The Biden Administration’s Interim Final Rule implementing provisions of the No Surprises Act suffered its first major legal setback yesterday.  Judge Kernodle of the Eastern District of Texas issued a decision vacating portions of the Rule relating to the independent dispute resolution (“IDR”) process that the Act creates.

As we’ve previously reported, the No Surprises Act tasks IDR entities with resolving disputes between providers and insurers over the appropriate rate of reimbursement for out-of-network services.  When a provider and an insurer are at an impasse in negotiations over a reimbursement dispute, the Act, if applicable, requires them to submit their offers to the IDR entity, which is supposed to select the most reasonable of the two offers.  In making that determination, the Act requires the IDR entity to consider an express list of statutory factors, such as the median in-network rate for the services, information relating to the training and experience of the provider, and the market share of the parties.  On September 30, 2021, the government promulgated the interim Rule, which requires IDR entities to “select the offer closest to the” median in-network rate “unless the certified IDR entity determines that credible information submitted by either party [regarding the other statutory factors] clearly demonstrates that the” median in-network rate “is materially different from the appropriate out-of-network rate.”  In those instances, the IDR entity must select the offer that “best represents the value of the” services rendered.

Shortly after the Rule’s promulgation, providers brought multiple lawsuits arguing that the Rule unlawfully creates a presumption in favor of the median in-network rate and, in so doing, skews the IDR process in favor of insurers.  According to the providers, the Rule contravenes the No Surprises Act, which lists the median in-network rate as only one of several other factors that IDR entities are to consider in determining appropriate reimbursement rates.  A lawsuit brought by the Texas Medical Association and an individual physician was the first of these challenges to be filed, and it was also the first suit to obtain a decision on the merits when Judge Kernodle ruled in favor of the providers over the government yesterday.

The court held that the Rule violates the Administrative Procedure Act.  But before getting to the merits, Judge Kernodle had to address standing.  The court reasoned that plaintiffs had standing to bring suit based on two injuries “fairly traceable” to the Rule.   First, the plaintiffs had asserted that the Rule would deprive them of the arbitration process established by the Act.  And second, the plaintiffs had shown they would suffer financial harm because—as the government acknowledged—the Rule’s presumption in favor of the in-network median rate would “systematically reduce out-of-network reimbursement compared to an IDR process without such a presumption.”  The court also found that the plaintiffs had prudential standing and that the TMA, in particular, had associational standing.

Moving onto the merits, the court reasoned that the Act’s use of the term “shall” indicates that IDR entities are required to consider all of the statutory factors in determining which offer to select—not just the in-network median rate.  “Nothing in the Act, moreover, instructs arbitrators to weigh any one factor or circumstance more heavily than the others.”  That mattered to the court because “[a] statute’s lack of text is sometimes more telling than the text itself.”  “And here, the Act nowhere states that the” in-network median rate is the “primary” or “most important” factor.  Nor does the Act impose a “rebuttable presumption” that the offer closest to the in-network median rate should be chosen.  Because, in the court’s view, the Rule creates such a presumption or treats the in-network median rate as the most important factor, the Rule “unambiguously” conflicts with the No Surprises Act and violates the APA.

That sums up the court’s view of the Rule’s substantive deficiencies.  But the court also found, as an independent and sufficient basis for striking down the Rule, that the Rule is procedurally deficient.  More specifically, the court held that the government violated the APA in promulgating the rule without going through notice and comment.  The court found, contrary to the government’s argument, that no other statute expressly or implicitly exempts the government from going through the APA’s notice-and-comment process.  Nor could the government satisfy the APA’s good-cause exception to the notice-and-comment process.  The court was unpersuaded by the government’s argument that it would have been “impracticable” to comply with the notice-and-comment process in the twelve months between the Act’s passage and effective date.  And the government’s failure to abide by the normal rule-making process was not harmless, the court concluded.

Whether viewed in light of its procedural or substantive flaws, the court’s bottom-line conclusion was the same:  the Rule violates the APA.  And, as a result, the court vacated the provisions it considered problematic.

As for the other provider suits challenging the Rule, the substantive briefing either is or is nearly complete.  However the courts ultimately rule in those cases, Judge Kernodle’s opinion will likely inform their analyses going forward, and the Triage Health Law blog will be watching all the developments closely.