“The procedure of administrative rule making is one of the greatest inventions of modern government.” ¹1. Nat'l Nutritional Foods Ass'n v. Kennedy, 572 F.2d 377, 383 (2d Cir. 1978) (Friendly, J.) (quoting Kenneth Culp Davis, Administrative Law Treatise § 6.15, at 283 (Supp. 1970)).

Summary

Section 553(a)(2) of the Administrative Procedure Act exempts “loans, grants, benefits or contracts” from the Act’s rulemaking requirements. Many of the programs administered by the Department of Health and Human Services (DHHS) – such as Medicaid, old age, survivors, Temporary Assistance for Needy Families (TANF), some ACA programs such as the insurance exchanges, and the Children’s Health Insurance Program (CHIP) (i.e., almost all of the Social Security Act’s social welfare programs) as well as the grant programs of the National Institutes of Health, the Health Resources and Services Administration, and the Substance Abuse and Mental Health Services Administration – are therefore exempt from the APA’s rulemaking requirements.

In 1971, however, DHHS waived the exemption to foster “greater participation by the public in the formulation of the Department’s rules and regulations,” finding that the “public benefit from such participation, should outweigh any administrative inconvenience or delay.” 36 Fed. Reg. 2532 (Feb. 5, 1971) (the Richardson Memorandum). In 1982, DHHS tried to reverse course because public participation in rulemaking was “too troublesome.” Congress, however, believed in the benefits of public participation and responded by adopting Medicare-specific statutory rule-making requirements. Azar v. Allina Health Services, 587 U.S. 566, 569 (2019).

Yet, on February 28, 2025, DHHS announced that it would no longer utilize the APA rulemaking procedures when developing standards governing “loans, grants, benefits or contracts.” DHHS stated that procedures requiring public participation “are contrary to the efficient operation of the Department and impede the Department’s flexibility to adapt quickly to legal and policy mandates.” DHHS, “Policy on Adhering to the Text of the Administrative Procedure Act,” 90 Fed. Reg. 11029 (Mar. 3, 2025).

DHHS’s action will adversely impact recipients of benefits, entities that supply benefits, grant recipients, and States that operate programs created by the Social Security Act:

• DHHS will no longer be required to solicit public participation in rulemaking;

• The public will no longer have a right to submit comments and data on proposed rules;

• DHHS will have no obligation to consider, respond to, or reasonably address stakeholders’ views;

• Instead, subject to substantive statutory requirements, DHHS will be able to unilaterally develop program standards based on whatever data, evidence, or input it deems appropriate; and

• There will be no means for beneficiaries, providers, states, contractors, grantees, and other interested entities to create a record on which to challenge DHHS’s actions.

In short, DHHS will have the “flexibility to adapt quickly to legal and policy mandates” by adopting standards governing most SSA and grants programs behind closed doors, based on whatever data DHHS deems appropriate. Further, DHHS will be able to unilaterally determine the contents of the rulemaking record, effectively insulating its actions from court review.

Discussion

As a general rule, the Administrative Procedure Act mandates that federal agencies adopt rules using a specified process. That process is designed to assure: (1) that the public is aware in advance of an agency’s intentions and of the factual and legal bases for the agency’s proposal; (2) that potentially affected individuals and entities have the opportunity to participate in the process by submitting comments to the agency; (3) that the agency actually considers and takes into account the views of stakeholders; and (4) to create a record of the evidence on which the agency based its decision that serves as the basis for judicial review.

The four principal components of the process are:

• the agency must publish a Notice of Proposed Rule Making (NPRM) in the Federal Register. The NPRM must disclose the legal and factual basis for the agency’s proposal as well as the proposed rule itself;

• the agency must solicit public participation in the rulemaking by identifying how and when the public may submit written comments, data, and evidence about the proposal;

• the agency must meaningfully consider all significant public comments and determine whether the comments, data, and other evidence require modification of the proposal; and

• the agency must publish the Final Rule in the Federal Register. The Final Rule must be accompanied by a preamble that explains the agency response to significant public comments, explains the evidence that the agency considered, and explains the agency’s rationales for the policy choices made in the final rule.

5 U.S.C. § 553(b)-(d). However, the APA’s public participation rulemaking requirements do not apply to “matter[s] relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.” 5 U.S.C. § 553(a)(2) (the “grants and benefits” exemption).

