This dispute centers on Medicare reimbursement rules for graduate medical education costs, specifically the Direct Graduate Medical Education (DGME) payments hospitals receive for training physicians. Under federal law, hospitals must file annual cost reports with private contractors to determine their reimbursement. Once a cost reporting period closes, the contractor's determination of the total reimbursement is considered final. However, regulations allow these final determinations to be reopened under specific guidelines established by the Secretary of Health and Human Services. In 1997, the Secretary implemented a formula that capped reimbursable resident counts based on 1996 levels. In 2020, teaching hospitals challenged this cap, and the district court in a prior case, Hershey I, struck down the regulation as inconsistent with the Medicare statute. In response, the Secretary issued the FY 2023 Rule, modifying the formula to comply with the court's decision and applying it retroactively to open cost years starting in 2001. Crucially, the FY 2023 Rule explicitly stated that it would not be the basis for reopening final settled cost reports. Thirty-one hospitals, many of whom were plaintiffs in the earlier case, sought to apply the new formula to their final settled reports from years prior to 2021. When the agency refused, the hospitals sought a writ of mandamus in district court to compel the Secretary to reopen the reports. The district court granted summary judgment to the Secretary, and the hospitals appealed to the D.C. Circuit.
The D.C. Circuit affirmed the lower court's decision, focusing on the strict requirements for reopening final cost determinations under the Medicare regulations. The court first addressed the hospitals' claim that the Secretary had a clear duty to reopen the reports. The governing regulation, 42 C.F.R. § 405.1885(c), states that a contractor determination must be reopened if CMS provides 'explicit direction' to do so. The court noted that the regulation grants CMS discretion to direct a contractor to reopen or not reopen a determination. In this case, the FY 2023 Rule contained an express directive that it would not be the basis for reopening final settled cost reports. The court rejected the hospitals' argument that an example in the regulation, which mentions reopening if a determination is inconsistent with applicable law, created a mandatory duty to reopen. The court reasoned that the example illustrates how an 'explicit notice' can constitute an 'explicit direction' to reopen, but it does not override the agency's discretion to explicitly direct against reopening. Furthermore, the court found the example inapplicable because the regulation requires that the inconsistency with law be understood by CMS at the time the determination was rendered. Here, the understanding that the prior formula was inconsistent with law arose only after the Hershey I decision, years after the cost reports were settled. The court also identified two additional regulatory bars. First, the regulation limits requests for reopening to those made within three years of the determination, unless fraud is involved. The hospitals sought reopening in 2023, well past the three-year window for most of the relevant reports. Second, the regulation explicitly forbids reopening if the basis is a 'change of legal interpretation or policy' by CMS in response to judicial precedent. Since the FY 2023 Rule was a direct response to the Hershey I decision, it fell squarely within this prohibition. Consequently, the hospitals failed to demonstrate a clear right to relief or a clear duty on the part of the Secretary to act, which are necessary elements for a writ of mandamus.
The decision confirms that final Medicare cost reports are generally immune from reopening once the three-year statutory period has passed, unless fraud is proven. It reinforces that agencies cannot use subsequent changes in legal interpretation or policy, even those mandated by court decisions, to reopen settled financial determinations. Hospitals seeking to apply new reimbursement formulas to past years must do so within the regulatory timeframe or while the cost reports remain open. The case leaves open the question of whether the new formula applies to any remaining open cost years, but it definitively closes the door on retroactive adjustments to settled accounts based on the FY 2023 Rule.
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