February 2013 Volume 9 Number 6

Supreme Court: Medicare Disproportionate Share Hospital (“DSH”) Providers Denied Right to Correct Reimbursement After Government’s Methodological Error Revealed

By Mary D. Lane, Mitchell Silberberg & Knupp LLP, Los Angeles, CA*

AuthorReimbursement to DSH Hospitals

The Medicare Disproportionate Share Hospital Program (“DSH”) is a program under which hospitals that serve a disproportionate share of low-income patients receive additional reimbursement from the Centers for Medicare & Medicaid Services (“CMS”).1 An estimate of the adjustment is paid when care is provided and then “trued up” annually through submission of a Medicare cost report.2 The cost report is typically audited by a fiscal intermediary (“FI”)3 acting on the government’s behalf, who notifies the hospital of its approved payment with a notice of program reimbursement (“NPR”).4 A provider may submit an initial appeal to the Provider Reimbursement Review Board (“Board”) within 180 days and, if good cause is shown, the time to appeal may be extended to three years from receipt of the NPR.5

Anyone even peripherally involved in this process knows how complicated it actually is. There is an industry of people who prepare cost reports, review FIs’ determinations, file appeals, and negotiate with the FIs and Board about why the approved payment set forth in the NPR is incorrect. The portion of the DSH adjustment often at issue is based on the percentage of days for which the beneficiary was entitled to Medicare Part A and also received Supplemental Security Income (“SSI”) payments from the Social Security Administration (“SSA”).6 The SSA provides the SSI information to CMS, which then pulls all of the Medicare days for each eligible hospital and determines the percentage of days for which the Medicare beneficiaries were simultaneously eligible for SSI and Medicare (the “SSI fraction”).7 Note that the hospital cannot independently make this determination but relies on SSA and CMS to properly determine and communicate the appropriate SSI fraction. Usually geographical data becomes available to the FIs years after the cost report for the cost year under examination was submitted. Negotiations include issues about which year’s data is appropriately used, and cost reports are finally “closed” years after they are submitted.8

CMS’ Flawed Process

In a dispute which began before the year 2000 and involved discovery of CMS’s data from years 1993 through 1995, Baystate Medical Center appealed to the Board the accuracy of CMS’s calculation of the SSI fraction for cost years 1993, 1994, and 1995. The decision, which was published in March, 2006, reversed the FI’s determination of the SSI fraction, holding that CMS had omitted data from its calculations and had used a systemically flawed process to determine numerous hospitals’ SSI fractions resulting in underpayments to providers.9 The opinion notes that “the evidence clearly indicates that CMS knew or should have known at least by 1993 that there were significant inaccuracies with the data used for the DSH calculation and that those inaccuracies may have diminished the DSH payment to providers.”10

If CMS’s data used for the DSH calculation was inaccurate and those inaccuracies may have diminished the DSH payment to Baystate, as the Board had found, other providers were similarly situated to Baystate in having been potentially shorted in their DSH payments. Naturally, within 180 days after the Baystate decision was published, other providers filed complaints with the Board challenging their DSH adjustments. These providers did not contest just the years 1993-1995, but sought review of cost years 1987 through 1994, perhaps because the regulation specifying calculation of the SSI fraction became effective for patient discharges occurring on or after May 1, 1986.11 These appeals were more than a decade late — unless, as the appealing hospitals argued, the time to appeal was equitably tolled due to CMS’s failure to inform them that the SSI fractions had been based on faulty data.

In its January 22, 2013 decision on the appeals of the other providers, the Supreme Court in Sebelius v. Auburn Regional Medical Center12 acknowledged that “[t]he methodological errors revealed by the Board’s Baystate decision would have yielded similarly reduced payments to all providers for which CMS had calculated an SSI fraction.”13

The Supreme Court granted certiorari to resolve a conflict among circuits14 as to whether the 180-day limit, as extended to three years for good cause, was jurisdictional, meaning that HHS did not have the power to extend the three year deadline. Without much ado, it held that the time limit, like most filing deadlines, was not jurisdictional because Congress had not clearly revealed “a design to preclude any regulatory extension.”15

Thus, the tougher issue, at least from the perspective of the hospitals, was whether the regulation imposing the time limit should be equitably tolled to adhere to the “fundamentals of fair play,” citing regulations permitting the reopening of an FI’s reimbursement determination if “it was procured by fraud . . . or similar fault.”16

But the Supreme Court saw things differently. It held that the “Irwin presumption”17 of equitable tolling does not apply to an agency’s internal appeal deadline; the theory of that presumption that it was a realistic assessment of legislative intent did not apply in an administrative context in which the Secretary was authorized to establish the Board and was given rulemaking authority. In addition, unlike the equitable tolling applied to many statutes that were designed to be “unusually protective of claimants,” this statute applies to “sophisticated institutional providers assisted by legal counsel and generally capable of identifying an underpayment within the 180-day time period”; and that “[a]s repeat players who elect to participate in the Medicare system, providers can hardly claim lack of notice of the Secretary’s regulations.”18 The Court further held that the Secretary lawfully exercised her rulemaking authority in providing for a three year good cause extension and that the imbalance in the time of the FIs to discover overpayments versus the providers to discover underpayments was justified by the FIs dealing with tens of thousands of cost reports.

