News & Insights


October 1, 2018

Health Headlines – October 1, 2018

New Hampshire Hospital Association v. Azar is Another Win for Hospitals in Medicaid DSH Reimbursement Litigation – On August 25, 2018, the U.S. District Court for the District of New Hampshire in New Hampshire Hospital Association v. Azar gavehospitals another victory in their claims that CMS unlawfully reduces Medicaid Disproportionate Share Hospital (DSH) payments to hospitals by requiring them to calculate their uncompensated care costs to include an offset of payments for patients who were “dually eligible” for Medicaid and either private commercial insurance or Medicare.  Earlier this year, the U.S. District Court for the District of Columbia vacated CMS’s 2017 Final Rule codifying this policy.  The Secretary appealed that decision to the U.S. Court of Appeals but continued defending the 2017 Final Rule in other districts.  In this present instance, the U.S. District Court for the District of New Hampshire found that the nationwide vacatur rendered the issue moot and dismissed the case.   The dismissal notes that CMS no longer plans to enforce the 2017 Final Rule while the vacatur remains in effect.  Though CMS does not appear to have totally abandoned its position, hospitals are well positioned to argue for Medicaid DSH reimbursement without feeling the reductions of CMS’s policy to count commercial and Medicare payments for dual eligibles toward the hospital-specific limit for Medicaid DSH.


The federal Medicaid statute sets a hospital-specific limit on the amount of Medicaid DSH funding a hospital can receive.  The limit is calculated as the net costs of care to Medicaid eligible and uninsured individuals.  The Medicaid statute requires hospitals to calculate “net costs” by offsetting payments received under the Medicaid program.  The controversy in these cases is whether hospitals are also required to offset payments received by commercial insurers or Medicare for patients who are dually eligible.  Offsetting these payments will lower a hospital’s limit and therefore reduce the amount of Medicaid DSH funds it can receive. 

When CMS first promulgated regulations setting out the Medicaid DSH payment calculation in a 2008 final rule, it did not require offsets for commercial and Medicare payments for dually eligible payments.  Since the 2008 final rule, however, CMS has twice attempted to change this policy and require hospitals to report payments from commercial insurers or Medicare for dually eligible patients.  In both instances, federal courts have ruled in favor of providers. 

In the first instance, CMS issued guidance in the form of Frequently Asked Questions (FAQs) in 2010, stating in FAQs 33 and 34 that hospitals were to include in the hospital specific limit both private insurance payments received for commercial/Medicaid duals and Medicare payments for Medicare/Medicaid duals.  When CMS attempted to enforce this policy from the FAQs, several federal courts ruled that this new policy was not adopted in accordance with lawful procedure and is, therefore, invalid.

In reaction to these losses, CMS promulgated a 2017 final rule codifying into regulation the policy from FAQs 33 and 34.  See 82 Fed. Reg. 16114 (April 3, 2017).  Hospitals have also successfully challenged the 2017 Final Rule in federal court.  In particular, the U.S. District Court for the District of Columbia in Children’s Hospital Association of Texas v. Azar found that the 2017 Final Rule violated the federal Medicaid statute and vacated the rule on a nationwide basis.  See, No. 17-cv-844 (D.D.C. Mar. 6, 2018).  Federal case law supports the conclusion that when a federal court vacates a rule, it is as if the rule was never in effect, and the agency’s prior policy is effective. 

The current case

In New Hampshire Hospital Association, the Secretary attempted to defend the 2017 Final Rule in front of the U.S. District Court for the District of New Hampshire while the Children’s Hospital decision is on appeal in the D.C. Circuit.  Judge McCafferty, however, dismissed the case by finding that “the ruling in Children’s Hospital vacating the Final Rule renders the parties’ dispute moot.”  In other words, it is no longer in effect.  In doing so, the court relied on the Secretary’s filings which acknowledged that the Children’s Hospital vacatur order “prevents application of the Final Rule” and that CMS “will not enforce the rule so long as the Children’s Hospital [] decision remains operative in its current form.”

What this case means for hospitals

Many hospitals are in the midst of receiving audit results from states or their contractors, like Myers and Stauffer, that seek to recoup Medicaid DSH funds relying upon CMS’s heavily criticized policy set forth in the FAQs and the 2017 rule that has now been vacated.  Similarly, many hospitals are in the process of reporting cost and payment data to states for the purposes of calculating their hospital-specific DSH limits for future years.  Hospitals in these positions now have some additional options to consider as a result of the New Hampshire Hospital Association development and the Secretary’s admission that he is no longer enforcing the 2017 rule while the D.C. Circuit case is pending on appeal.  These decisions are difficult to manage, however, in light of the fact that the Secretary has still not conceded that he has authority to require hospitals to report commercial and Medicare payments for purposes of calculating the hospital-specific limit.

