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Supreme Court Sides With Hospitals in Multi-Billion-Dollar DSH Formula Dispute

Analysis  |  By Steven Porter  
   June 03, 2019

The decision means HHS owes hospitals more money because the justices rejected an Obama-era rule change.

In a 7–1 decision issued Monday morning, the U.S. Supreme Court sided with hospitals that sued Health and Human Services over a payment policy change that was implemented by the Obama administration and defended by the Trump administration.

The justices affirmed a 2017 ruling by the D.C. Circuit Court, which found HHS in violation of the Medicare Act for tweaking the reimbursement formula for disproportionate share hospital (DSH) payments without going through public notice-and-comment rulemaking.

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

"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 majority's 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."

The justices decided last September to take the case, and they heard oral arguments in January.

The court's newest member, Justice Brett Kavanaugh, wrote the appellate decision at issue in the case, so he recused himself last fall. The court's opinion says Kavanaugh took no part in the Supreme Court's deliberation or decision.

The lone dissenting member was Justice Stephen Breyer, who wrote that he would have sent the dispute back to the D.C. Circuit for a determination as to "whether the agency determination at issue in this case is a substantive rule (which requires notice and comment) or an interpretive rule (which does not)."

Nine hospitals, led by Allina Health Services, are party to the case. But their claims total $48.5 million in additional reimbursement for a single year. Hundreds of similarly situated hospitals have filed follow-on lawsuits making similar claims, so the total amount implicated in this dispute is $3-4 billion for fiscal years 2005 through 2013, HHS said in court filings.

The hospitals have enjoyed support from numerous and powerful allies, with amicus briefs filed by the American Hospital Association, the Federation of American Hospitals, and the Association of American Medical Colleges, plus 14 other state and regional hospital associationsCatholic Health, more than 77 other hospitals, and others.

While the government's attorneys warned a decision in the hospitals' favor could have broader consequences that could "substantially undermine effective administration of the Medicare program," the AHA argued in an amicus brief that the government's concerns about workability are "overblown."

The AHA applauded the decision in a statement released Monday afternoon.

"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," AHA General Counsel Melinda Hatton 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."

Editor's note: This story was updated to include a statement from the American Hospital Association.

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.


A change that HHS made in 2014 'dramatically' reduced payments to hospitals serving low-income patients.

The government made the change without formal notice-and-comment rulemaking.

Seven of the justices agreed that HHS was statutorily required to go through the rulemaking process.

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