Case 1:18-cv-02841 Document 1 Filed 12/04/18 Page 1 of 22

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

THE AMERICAN HOSPITAL ASSOCIATION,
800 Tenth Street, N.W., Suite 400
Washington, D.C. 20001,
ASSOCIATION OF AMERICAN MEDICAL
COLLEGES,
655 K Street, N.W., Suite 100
Washington, D.C. 20001,
MERCY HEALTH MUSKEGON,
1500 E. Sherman Boulevard
Muskegon, MI 49444,
CLALLAM COUNTY PUBLIC HOSPITAL
NO. 2, d/b/a OLYMPIC MEDICAL CENTER,
939 Caroline Street
Port Angeles, WA 98362,
YORK HOSPITAL,
3 Loving Kindness Way
York, ME 03909,
Plaintiffs,
v.
ALEX M. AZAR II,
in his official capacity as SECRETARY OF
HEALTH AND HUMAN SERVICES,
200 Independence Avenue, S.W.
Washington, D.C. 20201,
Defendant.

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COMPLAINT

Civil Action No. ______________

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Plaintiffs the American Hospital Association, Association of American Medical Colleges,
Mercy Health Muskegon, Clallam County Public Hospital District No. 2, d/b/a Olympic Medical
Center, and York Hospital bring this Complaint against Defendant Alex M. Azar II, in his
official capacity as Secretary of Health and Human Services (HHS), and allege as follows:
PRELIMINARY STATEMENT
1.

This is an action to challenge certain aspects of a final rule issued by the Centers

for Medicare & Medicaid Services (CMS), an agency within HHS, published in the Federal
Register on November 21. See Centers for Medicare & Medicaid Services, Medicare Program:
Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment
Systems and Quality Reporting Programs, Dep’t of Health and Human Servs., 83 Fed. Reg.
58,818 (Nov. 21, 2018) (Final Rule). The Final Rule, in relevant part, makes serious reductions
to Medicare payment rates for certain clinic visit services provided at specified off-campus
hospital provider-based departments (off-campus PBDs), commencing on January 1, 2019. Offcampus PBDs are practice locations of a hospital that are not located in immediate proximity to
the main building of their affiliated hospital, but are nonetheless so closely integrated with and
controlled by the main hospital as to be considered a part of the hospital.
2.

In the Medicare statute, Congress has laid out a clear distinction between

“excepted” off-campus PBDs, which meet specified grandfathering requirements, and “nonexcepted” off-campus PBDs, which do not. The statute makes clear that services provided at
excepted and non-excepted off-campus PBDs should be paid pursuant to different payment
systems. 42 U.S.C. § 1395l(t)(21)(C). And yet the Final Rule effectively abolishes any
distinction between excepted and non-excepted entities by subjecting them both to the same
payment system and rate. That violates the clear intent of Congress and therefore is ultra vires.
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3.

Congress also has established a clear structure for CMS to make annual changes

to payments for covered hospital outpatient services under Medicare. 42 U.S.C.
§ 1395l(t)(9)(A). Changes to payments that target only specific items or services must be budget
neutral. 42 U.S.C. § 1395l(t)(9)(B). And yet in an unprecedented assertion of the agency’s
authority, the Final Rule purports to do precisely what Congress has expressly prohibited: CMS
seeks to reduce total payments for covered hospital outpatient services for calendar year (CY)
2019 by hundreds of millions of dollars by targeting a select group of services for non-budgetneutral payment adjustments. CMS cannot exercise its limited authority in a manner so
flagrantly inconsistent with the Medicare statute. That, too, is textbook ultra vires action.
4.

This Court should reject CMS’s attempts to replace Congress’s unequivocal

directives with the agency’s own policy preferences. CMS may not contravene clear
congressional mandates merely because the agency wishes to make cuts to Medicare spending.
PARTIES
5.

Plaintiff the American Hospital Association (AHA) is a national, not-for-profit

organization headquartered in Washington, D.C. The AHA represents and serves nearly 5,000
hospitals, health care systems, and networks, plus 43,000 individual members. Its mission is to
advance the health of individuals and communities by leading, representing, and serving the
hospitals, systems, and other related organizations that are accountable to the community and
committed to health improvement. The AHA provides extensive education for health care
leaders and is a source of valuable information and data on health care issues and trends. It also
ensures that members’ perspectives and needs are heard and addressed in national health-policy
development, legislative and regulatory debates, and judicial matters. The AHA has a principal
place of business located at 800 Tenth Street, N.W., Suite 400, Washington, D.C. 20001.
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6.

