Health Law Daily Medicare Contractor improperly calculated VDA by comparing total fixed costs to total DRG payments
Wednesday, October 14, 2020

Medicare Contractor improperly calculated VDA by comparing total fixed costs to total DRG payments

By Jeffrey H. Brochin, J.D.

A hospital was entitled to a volume decrease adjustment (VDA) payment of $2,221,578 due to an improper calculation which erroneously compared the hospital’s total fixed costs to its total Diagnostic Related Group (DRG) payments.

A Medicare Contractor, Noridian Healthcare Solutions, improperly calculated a Provider’s 2011 Volume Decrease Adjustment (VDA) by comparing its total fixed costs to its total Diagnosis-Related Group (DRG) payments, determining that the Provider was not entitled to any VDA payment for FY 2011, the Provider Reimbursement Review Board (Board) found. However, the Board disagreed with the contractor’s interpretation of the relevant statute and regulations, and found that the Provider was entitled to a VDA payment of $2,221,578(Three Rivers Community Hospital v. Noridian Healthcare Solutions, PRRB Hearing, Dec. No. 2020-D23, Case No. 16-1155, September 9, 2020).

Basis for VDA payments. Medicare pays hospitals a predetermined, standardized amount per discharge under the inpatient prospective payment system (IPPS) based on the DRG assigned to each patient. DRG payments are also subject to certain payment adjustments, one of which is the VDA payment which is available to Sole Community Hospitals (SCH) if they experience a decrease in patient discharges due to circumstances beyond their control, of more than 5 percent from one cost reporting year to the next. VDA payments are designed to compensate the hospital for the fixed costs it incurs in the relevant cost reporting period for providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.

Provider experienced a decrease. Three Rivers Community Hospital qualified as an SCH and, it was undisputed that the Provider experienced a decrease in discharges greater than 5 percent from FY 2010 to FY 2011, due to circumstances beyond the provider’s control. As a result, the hospital was eligible to have a VDA calculation performed. However, when the contractor calculated the VDA for the provider for FY 2011, it determined that the provider was not entitled to a VDA payment. The provider timely appealed the contractor’s denial of the VDA request.

Regulations and the PRM. Under 42 C.F.R. § 412.92(e) a contractor must adjudicate a VDA request once an SCH demonstrates it suffered a qualifying decrease in total inpatient discharges. In pertinent part, the regulation states:

"(3) The intermediary determines a lump sum adjustment amount not to exceed the difference between the hospital's Medicare inpatient operating costs and the hospital's total DRG revenue for inpatient operating costs based on DRG-adjusted prospective payment rates for inpatient operating costs . . . (i) In determining the adjustment amount, the Intermediary considers—. . . (B) The hospital's fixed (and semi-fixed) costs, other than those costs paid on a reasonable cost basis under part 413 of this chapter. . ."

Furthermore, in the preamble to the IPPS final rule published in 2006, CMS referenced the Provider Reimbursement Manual, Pub. No. 15-1 (PRM 15-1) § 2810.1 (Rev. 356), which provides:

"B. Additional payment is made . . . for the fixed costs it incurs in the period in providing inpatient hospital services including the reasonable cost of maintaining necessary core staff and services, not to exceed the difference between the hospital’s Medicare inpatient operating cost and the hospital’s total DRG revenue."

Accordingly, the contractor calculated the provider’s VDA payment amount by comparing the total fixed costs to the total DRG payments.

‘Apples from oranges.’ The provider contested the method used by the contractor, asserting that it was like "subtracting apples from oranges" and understated the VDA payment because DRG revenue compensates a hospital for both fixed and variable costs. The provider contended that the most appropriate methodology to calculate the VDA payment can be found in PRM 15-1 § 2810.1, and maintained that PRM 15-1 cannot be ignored because the Secretary has repeatedly endorsed PRM 15-1, including in the preamble to two final rules, published on August 18, 2006 (FFY 2007 IPPS final rule) and on August 19, 2008 (FFY 2009 IPPS final rule).

Not a new issue. The Board noted that the issue of interpreting VDA payment calculation was not new to the Board, and that in recent decisions, the Board had disagreed with the methodology used by multiple Medicare contractors to calculate VDA payments because it compares fixed costs to total DRG payments, and only results in a VDA payment if the fixed costs exceed the total DRG payment amount. In those cases, the Board recalculated the hospitals’ VDA payments by estimating the fixed portion of the hospital’s DRG payments and compared that fixed DRG payment to the hospital’s fixed operating costs, so there would be an "apples-to-apples" comparison.

Notwithstanding the fact that the CMS Administrator has overturned the Board’s decisions using the above-described methodology, the Board remarked that Administrator decisions are not binding precedent. It was clear from the preambles to the final rules that the only deduction to the hospital’s cost is for excess staffing, and therefore, the Board found that the contractor did not calculate the provider’s VDA using the methodology laid out by CMS in the PRM 15-1 or by the Secretary in the preambles to the FFY 2007 and 2009 IPPS Final Rules.

For the foregoing reasons, the Board ruled that the contractor improperly calculated the provider’s VDA payment, and that the provider should receive a VDA payment for FY 2011 in the amount of $2,221,578.

MainStory: TopStory PRRBDecisions IPPSNews CMSNews MedicareContractorNews PaymentNews PartANews ProgramIntegrityNews ProviderNews FedTracker HealthCare

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