Am. Hosp. Ass'n v. Azar

• Decision Date: 17 July 2020
• Docket Number: C/w 19-5353, 19-5354,No. 19-5352,19-5352
• Parties: AMERICAN HOSPITAL ASSOCIATION, et al., Appellees v. Alex M. AZAR, II, in his official capacity as Secretary of Health and Human Services, Appellant
• Court: U.S. Court of Appeals — District of Columbia Circuit

964 F.3d 1230

AMERICAN HOSPITAL ASSOCIATION, et al., Appellees

v.Alex M. AZAR, II, in his official capacity as Secretary of Health and Human Services, Appellant

No. 19-5352

C/w 19-5353, 19-5354

United States Court of Appeals, District of Columbia Circuit.

Argued April 17, 2020

Decided July 17, 2020

Alisa B. Klein, Attorney, U.S. Department of Justice, Washington, DC, argued the cause for appellant. With her on the briefs were Mark B. Stern, Attorney, Washington, DC, Robert P. Charrow, General Counsel, U.S. Department of Health & Human Services, Janice L. Hoffman, Associate General Counsel, Baltimore, MD, Susan Maxson Lyons, Deputy Associate General Counsel for Litigation, and Robert W. Balderston, Attorney, Washington, DC.

Howard R. Rubin and Robert T. Smith, Washington, DC, were on the brief for amici curiae Digestive Health Physicians Association, et al. in support of appellant.

Catherine E. Stetson argued the cause for appellees. With her on the brief were Susan M. Cook, Washington, DC, Katherine B. Wellington, Mark D. Polston, Joel McElvain, Christopher P. Kenny, and Michael LaBattaglia, Washington, DC. Kyle Druding, Washington, DC, entered an appearance.

Before: Srinivasan, Chief Judge, Garland and Millett, Circuit Judges.

Srinivasan, Chief Judge:

Many hospitals provide outpatient care at off-site facilities known as "off-campus provider-based departments," or PBDs. Certain services offered by hospitals at off-campus PBDs, such as routine clinic visits, can also be provided by independent physician practices unaffiliated with a hospital. Although off-campus PBDs and independent physician practices can offer the same service, Medicare until recently reimbursed those providers at different rates: because off-campus PBDs are considered hospitals for regulatory purposes, they were paid a higher rate applicable to hospitals instead of a lower rate applicable to physician practices. The result was that, for the same outpatient service, off-campus PBDs obtained up to twice as much per patient in Medicare reimbursements as did physician practices.

The Department of Health and Human Services determined that the payment differential gave rise to an economic incentive that induced unnecessary growth in the volume of outpatient care provided at off-campus PBDs. HHS thus reduced the rate it paid hospitals for the most common off-campus PBD service, "patient evaluation and management," to equal the rate paid to physician practices for that service. HHS justified that reimbursement cut as an exercise of its statutory authority to adopt "method[s] for controlling unnecessary increases in the volume" of covered outpatient services. 42 U.S.C. § 1395l (t)(2)(F).

A group of hospitals brought these consolidated actions, claiming that HHS's rate reduction for off-campus PBDs falls outside of the agency's statutory authority. The district court agreed and set aside the regulation implementing the rate reduction. Because we conclude that the regulation rests on a reasonable interpretation of HHS's statutory authority to adopt volume-control methods, we now reverse.

I.

A.

Medicare Part B health insurance covers outpatient hospital care, including same-day surgery, preventive and screening services, and physician visits. See 42 U.S.C. §§ 1395j, 1395k. The Department of Health and Human Services (HHS) sets the rates at which Medicare will reimburse hospitals for providing such services according to an intricate statutory system known as the Outpatient Prospective Payment System (OPPS). See 42 U.S.C. § 1395l (t).

Under the OPPS, hospitals are not reimbursed for the actual costs incurred in providing care. Instead, to help control Medicare expenditures, the statute calls for HHS to set predetermined payment amounts for each covered outpatient service. See H.R. Rep. No. 106-436, at 33 (1999). Hospitals then receive that amount for every instance in which they provide the service. OPPS rates are revised each year via notice-and-comment rulemaking and are published before they go into effect. See Amgen, Inc. v. Smith , 357 F.3d 103, 106 (D.C. Cir. 2004).

