[Federal Register Volume 88, Number 111 (Friday, June 9, 2023)]
[Rules and Regulations]
[Pages 37772-37793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12308]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1739-F]
RIN 0938-AU24


Medicare Program; Treatment of Medicare Part C Days in the 
Calculation of a Hospital's Medicare Disproportionate Patient 
Percentage

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of 
Health and Human Services (HHS).

ACTION: Final action.

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SUMMARY: This final action establishes a policy concerning the 
treatment of patient days associated with persons enrolled in a 
Medicare Part C (also known as ``Medicare Advantage'') plan for 
purposes of calculating a hospital's disproportionate patient 
percentage for cost reporting periods starting before fiscal year (FY) 
2014 in response to the Supreme Court's ruling in Azar v. Allina Health 
Services, 139 S. Ct. 1804 (June 3, 2019).

DATES: The policy set out in this final action is effective August 8, 
2023.

FOR FURTHER INFORMATION CONTACT: Donald Thompson, [email protected], 
(410) 786-4487.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary and Background

A. Executive Summary

1. Purpose and Legal Authority
    This final action creates a policy governing the treatment of days 
associated with beneficiaries enrolled in Medicare Part C for 
discharges occurring prior to October 1, 2013, for the purpose of 
determining the additional Medicare payments to subsection (d) 
hospitals under section 1886(d)(5)(F) of the Social Security Act (the 
Act).
2. Summary of Major Provisions
    Section 1886(d)(5)(F) of the Act provides for additional Medicare 
payments to subsection (d) hospitals that serve a significantly 
disproportionate number of low income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) payment adjustment. Under the 
first method, hospitals that are located in an urban area and have 100 
or more beds may receive a Medicare DSH payment adjustment if the 
hospital can demonstrate that, during its cost reporting period, more 
than 30 percent of its net inpatient care revenues are derived from 
State and local government payments for care furnished to needy 
patients with low incomes. This method is commonly referred to as the 
``Pickle method.'' The second method for qualifying for the DSH payment 
adjustment, which is more common, is based on a complex statutory 
formula under which the DSH payment adjustment is based on the 
hospital's geographic designation, the number of beds in the hospital, 
and the hospital's disproportionate patient percentage (DPP). A 
hospital's DPP is the sum of two fractions: the ``Medicare fraction'' 
and the ``Medicaid fraction.'' The Medicare fraction (also known as the 
SSI fraction or SSI ratio) is computed by dividing the number of the 
hospital's inpatient days that are furnished to patients who were 
entitled to both Medicare Part A and Supplemental Security Income (SSI) 
benefits by the hospital's total number of patient days furnished to 
patients entitled to benefits under Medicare Part A. The Medicaid 
fraction is computed by dividing the hospital's number of inpatient 
days furnished to patients who, for such days, were eligible for 
Medicaid, but were not entitled to benefits under Medicare Part A, by 
the hospital's total number of inpatient days in the same period.
    Because the DSH payment adjustment is part of the hospital 
inpatient prospective payment system (IPPS) for acute care hospitals, 
the statutory references to ``days'' in section 1886(d)(5)(F) of the 
Act have been interpreted to apply only to hospital acute care 
inpatient days. Regulations located at 42 CFR 412.106 implement the 
Medicare DSH payment adjustment and specify how the DPP is calculated 
as well as how beds and patient days are counted in determining the 
Medicare DSH payment adjustment.
3. Summary of Costs and Benefits
    Including days associated with patients enrolled in Medicare Part C 
in the calculation of the Medicare fraction and excluding them from the 
calculation of the numerator of the Medicaid fraction, does not have 
any additional costs or benefits relative to the Medicare DSH payments 
that have already been made because those payments were made under the 
policy reflected in the fiscal year (FY) 2005 IPPS final rule (69 FR 
49099) (prior to it having been vacated). The effect of this final 
action is to provide certainty as to how Part C days will be treated 
for DSH calculations for cost years not governed by the FY 2014 IPPS/
Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) final 
rule (78 FR 50614; hereinafter referred to as ``the FY 2014 IPPS final 
rule''), resolving any uncertainty that may otherwise continue into the 
future.

B. Background

    In August 2020, we issued a proposed rule, which appeared in the 
Federal Register on August 6, 2020 (85 FR 47723) (hereinafter referred 
to as the ``August 2020 proposed rule''). The proposed rule would 
establish a policy concerning the treatment of patient days associated 
with persons enrolled in a Medicare Part C (also known as ``Medicare 
Advantage'' or ``MA'') plan for purposes of calculating a hospital's 
disproportionate patient percentage for cost reporting periods starting 
before October 1, 2013, in response to the Supreme Court's ruling in 
Azar v. Allina Health Services.
    We received approximately 110 timely pieces of correspondence 
containing multiple comments on the August 2020 proposed rule. 
Summaries of the public comments received and our responses to those 
public comments are set forth in section II. of this final action.

[[Page 37773]]

II. Provisions of the Regulations--Treatment of Patient Days Associated 
With Patients Enrolled in Medicare Advantage Plans With Discharge Dates 
Before October 1, 2013, in the Medicare and Medicaid Fractions of the 
Disproportionate Patient Percentage (DPP)

    Medicare Advantage (MA) plans are authorized under Medicare Part C. 
The regulation at 42 CFR 422.2 defines MA plan to mean ``health 
benefits coverage offered under a policy or contract by an MA 
organization that includes a specific set of health benefits offered at 
a uniform premium and uniform level of cost-sharing to all Medicare 
beneficiaries residing in the service area of the MA plan . . . .'' 
Generally, each MA plan must at least provide coverage of all services 
that are covered by Medicare Part A and Part B, but also may provide 
for Medicare Part D benefits and/or additional supplemental benefits. 
However, certain items and services, such as hospice benefits, continue 
to be covered under Medicare Part A fee-for-service (FFS) even if a 
beneficiary chooses to enroll in an MA plan. Generally, under Sec.  
422.50 of the regulations, an individual is eligible to elect an MA 
plan if he or she is entitled to Medicare Part A and enrolled in 
Medicare Part B. This is in accordance with section 1851(a)(3) of the 
Act, which requires that individuals enrolling in MA plans must be 
entitled to benefits under Part A and enrolled under Part B. Dually 
eligible beneficiaries (individuals entitled to Medicare and eligible 
for Medicaid) may choose to enroll in an MA plan.
    In the FY 2004 IPPS proposed rule (68 FR 27208), in response to 
questions about whether the patient days associated with patients 
enrolled in an MA plan should be counted in the Medicare fraction or 
the Medicaid fraction of the DPP calculation, we proposed that once a 
beneficiary enrolls in an MA plan, patient days attributable to the 
beneficiary would not be included in the Medicare fraction of the DPP. 
(We note, at the time of the FY 2004 IPPS proposed rule and FY 2005 
rulemaking, Medicare Part C was referred to as Medicare + Choice (M+C); 
however, to avoid confusion we use the current terminology (MA) when 
referring to Medicare Part C.) Instead, those patient days would be 
included in the numerator of the Medicaid fraction, if the patient also 
were eligible for Medicaid. In the FY 2004 IPPS final rule (68 FR 
45422), we did not respond to public comments on this proposal, due to 
the volume and nature of the public comments we received, and we 
indicated that we would address those comments later in a separate 
document. In the FY 2005 IPPS proposed rule (69 FR 28286), we stated 
that we planned to address the FY 2004 comments regarding MA days in 
the IPPS final rule for FY 2005. After considering comments on this 
proposal, we decided not to implement the policy as proposed. Instead, 
in the FY 2005 IPPS final rule (69 FR 49099; hereinafter referred to as 
``the FY 2005 IPPS final rule''), we determined that, under Sec.  
412.106(b)(2)(i) of the regulations, MA patient days should be counted 
in the Medicare fraction of the DPP calculation. We explained that, 
even where Medicare beneficiaries enroll in an MA plan, they are still 
entitled to benefits under Medicare Part A. Therefore, we noted that if 
an MA beneficiary is also entitled to SSI benefits, the patient days 
for that beneficiary would be included in the numerator of the Medicare 
fraction (as well as in the denominator) and not in the numerator of 
the Medicaid fraction. We note that, despite our statement in the FY 
2005 IPPS final rule that the text of the regulation at Sec.  
412.106(b)(2)(i) would be revised to state explicitly that the days 
associated with MA beneficiaries are included in the Medicare fraction, 
due to a clerical oversight, the regulation at Sec.  412.106(b)(2)(i) 
was not amended to reflect this policy until 2007 (72 FR 47384).
    In 2012, a district court vacated the final policy adopted in the 
FY 2005 IPPS final rule on the basis that the final rule was not a 
``logical outgrowth'' of the proposed rule. Allina Health Svcs. v. 
Sebelius, 904 F. Supp. 2d 75, 89 (D.D.C. 2012). In the FY 2014 IPPS/
LTCH PPS proposed rule (hereinafter referred to as ``the FY 2014 IPPS 
proposed rule''), we proposed to re-adopt the policy of including MA 
patient days in the Medicare fraction prospectively for FY 2014 and 
subsequent fiscal years (78 FR 27578). We finalized this proposal in 
the FY 2014 IPPS final rule (78 FR 50614). We made no change to the 
regulation text at Sec.  412.106(b)(2)(i) because the text of the 
regulation which was revised in 2007 (72 FR 47384) to incorporate the 
policy we first adopted in the FY 2005 IPPS final rule, already 
reflected the policy we again adopted in the FY 2014 IPPS final rule. 
In 2014, the United States Court of Appeals for the D.C. Circuit upheld 
the district court's holding that the policy adopted in the FY 2005 
IPPS final rule requiring inclusion of Part C days in the Medicare 
fraction was not a logical outgrowth of the proposed rule, but left 
open the possibility that the agency could treat Part C days the same 
way through adjudication.
    In Azar v. Allina Health Services, 139 S. Ct. 1804 (June 3, 2019, 
hereinafter referred to as Allina II), the Supreme Court considered a 
challenge to the agency's inclusion of MA patient days in the Medicare 
fractions it published for FY 2012. Section 1871(a)(2) of the Act 
requires notice-and-comment rulemaking for any Medicare ``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.'' The 
Supreme Court held that section 1871(a)(2) of the Act required CMS to 
engage in notice-and-comment rulemaking before adopting its ``avowedly 
gap-filling policy'' regarding treatment of inpatient days for 
beneficiaries enrolled in MA plans for purposes of calculating the DPP.
    Section 1871(e)(1)(A) of the Act authorizes CMS to engage in 
retroactive rulemaking when the Secretary determines that such 
retroactive application is necessary to comply with statutory 
requirements or that a failure to apply a policy retroactively would be 
contrary to the public interest. For example, CMS has invoked its 
authority to engage in retroactive rulemaking under section 
1871(e)(1)(A) of the Act in connection with its policy related to bad 
debt (see the FY 2021 IPPS/LTCH PPS proposed rule (85 FR 32867)), 
predicate facts and cost report reopening (see the CY 2014 OPPS final 
rule (78 FR 75165)), and the low-volume hospital adjustment (see the FY 
2020 IPPS/LTCH PPS final rule (84 FR 42349)).
    The Secretary has determined that to the extent there is a 
statutory gap to fill with respect to the treatment of Part C patient 
days, retroactive application is necessary to comply with statutory 
requirements and a failure to apply this policy retroactively would be 
contrary to the public interest. Section 1886(d)(5)(F) of the Act 
requires CMS to make DSH payments to eligible hospitals. Calculating 
such payments, in turn, requires CMS to calculate a Medicare fraction 
and a Medicaid fraction for each hospital. Under section 
1886(d)(5)(F)(vi)(I) of the Act, the Medicare fraction must include the 
patient days for beneficiaries ``entitled to benefits under part A.'' 
The Court of Appeals for the D.C. Circuit has held that the Medicare 
statute does not speak directly to how Part C days should be treated 
for purposes of DSH calculations, that is, whether Part C

[[Page 37774]]

patients are ``entitled to benefits under part A'' and should therefore 
be included in the Medicare fraction, or whether they are not so 
entitled, and should therefore be included in the numerator of the 
Medicaid fraction if they are also eligible for Medicaid. (See 
Northeast Hospital Corporation v. Sebelius, 657 F.3d 1, 13 (D.C. Cir. 
2011) (hereinafter referred to as ``Northeast''.) However, the court 
has also found that section 1886(d)(5)(F)(vi) of the Act requires the 
Secretary to account for Part C days in the DPP calculation by 
including them in one of the fractions (Medicare or Medicaid) and 
excluding them from the other. (See Allina Health Services. v. 
Sebelius, 746 F.3d 1102, 1108 (D.C. Cir. 2014) (hereinafter referred to 
as ``Allina I'').)
    Since the publication of our proposed rule, the Supreme Court 
handed down its decision in Becerra v. Empire Health Foundation, 142 S. 
Ct. 2354, 1368 (June 24, 2022) (hereinafter referred to as ``Empire''). 
In Empire, the Supreme Court held that the statutory text is clear that 
``being `entitled' to Medicare benefits . . . means--in the [DSH] 
fraction descriptions, as throughout the statute--meeting the basic 
statutory criteria.'' (142 S. Ct. at 2362.) Part C enrollees, who by 
definition must be ``entitled'' to Part A benefits to enroll under Part 
C, necessarily meet the basic statutory criteria (essentially that they 
are over 65 or disabled). Empire did not address Part C days 
specifically, it addressed the same statutory language that is the 
subject of the August 2020 proposed rule, the meaning of ``entitled to 
benefits under part A of [Medicare].'' The Supreme Court held that the 
Secretary was correct in interpreting that phrase as denoting a legal 
status that does not turn on whether Medicare pays for any particular 
hospital day. The Supreme Court concluded that the ``[t]ext, context, 
and structure all support calculating the Medicare fraction HHS's way. 
In that fraction, individuals `entitled to [Medicare Part A] benefits' 
are all those qualifying for the program.'' We believe it is now clear 
that the statute itself requires the Secretary to count Part C days in 
the Medicare fraction because Medicare beneficiaries remain ``entitled 
to [Medicare Part A]'' regardless of whether they enroll in Part C, 
just as do beneficiaries who have exhausted their coverage for a spell 
of illness. Nonetheless, Empire did not address specifically whether 
Part C enrollees remain ``entitled to Part A,'' and because the FY 2005 
IPPS final rule was vacated, the Secretary ``has no promulgated rule 
governing'' the treatment of Part C days ``for the fiscal years before 
2014.'' Allina Health Servs. v. Price, 863 F.3d 937, 939 (D.C. Cir. 
2017). As a result, to the extent there is still a statutory gap for 
the Secretary to fill after Empire regarding the treatment of Part C 
days in the Medicare DSH payment calculation, CMS must determine 
whether beneficiaries enrolled in Part C are ``entitled to benefits 
under part A'' and so must be included in the Medicare fraction (and 
excluded from the numerator of the Medicaid fraction), or are not so 
entitled and so must be excluded from the Medicare fraction (and 
included in the numerator of the Medicaid fraction, if dually 
eligible). The Secretary has therefore determined that, in order to 
comply with the statutory requirement to make DSH payments and in order 
to address any potential statutory gap, to the extent one might remain 
after Empire, it is necessary for CMS to engage in retroactive 
rulemaking to establish a policy to govern whether individuals enrolled 
in MA plans should be included in the Medicare fraction or in the 
numerator of the Medicaid fraction, if dually eligible, for fiscal 
years before 2014.
    We continue to believe, as we stated in the preamble to the FY 2014 
IPPS final rule (78 FR 50614 and 50615) and have consistently expressed 
since the issuance of the FY 2005 IPPS final rule, that individuals 
enrolled in MA plans are ``entitled to benefits under part A'' as the 
phrase is used in the DSH provisions at section 1886(d)(5)(F)(vi) of 
the Act. Even without relying on the Supreme Court's decision in 
Empire, which in our view confirms our interpretation, we believe this 
is the best reading of the statute.
    Section 226 of the Act provides that an individual is automatically 
``entitled'' to Medicare Part A when the person reaches age 65, 
provided that the individual is entitled to Social Security benefits 
under section 202 of the Act, or becomes disabled. Beneficiaries who 
are enrolled in MA plans provided under Medicare Part C continue to 
meet all of the statutory criteria for entitlement to Medicare Part A 
benefits under section 226 of the Act. Moreover, section 1851(a)(3) of 
the Act provides that in order to enroll in Medicare Part C a 
beneficiary must be ``entitled to benefits under Part A and enrolled 
under Part B.'' Thus, by definition, a beneficiary must be entitled to 
Part A to be enrolled in Part C. There is nothing in the Act that 
suggests that beneficiaries who enroll in a Medicare Part C plan 
thereby forfeit their entitlement to Medicare Part A benefits. To the 
contrary, enrollment in a plan under Medicare Part C is simply an 
option that a person entitled to Part A benefits may choose as a way to 
receive their Part A benefits. A beneficiary who enrolls in Medicare 
Part C is entitled to receive benefits under Medicare Part A through 
the MA plan in which he or she is enrolled, and the MA organization's 
costs in providing such Part A benefits are paid for by CMS with money 
from the Medicare Part A Trust Fund. In addition, under certain 
circumstances, Medicare Part A pays directly for care furnished to 
patients enrolled in Medicare Part C plans, rather than indirectly 
through Medicare Part A Trust Fund payments to MA organizations. For 
example, under section 1852(a)(5) of the Act, if, during the course of 
the year, the scope of benefits provided under Medicare Part A expands 
beyond a certain cost threshold due to congressional action or a 
national coverage determination, Medicare Part A will pay providers 
directly for the cost of those services provided to beneficiaries 
enrolled in Part C. Similarly, Medicare Part A pays directly for 
hospice care furnished to MA patients who elect under section 
1812(d)(1) of the Act to receive such care from a particular hospice 
program and, under certain circumstances, for federally qualified 
health center (FQHC) services provided to MA patients by FQHCs that 
contract with MA organizations under sections 1853(h)(2) and 1853(a)(4) 
of the Act, respectively. Thus, we continue to believe that a patient 
enrolled in an MA plan remains entitled to benefits under Medicare Part 
A, and patient days associated with that patient should be counted in 
the Medicare fraction of the DPP, and not (in the case of a dually-
eligible patient) the numerator of the Medicaid fraction.
    Additionally, the Secretary has determined that it is in the public 
interest for CMS to adopt a retroactive policy for the treatment of MA 
patient days in the Medicare and Medicaid fractions through notice and 
comment rulemaking for discharges before October 1, 2013 (the effective 
date of the FY 2014 IPPS final rule). CMS must calculate DSH payments 
for periods that include discharges occurring before the effective date 
of the prospective FY 2014 IPPS final rule for hundreds of hospitals 
whose DSH payments for those periods are still open or have not yet 
been finally settled, encompassing thousands of cost reports. In order 
to calculate these payments, CMS must establish Medicare fractions for 
each applicable cost reporting period during the time period for which 
there is currently no regulation in place that

