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Legal Insights and Perspectives for the Healthcare Industry

In what has become the new “normal” in Washington, DC, these days, hospitals and their associations filed a lawsuit today against the US Secretary of Health and Human Services (Secretary) challenging the recent Final Rule issued by the Centers for Medicare and Medicaid Services (CMS) on November 27, 2019, addressing hospital pricing disclosures.

In its complaint, the American Hospital Association, joined by the Association of American Medical Colleges, the Federation of American Hospitals, the National Association of Children’s Hospitals, Inc. (d/b/a Children’s Hospital Association), and three representative hospitals in Missouri, California, and Nebraska (collectively, Plaintiffs), argue that the Secretary issued a Final Rule that (1) is unlawful and in excess of his statutory authority; (2) is a violation of the First Amendment by unlawfully compelling speech; and (3) is arbitrary and capricious, an abuse of discretion, and contrary to law, citing the Administrative Procedures Act (APA).

Plaintiffs plan to file a motion for summary judgment, requesting a decision on the merits as soon as practical, with relief in the form of a declaratory judgment, including preliminary and permanent injunctive relief.

The Final Rule, whose effective date is January 1, 2021, would require each hospital to publicize on its website a huge quantity of confidential pricing information reflecting individually negotiated contract terms with all third-party payers, including all private commercial health insurers. As the complaint describes, this requirement, which they allege is patently illegal, does not lead to the transparency of pricing information that consumers need and imposes an enormous burden on hospitals. Further, they argue that the Final Rule would significantly eliminate price competition between and among healthcare systems, posing a “substantial risk of reducing competition in healthcare markets,” rather than clarify pricing for the public.

With regard to the types of pricing data the Final Rule would require that hospitals compile and publish, the following five types: (1) gross charges, (2) payer-specific negotiated charges, (3) discounted cash prices, (4) de-identified minimum negotiated charges, and (5) de-identified maximum negotiated charges.

The core allegations in the lawsuit attack the statutory authority on which CMS relies, which provides that “each hospital…make public (in accordance with guidelines developed by the Secretary), a list of the hospital’s standard charges for items and services provided by the hospital…” Section 2718(e) of the Public Health Service Act. 42 USC § 300gg-18(e).

Plaintiffs first argue that the term “standard charges” means a hospital’s usual and customary chargemaster charges and that Congress, thus, granted CMS limited or narrow authority to mandate disclosure of only that specific type of charge, rather than the large array of non-standard charges represented by the five categories noted in the Final Rule. This interpretation, argue Plaintiffs, exceeds the Secretary’s authority under the statute.

In their second count, Plaintiffs allege violation of the First Amendment, in that the Final Rule unconstitutionally compels speech that does not advance a substantial government interest. Plaintiffs allege that publication of the five types of charges does not clarify out-of-pocket costs for consumers, but rather will further confuse consumers. They argue that CMS itself recognized this fact in the preamble to the Final Rule and in the notice and comment that was part of the rulemaking process.

With regard to the disclosure of highly confidential and commercially sensitive pricing information, the complaint cites case law that supports the analysis that privately negotiated pricing among hospitals and plans are “trade secrets,” subject to disclosure protections.

Finally, the enormous burden associated with gearing up to comply with the Final Rule is challenged as being “way out of line with any projected benefits associated with the rule.” The complaint brings to light the practical issues associated with the creation of thousands of columns of data that would be required to be amassed, additional individuals needed to focus on compliance, redistribution of human resources directed at needs other than patient care, and the sheer potential that the data could crash common websites.

As is typical with rule challenge cases, the complaint alleges that the Final Rule is arbitrary and capricious, failing to meet the APAs threshold demand for reasoned decisionmaking.

The lawsuit proves, that, once again, the APA is the statutory tool relied upon by the industry to combat alleged executive branch overreach, heralding a new age in health law and policy where the application of rulemaking appears to be finally determined in the judicial branch. The practical outcome of this new dynamic is that the hospital and insurance industries, in this case, must watch closely and wait. Sadly, the industry, which relies on predictability in dealing with its highly regulated environment, will need to manage this significant potential change while continuing to attempt to address the real issue of consumer pricing, out-of-pocket costs and delivery of quality patient care.

If you have questions or would like more information on the issues raised in this post, please contact Susan Feigin Harris, Greg Etzel, and Ryan Kantor.