Health Law Daily Preclusion of step-two rate review also bars review of LIP calculations
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Wednesday, June 13, 2018

Preclusion of step-two rate review also bars review of LIP calculations

By Jeffrey H. Brochin, J.D.

A federal appellate court has ruled that the statutory bar on administrative and judicial review of prospective payment rates also bars review of how low-income percentage (LIP) adjustments are calculated. The court concluded from the statute’s plain language that "prospective payment rates" means step-two rates and that that rate and its adjustments are precluded from review (Mercy Hospital, Inc. v. Azar, June 8, 2018, Griffith, T).

Two steps to calculate reimbursement rates. In 42 U.S.C. § 1395ww(j), Congress directed CMS to set rates for Medicare reimbursements for inpatient rehabilitation services in two steps: The first step takes place before the beginning of the fiscal year, and the second step takes place after the fiscal year ends, when CMS adjusts the standardized rates to reflect the particular circumstances of each hospital for that year. In 2001, CMS created the LIP adjustment which increases hospital payments based on the number of low-income patients served during the preceding fiscal year, and, in 2004, CMS changed the method of calculating the LIP formula.

Mercy Hospital, Inc. (Mercy) operates an inpatient rehabilitation facility that is eligible for Medicare reimbursements. For fiscal years 2002 through 2004, the Medicare Contractor used the amended LIP formula to adjust Mercy’s reimbursement rate. The hospital appealed the adjustment to the Provider Reimbursement Review Board (Board), which rejected the Medicare Contractor’s jurisdictional challenge and ordered the Medicare Contractor to recalculate Mercy’s reimbursement using the pre-2004 LIP formula. Upon appeal to the CMS Administrator, the decision was reversed and Mercy’s administrative appeal was dismissed. Mercy appealed to the district court which affirmed the Administrator’s interpretation of the statute and dismissed Mercy’s appeal. The appellate court has now affirmed the district court’s dismissal.

Rates shielded from review. The appellate court noted that 42 U.S.C. § 1395ww(j)(8) expressly shields "prospective payment rates" and most of the statutory adjustments used to calculate them from administrative and judicial review. CMS interpreted the term "prospective payment rates" to mean the step-two rates calculated by adjusting the step-one rates, and Mercy interpreted the term to mean the unadjusted rates set at step one. The court cited the statutory preclusion paragraph which reads: "There shall be no administrative or judicial review . . . of the establishment of . . . B) the prospective payment rates under paragraph (3) . . . [emphasis by the court].

Meaning of "prospective payment rate." The court next turned to a careful reading of the referenced paragraph (3) and found that Congress intended the plain meaning of "prospective payment rate" to mean the ultimate payment rate arrived at after adjustments are factored in. The court therefore concluded that the statute defines "prospective payment rates" as the step-two rate and not the step-one rate, and that if the bar on reviewing the prospective payment rates protects the rate determined at step two, that bar must also include the adjustments used to calculate that rate. The court further found that as a practical matter, the LIP adjustment is inextricably intertwined with the step-two rate, and that therefore the shield that protects the step-two rate from review protects the LIP adjustment as well.

Because the preclusion paragraph bars review of step-two rates and the statutory adjustments, the appellate court affirmed the district court’s dismissal of the lawsuit for lack of subject-matter jurisdiction.

The case is No. 16-5267.

Attorneys: Stephanie A. Webster (Akin Gump Strauss Hauer & Feld LLP) for Mercy Hospital, Inc. Abby C. Wright, U.S. Department of Justice, for Alex M. Azar II.

Companies: Mercy Hospital, Inc.

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