Plaintiff Association of American Medical Colleges (AAMC) is a national, not-

for-profit association based in Washington, D.C. The AAMC represents and serves all 152
accredited U.S. medical schools, nearly 400 major teaching hospitals and health systems, and
more than 80 academic societies. Through these institutions and organizations, the AAMC
represents 128,000 faculty members, 83,000 medical students, and 110,000 resident physicians.
The AAMC works to improve the nation’s health by strengthening the quality of medical
education and training, enhancing the search for biomedical knowledge, advancing health
services research, and integrating education and research into the provision of effective health
care. In addition, it is one of the AAMC’s core missions to advocate on behalf of its members
and patients in connection with national health-policy matters. The AAMC has a principal place
of business located at 655 K Street, N.W., Suite 100, Washington, D.C. 20001.
7.

Plaintiff Mercy Health Muskegon is a Catholic nonprofit hospital that serves the

greater Muskegon, Michigan area and surrounding communities. Mercy Health Muskegon
operates 27 off-campus PBDs, 25 of which are excepted PBDs. These include a sleep center, a
comprehensive breast high-risk clinic, specialty clinics (including neurosurgery, cardiology,
geriatrics, and gastroenterology), and a number of primary care facilities capable of providing xray, laboratory, and pharmacy services in the same building. Mercy Health Muskegon furnishes
outpatient services at these excepted off-campus PBDs and will suffer immediate and concrete
harm from the outpatient service payment reductions set forth in the Final Rule. Mercy Health
Muskegon has its principal place of business at 1500 E. Sherman Boulevard, Muskegon,
Michigan 49444.
8.

Plaintiff Clallam County Public Hospital District No. 2, d/b/a Olympic Medical

Center (Olympic Medical) is a comprehensive health care provider serving the North Olympic
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Peninsula with a network of facilities in Clallam County, Washington. Olympic Medical is a
large rural hospital and health care center designated as a Sole Community Hospital and Rural
Referral Center, and which operates as a safety-net hospital, employing over 100 physicians and
advanced practice clinicians. Of Olympic Medical’s patients, 83% rely on Government-paid
insurance and 58.3% rely on Medicare. Olympic Medical furnishes outpatient services at eight
excepted off-campus PBDs, including a specialty physician clinic offering cardiology,
gastroenterology, pulmonary medicine, neurology, urology and women’s health, a sleep center, a
primary care clinic, a coagulation clinic, a walk-in clinic, a cancer center providing medical
oncology services and radiation oncology services in Sequim, which is 17 miles from the main
hospital campus, and a primary care clinic in Port Angeles, which is approximately one mile
from the hospital. Olympic Medical will suffer immediate and concrete harm from the
outpatient service payment reductions set forth in the Final Rule. Olympic Medical has its
principal place of business at 939 Caroline Street, Port Angeles, Washington 98362.
9.

Plaintiff York Hospital (York) is a small community hospital located in York,

Maine and serving the surrounding area. York is licensed for 79 beds, and currently has only 50
beds in operation. Founded in 1906, York is dedicated to giving back to its community: among
other things, it provides support programs and services to schools, civic organizations, and nonprofit groups, runs an opiate treatment facility, and offers transportation and food to patients
unable to afford them. Of York’s patients, almost 54% rely on Medicare. York furnishes
outpatient services at 14 excepted off-campus PBDs, including an oncology clinic and specialty
clinics offering psychiatry, cardiovascular care, diabetes care, endocrinology services, and
urology care. York will suffer immediate and concrete harm from the outpatient service

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payment reductions set forth in the Final Rule. York has its principal place of business at 3
Loving Kindness Way, York, Maine 03909.
10.

Defendant Alex M. Azar II is the Secretary of HHS and is responsible for the

conduct and policies of HHS, including those relating to the Hospital Outpatient Prospective
Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs.
The Secretary maintains an office at 200 Independence Avenue, S.W., Washington, D.C. 20201,
and is sued in his official capacity only.
JURISDICTION AND VENUE
11.

Jurisdiction in this Court is grounded upon and proper under 28 U.S.C. § 1331, in

that this civil action arises under the laws of the United States; 28 U.S.C. § 1346, in that this case
involves claims against the federal government; 28 U.S.C. § 1361, in that this is an action to
compel officers of the United States to perform their duty; and 28 U.S.C. §§ 2201–2202, in that
there exists an actual justiciable controversy as to which Plaintiffs require a declaration of their
rights by this Court and injunctive relief to prohibit the Defendants from violating laws and
regulations.
12.

