New Supreme Court Decision Addressing Regulatory Notice and Comment

The U.S. Supreme Court issued a decision Monday, June 3, 2019 in Azar v. Allina Health Services holding that Centers for Medicare & Medicaid Services (“CMS”) cannot use interpretative rules to bypass statutory notice and comment requirements when changing substantive legal standards under the Medicare Act.

The key dispute between the parties dates back to 2004 when the Secretary changed the agency’s historic interpretation as to the allocation of Part C days for purposes of the Disproportionate Share Hospital (“DSH”) payment calculation (an additional payment made to hospitals that serve a “disproportionate share” of low-income patients). Prior to 2004, CMS interpreted the statute in such a way that benefitted those hospitals that served a disproportionate share of low-income patients. CMS even proposed codifying that interpretation in the Proposed Final Rule in 2003, but then in the 2004 Final Rule, abruptly changed course by changing its interpretation, completely bypassing notice and comment requirements. This change led to numerous PRRB appeals and other legal challenges.

In Allina Health Services v. Sebelius, 746 F.3d 1102, 1108 (D.C. Cir. 2014), the Court vacated the Final Rule because the agency had “‘pull[ed] a surprise switcheroo’” by doing the opposite of what it had proposed.’” Then in 2013, CMS issued a new rule that prospectively “readopted the policy” of counting the Part C patients in the Medicare fraction.

The particular case that resulted in the opinion issued yesterday arose in 2014 when CMS calculated the hospitals’ Medicare fractions for fiscal year 2012. When it made the calculation, CMS wanted to count the Part C days in the Medicare fraction, but couldn’t rely on the vacated 2004 Final Rule or on the 2013 Final Rule which could only be applied prospectively. So, CMS posted on its website a spreadsheet listing the hospitals’ rates and noting that the Medicare fractions included Part C days. This lawsuit followed arguing that CMS violated the Medicare Act by failing to observe its statutorily mandated notice and comment obligations. CMS admitted that it had not provided notice and comment, but argued that it was not required to do so as this was an interpretive rule exempt from notice and comment requirements. The D.C. Circuit Court of Appeals ultimately sided with the hospitals. Thereafter, CMS petitioned the U.S. Supreme Court to resolve the circuit split about whether notice and comment was required.

In its decision, the Supreme Court analyzed whether CMS’ 2014 announcement established or changed a “substantive legal standard” and in doing so, considered both the Medicare Act and the Administrative Procedures Act (APA). The Court found that the agency’s notice and comment obligations under the Medicare Act were more expansive than under the APA. What might pass as an interpretive rule that did not require notice and comment under the APA could be a change to a substantive legal standard under the Medicare Act requiring notice and comment. The Court found that notice and comment was required here and held that “because the government has not identified a lawful excuse for neglecting its statutory notice-and-comment obligations, its policy must be vacated.”

This opinion suggests that CMS may not be able to change the rules in other contexts without observing proper notice and comment — giving providers more certainty and some relief from what can seem to be the vagaries of government interpretive rules regarding Medicare reimbursements.

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Jennifer Wintergerst 502-562-7305

Stephen R. Price 502-562-7305