Court Orders Remedy in Montefiore Medical Center v. Kennedy: Another Mulligan for CMS DSH Policy Regarding Medicare Part C

• September 18, 2026

• Kenneth R. Marcus

The U.S. District Court for the District of Columbia issued its decision on the merits in Montefiore Medical Center v. Kennedy[1] on September 30, 2025. The court held that the Centers for Medicare & Medicaid Services’ (CMS’) 2023 rule for treating Medicare Part C patients as entitled to benefits under Medicare Part A in the disproportionate share hospital (DSH) adjustment computation was consistent with the DSH statute but was arbitrary and capricious and impermissibly retroactive to periods prior to October 1, 2013.[2] The court ordered the parties to brief on the appropriate remedy. Nearly a year after the decision on the merits, the court has now issued its opinion on remedy, i.e., vacatur and remand without further instruction.[3] The court, therefore, gave CMS still another opportunity to attempt to treat Medicare Part C patients as entitled to benefits under Medicare Part A for purposes of the DSH adjustment. One is reminded of the familiar Paul Simon lyric: “You know the nearer your destination/The more you’re slip slidin’ away.”

The Parties’ Positions and the Court’s Holding Regarding Remedy

The plaintiff hospitals contended that, in addition to vacatur, “the court should also remand with specific instructions to ‘direct recalculation of [its] DSH payment, with interest, using the pre-2004 policy’ of excluding Medicare Part C days in the Medicare fraction.”[4] The Department of Health and Human Services (HHS) Secretary, however, argued “that vacatur is an unlawful remedy under the APA [Administrative Procedure Act] and asks the court to remand the matter to HHS with only a ‘party-specific declaration that the challenged rule is unlawful.’”[5]

In response to the parties’ briefing, the court held “that binding precedent forecloses the Secretary’s frontline position on the permissibility of vacating agency action under the APA and, without any argument from the Secretary about the Allied-Signal factors, it concludes vacatur of the 2023 Rule is warranted.” However, the court agreed “with the Secretary that the remand order should not direct HHS to make any specific payment to Montefiore for Fiscal Year 2006.”[6]

CMS’ Continued Opportunity to Implement Its Part C Policy

It appeared that two conflicting yet equally important legal principles seemingly presented an impossible task for the court to fashion a remedy. On the one hand, in Allina II the Supreme Court ordered the Secretary to implement its Part C policy in compliance with notice-and-comment rulemaking requirements.[7] On the other hand, when the Secretary proceeded to do so the district court in Montefiore held that the rulemaking was prohibitively retroactive. 

The court side stepped resolution of these irreconcilable principles by essentially kicking the proverbial can down the proverbial road by remanding without a payment order. Although aware that hospitals have in large part successfully challenged the DSH Part C policy for upwards of 20 years, the court nonetheless expressed sympathy with CMS’ efforts to lawfully implement the DSH Part C policy: “Although roughly twenty years of litigation have unfolded over different aspects of HHS’s Part C policy, the agency has tried to adhere to a unique statutory scheme.”[8] 

Despite 20 years of adverse decisions, the Secretary asserted that upon remand it would have available two methods to lawfully implement its Medicare Part C DSH policy retroactively: “first, by avoiding rulemaking altogether, because the court ‘did not address’ whether ‘rulemaking is necessary’ if the Secretary thinks that his interpretation of the DSH provision is unambiguously correct and there is no ‘Chevron-style gap to fill; and second, by relying exclusively on Empire Health, because the court ‘did not resolve’ whether the Secretary can adopt the same interpretation from the 2023 Rule solely on the theory that Empire Health is binding precedent . . . .”[9]

The court expressed favor with the Secretary’s argument. In essence, the court narrowly interpreted the scope of its merits decision to mean simply that the regulation at issue was impermissibly retroactive, not the policy. Thus, if the policy may be implemented in an otherwise lawful fashion, without a duly promulgated regulation, so be it.

CMS Available Action Upon Remand

The court concluded that “[f]ollowing remand, the Secretary may consider any new action that complies with [42 U.S.C.] Section 1395hh(e)(1)(A).”[10] Thus, it appears that CMS will have carte blanche to rationalize retroactive application of its Medicare Part C DSH policy. 

Either or both parties have the right to appeal the now final decision. Whether an appeal is taken or the parties agree to a remand, this litigation is far from over. 

About the Author

Kenneth R. Marcus, an AHLA Fellow, is retired from the practice of law. This article is not intended to furnish legal advice. Readers wishing to discuss the subject matter of this article are welcome to contact the author at [email protected]. 

ARTICLE TAGS

• Regulation, Accreditation, and Payment Practice Group
• Government Reimbursement