DC Circuit Post-Chevron Ruling Reverses Hospital Payment Denial

A federal appeals court reversed a lower court determination that a rural Minnesota hospital was ineligible for volume-based compensation, using post-Chevron doctrine precedent to decide that the method the HHS used to calculate payments didn’t fully compensate the hospital for its fixed costs.

In a Tuesday opinion, the US Court of Appeals for the District of Columbia Circuit sided with Lake Region Hospital in its battle to win a “volume decrease adjustment” payment of $1.9 million after patient volume decreased by more than 5% in 2013.

The Medicare statute allows rural hospitals access to volume-based payments if a hospital’s annual Medicare revenue does not exceed its unreimbursed fixed costs. According to the opinion authored by Judge Gregory G. Katsas, the Centers for Medicare & Medicaid Services historically has used three different methods to calculate eligibility for VDA, two of which would have allowed the hospital group to meet the threshold for eligibility.

Lake Region Hospital alleges the agency adopted a method to calculate its VDA that made the hospital ineligible for reimbursement.

The US District Court for the District of Columbia in 2022—partially citing the since-overturned Chevron doctrine where courts deferred to reasonable agency interpretations of ambiguous statutes—rejected the hospital’s claims and relied on the HHS’s reading of the Medicare statute for how it should reasonably determine methods for calculating the payments.

“But Chevron has now been overruled, so we must ‘exercise independent judgment’ in construing the Medicare statute,” Katsas wrote in his opinion, citing the US Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo.

Upon review, the DC Circuit’s three-judge panel found the method that HHS used to determine Lake Region Hospital’s volume decrease adjustment was inconsistent with the statutory requirements to “fully compensate” qualifying hospitals for their “fixed costs.”

“We recognize, as other courts have emphasized, that the statute does not specify exactly how HHS should calculate the VDA. But it does require attention to unreimbursed fixed costs—those a hospital has actually incurred minus those for which it has already been reimbursed,” Katsas wrote.

“We recognize that no method for calculating the VDA is perfect. Nonetheless, a method that ignores all compensation for variable costs is not one that reasonably approximates full compensation for fixed costs,” Katsas wrote.

“Regardless, all we hold today is that the fixed-total method used by CMS did not ‘fully compensate’ Lake Region for its ‘fixed costs’ in 2013,” wrote Katsas.

The court reversed the summary judgment granted to the HHS and reversed the denial of summary judgment to Lake Region Hospital. The court directed the district court to set aside the CMS’s decision denying the hospital’s VDA and remand it back to the agency to re-evaluate the hospitals request consistent with the court’s opinion.

The case is Lake Region Healthcare Corp. v. Becerra, D.C. Cir., No. 22-5318, opinion 9/3/24.