News & Insights


March 18, 2019

Health Headlines – March 18, 2019

2020 Federal Government Budget Proposes Reducing Medicare and Medicaid Spending  President Trump’s 2020 budget proposal (the Budget) released last Monday cuts the Department of Health and Human Services’ (HHS) budget by 12% from last year. The Budget requests $87.1 billion for HHS and proposes $1,248.8 billion in net mandatory health savings.  The Budget proposes over a hundred-billion-dollar reduction in Medicare and Medicaid program spending over the next ten years.  Most proposals would disproportionately place the burden on providers to reduce the cost of care.  The Budget proposes extending reductions in Medicaid disproportionate share payments, which are payments that offset safety-net hospitals’ uncompensated care costs.   The Budget supports basing post-acute and long-term care provider payments on patients’ clinical needs instead of the site of service, paying on-campus outpatient hospital departments at the lower physician office rate for certain services, and reducing Medicare payments for bad debt.  In addition, the Budget proposes new measures for improving 340B drug discount program integrity.  The proposal includes setting standards for participation and reporting requirements that may increase the administrative cost of 340B program participation.

The Budget also recommends measures that could affect beneficiary spending.  One proposal encourages state flexibility in administering Medicaid benefits and suggests increasing copayments for non-emergent emergency department visits.  This measure is aimed at reducing unnecessary resource use and shifting care to other settings, such as urgent care centers or primary care providers; however, it may burden providers who are unable to recoup higher co-payments from Medicaid beneficiaries and increase out-of-pocket costs for Medicaid beneficiaries.  Proposed changes to the Medicare Part D drug benefit may cost some beneficiaries more for prescription drugs as well, depending on the type of prescribed medication.

The Budget focuses on combatting Medicare and Medicaid fraud, waste, and abuse, including increasing Medicare’s authority to conduct prior authorizations on certain items and services that are at risk for fraud and abuse.  Industry stakeholders have cautioned that expanding HHS’s administrative authority may place additional burdens on providers, causing delays in payment and increases to administrative costs.

The Budget continues to support the idea of shifting Medicaid funding to a block grant program.  This would mean that states would receive a set amount of money from the federal government each year for Medicaid spending.  The measure would constrain how much money is available for states to spend on Medicaid beneficiaries’ care, which may increase Medicaid beneficiary out-of-pocket spending and lower reimbursement to providers.

Regardless of whether the Budget will pass the House in its current form, providers should prepare for cuts to Medicare and Medicaid spending in the near future.  Budget cuts aimed at government healthcare spending is a recurring theme that is unlikely to disappear, no matter which party has a political majority.

Reporter, Taylor Whitten, Sacramento, +1 916 321 4815,

Eighth Circuit Upholds CMS’s Methodology for Calculating the Volume Decrease Adjustment for Cost Reporting Periods Preceding October 1, 2017 – Last week, the United States Court of Appeals for the Eighth Circuit issued a consolidated opinion for three cases in which it upheld the methodology that CMS used to calculate the volume decrease adjustment (VDA) for qualifying sole community hospitals (SCHs) and Medicare-dependent hospitals (MDHs) for cost reporting periods preceding October 1, 2017.  The three cases were brought by SCHs and MDHs seeking to have their VDA payments for their pre-October 1, 2017 cost reporting periods determined under the more favorable methodology CMS adopted for cost reporting periods beginning after October 1, 2017.  The hospitals claimed that the pre-October 1, 2017 methodology does not comply with the VDA provision of the Medicare statute, and the new methodology does.  The Eighth Circuit affirmed the lower court rulings, which held that the pre-October 1, 2017 methodology is based on a permissible interpretation of the statute.

The Medicare statute requires CMS to make VDA payments to SCHs and MDHs that experience more than a five percent decrease in patient volume in a given cost reporting period (compared to the preceding period) due to circumstances beyond the hospital’s control.  The VDA payment must be the amount “necessary to fully compensate the hospital for the fixed costs it incurs in the period in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.”  42 U.S.C. § 1395ww(d)(5)(D)(ii).  Fixed costs are costs over which management has no control, such as rent, interest, and depreciation, and costs that vary with utilization but are essential for the hospital to maintain operation.  All other costs are variable costs.

