On July 17, 2020, in a blow to health care providers, the U.S. Court of Appeals for the D.C. Circuit overturned a lower court’s more favorable ruling and held that the Department of Health and Human Services (“HHS”) “site-neutral payment” policy may stand.

In 2014, the Medicare Payment Advisory Commission (“MedPAC”) in a report to Congress noted an increasing trend of hospitals acquiring physician practices and, in turn, converting the acquired physician office locations into off-campus provider-based hospital departments (“PBDs”). Since Medicare reimbursement for services (in this case, patient evaluation and management (“E&M”) services) provided in a hospital setting has historically been greater than Medicare reimbursement for the same services provided in a physician office setting, the conversion of physician offices to PBDs was effectively increasing Medicare costs for the provision of functionally equivalent services to Medicare beneficiaries.

In an effort to address this issue, Congress included a provision, Section 603, in the Bipartisan Budget Act of 2015 (“Section 603”), stating that new off-campus PBDs would be paid at physician practice rates for all services. HHS took it a step further by adopting 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.

The American Hospital Association (“AHA”) and various hospitals (collectively, the “Hospitals”) brought suit in the D.C. District Court to contest the site-neutral payment policy, arguing 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.

In reaching its September 17, 2019 decision, the D.C. District Court sided with the Hospitals and vacated the site-neutral payment policy and, in turn, the E&M services reimbursement reduction for PBDs. 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” volume.  Moreover, the court concluded that HHS’ manner of making such rate cuts was consistent with its authority to develop methods for controlling unnecessary increases in the volume of Medicare-covered services.  Finally, the Court held that that the site-neutral payment policy “rests on a reasonable interpretation of HHS’s statutory authority to adopt volume-control methods.”

In response to the Court of Appeals decision, AHA General Counsel, Melinda Hatton, stated that the AHA is disappointed in the ruling and is considering its options going forward. As reported by Healthcare Dive, Ms. Hatton said the ruling “fails to account for the fundamental differences between hospital outpatient departments and other sites of care. Hospitals are open 24/7, held to higher regulatory standards and are often the only point of access for patients with the most severe chronic conditions, all of whom receive treatment regardless of ability to pay.”