ALEX M. AZAR, II, SECRETARY OF HEALTH AND HUMAN SERVICES, Petitioner, v. ALLINA HEALTH SERVICES, ET AL., Respondents
Interviewer(s): Samuel A. Alito, Jr., Stephen G. Breyer, Elena Kagan, John G. Roberts, Jr., Neil Gorsuch, Sonia Sotomayor
Interviewee(s): Pratik A. Shah, Edwin S. Kneedler

John G. Roberts, Jr.: We'll hear argument next in Case 17-1484, Azar versus Allina Health Services. Mr. Kneedler.

Edwin S. Kneedler: Mr. Chief Justice, and may it please the Court: Section 1395hh did not require CMS to go through notice-and-comment rulemaking before it could furnish its calculation of one component of a hospital's reimbursement to the contractors that perform the initial determination of reimbursement for the agency. That calculation was not binding on the agency, the courts, or Respondents, and it could be challenged on administrative appeal, as, in fact, Respondents did here.

Sonia Sotomayor: I have a -- a sort of problem with this.

And I know you say that, but I don't know how you take this outside of being a policy, meaning it's applying to every single provider uniformly.

I don't know the basis that you could have a individual adjudication.

And what would happen? The board would look at it and say we're not going to listen, even though we're required to listen, to the agency's position; we're going to tell them they're wrong? If one case tells you the agency is wrong, does that case then become the new policy? Or -- or are you -- I'm a little lost as to how this is not a agency policy.

Edwin S. Kneedler: So several points.

Sonia Sotomayor: A statement of policy.

Edwin S. Kneedler: Several points, Justice Sotomayor.

And the -- the first is that we are relying on the operative language in 1395hh, whether it's called a -- whether the issuance is called a policy or a requirement or whatever the agency calls it.

It is only -- it only triggers notice-and-comment rulemaking if it establishes or changes a substantive legal standard.

And that is the --

Sonia Sotomayor: Well, that's what I'm -- that's what I'm having a problem with. It's every single provider is going to be given a fraction that incorporates your policy, and that binds what they're going to get.

Edwin S. Kneedler: No, it -- it --

Sonia Sotomayor: Because they have to use that fraction in the claims they made against you.

Edwin S. Kneedler: It -- it only governs what the contractor does.

The contractor is just like an agency employee, making determinations on behalf of the agency at the first step. When -- when the --

Sonia Sotomayor: From you -- from the contractor, from the agency, they're only going to get the fraction as you told the contractor to calculate it.

Edwin S. Kneedler: Only if they don't appeal.

And -- and as -- as we point out --

Sonia Sotomayor: I -- I just don't understand what difference it means -- it means -- I mean, even a regulation or a rule may have legal meaning only until it's accepted, but even a rule can be challenged later on appeal. The grounds for that challenge might be different, but I can go into court and say it's ultra vires.

I can go into court and say it's not supported by the statute.

It's not binding in -- in any meaningful way, other than that's what the agency's going to do.

Edwin S. Kneedler: Well, if I -- if I may, in our view, 1395hh codifies for the Medicare program what this Court referred to in Chrysler Corporation as the central distinction in the APA between substantive and interpretive rules. And this Court in Guernsey --

Sonia Sotomayor: Well, the problem I have is that the provision adds something. It's not just rule or regulation; it's statement of policy.

And it seems to suggest to me that there's some interpretive rules that are encompassed by that.

Now which ones is the open question. But it does seem to suggest that it's broader than the APA ever was, because the APA only talks about rules.

Edwin S. Kneedler: Well, again, several points -- several points about that.

This Court's decision in Guernsey Memorial Hospital, which described the general APA standards, distinguished between substantive rules and interpretive rules. And the interpretive rule there was something in the provider reimbursement manual which, just as here, bound the contractor but could be changed -- or could be challenged --

Sonia Sotomayor: Mr. Kneedler, why didn't --

Edwin S. Kneedler: -- and set aside on appeal.

Sonia Sotomayor: -- why didn't Congress just say this is like the APA? Why does it change the language at all?

Edwin S. Kneedler: Well --

Sonia Sotomayor: I have to give some meaning different than the APA to Congress's express choice of a different articulation of the standard.

Edwin S. Kneedler: Well, first of all, when -- when Congress first enacted the provisions or amended the provisions in the rulemaking in 1986, it said certain regulations -- regulations have to go through notice and comment.

It didn't define regulation at that point. But the conference report said this does not require notice-and-comment rulemaking for interpretive rules or other things that are not now subject to that requirement. Then, in 1987, Congress revisited the -- the provision.

And if you look at page 34 of our brief, we -- we set out the House version, the version that was passed by the House, and then -- and contrast that to the version that was finally enacted. The House -- the House version said no rule requirement or other statement of policy that has or may have a significant effect on the payment for services can go into effect unless promulgated through notice-and-comment rulemaking.

That was changed in conference. And the enacted language kept everything but substituted for that italicized language the phrase "that has" -- that -- excuse me, "that establishes or changes a substantive legal standard."

Stephen G. Breyer: Is -- is this right? I mean, I -- it's very complicated, what you're saying.

I thought it was quite simple, that for a long time in Medicare they didn't have to follow the APA.

All right? Then Congress passes a statute and says, in this area, you do.

So the reason it says no rule, requirement, or other statement of policy is they have certain policy statements in mind, certain requirements in mind, and certain rules in mind, namely, those that establish or change a substantive legal standard.

Edwin S. Kneedler: And that --

Stephen G. Breyer: And, basically, what they're doing is saying to the agency, don't run around this.

We're not going to permit a run-around, where what you do is you change the legal standard and you call what you're doing a statement of policy.

So don't run around us, my friend.

You follow the APA. Now that is what I took out of your brief, but have I got that right?

Edwin S. Kneedler: That -- that is exactly -- that is exactly our position.

And the --

Stephen G. Breyer: So why didn't you say that was the answer to what Justice Sotomayor said? (Laughter.)

Sonia Sotomayor: Well, the problem I have with that --

Edwin S. Kneedler: I -- I -- I tried to start down that path --

Sonia Sotomayor: -- counsel --

Edwin S. Kneedler: -- but I -- but that --

Sonia Sotomayor: -- but -- but let me -- let me stop you.

