410 F.Supp.3d 142 (D.D.C. 2019), C. A. 18-2841 (RMC), American Hospital Association v. Azar

Docket NºCivil Action No. 18-2841 (RMC)
Citation410 F.Supp.3d 142
Opinion JudgeROSEMARY M. COLLYER, United States District Judge
Party NameAMERICAN HOSPITAL ASSOCIATION, et al., Plaintiffs, v. Alex M. AZAR II, Secretary of the Department of Health and Human Services, Defendant.
AttorneyCatherine Emily Stetson, Susan Margaret Cook, Hogan Lovells U.S. LLP, Washington, DC, Joel L. McElvain, Mark D. Polston, King & Spalding LLP, Washington, DC, for Plaintiff. Bradley P. Humphreys, Justin Michael Sandberg, U.S. Department of Justice, Washington, DC, for Defendant.
Case DateSeptember 17, 2019
CourtUnited States District Courts, District of Columbia

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410 F.Supp.3d 142 (D.D.C. 2019)

AMERICAN HOSPITAL ASSOCIATION, et al., Plaintiffs,

v.

Alex M. AZAR II, Secretary of the Department of Health and Human Services, Defendant.

Civil Action No. 18-2841 (RMC)

United States District Court, District of Columbia

September 17, 2019

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Catherine Emily Stetson, Susan Margaret Cook, Hogan Lovells U.S. LLP, Washington, DC, Joel L. McElvain, Mark D. Polston, King & Spalding LLP, Washington, DC, for Plaintiff.

Bradley P. Humphreys, Justin Michael Sandberg, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

ROSEMARY M. COLLYER, United States District Judge

Under Medicare Part B, the Centers for Medicare & Medicaid Services (CMS) pays

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hospital outpatient departments at predetermined rates for patient services, and Congress has established the Outpatient Prospective Payment System by which CMS is to set and pay those rates. CMS came to believe that the rate for certain clinic-visit services at a specific subset of these outpatient departments— familiarly, off-campus provider-based departments— was too high and that patients could receive similar services from free-standing physician offices at lower cost to the government and to taxpayers. Accordingly, CMS promulgated a rule in 2018 lowering the payment rate for clinic-visit services at off-campus provider-based departments to match the rate for similar services at physician offices, in order to shift patients towards the latter.

Plaintiffs are hospital organizations which have seen their payment rates cut. They argue that the method by which CMS has cut their rates has no place in the statutory scheme established by Congress, and further that Congress has already decided as a matter of policy and practicality that off-campus provider-based departments should be paid at higher rates than physician offices for similar services. In short, Plaintiffs argue that CMS’ 2018 rule is ultra vires. CMS opposes. Both parties move for summary judgment.

The Court has given close attention to the parties’ arguments and the statutory scheme, which, as relevant, is both simple and detailed. For the reasons below, the Court finds that CMS exceeded its statutory authority when it cut the payment rate for clinic services at off-campus provider-based clinics. The Court will grant Plaintiffs’ motion, deny CMS’ cross-motion, vacate the rule, and remand.

I. BACKGROUND

The Medicare program, established by Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., provides federally funded medical insurance to the elderly and disabled. Medicare Part A addresses insurance coverage for inpatient hospital care, home health care, and hospice services. Id. § 1395c. Medicare Part B addresses supplemental coverage for other types of care, including outpatient hospital care. Id. § § 1395j, 1395k.

