CMS Has Egg on Its Face

Over the past several years, there has been a noticeable change in how the Medicare administrative appeals process has changed. Increasingly, Medicare contractors are unilaterally interpreting vague provisions in Medicare manuals and policies to support prepayment and post-payment audit claim denials. Subsequently, administrative law judges and the Medicare Appeals Council are deferring to the contractors’ interpretations, and upholding the payment denials. Most providers do not appeal the denials to federal court, because they are penniless from a prolonged recoupment, which may exceed two years before a final administrative decision is reached. Luckily, one provider decided to pursue their appeal to federal district court (and beyond), and the precedent they set may change the landscape of audits going forward.

The Lawsuit

In Elgin Nursing Rehabilitation Center v. U.S. Department of Health and Human Services, a landmark case decided in May 2013, the 5th Circuit Court addressed the amount of deference that should be afforded to the Centers for Medicare and Medicaid Services’ interpretation of the State Operations Manual.

The case arose from the Texas Department of Aging and Disability’s survey of Elgin Nursing Rehabilitation Center, a long-term care facility in Texas that participates in Medicare and Medicaid. During TDAD’s visit, surveyors noticed two breakfast plates with egg yolk “smeared around the plate.” TDAD determined that soft cooked eggs could lead to serious illness and, therefore, TRAD cited the Center for violating a federal regulation requiring facilities to serve food under “sanitary conditions.”

CMS adopted TDAD’s findings and imposed the following civil monetary penalties against the Center: (a) a fine of $5,000; (b) denial of payment for new admissions; (c) withdrawal of the Center’s approval to conduct nurse training; (d) and termination of the Center’s provider agreement. After a resurvey, CMS chose only to enforce the CMP fine.

A judge upheld CMS’s findings and concluded that the CMP was reasonable. At the next level of appeal, the Medicare Appeals Council affirmed the ALJ’s decision and the center appealed to the court. The center appealed to federal court.

The court determined that CMS applied a three-step analysis in reaching its conclusion that the Center had violated a Medicare regulation:

1. CMS applied a regulation requiring facilities to serve food under “sanitary conditions.”

2. Because the term “sanitary conditions” is not defined in the regulation, CMS relied on a Medicare manual to clarify the term; specifically, the SOM. Appendix PP to the SOM requires unpasteurized eggs to be cooked at “145 degrees Fahrenheit for 15 seconds; until the white is completely set and the yolk is congealed.

3. CMS interpreted the semi-colon in Appendix PP to the SOM to mean that an egg must be cooked at 145 degrees Fahrenheit and the white must be completely congealed and the yolk firm, whereas the Center interpreted the semi-colon in Appendix PP to the SOM to mean that an egg must be cooked at 145 degrees Fahrenheit or the white must be completely congealed and the yolk firm.

Whenever a federal agency (i.e., CMS) interprets a statute or regulation that affects a provider, and that provider appeals the agency’s interpretation, a court is left to decide what level of deference to give to the agency’s interpretation. The Supreme Court has held that courts should defer to agency interpretations of such statutes and regulations unless they are unreasonable. However, the Supreme Court has not ruled on the level of deference a court should give to an agency that interprets manuals and guidelines. As such, in this case, the court was left to determine what level of deference to give to CMS’s interpretation of the SOM. CMS argued that the court should give “great deference” to its interpretation of the SOM, but the court ultimately rejected CMS’s argument, and disagreed.

In its analysis, the court stated that “affording deference to agency interpretations of even more ambiguous regulations would allow the agency to function not only as judge, jury, and executioner but to do so while crafting new rules.” The court reasoned that adopting a policy in which agencies, such as CMS, are allowed to issue ambiguous requirements and then create and enforce ambiguous interpretations of those requirements, would foreclose agency interpretations from judicial review by “punishing ‘wrongdoers’ without first giving fair notice of the wrong to be avoided.” Furthermore, the court stated that its refusal to defer to CMS’s interpretation of the SOM is based on the notion that deferring to an agency’s interpretations of its own rules would encourage “the agency to enact vague rules which give it the power, in future adjudications, to do what it pleases.” In turn that would frustrate the notice requirement and would unfairly surprise the sanctioned party because the sanctioned party would not have fair warning of the conduct a regulation prohibits. For these reasons, the court decided not to defer to CMS’s interpretation of the SOM.

Upon the Court’s refusal to grant deference to the interpretation of the SOM, the Court found that the SOM’s directive was inherently ambiguous and that CMS failed to offer substantial evidence that the Center had violated the SOM. Therefore, the Court granted the petition for review and set aside the finding of a deficiency and the CMP.

Its Impact

Deference to CMS’s Interpretation of its Manuals: In Elgin, the court held that an agency cannot interpret the ambiguous language of its own manuals. This outcome is critical, not only for long-term care facilities, but for all Medicare providers whose claims are denied for violations of ambiguous Medicare manual provisions. For example, the Medicare Program Integrity Manual, which outlines standards to be used by CMS contractors during pre-payment and post-payment audits, and consequently leads to significant fines and penalties assessed against Medicare providers, has provisions in it that are incredibly ambiguous. CMS consistently offers its own interpretation of certain PIM provisions at ALJ hearings. ALJs commonly defer to CMS’s interpretation of the provisions, which, in effect, leads to denied claims, recoupments, and the imposition of CMPs against the provider. If courts begin to apply the Elgin court’s logic, ALJs will not simply defer CMS’s own interpretation of the ambiguous provisions of the manuals like the PIM. This may lead to significantly fewer claim denials, recoupments, and CMPs imposed against Medicare providers.


Deference to an ALJ’s Interpretation of CMS Manuals: The holding in Elgin should also be applied to an ALJ’s interpretation of the Medicare manuals. Although agency manuals are not necessarily binding on ALJs, ALJs commonly rely on these manuals when adjudicating cases. As it relates to Medicare, an ALJ is an employee of the United States Department of Health and Human Services, an administrative agency of the federal government. Therefore, if CMS is prohibited from interpreting agency guidelines and manuals, other administrative agencies of the government, such as HHS (and its employees, ALJs), should also be prohibited from interpreting agency guidelines and manuals.

Deference to Medicare Contractors’ Interpretation of CMS Manuals: Although Medicare manuals were created to clarify certain Medicare regulations, many provisions remain vague. As agents of CMS and HHS, contractors, such as the Medicare Administrative Contractors, Recovery Audit Contractors, Zone Program Integrity Contractors, and Quality Improvement Contractors should be held to the same standard as any agency (or agent of an agency) regarding the interpretation of an ambiguous Medicare manual provision. Using the Court’s logic in Elgin, contractors should not be able to approve or deny claims based on their interpretation of an ambiguous provision in a Medicare manual.


While Elgin has multiple theoretical and practice applications, the one that stands out the most is this: if an agency (i.e. CMS, HHS) or one of its contractors (ZPIC, RAC, MAC, QIC, ALJ, etc.) denies a claim, recoups money, revokes a license, or imposes a CMP against a Medicare provider (or upholds any of the preceding actions), based on an interpretation of a vague or ambiguous provision of a manual, and the provider can offer an alternate interpretation of the provision to demonstrate compliance with the law, then the agency’s (or agency contractor’s) interpretation should be rejected at all levels of administrative appeal.

Edward L. Vishnevetsky, an associate at Munsch Hardt, focuses on health law and commercial litigation.

Posted in Expert Opinions.