Last week, the United States Court of Appeals for the District of Columbia Circuit upheld the ruling of a federal district court vacating HHS’s 2004 Disproportionate Share Hospital (“DSH”) rule regarding Part C days.  The D.C. Circuit held that the district court properly determined that HHS “did not provide adequate notice and opportunity to comment before promulgating its 2004 rule,” and its failure to do so was not harmless error.  The Court, however, reversed the lower court’s order directing the agency to pay hospitals under the pre-existing policy of including dual-eligible Part C days in the Medicaid fraction in the DSH formula and not in the Medicare fraction.  The D.C. Circuit left open the possibility that HHS could achieve the same result as its void rule through “adjudication.”  At this time, HHS has not indicated whether it will attempt to achieve the same result through adjudication or simply pay hospitals under its prior policy.   Thus, the immediate impact of the decision is not clear at this time, and there may be more years of litigation ahead on this issue depending on how HHS reacts to the Court’s decision.

The Medicare DSH computation has two elements:  the “Medicaid fraction” which is the percentage of Medicaid days of total days; and the “Medicare fraction” which is the percentage of SSI patient days of Medicare days.  Under CMS’s policy announced in 2004 and first implemented in the settlement of 2007 cost reports, Medicare Advantage (Part C) days were included in the denominator of the so-called “Medicare fraction” in the DSH formula and dual-eligible Part C and Medicaid days were included in the numerator of that fraction.  Previously, dual-eligible Part C patient days were included in the Medicaid fraction.  The result of CMS’s policy change was to dilute the Medicare fraction, and to reduce Medicare DSH payments.  For some hospitals, the reduction was substantial.  

Regardless of what HHS decides to do for prior years in light of the D.C. Circuit Court’s decision, HHS will certainly take the position that as of October 1, 2013, Part C days must be included in the “Medicare fraction” in the DSH formula because it promulgated a rule in the most recent hospital IPPS rulemaking that was effective October 1, 2013. 

View a copy of the D.C. Circuit’s opinion by clicking here.