By Jeffrey H. Brochin, J.D.
CMS acted properly when it applied the ruling of the Sixth Circuit court when counting hospital beds for payment adjustments under the Inpatient Prospective Payment System (IPPS), a federal appellate court in the District of Columbia has ruled. The inclusion of "swing" beds and "observation" beds in the count for facilities within the Sixth Circuit’s jurisdiction—pending revision of CMS regulations—was reasonable because agencies are expected to obey judicial decisions, notwithstanding any disadvantage faced by providers as a result of CMS’ acquiescence to the ruling (Grant Medical Center v. Hargan, November 17, 2017, Tatel, D.).
Background. In 2001, two Kentucky hospitals that fell short of the bed count needed to qualify for a reimbursement adjustment challenged CMS’ interpretation of the bed-count regulation, claiming that excluding "swing" and "observation: beds conflicted with the regulation’s plain text. The Sixth Circuit agreed, noting that because the regulation specifically listed certain types of beds that were excluded from the bed count, but did not list swing or observation beds, the plain meaning of the regulation suggested that it was permissible to count swing and observation beds (see Clark Regional Medical Center v. HHS, 314 F.3d 241 (6th Cir. 2002)).
In response to the Sixth Circuit’s decision, CMS began the process to amend the regulation to expressly exclude swing and observation beds. However, pending the amendment, CMS applied the Sixth Circuit’s ruling to hospitals located within that circuit—thereby counting swing and observation beds—until the revised regulation took effect. Ten Ohio hospitals that were adversely affected challenged CMS’ decision administratively (see CMS bound by 2002 court decision, February 26, 2015), and in federal district court. The district court ruled that CMS acted properly and entered summary judgment in favor of the agency (see HHS can’t flout appellate bed count decision, court admonishes hospitals, September 6, 2016), and the hospitals appealed.
The complexities of counting beds. Under the IPPS, hospitals are paid a fixed Medicare reimbursement amount for each patient regardless of the actual costs incurred. However, two adjustments that may apply to that system are the Indirect Medical Education (IME) adjustment, which supplements payments to hospitals that train medical residents, and the Disproportionate Share Hospital (DSH) adjustment, which supplements payments to hospitals that serve a disproportionate share of low-income patients. Both adjustments turn, in part, on the number of inpatient beds at the hospital. Due to the particularities of the formulas, hospitals claiming the IME adjustment generally benefit when the bed count is lower, while hospitals claiming the DSH adjustment benefit when the bed count is higher.
Prior to October 1, 2003, the bed count regulation specified which type of beds were to be excluded from the count, but did not recite swing beds—which can change status depending upon usage—nor observation beds, which are generally short-term beds used for outpatient care when a patient had not been formally admitted to the hospital.
PRRB rationale. The Provider Reimbursement Review Board (PRRB) rejected the hospitals’ claim, explaining that the inclusion of observation bed days and swing bed days for discharges prior to October 2003 was correct because all of the providers were located within the Sixth Circuit and the Clark decision was controlling legal precedent. The Board also noted that the separation of powers doctrine requires administrative agencies to follow the law of the circuit whose courts have jurisdiction over the cause of action.
Clarification versus change. The hospitals argued that the PRRB should have applied the revised regulation retroactively because it "clarified" rather than "changed" the law and because the clarification inured to their benefit. The D.C. Circuit rejected that argument, noting that even if the revised regulation merely reiterated the law outside the Sixth Circuit, it still marked a "change" from the interpretation of the regulation that CMS had acquiesced to after Clark within that circuit. In addition, the hospitals misread the Sixth Circuit’s retroactivity law: while the court has prohibited retroactive application of a rule that disadvantages a party by effecting a substantive change from the agency’s prior regulation, the court had never required agencies to apply rules retroactively even where it would be permissible for them to do so.
Based on the foregoing, the D.C. Circuit found that CMS acted properly, and affirmed the district court’s grant of summary judgment to CMS.
The case is No. 16-5314.
Attorneys: Daniel C. Gibson (Bricker & Eckler LLP) for Grant Medical Center. Weili J. Shaw, U.S. Department of Justice, for Eric D. Hargan, Acting Secretary, U.S. Department of Health and Human Services.
Companies: Grant Medical Center; U.S. Department of Health and Human Services; Riverside Methodist Hospital; Doctor’s Hospital; Western Reserve Care System; St. Elizabeth Health Center; St. Joseph Health Center; Kettering Memorial Hospital; Grandview Medical Center; Summa Health System; Sycamore Hospital
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