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From Health Law Daily, July 16, 2013

Hospitals not entitled to adjustment of DSH payment for 1996 cost report

By Paul Clark

The decision by the CMS Administrator to uphold a decision of the Provider Reimbursement Review Board (PRRB) not to include days of disabled patients treated under a state-funded health insurance program in the Medicaid fraction of the Medicare disproportionate share hospital (DSH) calculation for fiscal year 1996 was in accordance with Soc. Sec. Act §1886(d)(5)(F)(vi)(II). (University of Kansas v Sebelius, July 15, 2013, Rothstein, B).

Background. Under Medicare’s inpatient hospital prospective payment system (IPPS), hospitals are reimbursed the portion of their annual operating costs allocated to Medicare under a system of prospectively determined standardized rates. These rates may be adjusted for certain hospitals under certain circumstances. One adjustment is the Medicare DSH adjustment, which goes to hospitals that serve a significantly disproportionate number of low-income persons.

Whether a hospital qualifies for the DSH adjustment is based on the hospital’s “disproportionate low-income patient percentage”—the higher the hospital’s disproportionate low-income patient percentage, the greater DSH adjustment the hospital will receive. The disproportionate low-income patient percentage is determined by dividing the total number of inpatient hospital days for which the treated patient is a Medicaid beneficiary, but who is not entitled to benefits under Medicare Part A, by the total number of inpatient hospital days for that same time period.

HCFA Ruling 97-2. Prior to 1997, the HHS Secretary required that a fiscal intermediary (FI) calculate a hospital’s Medicaid fraction by considering only those Medicaid-eligible patient days for which the hospital was actually reimbursed through Medicaid. It was not sufficient for a patient to simply be Medicaid-eligible in order for the patient’s treatment days to count in a hospital’s Medicaid fraction; Medicaid must have actually paid the hospital for those days. Several courts ruled that the Secretary’s interpretation of the law did not comply with the Congressional intent to supplement payments to hospitals that serve many low-income patients.

In response, HHS issued HCFA Ruling 97-2, which clarified that each Medicaid-eligible patient day should be included in the Medicaid fraction, regardless of whether the hospital received Medicaid reimbursement for that patient day. A further complication was that some states operate two separate health programs for low-income residents (1) a Medicaid approved state plan, (jointly funded by the state and the federal government) and (2) a plan that provides health insurance to low-income individuals who are not eligible for Medicaid (which is funded entirely by the state). On June 12, 1997, the Secretary issued instructions to HCFA Ruling 97-2, and affirmed that only Medicaid-eligible patient days could be included in a hospital’s Medicaid Fraction.

HHS further determined, however, that FIs in some states were still including beneficiary patient days related to state-funded health plans in their Medicaid fractions because states were not distinguishing in their reports to FIs which patients were Medicaid-eligible and which were not. The HHS Secretary agreed to hold harmless those hospitals that had already received Medicare DSH adjustments that were based on the erroneous inclusion of state-only beneficiary patient days in their Medicaid fractions. In particular, FIs were instructed via a Program Memorandum in December 1999 “not to reopen any cost reports for … periods beginning before January 1, 2000 to disallow the portions of Medicare DSH payments attributable to the erroneous inclusion of … state-only …days if the hospital received payment for those days.”

MediKan program. MediKan is a health program operated by the Kansas Department of Social and Rehabilitation Services that provides health insurance to disabled individuals who do not qualify for Medicaid and is funded entirely by the state. The three hospitals involved in this lawsuit sought to have certain state-only beneficiary patient days, or “MediKan days,” included in their Medicaid fractions for fiscal year 1996, pursuant to the hold harmless provision of the Program Memorandum.

There are two types of MediKan days. “Primary” MediKan days are days for which MediKan reimbursed the hospital for the services provided. “Secondary” days are days for which MediKan did not reimburse the hospital for the services furnished. When the FI issued its final Notice of Program Reimbursement for the hospitals for FY 1996, it only included primary days in its calculation of the hospitals’ Medicaid fraction.

While the hospitals conceded that MediKan-eligible patient days, whether primary or secondary, could not be counted in their Medicaid fractions (but for the hold harmless provision in the Program Memorandum), they appealed the FI’s notice of program reimbursement (NPR), arguing that because the FI erroneously included primary MediKan days in their Medicaid fractions, it should have also included the secondary MediKan days because of the hold harmless provisions.

The appeals. The PRRB determined, and the CMS Administrator affirmed, that the FI properly excluded the secondary MediKan days from the hospitals’ Medicaid fractions because the secondary MediKan days were not subject to the 1999 Program Memorandum’s hold harmless provisions. The CMS Administrator further concluded that the secondary MediKan days that were not erroneously paid on the FI’s NPR were not eligible to be included under the hold harmless provision because they were never previously included and were not part of a reopening because they had never been erroneously paid.

The court agreed, concluding (1) that MediKan beneficiaries are not eligible for medical assistance within the meaning of the Medicare DSH adjustment, and as such, MediKan days must be excluded from a provider’s Medicaid fraction; (2) the hold harmless provision does not make MediKan days Medicaid-eligible within the meaning of the Medicare DSH adjustment; and (3) that the hospitals’ contention that the decision of the HHS Secretary to distinguish between primary and secondary MediKan days was arbitrary and capricious was an argument without merit. The court noted, “the Secretary’s determination that the hold harmless provision did not apply to [the hospitals] with respect to the secondary MediKan days is supported by substantial evidence.”

The case number is 11-cv-1382 (BJR).

Attorneys: Kenneth R. Marcus (Honigman Miller Schwartz and Cohn L.L.P.) for University of Kansas Hospital, Christi Regional Medical Center, Stormont-Vail Regional Medical Center. Javier M. Guzman, U.S. Attorney’s Office, for Kathleen G. Sebelius, in her official capacity as Secretary of Health and Human Services.

Companies: University of Kansas Hospital; Christi Regional Medical Center; Stormont-Vail Regional Medical Center

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