In a decision with potentially far reaching implications for Medicare hospital reimbursement, on June 3  the U.S. Supreme Court ruled 7-1 against the U.S. Department of Health and Human Services (“HHS”) in Azar v. Allina Health Services.   The Court affirmed the U.S. Court of Appeals for the D.C. Circuit decision that vacated a rate calculation methodology for disproportionate share (“DSH”) payments because the Medicare statute requires notice-and-comment rulemaking.  The decision will impact billions of dollars in Medicare reimbursement owed to hospitals entitled to higher DSH payments over a period of time.

Hospitals that serve a disproportionate number of low-income patients receive additional payments (DSH payments) under the Medicare program.  DSH payments are calculated by a formula that takes into account the proportion of low-income patients a hospital treats – a hospital’s “Medicare fraction.”  More specifically:

The fraction’s denominator is the time the hospital spent caring for patients who were “entitled to benefits under” Medicare Part A.  The numerator is the time the hospital spent caring for Part-A-entitled patients who were also entitled to income support payments under the Social Security Act.  §1395ww(d)(5)(F)(vi)(I). The bigger the fraction, the bigger the payment.

In 1997, Congress created Medicare Part C or “Medicare Advantage,” which enabled Part A beneficiaries to opt to have the federal government pay their private insurance premiums, rather than pay healthcare providers directly. This option allowed greater provider flexibility for beneficiaries that chose to incur the additional costs associated with their chosen private insurance plan. The question arose, do these newly segregated Part C beneficiaries still count as patients “entitled to benefits under” Medicare Part A for purposes of DSH payments? Because people that choose to participate in Part C tend to be higher-income, including them in the Medicare fraction reduces hospitals’ entitlement to DSH payments.

HHS policy on this calculation has changed over time.  In 2003, the Centers for Medicare and Medicaid Services (“CMS”) proposed a rule that excluded Medicare Part C beneficiaries from the calculation of the Medicare fraction. In 2004, CMS reversed course and issued a final rule that Medicare Part C patients would be counted in the calculation of patients “entitled to benefits” under Part A (at least in part due to public comment and legal challenges).  A court later vacated this rule because it was a “surprise switcheroo” from the 2003 proposed version available for public comment. In 2013, CMS issued a new rule formally including Part C beneficiaries and applying the practice prospectively (this rule is currently being challenged).  In 2014, CMS issued a methodology through sub-regulatory guidance that included Part C patients in the calculation of DSH payments for fiscal year 2012.  A group of hospitals filed a lawsuit against the Secretary of HHS, alleging a violation of section 1395ww(d)(5)(F)(vi)(I) of the Social Security Act. Because the 2004 rule had been vacated and the 2013 rule was only enacted prospectively, CMS relied only on this sub-regulatory guidance as a basis for the changed calculation of the Medicare fraction.  Hospitals challenging the CMS guidance argued that the Medicare Statute requires formal notice and comment rulemaking for statements of policy that affect a “substantive legal standard governing…payment for Medicare services” – a notably distinct standard from the Administrative Procedure Act, which does not require notice and comment rulemaking in the case of interpretive rules. In turn, the government argued that the policy of counting Part C patients in the DSH fractions is an interpretive rule that does not require notice-and-comment rulemaking and that requiring notice-and- comment rulemaking for interpretive rules would be excessively burdensome.  The District Court found in favor of CMS, but the D.C. Circuit overturned the decision.  On January 15, 2019, the Supreme Court heard oral arguments in this case.

Justice Gorsuch wrote the majority opinion and was joined by six other justices.  Justice Breyer dissented and Justice Kavanaugh, who wrote the opinion for the D.C. Circuit,  was recused.  The Court rejected HHS’ argument that the Medicare Act borrowed the exemption to notice-and-comment rulemaking for interpretive rules and that the Medicare Act “doesn’t use the word ‘substantive’ in the same way the APA does – to identify only those legal standards that have the ‘force and effect of law.’  The opinion notes that the term “substantive legal standard” in the Medicare Act appears to provide a more expansive scope than the term “substantive rule” that is contained in the APA.  The Court held that the text and structure of the Medicare Act does not support the government’s argument and finds the legislative history to be “ambiguous at best.”

In rejecting the government’s view that soliciting comments prior to policy changes is overly burdensome, Justice Gorsuch wrote that “[c]ourts are not free to rewrite clear statutes under the banner of their own policy concerns, and the government’s argument carries little force even on its own terms.”  The Court rejected the argument of a substantial burden and found that the government had failed to document the supposed “draconian” costs and also failed to acknowledge the potential countervailing benefits of notice-and-comment rulemaking.  The Court suggested the agency could seek relief from Congress if notice and comment becomes “a major roadblock to the implementation of” the Medicare program.

Justice Breyer’s dissenting opinion stated that he would remand the case to consider whether the agency determination is a substantive or interpretative rule.  His dissent is based on the statute’s context, language, history, and the practical consequences of requiring notice-and-comment rulemaking for interpretive rules.  He believes Congress was clear that only substantive rules require notice-and-comment rulemaking. Justice Breyer further provides that “statements of policy” in the Medicare statute referred to “only those that are, in effect, substantive rules” because the statute refers to “statement[s] of policy…that establis[h] or chang[e] a substantive legal standard.”   He believes that reading the words together are another way of referring to substantive rules that are “disguised” as guidance by an agency.   Justice Breyer also added that interpreting the statute to replicate the APA provides clarity and stability, stating that “the APA offers us a familiar port in an interpretive storm.”

Both the majority opinion and the dissent focus on the enormity of the Medicare program in terms of cost, implementation, and effect on the population.  CMS regularly utilizes interpretive rules to provide clarity and implement policies.  The ruling in Allina does not provide a definition of when a rule establishes or modifies a substantive legal standard.   The ruling will certainly lead to additional challenges to sub-regulatory guidance that negatively affect Medicare reimbursement.