In a blow to HHS, Supreme Court sides with hospitals in legal battle over DSH payments

The Supreme Court has weighed in on an ongoing legal battle between the Department of Health and Human Services and hospitals over disproportionate share hospital payments. (Getty/BrianPIrwin)

The Supreme Court has sided with hospitals in an ongoing legal battle over billions in disproportionate share hospital (DSH) payments, a ruling that could impact how federal agencies run Medicare. 

In a 7-1 ruling (PDF) issued Monday, the court said that the Department of Health and Human Services (HHS) had failed to properly seek public comment before making the payment change. The DSH adjustment was issued under the Obama administration but defended under the Trump administration. 

The policy change, which dates back to 2014, tweaked the way that the Centers for Medicare & Medicaid Services (CMS) calculates DSH payments. As much as $4 billion in payments is at the center of the dispute. 

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In the ruling, the court said that HHS has failed to find legal footing to defend its decision to post the changes without a customary comment window. 

RELATED: 5 ways hospitals can mitigate the risks from a growing uncompensated care burden 

“In 2014, the government revealed a new policy on its website that dramatically—and retroactively—reduced payments to hospitals serving low-income patients,” Justice Neil Gorsuch wrote in the opinion.  

“Because affected members of the public received no advance warning and no chance to comment first, and because the government has not identified a lawful excuse for neglecting its statutory notice-and-comment obligations, we agree with the court of appeals that the new policy cannot stand,” Gorsuch wrote. 

Justice Stephen Breyer dissented on the ruling, arguing that he would instead favor sending the case back down to the Circuit Court of the District of Columbia, allowing that court to determine whether HHS had issued an “interpretive rule” or “substantive rule.” The former would not require public comment, and HHS argued it was their intent to issue an interpretive statute. 

Justice Brett Kavanaugh, who was on the ruling panel at the Circuit Court that also overturned the HHS rule, abstained. 

RELATED: MACPAC to Congress—Roll out DSH cuts first in states with unspent funds 

The Supreme Court agreed to hear the case in September, and oral arguments were held in January. 

Experts told FierceHealthcare in September that the debate over whether the rule is interpretive or substantive could significantly impact how CMS administers Medicare, as it commonly uses interpretive statute to make changes. 

HHS argued that rejecting the rule “threatens to undermine HHS’ ability to administer the Medicare program in a workable manner.” 

How that will play out will depend on how CMS chooses to interpret the ruling, Anne Karl, a partner at Manatt Health, told FierceHealthcare. CMS could interpret it broadly, which would likely lead to far more notice-and-comment rulemaking, or could interpret it more narrowly and continue to do its work much as it does now.

In the latter case, Karl said, it's likely that hospitals would test the boundaries through litigation, like in the DSH case.

RELATED: 'Medicaid shortfall' definition should change when tallying DSH payments, MACPAC says

"[The ruling] was a pretty straight statutory interpretation opinion," Karl said. "We’ll see how CMS interprets it going forward."

She added that the ruling was a "big win" both for safety-net hospitals that rely on DSH funding and other hospitals, who may have a greater chance in the future to weigh-in and comment on CMS rulemaking efforts.

The American Hospital Association cheered the ruling in a statement Monday afternoon on those grounds.

"By evading the notice-and-comment process, HHS failed to consider the real-world impact of its changes, leading to policies that may adversely affect patients as well as providers," Melinda Hatton, AHA's general counsel, said in the statement. "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."

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