Appeals court rules HHS has authority to implement site-neutral payments, dealing blow to hospitals

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A federal appeals court ruled HHS did have the authority to implement site-neutral payments, dealing a major blow to hospitals. (iStock/Michał Chodyra)

A federal appeals court ruled the federal government has the authority to cut Medicare payments to off-campus clinics to bring them in line with independent physician practices, reversing a lower court’s decision.

The ruling from the U.S. Court of Appeals for the District of Columbia delivered Friday strikes a major blow to the hospital industry who has been fighting the Department of Health and Human Services (HHS) over the controversial rule.

The goal of the rule is to reduce a disparity in Medicare payments where hospital-affiliated clinics get paid more than physician offices for the same services. Some critics have said the gap has helped fuel a race towards hospital-physician consolidation.

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The American Hospital Association led a lawsuit against an annual 2019 hospital payments rule, which phased in the cuts over two years. The hospitals argued that HHS’ site-neutral payment cuts violated the federal statute governing the annual payment rule.

A lower court agreed with the hospitals that HHS did not have the authority to make the payments.

RELATED: Hospitals file new lawsuit to halt 2020 site-neutral payment cuts

However, the appeals court found that HHS did have the authority because federal law gives HHS the power to control unnecessary increases in the volume of covered outpatient services, the ruling said.

HHS’ interpretation of federal law was also adequate as the federal law governing its payment rule allows the agency some latitude on changing its payment formula.

HHS explained that the site-neutral cut would eliminate an incentive to control the volume of unnecessary services “because the payment differential that is driving the site-of-service decision will be removed,” the ruling said.

But the AHA also argued that the agency’s change is not budget-neutral, a requirement under federal law. However, HHS said that the budget neutrality requirement doesn’t apply to the site-neutral cuts.

They argue that the overall reimbursement for such payments will remain the same, but volume would simply shift to physician practices.

RELATED: Judge strikes down AHA's bid to halt CMS' site-neutral payment cuts for 2020

The appeals panel agreed with HHS’ interpretation of federal law over budget neutrality.

AHA also argued that HHS’ decision to cut payments to all off-campus clinics goes against the Bipartisan Budget Act of 2015, which gave HHS the power to cut payments to clinics created after the law went into effect but not to pre-existing clinics.

But hospitals were once again shot down by the appellate judges. They say that Congress would not find the major increases in volume at such off-campus clinics that occurred in 2016 and 2017 acceptable, and therefore the cuts don't go against Congress' intent.

Hospital groups implored for Congress to step in and pass legislation to outlaw the cuts. America's Essential Hospitals, which represents primarily safety-net hospitals, said the decision couldn't have come at a worse time as facilities struggle with the COVID-19 pandemic. 

"The communities most likely to suffer from diminished access due to this ruling also are those at greatest risk during the COVID-19 pandemic—communities where health disparities leave racial and ethnic minorities vulnerable," said America's Essential Hospitals President and CEO Bruce Siegel in a statement.

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