Supreme Court Adopts Provider-Favorable Construction of Medicare Act Notice and Comment Procedures

The Supreme Court handed a major procedural victory to hospitals in its June 3, 2019, opinion in Azar v. Allina Health Services.[1] By a 7-1 majority, the Court found that the government’s imposition of controversial Medicare payment calculations without a public notice and comment period violated the Medicare Act. Although the opinion has received modest attention in provider circles, it should serve as welcome news for financially stressed providers that are dependent upon Medicare and are especially vulnerable to rate changes. The Court’s analysis makes clear that Medicare’s notice requirements are more stringent than the requirements imposed on other regulatory agencies subject to the Administrative Procedures Act (APA).

Background

At issue in Allina was the calculation of additional payments made to a disproportionate share hospitals (DSH) under the Medicare Program. DSH payments are calculated in part using a hospital’s “Medicare fraction.” The fraction’s denominator represents the total number of days in a year that a particular hospital spent caring for patients who are entitled to benefits under Medicare Part A. The numerator represents the number of Medicare days for beneficiaries who both are entitled to benefits under Medicare Part A and also receive supplemental security income (SSI) payments. The larger the fraction, the higher the DSH payment a hospital receives.[2]

The Allina dispute related to a 2014 decision by the Department of Health and Human Services Centers for Medicare & Medicaid Services (CMS) to calculate hospital DSH percentages for fiscal year 2012 to include not only Medicare Part A beneficiaries but also participants in Medicare Part C (also known as Medicare Advantage) who are “entitled to benefits under” Part A.[3] Part C participants elect to have the government pay their private health insurance premiums rather than pay for hospital care directly.[4] Since Part C participants tend to be more financially secure than patients who rely on Part A, the inclusion of Part C patients in the calculation of the Medicare fraction reduces each hospital’s DSH payments.[5]

Prior to 2014, CMS had reversed positions several times on whether to include Part C participants in the Medicare fraction. For over a decade, CMS had faced public resistance and legal challenges to its efforts to implement a formal rule change to include Part C in the calculation methodology.[6] By 2014, CMS’s then-pending proposal to adopt that policy as a formal rule was subject to pending challenges and was therefore prospective. Instead of waiting for the resolution of those challenges, CMS implemented its policy change by posting a spreadsheet on the internet announcing Medicare fractions for 3,500 hospitals for the 2012 fiscal year using CMS’s preferred calculation methodology.[7]

A group of hospitals challenged the Medicare fractions on the ground that CMS had violated the Medicare Act by failing to provide public notice and a 60-day comment period for the calculation methodology. The district court ruled against the hospitals, the Court of Appeals for the District of Columbia Circuit reversed, and the Secretary of Health and Human Services appealed to the Supreme Court.[8]

Supreme Court Decision

The Supreme Court affirmed the appellate court’s decision and vacated CMS’s policy of including Medicare Part C days when calculating the Medicare fraction. The decision turned on whether the government’s 2014 announcement established or changed a “substantive legal standard” that would require CMS to comply with the notice-and-comment procedures applicable to regulations promulgated under the Medicare Act.[9] The government argued that the Medicare Act means to distinguish a substantive from an interpretive legal standard and thus tracks the APA, under which “substantive rules” have the “force and effect of law,” while “interpretive rules” merely “advise the public of the agency’s construction of the statutes and rules which it administers.”[10] According to the government, because the policy of counting Part C patients in the Medicare fractions would be treated as interpretive rather than substantive under the APA, the government had no statutory obligation to provide notice and comment before adopting the policy.[11]

Parsing the language of the Medicare Act, the Supreme Court rejected the government’s argument for three primary reasons. First, the Medicare Act specifically contemplates that statements of policy — such as the 2014 calculation — can establish or change a substantive legal standard.[12] Yet, by definition, under the APA statements of policy are not substantive; instead, they are grouped with and treated as interpretive rules. This distinction, according to the Court, “strongly suggests that the Medicare Act just isn’t using the word ‘substantive’ in the same way as the APA.”[13]

Second, the Court found that the government’s interpretation of the Medicare Act would introduce an incoherence. Superficially, § 1395hh(e)(1) — which gives the government limited authority to make retroactive “substantive change[s]” in, among other things, “interpretative rules” and “statements of policy” — would make no sense if the Medicare Act used the term “substantive” as the APA does, because interpretive rules and statements of policy — and any changes to them — are not substantive under the APA by definition.[14] Third, Congress could have easily adopted APA rulemaking requirements by cross-referencing the exemption in § 553(b)(A) of the APA.[15] Indeed, Congress did cross-reference the APA’s neighboring good cause exemption found in § 553(b)(B), strongly suggesting that it “act[ed] intentionally and purposefully in the disparate” decisions.[16] According to the Court, “when the government establishes or changes an avowedly ‘gap’-filling policy, it can’t evade its notice-and-comment obligations under § 1395hh(a)(2) on the strength of the arguments it has advanced in this case.”[17]

Implications

In theory, the Allina decision could have far-reaching implications for CMS policies that affect Medicare payments but were enacted without following the Medicare Act’s notice-and-comment procedures. In his dissenting opinion, Justice Breyer surmised a risk that potentially unworkable consequences could follow from the majority’s reasoning, such as the imposition of notice-and-comment requirements upon “tens of thousands” of instructions contained in the Medicare Provider Reimbursement Manual and numerous other manuals filled with interpretative guidance. It remains to be seen whether Allina will be used as a basis to challenge existing or future guidance from CMS that impacts provider payments. At the very least, providers and their counsel should consider Allina a potentially valuable deterrent against overzealous interpretative guidance impacting Medicare payments.