On June 26, 2019, in a splintered 5-4 decision, the United States Supreme Court issued its decision in the case of Kisor v. Wilkie.1 At issue was the fate of Auer deference (sometimes referred to as Seminole Rock deference),2 which is the legal doctrine expressing that a court will defer to an agency’s reasonable interpretation of its own genuinely ambiguous regulation.3 In the end, the doctrine of Auer deference narrowly survived, but the Court significantly constrained its application. This article will examine Kisor’s implications for healthcare providers and suppliers and their legal counsel.
Kisor’s Claim for Disability Benefits
James Kisor is a veteran of the Vietnam War who initially sought disability benefits from the Department of Veterans Affairs (VA) in 1982, alleging that he suffered from post-traumatic stress disorder (PTSD) resulting from a military action in which he participated during the war. The VA’s evaluating psychiatrist acknowledged Mr. Kisor’s participation in the military action,but concluded that Mr. Kisor did not suffer from PTSD. On this basis, the VA denied Mr. Kisor disability benefits.4 In 2006, Mr. Kisor moved to reopen his claim for disability benefits after a new psychiatric evaluation found that Mr. Kisor in fact suffered from PTSD. The VA granted Mr. Kisor benefits from the date of his motion to reopen, rather than from the date of his first application, as he had requested.
Under a VA regulation codified at 38 C.F.R. § 3.156(c)(1), the VA will reconsider its decision on a claim if it receives “relevant” official service department records that were not considered at the time the claim was initially decided. In other words, the VA will consider an individual’s request for benefits retroactively to the date of the initial claim if he or she produces “relevant” service department records that were not previously considered. Although Mr. Kisor produced additional service records with his request to reopen the claim determination that the VA did not consider at the time of its denial of the initial claim, the VA found that such records were not “relevant” because they did not address the reason for initial denial, such as whether Mr. Kisor suffered from PTSD.5
Mr. Kisor initially appealed the VA’s denial of retroactive benefits to an Administrative Law Judge (ALJ), then to the Court of Appeals for Veterans Claims, and finally to the Court of Appeals for the Federal Circuit. The Court of Appeals for the Federal Circuit affirmed the VA’s denial of retroactive benefits based on Auer deference, such that the VA’s interpretation of its ambiguous regulation was entitled to deference. The Supreme Court granted certiorari to decide whether to overrule Auer.6
Auer deference attempts to address those scenarios in which a regulation is genuinely ambiguous. For example, a regulation may not directly or clearly address every issue that could arise, or a regulation may be susceptible to more than one reasonable reading.7 In such cases, a court will defer to the agency’s interpretation of its own genuinely ambiguous regulation. The Supreme Court summarized that, “we have often thought that a court should defer to the agency’s construction of its own regulation. For the last 20 or so years, we have referred to that doctrine as Auer deference, and applied it often.”8
Auer deference has roots dating back to the 1945 case of Bowles v. Seminole Rock & Sand Co., where the Court “declared that when ‘the meaning of [a regulation] is in doubt,’ the agency’s interpretation ‘becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation.’”9 Auer deference is “rooted in a presumption about congressional intent – a presumption that Congress would generally want the agency to play the primary role in resolving regulatory ambiguities.”10
Kisor Upholds and Constrains Auer Deference
A. Auer deference upheld
In Kisor, the Supreme Court concluded that Auer deference should not be overruled. However, in so holding, the Court clarified and reinforced limitations of Auer deference. The Court noted, “[W]e presume that Congress intended for courts to defer to agencies when they interpret their own ambiguous rules. But when the reasons for that presumption do not apply, or countervailing reasons outweigh them, courts should not give deference to an agency’s reading, except to the extent it has the ‘power to persuade.’”11
B. Constraints on Auer deference
The Court acknowledged that it previously had sent “mixed messages” regarding Auer deference and a court’s proper application of the doctrine. Therefore, Kisor served to outline and “reinforc[e] some of the limits inherent in the Auer doctrine.”12
1. Auer deference should be afforded only if a regulation is genuinely ambiguous
First, a regulation must be genuinely ambiguous before Auer deference is afforded. “[B]efore concluding that a rule is genuinely ambiguous, a court must exhaust all the ‘traditional tools’ of construction.”13 A court should not state that a regulation is ambiguous just because that regulation is challenging to interpret. The Court acknowledged that “[a]gency regulations can sometimes make the eyes glaze over. But hard interpretive conundrums, even relating to complex rules, can often be solved.”14 Traditional tools of construction that a court must exhaust include analyzing the regulation’s text, structure, history and purpose.15
