By: Allisa Newman, Volume 103 Staff Member

Medicare administration has met its match. An already technical healthcare statute is under scrutiny to navigate proper rulemaking procedure for its administration. On January 15, the Supreme Court heard oral arguments in Azar v. Allina Health Services, a case that bridges together healthcare and administrative law.[1] Several hospitals challenged a Department of Health and Human Services (HHS) action for failing to engage in informal notice-and-comment rulemaking procedures before instructing a new method for calculating the “Medicare fraction”[2] for payment to hospitals under the Medicare[3] Act (Act).[4] Allina provides a snapshot of a larger issue in administrative law concerning whether there is a more concrete way to distinguish an interpretive rule versus a legislative rule absent an explicit provision and implications on the healthcare industry.


Before diving into the notoriously complex Medicare scheme, it is important to place the statute in the context of notice-and-comment rulemaking. Section 553 of the Administrative Procedure Act (APA) dictates procedures agencies must follow when promulgating rules that affect regulated parties and industries.[5] The primary procedure is notice-and-comment rulemaking, also known as informal rulemaking.[6] This procedure encourages public participation and requires the agency to publish a notice of proposed rulemaking in the Federal Register and imposes a comment period for affected or interested parties to voice their opinions before the agency promulgates the final rule.[7] However, § 553 includes exemptions from notice-and-comment rulemaking for interpretive rules[8] which do not carry the force of law.[9]

Notice-and-comment rulemaking presents challenges because it places two important values at odds: procedure and efficiency. To abandon coveted procedure means otherwise delayed agency action—which some agencies view as burdensome or as a hindrance to carrying out their designated authority granted by an organic statute—may be implemented in an efficient manner.[10] Agencies may prefer taking the path of least resistance to avoid notice-and-comment rulemaking by trying to fit their action within an exemption articulated in § 553. These exemptions often include distinctions between rules that are merely interpretive and those “substantive” rules that carry the force of law.[11]


In addition to APA requirements, other statutes may impose additional or more specific procedures to govern agency behavior. In this context, § 1395hh of the Medicare Act proscribes its own procedures for when notice-and-comment rulemaking is required, but is silent regarding an interpretive rule exemption. After providing an overview of the Medicare Act itself, the following will identify the key language at issue in Allina in the context of notice-and-comment rulemaking.

The Act generally governs reimbursement to hospitals that provide services for low-income patients and receive “supplemental payments” through the “disproportionate share hospital adjustment.”[12] Calculating these supplemental payments requires taking into account the type of enrollee covered under the program. Medicare enrollees may fall under two categories: Medicare Part A and Medicare Part C.[13] When Part C was originally enacted in 1997 drafters did not determine whether the calculations should include Part C enrollees.[14] In 2004, CMS promulgated a rule that Part C enrollees are entitled to benefits under Part A and should be included when calculating the Medicare fraction.[15] The D.C. Circuit affirmed the district court’s holding and vacated the rule in 2012 for failing to be a logical outgrowth of the proposed rule, but vacated the district court’s directive that Part C should be excluded from the fraction.[16] Without binding authority, the Centers for Medicare & Medicaid Services (CMS) continued to calculate the fraction by including Part C patients.[17] Allina in particular concerns rates calculated during the period that included Part C patients in the fraction.

Sections 1395hh(a)(2), (a)(4) of the Act require notice-and-comment rulemaking for a “rule, requirement, or statement of policy” that “establishes or changes a substantial legal standard governing . . . the payment for services.”[18] However, disagreement arises over whether the fraction is included within the meaning of “rule, requirement, or statement of policy,” or whether the fraction is exempt from notice-and-comment rulemaking for being an interpretive, rather than a substantive rule that “establishes or changes a substantive legal standard.”[19]


Allina presents competing interests in which HHS strives to maintain the status quo to ensure efficient program administration, while the hospitals cling to procedure. The agency’s primary argument is that an express exemption in the Medicare Act is not required because, borrowing from the APA, the method at most is an interpretive rule. Instead, HHS claims the action is nonbinding so it cannot establish or change a legal standard within the meaning of § 1395hh because it does not have the force and effect of law.[20] Moreover, the agency claims requiring notice-and-comment rulemaking could reduce efficiency because it is a time-consuming and costly procedure. Any delay caused by the requirement to publicly notify all nonbinding manuals and interpretive documents is potentially harmful to administering Medicare.[21] As a result, whether a new formula falls within the scope of “chang[ing]” or “establish[ing] a substantive legal standard” will impact how HHS responds to future agency actions in carrying out its statutory responsibilities.

