On June 3rd, the Supreme Court resolved a circuit split regarding the scope and applicability of the Medicare statute’s “notice-and-comment” requirement in a case with far-reaching implications for federal agency policymaking. The Court’s decision in Azar v. Allina Health Services (No. 17–1484) (Allina) arms hospitals and other care providers with a powerful new tool for challenging subregulatory Medicare reimbursement policies, potentially including GME payment policies, that were not promulgated through formal rulemaking processes.

In Allina, the Court upheld, in a 7-1 decision, the DC Circuit’s ruling vacating CMS’s policy of including Medicare Part C days when calculating the “Medicare fraction” used to determine Medicare disproportionate share hospital (DSH) payments. Siding with the hospitals, the Supreme Court held that a 2014 posting on CMS’s website announcing hospitals’ 2012 Medicare fractions and noting that the fractions included Part C patient days was invalid because it did not comply with the notice-and-comment requirement under the Medicare statute (Title XVIII of the Social Security Act). Specifically, the Medicare statute requires notice-and-comment rulemaking for any “rule, requirement or statement of policy” 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.” 42 U.S.C. § 1395hh(a)(2). This notice-and-comment provision is distinct from the more familiar and oft-litigated notice-and-comment requirement under the Administrative Procedure Act (APA), which expressly exempts “interpretive rules” and “general statements of policy” from notice-and-comment rulemaking requirements. Thus, the Court previously has recognized that the APA draws a distinction between “substantive” rules having the “force and effect of law,” versus “interpretive” ones that “advise the public of the agency’s construction of the statutes and rules which it administers” and do not themselves impose legally binding obligations. 

In Allina, the government argued that the policy at issue was an interpretive “gap-filling” policy, because the statute itself does not speak directly to this particular issue of whether Medicare Part C days should be included in the Medicare fraction—and that, as such, the policy is exempt from notice-and-comment rulemaking requirements under both the APA and the Medicare statute. However, the Court ultimately rejected the government’s argument that the Medicare statute adopts the APA’s same dichotomy between “substantive” versus “interpretive” rules, and found that the Medicare statute does not provide the same exemption from its notice-and-comment requirement for “interpretive” rules as exists under the APA. The Allina Court zeroed in on the Medicare statute’s general applicability to policy statements that establish or change a “substantive legal standard,” finding that this terminology does not necessarily exclude all “interpretive rules” and “general statements of policy” from its notice-and-comment requirement. Rather, the Court found that the Medicare statute contemplates that “statements of policy” exempt from the APA notice-and-comment requirement nevertheless can establish or change a “substantive legal standard,” and therefore would be required to go through notice-and-comment rulemaking by virtue of the separate and independent notice-and-comment requirement under the Medicare statute. 

Parsing the Medicare statute, Justice Gorsuch’s majority opinion concluded that CMS’s 2014 Internet posting at issue, announcing hospitals’ 2012 DSH Medicare fractions, was inarguably a “statement of policy” governing “payment for services” (as those terms are used in the Medicare statute), and that, moreover, it changed a “substantive legal standard” applicable to hospitals entitled to receive DSH payments. For this reason, the Court concluded, the Medicare statute requires the policy announcement at issue to have gone through notice-and-comment rulemaking. 

Frustratingly, the Court did not go so far as to specifically define a “substantive legal standard” or to describe its core attributes, except to conclude in this instance that the DSH Medicare fraction calculation clearly met the threshold. The hospitals in Allina argued that the Medicare statute distinguishes a “substantive legal standard” (which creates duties, rights and obligations) from a “procedural” one (which explains how such duties, rights and obligations are enforced). While the Court acknowledged some support for this proposed distinction in the Medicare statute’s legislative history, it stopped short of endorsing this analytical framework advanced by the hospitals. Instead, the Court decided simply that the “government’s interpretation can’t be right,” holding instead that the word “substantive” is used more broadly under the Medicare statute than under the APA, and the Medicare statute does not borrow the APA’s exemption for all gap-filling “interpretive” rules and general policy statements. In the wake of Allina, the question of what types of policies do, or do not, affect a “substantive legal standard” remains subject to interpretation.

In sum, Allina stands for the proposition that the notice-and-comment requirement under the Medicare statute is more extensive than the one under the APA. Under the APA standard, subregulatory policy statements and manual guidance that explain how agency regulations are interpreted and applied are exempt from notice-and-comment requirements. However, the Court held in Allina that at least some such policy statements may address a “substantive legal standard,” which would subject these statements to the Medicare statute’s independent notice-and-comment requirement.  

The implications of the Allina decision reach far beyond Medicare DSH payments (the narrow issue in the case), and could have significant repercussions for CMS policy statements and changes that affect Medicare payment issues but did not undergo notice-and-comment rulemaking. Payment policies articulated only in Medicare manuals and/or announcements that the agency has characterized as a “clarification” or interpretation of a “longstanding” rule could be particularly vulnerable to challenge by providers, potentially including certain CMS policies governing GME payments and methodologies used to establish hospitals’ GME caps. Contact the GME @ Dentons team if you are interested in learning more about the possible implications of the Allina decision for your facility’s GME payments.