Appeals court eliminates Medicare supplemental payments for low-wage hospitals (updated-2)

Note: This article was updated most recently Oct. 4 with news that CMS has ended the low-wage-index policy. See that update below.

Plaintiff hospitals won litigation last week at the federal appellate level that will adversely affect Medicare payment for some rural hospitals.

The U.S. Court of Appeals for the D.C. Circuit backed a district court’s decision that HHS acted unlawfully in 2019 when it issued regulations to increase payments for hospitals in the bottom quartile of the Medicare area wage index. Due to budget-neutrality requirements, the supplemental payment was funded by an across-the-board reduction in Medicare inpatient payments.

The appeals court went a step further than the district court, finding that the regulations must be vacated rather than giving HHS a chance to potentially adjust the policy. It also deviated from the lower court’s ruling by awarding interest to the two-dozen plaintiff hospitals.

After initially saying the low-wage-index adjustment would be applied for at least a four-year period beginning in FY20, HHS chose to continue the adjustment — and the budget-neutrality reduction — in FY24 and, this year, proposed that the policy extend through FY27. A stated reason for maintaining the policy was the need to assess the impact during a period of relative operational normalcy for hospitals after the end of the COVID-19 public health emergency.

HHS is now forced to scrap those plans, at least barring a successful appeal to the Supreme Court (or, theoretically, an en banc review by the full D.C. appeals court). The low-wage-index adjustment has bipartisan support in Congress, meaning legislative action to codify the policy could receive consideration.

The court decision in the case, Bridgeport v. Becerra, does not affect other wage-index adjustments that have been implemented over the years, including one designed to boost the values for hospitals in several frontier states and another that established an imputed rural floor for designated all-urban states

What triggered the dispute

In crafting the low-wage-index policy, HHS noted the wage index can exacerbate disparities because hospitals in high-wage areas receive higher payments that, in turn, allow them to pay higher wages and thus continue to benefit from placing higher on the index (the applicable wage rate for a given market is determined via nationwide hospital surveys).

A corresponding concern was that hospitals with lower wage-index values may have to pay beyond their means to compete for employees with hospitals in nearby markets that benefit from higher values, potentially resulting in financial distress for low-wage hospitals.

HHS also highlighted that wage-index values are not necessarily timely because of the inherent lag in data collection. Hospitals thus may be classified as low wage on the index even for several years after they have increased their wages.

In an FY20 Medicare payment rule, HHS sought to temper the disparity. Per those regulations, a hospital in the lowest quartile of the index would have its wage-index value increased by the average of the hospital’s actual value and the 25th-percentile value. As a result, those hospitals received $245 million in redistributed funding during FY20, as stated in the court’s ruling and by HHS counsel during oral arguments last October.

Budget neutrality was achieved with a reduction of more than 0.2% in the national standardized Medicare payment rate for all hospitals. In a brief filed with the court, the roughly 25 plaintiff hospitals said they were collectively underpaid by $3.6 million in FY20.

The initial ruling

The plaintiff hospitals brought the lawsuit to the U.S. District Court for the District of Columbia, saying HHS violated the Medicare statute, which requires all wage-index payments to be based on surveys of hospital wages in a given market.

In a 2022 decision issued by Judge Carl Nichols (a Trump nominee), the district court issued a summary judgment for the plaintiffs, writing that the statute “does not leave room for HHS to adjust wage-index values based on policy considerations.” The 2019 Medicare payment rule, issued during the Trump administration, “increases the wage-index values of hospitals in low-cost labor markets without regard for their actual labor costs.”

As a remedy, the district court required HHS to recalculate payments to the plaintiff hospitals for FY20 as though the low-wage-index policy had not been instituted. It also remanded the rule to HHS for the department to adjust as necessary to comply with the Medicare statute. HHS did not take those steps, noting the case was under appeal.

The latest ruling

The case reached the D.C. circuit court after HHS appealed the merits of the lower court’s ruling and the plaintiffs countered by appealing the narrow scope of the remedy.

In an emphatic decision, the appeals court said HHS had overstepped its bounds when setting the low-wage-index policy and that there was no other recourse but to vacate the policy.

“The wage-index provision does not authorize HHS to depart from Congress’s established formula for a favored quartile of hospitals simply because HHS wants those favored hospitals to be able to pay their employees higher wages in the future,” states the ruling by a three-judge panel (consisting of two Trump nominees and one nominee of George H.W. Bush).

As to HHS’s argument that the Medicare statute authorizes the department to adjust reimbursement rates, the court said the low-wage-index policy went too far in attempting to modify a congressionally prescribed formula.

“That is not in any sense a reimbursement ‘adjustment,’ but an entirely different policy,” the court stated.

