In an opinion of significant importance to the administration of the Medicare program, the US Supreme Court issued a 7–1 decision requiring the Centers for Medicare & Medicaid Services (CMS) to follow notice and comment rulemaking when adopting a “statement of policy” that establishes or changes a “substantive legal standard.” The near unanimous Court[1] upheld the DC Circuit Court’s decision in Allina Health Services v. Price, 863 F.3d 937, 939 (DC Cir. 2017), which highlighted an important distinction between Medicare Act and Administrative Procedure Act (APA) rulemaking requirements.

The APA establishes a statutory exemption from notice and comment rulemaking procedures in the case of “interpretive rules, general statements of policy . . . or agency . . . practice.” 5 USC § 553(b)(A) (emphasis added). CMS relied on an assumption that this “interpretive rule exception” applied to the policy it adopted in order to include Medicare Part C patient days in the Medicare fraction of the payment formula used to calculate the qualification for, and amount of, the Medicare disproportionate share hospital (DSH) payment adjustment. The policy resulted in the reduction of Medicare DSH payments for hospitals until 2013, when the agency furnished notice and comment. Like the DC Circuit, the Supreme Court rejected the government’s argument that the Medicare Act rulemaking requirement in 42 USC § 1395hh(a)(2) implicitly incorporated a similar interpretive rule exception permitting such a policy.

The Court began with the Medicare Act’s plain language requiring notice and comment for “statements of policy” that establish or change a “substantive legal standard.” After distinguishing the APA’s express exclusion of “statements of policy” from the APA rulemaking requirements from the express inclusion of the same phrase in the rulemaking requirements of the Medicare Act, the Court took aim at the phrase “substantive legal standard.” It distinguished that phrase, apparently unused anywhere else in the United States Code, from the APA definition of substantive rule. It was compelling to the Court that the Medicare Act specifically adopted the APA’s good-cause exception but did not adopt the APA’s interpretive rule exception, though Congress could have easily done so.

The Court was equally dismissive of CMS’s policy arguments. Not only did the Court cite CMS’s failure to produce documentation of the difficulties associated with having to comply with notice and comment procedures for statements of policy affecting substantive legal standards, it chided CMS for not considering the importance that such notice gives the parties affected by such policy changes. The Court highlighted the concerns leading to Congress’s enactment of the Medicare rulemaking requirement and the reality that “even seemingly modest modifications to the program can affect the lives of millions,” determining that it is only proper that CMS give notice of policies that may have substantive legal effect on regulated entities so that they may give comment to illicit an informed policy decision.

Though the Court dismissed any notion that the phrase “substantive legal standard” can be construed as the term “substantive rule” under the APA, the Court did not go so far as to establish any guidance as to its meaning beyond the context of the case, noting, “Other questions about the statute’s meaning can await other cases.” Nevertheless, those subject to Medicare program regulations and policies can claim victory in the right to broader notice requirements than the APA, and can hope for greater participation in the development of the policies that address Medicare program needs.