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SCOTUS Rules 5-4 in Favor of Federal Government’s Position on Medicare Payments to Hospitals Serving Low-Income Patients


Associate Justice Elena Kagan

Despite the rather chilly reception the justices gave the Biden Administration’s Department of Health and Human Services (HHS) at oral arguments, SCOTUS sided 5-4 with the federal agency on Friday. The Supreme Court’s ruling means that HHS can continue using its preferred method of calculating payments for hospitals that take on a disproportionate number of low-income patients.

Becerra v. Empire Health Foundation, which came to the high court from the U.S. Court of Appeals for the Ninth Circuit, is a case about what formula HHS should use to calculate federal Medicare payments to certain hospitals known as “DSH hospitals.” DSH — or “disproportionate share hospitals” — are those that care for a high percentage of low-income patients. These facilities receive extra Medicare funding to account for the increased costs associated with low-income patients.

What’s at issue, though, is precisely how much extra funding DSH hospitals are entitled to receive. The amount is calculated based on a complex formula set out by the Medicare statute. There is significant disagreement about how to carry out the calculation under that formula, not only between the hospitals and the federal government but also between members of the Supreme Court.

Empire Health Foundation sued, arguing that HHS’s calculations intentionally deprived DSH hospitals of over $600 million, thereby circumventing Congress’ statutory intent. In a close ruling, Supreme Court sided against Empire and found that HHS’s calculations had been correct all along.

Justice Elena Kagan penned the majority decision for SCOTUS. In it, Kagan went to great lengths in an effort to explain the DSH formula to readers. After lengthy description of the DSH “mark up” using both the “Medicare fraction” and the “Medicaid fraction,” Kagan told readers, “With that under your belt, you might be ready to absorb the relevant statutory language (but don’t bet on it).” Throughout the opinion, Kagan made frequent reference to the formula’s complexity, echoing Justice Clarence Thomas’ statements during oral arguments which called the statute “indecipherable.”

Ever the professor, Kagan walked readers through HHS’s interpretation of these fractions before summing up:

So again, in general terms: The numerator is the number of patient days attributable to non-Medicare patients who are poor. The denominator is the total number of patient days. Divide the former by the latter to get the second percentage the DSH calculation requires.

Kagan next moved on to explaining the real-world application of these calculations. Some patients are excluded from a portion of the applicable formula because they are eligible for coverage under Medicare (even if Medicare is not actually paying for their treatment). Excluding those patients from the formula has the effect of decreasing DSH payments in most instances.

The Supreme Court ruled that, confusing as the process may well be, HHS is making calculations correctly.

“The text and context support the agency’s reading,” Kagan said, noting that HHS’s interpretation of this calculation is consistent with definitions “throughout the Medicare statute.”

By contrast, Kagan said, Empire’s proposed formula just does not make sense. Empire’s reading of the statute would mean that the phrases “eligible for benefits” and “entitled to benefits” are equivalent. The high court was unconvinced and Kagan wrote, “But that reading, even if plausible in the abstract, does not work in the Medicare statute.”

Kagan also turned to the practical impact of what siding with Empire would mean:

Consider what that might mean in the real world: A Medicare patient in the hospital for longer than 90 days—by definition, a very ill person—could not enroll in Part D’s prescription-drug coverage. Congress could not have wanted—and in fact did not provide for—that result.

The majority found Empire Health’s interpretation to be problematic in a number of ways and argued that Empire’s reading of the statute would render other provisions of healthcare law “unworkable or unthinkable or both.”

While the majority confined most of its decision on principles of statutory interpretation, the impact to DSH hospitals was not lost on the court. “Empire’s only response [to the many arguments in HHS’s favor] is to insist that its interpretation has to be right because it usually (though not always) leads to higher DSH payments for hospitals.” This line of thinking is incorrect, said the majority.

Kagan elaborated, writing that “the point of the DSH provisions is not to pay hospitals the most money possible; it is instead to compensate hospitals for serving a disproportionate share of low-income patients.”

“And Empire’s reading excels only by the former measure, not by the latter one,” she added.

Justice Brett Kavanaugh authored a dissent that was joined by Chief Justice John Roberts, as well as Justices Samuel Alito and Neil Gorsuch. Kavanaugh refused to agree with the majority’s repeated assessment that the statutory formula at issue is highly complex. Rather, he called the formula “relatively straightforward,” and said that Empire Health’s position is supported by “traditional insurance and coordination-of-benefits principles.

Kavanaugh noted that over the years, HHS has used different interpretations.

“Importantly, from the time the statute was enacted in 1986 until 2003, HHS interpreted this statutory provision in the exact same way that I do,” the justice wrote.

He continued, pointing the finger directly at HHS for manipulating the numbers to save money:

Then in 2004, HHS abruptly changed course. Why? Presumably to save money. HHS was trying hard to find ways to contain Medicare costs in light of increasing Medicare expenditures and the country’s fiscal situation. To that end, HHS’s new 2004 interpretation of this statutory provision had the downstream effect of significantly reducing HHS’s reimbursements to hospitals that serve low-income patients.

The correct interpretation of the statute, said Kavanaugh, isn’t to side with one of the “dog’s breakfast of arguments about broad statutory purposes” offered by the parties. Rather, he wrote, “this case is resolved by the most fundamental principle of statutory interpretation: Read the statute.”

Under Kavanaugh’s reading, “none” of majority’s conclusion “adds up”:

To sum up: A patient was not entitled to have payment made by Medicare “for such days” in the hospital if the patient by statute could not (and thus did not) have payment made by Medicare for those days—for example, because private insurance was already covering the patient’s care, or the patient had exhausted his Medicare benefits. Both statutory text and common sense point to that conclusion. HHS’s contrary interpretation boils down to the proposition that a patient can be simultaneously entitled and disentitled to have payment made by Medicare for a particular day in the hospital. That interpretation does not work. And HHS’s misreading of the statute has significant real-world effects: It financially harms hospitals that serve low-income patients, thereby hamstringing those hospitals’ ability to provide needed care to low-income communities.

Although Gorsuch joined Kavanaugh’s dissent, he was noticeably silent on the case. Gorsuch has been a longtime critic of “Chevron deference,” the principle of deferring to an administrative agency’s interpretation of complex industry-specific statutory terms. Kavanaugh confined his dissent to the proper interpretation of the statute in play for DSH hospitals and did not comment on Chevron deference generally.

During oral arguments, Gorsuch noted that in contracts disputes, courts tend to pay attention to the interests of the parties and asked whether it would be fair to defer to HHS’ own interpretation when it has a financial stake in the outcome of the litigation. Interestingly, neither Gorsuch nor his fellow dissenters took up this line of reasoning in the four-page dissent.

[Photo by Erin Schaff-Pool/Getty Images]

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Elura is a columnist and trial analyst for Law & Crime. Elura is also a former civil prosecutor for NYC's Administration for Children's Services, the CEO of Lawyer Up, and the author of How To Talk To Your Lawyer and the Legalese-to-English series. Follow Elura on Twitter @elurananos