Victory for Hospitals as Judge Rules that CMS’s Reduction of Medicare Payments for Outpatient E&M Services Was Ultra Vires

King & Spalding

On September 17, 2019, U.S. District Judge Rosemary M. Collyer of the U.S. District Court for the District of Columbia awarded summary judgment in favor a group of more than 40 hospitals on their challenge to CMS’s decision to cut payment rates for evaluation and management (E&M) services at off-campus excepted provider-based departments (PBDs). King & Spalding partners Mark Polston, Chris Kenny, Joel McElvain and Nikesh Jindal represented the plaintiff hospitals in this case. Judge Collyer held that the rule was outside of the scope of CMS’s authority because the agency had tried to circumvent the requirement in the OPPS statute that payment adjustments be conducted in a budget-neutral manner. The hospital plaintiffs had also argued that, because Congress had directly addressed OPPS payments for excepted off-campus PBDs in a recent statute, CMS could not override Congress’s judgment at all, even if it had attempted to follow budget-neutrality procedures. Judge Collyer did not rule on this argument, but some language in the Court’s opinion endorses this additional argument as well. Judge Collyer vacated the portion of the agency’s 2019 OPPS rule that announced the cut in payments to excepted off-campus PBDs for E&M services, and “remand[ed] to the agency for further action consistent with the correct legal standard.” The Court’s opinion which consolidated the hospitals’ case with another lawsuit by the American Hospital Association, can be found here.

In accordance with the OPPS, CMS reimburses hospital outpatient departments for providing outpatient department (OPD) services to Medicare beneficiaries at pre-determined rates. CMS reviews these rates on an annual basis and can adjust various payment factors as it determines appropriate but with the caveat that “any adjustment to the groups, relative payment weights, or adjustments must be budget neutral, meaning that it cannot cause a change in CMS’ estimated expenditures for OPD services for the year.” Thus, as the Court explained, “decreases or increases in spending caused by one adjustment must be offset with increases or decreases in spending by another.” Congress also included the following two provisions as part of the statutory provisions governing OPPS:

  • Under paragraph (t)(2)(F), “the Secretary shall develop a method for controlling unnecessary increases in the volume of covered OPD services.” 42 U.S.C. § 1395l(t)(2)(F).
  • Further, under paragraph (t)(9)(C), “[i]f the Secretary determines under methodologies described in paragraph (2)(F) that the volume of services paid for under this subsection increased beyond amounts established through those methodologies, the Secretary may appropriately adjust the update to the conversion factor otherwise applicable in a subsequent year.” Id. § 1395l(t)(9)(C).

In 2018, CMS promulgated a proposed rule, which became a Final Rule on November 21, 2018 and effective January 1, 2019, in which CMS determined it would pay excepted off-campus PBDs the same rate as physician’s offices for E&M services. Prior to this time, off-campus PBDs that had been in operation 2015 had been paid higher rates than physician offices for E&M services due to higher PBD operating costs. The Final Rule, with a two-year phase-in period, was projected to reduce E&M payments by an estimated $300 million in 2019 and increased to $600 million by 2020.

CMS described this payment cut as a “method” under paragraph (t)(2)(F), rather than an adjustment, and thereby reasoned that it need not follow budget-neutrality rules in imposing the payment cut. The plaintiff hospitals argued that a simple payment cut for one particular service was not a “method” within the meaning of the statute, and further, that Congress had already decided as a matter of policy that excepted off-campus provider-based departments should be paid at higherrate than physician offices for similar services. On the other hand, CMS argued that the Court lacked “jurisdiction to review the Final Rule under the APA because Congress has precluded judicial review of the development of the Outpatient Prospective Payment System” and because Plaintiffs failed to exhaust their administrative remedies under the Medicare statute.

The Court dismissed CMS’s jurisdictional challenges by concluding that CMS’s actions did “not constitute a ‘method’ within the meaning of [42 U.S.C. § 1395l(t)(2)(F)]” and therefore were not shielded from judicial review. Upon review of the statutory scheme, the Court concluded that the “context does not make clear what a ‘method’ is, but it does make clear what a ‘method’ is not: it is not a price-setting tool, and the government’s effort to wield it in such a manner is manifestly inconsistent with the statutory scheme.” Likewise, “CMS cannot shoehorn a ‘method’ into the multi-faceted congressional payment scheme when Congress’s clear directions lack any such reference.” Quite simply, “nothing in the payment scheme permits service-specific, non-budget-neutral cuts.”

In addressing whether paragraphs (t)(2)(F) and (t)(9)(C) of the statute provide CMS the authority to make these types of payment adjustments, the Court explained that “Congress … does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.” Rather,

the structure of the Outpatient Prospective Payment System makes clear that Congress intended to preserve “the clinical integrity of the groups and weights.” 42 U.S.C. § 1395l(t)(9)(A). There is no reason to think that Congress with one hand granted CMS the authority to upend such a “basic principle” of the Outpatient Prospective Payment System while working with the other to preserve it.

Thus, the Court concluded that CMS’s non-budget-neutral decision to cut Medicare spending by reducing payments made to excepted off-campus PBDs for E&M services was outside the scope of CMS’s authority as granted by Congress.

The Court also determined that “requiring Plaintiffs to exhaust their administrative remedies here would be a ‘wholly formalistic’ exercise in futility” because there was no indication that CMS would change its position on the matter or that further review by CMS would have helped develop the record for judicial review. Therefore, the need to exhaust the CMS review process would not preclude judicial review.

CMS likely will appeal the district court’s decision. Even so, the decision is an important one, given that the agency has indicated its broader desire to cut hospital payments under OPPS, and the decision establishes a clear limit on the agency’s authority to make OPPS price adjustments going forward. King & Spalding was listed by Law360 on its Legal Lions List for the week for this victory.

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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