Deadlines Matter in Wage Index Case

On February 11, 2020, the U.S. Court of Appeals for the District of Columbia (D.C.) Circuit upheld the decision of a lower court granting summary judgment in favor of the Secretary of the Department of Health and Human Services (“HHS”) in a wage index calculation Medicare reimbursement case. The Court held that the Secretary’s refusal to accept a rural Massachusetts hospital’s (“Rural Hospital’s”) corrected wage data for calculation of the FFY 2017 Wage Index, seven months after the revision submission deadline, was lawful, was a permissible interpretation of the Medicare Statute and was not arbitrary or capricious.

Appellants, four other Massachusetts hospitals (“Appellants”), claimed that as a result of the Secretary’s decision, 39 Massachusetts hospitals lost $115 million in Medicare inpatient and outpatient reimbursement for FFY 2017. As Rural Hospital was the only hospital establishing the rural floor in Massachusetts, and the Massachusetts rural floor is used across multiple Core Based Statistical Areas (“CBSAs”) because it is higher than the original wage index in some CBSAs, the uncorrected data had a significant impact on Massachusetts hospital reimbursement. Notwithstanding, in its decision, the Court deferred to the Secretary’s judgment on balancing finality and administrative efficiency over accuracy. Under the current administration, stakeholders should expect little flexibility in the strict enforcement of submissions deadlines.

Background – Significance of Wage Data in Calculating Hospital Reimbursement

Under the current Medicare program, acute care hospitals are paid under a “prospective payment system” (“PPS”) which reimburses hospitals at a predetermined rate for each hospital discharge. The PPS payments are comprised of a labor-related component and a nonlabor-related component. The Medicare Statute requires the Secretary of HHS to adjust the labor-related component to reflect geographic variations in hospital wage expenses. The Secretary (through the Centers for Medicare & Medicaid Services (“CMS”)) calculates a factor comparing the hospital wage level in the hospital’s geographic area to the national average hospital wage level. This factor is known as the “wage index” and it is updated annually. The wage index for any hospital in a state cannot be lower than the wage index applicable to rural hospitals in that state. This is known as the “rural floor.”

In calculating the wage index, CMS relies on information in cost reports filed by hospitals with their Medicare Administrative Contractors (“MAC”). The MACs and hospitals review and revise the data in an iterative manner in accordance with a timetable published by CMS each year. For the FFY 2017 wage index, CMS released its preliminary wage data files on May 15, 2015, and hospitals were expected to notify their MACs of any revisions to the wage index data by September 2, 2015. Using the hospital wage data, CMS was expected to publish a proposed rule setting forth the FFY 2017 wage index by May 2016 with a final rule expected on August 1, 2016.

Significantly, the wage index development process does not provide an opportunity for hospitals to review or contest any other hospital’s wage data. Further, if the data upon which the wage index is based is incorrect, this can lead to significant underpayment (or overpayment) to hospitals under the PPS. Thus, the calculation of an accurate wage index is very important for hospitals that depend heavily on reimbursement from the Medicare program. This is particularly true in Massachusetts where only one hospital typically sets the rural floor. Since the rural floor is established in Massachusetts only by one Rural Hospital, a hospital with high hospital wage expenses, if Rural Hospital were to submit incorrect (low) wage data, this would result in lower reimbursement to every PPS hospital in Massachusetts for a given fiscal year. This is what happened in the wage index calculation case discussed here.

Complaint and District Court Decision

Rural Hospital submitted to CMS incorrect data used to calculate the FFY 2017 wage index under the PPS. On April 4, 2016, seven months after the deadline for submitting revisions to preliminary wage data had passed, Rural Hospital notified CMS of the errors and requested to correct them. Rural Hospital estimated that the corrections would change its average hourly wage from $43.78 to $60.50.

Prior to responding to Rural Hospital’s letter, the Secretary published the proposed FFY 2017 wage index in the April 27, 2016, Federal Register. The Secretary commented that all revisions to wage data were due by September 2, 2015 and that hospitals were notified of this deadline. During the notice and comment period, many Massachusetts hospitals submitted comments urging the Secretary to accept Rural Hospital’s corrected wage data because of the deleterious effect not doing so would have on Massachusetts hospitals. Ultimately, the Secretary refused to accept Rural Hospital’s corrected data stating that the wage index must be “calculated from the best available data” consistent with wage index policies and deadlines.

