Supreme Court sides with hospitals in ruling over DSH payments

The highest court in the land cited a failure by HHS to follow notice-and-comment obligations.

In a ruling made public Monday, the U.S. Supreme Court has sided with hospitals that had sued the U.S. Department of Health and Human Services (HHS) over a payment policy change.

The 7-1 decision in HHS Secretary Alex Azar v. Allina Health Services affirmed a 2017 ruling by the United States District Court of Washington, D.C., which found that HHS had violated the Medicare Act for adjusting the reimbursement formula for disproportionate share hospital (DSH) payments without going through the statutorily required public notice-and-comment period.

The dispute implicates up to $4 billion in payments to hospitals, according to HHS.

The first page of Monday’s decision, issued following oral arguments that took place in January, focuses on the “Medicare fraction,” the formula used by the government to determine what additional payments will go to providers that serve a “disproportionate number” of low-income patients. The fraction’s denominator is the time such a provider spends caring for patients entitled to Medicare Part A benefits, while the numerator is the time the provider spends caring for Part A patients who were also entitled to income support payments under the Social Security Act.

“Congress created Medicare Part C in 1997, leading to the question whether Part C enrollees should be counted as ‘entitled to benefits under’ Part A when calculating a hospital’s Medicare fraction,” the ruling explained. “Respondents claim that, because Part C enrollees tend to be wealthier than Part A enrollees, counting them makes the fraction smaller and reduces hospitals’ payments considerably.”

In 2004, the ruling went on to note, the Centers for Medicare & Medicaid Services (CMS) issued a final rule declaring that it would count Part C patients, but that rule was later vacated after hospitals filed legal challenges.

In 2013, CMS issued a new rule, prospectively readopting the policy of counting Part C patients.

A year later, “unable to rely on either the vacated 2004 rule or the prospective 2013 rule,” CMS posted on its website the Medicare fractions for fiscal year 2012, noting that they included Part C patients.

The federal lawsuit followed. The aforementioned notice-and-comment period, intended to run 60 days, is to be implemented for any “rule, requirement, or other statement of policy . . . that establishes or changes a substantive legal standard governing . . . the payment for services” – a definition the Supreme Court said applied here.

“Because the government has not identified a lawful excuse for neglecting its statutory notice-and-comment obligations,” the ruling concluded, “its policy must be vacated.”

“In one way, this ruling can be described as having only limited significance since the new rule for calculating DSH payments adopted in 2013, which applies to current and future DSH payments, was adopted after a formal notice and comment period and includes Part C enrollees in the DSH fraction’s denominator,” wrote attorney Mary Inman in an email to RACmonitor.  It is only the method for calculating DSH payments during the 8-year period from 2005 to 2013, which was not subjected to notice and comment, that will be vacated as a result of the Supreme Court’s ruling. However, the broader significance of this ruling lies in the fact that there are a large number of provisions in the various Medicare manuals that may now require formal notice and comment before they can be implemented and such widespread delays could undermine the ability of CMS to administer the Medicare program.”