Court Upholds Application of Payment-Reduction Factor to Part B Ancillary Services

Healthcare Financial Management, July, 2001 by Christopher L. Keough

On April 19, 2001, a Federal district court ruled that HCFA may apply a 5.8 percent payment-reduction factor in determining Medicare Part B payments to hospitals for ancillary services furnished to inpatients who are not entitled to Medicare Part A coverage. [a] Although the payment-reduction factor does not expressly apply to Part B inpatient ancillary services, the court concluded that the factor may reasonably be applied to those services, as well as hospital outpatient services, because HCFA has complete discretion to determine the extent to which payment should be made for such services under Part B.

Background

Medicare Part B generally covers "medical and other health services" furnished by a provider, such as a hospital. [b] This category of services encompasses both hospital outpatient services and certain other ancillary services, such as 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. [c] For example, the patient may have exhausted Part A coverage for inpatient hospital services during an illness, or may be receiving care not covered by Part A. [d] Such inpatient ancillary services are covered on a reasonable-cost basis under Medicare Part B.

Historically, hospitals also received Medicare payment on a reasonable-cost basis for hospital outpatient services covered under Part B. [e] In 1990, Congress amended the reasonable-cost provision of the Medicare statute to reduce payments for operating costs of outpatient hospital services by 5.8 percent for fiscal years after 1990 and prior to the effective date of the prospective payment system (PPS) for hospital outpatient services. [f] In 1992, HCFA promulgated a regulation essentially replicating the statutory language. [g] Like the statute, the regulation applies a 5.8 percent reduction factor to "the reasonable costs of outpatient hospital services (other than capital-related costs of these services)."

Neither the statute nor the regulation purports to apply the outpatient payment-reduction factor to the costs of inpatient ancillary services covered under Part B. Nevertheless, HCFA's cost-reporting forms include the costs of both types of service on the same schedule and apply the same 5.8 percent payment-reduction factor to both types of services. [h] The cost-report instructions apparently contain the only public pronouncement that the outpatient payment-reduction factor applies to the costs of inpatient ancillary services. [i]

The Court's Decision

In St. Barnabas Hospital v. Thompson, a hospital challenged the application of the payment-reduction factor to the costs of inpatient ancillary Part B services, arguing that the plain language of both the statute and the regulation apply the reduction factor only to costs incurred in furnishing hospital outpatient services. The Provider Reimbursement Review Board agreed with the hospital, but the HCFA administrator concluded that the extension of the outpatient payment-reduction factor is reasonable because HCFA has complete discretion to determine the extent of coverage and payment under Part B for ancillary services furnished to inpatients.

The district court agreed with HCFA. The court reasoned that the statute and regulation do not expressly limit the application of the outpatient payment-reduction factor only to the costs of hospital outpatient services. The court also concluded that the omission of any reference to inpatient ancillary services in the statute does not imply the reduction factor is inapplicable to this category of services in this instance.

Although customary principles of statutory construction ordinarily would support the inference that the payment-reduction factor does not apply to services not specified in the statute, [j] the district court concluded that Congress "never mandated reimbursement under Part B of the cost of providing [such] services." Thus, the court agreed that HCFA has complete discretion to determine "whether, how, to what extent" Medicare should pay hospitals under Part B for ancillary services furnished to inpatients who have exhausted Part A coverage.

Effect of the Court's Decision

St. Barnabas is the first court decision addressing the application of the outpatient payment-reduction factor to inpatient ancillary Part B services. Other courts are not bound by the district court's decision in St. Barnabas, but they may follow the decision if they find it persuasive.

Discretion is one of the two keys to unlocking the court's decision in St. Barnabas. The district court's decision ultimately rests on the premise that the Medicare statute does not mandate payment under Part B of the cost of providing ancillary services to inpatients. This conclusion is questionable. The Medicare Act defines "medical and other health services" as including several types of ancillary services, separate and apart from hospital outpatient services. In addition, except as otherwise specified in the statute, the Medicare Act mandates coverage under Part B for all "medical and other health services" furnished by a "provider," including a hospital, and requires payment for the reasonable cost of those services. [k] For these reasons, another court may not agree that HCFA has unlimited discretion to determine the extent to which payment may be made under Part B for inpatient ancillary services.