News & Insights


November 25, 2019

Health Headlines – November 25, 2019

HHS Discusses Limitations on Ability to Recoup Certain Overpayments – In a recent internal legal memorandum (“Cleary Memo”) that has been made available to the public, Kelly Cleary, the chief legal officer for CMS, expressed her views of the effect that Azar v. Allina Health Services, 139 S. Ct. 1804 (2019), may have on the federal government’s ability to recoup overpayments from certain providers.  The Cleary Memo concludes that where HHS or CMS has issued guidance that, under Allina, should have been promulgated through notice-and-comment rulemaking, the government’s “ability to bring enforcement actions predicated on violations of those payment policies is restricted.”

In Allina, the Supreme Court affirmed the D.C. Circuit Court’s ruling that held the federal government should have followed notice-and-comment procedures before changing the rate used to calculate Medicare payments for hospitals serving low-income patients.  In the decision, the Supreme Court held that CMS’s policy could not stand because “affected members of the public received no advance warning and no chance to comment first, and because the government [had] not identified a lawful excuse for neglecting its statutory notice-and-comment obligations.”  The Court held that the agency’s notice-and-comment obligations under the Medicare Act are broader than those obligations would be under the Administrative Procedure Act, and that at least in some instances the agency may adopt interpretive rules only through notice and comment.

The Cleary Memo states that, “to the extent that IOMs and similar guidance set forth payment rules that are not closely tied to statutory or regulatory standards, the government generally cannot use violations of that guidance in enforcement actions, because under Allina, it was not validly issued.”  In particular, the Cleary Memo points to the example of Local Coverage Determinations (LCDs), which do not go through the notice and comment process, but instead reflect the payment determinations of the associated Medicare Administrative Contractor.  The memo states that “as a result of Allina, government enforcement actions based solely on LCDs are generally unsupportable.”

The Cleary Memo reasons that the critical question is whether the enforcement action could be brought absent the guidance document.  If the answer to this threshold question is no, “then the guidance document establishes a norm and, under Allina, is invalid unless issued through notice-and-comment rulemaking.”  The Cleary Memo goes on to state that “[e]ven a guidance document issued consistent with Allina may, not be used as the sole basis for an enforcement action, although it may be relevant for other purposes, such as scienter or materiality.”

The memo recites that HHS and CMS legal officers would continue to work with the agency to “identify particular guidance documents that might be appropriate to issue through notice-and comment-rulemaking on a more expedited basis.”

Reporter, Michelle Huntsman, Houston, TX,  +1 713 751 3211,

Court Denies Injunction Request Against Overpayment Recoupment  – On November 21, the Fourth Circuit denied a provider’s request for injunctive relief to stop HHS from recouping money from the provider’s Medicare reimbursements while waiting to challenge its overpayment determination before an administrative law judge (ALJ).  The provider argued that HHS’s recoupment efforts were severely straining its financial resources while it waited for agency review, and that the backlogged administrative review process was effectively denying the provider its procedural due process.  The Fourth Circuit found this argument unavailing and concluded that the district court had inappropriately entered a preliminary injunction to stop HHS’s recoupment efforts, reasoning that a provider can bypass agency review if there is a delay at the ALJ level and obtain judicial review in a relatively quick manner.  This alternate route provided for by the Medicare Act allows providers to avoid unnecessary delay and get a judgment quickly. 

The provider had followed the Medicare Act’s review procedure by appealing the Medicare Administrative Contractor’s overpayment determination to a Medicare Qualified Independent Contractor and then requesting an ALJ review at HHS’s Office of Medicare Hearings and Appeals.  The statute, 42 U.S.C. § 1395ff(d)(3)(B), provides for five stages of appellate review: (1) redetermination from the Medicare Administrative Contractor; (2) appeal to a Qualified Independent Contractor; (3) review by an ALJ; (4) de novo review by the Departmental Appeals Board; and (5) judicial review in a United States District Court.  The statute has deadlines for each of the four administrative review stages and allows a provider to bypass each step and escalate the claim to the next level if a deadline is not met.

By not electing to pursue the statutory bypass procedure, a provider may have to wait years to be heard before an ALJ.  In the interim, HHS can continue to withhold the provider’s Medicare reimbursements to offset the contested Medicare overpayments.  HHS explains that the agency review backlog is due to the one billion Medicare claims that it must process.  Based on this decision, next time a provider is faced with a Medicare overpayment determination, it may be prudent to consider bypassing any delayed steps in the appellate process and pursuing judicial review.

Reporter, Taylor Whitten, Sacramento, CA, +1 916 321 4815,

Tennessee Seeks Approval for Block Grant Medicaid Program - On November 20, 2019, the state of Tennessee filed a proposal with CMS for approval of a demonstration project that would convert much of the federal funding for its state Medicaid program into a modified block grant.  Instead of following the current Medicaid formula–which provides unlimited federal funding depending on need–Tennessee is asking that $7.9 billion of its federal Medicaid funding be delivered as a lump sum block grant that would be adjusted annually for inflation.  The proposal excludes certain expenses from the block grant (e.g., outpatient prescription drugs, uncompensated care payments to hospitals, and several other costs), which will continue to be financed through the current Medicaid financing model.

Tennessee also proposes that any money saved under this modified block grant by the state be split 50/50 between Tennessee and the federal government.  For this purpose, the state would “save money” when it does not spend the entirety of its lump sum block grant, which the state proposes would be calculated on the basis of the higher expenditures that the state would have incurred in the absence of its existing managed-care demonstration project.  In exchange for this cost-savings sharing, Tennessee seeks to be exempted from any new Medicaid program mandates that could have a material impact on the state’s Medicaid expenditures (e.g., program eligibility, benefits, coverage, and enrollment), notably including the statutory mandate that benefits under managed care plans be actuarially equivalent to benefits under traditional Medicaid.

Tennessee officials have asserted that their goal is not to cut Medicaid benefits.  If the proposal is approved, however, Tennessee will likely face a legal challenge.  Specifically, opponents might argue that the proposal seeks to waive mandatory provisions of the Medicaid statute, and that the proposal does not meet the essential requirement of the Medicaid waiver to further the objectives of Medicaid.  In a different context, a federal court has already twice blocked restrictive state Medicaid waiver proposals, and the judgment in those cases are pending on appeal.  In those cases, Arkansas and Kentucky proposed waivers for work requirements, but the proposals were struck down because they conflicted with Medicaid’s central mission to provide access to healthcare and services. The opinions can be read here (Arkansas) and here (Kentucky).

Nonetheless, the Trump administration has signaled support for state Medicaid block grants.  CMS guidance is expected soon to make it easier for states to apply for block grants, although proposed guidance was removed on November 15th from the White House Office of Management and Budget.  Although no reasons were given for withdrawing the guidance, CMS still says new rules will soon be forthcoming.

If Tennessee's proposal is granted, Tennessee would be the first state to convert Medicaid into a block grant program, ending Medicaid’s run as an open-ended entitlement program.  Tennessee’s proposal is available here.

Reporter, Ahsin Azim, Washington, D.C., +1 202 626 9262,