If that's what Congress intended, it could have stopped in 1986 because, in 1986, it had done what you said. But something -- and you read the House report --

Edwin S. Kneedler: The House bill.

Sonia Sotomayor: -- the House bill -- was leading them to believe that a different standard was necessary because they changed it.

They had the APA standard in 1986. They chose intentionally to alter it by altering it in '87. And you look at the rejection of the House bill as something that helps you, but I'm not sure how.

Edwin S. Kneedler: It -- it --

Sonia Sotomayor: Because it tells me they are significantly concerned about things that make major changes, substantive changes in how people are being paid.

Edwin S. Kneedler: And -- and here's -- here's what matters there, as -- as I pointed out.

Congress substituted has or may have a significant effect.

Maybe that would sweep in ordinary statements of policy or interpretive rules.

But the -- the Conference Committee and Congress enacted something that -- that refers only to substantive legal standards. And the committee report said this language reflects recent court rulings.

The recent court rulings could only be APA rulings because there was nothing else that would have governed Medicare. And, in fact, as we point out in our brief, there was an American Hospital Association case decided, I think, just a matter of several weeks before the Conference Committee that was very similar to this, and it involved instructions affecting peer review organizations, which are contractors that operate on behalf of HHS under the Medicare program. And the court there drew a sharp distinction between substantive rules on the one hand and interpretive and procedural rules on the other hand.

Stephen G. Breyer: So the answer is that it didn't do what it's trying to do in 1986. What it talked about was any regulation, which could have included interpretive regulations. I would have found out, because I read the House reports.

But those who think they're irrelevant might not have understood the statute. And, moreover, there was an argument going on in the D.C. Circuit about what is a legislative rule.

Is it just important versus unimportant, or is it legally binding versus non-legally binding no matter how unimportant? All right.

That's what they're thinking about.

And it's confused.

And the 1987 statute clarifies it.

Edwin S. Kneedler: Yes.

We --

Stephen G. Breyer: Am I right or not right?

Edwin S. Kneedler: Yes, we agree.

But -- but all -- but 1986, we think, makes that clear too.

Not only the conference report, which specifically says interpretive rules are not covered, in fact, nothing's covered that wasn't already covered by the APA, but the -- the -- the term "regulation" as used itself connotes a -- a substantive rule, a -- a legislative type rule. People may talk about interpretive rules.

You don't usually talk about interpretive regulations.

Neil Gorsuch: Mr. Kneedler, this is where I get stuck.

And I'm -- I'm -- I'm focusing more on the language of the statute, I confess, than -- than the history, which I've read but I -- I find confused, as Justice Breyer suggests. So (a)(2) says that any rule, requirement, or other statement of policy that establishes a substantive legal change has to go through informal rulemaking, not even formal rulemaking.

And so, really, the question all boils down to what does "substantive" mean, I think, as -- as -- as I understand it. And the import of that in the government's view is that it's binding, as opposed to an interpretive rule, borrowing language from the APA.

And your friend on the other side reads substantive, as it's often read elsewhere in the law, as material or affecting private rights, as opposed to procedural. And both seem to me pretty plausible interpretations of that word.

And -- and the strikes against you, as I see it from the text of the statute, are a few. First, the statute speaks of statements of policy as being substantive. But, of course, in APA language, statements of policy are interpretive.

They're not substantive.

They don't bind the agency in any reasonable sense. It speaks of substantive changes in an interpretive rule in (e).

And, of course, that's like a -- a complete incoherent statement in APA language, but entirely coherent in the language of the law if "substantive" means material. And then, of course, the statute also adopts the APA good faith -- the good clause exception to -- to -- to rulemaking verbatim. And it clearly doesn't adopt the substantive interpretive language verbatim, which is right next door in -- in the APA.

I mean, it's the next section. And you're asking us to think that Congress recreated that section in this statute through this rather oblique mechanism. So, there, I've put my cards on the table.

Tell me where I've gone wrong.

Edwin S. Kneedler: Okay.

Starting with the good cause exception, as -- as we say, in our view, the statute only applies to substantive or legislative rules.

And the good cause exception under the APA applies to things that have to go through notice-and-comment rulemaking, which are substantive rules, so it was necessary to incorporate that. But, in -- in our view, the text of the provision, which refers only to substantive legal standards, does not include interpretive rules to begin with or procedural rules for that matter, so there's no need to have an express exception because the operative text excludes it. With respect to the substantive change in regulations under (e)(1), it does not say substantive legal standard, which is the operative language in -- in (a)(2).

It says a substantive change. And we think "substantive" means in substance, as opposed to perhaps form or wording or something like that.

Elena Kagan: But then you would be using the word "substantive" in two different ways in two very nearby provisions, wouldn't you?

Edwin S. Kneedler: Well, but we -- but we think that they -- that they have a different effect.

But even -- but even -- even if you said an interpretive rule can address something of substance, it's -- for example, if it's interpreting a statute or a regulation, it may have some effect as a substantive matter, but it is not binding. And what this Court has said in -- in Chrysler Corporation, said it in Guernsey Memorial Hospital, which deals with this very program, a substantive rule is one that has the force and effect of law.

An interpretive rule does not.

It simply explains the agency's construction of the statutes and rules that it implements.

So --

Neil Gorsuch: Mr. Kneedler, there's a lot of words there, but I'm not sure there's an answer to Justice Kagan's question. So I'm -- I'm going to give you an opportunity to try again, because it's very important to me as well. Aren't you using the word "substantive" in two different senses, first in the APA's -- what I call the APA sense in (a), and then what I'll call the other traditional legal sense in (e)? So you're conceding to your colleague on the other side that it is used in that sense at least in (e), I believe.

Edwin S. Kneedler: Well, it -- it doesn't say substantive rule or substantive standard, which would be the --

Neil Gorsuch: Substantive -- it says substantive change to an interpretive rule.

Edwin S. Kneedler: Right.

Neil Gorsuch: Which is a nonsense under your view, I believe.

Edwin S. Kneedler: But -- but substantive there, we -- we think in substance is whatever -- no, I'm -- I'm -- I'm serious, is what it refers to.

It's not in form.

It's meaningful. But beyond that, the -- the subsequent words used in the section refer to regulations, manual instructions, interpretive rules, statements of policy.