The court opinion is available here.

Reporters, Mark D. Polston, Washington, D.C., + 202 262 5540,, and Michael L. LaBattaglia, Washington, D.C., + 1 202 262 5579,

Office of Inspector General Announces New Fraud Risk Indicator Tool – The Office of Inspector General (OIG) has announced the launch of a new tool, which OIG has titled the “Fraud Risk Indicator.” A preliminary page for the Fraud Risk Indicator is available here on OIG’s website. OIG’s stated purposes for the tool are to provide guidance as to how it has evaluated risk in settling False Claims Act (FCA) cases and publicize information about where FCA defendants fall on OIG’s risk spectrum for the benefit of patients, healthcare industry professionals and other stakeholders who may consider such information relevant. Greg Demske, Chief Counsel to the Inspector General, provided details of OIG’s plans for the Fraud Risk Indicator during last week’s AHLA Fraud and Compliance Forum.

Mr. Demske explained that OIG will use the Fraud Risk Indicator to track resolutions that fit within each of the five categories of determinations on the risk spectrum bar set forth in OIG’s 2016 guidance for implementing exclusion authority. Those categories are as follows:

  • Highest Risk – Exclusion: Parties that OIG has excluded from Federal healthcare programs.
  • High Risk – Heightened Scrutiny: Parties that OIG has determined to pose “significant risk” to Federal healthcare programs because these parties have refused to enter into CIAs despite OIG’s determination that additional oversight is needed.
  • Medium Risk – CIAs: Parties that have signed CIAs with OIG in settling investigations. Mr. Demske noted that OIG intends to list older CIAs that have already closed.
  • Lower Risk – No Further Action: Parties with cases that have been closed without OIG seeking exclusion or requiring a CIA based on OIG’s determination that they present a “relatively low risk” to Federal healthcare programs.
  • Low Risk – Self-Disclosure: Parties that have self-disclosed potential fraud and abuse to OIG.

Describing the rationale for the new tool, Mr. Demske stated that visibility into where an entity stands has historically been opaque where there has been an FCA settlement without a CIA. More specifically, Mr. Demske explained, parties have been unable to know whether such an entity belonged on the high-risk end of the spectrum—having refused to enter a CIA—or on the opposite end of the spectrum—having been determined by OIG to be low risk. Mr. Demske indicated that the Fraud Risk Indicator will provide more transparency in this regard.

Please click here to access the new Fraud Risk Indicator site.

Reporter, J. Gardner Armsby, Atlanta, +1 404 572 2760,

D.C. District Court Issues Favorable Decision in Section 1115 Waiver DSH Case -- On September 28, 2018, the United States District Court for the District of Columbia issued a favorable decision for hospitals appealing the CMS Administrator’s disallowance of certain Medicaid section 1115 waiver days from their Medicare DSH payment calculations.  See HealthAlliance Hosps. v. Azar, No. 17-cv-917 (KBJ) (D.D.C. Sept. 28, 2018).

The state of Massachusetts operates a Medicaid managed care program known as MassHealth.  Under a section 1115 waiver demonstration program known as the Commonwealth Care Health Insurance Program, Medicaid managed care recipients were provided premium assistance for their coverage.  That assistance was funded through federal Medicaid matching funds and Massachusetts Safety Net Care Pool funds.  The terms of the section 1115 waiver also allowed the state to provide coverage to a low-income, expansion population that would otherwise not be eligible for Medicaid (and the associated federal matching payments).

Certain Massachusetts hospitals claimed the inpatient days associated with individuals eligible for and receiving assistance under the Commonwealth Care program.  The Medicare Administrative Contractor (MAC) disallowed the days, and the hospitals appealed to the Provider Reimbursement Review Board (the Board).  Following hearing, the Board overruled the MAC and concluded that the days attributable to patients receiving Commonwealth Care assistance, a CMS-approved section 1115 waiver demonstration program, should be included in the numerator of the Medicaid fraction of the Medicare DSH calculation.  See Southwest Consulting UMass Mem’l Health Care & Steward Health 2009 DSH CCHIP Sec. 1115 Waiver Days Grps. v. Nat’l Gov’t Servs, Inc., PRRB Dec. No. 2017-D4, at 6 (Jan. 27, 2017).  The Board’s decision is available here.

