Becerra v. Empire Health Foundation: Supreme Court Upholds HHS Reading of Medicare DSH Fraction Statute | Foley Hoag LLP

  • The Supreme Court upheld HHS’s interpretation of the Medicare Act establishing payments for hospitals that treat a statistically significant share of low-income patients.
  • HHS may therefore continue to calculate the Disproportionate Hospital Share (DSH) adjustment in a manner that generally reduces DSH payments to hospitals.
  • The Supreme Court issued its decision with no apparent deference to the agency – and without even mentioning Chevron – leaving open the question of whether the Court will grant the agencies Chevron deference in future cases.


At the end of last week, the Supreme Court rendered its opinion in Becerra v. Empire Health Foundation, a case that involves the complex but important issue regarding how to calculate the Medicare and Medicaid fractions of a hospital’s Disproportionate Share Hospital (DSH) adjustment. Medicare’s DSH adjustment is an additional payment made to hospitals that treat a statistically significant share of low-income patients. The specific question presented was how to count patients eligible for Medicare Part A at times when Medicare does not pay for their hospital treatment. The Department of Health and Human Services (HHS) had issued a rule interpreting the Medicare Act to count these patients, which resulted in lower DSH payments for most hospitals. In reviewing Empire Health’s challenge to this regulation, the Ninth Circuit struck down HHS’ interpretation on the grounds that it was inconsistent with the law. However, two other appellate courts had previously deferred to the HHS statutory reading. In a 5-4 decision by Judge Kagan, joined by Judges Thomas, Breyer, Sotomayor and Barrett, the Court settled this division of the circuit and affirmed the HHS regulations.


The Medicare program originally paid for inpatient hospital services on a reasonable cost basis. However, in 1983, Congress passed the Prospective Inpatient Payment System, or IPPS, which pays hospitals at a fixed rate based on diagnostic-related groupings (DRGs). As originally designed, the flat rate payment under IPPS did not take into account the higher costs incurred by hospitals treating low-income patients. However, in 1985, Congress added the “disproportionate share of hospitals” (DSH) adjustment for hospitals that treat a “disproportionate share of low-income patients.” Although the general parameters of this DSH formula are codified in statute, given the complex legislative text and the volume of dollars involved, the precise details of what is included and excluded under the DSH formula have been the subject of many disputes.

For purposes of the Medicare DSH adjustment, a given hospital’s DSH percentage is determined based on a proxy measure of the hospital’s low-income patient load. This measure is called the “disproportionate percentage of patients” and is calculated as the sum of two fractions, the Medicare fraction and the Medicaid fraction, expressed as a percentage. involved in Empire was the position of HHS, adopted by rulemaking, that an inpatient whose care is not paid for by Medicare (even if she meets Medicare eligibility criteria) nevertheless remains “eligible for benefits” under the Medicare program and is therefore correctly included in the numerator and denominator of the Medicare fraction and the numerator of the Medicaid fraction. This can happen for several reasons: another insurer is responsible for the patient’s care (employment-based insurance, for example), or because the patient has exhausted his Medicare hospital days during a period of illness, or because Medicare deemed their care not medically necessary. . The question posed to the Court was: is this patient still considered “entitled to benefits” even though Medicare does not pay for her care?

HHS policy generally results in reduced DSH payments to hospitals for two reasons. First, including more patient days in the denominator (all individuals eligible for Medicare as opposed to merely doubly eligible patients) decreases the value of the Medicare fraction . Second, because the Medicaid fraction numerator excludes patient days for Medicaid patients who are also eligible for Medicare, the exclusion of patient days for Medicare patients who have exhausted their benefits (because they are still, under HHS policy, deemed eligible for Medicare) decreases the value of the Medicaid portion.

The Empire Health Foundation challenged HHS’s interpretation as being against the law. The trial court invalidated the policy on procedural grounds and overturned the rule. On appeal, the Ninth Circuit found that the HHS policy change was procedurally properly enacted, but found that the policy was not supported by law. The Supreme Court granted the government’s motion for certiorari in Becerra v. Empire Health Foundation, 958 F.3d 873 (9th Cir. 2020). Although the case involved an obscure Medicare payment methodology, many considered the Empire as an opportunity for the Court to revisit the long-standing deference of federal courts to agencies’ statutory interpretations under Chevron USA, Inc. v. National Resources Defense Council, Inc., 468 U.S. 1227 (1984). For example, the amicus Americans for Prosperity Foundation did not address the merits of the dispute at all and instead categorically urged the Supreme Court to strike down Chevron because it violates the doctrine of the separation of powers.

Supreme Court upholds HHS Read without applying Chevron

The Court decided the case on textual grounds, holding that “[t]The text and context support the agency’s reading: HHS has interpreted the words of these provisions to mean exactly what they mean throughout the Medicare Act. » Empire did not explicitly cancel Chevron. In fact, Judge Kagan’s opinion never even mentioned Herringbone two-step framework, unlike the three circuit courts that have considered the issue at hand. See Becerra v. Empire Health Foundation958 F.3d 873 (9th Cir. 2020) (applying a Chevron Step One analysis to conclude that the statute was unambiguous and excluded the agency’s interpretation); Catholic Health Initiatives Iowa Corp. vs. Sebelius718 F.3d at 920 (DC Cir. 2013) (“the law [is] ambiguous on this question…we defer of course to the construction of the Ministry”); Metropolitan Hospital c. United States Department of Health and Human Services712 F.3d at 265 (6th Circ. 2013) (because the statute “is, at best, ambiguous…our analysis proceeds to Chevron’s second step”).

This is particularly noteworthy because Justice Kagan’s opinion in many places highlights how unclear the Medicare Act is on its face, noting that “[t]The ordinary meaning of fraction descriptions, as is obvious to any ordinary reader, does not exactly jump off the page. This would traditionally result in the application of a Chevron Stage two analysis, under which the agency’s interpretation would receive significant deference. But instead, the Court conducted its own analysis of the law and its context, scrutinizing the term “entitled” as used in the Medicare Act, as well as the structure of the relevant legislative provisions. The Court ultimately concluded that:

Text, context, and structure all support HHS-style Medicare fraction calculation. In this fraction, individuals “entitled to [Medicare Part A] benefits’ are all people eligible for the program, whether or not they receive Medicare payments for part or all of a hospital stay. This reading gives the expression “entitled” the same meaning as it has throughout the law on health insurance. And it best implements the law’s bifurcated framework by capturing low-income people in each of the two distinct populations served by a hospital.

But while the court ultimately came to the same conclusion as HHS, it did so without any apparent deference to the agency.


The Court’s decision in Empire has two important implications. First, Medicare can continue to include all Medicare-eligible patients in DSH fractions, whether they receive Medicare payments for part or all of a hospital stay. Second, and perhaps more importantly, this case may portend an abandonment of Chevron and the deference he accorded agencies to greater reliance on a judge’s own reading of a given piece of legislation. In another hospital health insurance reimbursement case decided recently, the Court also did not address the Chevron doctrine and instead treated the dispute as a simple case of statutory interpretation.

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