Becerra v. Empire Health: US Supreme Court grapples with Medicare DSH formula; sides with HHS

This decision is particularly important to hospitals that rely on Medicare Disproportionate Share Payments (DSH) when caring for large numbers of low-income patients.

The Medicare program once again took front and center stage in late June as the US Supreme Court took on the complexity of the disproportionate share supplemental payment formula. Berating the Medicare statute’s byzantine language and chiding that if you understand the purpose of the statute, you still may have difficulty with the language teasing “don’t bet on it,” the Court upheld a 2004 regulation by the US Department of Health and Human Services (HHS) that resulted in substantial payment reductions for hospitals that provide significant services to Medicare low-income patients. 

The DSH formula at issue is comprised of two components. When combined, these components should fully capture a hospital’s percent of low-income Medicare and Medicaid patients, with one fraction commonly called the “Medicare fraction” and the other the “Medicaid fraction.” The Medicare fraction and its language are at the core of Empire Health.

The Court’s decision came down to the statutory language that describes the numerator of that Medicare fraction; “the numerator… which is the number of [a] hospital’s patient days for [the fiscal year] …..made up of patients who (for such days) were entitled to benefits under part A of [Medicare] and were entitled to [SSI] benefits..” [cite]

The question presented to the Court was: Are patients whom Medicare insures but does not pay for on a given day considered “entitled to [Medicare Part A] benefits” for computing a hospital’s disproportionate-patient percentage? The majority held that the 2004 HHS regulations properly interpret the statute to include these patients - they are “entitled” to benefits; whether Medicare actually pays for hospital treatment is irrelevant.

Empire Health argued that the parenthetical in the statute “for such days” modifies the calculation such that only days for which the program actually compensates the hospital should be included in the numerator of the fraction. Empire further argued that including those who are eligible where no payment is actually made, as the 2004 regulations require, inflates the numerator, reducing the applicable DSH payment.

Justice Kagan, writing for five to four majority, put the nail in the coffin for hospitals heavily reliant on Medicare DSH supplemental payments by concluding the statute was clear and the term “entitled to benefits” could not be modified by the term “for such days,” reducing the number of patients who are included in the numerator. To that end, the majority found they needed only look at the text, context and structure of the DSH statute itself.

The majority found that the statutory language that governs the Medicare DSH calculation is byzantine and complex, commenting that its interpretation “does not exactly leap off the page.” Nevertheless, the Court refused to concede to Empire Health’s arguments that the proper calculation for the numerator in the Medicare component of the DSH percentage formula should exclude days and costs where Medicare did not pay the hospital for care due to coverage limitations.

While Empire Health sought to point out that the term in the statute was modified by the parenthetical “(for such days)” in support of their assertions, the majority determined that sufficient weight could not be provided to the parenthetical and that doing so would pervert the purpose of the statute. Justice Kagan wrote, “[T]he point of the statute is not to pay hospitals the most money possible; it is to compensate them for serving a disproportionate share of low-income patients.”

The issue of statutory language has been at the core of similar Medicaid DSH litigation, where HHS regulations similarly were promulgated to include costs associated with treating patients who are eligible for services but for whom the Medicaid program does not pay for such hospital services. The meaning of the terms “entitled” and “eligible” used in these statutes has now been addressed in the Empire Health case in a way that broadens the meaning in mathematical calculations for supplemental payment.

The result of Empire Health is to solidify additional payment reductions for hospitals that provide significant services and subsidies as they treat both Medicare and Medicaid low-income patients.

Special thanks to senior health care analyst, Kathy Rubinstein, for assisting in the preparation of this content.