Safety-Net Hospitals Lose Challenge of Medicare DSH Payment Rule

In a narrow ruling, the Supreme Court recently sided with HHS in a case challenging a multi-billion dollar cut to Medicare payments to safety-net hospitals.

The Court ruled 5 to 4 that HHS did have the authority to modify the calculations of Medicare payments to Disproportionate Shared Hospitals (DSH). These hospitals qualify for additional Medicare payments if they serve a disproportionate number of low-income patients.

HHS issued a rule in 2004 that altered how CMS determined the Medicare reimbursement rate paid to qualifying hospitals. The rule specifically altered the “Medicare fraction,” which partly determines a safety-net hospital’s additional Medicare payments using the number of a hospital’s patient days attributable to low-income patients who were entitled to benefits under Medicare Part A for those days. The 2004 rule expanded the definition of “entitled to” to mean all patients eligible for Medicare Part because they are 65 years or older or disabled, even if Medicare Part A is not paying the hospital for the inpatient services.

The new interpretation of “entitled to” resulted in a larger denominator for the Medicare fraction, which led to lower DSH percentages for most safety-net hospitals.

Despite complaints from safety-net hospitals, the Supreme Court ruled that HHS had the authority to interpret the Medicare payment statute as it did in the 2004 rule.

“That reading gives the ‘entitled’ phrase the same meaning it has throughout the Medicare statute,” wrote Justice Elana Kagan in the majority opinion. “And it best implements the statute’s bifurcated framework by capturing low-income individuals in each of two distinct populations a hospital serves.”

Furthermore, Justice Kagan explained that upholding the pre-2004 interpretation, which only included patients who were entitled to have Medicare pay for hospital services so long as Medicare was obligated to pay, would result in Medicare beneficiaries losing “important rights and protections,” including a patient’s ability to enroll in other Medicare programs just because he did not have right to Part A payments for hospital care.

“[A] person’s entitlement to Part A benefits is usually the predicate for his enrollment in Part B (covering outpatient care), Part C (providing coverage through privately managed plans), or Part D,” Justice Kagan wrote. “Consider what that might mean in the real world: A Medicare patient in the hospital for longer than 90 days—by definition, a very ill person—could not enroll in Part D’s prescription-drug coverage. Congress could not have wanted—and in fact did not provide for—that result.”

In a dissenting opinion authored by Justice Brett Kavanaugh, the dissenting justices countered that “HHS’s 2004 interpretation is not the best reading of this statutory reimbursement provision.”

“In my view (and in HHS’s view from 1986 to 2003), a patient was entitled to have payment made by Medicare for particular days in the hospital if Medicare was obligated to pay for the patient’s care for those days,” Justice Kavanaugh wrote. “Stated the other way, a patient was not entitled to have payment made by Medicare for particular days in the hospital if the patient by statute could not (and did not) have payment made by Medicare for those days—for example, because the patient had other insurance, the patient had exhausted his Medicare benefits, or a third-party tortfeasor was paying. Simple enough.”

The dissenting justices also pointed out that the Supreme Court’s ruling in favor of the 2004 rule’s interpretation will have “significant real-world effects,” including financially harming hospitals that serve low-income patients. That harm will negatively impact “those hospitals’ ability to provide needed care to low-income communities,” Justice Kavanaugh added.