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From Health Law Daily, August 22, 2017

HHS must explain Medicare outlier payment formula

By Brian Craig, J.D.

The U.S. Court of Appeals for the District of Columbia Circuit ruled that HHS must provide better explanation of the formula used to create the Medicare outlier payment system. A group of 29 nonprofit hospitals, including Banner Health, argued that HHS violated the Administrative Procedure Act (APA) for every fiscal (FY) year between 1997 and 2007 by failing to identify and appropriately respond to flaws in its methodology that enabled certain "turbo-charging" hospitals to manipulate the system, and by receiving excessive payments at the expense of non-turbo-charging hospitals. The D.C. Circuit reversed the district court’s grant of summary judgment for HHS with respect to the successfully challenged aspects of the FYs 2004, 2005, and 2006 Final rules (Banner Health v. Price, August 18, 2017, per curiam).

The Medicare outlier payment system provides supplemental payments to hospitals to protect them from bearing a disproportionate share of the atypical costs associated with caring for patients whose hospitalization would be extraordinarily costly or lengthy. The court recognized that calculating cost outlier payments is an elaborate process where HHS applies a cost-to-charge ratio representing a hospital’s "average markup" to a hospital’s charges. According to the opinion, approximately 2 percent of hospitals manipulated the outlier payment program. In the lengthy per curium decision by the DC Circuit, often regarded as the nation’s second most powerful court after the U.S. Supreme Court, the three-judge panel examined each of the challenges by the hospitals from 1997 to 2007 and found that HHS must provide more explanation for the FY 2004, 2005, and 2006 Final rules. The D.C. Circuit remanded the case to the district court for further proceedings. On remand, HHS will be given a chance to remedy the explanatory deficiencies.

FYs 2004 - 2006. The DC Circuit held that HHS acted arbitrarily and capriciously in failing to exclude charge data for the 123 historical turbo-chargers from its FY 2004 charge-inflation calculation. The court recognized that if HHS fails to supply a "satisfactory explanation" for including the turbo-charged data, that portion of the 2004 rule will be vacated. For the FY 2005 Final rule, as with FY 2004, HHS failed to adequately explain its decision not to adjust its projection cost-to-charge ratios downward. HHS used substantially the same methodology for calculating the outlier threshold that it had used in FY 2004, with some modifications. Lastly, the federal appeals court also agreed with the hospitals surrounding one of their challenges for the FY 2006 Final rule similar to the arguments raised for the FY 2004 and 2005 Final rules.

FY 2007. The court rejected the challenges by the hospitals for the FY 2007 Final rule. The hospitals’ primary objection targets the methodology HHS employed to adjust its projection cost-to-charge ratios downward when calculating the fixed-loss threshold. In FY 2007, HHS finally attempted to account for the effect of declining cost-to-charge ratios on its efforts to make total outlier payments in a fiscal year equal 5.1 percent of non-outlier inpatient payments. Therefore, the court rejected the challenge to the FY 2007 outlier rule.

Other claims. The court rejected three additional claims made by the hospitals. First, the hospitals contended that HHS violated the APA for the outlier rules for every FY between 1997 and 2007 and themidyear rule promulgated during FY 2003. Their primary challenge to the fixed-loss thresholds for FYs 1997 through 2003 is that the failure to discover and stop turbo-charging was arbitrary and capricious. The hospitals also argued that the HHS decision not to lower the FY 2003 fixed-loss threshold midyear violated the agency's obligations under both the Medicare Act and the APA. Lastly, the hospitals challenged many of the district court's procedural rulings such as the court’s refusal to consider certain evidence.

The case is No. 16-5129.

Attorneys: Sven C. Collins (Sven C. Collin, Attorney at Law) for Banner Health. Benjamin M. Shultz, U.S. Department of Justice, for Thomas E. Price, Secretary, U.S. Department of Health and Human Services.

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

MainStory: TopStory CaseDecisions IPPSNews CMSNews DSHNews GCNNews PaymentNews PartANews DistrictofColumbiaNews

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