On September 17, 2019, the U.S. District Court for the District of Columbia ruled against the Centers for Medicare and Medicaid Services (“CMS”), vacating CMS’ 2018 Final OPPS Rule, which cut Medicare reimbursement rates for certain outpatient hospital services provided at certain off-campus provider-based departments (“PBDs”).

Until 2015, all off-campus provider-based departments were reimbursed under the Outpatient Prospective Payment System (“OPPS”).  However, in response to a perceived trend of hospitals acquiring physician practices that traditionally had billed under the less lucrative Physician Fee Schedule (“PFS”) and converting such practice sites to off-campus PBDs (which are reimbursed at higher rates under the OPPS), Congress passed the Bipartisan Budget Act of 2015.  Under that law, off-campus PBDs are paid at the lower PFS rate, rather than the higher rate under the OPPS.  However, Congress included a provision excepting off-campus PBDs that were already billing under the OPPS as of November 2, 2015 (“grandfathered PBDs”).

Despite this statutory exception, CMS promulgated a Final OPPS Rule in 2018 that took aim at grandfathered PBDs.  The 2018 Final OPPS Rule changed reimbursement for certain hospital outpatient services, specifically clinic visits identified by HCPCS code G0463, provided at grandfathered off-campus PBDs.  Specifically, CMS lowered the reimbursement rate for those services to the “site-specific PFS rate for the clinic visit service” – a 60% reduction from the OPPS reimbursement rate for the same service.  83 Fed. Reg. 58818, 58822 (Nov. 21, 2018).  CMS planned to phase in application of this payment reduction over two years and projected that the policy would result in approximately $300 million in savings to Medicare in 2019, with Medicare beneficiaries saving approximately $80 million in the form of reduced copayments.  Id. at 59014.

The Association of American Medical Colleges, the American Hospital Association, and nearly 40 hospitals challenged the 2018 Final OPPS Rule, arguing that CMS did not have the authority to reduce reimbursement rates in this manner.  The plaintiffs contended that adjustments have to “be budget neutral, and CMS may not reduce Medicare Part B spending by selectively slashing the payment rates for specific types of services.”  The plaintiffs also argued that Congress’ exception for grandfathered PBDs in the Bipartisan Budget Act of 2015 reflected a determination that these PBDs should be reimbursed at a higher rate for all of the services they provide, asserting that “Congress’s choice to grandfather some off-campus PBDs to permit them to continue billing under the OPPS, and thus be subject to different payment rates from other off-campus PBDs, cannot have been anything but deliberate.”

CMS argued that clinic visits identified by HCPCS code G0463 could be obtained at other provider sites, such as physicians’ offices, at lower a cost to Medicare, and the level of reimbursement for those services when provided at grandfathered PBDs was unnecessarily and disproportionally high – stating that while the services were not deemed “medically unnecessary,” they were “financially unnecessary.”  CMS argued further that it could develop a method to “set payment rates for a particular service which is causing an ‘unnecessary’ increase in cost (and volume) without regard to budget neutrality, because there is no logical reason Congress would want CMS to penalize all outpatient departments—by reducing rates for all [outpatient department] services—for the spike in volume (as measured by total expenditures) if only one such service caused the spike.”

In its opinion, the Court accepted the possibility that CMS might be overpaying for services, but rejected CMS’ argument that CMS had the authority to cut reimbursement rates in the manner it had, in view of the statutory scheme enacted by Congress.  In particular, the Court stated:

CMS believes it is paying millions of taxpayer dollars for patient services in hospital outpatient departments that could be provided at less expense in physician offices.  CMS may be correct.  But CMS was not authorized to ignore the statutory process for setting payment rates in the Outpatient Prospective Payment System and to lower payments only for certain services performed by certain providers.

CMS argued that it has the authority to develop a method for controlling unnecessary volume increases, but the Court held that the particular method adopted – slashing reimbursement rates for a particular service provided by a particular category of provider otherwise entitled to a higher reimbursement rate – “is not a price-setting tool, and the government’s efforts to wield it in such a manner is manifestly inconsistent with the statutory scheme.”

Because the opinion vacates the 2018 Final OPPS Rule, its full implications, particularly for grandfathered PBDs that already furnished, billed, and have been paid for services identified by HCPCS code G0463, are not entirely clear.  The Court, while recognizing the potential for complications in vacating one part of the rule, noted that the “Final Rule is less than one year old and did not apply budget neutrality principles,” which should lessen the burden on CMS in reconsidering it.  While promulgating an appropriate revised rule might not be overly demanding, CMS may face greater challenges in addressing damages incurred during the year that the Final Rule was in effect.  As indicated in a joint statement by the American Hospital Association and the American Academy of Medical Colleges, “Now that the court has ruled, it is up to the agency to put forth remedies for impacted hospitals and the patients they serve.”

The plaintiffs requested that the court order CMS to issue make-whole payments associated with prior ‘underpayments’ improperly made due to the 2018 Final OPPS Rule, but the Court noted that when “a court reviewing agency action determines that an agency made an error of law, the court’s inquiry is at an end: the case must be remanded to the agency for further action consistent with the correct legal standards.”  The Court, however, has required a joint status report from the parties by October 1, 2019 to determine if additional briefing on remedies is required.  Hospitals operating grandfathered PBMs should watch the evolution of this outstanding issue closely, as it may have potentially substantial financial implications – for both future and potentially past reimbursement of clinic visits at those sites.