Prior to 1971 many of the programs administered by the Department of Health and Human Services (at that time known as the Department of Health, Education, and Welfare) were exempt under the “grants and benefits” exemption from the rulemaking requirements of the Administrative Procedure Act. 5 U.S.C. § 553(a)(2). In Humana of S.C., Inc. v. Califano, the D.C. Circuit explained that “the ‘benefits’ exclusion has a very broad scope and … applies to … all rulemaking relating to old age, survivors, disability, and health insurance payments made under the Social Security Act.” 590 F.2d 1070, 1084 n.102 (D.C. Cir. 1978) (cleaned up).  In Opelika Nursing Home, Inc. v. Richardson, for example, the court held that the “grants and benefits” exception exempted Medicaid reimbursement regulations from the APA’s rulemaking requirements. 356 F. Supp. 1338, 1340 (M.D. Ala. 1973), aff’d sub nom. on other grounds, Johnson’s Professional Nursing Home v. Weinberger, 490 F.2d 841 (5th Cir. 1974).

Insulation of loans, grants, and benefits from public participation-based rulemaking did not sit well outside federal agencies. In October 1969, the Administrative Conference of the United States recommended that: “The [grants and benefits] exemptions should therefore be amended to discontinue the exemptions to strengthen procedures that will make for fair, informed exercise of rulemaking authority in these as in other areas.” A.E. Bonfield, Public Participation in Federal Rulemaking Relating to Public Property, Loans, Grants, Benefits, or Contracts, 118 U. Pa. L. Rev. 540, 611 (1970) (quoting recommendation). At roughly the same time, the Senate Committee on Administrative Procedure recommended repeal or modification of the exemption because agencies were using the exemption to adopt rules governing various programs – especially those affecting the poor – in secret. Id. at 550–53. Federal courts, likewise, began to observe that agencies “reject[ed] effective public participation by invoking the oft-expressed fear that a ‘host of parties’ will descend upon it and render its dockets ‘clogged’ and ‘unworkable.’” Off. of Commc’n of United Church of Christ v. F.C.C., 359 F.2d 994, 1004 (D.C. Cir. 1966) (Burger, J.).

As a result, then-Secretary Elliot Richardson issued a memorandum waiving the “grants and benefits” exemption. 36 Fed. Reg. 2532 (Feb. 5, 1971). Many other federal agencies did the same. See 29 C.F.R. § 2.7 (Dept. of Labor); Public Participation in Rule Making, 36 Fed. Reg. 13,804 (July 24, 1971) (Dept. of Agriculture); 24 C.F.R. § 10.1 (Housing and Urban Development); 36 Fed. Reg. 8,336 (May 4, 1971) (Dept. of Interior); 36 Fed. Reg. 16,716-717 (Aug. 5, 1971) (Small Business Admin.). The Richardson Memorandum also provided that, even if the Department had cause to waive rulemaking requirements, it would do so “sparingly.”

In a 1982 proposed rule, however, DHHS tried to reverse course:

We do not believe … that it is appropriate for the Department to be held to the rigorous standard for omitting mandatory notice and comment procedures when those procedures are used voluntarily. Accordingly, the proposed regulations would make clear that the Department may properly omit use of notice and comment procedures for rules relating to public property, loans, grants, benefits, and contracts if, in the Department’s judgement, the delay that would result from such procedures would impair the attainment of program objectives or would have other disadvantages that outweigh the benefits of receiving public comment prior to issuance of the rules.

47 Fed. Reg. 26860 (June 22, 1982). But that effort died on the vine.

With respect to the Medicare program, “Congress formed a different judgment. It decided that, with the growing scope of Medicare, notice and comment should become a matter not merely of administrative grace, but of statutory duty.” Azar v. Allina Health Services, 587 U.S. 566, 569 (2019). Congress adopted a Medicare-specific statute that “required the government to provide public notice and a 60-day comment period (twice the APA minimum of 30 days) for any ‘rule, requirement, or other statement of policy … 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].’ 42 U.S.C. § 1395hh(a) (2).” Id. at 570. In several other instances, Congress also ordered DHHS to utilize formal notice and comment procedures. See 42 U.S.C § 1315(d)(2) and (2)(C) (governing state and federal review of certain state Medicaid waiver programs); 42 U.S.C. § 421(k)(2) (regarding standards for disability determinations). See also 41 U.S.C. § 1707 (requiring notice and comment rulemaking for procurement policies, regulations, procedures, and forms).

Undeterred by history, on February 28, 2025, DHHS announced that it was rescinding its 50-year-old waiver of the APA’s “grants and benefits” exemption:

The text of the APA recognizes that it is necessary and appropriate to issue rules relating to agency management or personnel or to public property, loans, grants, benefits, or contracts without notice and comment procedures. It also is contrary to the clear text of the APA to use the good cause exception “sparingly.” The extra-statutory obligations of the Richardson Waiver impose costs on the Department and the public, are contrary to the efficient operation of the Department, and impede the Department’s flexibility to adapt quickly to legal and policy mandates.

