Executive Summary

Last week, the United States Court of Appeals for the D.C. Circuit released a decision related to Medicare Disproportionate Share Hospital ("DSH") payments that has the potential to be a significant victory for hospitals appealing the Part C Medicare Advantage Days issue.  At issue was whether such days would be included in the Medicare fraction (Secretary's position) or the Medicaid fraction (hospitals' position) when calculating DSH eligibility and payment.  The Court ruled that the promulgation of the regulation including these days in the Medicare fraction was improper since the Proposed Rule sought to do the opposite of what CMS did in the Final Rule and therefore did not provide the required notice to the industry under the Administrative Procedures Act ("APA").  The Court also ruled that the plain language of the Medicare Statute clearly requires that Part C days be included in the DSH calculation.  It remains to be seen whether the Secretary will further appeal or adjudicate this matter, but this decision is a very favorable one for hospitals that perfected appeal rights on this issue. 


On April 1, 2014, the D.C. Circuit for the United States Court of Appeals released a major decision in Allina v. Sebeliusrelating to calculation of Medicare DSH payments.  As explained below, the Court of Appeals affirmed in part, and reversed in part, a very favorable lower court ruling from the District Court. 

At issue was which fraction of the DSH formula Part C Medicare Advantage Days should be included in when determining a hospital's eligibility for, and amount of, DSH payments.  The Secretary first proposed a rule saying these days would be counted in the Medicaid Fraction, an approach more favorable to hospitals.  However, in the publication of the Final Rule, the Secretary did exactly the reverse, requiring that these days be counted in the Medicare fraction, an approach less favorable to hospitals.

The Court of Appeals ruled that the Secretary's promulgation of the unfavorable Final Rule violated the APA because the industry was denied opportunity to comment on the rule as finalized.  The Court held that the hospitals were not on notice that the Secretary might do the opposite in the Final Rule of what the Secretary stated in the Proposed Rule, and further found that the Final Rule did not meet the legal standard of being "a logical outgrowth of the Proposed Rule."   Accordingly, the Final Rule is void and any further adjudication of this issue would proceed with the Secretary unable to rely upon it, as if the adverse Final Rule never happened.

The Court of Appeals directly stated that "the statute unambiguously requires that Part C days be counted in one fraction or the other."  The Court also stated that "a party reviewing the Secretary's notice of proposed rulemaking understandably would have assumed that the Secretary was proposing to 'clarify' a then-existing policy, i.e. one of excluding Part C days from the Medicare fraction and including them in the Medicaid fraction."

Finally, the Court of Appeals ruled that the District Court went too far in directly ordering the Secretary to recalculate DSH payments to include Part C days in the Medicaid fraction, holding that the agency was free to decide "how to resolve the problem."  In theory, this could leave the agency free to adjudicate the issue on a case-by-case basis, arguing that the statute is ambiguous on the question of which fraction Part C Days belong in and is therefore within the discretion of the Secretary to decide.  However, the Secretary may have a difficult time with such an approach as the Court of Appeals also suggested that the Proposed Rule reflected the Secretary's then existing policy, which other case law holds the Secretary may change only by promulgating a formal rule with appropriate notice and comment under the APA and not through adjudication.

The possibility of a split decision of this nature was something we realized might occur.  We will continue to evaluate this decision and keep hospitals apprised of CMS's response to it.  The Secretary may continue to contest this issue, either through the adjudication process and arguments discussed above or by appealing the decision to the Supreme Court of the United States.  It is also possible that CMS could order the Medicare Administrative Contractors ("MACs") to reopen hospitals' Notices of Program Reimbursement ("NPRs") that were appealed and exclude Part C Days from the Medicare fraction.  Whether the Secretary would also allow the Part C Days that are dual eligible to be included in the Medicaid fraction is a different question though, which may be less likely to occur.

Practical Takeaways

Many hospitals previously received notices from their MACs indicating they would reopen cost reports to adjust DSH payments in the event of an unfavorable final non-appealable decision in Allina.  Since the Court issued a split decision, with language favorable to both sides, it is unlikely that the reopenings will occur in the immediate future.

Because these reopening notices are discretionary and carry no appeal rights, if you have not previously appealed this DSH Medicare Advantage Part C Days issue, you should consider doing so now.  Appeals must be filed within 180 days of the hospital's NPR date, which is issued after the cost report is settled.

Additionally, in order to preserve your right to appeal this or any other potential cost report issues, hospitals should continue to include such appeal issues as protested items in their cost reports upon submission.  If you have not previously done so, we recommend that you amend your unaudited cost reports to include the protest items and obtain proof of delivery of those amendments.