This article was originally published in the American Bar Association’s Health eSource newsletter in February 2020.

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By Mary Holloway Richard, Phillips Murrah, and
Anna Stewart Whites, Attorney at Law, Frankfort, KY

The tension between the government’s need to ensure appropriate use of Medicare funds and the need of providers to receive reasonable compensation for services to Medicare beneficiaries is an ongoing issue.  Providers are subject to demands for repayment or recoupment of compensation paid to providers based upon claims filed.  Providers are also pressed to keep up with the continually developing arsenal of vast data mining, increasingly restrictive federal reimbursement policies, and oversight tools, including a plethora of audit options available to the Department of Health and Human Services (HHS) and Centers for Medicare & Medicaid Services (CMS) programs that can lead to penalties and mandatory exclusion.  Locating the applicable guidance — statutes, regulations, guidelines, reimbursement policies — can be challenging, with the information upon which CMS actions are based sometimes emanating from data gathered across the country, which allows for identification of trends to be pursued by the regulators.

The focus of this article is to explore the tools available to counsel for providers seeking to place appropriate limits on CMS in connection with statutory and regulatory limits on HHS rulemaking authority as interpreted by recent case law.

Proper Rulemaking as a Limit to Regulatory Authority

Providers who have received payment under the CMS fee schedules may, even years later (1) be faced with demands by CMS for repayment of amounts received due to an after-the-fact reduction in the fees payable to the provider, or (2) experience a downward adjustment in payments.¹  These changes by CMS, both prospective and retrospective, are frequently transmitted via electronic manuals or by local or national coverage determinations (LCDs or NCDs).

Providers argue that the retrospective changes by fiat can be likened to ex post facto laws penalizing the provider for actions occurring before the regulation, policy or change in interpretation of the law existed.  When a government entity or agency determines that such a change is necessary, and when those changes are substantive or can adversely impact providers or patients, an opportunity for all affected parties to comment is advisable to support wise decision-making within the government’s scope of authority, and to facilitate smooth transitions within the industry.²  The existing structured rulemaking process offers providers and other interested parties the opportunity to comment on the proposed change prior to its implementation, thereby facilitating the avoidance of bad rulemaking or rulemaking with unintended consequences.

The Rulemaking Process:  An Overview

The rulemaking process is formal and includes the notice-and-comment period so that public awareness and input are parts of the making of any enforceable regulatory change.³  Under the Social Security Act, a notice-and-comment period is required for a “rule, requirement or statement of policy” that establishes or changes a “substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits.”⁴ This requirement is stricter than the more common notice-and-comment requirements of the Administrative Procedures Act (APA). The APA employs different nomenclature and holds that no notice-and-comment period is required where the change is merely an “interpretive rule” or “general statement of policy.”  That exception had been relied upon by agencies to change rules via policy manual updates or internal regulatory interpretations.⁵

Informal rulemaking under the APA requires development of a proposed rule and a published notice of the proposed rule or changes to an existing rule.  Following that, there is a comment period of at least 30 days.  Members of the public, including but not limited to those impacted by the change, have the opportunity to comment on the proposal. Codification of the final rule may take place only after the comment period has passed and the agency has made any final revisions to the rule.⁶ Typically, rule and regulation changes have a future, rather than retroactive, effective date.  Where the change to a law or regulation is “substantive,” formal rulemaking under the APA requires an additional opportunity for an agency hearing on the proposal before it can be made effective.

Historically, providers faced with recoupment demands from a federal payor had little choice but to accede to the payor’s demands within a specified, limited timeframe.  Providers could argue against such recoupment or denial, but such arguments in reality were limited to proving that the recoupment demand was in error.. The provider was thus placed in a defensive posture and required to operate from the premise that the recoupment request was correct, but for an obvious calculation or medical necessity oversight by the payor during its review.⁸

From the agency perspective, however, rulemaking takes significant time and effort and can be administratively debilitating.  It requires publication of the proposed changes, a lengthy comment period (often as much as several months long), opportunity for live comments as well as written comments, and then an analysis of the comments by the agency and publication of the agency’s responses to the comments.  If the comments result in an amendment to the policy, the rulemaking process may have to begin again to allow comment on those amendments newly proposed or on the resolution of issues raised during the comment period.  Because of the complexity of that rulemaking, agencies may choose to draft minor changes instead, and implement those via an announcement to providers/patients, thereby eliminating any delay in implementation or any requirement that those affected be allowed to speak.  Implementing minor changes is a necessary way to keep policies and regulations current, and is an acceptable part of the agency’s process.  Over time, however, there may be a blurring of the applicable procedures, where an agency implements a substantive change informally for an item that required the complete rulemaking process, particularly under the Medicare Act.  Providers have begun to pay more attention to the correct application of the rulemaking process and to challenge agencies ignoring required rulemaking.

