What the Supreme Court’s Azar v. Allina Ruling Means for Health Care Providers

Even the narrow issue decided yesterday—whether the government could change the standard governing payment to hospitals that serve a disproportionate number of low-income patients without engaging in notice-and-comment rulemaking—could impact hospitals nationwide to the tune of a few billion dollars.

In Allina, the hospitals challenged the Medicare disproportionate share hospital (DSH) adjustments for federal fiscal year 2012, specifically challenging CMS’s decision to include inpatient hospital days attributable to Medicare Part C enrollee patients in the numerator and denominator of the Medicare/SSI fraction used to calculate a hospital’s DSH payments. This particular challenge followed years of litigation relating to CMS’s inconsistent treatment of Medicare Part C days. Prior to 2004, the agency’s standard practice was to exclude Part C days from the Medicare/SSI fraction; in 2004, the agency attempted to switch course to include Part C days in the Medicare/SSI fraction, but that rule was ultimately vacated. In 2013, the agency prospectively adopted a rule to include Part C days in the Medicare/SSI fraction for federal fiscal year 2014 and beyond, and that rule remains the subject of ongoing litigation as to whether it is enforceable substantively.

Yesterday’s ruling addresses the agency’s attempts to impose the policy espoused in its vacated 2004 rulemaking to a fiscal year in the 2004–2013 time period without using notice-and-comment rulemaking. The Court’s decision yesterday hinged on the meaning of the statutory phrase “substantive legal standard” within the Medicare Act’s notice-and-comment requirements at 42 U.S.C. §1395hh(a)(2). The D.C. Circuit previously found in favor of the hospitals on this point, in an opinion issued by then-Circuit Judge Kavanaugh: “The Medicare Act requires notice-and-comment rulemaking for any (1) ‘rule, requirement, or other statement of policy’ that (2) ‘establishes or changes’ (3) a ‘substantive legal standard’ that (4) governs ‘payment for services.’ Id. § 1395hh(a)(2). All four requirements are readily met here.” Allina Health Servs. v. Price, 863 F.3d 937, 943 (D.C. Cir. 2017). In affirming the D.C. Circuit’s judgment, the Supreme Court found that the government failed to offer a lawful excuse for its failure to engage in its statutory notice-and-comment obligations, specifically rejecting the government’s suggestion that the Medicare Act’s use of “substantive” should be read as distinguishing from an “interpretive” legal standard, tracking the use of those terms under the APA, and thus exempting the government from any notice-and-comment obligations. The Court rebuffed the government’s attempts, finding that the Medicare Act and the APA do not use “substantive” in the same way.

Although the Court affirmed the D.C. Circuit’s judgment only under §1395hh(a)(2), and the Court suggests that this decision will have fairly limited impact in terms of requiring that certain policies currently contained in the Provider Reimbursement Manual be adopted through notice-and-comment rulemaking, the implications for the Supreme Court’s decision on Medicare policymaking are important and potentially highly significant.  CMS regularly establishes policies that are set forth only in sub-regulatory guidance, whether that takes the form of manual provisions, internet announcements (like the spreadsheet at issue in Allina), or answers to frequently asked questions (FAQs). In addition, Local Coverage Decisions (LCDs), which are Medicare coverage determinations made by Medicare Administrative Contractors (MACs) on behalf of CMS, may be considered substantive legal standards concerning Medicare benefits.  The Allina decision makes clear that, over the past three decades, CMS has been required to provide notice and opportunity for comment when establishing or changing substantive legal standards in Medicare. This decision likely will aid providers, beneficiaries, and other stakeholders that have been adversely impacted by sub-regulatory guidance and will help ensure that future Medicare policies are imposed only after proper notice and consideration of public comments

With respect to hospitals’ DSH payments, yesterday’s decision should require CMS to recalculate hospitals’ DSH Medicare/SSI fractions, with Medicare Part C days excluded, for at least federal fiscal year 2012, but likely federal fiscal years 2005 through 2013.

If you would like more information or need assistance, please contact Kelly Carroll or Bob Roth in Washington, DC, Katrina Pagonis in San Francisco, Lloyd Bookman, Larry Getzoff, John Hellow, or Patric Hooper in Los Angeles, or your regular Hooper, Lundy & Bookman contact.

¹ Having authored the D.C. Circuit opinion appealed by the government (and affirmed by yesterday’s  Supreme Court decision), Justice Kavanaugh took no part in the consideration of or decision of this case before the Supreme Court.