[[Page 37775]]

expressly addresses the treatment of Part C days. Because the Supreme 
Court has held in Allina II that, unless an exception applies, CMS 
cannot establish or change ``an avowedly `gap'-filling policy'' under 
the Medicare statute except by notice-and-comment rulemaking, we have 
concluded that, to the extent there is a gap after Empire, the only way 
for CMS to resolve this issue and properly calculate DSH payments for 
time periods before FY 2014 is to promulgate a new regulation through 
notice-and-comment rulemaking that would apply retroactively to the 
determination of Medicare and Medicaid fractions for this time period. 
Consequently, retroactive rulemaking is not only necessary to comply 
with the statutory requirement to calculate DSH payments, it is also 
necessary to avoid an outcome that would be contrary to the public 
interest. Absent such a retroactive rulemaking, if there is a gap in 
the statute to fill, the Secretary would be unable to calculate and 
confirm proper DSH payments for time periods before FY 2014, which 
would be contrary to the public interest of providing additional 
payments to hospitals that serve a significantly disproportionate 
number of low-income patients, as expressed in the DSH provisions of 
the Medicare statute. Moreover, to the extent the Secretary must adopt 
an approach to calculate those payments, it is in the public interest 
to permit interested stakeholders to comment on the proposed approach 
and for the agency to have the benefit of those comments in the 
development of any final action. Therefore, for the purposes of 
calculating the Medicare and Medicaid fractions for cost reporting 
periods that include discharges before October 1, 2013, in the August 
2020 proposed rule (85 FR 47725), we proposed to adopt the same policy 
of including MA patient days in the Medicare fraction that was 
prospectively adopted in the FY 2014 IPPS final rule and to apply this 
policy retroactively to any cost reports that remain open for cost 
reporting periods starting before October 1, 2013. We stated that we 
did not expect the proposed policy to have an effect on payments as the 
payments previously made already reflect the proposed policy. We did 
not propose any change to the regulation text because the current text 
at Sec.  412.106(b)(2)(i) reflects the policy being proposed for fiscal 
years before FY 2014. In the August 2020 proposed rule (85 FR 47726), 
we stated that because we proposed to establish this policy 
retroactively, it would cover cost reporting periods for which many 
cost reports have already been final settled. Consistent with 42 CFR 
405.1885(c)(2), any final action retroactively adopting the policy at 
42 CFR 412.106(b)(2)(i) for fiscal years before FY 2014 would not be a 
basis for reopening these final settled cost reports, irrespective of 
how payments in those cost reports were calculated.
    In the August 2020 proposed rule, we sought comments on our 
proposed approach to include MA patient days in the Medicare fraction 
for fiscal years before FY 2014, and also on an alternative, of 
including MA patient days for dually eligible beneficiaries in the 
numerator of the Medicaid fraction for those fiscal years, which we 
discussed in detail in section V. of the August 2020 proposed rule (85 
FR 47727). We summarize and respond to the public comments received on 
our proposal and the alternative approach considered in the proposed 
rule.
    Comment: Some commenters stated that the statute unambiguously 
forecloses the Secretary's interpretation and is self-executing, so 
retroactive rulemaking cannot be justified.
    Response: We disagree that the statute unambiguously forecloses the 
Secretary's interpretation. Quite the opposite is true; based on the 
Supreme Court's intervening decision in Empire, we believe the statute 
itself requires the Secretary to count Part C days in the Medicare 
fraction, exactly as contemplated in the August 2020 proposed rule. To 
the extent that the statute itself establishes the applicable 
``substantive legal standard,'' there is no need for a ``gap-filling 
policy'' that would trigger the notice-and-comment obligations of 
section 1871(a)(2) of the Act, nor any resulting need to rely on the 
retroactive rulemaking authority under section 1871(e) of the Act. The 
Supreme Court in Allina II made clear that while notice-and-comment 
rulemaking is required to change or establish an ``avowedly `gap'-
filling policy,'' its holding should not be construed to require such 
rulemaking where the substantive legal standard is established by the 
statute itself. (139 S. Ct. at 1816-17.) Of course, to the extent 
notice-and-comment rulemaking is required under Allina II, we continue 
to believe that this final action is a necessary and appropriate 
exercise of the Secretary's retroactive rulemaking authority under 
section 1871(e) of the Act. In our view, however, Empire now makes 
clear that the interpretation set forth in this final action simply 
reflects the ``substantive legal standard'' already set forth in the 
statute and the action thus does not ``establish or change'' that 
standard.
    Although Empire did not address Part C days specifically, it 
addressed the same statutory language at issue here, and its analysis 
of that language compels the conclusion that Part C days must be 
treated as days for which patients are ``entitled to part A benefits.'' 
Under the governing statutory language, patients are ``entitled'' to 
Part A benefits if they meet the basic statutory criteria for such 
entitlement under section 226 of the Act--essentially, if they are over 
65 or disabled. (142 S. Ct. at 2358, 2361-62, 2365-66.) As noted 
previously, Part C enrollees must, by definition, meet these statutory 
criteria. And because their enrollment in MA does not change their age 
or disability status, such enrollment also does not change their 
entitlement to benefits under Part A.\1\ There is no indication in the 
Empire Court's opinion to suggest that some other interpretation might 
be permissible. To the contrary, the Court held that the meaning of the 
statute was clear (indeed, ``surprisingly clear''), and that the 
Secretary had ``correctly'' interpreted the statutory language.\2\ It 
also held that the alternative reading (including the reading advanced 
by the plaintiffs in Northeast, a Part C days case) would render 
various statutory provisions ``unworkable or unthinkable or both,'' 
which ``is not the statute Congress wrote.'' \3\ It further found that 
excluding Medicare beneficiaries from the Medicare fraction denominator 
simply because payment was not made under Medicare Part A would 
``deflate'' the Medicare fraction denominator and ``distort[ ] what the 
Medicare fraction is designed to measure--the share of low-income 
Medicare patients relative to the total.'' \4\ The same concern applies 
at least as much, if not more, in the context of Part C days.
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    \1\ 142 S. Ct. at 2364 (explaining that ``entitlement'' arises 
when a person meets the basic criteria and, unless a disability 
diminishes, ``never goes away'').
    \2\ Id. at 2362.
    \3\ Id. at 2364.
    \4\ Id. at 2367-68.
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    In short, based on the Empire Court's clarification of the 
governing statute, we now believe the interpretation announced here 
simply reflects the substantive legal standard already established in 
``the statute Congress wrote,'' and that this action itself does not 
establish or change that standard.\5\ That being the case, we now 
believe that notice-and-comment rulemaking is not required under Allina 
II, and the interpretation set forth in this action is proper without a 
need to rely on the

[[Page 37776]]

Secretary's retroactive rulemaking authority.
---------------------------------------------------------------------------

    \5\ 142 S. Ct. at 2364.
---------------------------------------------------------------------------

    Alternatively, if notice-and-comment rulemaking is required, then 
we continue to believe this action reflects an appropriate exercise of 
the Secretary's retroactive rulemaking authority. The commenters are 
incorrect to say the statute unambiguously forecloses the Secretary's 
interpretation. Even before the Supreme Court in Empire found that the 
Secretary had correctly construed the statutory language, the D.C. 
Circuit in Northeast held that ``the statute does not unambiguously 
foreclose the Secretary's interpretation.'' \6\ The D.C. Circuit found 
that Congress ``left a statutory gap, and it is for the Secretary . . . 
to fill that gap.'' \7\ Thus, to the extent that any such gap remains 
in the wake of the Supreme Court's clarification in Empire, the 
decision in Allina II would require notice-and-comment rulemaking to 
establish the gap-filling policy stated in this action.\8\
---------------------------------------------------------------------------

    \6\ 657 F.3d at 2.
    \7\ Id. at 13.
    \8\ 139 S. Ct. at 1816-17.
---------------------------------------------------------------------------

    Comment: Several commenters stated that retroactive rulemaking in 
this context offends ``fundamental notions of justice'' and the public 
interest and sets a dangerous precedent by giving CMS a way to evade 
the notice-and-comment requirements of the Medicare statute and the 
Administrative Procedure Act (APA) whenever it loses a procedural 
challenge in court. Some stated that retroactive rulemaking subverts 
what the Supreme Court in Allina II identified as Congress' purpose in 
the notice-and-comment requirement--giving the public fair warning and 
a chance to be heard. Some commenters suggested that it is poor public 
policy and contrary to the public interest to finalize a retroactive 
rule when the earlier rulemaking was found deficient on logical 
outgrowth grounds. A commenter stated that CMS's proposal suggests that 
there are no practical consequences associated with the agency's 
failure to comply with the APA.
    Response: To the extent that Empire has now held that our 
interpretation of the statute reflects its clear meaning, we need not 
rely on retroactive rulemaking authority, as discussed previously. But 
to the extent retroactive rulemaking is necessary, we do not agree that 
retroactive rulemaking here offends justice, sets a dangerous 
precedent, or evades the APA's notice-and-comment rulemaking 
requirement. As described in the August 2020 proposed rule and herein, 
this retroactive rulemaking is authorized by statute, specifically 
section 1871(e) of the Act, complies with the Medicare statute's 
notice-and-comment requirement, and implements the Supreme Court's 
decision in Allina II, thereby upholding fundamental notions of 
justice. The Supreme Court did not expressly instruct CMS to promulgate 
a retroactive rule, but it did hold that the Medicare statute requires 
the agency to engage in notice-and-comment rulemaking before it may 
either ``establish'' or ``change'' a substantive legal standard, such 
as its policy governing the treatment of Part C days in the DSH 
statute, if such a policy is intended to fill a statutory gap. As noted 
previously, because the FY 2005 IPPS final rule was vacated, no policy 
governing the treatment of Part C days has been established by 
rulemaking for fiscal years before 2014. Thus, for fiscal years not 
already addressed by the FY 2014 IPPS final rule,\9\ whether CMS 
interprets the statute to treat beneficiaries enrolled in Part C as 
``entitled to benefits under part A'' or as not so entitled, the 
Medicare statute requires a policy established by notice-and-comment 
rulemaking to resolve the issue for these years, at least to the extent 
that any statutory ``gap'' remains to be filled after Empire. If CMS 
were to proceed to calculate DSH adjustments for fiscal years before 
2014 without a promulgated rule in place, this would (to the extent any 
gap remains) be contrary to the holding of Allina II because the 
Supreme Court held that gaps in the Medicare statute can only be filled 
via rulemaking (unless an exception applies). The Allina II plaintiffs 
prevailed only on their procedural challenge. No provision of either 
the Medicare statute or the APA requires CMS to adopt a different 
substantive legal standard. Instead, the Medicare statute contemplates 
that ``if the Secretary publishes a final regulation that includes a 
provision that is not a logical outgrowth of'' a proposed rule, as 
happened here, under section 1871(a)(4) of the Act, ``such provision'' 
may still take effect after ``further opportunity for public comment 
and a publication of the provision again as a final regulation.'' Here, 
the August 2020 proposed rule provided that further opportunity, and 
all interested parties have had a full opportunity to share their views 
on the proper interpretation of the statute. We have fully considered 
all comments received before finalizing this action.
---------------------------------------------------------------------------

    \9\ For more information on the FY 2014 IPPS final rule, which 
became effective October 1, 2013, we refer readers to 78 FR 50614.
---------------------------------------------------------------------------

    We are not setting a precedent in this action that the agency can 
always engage in retroactive rulemaking when courts find that one of 
our final rules is not a logical outgrowth of the associated proposed 
rule. Retroactive rulemaking is authorized only when the Secretary 
determines that retroactive application: (1) is necessary to comply 
with statutory requirements; or (2) that a failure to do so would be 
contrary to the public interest. These circumstances will not always be 
present. For example, as to necessity to comply with statutory 
requirements, there will not always be, as there is here, a statutory 
directive to calculate payments that demands an interpretation of the 
very statutory provision interpreted in the vacated rule coupled with 
the absence of a prior rule addressing the issue that needs to be 
resolved (here, how to treat days attributable to Part C enrollees in 
the DPP).
    We do not agree that this retroactive rulemaking has deprived the 
public of a chance to be heard as the agency has provided a period for 
comment and considered all the comments submitted.
    We also do not agree with the underlying premise that either the 
APA or the Medicare statute require some sort of punitive 
``consequences'' to an agency as the result of a logical outgrowth 
deficiency, especially where, as here, the alternative interpretation 
(that Part C enrollees are not entitled to benefits under Part A) would 
be contrary to statute. CMS has given the public a chance to submit 
comments and has considered those comments, thereby curing the 
procedural error.
    Comment: Some commenters stated that the DSH statute does not 
require any specific treatment of Part C days and so retroactive 
rulemaking is not authorized because retroactivity is not ``necessary 
to comply with statutory requirements'' as contemplated by section 
1871(e)(i) of the Act. Similarly, a commenter asserted that because the 
D.C. Circuit in Northeast and the D.C. District Court in Alegent 
Health-Immanuel Medical Center v. Sebelius, 917 F. Supp. 2d 1 (D.D.C. 
2012), have read the statute to permit excluding Part C days from the 
Medicare fraction, retroactive rulemaking would not be necessary to 
comply with the statute. Some commenters stated that retroactive 
rulemaking is only permitted to adopt what they believe to be CMS' pre-
2004 policy.
    Response: The commenters misunderstand the Secretary's position in 
the August 2020 proposed rule. Section 1871(e) of the Act authorizes 
retroactive rulemaking when the Secretary determines that, in order to

[[Page 37777]]

comply with statutory requirements, it is necessary to apply a 
``substantive change in regulations, manual instructions, 
interpretative rules, statements of policy, or guidelines of general 
applicability . . . retroactively to items and services furnished 
before the effective date of the change.'' Here the DSH statute 
requires the Secretary to calculate DSH payments by, in part, treating 
Part C enrollees as either ``entitled to benefits under part A'' or as 
not so entitled, but there is no promulgated rule governing the 
treatment of Part C days for fiscal years before 2014. Therefore, 
unless the statute itself establishes the substantive legal standard, 
retroactive rulemaking is required in order make the statutorily 
required DSH adjustments. In other words, the Secretary's determination 
that retroactive rulemaking is necessary to comply with statutory 
requirements is not based on the view that the statute admits of only 
one interpretation of ``entitled to benefits under part A,'' which the 
Court in Empire has now confirmed. Rather, the basis of the 
determination is that the statute requires the Secretary to make DSH 
adjustments, which in turn requires him (to the extent the statute 
itself contains any ambiguity or ``gap'') to interpret the phrase 
``entitled to benefits under part A'' as that phrase relates to Part C 
days, and the Supreme Court has instructed that such an interpretation 
must be promulgated by notice-and-comment rulemaking. This same 
conclusion--that retroactive rulemaking is required--results even if 
CMS found the commenters' preferred treatment of Part C days to be the 
better interpretation and wished to adopt it. Northeast and Alegent did 
not address section 1871 of the Act and have been superseded in some 
respects by the Supreme Court's decision in Allina II.
    Comment: A commenter stated that CMS has authority to adopt a 
retroactive rule only if the substantive change in the regulation 
itself is required, in other words, only if the statute unambiguously 
requires the proposed interpretation. Some commenters stated that, 
contrary to the August 2020 proposed rule (as they interpret it), the 
Allina cases created no legal ambiguity and so retroactive rulemaking 
is not required. Another commenter stated that any legal ambiguity is 
already resolved by following the precedent of Northeast.
    Response: By its terms, section 1871(e)(1)(A)(i) of the Act permits 
retroactive rulemaking when the Secretary determines rulemaking is 
``necessary to comply with statutory requirements,'' not only when the 
Secretary determines that the interpretation embodied in a proposed 
regulation is itself unambiguously required by the statute. Where the 
statute admits of only one interpretation, rulemaking (prospective or 
retroactive) may not be required at all. In Allina II, the Court held 
that rulemaking is necessary under section 1871(a)(2) of the Act when 
HHS's policy fills a statutory gap. Here, as noted before, the D.C. 
Circuit previously found that the statute is ambiguous as to whether 
Part C days are days of beneficiaries ``entitled to benefits under Part 
A,'' and that the Secretary's interpretation is not foreclosed. 
Subsequently, in Empire, the Supreme Court held that ``entitled to 
benefits under part A'' clearly refers to ``all those qualifying for 
the [Medicare] program.'' (142 S. Ct. at 2368.) We believe this 
reasoning supports the Secretary's interpretation that ``entitled to 
benefits under part A'' includes Part C enrollees since, in order to 
enroll in Part C, an individual must be entitled to Part A.\10\
---------------------------------------------------------------------------

