American Journal of Law & Medicine

Jimmo and the Improvement Standard: Implementing Medicare Coverage through Regulations, Policy Manuals and Other Guidance

In Jimmo v. Sebelius, the plaintiffs alleged that the Centers for Medicare and Medicaid Services (CMS) regularly and improperly denied Medicare reimbursement for outpatient therapy treatment when the beneficiary did not show a likelihood of improvement. These denials, based on policy manuals and other guidance, appear to contradict the government's own regulations, which specifically prohibit coverage denials based solely on the so-called "Improvement Standard." In Jimmo, the United States District Court for the District of Vermont found that CMS' use of the Improvement Standard may have violated the rulemaking provisions of the Administrative Procedure Act (APA) and denied CMS' motion for summary judgment. Subsequently, the parties settled out of court.

In the settlement, CMS agreed to revise its policy manuals to clarify that the Improvement Standard was not an acceptable basis on which to deny Medicare coverage. CMS declined to defend its policies even though courts often grant deference to agency interpretations. The settlement implies that the agency feared that it would not have received such deference. It also implies that future Supreme Court decisions may give less deference to agency interpretations.


     A. Skilled Nursing Facilities
     B. Home Health Services
     C. Part B Coverage of Outpatient Therapy Services
     A. Non-Legislative Rules and Chevron Deference
     B. Deference Under Seminole Rock
     A. The Application of the Improvement Standard
     B. The Settlement Agreement and Revised Policy Manual


Subject to some exceptions such as hospice care, Medicare covers and pays only for services that are medically necessary, defined as "reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member." (1) However, determining what is "reasonable and necessary" is not always easy. As a result, the Centers for Medicare and Medicaid Services (CMS), the administrative agency within the U.S. Department of Health and Human Services (HHS) that runs the Medicare program, often issues national coverage decisions (NCDs) on specific medical procedures. (2) Because CMS cannot evaluate every possible medical situation, it delegates the ability to make local coverage decisions (LCDs) to Medicare Administrative Contractors (MACs) to ensure that covered services are medically necessary. (3) CMS has also issued policy guidance in the form of Medicare Policy Manuals to guide MACs in the general processing of medical claims to ensure medical necessity. (4)

It is through this delegation to third-party MACs that the plaintiffs in Jimmo v. Sebelius (5) asserted that CMS promoted an implicit policy of requiring improvement, which was inconsistent with the promulgated regulations. (6) The plaintiff class alleged that the LCDs inappropriately limited the scope of "medical necessity" without providing the notice and comment period required under both the Medicare statute (7) and the Administrative Procedure Act (APA). (8) By permitting MACs to consider costs in making coverage decisions, CMS was effectively able to control costs in direct contravention of its statutory delegation of authority. (9)

Part II of this Article reviews the regulatory status of Medicare's coverage of skilled services, including outpatient therapy services such as physical therapy, occupational therapy, and speech-language pathology services. It looks at CMS's use of informal policy guidance through the MACs to more narrowly determine medical necessity in these coverage decisions. Part III discusses the administrative law principles that guide courts in their construction of agency-promulgated regulations and informal policy guidance. Part IV lays out the facts of Jimmo, including the application of the Improvement Standard. In light of the regulations promulgated by CMS's statutory authority, this section discusses the level of deference the Policy Manuals and MAC's LCDs should receive. It then turns to the settlement agreement in Jimmo to explain how the agency violated these principles in issuing subsequent guidance to third parties. Part V explores whether the injunctive relief that plaintiffs received will expand Medicare coverage in practice and discusses some of the budgetary and political ramifications that the settlement agreement will have for Medicare and Medicaid.

The Article concludes that while the Jimmo settlement represents a sizeable victory for beneficiaries and providers, it is also another hurdle for a program whose costs have historically been difficult to control. By permitting MACs to consider costs in making coverage decisions, CMS is effectively able to control costs in direct contravention of its statutory delegation. The settlement in Jimmo and the subsequent clarifications to the Policy Manuals close this regulatory loophole and reinforce the requirement that Medicare use an individualized methodology to cover all reasonable and necessary care.


