Hospitals Look to Courts on HHS Rulemaking, Medicare Payments (Updated)

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By Eric Topor

Medicare payments worth potentially hundreds of millions of dollars to hospitals nationwide hang in the balance as providers wait to see whether the Department of Health and Human Services will appeal a recent court loss to the U.S. Supreme Court.

Health-care attorneys will be watching what steps the HHS takes after the U.S. Court of Appeals for the District of Columbia Circuit invalidated the prevailing Medicare rule on how disproportionate share hospital (DSH) payments are calculated, specifically, how the DSH payment calculation accounts for managed care beneficiaries ( Allina Health Servs. v. Hargan, 2017 BL 426456, D.C. Cir., No. 16-5255, rehearing denied 11/29/17).

The appeals court recently denied HHS an opportunity for rehearing in the case. The HHS has until Feb. 27—or longer if an extension is granted—to petition the Supreme Court to review the decision or acquiesce to the July 2017 appeals court ruling. Kenneth Marcus, an attorney with Honigman Miller Schwartz and Cohn LLP in Detroit, told Bloomberg Law the Supreme Court likely would decide whether to grant any petition in Allina during its current term, and if granted, would probably consider the case during the next one.

A Supreme Court decision in Allina could decide whether the Medicare Act allows for interpretive rulemaking, which doesn’t require a public notice and comment period. However, if the HHS decides against Supreme Court review, the agency will have to decide whether to continue to litigate the many similar cases brought by hospitals that are working their way through the administrative appeals process, or acquiesce to the D.C. Circuit ruling.

Stephanie A. Webster with Akin Gump Strauss Hauer & Feld LLP in Washington, who represents the plaintiff hospitals in Allina, told Bloomberg Law that litigation on this issue “could help determine the landscape going forward” for the process of Medicare policy changes. Stephen P. Nash, with Squire Patton Boggs in Denver, noted there is a federal circuit court split on whether the Medicare Act allows for interpretive rulemaking. The split could increase the likelihood of the Supreme Court accepting the case for review.

Acquiescence would mean paying significant Medicare reimbursements to hospitals with pending appeals, Marcus said, a route the HHS took in another DSH dispute, resulting in settlement with hundreds of hospitals in 2016.

“CMS may be reluctant to take that approach,” Marcus said, given the financial cost of complete acquiescence, though he added that administering relief to hospitals nationwide will “consume a lengthy period of time” if the D.C. Circuit ruling stands.

Resolution of Appeals Backlog Not Expected

There appears to be no clear solution to the continuing saga of backlogged Medicare appeals at the administrative law judge level, standing at more than 500,000 appeals heading into 2018. Having been released by the District of Columbia Circuit from a court ruling requiring complete resolution of the backlog by 2020—an impossible goal according to the HHS—the agency has renewed its efforts for obtaining summary judgment on claims brought by the American Hospital Association.

The HHS is again claiming it’s pursuing administrative improvements to increase appeal resolutions, but reiterates that only dramatically increased funding from Congress to increase the number of ALJs will fully resolve the backlog.

Eric Zimmerman, a health-care partner at McDermott Will & Emery LLP in Washington, told Bloomberg Law that the HHS’s Office of Medicare Hearings and Appeals, which administers ALJ appeals, “has taken commendable steps” to reduce the backlog, but he said the backlog “is shameful” and that “much more than is within the current authority of the OMHA needs to be done.”

Nash said one significant cause of the backlog is “the increasing improper use by Medicare Administrative Contractors of ‘rules of thumb’ to deny requests for pre-authoritzation of certain surgical procedures.” However, Nash said none of the global appeal settlement initiatives proposed thus far by the HHS have included these types of appeals.

Reimbursement Lawsuits to Watch

Legal action challenging a Medicare rule slashing drug reimbursements under the 340B program by 30 percent looks likely to continue despite a Dec. 29 dismissal of a lawsuit filed by provider groups ( Am. Hosp. Ass’n v. Hargan, D.D.C., No. 1:17-cv-2447, dismissed 12/29/17). Rick Pollack, president and chief executive officer of the American Hospital Association, one of the lawsuit plaintiffs, said the AHA would continue its efforts in the courts to reverse the reimbursement cuts in a statement following the lawsuit’s dismissal.

