Upholding a ruling by the U.S. District Court for the Central District of Illinois, the Seventh Circuit ruled on Oct. 16, 2012 that the Department of Health and Human Services (HHS) was correct to lower Medicare reimbursement by several million dollars for 19 Illinois hospitals in 2005 and 2006, as HHS was within their discretion to rule that access payments offset taxes paid by the hospitals.

The hospitals claimed that a new state tax assessment was a cost eligible for Medicare reimbursement. The revenue from this new state tax was placed in a fund used to improve access to hospitals. Thus, many of the hospitals paying the tax also received payments (referred to as “access payments”) from the fund. However, the taxes paid were not considered a reasonable cost by the Medicare contractor. As such, the Medicare contractor deducted the access payments received by the hospitals. Upon appeal from the hospitals, the Provider Reimbursement Review Board (the Board) reversed the decision on both counts, holding that the taxes did indeed qualify for reimbursement and that access payments were not a refund of those taxes.

An appeal of the Board decision by the Medicare contractor led to the Centers for Medicare and Medicaid Services deciding that while the taxes qualify for reimbursement, the access payments counted as refunds, and could be used to offset taxes. When the hospitals took their case to federal court, the central Illinois district court found that HHS had acted appropriately in concluding that access payments offset payments paid by the hospitals.

In affirming the lower court’s decision, the Seventh Circuit found that HHS’s decision was supported by substantial evidence and that it was not an arbitrary reversal of policy, and noted that federal agency decisions should be granted a high level of deference.