Health Law Daily Rule modifying DSH payment calculations reinstated by court of appeals
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Thursday, August 15, 2019

Rule modifying DSH payment calculations reinstated by court of appeals

By Rebecca Mayo, J.D.

After a lower court vacated a rule that included Medicare and private insurance payments in the calculation of the DSH payment, an appeals court found the rule to be consistent with the statute and reinstated the rule.

The court of appeals held that while the statute that allows for a Disproportionate Share Hospital (DSH) payment may have specified two types of payments to be included in the calculation of the payment, it did not preclude CMS from factoring in other third party payments. The court found that the rule modifying the calculation to include consideration of Medicare and private insurer payments, fulfilled the statute’s purpose of ensuring that the hospitals which are compensated the least—and thus most in need—receive the DSH payments. It held that the rule was not arbitrary and capricious and reversed the lower court ruling vacating the rule and reinstated the rule (Children’s Hospital Association of Texas v. Azar, August 13, 2019, Henderson, K.).

Disproportionate Share Hospital payments. The DSH payment is intended to help hospitals that serve a disproportionate share of Medicaid patients, cover some of the normally non-reimbursable costs that go along with treating Medicaid patients. The statute allows hospitals to receive a payment that does not exceed the costs incurred during the year of furnishing hospital services to Medicaid-eligible and uninsured individuals. These costs are defined by the Secretary as net payments other than payments made by Medicaid and uninsured individuals. CMS informally modified the rule to also subtract the Medicare and private insurer payments out of the total net payments, and later formalized the rule in a 2017 final rule. Under this rule costs were defined as costs net of third-party payments, including, but not limited to, payments by Medicare and private insurance. CMS reasoned that this limit DSH payment to a hospital’s uncompensated care costs and would ensure that limited DSH resources were allocated to hospitals that have a net financial shortfall in serving Medicaid patients.

A group of children’s hospitals and an association of children’s hospitals filed suit, arguing that the rule violated the Administrative Procedure Act because it exceeded the Secretary’s authority under the Medicaid Act and was the product of arbitrary and capricious reasoning. A district court entered summary judgement, holding that the rule was inconsistent with the plain language of the Medicaid Act and vacated the rule (see Court vacates rule that included third-party payments in DSH payment adjustment calculation, March 7, 2018). The Secretary appealed.

Reasonableness. To determine if a regulation is in excess of statutory jurisdiction or authority, the court must determine whether the agency’s interpretation is reasonable. The court held that although the statute establishes that payments by Medicaid and the uninsured must be considered, it does not exclude the possibility of other considering other payments by stating that those are the only payments that may be considered. The specification that two forms of payment must be considered removes the Secretary’s discretion as to those two forms of payment but does not disturb the Secretary’s discretion as to other forms of payment which may be considered. Therefore, the inclusion of the two specified forms of payment to be included is not superfluous.

The hospitals assert that because another provision specifies that third party payments should be considered and this provision does not, it should be presumed that Congress intended to exclude consideration of those third party payments. However, the court found the two sections to be so fundamentally different, that such that an inference could not be made. Finally, the hospitals assert that the statute distinguishes between costs and payments such that payments can not be considered in calculating costs incurred. The court disagreed, finding that the adjoining phrases modify "costs incurred," meaning that costs incurred are "as determined by the Secretary" and the costs incurred are the "net payments under Medicaid and by uninsured payments."

Arbitrary and capricious. The hospitals contend that CMS never acknowledged or justified the new rule’s departure from the previous rule. However, the court found no unexplained inconsistency with an earlier position. CMS explained why that statute’s purposes were better fulfilled by a policy that required consideration of payments by Medicare and private insurers than one that does not. Requiring the inclusion of payments by Medicare and private insurers, ensures that DSH payments go to hospitals that have been compensated least and are thus most in need. The court found this explanation more than sufficient.

The case is No. 18-5135.

Attorneys: David B. Salmons (Morgan, Lewis & Bockius LLP) for Children’s Hospital Association of Texas. Tara S. Morrissey, United States Department of Justice, for Alex Michael Azar, II.

Companies: Children’s Hospital Association of Texas

MainStory: TopStory CaseDecisions CMSNews BillingNews DSHNews MedicaidNews MedicaidPaymentNews ProgramIntegrityNews DistrictofColumbiaNews

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