On June 14, 2017, the Sixth Circuit Court of Appeals in Breckinridge Health, Inc., et al. v. Price affirmed the district court’s finding that HHS could offset the amount of a hospital’s Medicare reimbursement by the Medicaid Disproportionate Share Hospital (DSH) payments received by such hospital. In its decision, the Sixth Circuit followed the holding of the Seventh Circuit Court of Appeals in its 2012 decision in Abraham Lincoln Memorial Hospital v. Sebelius, where the Seventh Circuit, under similar facts, came to the same conclusion.
Breckinridge Health involved various Kentucky Critical Access Hospitals that, as part of Kentucky’s contribution to the DSH program, must pay a 2.5% tax on their gross revenue (the KP-Tax). The revenue from the KP-Tax is then deposited into the Medical Assistance Revolving Trust under Kentucky law. Funds from the revolving trust are then used to fund, in part, the DSH payments made to Kentucky hospitals.
The hospitals in this case had historically sought and received reimbursement under the Medicare Act’s reasonable cost statute for the full amount of their 2.5% tax payment. However, for 2009 and 2010, full reimbursement was denied by the Medicare Administrative Contractor. Instead, each hospital’s tax costs were offset against the amount of Medicaid DSH payments such hospital actually received. This decision was upheld by the Provider Reimbursement Review Board and later the Administrator of the Centers for Medicare and Medicaid Services and, finally, the district court.
In affirming the district court’s decision, the Sixth Circuit relied on the Seventh Circuit’s rationale in Abraham Lincoln Memorial Hospital. There, Illinois hospitals paid a tax assessment to the state as a condition of participation in Medicaid “access payments.” The Seventh Circuit found that the tax assessment was a reasonable cost eligible for Medicare reimbursement. However, because the payments the Illinois hospitals received from the fund were meant to reduce expenses associated with participation in the program, including the expense of paying the mandatory tax assessment that is a condition to participation, the set off was appropriate because the net economic impact of the access payments must be considered in calculating the reimbursement.
Applying the Seventh Circuit’s rationale, the Breckinridge court reasoned that “[b]ecause the DSH payment [the hospitals] received derived from the fund into which the [hospitals’] KP-Tax expenditures were placed, the net effect of the DSH payment is to reduce, at least in part, the costs [the hospitals] incurred in paying the KP-Tax. Therefore, it constituted a refund notwithstanding the fact that it was not labeled as such.” In other words, by receiving a return of the economic value of their KP-Tax payments through the disbursement of revolving trust funds, the hospitals essentially had already been reimbursed for their KP-Tax payments and such costs were not eligible to be reimbursed again under the reasonable cost statute.
In affirming the district court’s judgment, the Sixth Circuit made clear that the standard of review is to give the judgment of HHS controlling weight unless it is “arbitrary, capricious, or manifestly contrary to the statute.” However, through its detailed review of HHS’s decision, the Breckinridge court bolsters the rationale arguably justifying the expanding view that DSH payments can properly be set off against the reasonable costs of participation.