Saturday, October 24, 2026

CLAUDE alternative essay on CMS Elective Exclusion

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Two Hands on One Lever:

CMS, Permissive Exclusion, and Forty Years of Case Law

CLAUDE OPUS Oct 24, 2026 · @Bruce Quinn

On October 14, 2026, Secretary Kennedy published a one-page Statement of Delegation of Authority that may turn out to be the most consequential program-integrity document of the year. It hands the CMS Administrator the Secretary's permissive exclusion powers under section 1128(b) of the Social Security Act, 42 U.S.C. § 1320a-7(b). The Office of Inspector General keeps everything it had. The delegation withholds two things, the authority to conduct hearings and the authority to issue regulations, and it ratifies any exclusion-related action CMS took before the notice appeared. CMS may redelegate within the agency.

Nothing in the statute changed. What changed is who may pull the lever, and that turns out to matter a great deal, because section 1128 has spent four decades being interpreted on the assumption that the entity pulling it was a law-enforcement office rather than the payer. The question for law professors is what the accumulated case law has to say to a new actor; the question for policy people is whether that case law will discipline CMS the way it has disciplined OIG, or whether a payer with its own data warehouse and its own grievances will find the doctrinal fences less constraining than they look.

The statute CMS inherited

Exclusion predates OIG's custody of it. The 1977 Medicare-Medicaid Anti-Fraud and Abuse Amendments gave the Secretary authority to bar providers convicted of program-related crimes, and the Medicare and Medicaid Patient and Program Protection Act of 1987 reorganized the authority into the structure we still use: section 1128(a) mandates exclusion for a short list of convictions (program-related crimes, patient abuse, and later felony fraud and felony controlled-substance offenses), while section 1128(b) permits exclusion on a longer and more heterogeneous list. The Secretary delegated both to OIG in the 1980s, and OIG has run the machinery, and written the regulations at 42 C.F.R. Part 1001, ever since. The Affordable Care Act added grounds in 2010, including section 1128(b)(16) for false statements on enrollment applications, a provision that sits squarely in CMS's own territory.

The permissive grounds are worth reading as a list, because their diversity is the point. Some require a conviction: misdemeanor fraud, obstruction of an investigation, misdemeanor controlled-substance offenses. Some require no conviction at all: loss of a state license, exclusion from another federal program, furnishing unnecessary or substandard services, charging substantially in excess of usual charges, engaging in kickback or false-claims conduct found administratively, being an owner or officer of an excluded entity, defaulting on health-education loans. "Permissive" describes the Secretary's discretion once a ground is established; it says nothing about how much process preceded the finding. A conviction-based permissive exclusion rides on a judgment entered by a court. A section 1128(b)(6) exclusion for unnecessary services rides on a medical-review file assembled by the agency, which, as of this month, may be the same agency that decides whether to exclude.

The consequences are also worth stating plainly for the non-lawyers. Exclusion is not revocation. Revocation under 42 C.F.R. § 424.535 removes a supplier's Medicare billing privileges and is appealed through the enrollment track. Exclusion bars payment by every federal health care program for any item or service furnished, ordered, or prescribed by the excluded person; it lands the name on the public LEIE; it exposes any employer who bills for the excluded person's work to civil monetary penalties; and it is appealed through an ALJ and the Departmental Appeals Board under 42 C.F.R. Part 1005, with judicial review after that. CMS has for years run a smaller version of this, the Medicare Advantage and Part D preclusion list and a seldom-used set of Part 402 exclusion grounds, but those were the minor leagues. Section 1128(b) is the real thing.

Exclusion is remedial, which is why the courts let it be harsh

The foundational line of cases established that exclusion is not punishment, and nearly every later doctrine depends on that characterization.

The problem arose because excluded providers were often also prosecuted, and after United States v. Halper (1989) it was briefly fashionable to argue that a civil sanction imposed on top of a criminal conviction was a second punishment. Dr. Manocchio, a physician who pleaded guilty to filing a false Medicare claim and then received the mandatory five-year exclusion, made exactly that argument. The Eleventh Circuit rejected it in Manocchio v. Kusserow, 961 F.2d 1539 (11th Cir. 1992), holding that exclusion serves to protect the programs and their beneficiaries from untrustworthy providers rather than to punish, and so raises no double-jeopardy problem. The Ninth Circuit reached the same conclusion from the ex post facto direction in Travers v. Shalala, 20 F.3d 993 (9th Cir. 1994), where a physician's offense predated the 1987 amendments that created the five-year mandatory minimum; because the sanction was remedial, applying the longer term to earlier conduct was permissible.

