Relying on PPACA Provision, 6th Circuit Court of Appeals Rules that Pure Research Performed in 1990s by Residents and Interns is Not Reimbursable

Henry Ford Hospital (“Hospital”), a Detroit teaching hospital, applied for Medicare reimbursement for FY 1991-96 and 1998-99 for “pure research” conducted by its residents. In an opinion dated August 18, 2011, the 6th Circuit held that the federal government is not under an obligation to reimburse teaching hospitals for the time their residents conducted pure research in the 1990s.

Generally, Medicare reimburses teaching hospitals for their direct and indirect costs of medical education. “Direct costs include education-related expenses, such as residents’ salaries…Indirect costs, the ones at stake here, include costs incurred by teaching hospitals due to the ‘general inefficiencies’ and ‘extra demands placed on other staff’ that result from educating residents.” Because measuring “general efficiencies” and “extra demands” was not easy, Congress developed a formula (See 42 USC §1395ww(d)(5)(B)(ii)) for these expenses that takes into account a hospital’s “full-time equivalent” (“FTE”). The greater the FTE residents the hospital teaches, the greater its Medicare subsidies. However, the definition of “indirect costs” and which activities constitute indirect costs remained vague and raised the present controversy.

In 2009, the federal district court ruled in favor of the Hospital stating, residents that engaged in educational research cannot be excluded from the hospital’s indirect medical education (“IME”) FTE resident count. While the Secretary of Health and Human Services’ (“Secretary”) appeal of this decision was pending, President Obama’s healthcare reform act (the Patient Protection and Affordable Care Act (“PPACA”)) passed. Included in PPACA’s many provisions was Section 5505, which reevaluated the rules for calculating hospitals’ FTE counts. Accordingly, as described in more detail below, the 6th Circuit Court of Appeals reversed the district court’s decision in reliance upon this new Section 5505.

Section 5505 provides, in part,

(b)…In determining the hospital’s number of fulltime equivalent residents for purposes of this subparagraph, all the time spent by an intern or resident in an approved medical residency training program in non-patient care activities, such as didactic conferences and seminars, as such time and activities are defined by the Secretary, that occurs in the hospital shall be counted toward the determination of full-time equivalency if the hospital…

(c) EFFECTIVE DATES.–
(1) IN GENERAL.–Except as otherwise provided, the Secretary of Health and Human Services shall implement the amendments made by this section in a manner so as to apply to cost reporting periods beginning on or after January 1, 1983.

Notably, time spent on non-patient activities includes didactic conferences, seminars, and other activities the Secretary determines. On November 24, 2010, the Secretary issued a rule (42 CFR 412.105) that stated, in part, the following:

(f) Determining the total number of full-time equivalent residents for cost reporting periods beginning on or after July 1, 1991. (1) For cost reporting periods beginning on or after July 1, 1991, the count of full-time equivalent residents for the purpose of determining the indirect medical education adjustment is determined as follows:

(iii)

(B) The time spent by a resident in research that is not associated with the treatment or diagnosis of a particular patient is not countable.

(C) Effective for cost reporting periods beginning on or after January 1, 1983, except for research activities described in paragraph (f)(1)(iii)(B) of this section, the time a resident is training in an approved medical residency program in a hospital setting, as described in paragraphs (f)(1)(ii)(A) through (f)(1)(ii)(D) of this section, must be spent in either patient care activities, as defined in §413.75(b) of this subchapter, or in nonpatient care activities, such as didactic conferences and seminars, to be counted. This provision may not be applied in a manner that would require the reopening of settled cost reports, except those cost reports on which, as of March 23, 2010, there is a jurisdictionally proper appeal pending on direct GME or IME payments.

Explicitly stated in the new regulation, research not associated with treating or diagnosing a patient does not qualify as an IME FTE. Moreover, because both the statute and the regulation prescribe that the new rules apply retroactively, the court of appeals ruled that the district court’s ruling be reversed and that the Hospital not be entitled to reimbursement for the time its residents spent conducting pure research in the 1990s.

For more information, please contact Abby Pendleton, Esq. or Jessica L. Gustafson, Esq. at (248) 996-8510 or at (212) 734-0128 or visit the HLP website.