DHHS, “Policy on Adhering to the Text of the Administrative Procedure Act,” 90 Fed. Reg. 11029 (Mar. 3, 2025).

DHHS’s position that notice and comment rulemaking will no longer be used to establish standards governing “loans, grants, benefits or contracts” is a grave threat to providers, program beneficiaries, grant applicants and recipients and the States that administer many SSA programs.

First, section 553(b) assures that affected parties are given notice of proposed rules: “General notice of proposed rule making shall be published in the Federal Register….” The notice must include “reference to the legal authority under which the rule is proposed” and “either the terms or substance of the proposed rule or a description of the subjects and issues involved.”

Advance notice of proposed rulemaking and the basis for the proposal allows informed public participation in the development of policies that affect their interests. It has served an additional purpose as well. Historically, DHHS avoided public-facing rulemaking, often opting not to publish important standards or publishing vague rules supplemented by standards published in Manuals or informal guidance documents that are not subject to mandatory public participation requirements. Doing so reserved to DHHS great flexibility in interpretation, application, and enforcement.

Several examples illustrate the point:

Whether a service is “reasonable and necessary” dictates whether a medical service is covered and reimbursable. 42 U.S.C.1395y(a)(1)(A). The Government frequently has brought False Claims Act cases and recoupment actions claiming that services were not reasonable and necessary. Nonetheless, regulations specifying “criteria” defining when a service was reasonable and necessary do not exist. CMS has explained: “The term ‘reasonable and necessary’ is not defined in the regulation, nor does the regulation spell out a process for how this term is to be applied.”  52 Fed. Reg. 15560 (April 29, 1987). A proposed rule was published on January 30, 1989, 54 Fed. Reg. 4302, but CMS “decided not to adopt the proposed rule. …”  64 Fed. Reg. 22619, 22620 (April 27, 1999). In 2021, DHHS published a rule defining “reasonable and necessary,” but that rule was repealed in November of the same year. 86 Fed. Reg. 62944 (Nov. 15, 2021). Ironically, DHHS repealed the rule asserting that it was “important to provide for additional stakeholder feedback on this topic that includes a wider group of stakeholders than those who may have offered input during rulemaking for the … final rule.” Id.

The absence of a clear binding regulatory definition has had significant consequences for providers and the Government. For example, in United States v. AseraCare, Inc., the Government brought a False Claims Act case seeking to recover “millions” of “misspent” Medicare dollars. 938 F.3d 1278, 1284 (11th Cir. 2019). Noting that DHHS “has considered and expressly declined to impose defined criteria that would govern” when a service is “reasonable and necessary,” id. at 1301, the Eleventh Circuit held that the absence of a “rigid set of criteria for eligibility determinations” left the case dependent on clinical judgment and doomed the Government’s case. Id. at 1297–98. After more than a decade, the case was settled with AseraCare paying one million dollars, far less than the hundreds of millions that the Government had sought and likely far less than each party spent on the litigation. Other courts have likewise struggled with the application of “reasonable and necessary” to concrete situations. See, e.g., Thitipong Mongkolrattanothai, Note, Battle of the Opinions: Conflicting Interpretations of False Opinions and the Falsity Standard Under the False Claims Act, 96 S. Cal. L. Rev. 665 (2023) (discussing cases).

Similarly, for years Medicare “imposed a covert rule of thumb – the Improvement Standard – that operated as an additional and illegal condition of coverage and resulted in the termination, reduction, or denial of coverage for thousands of Medicare beneficiaries annually.” Jimmo v. Burwell, 2016 WL 4401371 *12 (Aug. 17, 2016) (collecting cases) (cleaned up). That unwritten standard was applied by Medicare contractors and ALJs to deny coverage – even after courts held that it was illegal. See, e.g., In re Jimmo, Docket Number M-14-1755 (DHHS Medicare Appeals Council April 23, 2014), vacated sub nom, Jimmo v. Burwell, Case 5:14-cv-00128-cr (D. Vt. 2014).

The Centers for Medicare and Medicaid Services (CMS) also conducts review of state Medicaid plan amendments in a black box. Providers and beneficiaries have no right to participate in the process. CMS is not required to seek or respond to comments or data submitted by stakeholders. Indeed, comments and evidence submitted by stakeholders need not be considered or addressed in the decision approving a Plan amendment.

