Under either Sections 1395hh(a)(2) or 1395hh(a)(4) of the Medicare Act, did the Department of Health and Human Services err in not providing notice and an opportunity for comment before interpreting Medicare Part C enrollees to be “entitled to benefits under Part A” of Medicare, which thereby altered one of the calculations used to determine hospitals’ Medicare reimbursement payments?
The Supreme Court will decide whether Sections 1395hh(a)(2) or 1395hh(a)(4) of the Medicare Act requires the Department of Health and Human Services to provide notice and an opportunity for comment when issuing an interpretation of the Medicare Act that affects calculations involving Medicare Part C patients and Medicare payments. Petitioner Alex M. Azar II, the Secretary of Health and Human Services, argues that the agency’s issuance of a legally nonbinding interpretation of the Medicare Act that affected Medicare payment could not substantively affect legal standards and therefore did not trigger the notice-and-comment requirements of Sections 1395hh(a)(2) or 1395hh(a)(4). Respondents Allina Health Services et al. contend that this issuance was legally significant because hospitals and contractors were required to follow it, therefore triggering the notice-and-comment requirements of both Subsections (a)(2) and (a)(4). The Court’s decision could affect the administration of the Medicare Program, including the Department of Health and Human Services’ ability to respond swiftly to frequent Medicare changes and its ability to accurately anticipate the financial impacts of its issuances.
Questions as Framed for the Court by the Parties
Whether 42 U.S.C. § 1395hh(a)(2) or § 1395hh(a)(4) required the Department of Health and Human Services to conduct notice-and-comment rulemaking before providing the challenged instructions to a Medicare administrative contractor making initial determinations of payments due under Medicare.
The federal government, through the Department of Health and Human Services (“HHS”), provides Americans who are at least 65 years old or disabled with health insurance through the multi-part Medicare program. Through Medicare “Part A,” the federal government directly administers health insurance to enrollees, resulting in the government paying hospitals directly for treating Part A Medicare enrollees. Under “Part C” of Medicare, the government subsidizes Medicare enrollment in private insurance plans.
To reimburse hospitals for treatments provided to Part A enrollees, HHS first makes initial payments—through “fiscal intermediaries”—to each hospital based on an estimate of each hospital’s actual costs incurred for treating Part A patients in a given fiscal year. Later, as authorized by the Medicare Act, HHS adjusts the original payment for any hospital that treated a disproportionate amount of Part A patients based on each hospital’s yearly actual costs report. Each year, HHS requires its fiscal intermediaries to calculate this adjustment payment for every hospital in the country by using a formula that adds together two fractions—one of which is called the “Medicare fraction”—to estimate how many low-income patients each hospital treated. Each hospital’s Medicare fraction is determined, in part, by “the number of each hospital’s patient days for patients ‘entitled to benefits under Part A’ of Medicare.”
In 2004, HHS promulgated a new rule to begin treating Part C enrollees as patients “entitled to benefits under Part A.” Due to Part C enrollees’ generally higher incomes, the 2004 rule generally resulted in lower hospital reimbursement payments. Ultimately, though, the United States Court of Appeals for the District of Columbia Circuit vacated HHS’s 2004 rule because “it was not a logical outgrowth of the proposed rule and had therefore been improperly issued without notice and opportunity for comment.”
Nonetheless, in 2013, HHS yet again promulgated another rule to start treating Part C enrollees as patients “entitled to benefits under Part A,” beginning in fiscal year 2014. In June 2014, however, HHS published its 2012 Medicare fractions, which included Part C patient days. Respondents Allina Health Services et al. (“Allina Health”) then challenged the 2012 fractions by first seeking review, as required, by HHS’s Provider Reimbursement Review Board (“Board”). Because “the Board does not have the authority to declare statutes or regulations invalid,” though, the Board certified that it could not resolve Allina Health’s issue, allowing Allina Health to bring suit in the United States District Court for the District of Columbia.
In the district court, both HHS and Allina Health moved for summary judgment. The court rejected Allina Health’s argument that the Administrative Procedure Act (“APA”) and the Medicare Act required HHS to go through the notice-and-comment procedure before it could use Part C patient days in determining the 2012 Medicare fractions. Instead, the court held that HHS’s inclusion of Part C patient days constituted an “interpretive rule,” exempting it from notice-and-comment procedures under both acts.
