A Loss in SCOTUS Prompts New CMS Notice of Proposed Rulemaking

Before getting into the weeds of how notice-and-comment rulemaking requirements interact with CMS’s ability to set payment policy – Medicaid and the Law would like to formally introduce its readers to Alexander Somodevilla (Alex), a new Associate in the Washington, DC office who will become a regular contributor to the blog. Alex has a deep background in Medicaid and Medicare law and policy, and is passionate about the issues and far-reaching impact of these programs.


On August 4th, CMS released a proposed rule titled Treatment of Medicare Part C Days in the Calculation of a Hospital’s Medicare Disproportionate Patient Percentage (DPP). We’ve written before about the Medicaid disproportionate share program; today’s post concerns disproportionate share hospital (DSH) payments in the Medicare program.

The CMS proposed rule would retroactively apply a policy governing the treatment of Medicare Advantage (MA) patient days for discharges occurring prior to October 1, 2013 for the purpose of calculating a hospital’s Medicare disproportionate share payments. The proposal does not in any way impact cost reports for discharges after October 1, 2013, as this period is already covered by a separate regulation which implements the same policy and DPP calculation as this proposed rule.

Issuing a proposed regulation that only impacts DSH payments dating back seven years seems odd at first glance. Thus, in order to understand why CMS issued this proposal, and to get a glimpse into the machinations of CMS Medicare payment policy, it is first useful to lay out the series of events that ultimately culminated in the Supreme Court’s June 2019 decision in Azar v. Allina Health Services, which reined in CMS’s authority to set substantive Medicare payment policies without the notice-and-comment rulemaking process and led CMS to issue this proposal.

Medicare DSH Payments

Section 1886(d)(5)(F) of the Social Security Act establishes Medicare DSH payments. DSH payments are intended to offset costs incurred by hospitals treating “a significantly disproportionate number of low-income patients.” It’s the same idea that led Congress to enact the Medicaid DSH program, as we noted here. The Act specifies two methods by which a hospital may qualify for Medicare DSH payments. The most common method is based on a statutory formula that takes into account the hospital’s geographic designation, the number of beds in the hospital, and the hospital’s DPP. This blog post will focus on the DPP.

The DPP itself features two fractions: the “Medicare fraction” and the “Medicaid fraction.” The Medicare fraction’s denominator is total patient days furnished to patients “entitled to benefits under” Medicare Part A, and the numerator is the number of patient days furnished to Part A-entitled patients who are also entitled to Supplemental Security Income (SSI) payments. The Medicaid fraction’s denominator is total patient days, and its numerator is total patient days attributable to patients who are entitled to Medicaid. A larger Medicare fraction ultimately creates a larger DSH payment for the hospital, and a smaller fraction reduces a hospital’s DSH payment.

The issue covered by the proposed regulation, and in dispute in Allina, is whether beneficiaries who receive care under Medicare Advantage (that is, Medicare Part C) fall in the category of patients entitled to benefits under Medicare Part A. In other words, should patients who receive care under Medicare Part C be included in the Medicare fraction at all. Hospitals oppose including Part C enrollees, because Part C enrollees tend to be wealthier than Part A enrollees, and counting them in the denominator of the Medicare fraction makes it smaller and reduces hospitals’ payments considerably. CMS, however, asserts that because Part C Enrollees still receive Part A services, they should be included in the Medicare fraction.

CMS typically addresses DSH payments in the annual inpatient Medicare prospective payment system (IPPS) rule. The agency has a long history of trying to include Medicare Part C days in the Medicare fraction for purposes of calculating the DPP, dating back to its FY 2005 IPPS final rule. However, in 2012, a district court vacated this policy on the basis that the final rule was not a “logical outgrowth” of the proposed rule. In 2014, the D.C. Circuit upheld that decision but left open the possibility that CMS could employ its desired approach through further adjudication.

In 2013, CMS finalized the FY 2014 IPPS final rule, which re-adopted the policy of including Part C patient days in the Medicare fraction, but did so prospectively for fiscal year 2014 and subsequent fiscal years. This rule did not apply retroactively, so at the time CMS did not have an established policy for how to treat Medicare Part C enrollees prior to 2014. However, instead of issuing a new notice of proposed rulemaking to cover this time period, CMS decided to implement and enforce this policy to fiscal year 2012 via its Provider Reimbursement Manual. This decision ultimately led to the Supreme Court case Azar v. Allina Health Services, brought by hospitals who stood to receive lower DSH payments as a result of this policy change.

At this point readers of the blog may be asking themselves, “this is dealing with Medicare – why are we covering this in the Medicaid and the Law blog?” Good question! The Allina case was noteworthy not only for its impact on DSH payment policy – but also for its potential implications on agency discretion to set policy via sub-regulatory guidance generally. Thus, the Allina decision could have also impacted how CMS sets policy relating to the Medicaid program.

The Administrative Procedure Act (APA) and Allina

Agency actions are governed by the Administrative Procedure Act (APA). The APA differentiates between agency actions that are “interpretive rules” on the one hand, and “substantive rules” on the other. Interpretive rules are statements of policy that normally lack legal force, and are thus exempted from the notice-and-comment rulemaking process. Substantive rules, however, are legally binding and require notice-and-comment rulemaking. Exactly where to draw the line between the two has perplexed courts for decades, and the Allina case was seen at the time as an opportunity for the Court to offer guidance to help clear up the issue. Such a decision would have been monumental because depending on the outcome it could have severely restrained, or significantly broadened, CMS’s (or any agency’s) authority to set policy without going through the notice-and-comment rulemaking process.

However, as is often the case, the Court avoided issuing such a sweeping opinion and decided the case on much narrower grounds. Instead of delving into fundamental questions of administrative law, the Court limited its opinion to the statutory text of the Medicare Act itself. Separate and apart from the APA, Section 1871(a)(2) of the Medicare Act requires notice-and-comment rulemaking for any “rule, requirement, or other statement of policy” that “establishes or changes a substantive legal standard governing … the payment for services.” Here, the Court stated that “everyone agrees that a policy of counting Part C patients in the Medicare fraction is substantive in this sense, because it affects a hospital’s right to payment.” Thus, such a policy change would require notice-and-comment rulemaking under the Medicare Act.

The issue of where to draw the line between interpretive and substantive rules will persist, to the chagrin of administrative law attorneys and law students alike.

Practical Implications of the Allina Decision

The Allina decision forced CMS back to the drawing board to ultimately develop the August 2020 proposed rule, which the agency explicitly states is “in response to the ruling in Azar v. Allina Health Services.” Moving forward, CMS will likely not have the option to utilize sub-regulatory pathways such as the Provider Reimbursement Manual to set substantive Medicare payment policy.

In the meantime, CMS is inviting stakeholders to submit public comments on the proposed rule. Notably, CMS asserts that adopting this proposal would not result in any additional costs or benefits because the proposal reflects the status quo at the time the DSH payments for the period in question were made. Thus, the hospitals that prevailed in the Allina decision will effectively get no benefit from having done so if the proposed rule is adopted.

In order to facilitate public comment, CMS is making public its analysis of this proposal, as well its analysis of an alternative approach which would exclude Part C patient days from the Medicare fraction and instead include them in the Medicaid fraction (for those who are dually eligible). CMS is also seeking comments on its illustrative model and the assumptions used in its analyses. Public comments must be submitted by October 5, 2020.

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