INSIGHT: Supreme Court Rules HHS Cannot Take Shortcuts in Rulemaking

The U.S. Supreme Court June 3 ruling that the Health and Human Services Department improperly changed Medicare payment rates without notice should be of interest to anyone who interacts with Medicare, including benefits, payment policy, and providers of care under Medicare.

In Azar v. Allina Health Services, the issue was not the policy, but whether, under the relevant provisions of the Medicare Act, 42 U.S.C. §§1395hh(a)(2) & (a)(4), the HHS was permitted to change the disproportionate share hospital (DHS) calculation formula without notice-and-comment rulemaking.

The ruling does not stop good, bad, or indifferent policy from being implemented. However, it does ensure transparency when a substantial change in Medicare policy is proposed by the HHS’s Centers for Medicare & Medicaid Services (CMS), and stakeholders will be able to provide information about how a proposed policy will impact Medicare providers and patients in real terms.

History

In 2004, the CMS issued a final rule that included a new methodology for DSH payments that counted Medicare Part C inpatient days, in addition to Part A days in its calculation. This differed from the proposed rule the CMS issued in 2003 that excluded Part C days from the calculation. The rule was vacated after hospitals filed legal action.

A federal court held that the final rule violated the Administrative Procedures Act (APA) because it was not a “logical outgrowth of the proposed rule. The U.S. Court of Appeals for District of Columbia affirmed the decision. The CMS issued a new rule in 2013 prospectively readopting the policy of counting Part C patients. In 2014, unable to rely on the prospective 2013 rule or the vacated 2004 rule, the CMS posted on its website the Medicare fractions for fiscal year 2012, noting that they included Part C patients.

The policy of combining beneficiaries reduced DSH payments to hospitals because Medicare Advantage patients tend to have higher incomes. Thus, if a hospital is deemed to be treating wealthier patients, the hospital will receive fewer DSH dollars.

Hospitals sued over the change, arguing that the government violated the Medicare Act’s requirement to provide public notice and a 60-day comment period for any rule that establishes or changes a “substantive legal standard governing … the payment for services.”

The Issue

The HHS asked the court to review its claim that the APA’s exception for interpretive rules applies to its DSH payment change and that Congress never intended the Medicare Act to have stricter procedural requirements than the APA.

The APA contains a rulemaking exception for interpretative rules, but the D.C. Circuit in a 2018 decision, authored by then U.S. Supreme Court nominee Judge Brett Kavanaugh, found that the Medicare Act does not incorporate that exception.

The Supreme Court’s decision, authored by Justice Neil Gorsuch, stated that HHS had not identified a lawful excuse for neglecting its statutory notice and comment obligation. The opinion is clear that the Medicare Act’s use of the word “substantive” is different from the APA’s use of “substantive.” Gorsuch stated that “under the APA, statements of policy are not substantive; instead they are grouped with and treated as interpretive rules.” The Medicare Act, however, “contemplates that ‘statements of policy’ like the one at issue here can establish or change a ‘substantive legal standard.’”

The government and others argued that notice-and-comment rulemaking would mean that the HHS would have to perform rulemaking in order to do day-to-day business in the Medicare program. The court suggested that if the department found this to be a burden, the HHS could seek relief from Congress. It is unlikely given the need for oversight; Congress would be open to loosening notice and comment rulemaking for the department unless it could truly demonstrate a burden.

Impact and Takeaways

Many hospitals preserved appeal rights for their 2004-2014 cost reports that are eligible to appeal this issue. In addition, some Medicare administrative contractors (MAC) alerted hospitals that the MAC would unilaterally reopen the hospital cost report if there were a final decision in Allina that changed the hospital’s DSH payments.

What is not yet known is how the CMS will address those hospitals’ that are eligible to appeal. The CMS could take steps to recalculate the fractions in the formula of those cost reports that have been appealed or are still subject to appeal.

Hospitals that have appeals pending should also determine if they would receive interest on the amount owed to them by the government.

This case has implications for other “statements of policy” in Medicare that substantively effect reimbursement but were not subject to notice and comment rulemaking. While hospitals argued that there was no undue burden because the case was limited in scope, the court’s decision does not necessarily limit the standard only to hospital payment policy.

Going forward, stakeholders should watch for situations that create or change a substantive legal standard governing the scope of benefits, payment for services, and eligibility to provide or receive services under Medicare. If the CMS created or changed a substantive legal standard without a notice and a comment period, then a violation of the standard established by this case could exist.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Stephanie Kennan is a senior vice president on McGuireWoods Consulting’s federal public affairs team, focusing on providers, medical device manufacturers, drug manufacturers and associations concerned about Medicare and Medicaid reimbursement.