Health Law Daily District court’s enjoining of HHS’ Medicaid DSH payment rule overturned
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Tuesday, April 21, 2020

District court’s enjoining of HHS’ Medicaid DSH payment rule overturned

By Jeffrey H. Brochin, J.D.

HHS had the authority to create the Medicaid Disproportionate Share Hospital (DSH) payment rule that deemed hospitals’ costs incurred as net of payments received from third parties.

The Fifth Circuit reversed a district court ruling granting summary judgment to a group of Mississippi hospitals that sued HHS over the 2017 final rule on calculating disproportionate share hospital (DSH) payments. The hospitals had disputed the method for calculating the hospital-specific limit for annual DSH payments; however, the appeals court ruled that the final rule was consistent with Medicaid Act, which expressly delegates gap-filling authority to the Secretary (Baptist Memorial Hospital-Golden Triangle, Incorporated v. Azar, April 20, 2020, Higginbotham, P.).

Reining in excessive DSH payments. The Medicaid Act provides each state with a fixed pool of funds in order to make supplemental payments to hospitals that serve a disproportionate share of indigent patients. The DSH payments are limited to a hospital’s "costs incurred" in caring for indigent patients. However, in the early 1990s, it was determined that some states were reportedly making DSH payments to hospitals in amounts that exceeded their net costs, and in some instances their total costs, of operating the hospital facilities. Therefore, in 1993 Congress imposed a "hospital-specific limit" on annual DSH payments to each hospital. Under the limit, payments were capped at a hospital’s costs incurred by serving Medicaid-eligible and uninsured patients, net of other Medicaid payments and payments from uninsured patients.

Clarifying costs incurred. In 2010, CMS issued guidance clarifying that the costs incurred were also net of payments received from third parties such as Medicare and private health insurance. Under the 2010 guidance, when a third party reimbursed a hospital for serving a Medicaid patient, the third-party payments were excluded from the costs incurred. After hospitals filed suits against the 2010 guidance, it was withdrawn, however, in 2017 HHS essentially issued the same method for determining costs incurred but as a final rule.

2017 final rule enforcement enjoined. Eight Mississippi hospitals challenged the 2017 final rule contending that its definition of costs incurred conflicted with the Medicaid Act. The district court granted summary judgment for the hospitals and enjoined enforcement of the 2017 rule, and the Secretary of HHS then commenced the instant appeal.

The hospitals challenged the final rule on the basis of several arguments, all of which were rejected by the Fifth Circuit. For example, the appeals court did not agree that the ordinary meaning and dictionary definitions of "costs" and "payments" rendered the disputed language unambiguous, and cited Supreme Court recognition that the word "cost" is "a chameleon," and a virtually meaningless term. Agencies therefore have broad methodological leeway to interpret the word, and courts have repeatedly upheld the Secretary’s authority to account for offsetting payments when construing costs or costs incurred.

Secretary acted within his authority. The Fifth Circuit was also unpersuaded by the hospitals’ argument that the statute draws a clear line between costs and payments. The hospitals’ view that the statute granted the Secretary discretion to determine the calculation of gross costs, but not the discretion to select payments to subtract from those costs, was characterized by the appeals court as "flying in the teeth of the statutory text." Because costs incurred are both as determined by the Secretary and net of payments under Medicaid and by uninsured patients, the statute required that some payments be considered in calculating a hospital’s costs incurred. Accordingly, costs incurred refers to net costs, not gross costs, and because the statute did not direct the Secretary to exclude only payments from Medicaid and uninsured patients, it was within the Secretary’s expressly delegated authority to interpret costs incurred to exclude other payments. The 2017 final rule properly safeguarded against states paying hospitals for costs that have already been reimbursed by a third party, thereby ensuring that DSH payments go to hospitals that have been compensated least and are thus most in need.

The case is No. 18-60592.

Attorneys: Rebecca Hawkins (Wise Carter Law Firm) for Baptist Memorial Hospital. Samuel Lynn Murray, U. S. Attorney's Office, for Alex M. Azar, II.

MainStory: TopStory CMSNews DSHNews MedicaidNews MedicaidPaymentNews PartANews

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