On December 26, 2017, the United States Court of Appeals for the District of Columbia Circuit overturned a summary judgment decision of the District Court and held that the provisions of the 2010 Medicare Claims Processing Manual (CMS Manual), which proscribe the manner in which CMS will enforce reconciliation of outlier payments, were “not ‘rules’ that must be issued through notice-and-comment ruling making” “[n]or are the instructions subject to the Medicare Act’s independent notice-and-comment requirement because they do not establish or change a substantive legal standard.”  Clarian Health West, LLC v. Hargan, No. 16-5307, slip op. at 4 (D.C. Cir. Dec. 26, 2017). The decision is available here.

In 2003, CMS responded to what it perceived to be abuses of the outlier payment process through so-called “turbo-charging” by promulgating a rule, after notice-and-comment ruling making, that provided for “reconciliation” of outlier payments. The rule allows Medicare Administrative Contractors (MACs) to revisit outlier payments for specific years using the cost report for the year in which the service was actually provided once the cost report for that year had been finalized. 68 Fed. Reg. 34494, 34501 (June 9, 2003); 42 C.F.R. § 412.84(i)(4). The rules indicate that reconciliation will only be done on a limited basis, but do not indicate the circumstances under which reconciliation will or should occur. 68 Fed. Reg. at 34503.

In 2010, CMS adopted a policy for administering the reconciliation process and published the instructions in the CMS Manual. See CMS Manual, Ch. 3 § 21.1.2.5. CMS did not engage in notice-and-comment rulemaking procedures before issuing these instructions in the CMS Manual. Using these instructions, the MAC assigned to Clarian West Medical Center (Clarian) determined upon a retrospective review that although Clarian had received approximately $2.8 million in outlier payments between 2005 and 2007, it was actually only entitled to less than $700,000. With the approval of CMS, Clarian was issued a Notice of Program Reimbursement requiring it to repay $2.4 million (which included a $200,000 repayment for the time value of money).

Clarian contested the repayment notice on the ground that the reconciliation process was unlawful because the CMS Manual instructions were procedurally invalid in light of CMS’s failure to follow the notice-and-comment rulemaking procedures of the Administrative Procedures Act (APA) or the Medicare Act’s independent notice-and-comment requirement. The Provider Reimbursement Review Board determined that it lacked authority to grant the relief sought “with respect to those issues involving the validity of 42 C.F.R. §412.84(h).”  The case thus proceeded to the District Court which held, on a motion for summary judgment, that under the Medicare Act, CMS was required to promulgate the 2010 instructions through notice-and-comment rulemaking and because it did not, the manual provisions were not enforceable.

On appeal, the government argued that the CMS Manual instructions fall outside of the APA and the Medicare Act’s notice-and-comment rulemaking procedures because, while the CMS Manual instructions do constitute a “rule, requirement, or other statement of policy” governing “the payment of services,” they do not “establish[] or change[] a substantive legal standard.”  In short, the government argued that the CMS Manual instructions are merely “guidelines that amplify the agency’s enforcement discretion—discretion that stems from the statute, the 2003 legislative rule, and 42 C.F.R. § 412.84(i)(4).” Clarian Health West, supra, at 15. Clarian argued that it was the 2010 CMS Manual instructions that established the substantive legal standard for the reconciliation scheme and that the CMS Manual instructions are mandatory and binding as they employ the words “will” and “shall.”  Thus, Clarian argued, the instructions were required to go through the notice-and-comment rulemaking procedures. Id. at 16.

In siding with the government and holding that the CMS Manual instructions are not subject to notice-and-comment rulemaking under either the APA or the Medicare Act, the D.C. Circuit Court explained its reasoning as follows:

The Manual instructions do not alter the applicable legal standards. This is not to say that they have no practical effect. Rather, the important point is that the agency maintains the same authority to reconcile any outlier payments that it had prior to the adoption of the Manual instructions. The instructions merely set forth an enforcement policy that determines when MACs will report hospitals for reconciliation. They do not change the legal standards that govern the hospitals, and they do not change the legal standards that govern the agency.

Indeed, the instructions bind neither CMS nor the Board in adjudications. In adjudicated cases, CMS and the Board apply the formulas described in the regulations, not the thresholds contained in the Manual instructions, in determining hospitals’ outlier-payment totals . . . . Put simply, the Manual instructions “merely explain[] how the agency will enforce a statute or regulation—in other words, how it will exercise its broad enforcement discretion.”