Supreme Court sides with hospitals in multibillion-dollar payment dispute

In an opinion issued June 3, the U.S. Supreme Court ruled that HHS improperly failed to undergo formal notice-and-comment rulemaking before announcing a new Medicare rate calculation for disproportionate share payments to hospitals.

At issue in the case, Azar v. Allina Health Services, is the federal government's decision to include Medicare Part C enrollees with Medicare Part A enrollees when calculating disproportionate share hospital payments.

In 2004, CMS issued a final rule that included a new methodology for DSH payments that counted Medicare Part C inpatient days, in addition to Part A days in its calculation. This differed from the proposed rule CMS issued in 2003 that excluded Part C days from the calculation.

The 2004 rule was vacated after hospitals filed legal action. The U.S. District Court held that the final rule violated the Administrative Procedures Act because it was not a "logical outgrowth" of the proposed rule. The U.S. Court of Appeals for D.C. affirmed the decision.

CMS issued a new rule in 2013 prospectively readopting the policy of counting Part C patients. In 2014, unable to rely on the prospective 2013 rule or the vacated 2004 rule, CMS posted on its website the Medicare fractions for fiscal year 2012, noting that they included Part C patients.

Hospitals sued over the change, arguing that the government violated the Medicare Act's requirement to provide public notice and a 60-day comment period for any rule that establishes or changes a "substantive legal standard governing … the payment for services."

The government argued it had no statutory obligation to provide notice and comment before adopting the policy because the APA's requirements are incorporated into the Medicare Act, and the policy of counting Part C patients in the Medicare fractions would be treated as interpretive rather than substantive under the APA. Counting Part C enrollees would reduce hospitals' payments by between $3 billion and $4 billion over a nine-year period, according to the government.

The appellate court ultimately sided with the group of hospitals, led by Allina Health Services. The Supreme Court heard arguments in the case in January, and the high court sided with the hospitals in a 7-1 decision issued June 3.

"In 2014, the government revealed a new policy on its website that dramatically — and retroactively — reduced payments to hospitals serving low-income patients," Justice Neil Gorsuch wrote in the majority's opinion. "Because affected members of the public received no advance warning and no chance to comment first, and because the government has not identified a lawful excuse for neglecting its statutory notice-and-comment obligations, we agree with the court of appeals that the new policy cannot stand."

Access the Supreme Court opinion here.

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