Court Overturns CMS' Site-Neutral Payment Policy; Doc Groups Upset

Ken Terry

September 19, 2019

Hospitals scored a big victory on Tuesday, when a federal district court judge in Washington, DC, ruled in favor of their complaint that the Centers for Medicare & Medicaid Services (CMS) had overstepped its bounds by implementing site-neutral payments in January. 

But physician groups are disappointed in the decision, claiming it is detrimental to small private practices and patients alike.

US District Judge Rosemary M. Collyer said in her decision, "The Court finds that CMS exceeded its statutory authority when it cut the payment rate for clinic services at off-campus provider-based clinics."

Under its site-neutral policy, CMS had begun paying the outpatient provider-based departments (PBDs) of hospitals the same for evaluation & management (E&M) visits that it paid to independent physician practices. Previously, the PBDs had been paid significantly more for these services than community practices had received.

The change in CMS policy was expected to level the playing field between independent offices and hospital-employed practices. In addition, it lowered the incentive of healthcare systems to acquire more physicians and their practices, according to some health policy experts, as reported by Medscape Medical News.

But the site-neutral payments were also expected to cost hospitals about $380 million this year and $760 million in 2020, according to the suit filed in federal court by the American Hospital Association (AHA), the Association of American Medical Colleges (AAMC), and several hospitals.

Off-campus PBDs are considered part of hospitals and are subject to the same regulations as hospitals, Collyer noted. Therefore, they're paid at the same rate as hospitals for outpatient services. Independent practices, she said, are paid at a lower rate because they're not subject to the same regulatory requirements and don't have the same costs as PBDs.

The Medicare Payment Advisory Commission (MedPAC), Collyer observed, had advised Congress that hospitals were buying physician offices and converting them to off-campus provider-based departments partly because PBDs were paid at a higher rate than independent physician offices. MedPAC repeatedly urged the government to establish site-neutral payments.

In the Bipartisan Budget Act of 2015, Congress allowed hospital PBDs to bill CMS at the higher outpatient department rate if they existed prior to Nov. 2, 2015. The law permitted CMS to change the payment system for newly established PBDs. But one expert told Medscape Medical News last year that this provision of the budget act hadn't had much impact, because many hospitals just added newly recruited physicians to the PBDs that had been grandfathered in.

Under the site-neutral payment rule that CMS finalized last December, Medicare E&M payments to all PBDs — whether or not they'd been excepted under the budget act — were to be reduced to the same level as payments to independent physicians. The change was to be phased in over 2 years.

More Cost, Less Choice?

The plaintiffs in the case argued that if CMS wants to reduce payment for a hospital outpatient department service, it must change the relative payment weights and adjustments through the annual review process. If CMS wants to address what it sees as unnecessary increases in volume of services, it must develop a method to do so and implement it by adjusting the payment conversion factor.

CMS argued that it has the statutory authority to develop a method for controlling unnecessary increases in volume independent of its authority to adjust the conversion factor. But Judge Collyer disagreed. In her opinion, she said that Congress had spelled out each step for determining the amount of payment for outpatient department services under the Outpatient Prospective Payment System. CMS doesn't have any other statutory authority to reduce payment rates, she said.

"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," Collyer wrote. "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."

The judge vacated CMS's site-neutral regulations but did not grant the plaintiffs' request that hospitals be paid the amounts they had lost this year because of the site-neutral rule. Instead, she remanded action on the shortfall in PBD payments this year to CMS. She asked both sides to submit a joint status report by October 1 so she could determine whether to make further decisions on remedies.

Asked to comment on the court ruling, a CMS spokesperson told Medscape Medical News, "We are aware of the decision and are determining next steps."

The AHA and the AAMC were jubilant. In a joint statement, they said, "We are pleased with the District Court's decision that the Department of Health and Human Services exceeded its statutory authority when it reduced payments for hospital outpatient services provided in grandfathered, off-campus, provider-based departments. The ruling, which will allow hospitals to maintain access to important services for patients and communities, affirmed that the cuts directly undercut the clear intent of Congress to protect hospital outpatient departments because of the many real and crucial differences between them and other sites of care."

The American Medical Association had no comment at press time. But John Cullen, MD, president of the American Academy of Family Physicians, said in a statement that the AAFP is disappointed with the court ruling.

"The decision preserves a system that both costs patients more in out-of-pocket expenses and limits their choice of physicians by paying hospital outpatient departments more for the same services provided by community-based physicians," he said.

These payment disparities across sites of service, he added, "force many community clinics to close their doors or sell their practices to hospitals. The small private practices, which provide high-quality care at a lower cost, are most at risk as a result of this decision."

The American College of Physicians echoed the disappointment.

Robert Doherty, senior vice president, governmental affairs and public policy, for the American College of Physicians, tweeted, "This is very bad news for all the patients harmed by hospitals adding 'facility fees' for visits to doctors in practices they acquired."

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