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Hospitals Challenge Medicare Payments, With Help From Judge Kavanaugh

WASHINGTON — A federal appeals court has cleared the way for hospitals around the country to seek more money from Medicare, based on evidence that the government has been using faulty data to calculate costs for decades.

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WASHINGTON — A federal appeals court has cleared the way for hospitals around the country to seek more money from Medicare, based on evidence that the government has been using faulty data to calculate costs for decades.

The case, which was decided in June, featured a concurring opinion by Judge Brett M. Kavanaugh, President Donald Trump’s choice for the Supreme Court, who heaved a broadside at the Department of Health and Human Services just days before he was nominated.

The hospitals that brought the suit said Medicare had been using the flawed data since 1983. The federal government tried to bar their claims, saying hospitals should not be able to challenge factual determinations made many years ago.

The ruling, by the U.S. Court of Appeals for the District of Columbia Circuit, rejected that argument. It agreed with the hospitals, which said Medicare’s policy would require “the perpetual use of even demonstrably erroneous” information.

“It would seem to be the very definition of arbitrary and capricious for HHS to knowingly use false facts when calculating hospital reimbursements,” Kavanaugh wrote. “That is particularly so when those erroneous facts cost hospitals hundreds of millions of dollars. That is real money.”

The error continues to affect payment decisions to this day, Kavanaugh said. Medicare’s apparent goal, he said, was to save money by paying less in reimbursements to hospitals.

“Saving money is a laudable goal,” Kavanaugh said, “but not one that may be pursued by using phony facts to shift costs onto the backs of hospitals.”

The ruling was issued by a unanimous three-judge panel composed of Kavanaugh; Judge Gregory G. Katsas, an appointee of Trump; and Judge Merrick B. Garland, whose nomination to the Supreme Court by President Barack Obama was blocked by Senate Republicans in 2016.

The Department of Health and Human Services asserted that its rules gave hospitals a three-year window in which to challenge factual findings.

But the court said Medicare was misreading its rules. “We do not defer when an agency’s interpretation of its own regulations is ‘plainly erroneous or inconsistent with the regulation,'” the court said.

The lawsuit was filed three years ago by St. Francis Medical Center of Peoria, Illinois, and 276 other hospitals that said the government was underpaying them because it was using faulty data.

The government calculates Medicare payments to hospitals using a formula that incorporates data on hospital discharges in 1981. This data helps establish the “base rate,” which is adjusted and then used to help determine the current hospital payment rates.

St. Francis and other hospitals said the government had overstated the number of discharges in 1981, so the average cost per discharge appeared to be lower than it actually was.

Federal rules provide that Medicare and its contractors can reconsider their own decisions within three years, but the court said this limit did not apply to appeals by hospitals seeking review at a higher level, by an administrative tribunal or a federal court.

“It is not reasonable for HHS to cement misclassified costs into future reimbursements, thus perpetuating literally million-dollar mistakes,” Kavanaugh wrote.

The hospitals won a procedural victory. To collect more money from Medicare, they will still need to show how they have been harmed by errors in the data used to calculate their payments.

Thomas W. Coons, a lawyer who worked at the Medicare agency for 18 years, said the court decision could be “quite significant.”

“It opens up for review determinations that were made long ago,” Coons said. “The computations may be open to challenge now, to the extent they affect reimbursement for more recent years.”

Kenneth R. Marcus, a lawyer in Detroit who specializes in Medicare issues, said Kavanaugh’s opinion may provide “a glimpse into his judicial philosophy,” suggesting that “he is not inclined to rubber-stamp the actions of a government agency.”

Marcus said the decision makes it “likely that hundreds and perhaps thousands of hospitals nationwide will now file appeals challenging the standardized amount” — the average cost per discharge, calculated by the government and used to compute their Medicare payments.

In refusing to correct errors made long ago, Medicare officials said it was important to preserve the “finality” of reimbursement decisions.

But the appeals court said the need to correct inaccurate Medicare payments outweighed the agency’s desire for finality.

Robert L. Brandfass, senior vice president and chief legal officer of the OSF HealthCare System, which includes the Peoria hospital, said, “St. Francis Medical Center and, I suspect, all Medicare providers, are grateful for the recent ruling” by the appeals court.

“This decision,” he said, “corrects the unfair situation where Medicare providers were stopped from pursuing legitimate Medicare reimbursement appeals by a regulation created just for that purpose.”