One of the principles of notice and comment rulemaking - and it's applied less formally to LCDs and NCDs - is that a rule cannot change too much from proposal to final, even though edits to the proposal are the point of notice and comment rulemaking.
In recent years, Novitas put out a draft LCD for oncology biomarkers, radically changed the final, and CMS required it to put out the "new" final as a "proposal" for public comment. I think something similar may have occurred with a MolDx LCD regarding transplant rejection genomics.
Here's a new example of the same principle playing out in federal rulemaking.
CMS published a Medicare Advantage rule about audits, and changed some key points from draft to final. Judge Reed O'Connor of the Texas Northern District tossed out the rule, based on excessive change.
(Litigants may have chosen Texas to file in the hopes it would rule against Yankee regulators.)
Here's coverage:
Humana said that regulators changed their justification for reversing the fee-for-service adjuster between the rule’s proposed and final versions. Without the adjuster, MA plans would be unfairly penalized since doctors in traditional Medicare may not be incentivized to log all of their patients’ health conditions, the insurer argued.On Thursday, O’Connor agreed.“Because there was no meaningful notice of Defendants’ ultimate finding that actuarial equivalence does not apply to RADV audits, there was no meaningful dialogue regarding the costs and benefits of the surprise changes,” O’Connor wrote in his ruling, arguing that the harm to insurers was exacerbated by the rule’s retroactive application back to 2018.
Here is a paragraph-style summary for a readership of health-care policy experts, most of whom are attorneys, emphasizing the limits the court placed on CMS’s authority to alter the content and justification of a final rule. I include the full controlling citation for the “logical outgrowth” doctrine.
The decision by Judge Reed O’Connor in Humana Inc. v. Becerra, No. 4:23-cv-00909-O (N.D. Tex. Sept. 25 2025), vacated and remanded the 2023 CMS RADV Final Rule because the agency violated the Administrative Procedure Act’s notice-and-comment requirement. The APA requires that the final rule be a “logical outgrowth” of the proposal placed before the public during rulemaking. The leading Supreme Court case is Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007), which held that “[a] final rule need not match the proposed rule exactly, but it must be a logical outgrowth of the proposal so that the affected parties should have anticipated the final course in light of the initial notice.” The Fifth Circuit has repeatedly applied this standard, for example in Texas Association of Manufacturers v. U.S. Consumer Product Safety Commission, 989 F.3d 368, 381 (5th Cir. 2021), describing the test as whether the proposal “adequately frame[d] the subjects for discussion such that the affected party should have anticipated the agency’s final course in light of the initial notice.” The doctrine protects both regulated entities and the integrity of the rulemaking process by ensuring meaningful participation.
In this case the court concluded that CMS crossed the line from permissible modification into impermissible surprise. The 2018–2019 proposed rules explained the plan to drop the long-standing Fee-for-Service (FFS) Adjuster on two empirical or equitable grounds: CMS’s own study suggested that diagnosis-coding error in traditional Medicare did not materially distort MA payments, and CMS feared it would be inequitable to correct audited MA plans but not others. Those were the propositions on which the public was invited to comment. In the 2023 Final Rule, however, CMS offered two different core justifications: that the statutory requirement of “actuarial equivalence” in 42 U.S.C. § 1395w-23(a)(1)(C) simply does not apply to RADV audits as a matter of law, and that the separate Coding-Intensity Adjustment already accounted for any bias. That switch in legal theory—away from the empirical and equity-based rationale of the proposal and toward a new statutory interpretation—was held not to be a logical outgrowth of what had been proposed. The court stressed that nothing in the proposal gave regulated parties fair warning that CMS was reconsidering more than a decade of precedent recognizing actuarial-equivalence obligations in RADV audits.
The court also found it significant that CMS’s new interpretation rested in part on a D.C. Circuit decision (UnitedHealthcare v. Becerra, 16 F.4th 867 (D.C. Cir. 2021)) that was issued after the comment period closed. Stakeholders could not have anticipated the agency’s shift, and there was therefore no meaningful opportunity to submit comments on the costs, benefits, and reliance interests affected by abandoning the FFS Adjuster. The harm from the lack of notice was compounded by the rule’s retroactive application to 2018, which exposed MA organizations to substantial unanticipated liabilities for prior years in which they had operated under the old rule.
Under the governing doctrine, agencies retain wide latitude to adjust details, respond to evidence in the record, and select among approaches squarely placed before the public in the proposal. But they may not use notice-and-comment as a placeholder and then unveil in the final rule an altogether new controlling legal theory or an interpretive reversal of long-standing practice. When the final rule “repudiates or is irreconcilable with a prior legislative rule, the second rule … must itself be legislative,” requiring full notice-and-comment rulemaking. See Flight Training International, Inc. v. FAA, 58 F.4th 234, 241 (5th Cir. 2023).
The practical message for both government and industry is that Medicare can refine and even significantly modify a proposed rule so long as the shift is a reasonably foreseeable outgrowth of the proposal, but it cannot substitute an unforeseen statutory theory for the one on which comments were invited. Courts will vacate such rules even if the agency’s new interpretation might prove substantively sound. The opinion underscores that procedural fidelity to the APA remains as important as substantive correctness when CMS attempts to revise the payment and audit architecture of the Medicare Advantage program.
