Health Law Daily Court upholds CMS calculation of volume-decrease adjustment
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Wednesday, March 13, 2019

Court upholds CMS calculation of volume-decrease adjustment

By Rebecca Mayo, J.D.

A circuit court affirmed CMS’s interpretation of statutes and regulations relating to the calculation of the volume-decrease adjustment (VDA).

In a circuit court decision, consolidating appeals by three different hospitals, a court found that CMS’s interpretation of statutes and regulations relating to the calculation of a hospital’s volume-decrease adjustment (VDA) was reasonable. The fact that CMS’s interpretation of a statute may have changed over time does not mean that the initial interpretation was unreasonable. Further, deference should be given to an agency’s interpretation of its own regulations and there was no evidence that CMS’s interpretation of the regulations was arbitrary or capricious (Unity HealthCare v. Azar, March 12, 2019, Erickson, R.).

The adjustment. Unity HealthCare, Lakes Regional Healthcare, and St. Anthony Regional Hospital are all three qualifying rural hospitals that had significant reductions in patients and requested a VDA. In each case, the Medicare Administrative Contractor (MAC) reduced the hospital’s reported costs and expenses by removing those costs and expenses that were classified as variable. For Unity and Lakes, the MAC then subtracted the payment total from the diagnosis-related group (DRG) payment to determine the VDA. For St. Anthony, the MAC subtracted the payment amount from the Pay Per Service payments for the year to determine the VDA.

All three hospitals appealed the MAC calculations to the appeals board which upheld the classification of costs but in Unity and Lakes, minor adjustments were made to the VDA calculations. The board found that the VDA amount should be the hospital's total fixed costs, but capped at the regulatory ceiling that the payment would not exceed the difference between the hospital’s total Medicare inpatient operating costs (including variable costs) and its DRG payments. Unity and Lake’s fixed costs exceeded that ceiling, therefore the board ruled that each was entitled to a payment equal to the difference between the Medicare inpatient operating costs and its DRG payments. For St. Anthony’s, the board used a ratio of the hospital’s fixed costs to total costs to apportion some of the DRG payments to the hospital’s fixed costs and then subtracted the fixed portion of the DRG payments from the fixed costs to determine the VDA.

CMS affirmed the rulings relating to the variable costs, but reversed the Board’s VDA calculation methodology in all three cases, holding that the MAC’s initial methodology was correct. The hospitals then appealed to the district courts, where the CMS decisions were upheld in a joint decision for Unity and Lake (see VDA rule change does not prove previous rule was improper, January 31, 2018) and a separate decision upholding the agency action for St. Anthony. The three hospitals appealed, and the cases were consolidated.

Decision. The court held that the agency’s interpretation of the language of the statute allowing for hospitals to be compensated for the fixed costs it incurs in providing inpatient hospital services, was a reasonable one. The court noted that a statute can have more than one reasonable interpretation and the fact that an interpretation adapts and changes over time does not necessarily mean that the initial interpretation was wrong or unreasonable. Further, where a regulation’s plain language does not control the issue, the court must uphold an agency’s interpretation of its own regulation unless the interpretation is plainly erroneous or inconsistent with the regulation. The court found here that the interpretation of the relevant regulations were consistent with their text. Finally, the court held that to the extent that any of the hospitals claim that some portion of the variable costs were in fact semi-fixed, the hospitals failed to meet the burden of demonstrating entitlement to a payment adjustment. The agency’s decision to classify certain costs as variable was not arbitrary or capricious.

The case is No. 18-1316.

Attorneys: Leslie Demaree Goldsmith (Baker, Donelson, Bearman, Caldwell & Berkowitz, PC) for Unity HealthCare. Alisa Beth Klein, U.S. Department of Justice, for Alex M. Azar, II.

Companies: Unity HealthCare

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