United States: Court Orders Medicare Program to Reopen Cost Reports and Make Additional Disproportionate Share Hospital Payments

On July 1, 2005, the United States Court of Appeals for the District of Columbia Circuit issued a decision requiring the Centers for Medicare & Medicaid Services ("CMS," previously the Health Care Financing Administration or "HCFA") to reopen certain Medicare cost report determinations, and make additional Medicare Disproportionate Share Hospital ("DSH") payments to the affected hospitals. In this decision, In re Medicare Reim- bursement Litigation, Baystate Health Systems v. Leavitt ("Bay- state"), the court required CMS to reopen Medicare cost report determinations that were issued during the three year period preceding the Medicare program.s issuance of HCFA Ruling 97-2 on February 27, 1997. In that ruling, CMS revised its interpretation of the Medicaid fraction of the DSH calculation; however, it stated that this revised interpretation would not apply to previously settled cost report determinations. The Baystate court held that pursuant to the cost report reopening regulation that was in effect in 1997, the Medicare program was required to reopen cost report determinations issued during the three year period prior to issuance of HCFA Ruling 97-2, to apply the revised interpretation of the Medicaid fraction to those determinations, and to pay hospitals the additional DSH payments resulting from the revised interpretation.

Under the Medicare program, hospitals that serve a disproportionately high percentage of low income patients are entitled to receive DSH payments. In order to receive DSH payments, a hospital's "disproportionate patient percentage," which is intended to be an estimate of the level of care furnished to low income patients, must meet certain thresholds.

A hospital's disproportionate patient percentage is based on two fractions: the Medicare fraction; and the Medicaid fraction. The Medicare fraction reflects the percentage of the hospital's Medicare Part A patient days that were provided to persons who were also eligible to receive Supplemental Security Income ("SSI") payments. The Medicaid fraction reflects the percentage of the hospital's Medicaid patient days that were provided to persons eligible for Medicaid, but who were not entitled to Medicare Part A. The Medicare and Medicaid fractions are added together to determine if the hospital is entitled to receive DSH payments and, if so, the amount of such payments.

The hospital's disproportionate patient percentage and DSH payments are reflected in the Notice of Program Reimbursement ("NPR"), which is issued by the Medicare fiscal intermediary upon completion of its audit of the hospital's cost report.

In 1986, CMS promulgated an interpretive regulation to implement the DSH law. Under that interpretation, the only patient days that could be included in the numerator of the Medicaid fraction of the DSH calculation were patient days for persons who were eligible for Medicaid, and for which the hospital was actually paid by the state Medicaid agency. Many hospitals challenged this interpretation, and contended that as long as a patient was eligible for Medicaid, the patient day should be included in the Medicaid fraction regardless of whether the state Medicaid program actually paid the hospital for that day. Eventually, four different circuit courts of appeal held that the interpretation issued by CMS was incorrect, and that the numerator of the Medicaid fraction must include all patient days for which a patient was eligible for Medicaid, regardless of whether the state Medicaid program actually paid the hospital for the patient days in question. Thus, the courts held that CMS had improperly restricted DSH eligibility and, as a consequence, improperly reduced payments to eligible hospitals.

In response to these circuit court decisions, HCFA Ruling 97-2 was issued on February 27, 1997. In that ruling, CMS announced that it had changed its interpretation of the calculation of the numerator of the Medicaid fraction to follow the holdings of the courts. CMS directed that in calculating the numerator of the Medicaid fraction, all inpatient days for eligible Medicaid patients must be counted, regardless of whether the hospital received payment from Medicaid for those services.

However, CMS also stated that its new interpretation would only have prospective effect. It directed intermediaries not to reopen settled cost reports, and to apply the new interpretation only to cost reports settled after the date of HCFA Ruling 97-2, or to cost reports for which the hospital had a pending appeal.

The Medicare regulations contain two provisions permitting the reopening of NPRs. One provides that an intermediary's payment determination (such as an NPR) or a decision of the Provider Reimbursement Review Board ("PRRB") "may be reopened" if the issuer of the decision or the affected hospital moves to do so within three years of the date of the determination or decision. The other, prior to its amendment in 2002, provided that an intermediary's determination "shall be reopened and revised" by the intermediary if, within the three year period, CMS notifies the intermediary that its determination was inconsistent with the applicable law, regulations, or general instructions.

Following the issuance of HCFA Ruling 97-2, a number of hospitals filed requests with their intermediaries seeking to reopen NPRs that were issued to them within the three years prior to that ruling. After the intermediaries denied these requests, and the PRRB declined to order the intermediaries to reopen the affected NPRs, the hospitals filed lawsuits.