Venue is proper in this Court under 28 U.S.C. §§ 1391(b) and (e) because this is a

civil action in which the Defendant is an officer of the United States acting in his official
capacity and maintains his office and conducts business in this judicial district. Moreover, a
substantial part of the events giving rise to the claims occurred within this judicial district.
13.

Plaintiffs have standing to bring this lawsuit because the Plaintiff-Hospitals and

the AHA’s and AAMC’s members are suffering and face imminent actual injury as a result of
CMS’s ultra vires decision to reduce the payment rates for targeted services furnished at their
members’ off-campus PBDs. This lawsuit seeks to vindicate interests that are germane to the
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AHA’s and AAMC’s purposes because a critical mission of both entities is to protect their
members’ interests in connection with policy changes initiated by CMS. The AHA’s and
AAMC’s members use the Medicare payments at issue in this lawsuit to provide critical health
care services and will suffer a concrete and imminent injury absent judicial relief.
14.

This lawsuit is ripe for judicial review. Because Plaintiffs are alleging only that

CMS is acting well beyond the agency’s statutorily granted powers, this Court has the authority
to review Plaintiffs’ claims, and to do so now. See Amgen, Inc. v. Smith, 357 F.3d 103, 114
(D.C. Cir. 2004).
FACTUAL BACKGROUND
Statutory Framework
15.

Title XVIII of the Social Security Act establishes a program of health insurance

for the aged and disabled, commonly known as Medicare. 42 U.S.C. §§ 1395 et seq. The
Plaintiff-Hospitals and many of Plaintiffs AHA’s and AAMC’s members qualify as providers of
hospital services under Title XVIII, commonly known as the Medicare Act.
16.

Part B of the Medicare Act covers, among other things, hospital outpatient

department services (OPD services), which are services that are provided to patients on an
outpatient basis. OPD services include emergency or observation services, services furnished in
an outpatient clinic (e.g., physician visits, same-day surgery), laboratory tests billed by the
hospital, medical supplies (e.g., splints and casts), preventive and screening services, and certain
drugs and biologicals.
17.

Payments for OPD services are generally made under the Medicare Outpatient

Prospective Payment System (OPPS) created pursuant to 42 U.S.C. § 1395l(t). The Medicare
statute authorized CMS to establish the OPPS pursuant to requirements spelled out in 42 U.S.C.
§ 1395l(t)(2)(A) through (H).
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18.

The Medicare statute authorizes CMS, on an annual basis, to review and revise

the “groups, the relative payment weights, and the wage and other adjustments . . . to take into
account changes in medical practice, changes in technology, the addition of new services, new
cost data, and other relevant information and factors.” 42 U.S.C. § 1395l(t)(9)(A).
19.

But the Medicare statute sets clear limits on these annual adjustments, including

the critical requirement that any such adjustments be budget neutral. Specifically, Congress
mandated: “the adjustments for a year may not cause the estimated amount of expenditures
under this part for the year to increase or decrease from the estimated amount of expenditures
under this part that would have been made if the adjustments had not been made.” 42 U.S.C.
§ 1395l(t)(9)(A). This is a mouthful, but its meaning is plain: Any adjustments under
Subsection (t)(9)(A) must be budget neutral, and CMS may not reduce Medicare Part B spending
by selectively slashing the payment rates for specific types of services.
20.

When Congress confers authority on CMS to make non-budget neutral changes, it

has said so expressly. See, e.g., 42 U.S.C. § 1395l(t)(7)(I). Indeed, if CMS wishes to make nonbudget-neutral cuts to payments under the OPPS, the statute provides a separate mechanism for
the agency to do so. First, the statute authorizes CMS to “develop a method for controlling
unnecessary increases in the volume of covered OPD services.” 42 U.S.C. § 1395l(t)(2)(F).
Once the agency identifies that method, another statutory provision authorizes the agency to
make non-budget-neutral adjustments to address those unnecessary increases in volume—but
only through across-the-board adjustments to all items or services paid under the OPPS.
Specifically, Subsection (t)(9)(C) provides that if CMS determines under Subsection (t)(2)(F)
that the “volume of services . . . [has] increased beyond amounts established through those
methodologies,” CMS “may appropriately adjust the update to the conversion factor otherwise
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applicable in a subsequent year.” Id. § 1395l(t)(9)(C). The conversion factor is a uniform
amount that is used in the formula to calculate payment rates for all services or items paid under
the OPPS. In other words, a conversion factor adjustment can shrink (or grow) the entire OPPS
by a percentage-factor, but it cannot reduce the relative rate of payment for a particular set of
services or items.
21.

