American Hospital Association v. Azar: Upholding CMS’s Final Rule on Price Transparency for Hospitals

On June 23, 2020 the U.S. District Court for the District of Columbia upheld a final rule requiring hospitals to publicly post “standard charges” on the internet in Am. Hospital Assoc. v. Azar, No. 1:19-cv-03619 (D.D.C. June 23, 2020). The Centers for Medicare and Medicaid Services’ (“CMS”) final rule on price transparency was challenged in December 2019 by the American Hospital Association, Association of American Medical Colleges, Federation of American Hospitals, National Association of Children’s Hospitals, Memorial Community Hospital and Health System, Providence Health System, and Bothwell Regional Health Center (parties will be referred to collectively as the “plaintiffs”). The D.C. Court ultimately rejected the plaintiff’s argument that CMS’s final rule exceeded the agency’s statutory authority, violated the First Amendment, and is arbitrary and capricious under the Administrative Procedure Act (“APA”).

CMS’s Final Rule

On November 15, 2019, CMS released the final rule on Hospital Price Transparency, which required hospitals to post “standard charges” on the internet. This rule was CMS’s effort to define “standard charges” in order to delineate a hospital’s publication requirements under the Patient Protection and Affordable Care Act (“ACA”). CMS’s definition of “standard charges” included five charges: (1) gross charges (i.e., chargemaster rates), (2) payer specific negotiated charges, (3) de-identified minimum negotiated charges, (4) de-identified maximum negotiated charges, and (5) discounted cash prices.

Under the rule, hospitals must post all “standard charges” as identified above for all offered “items and services” in a machine-readable format (like .XML, .JSON, and .CSV formats). Hospitals must also post “standard charges” for 300 total “shoppable services” in addition to any ancillary services commonly provided with such services. The final rule will go into effect on January 1, 2021. Read more about final rule here.

A History of Regulation

The D.C. Circuit Court noted the “arcane art” and “mystifying” nature of hospital billing has been targeted by regulation for years. Regulators, both at the state and federal level, have been pushing for greater transparency beginning with the Bush administration in 2006 and continuing under the Obama administration in 2010 with the ACA. The ACA amended the Public Health Service Act to enact Section 2718(e) mandating “[e]ach hospital operating within the United States shall for each year establish (and update) and make public . . . a list of the hospital standard charges for items and service provided by the hospital.”

This regulation went largely ignored until 2014, when CMS prompted hospitals to comply with section 2718(e) requirements by making public a chargemaster document listing prices for each individual item and procedure offered. In 2018, CMS announced plans to further update guidelines to require hospitals to post standard charges online in a machine-readable format.

On June 24, 2019, President Donald Trump issued Executive Order No. 13877 titled “Improving Price and Quality Transparency in American Healthcare to Put Patients First.” This order directed the U.S. Department of Health and Human Services (“HHS”) to propose regulations requiring hospitals to post standard charge information and negotiated rates. Following agency rulemaking procedures, HHS and CMS issued a notice of proposed rulemaking in August 2019 and proposed a new definition for “standard charges” accounting for two groups of hospital patients: those who are self-pay patients and those who have third-party payer coverage (i.e., health insurance). CMS’s definition of “standard charges” raised concerns among hospitals, insurer organizations, and advocacy groups regarding the required disclosures of specific negotiated charges or information that could account for trade secrets.

CMS’s overarching goal was to drive greater transparency in hospital pricing. CMS argued consumers will be able to better “shop” for health care services if health care pricing information is readily available. This would result in decreased spending on healthcare. Others remain skeptical price disclosures would lead to lower costs, primarily because disclosed charges often do not represent patients’ actual out-of-pocket costs. Regardless, CMS argued its “standard charges” definition would help patients navigate the health care industry and to make informed decisions.

The Plainitiff’s Challenge

Following CMS’s issuing of the final rule, the plaintiffs filed suit against the agency alleging: (1) CMS exceeded its statutory authority under the APA, (2) the final rule violates the First Amendment, and (3) the final rule is arbitrary and capricious under the APA.

1. Statutory Authority

The plaintiffs argued the final rule exceeded CMS’s statutory authority because the rule’s definition of “standard charges” overreached by including negotiated rates between private third-party payers. The D.C. Circuit Court used the well-established Chevron doctrine as the legal test to determine whether to grant deference to a federal agency’s statutory interpretation. Under administrative law precedent, the court’s role in these cases is to determine whether the agency’s interpretation is reasonable and consistent with statutory law, and “not to determine . . . the most reasonable interpretation of the statute.”