It is distinguishing regulations, which are the things that have to go through notice-and-comment under (a), from the subsequent things, manual instructions, interpretive rules, which do not.

Neil Gorsuch: Again, a lot of words, but I think at the end of the day you are agreeing that Congress is using that word in two different senses, right?

Edwin S. Kneedler: We -- we -- we think the phrase "substantive change" here is different from substantive legal standard, which is -- we think is the same as substantive -- as substantive rule. And, I'm sorry, I -- I forgot the third point you asked me.

Elena Kagan: Statement of policy, because that's hanging me up too.

Edwin S. Kneedler: Okay.

State -- statement of policy, again, frankly, I think that is an artifact of the House version of the -- of the bill.

If you go back to page 34, it read off no rule, requirement, or other statement of policy that has or may have a significant effect. It's possible that a statement of policy, or an interpretive rule, could have a significant effect on -- on --

Sonia Sotomayor: This one does.

Edwin S. Kneedler: -- interpretation, but it doesn't have the force of law.

Elena Kagan: So you're -- you're agreeing it's incoherent as written.

It's just that when the language was different it was not incoherent?

Edwin S. Kneedler: Well --

Elena Kagan: As written, it's incoherent because a statement of policy is, by definition, not a substantive rule?

Edwin S. Kneedler: Yes, but I think it -- I think it serves the purpose that Justice Breyer was identifying, basically saying we don't care what you call it, whether you call it a rule, whether you call it a requirement, whether you call it a statement of policy. A rule, after all, includes interpretive rules.

So no matter what you call it, a rule, a requirement, or a statement of policy, it -- it covers -- it's only covered if it would have established or changed a substantive legal standard. And, in fact, the conference report on the 1987 amendment specifically stresses --

Neil Gorsuch: What would be the --

Edwin S. Kneedler: -- that it only covers --

Neil Gorsuch: What would be the point --

Edwin S. Kneedler: -- substantive legal standards.

Neil Gorsuch: What would be the point of that, though, if a statement of policy couldn't have operative legal effect on anyone anyway?

Edwin S. Kneedler: Well, again, if -- if -- if that was the --

Neil Gorsuch: I mean, a party would simply say that's just a statement of policy.

Have a nice day.

Edwin S. Kneedler: Well, but if -- but if it -- if it purports to, as the language the Court used in Chrysler, to establish a substantive legal standard, it's not just a statement of policy.

It's called a statement of policy.

Then it actually describes --

Neil Gorsuch: Well, then it's not a statement -- then the argument would be it's not a statement of policy, right?

Edwin S. Kneedler: Right, that -- that -- that is true, but that -- but that --

Neil Gorsuch: Okay.

Edwin S. Kneedler: -- that doesn't mean that -- that doesn't mean it's not -- it's not a statement of policy within the precise meaning of the APA.

Stephen G. Breyer: Well, they don't want a run-around.

Edwin S. Kneedler: Right.

Stephen G. Breyer: But, (e), they don't run around it by calling it a statement of policy when you're --

Edwin S. Kneedler: Right.

Stephen G. Breyer: -- changing the substantive --

Elena Kagan: Yes, but it's at least --

Stephen G. Breyer: And -- and I have a different question, which is (e), which is because they are using the word "substantive change" there possibly in a different sense. So -- so -- so I -- I agree with that, and I -- but I thought that (e) has something to do that's not involved here. (e) is a kind of codification of a different common law rule of administrative law that, when you do something retroactively that's important, Mr. Agency, you better have a reason.

You better look at why you've changed it.

Edwin S. Kneedler: Right.

Stephen G. Breyer: If you're changing policy, go look at it and explain it to us.

Edwin S. Kneedler: Right.

Stephen G. Breyer: Something this Court has said many, many times.

Edwin S. Kneedler: Right.

Stephen G. Breyer: And I thought that's what (e) is about.

Edwin S. Kneedler: Yes.

Stephen G. Breyer: It's a different subject.

Edwin S. Kneedler: That -- that is -- that's correct in our view.

And it talks about a substantive change in regulations, again, which are the things that have to go through notice-and-comment rule -- rulemaking under subsection (a).

And then goes on to say manual instructions, interpretive rules, statements of policy or guidelines, which do not have the force and effect of law, they are not substantive rules or, in the language here, they do not establish or change substantive legal standards.

Elena Kagan: May -- may --

Edwin S. Kneedler: And so it distinguishes right -- right in there the reg -- the sort of regulations that (a) is talking about and these -- these non-binding sorts of things that -- that either way they should be made retroactive.

If they're interpretive, the interpretation shouldn't be made retroactive unless it -- it goes through -- unless the agency makes it specified.

Elena Kagan: May -- may I take you back, Mr. Kneedler, to one of Justice Sotomayor's original questions, which is just what, on your theory, this provision ends up actually accomplishing? Because, as I understand the 19 -- the 1986, the -- the prior year's provision, Congress essentially already said, for Medicare substantive rules, you have to go through notice and comment.

And I understand how this would have been different if it was the original version of the thing, the "has or may have a significant effect." But, as written, on your theory, it seems to just repeat the 1986 command, doesn't it?

Edwin S. Kneedler: Well, again, the House would have done something broader in 1987.

And I -- and I think that the -- I think the Court should realize that --

Elena Kagan: But are you saying -- I want to make sure I understand this.

Are you saying that the compromise was essentially to just repeat the 1986 provision?

Edwin S. Kneedler: Yes.

I mean, I think -- I think that is -- it was carried forward. And the -- and, again, the conference committee report stresses that only things that establish or change a substantive legal standard. And that -- the word "substantive" in the rulemaking context has a -- has a long history in administrative law under the APA. It also -- the distinction -- that very distinction is drawn in Black's Law Dictionary, as we explain in our -- in our brief.

Elena Kagan: I mean, it is a little bit odd, don't you agree, Mr. Kneedler, because, if the compromise was not to do anything beyond 1986, then you would think that people would just say, okay, let's not do it. Not put in a new -- a new -- a new statute saying precisely the same thing.

Edwin S. Kneedler: Well, the -- the bill was in conference -- in conference at that point, and there were several other things that were in the bill at that point.