    \10\ 142 S. Ct. at 2359 (``[E]ntitlement to Part A generally 
enables a patient to enroll (if he wishes) in Medicare's other 
programs . . . [including] Part C's coverage.'') (citing section 
1851(a)(3) of the Act)).
---------------------------------------------------------------------------

    Some commenters appear to have misunderstood the discussion of 
legal ambiguity in the August 2020 proposed rule. In that rule, we 
stated that failing to finalize a regulation through notice-and-comment 
rulemaking would create ``legal ambiguity'' in the future as to the 
Secretary's treatment of Part C days for fiscal periods before 2014. As 
noted previously and in the August 2020 proposed rule, until this 
action is finalized and in effect, no regulation governs the treatment 
of Part C days for years before FY 2014. Because there is no rule 
governing the treatment of Part C days for discharges before October 1, 
2013, the Secretary concluded he must promulgate a rule that governs 
this period--whether the rule counts the Part C days in the numerator 
of the Medicaid fraction (for individuals also eligible for Medicaid), 
as most commenters desire, or in the Medicare fraction, as CMS 
proposed. The Northeast decision striking down the exclusion of Part C 
days from the numerator of the Medicaid fraction for FYs 1999 to 2002 
and holding that the Secretary could not apply her 2004 interpretation 
retroactively to those years does not control in the face of the 
Supreme Court's decision in Allina II, as discussed throughout this 
action.
    Comment: Some commenters stated that there was no missed statutory 
deadline to justify a retroactive rule.
    Response: Section 1871(e) of the Act authorizes retroactive 
rulemaking when the Secretary determines that, in order to comply with 
statutory requirements, it is necessary to apply a ``substantive change 
in regulations, manual instructions, interpretative rules, statements 
of policy, or guidelines of general applicability'' or it is in the 
public interest. The Secretary's authority to undertake retroactive 
rulemaking is not limited to instances when a statutory deadline has 
been missed. As explained in this action, the Secretary has determined 
that retroactive rulemaking is necessary to comply with statutory 
requirements, to the extent a statutory gap is left to fill after 
Empire, and is in the public interest.
    Comment: Some commenters stated that the Secretary's argument that 
retroactive rulemaking is in the public interest is circular because it 
presupposes that the DSH statute cannot be given effect except through 
regulation. Some stated that the Secretary's arguments that a 
retroactive rule would be in the public interest simply repeat his 
arguments for why a retroactive rule is required by statute.
    Response: We do not agree that the conclusion that the treatment of 
Part C days cannot be resolved without rulemaking is a mere 
presupposition, and therefore that the Secretary's argument is 
circular. Rather, as stated previously, there is no ``promulgated rule 
governing the treatment of Part C days for fiscal years before 2014'' 
(Allina Health Servs., 863 F.3d at 939), and the Supreme Court held 
that the Secretary cannot establish or change an avowedly gap-filling 
policy for the treatment of Part C days without first promulgating a 
regulation. Thus, to the extent the Supreme Court in Empire did not 
foreclose any other interpretation of the statute than the one the 
Secretary proposes, the need for rulemaking on the treatment of Part C 
days under the statute is not a presumption. We also believe it is in 
the public interest for the Secretary to enact rulemaking that reflects 
what he believes is the best interpretation of the statute, one 
consistent with what the Supreme Court has since described as the clear 
meaning of the statute, because to do otherwise may result in payments 
from the Medicare Trust Fund in excess of what he believes is 
authorized in the DSH statute.
    Comment: Some commenters stated that the Medicare statute's 
authorization of a retroactive substantive change in regulations may 
apply only when the Secretary determines that the change has a positive 
impact on providers.

[[Page 37778]]

Similarly, some commenters stated that CMS does not have authority to 
act retroactively because its proposed rule would cause a loss to most 
hospitals and the public interest exception was intended to apply only 
where beneficial to providers. Some commenters relied on language in a 
2001 Ways and Means Committee report that stated that a retroactive 
substantive change would be permissible if it would ``have a positive 
effect on beneficiaries or providers of services and suppliers.''
    Response: By its terms, the statute as enacted does not restrict 
the Secretary's determination that a retroactive substantive change in 
regulations is in the public interest only in those instances where the 
change would have a positive impact on providers. The statute refers to 
``public interest'' not ``providers' interest.'' It is in each 
providers' interest to receive as much in DSH payments as possible. It 
is in the public interest that hospitals are paid in accordance with 
the statute. To the extent that any statutory gap remains following the 
Supreme Court's Empire decision, the Secretary believes rulemaking on 
the Part C days issue for years prior to the FY 2014 IPPS final rule is 
required by Allina II and is in the public interest. We believe that 
the interpretation articulated in the August 2020 proposed rule best 
reflects the statutory text as well as congressional intent. We also 
believe that applying that interpretation retroactively is in the 
public interest because the alternative interpretation (that Part C 
enrollees are not entitled to benefits under Part A) would in many 
instances result in payments in excess of what Congress intended.
    Comment: A commenter reasoned that because the D.C. Circuit held in 
Allina Health Services v. Price that CMS could not bypass notice-and-
comment rulemaking and resolve the treatment of Part C days through 
adjudication, which is inherently retroactive, retroactive rulemaking 
is likewise impermissible.
    Response: The Medicare statute at section 1871(e)(1)(A) of the Act 
expressly provides authority for retroactive rulemaking under certain 
conditions, as explained previously, and for the reasons articulated in 
the August 2020 proposed rule and in this final action, the Secretary 
finds that those conditions are met here.
    Comment: Most commenters opposed CMS's proposal and urged CMS to 
exclude Part C days from the Medicare fraction of the DPP calculation 
and include them (for dually eligible individuals) in the numerator of 
the Medicaid fraction. (We note that, as explained previously, all 
patient days, regardless of eligibility for Medicaid or entitlement to 
Medicare Part A, are included in the denominator of the Medicaid 
fraction.) Many commenters disagreed that individuals enrolled in Part 
C are ``entitled'' to benefits under Part A and asserted that the 
proposed interpretation is inconsistent with their view of the intent 
of the statute. Commenters cited the following statutory provisions in 
support of their arguments:
     Section 226(c)(1) of the Act, which states that 
entitlement of an individual to hospital insurance benefits for a month 
under Part A ``shall consist of entitlement to have payment made under, 
and subject to the limitations in, part A.''
     Section 1851(a)(1) of the Act, which states persons 
eligible for Medicare Advantage are ``entitled to elect to receive 
benefits'' either ``through the original Medicare fee-for-service 
program under parts A and B'' or ``through enrollment in a [Medicare 
Advantage plan] under [Part C].''
     Section 1851(i)(1) of the Act, which states that 
``payments under a contract with a [Medicare Advantage] organization . 
. . with respect to an individual electing a [Medicare Advantage] plan 
. . . shall be instead of the amounts which (in the absence of the 
contract) would otherwise be payable under parts A and B . . .''
    Commenters contended that individuals who enroll in an MA plan 
receive benefits under Part C and not Part A, and so cannot be 
``entitled'' to benefits under Part A. Some stated that, because the 
payments received by providers under contract with the MA organization 
are made instead of the amounts that would otherwise be payable under 
Part A, Part C enrollees are not entitled to benefits under Part A. 
Some commenters stated that a patient who is enrolled in Part C on a 
given patient day is not entitled to Part A benefits ``for that 
hospitalization''; several argued that while a beneficiary must at some 
point be entitled to benefits under Part A in order to enroll in Part 
C, once they do so they are no longer entitled to benefits under Part 
A. Similarly, a commenter suggested that the benefits to which 
beneficiaries are entitled under Part A are ``subject to the 
limitations'' of Part A, but Part C enrollees may receive benefits from 
their MA plans that are in excess of benefits to which they are 
entitled under Part A, such that beneficiaries must not be entitled to 
benefits under Part A.
    Response: We disagree with the commenters, and we believe the 
Supreme Court's intervening decision in Empire now forecloses the 
commenters' interpretation. (142 S. Ct. 2354, 2368.) Indeed, even 
before Empire, we did not find these comments persuasive. These 
comments are the same or similar to comments CMS received in response 
to the proposed prospective rule concerning the treatment of Part C 
days that was finalized in the FY 2014 IPPS final rule.\11\ We continue 
to disagree that Medicare beneficiaries enrolled in Part C no longer 
receive benefits under Part A and that, because the payment structure 
of Part C applies (that is, CMS pays the MA plans so that the plans may 
make payments to hospitals for the care of the beneficiaries), those 
beneficiaries are not entitled to Part A benefits. As we stated in the 
FY 2014 final rule, section 226 of the Act provides that an individual 
is automatically ``entitled'' to Medicare Part A when the person 
reaches age 65, provided that the individual is entitled to Social 
Security Benefits under section 202 of the Act, or becomes disabled.
---------------------------------------------------------------------------

    \11\ For more information on that rule, including a summary of 
the comments received, we refer readers to 78 FR 50496.
---------------------------------------------------------------------------

    We continue to believe, as we concluded in the FY 2014 IPPS final 
rule, that Congress uses the phrase ``entitled to benefits under part 
A'' consistently to refer to an individual's legal status as a Medicare 
Part A beneficiary. This phrase is used in numerous other sections of 
the Medicare statute, indicating that it has a specific, consistent 
meaning throughout the statutory scheme, rather than a varying, 
context-specific meaning in each section and subsection. Enrolling in 
Part C does not change an enrollee's status as a Medicare Part A 
beneficiary and does not remove or reduce any benefits the beneficiary 
would otherwise have received; indeed, the MA plan must provide the 
benefits to which the beneficiary is entitled under Part A as described 
by section 1852(a)(1)(A) and (B)(i) of the Act and may provide 
additional supplemental benefits as described by section 1852(a)(3)(C) 
of the Act. The D.C. Circuit rejected many of the commenters' views 
that the agency's interpretation is inconsistent with the plain 
language of the statute. (Northeast, 657 F.3d at 6-13.) We note that 
the Supreme Court in Empire further explained that, for purposes of 
calculating hospitals' DPPs, ``individuals `entitled to [Medicare Part 
A] benefits' are all those qualifying for the program'' and that 
entitlement to Part A benefits is, ``according to the statute, simply a 
legal status arising from'' meeting the statutory criteria in

[[Page 37779]]

section 226(a)-(b) of the Act. (142 S. Ct. 2354 at 2368 and 2363 
(emphasis added).) A person's entitlement to Part A benefits arises 
when the ``person meets the basic statutory qualifications and (unless 
a disability diminishes) never goes away.'' (Id. at 2364.)
    In response to commenters' concerns about section 226(c)(1) of the 
Act, we note that, for purposes of section 226(c)(1) of the Act, 
beneficiaries enrolled in Part C are having payment made under Part A 
for the month in question, via the Part A component of the monthly 
payment made to the MA organization, and are receiving Part A benefits 
subject to the limitations on such benefits provided for in Part A.
    In response to commenters' concerns about section 1851(a)(1) of the 
Act, we note that, for purposes of section 1851(a)(1) of the Act, the 
``benefits'' referenced in the phrase quoted by the commenters 
(``entitled to elect to receive benefits'') are the benefits provided 
for in Part A and Part B. Thus, this language confirms that 
beneficiaries enrolled in Part C remain ``entitled'' to benefits under 
Part A, and thus supports our interpretation of the statute. It is only 
the vehicle ``through'' which such Part A benefits are received that 
changes, from the ``fee-for-service'' method spelled out under Part A 
to the capitation payment method spelled out in Part C.
    Section 1851(i)(1) of the Act similarly refers only to whether Part 
A benefits are provided via payments to, and by, the MA organization or 
direct payments made under the ``fee-for-service'' payment procedures 
provided for in Part A and Part B. It is only the process for 
furnishing these benefits that is at issue in the provision, not 
entitlement to such benefits themselves. That Part C enrollees may 
receive supplementary benefits beyond what other Part A-entitled 
beneficiaries are entitled to does not deprive the Part C enrollees of 
entitlement to Part A benefits.
    Commenters who argue that it is obvious that a beneficiary cannot 
be entitled to both Part C and Part A benefits on the same day confuse 
the method for covering Part A benefits with whether an individual is 
entitled to receive such benefits. The question of whether a 
beneficiary is ``entitled'' to Part A benefits is distinct from how the 
provider is paid for furnishing those benefits. As we stated in the 
August 2020 proposed rule (85 FR 47725), and has been subsequently 
affirmed by the Supreme Court in Empire, section 226 of the Act 
identifies statutory criteria for an individual's entitlement to Part A 
benefits. (142 S. Ct. at 2362.) Beneficiaries who are enrolled in MA 
plans provided under Medicare Part C continue to meet all the statutory 
criteria for entitlement to Medicare Part A benefits under section 226 
of the Act. Moreover, section 1851(a)(3) of the Act provides that, in 
order to be eligible to enroll in Medicare Part C, a beneficiary must 
be ``entitled to benefits under Part A and enrolled under Part B.'' 
Thus, by definition, a beneficiary must be entitled to Part A to be 
enrolled in Part C. We do not believe that the Act suggests that 
beneficiaries who enroll in a Medicare Part C plan thereby forfeit 
their entitlement to Medicare Part A benefits. To the contrary, as 
affirmed in Empire, because they continue to meet the basic statutory 
criteria for entitlement under the statute (that is, being over 65 or 
disabled), their entitlement status is unaffected by such enrollment. 
(142 U.S. at 2362.) In our view, enrollment in a plan under Medicare 
Part C is simply an option that a person entitled to Part A benefits 
may choose as a way to receive their Part A benefits. A beneficiary who 
enrolls in Medicare Part C is entitled to receive benefits under Part A 
through the MA plan in which he or she is enrolled, and the MA 
organization's costs for providing such Part A benefits are paid for by 
CMS with money from the Medicare Part A Trust Fund.
    In addition, under certain circumstances, Medicare Part A pays 
providers directly for care furnished to patients enrolled in Medicare 
Part C plans, rather than indirectly through capitated payments to MA 
organizations from the Medicare Part A Trust Fund. For example, under 
section 1852(a)(5) of the Act, if, during the course of the year, the 
scope of benefits provided under Medicare Part A expands beyond a 
certain cost threshold due to Congressional action or a national 
coverage determination, Medicare Part A will pay providers directly for 
the cost of those services provided to beneficiaries enrolled in Part 
C. Similarly, Medicare Part A pays directly for hospice care (a Part A 
benefit) furnished to MA patients who elect under section 1812(d) of 
the Act to receive such care from a particular hospice program and, 
under certain circumstances, for FQHC services provided to MA patients 
for FQHCs that contract with MA organizations under sections 1853(h)(2) 
and 1853(a)(4) of the Act, respectively. Thus, we continue to believe 
that a patient enrolled in an MA plan remains entitled to benefits 
under Part A and should be counted in the Medicare fraction, not in the 
numerator of the Medicaid fraction (should the Part C enrollee also be 
eligible for Medicaid). Indeed, in light of the Supreme Court decision 
in Empire, we do not believe the statute can properly be read 
otherwise.
    Comment: Some commenters stated that the Secretary's interpretation 
of ``entitled to benefits under part A'' in the DSH statute is 
inconsistent with his interpretation of ``entitled to [SSI] benefits'' 
in that same statute because he treats people as ``entitled'' to 
Medicare Part A benefits if they meet the statutory criteria for 
entitlement, regardless of whether Medicare pays for hospital services 
during a given hospital stay, but treats patients as ``entitled'' to 
SSI benefits only if they are actually paid those monthly cash benefits 
for the month(s) in which they are hospitalized. Some commenters 
suggested that, if CMS interprets ``entitled'' to Medicare to include 
unpaid days it must include in the Medicare fraction numerator days for 
beneficiaries who are (they argue) ``entitled'' to SSI but who do not 
receive any cash benefit. Some commenters proposed additional Social 
Security Administration status codes that, in their opinion, should be 
included in the numerator of the Medicare fraction because they capture 
individuals who, purportedly, are entitled to SSI.
    Response: The meaning of ``entitled to [SSI] benefits'' in the DSH 
statute is beyond the scope of this action. However, we note that, as 
the Secretary explained in the FY 2014 IPPS final rule (78 FR 50617), 
the differing interpretation of these two distinct phrases is based on 
the two different kinds of entitlements at issue. Because SSI is a cash 
benefit, and because entitlement to that benefit depends on factors 
(such as income level) that can change over time, only a person who is 
actually entitled to be paid these benefits for the month in question 
is considered entitled to those benefits. This differs from entitlement 
to Medicare benefits under Part A, which are a distinct set of health 
insurance benefits where an individual's entitlement to such benefits 
does not generally evolve over time. The health insurance benefits also 
include ongoing, continuous coverage for various specified kinds of 
healthcare service, regardless of income status or other financial 
factors.\12\ The Secretary has more extensively addressed these two 
different kinds of entitlement for purposes of the DSH calculation in 
another notice-and-comment rulemaking. For more information, we refer 
readers to the FY 2011 IPPS/LTCH

[[Page 37780]]

PPS final rule (75 FR 50275 through 50286). That rulemaking further 
elaborates on the reasons for distinguishing between entitlement to SSI 
benefits and entitlement to Medicare benefits under Part A. (Id. at 75 
FR 50280 and 50281.) We note also that courts have upheld the 
Secretary's distinction between these two different kinds of 
entitlement against similar allegations of ``inconsistency.'' \13\
---------------------------------------------------------------------------

    \12\ 142 S. Ct. at 2363 (emphasizing that Part A entitlement 
under the statute ``reflects the complexity of health insurance'').
    \13\ Metro. Hosp. v. HHS, 712 F.3d 248, 268 (6th Cir. 2013); 
Advoc. Christ Med. Ctr. v. Azar, No. 17-CV-1519 (TSC), 2022 WL 
2064830, at *9 (D.D.C. June 8, 2022); Florida Health Scis. Ctr. v. 
Becerra, 19-cv-3487-RC, 2021 WL 2823104, at *15-16 (D.D.C. July 7, 
2021).
---------------------------------------------------------------------------

    Comment: Some commenters stated that the August 2020 proposed rule 
did not discuss the phrase ``for such days'' in the DSH statute and 
impermissibly seeks to eliminate that statutory clause through 
rulemaking. Other commenters state the phrase ``for such days'' could 
or must be interpreted to exclude Part C days from the Medicare 
fraction, which includes days for patients who ``(for such days) were 
entitled to benefits under part A.'' (Section 1886(d)(5)(F)(vi) of the 
Act.) These commenters believe this phrase requires that, to be 
included in the Medicare fraction, a patient must be entitled to Part A 
hospital benefits on the patient day being counted, and that Part C-
enrolled patients are not so entitled.
    Some commenters agree with then-Judge Kavanaugh's concurrence in 
Northeast when he reasoned that the statute's use of ``were'' indicates 
that the calculation of the Medicare fraction is meant to determine 
``what kind of benefits a specific patient received on a specific day'' 
and so HHS must ``isolate hospital days attributable to patients who 
were, on those days, receiving benefit payments through Part A of 
Medicare,'' which in his (and the commenters') view excludes a Part C 
enrollee. (Northeast, 657 F.3d. at 19 (Kavanaugh, J., concurring).) 
Moreover, these commenters assert that since a patient who is receiving 
benefits under Part A for a given day cannot also receive benefits 
under MA for that day, the ``for such days'' language indicates there 
is a clear delineation between MA days and Medicare Part A days.
    Response: The Secretary's interpretation does not seek to eliminate 
the clause ``for such days.'' As the Supreme Court explained in Empire:

    The ``(for such days)'' phrase instead works as HHS says: hand 
in hand with the ordinary statutory meaning of ``entitled to [Part 
A] benefits.'' The parenthetical no doubt tells HHS to ask about a 
patient on a given day. But the query the agency must make is not 
whether that patient on that day has received Part A payments; the 
query is, consistent with what ``entitled'' means all over the 
statute, whether that patient on that day is qualified to do so.