Allina Health appealed to the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit”), which reversed the district court’s decision. The DC Circuit held that Section 1395hh(a)(2) of the Medicare Act required notice-and-comment procedure for HHS’s inclusion of Part C days in the 2012 fractions because HHS’s 2013 announcement was a “(1) ‘rule, requirement, or other statement of policy’ that (2) ‘establishe[d] or change[d]’ (3) a ‘substantive legal standard’ that (4) govern[ed] ‘payment for Services.’” Alternatively, the DC Circuit held that Section 1395hh(a)(4) of the Medicare Act independently required the notice-and-comment procedure because the 2013 rule mirrored the 2004 rule, which was not a “logical outgrowth” of the proposed rule. This, according to the court, meant that HHS had to provide an opportunity for notice and comment before reissuing the same rule again.
WHAT TRIGGERS THE NOTICE-AND-COMMENT REQUIREMENTS IN SECTION 1395hh(a)(2)?
Alex M. Azar II, acting in his official capacity as Secretary of Health and Human Services, argues that Section 1395hh(a)(2) of the Medicare Act does not require public notice and the opportunity for public comment when the Secretary issues a nonbinding statutory interpretation upon which an agency within HHS relies. To justify this assertion, Azar points to the language of Subsection (a)(2), which only requires the Secretary to provide notice and an opportunity for comment when the agency issues a “rule, requirement, or other statement of policy” that substantively changes or establishes the Medicare Act’s substantive legal standards. Azar contends that the language of the Medicare Act itself provides a legal standard and that Subsection (a)(2) does not reach nonbinding interpretations of the Medicare Act that do not affect the Medicare Act’s substantive legal standards. Azar further maintains that the issuance of a nonbinding interpretation of the Medicare Act is incapable of substantively changing or establishing the Act’s legal standards.
Azar posits that his reading of Section 13955hh(a)(2) accurately reflects legislative intent, as Congress wrote Subsection (a)(2)’s notice-and-comment requirements to reflect the APA’s notice-and-comment requirements. At the time in which Congress wrote Subsection (a)(2), Azar notes, the APA was approximately forty years old and thus provided the writers of Subsection (a)(2) with a substantial framework to determine what triggers a notice-and-comment requirement. To support this claim, Azar asserts that HHS issued notice of a public proposal in 1982 that suggested that HHS did not need to import the APA’s rulemaking practices to its Medicare operations. Azar states that Congress responded to the 1982 proposal by enacting amendments in 1987 and 1988 that clarified that Congress intended HHS to import the APA’s rulemaking practices into HHS’s interpretation of the Medicare Act. The APA, Azar claims, has a long history of separating substantive and interpretative rules, and requires that agencies provide an opportunity for public notice and comment only for substantive rules. Azar contends, citing jurisprudence surrounding the APA as a model, that the writers of Subsection (a)(2) did not intend to require public notice-and-comment requirements for interpretive rulings that merely reflect an agency’s understanding of the rules that the agency is required to execute. Given this history, Azar argues, the DC Circuit inappropriately looked to Black’s Law Dictionary’s definition of “substantive law” rather than the jurisprudence surrounding the APA’s understanding of substantive law as it applies to notice-and-comment requirements. Moreover, Azar maintains, the calculation of Medicare fractions by a division of HHS is incapable of substantively changing or establishing the Medicare Act’s legal standards because the division’s calculations are subject to revision upon either judicial or administrative review. Given this, Azar asserts, the division’s reliance upon the Secretary’s legally nonbinding interpretation when calculating Medicare fractions did not require public notice and comment under Subsection (a)(2).
