June 4, 2019

The Supreme Court just sided with hospitals over $4B in Medicare payments

Daily Briefing

    The Supreme Court on Monday in a 7-1 decision upheld a lower court ruling that CMS improperly changed Medicare's disproportionate-share hospital (DSH) payment formula.

    Your cheat sheets for understanding health care's legal landscape

    Justice Stephen Breyer dissented from the majority opinion. Justice Brett Kavanaugh did not participate, as he had previously ruled on the matter as a judge on the District of Columbia Circuit Court. 

    Case details

    The ruling came in a case brought by nine hospitals regarding changes CMS made in 2014 under former President Barack Obama's administration.  

    As part of the changes, CMS began to include Medicare Advantage enrollees along with traditional Medicare beneficiaries when calculating a hospital's DSH payment. The providers argued that the new method undercounted the number of low-income Medicare beneficiaries hospitals treat, and that the agency implemented the changes without complying with the notice-and-comment requirements under the federal Medicare Act.

    However, HHS under both Obama's and President Trump's administrations has 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.

    The District of Columbia Circuit Court in 2017 ruled that HHS had violated the law when it changed the DSH formula, and that CMS could not include MA beneficiaries, who are not entitled to benefits covered under Medicare Part A, in its new DSH payment calculations.

    HHS Secretary Alex Azar in April 2018 requested the Supreme Court take up the case, arguing 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. HHS also estimated the ruling could place CMS on the hook for up to $4 billion in DSH payments for fiscal years 2005 through 2013.

    Supreme Court

    In the ruling, the Supreme Court upheld that ruling in a 7-1 decision. The justices in the ruling took issue with HHS' argument that the DSH payments changes should be considered interpretive.

    "Not only has the government failed to document any draconian costs associated with notice and comment, it also has neglected to acknowledge the potential countervailing benefits," the Court stated. "Notice and comment gives affected parties fair warning of potential changes in the law and an opportunity to be heard on those changes—and it affords the agency a chance to avoid errors and make a more informed decision."

    The justices also noted the size and scope of Medicare, writing that "even seemingly modest modifications to the program can affect the lives of millions."

    In the dissent, Breyer wrote that he would have sent the case back to the Circuit Court to determine "whether the agency determination at issue in this case is a substantive rule (which requires notice and comment) or an interpretive rule (which does not)."


    Industry experts say the ruling's implications will largely depend on how CMS interprets the decision, FierceHealthcare reports. "[The ruling] was a pretty straight statutory interpretation opinion," said Anne Karl, a partner at Manatt Health. "We'll see how CMS interprets it going forward."

    Karl explained that CMS could interpret it broadly, in which case it would likely issue more notice-and-comment rulemaking notices in the future, or it could view the ruling narrowly and continue to gauge interpretive or substantial rules as it currently does. Karl noted, however, that if CMS pursues the narrow view, it could face an increased number of legal challenges in the future.

    The American Hospital Association in a statement praised the ruling. "As we stated in our amicus brief, more public participation in policymaking, including by hospitals and health systems, leads to better-thought-out policies with a deeper understanding of their direct impact on health care providers and those they serve," Melinda Hatton, AHA's general counsel, said in the statement (Luthi, Modern Healthcare, 6/3; Porter, HealthLeaders Media, 6/3; Minemyer, FierceHealthcare, 6/3).

    Your cheat sheets for understanding health care's legal landscape


    To help you keep up with the ever-changing regulatory environment, we recently updated our cheat sheets on some of the most important—and complicated—legal landmarks to include a brand new one-pager on the new tax law.

    Check out the cheat sheets now for everything you need to know about MACRA, the Affordable Care Act, antitrust laws, fraud and abuse prevention measures, HIPAA, and the two-midnight rule.

    Get the Cheat Sheets

    Have a Question?


    Ask our experts a question on any topic in health care by visiting our member portal, AskAdvisory.

    Cookies help us improve your website experience. By using our website, you agree to our use of cookies.