The implications for CMS are clear: If CMS wants to make cuts to payment rates

in order to control unnecessary increases in the volume of hospital services, it must do so acrossthe-board, to all services and items under the OPPS, by using the conversion factor. If CMS
instead wants to make adjustments to payment rates for specific services, it must do so in a
budget-neutral manner. And for good reason. The statute’s structure and directives prevent the
agency from engaging in cost-control measures by making draconian payment reductions
targeting only specific services.
Off-Campus Provider-Based Departments
22.

At issue in this lawsuit are Medicare payments for certain clinic visit services

provided at off-campus PBDs. As previously noted, off-campus PBDs are practice locations of a
hospital that are not in immediate proximity to the main hospital building, but are nonetheless so
closely integrated with the hospital as to be considered a part of the hospital. See 42 C.F.R.
§ 413.65(e). An off-campus PBD could include a stand-alone oncology clinic, an urgent care
clinic, or an office providing necessary specialty services (e.g., cardiology, pulmonology,
neurology, and urology). Off-campus PBDs vary significantly in function and purpose. In some
cases, a hospital may lack the space on its main campus to expand, and a practice location is
located off-campus as a matter of necessity. In other cases, there may be operational reasons for
having a practice location off-campus. For example, a hospital might want to place an off9

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campus PBD in a location that is convenient to the patient population it serves. Notably, in
Clallam County, where Olympic Medical Center is located, the community of Sequim (located
17 miles from the hospital) has no hospital of its own, and there are no emergency care services
of any kind. The vital clinic services Olympic Medical Center offers the 28,000 residents
provide essential primary, specialty and walk-in clinic services to a patient population in
desperate need of those services.
23.

Off-campus PBDs must be closely integrated with their main hospitals and are

subject to regulatory requirements as a part of the hospital—unlike independent clinics or
physician offices. See 42 C.F.R. § 413.65(a). As a result, off-campus PBDs often have higher
costs relative to a physician office. There are many reasons for this: The patient population that
visits off-campus PBDs tends to be sicker and poorer than the patient population that visits
independent physician offices. See Berna Demiralp, Jing Xu, et al., Comparison of Care in
Hospital Outpatient Departments and Independent Physician Offices, KNG Health Consulting
LLC (Sept. 25, 2018). In addition, off-campus PBDs are often intended to serve more functions
than standalone physician offices. For example, an off-campus PBD may be an emergency
department operating on nights and weekends with a team of specialist doctors and nurses on
staff. In addition, CMS requires off-campus PBDs to satisfy the Medicare Conditions of
Participation applicable to their main hospital, which are more demanding than the requirements
imposed on physician offices or clinics. See Hospital Outpatient Department (HOPD) Costs
Higher than Physician Offices Due to Additional Capabilities, Regulations, American Hospital
Ass’n (2014), available at https://www.aha.org/system/files/2018-09/info-hopd.pdf.

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Section 603 of the Bipartisan Budget Act of 2015
24.

Until November 2015, clinic visit services at all off-campus PBDs were paid

under the OPPS, at the relatively higher payment rates paid to hospitals (as compared to their
physician office counterparts). 83 Fed. Reg. at 59,004–005.
25.

The total volume of outpatient services furnished at off-campus PBDs nationwide

has been increasing for years. Id. at 59,005–007. That increase has been necessary and
appropriate. The Medicare-eligible population as a whole has increased during that same period.
In addition, as medical technology has evolved, more and more services are able to be furnished
on an outpatient (rather than an inpatient) basis.
26.

Among the many factors contributing to the increase in volume of outpatient

services furnished at off-campus PBDs is the acquisition of stand-alone physician offices by
some hospitals and integration of the physician offices into hospital operations. CMS took the
view that Medicare costs could be lowered if these same outpatient services were furnished in a
less-expensive physician office setting. 83 Fed. Reg. at 59,008–009. The off-campus PBDs
could—the agency argued—be effectively de-integrated from their main hospital and operated
independently, and therefore paid under the Medicare physician fee schedule rather than the
OPPS. In response, commenters pointed out that off-campus PBDs have higher costs than
physician offices (in some cases, exceeding even the current payment rate for such services) and
that off-campus PBDs are often able to provide services that are not available in physician
offices. Commenters also noted that paying off-campus PBDs at the lower rates paid to
physicians would upset the reasonable expectations of hospitals that acquired or built off-campus
PBDs with the understanding that they would be paid under the OPPS.

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27.

