In a 7-1 decision released June 3, 2019, the U.S. Supreme Court vacated a proposal of the U.S. Department of Health and Human Services (HHS) that would have had the effect of significantly reducing Disproportionate Share Hospital (DSH) payments to thousands of hospitals for care furnished to low income patients in 2012.

In Azar v. Allina Health Services, Et Al., the Supreme Court held that HHS needed to comply with statutory notice and comment rulemaking procedures under the Social Security Act (Act) when making interpretive changes, because HHS sought to establish or change substantive legal standards.  As a result, HHS was required to publish its proposal to change the DSH payment calculations for 2012 for notice and comment, and its unilateral determination regarding the calculation of those payments was invalid.

This case arises out of the manner in which hospitals that serve a disproportionate number of low income patients are entitled to DSH payments. DSH payments under Medicare are intended to incentivize the provision of care to low income communities and ensure that providers have the resources to continue serving such patients. DSH payments are based on a “Medicare Fraction” that is calculated by dividing the number of patients entitled to Part A benefits a hospital treats by the number of its patients who are also entitled to income support payments under the Act.  The enactment of Medicare Part C in 1997 created a still unresolved question of how Part C enrollees should factor into the calculation of DSH payments, if at all.  This is controversial because – according to the parties to this case – Part C enrollees tend to be more affluent, and therefore including Part C enrollees among a hospital’s patients entitled to Part A is likely to reduce the Medicare fraction and correspondingly reduce DSH payments for that hospital.

When calculating the DSH payments owed to hospitals for 2012, in lieu of conducting any rulemaking, HHS simply posted a spreadsheet online showing the Medicare fractions for 3,500 hospitals nationwide with a notation that the fractions included Part C beneficiaries. HHS’ approach to the 2012 DSH payments – i.e., its alleged failure to engage in mandatory notice and comment rulemaking – was subsequently challenged by a number of hospitals in this case because it would have reduced the available DSH payments by billions of dollars.

The case turns on the proper interpretation of the Medicare-specific administrative procedure statute, which requires public notice and a 60-day comment period prior to promulgation of a “rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits” under the Medicare program. According to HHS, its formula for calculation of the 2012 DSH payments only changed an interpretive legal standard, and not a “substantive legal standard” as that term is used in the aforementioned statute, and therefore the notice and comment requirements under that law were not implicated.

The Supreme Court rejected the government’s arguments and sided with the hospitals, holding in a narrow ruling that HHS had not met its burden to avoid notice and comment requirements for its determination of the 2012 DSH payments. The Court thus affirmed a circuit court decision in favor of the hospitals, but in doing so noted that there are alternative grounds that HHS could have pursued that may have led to a different result. Hospitals therefore face continued uncertainty with regard to how and when HHS will remit DSH payments for 2012.