Judicial Interpretation of Rulemaking Requirements Related to Healthcare

In Clarian Health West, LLC v. Hargan,⁹ the Court required adherence to the rulemaking process before a recoupment of payments could be enforced.  Under Part A of the Medicare program, hospitals are compensated prospectively based on the estimated likely cost of patient care.¹⁰ The hospitals may also receive supplemental or “outlier” payments.¹¹ The regulatory changes enacted by HHS in 2003, which included notice-and-comment rule making, altered the way such “outlier payments” are calculated.¹²  The Court found that an agency decision is arbitrary and unenforceable as such where the agency “has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”¹³

Two recent cases, Azar v. Allina Health Services¹⁴ and Polansky v. Executive Health Resources, Inc.,¹⁵ have provided validation for that argument, finding that absent the required rulemaking process and an opportunity for providers to comment on and be aware of the effect of the changes to the law, recoupment of funds properly paid exceeds CMS authority.

Provider Litigation to Enforce Rulemaking

In Azar v. Allina Health Services, the United States Supreme Court held that the decision to retroactively reduce Medicare disproportionate share hospital (DSH) payments according to a newly revised formula and practice must be vacated due to HHS’s failure to provide an opportunity for notice and comment in the context of revised payment rules.¹⁶ The DSH payment is calculated based upon a Medicare Fraction which establishes a proportion of low income patients provided services at the hospital for a certain time period and is the basis for the hospital’s final reimbursement adjustments.

By way of explanation, a DSH payment is a sum awarded a hospital pursuant to 42 C.F.R. 412.106.  Under Section 1886(d) (5) (F) of the Medicare Act, hospital DSH payments are calculated by the formula:

• DSH Patient Percent = (Medicare SSI Days / Total Medicare Days) + (Medicaid, Non-Medicare Days / Total Patient Days)¹⁷

A new CMS rate calculation affected the way the applicable payments were made, and was therefore considered by the Court to be a ‟substantive legal standard” under the Medicare Act requiring notice-and-comment rulemaking prior to enforcement.¹⁸  The Court found that HHS had promulgated a retroactive Medicare rate calculation methodology and that this was not a change that could be enacted without opportunity for comment and discussion.As explained by the Court of Appeals for the D.C. Circuit, in 2004 HHS decreed that Medicare Part C patients would now be included in DSH calculations along with patients entitled to Medicare Part A benefits, and this change would have been applied prospectively for all Medicare Fraction calculations from 2005 onward. However, this change was successfully challenged and vacated by the D.C. Circuit.¹⁹ In response, in 2013 HHS promulgated the same rule to be applied prospectively from 2014. This left fiscal year 2012 at issue, and in 2014 HHS posted the Medicare Fraction on the CMS website, including Part C patients and Part A patients.²⁰

CMS clarified that the 2012 determination that Medicare Part C days would be included in the calculations, thereby lowering the DSH calculation by including Medicare Advantage subscribers who generally represented higher income, resulting in a reduction of the DSH payments to hospitals.²¹

The proposed change underwent notice and comment in 2013 and eventually was adopted as a valid way to calculate those payments prospectively, beginning in 2014.  Rather than simply implementing the changed standard from 2014 onward, CMS looked back at earlier years and claimed that the change should apply retroactively.  There was no notice and comment period in 2012 on that change.  Following the changes, CMS used this ability to look back and demanded recoupment from provider hospitals, applying the changed law or interpretation of the law retroactively to 2012.

A group of  hospitals  challenged the changes made without notice and the opportunity to comment and sought to stop the recoupment, which represented billions of dollars.²²  They argued that absent such timely rulemaking procedures, the change should not apply to years prior to 2014. HHS’s response was that it was not required to hold a notice-and-comment period for the new rule, since it was only advising the public on an existing interpretation of the law.  HHS relied on the less stringent standards of the APA²³ to permit the recoupment.

