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The U.S. Supreme Court has been asked to clarify when formal notice-and-comment rulemaking is required in a case involving Medicare payment adjustments for hospitals. (Azar v. Allina Health Servs., No. 17-1484 (U.S. oral arg. Jan. 15, 2019).) In oral arguments, the Court considered whether an administrative decision of the Department of Health and Human Services (HHS) regarding instructions to contractors on how to calculate Medicare payments was “substantive” under the Medicare Act and the Administrative Procedure Act (APA), and therefore subject to notice-and-comment requirements.

The case involves a provision of the Medicare Act that entitles hospitals to an adjustment to their payment rate based on the proportion of low-income patients they treat, referred to as the “disproportionate share hospital adjustment.” The adjustment is determined by the hospital’s Medicaid and Medicaid fractions (42 U.S.C. §1395ww(d)(5)(F)(v)-(vi).) At issue in Azar is the Medicare fraction calculation. Under §1395ww(d)(5)(F)(vi), the numerator of the Medicare fraction is the number of a hospital’s patient days for patients eligible for federal supplementary security income (SSI) benefits and entitled to benefits under Part A while the denominator is based on patient days for patients entitled to Part A benefits.

In 2003, the HHS proposed that the denominator of the Medicare fraction should only include a hospital’s patient days for patients who are receiving benefits under Medicare Part A. However, the agency changed course and adopted a final rule in 2004 interpreting the statutory language “entitled to benefits under Part A” also to include Medicare Part C patients. Medicare Part C, or Medicare Advantage, patients are enrolled in government-subsidized private insurance and are generally wealthier than Medicare Part A patients. Including patient days for Part C patients that are “entitled to benefits under Part A” in the Medicare fraction has the effect of increasing the denominator and thereby reducing the overall Medicare fraction and the amount of a hospital’s disproportionate share adjustment payment.   

The D.C. Circuit vacated the 2004 rule that included Medicare Part C patient days in the Medicare fraction, finding it was not a “logical outgrowth” of the proposed rule, and that the HHS had adopted the final rule without following notice-and-comment procedures. (Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014).)  However, in 2013, the HHS, through formal notice-and-comment rulemaking, revised its interpretation of “entitled to benefits under Part A” to also include Medicare Part C patients for purposes of the disproportionate share hospital adjustment fraction. The 2013 rule prospectively included Medicare Part C patient days in the fraction beginning in fiscal year 2014.           

At issue in Azar is the HHS’s publication of the Medicare Part A/SSI Fraction Data File in 2014 to be applied retroactively for fiscal year 2012. The file, which was published in a spreadsheet posted on the HHS’s website without any notice-or-comment procedures, contained SSI ratios based on a Medicare fraction that included patient days for Medicare Part C patients within the denominator.

Allina Health alleged the publication of the 2012 file was a substantive change made in violation of Medicare Act rulemaking procedures. The district court disagreed, finding that the publication was an interpretive rule and that the Medicare Act incorporates the APA’s exception to notice-and-comment for interpretive rules. The D.C. Circuit, in an opinion by Justice Brett Kavanaugh, disagreed and reversed.

Arguing for respondent Allina Health Services at oral argument, Washington, D.C., attorney Pratik Shah told the justices that Congress’s intent in the Medicare Act was to require “a rule, whatever type, interpretive or legislative, a requirement or a statement of policy, as long as it's actually affecting a standard changing effect on Medicare providers or beneficiaries [and] their legal rights . . . to go through notice-and-comment.” Shah further argued that if Congress had intended for the APA’s exception to apply to Medicare rulemaking, “it could have simply cross-referenced the interpretive rule exception in the APA.” According to Shah, only procedural rules are free from notice-and-comment requirements.

Arguing for the HHS, Deputy Solicitor General Edwin Kneedler countered that under the Medicare Act, notice-and-comment rulemaking is only triggered if a rule “establishes or changes a substantive legal standard.” Kneedler said that the word “substantive” has an established meaning in administrative law and under the APA as noninterpretive, and this meaning also applies in this case.

Justices Sonia Sotomayor, Elena Kagan, and Neil Gorsuch questioned Kneedler’s reading of the Medicare Act as including the same exceptions to notice-and-comment rulemaking as the APA. Chief Justice John Roberts, however, appeared to side with the HHS, asking whether the 2012 publication contained nonbinding interim calculations, and why the agency in this case “could not choose adjudication as a means of establishing [the] policy.”