Congress sought to balance these competing concerns when it enacted Section

603 of the Bipartisan Budget Act of 2015. Pub. L. No 114-74 § 603, 129 Stat. 584, 598.
Congress’s solution was to create two classes of off-campus PBDs. Qualifying off-campus
PBDs that were billing as a hospital department under the OPPS when the statute took effect on
November 2, 2015 (commonly known as “excepted PBDs”) would continue to be paid under the
OPPS. See 42 U.S.C. §§ 1395l(t)(1)(B)(V), (t)(21) & (t)(21)(B)(ii). But going forward,
Congress required that newly created or acquired off-campus PBDs (commonly known as “nonexcepted PBDs”) be paid under the “applicable payment system” in order to eliminate the
possibility that a payment differential could be a factor in a hospital’s decision to open a new offcampus PBD. Id. § 1395l(t)(21)(C)); see also id. § 1395l(t)(21)(B)(iii)–(vi) (codifying additional
exceptions, such as for off-campus PBDs that were mid-build when Section 603 was enacted,
which allowed those mid-build PBDs to continue to be paid under the OPPS).
28.

CMS has interpreted the statutory phrase “applicable payment system” to mean

that non-excepted PBDs should be paid under the Medicare Physician Fee Schedule (PFS). 81
Fed. Reg. 79,562, 179,659 (Nov. 14, 2016). The Physician Fee Schedule has lower payment
rates relative to OPPS because it is intended to reflect the costs for furnishing items or services in
a physician office (as opposed to in a hospital). Thus, the payment rates for excepted PBDs
(under the OPPS) are generally higher than for non-excepted PBDs (under the Physician Fee
Schedule).
29.

In practice, CMS does not actually abide by the statutory requirement to pay non-

excepted PBDs under a separate payment system from OPPS. Rather, CMS continues to pay
such non-excepted PBDs under the OPPS but applies a “PFS Relativity Adjustor,” which CMS

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says is intended to approximate what the rate of payment “would have been” if the item or
service were actually paid under the Physician Fee Schedule. See generally id. at 79,726.
30.

Common sense and the statutory structure make clear that in requiring that

excepted and non-excepted PBDs be subject to different payment systems, Congress intended
that they would receive different rates of payment. Congress’s choice to grandfather some offcampus PBDs to permit them to continue billing under the OPPS, and thus be subject to different
payment rates from other off-campus PBDs, cannot have been anything but deliberate.
The Final Rule
31.

On July 31, 2018, CMS published a Proposed Rule proposing changes to the

OPPS for CY 2019. As relevant here, the Proposed Rule proposed changes to the payment rate
for certain clinic visit services provided at excepted PBDs in order to render it equal to the
payment rate for services provided at non-excepted PBDs (the Clinic Visit Policy). Specifically,
the Proposed Rule stated that the payment rate for clinic services provided by excepted PBDs in
CY 2019 “would now be equivalent to the payment rate for” services provided by non-excepted
PBDs. 83 Fed. Reg. 37,046, 37,142 (July 31, 2018). CMS proposed to make this adjustment in
a non-budget-neutral fashion. Id. In other words, the payment rate reductions proposed by CMS
would not be offset by increases in other payment rates under the OPPS to ensure that the overall
payments to hospitals would remain the same. CMS estimated that this change would result in
reductions in payments to hospitals of $760 million in CY 2019 alone. Id. at 37,143.
32.

Almost 3,000 commenters submitted comments in response to the Proposed Rule,

including the AHA, the AAMC, and the Plaintiff-Hospitals or their associated health systems,
either directly or through an association. Among other things, Plaintiffs pointed out that CMS
was statutorily prohibited from making adjustments to payment rates in a non-budget-neutral
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manner under 42 U.S.C. § 1395l(t)(9)(B). Plaintiffs also explained that the Proposed Rule ran
afoul of Congress’s statutory mandate that CMS treat excepted and non-excepted PBDs
differently under 42 U.S.C. § 1395l(t)(21).
33.

On November 2, CMS posted the Final Rule on its website. Like the Proposed

Rule, the Final Rule adjusts the payment rate for services provided by excepted PBDs so that it is
“equal to” the payment rate for services provided by non-excepted PBDs. 83 Fed. Reg. at
58,822, 59,013. CMS explained its decision succinctly: “To the extent that similar services can
be safely provided in more than one setting, we do not believe it is prudent for the Medicare
program to pay more for these services in one setting than another.” Id. at 59,008. CMS also
confirmed its decision to implement the adjustment in a non-budget-neutral fashion. Id. at
59,014. However, CMS announced that it would be phasing in the payment reduction over a
two-year period, such that the estimated reductions in payments to hospitals in CY 2019 would
be approximately $380 million. Id.
34.