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- How did CMS try to justify the shift?
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The court’s opinion makes clear that CMS and HHS did try to defend the change, but the justifications they relied on were, in the court’s view, too different from what they had proposed back in 2018-2019 and too weak to satisfy the APA.
First, the agencies argued that their new legal rationale—that the actuarial-equivalence requirement in 42 U.S.C. § 1395w-23(a)(1)(C) simply does not apply to RADV audits—was really implicit in the proposal all along. They pointed to isolated sentences in the 2018 proposed rule suggesting that a RADV-specific adjustment might not be “appropriate” because the purpose of RADV audits is to identify diagnoses unsupported by the medical record. They also relied on a short request for public comment in the 2019 notice that asked whether the statute “mandates or prohibits” an FFS Adjuster. CMS argued that these references were enough to alert the industry that it was reconsidering the statutory foundation for the adjuster.
Second, the government argued that even if there was a procedural misstep, it was “harmless” because its new reading of the statute was, in its view, the “best reading,” particularly after the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), which curtailed Chevron deference. Essentially, CMS contended that because it was now correctly interpreting the statute, there was no need to redo notice-and-comment.
Third, in support of the change CMS cited the D.C. Circuit’s decision in UnitedHealthcare Insurance Co. v. Becerra, 16 F.4th 867 (D.C. Cir. 2021), which emphasized that the actuarial-equivalence mandate governs prospective payments and not necessarily retrospective audits. CMS referred to that case nineteen times in the preamble to the 2023 final rule, but the Fifth Circuit-bound Texas court found that relying on a case decided after the comment period closed only underscored that the public had lacked notice of the intended shift.
Judge O’Connor described this as a classic “surprise-switcheroo.” The government had invited comments on the equitable and empirical rationale for dropping the adjuster—whether it was fair or unfair to apply it only to audited plans—but then adopted a legal rationale that had never been squarely presented for comment.
The court rejected the argument that stray comments by a few stakeholders who anticipated the statutory argument were enough; under Texas Ass’n of Manufacturers v. CPSC, 989 F.3d 368, 381–83 (5th Cir. 2021), the agency must give notice sufficient for the general body of interested parties to foresee the agency’s final course.
Finally, the court dismissed the harmless-error argument as inconsistent with the APA’s requirement that agencies must not only reach the right substantive result but must do so through a procedure that gives the public a meaningful chance to comment on the costs, benefits, and reliance interests at stake. The procedural defect was especially serious here because CMS made the new policy retroactive to 2018, exposing MA organizations to large liabilities for past years in which they had acted under the old policy.
In short, CMS tried to justify its shift by saying that the seeds of the legal argument were already in the proposal and by invoking intervening case law and a post-Chevron view of the statute. The court found those efforts unpersuasive because the rulemaking record gave no meaningful notice that the agency might abandon its long-standing view that actuarial-equivalence applied to RADV audits, and because the lack of notice deprived stakeholders of the opportunity to comment on the costs and consequences of that change.
- But remember, too, the whole point of N&C rulemaking is to encourage changes in the proposal and incorporate public comment into the final.
You are exactly right — the APA does not freeze agencies to the wording of the proposed rule. The entire purpose of notice-and-comment rulemaking is to give agencies the benefit of public input and allow them to refine, improve, and even substantially alter their proposals before they are finalized. Courts have long recognized this. The Supreme Court in Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007), emphasized that a final rule “need not match the proposed rule exactly,” so long as it is a “logical outgrowth” of the proposal such that affected parties “should have anticipated the agency’s final course in light of the initial notice.”
What the Texas court underscored in Humana v. Becerra is that the kind of change matters. Changes in details — for example, the sampling size for audits, the choice of statistical formula, or even the weight given to certain empirical findings — are exactly what the notice-and-comment process is meant to elicit. If commenters raise concerns about data quality or fairness, the agency can respond by adjusting the methodology or even reversing its tentative approach, and those changes will usually be upheld as a legitimate outcome of public participation.
By contrast, the court viewed CMS’s 2023 RADV rule as an abrupt shift in the basic legal theory underlying the rule: the agency moved from saying that the FFS Adjuster was empirically unnecessary and potentially inequitable to saying that the statute never required actuarial equivalence in audits at all. That change was not a refinement of the same concept but, in the court’s words, a “surprise-switcheroo.” Because nothing in the proposal clearly signaled that the agency was reconsidering the statutory mandate itself — a 13-year-old premise of the RADV program — affected parties had no fair opportunity to focus their comments on that fundamental question. The court therefore concluded that the final rule failed the logical-outgrowth test.
So the case does not hold that agencies must freeze their proposals in place. It reiterates the traditional line: changes that stakeholders could reasonably foresee and comment on are permitted; changes that introduce a wholly new rationale or legal foundation without notice are not. That distinction preserves both the flexibility agencies need to learn from comments and the fairness and deliberation that the APA is designed to guarantee.
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Prompt
For health care policy experts, most of whom are also attorneys, please summarize the ruling. Focus on when Medicare can, and cannot, adjust and edit proposals for the final version. Please write in paragraphs rather than bullets. Please give a full citation for the rule about 'natural outgrowth' of proposal.
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Judge O'Connor ruled the Affordable Care Act unconstitutional in 2018.
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Here's a footnote from the current ruling.