The respondent hospitals object to this explicit exception and argue the instruction to calculate the fraction requires notice-and-comment rulemaking procedures because the new method changed a legal standard for Medicare payments to hospitals.[22] In their view, the method falls under § 1395hh(a)(2) and does not contain the same interpretive rule exemption in the APA.[23] Moreover, the hospitals claim even if the new method is not a “rule” per se, even policy statements, traditionally viewed as non-binding and lacking the force and effect of law, under § 1395hh(a)(2) require rulemaking procedures if the statements affect a “substantive legal standard.”[24]


Allina presents several implications that affect both healthcare administration and administrative law. First, Allina is placed squarely within an on-going inquiry to draw the boundary between an interpretative rule and legislative rule.[25]Second, its implications extend beyond determining how Medicare fractions are calculated, but affect how the agency administers Medicare, a program that impacts a considerable portion of the population. Finally, Allina’s prior history in the D.C. Circuit matters to understand its potential effect on administrative law doctrine more broadly.

In the administrative law camp, § 1395hh specifically refers to the “substantive legal standard,” but it is unclear whether that provision has a similar (yet silent) exception to the explicit APA exemption. HHS often utilizes manual guidance to instruct contractors calculating reimbursement rates. However, requiring notice-and-comment rulemaking shifts away from the manual model and will prompt the agency to incorporate additional procedure.[26]

On the one hand, informal rulemaking is beneficial because it encourages public participation. Regulated parties and interested industry members, among others, may provide input on a given regulation.[27] Studies suggest that participation and explanation of agency actions can increase compliance if those who are regulated believe in what the agency is doing.[28] On the other hand, incorporating additional procedure to routine actions, such as formula development, may affect the agency action’s timeline and delay payments for reimbursements.[29] In addition, uprooting an agency’s common practice may leave other HHS actions and instructions to contractors susceptible to challenges for failure to follow proper procedure.[30]

A ruling in favor of HHS may open the door to inferences of interpretive rule designations for statutes, like the Medicare Act, that do not have specific exemptions. However, if the Supreme Court follows the D.C. Circuit, and rules in favor of the hospitals, the ruling could require HHS to engage in more formal procedures for future actions. Relying on Black’s Law Dictionary, the D.C. Circuit articulated that a “substantive legal standard” “at a minimum included a standard that ‘creates, defines, and regulates the rights, duties, and powers of parties.’”[31] Adopting this broad definition may place many of the agency’s prior “interpretive” actions under the substantive legal standard umbrella, which triggers notice-and-comment rulemaking. In practice, this would mean each time HHS chooses to calculate the fraction differently or make adjustments, a once fairly benign agency action becomes susceptible to delay, public exposure, and potential litigation.

Looking at the impact on administrative law more broadly, the Court may be advised to adhere to the D.C. Circuit’s reasoning because of the Circuit’s “semi-specialized” status.[32] The D.C. Circuit is notable for its high volume of cases relating to administrative law. It is not surprising that due to its “unique jurisdictional role,” important administrative law doctrine and case law emerged from this circuit.[33] The relationship between the Supreme Court and the D.C. Circuit has changed over time, and more recent years suggest the Court is taking a more “back seat” approach to administrative law.[34] This means the Allina decision could signal whether the Court takes on a deferential approach to the D.C. Circuit, or seeks to take administrative matters in its own hands. Even if the Court agrees with the D.C. Circuit, the Court should articulate a clearer standard for interpretive rule exemptions to resolve the broader debate of understanding where the distinction lies.


Interpreting the law and forming legal opinions do not occur in isolation, rather the Supreme Court may weigh policy considerations that motivate both arguments and legal conclusions. Whether the Court gives deference to the agency or fails to read an interpretive rule exemption, the decision will not be taken lightly. First, the bottom line is that hospitals are subject higher or lower reimbursement payments after adjustments depending on the outcome of the decision. In order words, in addition to enhancing the understanding of exemptions to informal rulemaking procedures, this decision will implicate several billion dollars in the Medicare program.[35] Second, the Court may (and should) shed some light on the evaluation of interpretive and substantive rules to take a step in resolving the debate. Finally, this decision lends itself to understanding the role of the D.C. Circuit in administrative law and how, if at all, that influences the Supreme Court.

