Health Law Daily HHS failed to follow the rules in expanding definition of DSH ‘costs incurred’
Thursday, April 5, 2018

HHS failed to follow the rules in expanding definition of DSH ‘costs incurred’

By Robert B. Barnett Jr., J.D.

The HHS Secretary’s 2010 rule expanding the definition of "costs incurred" for purposes of determining the cap for payments to disproportionate share hospitals (DSHs) to include offsets for Medicare payments and private insurance payments was procedurally flawed because it failed to follow proper notice-and-comment requirements, the First Circuit ruled. HHS’ attempted rule change—announced in a Frequently Asked Questions (FAQ) section on, and saying that Medicare and private insurance payments should be added to Medicaid payments as DSH cap offsets—was in the nature of a new legislative rule rather than merely an interpretation of an existing one, which triggers Administrative Procedures Act notice-and-comment requirements. Whether HHS even has the authority to implement such a change was not addressed (HHS re-implemented this rule in June 2017 using notice-and-comment); such a determination will presumably be made at some later date in a separate pending legal action (New Hampshire Hospital Association v. Azar, April 4, 2018, Kayatta, W.).

Background. Several New Hampshire hospitals and the New Hampshire Hospital Association filed suit in federal court challenging HHS’ right to change the rules for calculating the DSH cap in a website FAQ. The suit arose after an audit authorized by the New Hampshire Department of Health and Human Services, which deducted for amounts received from Medicare and private insurers, as the FAQ mandated, revealed that New Hampshire hospitals had been significantly overpaid in fiscal year 2011. The state, therefore, was required to recover the overpayment. Before filing suit, the hospitals petitioned CMS to withdraw the FAQs, but it refused. In this lawsuit, the federal court granted their request for a preliminary injunction (see CMS unable to recoup so-called DSH overpayments from New Hampshire Hospitals, March 14, 2016), and then one year later granted them summary judgment (see FAQs aren’t a substitute for regulations, March 3, 2017), permanently enjoining HHS from enforcing the FAQs. HHS appealed the decision to the First Circuit.

DSH caps. In 1981, Congress allowed "payment adjustments" to DSHs in recognition of their treatment of disproportionate numbers of low income patients. Evidence revealed, however, that some hospitals were receiving payment adjustments that exceeded the total costs of operating their hospitals. As a result, Congress imposed in 1993 a cap that limited the payment adjustment to the "costs incurred" in treating Medicaid-eligible patients, less the Medicaid payments they received. Over time, however, confusion arose as to the calculation of "costs incurred," particularly for dual-eligible patients who were covered by both Medicaid and Medicare. In 2010, in’s FAQ section, HHS indicated in FAQs 33 and 34 that both Medicare payments and private insurance payments should be deducted in calculating the DSH cap. In April 2017, HHS, presumably in response to the district court’s decision in this case, promulgated a new rule, this time with notice and comment, that Medicare and private insurance should be deducted in calculating the cap. Because that new rule did not go into effect until June 2017, it did not affect this case. HHS’ right to implement that change has been challenged by these hospitals in a separate legal action (see Hospitals cannot strike down FAQs and a Final rule too, April 19, 2017), so that issue is not part of this ruling.

HHS authority. For purposes of this decision, the court accepted that HHS had the right to determine whether sources of payment other than Medicaid must be deducted. The Administrative Procedures Act (APA) requires that new rules be published in the Federal Register and that interested parties be given to chance to submit comments. The question for the court was whether this situation fell within an exemption from the general rule for rules that merely interpreted existing rules. Thus, was this HHS decision a legislative rule or merely an interpretative rule? The court came down heavily on the side of it being a legislative rule.

First, the language of the original statue mention "costs incurred" without further explanation. Where Congress is silent, an agency cannot leap into the breach to fill in the gaps. Second, HHS never explained its decision in the FAQs as an effort to clarify an existing rule, which suggests an intent to announce a new policy. Third, HHS’s decision did not fit within the existing statutory and regulatory scheme. Fourth, no consistent implementation of the statute between 1993 and 2010 existed. In fact, no evidence existed that HHS had ever enforced the policy before the FAQs, which suggests a new policy rather than a clarification of an existing one. As a result, the court concluded that this rule was in the nature of a legislative rule, requiring that HHS follow APA requirements. All parties agreed that the statutes and regulations are silent on whether "costs incurred" includes Medicare payments and private insurance payments. If HHS wants to make that link, it must provide notice-and-comment (as it implicitly acknowledged when it followed those protocols in 2017).

The First Circuit, therefore, affirmed the lower court’s decision that HHS improperly changed the rules without notice-and-comment procedures. The validity of HHS’ 2017 regulations, as well as any other substantive challenge to the rules changes, the appellate court said, "is a matter for another day."

The case is No. 17-1615.

Attorneys: Morgan Caissie Nighan (Nixon Peabody LLP) for New Hampshire Hospital Association, Mary Hitchcock Memorial Hospital, and LRGHealthcare. Tara S. Morrissey, U.S. Department of Justice, for Alex Azar, Secretary, U.S. Department of Health and Human Services.

Companies: New Hampshire Hospital Association; Mary Hitchcock Memorial Hospital; LRGHealthcare; U.S. Department of Health and Human Services

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