The remedial label did enormous work. It is why exclusion need not be proportioned to culpability in the way a sentence must be, why it can follow a conviction without constitutional objection, and why the government may act before a full hearing. For CMS, the label is a gift and a warning. It is a gift because an agency that excludes to protect beneficiaries need not prove much about the provider's state of mind. It is a warning because the remedial rationale has to be true in the individual case. Hanlester, discussed below, is what happens when a court decides it is not.

No hearing first, usually

A second early cluster of cases settled that due process does not generally require a hearing before exclusion takes effect, provided the provider has notice, a chance to respond in writing, and a prompt hearing afterward.

Ritter v. Cohen, 797 F.2d 119 (3d Cir. 1986), involved a Pennsylvania physician suspended from Medicare on findings that he had furnished excessive and unnecessary services. He argued that his livelihood could not be taken without a prior evidentiary hearing. Applying Mathews v. Eldridge, the Third Circuit held that written notice, an opportunity to submit evidence and argument, and a post-suspension hearing were enough, given the government's interest in stopping harm to patients and the program. Two years later the Eighth Circuit faced the same argument from Dr. Ruben Thorbus, a rural Minnesota physician whose clinic drew roughly sixty percent of its patients from Medicare and Medicaid and whom federal medical reviewers accused of performing excessive diagnostic endoscopies and delivering substandard care. HHS imposed a five-year exclusion after he had an opportunity to respond, and he sought a preliminary injunction to keep practicing while his administrative appeal proceeded. Thorbus v. Bowen, 848 F.2d 901 (8th Cir. 1988), affirmed the denial. The court found no likely due-process violation and, in the balance of harms, put the risk to patients ahead of the physician's financial and reputational loss, even in a community where he was one of few available doctors.

Congress later carved out one important exception. Exclusions under section 1128(b)(7), the ground for kickback and false-claims conduct found administratively rather than by a court, do not take effect until after a hearing, unless the Secretary determines that the provider's continued participation poses a risk to health or safety. The distinction is sensible: a conviction or license revocation has already been adjudicated somewhere, whereas a (b)(7) exclusion asks the agency to prove the underlying violation itself. CMS now holds (b)(7) authority, and if it is tempted to lean on the health-or-safety override to skip the pre-exclusion hearing, the Thorbus and Ritter line will be read against it: those courts tolerated speed because the statute and regulations supplied prompt review afterward, not because the agency's say-so about danger was self-validating.

"Related to" is capacious, but the length must be explained

The most important modern appellate decision on permissive exclusion is Friedman v. Sebelius, 686 F.3d 813 (D.C. Cir. 2012), and it cuts both ways.

The facts are familiar to anyone who followed the opioid litigation. Purdue Frederick had marketed OxyContin with claims that it was less addictive and less prone to abuse than competing opioids. In 2007 the company pleaded guilty to felony misbranding, and three senior executives, the chief executive, the general counsel, and the chief medical officer, pleaded guilty to misdemeanor misbranding under the responsible corporate officer doctrine. That doctrine, which dates to Dotterweich and Park, imposes liability on an officer who had authority to prevent or correct the violation, without proof that he knew about it. OIG then excluded all three for twelve years under section 1128(b)(1), which reaches misdemeanor convictions "relating to" fraud in connection with the delivery of a health care item or service.

The D.C. Circuit answered two questions. First, was a strict-liability misdemeanor "related to" fraud? Yes. The court read the phrase broadly: the conduct underlying the conviction was fraudulent misbranding, and the executives' pleas admitted a relationship to it, even though their own offense required no fraudulent intent. That holding gives the government a long reach; it means an executive can be excluded for a crime that required nothing more than being in charge. Second, was twelve years lawful? Not as explained. OIG had never before imposed anything close to that length on individuals in comparable circumstances, and the agency's decision did not grapple with its own prior practice. Under ordinary administrative-law principles, an agency may change course, but it must acknowledge that it is doing so and say why. The court vacated the twelve-year term and remanded; the executives ultimately received substantially shorter exclusions.

For CMS, Friedman is the case to tape to the wall. The agency arrives with a mandate, voiced by the Secretary in July and in the delegation notice itself, to remove bad actors more aggressively than OIG has. Nothing in section 1128 forbids that. But the baseline against which any CMS exclusion will be measured for arbitrariness is OIG's forty-year corpus of decisions, aggravating and mitigating factors at 42 C.F.R. §§ 1001.102 and 1001.201, and the Board's settled rule that an ALJ reviews the length of a permissive exclusion for reasonableness rather than substituting his own judgment. Because the delegation withholds rulemaking, CMS cannot write itself a new set of factors; it must apply OIG's, and it must explain any departure from how OIG has applied them. A payer that wants to signal toughness by handing out fifteen-year exclusions for conduct OIG historically treated with five will be writing briefs for the D.C. Circuit.

