HHS Rule on Medicare Pay for Psychiatric Hospitals Upheld

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By Eric Topor

Dec. 30 — A federal appeals court Dec. 29 affirmed a Medicare regulation for determining reimbursement amounts for psychiatric hospitals for the cost reporting years of 2003 and 2004 over a hospital's objections that the regulation impermissibly extended temporary reimbursement caps enacted by Congress past 2002.

Medicare caps for psychiatric hospitals, authorized by Congress in the Balanced Budget Act of 1997 (BBA) (42 U.S.C. §1395ww(b)(3)(H)), were set to expire in 2002 and be replaced by a prospective payment system (PPS). However, the Department of Health and Human Services didn't have regulations to implement the PPS for psychiatric hospitals ready until the 2005 cost reporting year, and it continued the BBA cost reporting calculation methods for the two intervening years.

Plaintiff Washington Regional Medicorp of Fayetteville, Ark. (doing business as Fayetteville City Hospital), said the use of the 2002 cost reporting year to calculate the 2003 and 2004 cost reporting years impermissibly perpetuated the effect of the BBA reimbursement caps past their intended 2002 expiration.

Court: HHS's Interpretation Best

However, the U.S. Court of Appeals for the District of Columbia Circuit affirmed a district court ruling that granted summary judgment to the HHS, holding that the secretary's use of the 2002 cost reporting year to calculate the two subsequent years was the “best interpretation of the controlling statute.”

Senior Judge David B. Sentelle said in the court's opinion that HHS's methodology of using the 2002 cost reporting year and adding an applicable percentage was the best approach to bridging the unanticipated gap years. Sentelle cited §1395ww(b)(3)(A)(ii), which governs a psychiatric hospital's target amount for a cost reporting year other than its first, and instructs the HHS to use the “preceding 12-month cost reporting period,” which would be 2002 for the 2003 cost reporting year.

Fayetteville City Hospital argued that this effectively extended the BBA caps through the 2003 and 2004 cost reporting years, as both would be affected by the caps if the 2002 cost reporting year was used as the target amount for the 2003 cost reporting year.

The court acknowledged that the BBA caps did have an effect on the 2003 and 2004 cost reporting years using the HHS's methodology, but said that “this ‘echo effect' is not contrary to statute.” Sentelle also said the HHS's interpretation for the two gap years “is consistent with Congress's ‘progressive effort' to move hospitals” to the PPS-style reimbursement model.

Dan M. Peterson in Fairfax, Va., represented Fayetteville City Hospital. The Department of Justice represented the government.

To contact the reporter on this story: Eric Topor in Washington at etopor@bna.com

To contact the editor responsible for this story: Janey Cohen at jcohen@bna.com