HHS generally sets the rates using a complex statutory formula. First, each covered outpatient service (or group of related services) is assigned an Ambulatory Payment Classification (APC). 42 U.S.C. § 1395l (t)(2)(B). HHS then establishes "relative payment weights" for each APC based on the median cost of providing the relevant services. Id. § 1395l (t)(2)(C). In that relative weighting process, HHS may decide, for instance, that given the cost to the hospital, a certain service should be reimbursed at twice the rate of a different service. Next, each APC's relative weight is multiplied by a number known as the "conversion factor." Id. § 1395l (t)(3)(D). The same conversion factor applies to all APCs. Id. Multiplying an APC's relative payment weight by the conversion factor produces a dollar amount, which is the base "fee schedule amount" for that APC. Id. § 1395l (t)(4)(A). That amount is subject to a variety of possible further adjustments, such as adjustments reflecting regional wage differences, id. § 1395l (t)(4)(A), or "outlier adjustments" for hospitals facing unusually high operating costs, id . § 1395l (t)(5).

When setting rates each year, HHS is required to reassess its choices: what services or groups of services should make up each APC, what an APC's relative payment weight should be, and what statutory adjustments (such as for labor cost differences) should be applied. Id. § 1395l (t)(9)(A). Changes to any of those inputs will alter the payment rate for a particular service. Any change HHS makes in those respects, however, must not cause overall projected expenditures for the next year to increase or decrease. Id. § 1395l (t)(9)(B). Under this "budget-neutrality" requirement, an increase or decrease in projected spending must be offset by other changes.

HHS must also update the conversion factor each year in order to keep up with inflation in general health care costs. Id. § 1395l (t)(3)(C)(ii), (t)(3)(C)(iv). Increases to the conversion factor, of course, proportionately increase overall OPPS outlays. But adjustments to the conversion factor need not be implemented in a budget-neutral manner—indeed, it would make little sense to do so in light of the objective of keeping pace with inflation.

The OPPS is designed to advance Congress's goal of controlling Medicare Part B costs in two ways. First, the OPPS encourages hospital efficiency by setting payment rates prospectively and basing the amount on median cost. Second, because of the budget-neutrality requirement, overall OPPS expenditure growth should closely track annual increases to the conversion factor. Those increases are modest and their amount is prescribed by statute.

Although HHS has significant control over the rate it will pay hospitals for a specific service under the OPPS system, the agency has little control over how frequently hospitals will provide that service. Consequently, even if payment rates remain constant, an increase in the amount of services provided will cause an increase in overall Medicare expenditures.

Congress addressed that possibility in subparagraph (2)(F) of the OPPS statute, the provision centrally in issue in this case. Subparagraph (2)(F) directs HHS to "develop a method for controlling unnecessary increases in the volume of covered [outpatient] services." Id. § 1395l (t)(2)(F). Relatedly, Congress also authorized HHS to reduce the conversion factor, thereby shrinking projected overall expenditures, if it "determines under methodologies described in [sub]paragraph (2)(F) that the volume of services paid for ... increased beyond amounts established through those methodologies." Id. § 1395l (t)(9)(C).

B.

Some hospitals provide outpatient care at facilities known as off-campus provider-based departments (PBDs), which are located away from the physical site of the hospital. Off-campus PBDs are considered part of the hospital for regulatory purposes. See 42 C.F.R. § 413.65. For that reason, services provided at off-campus PBDs are reimbursed through the OPPS system. HHS thus has generally paid hospitals the same amount for outpatient care provided at an off-campus PBD as for outpatient care provided in the main hospital.

At least some services provided at off-campus PBDs can also be provided by freestanding physician offices, i.e., medical practices unaffiliated with a hospital. Physician offices are generally reimbursed at a lower rate for a given service than hospitals, because hospitals receive a separate "facility" rate inapplicable to freestanding physician practices. See Medicare Program: Proposed Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 83 Fed. Reg. 37,046, 37,142 (July 31, 2018).

Consider the amounts Medicare paid for a service commonly provided by off-campus PBDs: "evaluation and management of a patient," or E & M. In 2017, the E & M reimbursement rate for off-campus PBDs under the OPPS was $184.44 for new patients and $158.24 for established patients. By contrast, the 2017 E & M rate for freestanding physician offices—paid under a separate system known as the Physician Fee Schedule—was $109.46 for new patients and $73.93 for established patients. See id. Hospital-affiliated outpatient departments thus received between 68% and 114% more in reimbursements per patient for the same service.

According to the Medicare Payment Advisory Commission (MedPAC), which was established by Congress to advise HHS, see Pub. L. No. 105-33 § 4022, 111 Stat. 251, 350, hospitals reacted to the incentive created by the payment differential between off-campus PBDs and independent physician practices. Almost a decade ago, hospitals began buying freestanding physician practices and converting them into off-campus PBDs, without much change in the facility or the patients served. MedPAC, Report to the Congress: Medicare Payment Policy 53,...