D.C. Circuit Decides Part C DSH Issue in Favor of Providers

King & Spalding

On July 25, 2017, the United States Court of Appeals for the District of Columbia Circuit held that HHS violated the terms of the Medicare statute by failing to undertake notice-and-comment rulemaking in implementing its policy to treat Medicare Part C days as “days entitled to benefits under part A” in calculating hospitals’ disproportionate share hospital (“DSH”) calculations. See Allina Health Servs. v. Price, No. 16-5255 (D.C. Cir. July 25, 2017) (“Allina II”). Allina II is the culmination of many years of ongoing litigation on the Part C DSH issue. Generally speaking, treatment of Part C days as Part A days in the DSH calculation serves to severely ratchet down payments to hospitals. The D.C. Circuit’s decision is, therefore, a clear victory for providers, but it is likely that the Secretary will appeal the determination to the Supreme Court.

History of the Secretary’s Part C DSH Policy

In the 2014 case Allina Health Servs. v. Sebelius, the D.C. Circuit ruled that HHS’s 2004 regulation on the same was not a logical outgrowth of the proposed rule and therefore was “deficient” from a notice standpoint. 746 F.3d 1102 (D.C. Cir. 2014) (“Allina I”). Allina I vacated the 2004 regulation and remanded to the CMS Administrator the question of, in the absence of the vacated 2004 rule, how Part C days should be treated for the purposes of DSH. In 2015, the Administrator issued a decision reaffirming the Secretary’s prior position that Part C days were days entitled to benefits under Part A for purposes of DSH. The plaintiffs in Allina I have once again challenged that position, and their appeal is pending in the United States District Court for the District of Columbia. See Allina Health Sys. v. Burwell, Case. No. 1:16-cv-00150-GK (D.D.C.).

In June 2014, just two months after its defeat in Allina I, HHS published DSH data for fiscal year 2012 adjustments. HHS explicitly included Part C days as “days entitled to benefits under part A.”  Hospitals brought suit based on the Secretary’s 2012 data and policy – this is the subject of the Allina II decision.

Allina II Holdings

In Allina II, the D.C. Circuit held that the Secretary’s 2012 policy was invalid because the Medicare statute required CMS to undergo notice and comment before treating Part C days as days entitled to Part A.

In particular, the court held that the Medicare statute’s notice-and-comment requirements necessitated notice-and-comment rulemaking for any 1) “rule, requirement or other statement of policy” that 2) “establishes or changes” 3) a “substantive legal standard” that 4) governs “payment for services.” 42 U.S.C. §§ 1395hh(a)(2), (b)(1). The D.C. Circuit found that each of these four requirements was met and therefore notice-and-comment rulemaking was required.

HHS argued that the Medicare statute incorporates the Administrative Procedure Act’s (“APA’s”) exceptions to the notice-and-comment. Under the APA, “interpretive rules” need not go through notice-and-comment rulemaking. Without deciding whether the Secretary’s 2012 policy was indeed interpretive, the court rejected the Secretary’s argument. Specifically, the court held that the Medicare statute did not incorporate the APA exceptions, and that the Medicare statute explicitly required notice-and-comment rulemaking for all “statements of policy,” even if they were “interpretative,” whenever the other three elements of the statute were also met. See 42 U.S.C. §§ 1395hh(a)(2), (b)(1).

The D.C. Circuit also held that another provision of the Medicare statute independently required notice-and-comment rulemaking, such that it would reach the same outcome even if the APA’s interpretive rule exception to notice-and-comment rulemaking applies. In particular, 42 U.S.C. § 1395hh(a)(4) states that a regulation that is not a “logical outgrowth” of proposed rulemaking is to be treated as a mere “proposal” until new notice-and-comment rulemaking is undertaken. Because the Allina I court vacated the Secretary’s 2004 rule, HHS was required to provide “further opportunity for public comment and a publication of the provision against as a final regulation” before imposing the rule, per 42 U.S.C. § 1395hh(a)(4).

Although the Secretary adopted the same policy through new notice-and-comment rulemaking for periods starting on or after October 1, 2013, the court found that that rulemaking was irrelevant for fiscal years prior to 2014 (though it noted that the Secretary’s post-10/1/13 policy was the subject of separate litigation before the D.C. District Court).

Having concluded that the Secretary’s 2012 policy was invalid from a procedural standpoint under the Medicare statute in two distinct ways, the court did not address whether the policy was also arbitrary and capricious.

The case was therefore remanded to the D.C. District Court for additional proceedings consistent with the issued opinion.

Implications of the D.C. Circuit’s Decision

Although the only fiscal year before the court was 2012, the logic of the holding should apply to all fiscal years prior to the Secretary’s 2013 notice-and-comment rulemaking, starting in 2004 with the vacated rule.

Given the scope of the court’s holdings addressing not only Part C days, which alone is worth hundreds of millions of dollars to providers, but also the larger procedural holding that the Medicare statute’s imposition of a more stringent notice-and-comment requirements than the APA, we believe it is likely that the Secretary will take advantage of one or both of his two opportunities for appeal. First, the Secretary has 45 days to request an en banc rehearing by the entire D.C. Circuit. Second, the Secretary has 90 days to request that the Supreme Court grant a writ of certiori to review the decision.

The Supreme Court is under no obligation to hear a case upon such a petition (and in fact only accepts approximately 100-150 of the more than 7,000 cases it is asked to review each year). Nonetheless, the odds of the Supreme Court granting review of this case if requested is greatly increased by several factors, including that the D.C. Circuit’s Allina II holding creates a “circuit-split,” given that several other U.S. Circuit Courts of Appeal have suggested that the Medicare statute and the APA create identical notice-and-comment standards. During Allina II oral arguments, Judge Kavanaugh acknowledged that such a determination would create a split amongst the circuits that could lead to Supreme Court review.

As it stands, the Allina II decision represents a major win for providers. If and when it becomes final, i.e., non-appealable, providers should expect to see CMS recalculate their FFY 2004-2014 SSI ratios to exclude Part C days. (Notably, the court’s opinion only discusses the treatment of Part C days for the purposes of the SSI or Medicare fraction of the DSH formula and does not directly address the treatment of dual-eligible Part C days for purposes of the Medicaid fraction.)  In addition, under the broader holding of this case, any time CMS has denied reimbursement based upon the application of a manual provision or some “other statement of policy,” providers should question whether the Medicare statute required that policy to be subjected to notice-and-comment rulemaking under the standard announced in Allina II.

The D.C. Circuit Court’s decision is available here.

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