Supreme Court to Review Notice Requirements for Medicare Payment Rules

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Court’s ruling could determine the procedure for changing hospital reimbursement formulas.

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Between $3 and $4 billion in Medicare hospital reimbursements hang in the balance due to a case that the U.S. Supreme Court will decide by this June. Whether hospitals can get their hands on this money will turn on basic questions of administrative procedure.

In Azar v. Allina Health Services, the Court will decide whether the U.S. Department of Health and Human Services (HHS)—which administers the Medicare program—must go through the full notice-and-comment rulemaking process before changing the formula for reimbursing hospitals with large numbers of low-income patients. The decision will come down to how the Court interprets a key provision of the Medicare Act and its relationship to a separate statute which governs rulemaking procedure for federal agencies, the Administrative Procedure Act.

When HHS adopted a new, less generous reimbursement formula without providing notice and an opportunity for public comment, a group of healthcare providers filed suit, crying foul for the alleged procedural misstep. In an opinion by then-Judge Brett M. Kavanaugh, the U.S. Court of Appeals for the D.C. Circuit agreed with the hospitals, holding that HHS must go through the more thorough rulemaking process before changing its reimbursement formula. HHS has now appealed to the Supreme Court.

Medicare provides federally funded health insurance to individuals who are 65 and older, along with those who are disabled. The program includes different types of coverage and government reimbursement under its various “parts.” Under Medicare Part A, the federal government reimburses hospitals for serving covered patients. Medicare Part C enrollees, on the other hand, receive government subsidies to sign up for private insurance. Although enrollees in both parts receive government-funded healthcare, Part A recipients generally have lower incomes than Part C recipients.

Rather than pay hospitals directly for Medicare Part A enrollees’ medical care, HHS contracts with “fiscal intermediaries” that reimburse hospitals on behalf of the government. The intermediaries make preliminary payments to health care providers based on projections of the hospitals’ annual costs and then adjust these payments based on the actual costs reported later in the year. Many factors can affect the adjustments, but if hospitals treat a higher proportion of low-income patients than initially expected, HHS requires the intermediaries to adjust the initial reimbursements upward.

The central issue in Allina Health Services revolves around a decision HHS made about how it approximates the fraction of low-income patients for the reimbursement adjustment—and whether the agency needed to solicit public comment before changing that estimation formula. Under the Medicare Act, HHS may take into account the number of days patients “entitled to benefits under Part A” spend in a given hospital. Historically, HHS calculated the fraction of low-income patients by looking at only Part A patients, but in 2013 the agency changed the formula for future reimbursement adjustments to account for Part C patients as well.

“That difference in interpretation makes a huge difference in the real world,” Judge Kavanaugh wrote. Because Part C patients generally earn more money than Part A patients, including Part C enrollees in the adjustment calculation makes it appear that hospitals served a lower proportion of low-income patients, potentially lowering Medicare reimbursement totals by billions of dollars.

Although HHS had provided notice and a public comment period for the new formula to come into effect in 2014, the agency later announced that it would apply the new formula retroactively to 2012 reimbursement adjustments.

Concerned about the Medicare funds they would lose, the hospitals argued that this policy change required an additional round of notice and comment. The hospitals pointed to language in the Medicare Act that requires the notice-and-comment process for any “rule, requirement, or other statement of policy” that “establishes or changes a substantive legal standard…governing…the payment for services.” The D.C. Circuit agreed that changes to reimbursement calculations clearly fit these definitions.

HHS has responded by turning to the Administrative Procedure Act.

The agency has argued that even if the change to the reimbursement adjustment formula is a “rule” under the Medicare Act, it is at most a legally nonbinding “interpretative rule”—a mere clarification of existing regulations. Interpretative rules are not subject to the Administrative Procedure Act’s notice-and-comment requirements, HHS reasoned, so retroactively applying the new formula to 2012 reimbursements without any notice and comment was permissible.

Distinguishing between interpretative rules and “substantive rules,” which are subject to notice and comment, can be difficult. But the D.C. Circuit dodged the question, instead deciding that the Medicare Act simply does not incorporate the Administrative Procedure Act’s exception for interpretative rules.

HHS now argues that the D.C. Circuit’s decision will lead to significant inconsistency across the country because all other circuits have said that the Medicare Act does incorporate the Administrative Procedure Act’s exception for interpretative rules.

HHS warns, moreover, that requiring the more burdensome notice-and-comment process would also “significantly impair HHS’s ability to administer annual…reimbursements” for Medicare. The additional procedural requirements would reduce the flexibility needed to run a “massive, complex health and safety program.” Imposing the notice-and-comment requirements could also carry significant budgetary implications. HHS estimates that under the old reimbursement adjustment formula, the agency would be obligated to pay an additional $3 to $4 billion, which could significantly deplete Medicare funding.

Although the Allina Health Services decision would only immediately affect Medicare reimbursements for fiscal years 2005 through 2013, the Court’s ruling could ultimately reshape the procedural steps HHS must take to make future changes to its reimbursement formulas.

Oral argument in Azar v. Allina Health Services is scheduled for today. Justice Kavanaugh has recused himself from the case.