Argument analysis: Justices grapple with notice-and-comment rulemaking for Medicare and beyond

Medicare was before the Supreme Court yesterday in a case that could have significant implications for administrative law. At the granular level, the case, Azar v. Allina Health Services, concerns whether the Department of Health and Human Services was permitted to change, without notice and comment, an important reimbursement formula for hospitals that treat many low-income patients. That question alone determines the fate of $3 to $4 billion. But the stakes are higher because the case requires the Supreme Court to interpret a provision of the Medicare Act, 42 U.S.C. §§ 1395hh(a)(2), that applies to any “substantive” changes to benefits, payment of services, or eligibility, and, therefore implicates significant components of the entire program. At a broader level still, and beyond the Medicare context, the case has administrative law mavens watching because it gives the court the opportunity to opine on some still unsettled, yet central, administrative law questions about the line between substantive and interpretive rules.

The bench was missing two justices during the argument. Justice Ruth Bader Ginsburg is recuperating at home from lung surgery, but will participate in the decision based on the briefs and the argument transcript. Justice Brett Kavanaugh is recused because he wrote the U.S. Court of Appeals for the District of Columbia Circuit’s decision invalidating the HHS formula — but his presence was definitely felt.

The focus of the argument teetered between the particular statutory interpretation of the Medicare Act and HHS’s administrative authority more broadly. Justice Sonia Sotomayor led off the questioning by asking the Deputy Solicitor General Edwin Kneedler about one of the key open areas of administrative law when it comes to the fuzzy line between interpretive rules, which do not require notice-and-comment procedures under the Administrative Procedure Act, and substantive rules, which typically do: What makes an administrative decision binding? Although the reimbursement formula technically binds only the private contractors who work for the agency, Sotomayor emphasized that “every single provider is going to be given a fraction that incorporates your policy.”

As sometimes happens in administrative law cases, the justices’ questioning did not break down along traditional ideological lines. Sotomayor, retaining the floor, next turned to statutory construction. She was soon joined by Justices Elena Kagan and Neil Gorsuch in the same line of questioning — which echoed the reasoning of Kavanaugh’s opinion for the D.C. Circuit.

The trio of justices resisted the government’s reading of the Medicare Act as coterminous with the APA. They pressed Kneedler to the point where he could barely get a word in to explain how the two acts could be construed in the same way given the clear textual differences between them.

Sotomayor wondered why Congress did not just use the language of the APA in its 1987 amendment to the Medicare Act if it meant to include the same exceptions to notice and comment that the APA allows. Under the 1987 amendment, the Medicare Act requires prior notice and comment for any “rule, requirement, or other 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.”

Gorsuch noted that the very idea of “statements of policy as being substantive” is a “complete incoherent statement in APA language” because under the APA, statements of policy lack legal force and are therefore excluded from the notice-and-comment requirement. Gorsuch next pointed out that, although the Medicare Act adopts the APA’s good-cause exception to rulemaking verbatim, “it clearly doesn’t adopt the substantive interpretive language verbatim, which is right next door … in the APA.” He told the government it was “asking us to think that Congress recreated that [APA] section in this statute through this rather oblique mechanism.”

Justice Stephen Breyer jumped in, in an apparent attempt to offer support to the government with his reading of the Medicare Act’s legislative and enactment history. Breyer read the history to say that, because the government had previously avoided notice and comment in its Medicare decisions, Congress essentially told the agency that no matter what the agency called a particular decision, if that decision affected a substantive legal standard, the agency had to give prior notice and accept public comments.

The Medicare Act’s legislative and enactment history was more prominent at the argument than in the briefing. Both Breyer and Gorsuch said they found the legislative history of the Medicare Act “confused.” Specifically, the argument focused on both the original version of the provision, which was enacted in 1986 and seemed to track the APA, and the amended and current version, enacted in 1987. Kagan asked what the 1987 amendment “ends up actually accomplishing” if it goes farther than the APA, which was already covered by the 1986 legislation. Gorsuch, after making clear that he had read the legislative history but preferred to focus on the text, asked how the 1987 additions could be “entirely superfluous.”

