By Jeffrey H. Brochin, J.D.
HHS’s methodology used to calculate the "outlier payment" component of Medicare reimbursements for 2008, 2009, 2010, and 2011, and its decision to continue with its methodology after the 2007 fiscal year was not arbitrary despite the fact of the methodology’s generally sub-par performance. Because HHS had, at best, only limited additional data for 2008 and 2009, and because the 2009 data suggested that hospitals were paid more than expected, the decision to wait a bit longer before reevaluating its complex predictive model was reasonable, according to the D.C. Circuit. Predicting Medicare costs for patients in each fiscal year is fraught with variables, estimates, and uncertainties, which the Medicare statute recognizes by requiring HHS to model results that fall between 5 percent and 6 percent of total projected payments, without mandating that HHS actually hit the bullseye each year (Billings Clinic v. Azar, August 10, 2018, Millett, P.).
Basis of the challenge. Several hospitals challenged the methodology that HHS used to calculate the "outlier payment" component of their Medicare payments for certain years. Following the court’s decision in Banner Health v. Price, 867 F.3d 1323 (D.C. Cir. 2017) (per curiam) (see HHS must explain Medicare outlier payment formula, August 22, 2018) to uphold the methodology at its inception in 2007, the primary question before the D.C. Circuit became one of whether the department’s decision to continue with its methodology after the 2007 fiscal year was arbitrary in light of accumulating data about the methodology’s generally sub-par performance.
Various iterations of the method. In 2007, HHS refined its methodology for projecting historical cost-to-charge ratios forward to the current year. In the aftermath of the 2003 turbo-charging reforms, cost-to-charge ratios had fallen. As a result, the Department’s efforts to hit its 5.1 percent target had begun to land consistently short. Commenters, including many hospital providers, asked the department to adopt an "adjustment factor" to update the cost-to-charge ratio formula based on the current downward trend in hospital costs.
The department agreed, and proposed a new formula to estimate costs for purposes of determining the outlier threshold. The refined formula relied upon two critical metrics to predict future costs and charges from the available historical information: the cost inflation factor and the charge inflation factor. The latter was relatively simple. The agency would update historical charge data using the average annualized rate of change in charges per case. The cost inflation factor, however, was more complex. It factored in both hospital-specific cost inflation and general inflation as measured by the change in a standard market basket of goods and services.
Outlier threshold factors. The court noted that their previous ruling in Banner Health also largely answered the hospitals’ argument that the department had to factor reconciliation claw-backs into its threshold predictions. Banner Health rejected that exact same challenge as to the 2005 outlier thresholds, where the court held that the department was under no obligation to account for the possibility of reconciliation in setting the fixed-loss threshold. The appellate court now found that their ruling applied with equal force to the 2008 through 2011 outlier thresholds. As in Banner Health, HHS reasonably concluded that the charging practices would not fluctuate significantly enough to justify accounting for reconciliation, and nothing in the current record supported a different conclusion here.
The D.C. Circuit noted that the complex, labyrinthine mathematical formulae used to predict Medicare costs for patients across the nation each fiscal year is fraught with variables, estimates, and uncertainties, and the Medicare statute recognizes that difficulty by requiring the department to model results that fall between 5 percent and 6 percent of total projected payments, without mandating that HHS actually hit the bullseye each year.
For the foregoing reasons, the court ruled that Banner Health decided this issue in favor of HHS, that the prior circuit precedent controlled here, and the judgment was affirmed.
The case is No. 17-5006.
Attorneys: Sven Collins (Squire Patton Boggs) for Billings Clinic. Sydney Foster, U.S. Department of Justice, for Alex Michael Azar, II.
Companies: Billings Clinic
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