The CMS Administrator then reversed the Board’s determination, finding that the statutory definition of “medical assistance” did not include premium payment, and that the Commonwealth Care recipients should not be counted for the purposes of DSH.  See Southwest Consulting UMass Mem’l Health Care & Steward Health 2009 DSH CCHIP Sec. 1115 Waiver Days Grps. v. Nat’l Gov’t Servs, Inc., PRRB Dec. No. 2017-D4, Adm’r Dec. at 18 (Mar. 21, 2017).  The Administrator’s decision is available here.

The hospitals filed an appeal to federal court following the Administrator’s unfavorable determination.  Plaintiffs argued that the Secretary’s actions (through his Administrator) constituted a violation of the Administrative Procedure Act and were contrary to the plain language of the Secretary’s DSH regulation at 42 C.F.R. § 412.106 and the Secretary’s intent at the time of approving the section 1115 waiver demonstration project.

Following briefing on cross-motions for summary judgment, the court issued an order stating “HHS erred when it refused to count the patient days associated with Massachusetts’ Commonwealth Care program in the numerator of the Medicaid fraction when determining a hospital’s entitlement to a [DSH] adjustment under the Medicare program.”  It then remanded the issue back to the Secretary for reconsideration of the CMS Administrator’s decision “in accordance with th[e] Court’s reasoning in its forthcoming Memorandum Opinion.”  As of the time of this writing, the court has yet to issue that opinion.  The court’s order is available here.

Reporter, Elizabeth Swayne, Washington, D.C., +1 202 383 8932,

Supreme Court Will Review Allina II DSH Part C Decision to Resolve Circuit Split on Medicare Rulemaking Requirements – On September 27, 2018, the U.S. Supreme Court granted certiorari to review the D.C. Circuit’s decision in favor of hospitals in Allina Health Services, et al. v. Price, 863 F.3d 937 (D.C. Cir. 2017) (Allina II).The Court’s review will focus on whether the Medicare Act requires the Department of Health and Human Services (HHS) to conduct notice-and-comment rulemaking before providing instructions to a Medicare Administrative Contractor (MAC) making initial determinations of payments due under Medicare.

The substantive dispute in Allina II is whether patient days associated with patients enrolled in a Medicare Advantage plan under Medicare Part C (i.e., Part C days) are nonetheless days entitled to benefits under Medicare Part A for purpose of disproportionate share hospital (DSH) payments. In Allina I, the D.C. Circuit invalidated on procedural grounds the Secretary’s 2004 regulation in which the Secretary adopted a policy to treat Part C days as days entitled to benefits under Part A. See Allina Health Services v. Sebelius, 746 F.3d 1102, 1107-09 (D.C. Cir. 2014). Allina II presented the follow-up question of whether the Secretary could, in the absence of a regulation, continue to apply the same policy, or whether the Secretary was required to undertake new rulemaking before doing so.

The D.C. Circuit, in a decision issued July 25, 2017 authored by Judge Brett Kavanaugh, found that the law “required HHS to engage in notice-and-comment rulemaking before deciding to include Part C days in the 2012 Medicare fractions.” A primary factor in the court’s decision was its holding that the Medicare Act creates a more stringent standard for notice-and-comment rulemaking than that imposed by the Administrative Procedure Act. In particular, the D.C. Circuit held that the Medicare Act does not contain an exception to notice-and-comment rulemaking for “interpretative rules.” In reaching that conclusion, the court created an ostensible split with the First, Sixth, Eighth, and Tenth Circuits. The Supreme Court will now resolve that split.

King & Spalding will publish updates on the Supreme Court’s consideration and decision as they become available over the coming months.

Click here to read the petition for certiorari and here to read the order granting certiorari in Azar v. Allina Health Services, et al., No. 17-1484. The D.C. Circuit opinion is available here.

Reporter, Lee Nutini, Atlanta, +1 404 572 3533,

CMS Begins Audits of Worksheet S-10 for FY 2015 Cost Reports -- In the Inpatient Prospective Payment System (IPPS) rulemaking for fiscal year (FY) 2019, the Centers for Medicare and Medicare Services (CMS) announced that it would begin auditing the charity care and bad debt costs reported by hospitals on Worksheet S-10 of their Medicare cost reports starting in fall of 2018.  83 Fed. Reg. 41144, 41424 (Aug. 17, 2018).  It would appear that CMS is delivering on that promise.  In the past month, hospitals across the country have reported receiving requests from Medicare Administrative Contractors (MACs) to answer questions and produce data in support of the charity care and bad debt reported on Worksheet S-10 of the cost reports they filed in FY 2015.  Hospitals would be wise not to take these audits lightly, as they will inevitably affect Medicare reimbursement in the near future.