Problems with the Decision: a Wrong without a Right

This decision is based on the flawed premise that the providers could have discovered the underpayment within 180 days after the FI determination. How? They didn’t learn until 2006 that the SSI fractions underlying the DSH calculations had been based on faulty data and methodology which they correctly applied in submitting their Medicare cost reports. It seems that the Supreme Court did not understand how complicated the calculation of the SSI fractions is, and how dependent the provider is on data collected and manipulated by the government. That data is the starting point from which the provider’s cost report expert negotiates with the government.

Even in hindsight, it isn’t clear what the providers should have done to preserve their rights. Should the providers have routinely appealed NPRs just in case, years later, they were to learn that the government had made a mistake and underpaid them? Making matters worse, the providers that were shorted are providers that handle a disproportionate share of low income Medicare and Medicaid beneficiaries.

Mary Lane is a lawyer with over 20 years of experience whose business practice includes healthcare finance, general restructuring, bankruptcy, bankruptcy litigation and workouts. She is Chair of the Bankruptcy and Workout group at Mitchell Silberberg & Knupp LLP,a premier mid-size law firm with offices in Los Angeles, New York, and Washington, D.C. www.msk.com.

142 CFR 412.106. See also Baystate Medical Center Springfield Ma, Provider No. 22-0077, v. Intermediary-Mutual of Omaha Insurance Company, 2006 WL 752453 (P.R.R.B.), pp. 1-2 (March 17, 2006).

“After the end of its fiscal year, the hospital files an annual cost report with its Medicare fiscal intermediary. The cost report is due 90 days following the close of the hospital's fiscal year. This report, among other things, reconciles interim payments made to the hospital by the fiscal intermediary . . .” 2 Hooper Lundy & Bookman, Treatise on Health Care Law (“Treatise”), § 8.04 (Matthew Bender 2012) As to DSH payments, see Baystate, at p. 22:

“The Medicare fraction is calculated relatively early in the cost report settlement process, which generally is not completed until two or three years after the end of a hospital’s fiscal year. During this time, the provider is, among other things, collecting information from the state concerning data for the other component of its DSH calculation, the Medicaid fraction. Billing for services rendered during the year continues—up to 30 months after the end of the provider’s cost report year – and that patient data from the billing and payment process is . . .used to determine the denominator of the Medicare fraction.”



Since October 2005, fiscal intermediaries have been called Medicare Administrative Contractors (“MAC”s) Treatise, supra, § 8.02[5]. Since the cost years at issue here pre-date 2005, this article will continue to use the term fiscal intermediary (“FI”).


“After receiving a provider's cost report and audit information, if appropriate, the intermediary must furnish the provider a notice of the total amount of Medicare reimbursement due to the provider, i.e., a notice of program reimbursement (NPR). . . .The notice must also inform the provider of its right to seek an intermediary or Provider Reimbursement Review Board (PRRB or the Board) hearing within 180 days.” Treatise, supra, § 8.07[1]


See iv, supra.


The disproportionate patient percentage is the sum of two fractions, commonly known as the Medicare/SSI fraction and the Medicaid fraction . . . the Medicare fraction serves as a proxy, based on the SSI program, for the percentage of a hospital’s Medicare patients that are indigent. . . . [The Medicaid] fraction uses the Medicaid program as a proxy for determining the percentage of a hospital’s total patients that are indigent and not entitled to Medicare.” Public Hospital Pharmacy Coalition, Disproportionate Share Hospital Adjustment Background and Current Issues, pp. 2-3 (May 2006), .http://www.phpcrx.org/public/documents/pdfs/DSH_description.pdf.


See, e.g., Baystate, supra, at p. 2 for discussion of how CMS calculates the Medicare fraction and notifies the provider.


The government has been known to submit three amended proofs of claim in a provider’s Chapter 11 case because of the difficulty in getting a correct determination from its own FI of the DSH adjustment. See, e.g. In re Victor Valley Community Hospital, 8:12-bk-12896-CB (CD Cal., filed Sept. 13, 2010).

9Baystate, supra, at 30.

Baystate, supra, at 24.

11See 51 Fed. Reg. 16772, 16776 (May 6, 1986).

2013 WL 215485 (U.S., 2013).

13Sebelius, supra, at 6.
14The Ninth Circuit had held that the 180 day limit was not jurisdictional and could be extended for good cause (Western Medical Enterprises, Inc. v. Heckler, 783 F.2d 1376 (9th Cir. 1986); l the Eleventh and Eighth Circuits had held to the contrary, Alacare Home Health Servc., Inc. v. Sullivan, 891 F.2d 850(11th Cir. 1990); St. Joseph’s Hospital of Kansas City v. Heckler, 786 F.2d 848 (8th Cir. 1986).

Sebelius, supra, at 8.


Sebelius, supra, at 10.


Irwin v. Department of Veteran Affairs, 498 U.S. 89, 95-96 (1990), holding that “the same rebuttable presumption of equitable tolling applicable to suits against private defendants should also apply to suits against the United States. Congress, of course, may provide otherwise if it wishes to do so.”


Sebelius, supra, at 10.

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