A federal appeals panel ruled yesterday that the U.S. Department of Health and Human Services was right when it chose not to reimburse Rhode Island Hospital for time resident physicians spent doing research unrelated to patient care.

The ruling, by a three-judge panel of the U.S. 1st Circuit Court of Appeals, means the hospital will receive $1 million less than it sought in Medicare reimbursements in 1996.

The decision overturns an August 2007 decision by U.S. District Judge Ernest C. Torres. The lower court will now be asked to decide if, in fact, any of the research time was related to patient care and should count toward the payment.

At issue is how Medicare reimbursement is calculated for teaching hospitals, such as Rhode Island Hospital. The hospital had argued that all the residents’ time, including hours spent in the lab and at lectures, should count toward the payment it received from the federal government.

The appeals court, however, sided with Health and Human Services Secretary Michael O. Leavitt, saying the department was reasonable to interpret the regulations to exclude research time not related to patient care.

Created in 1966 to provide health insurance to the elderly and disabled, the Medicare program reimburses health care providers based on predetermined rates. Concerned that teaching hospitals would incur greater costs than other providers, Congress adjusted the reimbursement formula in 1983 to increase payments to teaching hospitals by factoring in the ratio of full-time residents to the number of beds.

The hospital placed the number of residents at 290 in its Medicare request in 1996. A “fiscal intermediary” reviewing the request, however, dropped the total by 12.06 positions after concluding that research time should not be included. That finding cut the reimbursement by $1 million.

The hospital appealed to a review board, which ruled in its favor. The secretary of the Department of Health and Human Services, which administers the Medicare program, overruled that finding.

The hospital then appealed to U.S. District Court, where Torres ruled last August that the secretary had misread the regulations. Even if that reading was reasonable in the abstract, he said, it was unreasonable in light of Congress’ purpose in adjusting the formula for teaching hospitals.

The federal government took the case to the appeals court. In yesterday’s decision, the court wrote that it must give “considerable deference” to the department’s interpretation of the regulations given that Congress had entrusted that agency with rule-making authority.

Robert G. Flanders Jr., representing the hospital, said yesterday other teaching hospitals had filed a brief supporting Rhode Island Hospital’s position.

“This is a very important issue for hospitals across the land,” he said, adding “The bottom line is that teaching hospitals have higher and greater costs” because of time spent on instruction.

Though regulations were changed seven years ago to clear up ambiguity in the language, he said questions remain about the reimbursement for other years.

The $1 million made up a “small portion” of the hospital’s annual reimbursement in 1996, he said. A hospital spokeswoman refused to release a total figure yesterday, saying that information was proprietary. It was unclear if the hospital would appeal the three-judge panel’s decision to the full appeals court.

kmulvane@projo.com