backD.C. District Court Rules CMS’s 2023 Retroactive Medicare DSH Part C Rule is Unlawful
On September 30, 2025, Judge Loren Alikhan of the D.C. District Court issued a decision holding that a rule CMS adopted in 2023 to address the treatment of Part C days in the calculation of the Medicare DSH payment for periods prior to 2013 was impermissibly retroactive and arbitrary and capricious. Montefiore Medical Center v. Kennedy, No. CV 24-cv-1810-LLA, 2025 WL 2801237 (D.D.C. Sept. 30, 2025). The Court’s decision marks the latest development in the now decades-old legal brawl between hospitals and CMS over the treatment of Part C days in the Medicare DSH payment formula.
Background
The Medicare DSH payment is derived from the sum of two fractions: a Medicare and a Medicaid fraction. The Medicare faction asks what percentage of a hospital’s patient days attributable to patients who are “entitled to benefits under Part A” are also entitled to supplemental security income (SSI). The Medicaid fraction asks what percentage of the hospital’s non-Medicare patient days are attributable to patients who are eligible for Medicaid. The higher the sum of these fractions, the greater the DSH payment.
In the inpatient prospective payment system (IPPS) proposed rule for FY 2004, CMS proposed to “clarify” its “practice” concerning the treatment of Part C days in the Medicare fraction. At that time, CMS did not regard Part C patients as “entitled to . . . Part A” and therefore did not include Part C days in the Medicare fraction. In the FY 2005 final rule, based on the comments solicited the year before, CMS reversed course and adopted a policy of including Part C days in the Medicare fraction. This shift was generally expected to reduce the Medicare fraction (and consequently, DSH payments) because Part C patients are less likely to be on SSI.
The D.C. Circuit held that CMS’s “surprise switcheroo” in 2005 violated the notice and comment rulemaking requirements of the Administrative Procedure Act (APA). Allina Health Services v. Sebelius, 746 F.3d 1102, 1106 (D.C. Cir. 2014) (Allina I). Perhaps expecting that result, while Allina I was still pending, CMS readopted its policy of including Part C days in the Medicare fraction in the IPPS final rule for 2014. For periods prior to 2013, the agency attempted to implement the same policy without formal rulemaking. But the Supreme Court crushed that attempt in Allina II, holding that the agency could not adopt its Part C policy for periods prior to 2013 without notice and comment rulemaking. Azar v. Allina Health Services, 139 S. Ct. 1804 (2019) (Allina II).
The Supreme Court addressed DSH again in Becerra v. Empire Health Foundation, 142 S. Ct. 2354, 1368 (2022) (Empire). In Empire, the court held that Medicare beneficiaries who had exhausted their Part A coverage were “entitled to . . . Part A.” While the Empire court did not address Part C days directly, it held that one’s entitlement to Part A turns on whether they meet Medicare’s eligibility requirements—not on whether Medicare is paying for their stay.
In 2023, CMS published a final rule adopting its Part C policy for periods prior to 2013. The Medicare statute generally prohibits retroactive rulemaking except where necessary to comply with statutory requirements, or failure to apply the change retroactively would be contrary to public interest. But CMS alleged that retroactive rulemaking was not strictly necessary because, in the agency’s view, the Supreme Court held in Empire that the only reasonable interpretation of the statute was to treat patients who had met Medicare’s eligibility criteria as being “entitled to . . . Part A.”
CMS opined in its 2023 rule that retroactive rulemaking would be appropriate even absent the Empire decision. The agency contended retroactive rulemaking was necessary to comply with its statutory requirement to calculate DSH payments because for the period between 2005 and 2013 there was no regulation in effect governing the treatment of Part C days (since the Allina I court vacated that regulation). CMS also argued that retroactive rulemaking was in the public interest so that hospitals could receive their DSH payments for the period between 2005 and 2013.
Montefiore Medical Center v. Kennedy
Acting on CMS’s instruction in the 2023 rule, a Medicare contractor finalized a hospital’s DSH payment for its 2006 cost reporting period using a Medicare fraction that included Part C days. The hospital appealed that calculation to the Provider Reimbursement Review Board and to D.C. District Court. Before the court, the hospital filed a motion for summary judgment in which it argued that the Medicare statute requires excluding Part C days from the Medicare fraction, and that the 2023 rule was impermissibly retroactive and otherwise arbitrary and capricious.
In its decision, the Court applied the newly minted Loper Bright test to conclude that including Part C days in the Medicare fraction is consistent with the “best reading” of the statute. Relying principally on Empire, the Court held that entitlement to Part A turns on whether the patient meets the eligibility requirements for Medicare coverage—not on whether Part A (or Part C) is paying for the patient’s care during a given hospital stay.
