In a major win for providers that serve a disproportionate share of indigent patients, the Supreme Court today upheld the D.C. Circuit’s earlier decision invalidating CMS’s policy to treat beneficiaries enrolled in Part C managed care plans as nonetheless remaining entitled to benefits under Part A for purposes of calculating Medicare’s disproportionate share (DSH) payments. Azar v. Allina Health Services, U.S., No. 17–1484, 6/3/19. Per the government’s own estimates, CMS’s policy reduced payments to providers by $3 - $4 billion over the nine-year period at issue. In its 7-1 decision, the Court agreed with the D.C. Circuit that the Medicare statute imposes more stringent notice and comment rulemaking requirements than those found under the Administrative Procedure Act (APA). The Court further held that by failing to properly subject its policy regarding Part C days to notice and comment rulemaking before applying the policy to calculate DSH payments, CMS had violated those more stringent requirements. This holding has significant implications not just for DSH payments, but for other CMS policies that significantly affect reimbursement but have not been subjected to notice and comment rulemaking. The Court’s decision is available here.
The Hospitals in Allina argued that CMS was required to subject its policy to treat patients enrolled under Part C as nonetheless being entitled to benefits under Part A to notice and comment rulemaking before applying it. (The DC Circuit had previously determined that CMS’s attempt to adopt this policy through notice and comment in 2004 was invalid). For several reasons, including that Part C beneficiaries tend to be proportionally wealthier than traditional Medicare patients, including Part C patients in the Medicare fraction tends to dilute that fraction. In addition to an argument under the APA’s standard, the Hospitals claimed that the Medicare statute subjects even “statements of policy” to notice and comment rulemaking if those notices of policy create substantive legal standards affecting reimbursement.
The government, by contrast, argued that the Medicare statute’s notice and comment requirement was virtually identical to the APA’s and contained the same exemption for interpretative rules.
In the decision affirmed by the Supreme Court, the DC Circuit agreed with the Hospitals that the Medicare statute imposes a heightened notice and comment rulemaking standard. Under that standard, the DC Circuit held, CMS’s Part C policy had to undergo notice and comment rulemaking since it was, at a minimum, a “statement of policy” that “establishes or changes a substantive legal standard governing . . . the payment for services.” 42 USC § 1395hh(a)(2).
The Supreme Court largely agreed. Rather than fully defining the contours of the Medicare statute’s notice and comment rulemaking requirement, the Court settled for a more modest holding. It stated that it was “persuade[d] of at least one thing: The government’s interpretation can’t be right.” Contrary to the government’s position, the Court held that “the term ‘substantive legal standard’ in the Medicare Act appears to carry a more expansive scope than that borne by the term ‘substantive rule’ under the APA.” Therefore, the Court continued, the “government’s arguments for reversal [of the D.C. Circuit’s decision] fail to withstand scrutiny.”
Given that this decision represents the end of the road on this issue for CMS, we would expect CMS to take steps to implement the decision soon and to recalculate the SSI fractions during the relevant cost reporting periods that have either been appealed or are still subject to appeal. Hospitals that have appeals pending in Federal court for this issue should also receive interest on the amount of money owed them by the government.
In addition, at least some MACs have provided notices to hospitals that the MAC would unilaterally reopen the hospital’s cost report if there was a final decision in Allina that would change the hospital’s DSH payments. Hospitals that have received such notices, especially those that have not also appealed this issue, should begin reaching out to their MACs asking them to make good on those promises.
Despite the Court’s refusal to more fully define the contours of the Medicare statute’s notice and comment rulemaking requirements, this case also has clear implications for many other “statements of policy” that substantively effect reimbursement but have never been subject to notice and comment rulemaking, including the many such policies found only in CMS manuals. To choose one example out of many, much of CMS’s policies governing reimbursement for Medicare bad debts are found only in manuals. Providers that have been subjected to disallowances based on such policies should give serious consideration to how the Supreme Court’s decision here affects the merits of a potential appeal.
