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Federal Court Rejects Hospitals’ Challenge to Medicare Wage Rule 

In a decision with far-reaching implications within the health care industry, on February 22, 2016, a federal judge rejected a challenge to how Medicare reimbursement is adjusted based on local labor costs, dismissing assertions that regulators retroactively changed the applicable formula. Under the Medicare program, the government reimburses health care providers for certain expenses incurred in treating Medicare beneficiaries. The Medicare wage index reflects regional variations in hospital wage costs which is one factor used to determine the amount of reimbursement.

The suit in question -- Regents of the University of California et al. v. Burwell, case number 1:13-cv-00683 -- was brought against the Department of Health and Human Services (DHHS) by more than 100 hospitals that had seen their reimbursement reduced because of changes to Medicare’s wage index. The court dismissed plaintiffs’ claims under the Administrative Procedure Act and Medicare Act and granted the defense motion for summary judgment.

Under the Prospective Payment System (PPS), which determines the procedure for reimbursing Medicare hospitals, wages and wage-related costs are a "significant component of the Medicare payment" that qualifying hospitals receive. Anna Jaques Hosp. v. Sebelius, 583 F.3d 1, 2 (D.C. Cir. 2009).  As such, The Medicare Act requires the DHHS Secretary to update the wage index at least every 12 months, using data from cost reports that hospitals file annually with fiscal intermediaries.

On August 12, 2005, the Centers for Medicare & Medicaid Services (CMS) promulgated a final rule making a variety of revisions to the wage index. The core revision in question limited the inclusion of pension obligations in wage data, and it began applying the changes in 2007 and 2008. Hospitals complained that the relevant wage data for 2007 and 2008 was generated prior to finalization of the 2005 rule, and that the approach therefore was impermissibly retroactive.

The plaintiffs in the Burwell case claimed that the CMS rule constitutes impermissible, retroactive rulemaking because the wage index for a given fiscal year is based on cost data submitted by providers three or four years earlier, and Plaintiffs submitted their cost data in accordance with the accounting rules then in effect. Plaintiffs further argued that the 2005 Rule "is inconsistent with the overall purpose and objective of the wage index statute.”

The Burwell court ultimately concluded that the rule does not operate retroactively. The wage index for a particular fiscal year is used to calculate hospitals' compensation for wage-related costs that will be incurred to provide Medicare services in that fiscal year. Thus, the 2007 and 2008 wage indices were used to determine the amount of compensation hospitals would receive under the prospective payment system for services provided in those years. The Secretary simply used historical data—including historical pension costs—to calculate the prospective payment rate. Although the Secretary's application of the 2005 Rule to evaluate historical pension costs from fiscal years 2004 and 2005 arguably changed the method used to make this prospective estimation, it did not alter the compensation that providers receive for services already provided. The court continued that, under the PPS, the wage index is not used to reimburse providers for labor costs incurred in earlier years. Rather, those historical costs are used to determine a fair rate for prospective compensation.  The court noted that a rule is not retroactive "merely because it . . . upsets expectations based on prior law" or because it relies on facts "drawn from a time antecedent to the enactment."

Ultimately, providers that filed 2004 and 2005 cost reports had no way of knowing that a 2005 rule would use the content of these reports against them in 2007 and 2008, to adjust the wage indices downward. These adjustments have resulted in a number of different lawsuits, many of which are currently being appealed. It is likely that the providers in this case will similarly appeal the lower court's decision to the Court of Appeals for the D.C. Circuit.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.