This is -- this change was not the only one. The bill was in conference, and they -- the conference committee decided that something should be enacted, rather than nothing done at all.

But, as to this provision, we think that it -- that --

Neil Gorsuch: It's entirely superfluous?

Edwin S. Kneedler: I -- I -- I don't think it's --

Neil Gorsuch: It does nothing?

Edwin S. Kneedler: No, I don't think it's superfluous.

Neil Gorsuch: It does nothing new?

Edwin S. Kneedler: Well, it -- it -- it substitutes -- it -- it elaborates -- it elaborates on --

Neil Gorsuch: But substantively -- sorry -- it does nothing new?

Edwin S. Kneedler: No, it -- it -- it reiterates through the use of such --

Neil Gorsuch: It reiterates, okay. It reiterates what's already the law --

Edwin S. Kneedler: Well, it was not -- it was not in the --

Neil Gorsuch: -- which is to say it is superfluous.

Edwin S. Kneedler: It was not in the statute in 1986.

Neil Gorsuch: Can I -- can I take you --

Edwin S. Kneedler: The statute referred to regulation --

Neil Gorsuch: Can I take you back just to one other problem I have? You want us to -- to -- to view this statute as very carefully using APA terminology when it comes to substantive.

But, when it comes to statements of policy, you want us to ignore the fact that what -- what the APA -- how it treats them and say even faux statements of policy that are really rules and requirements and regulations, that's what it's aiming at.

Isn't that a problem for you too?

Edwin S. Kneedler: No, I don't -- I don't think so because the -- the statement of policy is in the opening clause, which refers to rules, which could include interpretive rules, requirement, or statement of policy. Those are descriptions of the kind of agency issues --

Sonia Sotomayor: But when is ever a statement of policy binding?

Edwin S. Kneedler: Pardon me?

Sonia Sotomayor: Meaning, when is a statement -- if it's not a rule or regulation, if it's just a statement of policy, when is it ever binding as you've defined "binding"?

Edwin S. Kneedler: I --

Sonia Sotomayor: Isn't policy something that can be challenged?

Edwin S. Kneedler: It -- it -- it is, but I think it's important for the Court to focus on the -- on the operative language, which is whether it changes -- establishes or changes a substantive legal standard.

That's what Congress enacted. I'd also like to point out what the consequences of this for the Medicare program are.

As -- as this Court has pointed out in Guernsey Memorial Hospital and other cases, the Medicare program has, you know, hundreds of pages of statutes, probably thousands of pages of regulations, but the Court has recognized that that can't answer all questions that come up. And -- and the Court in Guernsey recognized the importance of interpretive materials like, in that case, a provision in the provider reimbursement manual.

There are similar manuals governing the program integrity for hospitals and doctors and -- and -- and whatnot.

There are still reimbursement issues that are -- that are fleshed out in the manual.

Sonia Sotomayor: But I look at the subsequent history of this in -- in the D.C. Circuit, and I look at Clarian Health West, and your fears there are overstated.

A fairly significant change was held not to be encompassed by this provision because it really was just following the statute. This is filling a gap in the statute. I don't know what else is clearly more a policy than that when you're filling in a gap as opposed to interpreting a statute.

And that seems to be the distinction the D.C. -- D.C. Circuit is applying.

Edwin S. Kneedler: Well, Clarian did not go to the substantive provisions for reimbursement.

It had to do with a procedure for various screening.

Sonia Sotomayor: That's my point. That's my point.

Edwin S. Kneedler: Yes, but it --

Sonia Sotomayor: Which is not everything is going to come under this.

Edwin S. Kneedler: It's not everything, but it -- but it -- but it certainly would subject to notice-and-comment rule -- rulemaking a broad swath of what has never been done.

This is --

Neil Gorsuch: Well, on that -- on that --

Edwin S. Kneedler: -- this is 30 years later in HHS --

Neil Gorsuch: -- on that -- on that, though, I don't doubt it's more convenient for the government to proceed through adjudication of an individual case and announce a new rule that applies to the whole of society without inviting comment and providing notice to everyone affected.

Surely, I -- I get that that's easier and preferable, certainly more efficient. But couldn't Congress make rationally an alternative decision that informal rulemaking, not even formal rulemaking, that's gone by the boards, but just informal notice and comment to affected parties in something as significant as changing the formula for Medicare for all Medicare providers nationwide, that maybe they should have 60 days to at least throw in their comments.

Edwin S. Kneedler: Well, first of all, the agency has tried to go through notice-and-comment rulemaking twice on this. It did -- it did it in 2004, when the issue was brought to its attention.

It did it in 2013. It recognizes that. But what it did here was -- was not -- not establish a binding provision that has the force and effect of law but simply furnish fractions to the contractors who were performing calculations at the very first stage of the -- of the process.

Elena Kagan: Could I very quickly ask you, given Clarian Health, what consequences are you afraid of?

Edwin S. Kneedler: Afraid of, again, the broad swath of -- of manual provisions that -- I mean, that -- that really just dealt with procedures.

I mean, I -- in -- in one respect, you could look at it as -- as recognizing the procedures.

Procedural rules are not covered by notice and comment under the APA.

A procedure about how contractors are supposed to evaluate certain situations without changing substantive standards isn't -- isn't covered. And that's our -- you know, when it comes to interpretive rules, that's our position, because they -- they explain the agency's own interpretation, but it's the statute that governs, not -- and this is not a regulation that establishes a substantive legal standard on its own terms. If I may reserve the balance of my time.

John G. Roberts, Jr.: Thank you, Mr. Kneedler. Mr. Shah.

Pratik A. Shah: Mr. Chief Justice, and may it please the Court: By making the legal determination to count Part C days as Part A entitled days in the Medicare fraction, the agency's 2014 issuance reduced the payment right of hospitals nationwide by -- and this is according to the agency's own estimate -- billions of dollars. That is --

John G. Roberts, Jr.: But it's not -- it's not binding at all.

Pratik A. Shah: Well, Your Honor --

John G. Roberts, Jr.: Interim calculation.

Pratik A. Shah: I -- I think it's binding in every normal sense of the word.

Let me give you two responses.

First, let me address your concern on binding as a factual matter and then tell you why it's legally irrelevant. First, as a factual matter, they call it just an internal instruction.

