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From Health Law Daily, September 9, 2014

HHS and hospitals ‘wage’ a contest over wordplay, HHS victorious

By Bryant Storm, JD

The United States Court of Appeals for the Sixth Circuit affirmed the decision of a district court, which agreed with an HHS determination to treat short-term disability payments and part-time weekend work payments as “wage” casts rather than “wage-related” costs. The court determined that the HHS Secretary’s wage-index determinations did not exceed the Secretary’s authority and represented reasonable and consistent interpretations of the CMS Provider Reimbursement Manual (PRM) (Atrium Medical Center, et al.,v HHS., September 8, 2014, Stranch, J).

Reimbursement. Under 42 U.S.C. sec. 1395ww(d)(3)(E)(i) and the prospective payment system (PPS) in Medicare Part A, HHS is required to reimburse providers based upon geographical differences in the cost of labor known as the wage index. Labor costs for individual hospitals are determined through a complex reporting process under 42 C.F.R. sec. 413.24. Through CMS’s Provider Reimbursement Manual (PRM), providers are given step-by-step instructions on how to complete the reporting process.

Wage index. The wage index is based upon three different components: “wages,” “paid hours,” and “wage-related costs.” Wages are the dollar value of every hour the hospital pays an employee. Paid hours are the actual hours associated with wages and include things like paid time off and paid lunch. Wage-related costs are fringe benefits like health insurance and other benefits that are not tied to paid hours. CMS applies the three concepts through the following formula: “(wages + wage-related costs)/(paid hours).” Because wage costs are tied to paid hours, hospitals typically want to treat costs as wage-related rather than wages because the more paid hours a hospital has to report, the lower its region’s index will be, which will in turn reduce the amount it receives for inpatient services.

Deference. Under section 1395ww(d)(3)(E), the HHS Secretary is granted the authority to define the wage index. In fact, it was HHS and not Congress that developed the three classifications that comprise wage index calculations. The court was asked to consider how much authority was to be given to the PRM because, although it is subject to notice and comment, it is not a formal rule or regulation. The court decided before answering any substantive questions that HHS was entitled to use and interpret the PRM in an authoritative manner because of the significant deference afforded to HHS by congress in the area of wage index calculation. The court also reasoned that because HHS had defined and implemented the wage index distinctions reasonably and consistently, the court had no basis to overturn related HHS determinations. The Sixth Circuit held that HHS was free to define and implement the wage index in ways that were not manifestly contrary to federal law and were not arbitrary or capricious.

Appeal. The specific challenges to the HHS wage index determinations were brought by two hospital groups, one in Cincinnati and another in Iowa. The hospitals challenged an HHS determination that part time weekend work pay and short-term disability pay had to be treated as wage costs. HHS and a district court rejected the hospitals’ attempts to alter their wage index and dismissed the hospitals’ arguments that part time payment and disability payments were more properly treated as wage-related costs. As a result, the hospitals appealed to the Sixth Circuit for additional review (see, The Secretary properly included the hours hospital payroll systems use to calculate short-term disability payments and shift incentives in calculating the wage index factor for PPS payment, January 9, 2013).

Disability. Many hospitals self-insure or buy disability insurance to cover short-term disability costs. CMS treats the cost of the insurance as a “wage-related” cost under the PRM. One of the plaintiff hospitals chose not to insure itself or purchase insurance and instead paid short-term disability costs out of its general funds through its payroll process. CMS elected to treat that cost as paid time off and, therefore, a “wage” under the PRM. The hospital objected to the distinction and contended that the different treatment represented an impermissible and inconsistent treatment of providers because, despite how the hospital chose to cover the costs, it was not different from the insurance premiums paid by other hospitals to cover short-term disability costs. HHS, the district court, and the Sixth Circuit disagreed and adopted the HHS position that because the short-term disability costs were not insurance premiums and were paid out of general funds as part of the payroll process, they were more akin to paid sick leave and had to be considered a wage to remain consistent with other HHS determinations.

Baylor hours. To incentivize employees to work weekend hours, many hospitals pay what are called “Baylor hours” where an employee works, for example, two 12 hour shifts on a weekend and is paid as though he or she worked 40 hours. The “phantom hours,” or 16 hours that the employee does not actually work, are treated by CMS as paid hours, because the paid hour classification hinges on the nature of employees’ salaries not upon the actual number of hours worked. Additionally, HHS argued and the Sixth Circuit agreed that CMS had a longstanding position of treating Baylor hours as paid hours and giving an exception to one hospital would impermissibly treat some hospitals with Baylor hours different from others. The court held that because neither of the criticized wage index determinations was made in an arbitrary or capricious manner, both were premised on longstanding CMS practices, and the determinations were consistently applied across multiple providers, the PRM interpretations could stand.

The case number is 13-3288.

Attorneys: Nolan Kent Smith (Hall, Render, Killian, Heath & Lyman) for Atrium Medical Center, Bethesda North Hospital, Brown County General Hospital, Christ Hospital, and Deaconess Hospital. Brett Bierer for U.S. Department of Health & Human Services.

Companies: Atrium Medical Center; Bethesda North Hospital; Brown County General Hospital; Christ Hospital; Deaconess Hospital; U.S. Department of Health and Human Services

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