Charity care and bad debt costs reported in Worksheet S-10 are used to determine the uncompensated care component of the Medicare Disproportionate Share Hospital (DSH) payments to hospitals.  Each year, as required under the Affordable Care Act (ACA), CMS estimates the aggregate dollar amount that hospitals would have received in Medicare DSH payments under the payment methodology that preceded the ACA.  That amount is then reduced by 25 percent (Factor 1), reduced again by the percent change in uninsured individuals (Factor 2), and then divided among eligible hospitals based on their proportionate share of uncompensated care (Factor 3).  In FY 2018, CMS began using charity care and bad debt costs reported on Worksheet S-10 to measure each qualifying hospital’s proportionate share of uncompensated care.  That is, CMS determines a given hospital’s Factor 3 by comparing the charity care and bad debt costs reported by the hospital over a span of three years to the charity care and bad debt costs reported by other hospitals during that same period. 

The Worksheet S-10 data from FY 2015 will be one of the three years of data used to determine Factor 3 for qualifying hospitals in FYs 2019 through 2021.  The Worksheet S-10 audits for FY 2015 should only affect hospitals’ Factor 3s for FYs 2020 and 2021.  The Factor 3s for FY 2019 were finalized in August 2018.  CMS appears to be motivated to complete the Worksheet S-10 audits for FY 2015 in time for the FY 2020 rulemaking.  In all reported cases, hospitals selected for audit were given only two weeks to respond to the MAC’s questions and requests for data, which is a remarkably short timeframe given the breadth of the information requested. 

MACs are asking hospitals to explain how the charity care they provided and reported was consistent with their financial assistance policies.  In addition, hospitals must explain how they identified the charity care and bad debt they reported on Worksheet S-10.  Then hospitals have to produce up to twenty data points for each charity care charge and bad debt expense so identified, including information about the patient, other payors, dates of service, revenue codes, write off date, and patient payments.  Hospitals are also required to reconcile the bad debts from their financial accounting records to the bad debts reported in Worksheet S-10.  In addition, hospitals are asked to provide a comparison of their FY 2014 and FY 2015 charity care charges from their audited financial statements and explain any significant changes between those years. 

Hospitals selected for audit should tread carefully when preparing their responses to the MAC’s questions and requests for data, because it is not clear at this point the extent to which hospitals will have opportunities to communicate with contractors or informally appeal the adjustments they make to the costs reported on S-10.  Any answer or production that does not fully address the MAC’s questions or requests could, therefore, result in an unfavorable adjustment that could be “baked in” to the hospital’s Factor 3 for the next two years.   

Reporter, Alek Pivec, Washington, D.C., +1 202 626 2914,

Also In the News

State Attorneys General Roundtable Discussion – King & Spalding will host a roundtable discussion on Tuesday, October 2, 2018, at 4:30 p.m. ET in the Washington, D.C. office about the increasingly active and consequential role state Attorneys General are assuming in investigating and regulating businesses throughout the country, including in the healthcare industry.  State Attorneys General are investigating healthcare fraud and abuse cases, particularly those involving opioids and the Affordable Care Act, more and more frequently.  They routinely combine efforts and resources to create multistate investigations, often hand-in-hand with the Department of Justice, other federal agencies or high-profile private practitioners. Join King & Spalding to hear directly from current and former state Attorneys General about how this approach has raised the stakes for entire industries, including the healthcare industry, and about what corporations can do to mitigate risks and respond effectively. To register, click here

Health Care Fraud Enforcement Priorities in 2018 and Beyond Roundtable Webinar -- King & Spalding will host a webinar on Thursday, October 25, 2018, from 1:00 p.m. – 2:00 p.m. ET focused on the government’s priorities in health care fraud enforcement – from mainstay issues like managed care and “short stays,” to new theories of enforcement under the ACA and the DOJ “PIL” Task Force. This webinar is prompted by the latest trends in False Claims Act cases and investigations, and the panel will discuss how these developments may impact a range of health care providers. The current enforcement environment requires careful thought about areas of exposure, opportunities to mitigate risk and how to react if investigated. The panel will discuss lessons learned from recent enforcement activity. To register, click here.