CMS’s Provider Reimbursement Manual (PRM) states that VDA payments should be equal to the excess, if any, of the hospital’s inpatient operating costs over its total revenue for inpatient services.  But in 2008, several Medicare Administrative Contractors (MACs) decided that the program guidance is incomplete because it allegedly does not distinguish between fixed and variable costs.  These MACs adopted a modified methodology whereby a hospital’s VDA payment is equal to the excess of its fixed operating costs (i.e., its total costs less its variable costs) over its total revenue for inpatient services.  CMS subsequently adopted this methodology, although it never updated the PRM.

Because the alternative approach compared a hospital’s total revenue to just its fixed costs, it invariably resulted in lower VDA payments, prompting several hospitals to file appeals with the Provider Reimbursement Review Board (PRRB).  The PRRB observed that the new methodology uses an apples-to-oranges comparison because it removes variable costs from the cost side of the calculation without removing revenue attributable to variable costs from the revenue side.  In 2016, the PRRB issued several decisions in which it modified the VDA payment calculation so that the MACs would have to reduce the revenue side by the hospital’s revenue attributable to variable costs.  In other words, under the PRRB’s methodology, a hospital’s VDA payment is equal to its fixed costs less the portion of its revenue attributable to fixed costs.

CMS overturned these decisions, reasoning that the VDA is only meant to compensate hospitals for their fixed costs, and the PRRB’s methodology would compensate hospitals for their variable costs, too.  The hospitals whose favorable PRRB decisions were overturned filed three separate cases in federal court challenging CMS’s decision.  Two cases were filed in the Northern District of Iowa and one was filed in the Southern District of Iowa.

Soon after those cases were filed, CMS issued the inpatient prospective payment system (IPPS) rulemaking for federal fiscal year 2018.  Therein, CMS adopted a modified VDA payment methodology that would apply to cost reporting periods beginning on or after October 1, 2017.  CMS’s new methodology was identical to the PRRB’s, which the agency rebuffed only a few months earlier as being contrary to the statute.  In the rulemaking, CMS maintained that the pre-October 1, 2017 methodology was reasonable, but said that it had decided to adopt the PRRB’s methodology to assuage concerns raised by the provider community that the former methodology did not fully compensate hospitals for their fixed costs.

Not long after the 2018 IPPS final rule was published, the hospitals that had brought their VDA appeals to federal court filed supplemental briefings in which they cited CMS’s reversal in policy as evidence that the pre-October 1, 2017 methodology is contrary to the statute. 

In deciding the cases against the hospitals, the district courts noted that CMS’s decision to modify its policy on a prospective basis does not mean that the former methodology is inconsistent with the statute.  Each court upheld the former methodology, finding that it ensured that hospitals were compensated for their fixed costs, as required by the statute.  The hospitals appealed and briefed their cases on a consolidated schedule before the United States Court of Appeals for the Eighth Circuit.  Last week, the Eighth Circuit issued an opinion with a discussion section of less than four pages in which it affirmed all three decisions on virtually the same reasoning used by the district courts.  Unity HealthCare v. Azar, No. 18-1316, 2019 WL 1118668 (8th Cir. Mar. 12, 2019).

Although the decision is only binding in states within the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, North Dakota, South Dakota and Nebraska), it clearly is a setback for all hospitals that have unresolved VDA payment determinations for periods preceding October 1, 2017.

A copy of the Eighth Circuit’s opinion is available here.

Reporters, Daniel Hettich, Washington, D.C., +1 202 626 9128,, and Alek Pivec, Washington, D.C., +1 202 626 2914,


King & Spalding Reception at the American Health Lawyers Association (AHLA) Institute on Medicare and Medicaid Payment IssuesPlease join us on March 21, 2019, for a reception hosted by King & Spalding at AHLA’s Institute on Medicare and Medicaid Payment Issues in Baltimore.  The reception will be held in the Laurel Room on the 4th Floor of the Baltimore Marriott Waterfront from 7:00 p.m. to 9:00 p.m. ET.  To register for our reception, please click here.

King & Spalding Reception at the Health Care Compliance Association’s (HCCA’s) 23rd Annual Compliance Institute – Please join us on April 7, 2019, for a reception hosted by King & Spalding at HCCA’s 23rd Annual Compliance Institute in Boston.  The reception will be held at the Top of the Hub from 6:00 p.m. to 8:00 p.m. ET and will feature iconic views of the Boston skyline, including Fenway Park.  For more information, please click here.  To register for our reception, please click here.