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Volume XII, Number 184

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Secret Rules and Hidden Penalties: Biden Executive Order Takes Aim at the Trump Administration’s Efforts to Limit HHS’s Use of Guidance Documents in Civil Enforcement Actions

Executive Orders and the Biden Administration’s promises to postpone or withdraw certain last-minute, so-called “midnight rules” promulgated by the Trump Administration are currently grabbing everyone’s attention, especially those in the healthcare space.  But while President Biden may have success in reversing much of his predecessor’s last minute regulatory activity, he is likely to face at least some headwinds as it relates to one of those midnight rules – the “Department of Health and Human Services Transparency and Fairness in Civil Administrative Enforcement Actions” (the “Final Rule”) – which was published in the Federal Register on January 14, 2021 and became effective on January 12, 2021.

As described by the U.S. Department of Health & Human Services (“HHS”) in its January 12, 2021 Press Release, the Final Rule is a continuation of the former Trump Administration’s self-described efforts to “enhance HHS practices involving transparency and fairness in civil enforcement actions” by promulgating regulations designed to protect healthcare providers from enforcement actions based upon “secret rules” and the imposition of “hidden penalties.” More specifically, the HHS Press Release describes the Final Rule as the fulfillment of HHS’s obligations under former President Trump’s October 9, 2019  Executive Order 13892 – “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication” (“EO 13892”)[1].

On his first day in office, President Biden issued an Executive Order on Revocation of Certain Executive Orders Concerning Federal Regulation (the “Biden Order”) which, among other actions, revoked EO 13892 as well as any, “orders, rules, regulations, guidelines, policies, or portions thereof,” that implement or enforce EO 13892.  As a result of the Biden Order, it appears that the Final Rule will have a relatively short shelf life.  Nevertheless, recent caselaw and United States Department of Justice (“DOJ”) policymaking may allow for the underlying policy goals of the Final Rule to endure.

In this article, we consider the Final Rule, its regulatory provisions and purpose, and the consequences and developments that may result following President Biden’s executive action.

The Final Rule: Secret Rules and Hidden Penalties.

Pursuant to the Final Rule, HHS may not use a regulated entity’s noncompliance with a, “standard or practice that is not in a statute or regulation and announced solely in a guidance document…as itself a violation of applicable statutes or regulations, unless expressly authorized by statute.” In this way, a “guidance document” cannot be used as the sole basis for taking a “civil enforcement action” against a regulated entity in a manner that has “legal consequences” for the regulated entity.  In short, HHS may only apply standards or practices set forth in guidance documents if such standards would not cause “unfair surprise” to the regulated entity at issue.

As set forth in the Final Rule and the resulting regulations at 45 CFR §1.2:

  • The term “guidance document” is defined as, “a statement of general applicability, intended to have future effect on the behavior of regulated parties and which sets forth a policy on a statutory, regulatory, or technical or scientific issue, or an interpretation of a statute or regulation.”

  • The term, “civil enforcement action,” is defined as an action taken by HHS that has legal consequences to a regulated entity. Such actions include, “administrative enforcement proceedings and enforcement adjudication (which is the administrative process undertaken by any component of the Department to resolve the legal rights and obligations of specific parties with regard to a particular enforcement issue pending before it) but do not include actions taken in the normal course of the Department’s regulatory communications or decision-making, for example, decisions on product applications (such as approvals or denials/withdrawals of approval), claims authorizations, responses to citizen petitions, food or color additive petitions, or public health notifications.”

  • The term “legal consequences” is defined as, “the result of an action that directly or indirectly affects substantive legal rights or obligations, including by subjecting a regulated party to potential liability in an enforcement action.”

  • The term, “unfair surprise” is defined by HHS as, “a lack of reasonable certainty or fair warning, from the perspective of a reasonably prudent member of regulated industry, of what a legal standard administered by an agency requires.