The Court found that under the hospital’s theory that Part C patients are categorically not “entitled to . . . Part A,” Part C patients would not be able to avail themselves of many of the benefits available under the statute to individuals, including Medicare Part D’s prescription-drug benefits, or even switching back from Part C to Part A. “This disruptive view of Part A entitlement is untenable, and it frustrates the statute's design . . . .”
The Court’s work was not finished there. The question remained whether the 2023 rule was nonetheless impermissibly retroactive. CMS argued that should the Court agree with its interpretation of “entitled to . . . Part A,” it need not address whether the rule was retroactive because the agency was simply giving effect to the intent of the statute. The Court disagreed that its decision affirming CMS’s interpretation of the statute mooted the question of retroactivity.
[T]he Secretary offers no support for the notion that once a court interprets a statute, an agency has an automatic license to apply that interpretation retroactively through the rulemaking process. The court declines the Secretary's invitation to read a Loper Bright-sized hole into the . . . retroactivity precedent.
The Court ruled that the 2023 rule was “quintessentially retroactive” because it “departs from established practice” and “alters the past legal consequences of past actions” at least as applied to periods preceding the 2008 IPPS rule since it was not until that rulemaking that CMS.
Next, the Court proceeded to consider whether the 2023 rule fell within the exceptions to the statutory bar against retroactive rulemaking. With regard to the first exception, the Court found that CMS did not need to adopt a retroactive rulemaking to comply with its statutory directive to calculate DSH payments because the agency could simply revert back to its historical practice of excluding Part C days from the Medicare fraction. The Court found that Allina I resurrected that policy when it vacated the 2005 rule.
As for the second exception, the Court determined that CMS failed to demonstrate that failing to apply the 2023 rule retroactively would be contrary to the public interest. CMS had argued that applying the rule retroactively advances the public interest by allowing CMS to make DSH payments and administer the DSH statute. But these rationales were too close to the “statutory compliance” exception for the Court’s comfort. “[A]s a matter of statutory interpretation, the public interest exception cannot be read in such a way that makes the statutory compliance exception altogether redundant.”
Finally, the Court found that the 2023 rule is arbitrary and capricious because the agency failed to fully consider and address the financial impact of the rule. In particular, the Court noted that CMS’s estimated impact in the 2023 rule cannot be reconciled with its past statements. CMS said in the 2023 rule that the impact would be between $0 and $0.6 billion annually. But in Allina II, CMS represented before the Court that the impact of reversing its Part C policy would be between $3 and $4 billion between 2005 and 2013.
Despite finding multiple flaws in the 2023 rule, the Court declined to vacate it just yet and has instead ordered the parties to file briefs to address whether vacatur is the appropriate remedy.
Reporter, Alek Pivec, Washington, D.C., +1 202 626 2914, apivec@kslaw.com.
CMS Directs MACs to Hold Telehealth Claims as Pandemic-Era Flexibilities Expire Amid Federal Funding Lapse
During the COVID-19 public health emergency, Medicare relaxed many of its longstanding telehealth restrictions to enable broader access to virtual care. These flexibilities included waiving geographic limitations, permitting beneficiaries to receive telehealth in their homes, and authorizing certain services—such as behavioral health and chronic care management—to be delivered remotely. These waivers were critical in ensuring continuity of care when in-person access was limited.
However, many of those flexibilities were tied to temporary emergency authorities and were set to expire absent congressional action. As of October 1, 2025, in the absence of new legislation, Medicare’s pre-pandemic rules for non-behavioral health telehealth services have resumed, ending most of the temporary flexibilities that had been in place since the COVID-19 public health emergency. In response, CMS issued new guidance to clarify how Medicare Administrative Contractors (MACs) should handle telehealth claims and provider billing during the transition period.
What the CMS guidance says: claims hold, reinstated limits, and provider cautions
CMS issued a Medicare Learning Network (MLN) Connects Newsletter update on October 1, 2025, directing all MACs to place a temporary 10-business-day hold on telehealth claims to avoid reprocessing if Congress restores pandemic-era flexibilities. The MLN update titled, “Update on Medicare Operations: Telehealth, Claims Processing, and Medicare Administrative Contractors,” states that Providers may continue submitting claims, but payments will not be released until the hold is lifted. CMS noted the delay should have minimal impact given Medicare’s existing 14-day payment floor.
The update further confirms that, with the expiration of the statutory telehealth “extenders,” Medicare coverage has reverted to pre-pandemic limits. This means most beneficiaries must again be located in a rural health clinic or hospital to receive telehealth from a distant-site provider, and audio-only visits are now limited to behavioral health services. Certain practitioner types, including occupational therapists, physical therapists, speech-language pathologists, and audiologists, can no longer bill for telehealth. However, under the Bipartisan Budget Act of 2018, clinicians in eligible Medicare Shared Savings Program ACOs may continue providing covered telehealth services without geographic restrictions, including when the beneficiary is at home.
