Last week, the United States Court of Appeals for the Eighth Circuit issued a consolidated opinion for three cases in which it upheld the methodology that CMS used to calculate the volume decrease adjustment (VDA) for qualifying sole community hospitals (SCHs) and Medicare-dependent hospitals (MDHs) for cost reporting periods preceding October 1, 2017. The three cases were brought by SCHs and MDHs seeking to have their VDA payments for their pre-October 1, 2017 cost reporting periods determined under the more favorable methodology CMS adopted for cost reporting periods beginning after October 1, 2017. The hospitals claimed that the pre-October 1, 2017 methodology does not comply with the VDA provision of the Medicare statute, and the new methodology does. The Eighth Circuit affirmed the lower court rulings, which held that the pre-October 1, 2017 methodology is based on a permissible interpretation of the statute.
The Medicare statute requires CMS to make VDA payments to SCHs and MDHs that experience more than a five percent decrease in patient volume in a given cost reporting period (compared to the preceding period) due to circumstances beyond the hospital’s control. The VDA payment must be the amount “necessary to fully compensate the hospital for the fixed costs it incurs in the period in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.” 42 U.S.C. § 1395ww(d)(5)(D)(ii). Fixed costs are costs over which management has no control, such as rent, interest, and depreciation, and costs that vary with utilization but are essential for the hospital to maintain operation. All other costs are variable costs.
CMS’s Provider Reimbursement Manual (PRM) states that VDA payments should be equal to the excess, if any, of the hospital’s inpatient operating costs over its total revenue for inpatient services. But in 2008, several Medicare Administrative Contractors (MACs) decided that the program guidance is incomplete because it allegedly does not distinguish between fixed and variable costs. These MACs adopted a modified methodology whereby a hospital’s VDA payment is equal to the excess of its fixed operating costs (i.e., its total costs less its variable costs) over its total revenue for inpatient services. CMS subsequently adopted this methodology, although it never updated the PRM.
Because the alternative approach compared a hospital’s total revenue to just its fixed costs, it invariably resulted in lower VDA payments, prompting several hospitals to file appeals with the Provider Reimbursement Review Board (PRRB). The PRRB observed that the new methodology uses an apples-to-oranges comparison because it removes variable costs from the cost side of the calculation without removing revenue attributable to variable costs from the revenue side. In 2016, the PRRB issued several decisions in which it modified the VDA payment calculation so that the MACs would have to reduce the revenue side by the hospital’s revenue attributable to variable costs. In other words, under the PRRB’s methodology, a hospital’s VDA payment is equal to its fixed costs less the portion of its revenue attributable to fixed costs.
CMS overturned these decisions, reasoning that the VDA is only meant to compensate hospitals for their fixed costs, and the PRRB’s methodology would compensate hospitals for their variable costs, too. The hospitals whose favorable PRRB decisions were overturned filed three separate cases in federal court challenging CMS’s decision. Two cases were filed in the Northern District of Iowa and one was filed in the Southern District of Iowa.
Soon after those cases were filed, CMS issued the inpatient prospective payment system (IPPS) rulemaking for federal fiscal year 2018. Therein, CMS adopted a modified VDA payment methodology that would apply to cost reporting periods beginning on or after October 1, 2017. CMS’s new methodology was identical to the PRRB’s, which the agency rebuffed only a few months earlier as being contrary to the statute. In the rulemaking, CMS maintained that the pre-October 1, 2017 methodology was reasonable, but said that it had decided to adopt the PRRB’s methodology to assuage concerns raised by the provider community that the former methodology did not fully compensate hospitals for their fixed costs.
Not long after the 2018 IPPS final rule was published, the hospitals that had brought their VDA appeals to federal court filed supplemental briefings in which they cited CMS’s reversal in policy as evidence that the pre-October 1, 2017 methodology is contrary to the statute.
In deciding the cases against the hospitals, the district courts noted that CMS’s decision to modify its policy on a prospective basis does not mean that the former methodology is inconsistent with the statute. Each court upheld the former methodology, finding that it ensured that hospitals were compensated for their fixed costs, as required by the statute. The hospitals appealed and briefed their cases on a consolidated schedule before the United States Court of Appeals for the Eighth Circuit. Last week, the Eighth Circuit issued an opinion with a discussion section of less than four pages in which it affirmed all three decisions on virtually the same reasoning used by the district courts. Unity HealthCare v. Azar, No. 18-1316, 2019 WL 1118668 (8th Cir. Mar. 12, 2019).
Although the decision is only binding in states within the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, North Dakota, South Dakota and Nebraska), it clearly is a setback for all hospitals that have unresolved VDA payment determinations for periods preceding October 1, 2017.
A copy of the Eighth Circuit’s opinion is available here.
