The Medicare statute at 42 U.S.C. § 1395ww(j) directs CMS to set Medicare rates for inpatient rehabilitation services through a two-step process. The first step involves establishing a standardized reimbursement rate for each discharged patient based on the average estimated cost of inpatient operating facilities and treating patients for the upcoming year. The second step takes place after the fiscal year has ended, when CMS adjusts the standardized rates to reflect the particular circumstances of each hospital for that year. These adjustments authorized in the statute include four specific adjustments for price increases in the relevant market, outlier adjustments, wage index adjustments, and case mix adjustments. In addition, the statute authorizes CMS to create such additional adjustments as the Secretary determines are "necessary to properly reflect variations in necessary costs of treatment among rehabilitation facilities." 42 U.S.C. § 1395ww(j)(3)(A)(5). The meaning of this last provision – termed the residual clause by the court – is not described in the statute, but instead, is described only in CMS rulemaking.
Relying on the residual clause, CMS created the LIP adjustment in 2001. In its...
