Implications of the HHS Notice of Proposed Rulemaking on Section 1557 and Medicare Part B

Implications of the HHS Notice of Proposed Rulemaking on Section 1557 and Medicare Part B

Legal Sidebari

Implications of the HHS Notice of Proposed
Rulemaking on Section 1557 and Medicare
Part B
November 17, 2022
On July 25, 2022, the Department of Health and Human Services (HHS) announced a Notice of Proposed
Rulemaking (NRPM) under Section 1557 of the Patient Protection and Affordable Care Act (ACA).
Section 1557 contains various antidiscrimination requirements that apply to certain health care programs,
including those that receive “federal financial assistance.” On several occasions since the ACA became
law in 2010, HHS has proposed regulations, which have since become the subject of litigation and public
controversy, under Section 1557. While HHS proposes a number of regulatory changes regarding Section
1557’s antidiscrimination requirements in the latest NPRM, this Sidebar discusses a significant change in
its proposed treatment of Medicare Part B as “federal financial assistance.” The NPRM proposes to
reverse HHS’s “longstanding position” that Medicare Part B does not constitute federal financial
assistance. If this proposed change were adopted, it would subject all Medicare Part B providers,
including outpatient providers, suppliers, and ambulance services, to Section 1557’s antidiscrimination
requirement.
Background
Section 1557 provides that a person “shall not . . . be subjected to discrimination under[] any health
program or activity, any part of which is receiving Federal financial assistance, including credits,
subsidies, or contracts of insurance, or under any program or activity that is administered by . . . any
entity established in this title . . . .” The NPRM proposes to define “health program or activity” broadly to
include an entity that assists individuals in obtaining health services, provides health insurance coverage,
and educates health care providers, provides clinical care, or undertakes health research. For the
enforcement of its provisions, Section 1557 references four other federal civil rights statutes: Title IX of
the Education Amendments of 1972, Title VI of the Civil Rights Act of 1964, Section 504 of the
Rehabilitation Act, and the Age Discrimination Act of 1975. Section 1557, like all of these predecessor
antidiscrimination statutes, conditions the receipt of “federal financial assistance,” on the recipient’s
agreement not to discriminate.
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The NPRM proposes to define “federal financial assistance” under Section 1557, in relevant part, as any
“subsidy, contract (other than a procurement contract but including a contract of insurance), or any other
arrangement” through which the government provides funding assistance. Additionally, HHS suggests
that a “recipient” of federal financial assistance should be “any . . . entity, or any person, to whom Federal
financial assistance is extended directly or indirectly,” but excludes any ultimate beneficiaries of federal
funding.
HHS offers two reasons in the NPRM for its change in interpretation reflecting that Medicare Part B now
constitutes federal financial assistance. First, HHS contends that Medicare Part B, which is considered a
“contract of insurance or guaranty,” should not be excepted from the definition of federal financial
assistance. Second, HHS reasoned that federal funds confer a benefit on Part B providers and ultimately
subsidize the care that Part B beneficiaries receive from those providers.
Part B as an Exception to Federal Financial Assistance
Congress created Medicare Parts A and B (also known as “original Medicare”) via the Social Security
Amendments of 1965 (P.L. No. 89-97) to provide basic health insurance coverage for Americans over age
65. Medicare Part A currently covers inpatient hospital services, skilled nursing care, and some home
health care, while Medicare Part B covers outpatient services, including physician and outpatient services
furnished in offices, hospital outpatient departments, and ambulatory surgery centers, as well as some
home health and preventive services. As of 2021, more than 36 million Americans receive health care
through Medicare Parts A and B.
HHS classifies Medicare Part A as “federal financial assistance” for purposes of federal civil rights
statutes. However, for many years, HHS considered Medicare Part B as a contract of insurance and
therefore exempt from other federal civil rights statutes. The text of Title VI of the Civil Rights Act of
1964 specifically exempts contracts of insurance from its definition of federal financial assistance. In
1976, the Department outlined that Medicare Part B was exempted as a contract of insurance when
proposing regulations under Section 504 of the Rehabilitation Act. In the final rule on Section 504,
published in 1977, the Department clarified that “whether or not Medicare Part B arrangements involve a
contract of insurance . . . no federal financial assistance flows from the Department to the doctor or other
practitioner under the program.” Instead, the program essentially made “payments to direct beneficiaries.”
The NPRM explains that Section 1557 is distinguishable from Title VI and Section 504 because Section
1557 sets forth that contracts of insurance can constitute federal financial assistance.
The Evolution of Provider Participation in Medicare
Part B
In addition to specifying that Section 1557’s definition of federal financial assistance includes contracts of
insurance, HHS also argues that changes in the Medicare Part B payment structure, as well as case law
developments in federal civil rights law, support its assertion that Part B payments constitute federal
financial assistance under Section 1557. Before explaining its changed view that Medicare Part B
constitutes federal financial assistance, HHS first distinguishes the various ways in which providers
receive federal funds from the program. Medical providers who enroll with Medicare Part B are classified
as either “participating” or “non-participating,” depending on how they receive payment for services. By
contrast, providers who do not accept any payment from Part B are considered to have “opted out” of the
program. The NPRM states that HHS will consider payments to both participating and non-participating
providers to be federal financial assistance, but not payments to “opt out” providers.

