Hospitals Allege Federal Government Ignored Precedent on Medicaid and Medicare Cost-Sharing

A case was filed Monday against the Department of Health and Human Services, and its Secretary, by 63 hospitals. The suit, filed in the District of Columbia District Court, alleges that the Center for Medicare and Medicaid Services (CMS) willfully ignored three prior court rulings to continue to apply a rule issued in 2004 that uses a calculation that reduces Medicare payments made to hospitals in areas with a disproportionate share of low-income and uninsured parties.

At issue in the suit is the Medicare Part A disproportionate share hospital payment (DSH). As the name implies, this share intends to increase the payment from Medicare for hospitals that have a disproportionate number of patients who are Medicare and Medicaid eligible and therefore are in need of greater federal funding. The complaint takes issue with the calculation of the DSH payments dealing with patients who are enrolled in Medicare Advantage plans under Part C of the Medicare Act. Prior to 2004, patients who were enrolled in Medicare Part C were included with the calculations for Medicaid reimbursement and were reimbursed at a higher rate. After the 2004 policy change, Part C patients would be included in the Medicare category and reimbursed at the lower rate. Initially, CMS attempted to apply the new calculation retroactively, but this was overruled in a D.C. Circuit case, Northeast Hosp. Corp. v. Sibelius.

After that ruling, CMS then issued prospective guidance for the 2007 fiscal year indicating that the rule change was to be applied prospectively. However, this attempt was challenged in Allina Health Services v. Sebelius. The court termed the changes in 2004 as a “volte-face” and “abruptly announced a change in policy.” and indicated that the changes did not meet the requirements of the Administrative Procedures Act (APA) regarding notice and comment periods, as well as requirements for a logical reasoning explaining the changes. While the litigation was still pending in the Alina Health case, CMS readopted the rule change for fiscal year 2013. However, this readoption was issued without a notice and comment period, and the court of appeals again held that this decision violated the APA in Allina Health Servs. v. Price.

This complaint alleged that CMS continues to apply the 2004 rule despite prior determinations that the application of the rule fails the APA. The complaint also alleged that CMS has sought to administratively prevent cases from going to judicial review by removing the jurisdiction of the appeals board for this type of complaint.

The plaintiffs are represented by Ropes & Gray LLP.