Health Law Daily MAC properly excluded variable costs from VDA payment calculation
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Monday, January 13, 2020

MAC properly excluded variable costs from VDA payment calculation

By Rebecca Mayo, J.D.

The CMS Administrator reversed a PRRB decision that included variable costs in calculating a provider’s volume decrease adjustment.

The volume decrease adjustment (VDA) is intended to compensate qualifying hospitals for their fixed costs only and variable costs should be excluded from the adjustment, according to the CMS Administrator. Further, the VDA should be reduced to reflect the compensation of fixed costs that has already been made through Medicare Severity-Diagnosis Related Group (MS-DRG) payments. The Administrator reversed a Provider Reimbursement Review Board (PRRB) decision and held that a Medicare Administrative Contract (MAC) properly determined that a hospital was not entitled to a VDA payment where the DRG exceeded the fixed costs (In the Case of: Stephens County Hospital v. Palmetto GBA, CMS Administrator Decision, Review of PRRB Decision No. 2019-D31, July 25, 2019).

Adjustment request. Stephens County Hospital is an acute care hospital in Georgia that was designated as a Medicare Dependent Hospital (MDH). The hospitals experienced a decrease in discharges greater than five percent from FY 2011 to FY 2012 due to circumstances beyond its control, and as a result was eligible to have a VDA calculation performed. The hospital requested a VDA payment of $1,806,332, however the MAC determined that the hospital’s DRG payments exceeded its calculated fixed operating costs, and as a result, no VDA payment was due.

PRRB decision. On appeal the Provider Reimbursement Review Board noted that the MAC’s calculation of the VDA compared fixed costs to total Medicare payments, while the hospital’s calculation compared total operating costs to total Medicare payments. The PRRB pointed out that the Medicare patients for which a provider furnished actual services in the current year are not part of the volume decrease and that the DRG payment made to the hospital for services furnished to the Medicare patients in the current year is payment for both fixed and variable costs of the actual services furnished to those patients. Therefore, the PRRB argued that to fully compensate a hospital for its fixed costs in the current year, the hospital must receive a payment for the variable costs related to its actual Medicare patient load in the current year as well as its full fixed costs in that year. Accordingly, it found that the MAC’s methodology did not ensure that a hospital, eligible for VDA adjustment, had been fully compensated for its fixed costs and, therefore, was not a reasonable interpretation of the statute. The PRRB calculated the VDA payment to be $1,461,660, which was less than the CAP and therefore was the amount the hospital should receive for FY 2012.

Administrator decision. The Administrator found that the MAC’s exclusion of the hospitals’ variable costs was proper and consistent with the regulation and guidance and intent of the adjustment. According to the Administrator the plain language of the relevant statute and regulation make it clear that the VDA is intended to compensate qualifying hospitals for their fixed costs, not their variable costs. Further, the hospital’s VDA is equal to the difference between its fixed and semi-fixed costs and its DRG payment. Since the DRG payment exceeded the fixed costs in this case, the VDA payment amount would be $0.

Cost reporting period ending September 30, 2012.

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