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Participating Providers
A Medicare participating provider agrees to accept the pre-determined amount that Medicare will pay for
services and directly bills Medicare for services provided to beneficiaries. In this arrangement, a
beneficiary “assigns” his claims rights to the provider. In turn, the participating provider only collects a
set deductible and/or coinsurance amount from the beneficiary. Although the practice of assigning claims
has existed for many years, it became the predominant practice after Congress passed the Omnibus
Budget Reconciliation Act, 1989, which changed the way physicians were compensated under the
program.
HHS reasons in the NPRM that the payment that the participating provider receives from Medicare on
behalf of the beneficiary for services rendered to that beneficiary constitutes federal financial assistance
because the payment confers a benefit on the provider and effectively subsidizes the care provided. The
NPRM explains that providers “receive the benefit of a reliable source of payment for the services
provided to eligible patients, at least some of whom may have been unable to afford services otherwise,”
thus making the payments federal financial assistance.
HHS explains in the NPRM that, unlike when the Medicare Part B program began, providers now most
often bill Part B directly for services they provide to beneficiaries. It is no longer as common for
beneficiaries to pay for services out of pocket and then be reimbursed by Medicare Part B for their
expenses. According to HHS, this change in Part B’s structure makes funds received by providers for Part
B services more like federal financial assistance, because a federal benefit is “flowing” from the
department to the provider.
Non-Participating Providers
In addition to participating providers, who have more of a direct contractual relationship with Medicare
Part B, the NPRM outlines that non-participating providers also receive federal financial assistance from
Medicare Part B. Non-participating providers do not agree to a pre-determined Medicare payment
amount, as participating providers do, and thus they can charge beneficiaries up to 15% more for the
services they provide. Typically, beneficiaries pay non-participating providers directly for services
rendered, and the provider then bills Medicare for reimbursement on their behalf. Non-participating
providers thus do not generally receive direct compensation from Medicare, but HHS reasons in the
NPRM that these providers still receive federal financial assistance because they participate in the Part B
program overall, which then effectively subsidizes the cost of the care they provide to beneficiaries. HHS
explains that through Medicare Part B, the government is assisting non-participating providers by
allowing them to access a patient population that “either (a) would not have been able to afford any
medical services, or (b) would not have been able to afford these specific providers.” In this way,
Medicare Part B is still providing federal financial assistance to non-participating providers, albeit in a
more indirect way.
In support of its rationale that non-participating providers receive federal financial assistance from
Medicare Part B, HHS points to the Supreme Court’s analysis of “receiving federal financial assistance”
in Grove City College v. Bell. In Grove City College, the Court held that, for purposes of being subject to
Title IX of the Education Amendments of 1972, an educational institution received federal financial
assistance by accepting students who received grant funding from the U.S. Department of Education. In
finding that the college received federal financial assistance and was subject to Title IX’s requirements,
the Court’s majority reasoned that “[w]ith the benefit of clear statutory language, powerful evidence of
Congress’ intent, and a longstanding and coherent administrative construction of the phrase ‘receiving
federal financial assistance,’” it had “little trouble concluding that Title IX coverage is not foreclosed
because federal funds are granted to Grove City’s students rather than directly to one of the college’s
educational programs.” The Court explained that even though the institution did not receive the federal

