June 18, 2024 | Volume 31, Issue 14
This Report summarizes opinions issued on June 6, 2024 (Part I); and cases granted review on June 10, 2024 (Part II).
Opinions
Becerra v. San Carlos Apache Tribe, 23-250.
In a 5-4 opinion, the Court held that the Indian Self-Determination and Education Assistance Act (ISDA) requires the Indian Health Service (IHS) to pay “contract supports costs” incurred by an Indian tribe when it collects and spends “program income” derived from third-party payers (i.e., Medicare, Medicaid, and private insurers) in administering its own healthcare program.
Almost 50 years ago, Congress passed ISDA, 25 U.S.C. §5301 et seq., to encourage Indian tribes’ participation in federal healthcare programs. Under the Act, a tribe can assume responsibility for administering healthcare services itself. If a tribe chooses that option, IHS must enter into a “self-determination contract” with the tribe. “Under this contract, the tribe receives funds to operate federal healthcare programs that IHS previously operated” on the tribe’s behalf. First, IHS must provide tribes with “the appropriated funds that IHS would have used to operate such programs absent the self-determination contract.” This so-called “Secretarial amount” cannot be less than what would have been allocated if IHS had continued to administer a tribe’s healthcare program. Second, like IHS-administered programs, “contracting tribes can collect revenue from third-party payers,” such as Medicare, Medicaid, and private insurers. A tribe must use this “program income” in furtherance of “the general purposes of the contract” with IHS. “The Secretarial amount from IHS and program income from third-party payers do not, however, place contracting tribes on equal footing with IHS.” This is because “[t]ribes incur overhead and administrative expenses that IHS does not incur when it runs the healthcare programs.” For instance, IHS can “rely on other federal agencies, such as the Office of Personnel Management, for general administrative functions,” whereas tribes are personally responsible for all manner of costs related to providing healthcare under their self-determination contracts. To compensate for this funding gap, Congress amended ISDA to account for “contract support costs” to cover such “reasonable costs for activities which must be carried on by a [tribe] as a contractor to ensure compliance with the terms of the [self-determination] contract.” §5325(a)(2). These “contract support costs” include “direct program expenses for the operation of the Federal program” and “any additional administrative or . . . overhead expense incurred by the [tribe] in connection with the operation of the Federal program, function, service, or activity pursuant to the contract.” §5325(a)(3)(A). Nevertheless, these contract support costs are restricted to “costs directly attributable to” self-determination contracts. This means that funds may not be used for “costs associated with any contract . . . entered into between [a tribe] and any entity other than [IHS].” §5326.
The litigation here involved separate self-determination contracts between IHS and (1) the San Carlos Apache Tribe in Arizona and (2) the Northern Arapaho Tribe in Wyoming. Each Tribe’s self-determination contract included a funding agreement with an attachment detailing the Tribes’ required activities under the contract. And each Tribe’s contract included requirements pertaining to the Tribe’s billing of third-party insurers. The Tribes separately sued the Federal Government for breach of contract claiming that, “although [they] had used both the Secretarial amount and program income to operate [their] healthcare programs under the self-determination contracts, IHS failed to pay contract support costs for the Tribe[s’] healthcare services to the extent they were funded by program income.” The district courts in each case dismissed the Tribes’ complaints. On appeal, the Ninth and Tenth Circuits reversed, concluding that the Tribes were entitled to reimbursement for the contract supports costs. In an opinion by Chief Justice Roberts, the Court affirmed the judgments.
The Court stated that the question was “whether IHS must [] cover the contract support costs the Tribes incur when they spend program income on the healthcare programs.” In ruling that IHS was obligated to do so, the Court first looked to the text of ISDA, namely, §§5325(a)(2) and (a)(3)(A). The Court addressed each in turn. To begin, subsection (a)(2) “defines contract support costs as ‘consist[ing]’ of ‘the reasonable costs for activities which must be carried on by a tribal organization as a contractor to ensure compliance with the terms of the contract.’” So, “if a tribe must collect and spend program income” to comply with its contract, “then the reasonable administrative and overhead costs it incurs doing so are ‘contract supports costs’ under Section 5325(a)(2).” And, yes, the Tribes were required to collect and spend “program income,” as evidenced by their contracts and certain provisions of ISDA. Specifically, each contract incorporated a section of ISDA requiring “tribes to use ‘program income earned . . . in the course of carrying out a self-determination contract’ to ‘further the general purposes of the contract.’” ISDA further defines the “purposes” of the contract as the “‘functions, services, activities, and programs’ to be transferred from IHS to the tribe.” As a result, found the Court, “Tribes are . . . contractually required to use program income to further the functions, services, activities, and programs transferred to them in their contracts. When they do so and incur reasonable costs for required support services, those costs are ‘contract support costs’ under Section 5325(a)(2).”
