D.C. Circuit Joins Sixth Circuit in Decision Regarding DSH Exhausted Part A Days: Catholic Health Initiatives v. Sebelius, D.C.Cir.

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On June 11, the U.S. Court of Appeals for the District of Columbia decided the appeal of the U.S. Department of Health & Human Services (HHS) in Catholic Health Initiatives v. Sebelius, No. 12-5092, regarding the exclusion of dual-eligible patient days in the Medicaid fraction when calculating the disproportionate patient percentage (DPP) that applies to a hospital's disproportionate share hospital (DSH) adjustment. At issue were the interpretation of the "entitled to benefits under Part A" phrase in the Medicare statute and the alleged retroactive application of this interpretation to a 1997 cost-reporting period. The dispute involved the placement of dual-eligible patient days into the Medicare versus Medicaid fraction when calculating DSH adjustments.

• The Court of Appeals reversed the district court and upheld HHS' interpretation of the phrase "entitled to benefits under Part A" resulting in the continuation of dual eligibles being placed in the Medicare fraction for calculation of DSH adjustments.
• The court also held that there was no impermissible retroactive application.

The U.S. Court of Appeals for the Sixth Circuit recently reached a similar holding in Metropolitan Hospital v. Sebelius, Nos. 11-2465 and -2466. A request for rehearing en banc is pending in that case.

Prior Proceedings
In 1999, the hospital submitted a cost report for the 1997 cost-reporting period which included dual-eligible exhausted days for two patients in the Medicaid fraction numerator. In 2000, HHS decided Edgewater Medical Center v. Blue Cross & Blue Shield Ass'n and determined that dual-eligible exhausted days should not be included in the Medicaid fraction.¹ The fiscal intermediary with jurisdiction then revised its calculations and excluded the dual-eligible patient days from the Medicaid fraction and recalculated the 1997 DSH adjustment. The hospital appealed and the intermediary included some of the dual-eligible exhausted days.

In 2005, the intermediary reopened the case.² The reopening was prompted by a 2004 rulemaking in which HHS adopted a policy to include the days associated with dual-eligible patients in the Medicare fraction, despite exhaustion. Following a decision by the Provider Reimbursement Review Board (PRRB) to reverse the intermediary's decision, the HHS Secretary reversed PRRB's decision and found that the phrase "entitled to benefits under Part A" conveys legal status on a patient that would not end with exhaustion. The Secretary also noted that this interpretation has always been HHS' policy. The hospital then filed suit in District Court.

The hospital argued that the phrase "entitled to benefits under Part A" means entitlement to have payment made under Part A on a patient's behalf and therefore ended once a patient's Part A benefits were exhausted. This interpretation would put the dual-eligible patient days into the Medicaid fraction. Regardless, the hospital argued that the application of HHS' interpretation was an unauthorized retroactive application of a 2004 rulemaking to a 1997 cost-reporting period. The District Court passed on the first issue and granted the hospital's Motion for Summary Judgment on the second holding that the application of the 2004 rulemaking was impermissibly retroactive.

Court of Appeals Decision
The Court of Appeals noted the "Medicare statute's inconsistent and specialized use of the phrase 'entitled to benefits under Part A'" and concluded that both the hospital's and HHS' interpretations of the phrase were permissible. Therefore, following the analysis set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 476 U.S. 837, 842-43 (1984), which held that a where a statute is silent or ambiguous on an issue if the agency interpretation is permissible, the agency interpretation will be given deference, the court deferred to HHS' construction of the phrase in the Medicare statute.

Further, the Court of Appeals noted the decision in 2000 in Edgewater to exclude dual-eligible exhausted days from the Medicaid fraction. This adjudication established the policy on the exclusion of dual eligibles from the Medicaid fraction. The 2004 rulemaking where HHS adopted the policy on exclusion of dual-eligible exhausted days was a "reiteration of this position." Even if the Edgewater adjudication was applied retroactively, it was not done so in a manner that constituted "unfair retroactivity that may render an agency decision arbitrary and capricious."

Finally, the Court of Appeals found that Catholic Health Initiatives did not argue either in its briefing or during oral argument that it detrimentally relied on the agency's allegedly contrary policy.

A higher DPP means greater reimbursement for a hospital because that hospital would be servicing more low-income patients. If the dual-eligible exhausted days are excluded from the Medicaid numerator, the Medicaid fraction will go down and arguably for most hospitals the Medicare fraction will go up, resulting in a lower DPP.³ As there are many providers with individual and group appeals before PRRB on this issue and the decision potentially lowers reimbursement, this decision will be significant for hospitals.
 

¹ Edgewater Medical Center v. Blue Cross & Blue Shield Ass'n, 2000 WL 1146601 (June 19, 2000).
² Reopening permissible under 42 C.F.R. §405.1885 (b).
³ The Court of Appeals Footnote 1 discusses the mathematics of the fractions.