On June 7, 2023, CMS issued a final rule retroactively re-adopting its policy requiring 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 rule reinstates the same policy regarding Part C days that was invalidated under the Supreme Court decision in Azar v. Allina because of lack of appropriate notice and comment rulemaking. In its final rule, CMS contends that patients enrolled under Part C are nonetheless “entitled to benefits under Part A.” Patients that are “entitled to benefits under Part A” are included in the Medicare fraction and categorically excluded from the Medicaid fraction, even if Medicaid ultimately pays for their care.

Background on Part C Days in Medicare DSH

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. 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. The D.C. Circuit 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.”

In 2017, the D.C. Circuit answered that question in the affirmative stating that the Medicare statute required CMS to undertake notice and comment rulemaking before adopting a policy including Part C days in 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’s decision. Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019).

In response, CMS issued a proposed rule proposing to adopt the same policy of including Part C in the Medicare fraction (and excluding them from the Medicaid fraction) retroactively to all periods prior to October 1, 2013 (CMS had separately adopted a prospective policy, effective October 1, 2013, of including Part C days in the Medicare fraction).

Since the publication of CMS’s proposed rule in August 2020, the Supreme Court decided Becerra v. Empire Health Foundation, 142 S. Ct. 2354, 1368 (2022) (Empire). While Empire addressed beneficiaries who had exhausted their Medicare Part A hospital coverage—and did not address Part C days specifically—the litigation revolved around the meaning of “entitled to benefits under part A of [Medicare].” In Empire, the Supreme Court held that the Secretary was correct in interpreting that phrase as denoting a legal status of meeting Medicare’s eligibility requirements and does not turn on whether Medicare pays for any particular hospital day. In light of that decision, CMS believes that the Medicare statute requires the Secretary to count Part C days in the Medicare fraction because Medicare beneficiaries remain “entitled to [Medicare Part A]” regardless of whether they enroll in Part C.

Retroactive Rulemaking

It appears that all or nearly all commenters opposed CMS’s policy. Now that CMS has nonetheless finalized its proposal, future litigation is likely to turn on the appropriateness of engaging in retroactive rulemaking in such circumstances. The Medicare statute prohibits retroactive rulemaking generally, but 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.” Hospitals will contend that these narrow criteria have not been met.

In its final rule, CMS attempts to buffer itself somewhat from this line of argument claiming that retroactive rulemaking was not strictly necessary because, according to CMS, the Supreme Court held in Empire that the only reasonable interpretation of the statute was to treat patients who had met Medicare’s eligibility criteria as being “entitled to benefits under Part A,” thereby rendering notice and comment rulemaking unnecessary. Such a position is odd for several reasons, including the fact that the Supreme Court in Allina had specifically found that notice and comment rulemaking was necessary before CMS could change its treatment of Part C days.

In any event, there will almost certainly be further litigation regarding the procedural and substantive validity of the agency’s latest move in this nearly-two-decade-long chess match on the Part C days issue in the Medicare DSH calculation.

A copy of the final rule is available here.