Health Law Daily Wrap Up, ADMINISTRATION OF MEDICARE/MEDICAID PROGRAMS—PRRB DECISIONS: Hospital deemed urban, not rural, by operation of Lugar provision, (Jun 17, 2025)

By Justin Marcus Smith, J.D.

The Board rejected District One’s argument that physical geographic location in a rural area would determine MDH status regardless of the Lugar county designation.

A hospital cannot be classified as both Lugar (urban) and MDH (rural) simultaneously, held the Centers for Medicare & Medicaid Services (CMS) Provider Reimbursement Review Board (Board), in affirming the revocation of a Minnesota hospital’s status as a Medicare-dependent small rural hospital (MDH). The hospital’s physical location in a rural county was not determinative of MDH status. However, the Board held the hospital was entitled to a transition payment for two cost reporting years, hence the Board reversed the decision of the Medicare administrative contractor (MAC) to deny a transition payment. The Board remanded to the MAC for calculation of the hospital’s transition payment (District One Hospital, PRRB No. 2025-D17, Case No. 17-1963, 17-1965, 17-1966, 17-1967 (Apr. 29, 2025)).

Background. The Centers for Medicare & Medicaid Services (CMS) reimburses most Medicare participant hospitals for inpatient services on a prospective payment system based on a nationally adjusted DRG (diagnostic -related group) prospective payment rate (Inpatient Prospective Payment System or IPPS). The Secretary of the Department of Health and Human Services (HHS) sets the rate annually, as adjusted for different area wage levels and additional payments to hospitals classified as Medicare-dependent small rural hospitals (MDHs).

Allina Health System (Allina) bought petitioner District One, a hospital in Rice County, Minnesota, effective January 1, 2015. At that time, CMS classified District One as an MDH and paid District One accordingly. District One indicated it was rural in its fiscal year (FY) 2015 filed cost report, and the Medicare administrative contractor (MAC) accepted that designation. The applicable regulations define a rural area as “[a]ny area outside an urban area.” In August 2015, the Medicare Geographic Classification Review Board (MGCRB) approved District One’s request for redesignation from rural to urban for wage index purposes, but District One continued to operate, and CMS continued to pay it, as an MDH.

In 2016, Allina asked the MAC to refer District One to an auditor expert for clarification of the MDH calculations and payment rates. After some back and forth, District One asked the MGCRB for reclassification from the urban Rochester, Minnesota core based statistical area (CBSA) to the urban Minneapolis CBSA for October 1, 2018 through September 30, 2020. District One said it was not a “Lugar County” hospital. See 42 U.S.C. § 1395ww(d)(8)(B) (Lugar provision). MBCRB denied the reclassification request.

In February 2017, after more back and forth, the MAC notified District One that it no longer qualified for MDH status and CMS would cancel that classification and retroactively reprocess all claims with discharge dates from October 1 2014. The MAC notice letter also stated that Rice County had been designated a Lugar County.

District One requested reconsideration, but the MAC declined to reverse its decision. On the same day, the MGCRB denied District One’s reclassification. The MGCRB letter said it could not approve the reclassification of the geographic area under the Lugar provision. District One filed a timely appeal challenging the revocation of its MDH status for the cost reporting years ending December 31, 2014 through 2017.

The Lugar provision reclassifies certain rural counties adjacent to one or more urban areas as urban (Lugar counties) for the purpose of calculating the wage index for certain rural hospitals in those counties (Lugar hospitals) for IPPS payment. Lugar hospitals are deemed to be in an urban area. Their payments are based on the urban area to which they are reclassified.

On appeal, District One asserted that it remained rural and the MAC improperly used the Lugar designation to penalize it. District One said it did not believe that the 2006 Final Rule requiring MDHs to report information that would affect the hospital’s MDH status to the MAC would apply in instances where a hospital’s county was designated as a Lugar county. Essentially, District One argued that its physical location in a rural area, Rice County, should determine MDH status, not its treatment as a Lugar hospital. District One argued further that, even if the Board were to find the MAC properly denied MDH status, such denial should not be retroactive, and that it should qualify for a transition payment for the FY 2016 and 2017. District One also said Allina did not know about Rice County’s Lugar designation when it bought District One in 2015 or when it filed the 2015 cost report.

The MAC contended that the October 1, 2024 classification of Rice County as a Lugar county meant District One could not be an MDH because it was no longer in a rural area. The MAC said CMS addressed the physical location and urban treatment issues District One raised on appeal in comments to the FY 2015 IPPS Final Rule. See 79 Fed. Reg. at 49978 (Aug. 22, 2014). The MAC said District One must be treated as an urban hospital because there was no evidence that District One applied for a geographic reclassification from urban to rural. Rather, the opposite occurred: District One applied for reclassification from rural to urban twice, once to the Rochester CBSA, and a second time to the Minneapolis-St. Paul-Bloomington CBSA.

Moreover, the MAC noted MGCRB denial of the second request cited the Lugar provision as the reason for denial, thus confirming District One’s redesignation as a Lugar hospital. The MAC said that triggered required reporting to the MAC. District One failure to comply with the reporting called for CMS cancellation of District One’s MDH classification. As for retroactivity, the MAC said District One was aware of its “Lugar” status at the time it filed its FY 2016 and 2017 cost reports with the MAC, filings that claimed “rural” status. Last, the MAC asserted CMS never notified that District One would be eligible for a transition payment for FY 2016 and 2017.

Discussion. The Board held District One did not prove by a preponderance of the evidence that it was entitled to MDH status for cost reporting years 2014, 2015, 2016, or 2017. The MAC decision to revoke MDH status under the Lugar provision was proper.

The Board rejected District One’s argument that physical geographic location in a rural area would determine MDH status regardless of the Lugar county designation. The parties stipulated that the Lugar provision requires the Secretary to treat hospitals in rural counties adjacent to one or more urban areas as within an urban CBSA and that such hospitals are deemed to be in an urban area for federal payment purposes. Neither the out-migration adjustment exception nor the urban-to-rural reclassification exception applied to the instant appeal. District One did not waive Lugar status by requesting an out-migration adjustment, and the only reclassifications were to urban CBSAs, i.e., Rochester, then Minneapolis. There were no other Medicare provisions that would permit a Lugar hospital to be treated as a rural provider. The Board clarified further that Lugar status categorically precludes MDH status.

As for retroactivity, the Board found that publication of the change in geographic classification to Lugar in the federal register gave both District One and the MAC constructive notice of that change at the time it occurred. An approved MDH must then notify the MAC of its classification change within 30 days. See 42 C.F.R. § 412.108(b)(4)(i). The Board concluded everyone should have known about it. The Board observed the MAC had an obligation to evaluate on an ongoing basis, but “clearly” did not.

The Board otherwise agreed that District One should qualify for the transition payment outlined in the Provider Reimbursement manual and in the November 13, 2015 Federal Register. The Board rejected the MAC’s notice argument here because the MAC was responsible for being aware and contacting CMS. The Board accordingly remanded to the MAC to calculate transition payment amounts for FY 2016 and 2017.

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