Hospitals Sue Medicare Over Changes to Payment Formula

A coalition of urban hospitals is suing the Trump administration over allegations that its interpretation of a complex Medicare payment formula unlawfully lowered their reimbursement.

The complaint filed Sunday in the US District Court for the District of Columbia by more than 50 hospitals across more than a dozen states alleges the US Department of Health and Human Services arbitrarily applied a payment decrease known as a “rural floor budget neutrality factor” to the plaintiffs, even though they claim the Medicare Act bars certain urban facilities from this adjustment.

Medicare sets a reimbursement “floor” for hospitals’ labor-related expenses. Under its payment program, known as the Prospective Payment System, urban facilities can’t be reimbursed for their labor costs at rates lower than those of rural facilities. The Medicare Act requires this rural reimbursement floor to be budget-neutral, meaning that overall increases in PPS payments are offset by budget neutrality adjustments that decrease payments to non-rural facilities, according to the lawsuit.

Plaintiffs in this case allege that in 2024, the HHS unlawfully misapplied the RFBNF to “low wage index urban hospitals,” which are not subject to the same payment adjustments as other urban facilities under section 4410(b) of the Medicare Act.

The hospitals ask the court to declare the HHS’s methods of applying the budget neutrality adjustment as unlawful. They also ask the agency to recalculate the hospitals’ 2024 reimbursement in a manner consistent with the Medicare Act.

Glazer Law PLLC and Greenbaum, Rowe, Smith & Davis, LLP represent the hospitals.

The case is Strong Memorial Hospital v. Kennedy, D.D.C., No. 1:25-cv-02612, complaint 8/10/25.