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Health Headlines – April 7, 2014

07 Apr 2014

D.C. Circuit Rules that the Medicare DSH Rule Requiring the Inclusion of Part C Days in the “Medicare Fraction” in the DSH Formula Must Be Vacated but the Effect of the Court’s Decision Is Uncertain – Last week, the United States Court of Appeals for the District of Columbia Circuit upheld the ruling of a federal district court vacating HHS’s 2004 Disproportionate Share Hospital (“DSH”) rule regarding Part C days.  The D.C. Circuit held that the district court properly determined that HHS “did not provide adequate notice and opportunity to comment before promulgating its 2004 rule,” and its failure to do so was not harmless error.  The Court, however, reversed the lower court’s order directing the agency to pay hospitals under the pre-existing policy of including dual-eligible Part C days in the Medicaid fraction in the DSH formula and not in the Medicare fraction.  The D.C. Circuit left open the possibility that HHS could achieve the same result as its void rule through “adjudication.”  At this time, HHS has not indicated whether it will attempt to achieve the same result through adjudication or simply pay hospitals under its prior policy.   Thus, the immediate impact of the decision is not clear at this time, and there may be more years of litigation ahead on this issue depending on how HHS reacts to the Court’s decision.

The Medicare DSH computation has two elements:  the “Medicaid fraction” which is the percentage of Medicaid days of total days; and the “Medicare fraction” which is the percentage of SSI patient days of Medicare days.  Under CMS’s policy announced in 2004 and first implemented in the settlement of 2007 cost reports, Medicare Advantage (Part C) days were included in the denominator of the so-called “Medicare fraction” in the DSH formula and dual-eligible Part C and Medicaid days were included in the numerator of that fraction.  Previously, dual-eligible Part C patient days were included in the Medicaid fraction.  The result of CMS’s policy change was to dilute the Medicare fraction, and to reduce Medicare DSH payments.  For some hospitals, the reduction was substantial.  

Regardless of what HHS decides to do for prior years in light of the D.C. Circuit Court’s decision, HHS will certainly take the position that as of October 1, 2013, Part C days must be included in the “Medicare fraction” in the DSH formula because it promulgated a rule in the most recent hospital IPPS rulemaking that was effective October 1, 2013. 

View a copy of the D.C. Circuit’s opinion by clicking here.

Reporter, Ramsey Prather, Atlanta, + 1 404 572 4624,

Third Circuit Rules General Assistance Days May Be Excluded from DSH Payments – The Third Circuit recently issued an opinion in Nazareth Hospital et al. v. Sebelius, No. 13-2627, holding that Medicaid pilot projects, known as Section 1115 waiver projects, were different enough from the State of Pennsylvania’s General Assistance (“GA”) plan to warrant being treated differently for purposes of calculating Disproportionate Share Hospital (“DSH”) payments.  The opinion overturns a decision by the U.S. District Court for the Eastern District of Pennsylvania that there was no good basis for the distinction, which had breathed life into the argument that general assistance days should be included in the DSH Medicaid fraction.   

The District Court focused on the fact that the Secretary approved Pennsylvania’s GA plan as part of the State Medicaid plan (specifically, in amendment SPA 94-08, which sets forth Pennsylvania’s proposal to distribute Medicaid DSH payments) just as she approves Section 1115 waiver projects, and that Section 1115 waiver projects and the GA plan covered essentially the same patients and services.  Thus, there was no rational basis for distinguishing the two, and to do so would result in some hospitals unfairly losing out on DSH money despite treating essentially the same people.

In overturning the District Court, the Third Circuit found the purpose of Section 1115 waiver programs as compared to the GA plan, as well as the Secretary’s amount of control and oversight of a Section 1115 waiver project, to be rational distinctions.  According to the Third Circuit, while the Secretary did review the GA plan, she reviewed it for a different purpose—to ascertain how the State of Pennsylvania intended to disburse Medicaid DSH payments, not to determine whether the objective of the Medicaid statute would be promoted by its authorization, as would be the case in reviewing a Section 1115 waiver project. 

As for the similarity in patients and plans, the Third Circuit stated that even if the similarities were accurate, they were irrelevant: “While people and services may be the same, they can be treated differently for purposes of reimbursement if the reason for the differing treatment is rational.  The Secretary has described relevant distinctions between patient days under the state GA plan and those under a Section 1115 waiver project, such that she rationally excluded the former from Medicare DSH calculations and included the latter.”    

For a copy of the Third Circuit opinion, please click here.  For a copy of the District Court decision, please click here

Reporter, Kerrie S. Howze, Atlanta, +1 404 572 3594,

King & Spalding Files Court Challenge to 0.2 Percent IPPS Rate Reduction – On March 25, 2014, King & Spalding filed a complaint in the United States District Court for the District of Columbia challenging CMS’s 0.2 percent reduction to FY 2014 IPPS payment rates associated with the two-midnight rule.  When proposing and finalizing the two-midnight rule, CMS maintained that the new rule would lead to a net increase of 40,000 inpatient admissions each year, which in turn required a 0.2 percent reduction in IPPS payment rates to ensure budget neutrality.  This appeal challenges CMS’s rate reduction, asserting that CMS relied on inaccurate and incomplete data that was not fully disclosed to stakeholders during the comment period.  Indeed, King & Spalding submitted comments to this effect during the rulemaking arguing that CMS’s publicly available claims files showed that the new standards would result in a net decrease in inpatient admissions, and thus a payment rate increase was required to ensure budget neutrality. 

This appeal, involving 24 IPPS hospitals from all regions of the country, was originally filed before the Provider Reimbursement Review Board in January.  The Board determined in a March 12, 2014 decision that the appeal was jurisdictionally proper but that the Board was without the legal authority to overturn the rate reduction, and thus granted expedited judicial review. 

The case is Athens Reg. Med. Ctr. v. Sebelius, Case No. 1-14-cv-503 (RBW) (D.D.C.).

Reporters, Mark Polston, Washington, D.C., + 1 202 626 5540,, and Christopher Kenny, Washington, D.C., + 1 202 626 9253,

Also in the News

CMS to Provide Public Access to Physician Payment Data – In a recent post on its official blog, CMS announced it will provide “unprecedented access” to information on services delivered by individual physicians and certain other health care professionals in 2012, as well as the amount Medicare paid them for those services.  The CMS blog post followed letters to the American Medical Association and Florida Medical Association summarizing the same policy.  While limitations to what is released will take into account patient privacy, CMS noted that the public’s interest in the physician information outweighs the physicians’ privacy interest with respect to the payment data CMS plans to make publicly available. 

Obama Signs the Protecting Access to Medicare Act of 2014 – On April 1, 2014, President Obama signed into law the “Protecting Access to Medicare Act of 2014.”  Among other changes, the Act provides for (1) a 12-month extension for Medicare physician payments; (2) the delay of the “two-midnight” policy, prohibiting recovery audit contractors from conducting reviews of inpatient claims with dates of admission October 1, 2013 through March 31, 2015, unless there is “evidence of systematic gaming, fraud, abuse, or delays in the provision of care by a provider of services;” and (3) the delay of transition from ICD–9 to ICD–10 code sets until at least October 1, 2015.

This bulletin provides a general summary of recent legal developments. It is not intended to be and should not be relied upon as legal advice.

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