CMS is Dealt Yet Another Blow in First Circuit Medicaid DSH Case

Last summer we wrote about an interesting court case involving payments to disproportionate share hospitals (DSH) under the Medicaid program.  It’s one of the hottest issues in Medicaid right now; seven courts have invalidated the CMS policy that is at issue.  The most recent decision came last week, in the US Court of Appeals for the First Circuit, involving a challenge brought by New Hampshire hospitals.

A couple of weeks ago we promised you a tutorial on Medicaid DSH.  That’s coming soon but for right now let’s dive into these court cases.

Medicaid DSH payments are supplemental payments made to hospitals in recognition of the fact that Medicaid is a poor payer and that sometimes, Medicaid doesn’t pay the full cost of care.  Congress has recognized for nearly 40 years that some hospitals – especially those that treat a disproportionate share of low-income patients – are deserving of special payment considerations.  In 1981, Congress ordered states to “take into account” the unique needs of DSH hospitals.  Over that decade, Congress specified with increasing precision how states should meet this mandate.

But what Congress can give, it can take away (or at least limit what it gives).  And in 1993, Congress told states that as they “take into account” the unique needs of DSH hospitals, they can’t pay them more than their costs that they incur in treating Medicaid or uninsured patients.

Sounds reasonable, right?  And it sounds simple:  if the Lord Have Mercy Hospital provides care to Medicaid beneficiaries that costs $3.5 million, and Medicaid only pays the hospital $2.5 million, then it can get up to $1 million in DSH payments under the 1993 amendments, but no more.

But what if some of those Medicaid beneficiaries also have Medicare coverage because they’re disabled, or have end stage renal disease, or are 65 years of age or older (so-called dual eligibles)?  What if they have some private health insurance coverage?  And what if, on behalf of those patients, Medicare pays the hospital $300,000?  Were the hospital’s costs $3.5 million, or were they $3.2 million?

It turns out that it took CMS over a decade to begin to implement the cost cap.  In 2008, CMS issued a regulation requiring enhanced reporting by states, including information on Medicaid uncompensated care.  This regulation was issued in the usual way:  a proposed rule was published in the Federal Register, the agency sought comments, and they published the final rule.

Then, two years later, because CMS had never really defined the term “costs incurred” by DSH hospitals, the agency decided to address this question about dual eligible patients.  But here’s the thing:  they never addressed the question by publishing a new rule, or a revised rule, or even putting a statement in the Federal Register.  They posted some frequently asked questions (FAQs) on the CMS website.

If you’re reading this and you’re an attorney who took administrative law in law school, you’re probably thinking right now:  “Uh oh.”

The FAQs directed state Medicaid agencies that, when they audited DSH hospitals for compliance with the cost protocol, they needed to deduct Medicare payments and private insurance payments from the DSH cap.  You can see from the example above why that’s a big deal.  It would dramatically reduce the DSH payments that states would be able to make.  Some hospitals might be faced with a payback.

Last year, in our post about the New Hampshire hospital case, we said that the district court invalidated the FAQs because CMS had not gone through the proper notice and comment rulemaking process.  Last week, the First Circuit agreed with that decision.  The court specifically did not address the substance of the FAQs:  only that the agency didn’t follow the proper procedure in issuing them.

The First Circuit’s opinion is just the latest in a string of decisions prohibiting CMS from enforcing the FAQs.  All of these decisions found that the FAQs were procedurally incorrect under the APA:

You might be thinking that CMS simply has to jump through the appropriate procedural hoops to formalize the rule set forth in the FAQs, right?  Not so fast.  Last year, after receiving several of the above adverse decisions, and in the midst of ongoing litigation over the FAQs, CMS did issue a final rule implementing its DSH cap policy.

But that rule is not without criticism and legal challenge.  Some disproportionate share hospitals have included the final rule in their ongoing challenges to the DSH cap policy FAQs, and some have brought new suits to challenge the final rule alone.  The results?  The final rule is also failing in the face of judicial scrutiny.  In the past two months, two district courts have found that the final rule is inconsistent with the Medicaid Act, and therefore in violation of the APA.  See Missouri Hospital Association v. Hargan, 2018 U.S. Dist. LEXIS 22024 (W.D. Mo. Feb. 9, 2018); Children’s Hosp. Ass’n of Tex. v. Azar, 2018 U.S. Dist. LEXIS 35962 (D.D.C. Mar. 6, 2018).

In total, seven cases in just the last year have invalidated either the FAQs or the final rule.

CMS is on a bit of a losing streak.  As a result, disproportionate share hospitals might be inclined to breathe a sigh of relief.  However, this battle between DSH hospitals and CMS is not over yet.   CMS has until early May to file a notice of appeal in the D.C. case, and late May to file a notice of appeal in the Missouri case.  Therefore, we may not have more information on CMS’s chosen course of action until mid to late May.  And of course, CMS could ask Congress to clarify the statute.  Whatever happens, it’s an important issue and one we will be continuing to watch here.


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