Next, ruled the Court, contract support costs are eligible for funding reimbursement under subsection (a)(3)(A), which specifies that “direct” and “indirect” program expenses are “‘reasonable and allowable costs’ that may be reimbursed.” Direct contract supports costs are “direct program expenses for the operation of the Federal program that is the subject of the contract,” such as “workers’ compensation insurance for ambulance drivers” or additional professional training for nurses. (Internal quotation marks omitted.) When a tribe spends program income, direct contract support costs are reimbursable “because the functions, services, activities, and programs that a tribe agrees to administer in IHS’s stead under a self-determination contract constitute the ‘Federal program that is the subject of the contract’” and the resultant costs are incurred for the operation of that program. On the other hand, indirect contract support costs are “any additional administrative or other expense incurred by the governing body of the [tribe] and any overhead expense incurred by the tribal contractor in connection with the operation of the Federal program, function, service or activity pursuant to the contract.” When a tribe spends program income to further “the Federal programs, functions, services or activities it assume[d] from IHS,” administrative and overhead expenses incurred are done so “‘in connection with the operation of the Federal program, function, service or activity pursuant to the [self-determination] contract” and reimbursable under subsection (a)(3)(A).
The Court acknowledged that ISDA in §5326 sets forth limits on IHS’s obligation to pay contract support costs. But these restrictions “do not preclude payment of costs incurred by the required spending of program income under a self-determination contract.” This is because “[w]hen a tribe spends program income to further the healthcare programs it assumes from IHS and incurs contract supports costs, the costs it incurs are ‘directly attributable’ to the [binding terms of the] self-determination contract.” The Court found its interpretation of §5326 confirmed by the section’s history; the section was added by Congress to “clarify that IHS may not pay costs incurred to support non-ISDA contracts.”
The Court then responded to the dissent’s core assertion “that the support costs tribes incur when they spend program income are not incurred in the ‘performance of their contracts.’” To the contrary, the Court explained, “the Tribes’ contracts plainly require them to collect income from third-party insurers” and, by incorporating portions of ISDA, the “self-determination contracts plainly require tribes to use that income ‘to further the general purposes of the[ir] contract[s].’” Finally, the Court explained that a contrary reading of the statute would “inflict[ ] a penalty on tribes for opting in favor of greater self-determination”―a result Congress specifically designed the statute to avoid. “Contract support costs are necessary to prevent a funding gap between tribes and IHS. By definition, these are costs that IHS does not incur when it provides healthcare services funded by congressional appropriations and third-party income . . . . But they are costs that tribes must bear when they provide, on their own, healthcare services funded by the Secretarial amount and program income.” Without reimbursement from IHS, tribes would be left to divert program income or pay out of their own pockets, creating “a system funding shortfall.” As a result, tribes would be penalized for pursuing self-determination.
Justice Kavanaugh, joined by Justices Thomas, Alito, and Barrett, dissented. Justice Kavanaugh disagreed with the Court’s conclusion for four primary reasons. First, he said, the relevant statutory provisions relied on by the Court do not support its decision. For example, §5325(a)(2) does not reference tribal collection of third-party income from Medicare, Medicaid, and private insurance companies. If Congress had intended that provision “to supply federal funding for the overhead costs incurred in spending that third-party income,” it would have said so. Moreover, subsection (a)(2) allows for “contract support funding only for the activities that a tribe ‘must’ perform to comply with its self-determination ‘contract’ and support its ‘contracted program.’” “The costs of spending the tribe’s Medicare and Medicaid income,” however, is not necessary to support the tribe’s ‘contract’ and ‘contracted program[.]’”