After exhausting administrative remedies, Appellants filed suit in the U.S. District Court for D.C. claiming losses of roughly $20 million in Medicare reimbursement due to an improperly calculated wage index. Appellants alleged that CMS relied on flawed data to calculate the FFY 2017 wage index which violated the Medicare Statute. Further, Appellants argued that the final rule establishing the FFY 2017 wage index was arbitrary and capricious because the Secretary failed to consider that one hospital’s erroneous data affected the wage index for all other Massachusetts hospitals, which such hospitals had no opportunity to review or contest the faulty data prior to the data submission deadline.

The D.C. District Court granted summary judgment in favor of the Secretary stating that the Medicare Statute grants the Secretary broad discretion to administer the PPS program and that the Secretary’s enforcement of the data submission deadline was reasonable and based on a permissible reading of the Medicare Statute. Further, the Secretary’s action was not “arbitrary and capricious” because the most reliable evidence available to the Secretary was that data already reviewed by the MACs, not the revised data submitted late. Further, the Court determined that the Secretary considered the effect of his decision on Massachusetts hospitals. Appellants appealed.

U.S. Court of Appeals for the D.C. Circuit Affirmed the Lower Court’s Decision

The U.S. Court of Appeals affirmed the District Court’s decision holding the following:

• The Secretary provided a reasonable explanation for his decision to reject Rural Hospital’s revised data:
  • The wage index was calculated from “the best available data” consistent with wage index policies and deadlines;
  • The data submission deadline was established well in advance of final rulemaking and deadlines are critical to maintaining the integrity and fairness of wage index calculation—a wage increase for hospitals in one area would necessitate a decrease in the wage index for hospitals in another due to the budget neutrality requirements of the wage index calculation;
  • Hospitals were on notice that if they failed to meet submission deadlines, they would not be afforded a later opportunity to submit wage data corrections; and
  • CMS would be required to return to the beginning of the wage index development process to vet Rural Hospital’s new data—accordingly, the new data would not have been the most reliable data available without the full review.

In summary, the Court of Appeals noted that the Secretary was aware of the effect on Massachusetts hospitals of his decision to enforce submission deadlines. The Court agreed with the lower court that the Secretary’s decision to reject the corrected data and enforce well-established deadlines was not arbitrary or capricious.

• Under a Chevron analysis[1], the Secretary’s promulgation of a final rule establishing the FFY 2017 wage index without considering revised wage data submitted after the deadline for submission had passed, was a permissible construction of the Medicare Statute. And while the Medicare Statute required the Secretary to compute a wage index that reflected hospital wage levels in the geographic area of a hospital compared to the national average hospital wage level, the Court had previously rejected constructions of the Statute that required “scientific exactitude.” Further, the Court found that relevant caselaw emphasized that the Secretary may balance accuracy against finality and administrative efficiency. Accordingly, the Secretary’s decision to enforce a submission deadline was consistent with this principle. Finally, a decision otherwise would render deadlines a nullity because the Secretary would be required to waive compliance with a deadline any time a hospital submitted revised data even long after a deadline had passed.

Practical Takeaways

1. The biggest takeaway from this wage index case is that deadlines matter. Hospitals and other stakeholders should not expect CMS under the current administration to be flexible with deadlines. In similar situations past, CMS was willing to compromise and settle with hospitals. Hospitals should not count on this type of flexibility. Therefore, it is important to docket all important Medicare deadline dates whether for wage index data submission, Medicare appeals purposes or for Medicare repayment of overpayments.
2. The timing of the decision, in this case, was somewhat coincidental as the deadline for hospitals to submit requests for corrections to errors and revisions to wage data for the FFY 2021 wage index was February 14, 2020, three days after the wage index case decision was published. But, it does serve to remind hospitals to more closely review their FFY 2022 wage data.
3. FFY 2022 wage data should be released on CMS’s website in mid-May. Hospitals should submit revisions prior to September 1, 2020.
4. Hospitals should carefully review the wage data files to confirm the inclusion and accuracy of their wage index data. Hospitals should also review if there are any significant changes to specific categories of costs or hours from last year and investigate whether those changes are appropriate.
5. Wage data also is used to set the wage indices for other providers – e.g., hospices, skilled nursing facilities and IPPS-excluded hospitals. So, wage data not only impacts hospitals, but also other providers receiving Medicare payments.

If you have any questions or would like additional information, please contact:

• Adele Merenstein at (317) 752-4427 or amerenstein@wp.hallrender.com;
• Elizabeth Elias at (317) 977-1468 or eelias@wp.hallrender.com;
• Joseph Krause at (414) 721-0906 or jkrause@wp.hallrender.com; or
• Your regular Hall Render attorney.

For more information about Hall Render’s Reimbursement & Payment Practices services, click here.