A PRRB held that a Volume Decrease Adjustment payment methodology based on a comparison of fixed costs to total Diagnosis-Related Group payments was improper.
A Volume Decrease Adjustment (VDA) payment is intended to compensate a hospital for its fixed costs associated with the qualifying volume decrease. Therefore, according to the Provider Reimbursement Review Board, a methodology for calculating that payment that does not ensure that the hospital has been fully compensated for its fixed costs, is not a reasonable interpretation of the statute and regulations. The Board found that a Medicare Contractor improperly calculated a provider’s VDA payment and the provider should have received a payment of $2,500,062 (Olympic Medica Center v. Noridian Healthcare Solutions, LLC. PRRB Hearing, Dec. No. 2020-D11, Case No. 16-2515, July 31, 2020).
Payment request. Olympic is a non-profit acute care hospital that was designated as a Sole Community Hospital (SCH). Olympic experienced a decrease in discharges greater than five percent from Fiscal Year (FY) 2011 to FY 2012 due to circumstances beyond Olympic’s control. Olympic requested a VDA payment of $2,929,138 to compensate for the decrease in inpatient discharges. The Medicare Contractor determined that a VDA payment was not warranted because Olympic’s Diagnosis-Related Group (DRG) revenue exceeded its fixed and semi-fixed Medicare costs. Olympic requested a reconsideration, however the Medicare Contractor did not respond to the reconsideration request.
Calculation. The Medicare Contractor alleged that a VDA payment is intended to reimburse a qualifying hospital for its fixed costs only and, therefore, the removal of variable costs from the VDA calculation is required. Olympic argued that the Medicare Contractor improperly changed the Medicare rules by calculating Olympic’s VDA payment based on a comparison of Olympic’s fixed costs to its total DRG payments. According to Olympic, "reducing a hospital’s total fixed cost by DRG revenue attributable to both fixed and variable costs renders an understated VDP. In effect, it is subtracting apples from oranges."
Decision. The Board noted that in recent decisions, the Board has disagreed with the methodology used by various Medicare contractors, which compared fixed costs to total DRG payments and only resulted in a VDA payment if the fixed costs exceeded the total DRG payment amount. The Board, instead, estimated the fixed portion of the hospital’s DRG payments and compared the fixed portion of the DRG payment to the hospital’s fixed operating costs, so there was an apples-to-apples comparison. The Administrator overturned these Board decisions and recently the Court of Appeals for the Eighth Circuit upheld the Administrator’s methodology (see Court upholds CMS calculation of volume-decrease adjustment. Mar. 13, 2019), finding that the Secretary’s interpretation was not arbitrary or capricious and was consistent with the regulation. The Board here also noted that Administrator decisions are not binding precedent and the provider is not located in the Eighth Circuit and therefore the decision is likewise not binding precedent on the appeal.
In a review of the applicable final rules for the reporting period at issue, the Board found that the preambles make it clear that the only adjustment to the hospital’s cost is for excess staffing. According to the Board, the methodology used by the Medicare Contractor was adopted by the Administrator through adjudication, however, CMS did not otherwise alter its written policy statements in either the PRM or Federal Register. Further, CMS subsequently essentially adopted the Board’s methodology for calculating VDA payments in the 2018 IPPS Final Rule. The new methodology requires Medicare contractors to compare the estimated portion of the DRG payment that is related to fixed costs, to the hospital’s fixed costs, when determining the amount of the VDA.
Therefore, the Board concluded that it disagreed with the Eighth Circuit’s decision that the methodology complied with the statutory mandate to "fully compensate the hospital for the fixed costs it incurs." Rather, based on the relevant law and regulations, in order to fully compensate a hospital for its fixed costs in the current year, the hospitals 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. The Board held that the Medicare Contractor improperly calculated Olympic’s VDA for FY 2012 and that Olympic should receive a VDA payment for FY 2012 in the amount of $2,500,062.
Cost reporting period ending December 31, 2012.
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