The fact is the contractors are the ones who make the final payment determination.

How this regime works is the hospitals submit a cost report form that has all the data on it.

The contractors then use the fractions from the agency, and they then compute the final adjustment that the hospital is owed. That is then a final binding payment determination.

That's it.

That's how much the hospital is owed, unless the hospitals could do an administrative appeal or they can sue in court. If you don't do the administrative appeal or sue in court, there's no doubt about it, it's in the reg, that is your final determination of your legal right to payment. Now, here --

John G. Roberts, Jr.: But doesn't it make sense if you've got -- I don't know exactly -- I mean, how many of these interim calculations do they have?

Pratik A. Shah: Well, when you're talking about interim calculations for the DSH adjustment, there's only two calculations. There's the Medicaid -- Medicare fraction and the Medicaid fraction.

That is it. And -- and they compute that, and then they give you a number for that adjustment.

Stephen G. Breyer: I think in --

John G. Roberts, Jr.: Well, but, I mean, how many every year or whatever the payment schedule is? My -- my understanding is they were using this to tell you how to calculate what you owe, but not until the, I don't know, the final bill comes in.

Pratik A. Shah: Oh, okay.

So, just to clarify here, so this is in the context of a final payment determination.

John G. Roberts, Jr.: Right.

Pratik A. Shah: So this happens once a year.

At the end of the year, the hospital will, after the year is closed, they'll file a cost report form, and the agency will then use that data, along with the Medicare fraction that the agency has given them, and give them a final total for that year. So it's used to -- as a payment total for the end of the year.

And then that Medicare fraction is used, just the Medicare fraction, is then used to compute the interim payments for the next year until the next fractions are issued. So all of that is binding, however that word is used.

Obviously, it's not in the statute.

But the hospitals are stuck with that.

That's their payment determination. Their only recourse, of course, is to file an administrative appeal or sue in court. They did that here.

And here is what the agency's own board said.

We are bound by the agency's action.

That is, we lack the legal authority to look behind the policy and adjudicate this. The agency's own board says they can't do that.

So for -- for the government --

Stephen G. Breyer: Well, then they're wrong, because the SG is telling us that they do have that power.

Pratik A. Shah: Well, okay.

Stephen G. Breyer: And so, therefore, your complaint is to go to a court and say they didn't do what they admit they were supposed to do --

Pratik A. Shah: Well, Justice Breyer--

Stephen G. Breyer: -- which is that they treat the substantive matter --

Pratik A. Shah: Justice Breyer, the government made that exact argument to the district court, and the district court found that the board was right.

They made that --

Stephen G. Breyer: That's what both of these things seem to me to be somewhat side issues.

I understand why they give color to the problem.

Pratik A. Shah: Right.

Stephen G. Breyer: And I accept that. But the basic problem to me is whether or not this statute, in using words like policy and so forth, is saying: Agency, when you have a legislative rule, which is defined as a rule that establishes or changes a legal -- substantive legal standard, when you have that kind of rule and don't hide it under a statement of policy or some other way, when it's doing that, use notice-and-comment. Now, if you aren't doing that, you can use notice-and-comment.

You're more free to do what you want. Now that's basically their argument.

Pratik A. Shah: Right.

Stephen G. Breyer: That has considerable importance even beyond this area.

And so I'd like you at some -- you know, to get to your view on that.

Pratik A. Shah: Sure.

Okay.

So, Your Honor, that -- that argument makes no sense because it goes -- it doesn't go any further than the 1986 enactment that we've already discussed. And even under the APA, if you call a legislative rule a ham sandwich, that doesn't get you out of the notice-and-comment requirement.

If you called an interpretive rule or a statement of policy, there is an exception for those, but if it's actually a legislative rule, you have to go through notice-and-comment.

So the government's --

Stephen G. Breyer: Well, yes, you know that --

Pratik A. Shah: Yeah.

Stephen G. Breyer: -- and I know that. But there are many, many people perhaps in the United States, and including many who work in agencies --

Pratik A. Shah: Well, Your Honor, the --

Stephen G. Breyer: -- who don't know that.

And so where it said in 1986 the word "regulation," and then you read the House report --

Pratik A. Shah: Yes.

Stephen G. Breyer: -- then we arrive at the same conclusion that it already said it. But many people don't read House reports.

And that word "regulation" might not explain itself.

And, therefore, they reenact 1987's law in order to put the House report, in essence, in the law.

Pratik A. Shah: Well --

Stephen G. Breyer: And they show exactly what they mean, okay?

Pratik A. Shah: Well, a --

Stephen G. Breyer: That's the argument on the other side.

Pratik A. Shah: Well, a couple responses. If you want to ignore the text and look at the House report, I would suggest we look at the 1987 House report, which is the one that led to Section (a)(2).

And what it says there is we tried this in 1986. It turns out that the agency, and this is a quote, "with growing frequency is enacting significant" -- unquote -- is enacting significant policies without going through not -- notice-and-comment, notwithstanding our 1986 enactment.

And, in fact, it -- the next sentence says, in fact, it's doing these things through things like manual instructions. And so what we are going to do is enact a further requirement that even if it is a rule, whatever type, interpretive or legislative, a requirement or a statement of policy, as long as it's actually affecting a standard changing effect on Medicare providers or beneficiaries, their legal rights, then they have to go through notice-and-comment. And -- and let me point out, let's get back to the fatal flaw, which the government has still not addressed in its statutory construction, other than saying that Congress's use of the word "statement of policy" is an artifact, that essentially Congress made a mistake when they enacted the statute because it didn't change -- it didn't strike everything out except legislative rule. The statute here says any rule, requirement, or statement of policy.

Now it's not an artifact.

A statement of policy -- this is the government's construction -- only things that have the force of law can have a standard -- can affect a substantive legal standard. Well, categorically, as the government says on page 16 its reply brief, a statement of policy under decades of APA law categorically lacks the force of law. So Congress has now enacted a statute that says any rule, requirement, or statement of policy can trigger notice-and-comment, except you could never have a statement of policy that triggers a notice of comment.

Both sides agree on that. You are now reading significant words out of a statute.