  1. 139 S. Ct. 51 (Sept. 27, 2018). 
  2. The fraction is the number of patient days of patients entitled to benefits under Part A and Social Security Income (SSI) benefits during the time period (numerator) divided by the number patient days of patients who are entitled to benefits under Part. Brief for the Petitioner at 3, Azar v. Allina Health Servs., 139 S. Ct. 51 (2018) (No. 17-1484) [hereinafter Brief for Petitioner]. The new method for calculating the Fraction includes Part C enrollees, in addition to Part A enrollees, and troubled hospitals because Part C enrollees included wealthier individuals than Part A, meaning lower reimbursement rates. Brett Goncher, SCOTUS to Hear Argument in Medicare Reimbursement Case, Westlaw Insurance Daily Briefing (Dec. 7, 2018). 
  3. Medicare is a federal health insurance program that includes hospital insurance, medical insurance, and prescription drug coverage for individuals over sixty-five and select younger individuals younger with certain disabilities or conditions. What’s Medicare? Medicare.gov (last visited Jan. 26, 2019), https://www.medicare.gov/what-medicare-covers/your-medicare-coverage-choices/whats-medicare
  4. See Brief for Respondents at 18–20, Azar v. Allina Health Servs., 139 S. Ct. 51 (2018) (Mem) (No. 17-1484) [hereinafter Brief for Respondents]; Goncher, supra note 2. 
  5. 5 U.S.C. § 553 (1978); David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Y.L.J. 276, 278 (2010) (calling this debate in administrative law a “vexing conundrum”). 
  6. Franklin, supra note 5, at 278. 
  7. 5 U.S.C. § 553(b), (c). 
  8. See William Funk, A Primer on Nonlegislative Rules, 53 Admin. L. Rev. 1321, 1347 (2001). Other exempted actions include policy statements, agency organization, and procedural rules. See 5 U.S.C. § 553. 
  9. See Funk, supra note 8, at 1347 (discussing the draw-back of informal rulemaking as being time-consuming and costly).
  10. See generally Richard J. Pierce, Jr., Distinguishing Legislative Rules from Interpretative Rules, 52 Admin. L. Rev. 547, 550 (2000) (highlighting the costs of informal rulemaking procedures). 
  11. Id. at 552 (discussing legislative rules as having the force and effect of law “in a manner indistinguishable from a statute”). 
  12. Id. § 1395ww(d)(5)(F)(vi) (2018); Amy Grossberg, HHS to SCOTUS: Toss D.C. Circuit Ruling in Medicare Reimbursement Case, 2018 Westlaw health Daily Briefing 0002 (Nov. 23, 2018). 
  13. Under Part A, the government pays hospitals directly for enrollees’ covered services. Enrollees under Part C, however, obtain private insurance coverage. Goncher, supra note 2. 
  14. Brief for Petitioner, supra note 2, at 7. 
  15. Id. at 8. 
  16. Id. at 9. 
  17. Id. at 10–11. 
  18. 42 U.S.C. § 1395hh(a)(2) (2003) (emphasis added). 
  19. Id. 
  20. See Brief for Petitioner, supra note 2, at 15–16 (citing Perez Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1204 (2015)); id. at 22 (“[A]n interpretation of a statute cannot establish or change a substantive legal standard. Rather, the statute supplies the substantive legal standard.”). 
  21. See Goncher, supra note 2; Graham Haviland, Comment, Not So Different After All: The Status of Interpretive Rules in the Medicare Act, 85 Univ. Chi. L. Rev. 1511, 1512–13 (2018). 
  22. Brief for Respondents, supra note 4, at 40. 
  23. Id. at 52–53. 
  24. Id. 
  25. See sources cited supra note 5. 
  26. See Stephen M. Johnson, Good Guidance, Good Grief!, 72 Missouri L. Rev. 605, 701 (2007). 
  27. See Cass R. Sunstein, “Practically Binding”: General Policy Statements and Notice-and-Comment Rulemaking, 68 Admin. L. Rev. 491, 501 (2016). 
  28. See generally Brief for American Medical Association and Medical Society of the District of Columbia as Amici Curiae Supporting Respondents, Azar v. Allina Health Servs., 139 S. Ct. 2018 WL 6716158 at 7–12 (discussing public participation as encouraging informed conduct, fairness, alternative suggestions, administrative responsiveness, and can improve outcomes); Ian Ayres & John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (1992); Tom R. Tyler, Why People Obey the Law (2006). 
  29. However, the discussion during oral argument suggested disagreement over whether informal rulemaking procedures would slow down coverage administration. See Transcript of Oral Argument at 46–54, Azar v. Allina Health Servs., 139 S. Ct. 51 (2018) (No. 17-1484). 
  30. See Sven Collins et al., Supreme Court to Decide if HHS May Skip Notice and Comment Requirements for Certain Payment Rules, Triage Health Law (Oct. 4, 2018), https://www.triagehealthlawblog.com/reimbursement/supreme-court-to-decide-if-hhs-may-skip-notice-and-comment-requirements-for-certain-payment-rules/
  31. Allina Health Servs. v. Price, 863 F.3d 937, 943 (D.C. Cir. 2017). 
  32. David M. Cooper, The Role of the D.C. Circuit in Administrative Law, App. Prac., Winter 2013, at 2, 3. 
  33. See id. (noting the impact of the circuit in developing concepts such as the hard look doctrine and Chevron deference). 
  34. Id. at 5. 
  35. Abbe R. Gluck & Anne Joseph, Argument Analysis: Justice Grapple With Notice-and-Comment Rulemaking for Medicare and Beyond, SCOTUS Blog (Jan. 16, 2019, 1:52 PM), https://www.scotusblog.com/2019/01/argument-analysis-justices-grapple-with-notice-and-comment-rulemaking-for-medicare-and-beyond/