Kagan also asked the government how it could argue that the term “substantive” means something different in the provision in question — 42 U.S.C. § 1395hh(a)(2) — where the government reads “substantive legal change” to mean something nonbinding and non-interpretive, and in § 1395hh(e), where the government reads “substantive change” to mean something material or significant. She wondered why the Supreme Court should interpret the word “substantive” in “two different ways in two very nearby provisions.” Gorsuch jumped in to second Kagan’s question.

Kneedler then pivoted to the feared consequences of an affirmance, noting that there are thousands of pages of Medicare manuals that could be subject to notice and comment, grinding the nation’s largest insurance system to a halt. But Sotomayor, in a question later echoed by Kagan, pointed to the D.C. Circuit’s post-Allina decision in Clarian Health West, LLC v. Hargan, which limited Allina’s reach by reading a different Medicare-manual decision as not requiring notice and comment. Sotomayor and Kagan both asked whether Clarian undercuts the government’s consequences argument.

The chief justice, who had been quiet during the government’s argument, was the first to engage with the hospitals’ attorney, Pratik Shah. Like Sotomayor, the chief justice opened with a question on whether HHS’s decision was binding, but unlike Sotomayor, he suggested that the proposed new formulae were “not binding … interim calculation[s].” Shah disputed that characterization, arguing that the government’s actions were indeed binding because the “only recourse … is to file an administrative appeal or sue in court.” There was some discussion about whether the agency appeals board correctly decided that it lacked power to review the formulae contested here.

Shah came back to the “statement of policy” language in the Medicare Act. If a statement of policy “lacks the force of law” under the APA, he argued, to conclude that its addition to the Medicare Act’s section requiring notice and comment does nothing is “reading significant words out of a statute. That,” he said, “is not how statutory construction works.” Picking up on Gorsuch’s earlier point, Shah added that the Medicare Act’s language would be “an exceedingly, extraordinarily, round-about way for Congress to try to adopt the interpretive rule exception which is [already] sitting on the books.”

Sotomayor then asked what “substantive legal [standard]” means if it does not mean legislative (noninterpretive) rules under the APA, providing Shah the opportunity to make his argument that substantive in this phrase is meant to distinguish procedural actions. The discussion returned to the convoluted legislative history — specifically, what cases members of Congress were referring to in a 1987 conference committee report connected to the statutory language at issue. Both the government and the hospitals invoked the D.C. Circuit’s 1987 decision in American Hospital Association v. Bowen as the key case — the government for the proposition that substantive was to be distinguished from interpretive, and the hospitals for the proposition that substantive was to be understood as distinct from procedural.

Turning back to the potential consequences, Breyer asked if the hospitals would really be happy if it takes “19 years” for HHS to make decisions. If it has to use notice and comment for “everything arguably important in every manual,” Breyer said, “it will be here till Christmas come.” Shah seized on this opportunity to cite empirical evidence from the hospitals’ brief indicating that the agency’s rulemakings proceed relatively quickly, arguing that not that many pages of the Medicare manuals would actually be affected. He managed to winnow down the 6,000 pages of manuals to 980 (because the last 5,000 or so are procedural) and then to 400 (because much of the rest are pre-1987 and not covered by the provision) and then to “about 35,” a mathematical feat a majority of the court may not have bought.

Finally, the chief justice returned the argument to administrative law matters, raising the agency’s ordinary ability to choose between rulemaking and adjudication, and asking why this freedom did not permit the government’s action here. Shah responded that “this looks nothing like adjudication,” because it “applies to every hospital nationwide without exception” and it is “prospective” (raising, without naming, issues in the 1969 Supreme Court case National Labor Relations Board v. Wyman-Gordon Co.).

For those trying to read the tea leaves (always a risky endeavor), Sotomayor, Kagan and Gorsuch seemed inclined to rule against the government, whereas Breyer and perhaps the chief justice seemed inclined in the other direction. Justice Samuel Alito said very little. Justice Clarence Thomas did not comment, but, given the justices’ preference for textual analysis, we suspect that Thomas and either Ginsburg, Alito or both will ultimately side against the government and affirm the Kavanaugh opinion.

Editor’s Note: Analysis based on transcript of oral argument.

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Past cases linked to in this post:

American Hosp. Ass’n v. Bowen, 834 F.2d 1037 (D.C. Cir. 1987)
Clarian Health W., LLC v. Hargan, 878 F.3d 346 (D.C. Cir. 2017)
National Labor Relations Board v. Wyman-Gordon Co., 394 U.S. 759 (1969)