In the Know

Supreme Court Rules in Favor of Hospitals in HHS DSH Payment Dispute
June 12, 2019
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Arnall Golden Gregory LLP

On June 3, 2019, the Supreme Court of the United States (SCOTUS) issued an opinion in Azar v. Allina Health Services whereby it ruled that the United States Department of Health and Human Services (HHS) violated the Medicare Act by failing to undergo formal notice-and-comment rulemaking before announcing a new Medicare rate calculation for disproportionate share payments (DSH) to hospitals. The 7-1 decision upheld the District of Columbia Circuit Court’s 2017 ruling stating the same.

Nine hospitals brought the case regarding changes the Centers for Medicare and Medicaid Services (CMS) made in 2014 under former President Barack Obama’s administration. As part of the changes, when calculating a hospital’s DSH payment, CMS began to include Medicare Advantage enrollees with traditional Medicare beneficiaries. The hospitals argued that in doing so, CMS’s new method misrepresented the number of low-income Medicare beneficiaries treated by the hospitals. Furthermore, they argued CMS implemented the new method without complying with the Medicare Act's notice-and-comment requirements.

HHS argued that the department does not need to go through formal rulemaking unless modifications involve a “substantive” rule. The DSH payment changes, HHS argued, involved an “interpretive” rule, which would not require a notice-and-comment period. In 2018, HHS Secretary Alex Azar requested SCOTUS take the case, and argued that the lower court’s ruling would “significantly impair” HHS’s ability to use interpretive rules and administer Medicare reimbursements through third parties used to pay hospitals. HHS estimated the ruling would cause CMS to be responsible for between $3 billion to $4 billion in DSH payments for fiscal years between 2005 and 2013.

In SCOTUS’s decision, Justice Neil Gorsuch wrote that the Medicare Act “requires the government to provide the public with advance notice and a chance to comment on any ‘rule, requirement, or other statement of policy’ that ‘establishes or changes a substantive legal standard governing . . . the payment for services.’” Allina Health Services, Slip Op. at 5 (quoting 42 U.S.C. §1395hh(a)(2)). Noting that it was agreed that HHS’s DSH policy governed the payment for services and was at least a statement of policy, the Court concluded that “whether the government had an obligation to provide notice and comment winds up turning on whether its 2014 announcement established or changed a ‘substantive legal standard.’” Id. at 5-6.

For its part, the government argued that the term “substantive” means the same thing in § 1395hh(a)(2) as it means in the APA. That is, the government viewed the Medicare Act's use of the phrase "substantive legal standard" as a way "to distinguish a substantive from an interpretive legal standard.” Allina Health Services, Slip Op. at 6 (emphasis in original). The government argued that, “because the policy of counting Part C patients in the Medicare fractions would be treated as interpretive rather than substantive under the APA, it had no statutory obligation to provide notice and comment before adopting its new policy.” Id. The Court rejected this interpretation, succinctly noting that “[s]everal statutory clues persuade us of at least one thing: The government’s interpretation can’t be right.” Id.

The Court expressly noted that its decision was limited to the arguments pressed by the government in the case before it and that it was not expressing any opinion on arguments that the government might have made. For example, the Court noted “that the government might have sought to argue that the policy at issue here didn’t ‘establis[h] or chang[e]’ a substantive legal standard—and so didn’t require notice and comment under §1395hh(a)(2)—because the statute itself required it to count Part C patients in the Medicare fraction.” Id. at 16-17. But because the government did not press that argument (and instead argued that the policy at issue filled a “gap” in an ambiguous statute), the Court did not express any opinion on whether the statute did contain a “gap.” Instead, the Court concluded that “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.” Id. at 17.

The American Hospital Association issued a brief statement praising the ruling. “By evading the notice-and-comment process, HHS failed to consider the real-world impact of its changes, leading to policies that may adversely affect patients as well as providers….more public participation in policymaking, including by hospitals and health systems, leads to better-thought-out policies with a deeper understanding of their direct impact on health care providers and those they serve.”