Second, Justice Kavanaugh asserted that the Court’s interpretation runs counter to the specified limitations set forth in §§5326 and 5388. These provisions in effect “prohibit the Federal Government from covering the tribes’ costs of spending their third-party income.” For example, §5326 precludes contract support funding “‘associated with any contract’ between a tribe and an ‘entity other than [IHS].’” In this case, however, the Tribes’ contracts to obtain Medicare and Medicaid funding are with federal and state agencies other than IHS. Additionally, §5388 “states that all third-party income ‘earned by an Indian tribe shall be treated as supplemental funding’ to the funding available through the tribe’s self-determination contract.” Thus, because the tribes’ third-party income is considered “supplemental” under the statute, “the costs of spending that income are legally separate from the costs of supporting the contract.”
Third, reasoned Justice Kavanaugh, the Court’s conclusion contradicts 30 years of the Executive Branch’s interpretation of the relevant statutory provisions. If the Executive Branch’s interpretation was incorrect, Congress would have stepped in to create a legislative fix by now. Finally, as a practical matter, the Court’s decision could increase the annual Indian healthcare budget by an additional $800 million to $2 billion, where Congress appropriates approximately $8 billion annually for the budget in its entirety. As a result, “if Congress does not change the overall annual appropriations for Indian healthcare, the Court’s decision will divert funding from poorer tribes to richer tribes.” Alternatively, Congress will have to increase its Indian healthcare appropriations, “thereby drawing money away from other vital federal programs or requiring additional taxes.”
Truck Insurance Exchange v. Kaiser Gypsum Co., 22-1079.
In an 8-0 opinion, the Court held that an insurer with financial responsibility for bankruptcy claims is a “party in interest” under 11 U.S.C. §1109(b) that “may raise and may appear and be heard on any issue” in a Chapter 11 case. Truck Insurance Exchange is the primary insurer for companies that sold and manufactured products containing asbestos. After facing thousands of asbestos-related lawsuits, the companies filed for Chapter 11 bankruptcy. The proposed reorganization plan treated insured and uninsured claims differently. For insured claims, Truck must defend the lawsuits and pay up to $500,000 per claim if there is a favorable judgment. On the other hand, uninsured claims are submitted directly to a §524(g) Asbestos Personal Injury Trust, requiring claimants to meet disclosure requirements designed to reduce fraudulent and duplicate claims. Truck objected to the plan, arguing that it lacked necessary disclosure requirements that could potentially save Truck from paying millions of dollars in fraudulent claims. Following the bankruptcy court’s recommendation, the district court confirmed the plan and rejected Truck’s objection, finding that the plan was “insurance neutral” because it “neither increase[d] Truck’s obligations nor impair[ed] its prepetition contractual rights.” The Fourth Circuit affirmed, agreeing that the plan was “insurance neutral” because it did not alter Truck’s prebankruptcy liability. In an opinion by Justice Sotomayor, the Court reversed and remanded. (Justice Alito took no part in the consideration of the case.)
The Court found that the language, context, and historical background of §1109(b) confirm that an insurer, like Truck, that bears financial responsibility for a bankruptcy claim qualifies as a “party in interest” because it may be directly and adversely affected by the reorganization plan. The Court said that the text of §1109(b) is “capacious.” It noted that §1109(b)’s list of “parties in interest,” though illustrative and not exhaustive, shares a “common thread” in that “each may be directly affected by a reorganization plan either because they have a financial interest in the estate’s assets . . . or because they represent parties that do.” The Court observed that “Congress uses the phrase ‘party in interest’ in bankruptcy provisions when it intends the provision to apply ‘broadly.’” The Court found this interpretation reinforced by the “ordinary meaning of the terms ‘party’ and ‘interest’” because it suggests that the phrase refers to “entities that are potentially concerned with or affected by a proceeding.”
The Court also found that the historical context and purpose of §1109(b) supported a broad reading of “party in interest.” The Court noted that “Congress consistently has acted to promote greater participation in reorganization proceedings.” It cited the progression from the relatively limited participation allowed under the 1898 Bankruptcy Act, which restricted the rights of creditors and stockholders, to the 1938 Bankruptcy Act, which expanded participation to include creditors and stockholders, and finally to the enactment of the 1978 Bankruptcy Code, “which continued the expansion of participatory rights in organization proceedings.” Through this history, “Congress moved from an exclusive list to the general and capacious term ‘party in interest.’” In discussing the Code’s purpose, the Court stressed that “[b]road participation promotes a fair and equitable reorganization process,” a principle the Bankruptcy Code uses to protect against the inherent dangers of the reorganization process. Through an expansive definition of “party in interest,” the Code aims to prevent dominant interests from controlling the restructuring process by having a “broad range of individuals and minority interests intervene in Chapter 11 cases.”
