Davis Wright Tremaine LLP

On June 3, 2019, the U.S. Supreme Court issued its decision in Azar v. Allina Health Services, et al., Case No. 17-1484. The Court ruled in favor of a group of hospitals in a dispute over Medicare disproportionate share hospital (“DSH”) payments. The decision vacates a policy that would have dramatically reduced payments to hospitals serving low-income patients. While the Allina ruling has an immediate impact on DSH hospitals, the decision also has significant implications for the broader provider community. The Court concluded that the Centers for Medicare & Medicaid Services (“CMS”) must engage in notice and comment rulemaking if it wishes to establish or change substantive legal standards governing coverage, payment or enrollment under the Medicare Act. See 42 U.S.C. § 1395hh(a)(2). This means that CMS may not rely on subregulatory guidance to establish substantive legal standards. This directly affects the bases on which CMS may seek to recover overpayments and the ability of the government to pursue False Claims Act allegations that are based on subregulatory guidance.

In the Court’s ruling, Justice Gorsuch rejected the government’s arguments that notice and comment rulemaking would impose undue burden and cost on CMS in administering the Medicare program. Instead, the Court recognized the benefits of requiring formal rulemaking for any new or changed legal standards to Medicare participation and payment—giving providers “fair warning of potential changes in the law and an opportunity to be heard on those changes” while allowing CMS “a chance to avoid errors and make a more informed decision” about potential changes. As Justice Gorsuch emphasized, such “benefits [are] especially valuable when it comes to [Medicare] where even minor changes in the agency’s approach can impact millions of people and billions of dollars in ways that are not always easy for regulators to anticipate.” Given the 7-1 ruling by the Court, Allina sends a clear statement to CMS that the agency cannot shortcut implementation of substantive legal standards through subregulatory guidance without going through the notice and comment rulemaking process.


In Allina, the Court declared invalid a CMS policy establishing how hospital days associated with Medicare managed care patients should factor into the DSH payment calculation. This “policy” was adopted in 2014 through an Internet posting. The Court concluded that the policy was not enforceable because CMS failed to engage in a formal “notice and comment” rulemaking process as required under 42 U.S.C. § 1395hh(a)(2).

The specific issue in Allina concerned the validity of CMS’s determination that hospital patient days associated with Medicare beneficiaries who receive health care benefits under the managed care component of the Medicare program, known as “Part C” or “Medicare Advantage,” must be counted in the statutorily prescribed formula for determining a hospital’s eligibility for Medicare DSH payments. The group of hospitals that initiated the lawsuit, in addition to claiming that CMS adopted the policy in a procedurally invalid manner, also claimed that CMS’s inclusion of the Medicare Advantage patient days in the DSH calculation was not consistent with the controlling Medicare DSH statute and improperly and artificially reduced overall DSH payments by billions of dollars.

The Court ruled in the hospital plaintiffs’ favor, relying on a provision of the Medicare Act stating expressly that CMS must provide public notice of and a sixty-day period for potentially impacted parties to comment on any “rule, requirement, or other statement of policy . . . that establishes or changes a substantive legal standard governing the scope of benefits for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits under [Medicare].” See 42 U.S.C. § 1395hh(a)(2). The Court determined that, since the CMS policy in question was broadly applicable to all hospitals potentially eligible for DSH reimbursement and also significantly impacted the amount of DSH reimbursement available to hospitals, it was a “substantive legal standard” that CMS needed to adopt via formal rulemaking. Because CMS adopted and implemented the challenged policy without an opportunity for public comment, the Court declared the policy invalid and remanded the matter for additional proceedings consistent with the Court’s opinion.

DSH Formula Implications

With respect to the DSH day counting issue specifically in dispute in Allina, it remains to be seen how CMS will respond to the Court’s decision. The agency has not yet made a statement on the opinion or otherwise given any indication of how it intends to proceed. Many hospitals have Medicare administrative appeals pending for multiple fiscal years that include a challenge to their respective DSH payment determinations on the grounds that Medicare Advantage patient days were improperly factored into the DSH calculation. The Allina decision should have an impact on these pending appeals, but the nature of that impact will depend on how CMS chooses to comply with the Court’s ruling.

Allina’s Implications for Subregulatory Guidance

Beyond the DSH issue, the Allina decision has broad implications for both CMS and government enforcement of CMS policies. The Court concluded that CMS and other government agencies can no longer enforce rules and policies governing Medicare participation and payment that were not adopted through a public notice and comment process. Allina confirms that parties adversely impacted by the government’s implementation and/or enforcement of rules and policies that articulate “substantive legal standards” governing coverage, payment and enrollment under the Medicare Act have a viable legal basis for challenging the government’s action. One example would be allegations that claims are improper due to a failure to adhere to provisions of Medicare billing manuals or informal coverage determinations. We should expect that there will be significant litigation regarding whether a particular policy or manual provision articulates a “substantive legal standard” under the Medicare Act as interpreted by Allina. When a policy or manual provision is used to deny coverage or as the basis for False Claims Act liability, the government seemingly will face significant challenges in attempting to distinguish Allina.

In summary, the Allina ruling establishes definitively that the federal government may only adopt a “substantive legal standard” governing the Medicare program through a formal, public rulemaking process. In that regard, the decision almost certainly will impact how CMS develops Medicare-related rules going forward and could also be relevant to existing policies contained in subregulatory guidance. The attorneys of Davis Wright Tremaine will be closely following any significant legal developments driven by the Allina decision, including any announcements from CMS about how the agency intends to deal with the DSH Part C days issue following the Court’s ruling.