June 20, 2013—A new federal appellate decision in a dispute over how to calculate safety-net hospitals’ Medicare disproportionate share (DSH) adjustment percentages could affect some hospitals’ participation in the 340B drug discount program.[ms-protect-content id=”2799″]
In its June 11 decision in Catholic Health Initiatives v. Sebelius, the U.S. Court of Appeals for the D.C. Circuit upheld the Centers for Medicare and Medicaid Services’ (CMS) position that days for dual-eligible patients who have exhausted their Medicare Part A benefits must be included in the Supplemental Security Income (SSI)/Medicare fraction of a hospital’s DSH adjustment percentage, rather than in the Medicaid fraction. In general, including dual-eligible exhausted benefit days in the SSI/Medicare fraction rather than the Medicaid fraction reduces a hospital’s DSH adjustment percentage.
Medicare compensates so-called DSH hospitals (those that incur high costs treating a large number of low-income patients) through a system of supplemental adjustment payments. The DSH adjustment percentage is the sum of two calculations: a hospital’s SSI/Medicare fraction and its Medicaid fraction. The SSI/Medicare fraction is a proxy for low-income Medicare patients and the Medicaid fraction is a proxy for low-income non-Medicare patients. To participate in 340B, public, private-nonprofit, children’s, and free-standing cancer hospitals must have a DSH adjustment percentage greater than 11.75 percent. For rural referral centers and sole community hospitals, the threshold is 8 percent. There is no DSH requirement for critical access hospitals.
The Catholic Health Initiatives case involves the pre-2004 treatment of dual-eligible exhausted benefit days. Earlier this year, in Metropolitan Hospital v. HHS, the U.S. Court of Appeals for the Sixth Circuit upheld the prospective application of the 2004 CMS regulation that includes dual-eligible exhausted benefit days in the SSI/Medicare fraction of a hospital’s DSH adjustment percentage. A request for rehearing is pending in that case.
Although the Catholic Health Initiatives case involved a pre-2004 cost reporting period, and thus turned on the legality of retroactive application of the 2004 CMS regulation, the court’s decision strongly suggests that it would uphold the CMS policy of including dual-eligible exhausted benefit days in the SSI/Medicare fraction for post-2004 periods as well. Specifically, as part of its analysis, the D.C. Circuit Court concluded that CMS’s interpretation of the DSH statute was permissible and entitled to deference, a conclusion that seemingly would also apply to the prospective application of the 2004 regulation. At this time, it is not known whether the losing hospital will request a rehearing or seek U.S. Supreme Court review of the decision.
A similar issue is pending in another case also before the D.C. Circuit Court. In Allina Health Services v. Sebelius, a lower court invalidated a provision in the 2004 CMS regulation that required Medicare Part C days to be included in the SSI/Medicare fraction of a hospital’s DSH percentage. The federal government has appealed that ruling. In a September 2011 decision in a related case, Northeast Hospital Corp. v. Sebelius, the D.C. Circuit Court ruled that CMS could not include Medicare Part C days in the DSH formula’s SSI/Medicare fraction for pre-2004 cost reporting periods, but did not rule on whether it could include Part C days in the SSI/Medicare fraction from 2004 forward.
In March 2012, CMS posted final SSI percentages for 2006 through 2009 that included dual-eligible exhausted benefit days. Last October, it published final SSI percentages for 2010 that also included exhausted benefit days. For 340B eligibility purposes, the Office of Pharmacy Affairs (OPA) uses the most recent SSI percentages.[/ms-protect-content]