In addition to the above, the Final Rule sets forth some new procedural hurdles for HHS.  If HHS relies on a document arising out of litigation to establish jurisdiction in future civil enforcement actions, it must publish both the document and an explanation of the document’s jurisdictional implications either in the Federal Register or in the newly-created HHS guidance repository.  Furthermore, prior to taking any civil enforcement action with legal consequence, HHS must provide the regulatory entity at issue written notice, an opportunity to be heard, and a written response.

A Little History

The Final Rule (and EO 13892) was promulgated as part of President Trump’s wider efforts throughout his term to “protect Americans from out-of-control bureaucracy and stop regulators from imposing secret rules and hidden penalties on the American people.”[2]

In a November 16, 2017 DOJ Memorandum (the “Sessions Memorandum”), then U.S. Attorney General Jeff Sessions announced that the DOJ would no longer engage in the practice of publishing, “guidance documents – or similar instruments of future effect by other names, such as letters to regulated entities – that effectively bind private parties without undergoing the rulemaking process.”  On January 25, 2018, the DOJ expanded on the directives included in the Sessions Memorandum by issuing the “Brand Memorandum.”[3]  The Brand Memorandum prohibits civil enforcement actions based on “noncompliance with guidance documents.”  In addition, the Brand Memorandum clarified that the Sessions Memorandum prohibits the DOJ from, “using [DOJ] guidance documents to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation.”

In the midst of the Trump Administration’s efforts to roll back agency actions based on guidance documents, the U.S. Supreme Court weighed in on a particular aspect of agency policymaking and its notice and comment obligations.  On June 3, 2019, the Supreme Court in Azar v. Allina Health Services addressed an attempt by HHS to change Medicare reimbursement rules by posting revisions online, without going through the APA’s formal rulemaking/notice-and-comment process.  By way of background, the Medicare Act authorizes reimbursement adjustments (disproportionate share (“DSH”) adjustments) to increase payments to hospitals that treat a disproportionately high number of low-income patients. The DSH adjustment formula included the number of “patient days” for patients entitled to benefits under Medicare Part A (hospital benefits); however, in 2012, HHS sought to expand the interpretation of “patient days” for patients entitled to benefits under Medicare Part C (Medicare Advantage benefits).  The Allina Court rejected HHS’s attempt to change the reimbursement formula without notice and comment procedures, finding that the change was “substantive” with the “full force and effect of law” rather than merely “interpretive.” Following the Allina decision, HHS issued an October 31, 2019 internal memorandum (the “HHS Memorandum”) that discouraged the Centers for Medicare & Medicaid Services (“CMS”) from basing enforcement actions on guidance documents that are “not closely tied to statutory or regulatory standards.”

While the Court rejected HHS’ actions in the context of DSH reimbursement adjustments under the Medicare Act., it is important to note that the courts have preserved the ability of agencies to issue guidance or other “sub-regulatory” documents without the need to follow notice and comment procedures.  For example, in Clarian Health West v. Hargan, the D.C. Circuit found that a CMS manual detailing claim processing was mere a policy statement (rather than a substantive rule requiring notice and comment procedures) because it had no binding legal effect.  However, given the wide-ranging use of sub-regulatory documents by HHS and CMS over the years in the administration of the Medicare program – e.g., Medicare local coverage determinations, Medicare provider and other manuals, etc. – the Allina decision and the HHS Memorandum has already made an impact on the enforcement of Medicare reimbursement and other rules traditionally relied upon by CMS and HHS.  For example, historically CMS and HHS have used sub-regulatory guidance as the basis of False Claims Act actions, and the HHS Memorandum has allowed providers to avoid False Claims Acts liability if the action is based solely on sub-regulatory guidance.[4]

Now What?

