Appeals court upholds CMS’ site-neutral payment policy

An appeals court ruled that CMS has the authority to implement a controversial site-neutral payment policy. The ruling, delivered July 17, reversed a 2019 district court decision that vacated the policy.

Ongoing legal challenges

The appeals court’s decision is the latest chapter in the policy’s long and litigious history.

Under Section 603 of the Bipartisan Budget Act of 2015, CMS was required to implement a site-neutral payment policy that reduced reimbursement to most off-campus provider-based departments (PBD). Reimbursement reductions to most off-campus PBDs were rolled out in the 2018 Outpatient Prospective Payment System (OPPS) final rule. Certain off-campus PBDs were grandfathered in under Section 603 and exempt from the reimbursement reductions.

In the 2019 OPPS final rule, CMS finalized a policy to extend reimbursement reductions to grandfathered off-campus PBDs, citing unnecessary increases in volume. CMS applied a 50% total reduction in payment to grandfathered off-campus PBDs as if these sites were paid the Medicare Physician Fee Schedule (MPFS) rate for services described by HCPCS code G0463 (hospital outpatient clinic visit for assessment and management of a patient). This effectively paid providers 70% of the OPPS rate for 2019. For 2020 and subsequent years, CMS planned to reimburse the grandfathered PBDs at the MPFS rate, which would equal 40% of the OPPS rate. Notably, the reductions were not budget-neutral, meaning the savings were not redistributed within the OPPS.

The American Hospital Association (AHA) and other industry groups filed a lawsuit to halt the payment reductions to grandfathered PBDs. The AHA argued that CMS lacked the statutory authority to enforce the policy and that the agency could not make payment cuts in a non-budget-neutral manner. The U.S. District Court ruled in favor of the AHA in September 2019 and in October 2019 it rejected CMS’ motion to reconsider or issue a stay on the ruling. However, the district court ruling affected only the policy contained in the 2019 OPPS final rule.

Despite the ongoing litigation, CMS rolled out the policy’s second phase in the 2020 OPPS final rule.

Appeals court’s decision

The appeals court determined that the policy is within CMS’ statutory authority and that in this instance CMS is not required to make payment cuts in a budget-neutral manner. Under federal law, CMS has the authority to control unnecessary increases in volume, according to the appeals court ruling. Because the payment cuts are designed to control unnecessary increases in volume by removing the financial incentive, it would defeat the policy’s purpose if the funds were redistributed to other covered services at the affected grandfathered PBDs, according to the appeals court ruling.

In addition, the appellate judges said that Congress would not find the increases in volume at grandfathered PBDs during 2016–2017 acceptable; therefore, the payment cuts do not violate Congress’ intent when it grandfathered certain PBDs.

The AHA is reviewing the decision and will determine its next steps, it said in a statement.

The situation is further complicated by the fact that following the district court ruling CMS began automatically reprocessing 2019 claims for affected services at grandfathered PBDs.

Questions remain

It’s not clear what the appeals court ruling means for hospitals or whether the policy will face further legal challenges. Hospitals that received payment for affected reprocessed claims may consider determining how much additional revenue they received from the reprocessed claims in the event CMS chooses to recoup those payments.

“On the longer term, it remains to be seen how health systems that have been acquiring physician practices respond to this,” says Ronald Hirsch, MD, FACP, CHCQM, CHRI, vice president in the physician advisory services division of R1 RCM in Chicago, and a NAHRI Advisory Board member. “These health systems counted on the facility fee revenue to cover the high costs of operating primary care physician practices which tend to have significantly less revenue from procedures and ancillary testing.”  

Hospitals should also consider the implications of the appeals court’s ruling. Although the appellate judges upheld CMS’ authority to base payment on controlling unnecessary increases in volume, it’s not clear how CMS, Congress, or the courts define necessary or unnecessary increases in volume. It’s also unclear how concerns about unnecessary increases in volume at specific outpatient facilities fits with CMS’ larger goal of shifting care from inpatient to outpatient settings.

“This could further change a hospital’s strategic plan related to facility expansion, provider practice acquisition, and the outlook for value-based care models,” says Caroline Znaniec, MBA, managing director in CohnReznick LLP’s Healthcare Advisory Practice in Baltimore, Maryland, and a NAHRI Advisory Board member. “Hospitals have been growing in scale to expand outpatient services to provide a more contained patient care model to control costs, streamline access, and provide higher quality and coordinated care. The reduction in reimbursement will require hospitals to revisit their strategic plan and adjust budgets.”

The ruling comes at a difficult time for all healthcare organizations, as they continue to struggle with significant revenue shortfalls due to the ongoing novel coronavirus pandemic, America’s Essential Hospitals said in a statement.

For hospitals already struggling to regain their outpatient revenue base, this is particularly troubling because those volumes may return at a lower rate when margins may be negative, Znaniec adds.