That is not how statutory construction works. Now the government says: Oh, you should just read this provision as simply codifying the preexisting distinction between substantive and interpretive rules in the APA, the APA's interpretive rule exception. Well, first of all, the term "substantive legal standard" that they use in (a)(2) appears nowhere in the APA or in any APA cases.

So it would be an exceedingly, extraordinarily round-about way for Congress to try to adopt the interpretive rule exception which is sitting on the books, instead to introduce new language which has never been used in the APA to duplicate the interpretive rule and section. Instead of introducing that novel concept, if all that's what the -- what Congress wanted to do in (a)(2), it could have simply cross-referenced the interpretive rule exception in the APA, just like it cross-referenced the neighboring good cause exception, or it could have simply said any substantive rule requires notice-and-comment. That would have been a lot simpler. And yet, obviously, Congress didn't do that. It did almost the opposite.

It -- it took -- it expressly includes any rule, requirement, or statement of policy, which, if you compare it to the interpretive rule exception in the APA, that expressly carves out any interpretive rule or statement of policy.

Sonia Sotomayor: Could you give meaning to legal, substantive legal?

Pratik A. Shah: Sure.

So --

Sonia Sotomayor: Because that -- that's where the strongest argument, I think your adversary makes, which is generally we think of legal as binding. So, if you can deal with that, I think --

Pratik A. Shah: Sure.

Sonia Sotomayor: -- everything else you're saying falls into place.

Pratik A. Shah: Sure.

So substantive legal standard, how we -- how we would view it is a legal standard is, obviously, a term that's used in law all the time.

It's this legal test, right? And so, here, the legal standard in their issuance is whether Part A entitled days cover Part C days, whether they cover days that are not covered under paid or covered under Part A.

So that's -- in substantive legal standard, the legal standard is the test. Here, we obviously have a test, that's what the whole 2014 issuance is doing, defining when Part C days are covered.

So that's your legal standard. Now the question is, what work is substantive doing? Well, then the work substantive doing it, it's doing it in contravention to procedural.

And there is no doubt here, everyone on both sides agree that in that sense, substantive versus procedural, what the agency did here has a substantive effect.

It's an effect towards billions of dollars, it reduces the right of recovery or reimbursement for these hospitals. Now what the government says, they point to this D.C. Circuit case called AHA v. Bowen, and they say Congress made this change in the statutory language and added the phrase "substantive legal standard" to reflect that ruling. Well, first of all, when Congress made that change, it said we are clarifying the statute.

It did not say we are doing a wholesale change in the statute, which is what the government's position is today at oral argument.

It said it's clarifying the statute. Second point: That AHA v. Bowen case, actually, substantive versus procedural is also a distinction in the APA.

There are substantive rules, there are interpretive rules, and there are procedural rules. And what AHA v. Bowen says is procedural rules, as opposed to substantive and interpretive rules, also lack notice-and-comment. And it draws the distinction between substantive and procedural.

This is on pages 1045 to 1047 of AHA v. Bowen. So even if we assume that Congress had AHA v. Bowen in mind -- Congress is silent about that in the House report -- but I'm willing to take the government at face value that --

Elena Kagan: Do you have any other case that that might be when the conference report says we're reflecting recent cases? Is there anything else other than Bowen that you think it might be referring to?

Pratik A. Shah: That -- that's the -- I mean, we've looked.

There really isn't anything that's on point of the ones that we could find in that time frame.

Bowen is obviously the one that the government focuses on. And we're happy to focus on that because the core of Bowen is distinguishing a procedural rule, things like enforcement policies, auditing requirements on contractors, how often you need -- the contractor has to go and check the books of the hospital, those sort of things. It's distinguishing them from substantive and interpretive rules.

And so in -- in -- if that's what Congress was trying to do, that makes perfect sense.

We agree that (a)(2) excludes procedural rules from its ambit. It says any rule, requirement, or statement of policy that alters a substantive legal standard, so what's off the table are like the rules in Clarion; things that have to do with enforcement policies, enforcement priorities, anything that's procedural in nature is off the table. So it's completely consistent. Congress used words that make sense.

They departed from the APA.

And it's completely consistent with the legislative history. Now, if I could --

Stephen G. Breyer: What about the practical --

Pratik A. Shah: Yes.

Stephen G. Breyer: -- the practical? And the reason is practical is relevant is you make a very coherent argument for one view that, at one time, the D.C. Circuit waffled between that a legislative rule was an important rule. And the other side of it is, no, it might or might not be.

It is a legally binding rule.

That was Davis.

And the D.C. Circuit tried your approach but then went back. And the reason was practical, that once you start to say, as you're reading this statute, that what they're talking about are important rules, you see, and that's why they put in not just rules but statements of policy, et cetera.

Once you do, you open the door to agency after agency, and at least here with this statute, saying what in heaven's name is that? You get into arguments about everything, every word of a manual.

And if they avoid that by applying this statute, to everything arguably important in every manual, they will be here 'til Christmas come. And -- and, moreover, they will have to make decisions in advance that they really don't understand until later. And your client, so they might be happy with this case, may not be so happy with a few of the others that take 19 years to go through -- I'm exaggerating --

Pratik A. Shah: Right.

Stephen G. Breyer: -- but you see the practical problem.

Pratik A. Shah: No.

Yes.

Stephen G. Breyer: You don't see it or you --

Pratik A. Shah: I do see your --

Stephen G. Breyer: That's why I want to know the answer.

Pratik A. Shah: I see your concern.

Stephen G. Breyer: Yeah.

Pratik A. Shah: But here is why your concern is misplaced here.

And let me give you three clear reasons why, and these -- these are important. First, we've already talked about the Clarian decision.

There's one D.C. Circuit decision that actually applies the decision here that they say is going to cause serious problems for the administration of Medicare Act. The D.C. Circuit made clear they are laying down a line, and that line is we're going to take everything that has any anything to do with enforcement priorities, auditing, anything like that, so a large swath of manual-type instructions, that was a manual instruction in Clarian, off the table. The second point, in its brief, the government focuses on the provider reimbursement manual.

They say: Oh, virtually all of this is going to require notice and comment and -- and -- and raised some of the concerns. Well, the government still has not provided a single example from that provider reimbursement manual, so we took a look at that provider reimbursement manual.

