The rulemaking process often accommodates a variety of interests, including the preference of regulatory agencies to maintain some flexibility and the rights of interested parties to participate in the regulatory process. On occasion, those interests come into direct conflict. On April 1, 2014, the U.S. Court of Appeals for the District of Columbia Circuit revisited this issue and limited an agency's ability to adopt final rules that differ dramatically from the proposed rules when the regulatory agency fails to provide adequate notice of the final rule it ultimately adopts. Allina Health Services v. Sebelius, No. 13-5011 (D.C. Cir. Apr. 1, 2014). Although this decision focused on one aspect of Medicare reimbursement, the concepts in the decision apply to the entire Medicare program and to other agency rulemaking under the Administrative Procedure Act ("APA").
Under the APA, agencies that engage in notice-and-comment rulemaking, such as the Centers for Medicare & Medicaid Services ("CMS"), must provide the public with adequate notice of a proposed rule and an opportunity to submit comments to the regulatory agency.[1] For several decades, federal courts have found that a final rule need not be the mirror image of the proposed rule as long as the final rule is the "logical outgrowth" of the proposed rule.[2] If the final rule is not a logical outgrowth, then a new round of notice-and-comment rulemaking is required under 42 U.S.C. § 1395hh(a)(4).[3] The critical factor in determining whether or not a final rule is the "logical outgrowth" of the proposed rule looks at whether the agency has put interested parties on notice that there is a possibility that it is considering adopting a final rule that is different from the proposed rule.[4] If the interested parties should have anticipated from the proposed rule that the change was possible, then those parties will be considered to be on notice and will then have the opportunity to participate in the rulemaking process by submitting comments.[5]
The underlying dispute in Allina involved the data that is used to determine a hospital's Medicare disproportionate share hospital ("DSH") payments, which are supplemental payments made by the Medicare program to hospitals that serve a significant number of elderly, low-income patients. The DSH formula in the Medicare statute refers to individuals who are "entitled to benefits under [Medicare] part A" but does not expressly address how to treat Medicare Part C enrollees, who are initially eligible for traditional Medicare Part A hospital benefits yet elect to be covered under a Medicare Part C managed care plan. In 2003, CMS proposed to clarify how the patient days attributable to individuals enrolled in Medicare Part C managed care plans would be counted for the purpose of determining a hospital's DSH eligibility and payments. The proposed rule would have codified CMS's existing interpretation of the law and excluded the patient days attributable to Medicare Part C beneficiaries from one of the calculations in the Medicare DSH formula, which was advantageous to the affected hospitals. CMS received just 26 pages of comments. However, when the final rule was published, CMS adopted the opposite position and included the Medicare Part C patient days, which would significantly reduce the DSH payments to affected hospitals. A group of hospitals challenged the final rule, and the U.S. District Court for the District of Columbia invalidated the rule and ordered that the hospitals be paid based on excluding the Medicare Part C patient days.[6]
The D.C. Circuit upheld the portion of the ruling that the final rule was not the logical outgrowth of the proposed rule and upheld the district court's decision...