142 S. Ct at 2365 (emphasis added). We note that Justice Kavanaugh 
authored the dissenting opinion in Empire, adhering to his view in his 
Northeast concurrence. The majority in Empire accepted the Secretary's 
view and necessarily rejected then-Judge Kavanaugh's interpretation of 
``for such days'' in Northeast.
    In the Secretary's view, Part C enrollees are entitled to all Part 
A benefits (including hospital benefits) regardless of how those 
benefits are (or are not) paid, that is they are ``entitled'' to Part A 
benefits when providers are paid by an MA organization (which in turn 
is paid from the Part A trust fund) and also when providers are paid 
directly from the Part A trust fund, such as in the case of hospice 
benefits. Part A entitlement is a status that does not change with 
enrollment in Part C. The Secretary's interpretation, which is the same 
one adopted by the Supreme Court in Empire, gives meaning to the clause 
``for such days'' and does isolate hospital days attributable to 
patients who were entitled to--meaning qualified for--Part A benefits 
on specific patient days. An individual's entitlement to Medicare Part 
A is largely, but not perfectly static, and ``[n]ot every patient who 
meets the criteria . . . during some portion of his hospital stay will 
meet those criteria for all of the stay.'' Northeast, 657 F.3d at 12. 
For example, ``a person who collects Social Security and who turns 65 
during his hospital stay will become `entitled' to benefits under Part 
A on his sixty-fifth birthday,'' and ``a person under age 65 who 
reaches his twenty-fifth calendar month of entitlement to disability 
benefits under [section 223 of the Act] during his hospital stay will 
become `entitled' to benefits under Part A upon reaching his twenty-
fifth month of disability entitlement.'' (Id.) For such beneficiaries, 
the days before they become entitled to benefits under Part A are 
excluded from the Medicare fraction, but the days on or after they 
become entitled to benefits under Part A are included in that 
fraction.\14\
---------------------------------------------------------------------------

    \14\ Empire, 142 S. Ct. at 2366 (``By the way, said Congress . . 
.: If someone turns 65 during the year the fraction covers, make 
sure to exclude his pre-birthday hospital days.'').
---------------------------------------------------------------------------

    Although our interpretation of the statute is not driven by the 
financial impact of that interpretation, we note also that excluding 
Part C days from the Medicare fraction based on the commenters' 
understanding of the statutory phrase ``for such days'' may put some 
hospitals in a worse position than the Secretary's view because those 
days would not necessarily be includable (for individuals also eligible 
for Medicaid) in the Medicaid fraction. The statutory language defining 
the Medicaid fraction only counts in that fraction patient days 
attributable to patients who ``were not entitled to benefits under part 
A [of Medicare]'' (section 1886(d)(5)(F)(vi)(II) of the Act); that 
phrase is not modified with the same ``for such days'' phrase that is 
present in the statutory language defining the Medicare fraction 
(section 1886(d)(5)(F)(vi)(I) of the Act). Therefore, under Empire, 
``the `not entitled' phrase in [the Medicaid fraction] should mean 
(consistent with the rest of the statute) not qualifying for 
Medicare,'' which includes Part C enrollees that the commenters ``would 
oust from the Medicare fraction,'' and those Part C enrollees thus 
would ``fall . . . outside the Medicaid fraction,'' too. (142 S. Ct. at 
2367.)
    Comment: A commenter stated that because the statute expressly 
references Part C days in the indirect medical education (IME) 
provisions of the Balanced Budget Act of 1997 (Pub. L. 105-33) (BBA) in 
order to provide IME payments to hospitals in connection with patients 
enrolled in Part C plans, but did not also change the DSH statute to 
expressly refer to Part C days, the DSH Medicare fraction should not be 
interpreted to include Part C days and the Medicaid fraction should not 
be interpreted to exclude Part C days because Congress did not mean for 
Part A and Part C to be synonymous.
    Response: The IME add-on for patients enrolled in Part C plans 
under section 1886(d)(5)(B) of the Act is designed to compensate IPPS 
teaching hospitals for increases in costs that are presumed to occur as 
an indirect consequence of the involvement of student doctors in 
patient care. Payments for IME costs in traditional Medicare are 
calculated on the basis of payments for discharges (Section 
1886(d)(5)(B) of the Act); this language does not include any reference 
to entitlement to Part A benefits. Prior to the BBA, Medicare did not 
make any separate payment to hospitals for IME costs associated with 
Medicare patients enrolled in Part C plans. Sections 4622 and 4624 of 
the BBA directed the Secretary to provide for an additional payment 
amount to hospitals for IME in connection with Medicare beneficiaries 
enrolled in a Part C plan. Congress expressly referenced Part C in the 
IME provisions of the BBA because neither hospitals nor Part C plans 
are paid by

[[Page 37781]]

the Secretary on the basis of discharges of Part C enrollees. (Section 
1886(d)(5)(B) of the Act.) We disagree with the commenter that because 
the DSH statute does not expressly mention Part C days, the statute 
unambiguously treats such days as days for which beneficiaries are not 
entitled to Part A. Rather, other statutory provisions contemplate that 
Part C enrollees remain entitled to Part A, indicating that the statute 
includes them in the Medicare fraction. The Secretary's position is not 
that ``Part A'' and ``Part C'' are synonymous, but that Part C 
enrollees remain entitled to benefits under Part A.
    Comment: A commenter stated that CMS is proposing to remove the 
word ``covered'' from the regulation. Other commenters stated that CMS 
implicitly conceded that Part C days are not ``covered'' days when it 
stated in the FY 2014 IPPS final rule that the corresponding proposed 
rule did not propose any change to the text of the regulation because 
``the current text [already] reflects the policy [that was] proposed'' 
(78 FR 50615). The commenters appeared to mean that if, in CMS's view, 
the text of the regulation did not need to change in the FY 2014 IPPS 
final rule in order to include Part C days in the Medicare fraction, 
that is because the word ``covered'' had already been removed from the 
text of the regulation.
    Response: We disagree with the suggestion that in the August 2020 
proposed rule, CMS proposed to remove the word ``covered'' from the 
regulation; the regulation had already been revised to remove the word 
``covered'' (69 FR 49099). Although the FY 2005 IPPS final rule was 
vacated by the D.C. Circuit as to its treatment of Part C days in 
Allina I, that decision did not address the issue of exhausted benefit 
days; that is, days that are not ``covered.'' Before we proposed the 
August 2020 proposed rule, the regulation had already been revised to 
remove the word ``covered'' (69 FR 49099). We also disagree with the 
commenters' interpretation that the statement in the FY 2014 IPPS final 
rule implied that Part C days are not ``covered days.'' When CMS stated 
in the FY 2014 IPPS proposed rule that the text already reflected the 
proposed policy, that was because the text of 42 CFR 
412.106(b)(2)(i)(B) and (b)(2)(iii)(B) expressly included Part C days 
in the Medicare fraction numerator and denominator, not because the 
word ``covered'' had already been removed from the regulation. In the 
FY 2005 IPPS final rule, the agency had stated that it was ``revising 
[its] regulations''--which at the time simply parroted the language of 
the statute--to specifically ``include the days associated with M+C 
beneficiaries in the Medicare fraction of the DSH calculation'' (69 FR 
49099). Although, the agency inadvertently failed to make that revision 
in the text of the regulations at that time, the Secretary made a 
``technical correction'' to the regulations in 2007 to expressly 
incorporate the interpretation announced in the FY 2005 IPPS final 
rule. (72 FR 47384 (August 22, 2007))
    Comment: A commenter read our description of the alternative 
considered in the August 2020 proposed rule to contemplate the 
restoration of the term ``covered'' to the DSH regulation (meaning that 
exhausted benefit or unpaid days would not be included in the 
calculation of the Medicare fraction), which the commenter favored.
    Response: This commenter misunderstood our proposal and the 
alternative considered. As discussed in more detail elsewhere in the 
action, under both our proposal and the alternative considered, Part C 
days would be treated as ``covered'' days for the purposes of 
calculating a hospital's DPP and neither the rule proposed nor the 
alternative considered directly addressed the status of exhausted 
benefit or other unpaid days. As we did not propose the change the 
commenter supports, we will not be adopting the commenter's suggestion.
    Comment: A commenter stated that the August 2020 proposed rule is 
arbitrary and capricious because the Secretary excludes from the 
Medicare fraction patient days paid under Medicare Part B and patient 
days for areas of a hospital not payable under Part A.
    Response: The August 2020 proposed rule is not inconsistent with 
the exclusion of Part B days from the Medicare fraction; to enroll in 
Part B under section 1836 of the Act, an individual need not be 
``entitled to benefits under part A.'' In a December 2, 2015 decision 
on remand in Allina I, the Administrator explained that the restriction 
on patient days to certain units of the hospital is entirely unrelated 
to the Secretary's interpretation of ``entitled to benefits under part 
A'' but is instead based on an interpretation of the term ``patient 
days'' in the DSH provision as limited to inpatient days payable under 
the IPPS.
    Comment: Several commenters stated that the August 2020 proposed 
rule is inconsistent with the D.C. Circuit's holding in Allina Health 
Services v. Price, 863 F.3d 937 (D.C. Cir. 2017) and the Supreme 
Court's decision in Allina II because those cases held that the 
Secretary cannot undertake a policy change without first promulgating a 
regulation. Several commenters stated that the August 2020 proposed 
rule disregarded or circumvented the Supreme Court's holding in Allina 
II. Some commenters stated that CMS must not interpret the statute to 
treat Part C days as days beneficiaries are entitled to benefits under 
Part A because CMS has, purportedly, gotten more than one adverse 
decision on this issue. They argue that the higher DSH payments that 
would be calculated by excluding these days from the Medicare fraction 
and including them in the Medicaid fraction numerator (for patients 
also eligible for Medicaid) have therefore been wrongfully withheld 
from providers for many years.
    Response: We agree that the Supreme Court in Allina II held that, 
because the policy on the treatment of Part C days in the DSH 
calculation was intended to address an avowed statutory gap, the 
Secretary cannot establish or change such a policy without first 
promulgating a regulation. The purpose of this final action is to 
comply with that requirement (to the extent any gap-filling policy is 
even necessary now that the Supreme Court has clarified the meaning of 
``entitled to benefits under part A,'' as discussed more elsewhere), 
not to disregard or circumvent the Court's ruling. As stated in Allina 
Health Services, there is ``no promulgated rule governing the 
[treatment of Part C days] for the fiscal years before 2014.'' (863 
F.3d at 939.) The Secretary explained in briefing to the Supreme Court 
in Allina II that if the Medicare statute required the Secretary's 
interpretation of ``entitled to benefits under part A'' to be 
promulgated through notice-and-comment procedures (as the Supreme Court 
ultimately held), then notice-and-comment rulemaking would also be 
necessary before the Secretary could adopt the respondents' preferred 
interpretation. And, even if considered retroactive in application, 
this action will not be effective until after the completion of this 
notice-and-comment rulemaking, which will have given interested parties 
the opportunity to present their arguments as to the proper 
interpretation of the statute and given the Secretary the opportunity 
to consider those arguments before the action is finalized.
    No final binding court decision has found fault with the 
Secretary's interpretation of ``entitled to benefits under part A'' to 
include Part C enrollees. That is why, after the Supreme Court issued 
its Allina II decision, the United States District

[[Page 37782]]

Court for the District of Columbia remanded to the Secretary cases 
presenting the Part C days issue, holding that the district court had 
``no basis to direct the agency as to what the formula for the [DSH] 
recalculation should be'' because ``this was the aspect of the case 
left open by previous opinions.'' (In Re Allina II-Type DSH Adjustment 
Cases, Misc. No. 19-0190, Dkt. 74 (D.D.C. Jan. 19, 2021).)
    Indeed, the weight of authority--in our view--now conclusively 
shows that the Secretary's interpretation of the relevant phrase is 
permissible, if not required, under the language of the statute. In 
Northeast, the D.C. Circuit held that ``the Balanced Budget Act of 
1997, Public Law 105-33, 111 Stat 251, which enacted M+C, as well as 
subsequent amendments to Part C, assume that a person enrolled in [Part 
C] remains entitled to benefits under Part A, and nothing in the text 
or structure of the DSH fractions compels a different result.'' Most 
importantly, the Supreme Court's decision in Empire has now confirmed 
the validity of the Secretary's interpretation. While Empire addressed 
exhausted benefit and other unpaid days, not Part C days, the Court's 
reasoning confirms that ``entitled to benefits under part A'' should be 
read to include Part C days. The Court concluded that the statutory 
text is clear: ``being `entitled' to Medicare benefits . . . means--in 
the [DSH] fraction descriptions, as throughout the statute--meeting the 
basic statutory criteria.'' (Empire, 142 S. Ct at 2362.) Part C 
enrollees, who by definition must be ``entitled'' to Part A benefits, 
necessarily meet these basic statutory criteria. They do not cease to 
meet them through enrollment in Part C because such enrollment does not 
affect their age or disabled status.
    Comment: Some commenters stated that CMS did not change what they 
call its ``covered days'' rule when Part C was added to the statute, 
and that CMS has acknowledged that, before the FY 2005 IPPS final rule, 
it had a practice of excluding Part C days from the Medicare fraction. 
The commenters appear to suggest that the pre-FY 2005 regulation 
therefore excluded Part C days from the Medicare fraction because they 
are (purportedly) not ``covered days.''
    Response: This argument was made by plaintiffs in Allina Health 
Services v. Price, 863 F.3d 937, 939 (D.C. Cir. 2017) and rejected by 
the D.C. Circuit, which held in that case that ``HHS has no promulgated 
rule governing the interpretation of `entitled to benefits under part 
A' for the fiscal years before 2014.'' (Emphasis added.) The 1986 
regulation, which preceded the FY 2005 IPPS final rule, established the 
limitation to ``covered'' days and was promulgated more than a decade 
before the creation of Medicare Part C and thus plainly could not have 
addressed whether enrollees in the later-created Part C program are 
``entitled to benefits'' under Part A. And the ``covered'' days 
limitation in the pre-FY 2005 IPPS final rule was not based on any 
interpretation of ``entitled to benefits under part A,'' nor did it 
establish any policy that would have excluded Part C days. Rather, as 
the Secretary explained in the 1986 rulemaking, the rule was intended 
to clarify that it ``refer[red] only to Medicare covered days,'' that 
is, days for which Medicare is authorized to make payment.\15\ The 
``covered'' limitation was an interpretation of the statutory phrase 
``for such days,'' which modifies the phrase ``entitled to benefits 
under part A'' (51 FR 31460 and 31461). The determination of whether a 
patient day is ``covered'' has never depended on whether the day is 
attributable to an individual under the traditional Part A fee-for-
service program or one enrolled in a managed care plan, such as under 
Part C. A Part C enrollee is entitled to receive benefits under Part A 
through the Part C plan in which he is enrolled, and such benefits are 
paid from the Medicare Part A Trust Fund. (Section 1853(f) of the Act.) 
Therefore, Part C days have always been considered to be paid or 
``covered'' days even though Medicare payments for Part C days are made 
to managed care plans rather than directly to hospitals.
---------------------------------------------------------------------------

    \15\ See the September 3, 1986 Federal Register (51 FR 31460 and 
31461) and 42 CFR 409.3 (``Covered'' refers to ``services for which 
the law and the regulations authorize Medicare payment.'').
---------------------------------------------------------------------------