2. Even if a regulation is genuinely ambiguous, the agency’s interpretation must still be reasonable
If, after applying the tools of construction identified above, a regulation remains genuinely ambiguous, then the agency’s interpretation must still be reasonable before Auer deference is afforded. Applying traditional tools of construction will assist the court to determine the outer bounds of a reasonable interpretation of the regulation.16
3. Even if a regulation is genuinely ambiguous, and the agency’s interpretation is reasonable, courts must then evaluate whether Auer deference is appropriate
After finding that a regulation is genuinely ambiguous, and the agency’s interpretation is reasonable, a court must next consider whether applying Auer deference is appropriate. The Court noted that, “not every reasonable agency reading of a genuinely ambiguous rule should receive Auer deference.”17 Courts are required also to consider whether the context of the agency interpretation warrants that the interpretation receive controlling weight.18 Auer deference is appropriate where the following criteria are satisfied:
· (a) The agency interpretation is an authoritative interpretation that was made by “the agency”; 19
· (b) The agency interpretation implicates its substantive expertise;20 and
· (c) The agency interpretation reflects its fair and considered judgment. To meet this criterion, the agency interpretation may not be based on a “convenient litigating position,” or constitute a “post hoc rationalizatio[n] advanced” to “defend past agency action against attack,” or create an “unfair surprise” to regulated parties.21
C. Mr. Kisor failed to establish that Auer ought to be overturned
In order to establish that Auer ought to be overturned, the appellant, Mr. Kisor, was required to first establish that Auer deference was incorrect, and then also overcome stare decisis.22 The Court found that Mr. Kisor failed to meet this burden.
1. Mr. Kisor failed to establish that Auer deference is incorrect
In arguing that Auer deference was incorrect, Mr. Kisor raised statutory, policy and constitutional claims:
a. Statutory claims
Mr. Kisor argued that Auer deference is inconsistent with the Administrative Procedures Act (APA), which requires reviewing courts to “determine the meaning or applicability of the terms of an agency action.”23 Mr. Kisor argued that when a court applied Auer deference, it abdicated its responsibility to determine the meaning of a regulation.24 The Court disagreed, stating that, as clarified and restrained, in applying Auer deference courts exercise independent review over the meaning of agency rules in many ways: by applying traditional methods of construction to determine whether a regulation is genuinely ambiguous and the agency’s interpretation reasonable; and by considering whether an agency’s interpretation is authoritative; implicates the agency’s substantive expertise; and reflects the fair and considered judgment of the agency.25 The court also found that the APA did not mandate a standard of review that a court should use to determine the meaning of an ambiguous rule, and that it could meet the statutory requirement by reviewing an agency’s interpretation for reasonableness.26
Mr. Kisor also argued that Auer deference circumvents the APA’s rulemaking requirements. Section 553 of the APA requires that an agency use notice and comment procedures before issuing legislative rules, which are rules that create policy.27 However, the APA allows an agency to develop “interpretive rules” without undergoing notice and comment.28 Mr. Kisor argued that when a court gives Auer deference to an interpretive rule, such a rule in effect becomes binding on the public. The Court again disagreed, stating that “an interpretive rule itself never forms ‘the basis for an enforcement action’ – because … such a rule does not impose any ‘legally binding requirements’ on private parties. An enforcement action must instead rely on a legislative rule, which (to be valid) must go through notice and comment. And … the meaning of a legislative rule remains in the hands of courts, even when they sometimes divine that meaning by looking to the agency’s interpretation.”29
b. Policy claims
Mr. Kisor next argued that Auer deference creates incentives for agencies to issue vague regulations so that they may later impose a preferred interpretation of the regulations. The Court dismissed this argument. The Court noted that such an argument was repeatedly raised by critics of Auer deference; however, there was a dearth of evidence that this concern had ever actually come to fruition. The Court further noted the competing incentive for agencies to develop regulations to have sufficient clarity to ensure compliance.30
c. Constitutional claims
Finally, Mr. Kisor argued that Auer deference violates “separation of powers” principles by vesting in a single branch the law-making and law-interpreting functions. The Court dismissed this argument as well, stating that “even when agency ‘activities take legislative and judicial forms’ they continue to be ‘exercises of executive power.’”31
