Lights Out for Hospitals'Suit Over Medicare Bed Count Rule

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By Eric Topor

Sept. 12 — Ten Ohio hospitals lost a challenge to a Medicare payment rule concerning hospital bed counts that cost them more than $5 million in Medicare reimbursement over three years ( Grant Med. Ctr. v. Burwell , D.D.C., No. 15-cv-480 (RMC), 9/1/16 ).

The plaintiff hospitals said Medicare guidance ( Joint Signature Memorandum 109) discriminated against hospitals in Ohio, Kentucky, Michigan and Tennessee with a different method of counting how many inpatient beds a hospital has, which can affect how Medicare reimbursements are calculated. The hospitals said JSM-109, which was implemented in 2004, resulted in an estimated $5 million in reduced medical education and disproportionate share hospital reimbursements during fiscal years 2002-2004.

Joseph D. Glazer, principle of The Law Office of Joseph D. Glazer PC in Princeton, N.J., told Bloomberg BNA Sept. 12 that the recent decision “shows the challenge [the Centers for Medicare & Medicaid Services] can face in trying to comply with court decisions and still achieve uniformity in applying Medicare rules.” Glazer, who specializes in hospital law, said hospital and representing counsel “need to pay close attention to Medicare litigation that might affect the hospitals’ interests.”

The challenged guidance was issued in 2002 after the U.S. Court of Appeals for the Sixth Circuit said the federal government's method for calculating bed counts violated its own rules by failing to include swing and observation beds in a hospital's inpatient bed count ( Clark Reg'l. Med. Ctr. v. HHS, 314 F.3d 241 (6th Cir. 2002)). The Department for Health and Human Services issued clarifying guidance (JSM-109) in the wake of Clark which applied only to hospitals within the Sixth Circuit, and only for hospital discharges prior to October 2003.

The U.S. District Court for the District of Columbia said in a Sept. 1 ruling that JSM-109 wasn't arbitrary because its application was mandated by a federal appeals court, and rejected the hospitals' argument that the HHS should have ignored the Sixth Circuit's decision.

Judge Rosemary M. Collyer also said the HHS lacked the authority to apply the associated clarifying final rule (68 Fed. Reg. 45346, Aug. 1, 2003) covering all hospital discharges except those within the Sixth Circuit prior to October 2003 retroactively to the plaintiff hospitals as they urged.

Glazer said the effect of the Clark ruling on the plaintiffs now illustrates that “[e]ven if a hospital is not directly involved in a given case, the outcome of the case might have repercussions for other hospitals.”

Glazer said hospitals that aren't party to a lawsuit that may affect them in the future “might even consider attempting to weigh in to protect their own rights and interests when they differ from the hospitals that are plaintiffs in the case.”

Counsel for the hospitals didn't return a request for comment on the decision.

Observation, Swing Beds Affected

The hospitals' dispute centered around the appropriate accounting of swing beds and observation beds in hospitals. Swing beds are hospital beds that can be used for either inpatient care or skilled nursing care depending on a hospital's need, and observation beds are those used to treat patients for short periods, or to monitor patients before determining whether to admit the patient.

Medicare reimbursement is affected by how many inpatient beds a hospital has and how many inpatient bed-days are recorded for a hospital's cost report year. Teaching hospitals generally receive less in Medicare indirect medical education (IME) payments when more inpatient bed-days are reported per medical resident. Conversely, hospitals with greater than a 100 inpatient bed count must meet a far lower threshold for percentage of low-income patient treatment to receive DSH payments, giving some hospitals an incentive to report more inpatient beds.

The Clark court held that swing and observation beds should have been counted as inpatient beds under the HHS's bed count regulation at the time (42 C.F.R. §412.105(b)), which was contrary to the HHS's practice.

The HHS bowed to the Clark ruling via JSM-109 only within the Sixth Circuit's jurisdiction and only for hospital discharges prior to October 2003. The HHS also issued the clarifying final rule, which explicitly excluded swing and observation beds from inpatient bed counts, except for hospitals and cost years affected by Clark and JSM-109.

Agency ‘Nonacquiescence' Strongly Discouraged

The plaintiff hospitals argued that the HHS should have refused to follow Clark, an action termed agency nonacquiescence, because of the HHS's disagreement with the Sixth Circuit's ruling.

Collyer said agency nonacquiescence has been “roundly ‘condemned' by every circuit that has addressed the issue,” and violates the Constitution's separation of powers doctrine. Collyer said the Clark ruling was “broad and clear,” and it wasn't unreasonable for the HHS to choose to apply the Clark ruling through JSM-109 only to the jurisdiction and hospital cost years required by the ruling, even if it resulted in disparate treatment of hospitals in certain situations.

The court also said the HHS couldn't apply the clarifying final rule retroactively to pre-October 2003 hospital discharges within the Sixth Circuit because “a regulation that changes legal rights adversely cannot be applied retroactively.” Collyer said that 68 Fed. Reg. 45346 was merely a clarifying amendment outside of the Sixth Circuit and therefore could be made retroactive, but the new regulation enacted a “substantive change” within the Sixth Circuit after Clark, preventing retroactive application by the HHS.

Bricker & Eckler LLP represented the hospitals. The U.S. Attorney's Office for the District of Columbia represented the government.

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

To contact the editor responsible for this story: Kendra Casey Plank at

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