Hospitals purchase certain drugs under the 340B program at a discount and are reimbursed through Medicare at 106 percent of the average sales price. Mark D. Polston a partner at King & Spalding in Washington said the plaintiff groups could appeal the dismissal, or file another lawsuit after receiving a claim denial for reimbursement under the new rule. Zimmerman said litigation on this issue will affect “hundreds of providers, as well as the pharmaceutical and pharmacy industries. Nash said additional providers are likely to join the “full court press” of litigation against the Medicare rule and rate cut.

Brad Robertson, a partner at Bradley Arant Boult Cummings LLP in Birmingham, Ala., told Bloomberg Law that the 340B lawsuit could also produce an important opinion about the limits on HHS rulemaking. Robertson also noted that a bill ( H.R. 4392) with bipartisan support is currently before Congress that could block the Medicare rule and 340B change entirely.

In another action of great importance to medical labs that submit Medicare claims, the American Clinical Laboratory Association (ACLA) recently followed through on its threat to sue over $670 million in Medicare lab payment rate cuts scheduled to take effect in 2018. The ACLA alleged the HHS improperly excluded the vast majority of laboratories servicing Medicare patients from the data reporting requirements that were integral in setting the new lab fee schedule ( Am. Clinical Lab. Ass’n. v. Hargan, D.D.C., No. 17-cv-2645, complaint filed 12/11/17).

Karen S. Lovitch, a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Washington and a Bloomberg Law advisory board member, said rural hospitals that accept lab orders from local unaffiliated physicians might curtail that aspect of local outreach under the new lower Medicare rates. She added that the lowered Medicare rates also could lead to lower private lab fee rates over the long term if private insurers push for reimbursement rates to match those paid by Medicare.

Commenting on reports that Congress might try to enact Medicare cuts in 2018, Robertson said any “more than incremental change reducing Medicare reimbursements” will spur litigation. On that point, Robertson said that practitioners should watch for any changes in reimbursement or the payment system itself for off-campus hospital outpatient departments that weren’t grandfathered in under the Bipartisan Budget Act of 2015, which already imposed rate cuts in 2017 and 2018.

Other Cases to Watch

Hospitals also are watching a case challenging whether a hospital can seek judicial or administrative review of a Medicare low-income percentage (LIP) adjustment determination. Plaintiff Mercy Hospital lost its case at trial, with the court ruling that Congress clearly intended to prohibit both judicial and administrative review of LIP adjustment rates paid to individual hospitals.

But Mercy appealed that ruling and the U.S. Court of Appeals for the District of Columbia Circuit heard oral arguments in the case Oct. 24. A ruling will affect not only LIP adjustment payments, but whether hospitals are precluded from appealing other similar payment determinations ( Mercy Hosp., Inc. v. Hargan, D.C. Cir., No. 16-5267, filed 9/23/16).

A ruling on Medicare outlier payments to hospitals for fiscal years 2008-2011 is also expected from the District of Columbia Circuit, which held oral arguments Dec. 15 ( Billings Clinic v. Price, D.C. Cir., No. 17-5006, filed 1/11/17). The HHS already lost an appeal on the issue for FYs 2004-2006, after the same court said the agency had to provide additional support for its methodology of calculating the payments, which compensate hospitals when the cost to care for a Medicare patient exceeds a fixed dollar amount set by the HHS.

The legality of the “two-midnight” rule is still litigated by a group of hospitals unsatisfied by the one-time 0.6 percent inpatient payment boost for FY 2017. The U.S. District Court for the District of Columbia is considering competing motions for summary judgment from some plaintiff hospitals and the government on the issues ( Shands Jacksonville Med. Ctr. v. Hargan, D.D.C., No. 14-cv-263, filed 2/20/14).

Nash, who represents the hospitals in the Billings Clinic litigation, said a ruling against the government would “potentially trigger broad, nationwide exposure to additional Medicare outlier payments” to hospitals. The government could be on the hook for additional Medicare reimbursements in the ongoing two-midnight litigation as well.

Updates with clarification of comment by Stephanie A. Webster.

To contact the reporter on this story: Eric Topor in Washington at

To contact the editor responsible for this story: Peyton Sturges at

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