The United States District Court’s 2021 ruling in Milton S. Hershey Medical Center v. Becerra is one example of a successful legal challenge to federal agency action, but a number of more recent cases reaffirm that lower federal courts may not hesitate to overturn agency action deemed outside the bounds of the agency’s legislative authority. This is an important trend for hospitals to note when considering potential challenges of reimbursement determinations made by the Centers for Medicare & Medicaid Services.

In Hershey, a number of teaching hospitals challenged one of the elements that the Secretary of Health and Human Services (HSS) used in fiscal years dating back to 2005 to determine a hospital’s direct Graduate Medical Education (DGME) payment: specifically, each hospital’s weighted number of full-time equivalent (FTE) residents. After students graduate from medical school, they often continue their training in an initial residency period (IRP) which, by statute, is defined to last five years. Some residents additionally complete a fellowship which typically occurs outside the 5-year IRP. Under the Medicare statute, the rules for calculating the weighted average number of FTEs are required to provide a weighing factor of 1.00 for a resident who is in the resident’s IRP, and a weighing factor of .50 for a resident who is not in the resident’s IRP. Thus, the Medicare statute requires that a resident’s time be fully counted but only one-half of a fellow’s time be counted for purposes of the FTE calculation.

In addition, in 1997, Congress amended the Medicare statute to set a limit on how many FTEs a hospital may factor into its count before application of the weighing factors. That limit was capped at the hospital’s 1996 levels.

In 1998, the HHS Secretary amended the agency’s regulation which effectively reduced the weighted number of FTEs a hospital may claim for reimbursement when the hospital’s unweighted FTE count exceeds its 1996 cap. When a hospital exceeds the cap, its weighted FTE count is reduced commensurate with the amount by which the hospital exceeds the cap.  As the Hershey Court explained, assuming a hospital’s cap of 100 which is met by employing 90 residents and 10 fellows, after weighing the fellows at 0.5, the hospital’s post-weighted FTE count is 95. The math is as follows:

However, if that hospital adds ten more fellows (for a total of 90 residents and 20 fellows), thereby exceeding the cap, its post-regulation weighted FTE count is reduced to 90.91. The math is as follows:

Recognizing, under the rules of statutory construction set forth in Chevron v. Nat’l Resource Defense Council, that it owed no deference to the Secretary’s interpretation of the Medicare statute because the statutory language speaks to the precise issue and is clear, the Court held that the express text of the Medicare statute did not give the Secretary the latitude to decide, when a hospital exceeds its cap or not, to change the weights that Congress assigned to residents and fellows when calculating the FTE residents for each hospital. Consequently, the Hershey Court struck down the agency’s regulation, and thus, the DGME calculation because it violated the express language of the Medicare statute.

Over the past year-and-a-half, we have seen a number of lower federal courts not hesitate to overturn federal agency action when an agency acted outside the bounds of the authority granted to it by Congress in its enabling legislation. The Hershey case is one such example. However, more recently, the United States Supreme Court reinforced this approach in American Hospital Association v. Becerra (Case No. 20-1114 and decided on June 15, 2022), in which the Court limited HHS’s authority to set two separate hospital reimbursement rates under the 340B drug program where Congress spoke clearly in the Medicare statute as to how the rates are to be determined. Further, in West Virginia v. Environmental Protection Agency (Case Nos. 20-1530, 20-1531, 20-1778 and decided June 30, 2022), the Court struck down as not authorized by the Clean Air Act EPA’s sweeping rules to devise carbon emissions caps based on a generation shifting approach away from coal-powered plants, thereby opening the door for more robust challenges to agency action.

The lesson? Aggrieved hospitals are in as good a position as they have ever been to challenge the methodology and calculations made by CMS when determining hospitals’ Medicare rates, DSH and GME payments, or 340B reimbursement.