The DC Circuit Court ruled in favor of HHS, and the hospitals appealed to the United States Court of Appeals for the District of Columbia, which reversed the lower court ruling and held that the new payment schedule amounted to a “statement of policy” that required the notice-and-comment period specified by the Social Security Act.²⁴

The Supreme Court, quoting the Social Security Act, held that “[n]o rule, requirement, or other statement of policy (other than an NCD) that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits under this title shall take effect unless it is promulgated by the Secretary by regulation.…”²⁵ “Substantive rules” refer to the Supreme Court phrase “substantive legal standard” as encompassing more than just the “substantive rules” that already require notice and comment under the APA.²⁶ The Supreme Court noted in particular that the many manuals that provide guidance to participants in the Medicare program might contain substantive legal standards that require notice and comment, and that its decision applied broadly across those fields.²⁷

The Allina ruling established that substantive changes to the law should not be applied retroactively to time periods in which there has been no rulemaking process.  Providers faced with any retroactive application of a change in the law that occurred after a payment to the provider which was valid at the time of payment could now claim that absent rulemaking at that time, the change should only be prospectively applied.

That doctrine was expanded in Polansky v. Executive Health Resources, Inc.,²⁸ where the provider faced a False Claims Act (FCA) action based upon allegations that the provider’s billing was fraudulent for failure to comply with Medicare reimbursement guidelines. The provider argued that the Medicare criteria being applied had not gone through appropriate rulemaking prior to implementation.  The Court agreed, holding that Medicare reimbursement criteria must be established through notice-and-comment rulemaking to provide the basis for enforcement actions under the FCA. Because the reimbursement policy at issue had been established solely in the 1989 edition of the Medicare Hospital Manual and not via the rulemaking process including questions and comments, the court found that it “cannot withstand scrutiny under Allina’s interpretation of the Medicare Act.”²⁹

The Court based its findings in part on Bowen v. Michigan Academy of Physicians,³⁰ which held that a provider demanding administrative or judicial review of a recoupment of a Medicare Part B claim or payment must show that the matter is reviewable by challenging the method by which the claim was determined under 42 U.S.C.A. § 1395ff(b)(1)(C) (Supp.1990).  While courts may not “improperly impose on agencies an obligation beyond the `maximum procedural requirements’ specified by [statute or regulation],” the rulemaking standards must have applied to the creation of the statute or regulation.³¹  The District Court in Polansky relied upon the Allina decision to grant summary judgment in favor of the defendant, holding that the method by which a change is implemented may be challenged by an affected party where the agency failed to comply with the process required.³²  The provider must show first that this is a matter to which the rulemaking standard applies, and secondly, that the method used by the agency was flawed in that it did not use the correct standard, before being allowed to attack the change or any related financial impact created by the change.³³

The Allina and Polansky decisions establish an additional strategy for providers to defend enforcement actions that are part of a recoupment or recalculation, rather than attempting to prove that the government’s audit determinations or interpretations are in error. This, in effect, places the burden of defense back on CMS (or another governmental agency or payor) by requiring it to prove that the law or regulation was properly created in compliance with required rulemaking procedures.  Importantly, these decisions offer that, where providers did not have opportunity to comment on or object to implementation of a rule or regulation, they should not be found to have either had notice of it or be bound by its terms.

In response to Allina, the Department of Justice (DOJ) provided notice of DOJ policy in a memorandum to U.S. Attorneys from former Associate Attorney General Rachel Brand dated January 25, 2018. Known as the Brand Memo, it announced that “Department litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law in affirmative civil enforcement (ACE) cases.”³⁴ The effect of the Brand Memo is to place agencies on notice that they may not rely upon sub-regulatory guidance to re-frame, expand, or enforce requirements established by statute or regulation.³⁵  Specifically, the Brand Memo prohibits coercing regulated parties from taking or refraining from taking actions beyond the requirements of applicable statute or “lawful regulation.”³⁶ The Brand Memo further pointedly provides that “the Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules.”³⁷

A new internal memorandum from HHS dated October 31, 2019 is instructive. That Memo says that it’s important for CMS to conform its guidance documents to the rulemaking obligations set forth in Allina.  For instance, HHS personnel are discouraged from basing enforcement actions on guidance documents, specifically the Internet-only manuals, that are not “closely tied to statutory or regulatory standards.”³⁸  This Memo suggests to counsel for providers a few new tools when dealing with Medicare payment issues, including the limits of the impact of formerly formidable sub-regulatory or “non-regulatory” guidance, the amelioration of LCDs as the single basis for enforcement actions and judicial support for these limitations.

Conclusion

Recoupment and reimbursement demands, audits, exclusions, prosecutions and targeting by CMS, its contractors or other federal and state agencies are substantive, significant matters.  Adherence to the regulatory protections, including the notice and opportunity to provide input, allows all affected parties to have an understanding of the law or regulation and to be prepared for its impact.  The Allina case and its progeny are likely to benefit providers and patients alike as the country continues to grapple with healthcare reform.