The Final Rule is set to become effective on January 1, 2019.

The Final Rule Exceeds CMS’s Authority Under the Medicare Act
35.

In promulgating the Final Rule, CMS has acted in clear violation of its statutory

authority. This is so for at least two separate reasons: (i) the Clinic Visit Policy violates the
Medicare statute’s mandate of budget neutrality; and (ii) the Clinic Visit Policy violates the
statutory mandate that excepted and non-excepted PBDs must be treated differently.
Budget Neutrality:
36.

First and foremost, the Final Rule is ultra vires because the Clinic Visit Policy is

not budget neutral, in plain violation of the statute. By CMS’s own admission, the Clinic Visit
Policy set forth in the Final Rule would reduce total hospital payments by $380 million in CY
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2019, and $760 million in CY 2020, with no offsetting increases in payments for other services.
83 Fed. Reg. at 59,014. Indeed, that was one of the justifications given by CMS for its proposed
adjustments. Id.
37.

But a critical element of the statute’s structure is that changes in the payments for

individual OPD services be made “in a budget neutral manner.” 42 U.S.C. § 1395l(t)(9)(B).
That is, if CMS wishes to reduce the amount of Medicare payments going to one type of service,
it must increase the payments for other items or services in equal amount. Id.
38.

While the Medicare statute allows for reductions to the total amount of Medicare

payments in appropriate, limited circumstances under Subsection (t)(9)(C) through changes to
the conversion factor, there is no statutory mechanism allowing CMS to reduce the total amount
of Medicare payments by targeting only selected services. By requiring budget neutrality for
payment reductions targeting specific services, the statute recognizes—and puts a check on—any
incentive for CMS to employ draconian cost-control measures.
39.

To get around the statutory requirement that annual adjustments be budget

neutral, CMS has claimed that its authority to adopt the Clinic Visit Policy flows not from the
annual adjustment authority granted in Subsection (t)(9)(A), but from the agency’s separate
statutory authorization to “develop a method for controlling unnecessary increases in the volume
of covered OPD services.” Id. § 1395l(t)(2)(F). CMS grounds the Clinic Visit Policy in
Subsection (t)(2)(F) for a strategic purpose: that provision, unlike the rest of Subsection (t),
makes no express mention of budget neutrality.
40.

For good reason, though: Subsection (t)(2)(F) does not need to address budget

neutrality because it does not actually authorize the agency to make any adjustments or changes
to payment rates at all. Instead, it merely authorizes CMS to “develop a method for controlling
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unnecessary increases” in the volume of services. 42 U.S.C. § 1395l(t)(2)(F). Another statutory
provision governs how that method may be used in actual volume-control efforts.
41.

Specifically, Subsection (t)(9)(C) addresses what CMS should do if it wants to

make adjustments based on a finding under Subsection (t)(2)(F) that there are unnecessary
increases in the volume of services: “If the Secretary determines under the methodologies
described in paragraph (2)(F) that the volume of services paid for under this subsection increased
beyond amounts established through those methodologies, the Secretary may appropriately
adjust the update to the conversion factor otherwise applicable in a subsequent year.” Id.
§ 1395l(t)(9)(C) (emphasis added). The conversion factor applies broadly to affect the payments
for all covered services and cannot be used to change the relative payment rates between and
among individual services.
42.

Contrary to CMS’s assertion, then, Subsection (t)(2)(F) does not confer authority

to modify payment rates for specific items or services in response to unnecessary increases in the
volume of OPD services. Rather, as noted above, if the methodology developed by CMS under
Subsection (t)(2)(F) shows that there are unnecessary increases in the volume of OPD services,
Congress has said in Subsection (t)(9)(C) that CMS’s recourse is to modify the conversion factor
and effectuate an across-the-board reduction in payment rates under the OPPS. And to state the
obvious, CMS has not adjusted the update to the conversion factor to effectuate the Clinic Visit
Policy. Instead, it has only decreased the payments for a certain subset of services. In short,
Subsection (t)(2)(F) is of little use to CMS in justifying the Final Rule.
43.

In explaining its statutory authority in the Final Rule, CMS attempted to bolster

its reliance on Subsection (t)(2)(F) by arguing that it had, in prior proposed rules, purported to

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invoke Subsection (t)(2)(F) to justify selective cuts to payment rates. 83 Fed. Reg. at 59,004–
005. Not so. In fact, CMS has never actually implemented anything using Subsection (t)(2)(F).
44.