Applying this reasoning here, the Court concluded “that insurers such as Truck with financial responsibility for bankruptcy claims are parties in interest.” It underscored that “[b]ankruptcy reorganization proceedings can affect an insurer’s interests in myriad ways,” thus making it a “party in interest” to those proceedings. In this instance, the lack of disclosure requirements for insured claims risked exposing Truck to millions of dollars in fraudulent claims. The Court further found that Truck’s involvement aligns with the purpose of §1109(b) because “neither the Debtors nor the Claimants have an incentive to limit the post-confirmation cost of defending or paying claims.” Truck is therefore the only entity with “an incentive to identify problems with the Plan.”
The Court criticized the Fourth Circuit’s focus on the “insurance neutrality” doctrine, which asks if the plan “increase[s] the insurer’s pre-petition obligations or impair[s] the insurer’s pre-petition policy rights.” The Court rejected the doctrine, finding it conceptually wrong because it “conflates the merits of an objection with the threshold party in interest inquiry.” Instead, the party in interest inquiry determines “whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party.” The Court found the insurance neutrality approach to be “too limited in its scope” as it concentrates solely on the insurer’s prepetition obligations, disregarding “all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers.” Finally, the Court rejected any claim that a broad reading of §1109(b) would risk allowing “peripheral parties to derail a reorganization.” The Court highlighted that a “parade of horribles argument generally cannot ‘surmount the plain language of a statute.’” The Court added that §1109(b) only provides parties in interest an opportunity to be heard, not a vote or veto in the proceedings.
Connelly v. Internal Revenue Service, 23-146.
The Court unanimously held that a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax. Michael and Thomas Connelly were the sole shareholders in Crown C Supply, a building supply corporation. Michael owned 77.18% of the company, and Thomas owned 22.82%. To ensure the company remained within the family in the event of one brother’s death, they entered into an agreement stipulating that the surviving brother could opt to acquire the deceased brother’s shares; if the surviving brother declined, Crown would be legally bound to redeem the shares. The company took out $3.5 million life insurance policies on each brother to guarantee Crown had sufficient funds for the redemption. When Michael died, Thomas chose not to purchase his shares, which triggered Crown’s obligation to redeem them under the agreement. Michael’s son and Thomas agreed that the shares were worth $3 million. Crown used $3 million from the life insurance proceeds to redeem Michael’s shares, leaving Thomas as the sole shareholder of Crown.
On the federal tax return for Michael’s estate, the value of Michael’s shares was reported as $3 million. The IRS audited the return. During the audit, Thomas hired an accounting firm to perform a valuation. The firm excluded the $3 million in insurance proceeds used to redeem Michael’s shares from the corporation’s value and determined that Crown’s fair market value at the time of Michael’s death was $3.86 million. Michael’s shares were, therefore, worth approximately $3 million, given his 77.18% ownership. The IRS concluded, however, that Crown’s redemption obligation did not offset the life insurance proceeds and assessed Crown’s fair market value at $6.86 million. This valuation meant Michael’s shares were worth $5.3 million, resulting in an additional $889,914 in taxes owed by the estate. The estate paid the deficiency but sued the Government for a refund, arguing that the $3 million life insurance proceeds used for Michael’s share redemption should not factor into the share valuation. The district court granted summary judgment to the Government, concluding that Michael’s estate was not entitled to a refund because Crown’s obligation to redeem Michael’s shares was not a liability that reduced the corporation’s fair market value. The Eighth Circuit affirmed on the same basis. In an opinion by Justice Thomas, the Court also affirmed.
