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January 17, 2019

The Supreme Court just heard the $4B DSH payment case. These are the stakes for hospitals.

Daily Briefing

    The Supreme Court on Tuesday heard oral arguments in a case that challenges CMS' changes to Medicare's disproportionate-share hospital (DSH) payment formula.

    Case details

    A group of nine hospitals, led by Allina Health Services, filed a lawsuit challenging changes CMS made in 2014 to include Medicare Advantage beneficiaries in its DSH reimbursement adjustment formula, claiming that the department had implemented the changes without complying with the notice-and-comment requirements under the federal Medicare Act. The providers also argued that the new method undercounted the number of low-income Medicare beneficiaries hospitals treat.

    However, HHS argued that under the Medicare Act the department needs to go through the formal rulemaking process only for "substantive" rules. The DSH payment changes, the department argued, constituted an "interpretive" rule, which does not require a notice-and-comment period.  

    In 2017, the case went to the District of Columbia Circuit court, where Supreme Court Justice Brett Kavanaugh, who was then a judge on the circuit court, ruled that HHS did in fact violate the law when it changed the DSH formula.

    Kavanaugh also ruled that CMS could not include Medicare Part C beneficiaries, who are not entitled to benefits covered under Medicare Part A, in its new DSH payment calculations.

    HHS Secretary Alex Azar last April requested the Supreme Court take up the case , claiming that the circuit court's ruling would "significantly impair" the department's ability to use interpretive rules and to administer Medicare reimbursements through third-parties it uses to pay hospitals.

    The oral argument

    The Supreme Court on Tuesday heard oral arguments on the case after agreeing to take up the case last September.

    In their questions during oral arguments in the case, Justice Sonia Sotomayor and Neal Gorsuch appeared skeptical of HHS' argument that the DSH payments changes should be considered interpretive.

    Justice Sotomayor told Justice Department attorney Edwin Kneeler that she has "a problem" with the government's argument that the change in reimbursement calculations was not a "substantive legal standard," because the entire hospital industry was impacted. "I don't know how you take this outside of being a policy, meaning it's applying to every single provider uniformly," she said.

    Gorsuch expressed a similar statement, and said that while it might be "more convenient for the government to ... announce a new rule" without notice-and-comment, the government should have made an "alternative decision" to offer "informal notice and comment to affected parties in something as significant as changing the formula for Medicare for all Medicare providers nationwide."

    Justice Stephen Breyer, on the other hand, appeared sympathetic to the government position, saying that a ruling in favor of the plaintiffs would mean that future rulemaking could create significant administrative burdens for CMS. "You may be happy with this case, but not in others when policies take 19 years to take effect," he said.

    Justice Ruth Bader Ginsberg did not participate in Tuesday's hearing as she continued to recover from surgery, but she is expected to participate in the ruling. Justice Kavanaugh recused himself from Tuesday's oral argument due to his previous involvement in the case.


    The final ruling, which is likely to come in June, could have significant implications both for hospitals' finances and administrative law. HHS estimates that it could owe providers up to $4 billion in DSH payments for fiscal years 2005 through 2013 if the Supreme Court rules against the department.

    But the justices must also look at a provision of the Medicare Act pertaining to "substantive" changes to benefits, eligibility, or payment of services, and they could weigh in on the much debated questions in administrative law surrounding what is considered substantive and interpretive rules, SCOTUS Blog reports.

     U.S. Solicitor General Noel Francisco said that, if the Supreme Court votes to affirm the decision of the D.C. Circuit Courts, the decision could require CMS to conduct notice-and-comment in decisions previously considered interpretive, which could "substantially undermine effective administration of the Medicare program."

    Similarly, HHS argued that, because of the time and cost associated with the formal rulemaking process, requiring notice and comment for other similar rules would "jeopardize the flexibility needed in light of Medicare's complex and frequently changing statutory context and administrative developments."

    The American Hospital Association in an amicus brief called the government's concerns of administrative hurdles "overblown," adding that "[n]ot all CMS policies need go through notice and comment; just those, like the determination here, that substantively alter how providers are paid."

    The nine hospitals involved in the case said in a brief last month said that the circumstances of the case are "unique" and that a ruling in their favor would have an "extremely limited" impact (Morse, Healthcare Finance, 1/15; Porter, Health Leaders Media, 1/15; Luthi, Modern Healthcare, 1/15; Romoser, Inside Health Policy, 1/15 [subscription required]; Diamond, "Pulse," Politico, 1/15; Gluck/O'Connell, SCOTUS Blog, 1/16).

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