On July 7, 2021, the U.S. District Court for the District of Columbia ruled in favor of HHS and upheld HHS’s 2013 rule readopting its policy of including Part C days in the Medicare fraction of the disproportionate share hospital (DSH) adjustment calculation. Plaintiffs in the case were a group of over 30 safety-net hospitals that challenged the rule as arbitrary and capricious. The Court rejected Plaintiffs’ arguments and held HHS’s promulgation of the rule complied with the Administrative Procedure Act (APA).

The DSH adjustment is a supplemental payment HHS makes to compensate hospitals for treating high percentages of low-income patients. The formula HHS uses to calculate the DSH adjustment includes a fraction that depends on whether the phrase “entitled to benefits under Part A” includes individuals who are eligible to receive benefits under Medicare Part A, but opt to receive benefits under Medicare Part C instead.

The dispute over HHS’s formula for calculating hospitals’ DSH adjustment goes back nearly 20 years. In 2003, HHS proposed to “clarify” its practice of excluding Medicare Part C days from the Medicare fraction of the DSH calculation (the 2003 Proposed Rule). In 2004, HHS reversed course and adopted a policy to treat Part C days as being days entitled to benefits under Part A and include them in the Medicare fraction (the 2004 Rule). The D.C. Circuit ultimately found the reversal violated notice-and-comment rulemaking requirements of the APA because it was not a “logical outgrowth” of the 2003 Proposed Rule,” but left open the question of whether notice and comment rulemaking was required for this type of policy change. See Allina Health Services v. Sebelius, 746 F.3d 1102, 1106 (D.C. Cir. 2014) (Allina I). In Allina II, the D.C. Circuit found that the Medicare statute requires notice and comment rulemaking. Allina Health Services, et al. v. Price, 863 F.3d 937 (D.C. Cir. 2017) (Allina II). The Supreme Court upheld that decision in 2019. Azar v. Allina Health Servs., 139 S. Ct. 1804, 204 L. Ed. 2d 139 (2019).

In May 2013, while Allina I was pending on appeal, HHS issued a notice of a new rulemaking with the intent to readopt the 2004 Rule’s interpretation of the phrase “entitled to benefits under Part A.” The new rule was finalized in August 2013 (the 2013 Rule).

Plaintiffs challenged the 2013 Rule as arbitrary and capricious on three grounds. First, Plaintiffs contended HHS failed to both acknowledge and explain the agency's reasoning for its change in agency policy. The Court rejected the argument and found HHS provided “a variety of reasons explaining why HHS believes the new interpretation to be the better policy.” The 2013 Rule “engaged in-depth recounting of HHS's policy and practice regarding the treatment of Part C days dating all the way back to 1990” and HHS expressly acknowledged that prior to 2004 Medicare Part C were generally not part of DSH adjustment calculation.

Next, Plaintiffs contended HHS failed to consider the significant financial consequences of the policy change on safety-net hospitals. However, the Court agreed with HHS that, because the agency’s position turned on its understanding of the statutory language, “policy factors such as the financial repercussions of the rule do not qualify as a relevant or important consideration that demand agency consideration prior to promulgation.” Nonetheless, the Court found substantial evidence supported HHS’s conclusion that, because the 2013 Rule “is consistent with [HHS’s] longstanding policy,” there would be no “additional savings or costs to the Medicare program, and by inference, to hospitals[.]” In this regard, the Court added that the D.C. Circuit’s “vacatur of the 2004 Rule [in Allina I] . . . did not magically erase th[e] history [of HHS’s prior inclusion of Part C days in the Medicare fraction].”

Finally, Plaintiffs contended HHS failed to meaningfully address comments regarding an alleged inconsistency with the 2013 Rule's interpretation of the phrase “entitled to benefits.” The court identified specific points in the record where HHS addressed these comments and held “the record clearly shows that the Secretary responded to these comments in a way that showed what issues were considered and why the agency reacted to them as it did.”

The case is Fla. Health Sci. Ctr. v. Becerra, No. 19-cv-3487 (RC), 2021 WL 2823104, (D.D.C. July 7, 2021). The full opinion is available here.