The court determined the statutory provisions of section 2718(e) mandated the publication of hospitals’ standard charges, but did not define “standard charges.” Under the Chevron doctrine, ambiguity in the statute permits an agency to fill a gap left by Congress. Because “standard charges” was determined to be an ambiguous term not defined by Congress, the court was left to determine whether the agency’s definition was a “permissible construction of the statute.”

The court ruled the agency’s definition of “standard charges” including third-party payer-negotiated charges was permissible. The court acknowledged it was a “close call whether the agency reasonably interpreted ‘standard charges’ to include rates negotiated with third-party payers. After all, the more charges published for any one time or service, the less any one of those charges can be considered ‘usual’ or ‘customary.’” Ultimately, amounts paid to hospitals for items and services differ across patient groups which have varying economic relationships with both hospitals and third-party payers. This makes it reasonable for the agency to define “standard charges” based on different patient grounds. Because the health care industry is an “exceptionally unique market” with “complex economic relationships among the insured patients, hospitals, and third-party intermediaries,” the court ruled CMS acted reasonably in interpreting “standard charges” to include negotiated rates.

2. First Amendment

The plaintiffs also alleged CMS’s final rule compels speech in violation of the First Amendment. The court analyzed this argument under a deferential Zauderer standard for the regulation of commercial speech, which states the agency’s rule must be reasonably related to the agency’s interests and cannot be “so unjustified or unduly burdensome that it chills protected speech.”

CMS’s alleged interests here were two-fold: (1) providing consumers with factual price information to facilitate more informed health care decisions and (2) lowering healthcare costs. The plaintiffs did not contend the agency’s interest in increasing transparency as substantial; instead, the plaintiffs claimed the final rule was unjustified because the publication of hundreds of prices would confuse patients and frustrate the decision-making process. The court did not find the plaintiff’s argument persuasive and instead looked to case studies (from New Hampshire and Maine) provided by CMS showing patients will use price transparency tools to inform their health care choices when pricing information is accessible. Further, the court agreed that publishing hospital charges allows CMS to further its interest to decrease the cost of health care. While patients may need to take additional steps to understand and compute health care costs based off of the published information, this does not make the rule unjustified.

The plaintiffs also argued the rule was unduly burdensome to hospitals due to the logistical and financial burdens of compliance. Primarily, the plaintiffs worried publishing payer-specific negotiated rates would “chill negotiations between hospitals and insurers.” There was also concern the rule could result in anti-competitive consequences which could cause adverse cost increases. The court reasoned that final rule only requires publication of final agreed-upon prices, excluding information about negotiations themselves. The court maintained that plaintiff hospital associations were “essentially attacking transparency measures generally.” Considering the weight of evidence provided by the defendant agency through price studies and general economic principles, the court ruled CMS’s final rule satisfied the Zauderer standard and was constitutional.

3. Arbitrary and Capricious

Section 706 of the APA instructs courts to invalidate agency action found to be arbitrary and capricious when considering the factual basis for agency rulemaking. Under the arbitrary and capricious standard, the court must confirm the agency “fulfilled its duty to examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” The plaintiff’s arguments here largely echoed the First Amendment arguments in asserting a disconnect between the rule and the agency’s goal.

The court ruled in favor of CMS by pointing to evidence showing that CMS considered the plaintiff’s arguments. For example, while CMS acknowledged the potential for patients to be confused or deterred from seeking health care due to disclosed negotiated rates, the agency ultimately concluded the vast majority stood to benefit from increased availability of pricing data. Overall, the court found CMS did not act arbitrarily and capriciously in concluding the final rule could have substantial benefits. The rulemaking procedure showed CMS considered many of the plaintiffs raised concerns regarding burdens and technical hurdles for hospitals, but did not find those concerns so persuasive as to outweigh the benefits of the final rule.

Penalties & Compliance

In the suit, the plaintiffs separately argued CMS does not have statutory authority to impose penalties for a hospital’s failure to comply with publication requirements. The court noted the plain language of section 2718(b)(3) provides for an enforcement provision and upheld the final rule’s enforcement scheme. Under the final rule, CMS may request a Corrective Action Plan (“CAP”) if a hospital has failed to comply with publication requirements. Failure to comply with a CAP or to submit a CAP can further result in civil monetary penalties.

The final rule is still scheduled to go into effect on January 1, 2021. CMS anticipates compliance with the final rule would take 150 hours and about $11,000 per hospital. While there is always potential for further challenges and appeals, hospitals should being to formulate strategies to comply with the price transparency rule by this date as no further delays seem forthcoming from the agency. The plaintiffs appealed the District Court’s ruling to the U.S. Court of Appeals for the D.C. Circuit and we will continue to post updates on the appeal in the Health Law Advisory.

Sapphire Andersen, Summer Associate