Why Hospitals Should Think Twice About Self-Funded Employee Benefits

October 9, 2014

By: Louis C. Szura

Employers must make many decisions regarding wages and benefits provided to employees. One of those decisions is whether to provide short-term disability (STD) benefits. As insurance premiums continue to rise, many larger hospitals also consider whether those benefits should be paid directly by the employer (self-funded) or through an outside insurance company. For most employers, that decision is often based on a number of factors, such as workforce size, risk appetite, tax implications, costs and resources. Hospitals, however, might also consider the potential affect that decision may have on Medicare Part A reimbursement.

The Sixth Circuit recently affirmed the Secretary of Health and Human Services decision to count hospital-paid STD benefits as “paid hours” in the wage index used to calculate Medicare Part A reimbursement for inpatient hospital services. That position is important because the more paid hours a hospital reports, the lower its region’s wage index will be and, therefore, the less money it will receive for inpatient services under Part A. On the contrary, if the hospital pays insurance premiums for the STD benefits, those payments could be considered fringe benefits and not counted as paid hours. Therefore, hospitals may have another factor to consider when deciding whether to self-fund employee benefits.

In Atrium Med. Ctr. v. United States Dep't of Health & Human Servs., Case No. 13-3288 (September 8, 2014), the Sixth Circuit determined that the Secretary of HHS has “exceptionally broad discretion to determine the wage index.” The Court analyzed whether the deference given to the HHS rules at issue enjoyed broader discretion under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., rather than the less-deferential standard given the agency rules under Skidmore v. Swift & Co., but ultimately held that the outcome would have been the same under either standard. The Court held “that the Medicare Act allows (but does not require) CMS to treat an insurance premium as a ‘wagerelated cost’ and a disability payment made from general funds and keyed to an employee’s base salary as a ‘wage’ for which hours must be reported” (Page 15, ftnt.2). In other words, HHS can consider STD insurance premiums a fringe benefit, but self-funded STD benefits to be a countable paid hour.

The Atrium decision also addressed HHS’s decision to count hospital employees on Baylor Plan schedules as full-time employees with respect to “paid hours.” Baylor Plan hours are the practice of counting part-time employees who work undesirable shifts (i.e., long weekend shifts) as full-time employees for wage and benefit purposes. The hospitals contended that offering a full-time salary for part-time weekend work was merely a bonus or incentive to work the undesirable shift and that only the hours actually worked should be counted. HHS disagreed and the District Court and Sixth Circuit upheld HHS’s decision.