It's about 6,000 pages long. The last 5,000 pages of it are procedural instructions on how to fill out the cost reimbursement form.

It's instructions to providers.

That's kind of like an exceedingly complicated tax return. And so the last 5,000 -- and, by the way, of those last 5,000 pages, a lot of those are obsolete because they don't pull out the old instructions.

It tells you to add line 20 to 21 to get to line 22.

That means --

Stephen G. Breyer: But does the statute apply only to provider manuals or does it provide, say, let's say, to 320 or 240 million Americans or 120 million Americans who get all kinds of things from Medicare?

Pratik A. Shah: Well, Your Honor --

Stephen G. Breyer: And perhaps thousands of hospitals and thousands of services.

How does -- if the statute's on just provider, you have a good point, but is it?

Pratik A. Shah: Well, the problem that the government points to are these manuals.

And what I'm telling you is the manuals --

Stephen G. Breyer: No, and I'm pointing to a different problem.

Pratik A. Shah: Okay.

Stephen G. Breyer: I'm pointing to a question --

Pratik A. Shah: So here --

Stephen G. Breyer: -- of whether this is limited to provider manuals.

Pratik A. Shah: So here's -- here's -- well, it's limited to the terms of the statute. It has to be a rule, requirement, or statement of policy that changes or alters a substantive legal standard affecting one of the three categories of things.

Right?

Samuel A. Alito, Jr.: Well, you explained away the --

Pratik A. Shah: A right to payment --

Samuel A. Alito, Jr.: You -- you explained away the last 5,000 pages of the manual.

Pratik A. Shah: Yes.

Samuel A. Alito, Jr.: But what about the first thousand? (Laughter.)

Pratik A. Shah: Okay.

So the first -- the first -- the remaining 980 pages, of that, 40 percent are from before 1987. (a)(2)'s effective date applies to any manual -- anything promulgated after 1987.

So that -- that's off the table.

That leaves you your roughly 400 pages, Justice Alito. Of those, we went page by page through those 400 pages.

All of about 30 -- except for about 35 of those pages, apply to the prior cost reimbursement regime.

That was the regime of how Medicare used to do those things.

And those required detailed instructions. Now, however, the vast, vast majority of providers are governed by the prospective payment system.

Only about 35 pages apply to those. Now, even if 35 pages worth of stuff needed to be done through notice-and-comment, although I'm quite sure the government can come up with all sorts of arguments why those 35 pages don't fall under (a)(2), but even if you did -- and here, Justice Breyer, this should address your concern better than anything I've said so far. There is an annual prospective payment system rulemaking that the statute requires when it made this change from reasonable cost reimbursement to this new regime, to which there are only 35 pages applicable. That annual prospective payment rulemaking is hundreds of pages long.

And the agency already puts everything governing prospective payment systems that has a substantive effect into that rulemaking. In fact, 16 times before this case, it adjusted the treatment of certain categories of days through the prospective payment system rulemaking.

Stephen G. Breyer: That's a prospective payment manual, but read this.

Pratik A. Shah: This is not a manual.

Stephen G. Breyer: It says it governs the scope of benefits.

Pratik A. Shah: Yes.

And so --

Stephen G. Breyer: Not just -- and the eligibility --

Pratik A. Shah: Right.

Stephen G. Breyer: -- of individuals to furnish or receive services or benefits.

Pratik A. Shah: Right.

Stephen G. Breyer: So suddenly reading that, I think it governs medicine and healthcare provided 80 million people or 100 million people.

Pratik A. Shah: Sure.

Well, Your Honor, a couple responses.

Stephen G. Breyer: Am I right or wrong?

Pratik A. Shah: First of all -- first, it would cover it if it falls under the terms of the statute, but here is why that doesn't create a workability problem.

And not even the government has argued that. And here's why.

First of all, all -- a lot of that stuff is already done through rulemaking, just like the prospective payment system rulemaking.

That's one of many, many annual rulemakings that the agency does, hundreds of pages long, includes all of the stuff that we have in here.

There's no burden to that. And, by the way, those rulemakings don't take 19 years, Justice Breyer.

We went through and averaged them.

It's in the appendix to our cert opposition brief.

They take on average 102 days to put through an agency rulemaking on all of this stuff. Now, to -- to address your other question, a lot of that stuff is done through regulation.

A lot of that stuff, the stuff that you're talking about, is this -- is this drug or treatment covered to the thousands of people who might submit a Medicare claim, that's all done through national coverage determinations, local determinations.

And then those are all adjudications. There are thousands of those that are done every day where the agency, a contractor gets a Medicare claim.

And that is just a mine-run -- there is a reg -- there is a rule on it.

I apply the rule.

Is this drug covered? Yes or no.

Sonia Sotomayor: Do you have any idea --

Pratik A. Shah: That doesn't implicate (a)(2).

Sonia Sotomayor: Do you have any idea why this change wasn't put through the ordinary rulemaking notice and --

Pratik A. Shah: Yes, Your Honor, because they tried.

They did.

In 2004, they did this through notice-and-comment rulemaking or tried to do it through notice --

Sonia Sotomayor: I've now forgotten.

Why was that rebuffed?

Pratik A. Shah: Right.

So --

Sonia Sotomayor: I remember the 2013.

Pratik A. Shah: Yes.

Sonia Sotomayor: But I don't remember the --

Pratik A. Shah: Yes.

So what happened is they did the proposed rulemaking in 2003, which said, look, we want to codify our long-standing policy and practice of excluding Part C days from the Medicare fraction.

That's our position as to how you should do this. Then, in 2004, they did a 180-degree turn but did not do any further notice-and-comment, and they issued it as a final rule to include the Part C days. The D.C. Circuit in the precursor to this case, what we call Allina I in the briefs, said that's a logical outgrowth failure because you've now flipped your long-standing policy without any notice and comment. So they tried to do it through notice-and-comment, but because they got rejected because of their defect in that process, they then came to these -- they then -- then they did the 2013 rulemaking, Justice Sotomayor, that you're talking about, but, of course, that's only going to apply prospectively. So then they were stuck while that Allina I litigation was going on.

Between 2005 to 2013, they had those years that were not covered by their new rule, because that had been invalidated for the logical outgrowth failure, and was not covered by the 2013 rule, which only operated prospectively. So, rather than doing a proper rulemaking, they simply announced these on a website.

