By Robert Margolis, J.D.
An HHS decision to offset the amount of Medicare reimbursement payments to several Kentucky hospitals by the amount of Medicaid Disproportionate Share Hospital (DSH) payments the hospitals received "was not arbitrary, capricious, or manifestly contrary to the Medicare statute," the United States Court of Appels for the Sixth Circuit has held. The appellate court thus affirmed a federal district court’s judgment, which upheld HHS’s decision to make the offset (Breckinridge Health, Inc. v. Price, June 14, 2017, Donald, B.).
Medicare reimburses the hospitals for the reasonable and necessary costs of providing services to Medicare patients. Medicaid requires states to create a plan to provide additional payments to hospitals serving a disproportionate number of low-income patients, such as the hospitals that brought the lawsuit. Kentucky funds its share of these DSH payments through a 2.5 percent tax on gross revenues known as the Kentucky Provider Tax (KP-Tax) and payments from state university hospitals. The hospitals sought reimbursement for their entire KP-Tax payments for 2009 and 2010, claiming that those payments are reasonable costs for reimbursement under the Medicare Act. Though they had received full reimbursement in prior years, the Medicare Administrative Contractor denied full reimbursement for 2009 and 2010, instead offsetting the KP-Tax cost by the DSH payment amounts the hospitals received. The reasoning was that since they were receiving money out of the fund into which they had paid the KP-Tax, the DSH payments were a refund of some of the KP-Tax. Thus, the reimbursable Medicare cost "actually incurred" was the gross amount after the offset. After this decision was upheld by the Provider Reimbursement Review Board and affirmed by the CMS Administrator, as well as a federal district court, the hospitals appealed to the Sixth Circuit (see Kentucky hospitals lose appeal of tax reimbursement offset, February 27, 2015).
Refund. Because Congress gave HHS discretion to determine what are reasonable costs meriting reimbursement, the hospitals had to show that the HHS decision to make the offset was "arbitrary, capricious, or manifestly contrary to the statute," for a court to overturn it. The appellate court agreed with the district court that the hospitals failed to meet this burden. The Medicaid DSH payments to the hospitals constitute a refund of at least a portion of the KP-Tax costs that the hospitals incurred, the appellate court held, citing the fact that the DSH payments derived from the very fund into which the hospitals made the KP-Tax payments. Thus, the decision to make the offset is within HHS’s discretion, according to the court.
The district court had relied on a decision by the Seventh Circuit, Abraham Lincoln Memorial Hospital v. Sebelius, in which that court affirmed HHS’s decision that a tax paid by Illinois hospitals to the state of Illinois was a reasonable cost eligible for Medicare reimbursement, but should be offset by payments from the state Medicaid fund to the Illinois hospitals (see Hospitals may claim cost of only the net Medicaid tax on Medicare cost reports, October 17, 2012). While the hospitals in this case pointed to several factual distinctions between the Illinois payment scheme and Kentucky’s, the appellate court held that those differences do not compel a different outcome.
Finally, the appellate court rejected the hospitals’ argument that the applicable Final rule (75 FR 50363, August 16, 2010) does not mandate an offset of taxes associated with disbursements. The court noted that the Final rule makes clear that "in determining the net amount of taxes incurred by a provider, the tax reimbursed should be reduced by the amount received associated with the tax." The hospitals could not establish that the DHS payments, made from a fund consisting of the KP-Tax, is not "associated with" that tax, the court held.
The case is No. 16-6269.
Attorneys: Mathew R. Klein (Dressman Benzinger LaVelle) for Breckinridge Health, Inc. d/b/a Breckinridge Memorial Hospital, New Horizons Health Systems, Inc. d/b/a New Horizons Medical Center and Livingston Hospital and Healthcare Services, Inc. Carleen M. Zubrzycki, U.S. Department of Justice, for Thomas E. Price.
Companies: Breckinridge Health, Inc. d/b/a Breckinridge Memorial Hospital; New Horizons Health Systems, Inc. d/b/a New Horizons Medical Center; Livingston Hospital and Healthcare Services, Inc.
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