Health Law Daily District court not required to vacate rule after HHS Secretary finds lack of confidence in rate reduction
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Wednesday, May 27, 2020

District court not required to vacate rule after HHS Secretary finds lack of confidence in rate reduction

By Sheryl Allenson, J.D.

Certain hospitals failed to convince a federal appeals court that summary judgment was improperly granted to the Secretary of Health and Human Services (the Secretary) arising from a FY 2014 Rule.

The appeals court affirmed the Secretary’s motion for summary judgment, noting that the lower court was not required to vacate the FY 2014 Rule and further that the district court was not required to enter a make whole order. The appeals court also held that the district court did not err in its decision to partially grant and partially deny statutory interest (Shands v Affinity Hospital, LLC, May 26, 2020, Rogers, J).

In its opinion, the appeals court explained how hospitals are reimbursed for Medicare impatient hospital stays, noting that the payment system for impatient hospital care under Medicare Part A is known as the inpatient prospective payment system (IPPS). The Secretary adjusts the IPPS every year in rulemakings. The appeals court explained the procedure under which hospitals can seek review of those rates.

With respect to the Rule at issue—FY 2014—the Secretary adopted a particular policy known as the "2-midnight" policy to provide hospitals guidance to decide when to admit Medicare beneficiary’s admission to an impatient stay and therefore, when the hospital would qualify for Medicare Part A reimbursement. The Secretary determined that as a result, IPPS expenditures would increase and as a result, the Secretary reduced IPPS rates by 2 percent.

Certain hospitals filed suit in the district court, challenged the rate reduction set out in the FY2014 Rule. They claimed that the Secretary failed to provide sufficient notice of the actuarial assumptions and methodologies used in determining the IPPS reduction. In response, the district court remanded the Rule to the Secretary for the additional administrative proceedings.

Upon remand, the Secretary issued a supplemental notice on its methodologies and requested comments on the methodologies. The Secretary considered the comments and in response, explained that its initial estimate on the 2 percent reduction was more uncertain than usual. The Secretary concluded that it was no longer confident in the effects of the 2-midnight policy as it related to the 2 percent IPPS rate. As a result, the Secretary eliminated that rate reduction for all future years and increased the IPPS to 6 percent beginning in FY 2017. This was done to account for the three years the 2 percent reduction was in place. In its final Rule, the Secretary also noted that hospitals with pending challenges to the rate reduction were entitled to statutory interest and explained how it would be received.

The appeals court rejected the hospitals’ position that, because the Secretary no longer defends the reduced rate set out in the FY 2014 Rule, the Rule had to be vacated or at a minimum make whole relief was required. The appeals court ruled that the hospitals’ position did "not withstand analysis." The appeals court explained that it was well settled law that the Rule need not be vacated.

Moreover, the appeals court noted that in light of the fact it was part of the remand, the decision to increase the rate in FY 2017 was properly considered as part of the FY 2014 Rule proceedings. Thus, it could "properly be considered by the district court in determining the reasonableness of the Secretary’s remedy on remand."

Additionally, the appeals court found that the one year "across-the-board" 6 percent increase would allow hospitals to receive compensation more quickly, and would create a more efficient process for the Secretary, notwithstanding the Secretary’s acknowledgment that the FY 2017 rate increase would not "properly compensate each hospital for payments that were reduced under the 2014 Rule." However, according to the appeals court, the hospitals did not show that FY 2017 rate increase would be so imprecise as to be arbitrary and capricious. Accordingly, the appeals court found that the district court properly granted the Secretary’s motion for summary judgment.

The appeals court also found that pursuant to statute, the hospitals were only entitled to interest for each fiscal year that they challenged the rate reduction, noting that the hospitals should have but did not file separate judicial challenges for the three fiscal years at issue. Thus, the appeals court also affirmed the partial award and denial of statutory interest.

The case is No. 19-5087.

Attorneys: Christopher L. Keough (Law Office of Christopher L. Keough) for Shands Jacksonville Medical Center, Inc. d/b/a UF Health Jacksonville. Lori A. Rubin (Foley & Lardner LLP) for Affinity Hospital, LLC d/b/a Trinity Medical Center. Thomas Gary Pulham, U.S. Department of Justice, for Alex Michael Azar, II.

Companies: Shands Jacksonville Medical Center, Inc. d/b/a UF Health Jacksonville; Affinity Hospital, LLC d/b/a Trinity Medical Center

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