Providers lose pair of Supreme Court decisions, including a case about disproportionate share hospital payments

• The Supreme Court upheld HHS’s interpretation of the formula used to calculate eligibility for disproportionate share hospital payments.
• One advocacy group said the issue has cost hospitals billions of dollars over the last two decades.
• In a separate opinion, the court said health plans can restrict coverage of outpatient dialysis.

A week after prevailing in a case about the 340B program, providers lost twice at the Supreme Court, including in one case about a rule that is thought to make a substantial difference in disproportionate share hospital (DSH) payments.

In that decision, issued Friday, June 24, a 5-4 majority of justices said the formula used to determine DSH payments is permissible as interpreted by the U.S. Department of Health and Human Services (HHS).

In the DSH payment formula, one of the two main factors is the “Medicare fraction,” in which the numerator is inpatient days attributable to patients eligible for both Medicare and Supplemental Security Income and the denominator is total Medicare inpatient days.

In 2004 regulations, HHS established that patients would be counted in the denominator as long as they met the statutory criteria for Medicare eligibility — even if Medicare was not actually covering their care during some or all of their hospital stay (for example, if their stay went past 90 days or they had other insurance).

Providers have mounted multiple legal challenges to the rule over the years. In a brief filed with the Supreme Court as part of the latest case, the Federation of American Hospitals argued that when “aggregated across the thousands of Medicare DSH hospitals and the years the [HHS] Secretary’s flawed policy has been in place, the Secretary has underpaid Medicare DSH hospitals on the order of billions of dollars.”

In a dissenting opinion issued Friday, Justice Brett Kavanaugh said that “HHS’s misreading of the statute has significant real-world effects: It financially harms hospitals that serve low-income patients, thereby hamstringing those hospitals’ ability to provide needed care to low-income communities.”

Previous challenges to the rule 2004 regulations failed, including in two cases at the appellate level in 2013. But in 2020, an appeals court decided in favor of Empire Health Foundation, a provider in Washington state.

Empire had argued that the phrase “entitled to benefits under part A” referred to actually receiving Medicare payment for specific inpatient days. In other words, for patients whose care wasn’t being covered by Medicare, those inpatient days shouldn’t factor into the denominator even if the patients were 65 or older and otherwise statutorily entitled to Medicare coverage.

Why HHS prevailed

The Supreme Court reversed the appeals court ruling in an opinion written by Justice Elena Kagan, saying “HHS’s regulation is consistent with the text, context and structure of the DSH provisions. The agency has interpreted the phrase ‘entitled to benefits’ in those provisions to mean just what it means throughout the Medicare statute: qualifying for benefits.”

The opinion states: “The entitlement to benefits, the statute repeatedly says, is an entitlement to payment under specified conditions. So a person remains entitled to benefits even if he has run into one of the statute’s conditions, such as the 90-day cap on inpatient hospital services.”

A broader interpretation of entitled to in this context could have unintended adverse consequences, according to the opinion: “If ‘entitled to benefits’ instead bore Empire’s meaning, Medicare beneficiaries would lose important rights and protections, such as the ability to enroll in other Medicare programs. Empire’s interpretation would also make a hash of provisions designed to inform Medicare beneficiaries of their benefits and to protect beneficiaries from misleading marketing materials. Congress could not have intended to write a statute whose safeguards would apply or not apply, or fluctuate constantly, based on the happenstance of whether Medicare paid for hospital care on a given day.”

Justices Amy Coney Barrett and Clarence Thomas joined Kagan and the two other justices appointed by Democratic presidents, Stephen Breyer and Sonia Sotomayor, to form the narrow majority in the case.

In his dissent, Kavanaugh questioned why HHS changed its interpretation of the formula in 2004. The correct reading of the statute, he said, is that “a patient was entitled to have payment made by Medicare for particular days in the hospital if Medicare was obligated to pay for the patient’s care for those days.”

Ruling in separate case affects dialysis coverage

A decision issued June 21 establishes that health plans have leeway to restrict benefits for outpatient dialysis — essentially nudging patients with end stage renal disease (ESRD) into Medicare coverage for dialysis services — as long as the same restrictions apply to all members.

In a 7-2 ruling, the court said Marietta Memorial Hospital Employee Benefit Plan was within its rights to constrain dialysis reimbursement rates. DaVita, a leading healthcare dialysis provider in the U.S., had asserted that the plan was in violation of the Medicare Secondary Payer Act, which limits Medicare’s obligation to cover dialysis for individuals who have other insurance (patients with ESRD are eligible for Medicare coverage regardless of age).

Arguments in the case concerned whether the plan was violating statutory language by limiting coverage for outpatient dialysis. The language prohibits plans from:

• Differentiating “in the benefits it provides between individuals having end stage renal disease on the basis of the existence of end stage renal disease, the need for renal dialysis or in any other manner”
• Taking into account that an individual is entitled to or eligible for Medicare based on having ESRD

In an opinion issued by Kavanaugh, the court said the plan has not violated those clauses. “It provides the same benefits, including the same outpatient dialysis benefits, to individuals with and without end stage renal disease.”

DaVita countered that the plan was in the wrong because its coverage had “a disparate impact” on individuals with ESRD.

The court’s written opinion rejects that argument, stating that “the text of the statute cannot be read to encompass a disparate-impact theory.”

“The disparate-impact theory not only is atextual but also would be all but impossible to fairly implement,” the opinion states. “The premise of the disparate-impact theory is that the plan’s benefits for outpatient dialysis are inadequate. But what level of benefits would be adequate, and how would courts determine the level of benefits that qualifies as adequate?”