The Supreme Court on Friday dealt a blow to safety-net hospitals’ Medicare rate calculation.

The high court resolved a years-long fight between the Health and Human Services Department and the hospital industry by ruling the agency appropriately interpreted Medicare law when it changed a formula for calculating safety-net payments in 2005.

The 5-4 decision, authored by Justice Elena Kagan, reverses a decision from the U.S. Court of Appeals for the 9th Circuit.

“HHS’s regulation correctly construes the statutory language at issue. The ordinary meaning of the fraction descriptions, as is obvious to any ordinary reader, does not exactly leap off the page…. The text and context support the agency’s reading: HHS has interpreted the words in those provisions to mean just what they mean throughout the Medicare statute,” Kagan wrote.

Justice Brett Kavanaugh wrote a dissenting opinion, joined by Justices Samuel Alito and Neil Gorsuch as well as Chief Justice John Roberts. HHS did not interpret the statute correctly when it changed the formula, they wrote.

“HHS’s misreading of the statute has significant real-world effects: It financially harms hospitals that serve low-income patients, thereby hamstringing those hospitals’ ability to provide needed care to low-income communities,” Kavanaugh wrote.

Disproportionate share hospital payments offset costs for hospitals that treat large numbers of low-income patients. DSH payments are determined by a complex equation that measures how many of a hospital’s patients are eligible for Medicaid, but not Medicare, and how many are entitled to both Medicare Part A and Supplemental Security Income benefits from Social Security.

The Centers for Medicare and Medicaid Services decided the Medicare component of the formula should include the patient days of anyone enrolled in Medicare Part A, regardless whether the program paid for or covered services provided during those days. This change resulted in lower DSH payments for most safety-net hospitals.

Empire Health Foundation, an organization that acquired the assets of Spokane, Washington-based Valley Hospital Medical Center, now known as MultiCare Valley Hospital, challenged the regulation in court over fiscal 2008 reimbursements on the hospital’s behalf. Empire Health Foundation argued the rule’s treatment of Medicare beneficiary patient days not covered by Medicare didn’t conform to the law.

The U.S. District Court for the Eastern District of Washington vacated the regulation in 2018 and ruled that HHS didn’t comply with notice and comment procedures when promulgating the regulations.

Two years later, the U.S. Court of Appeals for the 9th Circuit held that HHS did follow appropriate procedures but that the policy itself nevertheless was unlawful. The 2005 rule uses different phrases, “eligible for” and “entitled to,” interchangeably in the DSH calculation.

Medicaid law uses the phrase “eligible for” benefits, while Medicare uses “entitled to.” Congress intended them to mean different things, the appeals court ruled.

Hospitals contend that the revision to DSH payment calculations disadvantaged hospitals treating the patients the program is meant to serve.

“When a hospital provides care for a beneficiary who is enrolled in Medicaid and has exhausted his or her Medicare Part A benefits, those dual-eligible exhausted patient days should increase, not decrease, the hospital’s Medicare DSH payments,” the Federation of American Hospitals, which represents for-profit companies, wrote in an amicus curiae brief to the Supreme Court in October. “These are precisely the costly, low-income patient days that disproportionately burden DSH hospitals and drove Congress to require Medicare DSH payments,” the Federation wrote.