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American Hospital Association v. Azar

United States District Court, District of Columbia

September 17, 2019

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



         Under Medicare Part B, the Centers for Medicare & Medicaid Services (CMS) pays 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, 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 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 Payment System rate for the most voluminous OPD service provided by off-campus provider-based departments, “evaluation and management of a patient” (E&M), [3] was $184.44 for new patients and $109.46 for established patients while the Physician Fee Schedule rate for the comparable service at a physician office was $109.46 for a new patient and $73.93 for an established patient. See 83 Fed. Reg. 37, 046, 37, 142 (July 31, 2018) (Proposed Rule).

         Until 2015, all off-campus provider-based departments were paid according to the Outpatient Prospective Payment System. At that time, the volume of OPD services had increased by 47 percent over the decade ending in calendar year 2015 and, in the five years from 2011 to 2016, combined program spending and beneficiary cost-sharing (i.e., co-payments) rose by 51 percent, from $39.8 billion to $60.0 billion. See Proposed Rule at 37, 140. There are many possible explanations for this increase. For one, the Medicare-eligible population grew substantially during the same time period. See Medicare Board of Trustees, 2018 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 181 (2018), available at For another, advances in medical technology shifted services from inpatient settings to outpatient settings. See Ken Abrams, Andreea Balan-Cohen & Priyanshi Durbha, Growth in Outpatient Care, Deloitte (Aug. 15, 2018), available at

         However, the Medicare Payment Advisory Commission (MedPAC), an independent congressional agency which advises Congress on issues related to Medicare, long believed that another major reason for this increase was the financial incentive created by the Outpatient Prospective Payment System compared to the Physician Fee Schedule. See MedPAC, Report to the Congress: Medicare Payment Policy 69-70 (Mar. 2017). That is, because off- campus provider-based departments are paid at higher rates than physician offices, MedPAC advised that hospitals were buying existing physician offices and converting them into off-campus provider-based departments, sometimes without a change of location or patients, unnecessarily causing CMS to incur higher costs. See Id. To combat this trend, MedPAC repeatedly recommended that Congress authorize CMS to equalize payment rates under both the Outpatient Prospective Payment System and Physician Fee Schedule for certain services, including E&M services, at all off-campus provider-based departments. See Id. at 70-71; see also Id. at 69 (“One-third of the growth in outpatient volume from 2014 to 2015 was due to an increase in the number of evaluation and management (E&M) visits billed as outpatient services.”). Hospitals responded by advising Congress that MedPAC's recommendation ignored the higher costs required to operate a hospital and would force some existing off-campus provider-based departments, which relied on the rates set by the Outpatient Prospective Payment System, to reduce their services or close completely. See, e.g., Letter from Atul Grover, Chief Pub. Policy Officer, Ass'n of Am. Med. Colls., to The Hon. John Barrasso, et al. (Jan. 13, 2012), available at

         Congress ended the debate, at least momentarily, when it adopted Section 603 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 603, 129 Stat. 584, 597 (2015). That 2015 statute neither equalized payment rates for physicians offices and off-campus provider-based departments, as MedPAC had recommended, nor left the Outpatient Prospective Payment System untouched, as the hospitals requested. Instead, Congress chose a middle path: Off-campus provider-based departments that were billing under the Outpatient Prospective Payment System as of November 2, 2015 (now “excepted off-campus PBDs”) were permitted to continue that practice. See 42 U.S.C. § 1395l(t)(21)(B)(ii). However, off-campus provider-based departments which were not billing under the Outpatient Prospective Payment System as of November 2, 2015, i.e., new off-campus provider-based departments (or “nonexcepted off-campus PBDs”), would be paid according to a different rate system to be selected by CMS. See Id. § 1395l(t)(21)(C). In practice, CMS continues to pay nonexcepted off-campus PBDs under the Outpatient Prospective Payment System but applies a “[Physician Fee Schedule] Relativity Adjustor” which approximates the rate the operative Physician Fee Schedule would have paid. See 81 Fed. Reg. 79, 562, 79, 726 (Nov. 14, 2016).

         C. The Final Rule and Plaintiffs' Challenge

         Despite these changes, the volume of OPD services provided by excepted off-campus provider-based departments grew. When Congress passed the Bipartisan Budget Act of 2015, expenditures by the Outpatient Prospective Payment System were approximately $56 billion and increasing at an annual rate of about 7.3 percent, with the volume and intensity of outpatient services increasing by 3.5 percent. See Proposed Rule at 37, 139. In 2018, CMS estimated that, without intervention, expenditures in 2019 would rise to $75 billion (an increase of 8.1 percent over 2018), with the volume and intensity increasing by 5.3 percent. See Id. at 37, 139.

         CMS thus proposed to implement a “method for controlling unnecessary increases in the volume of covered OPD services.” See generally Id. at 37, 138-143; cf. 42 U.S.C. § 1395l(t)(2)(F). Specifically, CMS determined that many of the E&M services provided by off-campus provider-based departments were “unnecessary increases in the volume of outpatient department services.” Such services were not deemed medically “unnecessary” but financially “unnecessary” because “these services could likely be safely provided in a lower cost setting, ” i.e., at physician offices.[4] Proposed Rule at 37, 142. More specifically, CMS determined that the growth of E&M services provided by off-campus provider-based departments was due to the higher payment rate available to excepted off-campus provider-based departments under the Outpatient Prospective Payment System. Id. CMS proposed to solve its financial problem by applying the corresponding Physician Fee Schedule rate for E&M services to excepted off-campus PBDs, thereby equalizing the payment rate for E&M services provided by excepted off-campus PBDs, nonexcepted off-campus PBDs, and physician offices alike. Id. at 37, 142.

         CMS also determined that it could not control the volume of financially “unnecessary” OPD services in a budget-neutral fashion, since this would “simply shift the movement of the volume within the OPPS system in the aggregate.” Id. at 37, 143. Therefore, CMS proposed to implement its new approach in a non-budget-neutral manner, asserting that the budget neutrality requirements of paragraphs (t)(2)(D)-(E) and (t)(9)(B) do not apply to “methods” developed under paragraph (t)(2)(F) and that its new approach constituted such a method. Id. CMS estimated that this approach would save approximately $610 million in 2019 alone. Id.

         CMS received almost 3, 000 comments on the Proposed Rule, many of which argued that CMS lacked statutory authority to implement the proposed method. Nonetheless, on November 21, 2018, CMS issued a Final Rule implementing the proposed method effective January 1, 2019. See generally Medicare Program: Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs, 83 Fed. Reg. 58, 818, 59, 004-15 (Nov. 21, 2018) (Final Rule). The only substantive change between the Proposed Rule and the Final Rule was that ...

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