CMS Defers Low Wage Index Hospital Policy Changes in FY 2025 IPPS Final Rule Despite DC Circuit Holding

The Centers for Medicare and Medicaid Services (CMS) has deferred taking immediate action on its low wage index hospital policy in light of the US Court of Appeals for the DC Circuit’s decision in Bridgeport Hospital v. Becerra. While the CMS’s final rule for FY 2025 continues the policy for now, this move signals a potential shift as the agency reviews the court’s ruling and its potential impact on future Medicare payment policies.

In its recent final rule for the fiscal year (FY) 2025 Inpatient Prospective Payment System (IPPS), the CMS deferred action in response to the DC Circuit’s vacatur of its low wage index hospital policy and related budget neutrality adjustment in the case of Bridgeport Hospital.[1] CMS clarified that “the time to seek further review of the DC Circuit’s decision in Bridgeport Hospital has not expired” and proceeded to finalize the policy for the next three years as proposed.[2]

While finalizing the rule may hint at the agency’s intent to seek further review of the decision, the Bridgeport Hospital decision offers a look into the increasing willingness of courts to closely examine the limits of congressional authority delegated to agencies, even in complex federal programs like Medicare.

Bridgeport Hospital Case Overview

The Bridgeport Hospital court notes, with some wit, that the statute governing payment for inpatient hospitals, at nearly 60,000 words, “is longer than many books. See, e.g., F. Scott Fitzgerald, The Great Gatsby.”[3] When the US Congress enacted the verbose inpatient reimbursement statute, it developed a “wage index” provision to account for differences in hospital wages across various regions of the country.[4] Reimbursement rates are to be adjusted according to a set wage index that allow comparison of a region’s average wages to the national average, i.e., with higher-than-average wage regions receiving a value greater than 1.0 and lower-than-average wage regions assigned a value of less than 1.0.

The wage index was used in combination with other statutorily prescribed calculations to determine the overall reimbursement amount for hospital inpatient services. Among all the detailed pages of instructions in Section 1395ww governing hospital payments, Congress also granted CMS the authority to make “other exceptions and adjustments to such payment amounts under this subsection as the Secretary deems appropriate.”[5]

CMS Wage Index Adjustments

Using this “adjustment authority,” CMS had proposed in its FY 2020 IPPS rule that it would inflate the wage index value for hospitals in the lowest quartile as a policy solution for what the agency considered “growing disparities between wage index values for high- and low-wage-index hospitals.”[6] The resulting increase in reimbursement for the low wage index hospitals was to be offset for budget neutrality purposes (another chapter of Congress’s book of § 1395ww) by a downward adjustment for all other hospitals.[7] The agency’s authority to implement this redistributive policy was challenged by affected hospitals, and the DC district and circuit courts agreed that CMS had overstepped its bounds. Unlike the district court, which remanded the low wage index hospital policy to CMS with instructions to recalculate, on appeal, the DC Circuit Court vacated the policy entirely.

Judicial Review and Policy Limits

In doing so, the DC Circuit did not rely on the recent expansion of judicial interpretive authority explained by the US Supreme Court in Loper Bright Enterprises v. Raimondo, the 2024 decision overruling Chevron deference, which described deference provided by courts to federal agencies in interpretations of ambiguous statutes.[8] Instead, the court relied on the lack of ambiguity of the statutory authority in question in the case, i.e., the detailed directives of Congress within the statutory scheme, to reject the policy change implemented through the general adjustment authority as justified by CMS.

According to the Court, “sometimes Congress speaks precisely. And it did so in the section of the Medicare Act at issue. . . .”[9] Finding clarity in the specific mathematical directive and in plain statutory words and phrases like “shall adjust,” “by a factor,” “the,” and “on the basis of,” the court concluded that Congress had mandated a particularized process for the wage index.[10] The DC Circuit found that there was no room for deference to an agency interpretation, i.e., “Section 1395ww(d) is instead a regime of highly specific formulas.”[11] Moreover, because of the detailed nature of the wage index calculation process, the general adjustment authority granted by Congress in Section 1395ww(d)(5)(I)(i) cannot “override a statutory command as specific as the congressionally required formula in the wage-index provision.”[12]

Impact on Future CMS Policies

Where Congress has provided the directive to establish a particular payment policy, as it had with the wage index, there is no room for the agency to establish its own different policy even where the agency may have expressed a rational basis and furnished public notice.[13] While CMS has balked in the FY 2025 final IPPS rule on changing its low wage index hospital policy pending the period for appealing the court’s decision, its current policy cannot continue without a court reversal. In a similar situation, CMS recently acknowledged its need to yield to a court’s determination of the “congressional math” in a decision regarding the agency’s rule governing the payment methodology for costs associated with graduate medical education (GME).[14]

CMS indicated in its final IPPS rule for 2023 that it would change its rule and correct its flawed GME calculations retroactively for open cost reporting periods.[15] Likewise, the agency announced a separate fix to the payment errors caused by its outpatient prospective payment system policy that reduced hospital reimbursement for 340B drugs because the Supreme Court found that the agency failed to follow the statutory instructions to conduct a price survey prior to establishing the policy.[16] In each of these instances, the details furnished by Congress in the governing statute provided discrete limitations on CMS’s ability to establish alternative payment policy.

The “novel-length” narrative of Section 1395ww has furnished courts with specific congressional instructions for certain hospital payments that dictate policy with a specificity that cannot be dodged by the agency’s own policy designs or calculation errors. Hundreds of hospitals have challenged CMS’s base calculation of the standardized payment amount used in the IPPS formula based on “predicate errors” in the original formula still used in payment calculations to the present day.[17] These hospitals rely on the same underlying premise as the Bridgeport Hospital court—that “[i]ndeed, the Medicare Act prescribes formulas for inpatient reimbursements in excruciating detail.”[18]

These hospitals and other providers seeking to challenge CMS payment policies may encounter courts examining the Medicare statutory scheme, whether under the new review tools offered by the Loper Bright decision or based on the plain language of the congressionally drafted details.

As CMS faces increased judicial scrutiny regarding its interpretation of the congressional Medicare literature, the agency may find that navigating these challenges requires a continuous reassessment of its policies.