Legal Intelligencer article by Lamb McErlane PC Attorneys Vasilios J. Kalogredis ⁱ and Rachel E. (Lusk) Klebanoffⁱⁱ.

On July 17, 2020, the U.S. Court of Appeals for the District of Columbia reversed a lower court’s decision and held that the Department of Health and Human Services (“HHS”) has the authority to cut Medicare payments to hospital off-campus facilities to bring them in line with independent physician practices and other outpatient payments.

According to the appeals court, HHS had properly exercised its authority in allowing the Centers for Medicare and Medicaid (CMS) to implement a service-specific, non-budget-neutral reimbursement cut under the Outpatient Prospective Payment System (OPPS), despite there being a statutory requirement that any changes to the OPPS be “budget neutral,” meaning that an increase or decrease in projected spending must be offset by other changes.

The ruling is a major blow to the hospital industry which has historically benefited from the OPPS, the reimbursement mechanism for Hospital Outpatient Departments (HOPDs) facility fees, in comparison to their private practice peers. The latter functioned under the Medicare Physician Fee Schedule (PFS).

In the past, hospitals were highly incentivized to acquire physician office locations and convert them into off-campus provider-based hospital departments (PBDs) and switch their designation to HOPD because Medicare reimbursement for services (in this case, patient evaluation and management (“E&M”) services) provided in a hospital setting had been greater than Medicare reimbursement for the same services provided in a physician office setting. Consequently, the conversion of physician offices to PBDs was effectively increasing Medicare costs for the provision of functionally equivalent services to Medicare beneficiaries. For years many have believed this makes no logical sense.

In an effort to curb this trend, Congress enacted Section 603 of the Bipartisan Budget Act of 2016 (“Section 603”), which states that new off-campus PBDs would be paid at physician practice rates for all services. HHS further adopted a “site-neutral payment” policy that effectively equalized the Medicare reimbursement for E&M Services provided in a PBD and E&M services provided in a physician office.  HHS asserted that this reimbursement reduction (as it relates to the lowering of PBD reimbursement for E&M services) is an exercise of HHS’ statutory authority to “develop a method for controlling unnecessary increases in the volume of covered services.” 42 U.S.C. § 1395l(t)(2)(F).  Although rate adjustments are generally required to be budget-neutral, HHS determined that the neutrality requirement did not apply to methods for controlling volume.

In September 2019, the American Hospital Association (AHA), Association of American Medical Colleges (AAMC) and various members hospitals (collectively, the “Hospitals”) brought suit in the D.C. District Court to contest the site-neutral payment policy. The Hospitals argued that: (1) the rate cut exceeded HHS’ statutory authority because the reduction didn’t qualify as a “method for controlling unnecessary increases” in volume; and (2) the cut to preexisting off-campus PBD reimbursement contravened Congress’ decision not to change reimbursement for preexisting facilities in Section 603.

The lower court sided with the Hospitals and vacated the site-neutral payment policy (and, in turn, the E&M services reimbursement reduction for PBDs), stating CMS overstepped its authority in making payment changes to the OPPS which led to reduced rate for grandfathered off-campus hospital facilities. Explicitly, the ruling “affirmed that cuts directly undercut the clear intent of Congress to protect hospital outpatient departments because of the many real and crucial differences between them and other sites of care.”

CMS agreed to repay hospitals for cuts made in site-neutral payments by automatically reprocessing calendar year 2019 claims for hospital outpatient services provided in off-campus PBDs that had been grandfathered under the Bipartisan Budget Act of 2015. The amount was estimated at $380 million for 2019.

On appeal, the D.C. Court of Appeals overturned that decision and stated that Section 603 does not unambiguously foreclose HHS from adopting service-specific, non-budget-neutral rate cuts as a “method for controlling unnecessary increases” in the volume of covered outpatient services.  HHS explained that the site-neutral cut would eliminate an incentive to control the volume of unnecessary services “because the payment differential that is driving the site-of-service decision will be removed,” the ruling said.

But the AHA also argued that the agency’s change is not budget-neutral, which it believes is a requirement under federal law. However, HHS said that the budget neutrality requirement does not apply to the site-neutral cuts. They argued that the overall reimbursement for such payments will remain the same, but volume would simply shift to physician practices.

The appeals panel agreed with HHS’ interpretation of federal law over budget neutrality. In the opinion of the court, Chief Judge Sri Srinivasan, an appointee of President Barack Obama, wrote that the district court decision would be reversed since “we conclude that the [site-neutral payment policy] rests on a reasonable interpretation of HHS’s statutory authority to adopt volume-control methods.”

The Trump administration has maintained that CMS has the authority to impose payment cuts as a way to reduce unnecessary and costly increases in hospital procedures.

Bruce Siegal, President and CEO of America’s Essential Hospitals (which represents primarily safety-net hospitals), called the decision a “gut punch” to the nation’s essential hospitals which are already struggling under persistent funding shortages made worse by the COVID-19 crisis. Mr. Siegel said, “Allowing [CMS] to maintain its policy of deep cuts to payments for outpatient care will widen the gaps in healthcare access in communities across the country. We call on Congress and the [Trump] administration to reverse course on this terrible site-neutral payment policy and restore access to care for all people.”

The AHA has requested that the appellate court rehear the case, noting that the court “declined to strictly construe the statutory authority that binds the agency, [and] unaccountably deferr[ed] to impermissible agency decisions.”

According to the AHA and Federation of American Hospitals, hospitals could lose an estimated $800 million over the next decade through the lower Medicare reimbursements and raise premiums within the private market, thereby disrupting the employer insurance market where the majority of people get coverage.

Read the full article online in the Legal Intelligencer here.

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ⁱ Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other health care professionals and their businesses for over 40 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

ⁱⁱ Rachel E. (Lusk) Klebanoff is a senior associate at Lamb McErlane PC who focuses on health law and health care litigation. She represents physicians, dentists, medical group practices, and other health-related entities in transactional, regulatory, and compliance matters. rlusk@lambmcerlane.com. 610-701-4416.