2. Mr. Kisor failed to overcome stare decisis
The Court noted that the doctrine of stare decisis, (i.e., the special care taken to preserve precedent) “cuts strongly against Kisor’s position.”32 The Court noted that Mr. Kisor was asking not only for Auer to be overturned, but in effect, a long line of precedential cases. Therefore, overturning Auer would create uncertainty surrounding “many settled constructions of rules.”33 Finally, the Court stated that, even if it were wrong about Auer, Congress had the authority to alter the decision of the Court through the legislative process.34
In summary, the Court concluded that Auer deference ought not to be overruled. However, in so holding, the Court clarified and reinforced the limitations of Auer deference. Ultimately, the Court remanded Kisor to the Court of Appeals for the Federal Circuit to analyze Mr. Kisor’s appeal in the context of the limitations reinforced in its decision.35
Implications of Kisor in Healthcare
The healthcare industry is replete with sub-regulatory guidance that serves to interpret an agency’s regulations. Such guidance documents include, but are not limited to, Office of Inspector General (OIG) Fraud Alerts, Advisory Opinions and Special Bulletins; Centers for Medicare & Medicaid Services (CMS) Manuals and coverage articles; National Coverage Determinations (NCDs); and Local Coverage Determinations (LCDs). In evaluating whether such documents are entitled to Auer deference, attorneys representing healthcare providers and suppliers are well advised to consider the following:
· Does the agency interpretation constitute a legislative (i.e., substantive) rule, which would be required to undergo notice and comment rulemaking prior to serving as the basis of an enforcement action, or does the agency’s interpretation merely serve as an interpretive rule? Note that in the Medicare context, the Medicare Act has adopted notice and comment provisions applicable to Medicare policy that differ from the requirements set forth in the APA.36
· Is the agency interpretation an authoritative statement of official agency policy? Kisor provides the following illustrations as examples as to courts’ analyses:
- Official staff memoranda published in the Federal Register, but which were not approved by an agency’s head were afforded Auer deference;37
- A speech offered by a “mid-level official” was not afforded Auer deference;38
- An informal memorandum memorializing a telephone conversation between employees did not constitute an “authoritative pronouncement” entitled to Auer deference;39 and
- Where an agency “disclaimed the use of regulatory guides as authoritative,” a court may not defer.40
With respect to the final example, note that in December 2018, the Justice Manual of the United States Department of Justice was revised to state that, “Criminal and civil enforcement actions brought by the Department must be based on violations of applicable legal requirements, not mere noncompliance with guidance documents issued by federal agencies, because guidance documents cannot by themselves create binding requirements that do not already exist by statute or regulation.”41
In the context of Medicare reimbursement, federal regulations codified at 42 C.F.R. §§ 405.1060 and 1062 state that (1) NCDs are binding on fiscal intermediaries, carriers, quality improvement organizations (QIOs), qualified independent contractors (QICs), ALJs and attorney adjudicators, as well as the Medicare Appeals Council (the Council);42 and (2) LCDs, program memoranda and manual instructions are not binding on ALJs, attorney adjudicators and the Council, but ALJs, attorney adjudicators and the Council must give substantial deference to such policies. A question arises as to what, if any, deference would be afforded to a Local Coverage Article (LCA).43
· Does the agency interpretation reflect the fair and considered judgment of the agency? For example, is the “interpretation” raised as a convenient litigating position? Did the agency provide proper notice of its interpretation so as to avoid an “unfair surprise”? Does the agency’s interpretation reflect a different policy from that previously espoused by the agency?
Although Auer deference survives following Kisor, Kisor constrained its application (to such an extent that the dissent describes the doctrine as a “paper tiger.”)44 Limitations to Auer deference imposed by the Court provide an opportunity for counsel representing healthcare providers and suppliers subject to an agency interpretation adverse to their clients’ interests to challenge that agency’s interpretation. Challenges may include whether an underlying regulation is genuinely ambiguous; whether the agency’s interpretation is reasonable; whether the agency’s interpretation is an authoritative statement of agency policy; whether the interpretation implicates the agency’s substantive expertise; and whether the interpretation reflects the agency’s fair and considered judgment. In addition, arguments may exist that an agency’s interpretation of a regulation constitutes a “substantive” policy that would require notice and comment rulemaking before it could serve as the basis for an enforcement action.
