Providers Score a Victory in DSH Litigation

Spring 2006

In August 2005, the United States Court of Appeals for the District of Columbia Circuit ruled that CMS must reopen certain Medicare cost reports and provide relief to providers seeking additional disproportionate share (DSH) payments under Medicare. In re Medicare Reimbursement Litigation, 414 F.3d 7 (D.C. Cir. 2005) (Baystate). This case is significant because hundreds of providers have filed actions in D.C. seeking the very relief the D.C. Circuit has now ordered. Thus, if a decision stands, it will likely lead to hundreds of millions of dollars in additional Medicare reimbursement.

The D.C. Circuit's decision follows more than a decade of litigation between the provider community and CMS. Congress created the DSH adjustment to compensate Medicare hospitals that serve a disproportionately large number of low-income patients. 42 U.S.C. § 1395ww(d)(5)(F). The payment is based in part upon a Medicaid fraction. From the enactment of the DSH provision until 1997, the Secretary interpreted the statute's language as including in the numerator of the Medicaid fraction only those patient days for which the hospital actually had received Medicaid payments. The hospitals, however, argued that the numerator should be larger and include those days for which patients satisfied Medicaid eligibility criteria but for which no Medicaid payment was made because of state Medicaid coverage requirements or length-of-stay limitations. Numerous courts addressed this issue — whether eligible-but-not-paid days must be included in the numerator — and, by the end of 1996, four Circuit Courts of Appeals had ruled against CMS and had concluded that eligible-but-not-paid days must be included in the numerator.

In 1997, CMS ultimately conceded the providers' point and, in HCFA Ruling 97-2, announced that it would include eligible-but-not-paid days in the Medicaid fraction. CMS, however, continued to place limitations on this policy change. It stated that it would apply its new policy on a prospective-only basis, using the new methodology for cost reports settled "on or after the effective date of this ruling" and for cost reports "for which the hospital has a jurisdictionally proper appeal pending." Drawing a line in the sand, CMS expressly stated that it would not "reopen settled cost reports based on this issue."

Dissatisfied with CMS's limited grant of relief, numerous providers appealed. In 2001, in Monmouth Medical Center v. Thompson, 257 F.3d 807 (D.C. Cir. 2001), the D.C. Circuit rejected the CMS position and held that Ruling 97-2 coupled with CMS's own reopening regulation required fiscal intermediaries to reopen settled cost reports to give providers the retroactive benefit of the new methodology. The court ruled that, under the Secretary's reopening regulation, the Secretary must reopen matters when he "notifies the [fiscal] intermediary that [a final] determination or decision is inconsistent with applicable law .." See 42 C.F.R. § 405.1885(b). Ruling 97-2, the court held, notified CMS's fiscal intermediaries that the DSH payment methodology was incorrect, thereby imposing a clear and unambiguous duty on the intermediaries to reopen, a duty that could be enforced through a writ of mandamus.

Following Monmouth, providers around the country filed over 250 suits in the D.C. Circuit seeking the benefits of that ruling. The district court consolidated the cases, with Baystate Health Systems taking the lead in litigating the core legal issues common to the consolidated cases. In their suits, Baystate and the vast majority of the other providers sought to reopen cost reports that had become final when the hospitals received their notices of program reimbursement (NPRs) for cost years ending between 1994 and 1996, that is, for the three-year reopening period prior to the issuance of Ruling 97-2. The providers acknowledged that they did not fit within the express language of Ruling 97-2 in that they did not claim reimbursement in their cost reports for eligible-but-not-paid days and did not file appeals to the Provider Reimbursement Review Board (PRRB) seeking payment for the years in question. Additionally, they acknowledged that they had not requested reopening from CMS seeking the benefits of Ruling 97-2 within three years of the issuance of that ruling. The fact pattern presented by the hospitals thus was somewhat different from that presented by Monmouth Medical Center, which had sought to reopen its NPR for the three-year period prior to Ruling 97-2. Nevertheless, Baystate and the other providers took the position that the Medicare reopening regulation — and its use of the word "shall" — required CMS to reopen past NPRs once the agency had determined, as it had in Ruling 97-2, that its prior position was "inconsistent with the applicable law."

The D.C. Circuit agreed with the providers. The court ruled that, in Monmouth, it had held that Ruling 97-2 "amounted to a notice of inconsistency" and that 42 C.F.R. § 405.1885(b) "mandates reopening when HCFA issues such a notice." Although CMS insisted that the hospitals, unlike the Monmouth plaintiffs, had never sought reopening pursuant to § 405.1885, the court concluded that requesting such reopening would have been futile because, pursuant to the terms of Ruling 97-2, "the hospitals could not have obtained relief by seeking reopening in 1997." Given this, the court ruled in the providers' favor and rejected the government's position.

The government, however, has not conceded defeat. In August, the government filed a petition for rehearing en banc. In its petition, the government argued that the position taken by the court in both Baystate and Monmouth is incorrect. It asserted that mandamus, the basis upon which the court had granted relief, was an inappropriate basis for relief because the hospitals had failed to pursue their DSH reimbursement payments through an "entirely adequate remedy," the remedy that the providers had pursued in the four appeals courts' decisions leading up to the issuance of Ruling 97- 2. The government maintained that claimants who wish to challenge the legal basis of an administrative decision must do so when the case is decided and cannot later use mandamus "as a back door for their lapsed payment claims." Moreover, the government argued, the case law from the Supreme Court establishes that reopening is wholly discretionary and generally nonreviewable, offered only as a matter of administrative grace. Given this, the government asserted there is no clear duty of a nondiscretionary nature owed the providers, as mandamus requires. The government also pointed out the conflict between the D.C. Circuit's rulings and the decision of the United States Court of Appeals for the Tenth Circuit in Bartlett Memorial Medical Center, Inc. v. Thompson, 347 F.3d 828 (10th Cir. 2003), which rejected the D.C. Circuit's holding in Monmouth. In Bartlett, the Tenth Circuit noted that, in 97-2, CMS had plainly stated its intent not to allow reopening, the very result that the D.C. Circuit said was compelled by 97-2.

The many arguments posed by the government in its petition, however, were not sufficiently persuasive to compel the full D.C. Circuit to accept rehearing; the court recently denied the government's petition. The question now is whether the government will seek a writ of certiorari. It seems plain from discussions with CMS representatives that they hope the Baystate case will be appealed to the Supreme Court. They believe that the Baystate and Monmouth holdings are inconsistent with what they view to be the better-reasoned Bartlett decision out of the Tenth Circuit. Whether this view will prevail and whether the Supreme Court will be asked to grant a writ of certiorari is, at the moment, unclear. The only thing that is clear is that the reimbursement stakes are high. Accordingly, this is a matter that providers and the government will follow with interest over the ensuing months.