They posted them on their website and said: Now we are doing exactly the same thing we were told that we tried to do in the 2004 final rule but was vacated by the D.C. Circuit. So that's the answer.

John G. Roberts, Jr.: Well, I guess the way the government puts it is they decided not to proceed through rulemaking but to proceed through adjudication.

Pratik A. Shah: Well, Your Honor, as the D.C. Circuit said, this looks nothing like an adjudication.

This policy that they introduced on their website of including Part C days in the Medicare fraction, that applies to every hospital nationwide without exception.

It has prospective effect --

John G. Roberts, Jr.: It's a big adjudication.

Pratik A. Shah: Well -- well, I think what distinguishes the adjudication from the rulemaking is, does it have general applicability? That's the definition in the APA. And this, as the D.C. Circuit said in its opinion, and the fact is the government's counsel in the D.C. Circuit oral argument conceded, when asked at oral argument, doesn't this policy have effect to every single hospital in the nation -- nationwide, and the answer is yes, it does. And not only that, it's prospective because these fractions are used, again, for every hospital nationwide to calculate their interim payments for the intervening year until the new fractions come out.

John G. Roberts, Jr.: Well, but --

Pratik A. Shah: So this looks nothing like an adjudication.

John G. Roberts, Jr.: -- if it is -- well, I guess, again, I mean, we can hear on rebuttal, but, I mean, it's an adjudication where they're doing what you'd like to see people do in adjudication, which is apply the same rules to similarly situated parties.

Pratik A. Shah: Well --

John G. Roberts, Jr.: There just happens to be a lot of them.

Pratik A. Shah: Right.

Well -- well, that -- that would be fine.

But you can't issue a -- a -- a policy that changes how you were treating it and -- and have it have prospective effect for every hospital nationwide without complying with the terms of (a)(2), which says, if you do any rule, requirement, or statement of policy, you can't just give it a label that says we're doing adjudication. This has every effect of a rule, requirement, or statement of policy in that that treatment of Part C days, that is going to decide the Medicare reimbursement amount, their legal entitlement to reimbursement, for every hospital nationwide.

John G. Roberts, Jr.: So are -- you're saying this is not something that could have been done through adjudication?

Pratik A. Shah: Well, Your Honor, not in the way --

John G. Roberts, Jr.: The -- the agency could not choose adjudication as a means of establishing this policy?

Pratik A. Shah: Not as a means of establishing it nationwide for every hospital nationwide.

And the government has said that when they would do these things, they apply the same rule to each hospital. So, no, if you're going to do something like this, then -- you could call it an adjudication.

That's fine.

But you have to go through notice and comment when you're going to be changing a substantive legal standard that applies to them.

And so they can't -- they can't now label this as adjudication. Now, again, this is somewhat of a -- a -- a -- of a theoretical question in this case, because as the D.C. Circuit -- even the district court, which ruled in front of the government -- in favor of the government, rejected their claim that this was an adjudication and said this bears all the hallmarks of a rule. If there are no further questions, I'm happy to sit down.

John G. Roberts, Jr.: Thank you, counsel. Four minutes, Mr. Kneedler.

Edwin S. Kneedler: Several things, Mr. Chief Justice. Subsection (e), by the way, was enacted at a later time, and so its text doesn't necessarily shed light on what Congress did in 1987. The term "rule" in the lead-in to subsection (a)(2) includes statements of policy.

So there's some redundancy or some -- it's superfluous there anyway, no matter -- no matter how you read it.

So it is -- it is imprecise. The conference committee report in 1987, I want -- I want to stress this, again says recent court rulings.

Those could only have been APA rulings. And, in fact, I -- I take my friend to acknowledge that the American Hospital Association case was the leading case, and that case discussed the distinction between substantive rules and both interpretive rules and procedural rules, not just the one. And as we point out on page 11 of our reply brief, it did it in terms that are echoed in the text of -- of hh itself.

It says the APA's notice-and-comment requirement applies only to substantive rules that create law -- which goes to Justice Sotomayor's point about what does "legal standard" mean -- creates law and a -- "establish a standard of conduct" which has the force of law.

Those -- that language is very close to what -- what is in the statute as enacted. This is really the last program in which one would expect Congress to have created such a transformation of administrative law as Respondents are proposing here, that interpretive rules, such as manuals -- and the provider reimbursement manual is not the only manual.

Neil Gorsuch: But why -- why is that? In Chenery II, this Court did allow the government to engage in retroactive adjudications that affect substantive rights, but expected that it would be a rare thing that that would happen and that most of these kinds of actions would happen through rulemaking. This, of course, is the Court's -- the government's claiming the power to affect every Medicare provider in the country retroactively through these seriatim adjudications.

Why is -- why is this extraordinary?

Edwin S. Kneedler: The Court addressed that very situation in Guernsey Memorial Hospital, in which it said some things can be done by regulation, some things can be done by manuals, and some things are done by adjudication. And the agency -- and this is the teaching of Vermont Yankee, the agency has to have the flexibility to choose.

And this does have the character of a -- of an adjudication, going to the Chief Justice's question. Yes, they sent it out to every contractor performing on behalf of every individual hospital, but that contractor's determination for that -- for each of those hospitals is an individual adjudication. And the -- the application of this fraction in that individual adjudication is not binding.

It -- it can be reversed on appeal to the board or in court.

Sonia Sotomayor: Can you point to anything in the history of the '86 bill or '87 bill that leads substance to your claim that Congress was not, in fact, concerned about substantive changes in formulas like this one being done through rulemaking as opposed to adjudication?

Edwin S. Kneedler: Well --

Sonia Sotomayor: I thought in all the history I read that was motivating them is the agency's change of policy of doing less than a rulemaking.

They wanted more or the same but not less.

John G. Roberts, Jr.: You may.

Edwin S. Kneedler: What Congress was driving at -- and this comes from the word "substantive," which has an established meaning in administrative law and the APA -- was things that have the force and effect of law, not things that are simply interpretive.

That's the very distinction this Court drew in Mortgage Bankers and in Guernsey Memorial Hospital arising under this -- under this same program.

John G. Roberts, Jr.: Thank you, counsel.

The case is submitted.