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funding directly from the Department of Education, the institution was still the intended recipient of the
funds.
Applying the Court’s analysis of what constitutes federal financial assistance in Grove City College to
Medicare Part B, the NPRM asserts that Medicare Part B payments for non-participating providers should
be considered federal financial assistance. HHS states that in the same way the institution was the
intended recipient of the student aid in Grove City College, Medicare Part B payments are “structured to
ensure that [they] effectively supplement[]” providers’ own medical practices. In other words, even
though non-participating providers receive payment for services from Medicare Part B beneficiaries,
rather than directly from Medicare itself, those providers should still be considered recipients of federal
financial assistance because Part B then reimburses the beneficiaries, many of whom would be otherwise
unable to access the provider due to financial constraints.
The NPRM also notes that the payments received by Part B providers constitute more than mere general
government assistance. In Grove City College, the Court rejected the institution’s argument that the
federal grant funding it received through its students was comparable to “general purpose government
assistance to low-income families,” such as welfare payments. The Court reasoned that the institution was
aware of which students were receiving the federal education grants, which were specifically to pay for
their education, but that it would be unaware of whether a student was receiving general federal
assistance, like welfare or Social Security payments. Significantly, the Court said that the institution
“remain[ed] free to opt out” of the program. Similarly, HHS states that the federal funds received by
providers through Medicare Part B is likewise not general government assistance given to beneficiaries.
Instead, HHS reasons that, like in Grove City College, “[e]ntities such as non-participating providers are
aware of the flow of federal financial assistance to them and are permitted to opt out” of Medicare Part B
entirely. The NPRM further clarifies that providers who opt out of Medicare Part B altogether are not
subject to the rule because if a provider chooses not to participate in Medicare Part B at all, that provider
would not receive federal financial assistance from the program.
Considerations for Congress
Should Congress seek to clarify to which programs or entities Section 1557 should apply, it could amend
the statute to describe the purview of Section 1557 and what should fall under its umbrella. For example,
Congress could spell out which health programs are covered by Section 1557 and which institutions
should be recipients of federal financial assistance. Alternatively, Congress could expressly include
Medicare Part B providers under Section 1557, irrespective of whether Part B constitutes federal financial
assistance.
It is difficult to estimate exactly how many new providers would be covered under the NPRM’s proposed
expansion to Medicare Part B, and the NPRM does not offer an estimate of how many providers would
likely be impacted. Many Part B providers are already subject to Section 1557 requirements because they
participate in Medicare Part A and/or Medicaid, which are both considered federal financial assistance
and have traditionally been subject to federal civil rights laws.
Given the scope of Part B’s coverage of outpatient services, however, it may be that at least some
providers and suppliers who are not already subject to the rule will now constitute covered entities under
Section 1557. Data from the Center for Medicare and Medicaid Services (CMS) demonstrate that
Medicare Part B providers and suppliers are significant in number. In 2021, for example, CMS reports
that there are more than 1.4 million providers and suppliers who provide Part B non-institutional services
(i.e., services not provided in hospitals), including primary care, medical and surgical specialties,
emergency medicine, radiology, anesthesiology, obstetrics, pathology, psychiatry, outpatient physical
therapy, prosthetics, x-ray therapy and testing, ambulance service suppliers, and opioid treatment
programs.

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The NPRM was open to the public for comment for 60 days, and the comment period closed on October
3, 2022. HHS will review the comments received and could issue a final rule under Section 1557 at any
time. Assuming that the NPRM goes into effect as drafted, a party with standing (i.e., a Medicare Part B
provider or supplier that is not otherwise subject to Section 1557 through its participation in Medicare
Part A or Medicaid) could challenge the rule under the Administrative Procedure Act (APA) (5 U.S.C. §
706). Under the APA, courts invalidate and set aside agency actions that are “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law,” and those made “in excess of statutory
jurisdiction.”
A party with standing could also challenge the proposed rule on the grounds that it exceeds HHS’
statutory authority in Section 1557 or is otherwise not in accordance with law. To assess this question, a
court would likely look to Section 1557’s text and legislative history.

Author Information

Hannah-Alise Rogers

Legislative Attorney

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