Health Law Daily Wrap Up, MEDICARE OVERPAYMENTS AND UNDERPAYMENTS—PRRB DECISIONS: Medicare Contractor improperly calculated VDA payment by using the now-reversed fixed-total methodology, (Aug 6, 2025)

By Jeffrey H. Brochin, J.D.

CMS’s longstanding approach for cost reporting periods prior to FY 2018 violated 42 U.S.C.§1395ww(d)(5), and therefore the Medicare Contractor’s (MAC’s) VDA determination was remanded for calculation consistent with the fixed-fixed methodology.

The PRRB (Board) has ruled that Medicare Contractor National Government Services, Inc. (Medicare Contractor or MAC) improperly calculated the volume decrease adjustment (VDA) for Chenango Memorial Hospital (Chenango Memorial or Provider) for Fiscal Year 2017 by using the incorrect fixed-total methodology, and they accordingly remanded to the MAC for calculation of the Provider’s VDA in accordance with the court’s ruling in Lake Region Healthcare Corp. v. Becerra (2024) (Lake Region), as outlined in Provider Reimbursement Manual, Part 1 (PRM-1) § 2810.1.D.2.b (Chenango Memorial Hospital, PRRB No. 2025-D33, Case No. 21-0508 (June 18, 2025)).

VDA adjustments for MDH providers. Medicare pays certain hospitals a predetermined, standardized amount per discharge under the inpatient prospective payment system (IPPS) based on the diagnosis-related group (DRG) assigned to the patient. These DRG payments are also subject to certain payment adjustments, one of which is the VDA. It is available to Medicare Dependent Hospitals (MDHs) if, due to circumstances beyond their control, they incur a decrease of more than five percent (5%) in their total number of inpatient cases from one cost reporting period to the next. VDA payments are designed to fully compensate the hospital for the fixed costs it incurs in the relevant period in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.

For cost reporting periods prior to FY 2018, CMS calculated the VDA as the difference between a hospital’s fixed costs and the total DRG payments. However, in the FY 2018 IPPS/LTCH PPS final rule, (effective for cost reporting periods beginning on or after October 1, 2017, i.e., FY 2018 and beyond), CMS finalized prospective changes as to how the MACs would calculate the volume decrease adjustments, requiring that MACs compare estimated Medicare revenue for fixed costs to the hospital’s fixed costs to remove any conceivable possibility that a hospital that qualified for the VDA could ever be less than fully compensated for fixed costs as a result of the application of the adjustment.

FY 2017 VDA calculations. Chenango Memorial Hospital is an acute care hospital located in Norwich, New York that was designated as an MDH during FY 2017. It was undisputed that the Provider experienced a decrease in discharges greater than five percent (5%) from FY 2016 to FY 2017 due to circumstances beyond their control and that, as a result, they were eligible to have a VDA calculation performed for FY 2017.

On June 3, 2019, Chenango Memorial filed a timely request for a VDA payment of $2,022,125 for FY 2017 to compensate it for a decrease in inpatient discharges during FY 2017.7 On March 6, 2020, the Medicare Contractor requested additional information to continue its review, ad on August 11, 2020, the Medicare Contractor approved Chenango Memorial’s VDA payment request but determined the correct payment amount to be $781,647. Chenango Memorial timely appealed the Medicare Contractor’s VDA determination.

Change in longstanding methodology. The Board referenced the September 3, 2024 D.C. Circuit ruling in Lake Region Healthcare Corp. v. Becerra, that the agency’s and the Administrator’s longstanding approach for cost reporting periods prior to FY 2018 violated 42 U.S.C. § 1395ww(d)(5) (see CMS’s VDA calculation method did not exceed its interpretive discretion, Oct. 19, 2022). That approach calculated a hospital’s VDA as the difference between a hospital’s fixed costs and the total DRG payments, (which the court called the “fixed-total method”). Since that ruling, the Board has continued to issue VDA decisions applying the Board’s long-standing “fixed-fixed” methodology for cost reporting periods before October 1, 2017 (which also is the methodology CMS promulgated for cost reporting periods beginning on or after October 1, 2017).

Accordingly, the Board found that the “fixed-fixed” methodology was to proper methodology for calculation of the FY 2017 VDA payment for Chenango Memorial, and they remanded the matter back to the MAC with instructions to calculate the Provider’s FY 2017 VDA consistent with Lake Region and the methodology outlined in PRM-1, § 2810.1.D.2.b (Rev. 479).

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