the district court’s determination that the Secretary should be directed to implement the previous interpretation of the proper Part C recipient inclusion in the DSH percentage computation. The court found that the appropriate remedy was not to force the Secretary to calculate the Medicaid and Medicare fractions as it did before the final rule but simply to identify the error and remand the matter so that error could be corrected.

The case number is 13-5011.

Attorneys: Stephanie A. Webster (Akin Gump Strauss Hauer & Feld LLP) for Allina Health Services. Stephanie R. Marcus, U.S. Department Of Justice for Kathleen Sebelius.

Companies: Allina Health Services; U.S. Department of Health and Human Services

MainStory: TopStory DSHNews CMSNews PartANews PartCNews MedicaidPaymentNews PaymentNews DistrictofColumbiaNews

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