On September 27, 2018, the U.S. Supreme Court agreed to review a D.C. Circuit Court of Appeals decision that had tossed out a new calculation method, employed by the U.S. Department of Health and Human Services (“HHS”), which had cut Medicare payments to hospitals. Azar v. Allina Health Services (“Allina Health”). HHS itself estimated that the D.C. Circuit’s ruling implicates between $3 and $4 billion in so-called Medicare “DSH” payments to hospitals for federal fiscal year (“FY”) 2005 through FY 2013. While those huge amounts are directly at stake, so too is the public’s right to weigh in on HHS’s policy governing Medicare payments. If the D.C. Circuit’s ruling stands the agency will be required to submit far more of its payment policies to the rigors of notice and comment rulemaking.

D.C. Circuit’s Ruling Under Review in Allina Health

The Allina Health case is one of a series of hospital cases challenging how HHS computes supplemental payments to hospitals that treat a disproportionate share of low-income patients (“DSH payments”). In 2004, HHS had published a DSH payment rule establishing a new method to account for certain patients enrolled in Medicare’s managed care programs, known as Medicare Advantage or Part C. HHS’s new rule counted the Medicare Advantage/Part C patients in a way that significantly reduced the amount of DSH payments hospitals would receive. Hospitals successfully sued to block that rule, on the basis that it was not a logical outgrowth of anything HHS had proposed in the rulemaking—HHS had “pull[ed] a surprise switcheroo.” See Allina Health v. Sebelius, 746 F.3d 1102, 1108 (D.C. Cir. 2014). Almost a decade later, HHS cured this procedural defect by announcing this same payment policy in a proposed rule and then taking public comment before the rule took effect in October 2013. But even before 2013, including for 2012, HHS continued to apply its new DSH payment policy as if it had been valid all along.

The hospitals in the second Allina Health case again cried foul and sought to invalidate HHS’s 2012 DSH payment rates. Allina Health Servs. v. Price, 863 F.3d 937 (D.C. Cir. 2017). The D.C. Circuit ruled that, per the Medicare Act, HHS must give advance notice of and allow for comment on any “rule, requirement or statement of policy … that establishes or changes a substantive legal standard governing … the payment for services ….” To hit doubly home, the Medicare Act states that no provision of a rule may take effect if “it is not a logical outgrowth” of the rule HHS proposed in its notice to the public. The D.C. Circuit found that HHS’s new method to calculate DSH payments required advance notice and opportunity for comment under the Medicare Act. Id. at 943-44.

Importantly, the D.C. Circuit rejected HHS’s argument that the Medicare Act should be read to include an exception to notice and comment for what are known as “interpretive rules”—an exception available to other agencies under the Administrative Procedure Act. The court ruled that the Medicare Act contains no such exception. Id. at 944. In so holding, the D.C. Circuit acknowledged that it was breaking with four other Federal Circuit Courts on this issue.

Supreme Court Issue For Review:

In reviewing the D.C. Circuit’s ruling in Allina Health, the Supreme Court will decide whether the Medicare Act requires HHS to follow notice and comment rulemaking procedures before issuing instructions to its contractors on how to calculate Medicare payments. This review will include the central question of whether the Medicare Act has an exception for interpretive rules.

The stakes of Supreme Court’s review go far beyond the reimbursements at issue in the Allina Health case. As HHS noted in its petition for review, HHS often uses informal manual instructions to its contractors to regulate many aspects of the Medicare reimbursement process. If the Supreme Court decides the D.C. Circuit was correct—and that notice and comment is required for any instructions establishing or changing a substantive legal standard governing Medicare payments—then many other HHS payment instructions to contractors may be subject to challenge. Further, affirming the D.C. Circuit will be a victory for public participation in HHS’s critically important process for developing Medicare payment policies.

Hospital Takeaway

The Allina Health case will decide the very important issue of how much process HHS must follow before deploying new Medicare payment rules. Hospitals with pending DSH payment challenges should monitor both the Allina Health case itself as well as several other pending court challenges to the substantive validity of the HHS’s DSH payment policies. Hospitals that are unclear about the potential impact of Allina Health or other pending DSH payment cases should speak with a Medicare reimbursement expert for help with preserving and pursuing appeal rights.