A. The Outpatient Prospective Payment System

Under Medicare Part B, CMS directly reimburses hospital outpatient departments for providing outpatient department (OPD) services to Medicare beneficiaries, which payments are made through the elaborate Outpatient Prospective Payment System (occasionally, OPPS). See generally 42 U.S.C. § 1395l(t). Implemented as part of the Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 251, the Outpatient Prospective Payment System does not reimburse hospitals for their actual costs of providing OPD services. Rather, as with Medicare generally and in an effort to control costs, the Outpatient Prospective Payment System pays for OPD services at pre-determined rates. See

Amgen, Inc. v. Smith, 357 F.3d 103, 106 (D.C. Cir. 2004). Those payment rates are determined as follows: OPD services which are clinically comparable or which require similar resource usage are grouped together and assigned an Ambulatory Payment Classification (occasionally, APC). 42 U.S.C. § 1395l(t)(2)(B). A formula is used to calculate the relative payment weight of each Ambulatory Payment Classification against other APCs, based on the average cost of providing OPD services in previous years. See id. § 1395l(t)(2)(C). Each Ambulatory Payment Classification’s relative payment weight is then multiplied by an Outpatient Prospective Payment System "conversion factor"— which is the same for,

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and applies uniformly to, all APCs— to reach the fee schedule amount for each APC. Id. § 1395l(t)(3)(D). Ultimately, the actual amount paid to the hospital is the calculated fee schedule amount adjusted for regional wages, transitional pass-through payments, outlier costs, "and other adjustments as determined to be necessary to ensure equitable payments, such as adjustments for certain classes of hospitals," id. § 1395l(t)(2)(D)-(E), less an applicable deductible and modified by a "payment proportion." See id. § 1395l(t)(4).

Every year, CMS must review the groups, relative payment weights, and wage and other adjustments for each Ambulatory Payment Classification to account for changes in medical practice or technology, new services, new cost data, and other relevant information and factors. Id. § 1395l(t)(9)(A). This annual review is conducted with an important caveat: 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. See id. § 1395l(t)(9)(B); cf. id. § 1395l(t)(9)(D)-(E) (requiring initial wage, outlier, and other adjustments also be budget neutral). Thus, decreases or increases in spending caused by one adjustment must be offset with increases or decreases in spending by another.

CMS must also update annually the Outpatient Prospective Payment System conversion factor, generally to account for the inflation rate for the cost of medical services, see id. § 1395l(t)(3)(C)(iv), but sometimes for other reasons, as discussed below. Unlike adjustments to Ambulatory Payment Classifications under paragraph (t)(9)(A), adjustments to the conversion factor do not need to be budget neutral. See generally id. § 1395l(t)(3)(C) (describing conversion factor inputs). However, because the same conversion factor applies equally to all Ambulatory Payment Classifications, adjustments to the conversion factor cannot be used to change the fee schedule for specific APCs. In other words, changes to the conversion factor affect total spending and not spending on specific services.

The Outpatient Prospective Payment System controls overall costs by incentivizing hospital outpatient departments to provide OPD services at or below the average cost for such services. That said, while the Outpatient Prospective Payment System limits the amount Medicare will pay for each service, it does not limit the volume or mix of services provided to a patient. Concerned that fee schedule limits would not adequately limit increases in overall expenditures, Congress included as part of the Outpatient Prospective Payment System two provisions at issue here. Under paragraph (t)(2)(F), "the Secretary shall develop a method for controlling unnecessary increases in the volume of covered OPD services." Id. § 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).

B. Off-Campus Provider-Based Departments, Physician Offices, and the Bipartisan Budget Act of 2015

Many medical services that were once only offered in an inpatient hospital setting can now be provided by hospital outpatient departments whereby the patient does not spend the night. Medicare traditionally welcomed these cheaper alternatives to inpatient

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care and, to meet the growing demand for these services, some hospitals have established off-campus provider-based departments (occasionally, PBDs), which are outpatient departments at facilities separated by a specific distance (or more) from the physical campus of the hospital with which they are affiliated. See 42 C.F.R. § 413.65(e). Although not physically proximate to their affiliated hospital’s main campus,1 off-campus provider-based departments are so closely integrated into the same system that they are considered part of the hospital itself. This allows off-campus provider-based departments to offer more comprehensive services to their patients but also subjects off-campus provider-based departments to the same regulatory requirements as the main hospital. See 42 C.F.R. § 413.65 (describing regulatory requirements for off-campus provider-based departments). Because they are part of the same system and face the same regulatory requirements and regulatory costs as hospitals, off-campus provider-based departments have generally been paid at the same rates hospitals are paid for OPD services.2