CMS advised that practitioners offering non-covered telehealth services should consider issuing Advance Beneficiary Notices of Noncoverage (ABNs) and may choose to hold claims pending congressional action on reinstating the flexibilities.
What’s Next
Congressional intervention remains the key variable. If lawmakers act to restore or extend telehealth flexibilities, CMS may lift the claims hold and re-enable broader reimbursement retroactively. In the meantime, providers should monitor legislative and CMS updates, consider issuing ABNs for non-covered services, and decide whether to hold telehealth claims pending further guidance. They should also review compliance practices to ensure adherence to the reinstated geographic and practitioner restrictions now in effect.
Various MACs have made CMS’s update available on their websites. For example, the update can be found on Noridian’s website, available here.
Reporter, Francis Han, New York, +1 212 556 2154, fhan@kslaw.com.
CMS Issues Memorandum Related to State Survey & Certification Activities in Light of Federal Government Shutdown
On October 1, 2025, the CMS Center for Clinical Standards and Quality issued a memorandum outlining its contingency plans regarding state survey and certification activities in light of the federal government shut down. The memo sets out which activities will and will not be affected by the shutdown.
The following activities will remain fully functional during the shutdown:
- Clinical Laboratory Improvement Amendments (CLIA) Survey and Certification activities continue despite the government shutdown because it is funded directly through user fees.
- CMS or state vendor contracts that were fully awarded and funded on or before September 30, 2025 will not be impacted, but if a contractor’s current contract funding expires, the contractor shall refer to its specific contractual “stop work” provisions and reach out to its Government Contracting Official.
- State-funded surveys will continue.
- Surveys of Medicaid-only facilities depend on the length of the government shutdown, as the first quarter of Medicaid funding is not impacted. CMS suggests that state survey agencies continue to communicate with their state Medicaid agency regarding the availability of Medicaid funds.
- Hospice surveys funded through the Consolidated Appropriations Act (CAA) of 2021 continue despite the shutdown because the CAA is considered mandatory.
- Investigations into complaints that are triaged as containing credible allegations of immediate jeopardy or harm to an individual shall continue, but state agencies need not obtain prior CMS approval to conduct a complaint investigation for a deemed provider.
- Enforcement activities resulting from surveys mentioned above continue if the surveys indicate a finding of immediate jeopardy or actual harm, if there is a need to address a pending termination, or if the case meets the Immediate Imposition of Federal Remedies requirements.
- State survey agencies may request approval to conduct a re-visit survey if the following three requirements are met:
- A provider or supplier has alleged compliance with CMS requirements (pursuant to a prior determination of noncompliance);
- The re-visit survey is necessary to determine compliance and prevent the scheduled Medicare termination of a provider or supplier; and
- The Medicare termination is likely to occur due to timing or specific circumstances.
- Any action that is needed to prevent or mitigate any other immediate threats to the life or safety of a beneficiary that does not fit into the preceding categories will continue, such as any necessary survey and certification activities during a declared public health emergency that would be needed to prevent injury or harm to beneficiaries.
- State survey agencies may complete tasks that began before September 30, 2025, if completion of those activities is necessary to ensure an orderly shutdown only if the tasks can be accomplished within 4 hours of CMS notification to the state survey agency of a federal shutdown.
In addition to the above, CMS indicates that States should maintain the infrastructure capabilities to support complaint investigations, enforcement, and survey information system entries for Medicare activities that are authorized by the memorandum.
Any survey and certification functions that are normally conducted on CMS’s behalf that do not fall into one of the above categories shall not be performed during the government shutdown. Examples of activities that will not be performed during the shutdown include:
- Medicare-funded recertification surveys, including statutorily mandated surveys (except for hospice surveys as discussed above).
- Re-visits that are not required to prevent termination of Medicare participation within the subsequent 45 days.
- Medicare initial surveys, unless otherwise permitted, in connection with the allowed activities described above.
- Any action on initial certification kits for applicants to participate in Medicare who seek to demonstrate compliance via accreditation under a CMS-approved Medicare accreditation program.
- Medicare complaint investigations, except those alleging immediate jeopardy or actual harm to individuals or as permitted above.
- Minimum data set or OASIS activities, except those necessary to maintain provider reporting.
- Any Informal Dispute Resolutions (IDRs) or Independent IDRs unless pursuant to the excepted complaint investigations noted above for which there is an immediate adverse action that will be taken against the facility or provider during the period of the shutdown.
- Any new improvement project funded by civil monetary penalties unless approval has already been granted by CMS.
CMS will provide further instructions or special provisions should the shutdown persist for more than a few weeks. For more information regarding the specific CMS Survey & Operations Group Leadership points of contacts, please refer to the full CMS memorandum here.
Reporter, Morgan Cronin, Atlanta, + 1 404-572-2795, mcronin@kslaw.com.
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