    Comment: Some commenters stated that because the Ninth Circuit in 
Empire v. Becerra, 958 F.3d 873 (2020), vacated CMS's regulatory 
amendment in the FY 2005 IPPS final rule that removed the word 
``covered'' from the DSH regulation, and (purportedly) did so on a 
nationwide basis, the previous regulation was reinstated and so only 
``covered'' days can be included in the Medicare fraction. According to 
these commenters, Part C days can therefore not be included in the 
Medicare fraction because they are not paid for under Part A and so are 
not ``covered'' days. These commenters also believe that the Secretary 
ought to have discussed Empire in the proposed rule.
    Response: The Supreme Court reversed the Ninth Circuit's decision 
in Empire, concluding that ``individuals `entitled to [Medicare Part A] 
benefits' are all those qualifying for the program, regardless of 
whether they are receiving Medicare payments for part or all of a 
hospital stay.'' (142 S. Ct. at 2368 (alteration in original).) Empire 
did not involve the treatment of Part C days, nor did the Ninth 
Circuit's analysis of its own prior precedent bear directly on that 
issue, which is why the Ninth Circuit's holding was not discussed in 
the August 2020 proposed rule. Regardless, and putting aside the fact 
that the Ninth Circuit's decision in Empire was overturned by the 
Supreme Court, any relevance of the Ninth Circuit's decision in Empire 
to the Part C days issue would lie only in the Ninth Circuit's 
interpretation of ``entitled to benefits under part A,'' an issue that 
was addressed at length in the August 2020 proposed rule. The Secretary 
has explained why Part C enrollees remain entitled to benefits under 
Part A and also that, because MA plans are paid from the Part A trust 
fund and use such payments to pay hospitals for Part C days, Part C 
days are ``covered'' days. Accordingly, the Ninth Circuit's conclusion 
that only ``covered'' or paid days are included in the Medicare 
fraction would not have required the exclusion of Part C days. In any 
event, the Supreme Court's holding in Empire that individuals who meet 
the basic statutory criteria for Medicare Part A benefits are 
``entitled to benefits under part A,'' and their patient days are 
included in the Medicare fraction, has now confirmed the Secretary's 
interpretation.
    Comment: Some commenters stated that CMS must apply what they 
assert is its pre-FY 2005 practice of excluding Part C days from the 
Medicare fraction. Of these, some rely on CropLife America v. EPA, 329 
F.3d 876, 879 (D.C. Cir. 2003), and Action on Smoking & Health v. 
C.A.B., 713 F.2d 795, 797 (D.C. Cir. 1983), for the proposition that 
when an agency's rule is vacated, the agency's previous practice is 
reinstated. In Action on Smoking the Court of Appeals held that its 
vacatur of the challenged portion of a rule ``had the effect of 
reinstating the rules previously in force.'' In CropLife America the 
Court of Appeals held that the consequence of vacatur of a rule was the 
restoration of ``the agency's previous practice.'' Some of these 
commenters stated that CMS must therefore exclude Part C days from the 
Medicare fraction and include them in the Medicaid fraction (for 
individuals also eligible for Medicaid) either based on the pre-FY 2005 
regulation or based on a ``clarification'' of its regulation to reflect 
the pre-FY 2005 ``policy'' for years before the effective date of the 
prospective rule. Some commenters

[[Page 37783]]

stated that the Supreme Court's Allina II decision does not prevent CMS 
from reverting to its prior practice because the statute requires 
notice and comment only for ``rule[s], requirement[s] or other 
statement[s] of policy,'' not practices. Some commenters stated that 
the pre-FY 2005 practice could be reinstated without notice-and-comment 
rulemaking because the practice did not impose any ``requirement'' to 
which section 1871(a)(2) of the Act would apply, unlike the FY 2005 
IPPS final rule that was vacated in Allina I. A commenter relied on 
Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914 (D.C. 
Cir. 2013), in support of their argument that, whether a prior policy 
or practice is valid is irrelevant to the question of whether 
retroactive rulemaking is permissible; it matters only that such policy 
existed.
    Response: To the extent these comments suggest that the agency must 
apply an alleged pre-FY 2005 practice of excluding Part C days from the 
Medicare fraction and including them in the Medicaid fraction, we 
believe that approach would violate existing law. First, as discussed 
in more detail previously, we believe that the statute, as construed in 
Empire, does not reasonably permit the agency to treat persons enrolled 
in Medicare Advantage as not ``entitled'' to benefits under Part A. 
Second, to the extent that the statute, as construed in Empire, does 
not itself establish the applicable substantive legal standard, then 
the Supreme Court's Allina II decision requires the agency to engage in 
notice-and-comment rulemaking to address whatever statutory ``gap'' 
might remain as to that issue. We do not agree that the agency could, 
consistent with Allina II, adopt an approach on the treatment of Part C 
days by relying on an alleged pre-FY 2005 practice, even if the 
practice could be said to amount to a ``policy.'' If rulemaking was 
required to change the Secretary's approach, as held in Allina II, then 
rulemaking was also required to establish the Secretary's approach in 
the first place.
    Moreover, in a December 2, 2015 decision on remand in Allina I, the 
Administrator determined that ``it has never been CMS policy for Part C 
days to be included in the numerator of the Medicaid fraction, nor has 
CMS included such days'' as a matter of practice. The Secretary's 
practice prior to FY 2005 was to exclude Part C days from both the 
Medicare fraction and from the numerator of the Medicaid fraction (for 
individuals also eligible for Medicaid), and no approach to Part C days 
was embodied in a notice-and-comment rule before the now-vacated rule. 
We recognize that the D.C. Circuit in Northeast stated, in the context 
of discussing retroactivity, that the agency had a pre-FY 2005 
``practice'' of excluding Part C days from the Medicare fraction (657 
F.3d at 17), but that case did not hold that this practice amounted to 
a policy or that the agency had adopted a legal interpretation of the 
statute that would require the Secretary to account for Part C days in 
the manner preferred by providers. Most importantly, the D.C. Circuit 
has confirmed that any such practice, however characterized, did not 
amount to a notice-and-comment rule, as required to establish a gap-
filling policy under the Supreme Court's Allina II decision. 
Specifically, the D.C. Circuit found that HHS has ``no promulgated 
rule'' governing the treatment of Part C days for fiscal years prior to 
FY 2014. (863 F.3d at 939.)
    Neither CropLife nor Action on Smoking and Health were Medicare 
cases and so they did not address section 1871(a)(2) of the Act. Under 
the Supreme Court's opinion in Allina II, pursuant to that provision a 
``substantive legal standard'' concerning the treatment of Part C days 
can be established or changed only via notice and comment rulemaking, 
not merely by practice. Contrary to some commenters' suggestion, there 
is no valid substantive legal standard embodied in agency practice that 
the agency could ``reinstate'' for years prior to the effective date of 
the prospective rule, nor any ``policy'' created by adjudication or 
otherwise. The prior practice did not establish any policy consistent 
with section 1871(a)(2) of the Act as construed by the Supreme Court in 
Allina II. No commenter identified statutory language, or language from 
the Supreme Court in Allina II, that would suggest that the Secretary 
could establish a substantive legal standard concerning the treatment 
of Part C days simply by adopting a practice in the absence of notice-
and-comment rulemaking.
    As noted, the agency's prior practice was generally to exclude the 
days from both the Medicare fraction and the numerator of the Medicaid 
fraction (for individuals also eligible for Medicaid). In order to 
resolve the Part C days issue for pending appeals for cost years ending 
before the effective date of the prospective FY 2014 IPPS final rule, 
CMS must put these days in either the Medicare fraction or in the 
Medicaid fraction numerator (for individuals also eligible for 
Medicaid). In other words, CMS must instruct its contractors as to 
where these days are to be placed for DSH calculations for pending 
appeals. We do not agree that, after holding that the agency did not 
follow the proper procedure in adopting a policy regarding the 
treatment of Part C days after its rule was vacated, the Supreme Court 
contemplated that the Secretary could simply adopt a policy by 
reverting to an alleged prior practice that could not itself have 
established any policy under the terms of section 1871(a)(2) of the 
Act.
    We also do not agree that the Secretary could finalize a rule that 
``clarifies'' or ``codifies'' the regulation to reflect what some 
commenters refer to as the pre-FY 2005 ``policy.'' First, we believe 
that the characterization of the agency's practice of generally 
excluding Part C days from the Medicare fraction as a ``policy'' is 
mistaken. As already noted, and as we explained in the prospective FY 
2014 IPPS final rule (78 FR 50496), as a matter of practice, the 
Secretary generally excluded these days from both the Medicare fraction 
and the numerator of the Medicaid fraction (for individuals also 
eligible for Medicaid). In order for a regulation to reflect the 
general pre-FY 2005 practice, the Secretary would have to interpret the 
DSH statute to treat Part C days as both days on which beneficiaries 
are ``not entitled to benefits under part A'' (and thus to be excluded 
from the Medicare fraction) AND ``entitled to benefits under part A'' 
(and thus to be excluded from the numerator of the Medicaid fraction 
(for individuals also eligible for Medicaid)). Such an interpretation 
would not be a ``clarification,'' as it would interpret the phrase 
``entitled to benefits under part A'' in two different ways in the same 
clause of the statute and would not be in accord with Allina I, 746 
F.3d at 1108, which stated that the statute ``unambiguously'' requires 
Part C days to be counted in one fraction or the other because ``a Part 
C-enrolled individual is either eligible for Medicare Part A, or not.'' 
Id. Second, as discussed further elsewhere, such a policy would be 
inconsistent with what the Supreme Court has now held in Empire is the 
clear meaning of ``entitled to benefits under part A'': ``meeting the 
basic statutory criteria.'' (142 S. Ct. 2362.) Part C enrollees must 
meet the basic statutory criteria to enroll in Part C and do not cease 
to meet them through enrollment in Part C. For these reasons, we 
believe it would be legally impermissible to adopt a rule that codifies 
the agency's past practice.
    Comment: Some commenters stated that CMS's prior practice (before 
FY 2005) was to exclude Part C days from the Medicare fraction and 
include them in the Medicaid fraction. Some commenters stated the D.C. 
Circuit held

[[Page 37784]]

in Allina I that prior to FY 2005 the Secretary put Part C days in the 
Medicaid fraction.
    Response: As explained previously, in a December 2, 2015 decision 
on remand in Allina I, the Administrator determined that ``it has never 
been CMS policy for Part C days to be included in the numerator of the 
Medicaid fraction, nor has CMS included such days'' as a matter of 
practice. Part C days were thus generally excluded from both fractions, 
and no regulation governed the issue before FY 2005. And in Allina I, 
the D.C. Circuit did not hold that the Secretary had a policy of 
putting Part C days in the Medicaid fraction, but instead stated, in 
connection with the logical outgrowth challenge at issue there, that 
``a party reviewing the Secretary's notice of proposed rulemaking 
understandably would have assumed that the Secretary was proposing to 
`clarify' a then-existing policy, i.e., one of excluding Part C days 
from the Medicare fraction and including them in the Medicaid 
fraction.'' (746 F.3d at 1108.) But the Court of Appeals did not say 
that this was CMS's actual policy or practice.
    Comment: A commenter argued that the proposed interpretation is 
inconsistent with statements the Secretary made in the Federal Register 
(68 FR 45419) stating that section 1886(d)(5)(F) of the Act requires 
him to consider only inpatient days to which the prospective payment 
system applies.
    Response: The commenter mischaracterizes our statement in the 
Federal Register, which was discussing our interpretation of ``patient 
days'' and was unrelated to when a patient is considered entitled to 
benefits under Part A.
    Comment: Numerous commenters stated that higher payments to 
hospitals, especially safety net hospitals, and especially during and 
in light of the COVID-19 pandemic, are in the public interest, with 
some commenters specifying programs they state they cannot expand 
without higher DSH payments. Commenters also asserted that many 
hospitals will receive less in DSH payments under the Secretary's 
proposed interpretation than they would under the alternative 
interpretation that Part C enrollees are not ``entitled to benefits 
under part A,'' and therefore they suggested the public interest lies 
in making DSH adjustments using their preferred interpretation. 
Similarly, some commenters criticized the August 2020 proposed rule for 
suggesting that, in the Secretary's (purported) view, the alternative 
model is not in the public interest because it costs more than would 
effectuating the proposed model. A commenter stated that the ``public 
interest'' exception does not apply merely because the agency is 
required to pay monies that it owes.
    Response: We are adopting the interpretation of ``entitled to 
benefits under part A'' that we believe best comports with the statute 
enacted by Congress. Indeed, based on the Supreme Court's decision in 
Empire, we believe our interpretation is the only reasonable 
interpretation. We also do not agree it would be good public policy or 
in the public interest to promulgate a retroactive rule embodying the 
interpretation that beneficiaries enrolled in Part C are not entitled 
to Part A. Not only would this be a change from the position CMS has 
articulated consistently for many years, we believe that such an 
interpretation, in many instances, would result in payments in excess 
of what Congress authorized in the DSH statute and would be contrary to 
the Supreme Court's holding in Empire that a beneficiary is ``entitled 
to benefits under part A'' whenever he meets the statutory criteria for 
entitlement.
    In any event, for all the reasons articulated in the August 2020 
proposed rule and reiterated in this final action, we believe the 
better interpretation by far is that beneficiaries enrolled in Part C 
remain ``entitled to benefits under part A.'' And the Supreme Court's 
decision in Empire confirms this view, given its holding that, in the 
Medicare fraction of a hospital's DSH adjustment, ``individuals 
`entitled to [Medicare Part A] benefits' are all those qualifying for 
the program, regardless of whether they are receiving Medicare payments 
for part or all of a hospital stay.'' (142 S. Ct. at 2368 (alteration 
in original).) Congress, not the Secretary, can decide whether the 
resulting DSH payments are adequate, insufficient, or even too 
generous. ``[T]he point of the DSH provisions is not to pay hospitals 
the most money possible; it is instead to compensate hospitals for 
serving a disproportionate share of low-income patients.'' (Id. at 
2367.)
    Comment: A commenter argued that the D.C. Circuit's decision in 
Allina Health Services. v. Price, 863 F.3d 937, 939 (D.C. Cir. 2017) 
forecloses retroactive rulemaking here because that case held that 
section 1871(a)(4) of the Act applied and required notice and comment 
before a rule can ``take effect'' when a regulatory provision is not 
the logical outgrowth of a proposed rulemaking. The commenter states 
that there are two possible meanings of ``take effect'' in section 
1871(a)(4) of the Act, and the proposed retroactive rulemaking is 
impermissible under either of them. According to the commenter, either 
this final action will be impermissibly made effective earlier than the 
notice-and-comment period that was required under section 1871(a)(4) of 
the Act, or the action will be made effective later than the required 
notice-and-comment period but will apply to cost reporting periods pre-
dating that period in violation of section 1871(e)(1)(C) of the Act, 
which provides, ``No action shall be taken against a provider of 
services or supplier with respect to noncompliance with such a 
substantive change for items and services furnished before the 
effective date of such a change.'' Relatedly, some commenters stated 
that retroactive rulemaking in the face of a logical outgrowth finding 
renders section 1871(a)(4) of the Act meaningless.
    Response: We do not agree that the D.C. Circuit's holding in Allina 
Health Services v. Price concerning section 1871(a)(4) of the Act 
forecloses retroactive rulemaking here. The D.C. Circuit in Allina I 
held that the FY 2005 IPPS final rule was not a logical outgrowth of 
the proposed rule. Allina I, 746 F.3d at 1109. Section 1871(a)(4) of 
the Act states that ``[i]f the Secretary publishes a final regulation 
that includes a provision that is not a logical outgrowth, such 
provision shall be treated as a proposed regulation and shall not take 
effect until there is the further opportunity for public comment and a 
publication of the provision again as a final regulation.'' There was 
no retroactive rule challenged in Allina Health Services v. Price the 
providers in that case challenged SSI ratios that included Part C days 
that CMS posted after the FY 2005 IPPS final rule had been vacated. 
Thus, the D.C. Circuit was considering whether section 1871(a)(2) of 
the Act incorporates the APA's notice-and-comment exception for 
interpretive rules. In that context, the D.C. Circuit held that even if 
section 1871(a)(2) of the Act did incorporate an exception for 
interpretive rules (which the Supreme Court subsequently held it does 
not), section 1871(a)(4) of the Act required ``further opportunity for 
public comment and a publication of the provision again as a final 
regulation' before HHS could re-impose the rule.'' 863 F.3d at 945. 
This final action complies with that holding as it follows a further 
opportunity for public comment on a proposed rule and results in 
publication of a final action. This action will not ``take effect'' 
until after the notice-and-comment period has closed. Section 
1871(e)(1)(C) of the Act is irrelevant here because CMS is not taking 
any enforcement action against

