Supreme Court Rules HHS Cannot Take Short-Cuts in Rulemaking

June 10, 2019

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In a 7-to-1 decision, the U.S. Supreme Court on June 3, 2019, held that “Because the Department of Health and Human Services neglected its statutory notice-and-comment obligations when it revealed a new policy that dramatically – and retroactively – reduced Medicare payments to hospitals serving low-income patients, its policy must be vacated.”  

Azar v. Allina Health Services should be of interest to anyone who interacts with Medicare, including benefits, payment policy and who can and does provide care under Medicare. 


The federal government’s decision to include Medicare Part C enrollees with Medicare Part A enrollees when calculating disproportionate share hospital payments is the impetus behind this case.

In 2004, CMS issued a final rule that included a new methodology for DSH payments that counted Medicare Part C inpatient days, in addition to Part A days in its calculation. This differed from the proposed rule CMS issued in 2003 that excluded Part C days from the calculation.

The 2004 rule was vacated after hospitals filed legal action. The U.S. District Court held that the final rule violated the Administrative Procedures Act because it was not a “logical outgrowth” of the proposed rule. The U.S. Court of Appeals for D.C. affirmed the decision.

CMS issued a new rule in 2013 prospectively readopting the policy of counting Part C patients. In 2014, unable to rely on the prospective 2013 rule or the vacated 2004 rule, CMS posted on its website the Medicare fractions for fiscal year 2012, noting that they included Part C patients.   The policy of combining beneficiaries reduced Disproportionate Share (DSH) payments to hospitals because Medicare Advantage patients tend to have higher incomes. Thus, if a hospital is deemed to be treating wealthier patients, the hospital will receive fewer DSH dollars. 

Hospitals sued over the change, arguing that the government violated the Medicare Act’s requirement to provide public notice and a 60-day comment period for any rule that establishes or changes a “substantive legal standard governing … the payment for services.”

The Issue

In this case, HHS asked the court to review its claim that the Administrative Procedures Act’s (APA) exception for interpretive rules applies to its DSH payment change and that Congress never intended the Medicare Act to have stricter procedural requirements than the APA.

In the case, at issue was not the merits of the policy, but whether, under the relevant provisions of the Medicare Act, 42 U.S.C. §§1395hh(a)(2) & (a)(4), HHS was permitted to change the DSH calculation formula without notice-and-comment rulemaking.

The Administrative Procedures Act contains a rulemaking exception for interpretative rules, but the DC Circuit in a 2018 decision, authored by then US Supreme Court nominee Judge Brett Kavanaugh found that the Medicare Act does not incorporate that exception.

The Supreme Court’s decision, authored by Justice Gorsuch, stated that HHS had not identified a lawful excuse for neglecting its statutory notice and comment obligation. 

The government and others argued that notice-and-comment rulemaking would mean that HHS would have to perform rulemaking in order to do day-to-day business in the Medicare program. The Court suggested that if the Department found this to be a burden, the Department could seek relief from Congress.  It is unlikely given the need for oversight; Congress would be open to loosening notice and comment rulemaking for the Department unless it could truly demonstrate a burden.   

Hospitals and those who filed amicus briefs on their behalf, argued that the language of the statute expressly requires notice and comment and that these procedures are critical given the stakes of any changes.  In response to the burden the rulemaking would create for the Centers for Medicare and Medicaid Services (CMS), the hospitals argued that was not the case because the circumstances of this case were unique.


As a result of this decision, the Department of Health and Human Services and CMS may not be able to be as nimble as before, but a 60-day comment period for changes that amount to substantial policy changes is not an arduous delay.  A comment period provides stakeholders the opportunity to review and analyze policy changes and transparently provide information about those proposals.      

The ruling does not stop good, bad or indifferent policy from being implemented. However, it does ensures transparency when a substantial change in Medicare policy is proposed by CMS, and stakeholders will be able to provide information about how a proposed policy will impact Medicare providers and patients in real terms.