In 1998, CMS proposed invoking Subsection (t)(2)(F) when establishing the

OPPS, but that proposal—which involved modifications to the conversion factor—was
indefinitely delayed for “further study” in another CMS action in 2000. 65 Fed. Reg. 18,434,
18,502–503 (April 7, 2000). Indeed, CMS said that “possible legislative modification” would be
necessary before it could use its authority under Subsection (t)(2)(F) to adopt alternative options,
which would have implemented non-conversion factor adjustments. And in 2001 both CMS and
the Medicare Payment Advisory Commission (MedPAC) implicitly acknowledged that the
options turned on selecting the proper contemplated methodology for triggering updates to the
conversion factor. 66 Fed. Reg. 59,856, 59,908 (Nov. 30, 2001). Thus, in every prior instance
that the agency considered invoking Subsection (t)(2)(F), CMS implicitly (and correctly)
acknowledged that any corresponding non-budget neutral changes to payment rates must occur
pursuant to a change in the conversion factor. CMS’s present assertion of sweeping authority to
target only specific types of services under Subsection (t)(2)(F) in the Final Rule is
unprecedented—and unlawful.
45.

In any event, CMS has never made an adequate factual finding—as it must to

lawfully invoke whatever authority it has under Subsection (t)(2)(F)—that any increase in the
volume of covered OPD services is “unnecessary.” Instead, the agency merely asserted in
circular fashion that the increases in volume of covered outpatient services must have been
“unnecessary” simply because they occurred. 83 Fed. Reg. at 59,006–008. To bolster this selfserving conclusion, CMS purports to rely upon recommendations and estimates made by
MedPAC, an agency established by Congress to make recommendations to Congress regarding
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payment policy. See 42 U.S.C. § 1395b-6. And Congress has already spoken about the
appropriate path forward here.
46.

For the foregoing reasons, the Clinic Visit Policy is ultra vires because it is not

budget neutral, as required by the plain language of the statute.
Statutory Distinction Between Excepted and Non-Excepted PBDs.
47.

In addition, the Final Rule is ultra vires because it sets the same rate of payment

for clinic visit services provided at both excepted and non-excepted PBDs, in violation of
Congress’s statutory command. Specifically, the Final Rule provides that the payment rate for
services provided at excepted PBDs will be adjusted so that it would be “equal to” the payment
rate for services provided at non-excepted PBDs. 83 Fed. Reg. at 59,013.
48.

But the Medicare statute reflects Congress’s intent to treat excepted and non-

excepted PBDs differently. The statute creates two distinct categories of off-campus PBDs:
excepted entities, which satisfy certain grandfathering requirements and may continue billing
under the OPPS, and non-excepted entities, which do not and must instead be paid under an
alternative payment system. See 42 U.S.C. § 1395l(t)(21). Congress’s clear intent in creating
that distinction was to create a grandfather provision for excepted PBDs, allowing entities that
had been billing before November 2015 to continue billing under the OPPS, while non-excepted
entities would be subject to a different payment system (later determined by CMS to be the
Medicare Physician Fee Schedule). See id. § 1395l(t)(21)(C); H.R. Rep. No. 114-604, at 10
(2016).
49.

Congress necessarily understood and clearly intended that these separate payment

systems would entail separate payment rates. And Congress intentionally grandfathered
qualifying off-campus PBDs that were already in existence at the time the different payment
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system for non-excepted PBDs was put in place in order to ensure that the excepted PBDs
would still be paid under the OPPS. See 42 U.S.C. § 1395(t)(21)(B) (cross-referencing 42
C.F.R. § 413.65(a)(2)).
50.

By decreeing that excepted and non-excepted entities will now be subject to the

same payment rate, CMS has effectively abolished that statutory separateness, performing an
end-run around the congressional mandate. But the agency lacks authority to nullify the
Medicare statute in such manner.
51.

The Clinic Visit Policy set forth in the Final Rule is ultra vires for this reason as

well.
Plaintiffs Will Suffer Concrete and Imminent Harm Absent Judicial Intervention
52.

The Plaintiff-Hospitals and Plaintiffs AHA’s and AAMC’s member hospitals rely

heavily on the structure of Medicare payments established by Congress to provide critical
outpatient services for the vulnerable populations in their communities, many of whom have
been historically underserved.
53.

As CMS itself notes, the challenged policy will result in a total reduction in

payments for outpatient services of approximately $380 million in CY 2019. 83 Fed. Reg. at
59,014.
54.