Where the district court erred, according to the appeals court, was in kicking the regulations back to HHS to potentially be modified in compliance with the statute. Vacatur was the only feasible resolution, the appeals court said.

“HHS was powerless to adopt this wage-index adjustment, which means HHS will not be able to justify its decision on other grounds,” the court stated.

Another point for the plaintiffs

The appeals court also supported the hospitals’ contention that they should receive interest on the amounts owed as compensation for underpayments in FY20.

Pending issues, some of which may require additional litigation to decide, include:

• Should back payments and interest apply to all years in which the low-wage-index policy has been in effect (FY20-24)?
• Should other hospitals ultimately be entitled to any such payments even if they were not parties to the case?
• Will HHS appeal the ruling and, if so, seek a stay or take other steps to delay implementation?
• Does budget neutrality require money to be recouped from hospitals that received payments under the low-wage-index policy, once a remedy is applied?

The appeals court remanded the case to the district court to begin to determine specifics, although HHS likely will be tasked with figuring out some of the questions within the parameters of the ruling.

Aug. 2 updates

In a newly released final rule setting Medicare rates and policies for hospital inpatient payments in FY25, CMS continued to incorporate the low-wage-index payment bump and accompanying budget-neutrality adjustment. Barring additional developments, those policies will be in place at least at the outset of the federal fiscal year, which begins Oct. 1.

The status-quo approach in part reflects the small window between the appeals court’s July 23 decision and the Aug. 1 issuance of the nearly 3,000-page rule, which had to be released with a 60-day runup to the October effective date. The situation is in limbo because the district court has not had time to schedule proceedings to implement the appeals court’s instructions on determining remedies.

HHS also could try to seek a stay of the appeals court ruling that vacated the adjustment.

“As of the date of this rule’s publication, the time to seek further review of the D.C. Circuit’s decision in Bridgeport Hospital has not expired,” the final rule states. “The government is evaluating the decision and considering options for next steps.”

Oct. 4 updates

In keeping with the Bridgeport ruling, CMS terminated the low-wage-index policy via interim regulations that took effect Sept. 30. Thus, the standardized amount that applies to all hospitals is no longer subject to the budget neutrality reduction during the fiscal year that began Oct. 1.

The policy and the corresponding budget neutrality adjustment had been extended for a three-year period beginning in FY25, according to the latest Medicare final rule covering hospital inpatient payments (see the Aug. 2 update above). However, the July 23 court ruling could not be incorporated in that rule because of the timing, with the rule required to be published by early August.

An estimated 768 hospitals will end up with a lower wage-index value this year, with rural hospitals experiencing a 0.4% decrease in estimated FY25 Medicare operating payments. Total acute care hospital payments are set to increase by $41 million now that the budget neutrality adjustment is canceled.

A transitional policy

To mitigate the impact of terminating the policy on hospitals that have received the low-wage-index adjustment, CMS is utilizing a 5% cap on wage-index decreases for FY25. Such a cap already applies to year-over-year wage-index changes for all hospitals.

Unlike the general cap, the one-year cap on the decrease for low-wage-index hospitals will not be subject to budget neutrality, meaning the general cohort of hospitals does not face the prospect of a corresponding reduction in Medicare reimbursement.

Although it’s unclear whether the Medicare statute gives CMS authority to bypass budget neutrality requirements in such a manner, the agency said it is acting under the authority of sections in which there is no language establishing any such requirements.

The corresponding changes to a hospital’s cost-report information may affect the calculation of uncompensated care (UC) payments for certain hospitals. Specifically, the UC payment formula’s Factor 3, which reflects a hospital’s burden of uncompensated care relative to the national average, is subject to change.

“Given the very narrowly targeted update to the information used in the calculation of Factor 3, the change to the previously calculated Factor 3 is of limited magnitude to the majority of hospitals,” CMS wrote.

Removal of the low-wage-index policy also means CMS no longer will apply a second budget neutrality adjustment to the geographic adjustment factor for FY25. Only an adjustment for the general 5% cap on wage-index decreases will be used.

The outlier threshold also was recalculated to account for the changes, increasing by more than $60 to $46,217.

What comes next

Although the provisions are deemed to be final rather than subject to notice-and-comment procedures, CMS will consider industry feedback and theoretically can issue retroactive changes. Comments can be submitted through Nov. 29 at regulations.gov.

In the new regulations, CMS said it “respectfully disagrees” with the Bridgeport decision but did not clarify whether it will pursue a further appeal to seek authority to potentially reinstate the low-wage-index policy in a future year. The 45-day deadline to request further review by the circuit court has expired, but the 90-day window to petition for a writ of certiorari from the Supreme Court runs through Oct. 20.