The Court underscored that the scope of the dispute was limited, as all parties agreed that for federal estate tax purposes, the value of a decedent’s shares in a closely held corporation must reflect the corporation’s fair market value and that life-insurance proceeds payable to a corporation are an asset that increases the corporation’s fair market value. Thus, the only question before the Court was whether a contractual obligation to redeem shares at fair market value offsets the value of the life insurance proceeds committed to funding that redemption. The Court concluded that it does not, stating that “a corporation’s contractual obligation to redeem shares at fair market value does not reduce the value of those shares in and of itself.” Using a mathematical example, the Court demonstrated that “[e]conomically, the redemption would have no impact on either shareholder because, after the redemption, their interests would be equal to the value of their respective interests in the corporation before the redemption.” Thus, the Court noted that “no willing buyer purchasing Michael’s shares would have treated Crown’s obligation to redeem Michael’s shares at fair market value as a factor that reduced the value of those shares.” The Court detailed that at the time of Michael’s death, Crown was valued at $6.86 million based on the $3 million in life insurance proceeds and $3.86 million in other assets and income potential. It said that anyone buying Michael’s shares would obtain a 77.18% stake in a company worth $6.86 million, along with Crown’s obligation to redeem those shares at fair market value. As a result, a buyer would be willing to pay up to $5.3 million for Michael’s shares, reflecting the amount they could expect to receive when Crown redeemed the shares at fair market value. The Court noted that the result demonstrated that “Crown’s promise to redeem Michael’s shares at fair market value did not reduce the value of those shares.”
The Court rejected Thomas’s argument that a buyer would not consider the proceeds as net assets because the insurance proceeds would leave the company as soon as they arrived to complete the redemption. The Court noted that for estate tax purposes, the whole point is to “assess how much Michael’s share was worth at the time he died” before Crown spent the $3 million on the redemption payment. The Court also found that Thomas’s argument that the redemption obligation was a liability could not be “reconciled with the basic mechanics of a stock redemption.” The Court pointed out that during a redemption, a shareholder cashes out his shares of ownership in the company and its assets which necessarily reduce a corporation’s total value. And because there are now fewer outstanding shares, the remaining shareholders are left with a larger proportional ownership interest in a less valuable corporation. But under Thomas’s view, Crown’s redemption of Michael’s shares left Thomas with a larger ownership in a company with the same value as before redemption. The Court said that interpretation “cannot be right.” Likewise, the Court found meritless Thomas’s assertion that affirming the decisions below would make succession planning more difficult for closely held corporations. The Court pointed out that the result here was the consequence of the brothers’ choice on how to structure the agreement and that there were other options, but they would also have their own consequences.
Cases Granted Review
Facebook, Inc. v. Amalgamated Bank, 23-980.
The Court will resolve what public companies must disclose in the “risk factors” section of their 10-K filings. Specifically, the question presented is whether “risk disclosures [are] false or misleading when they do not disclose that a risk has materialized in the past, even if that past event presents no known risk of ongoing or future business harm[.]”
In 2014, Aleksandr Kogan and his company Global Science Research (GSR) released a quiz app on Facebook from which it surreptitiously collected user data to predict voter behavior. In December 2015, it was reported that Kogan had sold this data to Cambridge Analytica, which used it to “create psychological profiles of U.S. voters” in a bid to support Ted Cruz’s presidential campaign in the Republican Party primaries. Facebook confirmed the allegations and, as a result, “deleted Kogan’s app from its platform and demanded Kogan, GSR, Cambridge Analytica, and its parent company destroy the data.” In March 2018, it was reported that “Cambridge Analytica had . . . retained Facebook user data and deployed it to support the Trump [presidential] campaign.” “Facebook suspended Kogan, Cambridge Analytica and its parent company from the platform and commenced a further investigation.” Following this report about Cambridge Analytica’s continued misuse of the data, Facebook’s shares fell by 18%, reflecting a loss of more than $100 billion in market capitalization. In June 2018, press reports once again revealed that Facebook had engaged in “whitelisting,” wherein it allowed certain device manufacturers to continue accessing Facebook user data and certain apps to continue accessing friend data for an additional period of time. A month later, after a lackluster second-quarter earnings report, Facebook’s stock price declined 18.96%, amounting to $100 billion in shareholder value. Meanwhile, in 2017 Facebook filed its 2016 Form 10-K with the SEC. In it, Facebook contended “that third-party misuse of Facebook users’ personal data was a purely hypothetical risk that could harm the company if it materialized.” Specifically, in the “Risk Factors” section of the Form 10-K, the company stated that “[a]ny failure to prevent or mitigate . . . improper access to or disclosure of our data or user data . . . could result in the loss or misuse of such data, which would harm [Facebook’s] business and reputation and diminish our competitive position’”
Respondents are investors who purchased Facebook stock between February 2017 and July 2018. They sued Facebook under Section 10(b) of the Securities Exchange Act of 1934 claiming that the company and its officers had “made false and misleading ‘user control statements’ to the public and misleading ‘risk statements’ in their” 2016 Form 10-K filed with the SEC. The district court dismissed the complaint for failure to state a claim upon which relief could be granted. In a divided decision, the Ninth Circuit reversed. 87 F.4th 934. As relevant here, the Ninth Circuit held that the shareholders had adequately pleaded the falsity of Facebook’s risk disclosures.
