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Appeals Court Upholds Payment Reductions for Off-Campus Hospital Departments

July 28, 2020

Hospitals already reeling from the costs of the COVID-19 pandemic may now be paid less by Medicare. The U.S. Court of Appeals for the D.C. Circuit in American Hospital Association v. Azar upheld reimbursement reductions for certain services provided in off-campus, provider-based departments of hospitals (PBDs). 

Off-campus PBDs are outpatient facilities located away from a hospital’s main campus but considered part of a hospital by Medicare. Some services provided at off-campus PBDs, such as clinic visits, are also routinely provided in free-standing physician clinics.

Off-campus PBDs typically receive better Medicare reimbursement under the Outpatient Prospective Payment System than free-standing physician clinics receive under the Medicare Physician Fee Schedule. The Centers for Medicare & Medicaid Services (CMS) asserts that off‑campus PBDs receive between 68% and 114% more in reimbursement for providing routine evaluation and management (E&M) services than a physician clinic receives for the same services. The Medicare Payment Advisory Commission says this payment gap incentivized hospitals to acquire free-standing physician practices and convert them to off-campus PBDs.

Congress tried to control off-campus PBD growth with Section 603 of the Bipartisan Budget Act of 2015. It established that off-campus PBDs created after the statute’s enactment would be reimbursed at a rate equivalent to the Medicare Physician Fee Schedule. However, Section 603 did not affect existing off-campus PBDs.

CMS determined that the higher payment for pre-Section 603 off‑campus PBDs continued to be a “significant factor in the shift in services from the physician’s office to the hospital outpatient department, . . . unnecessarily increasing hospital outpatient department volume.” 

In 2018, CMS proposed a rule to reduce reimbursement for E&M services at off-campus PBDs to the amount paid to free‑standing clinics. CMS would reduce the payments to hospitals without raising reimbursement for other outpatient services. To make this rule, CMS relied on its statutory authority to control unnecessary increases in the volume of covered outpatient services. CMS estimated the proposed reductions would cut Medicare expenditures by $610 million in 2019 alone. After notice and comment, CMS adopted the proposed rule. It planned to phase in the rule over a two-year period beginning in 2019.

The American Hospital Association challenged the policy, arguing:

  • CMS lacked the statutory authority to reduce the reimbursement for E&M services as a “method for controlling unnecessary increases in volume.”
  • The decision to cut reimbursement for existing off‑campus PBDs went against Congress’ intention to exempt these facilities under Section 603.

The district court agreed with the hospitals’ first argument. The court vacated the portion of the final rule reducing E&M reimbursement for off-campus PBDs. 

On appeal, the D.C. Circuit reversed the district court. It found that CMS’s reimbursement reduction qualified as a method to control unnecessary increases in the volume of outpatient services and that neither it nor the district court had jurisdiction to hear the hospitals’ challenge. Even if it had jurisdiction to hear the hospitals’ Section 603 argument, the appeals court concluded that “[n]othing in the text of Section 603 indicates that preexisting off‑campus PBDs are forever exempt from adjustments to their reimbursement” and that Section 603 did not bar CMS’s 2019 payment reductions. Therefore, CMS acted within its statutory authority in enacting the payment policy.

The impact of this decision will no doubt add further strain to the precarious financial situations of many hospitals as they attempt to deal with increased expenses and lost revenue due to the COVID-19 pandemic.

Please contact Blake Adams or any other member of Phelps’ Health Care team if you have questions or need compliance advice and guidance.