Healthcare providers score in challenge to DSH recalculations

Photo from seattlechildrens.org.

Healthcare providers are on the cusp of overturning an expansive recalculation of disproportionate share funding allocations, the latest in several reimbursement battles being waged with Medicare and Medicaid.

Lawyers for Seattle Children’s Hospital and Texas Children’s Hospital convinced a federal judge to temporarily block the enforcement of a Medicaid rule requiring private insurance reimbursement to be included in calculating their hospital-specific limits (HSL) to disproportionate share (DSH) payments.

For the time being, Texas Children’s is avoiding repayment of $21 million, and Seattle Children’s is keeping $7 million, in clawbacks from the Centers for Medicare & Medicaid Services going back to 2011.

The decision by U.S. District Court Judge Emmet Sullivan in Washington D.C. “could have a far-reaching impact on disproportionate share hospitals throughout the country,” said Susan Feigin Harris, a BakerHostetler attorney, who has led the legal action on behalf of Seattle and Texas Children’s.

[See also: Medicaid DSH cuts mean crisis for some hospitals.]

Issued in 2008, the regulation set up provisions of the Medicaid Act that Congress enacted in 2003. The 2008 regulation requires the state government to recover Medicaid DSH payments found by auditors to be in excess of hospital-specific limits starting in 2011, with collected money due either to other state hospitals or back to the federal government.

States were instructed to ensure that DSH payments to each hospital do not surpass a hospital’s total annual uncompensated care costs, defined as inpatient and outpatient costs for Medicaid-eligible individuals and individuals with no third-party coverage, minus payments from Medicaid FFS, Medicaid managed care, supplemental allocations, uninsured patients and the Section 1011 program funding emergency services for undocumented immigrants.

Hospitals did not sue until after CMS released an update to the regulation in 2011, changing the formula for calculating DSH limits by adding the requirement that private insurance reimbursement be included in the tally of Medicaid payments — a factor sure to lower DSH allocations.

Healthcare providers are on the cusp of overturning an expansive recalculation of DSH allocations. - Tweet this

Providers said that CMS skipped over the federal government’s legal duty in rule promulgation, because the addition of private insurance was made to the regulations — in an online update dubbed FAQ 33 — without going through notice and public comment as required under the Administrative Procedure Act. Moreover, they argued, the Medicaid Act amendments Congress enacted in 2003 didn’t authorize any drastic change to the DSH program.

The federal judge hearing the case, Sullivan, agreed.

“The Act does not include private insurance payments among those that are specifically enumerated as offsets,”  wrote Sullivan, the same judge who famously demanded the Internal Revenue Service to produce the much-contested emails related to alleged targeting of Tea Party political groups.

“At most,” he wrote, the changes as passed by Congress “might have delegated to the Secretary the ability to determine by regulation that additional payments should be considered. Even if the Secretary had such discretion, she did not exercise it in the 2008 Rule.”

Seattle and Texas Children’s “are likely to succeed in arguing that FAQ 33 must be set aside as unlawful,” Sullivan concluded. His order extends to all DSH eligible providers, prohibiting CMS “from enforcing, applying, or implementing FAQ 33 pending further order.”

The ruling could face appeal by the Department of Health and Human Services. In the interim, it leaves 2015 DSH payments uncertain for states.

“I believe this decision has far-reaching implications for the healthcare community, especially children’s hospitals that treat a large share of critically ill Medicaid-eligible children,” said Susan Feigin Harris, the BakerHostetler attorney representing Seattle and Texas Children’s.

“These are nonprofit institutions that treat children needing transplants, cancer patients, and premature newborns,” she continued. “Eliminating their payments arbitrarily and recharacterizing private insurance payments as Medicaid payments should be vetted by Congress and the healthcare community, rather than slipped through a frequently asked question on a website.”

Twitter: @AnthonyBrino