Health Law Daily Illinois obtains reversal of HHS decision to claw back $147 million in Medicaid overpayments
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Tuesday, September 29, 2020

Illinois obtains reversal of HHS decision to claw back $147 million in Medicaid overpayments

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

The HHS Departmental Appeals Board erred when it concluded that Illinois had improperly interpreted its own Medicaid state plan in calculating DSH payments to hospitals.

The Illinois Department of Healthcare and Family Services reasonably interpreted its Medicaid state plan to allow for a prospective method of computing hospital reimbursements, a Chicago federal district court has ruled. As a result, the IDHFS was entitled to summary judgment in an action brought to challenge an effort by the U.S. Department of Health and Human Services to disallow more than $147 million in federal reimbursements for Medicaid payments by Illinois to Illinois hospitals. While federal courts frequently defer to administrative decisions in such cases, the federal court reversed the decision in this case on a finding that the administrative board’s conclusion ordering the disallowance "conflicts with the plain text" (Illinois Department of Healthcare and Family Services v. Azar, September 25, 2020, Blakey, J.).

Background. Under Medicaid, states are permitted to calculate and make payments to hospitals under either a prospective method or a retrospective method. Applying its HHS-approved state plan, Illinois made the payments using the prospective method, which meant that it fixed the amount of payment per discharge in advance, using the historical record as its guide. In addition, the federal government makes a DSH (disproportionate share hospitals) payment to states, in an amount calculated by the states, to cover extra payments to hospitals that serve a disproportionate share of low-income patients.

Between 1997 and 2000, Illinois made $380 million in DSH payments to two Chicago-area hospitals that serve low-income patients. In 2004, HHS’s Office of Inspector General audited those payments and recommended that CMS disallow about $147 million of those payments. The OIG report was seen as a prospective recommendation for those states involved in the audit to use actual costs rather than historical costs to determine DSH payments; no effort to recoup those costs was made.

In 2016, however, CMS notified Illinois that it would begin recouping the overpayments. Illinois appealed the decision through administrative channels, culminating with an HHS Departmental Appeals Board decision upholding the disallowance. The Board concluded that Illinois’ method for calculating the DSH payments was inconsistent with the terms of its own state plan. While the Board concluded that the text was ambiguous, it went on to find that the state’s decision to apply the prospective method was unreasonable. Illinois then filed suit in federal court, as permitted by the Administrative Procedure Act, asking for a review of the Board’s decision.

Waiver. Addressing an administrative matter first, the court concluded that Illinois did not waive several arguments it raised in federal court for the first time because those arguments supported the position that the state had the right to use the prospective method, a position that the state had consistently held from the beginning.

Chevron analysis. Board review of agency decisions are granted deference by the federal courts. The Supreme Court, however, established for federal courts a two-step analysis for reviewing an agency’s interpretation of a contract in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 838 (1984). Step one analyzes the disputed text and asks whether an ambiguity exists. If so, step two considers whether the agency interpretation of the contract was reasonable. If the language is ambiguous and the interpretation is unreasonable, the Board’s opinion is no longer entitled to deference.

Ambiguity. The court concluded that an ambiguity existed in the state plan about whether it demanded a retrospective or prospective method of calculating DSH limits. The disputed section contained six numbered paragraphs. Paragraphs 1-5 could be interpreted to allow either a prospective or retrospective method. The sixth paragraph provided that "If necessary, retroactive adjustments will be made." The ambiguity arose because the sentence failed to say which type of adjustment it was referring to. HHS interpreted the sentence to refer to the year-end reconciliation process described in the fifth paragraph. Illinois interpreted the sentence to apply to adjustment to a rate that needed to be made if, for example, the hospital successfully appealed its DSH status.

Reasonableness. Although the Board agreed that an ambiguity existed, it had concluded that Illinois’ interpretation was unreasonable. The court, however, disagreed, for several reasons. First, HHS’ interpretation was the more unreasonable interpretation because it rendered the fifth paragraph superfluous. The Illinois interpretation, on the other hand, gave effect to all six provisions. Second, the Board’s conclusion that Illinois’s interpretation was unreasonable because the hospital appeals process was in a separate section was itself unreasonable. Two of the paragraphs referred to hospital appeals. Third, Illinois’ interpretation was more reasonable because it gave effect to the fact that "estimated" was used to qualify "DSH payments" but not other elements of the DSH limit, such as component costs. The Board decision failed to acknowledge the absence of the word "estimate" in each of those instances. The court, therefore, concluded that the Board’s conclusion conflicted with the plain text.

The court concluded that it would not defer to the Board decision because the Chevron analysis revealed that the text was ambiguous and Illinois’ interpretation of it was reasonable. The matter, therefore, was reversed and remanded for further administrative proceedings.

The case is No. 1:19-CV-1877.

Attorneys: Richard Scott Huszagh, Office of the Attorney General, for Illinois Department of Healthcare and Family Services. Valerie Rebecca Raedy, U.S. Department of Justice, for Alex M. Azar II.

Companies: Illinois Department of Healthcare and Family Services

MainStory: TopStory CaseDecisions CMSNews DSHNews MedicaidNews MedicaidPaymentNews IllinoisNews

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