Court Case Involving Massachusetts Health Care Law Shows Relationship Between Medicare Payments and Medicaid

In 2006, former Massachusetts Governor Mitt Romney signed Chapter 58 of the Massachusetts Acts of 2006 into law.  Chapter 58 was designed to ensure that all Massachusetts residents would have access to some form of health insurance, and it accomplished this through reforms to the individual insurance market; subsidies to purchase health insurance; and an expansion of the Massachusetts Medicaid program, known as “MassHealth.”  Many observers have suggested that the enactment of Chapter 58 in Massachusetts paved the way for enactment of the Affordable Care Act at the federal level four years later (although Governor Romney strenuously denied this during his campaign for President in 2012).

We call attention to this law not because of the politics, but because a recent court case handed down just last month involving the Massachusetts law (Healthalliance Hospitals v. Azar) shows how the expansion of Medicaid in Massachusetts can have important implications for how hospitals in the state are paid by the Medicare program.  We don’t usually write about Medicare in our blog – but in this case, it was an important concern for Massachusetts hospitals.

We have written before about the disproportionate share (DSH) program in Medicaid.  There’s also a DSH program in Medicare, and it’s what is involved here.  Under the Medicare DSH reimbursement methodology, hospitals receive an increase in their payments if they treat a significant number of low income patients.  Under the formula, a “significant number” is 15%.  Congress authorized these additional payments in 1985 because “hospitals that serve a disproportionate number of low-income patients have higher Medicare costs per case.”  H.R. Rep. No. 99-241, pt.1, at 16 (1985).

Specifically, if the sum of low-income Medicare inpatient days at the hospital compared to all Medicare inpatient days (the Medicare fraction) plus Medicaid inpatient days compared to total inpatient days exceeds 15%, the hospital receives an additional Medicare payment.  Total DSH payments to hospitals nationwide in 2018 was nearly $16 billion, so it’s significant money for hospitals.

So what does all this have to do with Governor Romney’s health law?

We have written in the past about Medicaid waivers authorized under section 1115 of the Social Security Act.  In general, CMS can grant a waiver to a state if, in the agency’s judgment, doing so will “promote the objectives” of the Medicaid program.  Some states – including the Massachusetts health care expansion – expanded Medicaid using an § 1115 waiver.  And simply stated, the issue in the Healthalliance case was whether the expansion population who were receiving benefits under the waiver could be counted in the Medicaid fraction in the Medicare DSH formula.

Under the Massachusetts law, individuals whose incomes are below 300% of the federal poverty level and who are not otherwise eligible for Medicaid receive state subsidies to purchase a private, commercial health insurance plan in the individual health care market.  Massachusetts was able to receive Medicaid matching funds from CMS under the program under the terms of the state’s § 1115 waiver.  Massachusetts called this program “Commonwealth Care.”

When the hospitals involved in the Healthalliance case filed their annual cost reports, they claimed the patient days of patients who had received care under the Commonwealth Care program in their Medicaid fraction.  The CMS contractor that reviewed the hospital’s cost report disallowed those patient days on the grounds that the Commonwealth Care program was not Medicaid and that Commonwealth Care patients did not, by definition, qualify for Medicaid because their incomes were too high.  The CMS Administrator upheld the contractor’s conclusion, which led to the court case.

The United States District Court for the District of Columbia – where the case was brought – did not think much of the CMS Administrator’s argument.  According to the judge, CMS “acted in a manner that was contrary to its own regulations when it refused to count the patient days associated with the Commonwealth Care program in the … Medicaid fraction.”  As a result, the court invalidated the CMS Administrator’s opinion and allowed the hospitals to treat the Commonwealth Care patient days in the Medicaid fraction.

It remains to be seen whether CMS will appeal the court’s decision to the U.S. Court of Appeals.  Given the continuing broad use of § 1115 waivers – a trend that is being actively encouraged by the Trump Administration – it would not be surprising to us if a similar issue occurs in another state waiver program.

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