On June 3, 2019, the Supreme Court decided Azar v. Allina Health Services, No. 17–1484, holding that the Department of Health and Human Services failed to follow required notice-and-comment procedures when it decided to count Medicare Part C enrollees as “entitled to benefits” under Part A for purposes of calculating the “Medicare fraction” used in paying hospitals for providing services to low-income Medicare patients.

Under Medicare Part A, the government pays hospitals directly for providing services to Medicare patients. Hospitals that serve a disproportionate number of low-income Medicare patients receive additional payments that are calculated in part using a hospital’s “Medicare fraction,” which determines what fraction of services to Medicare patients were provided to low-income Medicare patients. The denominator (i.e., the “bottom number”) of the fraction is the time the hospital spent caring for patients who were “entitled to benefits” under Medicare Part A; the numerator is the time the hospital spent caring for Part A patients who were also entitled to income-support payments under the Social Security Act.

Some people who are eligible for Medicare Part A elect (under Part C, also called “Medicare Advantage”) to have the government pay their private-insurance premiums instead of paying directly for their hospital care.

The question is whether these “Part C patients” should be included in the denominator of the “Medicare fraction” (which would reduce the fraction and thus result in lower payments to hospitals). In 2014, the government decided that Part C patients should be included in the Medicare fractions. It posed on a website a spreadsheet announcing the 2012 Medicare fractions for 3,500 hospitals nationwide, noting that the fractions included Part C patients. A group of hospitals sued the government, alleging that the government violated the Medicare Act by failing to provide notice and a comment period relating to its decision to include Part C patients in the Medicare fraction. The District of Columbia Circuit ruled in favor of the hospitals, holding that the government’s decision to include Part C patients in the Medicare fraction was a “statement of policy” that “change[d] a substantive legal standard governing … the payment for services” that required the government to provide notice of the policy and a 60-day comment period under 42 U.S.C. § 1395hh(a)(2).

The Supreme Court affirmed. Its decision turned on whether the government’s announcement of its 2012 Medicare fraction calculations changed a “substantive legal standard” within the meaning of § 1395hh(a)(2). The government argued that “substantive legal standard” means the same thing as “substantive rules” under the Administrative Procedures Act (APA). Under the APA “substantive rules” are only those that have the “force and effect of law.” But, the government argued, the announcement of the 2012 Medicare fractions did not have the “force and effective of law,” so it did not constitute a “substantive rule” under the APA and thus was not a “substantive legal standard” under § 1395hh(a)(2) in the Medicare Act. The Court rejected that argument, observing that when Congress required in the Medicare Act that the government had to follow notice-and-comment procedures for any “statement of policy” that “establishes or changes a substantive legal standard governing … the payment for services,” Congress necessarily contemplated that a “statement of policy” could establish or change a “substantive legal standard” (otherwise, the phrase “statement of policy [that] establishes or changes a substantive legal standard” would be meaningless). Thus, Congress must have meant the term “substantive legal standard” in the Medicare Act to mean something different from the term “substantive rule” in the APA. The Court also observed that § 1395hh(e)(1) allows the government limited authority to make retroactive “substantive change[s]” to “statements of policy.” Because statements of policy are by definition not “substantive” under the APA, Congress must not have understood “substantive” in the Medicare Act to mean the same thing it does in the APA. And if Congress had wanted interpretive rules under the Medicare Act to be exempt from notice-and-comment procedures, as they are under the APA, Congress easily could have adopted or cross-referenced the provisions of the APA that provide that exemption, but it did not. The Court interpreted that choice as intentional.

Justice Gorsuch delivered the opinion for the Court, joined by Chief Justice Roberts and Justices Thomas, Ginsburg, Alito, Sotomayor, and Kagan. Justice Breyer filed a dissenting opinion.

Download Opinion of the Court.