Business Law

Empire Health Found. v. Azar, __ F.3d __, Nos. 18-35845 & 18-35872 (9th Cir. May 5, 2020)

Empire Health Found. v. Azar, __ F.3d __, Nos. 18-35845 & 18-35872 (9th Cir. May 5, 2020)

HHS reimbursement rule linked to low-income patient services improperly included Medicare-exhausted patients.

Under Medicare, hospitals that serve a disproportionate number of low-income patients receive a reimbursement for the higher costs incurred in providing those services. See 42 U.S.C. § 1395ww(d)(5)(F)(vi). Whether a hospital receives a reimbursement—and, if so, how much—depends on the hospital’s “disproportionate patient percentage,” which captures the number of Medicare- and Medicaid-eligible patient days for which the hospital provides services. Previously, Department of Health and Human Services rules included only “covered” patient days in calculating that percentage. But HHS promulgated a 2005 Rule that removed the word “covered” and thus included services provided to low-income patients who had exhausted their Medicare coverage.

Empire Health Foundation challenged the 2005 Rule under the Medicare Act’s expedited judicial review provision, which implements the Administrative Procedure Act. The district court determined that the 2005 Rule was substantively valid, but procedurally invalid, and concluded the 2005 Rule should be vacated.

The Ninth Circuit affirmed on different grounds. The panel upheld the 2005 Rule’s rulemaking process against Empire’s procedural challenge based on the APA’s notice-and-comment requirements. Though HHS did not resubmit the 2005 Rule for public comment after admitting errors in the notice, the 2005 Rule was still the logical outgrowth of the notice and provided fair notice to commenters. But the panel held that the 2005 Rule was substantively invalid. The text of the Medicare Act includes only those patients “entitled to” Medicare. And a previous Ninth Circuit opinion  held that this language unambiguously refers to patients with an “absolute right” to payment. Legacy Emanuel Hosp. & Health Ctr. v. Shalala, 97 F.3d 1261, 1265-66 (9th Cir. 1996). That interpretation foreclosed the 2005 Rule because patients who have exhausted their coverage have no such right. Thus, the Ninth Circuit reinstated the pre-2005 rule, which includes only “covered” patient days.

The bulletin describing the Ninth Circuit’s decision was originally prepared for the California Society for Healthcare Attorneys (CSHA) by H. Thomas Watson and Peder K. Batalden, Horvitz & Levy LLP, and is republished with permission.

For more information regarding this bulletin, please contact H. Thomas Watson, Horvitz & Levy LLP, at 818-995-0800 or

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