Breckinridge Health v. Thomas Price, 869 F.3d 422

Background

Kentucky Critical Access Hospitals paid a 2.5% provider tax on gross revenues (KP‑Tax); those receipts go into the Medical Assistance Revolving Trust (MART) to fund Kentucky Medicaid DSH payments.
DSH payments are federal‑state matched payments to hospitals that serve a disproportionate share of low‑income patients; the amount a hospital receives is unrelated to the KP‑Tax it paid.
Appellants claimed full KP‑Tax amounts as reasonable Medicare costs on 2009–2010 cost reports; CMS offset those costs by the DSH payments the hospitals received.
The PRRB upheld the offset, finding the DSH payments effectively refunded part of the KP‑Tax; the Administrator adopted that ruling and the district court affirmed.
The hospitals challenged the offset as arbitrary and contrary to the Medicare statute and a 2010 Final Rule, arguing DSH payments were not payments made specifically to reimburse the tax and that the offset unlawfully shifted costs.
The Sixth Circuit affirmed, concluding the net economic effect of the DSH payments reduced the KP‑Tax cost and therefore constituted a refund under Medicare rules.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether DSH payments must offset KP‑Tax claimed as Medicaid reasonable Medicare cost	KP‑Tax was actually incurred and reimbursable; DSH payments did not specifically reimburse the tax so cannot offset it	DSH payments were funded from the MART (which includes KP‑Tax receipts) and therefore economically reduced the KP‑Tax cost	The offset was proper: DSH payments reduced the net KP‑Tax cost and thus acted as refunds under Medicare rules
Whether the 2010 Final Rule requires payments be made "specifically" to reimburse the tax before offset allowed	The word “specifically” means only payments expressly made to make the provider whole for the tax may offset it	The Rule requires only that payments be “associated with” the assessed tax; association suffices for offset	The Rule does not require a payment explicitly labeled to reimburse the tax; association is enough
Whether HHS’s offset decision was arbitrary, capricious, or contrary to statute	HHS misapplied refund/net cost rules and departed from prior practice	HHS reasonably applied the net‑cost/refund regulatory framework to the economic realities of the state funding scheme	HHS’s decision is owed deference and is not arbitrary or capricious; affirmed
Whether the offset impermissibly shifts Medicare costs to non‑Medicare patients	Allowing offsets forces non‑Medicare patients to bear Medicare costs	The record does not show such impermissible cost‑shifting; offset only recognizes net cost	No impermissible cost‑shifting shown; offset permissible

Key Cases Cited

Abraham Lincoln Mem. Hosp. v. Sebelius, 698 F.3d 536 (7th Cir. 2012) (upholding offset where state fund funded both tax receipts and Medicaid payments)
Kindred Hospitals East, LLC v. Sebelius, 694 F.3d 924 (8th Cir. 2012) (payments from a pool that reduce hospital costs may be treated as refunds regardless of label)
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (U.S. 1994) (agency interpretation of Medicare reasonable‑cost provisions given deference absent compelling contrary evidence)
Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (U.S. 1984) (framework for judicial deference to reasonable agency interpretations)
Atrium Med. Ctr. v. HHS, 766 F.3d 560 (6th Cir. 2014) (broad deference appropriate for complex Medicare regulatory determinations)
Owensboro Health, Inc. v. HHS, 832 F.3d 615 (6th Cir. 2016) (explaining DSH statutory purpose)
Loyola Univ. of Chicago v. Bowen, 905 F.2d 1061 (7th Cir. 1990) (discussing limits on shifting costs to non‑Medicare patients)
Battle Creek Health Sys. v. Leavitt, 498 F.3d 401 (6th Cir. 2007) (Secretary has broad discretion to determine reimbursable reasonable costs)