[[Page 37785]]

providers for noncompliance with the policy adopted in this retroactive 
rulemaking. Instead, CMS will issue NPRs and revised NPRs, the DSH 
adjustments of which will be calculated pursuant to this final action. 
Finally, retroactive rulemaking after a failure of logical outgrowth 
problem does not render section 1871(a)(4) of the Act meaningless both 
because the retroactive rulemaking follows an opportunity for public 
comment, as required, and because CMS can only exercise retroactive 
rulemaking authority based on a finding that doing so ``is necessary to 
comply with statutory requirements'' or that failing to do so ``would 
be contrary to the public interest.'' (Section 1871(e)(1)(A) of the 
Act.)
    Comment: A commenter argued that promulgation of retroactive 
rulemakings to remedy procedural defects in a rule ``make a mockery of 
the provisions of the [Administrative Procedure Act],'' citing 
Georgetown University Hospital v. Bowen, 821 F.2d 750, 758 (D.C. Cir. 
1987).
    Response: In Georgetown University Hospital, the D.C. Circuit noted 
that the circuit had ``previously held that the effect of invalidating 
an agency rule is to `reinstat[e] the rules previously in force.' '' 
(Id. at 757 (alteration in original) (emphasis omitted).) Here, there 
was no rule governing the treatment of Part C days ``previously in 
force.'' Moreover, that 1987 case pre-dated Congress' express grant of 
authority to the Secretary for retroactive rulemaking; section 1871(e) 
of the Act was added by section 903 of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003, Public Law 108-173, 117 
Stat. 2066, 2376. To the extent Empire has not resolved the 
interpretive issue, the Medicare statute would require rulemaking, 
where it might not otherwise have been required under the APA, and the 
Medicare statute explicitly authorizes retroactive rulemaking.
    Comment: Some commenters stated the retroactivity provision was 
intended to prevent HHS from generally applying rules retroactively by 
``changing the rules'' and then ``punishing providers,'' or ``taking 
action against'' them, and the provision specifically bars the agency 
from ``reimposing'' a rule on the Part C days issue on which the 
commenters assert HHS has lost three times in the Court of Appeals and 
once in the Supreme Court.
    Response: We agree that Congress intends that HHS not generally 
apply a substantive change in regulations retroactively. Yet Congress 
did authorize retroactive rulemaking in specified circumstances. HHS's 
intent is not to punish providers in any way, nor do we believe this 
action punishes them. This action will affect final payment 
determinations for many providers with a new rulemaking that applies 
retroactively, but providers have been on notice of the Secretary's 
interpretation since no later than the publication of the FY 2005 IPPS 
final rule. While that rule eventually was vacated on notice-and-
comment grounds in 2014, even then the D.C. Circuit prohibited the 
district court from directing the agency to calculate DSH fractions by 
excluding Part C days from the Medicare fraction. The Secretary has 
advanced the same interpretation of the statute consistently since the 
publication of the FY 2005 IPPS final rule. And that rule was 
consistent with both the agency's prior rulemaking on HMO days and its 
longstanding definition of ``entitled'' under the Medicare statute, 
promulgated in 1983, as meaning that ``an individual meets all the 
requirements for Medicare benefits'' (42 CFR 400.202). Providers, 
therefore, cannot be said to have relied on a contrary interpretation 
at a minimum since FY 2005. Moreover, the D.C. Circuit has never taken 
issue with the Secretary's interpretation, even when it invalidated the 
FY 2005 IPPS final rule on procedural grounds. The Supreme Court also 
did not address the merits of the Secretary's interpretation when it 
held that the Secretary could not use Medicare fractions embodying that 
interpretation that were published in the absence of notice and comment 
rulemaking. (139 S. Ct. at 1816-17 (notice-and-comment rulemaking is 
required to change or establish an ``avowedly `gap'-filling 
policy.'').) After the Supreme Court issued its Allina II decision, the 
United States District Court for the District of Columbia remanded 
cases presenting the Part C days issue to the agency, holding that the 
court had ``no basis to direct the agency as to what the formula for 
the [DSH] recalculation should be'' because ``this was the aspect of 
the case left open by previous opinions.'' In Re Allina II-Type DSH 
Adjustment Cases, Misc. No. 19-0190, Dkt. 74 (Jan. 19, 2021). Paying 
providers in accordance with the Secretary's interpretation after 
remedying the procedural problems identified by the D.C. Circuit and 
the Supreme Court is consistent with those court decisions and 
permitted by section 1871(e) of the Act under these circumstances. We 
do not agree that paying providers consistent with our interpretation 
of the statute punishes providers.
    Comment: Some commenters stated the proposed retroactive rulemaking 
was foreclosed by Supreme Court precedent prohibiting giving 
retroactive effect to statutes burdening private rights.
    Response: We disagree that hospitals have any private right to 
compensation in excess of what Congress has provided for according to 
the best interpretation of the DSH statute. Nor was it reasonable for 
providers to expect that the Secretary would change his long-standing 
consistent interpretation of the DSH statute in the absence of any 
binding court ruling rejecting that interpretation on the merits.
    Comment: Some commenters stated that the Medicare statute 
authorizes the Secretary to ``change'' a policy retroactively, but not 
to ``establish'' one, and because the Secretary concedes he did not 
have a regulation in place that governed the treatment of Part C days, 
he cannot establish one retroactively, relying on Bowen v. Georgetown 
Hosp., 488 U.S. 204 (1988).
    Response: Section 1871(e) of the Act authorizes the Secretary to 
retroactively effect a ``substantive change in regulations, manual 
instructions, interpretive rules, statements of policy, or guidelines 
of general applicability'' when the Secretary makes one or both of 
specified determinations. We believe this rulemaking effects a 
``substantive change'' to the DSH regulations, which until now did not 
address how to treat Part C days in the DSH calculation for discharges 
prior to October 1, 2013. Bowen held that the Medicare statute's grant 
of authority to provide in regulation for ``suitable retroactive 
corrective adjustments,'' section 1861(v)(1)(A) of the Act, did not 
provide authority for the promulgation of retroactive cost limit rules 
and neither did the Secretary's general rulemaking authority. (488 U.S. 
at 209.) However, Bowen pre-dates Congress' grant of retroactive 
rulemaking authority at section 1871(e) of the Act that the Secretary 
relies upon in this action and so its interpretation of ``suitable 
retroactive corrective adjustments'' does not speak to the 
interpretation of the far broader ``substantive change in regulations'' 
language in section 1871(e).
    Comment: Some commenters stated that the August 2020 proposed rule 
flouts the D.C. Circuit's decision in Northeast. In that case, a 
hospital challenged the Secretary's exclusion of Part C days from the 
numerator of the Medicaid fraction for FYs 1999 to 2002. The court of 
appeals held that the

[[Page 37786]]

Secretary could not apply his interpretation retroactively to those 
years. Commenters noted that the August 2020 proposed rule did not 
mention Northeast or any of the agency's prior instructions to its 
contractors acquiescing in that decision and subsequent resolution of 
cases challenging application of the FY 2005 IPPS final rule to earlier 
periods. Some commenters stated that Northeast controls the treatment 
of Part C days for all years prior to the prospective FY 2014 IPPS 
final rule. Some commenters stated that, contrary to the holding of 
Northeast, the August 2020 proposed rule ``attaches new legal 
consequences to hospitals' treatment of low-income patients during the 
relevant time period.''
    Response: In Northeast, the D.C. Circuit observed ``[i]t is well 
settled that an agency may not promulgate a retroactive rule absent 
express congressional authorization.'' (657 F.3d at 13.) The Secretary 
had not invoked the retroactive rulemaking authority in Northeast, and 
neither party brought that authority to the court's attention. That 
circumstance likely explains the court's statement that it was ``aware 
of no statute that authorizes the Secretary to promulgate retroactive 
rules for the DSH calculations.'' (657 F.3d at 17.) Such a statute does 
exist, however, and the Secretary is invoking it here. The D.C. Circuit 
has held that the Medicare statute ``unambiguously requires that Part C 
days be counted in one fraction or the other'' (Allina I, 746 F.3d at 
1108), yet does not dictate which fraction (Northeast, 657 F.3d at 13). 
And, to the extent the statute could still be said to ``leave[ ] a 
`gap' for the agency to fill'' (Allina II, 139 S. Ct. at 1817) after 
the Supreme Court's clarifying decision in Empire, the Secretary cannot 
decide where to put the Part C days without first undertaking notice-
and-comment rulemaking (Id.). In other words, because there is no rule 
governing the treatment of Part C days for discharges before October 1, 
2013, if there is a statutory gap left to fill post-Empire, a rule that 
governs this period would be necessary even if the Secretary were to 
adopt the hospitals' preferred interpretation. In many cases, even a 
rule interpreting ``entitled to benefits under part A'' to exclude Part 
C days from the Medicare fraction (as most commenters would prefer) 
would itself attach new legal consequences to past discharges because 
the appeals were of DSH adjustments that were based on the (later-
vacated) rule that embodied the Secretary's interpretation.
    Comment: Several commenters inferred from CMS's promulgation of the 
FY 2014 IPPS final rule that CMS understood and impliedly conceded that 
it lacked authority to implement a retroactive rule.
    Response: The prospective nature of the FY 2014 IPPS final rule did 
not reflect any understanding by CMS that it lacked authority to 
promulgate a retroactive rule. The FY 2014 IPPS final rule appeared in 
the Federal Register on August 19, 2013 (78 FR 50496), before the D.C. 
Circuit affirmed the vacatur of the FY 2005 IPPS final rule in Allina I 
in 2014. Furthermore, in Allina I, the D.C. Circuit reversed the 
district court's decision insofar as it prohibited the Secretary from 
applying his interpretation to the Allina I plaintiffs' FY 2007 DSH 
adjustments on remand. The Secretary interpreted this aspect of the 
D.C. Circuit's Allina I decision to mean that he could proceed to 
calculate DSH adjustments for cost years predating the prospective FY 
2014 IPPS final rule by interpreting the DSH statute's treatment of 
Part C days in adjudications. The Administrator issued a 46-page 
decision after remand in that case, concluding anew that Part C days 
are to be included in the Medicare fraction. However, as discussed 
previously, the agency's attempt to resolve this issue through 
adjudication was rejected in Allina II, and so the Secretary must 
instead proceed by rulemaking, to the extent there is a statutory gap 
to fill.
    Comment: Some commenters stated that the August 2020 proposed rule 
is unfair to DSH hospitals because they have challenged the treatment 
of Part C days for more than a decade and now CMS is, in their view, 
attempting to circumvent the results of that litigation and reduce 
payments they believe are rightfully due to the hospitals. Similarly, 
many commenters expressed the opinion that it is unfair to hospitals to 
attempt to remedy notice and comment problems so many years after the 
D.C. Circuit vacated the rule; some commenters expressed that hospitals 
have counted on receiving additional money in DSH adjustments that 
would result from excluding Part C days from the Medicare fraction.
    Response: Hospitals have pursued procedural challenges to the FY 
2005 IPPS final rule, however, that rule was not vacated on logical 
outgrowth grounds until 2014. This action implements the subsequent 
directive of the Supreme Court that the Secretary establish or change a 
substantive legal standard concerning the treatment of Part C days only 
by rulemaking, if there is still a statutory gap to fill, and thus we 
do not agree that it is unfair for HHS to propose and finalize such a 
rule. We do not agree that it was reasonable for hospitals to have 
counted on additional reimbursement as a result of the Allina 
litigation since neither the D.C. Circuit nor the Supreme Court 
addressed the merits of our interpretation of ``entitled to benefits 
under part A'', and the Secretary has consistently articulated the same 
interpretation for nearly twenty years. Nor do we agree that the 
Secretary's interpretation reduces payments that are due to hospitals. 
The Secretary believes this final action embodies the correct 
interpretation of the Medicare statute and that the alternative 
interpretation, that beneficiaries enrolled in Part C are not entitled 
to benefits under Medicare Part A, would, in many cases, result in 
payments in excess of what Congress intended.
    Comment: Some commenters who disagreed that retroactive rulemaking 
is required here stated that if CMS nonetheless concludes that 
retroactive rulemaking is required, it should propose to adopt its 
prior practice of excluding Part C days from the Medicare fraction. A 
commenter stated that adoption of the August 2020 proposed rule is 
impermissibly retroactive, but CMS could instead simply ``codify'' the 
agency's prior agency practice and such rule would not be retroactive 
because, unlike the proposed interpretation, the alternative 
interpretation would (purportedly) not attach new legal consequences to 
events completed before its enactment.
    Response: In order to exclude Part C days from the Medicare 
fraction, the Secretary would have to construe ``entitled to benefits 
under part A'' in the Act as excluding Part C days, and construe ``not 
entitled to benefits under part A'' as including these days. The 
Secretary has never so interpreted the Act. As explained previously, we 
believe the correct interpretation of the statute is that beneficiaries 
enrolled in Part C remain entitled to Part A and that the commenters' 
proposed interpretation would require ``entitled to benefits under part 
A'' to mean something different in the DSH statute than it does in 
other parts of the Medicare statue. The Supreme Court in Empire has 
foreclosed the commenters' interpretation. Even setting aside that the 
general prior practice was to exclude Part C days from both the 
Medicare fraction and the numerator of the Medicaid fraction, we do not 
agree that a rule that codified such a practice would not also be 
retroactive. Section 1871(a)(2) of the Act contemplates that policies 
are ``establishe[d] or change[d]'' only by notice and comment 
rulemaking. As acknowledged by the

[[Page 37787]]

D.C. Circuit in Northeast, no rule addressed the treatment of Part C 
days before the FY 2005 IPPS final rule, and, of course, that rule was 
then vacated.
    Comment: Some commenters stated that other instances of retroactive 
rulemaking by CMS are distinguishable from this instance.
    Response: The citation to other instances of retroactive rulemaking 
in the August 2020 proposed rule was intended to illustrate that 
retroactive rulemaking is not unprecedented, not because the same legal 
arguments justify each instance of retroactive rulemaking.
    Comment: A commenter stated that CMS should finalize a policy of 
excluding Part C days from the Medicare fraction and including those 
days for individuals also eligible for Medicaid in the numerator of the 
Medicaid fraction and could lawfully do so because CMS gave the public 
an opportunity to comment on that proposal in the FY 2004 IPPS proposed 
rule.
    Response: The Secretary believes the correct interpretation of the 
statute is that Part C enrollees remain entitled to benefits under Part 
A and for that reason will not finalize a policy of excluding such days 
from the Medicare fraction. Moreover, the Supreme Court's decision in 
Empire forecloses a policy of excluding Part C days from the Medicare 
fraction and including those days for individuals also eligible for 
Medicaid in the numerator of the Medicaid fraction.\16\ In any event, 
there has been notice of and an opportunity to comment in advance on 
the interpretation adopted in this final action. Thus, even if the 
statute itself does not give rise to the substantive legal standard 
adopted here, thereby necessitating reliance on retroactive rulemaking 
authority, the public has now had an opportunity to comment on the 
proper interpretation of the statute, and we have considered all 
comments to the August 2020 proposed rule that were timely submitted as 
part of the development of this final action.
---------------------------------------------------------------------------

    \16\ 142 S. Ct. at 2362 (``The text and context support the 
agency's reading: HHS has interpreted the words in those provisions 
to mean just what they mean throughout the Medicare statute.'').
---------------------------------------------------------------------------

    Comment: A commenter stated that because there was no valid 
regulation governing the treatment of Part C days between FY 2005 and 
FY 2014, there is a legitimate legal question of what policy governs 
their proper treatment, and this question should be determined by the 
courts in light of facts and circumstances that existed during those 
years. The commenter stated that CMS's proposed rule would usurp the 
authority of the courts.
    Response: We agree that no valid regulation governs the treatment 
of Part C days between FY 2005 and FY 2014, and even before FY 2005. 
But CMS's interpretation of the proper treatment of Part C days has 
been consistent since FY 2005. The D.C. Circuit in Allina I held the 
lower court erred by directing the Secretary to include Part C days in 
the numerator of the Medicaid fraction, recognizing that it was an open 
question whether CMS could apply its interpretation retroactively 
through adjudication. And then the Supreme Court in Allina II concluded 
that the Secretary could only apply any gap-filling interpretation 
through rulemaking. Therefore, the courts have used their authority to 
judge the Secretary's acts, and there will be an opportunity for 
providers to exhaust administrative remedies and seek judicial review 
of the interpretation embodied in this final action, and so the role of 
the courts is preserved.
    Comment: Some commenters stated that in 2012 (after the Northeast 
decision), Medicare contractors were instructed to include Part C days 
for dual-eligibles in the Medicaid fraction numerator for discharges on 
or after January 1, 1999, and before October 1, 2004. Along the same 
lines, some commenters noted that Medicare contractors have finalized 
some cost reports that were remanded under CMS Ruling 1498-R of appeals 
specific to the Baystate case (which concerned the SSI data used by CMS 
in calculating the Medicare fraction) with Part C days for dually 
eligible beneficiaries included in the Medicaid fraction numerator, 
while other cost reports that are the subject of appeals remanded under 
1498-R will be finalized, pursuant to this final action, with Part C 
days included in the Medicare fraction instead. A commenter questioned 
what will happen for cost reports that have Part C days in the Medicaid 
fraction numerator but are still subject to remand or realignment where 
the Medicare fraction will be revised. And similarly, a commenter 
stated that there will be cost reports where Part C days for discharges 
before October 1, 2004, were already included in the Medicaid fraction 
but will now be finalized with these days included in the Medicare 
fraction. A commenter requested that the Secretary make a distinction 
between discharges occurring prior to October 1, 2004, and later 
discharges to avoid what the commenter sees as arbitrary treatment 
depending on when remands or resolutions are completed and to avoid 
counting Part C days in both fractions.
    Response: We appreciate the commenters' concern with treating all 
hospitals fairly. We do not agree that it is arbitrary or capricious to 
treat hospitals' Part C days differently on the basis of the timing of 
their appeals vis-[agrave]-vis Supreme Court and lower court decisions. 
The instructions to contractors that issued after the Northeast 
decision cannot control over the holding of the Supreme Court in Allina 
II. It is also not unusual for cost reports to be finalized differently 
from one another with respect to a legal issue depending on the outcome 
of litigation raising that issue and the status of a hospital's appeal 
at the time of a final non-appealable decision. Providers will also be 
able to request to have their Medicare fraction realigned to be based 
on their individual cost reporting periods rather than the Federal 
fiscal year, in accordance with the normal rules. Providers who remain 
dissatisfied after receiving NPRs and revised NPRs that reflect the 
interpretation adopted in this final action retain appeals rights and 
can challenge the reasonableness of the Secretary's interpretation set 
forth in this final action.
    Comment: A commenter sought clarification concerning whether this 
action applies to pre-2000 discharges of patients enrolled in managed 
care organizations, such as health maintenance organizations (HMOs), or 
only to patients enrolled in Part C plans (first known as Medicare + 
Choice and later as Medicare Advantage plans). The commenter stated 
that the action should not be applied to pre-2000 patient discharges 
for days attributable to patients enrolled in Medicare HMOs authorized 
under section 1876 of the Act. The commenter stated that the 
application of this action to pre-2000 days would be inconsistent with 
Baptist Medical Center v. Burwell, 2019 WL 978957 (D.D.C. Feb. 29, 
2019).
    Response: The treatment of patients entitled to benefits under Part 
A and enrolled in an HMO authorized under section 1876 of the Act is 
outside of the scope of this rulemaking, which applies to discharges of 
patients enrolled in Part C prior to FY 2014. We note, however, that 
section 1876 of the Act repeatedly refers to beneficiaries who are 
``entitled to benefits under part A,'' and as stated throughout this 
final action preamble, the statute unambiguously requires the inclusion 
in the Medicare fraction of patients entitled to benefits under Part A.
    Comment: Some commenters stated that the August 2020 proposed rule 
would renege on the statements included in reopening notices issued 
between 2013 and 2015 that the CMS would adjust DSH calculations in the