Facebook argues in its petition that “the Ninth Circuit [has] deepened a split among eight courts of appeals regarding what public companies must disclose in the ‘risk factors’ section of their annual Form 10-K and quarterly Form 10-Q filings.” In any circuit other than the Ninth, respondents’ allegations regarding the statements in the Form 10-K “would have been dismissed: the Sixth Circuit does not require companies to disclose any past events in its risk factors, and six other circuits require disclosure only if the company knows the past events will harm the business.” Conversely, says Facebook, the Ninth Circuit has “adopted an extreme, outlier rule: companies must disclose past instances when a risk materialized even if those events pose no known threat of business harm.” This will “require companies to chronicle past instances a risk came to fruition, even if the company has no reason to suspect those events pose any risk of business harm.” This will also “spur lawsuits alleging fraud-by-hindsight, make compliance with 10-K disclosure burdensome and unworkable, and ultimately reduce the usefulness of risk-factor disclosures by drowning investors in irrelevant information.”
In response, respondents argue that, not only is there no circuit split on the issue, but there is no factual predicate for it here. First, respondents contend that the “Ninth Circuit applie[d] the same rule as the other circuits Facebook cites: a statement is misleading if it treats a material risk as hypothetical when the risk has already materialized. The Ninth Circuit did not hold that companies must disclose events that pose no threat of business harm―such occurrences would not be material to a reasonable investor and the Ninth Circuit stressed that companies never have an obligation to disclose immaterial information,” such as adverse material events that are already known to the public. Respondents further maintain that “Facebook suggests that . . . risk statements are categorically incapable of misleading investors about already-materialized risks. That is wrong as well. Facebook offers no support for its factual claim that investors never view risk-factor statements as conveying information about past events.” All told, say respondents, “[i]nvestors may reasonably think that adverse events are material when they pose a real risk to the company’s bottom line, even if the extent of that harm is not entirely clear or has not yet been inflicted.”
Advocate Christ Medical Center v. Becerra, 23-715.
“Because low-income patients are often costlier to treat, Congress directed the government to reimburse hospitals that treat a disproportionate share of low-income patients at higher Medicare rates. A hospital qualifies for higher payments in part based on the number of days that a hospital provides inpatient care to senior (or disabled) low-income patients, measured as those who ‘were entitled to benefits under part A of [Medicare] and were entitled to supplementary security income [SSI] benefits.’ 42 U.S.C. §1395ww(d)(5)(F)(vi)(I).” At issue is whether the phrase “entitled . . . to benefits” means all those who qualify for the SSI program (as the petitioner hospitals argue) or only patients who received an SSI cash payment for the month of their hospital stay (as the Government insists).
Hospitals receive fixed payments for services provided to Medicare beneficiaries regardless of their actual cost based on a payment formula. Part of the formula is the “disproportionate share hospital (DSH)” adjustment, which provides additional compensation to hospitals that serve an unusually high percentage of low-income patients. The DSH is determined using the Medicare fraction, which accounts for the number of days a hospital provides inpatient care to patients entitled to Medicare Part A and SSI. The numerator is the number of patient days attributed to Medicare patients entitled to SSI benefits; the denominator is the number of patient days attributed to all Medicare patients. Those requirements are stated in the statute as “entitled to benefits under part A” and “entitled to supplementary security income benefits . . . under subchapter XVI.” In Becerra v. Empire Health Found., 597 U.S. 424 (2022), the Court adopted the Department of Health and Human Services’ interpretation regarding Medicare that a patient is “entitled to benefits under part A” if they satisfy the threshold requirements for Part A. Thus, patients are “entitled to benefits under part A” if they are over 65 years old or suffer from long-term disability—regardless of whether Medicare pays for the specific service rendered. But for SSI, HHS considers patients “entitled to benefits” only if they received an SSI cash payment for the month of hospitalization.