In 2001, the Court of Appeals for the District of Columbia Circuit issued its decision in Monmouth Medical Center v. Thompson ("Monmouth"). The court ruled that HCFA Ruling 97-2 amounted to a finding that CMS. first method of calculating entitlement for DSH payments was inconsistent with applicable law. Pointing out that the cost report reopening regulation in effect at that time spoke in mandatory terms, and required intermediaries to reopen payment determinations when they received notice that the determinations were inconsistent with applicable law, the court held that HCFA Ruling 97-2 constituted a notice to the intermediaries that the prior interpretation of the DSH calculation was inconsistent with the statute. Thus, the court held that HCFA Ruling 97-2 triggered a mandatory obligation to reopen NPRs that had been issued under the previous interpretation in the three year period prior to issuance of HCFA Ruling 97-2. The court, therefore, rejected CMS' attempt to apply that ruling on a prospective only basis.

The Baystate Decision

Eight months after the Monmouth ruling was issued, 26 hospitals filed suit against CMS, seeking to compel reopening of NPRs that had been issued to them in the three years preceding HCFA Ruling 97-2.

Baystate is the lead case among 250 similar cases, which involve a total of approximately 600 hospitals. Its facts are very similar to those in Monmouth, however, CMS raised several arguments in an attempt to distinguish it from Monmouth. In particular, CMS noted that unlike the hospitals in Monmouth, the hospitals in Baystate had not filed requests for reopening of their affected cost reports with their intermediaries. The court, nonetheless, stated that if the hospitals had filed requests for reopening, the intermediaries would have denied them either as untimely or as barred by HCFA Ruling 97-2, which expressly stated that it could not be applied to previously settled cost reports. The court ruled that since the hospitals could not have ob tained relief by requesting reopening CMS' argument failed. The court held that in accordance with the reopening regulation then in effect, all hospitals were entitled to reopening of their NPRs, whether or not they had filed a request for reopening.

The Baystate court also rejected CMS' contention that granting relief would be inequitable because the hospitals had waited too long to file their court proceedings. The court held that the Medicare program had a clear statutory duty to make the DSH payments, as the NPRs were based on an invalid interpretation of the statute.

CMS asserted that the hospitals' claims in the consolidated actions could involve payment of more than $1 billion, to which the court replied that .having to pay a sum one owes can hardly amount to an equitable reason for not requiring payment.

The Baystate and Monmouth decisions were based on the cost report reopening regulation that was in effect in 1997. This regulation was amended by CMS in 2002, and now provides that in order to trigger the intermediary's obligation to reopen, CMS must provide notice to the intermediary that an intermediary's determination, or hearing decision is inconsistent with applicable law, regulations, CMS rulings, or CMS general instructions then in effect, and as CMS understood those legal provisions at the time the intermediary's determination or decision was issued. In addition, the amended regulation provides that an intermediary is obligated to reopen a determination or decision only if the notice from CMS explicitly directs the intermediary to take such action. In light of this regulatory amendment, the Monmouth and Baystate rulings will likely have limited or no application with respect to CMS rulings issued after October 1, 2002.

Hospitals that have not yet filed in court to compel reopening of their cost reports that were settled during the three years preceding the issuance of HCFA Ruling 97-2 may not be able to obtain any direct benefit from the Baystate decision, because the general federal statute of limitations of six years for filing an action against the government would now bar such an action.

In addition, while Baystate directly addresses the reopening of cost reports to challenge the calculation of DSH payments, the same principles should apply to non-DSH payment disputes as well. Therefore, hospitals should carefully review their cost report determinations that were issued in the three year period prior to the amendment of the reopening regulation (effective October 1, 2002), and evaluate whether there is a basis to require that CMS, and the intermediary, reopen their cost reports.

On August 15, 2005, the Secretary of Health and Human Services ("Secretary"), filed a petition for rehearing of Baystate by the full Court of Appeals for the District of Columbia Circuit. The Secretary argued that the hospitals in Baystate are not entitled to relief because they did not first pursue their DSH reimbursement payments through Medicare's system of administrative and judicial review. The Secretary also contended that the agency's decision to change its interpretation of the Medicaid fraction, in light of the decisions in the four circuit courts of appeal, was not tantamount to a determination that the prior policy was invalid, and that the Baystate court wrongly interpreted both HCFA Ruling 97-2 and the reopening regulation in effect in 1997.

In addition, the Secretary asked the full Court of Appeals to reconsider the Monmouth case, contending that it was also wrongly decided. As of press time for this Law Watch, it was unknown whether the full Court of Appeals for the District of Columbia Circuit would grant the request for a rehearing.

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