U.S. Supreme Court Sides with Hospitals in Allina DSH Part C Days Decision

On June 3, 2019, the U.S. Supreme Court ("Court") issued a 7-1 decision in Azar v. Allina Health Services, favoring hospitals that had sued the U.S. Department of Health and Human Services ("HHS") over a Medicare payment policy change. The Court ruled that the Centers for Medicare & Medicaid Services ("CMS"), the HHS agency that oversees the Medicare program, impermissibly failed to undertake the formal notice-and-comment rulemaking required by the Medicare Act before announcing a revised approach to calculating disproportionate share hospital ("DSH") payments for fiscal year 2012 ("FY 2012"). More specifically, CMS issued DSH percentages in 2014 that, for FY 2012, counted Medicare Part C patients as Medicare Part A-entitled patients for purposes of DSH payment calculations, meaning that the inpatient days of Medicare beneficiaries who had elected Part C/Medicare Advantage coverage would be included in the Medicare DSH fraction. The Court found that CMS did so impermissibly, as this was a change to a "substantive legal standard" that required CMS to engage in notice-and-comment rulemaking that the Medicare Act requires. Apart from the potential impact on DSH payments, the decision could have a broader effect on other changes CMS has made and on how CMS rolls out or changes "substantive legal standards" going forward.

Part C Patients and CMS' DSH Calculation

In 2004, CMS issued a final rule that instituted a new methodology for calculating DSH payments by counting Medicare Part C participants as Part A-entitled patients and whose days belonged in the Medicare fraction. However, the final rule differed from the proposed rule that CMS had issued in 2003, which proposed excluding Part C patients from the Medicare fraction. Numerous hospitals filed lawsuits, eventually causing the 2004 final rule to be vacated as impermissibly retroactive. In 2013, CMS tried again, issuing a new rule prospectively readopting the policy of including Part C patients in the Medicare fraction. Challenges to the 2013 rule as being in violation of the statute are pending.

Meanwhile, in possible recognition of the fact that it could not enforce the vacated 2004 rule and the fact that the 2013 rule is prospective only, CMS posted Medicare fractions for FY 2012 on its website, noting that the fractions included Part C patients in its count of Part A-entitled patients. CMS did not engage in the usual notice-and-comment process. Hospitals again sued CMS over the posting, arguing that CMS had changed a "substantive legal standard" without complying with the Medicare Act's specific requirement to provide public notice and a 60-day comment period for any such change.

Allina Decision

The Court agreed with the hospitals or, rather, did not buy CMS' arguments and held that CMS, by tweaking the reimbursement formula for FY 2012 DSH payments without going through the proper public notice-and-comment rulemaking period, had violated the Medicare Act. In doing so, the Court heavily reviewed CMS' argument that a "substantive legal standard" under the Medicare Act is analogous to an interpretive rule under the Administrative Procedure Act ("APA"), which does not require notice-and-comment rulemaking. The Court rejected CMS' argument for several reasons, the thrust of the Court's reasoning being that CMS' reading of the Medicare Act in conjunction with the APA simply did not make sense. The Court also hesitantly considered CMS' legislative history and policy arguments, but failed to see merit in those arguments either. Thus, in the end, the Court found that CMS had changed a "substantive legal standard" and had done so in violation of the Medicare Act's notice-and-comment rulemaking requirements.

The decision is significant, both in terms of DSH payments and in terms of the potential application of the Medicare Act's notice-and-comment requirements in other Medicare contexts. On the reimbursement front, the government estimates that the financial impact of this decision, and the thousands of appeals that have been filed for fiscal years 2005-2013, could total between $3 and $4 billion. More generally, if CMS has made similar missteps in informally announcing new "substantive legal standards" in other Medicare reimbursement areas or other Medicare areas more generally, without going through notice-and-comment rulemaking, hospitals or other aggrieved parties could potentially rely on the Allina decision to challenge other CMS actions.

While the Allina decision is of great significance, how CMS responds to the decision will be of perhaps even more interest and importance to hospitals. Verrill Dana will continue to monitor and bring you updates on this matter. If you have questions about the Allina case, please reach out to Gary Rosenberg, Cecilie MacIntyre, or your regular Verrill Dana attorney.