- Kisor v. Wilkie, 139 S.Ct. 2400 (2019). Justice Kagan delivered the opinion of the Court joined by Justices Ginsburg, Breyer, and Sotomayor. Chief Justice Roberts concurred in the judgment, based on his agreement that overturning multiple precedent cases was not warranted. Justice Gorsuch, joined by Justice Thomas, delivered the dissent and was joined in part by Justices Kavanaugh and Alito.
- See Auer v. Robbins, 519 U.S. 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945).
- Note that Auer deference is distinct from the judicial deference that courts give to agency interpretations of statutes enacted by Congress (i.e., Chevron deference). Kisor does not implicate Chevron deference. See generally Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
- Kisor, 139 S.Ct. at 2409.
- Id. The records Mr. Kisor produced included two service records confirming his participation in the military action, which Mr. Kisor alleged was the basis for his PTSD diagnosis.
- Kisor, 139 S. Ct. at 2410.
- Id. at 2411.
- Id. at 2411, citing Seminole Rock, 325 U.S. at 414. The dissent dismisses the importance of the language included in Seminole Rock, dismissing Seminole Rock’s statements surrounding deference to agency interpretations as “dicta.” Kisor, 39 S.Ct. at 2428.
The majority opinion states also that agency deference has roots dating back much further than Seminole Rock: “Seminole Rock itself was not built on sand. Deference to administrative agencies traces back to the late nineteenth century, and perhaps beyond.” Id. at 2411, citing United States v. Eaton, 169 U.S. 331 (1898). The dissent disputes that Eaton placed significant weight on an agency’s interpretation, stating “As it had in Eaton, the Court … began with an extended discussion of ‘the plain words of the regulation,’ which led it to conclude that the text ‘clearly’ supported the government’s position. Only after reaching that conclusion based on its own independent analysis did the Court proceed to add that ‘[a]ny doubts … are removed by reference to the administrative construction.” Id. at 2428, citing Eaton at 414-417.
- Id. at 2412. In support of its presumption, the Court acknowledged that resolving regulatory ambiguities entails the exercise of judgment grounded in policy considerations. The Court stated that agencies have a comparative advantage over courts in making policy judgments due to their “unique expertise” often of a scientific or technical nature. Further, the Court stated that its presumption reflected the benefits of uniformity in interpreting genuinely ambiguous regulations (rather than being established through piecemeal decisions issued through litigation). Specifically, the Court stated that “Auer deference thus serves to ensure consistency in federal regulatory law, for everyone who needs to know what it requires.” Id. at 2413.
- Id. at 2414 (internal citations omitted).
- Id. at 2415.
- Id., citing Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
- Id. at 2416.
- Id. This analysis is fact-dependent. By way of example, the Court noted that it considered official staff memoranda published in the Federal Register to set forth the interpretation of an agency, even when the memoranda were not approved by an agency’s head. However, the Court declined to deem statements made during a speech of a mid-level official to constitute the agency’s position on a matter. Id.
- Id. at 2417.
- Id. at 2417-2418 (internal citations omitted).
- Id. at 2418.
Stare decisis is defined as follows:
(A) Latin term for let the decision stand which refers to precedent. It is a doctrine that requires that judges abide by the prior decisions on the same issues (usually only referring to courts in the same jurisdiction and of equal or higher level.)
(B) To abide or adhere to decided cases. 2. It is a general maxim that when a point has been settled by decision, it forms a precedent which is not afterwards to be departed from. The doctrine of stare decisis is not always to be relied upon, for the courts find it necessary to overrule cases which have been hastily decided, or contrary to principle. Many hundreds of such overruled cases may be found in the American and English books of reports. Mr. Greenleaf has made a collection of such cases, to which the reader is referred.
Black’s Law Dictionary, 2nd Ed., available at https://dictionary.thelaw.com/stare-decisis/.
- Kisor 139 S.Ct. at 2419, citing 5 U.S.C. § 706.
- Id. at 2420, citing 5 U.S.C. §§ 553 (b) and (c).
- Id., citing 5 U.S.C. § 553 (b) (A).
- Id., citing National Min. Assn. v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014).
- Id. at 2421.
- Id. (internal citations omitted).
- Id. at 2422.
- Id. at 2423.
- See e.g., Azar v. Allina Health Services, 139 S.Ct. 1804 (2019). Allina Health Services involved a hospital’s suit against the Secretary of the Department of Human services (HHS), alleging that HHS violated the Medicare Act by not engaging in notice and comment rulemaking before changing the Medicare formula for calculating disproportionate share hospital (DSH) payments. The change resulted in a reduction in the hospital’s payments for treating low-income Medicare patients.
