Health Law Daily Court finds weighted discharge cap violates reasonable cost reimbursement, challenges CMS
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Thursday, March 31, 2016

Court finds weighted discharge cap violates reasonable cost reimbursement, challenges CMS

By Melissa Mitchell, J.D.

CMS’ proposition that it had the authority to create a certain method for calculating a hospital’s ancillary costs, which resulted in a weighted discharge cap could not support a denial of reimbursement to a New York hospital group. Specifically, the court challenged the HHS Secretary’s interpretation that reversed an earlier decision of the Provider Reimbursement Review Board (PRRB), which found that the weighted discharge cap violated the reasonable cost reimbursement principle. The district court found that the Secretary’s decision to reverse the PRRB determination was not supported by the record, granted the hospital group’s motion for summary judgment, and remanded the case (New York City Health and Hospitals Corporation v. Burwell, March 29, 2016, Pauley, W.).

Reimbursement framework. The New York City Health and Hospitals Corporation (HHC) challenged the Secretary’s determination denying certain Medicare reimbursements, which the court implied dated back to 15 years before their initial challenge. Specifically, HHC’s claims involved one of the methods set forth in certain regulations established by the agency for determining ancillary costs of hospitals with “all inclusive rates” or limited billing functionality, Method B. As the court explained it, “under Method B, ancillary costs are apportioned to Medicare using an average per diem cost adjusted by a weighted average, which is based on a comparison of the average length of stay (ALOS) of Medicare patients to the ALOS of the entire patient population.” A weighted discharge cap that limited the apportionment of ancillary costs was added to the Method B computation in 1971. HHC argued that this cap violated the Medicare Act and the Administrative Procedure Act.

PRRB decision, CMS determination. The PRRB agreed with HHC and found that the weighted discharge cap was improperly applied to HHC’s ancillary costs. It reasoned that because “some Medicare patients (Medicare ALOS shorter than all inpatient ALOS) incur higher than average per diem ancillary costs,” the cap was in violation of the Medicare principle that health care providers should receive reasonable costs of providing health services to Medicare beneficiaries. Subsequently, the CMS Administrator—on behalf of the Secretary—reversed the PRRB decision, citing that the burden is on provider to use more sophisticated accounting methods to “establish that their actual costs of Medicare patients us higher than that calculated under Method B.” Since HHC failed to use such methods, it could not show it was entitled to the higher reimbursement amounts (see Weighted cap is a heavy burden for hospitals, December 31, 2014).

Reverse and remand. While HHC claimed that the Secretary’s interpretation was arbitrary and capricious, the government offered several reasons its determination should be upheld including: (1) that it had the authority to establish Method B and the weighted discharge cap; (2) the interpretation was in line with Medicare regulations and legislative decisions; and (3) the determination was consistent with HHC’s statutory obligation and the historical interpretation of Method B. The court, however, found that these arguments were lacking any supporting analysis and that there was no evidence that HHC would have been allowed to change its bookkeeping methods at the time in question. Due to the lack of evidence supporting the government’s assertions in the record, the court granted HCC’s motion for summary judgment, vacated the Secretary’s decision, and remanded the matter. The court directed the lower body to consider any newly discovered documents that “may illumine the reasons behind the addition of the weighted discharge cap in 1971” on remand.

The case is No. 15cv662.

Attorneys: Joseph Victor Willey (Katten Muchin Rosenman, LLP) for New York City Health and Hospitals Corp., Coler Memorial Hospital and Elmhurst Hospital Center. Jessica Jean Hu, U.S. Attorney's Office, for Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services.

Companies: New York City Health and Hospitals Corp.; Coler Memorial Hospital; Elmhurst Hospital Center; U.S. Department of Health and Human Services

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