That said, some comparable outpatient medical services can also be provided by free-standing physician offices, which are medical practices not integrated with, or part of, a hospital. See 42 C.F.R. § 413.65(a)(2). While physician offices do not provide the same array of services as off-campus provider-based departments, they also do not bear the same regulatory requirements and costs as hospitals. Accordingly, CMS pays physician offices for outpatient medical services according to the lower-paying Medicare Physician Fee Schedule instead of the Outpatient Prospective Payment System. As relevant to this case, in 2017 the Outpatient Prospective...

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3 practice notes
  • 964 F.3d 1230 (D.C. Cir. 2020), 19-5352, American Hospital Association v. Azar
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the District of Columbia Circuit
    • July 17, 2020
    ...district court for purposes of addressing the parties' cross-motions for summary judgment. See Am. Hosp. Ass'n v. Azar, 410 F.Supp.3d 142, 146 (D.D.C. 2019). The Hospitals first argued that HHS's reduction in reimbursement for E & M services exceeded the agency'......
  • American Hospital Association v. Azar, 071720 FEDDC, 19-5352
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the District of Columbia Circuit
    • July 17, 2020
    ...district court for purposes of addressing the parties' cross-motions for summary judgment. See Am. Hosp. Ass'n v. Azar, 410 F.Supp.3d 142, 146 (D.D.C. 2019). The Hospitals first argued that HHS's reduction in reimbursement for E&M services exceeded the agency's ......
  • 415 F.Supp.3d 1 (D.D.C. 2019), C. A. 18-2841 (RMC), American Hospital Association v. Azar
    • United States
    • Federal Cases United States District Courts District of Columbia
    • December 16, 2019
    ...provider-based departments for certain outpatient department (OPD) services. SeeAm. Hosp. Ass’n v. Azar, No. 18-2841, 410 F.Supp.3d 142, __, 2019 WL 4451984, at *1 (D.D.C. Sept. 17, 2019) (AHA I ); 83 Fed.Reg. 58,818 (Nov. 21, 2018) (2019 Final Rule). Specifically, ......
3 cases
  • 964 F.3d 1230 (D.C. Cir. 2020), 19-5352, American Hospital Association v. Azar
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the District of Columbia Circuit
    • July 17, 2020
    ...district court for purposes of addressing the parties' cross-motions for summary judgment. See Am. Hosp. Ass'n v. Azar, 410 F.Supp.3d 142, 146 (D.D.C. 2019). The Hospitals first argued that HHS's reduction in reimbursement for E & M services exceeded the agency'......
  • American Hospital Association v. Azar, 071720 FEDDC, 19-5352
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the District of Columbia Circuit
    • July 17, 2020
    ...district court for purposes of addressing the parties' cross-motions for summary judgment. See Am. Hosp. Ass'n v. Azar, 410 F.Supp.3d 142, 146 (D.D.C. 2019). The Hospitals first argued that HHS's reduction in reimbursement for E&M services exceeded the agency's ......
  • 415 F.Supp.3d 1 (D.D.C. 2019), C. A. 18-2841 (RMC), American Hospital Association v. Azar
    • United States
    • Federal Cases United States District Courts District of Columbia
    • December 16, 2019
    ...provider-based departments for certain outpatient department (OPD) services. SeeAm. Hosp. Ass’n v. Azar, No. 18-2841, 410 F.Supp.3d 142, __, 2019 WL 4451984, at *1 (D.D.C. Sept. 17, 2019) (AHA I ); 83 Fed.Reg. 58,818 (Nov. 21, 2018) (2019 Final Rule). Specifically, ......