Supreme Court to Hear Empire Case

On July 2, the Supreme Court granted the Government’s petition for certiorari and will review the Ninth Circuit’s decision in Empire v. Azar (now Becerra). The Court is expected to begin to hear oral arguments in October 2021. And we can expect a final decision sometime in the first half of 2022. If the court decides in favor of the Government, DSH calculations will include exhausted Part A, and MSP days in the Medicare fraction, reducing DSH payments for most hospitals – as has been the practice since 2005. If the Court decides in favor of hospitals, it will force CMS and its Medicare Administrative Contractors (MACs) to re-calculate DSH payments accordingly.


In the FFY 2005 Final Rule, CMS directed those exhausted days and other non-covered days be included in the Medicare Fraction of DSH calculations. At issue is the phrase “entitled to benefits” used in the Medicare statute, referring to those patient days that may be included in the DSH Medicare fraction. Up until 2005, “entitled” was interpreted as “eligible” for Medicare– meaning paid by Medicare. The 2005 Final Rule stated that “entitled” meant anyone who had Medicare, whether the benefits had expired, whether they were Medicare Secondary Payer (MSP) etc., were to be included in the fraction. This has had the effect of diluting the Medicare Fraction and thus diminishing DSH payments for most hospitals. Empire challenged this rule on procedural and substantive grounds. In May of 2020, a three-judge panel of the 9th Circuit Court of Appeals found that the 2005 rule was procedurally valid but substantively invalid. This represents a major victory for hospitals, but similar cases heard in the Sixth and Tenth Districts, ruled in favor of the Government, thus creating a dilemma for CMS in how to calculate DSH going forward.

On July 14, 2020, the government asked for a rehearing before the entire 9th Circuit. But in October, the 9th Circuit denied the government’s petition for rehearing. This left the government with only one remaining course of action: a writ of certiorari, appealing the case to the Supreme Court. Subsequently, the hospitals filed a conditional cross petition for certiorari: that if the Court grants the Government’s petition and takes review of the case on its merits, it should also review the Ninth Circuit’s holding that the FY 2005 final rule was procedurally valid.

On January 10, 2021, CMS filed its opposition to a motion that would enforce the 9th Circuit’s decision in Empire v. Azar. At issue is whether Empire’s vacatur of the 2005 Final Rule, applies only to hospitals in the jurisdiction of the 9th Circuit, or to all US hospitals. In CMS’s motion, the Secretary explicitly acknowledges that Empire’s vacatur is binding within the 9th Circuit. This admission appears to open the door for immediate resolution of the exhausted day cases pending in district courts subject to the 9th Circuit.

On July 2, 2021, the Supreme Court granted the Government’s petition for hearing the case on merit but denied the hospital’s conditional cross petition for review of procedural validity.


CMS’s January 2021 motion acknowledged that the Empire vacatur is binding within the 9th Circuit jurisdiction. This includes hospitals in Alaska, Washington, Oregon, California, Idaho, Nevada, Arizona, and Montana. A final decision by the Supreme Court will establish a single rule for all hospitals. If the hospitals prevail, it will require MACs to change methodology for calculating DSH payments going forward. But what about lost revenue due hospitals from 2005 to present? Most likely, settlement negotiations will be initiated between CMS and hospitals with valid appeals for FFY 2005 to present. Also, this would significantly impact hospitals that take advantage of the 2020 rule allowing providers to realign/rebase their SSI percentage (going back to 2005 and earlier). And further, there is the possibility that this decision could provide valuable precedent for “Part C” cases currently before the courts (e.g., Allina v. Azar).