[[Page 37788]]

event of an unfavorable final, non-appealable decision in Allina I.
    Response: Between 2013 and 2015 the Secretary did not yet know that 
neither Allina I nor Allina Health Services v. Burwell, 201 F. Supp. 3d 
94 (D.D.C. 2016) (the district court case that became Allina II) would 
not lead to a final, non-appealable decision on the merits of his 
interpretation of ``entitled to benefits under part A'' to include Part 
C days. In 2016, the district court upheld the Secretary's 
interpretation in Allina Health Services v. Burwell but neither the 
D.C. Circuit nor the Supreme Court reached the merits of that 
interpretation.
    Once this final action is effective, the Secretary will commence 
issuing NPRs and revised NPRs pursuant to the action, including for 
those NPRs previously held open.
    Comment: Some commenters stated that the action, if it finalizes 
the policy proposed, will deprive hospitals with pending appeals of the 
Part C days issue of their right to be heard in court. Some commenters 
characterized a final action that embodies the proposed interpretation 
as a ``non-action'' of the Secretary and questioned how hospitals will 
appeal the alleged ``non-action'' of the Secretary, if a hospital's DSH 
payments calculated under the new action do not change.
    Response: Providers with pending appeals subject to this action 
challenge DSH payments that were based on Medicare fractions that were 
issued in the absence of a valid rule addressing the Part C days issue 
(or, providers brought appeals to the Provider Reimbursement Review 
Board based on untimely NPRs and challenge Medicare fractions issued in 
the absence of a valid rule). The Secretary has already acquiesced in 
the Supreme Court's Allina II holding that if the statute itself does 
not dictate the substantive legal standard, then such fractions could 
not be lawfully issued without rulemaking. Providers who have pending 
appeals reflecting fractions calculated in the absence of a valid rule 
will receive NPRs or revised NPRs reflecting DSH fractions calculated 
pursuant to this new final action and will have appeal rights with 
respect to the treatment of Part C days in the calculation of the DSH 
fractions contained in the NPRs or revised NPRs. Providers whose 
appeals of the Part C days issue have been remanded to the Secretary 
will likewise receive NPRs or revised NPRs reflecting fractions 
calculated pursuant to this new final action, with attendant appeal 
rights. Because NPRs and revised NPRs will reflect the application of a 
new DSH Part C days rule, CMS will have taken action under the new 
action, and the new or revised NPRs will provide hospitals with a 
vehicle to appeal the new final action even if the Medicare fraction or 
DSH payment does not change numerically.
    Comment: Some commenters stated that the August 2020 proposed rule 
is unfair because it did not mention CMS Ruling 1739-R (hereinafter 
referred to as ``the Ruling''), that the Ruling demonstrates that the 
outcome of the rulemaking was pre-ordained, and that the Ruling would 
deprive providers of appeal rights. Some commenters recommended that 
the final action state that the hospitals may ``reinstate'' any appeals 
remanded under the Ruling within a year after the issuance of the final 
action. Some commenters stated that it is unfair that the Ruling 
permits CMS to ``reopen'' properly appealed cost reports to apply this 
final action, but does not permit providers to cite this action as a 
basis for reopening closed cost reports.
    Response: The Ruling is outside the scope of this action, but we 
will respond to the concern about appeal rights. The commenters 
misperceive the purpose and intended effect of the Ruling. The Ruling 
was not intended to cut off appeal rights and will not operate to do 
so. It was intended to promote judicial economy by announcing HHS's 
response to the Supreme Court's decision in Allina II. After the 
Supreme Court made clear that CMS could not resolve the avowedly gap-
filling issue of whether Part C enrollees are or are not ``entitled to 
benefits under part A'' for years before FY 2014 without rulemaking, 
HHS issued the Ruling so that providers would not need to continue 
litigating over DPP fractions that were issued in the absence of a 
valid rule. In other words, the point of the Ruling was to avoid 
wasting judicial, provider, and agency resources on cases in which the 
Secretary agreed that, after the Supreme Court's decision in Allina II, 
he could not defend such appeals of fractions issued in the absence of 
a valid regulation.
    Because rulemaking would be necessary to the extent there remains a 
statutory gap to fill after Empire, and irrespective of what 
interpretation CMS were to adopt, the Ruling does not demonstrate that 
the outcome of any rulemaking was foreordained. CMS's intention was 
(and is) to issue new and revised NPRs consistent with this final 
action, in order to implement the statute and respond to the Supreme 
Court's decision in Allina II. When the Secretary's treatment of Part C 
days in this final action is reflected in NPRs and revised NPRs, 
providers, including providers whose appeals were remanded under the 
Ruling, will be able to challenge the agency's interpretation by 
appealing those NPRs and revised NPRs. While some providers have 
already received reopening notices and had their NPRs held open for 
resolution of the Part C days issue, the issuance of new NPRs and 
revised NPRs pursuant to remands under the Ruling are not reopenings.
    Comment: Some commenters stated that in his petition for certiorari 
in Allina II, the Secretary said that a loss would result in 
significant costs, so the Secretary presumed he would have to pay these 
sums to providers if he lost that case.
    Response: The Secretary's petition stated that ``the particular 
issue in this case concerning the proper interpretation of the 
Medicare-fraction statute alone implicates between $3 and $4 billion in 
reimbursement for FY2005 through FY2013.'' The Secretary's 
acknowledgement that the underlying merits issue implicated significant 
costs to the Medicare program neither stated nor implied that an 
adverse Supreme Court decision that did not touch on the merits of his 
interpretation would lead him to pay providers according to their 
preferred interpretation.
    Comment: A commenter speculated that some hospitals may have made 
financial decisions, such as taking out debt through notes or bonds, or 
taking on construction projects, on the basis of their expectation 
that, after the Supreme Court's decision in Allina II, additional DSH 
funds would be forthcoming. This same commenter noted that the 
Secretary's November 15, 2019 motion to voluntarily remand the 
consolidated cases presenting the Allina issue in In Re Allina II-Type 
DSH Adjustment Cases, Misc. No. 19-0190 (D.D.C.), stated that voluntary 
remand would give the providers that had appeals pending before the 
district court the ``functional equivalent of a victory on the merits 
without any need to litigate the matter''; this commenter interpreted 
this statement to mean that CMS was intending to pay additional DSH 
funds after recalculating Medicare fractions to exclude Part C days.
    Response: No hospital commented that it had made financial 
decisions in reliance on the expectation of additional payment after 
the Supreme Court's decision, based on the expected exclusion of Part C 
days from the Medicare fraction for years with open appeals. Nor would 
such reliance have been reasonable, as the reasonableness of the 
Secretary's interpretation was not the issue before the Supreme Court 
in Allina II, nor did it opine on this issue.

[[Page 37789]]

    The Secretary's statement in district court that a remand was the 
functional equivalent of a victory for plaintiff hospitals did not 
imply that the Secretary intended to pay plaintiffs according to their 
preferred interpretation of the DSH statute. The Secretary's November 
15, 2019 motion to voluntarily remand the consolidated cases that 
presented the Allina issue stated accurately that a remand would give 
the plaintiff hospitals all they could achieve in a victory in their 
challenge to the procedural defects of the Secretary's calculation of 
Medicare fractions in the absence of a validly promulgated rule: 
namely, a remand for further proceedings consistent with the Supreme 
Court's decision. In other words, there was no need to litigate the 
issue of whether notice-and-comment rulemaking was necessary for 
deciding the treatment of Part C days because the cases were all 
controlled by the Supreme Court's decision in Allina II. Moreover, the 
Secretary disclosed in his November 15, 2019 motion to dismiss that he 
was contemplating retroactive rulemaking. And, as noted, the Supreme 
Court had not addressed the reasonableness of the Secretary's 
interpretation of the DSH statute, and Allina II pre-dated Empire 
wherein the Court agreed with the Secretary's interpretation of what it 
means to be ``entitled to benefits under part A'' of the Act.
    Comment: Some commenters, relying on the Ninth Circuit's Empire 
decision, stated that the Secretary's interpretation of ``entitled to 
benefits under part A'' impermissibly treats ``entitled'' and 
``eligible'' as synonymous. According to these commenters, 
beneficiaries are ``entitled'' to Part A benefits only on covered days 
but are eligible for Medicaid on days for which Medicaid does not pay. 
Therefore, these commenters conclude, the Secretary errs in treating a 
day for which Medicare Part A does not pay as a day for which that 
patient is entitled to benefits under Part A.
    Response: Whether exhausted benefit days and Medicare Secondary Pay 
days attributable to Medicare beneficiaries should be included in the 
Medicare fraction even though Medicare has not paid for them is beyond 
the scope of this action and has been resolved by the Supreme Court in 
Empire. As the Secretary explained in his briefing in that case, 
Congress's use in the Medicare and Medicaid fractions of ``entitled'' 
and ``eligible'' in referring to the Medicare and Medicaid programs, 
respectively, merely reflects Congress's usage of different terminology 
in the underlying Medicare and Medicaid statutes. (Northeast, 657 F.3d 
at 12.) The Supreme Court agreed with this reading of the statute. 
(Empire, 142 S. Ct. at 2363 n.3.) Moreover, as noted previously, CMS 
has always considered Part C days to be covered days.
    Comment: Some commenters stated that CMS is mistaken that the 
Supreme Court's holding in Allina II requires notice-and-comment 
rulemaking to resolve fiscal years before the FY 2014 final rule became 
effective. They state that the Court held only that ``the rule'' before 
it was invalid because it did not go through notice-and-comment 
rulemaking. They further assert that because the D.C. Circuit in Allina 
I held that CMS could resolve the treatment of Part C days in the DSH 
fraction by adjudication, and CMS agreed with this in its briefing in 
Allina II, CMS could now proceed by adjudication, and retroactive 
rulemaking is therefore not required.
    Response: We disagree that there was a rule at issue in Allina II. 
Rather, plaintiffs in that case challenged the publication of Medicare 
fractions on CMS's website, fractions that CMS had expected could be 
used in DSH calculations, then appealed and, under Allina I, resolved 
by adjudication. However, the Supreme Court in Allina II held that 
publishing of the Medicare fractions was ``at least a `statement of 
policy' because it `le[t] the public know [the agency's] current . . . 
adjudicatory approach' to a critical question involved in calculating 
payments for thousands of hospitals nationwide.'' (139 S. Ct. at 1810 
(alterations in original).) The Court held that, because that policy 
established an avowedly gap-filling substantive legal standard, the 
Medicare statute required notice-and-comment rulemaking.
    The Secretary does not see an adjudicatory approach to the 
treatment of Part C days that would be consistent with the Supreme 
Court's holding in Allina II (at least to the extent that a statutory 
gap remains after Empire). Medicare fractions necessarily include or 
exclude Part C days. Whether Part C enrollees are ``entitled to 
benefits under part A,'' or are not so entitled, is a legal question 
that does not turn on facts unique to any particular hospital. Thus, to 
resolve this issue by adjudication, hospitals would appeal fractions 
that, just as in Allina II, would necessarily already reflect a policy 
establishing the substantive legal standard of which DPP fraction 
includes Part C days and would end in final agency decisions that 
reflect the same policy in each case.
    Comment: Some commenters stated that their Medicare Administrative 
Contractors (MACs) are still issuing NPRs applying the vacated policy; 
thus, they opine, the Secretary is being disingenuous in claiming that 
retroactive rulemaking is necessary to calculate fractions. Similarly, 
some commenters stated that because CMS issued fractions before FY 2005 
without a regulation governing the treatment of Part C days, CMS knows 
that it can calculate fractions in the absence of a rule.
    Response: After the Supreme Court's decision in Allina II, in April 
2020 the Secretary instructed MACs to stop issuing NPRs calculating DSH 
fractions until promulgation of a new final rulemaking. That some 
contractors issued NPRs before this instruction or contrary to the 
instruction does not demonstrate that the Secretary is being 
disingenuous. Where providers have challenged the treatment of Part C 
days in NPRs prior to this final action, the Secretary has sought to 
have these cases remanded for recalculation under the final action. 
While it is operationally possible to calculate DSH fractions in the 
absence of a new rulemaking, any such fractions must necessarily treat 
Part C enrollees as entitled to benefits under Part A or as not-so 
entitled. After the Supreme Court's ruling in Allina II, establishing 
or changing a policy concerning Part C days in the absence of 
rulemaking is impermissible, to the extent there is a gap to fill in 
the statute. Whether calculating DSH fractions is feasible as a 
practical matter and whether such calculations are legally permissible 
(either procedurally or as a matter of interpretation) are distinct 
questions.
    Comment: Some commenters stated that CMS did not collect 
information about Part C days from non-teaching hospitals prior to 
October 1, 2006, and therefore cannot ``enforce'' the August 2020 
proposed rule as written; some of these commenters refer to Transmittal 
1311 issued July 29, 2007, which instructed providers to submit ``no-
pay'' claims for Medicare Advantage days because Medicare Advantage 
plans would no longer be required to submit ``encounter days'' for 
inclusion in the Medicare Provider and Analysis Review (MedPAR) file. 
Some of these comments argue that because Transmittal 1311 was not 
itself promulgated by regulation it is invalid under the Supreme 
Court's decision in Allina II. Some commenters described various change 
requests relating to data for Part C days that CMS issued to hospitals 
over the years and speculated as to the significance of the timing of 
those requests. Some stated that, because CMS has different data for 
teaching hospitals than non-teaching hospitals it will necessarily 
apply

[[Page 37790]]

different ``methodologies'' to these different types of hospitals 
(teaching hospitals and other hospitals), whereas the statute does not 
provide for different treatment. A commenter suggested that CMS should 
choose a method of treating Part C days for which the Part C data is 
available for all hospitals for all discharges before the FY 2014 IPPS 
final rule became effective on October 1, 2013; this commenter stated 
that this would mean excluding Part C days from the Medicare fraction 
and including them (for individuals also eligible for Medicaid) in the 
Medicaid fraction numerator. A commenter stated that it would be 
arbitrary and capricious and contrary to the public interest for CMS to 
apply the August 2020 proposed rule to all hospitals for all discharges 
prior to October 1, 2013, when it does not have necessary data to 
include Part C days for all hospitals, and some hospitals will lack the 
ability to supply this data.
    Response: Transmittal 1311 is outside the scope of this action. At 
least some of these commenters appear to believe, mistakenly, that CMS 
will require hospitals to submit information about their Part C days 
for periods prior to October 1, 2006. This action concerns the 
Secretary's interpretation of ``entitled to benefits under part A'' as 
it relates to the treatment of Part C days. That interpretation is 
logically distinct from any operational issues with whether or not CMS 
is able to include all such days in the Medicare fraction for any given 
hospital. We do not agree that if Part C days are not included in a 
hospital's Medicare fraction because CMS and the hospital do not have 
the necessary data that this means that CMS is applying a different 
methodology to that hospital than it applies to a hospital for which it 
does have such data. Nor do we agree that the Secretary's 
interpretation of the statute should be determined by what data is 
readily available for all or most hospitals.
    After considering the comments received, we are finalizing our 
proposal that a patient enrolled in an MA plan remains entitled to 
benefits under Medicare Part A and will be counted in the Medicare 
fraction of the DPP and not counted in the numerator of the Medicaid 
fraction.

III. Collection of Information Requirements

    This document does not impose information collection requirements, 
that is, reporting, recordkeeping, or third-party disclosure 
requirements. Consequently, there is no need for review by the Office 
of Management and Budget under the authority of the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501 et seq.).

IV. Regulatory Impact Analysis

A. Statement of Need

    This final action is necessary to create a policy governing the 
treatment of days associated with beneficiaries enrolled in Medicare 
Part C for discharges occurring prior to October 1, 2013, for the 
purposes of determining additional Medicare payments to subsection (d) 
hospitals under section 1886(d)(5)(F) of the Act.

B. Overall Impact

    We have examined the impact of this action as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993) as 
amended by Executive Order 14094 (April 6, 2023), Executive Order 13563 
on Improving Regulation and Regulatory Review (January 18, 2011), the 
Regulatory Flexibility Act (RFA) (5 U.S.C. 603), section 1102(b) of the 
Act, section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1532), Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Section 
3(f) of Executive Order 12866, as amended recently by Executive Order 
14094, defines a ``significant regulatory action'' as an action that is 
likely to result in a rule: (1) having an annual effect on the economy 
of $200 million or more in any 1 year, or adversely and materially 
affecting a sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, territorial, or 
tribal governments or communities; (2) creating a serious inconsistency 
or otherwise interfering with an action taken or planned by another 
agency; (3) materially altering the budgetary impact of entitlements, 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) raising legal or policy issues for which 
centralized review would meaningfully further the President's 
priorities or the principles set forth in Executive Order 12866.
    The discussion accompanying our proposal along with this Regulatory 
Impact Analysis (RIA) demonstrate that this final action has been 
analyzed consistent with the regulatory philosophy and principles 
identified in Executive Orders 12866 and 13563, the RFA, and section 
1102(b) of the Act. We note that Medicare DSH payments affect a 
substantial number of small rural hospitals, as well as other classes 
of hospitals, and the effect of Medicare DSH payments on some hospitals 
is significant.
    An RIA must be prepared for major rules that are subject to Section 
3(f)(1) of Executive Order 12866 (effect on economy of $200 million or 
more in any 1 year). This action is subject to Section 3(f)(1) of 
Executive Order 12866 and also meets the definition in 5 U.S.C. 804(2) 
(Congressional Review Act). Accordingly, we have prepared an RIA that 
to the best of our ability presents the costs and benefits of the 
action.

