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From Health Law Daily, September 8, 2016

Hospitals’ challenge to outlier payment methodology won’t pass threshold

By Bryant Storm, J.D.

HHS did not act arbitrarily or capriciously when establishing the method it uses to calculate the "fixed-loss threshold" (FLT) for Medicare hospitals, a district court held. The court dismissed the challenges of several acute care Medicare hospitals and granted summary judgment for HHS, reasoning that because the agency followed the notice and comment rulemaking procedures when developing the FLT method, HHS was entitled to deference and could not be said to have acted arbitrarily when applying its method (Lee Memorial Health System v. Burwell, September 7, 2016, Collyer, R.).

Outlier payment. A group of acute care Medicare hospitals contended that they were underpaid by CMS for fiscal years (FYs) ending in 2008, 2009, 2010, and 2011 as a result of CMS’ administration of the outlier payment system. Under the outlier payment system, CMS pays eligible hospitals a percentage of their costs for treating Medicare patients above the typical Medicare threshold. The outlier payment system is designed to compensate providers for circumstances where the diagnosis related group (DRG) based Inpatient Prospective Payment System (IPPS) rates drastically understate a hospital’s costs. If a hospital’s cost of care in a given case exceeds the DRG payment "plus a fixed dollar amount to be determined by the Secretary" then the hospital is eligible for an outlier payment. The DRG amount plus the fixed dollar amount is the "outlier threshold." Qualifying cases receive 80 percent of the costs that are in excess of the outlier threshold.

FLT. The hospitals and HHS refer to the "fixed dollar amount" as the FLT—a deductible of sorts which must be met before the provider can absorb outlier payments. Thus, HHS benefits from a high FLT while the hospitals prefer a low FLT. However, Congress set statutory limits on the scope of the FLT under 42 U.S.C. § 1395ww(d)(5)(A)(iv). Each year the HHS Secretary must set a Fixed Loss Threshold high enough to ensure that projected outlier payments do not exceed 6 percent of the projected DRG payments but not so high that projected outlier payments are less than 5 percent of the projected DRG. Yet, because the DRG payments are prospective and the FLT is based upon predictive figures, the Secretary cannot guarantee that the threshold will fall in the statutory range.

PRRB. The hospitals challenged payments they received for 2008 through 2011 before the Medicare Provider Reimbursement Review Board (PRRB) and requested expedited judicial review questioning whether the FLT regulations for those years were contrary to the outlier payment statute. The PRRB granted the request for expedited review.

CCR. The hospitals challenged CMS with applying only a token cost-to-charge ratio (CCR) to the outlier payment for the years in question—an amount the hospitals said represented only a fraction of the true decline of hospital costs. The hospitals asserted that CMS failed to use the best available data to calculate the yearly CCR adjustment factor because CMS relied on a projection, rather than historical data. The hospitals argued that CMS failed to adequately change its policy—first established in a 2007 rulemaking—after several comments challenging the CCR adjustment factor. The court disagreed with the hospitals and held that CMS adequately stated the reasons for its decisions in the proposed and final rulemaking each year.

Inflation. The hospitals also argued that because CMS was assuming a consistent upward trend in hospital costs, the FLT should have followed with a consistent deflation. However, the court held that CMS adequately explained it’s rational for setting the FLT. The court held that CMS left no unexplained consistencies in the FLT rulemakings.

Past payments. The court also rejected the hospital’s arguments that CMS acted arbitrarily and capriciously by not considering past outlier payments when calculating the FLT ratio each year. Although CMS consistently missed the 5 percent threshold for several of the years at issue, the court held that the hospitals were incorrect that CMS did not identify past outlier payments. Additionally, the court held that there was no evidence that CMS "disregarded accurate and reliable information or adopted an estimate it knew at the time to be inaccurate." The court similarly rejected the hospitals’ challenges to CMS’ estimates of total outlier payments each year. Although the hospitals asserted that CMS failed to identify how its estimates were calculated, the court held that the hospitals were mistaken and that the methodology was available. The court also rejected arguments that CMS inadequately responded to comments, holding that the agency adequately considered and responded to comments, even if the model was not ultimately changed.

The case is No. 13-cv-643 (RMC).

Attorneys: Michihiro M. Tsuda (Squire Patton Boggs) for Lee Memorial Health System f/b/o Lee Memorial Hospital f/b/o Cape Coral Hospital f/b/o Gulf Coast Medical Center, Halifax Community Health System a/k/a Halifax Medical Center and University of Colorado Health at Memorial Hospital f/k/a Memorial Health System Colorado Springs. Caroline Lewis Wolverton, U.S. Department of Justice, for Sylvia Mathews Burwell.

Companies: Lee Memorial Health System; Lee Memorial Hospital; Cape Coral Hospital; Gulf Coast Medical Center; Halifax Community Health System; Halifax Medical Center; University of Colorado Health at Memorial Hospital; Memorial Health System Colorado Springs;Charleston Area Medical Center; Good Samaritan Hospital; Sarasota Memorial Hospital; Valley View Hospital; West Virginia University Hospital; Lee Memorial Health System; Banner Health; Allina Health; Denver Health Medical Center; Billings Clinic Hospital; Parkview Medical Center; Good Samaritan Hospital; Boulder Community Hospital; U.S. Department of Health and Human Services.

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