July 5, 2022

Supreme Court Backs Rule That Decreases Medicare Payments to Safety-Net Hospitals

Holland & Knight Healthcare Blog
Scott O'Connell | Jamie Ehrlich
Healthcare Blog

The U.S. Supreme Court settled an Administrative Procedures Act (APA) dispute on June 24, 2022, involving Medicare's formula to adjust rates paid to safety-net hospitals, clarifying a statute that dictates how to calculate the portion of patients entitled to Medicare Part A benefits.1 Both the majority and dissent commented on the complexity of the statutory language, with dissenters referencing "indecipherable language" and being "baffled." Once again, the court did not address agency deference under Chevron v. Natural Resources Defense Council, which emerged during oral argument.2 Because of the statutory complexity and the unclear future of the Chevron doctrine, further reimbursement disputes should be expected.

The statute controls how the U.S. Department of Health and Human Services (HHS) distributes payments to "disproportionate share hospitals," which serve a higher percentage of low-income patients; the payments are known as DSH payments. Typically, Medicare Part A provides a fixed rate to hospitals for inpatient treatment, despite the hospital's actual cost to treat the patients. A DSH adjustment, on the other hand, provides additional reimbursements to these hospitals to financially compensate for the higher percentages of lower-income patients.

At issue in the case was how the DSH adjustment is calculated. Historically, HHS calculated the adjustment by adding together the Medicare fraction and the Medicaid fraction. The Medicare fraction represents the proportion of patients "entitled to" Medicare who have low incomes, and the Medicaid fraction represents those "not entitled to" Medicare and have low incomes.3 These two fractions are used to calculate the adjustment rate for the hospital.

However, often there are patients who qualify under Medicare (who are older than 65) who are not covered by those benefits. For example, a patient may be covered by private insurance or have exceeded Medicare's 90-day cap on a hospital stay. These patients do not receive the benefits of Medicare but are qualified to participate in the program. The question before the court was whether those patients, who were entitled to benefits but did not receive them, should be included in the calculus for DSH adjustments.

In a 5-4 opinion by Justice Elena Kagan, the court wrote that "entitled to [Part A] benefits" means simply qualifying for those benefits. Those who meet the basic statutory requirements of being older than 65 and qualifying for ordinary Social Security payments are included in the Medicare fraction to calculate the DSH adjustment.4 This broader definition sweeps more patients under the umbrella for purposes of the calculation, which in turn causes lower-income patients to become a smaller percentage of hospital patient population. With a smaller percentage, safety-net hospitals will receive a smaller DSH adjustment.

Notably, the opinion did not cite Chevron, a case of national interest that provides legal deference to a government agency's interpretation of a statute which it administers. During oral arguments, HHS argued it was at a minimum entitled to deference under Chevron. The federal government frequently relies upon the Chevron doctrine to defeat legal challenges to its rule implementation across several administrative areas. Though Kagan sided with HHS in this case, she did not grant HHS Chevron deference by name.

Kagan also cautioned against the definition of "entitled to" that Empire Health offered, saying it would all but eliminate certain entitlements guaranteed by the law in different Medicare programs.

Throughout the oral argument, several justices remarked on the complexity of the statutory scheme and history. Kagan reasoned that Congressional intent would perhaps be the best guiding light through the confusion. Kagan ultimately wrote in her opinion that Congress could not have intended to have fluctuating safeguards for safety-net hospitals "based on the happenstance of whether Medicare paid for hospital care on a given day."

"If Congress had wanted to accomplish that unexpected object, it would have simply said so," Kagan wrote in the majority opinion.


1 Empire Health Foundation v. Alex Azar, II

2 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

3 42 U. S. C. §1395ww(d)(5)(F)(vi)(I)

4 42 U. S. C. §§426(a)–(b)

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