[co-author: Virginia Flynn]

On June 23, the U.S. District Court for the District of Columbia dismissed a challenge to a federal rule requiring hospitals to disclose prices they privately negotiated with insurers.¹

Background

In 2010, as part of the Patient Protection and Affordable Care Act (ACA), Congress enacted a statute that required U.S. hospitals to create and make public a list of their standard charges for items and services.²

In 2014, the Centers for Medicare and Medicaid Services (CMS) reiterated this requirement, reminding hospitals that they must publicize this information and that they could do this either by making “public a list of their standard charges (whether that be the chargemaster³ itself or in another form of their choice), or their policies for allowing the public to view a list of those charges in response to an inquiry.”⁴ At the time, CMS stated that hospitals were in the best position to determine the manner and method by which to make these lists public.

In 2018, in a proposed rule, CMS expressed concern that chargemaster data was not helpful to patients and announced it was considering “new ways to improve the accessibility and usability” of the information that hospitals must disclose.⁵ It announced that, effective January 1, 2019, it was revising its prior guidelines to require hospitals to post their standard charges online in a machine-readable format and to update this information annually. CMS also solicited public comments concerning the definition of “standard charges,” whether the best measure of a hospital’s standard charges is its chargemaster, and what types of information would be relevant to patients.

A June 24, 2019 executive order directed the Secretary of Health and Human Services (HHS) to propose a regulation to require hospitals to:

• “publicly post standard charge information, including charges and information based on negotiated rates and for common or shoppable items and services, in an easy-to-understand, consumer-friendly, and machine-readable format using consensus-based data standards that will meaningfully inform patients’ decision making and allow patients to compare prices across hospitals”

• post “standard charge information for services, supplies, or fees billed by the hospital or provided by employees of the hospital”

• “regularly update the posted information and establish a monitoring mechanism for the Secretary to ensure compliance with the posting requirement, as needed.”

In August 2019, the HHS Secretary and CMS issued an annual notice of proposed rulemaking in which CMS expressed concern about a lack of pricing transparency and proposed expanding hospital disclosure requirements “to include charges and information based on negotiated rates and for common shoppable items and services, in a manner that is consumer-friendly.”⁶ CMS explained, “[A] standard charge can be identified as a charge that is the regular rate established by the hospital for the items and services provided to a specific group of paying patients.” Thus, it proposed changing the definition of “standard charges” to account for self-pay patients and patients with third-party coverage by including both “gross charges” and “payer-specific negotiated charges” in the definition. CMS defined “gross charges” as “the charge for an individual item or service that is reflected on a hospital chargemaster, absent any discounts” and defined “payer-specific negotiated charges” as “the charge that the hospital has negotiated with a third party payer for an item or service.”

In November 2019, CMS issued a final rule defining “standard charges” to include gross charges, payer-specific negotiated charges, discounted cash prices, and de-identified minimum and maximum negotiated charges.⁷ The final rule requires hospitals to publish these five types of “standard charges,” outlines publication requirements, and delineates an enforcement scheme.

D.C. District Court Decision

The plaintiffs — a group of hospital organizations, including the American Hospital Association, among others (collectively, AHA) — filed suit, arguing the final rule (1) exceeds CMS’s statutory authority, (2) violates the First Amendment, and (3) is arbitrary and capricious. The court rejected AHA’s challenges and granted HHS’s motion for summary judgment.

First, AHA argued the rule exceeds CMS’s statutory authority because the term “standard charges” is unambiguous, refers only to chargemaster charges, and cannot be extended to apply to custom negotiated charges with third-party payers. HHS countered that its interpretation of the term was at least reasonable. The court found the term “standard charges” does not unambiguously mean “chargemaster charges” and that CMS’s interpretation was reasonable, though “[i]t is a close call whether the agency reasonably interpreted ‘standard charges’ to include rates negotiated with third-party payers.” AHA also argued that the statute does not allow CMS to impose penalties for failure to comply with publication requirements, but the court found the “plain language” of the enforcement provision foreclosed that argument.

Second, AHA argued that the final rule compels speech in violation of the First Amendment. The court found the rule regulates commercial speech and was subject to the deferential “reasonable” standard — under which the rule must “be reasonably related to the agency’s interests and cannot be so unjustified or unduly burdensome that it chills protected speech.” AHA argued the rule imposes “logistical and financial burdens,” will “chill negotiations between hospitals and insurers,” and will potentially have anticompetitive consequences and increase costs. However, the court found the rule advances CMS’s stated interests of “providing consumers with factual price information to facilitate more informed health care decisions” and “lowering healthcare costs.” The court explained that the agency examined “general economic principles and specific price studies” and found “informed consumers would put pressure on providers to lower costs and increase the quality of care.”

Third, AHA argued the rule is arbitrary and capricious because there is a discrepancy between the rule and CMS’s stated goals of improving patients’ decision-making and because the rule “imposes a disproportionately large cost” on hospitals. The court rejected this argument, finding the agency fulfilled its duty to examine the evidence and connect it to the final rule by acknowledging conflicting data and articulating which information it found most convincing.

Implications

HHS Secretary Alex Azar described the decision as “a resounding victory” and stated, “Especially when patients are seeking needed care during a public health emergency, it is more important than ever that they have ready access to the actual prices of healthcare services.”

However, AHA issued a statement that, “The proposal does nothing to help patients understand their out-of-pocket costs. It also imposes significant burdens on hospitals at a time when resources are stretched thin and need to be devoted to patient care. Hospitals and health systems have consistently supported efforts to provide patients with information about the costs of their medical care. This is not the right way to achieve this important goal.” AHA plans to file an expedited appeal of the district court’s decision.

The final rule is scheduled to go into effect on January 1, 2021.

Endnotes