In opposition, Allina Health contends that HHS’s 2014 issuance of its statutory interpretation impacted the treatment of low-income patients across the country and therefore required notice and an opportunity for public comment under Section 1395hh(a)(2). To support this assertion, Allina Health points to Section 1395hh(a)(2)’s language that includes “statements of policy” in its requirement of HHS actions that trigger the notice-and-comment requirement.In essence, Allina Health rejects Azar’s argument that the interpretation was nonbinding and therefore did not trigger Subsection (a)(2)’s requirements, because hospitals were required to incorporate HHS’s issuance into their calculations for Medicare payments. Additionally, Allina Health notes that Subsection (a)(2) includes a “rule, requirement, or other statement of policy” in its consideration of what triggers the notice-and-comment requirement and characterizes HHS’s issuance as a requirement given hospitals’ obligation to follow it for the calculation of Medicare fractions. Allina Health further contends that HHS’s issuance can also be characterized as a “statement of policy” that Subsection (a)(2)’s language reaches. Allina Health invokes the APA to contend that, under the APA’s standards, HHS’s issuance can also be considered a rule under Subsection (a)(2). In contrast with Azar, Allina Health does not reject the DC Circuit’s use of Black’s Law Dictionary’s definition of “substantive law,” and further notes that HHS’s issuance comports with this definition of substantive law because it created new legal consequences for hospitals by impacting its treatment of Medicare patients.
Allina Health also counters that Congress did not intend for the APA to be a framework for the Medicare Act’s rulemaking procedures. Pointing to case law, Allina Health Services et al. contend that HHS’s issuance is a statement of policy because it advised the public on its adjudicatory approach. Rejecting Azar’s central argument, Allina Health asserts that Azar is misguided in claiming that the legally nonbinding nature of HHS’s issuance prevents the issuance from triggering Subsection (a)(2)’s requirements, as even under the APA statements of policy are considered nonbinding. Moreover, Allina Health notes that HHS’s issuance was in fact binding on hospitals and agency contractors. Allina Health contends that Subsection (a)(2)’s inclusion of “statements of policy” in its list of issuances that may trigger Subsection (a)(2)’s requirements, which clearly demonstrates that Congress did not intend to limit the requirements to issuances that are as binding or have an identical effect as the law. Allina Health also rejects Azar’s argument that the drafting history points in Azar’s favor. In contrast, Allina Health asserts that the drafting history of the Medicare Act reveals that Congress intended the Act to have different notice-and-comment requirements than the those under the APA.
THE REACH OF SECTION 1395hh(a)(4) AS AN INDEPENDENT BASIS FOR REQUIRING NOTICE AND COMMENT
Azar further contends that Section 1395hh(a)(4) does not provide an independent basis for the notice-and-comment requirement as applied to HHS’s actions in this case. Azar notes that Subsection (a)(4) prohibits a procedurally defective regulation from taking effect until the public is given proper notice and an opportunity for comment. Azar claims that this requirement does not apply to HHS’s nonbinding statutory interpretation because it was never published as a final regulation and that Subsection (a)(4) only applies when the Secretary has published a final regulation. Moreover, Azar contends that HHS never intended to publish its interpretation as a final regulation, and because Subsection (a)(2) did not require the Secretary to propose the regulation, Subsection (a)(4) cannot independently create a notice-and-comment requirement. Lastly, Azar maintains that even if Subsection (a)(4) is capable of independently triggering a notice-and-comment requirement, it was not triggered in this case because the hospitals’ calculations of Medicare fractions were made without the existence of a controlling government regulation and were therefore reflective of the HHS’s choice to proceed by adjudication rather than rulemaking. Azar implies that an act of adjudication does not fall under Subsection (a)(4)’s reach. Azar also asserts that HHS is empowered to choose between rulemaking or adjudication. Furthermore, Azar notes that, in the absence of a controlling regulation regarding how to deal with Medicare Part C patients in Medicare payment calculations, HHS had a duty to provide hospitals with guidance on how to handle Medicare Part C patients in calculating Medicare fractions. Given this, Azar contends, the DC Circuit erred when characterizing HHS’s lawful actions surrounding this case as an attempt to circumvent Subsection (a)(4)’s requirements.
