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Federal Court Invalidates CMS Position on DSH Payment Calculation

CMS has long taken the position that payments to hospitals under the Medicaid Disproportionate-Share Hospital program ("DSH") should be reduced to take into account any reimbursement from the Medicare program or third-party insurers for treatment of Medicaid beneficiaries. In February, the U.S. District Court for the Western District of Missouri opinion in Missouri Hospital Association v. Hargan et al. rejected this position as inconsistent with the Medicaid statute. The Court held that the plain language of the statute provides for DSH payments to be offset solely by other payments from the Medicaid program made on behalf of Medicaid beneficiaries.

CMS's controversial position has its roots in a 2008 regulation requiring states to audit their Medicaid programs' expenditures. In early 2010, CMS published an "FAQ" page for state auditors that instructed them to report to CMS payments made by the Medicare program on behalf of Medicaid beneficiaries who are also eligible for Medicare ("dual eligibles"). These payments, CMS said, should offset DSH payments, as well as any payments by private insurers on behalf of Medicaid beneficiaries.

That FAQ led to CMS demanding more than $95 million in repayments from Missouri hospitals, just for DSH payments made in 2011 and 2012. The Missouri Hospital Association ("MHA") and its members objected to the demands. Perhaps in response to Missouri's and other states' objections to the FAQ, CMS published a proposed rule in August 2016 "clarifying" that Medicare and private payments should offset DSH payments. This text became part of the final rule, which took effect in June 2017.

The MHA has asked the Court to clarify whether its rejection of CMS's position is meant to be a general rule invalidating the June 2017 regulation, or if it is limited to invalidating the specific repayments that CMS was demanding from MHA members. The Court had not responded by close of business on February 27, 2018. Whether or not the holding is general, CMS can be expected to appeal it, as CMS has appealed from several similar holdings in other states.

The Missouri case is noteworthy not only for its central holding, but also for the Court's furnishing several alternative bases for its holding. The Court took the time to criticize the FAQ in detail as an invalid deviation from standard rule-making. The Court noted that informal guidance cannot be used to impose new obligations on regulated entities. Proper rule-making requires notice and a public comment period. In the absence of such process, the FAQ exceeded CMS's powers and imposed an improper obligation on state auditors. CMS was not entitled, without notifying hospitals through proper rule-making, to use Medicare-related data in calculating DSH payments.

In this respect, the Court's ruling is consistent with recent guidance issued within the Department of Justice ("DOJ"), restricting civil actions by DOJ that are based on guidance that was not issued through the notice-and-comment process of normal rule-making. In the event that the Court's holding is interpreted narrowly or overturned on appeal, its alternative reasoning based on the deficiency of process is likely to survive and may be useful to MHA on remand. Further, the alternative holdings may provide useful support to civil litigants who must defend whistle-blower claims based on controverted guidance and sub-regulatory interpretation of law.


Thomas S. Dean

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