Second, section 553(c) of the APA requires that “after consideration of the relevant matter presented [by the public], the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose.” This requires an agency to respond meaningfully to all significant comments and explain how it addressed the comments as well as its rationale for adopting or rejecting the comments.

The practical importance of this process cannot be overstated: Rulemaking records are replete with evidence that, until informed by the public, DHHS and CMS often fail to understand whether proposed rules will achieve their objectives. Stakeholders provide that real world perspective. Final rules always reflect changes that DHHS has made in response to comments. 

In 2024, for example, CMS adopted a regulation imposing nurse staffing standards on Medicare and Medicaid certified nursing facilities. 89 Fed. Reg. 40876 (May 10, 2024). Reflecting the complex issues at stake, CMS received more than 46,500 comments on the proposed rule from “long term care consumers, advocacy groups for long-term care consumers, organizations representing providers of long-term care and senior service, long-term care ombudsmen, State survey agencies, various health care associations, legal organizations, labor unions, residents, families, and many individual health care professionals (such as nursing organizations) and administrative staff.” 89 Fed. Reg. 40876, 40883 (May 10, 2024). In the preamble to the Final Rule, CMS noted that the stakeholder comments resulted in numerous changes to address issues raised in such comments. See, e.g., 89 Fed. Reg. at 40905 (modifying criteria for hardship exemption).

Although the number of comments on the staffing rule is unusual, substantial public interest and comments leading to modification of DHHS regulations governing benefit programs is the rule. See, e.g., 89 Fed. Reg. 22780, 22782 (April 2, 2024) (“[A] total of 7,055 timely comments from State Medicaid and CHIP agencies, advocacy groups, health care providers and associations, health insurers and plans, and the general public”); 89 Fed. Reg. 4052, 40549 (May 10, 2024) (“We received 2,123 public comments from … individuals, State government agencies, non-profit health care organizations, advocacy groups, associations, law firms, managed care plans, academic groups, and tribal organizations.”). See also General Accountability Office, GAO-20-383R Federal Rulemaking (April 16, 2020) (“GAO surveyed 52 program offices at 10 federal agencies …. Almost all of the surveyed program offices responded that the public comment process resulted in at least some substantive changes to their final rules.”).

Third, when a provider or beneficiary challenges an agency rule, that challenge must be based on the record on which the agency based its decision. The Supreme Court explained in Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co.:

[A] court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made. In reviewing that explanation, we must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. The reviewing court should not attempt itself to make up for such deficiencies: We may not supply a reasoned basis for the agency’s action that the agency itself has not given. 

463 U.S. 29, 43–44 (1983).

The review that State Farm mandates must be based on and limited to the evidence in the administrative record that was before the agency and that was the basis for the agency’s decision. Yet, if there is no right for the public to participate in the rulemaking process, there is no way for an adversely affected party to create a record or present evidence that demonstrates that the agency failed to consider the congressionally mandated factors or whether the agency relied on factors Congress intended not be considered. Likewise, it will be virtually impossible for a stakeholder to argue successfully that the agency decision is not supported by substantial evidence on the record as a whole. Instead, DHHS and CMS control the content of the record and the record before a court will be one-sided. Almost any decision will appear rational on such a record.

Conclusion

DHHS’s effort to undo 50 years of rulemaking standards is a threat to regulated entities and to those who benefit from and participate in DHHS administered programs. DHHS’s rescission of the “grants and benefits” exemption will allow DHHS to unilaterally make law without involving or considering the impact on those directly and indirectly affected.

The Trump Administration has done just that. For example, without warning or public input, the National Institutes of Health “issued a Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates,” cutting previously established payment rates, effective on February 10, 2025. Comm. of Massachusetts v. National Institutes of Health, Case No. 25-CV-10338 at 2 (D. Mass. Mar. 3, 2025). The court found that the rate cut violated existing regulations, and also rejected NIH’s argument that the Guidance is exempt from APA notice and comment rulemaking requirements. Finding that “[e]ven a temporary halt in clinical trials would be catastrophic,” the court enjoined implementation of the rate cut. But that is only one example of many.  See, e.g., Pacito v. Trump, 2025 WL 655075, at *19 (W.D. Wash. Feb. 28, 2025) (refugee assistance and funding).

The Department fails to offer any serious reason why it must engage in rulemaking hidden from public view and absent the benefit of informed comment. The purpose of the APA, the Richardson memorandum, and subsequent congressional action is to ensure that rulemaking affecting core societal protections be subject to the bright light of public review and comment. DHHS, however, chooses to pursue its own interests in the dark at the expense of the public.

Malcolm J. Harkins is a Professor of Practice at the Center for Health Law Studies at St. Louis University School of Law.