Texas hospitals fall short in an appellate ruling about disproportionate share hospital payment calculations

An appeals court dealt hospitals a defeat in a case about Medicare disproportionate share hospital (DSH) payments, reversing a lower court’s prior ruling on jurisdictional grounds last week.

A Dec. 9 decision by a three-judge panel at the U.S. Court of Appeals for the Fifth Circuit means certain Section 1115 waiver days can remain excluded from a hospital’s tally of Medicaid patients as an input in the Medicare DSH formula, pending further administrative proceedings.

More than a dozen hospitals in Texas had filed suit against HHS regarding 2023 regulations that excluded patients from the formula if their hospital care was funded by a Section 1115 uncompensated care (UC) pool.

The Northern District of Texas federal court ruled for the hospitals and vacated the new regulations in 2024. But the appeals court said the district court did not have jurisdiction to decide the case at that stage because CMS’s Provider Reimbursement Review Board (PRRB) had not rendered a final decision on the matter of the hospitals’ DSH payment.

The case has been remanded to the district court for further action consistent with the appeals court’s decision.

High-dollar DSH stakes

In a filing, the plaintiffs said a given hospital could lose more than $10 million per year under the 2023 rule. Hospitals also risked being disqualified from the 340B Drug Pricing Program, given that eligibility depends on DSH percentage.

Practically speaking, the ruling will have disparate impacts on hospitals based on geography. In addition to Texas, states with Medicaid UC pools at the time of the 2023 final rule included Florida, Kansas, Massachusetts, New Mexico and Tennessee, CMS wrote in those regulations.

In that rule, CMS came up with a rough estimate that the total impact of the regulatory change across those states would be nearly $349 million (the agency cautioned that it lacked comprehensive data on Section 1115 patient days per affected hospital and instead based the estimate off unaudited records submitted by hospitals in a related 2020 lawsuit).

Among the affected states, Florida, Kansas, Tennessee and Texas are Medicaid non-expansion states and therefore likely to have a greater volume of patients in the UC funding pool. Texas hospitals are especially exposed to adverse effects because of the significant size of the state’s pool.

Judicial relief not an immediate option

Where the case may resonate industrywide is on a procedural and administrative basis, reinforcing that courts are not an immediate solution to hospitals’ issues with Medicare reimbursement claims.

Quoting the Medicare statute, the appeals court stated that judicial review is limited to considering “a final decision of [the HHS Secretary] made after a hearing to which he was a party.” The court said the PRRB, acting on behalf of HHS, had not yet made a final decision in this instance because the hospitals had not filed their cost reports and thus their DSH percentages could not be determined.

That perspective marked a key deviation from the district court’s opinion, which stated that the PRRB was obligated to pursue the information needed to make a definitive ruling.

Considering the 2023 regulations

The district court also found the 2023 regulations to be unlawful, saying a 2019 ruling by the Fifth Circuit in Forrest General Hospital v. Azar established that hospitals could include inpatient days paid under a Section 1115 UC pool in the Medicaid fraction.

That ruling did not enter into the appeals court’s recent decision because the decisive aspect was jurisdictional. If the substance of the regulations had been at issue, HHS seemingly was prepared to differentiate the 2019 and 2023 scenarios by saying that per the regulations in place at the time of the Forrest General ruling, Section 1115 patients were regarded as Medicaid-eligible for the purposes of the DSH formula.

In contrast, the legal question with respect to the 2023 regulations is “the extent of the [HHS] Secretary’s authority to decide whether or not to regard patients that benefit from a demonstration project as Medicaid-eligible,” Jennifer Utrecht, a Department of Justice attorney representing the government, said during oral arguments before the Fifth Circuit in September.

“We know that Congress thought that the Secretary could decide what type of benefit a patient had to receive in order to be regarded as Medicaid-eligible,” she added, citing 2005 legislation.

A perilous ruling for 340B eligibility

The issue of 340B eligibility was a key point during the oral arguments. Of the 14 plaintiff hospitals, four were set to lose eligibility due to falling under the minimum DSH percentage.

“As soon as they file those cost reports, they’re subject to [340B] termination,” Nikesh Jindal of King & Spalding, LLP, representing the plaintiffs, said during oral arguments.

That means they suffer “irreparable and substantial harm” from having to wait until the cost reports are reconciled, at which point they can pursue their claim administratively with the PRRB and then in the courts, he said.

The hospitals also argued that the statutory basis for the 340B program is the Public Health Service Act rather than the Medicare statute. Thus, the requirement to get a final decision from the PRRB before heading to court should not apply.

The appellate panel was not persuaded, writing, “It is the Medicare statute that provides the standing and substantive basis for the case because the hospitals are challenging a Medicare regulation used to calculate a Medicare reimbursement.”

“While they may suffer irreparable delay-related costs, such costs are not sufficient to exempt them from the channeling requirement,” the court wrote, referring to a statutory mandate to exhaust all possible administrative remedies before filing litigation.

Leaving hospitals in a bind

Judge Edith Jones, a Reagan appointee who authored the Fifth Circuit’s opinion in favor of the government, had sounded sympathetic to the hospitals during oral arguments.

“What is the policy rationale behind, frankly, screwing these hospitals out of reimbursement for these demonstration programs that the government already approved?” Jones asked.

Utrecht replied by referring to the 2023 regulations and sought to differentiate UC pools from other Section 1115 demonstration programs.

“The point of the DSH [payment] is to be a proxy for the number of low-income patients that [hospitals] treat,” she said. “Unlike when a state says, ‘I would like to extend full health insurance to this category of patients [via Section 1115],’ payments to hospitals from the uncompensated care pool are not based on income. There could be a high-income patient who says, ‘I’m not insured and I’m not paying my bill,’ and that is a cost that the hospital can claim from the uncompensated care pool.”

Jones also asked whether “the alternatives for the hospitals, assuming this [2023] regulation takes effect, are either to lose a lot of money or to make it up on those who are prepaying, or just discontinue uncompensated care.”

Jindal answered in the affirmative and pointed out that the DSH and 340B programs are intended to “restore or recoup hospitals from some of the losses that Congress noted they incur by treating uncompensated care in low-income individuals. It’s an important benefit, and if it’s withheld from them unlawfully, in direct defiance of Forrest General and in a way that they cannot recoup after the fact, [that] would cause them and the patients they serve significant harm.”