Medicare financial support for low-wage hospitals hits another roadblock in the courts

Plaintiff hospitals won a second consecutive appeals-court victory in the legal fight over Medicare’s low-wage-index policy.

In December, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s ruling that the policy of increasing wage-index values for rural hospitals starting in 2020 was impermissible under the Medicare statute. The decision echoed a July ruling by the Court of Appeals for the Washington, D.C., Circuit. In both cases, the appeals court said the policy should be vacated, overruling the district court’s finding that HHS could consider how to rework the policy.

In accordance with the policy, hospitals in the lowest quartile of the wage index received an increase that brought up their index value to the halfway point between their actual number and the 25^th percentile. HHS said the rationale for the policy was the three-year gap between a hospital’s reported wage data and the determination of its wage-index value. That lag can handicap hospitals in staff recruitment efforts.

The concern for the 53 plaintiff hospitals in the Ninth Circuit case was that due to budget neutrality requirements, the increase for low-wage-index hospitals required trimming the annual Medicare payment update for all hospitals. That funding redistribution amounted to roughly $245 million during the first year of the policy, according to arguments in the D.C. Circuit case.

What lies ahead

HHS in 2024 announced a proposal to maintain the low-wage-index policy through FY27, saying it wanted to continue evaluating the impact over a period of non-pandemic years. However, the department scrapped those plans after the D.C. Circuit’s summer ruling. A transitional policy (not subject to budget neutrality) then was incorporated to ensure no hospital faces a wage-index decrease of more than 5% in FY25.

The transitional regulatory language did not describe what type of restitution would be made to hospitals that had received a lower Medicare payment update because of the policy. Likewise, the Ninth Circuit’s opinion was silent on the matter, remanding the case to the district court for further proceedings.

In November comments to CMS, the American Hospital Association said any attempt to address the impact of the policy should not involve recouping money that went to hospitals with lower wage-index values starting in 2020.

CMS “should not seek a claw-back of funds that hospitals receive because of the agency’s mistakes and have long since spent on patient care,” the AHA wrote, noting that recoupment could affect the financial viability of rural hospitals and that CMS’s regulations give it leeway to avoid taking such a step.

The D.C. Circuit Court ruled that hospitals are entitled to interest on the Medicare back payments they’re owed. The Ninth Circuit did not weigh in on the issue.

Notably, while the termination of the low-wage-index policy and the budget-neutrality adjustment apply to FY25 Medicare inpatient payments, the finalized CY25 outpatient payment update retained the policy and the adjustment. CMS said differences in the statutory language allow for more flexibility in applying the policy to outpatient payments.

Statutory concerns prove decisive

A three-judge panel consisting of nominees by Reagan, Obama and Trump considered the case at the Ninth Circuit Court in San Francisco. The panel ruled 2-1 in favor of the plaintiff hospitals, with the Obama-nominated judge dissenting.

In the written opinion, the two judges in the majority said Medicare statutory language does not allow for boosting wage-index values among a segment of hospitals.

“An artificially inflated wage index for lower-wage hospitals does not ‘reflect’ regional wage differences, as required by the statute,” according to the opinion authored by Judge Kenneth K. Lee (a Trump nominee). “Neither the secretary’s good intentions nor pressing policy problems can substitute for an agency’s lack of statutory authority to act.”

The majority also was unmoved by issues stemming from the wage-data lag, noting that such delays apply to all hospitals, not only those that score low on the wage index.

“Congress, not the agency, has the power to bless the use of a wage index to seek the laudable goal of helping lower-wage hospitals recruit and retain medical staff,” the opinion states. “And to fix this policy problem, Congress must do its job — we cannot let an agency seize power it does not have.”

Members of Congress representing both sides of the aisle have supported a continued wage-index boost for struggling hospitals, indicating that some type of legislative solution is feasible in 2025.

A contrasting viewpoint

Judge Jacqueline H. Nguyen issued the dissenting opinion. Although the diverging arguments hinge on readings of the statute, Nguyen also said termination of the low-wage-index policy would have dire consequences for vulnerable communities.

The policy “is fully consistent with the statutory text, whereas the majority interprets ‘reflecting’ to have an unnaturally restrictive meaning,” Nguyen wrote. “But even if the majority’s reading were plausible, we should not toss out the agency’s equally plausible interpretation.”

She suggested there’s a link between constraints imposed by the wage index and the closures of an estimated 129 rural hospitals between 2010 and 2020.

“Although the Secretary’s policy goals are irrelevant to the statutory analysis, they highlight why, in close cases, courts should not dismiss an agency’s reasonable interpretation of the statute it administers,” Nguyen wrote.

She referred to the Supreme Court’s June 2024 Loper Bright ruling, which overturned a 40-year-old judicial doctrine that had guided courts on deferring to the authority of federal agencies when considering the lawfulness of regulations (the majority’s opinion in the wage-index case did not invoke Loper Bright).

“Just because in this Loper Bright new world we are free to ignore an agency’s statutory interpretation doesn’t mean that we should,” Nguyen wrote.