By Brendan Pierson

Oct 28 (Reuters) - A group of hospitals has sued the U.S. Department of Health and Human Services $(HHS)$ for allegedly underpaying hospitals that serve a disproportionate share of low-income patients.

The lawsuit, filed by 10 hospitals on Friday in Washington, D.C., federal court, says that hospitals will lose out on billions of dollars in reimbursements because of the rule, which was passed last year and applies retroactively to the years 2004 to 2013. (A 2014 rule that changed the policy going forward is not part of the case.)

The rule concerns annual payments made by Medicare to hospitals serving low-income patients, known as disproportionate share hospital payments. All of the plaintiff hospitals had appealed those payments during the 2004-2013 period.

HHS had initially tried to change the way those payments are calculated with a 2004 rule. That prompted legal challenges from hospitals, culminating in a 2019 U.S. Supreme Court ruling that the 2004 rule change did not go through proper rulemaking procedure with a public notice and comment period. HHS passed the retroactive rule in response to that decision.

In Friday's lawsuit, the hospitals - which include Scripps Mercy Hospital in San Diego, California, University of Texas-affiliated hospitals in Tyler and Athens, Texas, and Richmond University Medical Center in Staten Island, New York - say that the 2023 rule improperly makes a retroactive change in the way that the payments are calculated.

Specifically, they say that under the 2023 rule, HHS counts days spent in the hospital by patients who are covered by privately administered, Medicare-funded health plans, known as Medicare Advantage or Medicare Part C, in the same way that it counts days spent by patients covered by traditional Medicare.

That results in lower reimbursement under a complex formula used by HHS to calculate payments to disproportionate share hospitals, they allege. They say that the rule is arbitrary and capricious and violates the federal Medicare law and the Administrative Procedure Act on federal rulemaking.

HHS did not immediately respond to a request for comment.

The lawsuit follows a similar case filed in the same court by about 80 hospitals in September.

The U.S. Supreme Court in June agreed to hear a separate challenge by about 200 disproportionate share hospitals that claim they are being shortchanged by HHS. That case also involves the formula used to calculate disproportionate share hospitals' reimbursement, though a different part of it, concerning the proportion of patients eligible for government benefits.

The case is Scripps Mercy Hospital San Diego et al v. Becerra, U.S. District Court for the District of Columbia, No. 1:24-cv-03052.

For the hospitals: Ellen Wolf of Wolf Wallenstein and others

For HHS: not available

Read more:

Supreme Court will hear case claiming US underpays hospitals serving needy patients

(Reporting By Brendan Pierson in New York)

((Brendan.Pierson@thomsonreuters.com; 332-219-1345 (desk); 646-306-0235 (cell);))