SUPREME COURT VACATES HHS DECISION TO CHANGE THE FORMULA USED TO CALCULATE DISPROPORTIONATE SHARE PAYMENTS TO HOSPITALS WITHOUT NOTICE AND COMMENT

In a 7-1 decision, the Supreme Court affirmed a ruling of the D.C. Circuit Court of Appeals vacating a Department of Health and Human Services policy that would have changed the calculation of payments to disproportionate share hospitals because HHS did not provide the requisite opportunity for notice and comment.  The underlying dispute involved HHS’ efforts to include Medicare Advantage (Medicare Part C) patients in its calculation of the disproportionate share payments, which would have, in the words of the Court, “dramatically – and retroactively – reduced payments to hospitals serving low-income patients.”  

The Medicare Program makes additional payments to hospitals that serve a disproportionate share of low-income patients to ensure that these hospitals have sufficient resources and incentives to care for low-income patients.  Medicare has long calculated disproportionate share payments in part based on a hospital’s “Medicare Fraction.”  The numerator in the Medicare Fraction consists of the number of inpatient days in given year attributed to low-income Medicare patients, with the denominator consisting of the inpatient days attributed to patients “entitled to benefits under” Medicare Part A (inpatient benefits).  The calculation of the Medicare Fracture was complicated after Congress passed legislation allowing private health insurance companies to offer Medicare managed care plans, now known as Medicare Advantage (Medicare Part C) plans.  The question became whether patients enrolled in Medicare Advantage plans should be counted as part of the denominator in the Medicare Fracture, which would enlarge the denominator and, as a result, decrease the disproportionate share payments made to hospitals.   

In 2014, HHS posted a policy on its website stating that the Medicare Fractions to be used in calculating disproportionate share payments for fiscal year 2012 would include Medicare Advantage patients.  Several hospital systems challenged the policy, arguing that HHS’ failure to follow notice and comment procedures violated the Medicare Act.  The government argued that it wasn’t required to provide notice and comment because the policy should be treated as interpretive rather than substantive as is done under the Administrative Procedures Act, which does not apply to Medicare.

The legal issue centered on whether the 2014 policy announcement established or changed a “substantive legal standard,” which under the Medicare Act would require notice and comment.  As expressed by the Court:  “One way or another, Medicare touches the lives of nearly all Americans.  Recognizing this reality, Congress has told the government that, when it wishes to establish or change a ‘substantive legal standard’ affecting Medicare benefits, it must first afford the public notice and a chance to comment.” 

The Court held that “the government had not identified a lawful excuse for neglecting its statutory notice-and-comment obligations,” and vacated the policy.  In so ruling, the Court carefully examined the language of both the Medicare Act and the Administrative Procedures Act and found that, unlike the Administrative Procedures Act, under the Medicare Act statements of policy can change a substantive legal standard.  The Court also rejected the government’s policy argument that requiring notice and comment for interpretive rules would be excessively burdensome, stating that “courts are not free to rewrite clear statues under the banner of their own policy concerns.”

The opinion was written by Justice Neil Gorsuch and affirmed a ruling of the D.C. Circuit Court of Appeals written by Justice Brent Kavanaugh when he was on the D.C. Circuit.  Justice  Kavanaugh recused himself and Justice Stephen Breyer filed a dissent.

The case is Azar v. Allina Health Services, et al., case number 17-1484.  The Supreme Court’s opinion is linked here.