The Plaintiff-Hospitals and Plaintiffs AHA’s and AAMC’s members operate

excepted PBDs that are statutorily entitled to be paid differently from non-excepted PBDs. The
Final Rule reduces the payment rate for covered services performed at the excepted PBDs. If
the Final Rule is left in place, Plaintiff-Hospitals and Plaintiffs AHA’s and AAMC’s members
face the prospect of serious payment reductions for affected services, and may have to make
difficult decisions about whether to reduce services in response to the lowered payment rate.
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55.

This is particularly troubling for hospitals already operating at low or negative

margins.
56.

Plaintiffs and the vulnerable patients and communities they serve face concrete

and imminent harms––both economic and noneconomic—if CMS’s Final rule is allowed to
stand.
COUNT I
(Ultra Vires Agency Action)
57.

Plaintiffs re-allege and incorporate by reference the allegations made in the

foregoing numbered paragraphs of the Complaint.
58.

This Court has the inherent power to review alleged ultra vires agency action

when an agency patently misconstrues a statute, disregards a specific and unambiguous
statutory directive, or violates a specific command of a statute. See, e.g., Aid Ass’n for
Lutherans v. U.S. Postal Serv., 321 F.3d 1166, 1168 (D.C. Cir. 2003) (agency action is ultra
vires when it “exceed[s] the agency’s delegated authority under the statute.”); Dart v. United
States, 848 F.2d 217, 224 (D.C. Cir. 1988) (agency violation of “clear and mandatory” statutory
provision is ultra vires).
59.

The Clinic Visit Policy is ultra vires because it is not budget neutral. Annual

adjustments to payment rates for OPD services must be budget neutral. 42 U.S.C. §
1395l(t)(9)(B). But by CMS’s own admission, the Clinic Visit Policy would result in a net
reduction in total outpatient-services payments of more than $380 million for CY 2019. 83 Fed.
Reg. at 59,014. Rather than providing for offsetting increases in payments for other services or
adjusting the generally applicable conversion factor—as required by statutory safeguards
enacted to curb the agency’s discretion—CMS chose to slash the payment rate for a particular

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set of services and thereby reduce total expenditures. That is clearly in excess of the agency’s
statutory authority.
60.

The Clinic Visit Policy also is ultra vires because it effectively eliminates the

statutorily mandated distinction between excepted and non-excepted PBDs. Congress
intentionally created two classes of off-campus PBDs: excepted and non-excepted ones, with
the clear expectation that they would be paid differently for outpatient services. The Final Rule,
premised on CMS’s contrary policy preferences, effectively erases that distinction by providing
that outpatient services provided at excepted and non-excepted PBMs be subject to the exact
same payment rate.
61.

For these and other reasons, CMS has simply ignored Congress’s instructions

contained in the Medicare Act. The agency’s wholly unauthorized adoption of the Clinic Visit
Policy is ultra vires and cannot stand.
PRAYER FOR RELIEF
Plaintiffs respectfully pray for the following relief:
A. A declaration pursuant to 28 U.S.C. § 2201 that the Final Rule exceeds CMS’s
statutory authority under the Medicare Act, 42 US.C. § 1395l, and is unenforceable to
the extent it does so;
B. Preliminary and permanent injunctive relief (i) vacating and barring Defendants from
enforcing the ultra vires changes made to the Hospital Outpatient Prospective Payment
System and Ambulatory Surgical Payment System for Calendar Year 2019; (ii)
requiring CMS to conform its payment policies and conduct to the requirements of the
Medicare Act; and (iii) ordering that Defendants provide immediate payment of any
amounts improperly withheld as a result of the unauthorized conduct described above.
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C. An order awarding Plaintiffs their costs, expenses, and attorneys’ fees incurred in these
proceedings pursuant to 28 U.S.C. § 2412; and
D. Such other and further relief as the Court deems just and proper.

Respectfully submitted,

/s/ Catherine E. Stetson
Catherine E. Stetson (D.C. Bar No. 453221)
Susan M. Cook (D.C. Bar No. 462978)
HOGAN LOVELLS US LLP
555 Thirteenth Street, NW
Washington, D.C. 20004
Phone: (202) 637-5491
Fax: (202) 637-5910
cate.stetson@hoganlovells.com
Counsel for the American Hospital Association,
Association of American Medical Colleges, Mercy
Health Muskegon, Clallam County Public Hospital
No. 2, d/b/a Olympic Medical Center, and York
Hospital
Dated: December 4, 2018

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