CMS Issues Proposed Regulation Regarding Treatment of Part C Days Prior to October 1, 2013

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On August 6, 2020, CMS published a proposed regulation that would require patient days attributable to Medicare Part C beneficiaries (Part C days) to be counted in the Medicare fraction of the disproportionate share hospital (DSH) payment formula for cost reporting periods beginning before October 1, 2013. This regulation would treat Part C days in the same way they were treated under the policy that the Supreme Court invalidated on procedural grounds in last year’s decision in Azar v. Allina. CMS is seeking to reinstate its invalidated policy by invoking its statutory authority to adopt retroactive rules. As explained below, this proposed rule is the culmination of nearly a decade of proceedings concerning the treatment of Part C days prior to October 1, 2013.

In the inpatient prospective payment system (IPPS) proposed rule for FY 2004, CMS proposed to “clarify” its practice of excluding Part C days from the Medicare fraction of the DSH calculation. 68 Fed. Reg. 27154, 27208 (May 19, 2003). In the 2005 IPPS final rule, however, CMS 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. 69 Fed. Reg. 48916, 49099, 49246 (Aug. 11, 2004). The D.C. Circuit, however, stated that CMS’s “surprise switcheroo” violated notice-and-comment rulemaking and was not a logical outgrowth of its proposed rule. See Allina Health Services v. Sebelius, 746 F.3d 1102, 1106 (D.C. Cir. 2014) (Allina I). The D.C. Circuit left open, however, the question of whether CMS was required to undertake notice and comment rulemaking to adopt its policy of treating Part C days as being “entitled to benefits under Part A.” Allina I, 746 F.3d at 1106.

In 2017, the D.C. Circuit answered that question by stating that the Medicare statute required CMS to undertake notice and comment rulemaking before changing its prior standard of excluding Part C days from the Medicare fraction. See Allina Health Services v. Price, 863 F.3d 937 (D.C. Cir. 2017) (“Allina II”). The Supreme Court upheld the D.C. Circuit. Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019).

Typically, invalidation of a final rule would reinstate the status quo ante. CMS contends, however, that it cannot simply return to its prior practice of excluding Part C days because that, too, would violate the Supreme Court’s ruling that any policy regarding the treatment of Part C days requires notice-and-comment rulemaking.

While the Medicare statute generally prohibits retroactive rulemaking, it contains two limited exceptions if: “(i) such retroactive application is necessary to comply with statutory requirements; or (ii) failure to apply the change retroactively would be contrary to the public interest.” 42 U.S.C. § 1395hh(e)(1)(A). To justify its retroactive rulemaking here, CMS has invoked both exceptions.

CMS contends that retroactive rulemaking is compelled by the statute because the Supreme Court has interpreted the statute as requiring the agency to engage in rulemaking before it can establish a policy concerning the treatment of Part C days prior to October 1, 2013. CMS further contends that failure to engage in retroactive rulemaking would be contrary to the public interest because CMS would not be able to make DSH payments to hospitals. Both of these contentions are highly dubious and, if the rule is finalized as proposed, there will almost certainly be further litigation regarding its procedural and substantive validity.

A copy of the proposed rule is available here. Comments to the proposed rule are due October 5, 2020.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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