C. Detailed Economic Analysis

    In the August 2020 proposed rule (85 FR 47726), we explained that 
DSH payments made under our proposed policy, which we are finalizing 
here, would not differ from hospitals' historical DSH payments. We also 
stated that Medicare DSH payments have already been made under the 
policy reflected in the proposal (prior to the previous rule which 
governed the treatment of these days having been vacated by the Court 
of Appeals, which was affirmed by the Supreme Court's decision). 
Therefore, the effect of the August 2020 proposed rule being finalized 
here would be to avoid the consequences of legal ambiguity created by 
the absence of any properly promulgated regulation that would otherwise 
continue into the future; the resulting costs, benefits, and transfer 
impacts are thus highly uncertain. In other words, given that there is 
currently no regulation governing the treatment of Part C days for the 
period before FY 2014, it is not clear what to compare an estimate of 
DSH payments under the policy we are finalizing in order to determine 
the effect of this policy on DSH payments during that time period.
    In the August 2020 proposed rule (85 FR 47726 through 47727), we 
stated that there are multiple possible trajectories whereby agency 
actions could be made consistent with the Supreme Court's ruling 
requiring notice-and-comment rulemaking. The proposed (and now final) 
policy provides one such trajectory, and we stated that DSH payments 
made under the proposed policy would not differ from hospitals' 
historical DSH payments; as such, this comparison between DSH payments 
under our proposed policy and hospitals' historical DSH payments

[[Page 37791]]

quantifies one point within the relevant uncertainty range of potential 
costs, benefits, and transfer impacts. In order to explore another 
possible trajectory (and thus to quantify an additional point within 
the relevant uncertainty range), we also discussed our consideration of 
an alternative approach that excluded days associated with patients 
enrolled in Medicare Part C from the calculation of the Medicare 
fraction and included them in the numerator of the Medicaid fraction 
(for those patients who are dually eligible). In addition, we explained 
that we were not proposing such a policy because we continue to 
believe, as we stated in the preamble to the FY 2014 IPPS final rule 
(78 FR 50614 and 50615) and have consistently expressed since the 
issuance of the FY 2005 IPPS final rule, that individuals enrolled in 
MA plans are ``entitled to benefits under part A'' as the phrase is 
used in the DSH provisions at section 1886(d)(5)(F)(vi) of the Act. 
However, in conjunction with the August 2020 proposed rule, we created 
a public use data file in order to facilitate public comment and 
analysis of our proposal and the alternative approach. This file was 
made available in the Downloads section of the Disproportionate Share 
Hospital web page on the CMS website: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh. The file 
contained an illustrative model at the hospital level of the potential 
effect on the DSH adjustment of excluding days associated with patients 
enrolled in Medicare Part C from the Medicare fraction and including 
them in the numerator of the Medicaid fraction (for those patients who 
are dually eligible).
    Based on this illustrative model, in the August 2020 proposed rule 
we stated that under the alternative approach, most hospitals' Medicare 
DSH payments would increase relative to their historical Medicare DSH 
payments; however, some hospitals' Medicare DSH payments would decrease 
or not change. As discussed in the proposed rule (87 FR 47727), in 
aggregate, the modelled Medicare DSH payments under the alternative 
approach would increase by 6 percent relative to the historical 
Medicare DSH payments, which for the hospitals represented in the model 
meant approximately a net $0.6 billion annualized increase for their 
longest cost reporting period ending between January 1, 2013, and 
December 31, 2013. In that same proposed rule, we stated that these 
estimates were for illustrative purposes and involved modelling 
assumptions (for example, use of a proxy for the Medicaid days 
associated with patients enrolled in Medicare Part C, as described 
previously), which may differ from actual calculations that would be 
done during cost report review and settlement processes by contractors 
if such a policy were adopted. These expenditures (or, as regards 
payments already made for past years, the avoidance of potentially 
necessary reimbursements from providers to the Trust Fund) would be 
classified as transfers to Medicare providers. In addition, we sought 
comments on this illustrative model of the alternative approach and the 
assumptions used in this analysis. For additional details on the 
illustrative model, we refer readers to the August 2020 proposed rule 
(85 FR 47726 through 47727).
    Comment: We received many comments about the financial impact of 
the August 2020 proposed rule and the modeling of the alternative 
approach. Many commenters stated that the August 2020 proposed rule did 
not attempt to address what the loss in DSH payments associated with 
the agency's retroactive proposal would mean to safety net hospitals. 
Several commenters estimated that for 2004 to 2013 there would be a 
multibillion dollar difference under the proposed policy compared to 
the alternative approach.
    Many commenters stated that the alternative approach underestimated 
the impact on hospitals. Many of these commenters used their own data 
to argue that the estimated impact of the proposed rule was higher than 
the amount reflected under the alternative approach. Some commenters 
stated that CMS's calculations under the alternative approach using the 
illustrative model (that is, removing Part C days from the Medicare 
fraction and including in the Medicaid fraction days associated with 
patients enrolled in Medicare Part C who were also eligible for SSI as 
a proxy for counting Medicaid eligible days) are ``suspect'' due to 
issues with the CMS's data file, such as the exclusion of Medicaid 
patients. These commenters suggested that CMS should have validated 
data by requesting from providers the patient eligibility information.
    Some commenters disagreed with the August 2020 proposed rule's 
description of the summary of costs and benefits described as ``highly 
uncertain'' because the commenters stated CMS has actual hospital data 
for October 1, 2005, through September 30, 2013, and they believe that 
data should have been used by CMS to calculate ``more accurate'' 
estimates, at least for discharges after September 30, 2005, instead of 
using a proxy as CMS did with its alternative model of using days 
associated with patients enrolled in Medicare Part C who were also 
eligible for SSI benefits as a proxy to count Medicaid days for FY 
2013. Commenters stated that over the years CMS has been inconsistent 
in its estimates of the financial impact of including Part C days in 
the Medicare fraction and excluding them from the numerator of the 
Medicaid fraction. Some commenters stated that CMS ought to have sought 
patient details concerning Part C days from its contractors to account 
in its alternative calculations for Part C beneficiaries who are 
eligible for Medicaid but who do not receive SSI benefits. In addition, 
some commenters stated that CMS's modeling of the alternative approach 
failed to account for the impact on capital DSH payments, and another 
commenter indicated that the model did not include hospitals that do 
not currently qualify for DSH payments, but would qualify for DSH under 
the alternative approach.
    Some commenters faulted CMS's proxy modeling assumption because it 
did not account for beneficiaries enrolled in Part C who receive SSI 
but who are not eligible for Medicaid. Specifically, commenters 
expressed that CMS's estimates exclude the very large number of 
Medicaid patients who are not receiving SSI benefits, thereby 
understating the effect of the issue on the Medicaid fraction. In 
addition, some commenters stated that it was unreasonable for CMS to 
use only 2013 data or any proxy at all, and that providers did not have 
the information about financial impact they needed to comment 
meaningfully.
    Response: We thank the commenters for their input. Regarding the 
comments on the financial impact of the proposal, we stated in the 
August 2020 proposed rule that the DSH payments under the proposed 
policy will not differ from historical payments for years after FY 2005 
for most hospitals because CMS has made payments under the same 
interpretation, an interpretation which has never been substantively 
struck down. Many commenters compared the difference in the estimated 
DSH payments between the proposal and alternative approach using the 
hospitals' own estimates. Commenters' ability to do so overwhelmingly 
shows that many commenters were able to meaningfully engage with the 
August 2020 proposed rule's policy proposal and alternative approach 
model.
    There has been more than a decade of litigation over the treatment 
of Part C days in DSH calculations, and it is widely understood by DSH 
hospitals,

[[Page 37792]]

and the Secretary has acknowledged, that the financial impact of the 
Secretary's interpretation of ``entitled to benefits under part A'' to 
include Part C days in the Medicare fraction as compared with excluding 
them, is significant. While hospitals may argue whether the Secretary 
has over- or under-stated that number in the proxy described in the 
August 2020 proposed rule's alternative approach, by the time the 
August 2020 proposed rule was published hospitals had years of 
experience of the financial impact of the Secretary's interpretation, 
as the Secretary has been applying his policy to DSH adjustments for 
years.\17\
---------------------------------------------------------------------------

    \17\ FY 2013 IPPS/LTCH PPS final rule (78 FR 50614) (explaining 
that the policy was adopted in 2004 and CMS regulations were amended 
in 2007); id. at 50620 (noting explicit instructions in 2007 and 
2009 that hospitals submit information for Part C patients after the 
agency discovered that hospitals were not submitting the necessary 
information).
---------------------------------------------------------------------------

    Regarding the commenters who stated CMS should have used 
alternative data sources and/or hospitals' patient level data and/or 
different assumptions for the illustrative model of the alternative 
approach, in the August 2020 proposed rule we stated that these 
estimates are for illustrative purposes and involve modelling 
assumptions (for example, use of a proxy for the Medicaid days 
associated with patients enrolled in Medicare Part C, as described 
previously) which may differ from actual calculations that would be 
done during cost report review and settlement processes by contractors 
if such a policy were adopted (85 FR 47727). In other words, the proxy 
assumption and alternative approach model were intended to approximate 
the potential impact of the proposed interpretation and facilitate 
comment, rather than to reflect actual payment calculations.
    We note that, under the Administrative Procedure Act, a proposed 
rule is required to include either the terms or substance of the 
proposal or a description of the subjects and issues involved. We 
disagree with the commenters' assertion the August 2020 proposed rule 
did not provide an opportunity to meaningfully comment on the financial 
impact of the proposed policy. The August 2020 proposed rule did 
include a detailed discussion of our proposed policy and alternative 
approach to facilitate comments. Furthermore, as discussed, many 
commenters were able to meaningfully engage with the policy proposal 
and alternative approach, as evidenced by the analyses they provided in 
their comments, including comparisons of the difference in estimated 
DSH payments between the proposal and alternative approach using 
hospitals' own estimates. Accordingly, we believe interested parties 
were able to meaningfully comment on our proposed policy and the 
alternative approach.
    In addition, the financial impact of the interpretation of 
``entitled to benefits under part A'' is not legally relevant to the 
substance of CMS's interpretation of that statutory clause in relation 
to the treatment of Part C days in the DPP calculation. Whether that 
clause is best interpreted to include Part C days has never turned on 
the financial impact of that interpretation in comparison with the 
impact of treating Part C enrollees as not entitled to benefits under 
Part A. That many hospitals would enjoy higher DSH payments if CMS 
adopted the interpretation that Part C enrollees are not ``entitled to 
benefits under part A'' does not show that Congress would have agreed 
with that interpretation.\18\ Information from CMS contractors about 
Part C enrollees dually eligible for Medicaid would not resolve the 
interpretive question of whether Part C enrollees are or are not 
``entitled to benefits under part A.''
---------------------------------------------------------------------------

    \18\ See Empire, 142 S. Ct. at 2367 (``[T]he point of the DSH 
provisions is not to pay hospitals the most money possible; it is 
instead to compensate hospitals for serving a disproportionate share 
of low-income patients.'').
---------------------------------------------------------------------------

    Comment: A commenter stated that the August 2020 proposed rule 
would disproportionately affect rural hospitals because such hospitals 
are struggling more than urban hospitals due to the COVID-19 pandemic. 
The commenter considers the statement in the August 2020 proposed rule 
that there would not be additional costs or benefits for small rural 
hospitals to be arbitrary and capricious because, in the commenter's 
view, the DSH payments received by these hospitals were improperly 
calculated for these and other hospitals under a vacated rule.
    Response: In the August 2020 proposed rule the Secretary 
acknowledged that Medicare DSH payments generally affect a substantial 
number of small rural hospitals, as well as other hospitals, and the 
effect of DSH payments on some hospitals is significant (85 FR 47726). 
(We note approximately 500 rural hospitals with less than 100 beds are 
eligible for Medicare DSH payments.) The August 2020 proposed rule 
stated that a regulatory impact analysis under section 1102(b) of the 
Act was nonetheless not necessary because the Secretary had determined 
that adoption of the August 2020 proposed rule would not impose 
``additional costs or benefits'' for small rural hospitals ``relative 
to Medicare DSH payments that have already been made'' because the DSH 
payments for these hospitals (like others) have generally already been 
calculated according to the proposed interpretation. Nonetheless, we 
included a discussion with a regulatory impact analysis in the interest 
of public transparency.
    We do not agree that the DSH payments already calculated for such 
hospitals reflect an unreasonable interpretation. In the August 2020 
proposed rule, we proposed to adopt an interpretation of the statutory 
language ``entitled to benefits under part A'' in section 
1886(d)(5)(F)(vi)(I) to include Part C enrollees. We do not agree that 
the financial impact of COVID-19 on hospitals generally or on rural 
hospitals specifically is relevant to the proper interpretation of that 
phrase as the statute long pre-dates the pandemic.

D. Alternative Considered

    In the August 2020 proposed rule, we considered as an alternative 
to our proposal excluding days associated with patients enrolled in 
Medicare Part C from the calculation of the Medicare fraction and 
including them in the calculation of the Medicaid fraction for dually 
eligible beneficiaries. However, in the August 2020 proposed rule, we 
stated that we were not proposing such a policy because we continue to 
believe, as we stated in the preamble to the FY 2014 IPPS final rule 
(78 FR 50614 and 50615) and have consistently expressed since the 
issuance of the FY 2005 IPPS final rule, that individuals enrolled in 
MA plans are ``entitled to benefits under part A'' as the phrase is 
used in the DSH provisions at section 1886(d)(5)(F)(vi) of the Act.
    In the August 2020 proposed rule, we sought comments on our 
proposed approach as well as on the alternative approach. After 
consideration of those comments, in this final action we are adopting 
the same policy of including MA patient days in the Medicare fraction 
that was prospectively adopted in the FY 2014 IPPS final rule and 
applying this policy retroactively to any cost reports that remain open 
for cost reporting periods starting before October 1, 2013. This final 
action also provides descriptions of the statutory provisions that are 
addressed, identifies the finalized policy, and presents rationales for 
our decisions and, where relevant, alternatives that were considered.

E. Accounting Statement

    As required by OMB Circular A-4, in the following Table 1 we have 
prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this

[[Page 37793]]

final action as they relate to hospitals receiving Medicare DSH 
payments. It is not clear what to compare an estimate of DSH payments 
under our final policy. Therefore, consistent with the proposed rule, 
this table provides our estimate of the change in Medicare DSH payments 
to hospitals as a result of the policy finalized in this action based 
on a range of potential expenditures. All expenditures are classified 
as transfers to Medicare providers.

 Table 1--Accounting Statement: Classification of Estimated Medicare DSH
                      Expenditures Prior to FY 2014
------------------------------------------------------------------------
             Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers....  $0-$0.6 billion.
From Whom to Whom.................  Federal Government to Hospitals
                                     Receiving Medicare DSH Payments.
------------------------------------------------------------------------

F. Regulatory Flexibility Act (RFA)

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. We estimate that most hospitals and most 
other providers and suppliers are small entities as that term is used 
in the RFA. The great majority of hospitals and most other health care 
providers and suppliers are small entities, either because they are 
nonprofit organizations or because they meet the Small Business 
Administration (SBA) definition of a small business (having revenues of 
less than $8.0 million to $41.5 million in any 1 year). (For details on 
the latest standards for health care providers, we refer readers to 
page 38 of the Table of Small Business Size Standards for NAIC 622 
found on the SBA website at https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.)
    For purposes of the RFA, all hospitals and other providers and 
suppliers are considered to be small entities. We are not preparing an 
analysis for the RFA because we have determined, and the Secretary 
certifies, that with the adoption of this policy there will not be any 
additional costs or benefits relative to Medicare DSH payments that 
have already been made. Therefore, this final action will not have a 
significant economic impact on a substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare an 
RIA if a rule may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must conform 
to the provisions of section 604 of the RFA. For purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital that 
is located outside of a Metropolitan Statistical Area and has fewer 
than 100 beds. We are not preparing an analysis for section 1102(b) of 
the Act because we have determined, and the Secretary certifies, that 
with the adoption of this policy there will not be any additional costs 
or benefits for small rural hospitals relative to Medicare DSH payments 
that have already been made to these hospitals. Therefore, this final 
action would not have a significant impact on the operations of a 
substantial number of small rural hospitals.

G. Unfunded Mandates Reform Act (UMRA)

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2022, that 
threshold is approximately $165 million. This final action will have no 
unfunded mandate effect on state, local, or tribal governments or on 
the private sector.

H. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on state 
and local governments, preempts state law, or otherwise has Federalism 
implications. Since this action does not impose any costs on state or 
local governments, the requirements of Executive Order 13132 are not 
applicable.

I. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, this 
final action was reviewed by the Office of Management and Budget.
    Chiquita Brooks-LaSure, Administrator of the Centers for Medicare & 
Medicaid Services, approved this document on May 23, 2023.

Xavier Becerra,
Secretary, Department of Health and Human Services.
[FR Doc. 2023-12308 Filed 6-7-23; 4:15 pm]
BILLING CODE 4120-01-P