Due to potential inconsistencies in CMS's cap-setting calculation methodologies, new teaching hospitals that first started training residents after the 1996 cap-setting base year, but before October 1, 2012, are well-advised to scrutinize their permanent GME cap calculations. CMS's cap-building rules changed effective October 1, 2012, and some Medicare administrative contractors are retroactively applying various aspects of the new cap-building rules to hospitals that began training residents before the new rules took effect. Such hospitals may wish to consider appealing their cap calculations and relevant audit adjustments for cost reporting periods that can still be reopened.

New teaching hospitals used to have a three-year period in which to build their residency programs, starting from the first year in which the hospital began training residents in its first new program, before their permanent GME full-time equivalent (FTE) caps were established. At the close of the cap-building window, CMS would then calculate an individual teaching hospital's FTE caps based on the numbers of FTE residents training at that hospital in the highest-enrolled program year (PGY) class for each new program during the third year of the cap-building window, multiplied in each instance by the minimum accredited length for the particular program.

Effective October 1, 2012, CMS revised its regulation that prescribes the methodology for calculating new teaching hospitals' FTE caps in two key ways.

First and foremost, for teaching hospitals that began training residents on or after October 1, 2012, CMS articulated a new, prospective methodology to calculate their FTE caps, simultaneously lengthening the cap-building window from three to five years.

Second, CMS revised the preexisting FTE cap calculation methodology for new teaching hospitals that began training residents before October 1, 2012. In so doing, CMS purported to "clarify" the cap-setting calculation to account for new program residents who rotate to new teaching hospitals for portions of program years during the prior, three-year cap-building window. Specifically, CMS adopted a new calculation methodology for the prior period, that is apparently intended to take into account, for cap-setting purposes, the proportional resident training levels at the new teaching hospital during all years of the cap-building window, and not only in the third year. The effect of this rule change is to penalize new teaching hospitals for "out-rotations" that occurred at other hospitals during the first two cap-building years.

This proportionality adjustment is a significant aspect of CMS's prospective rule change that took effect on October 1, 2012. The mechanism by which CMS has attempted to invoke the same proportionality requirement for hospitals that started building their FTE caps prior to October 1, 2012 may be subject to legal challenge.

Teaching hospitals that first started training residents before October 1, 2012, should verify the accuracy of any adjustments to their FTE caps that may involve the application of the new regulatory language. If your hospital first started training residents during this earlier timeframe, and you believe your Medicare contractor may have incorrectly calculated your hospital's permanent GME caps, the Dentons team listed above can help you assess the potential impact of any possible calculation errors and evaluate your appeal and advocacy options.