On October 13, 2009, the U.S. District Court for the District of North Dakota reversed the Centers for Medicare and Medicaid Services (CMS) Administrator’s ruling that two hospitals could not claim their respective residents rotating to a nonhospital clinic because the hospitals "shared" the costs of the residency program at the clinic. Medcenter One Health Systems and St. Alexius Medical Center v. Leavitt, Case No. 1:08-cv-063 (D. N.D. 2009).
The Plaintiff hospitals operated a family practice residency program in conjunction with the University of North Dakota. As part of the program, residents were required to rotate to a Family Practice Center, which was created by the two hospitals and the University of North Dakota. Both of the hospitals rotated residents to the Family Practice Center, and each claimed the number of full-time equivalent (FTE) residents rotating to the Family Practice Center for whom they had incurred the training costs (i.e., resident salaries and fringe benefits and a portion of teaching physician costs associated with the residents’ training at the clinic). Because each hospital only claimed the number of FTE residents that they had paid for, there was no concern that any resident was being claimed twice. In spite of the fact that the hospitals had been claiming residents in this manner for 15-20 years, the hospitals’ fiscal intermediaries disallowed the FTE residents assigned to the Family Practice Center for the hospitals’ fiscal years 1999-2001, based on the contention that a hospital must have incurred all of the costs for the full complement of residents rotating to a nonhospital site in order to claim any residents rotating to that site. In other words, because the hospitals had split the costs of the residency training program, no one hospital had incurred all of the costs at that nonhospital site and, therefore, neither hospital could claim any residents rotating to that site.
Effectively, this decision implemented a ban on hospitals sharing costs at nonhospital sites. The hospitals argued that it was not Congress’s intent to prohibit one or more hospitals from sharing costs of residency programs at nonhospital sites, and that the rules merely require that a hospital incur all of the training costs with respect to the particular resident FTEs that it claims. The North Dakota District Court sided with the Plaintiff hospitals, holding that the Secretary of HHS’s interpretation of the rules, which first appeared in the Federal Register in 2003, was a change in policy that could not be applied retroactively to the hospitals’ FY 1999-2001 cost reports.
Although this ruling is not applicable to time periods after 2001 (i.e., time periods after the Secretary’s 2003 policy change), the court did make a number of comments regarding the Secretary’s policy that could be applied to later time periods, including: "the language of the Medicare Act does not require a single hospital to pay for and claim all of the residents in a medical residency training program," and "the confusing and ill-advised ‘all or nothing’ interpretation adhered to by the Secretary since 2003 serves no legitimate public interest."