Courts Rule for HHS on Allegations of Cross-Subsidization of Bad Debts

11 August 2009 Publication
Author(s): Judith A. Waltz

American Health Lawyers Association

By Judith A. Waltz and Alan Ouellette

On August 4, 2009, the U.S. Court of Appeals for the District of Columbia, in Abington Crest Nursing & Rehabilitation Center v. Sebelius,1 held that the Secretary of the Department of Health and Human Services (HHS Secretary) did not violate the Medicare Act or HHS regulations in denying Medicare-certified skilled nursing facilities (SNFs) reimbursement for bad debts relating to Part B therapy services provided to residents who were eligible for both Medicare and Medicaid. The Court found that it was reasonable for the Secretary to conclude that the statutory prohibition against cross-subsidization between the costs of services provided to Medicare beneficiaries and non-program costs applied only when a provider is reimbursed by Medicare on the basis of reasonable costs, and therefore did not require the reimbursement that appellants sought for their bad debts.

Prior to 1997, the Secretary reimbursed SNFs on the basis of "reasonable costs," and bad debts from Medicare deductibles and coinsurance payments that were uncollectible in full from either the patient or the patient's state Medicaid program were detailed on the Medicare cost report.2 In 1997, Congress changed the reasonable costs reimbursement methodology for SNF Part A services to a prospective payment system and for Part B therapy services to a fee schedule previously applicable to physicians.

As they had before the change in payment methodology, the appellant SNFs listed their bad debts on their fiscal year (FY) 1999 cost reports. The Fiscal Intermediary disallowed the claimed bad debts on the ground that Medicare's bad debt reimbursement policy applied only to the reasonable cost-payment system. A majority of the Provider Reimbursement Review Board (PRRB) disagreed with the Fiscal Intermediary, but the PRRB decision was reversed by the Secretary. That final decision was then appealed to the district and appellate courts.

The SNFs argued that the Secretary's refusal to reimburse them for uncollectible deductibles and co-insurance violated the Medicare Act's cross-subsidization ban, which provides that the costs of delivering covered services "will not be borne by individuals not so covered." 42 U.S.C. § 1395x(v)(1)(A). In other words, the SNFs argued that non-Medicare SNF residents would end up assuming the unreimbursed costs relating to the unpaid bad debts. As noted above, the Secretary's final decision concluded that this section applies only to reimbursements based on reasonable costs and not to reimbursements based on reasonable charges or fee schedules. In reviewing the Secretary's decision, the court observed that section 1395x(v)(1)(A) is silent on the bad debt subject. However, the court held that the Secretary's interpretation of the statute was reasonable and could not be set aside as "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." In contrast to the reasonable costs reimbursement method under Medicare Part A, the applicable fee schedule in Medicare Part B—which covers the therapy services at issue in this case—is based on charges. As such, the court held that the cross-subsidization ban does not apply.

The SNFs also argued that the Secretary's denial of reimbursement for bad debts disregards the plain terms of the Secretary's own regulation. The regulation at issue, [former] 42 C.F.R. § 413.80(d), expressly mandated reimbursement of unpaid deductibles and co-insurance to prevent cross-subsidization. The Secretary determined that (like the statute) the regulation only applies to reasonable costs reimbursement and not to reimbursement based on reasonable charges or fee schedules. The court held that this is a reasonable construction of the provision. Accordingly, the Secretary's interpretation could not be set aside as "plainly erroneous" or "inconsistent with the regulation."

On July 30, 2009, the U.S. Court of Appeals for the Sixth Circuit also rejected allegations of improper cross-subsidization in Detroit Receiving Hospital & University Health Center v. Sebelius.3 In 1997, Congress decreased the percentage of reimbursement for bad debt to reduce Medicare costs and to increase hospital incentives to make collection efforts. 42 U.S.C. § 1395x(v)(1)(T). At issue in this case was a regulation promulgated by the Secretary that mirrored the statute enacted by Congress, 42 C.F.R. § 413.89(h)(1). The hospital appellants argued that this regulatory construction was unlawful as it applied to individuals covered by both Medicare and Medicaid (QMBs, or qualified Medicare beneficiaries). In holding that the regulation does not violate the cross-subsidization ban, the court concluded that: (1) the statutory provisions can be read consistently as an overall reduction in payment rates for patients who are covered under both Medicare and Medicaid; and (2) section 1395x(v)(1)(A) only limits the Secretary's ability to promulgate regulations that result in cross-subsidization and is not triggered when the Secretary's regulation expresses the will of Congress.


1 No. 08-5120, slip. op. (D.C. Cir. Aug. 4, 2009), 2009 WL 2366076, 2009 U.S. App. LEXIS 17301.

2 See 42 C.F.R. § 413.89 (formerly § 413.80).

3 2009 Fed. App. 0269P (6th Cir. 7-30-2009), 2009 WL 2253296, 2009 U.S. App. LEXIS 16839.

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