On June 3, 2019, the Supreme Court issued an eagerly anticipated opinion in Azar v. Allina Health Services, a decision with far-reaching implications both for the calculation of disproportionate share payments and provider disputes with the Centers for Medicare and Medicaid Services (“CMS”) over changes to CMS manual and policy guidance.¹ While the decade-long dispute between CMS and hospitals over disproportionate share calculations is far from over, the recent Allina decision provides hospitals with additional ammunition to ensure CMS follows proper administrative procedure as this dispute continues to develop.

Background

The Allina case arose out of a longstanding clash between hospitals and CMS regarding the calculation of additional payments made to disproportionate share hospitals (“DSH”) under the Medicare Program. At a high level, DSH payments are calculated based on the sum of two fractions, the first of which is known as the Medicare or SSI fraction:  

Medicare/SSI Entitled Days
Medicare Entitled Days

The denominator represents the total number of days in a year that a particular hospital spent caring for patients who are entitled to Medicare Part A. The numerator represents the number of Medicare days for beneficiaries who are both entitled to Medicare Part A and also receive supplemental security income (“SSI”) payments. The larger the fraction, the higher the DSH payment a hospital receives.

CMS and hospitals disagree as to whether Part C (Medicare Advantage) beneficiaries should be included in the Medicare fraction. Hospitals have argued that Part C beneficiaries, who tend to be better-off than traditional Medicare beneficiaries, should be excluded. CMS’ position on this issue has changed over time, but the agency’s current position is that Part C days should be included in the fraction. The practical effect of including Part C days is to reduce the Medicare fraction and, by extension, hospital DSH payments.

The Allina case arose from a 2014 CMS decision to unilaterally calculate hospital DSH percentages for FY 2012 to include Part C days, posting these percentages on its website without prior notice to hospitals or the opportunity to comment.² Hospitals objected to this decision and filed a lawsuit alleging that CMS violated the Social Security Act’s procedural requirements for substantive changes in policy. Though the District Court ruled against the hospitals, the Court of Appeals reversed that decision, and the Secretary of HHS appealed to the Supreme Court.

Procedural Victory for Providers

The Supreme Court issued a 7-1³ decision in favor of the hospitals’ argument that CMS violated procedural requirements through its unilateral inclusion of Part C days without notice and comment. Although the Court did not reach the substantive issue of whether Part C days should be included in the Medicare fraction, the Court did find that CMS violated the Social Security Act’s procedural requirements for changes to a “substantive legal standard” impacting payment.⁴ Hospitals argued the unilateral inclusion of Part C days constituted such a change, while the government argued the change was a mere interpretive rule, attempting to rely on an analogy to more general Administrative Procedure Act (“APA”) provisions.⁵ The Court ultimately sided with hospitals for three primary reasons:

1. The administrative procedure requirements in the Social Security Act specifically contemplate that statements of policy (such as the 2014 calculation) can establish or change a substantive legal standard;

2. The government’s proposed interpretation would result in additional ambiguity under the Social Security Act’s procedural provisions; and

3. Congress could have simply adopted APA rulemaking requirements but chose not to do so.

Although the Court sided with hospitals, it expressly declined to rule on whether the hospitals’ position on the inclusion of Part C days in DSH payment calculations is correct, leaving this issue for resolution another day - most likely through the original Allina cases. At a minimum, however, the Allina ruling ensures two key procedural victories for providers. First, it is clear that in order for CMS to adopt a policy including Part C days in the DSH payment formula, CMS needs to go through notice and comment rulemaking. Second, Allina has provided all types of health care providers with additional ammunition to challenge CMS policy changes that impact substantive legal requirements on procedural grounds. For now, however, the ongoing dispute between CMS and hospitals over Part C days and DSH calculations will continue.

¹ Azar v. Allina Health Services, 139 S. Ct 1804 (2019)
²  Prior disputes between hospitals and CMS resulted in the invalidation of a 2004 CMS decision to include Part C days. 
³  Justice Kavanaugh did not participate in the Allina decision.
⁴  42 U.S.C. § 1395hh(a)(2).
⁵  See 5 U.S.C. § 553(b)(A).