The APA does not apply to public benefit programs, like Medicare. However, the Medicare Act includes notice and comment requirements applicable to Medicare policies. The Medicare-specific statute requires the government to provide a notice and comment period for any “rule, requirement, or other statement of policy (other than a national coverage determination), that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities or organizations to furnish or receive services or benefits under [Medicare].” See Allina Health Services at 1809, citing 42 U.S.C. § 1395hh(a) (emphasis added). The issue before the Court was whether HHS’ change in the formula to calculate hospitals’ DSH payments constituted a change in “substantive legal standard.” The Court expressly declined to clarify the distinction between interpretive and substantive rules (“Other questions about the statute’s meaning can await other cases”). Id. at 1814. The Court narrowly held that the phrase “substantive legal standard” could not bear the same construction as the term “substantive rule” in the APA, as the government had argued. The Court did not opine as to whether the appellant’s arguments were correct in every way. The Court found that the “government’s arguments for reversal fail[ed],” and notice and comment was required. Id.
- See Kisor, 139 S.Ct. at 2416, citing Ford Motor Credit, 444 U.S. at 566-567, n. 9 and n. 10.
- Id., citing Paralyzed Veterans, 117 F.3d 579 at 587 (D.C. Cir. 1997).
- Id., citing N.Y. State Dept. of Social Servs. v. Bowen, 835 F.2d. 360, 365-366 (CADC 1987).
- Id., citing Exelon Generation Co. v. Local 15, Int’l Brotherhood of Elec. Workers, AFL-CIO, 676 F.3d. 566, 576-578 (7th Cir. 2012).
- See Justice Manual, Title 1, Section 1.20.100, available at https://www.justice.gov/jm/1-20000-limitation-use-guidance-documents-litigation.
- For a description of the various auditing bodies and adjudicators, see “HHS Seeks to Improve the Medicare Appeals Process,” by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., The Health Lawyer, Vol. 29, No. 5, June 2017; see also “What Are Medicare Appeals?” by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., The American Bar Association, 2014.
- Pursuant to Section 1862 of the Social Security Act, Medicare coverage is limited to items and services that are reasonable and necessary for the diagnosis or treatment of an illness or injury (and within the scope of a Medicare benefit category).
NCDs are made through an evidence-based process, with opportunities for public participation.
In the absence of an NCD, an item or service may be covered at the discretion of Medicare contractors based on an LCD. LCDs are also made through an evidence-based process, with opportunities for public participation. In fact, LCDs undergo a comment period prior to finalization. See Medicare Program Integrity Manual (CMS Internet-Only Manual 100-08), Chapter 13.
Conversely, LCAs and other contractor articles are defined to include “any bulletin article, website article, educational handout or any other non-LCD document intended for public release that contains coverage/coding statements or medical review related to billing or claims considerations.” See e.g., https://med.noridianmedicare.com/web/jea/policies/coverage-articles. Unlike NCDs and LCDs, there is not opportunity to public participation prior to finalization of such policies.
- Kisor, 139 S.Ct. at 2426.
About the Authors
Jessica L. Gustafson is a founding shareholder with the healthcare law firm of The Health Law Partners, P.C. Ms. Gustafson co-leads the firm’s Recovery Audit (RAC) and Medicare appeals practice group, and specializes in a number of areas, including Medicare, Medicaid and other payor audit appeals; healthcare regulatory matters; compliance matters; reimbursement; and contracting matters. She is a member of the editorial board of the ABA Health eSource, the American Bar Association Health Law Section’s monthly online magazine. She can be reached at [email protected].
Adrienne Dresevic is a founding shareholder of The Health Law Partners, P.C. Ms. Dresevic practices in all areas of healthcare law and devotes a substantial portion of her practice to providing clients with counsel and analysis regarding Compliance and Stark and fraud and abuse. She is a published author and regular speaker on matters relating to Compliance, Stark and Fraud and Abuse at industry and professional conferences. Ms. Dresevic is an instructor for the University of Florida, teaching the Pharmaceutical Fraud and Abuse Online program for three years. Ms. Dresevic is a member of the American Bar Association (ABA), American Health Lawyers Association, State Bar of Michigan, and State Bar of New York. She serves as the Budget Officer of the ABA Health Law Section and has also served as the past co-Chair of the Section’s Physicians Legal Issues Conference. Ms. Dresevic can be reached at [email protected].