Kentucky Hospitals Lose Medicare Tax Reimbursement Appeal

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By Eric Topor

The HHS can deduct certain Medicaid payments funded through a Kentucky hospital tax from the Medicare reimbursements of hospitals paying the tax ( Breckinridge Health, Inc. v. Price , 2017 BL 201609, 6th Cir., No. 16-6269, 6/14/17 ).

The U.S. Court of Appeals for the Sixth Circuit affirmed June 14 a district court ruling in which eight Kentucky critical access hospitals challenged deductions from their Medicare reimbursements in the amount they received in state Medicaid disproportionate share hospital (DSH) payments. Kentucky Medicaid DSH payments are partially funded through a state hospital tax for which the hospitals sought reimbursement from Medicare as a cost of providing care.

The court relied heavily on precedent from the Seventh Circuit, which ruled in favor of the HHS on a similar tax cost issue in 2012. The agreement between the two federal appeals court decisions suggests that the HHS will have success in offsetting hospitals’ claimed Medicare tax reimbursements with any Medicaid DSH payments funded by those state taxes in jurisdictions outside these two federal appeals court jurisdictions as well.

The court said the Department of Health and Human Services acted reasonably in determining that the Medicare tax costs claims were offset by the Medicaid DSH payments the plaintiff hospitals received and in deducting the DSH payments from the claimed tax costs. The eight plaintiff hospitals won’t be able to recoup about $800,000 in Medicare reimbursements over two years as a result of the decision.

Kentucky System Different?

David M. Dirr, with Dressman Benzinger LaVelle in Crestview Hills, Ky., said his hospital clients are disappointed with the court’s decision and are considering their appeal options.

The hospitals “don’t believe that the facts in the record support the finding that the Disproportionate Share Hospital payments were refunds of the provider tax,” Dirr told Bloomberg BNA.

“We recognize the quid-pro-quo nature of provider tax systems in some states, but, in Kentucky, payment of the provider tax does not entitle a hospital to any payment from the state,” Dirr continued.

The decision also could present “an opportunity to challenge the continued viability of the judicial deference doctrine in cases with facts similar to this one,” he concluded.

The HHS did not respond to Bloomberg BNA’s request for comment on the decision.

State Tax Fund

The hospitals paid the taxes at issue into Kentucky’s Medical Assistance Revolving Trust (MART), and they were reported as expenses eligible for Medicare reimbursement under cost reports from 1994 through 2010. The plaintiffs also received Medicaid DSH payments, which are paid from the MART fund to eligible hospitals in the state.

The plaintiffs’ Medicare expenses for their state hospital taxes paid to the MART were fully reimbursed through their Medicare payments until fiscal years 2009 and 2010, when their Medicare contractors imposed offsets in the amount of Medicaid DSH payments each hospital received for those years.

Guidance From 7th Circuit

The appeals court, as well as the trial court, relied on Abraham Lincoln Mem’l Hosp. v. Sebelius from the Seventh Circuit, which in that case held that the hospital payments at issue were sufficiently related to later Medicaid payments that the taxes weren’t reimbursable as expenses incurred.

Although the Sixth Circuit noted that the tax and payment system set up by Illinois in the Abraham Lincoln Mem’l Hosp. litigation aren’t identical to one used by Kentucky, they both involved hospital taxes paid into a fund that receives other sources of funding as well and that later made payments to hospitals through Medicaid. The court looked to the “totality of the circumstances” in both state systems to reach its decision to follow the reasoning in Abraham Lincoln Mem’l Hosp., which suggests the ruling may be interpreted more broadly by other courts as well.

The court said the hospitals’ DSH payments were derived at least in part from the taxes the hospitals claimed as Medicare reimbursement, and it was reasonable to characterize the DSH payments as a refund of taxes paid, and offset the claimed Medicare reimbursement.

Dressman Benzinger LaVelle represented the hospitals. The Department of Justice represented the HHS.

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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