As noted above, on January 20, 2021, President Biden signed the Biden Order and, in turn, revoked EO 13892.  As described in the policy statement included in the Biden Order:

“It is the policy of my Administration to use available tools to confront the urgent challenges facing the Nation, including the coronavirus disease 2019 (COVID-19) pandemic, economic recovery, racial justice, and climate change.  To tackle these challenges effectively, executive departments and agencies (agencies) must be equipped with the flexibility to use robust regulatory action to address national priorities.  This order revokes harmful policies and directives that threaten to frustrate the Federal Government’s ability to confront these problems, and empowers agencies to use appropriate regulatory tools to achieve these goals.”

In order to implement the revocation of EO 13892 and those other Executive Orders identified in the Biden Order, the Biden Order directs the Office of Management and Budget (“OMB”) Director and the leaders of the impacted federal agencies – in this case, the HHS Secretary – to promptly revoke any orders, rules, regulations, guidelines, policies, or portions thereof, that implement or enforce the Executive Orders to be revoked pursuant to the Biden Order.

In addition to the foregoing, the Biden Order makes clear that if an Executive Order cannot be finalized immediately – for example, in the case of duly promulgated regulations that are related to an Executive Order pending revocation under the Biden Order – the OMB Director and the heads of the impacted agencies shall, “promptly take steps to provide all available exemptions authorized by any such orders, rules, regulations, guidelines, or policies, as appropriate and consistent with applicable law.”

Because the Final Rule was implemented without notice and comment procedures (which is allowed for rules articulating agency practice and procedure), the Biden Administration can theoretically reverse the rule without notice and comment, and thus avoid significant regulatory roadblocks in repealing the Final Rule as a technical matter.  Indeed, another procedural rule can effectuate the repeal, so long as the reasons for repeal are sufficiently articulated (i.e. not arbitrary and capricious).

However, even if the Final Rule is ostensibly repealed, its overarching policy aims may prove to persist longer than desired by the Biden Administration.  Though the Sessions and Brand Memorandums do not have the full force of law and will have limited effect on Biden’s DOJ and HHS, the Trump Administration’s efforts to undermine the use of guidance documents have been embraced, at least in part, by the judiciary.  The Supreme Court in Allina echoed the sentiments of the Brand Memorandum, by refusing to allow HHS to base enforcement actions on guidance documents that are “not closely tied to statutory or regulatory standards.”

The Allina decision also may be emblematic of future judicial challenges to Biden’s overarching regulatory agenda, given the influx of conservative Trump appointees in the federal judiciary.  While the Allina decision itself including both conservative and more liberal members of the Court in its opinion, certainly those seeking to challenge HHS or other Biden Administration enforcement actions will be likelier to find friendlier judicial venues and more favorable caselaw than they would four years ago to challenge such actions.

The healthcare industry will be anxiously awaiting the Administration’s next moves pursuant to the Biden Order (and perhaps, judicial responses to such actions) given the unique significance of guidance documents in healthcare.

FOOTNOTES

[1] See, “New Executive Orders Aim to Eliminate Unfair Surprise in Civil Enforcement Actions by Formalizing Guidance Documents,” by Emily Theriault, “Sheppard Mullin Government Contracts and Investigations Blog” (October 30, 2019).

[2] President Trump’s remarks made while signing Executive Order No. 13892, “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication” (October 9, 2019)

[3] See, “’Brand Memo’ Prohibits US DOJ From Converting Agency Guidance Into Binding Legal Obligations In Civil Enforcement Actions,” by Emily Theriault, “Sheppard Mullin Government Contracts and Investigations Blog” (January 30, 2018).

[4] See Polansky v. Exec. Health Res., Inc., 2019 WL 5790061, at *1 (E.D. Pa. 2019).

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 34
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About this Author

Emily S Theirault, Corporate Attorney, Sheppard Mullin Law Firm
Associate

Emily Theriault is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Ms. Theriault’s practice includes Contract Disputes Act litigation before the Court of Federal Claims; False Claims Act litigation before the United States District Courts; bid protests before the Government Accountability Office; internal investigations; and government contract counseling.

202-747-2190
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