Hospital Associations Appeal Decision Upholding Price Transparency Rule; King & Spalding Price Transparency Working Group Helping Hospitals to Meet Rule’s Requirements

King & Spalding

On July 17, 2020, the American Hospital Association and several additional associations and individual hospitals filed their opening brief in their appeal of a decision of the district court, which, had upheld CMS’s price transparency rule. The plaintiffs seek review in the U.S. Court of Appeals for the D.C. Circuit of a June 23, 2020 decision issued by district court Judge Carl Nichols that held that CMS had both the statutory and constitutional authority to issue the rule. American Hospital Association v. Azar, No. 1:19-cv-03619, 2020 WL 3429774 (D.D.C. 2020). The rule, slated to go into effect on January 1, 2021, will require hospitals to publish multiple types of pricing data for each item and service they provide, including the gross charge for the item, the discounted price that the hospital would accept from a cash payer for the item, and the payment rate for the item that was negotiated with any commercial payer King & Spalding has organized a working group of hospitals that offers legal advice and a variety of practical resources to help hospitals stand up their price transparency regimes, remain in compliance with CMS’s final rule, and adapt to an ever-changing regulatory environment. More details on participation in the Working Group are described here.

The Affordable Care Act enacted section 2718(e) of the Public Health Service Act (PHS Act), which requires hospitals, under “guidelines” adopted by CMS, to annually publish a list of their “standard charges,” including Diagnosis-Related Groups (DRGs), for every item and service they provide. CMS announced its first guidelines for section 2718(e) in 2014, stating that hospitals could comply with the provision by annually publishing their chargemasters. In a 2018 rulemaking, CMS updated its guidelines to require hospitals to post their chargemasters in a machine-readable format.

On June 24, 2019, President Trump issued an executive order directing the Secretary of HHS to propose a regulation consistent with applicable law that would require hospitals to publish, among other things, “charges and information based on negotiated rates” to “inform[] patients about actual prices.” Within months after the President’s order, CMS proposed and then finalized a rule to implement section 2718(e) of PHS Act. The agency reasoned that hospitals’ charges tend to vary by patient population—particularly between self-pay patients and those with third-party coverage, and accordingly redefined “standard charges” to mean “the regular rate established by the hospital for an item or service provided to a specific group of paying patients.”

The rule requires hospitals to publish five types of standard charges for each item and service: (1) gross charges (i.e., the chargemaster), (2) discounted prices that apply to patients who pay cash, (3) payer-specific negotiated rates, and the de-identified (4) minimum and (5) maximum charges that a hospital has negotiated with third-party payers. Hospitals must publish this data in two forms: first, in a machine-readable file, and, second, in a consumer-friendly display for so-called “shoppable” services.

The plaintiffs presented a series of challenges to the price transparency rule, and Judge Nichols rejected each argument in turn. The court rejected the notion that CMS had exceeded its authority under the statute. The court reasoned that the term chargemaster is a term of art in the healthcare industry, and the fact that Congress chose not to use it in section 2718(e) suggests that “standard charges” does not unambiguously mean only chargemaster charges. Furthermore, the court observed that chargemaster rates are not “standard” because that they only apply to about 10% of patients. Finally, the court noted that section 2718(e) says that standard charges should include DRGs, which are not in the chargemaster.

The court also ruled that it was not unreasonable for CMS to require hospitals to report multiple forms of pricing data for each line of service given the agency’s finding that charges vary between different patient groups. Furthermore, the court found that the rule did not violate the First Amendment because agencies can compel commercial speech when doing so is reasonably related to a public interest. In the court’s view, CMS’s rule advanced the public’s interest in providing consumers with factual price information to facilitate more informed health care decisions. A copy of the court’s decision is available here.

In their opening brief on appeal, the plaintiffs repeat the arguments that they made to the district court. They contend that the statutory term “standard charges” cannot reasonably be read to justify requiring hospitals to disclose every individually negotiated payment rate that they negotiate with dozens or hundreds of insurers. They also contend that the rule violates the First Amendment by requiring the disclosure of confidential pricing information that would not be of assistance to patients. A copy of the plaintiffs’ opening brief on appeal is available here.

The court of appeals has set a schedule in which the parties will complete their briefing by the end of August. Oral argument has not yet been scheduled, but the court is likely to hear argument in late September or in October. Given the timing of the appeal, and the possibility of further judicial review, it is unlikely that the courts will reach a final decision as to the validity of the rule before its January 1, 2021, effective date. Given that the rule poses a number of technical and legal challenges for providers, hospitals would be well advised to begin their compliance efforts now to avoid unpleasant surprises when the rule goes into effect.

The uncertainty and timing of this litigation make compliance with CMS’s final rule a more pressing reality for all licensed hospitals. In addition, CMS has proposed to require hospitals to report the median prices for MS-DRGs (calculated in two different ways) that they have negotiated with commercial payers. The consequences of violating this reporting requirement are severe as CMS has proposed to make these disclosures a condition for a hospital to receive payment from Medicare. As a practical matter, it is impossible for a hospital to meet this disclosure requirement if it is not in compliance with the price transparency rules. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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