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No Whammies! New CMS Reimbursement & Resident Reductions Take a Hit on Teaching Hospitals’ Bottom Lines

Health Law Alert Sarah E. Coyne, Katea M. Ravega

August has presented a double whammy to the country's teaching hospitals. First, on August 15, 2011, the Centers for Medicare and Medicaid Services ("CMS") announced that 267 teaching hospitals would experience reductions in their full-time equivalent resident slots, while 58 teaching hospitals will experience increases in their resident slots. Then, on August 18, 2011, in Henry Ford Health System v. DHHS, the Sixth Circuit upheld a Department of Health and Human Services ("DHHS") regulation that excludes the time residents spend doing pure research from the definition of "non-patient care activities," thereby rendering the costs non-reimbursable.

Because Medicare subsidies to teaching hospitals depend on the number of full-time equivalent residents that the hospital teaches and the activities those residents engage in at the hospital, the net effect of these two changes is an overall reduction in Medicare reimbursement amounts for many of the affected hospitals, and arguably the hospitals' incentives to continue training the country's future doctors. Both of these changes reflect federal agency interpretations of the Patient Protection and Affordable Care Act ("PPACA").

CMS Resident Reallocations

PPACA requires reallocating direct graduate medical education ("DGME") and indirect medical education ("IME") full-time equivalent resident caps among the teaching hospitals. CMS announced that hospital's full-time equivalent resident caps must be reduced by 65 percent of any excess slots. The number of slots that are taken from those hospitals are to be redistributed - 70 percent of them to hospitals in states with resident-to-population rations in the lowest quartile and 30 percent to hospitals in either a rural area or a health professional shortage area. This reallocation will affect cost-reporting periods occurring after July 1, 2011.

DGME and IME payment amounts, covering resident direct costs and overhead, respectively, directly reflect the number of full-time equivalent residents a teaching hospital has. As a result, hospitals with a reduction in its allowed residents will experience a reduction in DGME and IME reimbursement amounts.

Henry Ford Health System v. DHHS, _______ (6th Cir. 2011)

PPACA requires DHHS to reimburse teaching hospitals for "all the time spent by an intern or resident in non-patient care activities." The Act left it up to DHHS to define "non-patient care activities." In its effort to define that term, DHHS promulgated a regulation that defined non-patient care activities to exclude time residents spend doing "pure research." 42 C.F.R. ยง 412.105(f)(1)(iii)(C). In addition, the reimbursement requirement in PPACA at issue is expressly retroactive, applying to reimbursements from 1983 through 2001.

Henry Ford Health Systems ("Henry Ford") sued DHHS several years ago because DHHS had excluded - from its Medicaid reimbursements - time that Henry Ford residents spent doing pure research in the 1990s. Henry Ford won in the lower court and DHHS appealed to the Sixth Circuit. While the appeal was pending, Congress enacted PPACA, and DHHS promulgated this new definition of "non-patient care activities," excluding the research activity.

DHHS argued to the Sixth Circuit that its new definition resolved the appeal, in DHHS's favor because pure research is not a reimbursable task as a non-patient care activity. The court agreed and upheld the regulation on the basis that DHHS did not act in an arbitrary and capricious manner, nor did it exceed the authority that Congress delegated to the agency. As a result, the definition will be used to determine what tasks constitute non-patient care activities. Because pure research is not among them, costs associated with that task are not reimbursable.

Overall these new developments discourage teaching hospitals and reduce incentives to provide the critical hands-on education that medical professionals and public health require.

For more detail about these changes or to explore ways to mitigate the impact to your hospital, contact Sarah Coyne at (608) 283-2435 / sarah.coyne@quarles.com, Katea Ravega at (602) 230-5541) / katea.ravega@quarles.com or your Quarles & Brady LLP attorney.