On November 21, 2019, top attorneys at the U.S. Department of Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) released an internal memorandum addressing the impact of the U.S. Supreme Court’s 7-1 decision issued on June 3, 2019 in Azar v. Allina Health Services, 139 S. Ct. 1804 (2019) on Medicare payment rules and enforcement actions.

In this most recent chapter to the twisting history of calculating hospitals’ Medicare fraction, the Court in Allina held that HHS violated the Medicare Act by not engaging in notice-and-comment rulemaking before changing the formula for calculating disproportionate share hospital payments. More broadly, the Court held that the formal notice-and-comment rulemaking requirement under the Medicare Act applies to statements of policy if the policy establishes or changes a “substantive legal standard.” This is a notable departure from the notice-and-comment regime of the Administrative Procedure Act, which specifically exempts interpretive rules from the notice-and-comment requirement. Accordingly, this holding confirms that the notice-and-comment requirement under the Medicare Act has a far more expansive scope than that under the Administrative Procedure Act, and dispelled the previous assumption that the requirements were the same under each act.

In response, the HHS memo acknowledges a restriction in the department’s ability to bring enforcement actions for alleged violations of payment policies contained in guidance which, pursuant to Allina, should have been promulgated through notice-and-comment rulemaking. Specifically, the memo notes that Internet-Only Manuals and other guidance cited in enforcement actions (including preamble text published with final rules) that is “closely tied” to statutory or regulatory language can still form the basis for enforcement actions (i.e., where a statute or regulation is drafted narrowly enough to establish the payment norm and the guidance merely provides additional clarity). On the other hand, where guidance is “not closely tied” to statutory or regulatory language, enforcement actions cannot be brought pursuant to such guidance (i.e., where a broadly-worded statue or regulation can be interpreted in various ways and the guidance creates discrete criteria to explain the statutory or regulatory requirements). Simply put, according to the HHS memo, “the critical question is whether the enforcement action could be brought absent the guidance document.”

The HHS memo specifically notes that the Allina decision does not subject Local Coverage Determinations (LCDs) to the notice-and-comment rulemaking process, as LCDs merely reflect payment determinations by Medicare Administrative Contractors that are not ultimately binding on HHS. Under Allina, however, enforcement actions cannot be based solely on LCDs.

The HHS memo also addresses specific agency actions that are unimpeded by the Allina decision. The memo provides that Allina does not preclude CMS from enforcing substantive payment provisions in its contracts and participation agreements under contract law where those requirements are an express obligation of the party. Also, the memo finds that the Stark Law advisory opinion process is not likely affected by the Allina decision, because advisory opinions do not establish or change a substantive legal standard. Rather, they “aid[] in demonstrating that the standards in the relevant statutory or regulatory requirements have been or have not been satisfied.” Further, the advisory opinion process is set forth in a separate, more specific, statutory authority that supersedes the Medicare Act’s more general language.

According to the memo, HHS attorneys will continue to work with the agency to identify particular guidance documents that might be appropriate to issue through notice-and-comment rulemaking on a more expedited basis. Accordingly, the memo signals, as expected, that we will likely see HHS and CMS engage in more formal notice-and-comment rulemaking.

 

¹ Justice Kavanaugh took no part in consideration of the case because he decided the same case on July 25, 2017 as a judge on the United States Court of Appeals, District of Columbia Circuit.
² 42 U.S.C. § 1395hh(a)