In contrast, Allina Health asserts that Subsection (a)(4) is capable of independently requiring notice and comment. Allina Health argues that the Court should determine that Subsection (a)(4) applies narrowly to the facts of this case. Allina Health notes that Subsection (a)(4) requires notice and comment if there is a provision in a final regulation that is not a “logical outgrowth” of the proposed regulation. Allina Health contends that HHS’s 2014 issuance should not have been permitted without notice and comment because it allowed the 2004 rule—which violated the “logical outgrowth” test—to take effect. Allina Health rejects Azar’s argument that HHS’s actions were an adjudication rather than an act of rulemaking, and therefore not subject to Subsection (a)(4)’s requirements. Instead, Allina Health asserts that this distinction is irrelevant, as even if Azar is accurate in characterizing its issuance as adjudicative, an adjudication is still capable of violating the “logical outgrowth” test. Here, Allina Health posits that HHS’s issuance breached this test by reducing payments for services provided to Medicare Part C patients.
THE EFFECT ON THE ADMINISTRATION OF THE MEDICARE PROGRAM
Azar argues that interpreting Section 1395hh of the Medicare Act to require HHS to commence the notice-and-comment procedure for its decision to include Part C patient days in the 2012 Medicare fractions “would substantially undermine HHS’s ability to administer Medicare in a workable manner.” As Azar notes, the Medicare program’s sheer size and complexity have contributed to numerous ambiguities regarding the “substantive legal standards for reimbursement” of hospitals. To resolve those ambiguities, HHS makes nonbinding interpretations of the legal standards for reimbursement, which Azar states “have long been held exempt from notice-and-comment rulemaking.” Azar contends that these interpretations, including the ones in HHS’s Provider Reimbursement Manual, benefit hospitals by promoting a uniform standard through which fiscal intermediaries determine hospital reimbursement payments.
To convert HHS’s interpretations into regulations—as Azar argues the DC Circuit’s interpretation of Section 1395hh of the Medicare Act would do—may destroy HHS’s ability to respond to the Medicare program’s frequent changes, according to Azar. This is because, Azar contends, the DC Circuit’s reasoning will require every single HHS interpretive manual to go through the lengthy notice-and-comment process just because the agency requires its contractors to follow them. Azar states that this will have a “disruptive effect” on the administration of the Medicare program.
Allina Health counters that interpreting Section 1395hh of the Medicare Act as the DC Circuit did will benefit the Medicare program—not hurt it—because the notice-and-comment procedure will make the administration of the program smoother. First, Allina Health contends that the DC Circuit’s interpretation of Section 1395hh(a)(4), if affirmed by the Supreme Court, would have very little impact on HHS’s administration of Medicare. This is because, as Allina Health notes, HHS’s rules including Part C Medicare enrollees as patients “entitled to benefits under Part A” are the only Medicare rules to ever be “invalidated . . . for a logical outgrowth failure.”
Concerning Section 1395hh(a)(2), Allina Health Services maintains that requiring HHS to use the notice-and-comment procedure for interpretations related to the reimbursement of hospitals is a benefit to the Medicare program because it will force HHS to consider the financial impact of its decisions. Using this case as an example, Allina Health notes that an HHS decision to change payment standards, such as including Part C patient days in the Medicare fractions, has an extraordinary impact on hospital reimbursement payments. Here, Allina Health posits, the change impacts $3 to $4 billion in reimbursements, even according to Azar. Thus, by requiring HHS to commence notice-and-comment rulemaking, Allina Health argues that hospitals can better predict their reimbursement payments and, in turn, better serve Medicare patients. Allina Health also asserts that affirming the DC Circuit’s ruling will have no impact on typical HHS contractor instructions. This is because, according to Allina Health, the Medicare fractions are not merely an instruction, but rather a binding policy, and because the DC Circuit has already had the opportunity to require notice-and-comment procedure for manual instructions and declined to do so. Lastly, Allina Health disputes the impact of the length of the notice-and-comment procedure, arguing that it only takes a few months to complete.
- Sven Collins et al., Supreme Court to Decide if HHS May Skip Notice and Comment Requirements for Certain Payment Rules, Triage Health Law Blog (Oct. 4, 2018).
- Jacqueline LaPointe, Medicare DSH Payment Case Makes Its Way to the Supreme Court, RevCycle Intelligence (Oct. 2, 2018).