Breckinridge Health, Inc. v. Thomas Price, 860 F.3d 358

Background

Kentucky critical access hospitals (Appellants) paid a 2.5% provider tax on gross revenues (KP‑Tax); KP‑Tax revenue is deposited into the Medical Assistance Revolving Trust (MART) which helps fund Medicaid DSH payments.
Appellants historically claimed full KP‑Tax as a reasonable Medicare cost; for 2009–2010 CMS offset that claimed KP‑Tax reimbursement by the Medicaid Disproportionate Share Hospital (DSH) payments they received.
The PRRB upheld the offset, treating DSH payments as refunds that reduced the net tax cost; the Administrator affirmed.
The district court affirmed, relying on the Seventh Circuit’s reasoning in Abraham Lincoln Memorial Hospital v. Sebelius that payments sourced from a tax fund can operate as refunds for that tax.
Appellants argued the Final Rule requires payments be made "specifically" to reimburse the tax and that the offset improperly shifts costs to non‑Medicare patients; the courts rejected these arguments.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether DSH payments must be offset against KP‑Tax when DSH funds derive from the tax pool	Appellants: DSH payments are not "refunds" unless made specifically to reimburse the tax; they still bear unreimbursed indigent care costs so KP‑Tax should be fully reimbursable	HHS: DSH payments derived from the same fund as the KP‑Tax are "associated with" and economically reduce the tax cost; regulations require recognizing net tax expense	The offset is permissible—DSH payments reduced the net KP‑Tax cost and thus acted as refunds; agency action was not arbitrary or contrary to statute
Whether the Final Rule requires a stricter "specifically made to reimburse tax" test	Appellants: Final Rule’s use of "specifically" limits offsets to payments expressly intended to make providers whole for tax expenses	HHS: The Final Rule requires only that payments be "associated with" the assessed tax to reduce net expense	Court: The Rule permits offset when payments are associated with the tax; the DSH payments met that standard
Whether agency practice or prior reimbursement history barred the offset	Appellants: Longstanding prior full reimbursement and administrative practice should preclude new offsets	HHS: No binding administrative practice; agency may interpret regulations	Court: Prior inaction doesn’t establish binding policy; no estoppel against the offset
Whether treating DSH as refunds improperly shifts costs to non‑Medicare patients in violation of Medicare reimbursement principles	Appellants: Offsets force non‑Medicare patients to bear costs Medicare should cover	HHS: Regulations permit net‑cost adjustments; no showing that non‑Medicare patients are made to bear Medicare‑covered costs	Court: No violation shown; offset addresses net economic effect and is consistent with reimbursement rules

Key Cases Cited

Abraham Lincoln Mem. Hosp. v. Sebelius, 698 F.3d 536 (7th Cir. 2012) (payments drawn from a tax fund can operate as refunds reducing tax costs for Medicare reimbursement)
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (U.S. 1994) (agency interpretations of complex Medicare cost rules entitled to deference absent clear contrary indication)
Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (U.S. 1984) (framework for judicial deference to agency statutory interpretations)
Kindred Hospitals East, LLC v. Sebelius, 694 F.3d 924 (8th Cir. 2012) (payments from a pooled fund that reduce provider’s economic costs may be treated as refunds regardless of label)
Owensboro Health, Inc. v. HHS, 832 F.3d 615 (6th Cir. 2016) (discussing Medicaid DSH statutory purpose and related reimbursement principles)