Supreme Court Addresses Reimbursement for Graduate Medical Education Costs

By Ronald L. Scott

In Regions Hospital v. Shalala, decided February 24, 1998, the Supreme Court examined Medicare reimbursement rules for graduate medical education (GME) costs. Regions Hospital is a Minnesota teaching hospital that provides education programs for interns and residents, known as GME. Under the Medicare law and implementing regulations, GME costs are an "allowable cost" for which a hospital may receive reimbursement from Medicare. At the end of each fiscal year, the hospital files a cost report, which is filed with a "fiscal intermediary," usually an insurance company, designated by the Secretary of Health and Human Services (HHS). From 1966 to 1985, GME expenses were reimbursed on a "reasonable cost" basis. However, in 1986, Congress amended the method for calculating reimbursable GME costs ("GME Amendment"). Rather than using discrete annual determinations of "reasonable cost…actually incurred," the GME Amendment provided that the Secretary of HHS use the hospital’s cost reporting period for 1984, adjusted for inflation.

Regions Hospital had originally been advised that its amount of program reimbursement for the base year of 1984 was $9,892,644. An audit by the fiscal intermediary reduced the hospital’s allowable base year GME costs to $5,916,868. The hospital appealed to the Provider Reimbursement Review Board (PRRB) challenging the validity of the reaudit rule. The PRRB responded that it lacked authority to invalidate the reaudit regulation, and the hospital sought expedited judicial review. The United States District Court for the District of Minnesota granted summary judgment in favor of the Secretary of HHS, and the Eighth Circuit affirmed.

On appeal by the hospital, the Supreme Court held that: (1) the reaudit regulation authorizing fiscal intermediaries to reaudit 1984 base year cost reports to insure accurate reimbursements in future years in not an impermissible retroactive rule; (2) the GME Amendment providing that a hospital’s costs for GME "recognized as reasonable" for 1984 serve as a base figure used to calculate GME reimbursements for all subsequent years is ambiguous; (3) therefore, the reaudit regulation is a reasonable interpretation of the GME Amendment; and (4) the reaudit regulation does not violate principles of "issue preclusion." The Court held that the intent of Congress was ambiguous on whether 1984 base year calculations could be re-audited, noting that it did not accept that Congress intended that misclassified and nonallowable costs would continue to be recognized indefinitely through future GME payments. The GME Amendment introduced a new statutory concept of per-resident GME costs, and such innovation caused the Secretary of HHS to re-examine past GME costs. The Court rejected the hospital’s "fairness" and "issue preclusion" arguments arising from a three-year gap from the 1986 enactment of the GME Amendment to release of the Secretary’s final regulations in 1989, finding the Secretary’s actions reasonable as an interpretation of the governing legislation.

Neither the HHS rule nor the Court’s decision allows recoupment of excess reimbursement for years in which the reimbursement determination has become final. Rather, the regulation and decision prevent future overpayments and permit recoupment of prior excess reimbursement only for years in which the reimbursement determination has not yet become final. Prior to the Supreme Court’s decision, an issue that had divided the Circuit Courts of Appeals was whether the Secretary’s interpretation of the GME Amendment, embodied in the reaudit rule, is entitled to deference. The Court rejected the hospital’s argument that the phrase in the GME Amendment "recognized as reasonable" could not mean two separate amounts; one for 1984 itself (since 1984 itself was "final" under HHS regulations which provide for a three-year reopening window), and a lower, recalculated amount as a result of a reaudit. The Court held that the reaudit rule is not impermissibly retroactive, and that it reflects a reasonable interpretation of the law entitled to deference. This case is financially important to Medicare and GME, since government lawyers told the justices that amounts at stake in some pending cases could exceed $100 million.