Government Cannot Close Medicare Loophole

(CN) - Regulators cannot close a Medicare loophole allowing certain hospitals to qualify both for low drug prices and high wage reimbursement because it is written into the statute, the Second Circuit ruled Thursday.

A hospital's reimbursement rate under the Medicare Act depends on whether the institution is classified as a "rural" or "urban" hospital.

Some hospitals geographically located in an urban area may be classified as rural under Section 401, and vice versa.

However, the rules allow an urban hospital to seek reclassification as a rural hospital, allowing them access to a more favorable drug pricing program, then turn around and seek an exception for higher wage reimbursement using an urban wage index.

The Department of Health and Human Services issued a regulation in 2000 to prevent hospitals reclassified from urban to rural to maintain their higher wage reimbursement rate.

But the Second Circuit ruled Wednesday that the regulation exceeds the agency's authority in a challenge brought by Lawrence + Memorial Hospital in New London, Connecticut.

"Lawrence argues, and we agree, that Section 401 unequivocally directs the Secretary to consider MGCRB [Medicare Geographic Classification Review Board] applications from hospitals that have been granted rural status pursuant to Section 401 in the same way as the Secretary treats applications from other rural hospitals," U.S. Circuit Judge Jed Rakoff said, sitting by designation from the Southern District of New York.

In other words, the agency may not consider the fact that the hospital was only recently reclassified as rural when it considers its request for higher wage reimbursement.

"Secretary's purported distinction between 'geographically rural' hospitals and hospitals with 'acquired rural status' for the purposes of an MGCRB application appears nowhere in the statute," Rakoff said. "We must presume that Congress intended hospitals with 'acquired rural status' to be treated like 'geographically rural' hospitals when applying for MGCRB reclassification."

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