On Wednesday, a federal court in Texas stayed provisions of the Centers for Medicare & Medicaid Services’ (“CMS”) contract year 2025 Final Rule that amended the longstanding Medicare Advantage (“MA”) and Part D agent and broker compensation methodology and prohibited certain terms in contracts with third party marketing organizations (“TPMOs”). This decision follows two lawsuits filed against CMS and the Department of Health and Human Services (“HHS”) arguing that the Final Rule exceeds CMS’s statutory authority, is arbitrary and capricious, and was promulgated without complying with procedural requirements.[1] The Texas federal judge stayed the effective date of the “Fixed Fee” and “Contract-Terms Restriction” (i.e., 42 C.F.R. § 422.2274(a), (c), (d), (e) and § 423.2274(a), (c), (d), (e)) of the Final Rule during the pendency of the lawsuits, and chose not to remand to the agency, instead promising an expeditious ruling on the merits at the parties’ request.

The Final Rule

These lawsuits were initiated in response to three major changes made to MA and Part D regulations on agent, broker, and other third-party requirements by the Final Rule that were set to take effect on October 1, 2024 for CY2025 (summarized in our prior posts available here and here):

1. Contract-Terms Restriction: MA organizations and Part D sponsors must ensure that no contractual arrangement with an agent, broker, or other TPMO includes a provision that “has a direct or indirect effect of creating an incentive that would reasonably be expected to inhibit an agent or broker’s ability to objectively assess and recommend which plan best fits the health care needs of a beneficiary.” 
2. Compensation: The definition of “compensation” at Sections 422.2274(a) and 423.2274(a) was revised to include administrative payments – a type of payment previously excluded from the definition and previously not required to comply with the fair market value (“FMV”) cap on agent and broker compensation. Under the Final Rule, “compensation” includes all “payments made to an agent or broker that are tied to enrollment, related to an enrollment in an MA plan or product, or for services conducted as a part of the relationship associated with the enrollment into an MA plan or product.” 
3. Fixed Fee: In response to the major industry shift created by (2), CMS implemented a one-time increase of $100 to the FMV cap for new enrollments to account for administrative payments now being included under the compensation rate.

Legal Proceedings

Six weeks after CMS published the Final Rule, Americans For Beneficiary Choice (“ABC”), a trade association based in Dallas, Texas, and the Council for Medicare Choice (“CMC”), a nonprofit corporation in Austin, Texas composed of unaffiliated insurance agencies, brokerages, and field marketing organizations (“FMOs”), filed separate lawsuits in the Northern District of Texas, challenging the Final Rule and seeking a stay of the Final Rule (or in the alternative, a preliminary injunction) on an expedited timeline. The lawsuits, which were filed two days apart, were assigned to Judge Reed O’Connor for possible consolidation. 

In expedited briefing, ABC and CMC made the following arguments: the Final Rule (1) exceeds CMS’s statutory authority; (2) is arbitrary and capricious; and (3) was promulgated without observance of required procedures. 

Exceeds Statutory Authority. ABC and CMC argued that the revised definition of “compensation” is incompatible with the language, context, and purpose of the Social Security Act (specifically, § 1395w-21(j)(2)(D)). ABC’s Motion For a Section 705 Stay of the Final Rule, at 10. Plaintiffs claimed that, when this provision was enacted in 2008, “‘[c]ompensation [did] not include the payment of fees’ related to administrative costs and services.” ABC’s Reply Brief, at 7; CMC’s Reply Brief, at 5. The plaintiffs further alleged that CMS’s longstanding practice under its compensation regulations further demonstrated that administrative payments had not previously been considered “compensation,” and if CMS now chose to change course, it must “display awareness that it is changing position.” CMC’s Reply Brief, at 6.

Arbitrary and Capricious. Plaintiffs claimed that CMS selected a $100 increase to its fixed fee cap based on “several commenters” who stated this amount would be an appropriate starting point. CMC’s Reply Brief, at 10. But Plaintiffs found only one commenter “cursorily recommending a $100 increase” and “[r]ulemaking predicated on non-existent data violates the [Administrative Procedure Act].” Id. CMS also “expressly disclaimed an ability accurately to estimate the cost of providing necessary administrative services,” further supporting Plaintiffs’ position that CMS “picked the number from thin air,” in further violation of the APA. ABC’s Reply Brief, at 12.

