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Supreme Court Leaves Hospitals Exposed for Medical Training Costs

The U.S. Supreme Court has ruled in favor of federal regulators with respect to graduate medical expenses. The Court's 6-3 decision in Regions Hospital v. Shalala defeats a challenge to the government's authority to apply retroactive concepts to reaudits of "final" determinations.

A. Medicare Reimbursement Under the Medicare Act, all U.S. hospitals, except Maryland's hospitals, may obtain reimbursement from Medicare for "allowable costs," including the cost of certain educational programs for interns and residents, known as graduate medical education (GME). (Unlike the situation in the other 49 states, hospitals in Maryland are reimbursed for teaching expenses through Maryland's rate setting mechanisms.)

Hospitals obtain reimbursement for GME expenses by filing a cost report at the end of each year. This cost report is subject to a series of reviews, but the Secretary of Health and Human Services is also permitted to reopen, within three years, an otherwise final determination to correct insufficient reimbursement or to recoup excessive reimbursement for a given period.

In this context, it should be noted that Congress, in 1986, changed the method for calculating GME costs (the 1986 GME Amendment). Although the 1986 GME Amendment adopted 1984 as a base year for determining GME costs, final regulations implementing the 1986 GME Amendment were not published until September 1989.

B. Regions Hospital

Regions Hospital (formerly known as St. Paul-Ramsey Medical Center), a teaching hospital, filed a cost report with respect to GME cost reimbursement in 1984. In February 1986, the Hospital received a final determination for the 1984 reporting period that reflected total GME costs of $9,892,644, or $70,662 per resident, for 1984. However, a reaudit in late 1990 of the 1984 reporting period concluded that the Hospital's total allowable GME costs under the 1986 GME Amendment were only $5,916,868, or $49,805 per resident, for 1984.

Thereafter, although the Secretary did not seek recoupment for excessive reimbursement for 1984, because a final determination for that year was already 3 years old, the Secretary did seek recoupment of the excessive reimbursement for 1985 and beyond, and sought to use the recomputed amount of $49,805 per resident, down approximately $21,000 per resident, for future GME cost reimbursement at Regions Hospital.

Regions Hospital filed suit challenging the validity of the 1989 regulations authorizing the re-calculation, claiming that the reaudit rule was unfairly retroactive. Government regulators, on the other hand, argued that their action was proper because Congress directed them to use reaudits to prevent future over-payments and to recoup overpayments for years in which reimbursements for interns and residents were not yet final.

C. The Court's Decision

The Supreme Court quickly dismissed the hospital's argument that the reaudit regulation was an impermissible retroactive rule. In fact, the Court found that the reaudit rule applied the cost reimbursement principles in effect at the time the costs were incurred.

Further, the Court found that the reaudit did not affect actual 1984 reimbursement or reimbursement for any later years for which the three-year window had closed. The reaudit figures were to be used solely with respect to years still open and future years. Moreover, even though the three year window for 1984 itself had closed, the government could still use its corrected 1984 calculations as a base year, as contemplated by the 1986 GME Amendment.

Although lower courts had previously split on the "retroactive" application of the reaudit rule, the Supreme Court's decision closed the door on hospitals that hoped to use their final 1984 numbers as a base year. The result is that teaching hospitals nationwide (1) are subject to a recalculation of their 1984 base numbers to determine their proper GME reimbursements, and (2) remain very exposed to reaudits of any reimbursements that have not been final for at least three years.


March 21, 1999




Rosen, Barry F.


Health Care