CMS reverses application of payment-reduction factor to Part B inpatient ancillary services - Medicare/Medicaid - Centers for Medicare and Medicaid Services law for Medicare B

Healthcare Financial Management, Jan, 2002 by Christopher L. Keough

On September 28, 2001, the Centers for Medicare and Medicaid Services (CMS) issued a program memorandum (PM A-01-125) abruptly reversing the agency's policy of applying a payment-reduction factor to the costs of hospital inpatient ancillary services covered under Medicare Part B. (a) Previously, CMS had applied a 5.8 percent payment-reduction factor for operating costs of Part B inpatient ancillary services, which comprise certain medical and other health services (eg, clinical laboratory tests and radiology services) furnished to hospital inpatients who have Medicare Part B coverage but are not entitled to Part A payment for those services.

CMS's prior policy arguably had no basis in existing regulatory language. Indeed, CMS's final rule regarding the payment-reduction factor specified only that the factor was to be applied to "the reasonable costs of outpatient hospital services." The rule did not mention inpatient ancillary services, which traditionally had been covered on a reasonable-cost basis. (b)

Nevertheless, CMS's recent change in policy was unexpected. PM A-01-125 comes on the heels of St. Barnabas Hospital v. Thompson, in which the agency's previous policy was upheld by the only Federal court to consider this issue to date. (c) In St. Barnabas, the Federal district court rejected a hospital's challenge to CMS's policy regarding application of the 5.8 percent payment-reduction factor, concluding that the Medicare statute and regulations do not expressly limit the application of the payment-reduction factor to the costs of hospital outpatient services.

Notwithstanding the decision in St. Barnabas, CMS now asserts that the outpatient payment-reduction factor "should not be applied when computing reimbursement for inpatient ancillary services."

Reach of CMS's New Policy

CMS asserts that the policy "guidance" in PM A-01-125 applies only prospectively to "open" cost-reporting periods that were not settled before September 28, 2001, or to resolve "jurisdictionally valid" appeals challenging the application of the old policy for previously settled cost reports. Further, PM A-01-125 explains that jurisdictionally valid appeals include all appeals from an original notice of program reimbursement (NPR) for a fiscal year, but do not include any appeal from a revised NPR "on any issues other than the application of the 5.8 percent cost reduction to Part B inpatient ancillary services."

The clear implication of PM A-01125 is that CMS will not allow cost reports settled prior to September 28, 2001, to be reopened to reverse the application of the 5.8 percent payment-reduction factor to Part B inpatient ancillary services. It could be argued, however, that under the Medicare reopening regulation, (d) Medicare intermediaries are required to reopen all NPRs that applied the payment-reduction factor to Part B inpatient ancillary services and were issued after September 28, 1998 (ie, within the three-year period preceding the date of PM A-01-125). Support for this position may be found in the D.C. Circuit Court of Appeal's recent decision in Monmouth Medical Center v. Thompson. (e)

In Monmouth, the Court of Appeals concluded that the Medicare reopening regulation requires reopening of disproportionate share hospital (DSH) calculations effected in hospital cost reports that were settled prior to the issuance of HCFA Ruling 97-2. Ruling 97-2 purported to adopt a change in DSH policy that would apply only prospectively to fiscal years that had not yet been settled when the ruling was issued and to previously settled years for which the DSH issue had been appealed to the Provider Reimbursement Review Board (PRRB) or the courts. The ruling expressly prohibited reopening of all other previously "settled cost reports on this issue."

The Court in Monmouth concluded that Ruling 97-2 implicitly notified the Medicare intermediaries that prior settlements effected under the agency's former DSH policy were "inconsistent with law" because CMS otherwise would have been required to follow notice-and-comment rulemaking procedures to change its policy Moreover, the court concluded that the Medicare reopening regulation requires an intermediary to reopen a final payment determination if, within the three-year reopening period, CMS notifies the intermediary that the determination is "inconsistent with applicable law, regulations, or general [GMS] instructions." Although PM A-01-125 does not state expressly that CMS's application of the payment-reduction factor to the costs of Part B inpatient ancillary services was 'inconsistent with the law," it does acknowledge that the payment-reduction factor "should not be applied" to such costs. PM A-01-125 does not explain why this is so, but it could be argued that CMS's old policy implicitly is "inconsisten t with law" because CMS did not follow the notice-and-comment rulemaking procedure in adopting this payment policy

Following this line of reasoning, a court might conclude, as in Monmouth, that the Medicare reopening regulation requires the Medicare intermediaries to reopen all cost reports that applied the payment-reduction factor to the costs of Part B inpatient ancillary services in any NPR issued after September 28, 1998.