With respect to the Contract-Terms Restriction, Plaintiffs asserted that banning all contracts with “the direct or indirect effect of creating an [improper] incentive,” is impermissibly vague because, while CMS does provide examples of such improper conduct in the Final Rule’s preamble, the preamble lacks the force and effect of law, and CMS never explained how this restriction could have been anticipated from the Proposed Rule. Therefore, the Final Rule runs afoul of the “logical outgrowth doctrine”. CMC’s Motion for Preliminary Injunction, at 20.

ABC also objected to the Final Rule’s requirement that patient data collected by a TPMO for marketing or enrollment purposes can only be shared with another TPMO when prior express written consent is given by the beneficiary. ABC argued that the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) permits and encourages necessary sharing of protected health information among certain entities, and the Final Rule directly interferes and impermissibly conflicts with this regulatory scheme, and therefore cannot stand. ABC’s Reply Brief, at 12-13.

Non-Compliance With Procedural Requirements. Plaintiffs claim that CMS further violated the APA by failing to support its reasoning behind the Final Rule with evidence and by failing to examine the relevant data to articulate a satisfactory explanation for its action. The agency’s rulemaking only offered “conclusory [and] unsupported suppositions,” failed to disclose the “critical factual material” CMS relied upon, did not respond to criticisms of its own evidence, and “refused to acknowledge contrary evidence provided by commenters.” CMC’s Reply Brief, at 7; ABC’s Reply Brief, at 9-10.

Stay of the Final Rule

The Texas Court found predominantly for the Plaintiffs, stating that the “Court is not convinced that the current compensation framework – which has been in place for over fifteen years – is so flawed that it requires these sweeping new requirements now or that beneficiaries would be unfairly prejudiced by granting a stay pending final judgment.” Order, at 15. As a result, the Court stayed the Fixed Fee and Contract-Terms Restriction during the pendency of the lawsuits. The Court agreed that CMS never substantiated its decision to raise the Fixed Fee by $100 to account for administrative payments. The agency “cannot flout APA standards by merely insisting that administrative costs are unquantifiable.” Order, at 8. Additionally, CMS failed to provide fair notice of what was prohibited by the Contract-Terms Restriction. While the agency listed examples of prohibited conduct in the Final Rule’s preamble, these examples “also may have expanded the reach of the restriction without some meaningful identification of exactly what conduct is prohibited,” which the Court found to be arbitrary and capricious. Order, at 10. 

The Court further held that the Final Rule failed to mention CMS’s prior understanding that administrative payments are not considered compensation or explain the change in its position, and that CMS did not address important problems relating to its central evidence regarding the Fixed Fee and the Contract-Terms Restriction, which members of the public raised during the comment period. Order, at 9-11. CMS cannot now cite to factual materials that were not disclosed by the agency when it promulgated the Final Rule, as such post hoc rationalizations cannot cure an APA violation. Order, at 11-12.

The Court ruled in favor of the Government on the patient data issue, finding that even if the facilitation of patient data sharing is largely governed by HIPAA, CMS may limit certain harmful data sharing practices under the Medicare statute. Order, at 12.

Because Plaintiffs established irreparable harm across the “MA ecosystem” (not just to the parties to these cases) through evidence of the drastic shift in business operations and unrecoverable monetary damages that would result following implementation of the Final Rule, the Court found universal relief proper, and applied the stay to all industry actors. Order, at 16. The Court also held that “Plaintiffs may ultimately succeed on their claims that the Final Rule exceeds CMS’s statutory authority,” so remand at this time would be “a potential waste of judicial resources.” Order, at 17. Instead, the Court found that the parties “deserve a prompt resolution,” so the Court will expedite a ruling on the merits.

Given the fast paced nature of these proceedings and as Contract Year 2025 quickly approaches, Sheppard Mullin will continue to closely monitor both the ABC and CMC dockets and will provide updates as these cases progress.

FOOTNOTES

[1] Americans for Beneficiary Choice et al. v. U.S. Dept. of Health and Human Servs. et al., No. 4:24-cv-439 (N.D. Tex.); Council for Medicare Choice et al. v. U.S. Dept. of Health and Human Servs. et al, No. 4:24-cv-446 (N.D. Tex.).