Sixth Circuit Holds That Hospital Was Not Entitled to Medicare Indirect Medical Education Reimbursement for Time Spent by Residents in Research Activities Not Related to Patient Care

On August 18, 2011, the Sixth Circuit Court of Appeals issued a decision in Henry Ford Health System v. Department of Health and Human Services (10-1209). The court held that the hospital was not entitled to include the time spent by residents conducting educational research unrelated to the care of patients, which the court referred to as “pure research,” in its full-time equivalent (FTE) resident count for purposes of calculating the hospital’s Indirect Medical Education (IME) reimbursement for the years 1991-1996, and 1998-1999.

In its Medicare cost reports for the years at issue, the hospital included time that residents spent on pure research activities in its Medicare IME FTE count. The Medicare fiscal intermediary disallowed the time that residents spent conducting pure research as a part of their approved medical residency programs.

The hospital sought review by the Provider Reimbursement Review Board (PRRB), which held that the intermediary’s adjustments were improper. The administrator of the Centers for Medicare & Medicaid Services (CMS) reversed PRRB’s decision, concluding that time spent exclusively on research activities not related to patient care must be excluded for purposes of the IME adjustment.

The CMS administrator noted that the applicable regulation provides that residents may be included in the FTE resident count for IME purposes if they are providing services in an “area” of the hospital that is paid under the prospective payment system or in the outpatient department. The administrator concluded that the regulatory reference to area included a functional requirement as well as a geographical one. Because residents engaged in pure research were not providing patient care services, the administrator concluded that they were not assigned to an “area” of the hospital that is attributable to the prospective payment system or the outpatient department and, therefore, were not allowable.

The district court disagreed with the CMS administrator and held that the regulation’s reference to area of the hospital clearly referred to geographical locations within the hospital facility. The district court held that as the residents were in a portion of the hospital subject to the prospective payment system, they were allowable even if they were conducting pure research.

While the appeal in the Sixth Circuit was pending, both Congress and CMS amended the law regarding hospitals’ FTE counts. In the Patient Protection and Affordable Care Act (PPACA), Congress divided residents’ activities into “patient care activities” and “non-patient care activities,” and delegated authority to CMS to further define such activities. On November 24, 2010, CMS published a regulation specifying that eligible non-patient care activities do not include the time residents spend conducting pure research.

The court held that the Medicare statute, both before and after the amendment in PPACA, did not directly answer the question whether pure research activities are includable in the resident count for IME purposes. The court noted in PPACA, Congress expressly delegated to CMS the authority to define non-patient care activities that may be included in the IME resident count.

CMS argued that the 2010 regulation resolves the issue by excluding pure research from the IME resident count, and that the 2010 regulation applies retroactively to the years in question. The hospital objected, and contended that the 2010 regulation could not have retroactive effect.

The court held that the 2010 regulation excluding pure research from the time that may be included in the IME calculation was not arbitrary, capricious, or manifestly contrary to the statute. Therefore, the court held that the 2010 regulation should be given controlling weight.

The court also rejected the hospital’s contention that the 2010 regulation cannot be applied retroactively to the fiscal years in question. Although the starting assumption is that when Congress delegates rulemaking authority to an agency such delegation allows the agency to regulate prospectively, an agency may regulate retroactively when there is express congressional authorization for such action. The court found that Congress gave just such authorization here, saying that CMS may promulgate regulations with retroactive effect.

The Sixth Circuit noted that University of Chicago Medical Center v. Sebelius, 618 F.3d 739 (7th Cir. 2010) is in some tension with its decision. The court noted that it had a benefit that the Seventh Circuit did not, namely CMS’ 2010 regulation. The Sixth Circuit stated that University of Chicago Medical Center does not indicate what the court would have done had the validity of the regulation been presented to it.

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