DC Circuit Applies Loper Bright to Set Aside HHS Volume Decrease Adjustment Calculation Methodology

On September 3, 2023, the US Court of Appeals for the DC Circuit reversed a grant of summary judgment in favor of the Department of Health and Human Services and ordered the District Court to set aside HHS’s “fixed-total” methodology for calculating volume decrease adjustment (“VDA”) payments to hospitals in rural or isolated areas. Notably, the DC Circuit refused to defer to HHS’s interpretation of the VDA statute–an area where Chevron deference previously applied–due to the Supreme Court’s recent Loper Bright Enterprises v. Raimondo decision.

Under the Medicare program, VDA payments are intended to compensate rural or isolated hospitals for fixed costs, such as “the reasonable cost of maintaining necessary core staff and services,” if the hospitals’ patient volume decreases “more than five percent for reasons beyond [their] control.” The “fixed-total” approach, which HHS applied to the hospital at issue in this case, calculated VDA payments using “the difference between the hospital’s fixed costs for treating Medicare beneficiaries and the total DRG payments it has received."

On appeal, the DC Circuit noted that the district court and other courts had previously applied Chevron deference to uphold HHS’s interpretations of the VDA statute, but the DC Circuit found that such deference was no longer appropriate because the Supreme Court overruled Chevron in Loper Bright.  

Applying its own “‘independent judgment’ in construing the Medicare statute,” the DC Circuit held that HHS’s “fixed-total” approach impermissibly treated hospitals’ DRG payments–which the court stated were intended to cover “both fixed and variable costs”–as if they covered only fixed costs.  The court therefore found that HHS must “at least attempt to estimate how much compensation a hospital has already received for its fixed costs” when calculating the VDA.