When exclusion stops being remedial: the laboratory case

Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995), is the decision diagnostics people already know, usually for its (since-overruled) holding on anti-kickback intent. Its exclusion holding deserves more attention than it gets.

Hanlester Network organized three clinical laboratory joint ventures in California, selling limited-partnership interests to physicians who were, not coincidentally, in a position to refer specimens. SmithKline BioScience Laboratories managed the labs and performed most of the testing under contract. A Hanlester marketing agent told physician investors, in substance, that their returns would track their referrals. The Inspector General found anti-kickback violations and sought permissive exclusions under section 1128(b)(7) against the network, the three joint-venture laboratories, and several individuals.

The Ninth Circuit affirmed that the entities had violated the statute, through the agent's conduct, on a theory of vicarious liability. It then reversed the exclusions. The court's reasoning was the remedial rationale turned around and pointed at the government: exclusion exists to protect the programs from providers who are likely to cause future harm, the entities' culpability was derivative of an agent who had long since departed, and there was no evidence on the record that they remained untrustworthy. A violation had occurred; exclusion was still unwarranted.

Two cautions. The intent holding in Hanlester, which required proof that the defendant knew the conduct was unlawful and specifically intended to violate the statute, was legislatively displaced in 2010 when the ACA added section 1128B(h). And Hanlester does not stand for the proposition that firing the salesman cures the company; its outcome depended on a thin record of ongoing risk. But the structural point survives: the statutory ground and the remedial justification are separate inquiries, and a court will police the second. For CMS, which will often be acting on data showing that a laboratory or a physician billed aberrantly in 2024, the question a reviewing tribunal will ask is whether that history establishes untrustworthiness now.

The grounds CMS is best positioned to use, and least tested in using

The delegation notice says CMS is "uniquely positioned to investigate, identify, and develop the evidentiary basis" for permissive exclusions. That is true, and it is also the problem. The grounds where CMS's data advantage is greatest are precisely the ones with the thinnest case law.

Section 1128(b)(6)(B), unnecessary or substandard services, is the Thorbus ground, and Thorbus is a preliminary-injunction decision about interim relief, not a merits ruling about how many unnecessary endoscopies make a pattern. Section 1128(b)(6)(A), charges substantially in excess of usual charges, has never been defined; OIG proposed a rule in 2003 and withdrew it in 2007 after concluding it could not draft a workable definition, and the ground has lain largely dormant since. A payer that sets its own fee schedule and then excludes a laboratory for charging "substantially in excess" of its usual charges would be testing a provision that has no appellate gloss at all. Section 1128(b)(16), false statements in enrollment, is new enough that the Board's decisions are sparse, and CMS already revokes enrollment on the same facts under section 424.535(a)(4); the delegation lets it convert an enrollment dispute into a program-wide bar with a different appeal track and far heavier collateral consequences. Section 1128(b)(15), reaching owners and officers of excluded entities, invites exactly the kind of derivative-liability exclusion that Hanlester reversed.

None of this means CMS lacks authority. It means CMS will be making law in areas where OIG, for whatever mix of prudence and caseload, chose not to.

What the cases, read together, tell a new enforcer

Three threads run through the decisions. The statutory ground must be established as written, and the courts have read "related to" generously but have not read it to swallow the enumerated list. The decision to exclude, and the length of exclusion, must be justified on the record as protective rather than punitive, and must be consistent with the agency's own prior practice or explain the inconsistency. And the timing of review is fixed by the statute: ordinarily after the fact, with the (b)(7) pre-exclusion hearing as the exception, and with district courts disinclined to enjoin exclusions in the interim.

The institutional novelty is that these constraints were developed with OIG as the respondent, an office whose culture is prosecutorial and whose exclusion docket has been dominated by convictions and license losses, grounds where someone else did the fact-finding. CMS is a payer. Its instinct is to act on claims data, its grievance is overpayment, and its new authority is unaccompanied by new regulations, new hearing procedures, or any public statement about how it will coordinate with OIG, honor OIG's exclusion waivers in False Claims Act settlements, or treat entities already operating under corporate integrity agreements. The delegation notice resolves none of this and, in withholding rulemaking and hearings, suggests the Secretary did not intend it to.

The case law will not stop CMS from excluding anyone. It will insist that CMS do what OIG has had to do: name the ground, prove it, explain the term, and be prepared to defend the exclusion as something other than a sanction for having annoyed the payer. Friedman and Hanlester were both decided against an agency that had been doing this for decades. The first several CMS exclusions to reach the Board, and the first to reach a circuit, will tell us whether the statute's accumulated discipline transfers with the delegation or whether, as the Secretary's July remarks implied, the point of a second hand on the lever was to pull it harder.

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