Petitioners are 209 hospitals from 32 states who claim they are facing “dire financial instability” because their DSH adjustments were erroneous. The hospitals filed an appeal with the Provider Reimbursement Review Board, challenging the calculation of their Medicare fraction and alleging that HHS misinterpreted “entitled to [SSI] benefits” by limiting it to patients who received SSI cash payments for the month of their hospital stay, rather than those who met all the essential SSI program eligibility criteria. The Board found it lacked the authority to grant relief on a challenge to HHS’s methodology. The Centers for Medicare and Medicaid Services Administrator reviewed and upheld the Board’s decision, stating that patients are only “entitled to benefits” when receiving SSI cash payments during their stay. The hospitals then sought judicial review of the Administrator’s decision in district court. The district court found HHS’s interpretation of the phrase reasonable and entitled to deference. The D.C. Circuit affirmed, agreeing that HHS reasonably interpreted “entitled to [SSI] benefits” as those who received cash payments. 80 F.4th 346. The court noted that the statute expressly referred to SSI benefits under Title XVI, which includes only cash benefits. It rejected the hospitals’ reliance on Empire by highlighting the differences between the SSI and Medicare Part A schemes. It noted that Medicare benefits rarely result in loss of eligibility and extend beyond specific service payments. In contrast, SSI benefits are only cash payments with monthly eligibility fluctuations based on income and resources.
In their petition, the hospitals argue that the phrase “entitled to [SSI] benefits” should include all patients enrolled in the SSI program at the time of hospitalization, even if they did not qualify for the monthly cash payment. They assert that HHS’s interpretation creates an internal inconsistency that contradicts the Court’s decision in Empire and the statutory text. The hospitals argue that considering all patients who meet the program’s eligibility criteria as “entitled” aligns with the purpose of the DSH adjustment. This approach uses a bright-line rule based on whether a patient meets SSI program eligibility criteria rather than tracking the varying payments received month to month, thus avoiding the “ping-pong” effect of patients shifting between DSH fraction components, which the Court rejected in Empire. Furthermore, the hospitals claim that HHS’s interpretation directly conflicts with the Court’s decision in Empire, which held that “entitled to benefits under part A” refers to patients who meet the essential statutory criteria for Medicare, not necessarily those receiving payment for a specific day’s treatment. The hospitals argue that, according to the standard rule of statutory construction, identical words used in different parts of the same act are intended to have the same meaning. Thus, they assert that “entitled to benefits” in the same sentence should apply to Medicare Part A and SSI as “meeting basic eligibility requirements.”
The Government contends that the D.C. Circuit’s decision is correct and does not conflict with Empire. It argues that the hospitals overlook the statutory text specifying the benefits to which a patient must be entitled. The Government emphasizes that the statute explicitly considers whether a person is “entitled to [SSI] benefits . . . under [Title XVI],” which refers to monetary payments intended to provide supplemental income. Given that an individual’s financial situation can fluctuate, Title XVI appropriately evaluates needs monthly by determining “eligibility” for monthly benefit payments based on the individual’s finances. Thus, an individual enrolled in the SSI program who does not receive an SSI payment in a given month is not “entitled to [SSI] benefits under [Title] XVI.” The Government contrasts this with the entitlement to benefits in Empire, which concerned entitlement to hospital insurance benefits under Part A of the Medicare Program. Even if a patient’s Medicare Part A insurance does not cover a specific service due to coverage limits or other circumstances, the patient remains “insured.” Entitlement to benefits, therefore, is not affected by whether Medicare insurance results in an actual payment.
NAAG Center for Supreme Court Advocacy Staff
- Dan Schweitzer, Director and Chief Counsel
- Melissa Patterson, Supreme Court Fellow
- Amanda Schwartz, Supreme Court Fellow
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