During the summer months, several developments have occurred concerning the Medicaid Disproportionate Share Hospital (DSH) policy that the Centers for Medicare & Medicaid Services (CMS) has implemented, to the detriment of a number of hospitals. These hospitals and state hospitals associations have challenged CMS in district courts all over the country and several courts ruled over the summer months, issuing decisions that enjoined the application of the Medicaid DSH policy.

The Offending Policy

The Medicaid Act provides for a supplemental payment to qualifying hospitals that provide care to a disproportionate share of Medicaid program and uninsured patients. Once qualified, the formula determines the hospital-specific limit (HSL) for each hospital, which determines the maximum DSH supplemental payment. The formula, defined in 42 USC § 1396r-4(g)(1)(A), specifically defines the HSL as the “costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by the uninsured patients) by the hospital to individuals who are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year.”

CMS posted questions and answers (commonly referred to as “FAQs”) on its website in January, 2010. Two FAQs (#33 and #34) require that DSH auditors subtract third party commercial payments made on behalf of Medicaid eligible individuals (FAQ 33) and Medicare program payments made for dual eligible individuals (FAQ 34). The result significantly reduces or eliminates Medicaid DSH payments associated with individuals who qualify for Medicaid due to their illness, but for whom Medicaid is not the primary payor, and for individuals who are dual eligible, as defined by the Medicare program. In essence, CMS redefines the term “dual eligible” to add in private commercial payments in their new policy. CMS argues that the term “costs incurred” means hospital inpatient and outpatient costs minus payments made from commercial third party payors and the Medicare program, all calculated before the subtraction of Medicaid payments on the payment side of the formula.

Hospitals and hospital associations have challenged the application of the policies contained in the FAQs as a new and completely changed methodology, one which was implemented without notice and comment required under the Administrative Procedures Act, as well as a violation of the clear statutory language itself. The first case, Texas Children’s Hospital v. Burwell (D.D.C.), in 2014, resulted in a preliminary injunction entered in favor of Texas Children’s Hospital and Seattle Children’s Hospital that applied to Texas and Washington states, enjoining CMS from enforcing FAQ 33. Summary judgment motions remain pending in that case. However, since 2014, a number of other hospitals in jurisdictions around the U.S. have brought similar lawsuits challenging the FAQs.

Summer Court Action

In June, three additional decisions were issued. The first, issued June 20, 2017, held in favor of Children’s Hospital of the King’s Daughters, Inc. v. Price (No. 17-cv-139; 2017 WL 2936801) (E.D. Va. June 20, 2017), preliminarily enjoining CMS from enforcing FAQ 33 in Virginia. The court ruled that the Medicaid Act does not authorize CMS to include third-party commercial payments in the HSL. The court’s decision was converted to a final judgment in favor of the hospital, issued August 24, 2017. A final judgment was entered June 21, 2017 in the Tennessee Hosp. Ass’n v. Price case, No. 16-cv-3263; 2017 WL 2703540 (M.D. Tenn. June 21, 2017) which challenged both FAQs. The court granted summary judgment in favor of plaintiffs on their APA claim, holding that the policy violated the APA by conflicting with the Medicaid Act and the 2008 rule. Finally, on June 26, 2017, the Minnesota district court permanently enjoined CMS from enforcing FAQ 33 and vacated FAQ 33 as procedurally invalid in the Children’s Health Care v. Price case, No. 16-cv-4064 (D. Minn. June 26, 2017).

The 2017 Final Rule

CMS has not been deterred. Rather, CMS is signaling its intention to move forward with appeals of the adverse FAQ decisions and by pursuing its policy through issuance of a final rule formalizing the embattled FAQ policies. The final rule specifies as “clarifying’ in nature the application of commercial third party payments for Medicaid-eligible patients, and Medicare payments for dual eligibles in the HSL formula. The final rule, promulgated at 42 C.F.R. § 447.299, went into effect on June 2, 2017, but several cases have been filed challenging the promulgation of the final rule, in addition to the FAQs. Legally, a clarifying rule would have retroactive effect, meaning that the final rule would apply to all of the years that would be under audit prior to the “effective date”, but CMS has argued in court that the final rule only applies to services provided subsequently to the effective date. CMS’s assertions are inconsistent and not legally valid, given the specific language used within the final rule itself. The rule has been challenged in the District of Columbia District Court, filed by twelve hospitals, comprised of many of the same hospitals in the Texas, Washington, Minnesota and Virginia FAQ cases. A hearing was held in early August. Additionally, rule challenge cases have been filed by hospitals in Missouri, Pennsylvania, and Kentucky, Mississippi and New Hampshire.

Currently, CMS’s power to enforce DSH audit recoupments has been somewhat checked, but such enforcement is limited only to those states in which the application of the policy has been specifically challenged. If the rule itself is eventually vacated, the application of the DSH formula would be rendered impotent, but conceptually would not apply to the underlying FAQ challenges. The rule challenge court decision could be the next important step in obtaining much- needed financial relief for those hospitals who have not received DSH program year payments or who have been holding reserves for pending recoupments, while sending a message to CMS relating to the ultimate positioning of their legal posture.