Medicare covers therapy services under Part B (10) in the skilled nursing facility (SNF), home health, and physician services settings, with separate regulations, Policy Manuals, and LCDs governing each setting. (11) One function of Policy Manuals is to further interpret promulgated regulations to aid MACs in making LCDs. This Section reviews each coverage setting and concludes that while the regulations consistently specify an individualized approach, the Policy Manuals and LCDs contain categorical language related to recovery potential that is contrary to the language in the regulations. (12) Themes across settings in the Medicare coverage guidance discussed in this Part include: (1) the therapist must provide skilled services; (2) the patient's diagnosis should not be given significant weight when deciding if therapy is considered a skilled service; (3) skilled services are generally not appropriate for maintaining a level of functioning; and (4) depending on the patient's condition, if there is little chance of improvement, then Medicare will not cover the therapy. It is the ambiguity and inconsistency surrounding this last theme--the Improvement Standard--that was the topic of concern in Jimmo.


According to the regulations, the key to having therapy covered in a SNF is that the patient specifically needs skilled services. (13) This means that the therapy must be "so inherently complex that it can be safely and effectively performed only by... professional or technical personnel." (14) The SNF regulations clarify that "[t]he restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities." (15) This regulatory language makes clear that a rule of thumb must not be used to deny therapy services. Indeed, the regulations specifically state that the restoration potential of a patient should not be outcome determinative. (16)

In contrast, policy guidance appears to lean more toward using a rule of thumb by requiring five specific criteria: (1) the therapy must be directly and specifically related to a written treatment plan; (2) the complexity and sophistication of the therapy must require the skills of the physical therapist; (3) the patient's restoration potential must create an expectation "that the condition of the patient will improve materially in a reasonable and generally predictable period of time" with skilled physical therapy services, or be necessary for a maintenance plan; (4) the skilled physical therapy services must be generally accepted medical practice; and (5) the services must be "reasonable and necessary." (17) This expectation of material improvement in the third criteria is new and does not appear as a coverage requirement in CMS's regulations.

At least one MAC has an LCD that is used in the SNF context that has guidelines for therapy coverage that require improvement as a general rule. Specifically, LCD L26884 provides that coverage of outpatient therapy has two basic requirements:

(1) There must be an expectation that the patient's condition will improve significantly in a reasonable (and generally predictable) period of time; and

(2) If an individual's expected rehabilitation potential would be insignificant in relation to the extent and duration of therapy services required to achieve such potential, therapy would not be covered because is not considered rehabilitative or reasonable and necessary. (18)

With respect to maintenance therapy programs, LCD L26884 continues that "[t]he specialized skill, knowledge and judgment of a therapist [only] may be required" in limited circumstances. (19) These limited circumstances include to "design or establish the maintenance program, assure patient safety, train the patient, family members, caregiver, and/or unskilled personnel and make infrequent but periodic reevaluations of the program." (20) Furthermore, "[t]he services of a qualified professional are not necessary to carry out a maintenance program, and are not covered under ordinary circumstances." (21) The LCD anticipates that the patient will perform the maintenance program independently or with unskilled personnel. Services are only to be covered in limited situations in which the patient's safety is at risk (e.g., a hip fracture).

In conclusion, by comparing the SNF therapy regulations with the LCD, it appears that the regulations contemplate more of an individualized decision for each patient based on the facts and circumstances while the LCD seemingly starts with a categorical exclusion of coverage and would permit coverage in more limited circumstances.


Policy guidance that conflicts with the regulations also appears in the home health setting. CMS's home health regulations generally guide MACs on how to administer the coverage parameters for skilled services by stating that MACs should base the coverage "decision on whether care is reasonable and necessary" and "based on information provided . …

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