September 27, 2011—A recent federal appeals court ruling on how Medicare managed care beneficiaries should be factored into a hospital’s Medicare disproportionate share (DSH) patient percentage could potentially lead to hospitals being terminated from the 340B drug discount program—particularly in states with high Medicare managed care utilization.
In Northeast Hospital Corp. v. Sebelius, the U.S. District of Columbia Circuit Court of Appeals was asked to decide whether the Centers for Medicare and Medicaid Services (CMS) had the authority to include Medicare+Choice (M+C) patient days in the Supplemental Security Income (SSI)/Medicare fraction of a hospital’s DSH patient percentage. The M+C program is now called Medicare Advantage.
The DSH patient percentage, a proxy for the number of low-income patients that a hospital serves, is the sum of a hospital’s SSI/Medicare fraction and Medicaid fraction. Adding M+C days to the SSI/Medicare fraction usually lowers a hospital’s DSH patient percentage. The DSH patient percentage is used to calculate the DSH payment percentage, which determines 340B eligibility. To participate in 340B, public, private nonprofit, children’s and free-standing cancer hospitals must have a DSH payment 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 Northeast case involves a Massachusetts hospital’s contention that CMS’s decision to include M+C days in its SSI/Medicare fraction for fiscal years 1999-2002 was improper and reduced its Medicare payments by nearly $750,000.
In 2004, CMS issued a regulation stating that it was its policy to count M+C days in the SSI/Medicare fraction. In the lawsuit, it argued that prior to 2004 it had an unwritten policy of including the days in the SSI/Medicare fraction.
The hospital contended that, under the Medicare statute, CMS had no right in any year to include the days in the SSI/Medicare fraction. In its Sept. 13 decision, the appeals court disagreed, stating that the statute can be construed to allow inclusion of M+C days in the SSI/Medicare fraction from 2004 forward. But, it added, including M+C days for periods prior to 2004 is impermissible retroactive rulemaking.
During the summer of 2009, the Health Resources and Services Administration notified about 50 hospitals enrolled in 340B that they would be terminated from the program because they had fallen below the DSH eligibility threshold based on SSI/Medicare percentages for 2007, which included Medicare managed care days. The notices were sent shortly after CMS published and then subsequently withdrew those percentages. The hospitals were granted permission to stay in the 340B program because the 2007 percentages were in question.
Many observers believe that CMS delayed issuing final SSI/Medicare percentages for 2007 and subsequent years because it was awaiting the outcome in the Northeast case. They say hospitals should expect CMS to update the SSI/Medicare percentages soon.