News & Insights


February 12, 2024

Health Headlines – February 12, 2024

Federal Court Sides with Hospitals in Dispute Over Medicare Payment for Nursing and Allied Health Programs

On February 9, 2024, Judge Trevor McFadden of the United States District Court for the District of Columbia issued a decision holding that CMS miscalculated the Medicare reimbursement owed to five plaintiff hospitals for the costs associated with their nursing and allied health (NAH) educational programs. Mercy Health-St. Vincent Medical Center d/b/a Mercy St. Vincent Medical Center v. Becerra, Case No. 22-cv-3578-TNM (D.D.C. Feb. 9, 2024). The plaintiffs, all hospitals with reputable NAH programs, alleged that CMS ignored its own regulation in calculating their NAH payments. The Court agreed stating, “The hospitals are right, and it is not even close.” King & Spalding represented the five hospitals in the suit, which included St. Vincent Medical Center of the Mercy Health system, Beth Israel Medical Center of the Mount Sinai Health system, Brockton Hospital, Bryan Medical Center, and the Nebraska Medical Center.

Many hospitals operate educational programs in nursing and various allied health disciplines. The Medicare program reimburses hospitals for the “net cost” incurred in operating NAH programs in recognition of the value that these programs bring to the healthcare workforce and to Medicare beneficiaries.

CMS has adopted regulations governing how to calculate the net costs of NAH programs to determine reimbursement. The starting point of that calculation is “total costs” that are “directly related to” the program, which consists of the direct costs of the program, such as trainee stipends and teacher salaries, and indirect program costs, including the additional overhead costs associated with operating a NAH program. Total costs are offset by tuition the hospital collects from students enrolled in the program. The remainder, if any, is the net cost of the program, which is the basis for Medicare payment. Thus, the regulatory formula for calculating the net costs of NAH programs can be expressed as follows:

total (direct + indirect) costs – tuition = net costs

CMS uses the Medicare cost report to calculate the net costs of NAH programs. However, the methodology reflected in the cost report differs from the regulation. The cost report calculates net costs by deducting tuition from direct costs (instead of total costs) and adding indirect costs to what remains as follows:

direct costs – tuition + indirect costs = net costs

At first blush one might expect the cost report methodology to produce the same result as the regulation because the order of operations does not change the result of addition and subtraction. But the plaintiffs in St. Vincent begged to differ because of how Medicare determines the indirect costs of NAH programs.

CMS employs a process known as “cost finding” to allocate indirect costs to the areas of the hospital they support, such as the emergency room, the nursery, and NAH programs. Each category of indirect costs (e.g., capital depreciation, housekeeping) is apportioned based on a statistic that measures how much it benefits other “departments” in the hospital. For example, the depreciation cost of a building is allocated based on square footage. If the emergency room department occupies 10,000 square feet of a 100,000 square foot hospital, 10% of the depreciation cost is allocated to the emergency room. 

The plaintiffs in St. Vincent took exception with how the cost report allocates one category of indirect costs—administrative and general (A&G) costs—to their NAH programs. A&G costs include the cost of executive staff, legal, and accounting services, and are allocated based on the “accumulated costs” of each department. A department’s accumulated costs consist of its direct costs plus any indirect cost allocations it receives prior to the allocation of A&G costs. Put simply, the amount of A&G costs that a department receives is directly proportional to its accumulated costs. 

The cost report puts NAH programs at a disadvantage in the A&G allocation. This is because the cost report deducts tuition from direct costs prior to the cost-finding process. As a result, the accumulated costs of NAH programs are diluted because they are calculated net of tuition, producing a smaller share of A&G costs for the programs.

This is not a wash for hospitals. Although the other departments in the hospital pick up the A&G costs that are diverted from NAH programs, nearly all other departments are reimbursed under the inpatient and outpatient prospective payment systems, regardless of costs incurred. NAH programs are among the only hospital departments reimbursed on a cost basis. 

The St. Vincent plaintiffs filed appeals with the Provider Reimbursement Review Board (the Board) challenging the calculation of their NAH payments. In proceedings before the Board, the plaintiffs argued that the regulation establishes an order of operations that requires deducting tuition after the cost finding process is complete, since only at that point have total (direct and indirect) costs been determined. 

The Board upheld the calculation of the plaintiffs’ NAH payments, finding that the cost report instructions supported deducting tuition before the cost finding process. The Board also faulted the plaintiffs for failing to request an alternate methodology for allocating A&G costs prior to bringing their challenge.

The plaintiffs appealed the Board’s decision to the D.C. District Court. Before the court, CMS argued in defense of the Board’s decision that the regulation requires deducting tuition from costs that are “directly related” to the program, which in the agency’s view includes direct costs but not indirect costs identified in the cost-finding process like A&G. CMS also contended that tuition is a form of “community support” that must be deducted from “directly related” costs before indirect costs are determined.

The D.C. District Court ruled that the text of the regulation says that CMS cannot deduct tuition until after determining a hospital’s total (direct and indirect) costs, meaning that CMS must permit hospitals to allocate A&G costs based on the accumulated costs of their NAH programs before deducting tuition. “This order of operations comes straight from the regulation—one [CMS] devised, and one [CMS] must follow.”

Regarding the Board’s decision, the Court acknowledged that the cost report requires a different approach but held that the regulation controls because it carries the force and effect of law, and the cost report does not. The Court also found that it was not necessary for providers to request an alternate cost finding methodology because they “merely seek to get paid in accordance with [CMS’s] own regulation.” 

Turning to CMS’s arguments, the Court disagreed that the regulation supports deducting tuition from direct costs. The Court pointed out that tuition must be deducted from “total costs” that are “directly related to” NAH programs, which the regulation defines as including indirect costs like A&G. The Court also ruled that even if tuition were community support, that would not alter the regulatory command that tuition must be deducted from total costs.Finding that CMS incorrectly calculated the plaintiffs’ NAH payments, the Court remanded the case back to the Board for further proceedings consistent with the Court’s findings. CMS has until April 9, 2024, to file an appeal to the D.C. Circuit Court of Appeals. 

A copy of the D.C. District Court’s decision is available here.Reporter, Alek Pivec, Washington D.C., +1 202 626 2914,